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U.S. Telecommunications Services inEuropean Markets

August 1993

OTA-TCT-548NTIS order #PB93-231355

R E C O M M E N D E D C I T A T I O N:

U.S. Congress, Office of Technology Assessment, U.S. TelecommunicationsServices in European A4arkefs, OTA-TCT-548 (Washington, DC: U.S. Gover-nment Printing Office, August 1993).

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SupcIIIIlcIdL.nt t~f DtKumcIIt., M.111 Sl{Ip: SS[Y. W’;i\h]r]glfm, M’ 20402-932X”

ISBN O-16 -041895-X

ForewordThe Europeanmarket fortelecommunicationsservices will growrapidly over thenext decade,fueled by demandfrom the Europeanbusinesscommunity for fastdata transmissionand other advancedservices.

T HE E UROPEAN MARKET FOR TELECOMMUNICATIONS SERVICES will grow rapidly overthe next decade, fueled by demand from the European business community for fastdata transmission and other advanced services. In most European countries, thetelecommunications services market is still largely reserved for a state-ownedPublic Telephone Operator, but this is likely to change in the near future.Meanwhile, U.S. telecommunications firms-including regulated carriers-aresuccessfully competing in some European markets already open to them,especially in cellular communications and cable television. U.S. firms appear tohave an edge in these markets because of their experience operating in competitivemarkets and developing innovative services based on advanced networktechnology and in response to changing user needs.

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 ininternational trade in services can, and already does in part, offset our troublesomedeficit in trade in merchandise. U.S. telecommunications firms are eager to pursueopportunities in foreign markets, and no government interventions appear to benecessary, other than continuing to press our European trading partners to openmarkets to U.S. competition. Beckoning success in European telecommunicationsmarkets does, however, raise some domestic policy concerns, including the rolethat trade objectives should play in fomlulating telecommunications policy.

This study of U.S. participation in European telecommunications marketswas requested by the Senate Committee on Finance and the House Committee onForeign 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, HerdmanDirector

Page iii

Advisory panel

NOTE: OTA appreciatesand is grateful for thevaluable assistance andthoughtful critiques pro-vided by the advisory panelmembers. The panel doesnot, however, necessarilyapprove. disapprove, orendorse this report. OTAassumes full responsibilityfor the report and theaccuracy of its contents.

John Diebold, ChairmanDiebold Institute forPublic Policy Studies, Inc.

James R. BenigerProfessorAnnenberg School of CommunicationsUniversity of Southern California

Mark L. BigelowNetwork Architect, Information ServicesBechtel Corporation

Robert BrucePartnerDebevoise & Plimpton

Emilio DeLiaDepartment DirectorInternational Communications ServicesAT&T

Steven FlajserVice President for Space SystemsLORAL

Kenneth GordonChief CommissionerMassachusetts Department ofPublic Telecommunications

Bruce GreenwaldProfessorDepartment of EconomicsColumbia University School of Business

J. Donald KarmizinVice PresidentManagement Infomation SystemsUnited Airlines

Gene KimmelmanConsumer Federation of America

Michael NugentVice President andAssociate General CounselCitibank, NA

Barbara O’ConnorProfessor/ChairpersonAlliance for Public TechnologyCalifornia State UniversityDepartment of Communications

Reynie U. OrtizVice President for Public PolicyU.S. West

Frances PludeProfessorCommunications DepartmentJohn Carroll University

Michael J. Reilly, Sr.Vice President for External RelationsReuters America, Inc.

Tony RutkowskiDirector of Technology AssessmentSPRINT

Marie-Monique SteckelPresidentFrance Telecom, Inc.

Reviewers and contributorssee Appendix A, pages 203-210.

Page iv

Project staffP R I N C I P A L S T A F F C O N T R A C T O R S

Vary Coates, Project Director

Todd LaPorte, Analyst

Mark Young, Research Analyst

OTA MANAGEMENT

John Andel in, Assistant Director, OTAScience, Information, and Natural

Resources Division

James W. Curlin, Program ManagerTelecommunication and Computing

Technologies Program

A D M I N I S T R A T I V E

Liz Emanuel, Office AdminisstratorMichelle Smith, SecretaryKarolyn St. Clair, PC Specialist

Bruce Egan,Columbia Business School

Louis Feldner,Feldner Telecom Consulting

Rob Frieden, TelecommunicationConsultant and Attorney

Dale Hatfield,Hatfield Associates

Manley Irwin,University of New Hampshire

Gligor Tashkovich, Consultant,International Telecommunications

Deborah Workman, Consultant

OTA ADVISORY GROUP

Peter Blair.Energy and Materials Program

Sylvester Boyd, Telecommunication andInformation Systems

Linda Garcia, Telecommunication andComputing Technologies Program

Julie Gorte, industry, Technology, andEmployment Program

William Keller, Industry, Technology, and

Employment ProgramBill Westermeyer, Oceans and

Environment ProgramRobert Weissler, Industry, Technology,

and Employment ProgramRay Williamson, International Security

and Commerce ProgramDavid Wyc. Telecommunication and

Computing Technologies Program

Page v

Contents1 Exporting Telecommunications Services to Europe 1Summary of findings 3Conclusions and policy options 21

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

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

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

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

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

7 Domestic Deregulation and lnternational Trade Negotiations 135U.S. deregulation and the worldwide consequences 135Changing attitudes toward services and trade 138GATT 143Negotiating GATT 151Long-range consequences of a GATT agreement 155

Page vii

8 How Telecommunications Policy Is Made 159The telecommunications policymaking structure 160The policymaking structure for trade in services 168The adequacy of data for decisionmaking 171Conclusions and options 174

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

A Reviewers and Contributors 203B Acronyms 211Index 215

Page viii

ExportingTelecommunicationsServices toEurope 1

C H A P T E R

The entry of U.S.telecormmmicationsfirms into Europeanservices marketsis-at this ear/ystage-a strikingsuccess story.

U.S. TELECOMMUNICATIONS FIRMS are send-

ing a message to Europe—’ ‘we intend to

offer services to Europe’s under-served tele-communications users, ’ They are watch-fully assessing European progress towardliberalization of national markets and inte-gration into a single European market. Mean-while, U.S. carriers and enhanced-servicesproviders1 are entering the niche marketsthat are open to them, such as cellularcommunications and cable television.

The entry into European markets forservices by American telecommunicationsfirms, from major carriers to small niche-services providcrs, is—at this early stage—astriking success story. Growing U.S. exportof telecommunications and related informa-tion services2 in the future can contributesignificantly to national economic goals.

Further expansion appears to require little orno government intervention—in this area,deregulation and pursuit of free trade hasworked well.

However, there are some major caveats tothese conclusions:

Emerging technological and institutionaltrends could adversely affect bilateral andmultilateral trade agreements already ne-gotiated or being pursued by U.S. tradearepresentatives, making them eithcr unsta-ble or overly restrictive.U.S. international telecommunications pol-icy is being defined almost singlehandedly

by the Office of the United States TradeRepresentative (USTR). The industry struc-ture, regulatory environment, and invest-ment strategies that are conducive to freetrade and encouraged by the USTR maynot be equally appropriate for meeting thebroaderrange of national telecommunicationsobjectives.Inadequate investment in domestic tele-communications infrastructure could re-sult from continuing investment overseasby regulated U.S. telecommunications op-erators, according to some State regulatorsand public interest groups. (The Office ofTechnology Assessment finds eviidencefor this inconclusive, but concludes thatinvestment trends should be monitored.)

This report rests on the premise thattelecommunications is not just a set oftradable services, but also a basic function ofsociety, essential for effective governancesocial cohesion, and economic viability’ andequity. International telecommunications isa primary vehicle for U.S. participation in theglobal polity, as well as the global market -place. Public policy interest in internationaltelecommunciations therefore goes beyondthe question of competitiveness in foreignmarkets.

This chapter summarizes findings fromthe analysis presented in more detail in thefollow in: eight chapters. It addresses severalquestions:

Page 1

I The terms “enhanced” or “value-added” services Ind Icate services that go beyond the transm lsslon ofvoice or data (i. e., “basic services”) to provide collection, selection, formatting, processing, or selectlvedellvery of material being communicated. An enhanced-serwces prowder may be a carrier or networkoperator, 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 hercountries over electronic networks (e.g., cash management serwces or market data analysls), and thedell very of services through subsidiaries orjotnt venture corporations overseas. At other places in the report,as appropriate to analysis, these two phenomena WIII be clearly and expllc[tly dlsttnguished.

us.TelecommunicationsServices inEuropeanMarkets

Growing U.S. C A N U .S . F I R M S G A I N W I D E R A C C E S S T O E U R O-

export of telecom- PEAN MARKETS FOR TELECOMMUNICATIONS AND

munications and RELATED SERVICES?

related services Technological and political trends, espe-

can contribute to cially the likely effects of the European

U.S. economic Community’s Open Network Provision Di-

goals. rective, are converging to bring about wideraccess to European telecommunications mar-kets. For U.S. firms, nearly 85 percent of thepotential market is now closed. Continuingpressure from the U.S. Government throughUSTR may somewhat hasten broader marketaccess. However, U.S. telecommunicationsfirms caution that such pressure should notresult in opening U.S. markets to entry offoreign telecommunications operators whosehome markets still exclude U.S. servicesproviders.

C AN U .S . F IRMS SUCCESSFULLY COMPETE IN THE

EUROPEAN MARKETS?

U.S. services providers can be strongcompetitors in European telecommunica-tions markets. Technology and deregulationhave allowed them to develop innovativeservices attuned to the changing needs ofbusiness users. European business users noware relatively poorly served by the publictelephone operators (PTOS).3 U.S. firms,including major long-distance carriers andregional Bell holding companies (RBHCs)have already invested billions of dollars inEurope and are doing well in niche markets.

IS IT IN THE PUBLIC INTEREST TO ENCOURAGE

PARTICIPATION OF U.S. TELECOMMUNICATIONS FIRMS

IN OVERSEAS MARKETS, ESPECIALLY THOSE FIRMS

THAT ENJOY REGULATED MONOPOLY STATUS IN

THEIR HOME REGIONS--I.E., THE REGIONAL BELL

HOLDING COMPANIES?

Expansion into European markets by U.S.telecommunications firms can contributesignificantly to maintaining a positive tradebalance in services, both directly and bysupporting the competitive activities of otherU.S. services providers, ranging from air-lines to wholesale merchants, in Europeanmarkets. It may also encourage the Europeansales of U.S. telecommunications equipmentand other information technology. For politi-cal reasons most of this economic activity isin the form of joint ventures and similarkinds of direct overseas investment, whichhas given rise to fears that this will competewith capital for domestic investment ininfrastructure modernization and in research.There is so far no clear evidence of suchharmful effects, but investment patternsshould be monitored to detect any emergingadverse effects so that corrective measurescan be taken if appropriate.

W H A T C A N T H E U .S . G O V E R N M E N T , A N D E S P E-

CIALLY THE U.S. CONGRESS, DO TO ENCOURAGE

BROADER MARKET ACCESS AND TO ENHANCE THE

COMPETITIVENESS OF U.S. TELECOMMUNICATIONS

FIRMS OVERSEAS?

Broader market access may come aboutmore as a result of pressure from users andactions by the Commission of the EuropeanCommunity (EC), than as a result of tradenegotiations. However, the U.S. Govern-ment should continue to press, throughbilateral and multilateral trade negotiations,for further liberalization of European telecom-munications markets and wider access to

Page 2

3 The state telecommunications authorities were traditionally called PTTs, for Postal, Telephone andTelegraph administrations, and were generally part of a government ministry. In most cases telephone’telegraph

functions have been separated from postal functions and operating responsibility y has been divorced fromregulating responsibility, so that the older designation is no longer always appropriate.

ExportingTelecommunications

Services toEurope

those markets for U.S. firms. Caution isww-ranted, because negotiating positions de-veloped by the Office of the U.S. TradeRepresentative may be undermined by tech-nological trends that challenge distinctionsbetween basic and enhanced services andbetween public and private networks.

Beyond this, there is little that the U.S.Government needs to do or should do, at thistime, to improve the competitiveness of U.S.carriers and services providers overseas.There is little evidence that the domesticrestrictions imposed on carriers at divestiturc(however onerous or effective they maybe athome) now arc a significant factor in successin European ventures.

Is THE POLICYMAKING STRUCTURE FOR IN-

TERNATIONAL TELECOMMUNICATIONS NETWORKS

ADEQUATE AND APPROPRIATE FOR THE COMING

DECADE?

U.S. policy for international telecommu-nications has for the last 5 years been largelydetermined by USTR. This is cause forconcern. The unidimensional focus of USTRon forcing open world markets for servicesmay slight or diminish other public policygoals related to telecommunications, such asstrengthening the domestic telecommunica-tions infrastructure, extending the scope ofuniversal service, or assuring the interopera-bility of networks. The mechanisms forcoordinating policy formulation and regu-latory actions have become ineffective andneed to be strengthened.

This chapter summarizes these and otherfindings discussed more fully in later chap-ters, It then suggests some actions thatCongress may consider for monitoring thelong-term, indirect effects of overseas ac-tivities of U.S. carriers, and for strengthen-ing the policy development and implemen-

tution process for international telecom -munications.

Summary of findings

T H E E U R O P E A N M A R K E T F O R B A S I C A N D E N-

HANCED TELECOMMUNICATIONS SERVICES WILL

EXPAND STRONGLY OVER THE NEXT FIVE TO TEN

YEARS.

Comparison of the consumption of tele-communications services in Europe and theUnited States indicates that in all European

100

50

0

-50

-100

-150

-200

$billion (1987 dollars)

Services balance >

Merchandise ba lance

1970 72 74 76 78 80 82 84 86 88 90 92

SOURCE U.S DEPARTMENT OF COMMERCE, 1993

countries there is a substantial unsatisfied Figure 1-1.

demand for business-oriented telccommuni- U.S. Trade Balance,

cations services. Monopoly control of net- 1970-92

works and services, high tariffs, and strictconstraints on the development of privatenetworks have kept this demand from beingmet.

The Commission of the European Com-munity is pushing ahead with its effort tocreate a single European market; it puts highpriority on the integration of telecommuni-cations networks and deregulation of value- Page 3

u.s.TelecommunicationsServices inEuropeanMarkets

Box l-A. R ESTRICTIONS ON A CCESS TO THE U.S. MARKET FOR

FOREIGN TELECOMMUNICATIONS C OMPANIES

Although the U.S. telecommunications services market is relatively open compared with thatof 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 companiesfrom

—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. Whenforeign investment in a common carrier is indirect, i.e., through a subsidiary, Section31 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 theselimits. The FCC has never done so.

This provision was originally aimed at preventing foreign powers from gaining control ofU.S. broadcasting, which might be used for propaganda. With the advent of microwavetransmission 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 ashift from microwave to fiber optic cables, Section 310 will pose less difficulty for foreignfirms. There are also ways around Section 310, such as assignment of radio licenses tothird parties.

■ The Submarine Cable Landing Act (47 U.S.C. 34-39, especially Section 35) prohibitsforeign companies from landing cables in t he United States without permission from theFCC. 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 linesor cables in Alaska.

■ The Communications Satellite Act of 1962 (47 U.S.C. 701-757) established COMSAT asthe sole U.S. participant in the INTELSAT consortium, thereby limiting foreign carriers’

added services. In spite of stubborn politicalresistance, the liberalization of the 12 Euro-pean national markets is underway. In mostof these countries, the responsibility foroperating telecommunications networks hasbeen separated from telecommunicationsregulatory authority and placed in a free-

standing (but usually state-owned) corpora-tion. Competition is allowed in some or mostvalue-added services. Progress toward liberal -ization and curtailment of state monopoliesis likely to pick up speed because of pressure

on European governments from three sources:large business users, the EC Commission,and other participants in the Uruguay Roundof the General Agreement on Trade andTariffs (GAIT).

The European Community’s drive to asingle market promises to expand the geo-graphical scale of many European corpora-tions, increasing their need for translationalservices. If the single market succeeds inbringing about strong European economicgrowth, the demand for basic and enhanced


Services toEurope

access to satellite transmission capabilities in the United States. ’ Satellite transmissionrequires 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 modifiedin F?egu/alien of International Common Carrier Services (CC Docket No. 91-360, FCC92-463 as released Nov. 6, 1992) stipulates that a firm with 15 percent foreign ownership,or which has a foreign representative on its Board of Directors, be considered a “dominantcarrier” in the United States for purposes of regulation, and therefore be required to registerits proposed tariffs and costs with the FCC before offering its service to the public, and befurther required to file quarterly traffic and revenue reports with the FCC.2 Some foreigntelecommunications operators complain that the FCC has delayed action on applicationsfor 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. Thisprovision has not yet been invoked in the telecommunications field.

Note: While no mainland U.S. local telephone company has been acquired by a foreignfirm, an 80 percent interest in Puerto Rico Telephone Co. has been acquired by Telefonicaof Spain. The Section 310 radio license issue was dealt with by Puerto Rico Telephone Co.ceding its licenses to a third party.

The opportunity tobypass public net-

works will forceopen the markets

now closed tocompetition.

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 Swtlon214 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.

telecommunications services will further in-tensify. Thus European markets for telecom-munications services are attractive futuretargets for exported telecommunications serv-ices and reltitcd information services.

A C C E S S T O E U R O P E A N M A R K E T S F O R U . S .TELECOMMUNICATIONS FIRMS WILL NOW BROADEN

RAPIDLY.

As much as 85 percent of the aggregate

European telecommunications market re-mains closed to U.S. firms chiefly because it

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT 1993

is closed to even domestic competition. (In

the United States, the local cxchangc marketfor voice services is also closed to foreigncompetition. ) (See box 1 -A. ) Basic voice anddata transmission is reserved to state-ownedmonopolies (the PT()) in all European coun-tries except the United Kingdom.

Access to this rcscrvcd portion of themarket will almost certainly soon be forcedopened by the same kind of c(~mpctitivepressure that brought about CJ. S. deregula-

tion and divestiture of AT&T--nanlely, the Page 5

Us.TelecommunicationsServices inEuropeanMarkets

Figure 1-2.U.S. InternationalTransactions,1992

Page 6

ability of large corporations to bypass thepublic switched networks by developingprivate networks. The EC Open NetworkProvision Directive, issued in 1992, requireseach member-state to make leased linesavailable to customers with no restraints ontheir use or on interconnection to the public

600 $billions (1987 dollars)

Imports

400

200

0

Exports

Exports

Imports

Goods Services

SOURCE U.S DEPARTMENT OF COMMERCE, 1993.

switched networks. This effectively opensthe door for bypass—i.e., for the use ofprivate networks to deliver both voice anddata traffic in competition with the publicnetworks. As corporations rush to developprivate networks in order to get cheaper,customized basic services, they will alsowant to attach equipment of their ownchoosing, and they will actively seek en-hanced or value-added services customizedto meet their corporate needs. Thus broad-ened market access in the future may haveless to do with trade negotiations than withtechnological and market imperatives.

U.S. TELECOMMUNICATIONS FIRMS ARE MAKING A

STRONG ENTRANCE INTO EUROPEAN NICHE MAR-

KETS, PREDOMINANTLY BY DIRECT INVESTMENT

ABROAD.

U.S. firms are already entering Europeanniche markets for enhanced or value-addedservices, largely through partnering withEuropean firms, often the monopoly PTOs.A U.S. carrier can handle a global corpora-tion’s needs only so long as one end of thetraffic either originates or terminates in theUnited States. Partners are necessary both toshare capital and to provide national regula-tory standing and customer access in manycountries.

The three major U.S. long-distance carri-ers (AT&T, MCI, Sprint) are actively pursu-ing European partners for consortia to pro-vide large multinational corporations with afull range of services (’ ‘one-stop shopping’on a global basis. AT&T hopes to earn 50percent of its total revenues overseas by2000.

The seven regional Bell holding compa-nies are estimated to have invested about$12billion overseas. RBHCs pursue three kindsof European activities. They are constructingand operating cellular networks, building ontheir solid expertise gained at home, both tocompete with monopoly local carriers inWestern Europe and to provide an alternativeto wire infrastructure in Central and EasternEurope. They are experimenting with andgaining experience in other kinds of infra-structure-Personal Communications Net-works and, especially in the United King-dom, cable television networks—hoping tobring this experience and expertise homewhen there is a change in U.S. regulations.They are also investing in privatized foreignPTOs, although these investments have mostlybeen in non-European countries that havegreater need for infusion of foreign capitalthan do European countries.

Economists have assumed that most serv-ices must be produced where they are


Services toEurope

delivered. Many telecommunications andinformation services, however, could bedelivered electronically, directly from theUnited States through international networks.But even with liberalization and marketintegration, European countries will try toarrange matters so that both national lawsand EC regulations continue to favor Euro-pean firms. The primary purpose of Euro-pean market integration is to increase thecompetitiveness of European industries vis-a-vis American and Japanese firms that havebenefited from larger domestic markets andlarger scale operations.4 The benefits oftransborder access and free movement ofgoods will, however, accrue also to foreignfirms that have established a legal presencein member-states; in theory, they will beconsidered European firms. For this reason,many U.S. services vendors will continue tooperate through European subsidiaries orjoint ventures.

T H E C O M P E T I T I V E E D G E O F U .S . FIRMS IN BASIC

NETWORK SERVICES AND ENHANCED SERVICE>

BOTH IN TECHNOLOGY AND IN MANAGERIAL EXPE-

RIENCE—IS WIDELY RECOGNIZED.

U.S. services exporters to Europe, heavilydependent on international telecommunica-tions networks, agree that they are wellserved by U.S. carriers. (See chapter 5.)American communications and computertechnology, they say, gives them a competi-tive edge in foreign markets by enablingthem to offer innovative services. Networktechnologies and services are especiallyimportant to providers of transportation.freight, and travel-related services, which

constitute about 58 percent of all U.S.services exports, and to financial servicesand data processing services, which addanother 5 percent.

By comparison, American firms operatingin Europe feel seriously hampered by thenecessity of relying on European technologyand services for communications withinEurope and at the European end of interna-tional networks. Many of them complain ofthe scarcity of high-grade leased lines, re-strictions on the use of all leased lines, lackof access to fast data networks, severerestrictions on-or delays in—approvingcustomer-premise equipment, irregular andinconsistent billings, and above all, exces-sively high costs. These problems besetEuropean users as well. If U.S. telecommu-nications firms are allowed broader access tothe market they may be able to capitalize onthese opportunities to prove greater effi-ciency and greater responsiveness to users’needs.

E U R O P E A N O P P O R T U N I T I E S, N O T U .S . R E G U-

LATORY RESTRICTIONS, NOW DRIVE U.S. PARTICI-

PATION IN EUROPEAN MARKETS.

U.S. telecommunications firms have con-cluded that their future growth may dependlargely on foreign markets, where growthrates are expected to be much higher than inthe now better-served U.S. markets. Forexample, European consumer expendituresfor telecommunications (now much lowerthan those in the United States) are projectedt. grow three times faster in the next few

years. Estimates of annual growth rates forbusiness-oriented enhanced services range

U.S. carriersknow how to

provide innovativeservices wanted

by both Europeanand American

corporate users.

4 Japanese firms have not been significant competitors in the European market for telecommunicationsservices (as distinguished from telecommunications equipment). Japan has not permitted the NipponTelegraph and Telephone Co. to operate overseas. Page 7


from 20 to 30 percent per year (see chapter3 for detailed market projections).

U.S. Federal and state regulations—especially the Modified Final Judgment(MFJ) that has governed the activities ofRBHCs and their regional Bell operatingcompanies (RBOCs) since their divestiturefrom AT&T—limit the range of opportuni-ties for new services and new sources ofrevenue in the United States. The MFJprevented RBOCs from engaging in infor-mation services, long-distance transmission,and equipment manufacturing in the UnitedStates. The prohibition on offering informa-tion services has now been lifted, andlegislation is pending that would allowtelecommunications companies to own andoperate cable television companies.s

Just after divestiture, being forbidden bythe MFJ to invest in many domestic telecom-munications-related areas, RBHCs made widelydiversified investments beyond their line ofbusiness, including, for example, real estatedevelopment. The poor performance of thesenoncornmunications investments strongly en-couraged RBHCs to look abroad for expan-sion, divcrsification, and investment activi-ties that would better match their corporateexperience and competence.

Now, however, it is likely that theirEuropean initiatives arc pulled by opportuni-ties abroad more strongly than they arcpushed by regulatory limitations at home.U.S. telecommunications firms would prob-ably not pull back from overseas ventures ifMFJ restrictions were ended, as long asopportunities in foreign markets remain

inviting and there is hope of wider marketaccess. Although some industry spokesmencontinue to bring up the issue of overseasinvestment as a reason to end all remainingMFJ restrictions (indirectly implying thatthese discourage them from investment inthe United States), it is unlikely that resolu-tion of this domestic policy issue, one way orthe other, would in itself have a decisiveimpact on the rate of overseas investment.On the other hand, the experience RBHCsarc gaining overseas is likcly to affect whatnew enterprises they pursue at home, whenand if regulatory restrictions arc lifted.

Just as RBHCs use their overseas invest-ments as an argument for lifting MFJ restric-tions on domestic activities, they also arguethat U.S. antitrust laws should be softenedbecause they prevent RBHCs from joiningtogether to respond to European competitivecontract bids. It is not clear that this is true.U.S. Department of Justice rulings regardingantitrust arc not generally considered exporta-ble, and no effort has been made by thegovernment to prevent RBHCs from partner-ing with each other outside the United States.Two RBOCs have in fact done so in NewZealand, and other examples have occurred.Corporate lawyers arc cautious in interpret-ing antitrust law, since judicial challengesare expensive. It is likely, however, thatmore important considerations are the per-ceived value of a European partner and theperceived risk of sharing information andtechnology with another RBHC.

Some telecom firms argue that they arc ata competitive disadvantage vis-a-vis Euro-

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


Services toEurope

pean firms because of the high cost in theUnited States of capital and because foreigngovernments often subsidize low-cost capi-tal for overseas expansion. However, there islittle evidence that any governmental financ-ing support is needed. Most overseas tele-communications investments are funded fromretained earnings and the U.S. carriers aregenerally cash-rich.

F O R E I G N I N V E S T M E N T S B Y U .S . C A R R I E R S, E S P E-

CIALLY RBOCS, WHICH ARE REGULATED LOCAL

MONOPOLIES, MAY INVOLVE SOME RISKS TO U.S.

CONSUMERS.

Domestic investments by RBHCs soonafter divestiture, in fields unrelated to thefirms’ core business, were often unsuccess-ful. By contrast, recent overseas investmentsreflect focused corporate strategies that fittheir proven expertise and may have a muchbetter chance of success. The potential costsor risks of overseas competition have, how-ever, not been satisfactorily addressed. Somestate regulators and public interest grouprepresentatives fear that foreign investmentdiverts funds that would otherwise go toinvestment in domestic infrastructure mod-ernization and development of innovativeservices. Some also fear that business lossesor lack of adequate return on investmentoverseas could lead to rising consumerprices at home, or could by weakening theviability of the regional holding companiesundermine the stability of their regulatedlocal subsidiaries.

The idea that a firm’s overseas invest-ments might contribute to declining invest-ment or disinvestment at home is based onthe assumption that since companies mustallocate scarce resources among competinginterests, a pool of investment capital (suchas the BOCs’ retained earnings) would bespread more thinly in an organization withmany establishments than in one with few. Inaddition, if some of those establishmentsoperate in faster growing markets or lessrestrictive regulatory environments, a parentcompany may invest more in the enterpriseslocated in these favorable environments.These are legitimate concerns, although asdiscussed above, in high-tech enterprises thefailure to operate in global markets could bea brake on efficiency and innovation.

These concerns have only recently begunto be voiced, and state regulators are movingslowly to assess the risks. Only state regula-tors now have an obvious brake on the extentof overseas investment by RBHCs, throughtheir regulation of tariffs and depreciationrates and hence the ability to limit theamount of retained earnings available forinvestment—the major source of investmentfinancing. (See chapter 9.)

The evidence as to whether domesticinvestment is declining is mixed and inconclu-sive. The value of U.S. carriers’ current plantgrew little in the 1980s (when inflation istaken into account), and the value of annualconstruction appears to have decreased strik-

Could overseasinvestment mean adecline in domesticinvestment? Close

attention iswarranted.


Network interopera-bility is essentialto both users andproviders ofinternationalservices.

ingly between 1980 and 1990.6 However,technology costs also declined significantlyduring this period, and network architecturechanged in ways that affect the distributionof investment. Expenditure for research anddevelopment—by long-distance carriers, byRBHCs, and by telecommunications equip-ment manufacturers-is far lower than thatof European counterparts. This is a sig-nificant concern, but R&D investment, al-though low, cannot be conclusively shown tohave declined since divestiture in 1984 or inthe period of high foreign investment begin-ning about 1988. (See chapter 9.)

Available time-series data are inadequatefor making conclusive statements abouteither a continuing decline in investment orcausal relationships between high foreigninvestment and low domestic investment.This issue is potentially very important.Investment trends, both in infrastructure andin research and development, should becarefully monitored by state regulators, theFCC, and congressional committees.7

INTERNATIONAL CARRIERS AND USERS HAVE DIF-

FERENTPERSPECTIVES ON COMPETITIVENESS AND

TRADE POLICY ISSUES.

Accustomed to the expansive domesticmarket and relatively homogeneous regula-tory environment in the United States, Amer-

ican telecommunications users operating busi-nesses in Europe resent the multitude ofdisparate prices and billing procedures andthe conflicting rules and regulations overrelatively short distances. As discussed inchapter 5, they often are even more eager forliberalization of telecommunications mar-kets within Europe than they are for the endof remaining restrictions on market entry ofU.S. providers.

U.S. carriers want broader access to Euro-pean markets, but they fear that they could behurt by multilateral trade negotiations thatresult in the loss of some restrictions onforeign telecommunications firms enteringthe U.S. market, without assuring the fulldismantling of foreign state telecommunica-tions monopolies that exclude them frommuch of the European market. Some believethat they might fare better under bilateralthan multilateral negotiations. However, sinceeach European country is a much smallermarket than the United States, most wouldprefer a multilateral agreement.

The interests of providers and users alsodiverge with regard to network interconnec-tion and telecommunications standards. (Seechapter 2.) Both carriers and users give lipservice to the ideals of global interoperabil-ity and international standards. However,telecommunications companies have strong

Page 10

c According to the U.S. Telephone Association, t he value of U.S. carriers’ current plant grew only 3 percentfrom 1980 to 1989 (in 1980 dollars). From 1981 to 1989, there was shrinkage or no growth in value (i.e., anincrease of 1 percent or less) in 5 of the 9 years. The value of annual construction, in 1980 dollars, decreased40 percent from 1980 ($21.2 billion) to 1989 ($12.6 billion). In 8 of the 9 years following 1980, constructiondeclined from the previous year or was stable in value (increasing 1 percent or less). FCC figures, forreporting 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, thevalue of annual construction declined from 2 to 10 percent over the preceding year (from S1 5.1 billion in 1985to $12.3 billion in 1980 dollars). Annual revenues also declined by 3 percent in constant dollars from 1985to 1989.7 This will not be possible without requiring some standardized reporting of data by the industry, but the

paperwork burden would be very light since the data is well known to the corporations.


Services toEurope

reservations about traditional internationalstandards-setting bodies and procedures, andtend to cling to proprietary protocols and theuse of specializcd interconnection technol-ogy to achieve interoperability. Users, how-ever, generally want international standardsthat will give them broad choice in using andcombining networks, customer-end equip-ment, and services from a variety of vendors.

The emphasis now being given by theEuropean Community to the development ofcommunitywidc telecommunications stand-ards may put U.S. telecommunications firmsat a disadvantage both in gaining full accessto an integrated European market, and ininfluencing international standards develop-ment. Some ad hoc, specialized standardsconsortia are successfully pulling togethermanufacturers, services providers, and usersto develop and implement standards in areasonable time frame, but many tensionsremain in the cumbersome U.S. standards-setting process.8

Interoperability is essential to both usersand providers, and while it can be achievedby alternative strategies, the United Statescannot by itself dictate either the path toachievement, nor the architecture that even-tually determines interoperability. More lead-ership by the U.S. Government may, how-ever be necessary to assure this interopera-bility,

U.S. INTERNATIONAL TELECOMMUNICATIONS POL-

ICY HAS BEEN THOROUGHLY SUBORDINATED TO

TRADE POLICY. ACCESS TO FOREIGN MARKETS IS

NOW THE ONLY CLEARLY ARTICULATED GOAL.

U.S. trade policy is focused tightly on freetrade and open markets. The United States

initiated and consistently pushed for recog-nition of services as tradable entities, forwhich terms of trade could be embodied inbilateral and multilateral treaties and shouldeventually be included in the framework ofthe international General Agreement on Tradeand Tariffs. In the current Uruguay Round ofGATT negotiations, a “Telecommunica-tions Annex’ has been tentatively agreed on,pending acceptance of an overall trade agree-

ment (which may now be receding into thedistance). The annex sets out the rights ofusers and services providers to networkaccess, interconnect ion, and transparency ofterms and tariffs.

The U.S. negotiating position for theUruguay Round and its TelecommunicationsAnnex was worked out by USTR in consul-tation with Federal agencies and representa-tives of carriers, corporate telecommunica-tions users, and labor groups. Because theresponsibility, and therefore the constitu-ency, of USTR is very broad, cutting acrossall industry sectors, it is a hospitable forumfor large corporate users of telecommunica-tions and is especially attentive to theirconcerns. Corporate users reinforce USTR’sfocus on unfettered access to services andunlimited network interconnection, but areconcerned that USTR may not have pushedvigorously enough for open markets in

Europe. US. telecommunications firms areconcerned about the degree to which thedomestic telecommunications market maybe “locked open” to EC firms by GATT,while the EC nations continue to protect theirnational monopoly carriers by reserving

large segments of the telecommunicationsmarket 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


Trade agreementsthat distinguish“basic” from“enhanced”services will beundercut bychanging technologyand industryrestructuring.

national treatment would assure only thatforeign firms have equal treatment withnational firms-who may not be allowed tocompete with the national carrier.) Therough consensus that was hammered to-gether to form USTR’s negotiating positionhas tended to erode somewhat over the longcourse of negotiations and the necessity ofcompromises among nations participating inthe international give-and-take. Both U.S.telecommunications firms and users nowtend to argue that a‘ ‘bad’ GATT conclusionwill be worse than no agreement at all.

U S T R N E G O T I A T I N G P O S I T I O N S A R E B E I N G U N-

DERMINED BY INSTITUTIONAL AND TECHNOLOGICAL

DEVELOPMENTS.

The negotiating positions used by USTRin multilateral and bilateral negotiations inmany regards rest on traditional distinctionsbetween public and private networks, be-tween network operators and resellers, be-tween competing technologies, and betweenbasic and enhanced communication services.Many of these distinctions have already beenblurred by network interconnection and ca-pacity resale. They are rapidly being chal-lenged by clearly identifiable technologicaltrends and by the innovative services thatthey make possible. The development of“intelligent networks,’ in which program-mable logic and customer databases aredistributed throughout the system and linkedby a common packet-switched signalingsystem, as described in chapter 2, allowsnetwork services to be thoroughly custom-ized. This leads to pervasive commingling ofcarrier-provided and user-provided networkfacilities, logic, and databases. These tech-nologies and services make it both difficultand ultimately unproductive to maintain

distinctions between public and private net-works and between basic and enhanced

services. Trade agreements based on distinc-tions that are already becoming obsoletecannot be enforced or adhered to in the longterm.

The international telecommunications arenais marked by increasing complexity in thenature of relationships among industry par-ticipants and between industries and govern-ments. There are many new players—wireless communications companies, resell-ers, private network operators, value-addedservice providers—in markets previouslydominated by single national firms. Nationalcarriers are for the first time competing witheach other in global markets and at the sametime are partnering in joint ventures. Na-tional authorities are struggling to developtransparent regulations where before theyacted by fiat. Governments are strugglingboth to gain the advantages of competitionfor their consumers and corporate users, andto protect their national carriers and nationalequipment manufacturers.

Even as the Uruguay Round labors towarda conclusion after repeated suspensions andextensions, the future of multilateral traderegimes is being questioned because of thecoalescence of regional trading blocs andwaves of political change and restructuringthat increase the difficulty of concludingstable trade agreements. It is unlikely, neverthe-less, that the tradability of services, includ-ing telecommunications services, will everagain be questioned. A series of bilateral andregional agreements, most recently the NorthAmerican Free Trade Agreement (NAFTA),have codified principles that have reachedwidespread agreement. (See chapter 7.)

Page 12


Services toEurope

Carriers

?

—:,., : Interexchange carriers

:1

Figure 1-3.

Enhanced” Local exchange carriers Us./$wvkM

‘+, !--- ----- ~

U.S. Chamber ‘1 “~ Telecommunications. . . . providers \ \,

of Commerce I Po/icy Structure———

>1 -- -7

‘+ _ - I u s . co”rlcll 1..-.. , ‘Alternative , ‘, ,access /

\\ \\ for Internat’1. //’ ‘ /

/p r o v i d e r s ‘“~ \,,Buslness,/;~.-’

x., \,./ ,/

( Nat’l. Assoc. of ‘iRegulatory Uttllty ‘

/Commlssloners

Stateutility

commissions

FEDERAL GOVERNMENT. –7 ➤ ––—– – –.–

Congress (Senate in italics)Telecommunications - - - - - - - - - A L - - - - JEaE._..—

L

lndlvldual firms

Resellersu

c1

Schools,hospitals

L_—–&-/“Consumer

group‘ representatwes\

Smallbusinesses

Resldentlalcustomers

Corporate users

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993


When telecommuni-cations policy issubordinated totrade policy,other nationalgoals andinterests maybe ignored.

F O R M A L R E S P O N S I B I L I T Y F O R D E V E L O P M E N T O F

U.S. TELECOMMUNICATIONS POLICY IS DISPERSED,

AND COORDINATION MECHANISMS ARE WEAK.

Policy concerning international telecom-munications, until very recently, was anincidental byproduct of domestic telecom-munications policy. For over a decade, thetelecommunications industry has been al-lowed to frame and articulate the goals oftelecommunications policy with relativelylittle effective counterbalance from the exec-utive branch of government. The diversity of“the telecommunications industry’ meansthat there are many conflicting interests andperspectives, but a narrow range of policygoals on which to agree. Domestic telecom-munications policy has since 1978 focusedalmost exclusively on the divestiture of theBell system and deregulation.

The divided and dispersed structure ofFederal responsibility for telecommunicat-ions policy contributed to this outcome.Organizational fragmentation has some ad-vantages—it provides alternative fora forcompeting interests to be heard and resolved.The fragmentation may also be necessary,since there is a role for both a policy-development organ within the executivebranch and an independent regulatory com-mission outside of Administration control.Since their immediate goals are sometimesdivergent, there is probably also a need for acoordinator or mediating mechanism, espe-cially in dealing with international tele-communications, where it is desirable thatU.S. policy be articulated clearly and un-ambiguously. There is such a coordinatingmechanism located somewhat obscurely inthe Department of State—the Bureau ofCommunications and Information Policy—but for true coordination there needs to be

some coherent and comprehensive policythat bridges the interests of carriers, servicesproviders, and large business users.

The National Information Infrastructureadvocated by the present Administrationcould also become an appropriate model forthe evolution of a global information network—if the United States takes the lead in develop-ing and coordinating international telecom-munications policy. U.S. telecommunicationspolicy should incorporate the national inter-est in global networks; for example, thenational interest calls for network interopera-bility and service for small as well as largeusers. At present, there is no such policy, noeffective coordinating mechanism, and noleadership in articulating the national inter-est in telecommunications.

The National Telecommunications andInformation Administration (NTIA) is em-bedded in the business-oriented Departmentof Commerce, which has many competingconstituencies and has in the past hadrelatively weak and diffuse channels toAdministration decisionmakers. NTIA isstrongly oriented toward representing carri-ers, but tends to be paralyzed by the oftenconflicting interests among local exchangecarriers and interexchange carriers.

The FCC Common Carrier Bureau hasuntil the last 2 years tended to give littleattention to international issues, The FCCOffice of International Affairs is relativelynew and has primarily an internal coordina-tion function. The FCC, as an independentregulatory agency, is outside of and some-times at odds with Administration poli-cymaking. This often provides a valuable‘‘check and balance’ on policy develop-ment, but the Commission sometimes actsunpredictably, in violation of U.S. trade

Page 14


Services toEurope

policies and its own standing rules andpolicies. 9

The State Department’s Bureau of Com-munications and Information Policy (CIP)has the legislative mandate to coordinatetelecommunications policymaking amongand between FCC, NTIA, and other execu-tive agencies. The selection of the StateDepartment as the site for coordination oftelecommunication policy represented firstthe perception held by the Administration atthat time that telecommunications is primar-ily a service for multinational corporationsengaged in world trade, 10 and secondly a way

of extending congressional oversight oftelecommunications trade issues.11 CIP hashowever recently been largely ineffectiveboth in its coordinating role and in contribut-ing substantively to development of tele-communications policy, functioning largelyas a clerical facilitator for industry/gov-ernment participation in international meet-ings. Its effectiveness may be further less-ened by a current State Department plan todegrade it from Bureau status to that of an

office within another Bureau. To make CIPan effective tool for coordination of telecom-munications policy would require restructur-ing, refunding, and restaffing. It would alsorequire a hospitable environment within theState Department, one that recognizes theessential role of telecommunications in gov-ernance and in the conduct of foreign affairs.

E F F E C T I V E R E S P O N S I B I L I T Y F O R I N T E R N A T I O N A L

TELECOMMUNICATIONS POLICY HAS FALLEN TO

USTR, A TRADE AGENCY. THIS CONSTRICTS AND

DISTORTS THE FORMULATION OF TELECOMMUNICA-

TIONS POLICY.

The formulation and implementation ofinternational telecommunications policy, be-cause of the 1988 Trade Act, has come to bedominated by trade negotiations. The UnitedStates Trade Representative has in effectplayed the role envisioned for CIP, USTRconsults other agencies in depth and at greatlength, but when strong interagency differ-ences arise, USTR generally prevails, espe-cially since telecommunications agencies donot 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 imposeany 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 Carter Admmistration that in 1978 removed the Office of TelecommunicationsPolicy 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 socialpollcy 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 andCommerce (Subcomm lttee on Telecommunicate Ions and Finance). Ot her comm it tees, including for examplethe Senate Committee on Finance (Subcommittee on International Trade) and House Committee onForeign Affairs (Subcommittee on International Economic Policy and Trade), are concerned withinternational trade Issues. The House Committee on the Judiciary has played a strong role intelecommunications issues, having responsibility for “protection of trade and commerce against unlawfulrestraints and monopolies. ” The Iocatlon of the Coordinator in t he State Department assures that trade andforeign affairs committees will have some oversight over telecommunications.


these differences. In the future, however,formal trade negotiations may be less criticalthan technology and users’ needs in deter-mining the competitiveness of U.S. telecom-munications firms in foreign markets. Theindustry structure, investment patterns, re-search expenditures, and risk exposure can-not be effectively monitored by trade negoti-ators.

The central role of USTR in internationaltelecommunications policy has had someadvantages: it has imposed a degree of unityon representation of U.S. positions in globalissue resolution; it has kept telecommunica-tions trade issues under scrutiny by severalcongrcssional committees with a broad per-spective on global economic trends: and ithas given increased representation and im-portance to large business users of telecom-munications. to whom USTR has builtstrong bridges, while telecommunicationsagenies appear to listcn more attentively tothe major carriers. However, the dominanceof USTR further reinforces the compressionof policy formulation into a single dimen-sion, the opening up of foreign markets. Theestablished relationships and operating pro-cedures between the telecommunicationsagencies (NTIA, FCC, and CIP) and interna-

ational institutions such as the InternationalTeleccommunications Union (ITU) are beingsuperseded by trade negotiations, and somehistorical principles and procedures for co-operation and control may be effectively lostas a result.

The dominant role of USTR is also subjectto other criticism. Some communicationsindustry representatives fear that subjectingtelecommunications to broad trade princi-ples may result in the asymmetrical openingof U.S. markets without providing equalaccess for U.S. firms to foreign monopoly-

dominated markets. GATT agreements couldsupersede provisions of domestic law andregulation. Some stakeholders assert thattrade negotiators do not have full under-standing of highly technical telecommunica-tions issues, and work on the basis ofexisting distinctions and categories that willbe rapidly made obsolete by already emerg-ing technological changes.

U.S. POLICY FOR INTERNATIONAL TELECOM-

MUNICATIONS LACKS AN INFORMING VISION.

The fragmented structure for telecommu-nications policymaking and the narrow focusof both domestic and international telecom-munications policy has allowed policy for-mulation and implementation to be driven bythe needs of a relatively few private sectorstakeholders (carriers, equipmcnt manufac-turers, certain large business users), withgovernment taking a hands-off position.Communications is not merely a utility forfacilitating business competitiveness or atradable commodity. Communications is alsoa basic prerequisite of effective democraticgovernance, an essential foundation for sci-entific endeavors, a channel for conductingforeign relations and cooperative activities,and a critical element in national security andglobal peacekeeping.

For over a decade, however, the nationaladministration has largely renounced anyvoice in determining the structure, invest-ment strategies, and technology develop-ment policies of this core industry. Forexample, Europe and the United Statesincreasingly tend to differ in the approach tonetwork architecture. In Europe, relativelymore centralized ‘‘intelligence (computeri-zation) is integral to the network, while in theUnited States there is a tendency to use moresophisticated termiinal equipment, owned by


Services toEurope

the user. There arc many advantages to thelatter approach, but on the other hard,building advanced capabilities into the net-work may facilitate uses of telecommunicationsby middle-sized and even small firms thatcould not afford the specialized customerpremises equipment. In a global economy,the competitiveness of smaller firms mayturn out to be important; in addition, smallerfirms have a better track record in the UnitedStates of creating jobs than have largecorporations. Telecommunications policy,not trade policy, is the appropriate vehiclefor considering strategic alternatives of thiskind.

Notwithstanding the often-conflicting ini-tiatives of congressional committees andattempts by a few congressional leaders toput forward a vision of the possibilities ofb ‘electronic highway s,’ domestic telecom-munications policy has largely been articu-lated by the judicial branch of government.No agency, including the FCC as an independ-ent regulatory agency, has attempted tomodernize or translate the old objective of“Universal Service” in terms of new andadvancing technologies. ” Existing policy goalsremain narrow’: progressive deregulation atthe domestic level; opening of foreign mar-kets at the international level. This mayresult in:

Neglect of goals othcr than market access,

such as the most efficient interconnectionof networks and developmcnt of a fullspectrum of services for small businessand residential consumers as well as largebusinesses;Inattention to costs and risks such asweakening of regulated domestic subsidi -aries or disinvestment at home;Complete subordination of telecommuni-cat ions policy to more general trade prin -

ciples, ignoring special characteristics oftelecommunications services;

■ Continuing confusion and conflict overthe question of what the national telecom-munications infrastructure, and its con-nections to global networks, should belike at the beginning of the 21st century.

/+,

CORPORATE LEADERS GATHER IN A FIELD OUTSIDE DARIEN CONNECTICUT, WHEREONE OF THEM CLAMS TO HAVE 5EEN THE INVISIBLE HAND OF THE MARKETPLACE.

DRAWING BY DANA FRADON, © 1992, THE NEW YORKER MAGAZINE, INC

Under the present, dispersed policymak-ing structure, attention to such aspects of

international telecommunications may notbe adequate.

U.S. PARTICIPATION IN EUROPEAN MARKETS FOR

TELECOMMUNICATIONS SERVICES IS IN ACCORD

WITH U.S. ECONOMIC INTERESTS AND SUPPORTS

U.S. TRADE GOALS.

Export of services is now, and increas-ingly in the future, important to the U.S.economy. Concern about the Unitcd States’long-term balance of payments has mostlyfocused on the continuing trade deficit inmanufactured goods; but services exports arenow more than one-third as large as ourexport of goods and growing faster, with Page 17

U.S.TelecommunicationsServices inEuropeanMarkets

Europe as the primary foreign market. TheUnited States has a healthy trade surplus inservices, partially offsetting the troublesomemerchandise trade deficit. The increasedexport of enhanced telecommunications serv-ices and closely related information servicescan add significantly to this surplus. (Seechapter 3.)

Telecommunications and information serv-ices are a relatively small part of all U.S.services exports--only about 2 percent-butthey hold the opportunity for strong growth.U.S. firms have a competitive edge indelivering telecommunications and informa-tion services because of their experience incompetitive markets and in developing inno-vative, user-tailored services based on ad-vanced transmission and network technolo-gies. Other U.S. firms operating in or sellingto Europe benefit by the availability of U.S.telecommunications services. (See chapter5.) The sale of telecommunications servicesoverseas can also stimulate foreign demandfor U.S. telecommunications and computerequipment.

In contrast to the overall surplus in tradeof services, the United States now has anoverall trade deficit in telecommunicationsservices. (See figure 1-4.) This deficit, how-ever, is not due to lack of competitiveness,but to the excellent performance of U.S.telecommunications providers in compari-son with European telephone systems. Thedeficit results from international accounting

rates. A carrier originating an internationalcall pays a foreign carrier to route the call toits final destination. Countries from whichmore calls are made thus see a net outflow ofpayments. More international calls are madefrom the United States than are made to it,because of our large industrial base, largepopulation, and high per capita income, andbecause we enjoy much lower communica-tions tariffs and greater access to usefulservices than most countries.

It is important to correct the accountingrate deficit, but this will require both renego-tiation of accounting rates to reflect real costs(which will mean lower accounting rates),and lower customer charges in foreign coun-tries to reduce the asymmetry in telecommu-nications usage. But the accounting ratedeficit can also be partially counterbalancedby growth of the still-small U.S. export ofenhanced services (in which we now have ahealthy trade surplus), with the additionalbenefit of supporting the competitiveness ofother U.S. firms in Europe. (See figure 1-1.)

The success of U.S. telecommunicationsand information services firms in interna-tional markets is important to the U.S.economy. Most research on the employmenteffects of trade has dealt exclusively withexport and import of merchandise, but avail-able projections indicate that exports ofservices create U.S. jobs and that these jobshave relatively higher pay than other services

Page 1812 Accounting rates are discussed further in chapter 3. They are negotiated between carriers and areindependent of customer charges and of actual costs of message delivery.


Services toEurope

jobs. 13 However, there is relatively little

evidence for this proposition, probably be-cause the concepts of ‘trade in services’ orb ‘services exports’ are themselves new andbecause statistics on trade in services areinadequate (see chapter 8).

Some services, for example financial serv-ices, have been directly exported for centu-ries (e. g., bills of exchange), but the directelectronic export of enhanced services hasburgeoned only recently.15 Most telecom-munications services are delivered overseasthrough direct overseas investment in sub-sidiaries and joint ventures. It is difficult tojudge the impact of such corporate overseasinvestments on U.S. income, jobs, profits,and general economic welfare. Offshoreoperations financed by direct investmentgenerally create jobs and secondary income

in the foreign country, not in the UnitedStates, but profit repatriation must also betaken into account. Profits flowing back to a

~ Billions of minutes~“

~ From United States

6 To United States

4

r-l nl2

0

INet settlements ($ billions) –—- >

‘ - \

-4 1 I I 1 1 1 1 I1975 77 79 81 83 85

SOURCE FEDERAL COMMU~lCATIONS COMMISSION, 1992.

U.S. parent firm increase the value of thedomestic corporate enterprise, and arc as-sumed to strengthen its growth prospects andstimulate domestic employment and income.Foreign services firms entering our markets

‘3 For example, the Department of Commerce has estimated that 7.2 mllllon U.S. jobs were directly orIndirectly supported by merchandise exports in 1990. This study included some service-seetor jobs indirectlysupported 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 theU.S. Trade Representative matched this data, dusaggregated by industry, with average hourly wage datasupplled 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 nonexportingmanufacturing firms, USTR’S analysls Included a comment that “there is every reason to believe that thesame 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 annualgrowth In the domestic serwces sector) and 14 percent (recent growth In services exports) it will reach anannual total of between S206 and $257 bi Ill on by 1996, and t he statement was made that this could create5 million new jobs. Stephen Klndel, “lnwslble Trade,” Fmanclal Wodd, Oct. 13, 1992, pp. 56-69. Accordingto Klndel, t he employment est I mate was based on the number of jobs that USTR estimates are created byIncreases 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 localexchange carriers—have been undergoing rigorous “downs lz[ng, ” butt hls job destruct Ion does not appearto be tied to concurrent overseas expansions. Similarly, there IS ewdence of some mlgratlon of dataprocessing and other information Industry employment to offshore Iocatlons, but no evidence that this ISrelated directly to export of services.

87 89 91

Figure 1-4.Telecommunications

Traffic Balance

NOTE Does not Include traffic withMex!co and Canada.


Figure 1-5.Accounting andCollection Rates forInternationalTelecommunicationsTraffic

NOTES: The accounting ratewith Germany In 1992 was 0.8 sp~

clal drawing rights or $1.14 (FCC,Stat6tlcs of Commumcatlons Com-mon Carriers, 1991 /1 992 Ed.). Thecollection rate (I e., what the caller IS

charged) for the U S.-tmGermanycall IS calculated as $1.77 [for theInltlal m mute] + 4x$1 .09 -.$6.13(FCC), The collection rate for theGermany -to-U.S. call IS derived from5x$1 88 (TeleGeography 1992, in-ternational Inst{tute of Communica-tions). The costs to the carriers areestimated at SO.15 per m Inute atboth the US and German end;thm number IS conservatwe.

Page 20

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

n rate

1

0

❑❑Ez2

1 2 3 4 5 6 7 8 9 10Dollars

Amount paid to the correspondent carrier to complete the call, as per the accounting rate

Amount retained by operator originating the call

Estimate of carriers’ costs

under trade agreements also create jobs here.Unfortunately, economists have not devel-oped a credible way to track and calculate thenet benefits of these competing effects,especially for services firms. 16

In some industries, lower costs of produc-tion in foreign markets—often, lower laborcosts-have caused offshore facilities todisplace plants in the United States. But inother industries, particularly those with globalsales and increasing “returns-to-scale,’ 17

the most able firms are those with extensive

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

global operations. In some businesses, too,

access to customers with different prefer-ences, markets with different standards, andresearchers with a wide variety of ap-proaches to problems is an asset, In suchindustries, foreign investment is likely toresult in a bigger pool of investment capitalfor all the company’s establishments.lg

Those industries where offshore opera-tions are likely to displace domestic onesconsist mainly of commodities like wheat,textiles, apparel, and lumber.19 In the other

‘G James K. Jackson, “American Direct Investment In the European Community,” Congressional ResearchService Report for Congress, June 9, 1992.

17 “Increasing returns to scale” means that, within a generous Iim it, the more the company procluces of itsproduct 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 establishmentswhich, when sized to be efficient, add no more than small increments to global production.


Services toEurope

category are industries where the most expe-rienced and large-scale producers are themost efficient and innovative, both becauseof increasing returns-to-scale and because ofthe enormous amount of know-how andtechnology embodied in the production anddelivery of the output. The telecommunicationsservices industry is in this category. Increas-ing returns-to-scale was the justification for

its traditional status as a regulated monop-oly. Provision of high-quality services ishighly dependent on vast inputs of technol-ogy and decades of accumulated know-how.

Limits on the ability of the telecommuni-cations industry to invest in and servefast-growing, complex foreign markets wouldlikely prove a disastrous competitive disad-vantage. The speed of innovation and theshortening half-life of products is a powerfulargument for global operations. Slower mar-ket growth in the United States would notcontinue indefinitely to encourage rapidinnovation, while in faster-growing foreignmarkets there will be the opportunity toexperiment fruitfully with different technol-ogy, different demands, and different stand-

ards.

The United States is now operating in aglobal economy. It must begin to balance itsimports with exports-of services as well asgoods. Telecommunications equipment andservices is a sector in which U.S. firms excel.The European market for telecommunica-tions services is both growing and movingtoward liberalized entry. The U.S. Govcrn-ment can encourage and hasten this in-creased opportunity through trade negotia-tions and other actions. Whether U.S. firmscan remain competitive in this market willalso depend on other factors: technologicalsuperiority, management skills, access toaffordable capital, well-trained human re-

sources, and U.S. regulatory policies. Thestrategies being used by U.S. telecommuni-cations firms to compete in the Europeanmarket arc described in chapter 4.

Conclusions and policy optionsU.S. telecommunications firms and en-

hanced-services providers are well positionedto compete in European markets for services,to the extent that those markets are now opento them. A combination of technology,market forces, and institutional pressures isconverging to force open much of thetelecommunications services market that isnow closed to all competition-the opportu-nity to bypass monopolistic public telephoneoperators has been thrown open.

Congress need do little to enlarge thecompetitive opportunities for U.S. telecom-munications services providers in Europe,except for encouraging the President andUSTR to continue to push for the liberaliza-tion of European telecommunications mar-kets, and to support efforts of the EuropeanCommunity to establish a single Europeanmarket for telecommunications. No otheractions are clearly needed. There is a stronglikelihood that European markets will con-tinue slowly to liberalize and move towardgreater integration.

There are two other unresolved issues thatCongress may want to address:B

■

The risk of disinvestment or inadequateinvestment in domestic infrastructure as aresult of overseas investment by the majorlong-distance carriers and the holdingcompanies that include regulated localexchange carriers; andThe weak and ineffectively coordinatedFederal organizational structure throughwhich national telecommunications pol-icy is developed and implemented. Page 21


Page 22

The Office of Technology Assessmentfound only mixed and inconclusive evidencefor inadequate or declining investment indomestic infrastructure. There may be nosignificant trend in that direction; yet if thereis, the long-term consequences would beserious. In order to resolve this question forpurposes of future oversight and policymaking,Congress has options:■

D

Congress could instruct the FCC to moni-tor and report on all telecommunicationsactivities and investments overseas, on thesource of capital for these investments,and on the financial condition and re-sources of carriers undertaking such activi-ties.

An appropriate monitoring system wouldalso require reporting, in standardizedformat, of annual investment in infrastruc-ture modernization and in research anddevelopment.Congress could request consultation andcooperation among State regulatorsthrough the National Association of Regu-latory Utility Commission (NARUC), withsupport from the FCC, to develop jointstrategies for protecting consumer rates,requiring minimum infrastructure invest-ment, and other protective measures.

The publicly available data about carrierinvestments in infrastructure modernizationor in research and development is notadequate to allow decisionmakers either toaccept or to reject a trend toward ‘ ‘disinvest-merit. ’ The first step, therefore, is to createa monitoring system that can track bothinvestment in plant and equipment andinvestment in research and development.20 If

a consistent pattern or trend of disinvestmentappears, Congress and/or the states can thenconsider legislative remedies, including de-regulation, redefinition of depreciation rates,tax inducements, or tax penalties to correctthe situation.

State regulators are vitally concerned withthis issue, but they may lack the resourcesand the geographical span of authority totrack investments. Congress may thereforewish to ask the FCC to report regularly onpatterns of investment.

In order to encourage the development ofmore comprehensive, coherent, and vision -ary international telecommunication.Y pol-icy, Congress may wish to consider..

Declaring goals and priorities for interna-tional telecommunications developmentand deployment that include, but arc notlimitcd to, export and trade goals:Consulting with the Administration to callattention to the importance of clear defini-tion and location of responsibility forexecutive policy articulation and imple-mentation and to cooperatively create amechanism for consultation and coordina-tion between executive agencies and FCC;Mandating a restructuring of the poli-cymaking structure, possibly-creating a new Office of Telecommuni-

cations Policy within the ExecutiveOffice, or

—restructuring, refunding, and restaffingthe coordinating function/position withinthe Department of State. and

—limiting the responsibility of USTR bysetting congressional policy guidelinesfor or limitations on bilateral and multi -

20 Eight major carriers told the Office of Technology Assessment that they strongly object to the concept ofmonitoring as an additional paperwork burden. Although any well-run corporation has such Information forinternal decisionmaking, it is jealously guarded so t hat it will not fall into t he hands of compet Itors and crit ics.


Services toEurope

lateral negotiating positions with re-spect to telecommunications.

The three primary options (congressionalrestatement of policy goals, active consulta-tion and collaboration with the Administra-tion, and strengthening the policy implementa-tion structure) are not mutually exclusive,but could be strongly reinforcing. The mostactive of these options, organizational re-structuring, involves alternative approaches.

Creating a small policy office within theExecutive Office would signify the impor-tance of telecommunications and the recog-nition that there is a national interest in thehealth, structure, and operations of the indus-try that is responsible for this essentialinfrastructure. It would provide a voice intop-level deliberations. However, this actionto be effective must reflect the willingnessand intent of the Administration to make useof such an office. Past experiment has shownthat additions to the Executive Office that areforced on an unwilling President accomplishlittle.

Revalidating and reinvigorating the roleof the State Department’s Bureau of Com-munications and Information Po] icy reas-serts the interests of a number of congres-sional committees and subcommittees ininternational telecommunications. It would,however, also require the assent and collabo-ration of the Administration and Secretary ofState and a reversal of current plans todowngrade the Bureau. Historically, theDepartment has shown little understanding

of the effects of technology on the Nationand on relations between nations, and has notafforded much influence or prestige to itsbureaus that are concerned with science andtechnology. A stronger position and voicewithin the Department, which can only beeffected by those heading the Department, isa necessary prerequisite for making CIPeffective. However, Congress can through itsfunding and oversight roles encourage this tohappen.

While the United States Trade Representa-

tive is also an executive branch office,restricting and directing the USTR role intelecommunications policy fomlulation wouldbe an appropriate reassertion of Congress’primary responsibility for U.S. trade policy,trade relationships, and conduct of other,nontrade, international relationships. Statingsuch policy guidelines could take the form ofa general declaration of telecommunicationspolicy goals and need not unduly limit traderepresentatives in active negotiations anymore than does any prior fomlulation ofnegotiating positions. The difference is thatthese positions have recently been formu-lated entirely within USTR, with little priorcongressional instruction, or discussion.

Uniformity, single-mindedness, and a nar-

row focus are not desirable in formulatinginternational telecommunications policy, butultimately some consensus and concertedrepresentation is needed in national andinternational decisionmaking.

There is a nationalinterest in the

health, structure, andoperations of the

telecommunicationsindustry that

includes, but isnot limited to,

competitiveness inworld markets.

Page 23

TechnologicalTrendsandIssues 2

C H A P T E R

Technologicaltrends will increaseneed for internationalstandards, and willchallenge theviability of traditionalstandards processes.

E M E R G I N G T E C H N O L O G I E S A N D I N N O V A T I V E,

SOFTWARE-BASED SERVICES are undermining

some U.S. telecommunications regulationsand policies. Intelligent networks and information-based services will make it increasinglydifficult to draw clear boundaries betweenpublic networks and private networks andbetween regulated ‘‘basic’ telecommunica-tions services and ‘‘enhanced’ services.Such technological change may make thenegotiating positions developed by the Of-

fice of the United States Trade Representa-tive (USTR) irrelevant by the time they arcembodied in treaties, trapping the UnitedStates in agreements no longer in its bestinterests. These technological trends willboth increase the need for internationalstandards, and at the same time challenge theviability of traditional means of developingstandards.

The broad technological trends that willshape the networks of tomorrow stem fromthree fundamental developments: 1 ) theprogressive increase in processing power ofmicroelectronnic circuitry, 2 ) the continuingimprovement in fiber optics, and 3) fiberoptics: extraordinary reduction in cost. Thefirst provides the necessary processing powerfor advanced switching systems and for

compressing information signals into ever-smaller bandwidths. The second providesboth vastly improved transmission qualityand the necessary transmission capacity forbandwidth-intensive services that combinevoice, data, and video signals.

Changing technology Eight broad technological trends should

be noted:conversion from analog to digital trans-miss ion,common channel signaling,unbundling of stored-program controlswitching functions,advances in transmission systems,advances in digital multiplexing,advances in packet switching,mobile communications, andgreater functionality in terminal equip-ment.

The most basic and important of thesetrends is the progressive conversion fromanalog to digital systems. The great ad-vantages arc better performance, easiermultiplexing, 2 easier encryption, easier sig -naling, better monitorability of performance,integration of switching and transmission,

Page 25

NOTE: Much of the material In this chapter is based on an Office of Technology Assessment contractorreport: 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 alonga wire, unless It IS regularly boosted by am PI ifiers. But am pllflers cannot distinguish signal from noise, andthey boost both, while adding some additional noise and distortion. These distortions accumulate over along 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 samesequence of pulses presented at the beginning IS delivered at the end without weakening and without theaccumulation of nose and distortion.

z Multlplexlng IS the process of combin[ng multiple signals into a single channel for transm Isslon over acommon faclllty, e.g., a Iightwave or radio carrier, thus Increasing effect!ve capaclt y.


and accommodation of other services.3 Com-pression techniques are steadily reducing thenumber of bits per second that must betransmitted to reproduce a given signal, andadvanced modulation techniques allow higherbit-rates to be transmitted per unit of band-width. (See figure 2-1 and 2-2. )

A second important trend is commonchannel signaling, or separating voice trafficfrom signaling. Signaling is the informationassociated with setting up, maintaining, and

11’U”Yb

c

)

At

o

&/ ~+

( ))))))) (

Ampllfler Ampllfler >

)~,:,:.:,, .,:,:,:,::,.. ..:?::::::.:

/I

‘pm/c

Signal strength rt~ ~ Original signal

If’ti } Distofied Signal


Figure 2-1. taking down calls. Until recently, analogAnalog Transmission

NOTE In order to transmit a voiceover the telephone network, thesoundwaves (a) are converted to acorresponding electrcal wave (b)when the waves contact the mouth-pmce of the telephone handset. Thesignal weakens as It travels alongthe wires of the network, and there-fore must be ampllfwd at intervalsThe signal mewtably picks up noise

and dwtortton, and this noise anddistortion slncluded with the ongmalsound when the signal IS ampllfled(c)

tones were used to convey signaling infor-mation, which was carried on the samechannel as the voice conversation. Withcommon channel signaling, all of the signal-ing associated with multiple conversations is

handled on a common packet-switched subnet-work. Conversation channels are circuit-switched, while signaling information in thecommon channel is digitized and packet-switched. Common channel signaling isfaster than traditional analog signaling, al-lowing calls to be set up faster. The signaling

does not consume conversation capacity onthe trunk. The network can ‘ ‘look ahead” tosee if lines or trunks are busy before settingup a call on the circuit-switched network,and then pick a route through the networkthat minimizes congestion. These improve-ments become even more powerful whenenhanced computer processors and data-bases are added to common channel signal-ing to create ‘‘intelligent networks.

A third trend is toward unbundling ofstored-program control switching. Modemcomputerized or stored-program circuitswitches are composed of two basic parts—the matrix where physical connections arcmade between circuits, and a processor thatcontains the logic that controls the switch-ing. In early ‘‘stored program controlswitches, the switch (matrix) and processorelements were integrated. (In computer terms,there was no separation between the “appli-cation program’ and the "operating sys-tern, ’ The customer could not modify theswitch software to create new or changedservices-the switch manufacturer had to dothat, usually with a new switch.

Separating the switch control from thelower-level switching functions allows net-works to be programmable by a carrier, anenhanced services provider, or the customer/end-user. In the case of a public network, alocal switch can suspend an incoming call,look up the called number in a database, androute the call to the intended recipient atanother number and location (call forward-ing). In a corporate network, a private branchexchange (PBX) can be linked to externalcomputers; calls can be delivered to particu-lar corporate agents along with differentscreens of information depending on the

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

TechnologicalTrends

andIssues

1 . . .

L~ 20~8000 s e c o n d @ 124--

/. . .

Figure 2-2.Digital

Transmission

SOURCE OFFICEOF TECHNOLOGY

ASSESSMENT, 1993.

...which isencoded as100000111000001010000001100000000111111101111110011111010111110001111011

...and sent asn f- lJ-1 nn nn-J 1-1 LJ L-It- r L-

/

In a digital system, the soundwave is sampled (a) at sufficiently close intervals (1/8000 of asecond) to very accurately reproduce the wave’s shape. The amplitudes of the samples are thenquantized (b) -- or given approximate vaIues according to the range into which the amplitudefalls. The new signal IS encoded to an 8-character binary format (which permits 256 possiblelevels) 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)./// —

‘. ~———————-. —————— ~’

—J—,“RepeaterCr

/)

Finally, the signnal is converted back into an electrical impulse (e, f) and to soundwaves (g).-—— ——— ,r

e

I Ill -11111I ~ II II

I 11

I I

1-!I.— ——J ~

U.s.TelecommunicationsServices inEuropeanMarkets

The “IntelligentNetwork’ ’-locatingprocessors anddatabases through-out the network—permits a widevariety ofspecializednetwork services,including virtualprivate networks.

identity of the customer placing the call. Thisccm~putcr/telephone integration is one of themost important trends changing telephony.

The “Intelligent Network” is a naturalextension of these advances in switching andsignaling. Computer processors and theirassociated databases arc placed in the net-work where they can be accessed from thesignaling channel. The system uses thecalling and called numbers plus other infor-mation to handle calls in special ways--e. g.,to route calls to different locations depend-ing on the time of day and/or the originatinglocation. Public or private networks can bereconfigured to reflect changing traffic con-ditions or to respond to network failures. Anintelligent network can also create software-defined virtual private networks.

One characteristic of intelligent networkconcepts is that the call-handling logic anddatabases can be stored at a handful ofcentralized locations, to be accessed by alarge number of switches. This makes it easyto reprogram them, since the software anddatabases need be updated only at a limitednumber of locations. As a result of thesedevelopments, the logic and data associatedwith the handling of individual calls can beoptimal] y distributed among customer prem-ises equipment, the local or metropolitan orregional portion of the network, or the

long-haul portion, and linked using ad-vanced signaling systems.

Greatly improved transmission systemsarc a fourth broad technological trend. Trans-mission systems for traditional servicesevolved from open wire line to twisted-paircopper cable, coaxial cable, line-of-sightmicrowave, satellite, and optical fiber cable.

While technological advances have pro-duced significant capacity increases in eventhe older technologies such as twisted-paircopper cables, the largest increases areassociated with the deployment of opticalfibers or lightwave systems; these systemsoperate routinely at speeds as high as 2.4Gbps (billion bits per second) on a singlefiber.

A family of transmission standards nowbeing extensively implemented, called Syn-chronous Optical Network (SONET),4 al-lows transmission rates in the range of 51Mbps (million bits per second) to 2.4 Gbps.Because SONET uses synchronous trans-mission, individual channels can be effi-ciently added or dropped at intermediarynodes without the usc of back-to-back multi-plexer. This allows the creation of ringarchitectures that can provide added reliabil -ity. (See figure 2-3. ) Moreover, SONETincludes special data channels that facilitatevarious network management functions suchas surveillance and rerouting from a centrallocation. By installing high-capacity facili-ties to the customer’s premises and using theadvanced network management features ofthese systems, additional or reconfiguredchannels can be provided to the customersquickly, and without an on-site visit by atechnician. Through this ‘preprovisioning, ’a customer can even get additional capacityby directly accessing the network manage-ment system—a form of ‘‘bandwidth ondemand.

Packet-switching is another powerful tech-nological trend. The public switched tele-phone network with circuit-switching wasoptimized for voice communications. In the

4 Generally known outside of North America as Synchronous Digital Hierarchy (SDH), the internationalstandard.

TechnologicalTrends

andIssues

digital mode, it switches 56/64 kbps (thou-sand bits per second) circuits, correspondingto the uncompressed bandwidth require-ments of ordinary voice communications.For data communications, there are twodrawbacks to circuit-switching: the ineffi-ciency of having dedicatcd connections whentraffic is intermittent or “bursty,’ and theconstrained 56/64 kbps transmission speed.The lattcr can be partially overcome bymodifying or redesigning switches to handlemultiples of the 56/64 kbps rate. (This iscurrently being done to achieve speeds up to1.5 Mbps. ) A wideband, circuit-switchedservice of this type is appropriate for bulk filetransfers, vidcoconfcrencing, and other ap-plications with relatively constant bit-rates.

Traditional packet-switched networks arceffective for handling bursty data, but arecurrently 1 i m i ted to speeds of about 64 kbps.This is because the packet switch at eachnetwork nodc must read the address informa-tion, check the data contained in the packetfor errors, correct the errors or request aretransmission, reassemble the packet, andforward it to another node. New technology,known generically as ‘‘fast packet-switching, ’can reduce these delays.

Frame relay and cell relay are two formsof fast packet-switching. Both rely on thefact that modern digital transmission sys-tems have very low error rates comparedwith analog systems, and the end user’sterminal equipment now has the processingpower to correct errors or ask for retransmis-sion. Both frame relay and cell relay areattempt to improve a situ at ion in which theability to transmit information at high speedsexceeds the ability of switches to route it.These technologies have given rise to theimportant developments of AsynchronousTransfer Mode (ATM) and Switchcd Multi-

Megabit Data Service (SMDS), described

below.Frame relay utilizes the same type of

variable length packets characteristic of tra-ditional packet systems, but the individualpackets--called frames-arc relayed throughthe switch in: nodes with no effort to recoverfrom any errors detected. Much of the errordetection and all error recovery is left to theterminal devices. Transmission rates in the 1to 2 Mbps range arc possible.

Cell relay operates similarly, except thatthe packets-here called cells—have a short,fixed length, and because of this can beswitched at extremely high speeds (in the

Q❑:


range of hundreds of megabits per second).The expectation is that the high speeds andsmall delay will allow integrated combina-tions of’ voice, data and video traffic to behandled through a common switch. With allthe transmitted information divided intoindividually addressed cells, both variablebit-rate (i.e., data) and constant bit-rate (i.e.,voice ) traffic can be switched. While early

applications of cell relay technology are fordata communications, the goal is to extend

Figure 2-3.Multiplexing

NOTE Multlplexlng IS the process

of comblnlng multlple signals Into asingle channel for transmission overa common facll Ity (e.g , Ilghtwave orradio carrier). Multlplexlng IS used toIncrease transm s.slon efffc!ency by

allowlng mult @e clrcu[ts to beearned by the common facility

Page 29


Engineering oreconomic forcesare shiftingtelecommunicationsintelligence andfunctionality from thecenter to the edgeof the networks.

the technique to voice and video. In addition,cell relay works in a synergistic way withSONET,

Frame relay is both a technology and aservice. It is designed to carry data commu-nications and interconnect local area net-works (LANs), and it may be used totransport a variety of higher-level data com-munications protocols. Frame relay servicesare being introduced both in the UnitedStates and internationally, by U.S. carriersand value-added network providers. Euro-pean public telephone operators (PTOs) arealso planning to introduce public frame relayservices. 5 However, there are still unan-swered quest ions about performance charac-teristics and about support from carriers inseveral countries. A major unresolved issuefor the United States is the nature of intercon-nections between major carriers such asAT&T and MCI. Some users say that na-tional policy should insist on immediateaction to ensure interoperability.

Switched Multi-Megabit Data Service is abroadband public data communications serv-ice based on the second form of fast packetswitching-cell relay. SMDS was developedprimarily for LAN-LAN interconnection (i.e.,data communications). However, specifica-tions for handling voice and video are beingdeveloped. The cell relay structure is com-

patible with a new protocol known asAsynchronous Transfer Mode intended foruse in switching and transmitting voice, data,and video simultaneously.

ATM is the basis for Broadband Inte-grated Services Digital Network (ISDN), andSMDS could be an interim step pending thearrival of Broadband ISDN.6 The standardsfor Broadband ISDN are not fully developed.One configuration would provide for achannel of approximately 150 Mbps tocustomer premises, with integrated switch-ing and multiplexing.7 This would allowtransmission of high-quality, two-way videotelephone and vidcoconferencing, and othermultimedia services combining audio, video,graphics, text, and data. There is still muchuncertainty about architecture and standardsfor this development.

Another marked trend is toward wirelessor mobile communications, with the rapidgrowth of pm-table communications includ-ing cellular- mobile radio, specialized mobileradio, cordless telephones, and radio pagers,and in the future wireless forms of PersonalCommunications Services (PCS).8 Some ob-servers suggest that there may be a funda-mental shift in the way people communicate,with access to telecommunications servicesthrough wireless technology becoming therule rather than the exception. (See figure

Page 30

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, March1992, 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 heforeseeable future.8 Donald C. Cox, “Wireless Network Access for Personal Communications,” /EEE Comrnun/cations,December 1992, p. 96. Some studies suggest PCS could find 100 million customers In the United States.

TechnologicalTrends

andIssues

2-4.) Rapid growth9 has been encouraged bygovernment actions to reallocate spectrumfor advanced mobile communications sys-tems. by the continued increase in processingpower (e.g., Digital Signal Processing chips,or DSP), by steady improvements in batterytechnology, and by increased use of comput-ers within the supporting land-based infra-structure.

Still another trend shaping telecommuni-cations networks is increased functionalityin terminal equipment. The provision ofterminal equipment has been deregulated inmany countries and the markets arc intenselycompetitive. Intelligence and functionalityin terminal equipment at the edge of thenetwork can substitute for intelligence andfunctionality within the network. For exam-ple, frequently called telephone numbers canbe stored either: on a b ‘smart card’ that isplugged into a handset. in the terminalequipment itself. within a telecommunica-tions network (e.g., in a PBX or CENTREX),or at some common location or databaseaccessible to the customer from any network.

Hard engineering or economic reasons arcleading to locating intelligence and function-ality at the edge of the network rather thaninternal to it. It may also be done to respondto customer preferences. Some customerswant to develop proprietary solutions to theircommunications needs to gain some compet-itive advantage, and such customization maybe difficult on a network designed to servegeneral requirements. Other customers mayfeel more secure if information critical totheir competitiveness is embodied in soft-ware and hardware on their own premiscs.

Thus advances in telecommunications serv-ices will occur not just within networks butat the edge as well. The time needed for suchdevelopments is often shorter than for devel-opments in the internal network infrastruc-ture.

The evolution of advanced servicesThe broad technological trends discussed

above are the basis on which advancedservices will evolve. Perhaps the most highlytouted advanced telecommunications service isISDN. The concept of ISDN originally

Millions $billions12 T

9“

Revenues6-

Subscribersd

8

6

4

2

01984 1985 1986 1987 1988 1989 1990 1991 1992

SOURCE CELLULAR TELEPHONE INDUSTRY ASSOCIATION, 1993.

developed as an outgrowth of standards Figure 2-4.

development work in international bodies. It Growth in U.S.

represented a combination of two of the Cellular

technological trends identified above: the Subscribership

conversion from analog to digital networks, and Revenues,

and the separation of the signaling channel 1984-92

9 In the United States, the number of f Irst-generation cordless telephones grew from 8 million in 1984 to 50mllllon 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


Figure 2-5.A NetworkTopology

NOTE The publlc-switched tele-phone network consists of fourmalor segments

Customer premises equipment(CPE) refers to the commumcattonsdevices (mcludlng the mslde wlnng)In the user’s home or office, such astelephones, facslmtle machines, andcomputers and modems. The CPE oflarger compames often includes pr-ivate branch exchanges (PBXS) andIcd ar~ (computer) netvaks (lANS).

Local distribution network refersto 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 officeswitches and the mterofflce trunkImesconnectmgthose switches. Eachcmtraloffceswtch arespncfs muc$lyto a neighborhood so a city WIII beserved by multlple central offices.Telephone traffic for pcxnts outsidethe metropolitan network is collectedat and routed through a tandemswitch.

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-

swltched data network (representedby the thm dashed Ime) IS transpar-ent to the user but IS cntlcal as It ISthe mtelllgence of the network—determmmg the best route for a calland allocating the clrcults, handllngblllmg, etc. The mterexchange (orIongdlstance) carriers interconnectfor access to the local network at thepoint of presence (POP).

—.—---———-——. . . ..—— .—.

,\\ \. I w - - - - - + \

fl=—+

“ \ . . ‘\

r-=511r m - ? -—

——

1

1 f=%.// ~m1° ‘“ “’:’:’’””O” /1’bm \ + LN@/ / ’ ‘—,1- came / I I Swfld I I \,/

, / ’%L ~ TcentraK&5’[bY!!.4i J

Interoffice trunks\

4:, -jw~:* ,: piiEFEq \

/ 1’ , I \

/ \l

~fiSignal transfer point I

—! Interclty o r I

Iong-distance 1/1/

//’

=------ -Srna’iona’ga’eway

.

Page 32 SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993,

TechnologicalTrends

andIssues

from the channel carrying customer mes-sages.

ISDN offers two primary transmissionspeed- 144 kbps (the Basic Rate Interface)and 1.544 Mbps (the Primary Rate Inter-face). The former is divided into two 64 kbpsvoice and data (bearer) channels plus a 16kbps signaling channel. The Primary Rate

Interface is divided into 23 voice and data 64kbps data channels plus a 64 kbps signalingchannel. These speeds are compatible withthe bandwidth capabilities of twisted-paircopper cable. The bearer channels can becircuit-switched or packet-switched.

ISDN was designed to support manyapplications, including mutimedia commu-nications (i.e., simultaneous voice and docu-ment transmission). The National ISDNUsers Forum identified 16 important appli-cations for ISDN: 10

1.

2.z3 .4.

5. .6.7.8.9.

1 0.

11.

high-speed file exchange,videoconferencing,

data conferencing,multipoint screen sharing,

customer service call handling,

telephone/workstation integration,

image Communicant ions,

remote terminal access to LANs,automatic number ID/calling linc ID,

at-home agents,multidocument image storage andretrieval,

BelgiumDenmarkFranceGermanyIrelandItalyNetherlandsPortugalSpainUnited Kingdom

Percent ofnetworksconverted

800/010010010080

100100

100

Target date

19921992199119931993

“late 1990s”19951994

“late 1990s”1992

SOURCE

12.

13.

14.15.

16.

In

Percent ofnetworks now ISDN

capable (1 991)

20%o

10060

00000

60.

FHE YANKEE GROUP, AND COMMISSION OF THE EUROPEAN COMMUNITIES, 1992

multiple ISDN phones on a single Table 2-1.ISDN basic rate interface loop, National ISDN

transparent feature operation between Status and

ISDN, Goals

frame relay support,centralized fax server with ISDNaccess, andengineering workstation interface to

ISDN.

In 1990 the Federal Communications”

Commission (FCC) required Bell operatingcompanies (BOCS) to include plans forISDN in their open network architectureplans.

11 According to these plans, the seven

BOCs expect to convert over 2,000 of their9,000 switches by 1994, making over half oftheir regional access lines ISDN capable.

Some European countries arc much fur-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 Belloperating compames’ plans—from 21 percent of access lines for Southwestern Bell to 87 percent for BellAtlantic, About 30,000 ISDN-equipped I!nes are now In use in the area served by Bell Atlantic. GeneralIndustry acceptance of a national ISDN-1 standard was shown with a multlvendor 22-node ISDN network

demonstrated In November 1992. Page 33


Programmablenetworks open theopportunity tocustomize them tomeet customers’needs, either bycarriers, thirdparties, or (corpo-rate) customersthemselves.

concept evolved largely outside the UnitedStates and was identified with EuropeanPostal, Telephone, and Telegraph (adminis-tration) (PTTs). It was adopted by theInternational Telecommunications Union’sConsultative Committee for InternationalTelephone and Telegraph (CCITT) in 1972,and was intended as the response of PTI’s tothe growing demand for data communica-tions. It assumed a unitary ‘‘solution’ in amonopoly environment.

In the United States there may now bemore critics than advocates of ISDN. ISDNhas not lived up to early expectations. Itsslow growth has been attributed to a numberof factors, including lack of user input in itsdesign, slow development of ISDN stand-ards, the high cost of terminal equipment,and competition from newer technologies.Widespread acceptance of ISDN may havelagged so far that other advanced technolo-gies based on fiber optics and fast packet-switching will further limit the appeal ofISDN. AT&T officials point out, however,that these alternative technologies will bene-fit only big corporations, and the lack ofISDN severely limits the services that can beoffered for middle-sized and small busi-nesses, as well as for residences.

On the positive side, France and Germanyarc heavily committed to ISDN and theEuropean community is pushing it as ameans toward an integrated European net-work. There is now a greatly increaseddemand for data services, and according tothe International Telecommunications UsersGroup (INTUG), which is not a strongadvocate of ISDN, interconnection between

most of the various European ISDN systemshas now been substantial y achieved. ]3 How-ever, ISDN may not increase PTT revenuesbecause it sometimes replaces higher reve-nue services.

The ISDN outcome could possibly affectthe pattern of suppliers of equipment ininternational networks. ISDN is part of theEuropean pattern of centralized networkintelligence, whereas the U.S. trend is todiffuse intelligence (i.e., computer logic)throughout the network, making it effec-tively a web of computers. The formerstrategy will encourage European telecom-munications companies to stick with theirtraditional equipment suppliers; the latterstrategy could benefit U.S. firms such asIBM. On the other hand, long-lived ISDNcentralized switching and processing instal-lations would, in the long run, work againstsmall new firms with rapidly changingtechnologies, many of which arc U.S. firms.

A second category of emerging servicesare those based on the ‘‘intelligent networkconcept described above, The intelligentnetwork allows network switching elementsto interrogate remote processors and data-bases to determine how to route a call,Making the network programmable in thisway opens up the opportunity to customizeit to meet the needs of individual customers,whether this is done by the carrier, by a thirdpart y on behalf of the customer or customers,or by a (corporate) customer alone. This wasthe basis for ‘ ‘800’ service--when a cus-tomer dials an 800 number, the call is brieflysuspended while a remote database is con-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 ///usmyHo/y Grai/, by The Yankee Group Europe (The Old Free School, George Street, Watford WD1 813X, UnitedKingdom), and /SDN Communications kJ Western Europe 1992, by CIT Research Ltd. (23 Derlng Street,

London WI R 9AA).

TechnologicalTrends

andIssues

r‘&f-—’———

Transport or call-carrying circuit

((’l,,{ L1(TEM J/ ‘ /’ )

Local earner

Id

Local c Ier ~ ~A c

~-–

\\L.

/ \ I Signal

‘ 1 \A \

\\J


database, the 800 number is translated into aregular telephone number, which is sent backto the switch where the call was intercepted,and the call is then handled as a regularcircuit-switched call. It can be routed differ-ently depending on the place it originated,the time of day, or other variables. Intelligentnetworks can route calls automatically to acustomer location nearest the caller (forexample, from a chain of retail stores or pizzaparlors) and could take into account theclosing hours of the stores and the time atwhich the call is made.

Another usc of the intelligent networkconcept is the creation of Virtual PrivateNetwork (VPN) services. One of the advan-tages of a real private network is thatcorporate customers can employ their ownnumbering plans, using fewer digits thanrequired by a public-switched network bc-

Signaling circuit v

cause the private network serves a limitednumber of locations and telephones. Aninelligent public network can emulate thatfeature on VPNs, translating a 7-digit num-ber dialed on a VPN into a normal 10-digitnumber, and muting it accordingly. Anotherfeature of private networks is the ability torestrict calling from certain telephones toreduce toll calling abuse (e.g., to preventemployees from making unauthorized inter-national calls). The same type of restrictioncan be imposed by an intelligcnt publicnetwork by examining the calling and callednumbers. Other features possible on VPNsinclude, for example, alternative destinationrouting, account codes for cost allocationpurposes, management reports, hot lincs, andcall forwarding. VPN (and new tariffs forhigh volumc traffic) may already have swungthe balance for large corporations away from

Figure 2-6.Intelligent Network

NOTE Theadvanced mtelllgent net-work (AI N), elemen!s of wh{ch arecurrently {nstalled In today’s publlc -swltched telephone network, envt-stons greatly lncreas~ operatingefficiency as well as a broad array ofsophtstlcated network services byseparat Ing the call t ran sport (I e., t hevoice clrcult) function from the slg-nalmg and control funct~on and em-ploylng the powerful software In the

swlfches.

Imagme, for example, an Instancewhere a caller places a call to afam Ily member who while on vaca-tion has Ind Icated that calls fromcerfam numbers are to be rerouted tothe new Iocatlon and given a uniquenng to Indicate pnorlty In this Illus-tration, the vacationer would havepreprogrammed the pncmty telephonenumbers (other calls m Ight be routedto an answering service or machine)

and the new destmatton number bydlalmg mto the Intelligent peripheraland Inputt[ng these data When thecaller dials !he number, the localswlfch quer!es the sgnal transferpoint for b[lling and accounting infor-mation and ascertains from the serv-ice control point a clear path throughthe Iccal network to the point ofpresence of Ihe caller’s long-dlstance earner of choice The slg-nahng networks of the two local

exchange compantes and the longdistance carrier interact to learn thestatus of the called party and thushow to set the cah up, In fhls case,the call has been red lrecteC to atelephone address In a new Iocatlonso a third local company IS Involvedand once again the status of thecalled party IS learneC (for example,I f the hne were m use, the networkwould direct local carr!er A to trans-mit a busy signal to the caller) and

establishes a call!ng path Local car-rier C IS also Instructed to del wer the

special nng

Page 35


developing private networks and back to-ward reliance on public networks.14

VPN services are not limited to voicecommunications; AT&T offers an interna-tional Software Defined Data Network inabout 20 countries. Intelligent networks willbe crucial to the development of PersonalCommunications Services or Personal Num-ber Calling, which will require use of dataconcerning user identity, completion prefer-ences among available alternative networks,user-selected features, and billing proce-dures. 15

First-generation cordless telephones andcellular mobile radio systems are now widelyavailable in most parts of the world. TheUnited States has lagged behind Europe indevelopment of cordless telephone stand-ards. Here, the first-generation of analogcordless phones operated on a few channels,near 50 MHz in the radio spectrum. Somemanufacturers have recently introduced digi-tal cordless telephones that operate in a bandin the 900 MHz region that is set aside forlow power, unlicensed devices. U.S. cellularservice providers are beginning to converttheir first generation systems (operating inthe 800 MHz region) from analog to digitaltransmission. The FCC is expected to reallo-cate a substantial block of spectrum near 2GHz for PCS.

In Europe, two second-generation cord-less telephone systems have already been

developed, CT2 and DECT. CT2 is a low-powcr system in accord with a standardknown as the Common Air Interface, thatallows a single handset to be used inresidential, business, and public (Telepoint)applications.

There is a pan-European standard for adigital cellular system operating in the 900MHz band, the Global System for Mobiles(GSM),16 The GSM network will support notonly ordinary speech transmission but trans-mission of short data messages, videotex,teletex, and facsimile .17 The Digital CellularSystem, DCS1800, is another standard for aPersonal Communications Network that wasderived from the GSM standard, but operatesin a different region of the spectrum (1800MHz) at lower powers with smaller cells.The Europeans are also working on a third-generation mobile system known as theUniversal Mobile Telecommunications Sys-tem.

Satellites have proven to be especiallyeffective in delivering one-way video serv-ices and two-way data services utilizingVery Small Aperture Terminals (VSATs).VSATs arc extensively used in the United

States, but development of VSAT services inEurope lagged because of regulatory restric-tions. As discussed in chapter 5 (Users’Perspectives), they may become: increas-ingly important in the near future.

‘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 servicein several countries in mid-1 991 but was delayed for various reasons, including problems with subscriberequipment-type approvals.

17 Raymond Boult, “EuropeAwards Herself t he GSM,” Network Managerner’r( Europe, May/June 1992, p. 28.

TechnologicalTrends

andIssues

The implications oftechnological change

Telecommunications networks are becom-ing more software-intensive and the costs Ofdeveloping networks and services is increas-ingly in software rather than hardware. Theway in which networks and services arecompetitively differentiated is in the soft-ware incorporated in them. Fortunately, thisplays to the strength of U.S. firms.

In early generations of switching equip-ment, hardware and software were tightlycoupled and had to come from the samevendor. This is likcly to remain the case forsimple switching software, but carriers, third -party services providers, and users all will inthe future have increasing ability to ‘‘pro-g r a m networks to meet specialized needs.Carriers can be increasingly responsive tocustomer needs, and decreasingly dependenton hardware manufacturers and vendors.Customization through software can helpprivate network operators, such as financialservices providers. develop and offer inno-vative services and maintain a competitiveedgc.

The pressure will thus grow to unbundleapplications software and make basic trans-mission a more commodity-like product.There is likely to be more commingling ofcarrier-provided and customer-provided logicand databases. Both may be necessary. forexample, in call-routing that is sensitive totime of day or changing recipient locations.

Internationtal traffic has traditionally beencarried over national carriers’ ‘‘half cir-cuits"; that is, circuits were provided bycontractual agreement between two nationalmonopoly’ operators. Now there is a shift

toward “light carriers,” providing interna-

tional service by reselling. rerouting. andreprogramming capacity leased from thetraditional (’ ‘heavy”) carriers. This move-ment is driven by the ability to usc softwareto provide "least-cost global routing’through a wide choice of carriers (althoughin fact none of the light carriers can yet offer"globa" service).18

Carriers that have residual monopoly powerover basic telecommunications services willhave a continued means and incentive toleverage that power into the provision ofenhanced services. For example, a carriermight providc customer access to its internallogic and databases more efficiently oreffectively than it would provide access toexternal logic and databases belonging to acompetitor. This means that regulatory is-sues such as open network architecture andopen network provision will remain impor-tant topics in the future.

As private networks also become morecomplex, some corporations arc contractingwith carriers, value-added network opera-tors, and other outside firms to manage theirexisting networks ("outsourcing"). But car-riers arc also seeking help in network man-agement, administration, and maintenance.For example, Ericsson, the Swedish telecom-munications company, and Hewlett-Packard,the U.S. computer manufacturcr. recentlyannounced a joint venture to provide tele-communications operators with network man-agement systems. This was described asbeing “aimed at winning business from thegrowing demand among telecommunicationsoperators to place orders outside their owncompanies for systems that combine net-

“ Gregory Staple, “Winning the Global Telecommunications Market,” Telegeography 1992 (London:International Institute of Communications, 1992).

Telecommunicationsnetworks areincreasingly

software--intensiveand this plays to

the strength ofU.S. firms.

Page 37


Regulators andpolicymakers willfind it increasinglydifficult to separateregulated basicservices fromunregulated en-hanced services.

work management with administrative andcustomer support systems. ’ 19

Because of the creation of services withinsoftware rather than in hardware, regulatorsand policy makers will find it increasinglydifficult to separate regulated telecommuni-cations services from nonregulatcd enhancedinformation services, or to distinguish defin-itively between public and private networks.Similarly, agreements reached by trade ne-gotiators that depend on distinctions be-tween basic and enhanced services will bedifficult to implement and enforce----a- willtend to stultify innovative developments.

As networks become more software-intensive and more complex, like ‘ ‘giantdistributed computer systems,”20 they mayalso find that they are increasingly vulnera-ble to various kinds of systems failureresulting from software and hardware de-fects, human error, effects of natural disas-ters, and hostile and criminal intrusion. Thecore cause of failure may be simply theinability to comprehend and manage theproliferating relationships and dependencieswithin extremely complex systems. In inter-national networks, coping with these vulner-abilities will require global cooperative ac-tions.

StandardsIssues of standards development are in-

creasingly important in the context of U.S.competitiveness in European markets. U.S.

firms engaged in international commercewant a communications infrastructure that isseamless, reliable, cost-effective, and flexi-ble. Above all, they want transoceanic andpan-European networks that, whether public,private, hybrid, or shared, are fully intercon-nected and interoperable. This implies thenecessity of international standards.

A standard is an agreed upon technicalspecification or set of specifications used inproducing goods or services. ‘ ‘Product stand-ards’ define a particular item, system, func-tion, or service. “Process standards’ definefeatures or functions that must be the same inall versions of a product or service in orderto assure their safety, reliability, or interoper-ability with other products or services. Thelatter is of paramount importance for com-puters and telecommunications.

Many standards develop informally or defacto; that is, one kind of product or servicescaptures the market, either by being first orby winning nearly universal approval.21 Stand-ards may also be formally set by agreementamong producers; these are called voluntarystandards. Finally, standards may be man-dated by governments, usually for reasons ofsafety, health, or environmental protection.Standards traditionally were promulgatedlong after a technology was invented, butrecently they are often ‘‘anticipatory—that is, they may be agreed on at an earlystage of a technology’s development in orderto guide its design and make it attractive to

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, OTAcontractor 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 takenas a sign, Hack says, t hat “past creativit y has provided societ y with a solution which if adopted k)roadly andconsistently can move creative efforts to a new level.”

TechnologicalTrends

andIssues

Anticipatory standards create a target towardwhich technology development can be di-rected.

While simple product standards deal withthe characteristics of stand-alone devices orcomponents, such as the 12-button keypad ofa modern telephone, integrated-systcm stand-ards deal with the structure or architecture ofcomplex technological systems or networks.Such standards assure that one part of asystem will not disallow something that isimportant for another part of the system. Forexample, Open Systems Interconnect ion isan anticipatory integrated-systems standardthat may allow multiple development effortsto be integrated into a cohesive structure. 23

Networks and interoperabilityBecause of the imperative of interopera-

bility, there is a strong incentive for develop-ing international network standards that span

many national markets.24 Telecommunica-tions network standards were originally de-veloped for analog, hierarchical systemswhere the carrier was the dominant (or only)decisionmaker and the users had, or were

treated as though they had, ‘ ‘monolithic,invariant needs,"25 In analog networks, thecontent of the message (e. g., whether it isvoice or data) determines how it is to betreated or transmitted. Digital systems arcfundamentally different: ‘‘a bit is a bit is abit,’ and what matters is what happens at theinterface to the user’s application. Withprogrammable or intelligent networks, asdescribed above, control of the network maybe shared between carrier and user, andflexibility becomes essential. Carriers andproviders of services have a disproportionateadvantage here; standards, and user partici-pation in standards-setting, are increasinglyimportant to assure users of full and cost-effective interconnect ion.

In the 1980s, although computer costswere dropping rapidly, telecommunicationsnetwork costs were soaring because of prob-lems of incompatibility.26 which had to besolved one at a time with converters, transla-tors, and gateways, and other kinds ofcustomized connectors. In traditional meth-ods of standards development, the cost-effectiveness of manufacturing is balanced

22 Process standards to assure Interoperabllit y, compatiblllt y, or modularity are especially important wit hnetworks, whose value to users depends not only on the products’ intrlnslc qualities but on the number ofothers who have compat Ible products. The most fam il Iar examples oft his quallt y of beneftclal externally y aretelephone systems, whose value to each customer IS assumed to Increase with the number of subscribersIt 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 bringabout Improvements in the supply or quallt y of com elementary goods and im prove t he qual It y of after-salesservice 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 heInternational 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 ITStandard lzatlon,” sponsored by Mlnlstry of International Trade and Industry, Mlnstry of Posts andTelecommunlcatlons, and Organlzatlon for Economic Cooperation and Development, Tokyo, Nov. 18,1992.

26 Stanley Besen, op. cit., footnote 22.


Figure 2-7.TransatlanticCommunicationsCables

./

‘ - - d

., ,,. , r, , !

o0

— F i b e r o p t i c c a b l e– – Copper cable

-— Proposed (fiber) cable


against protection for consumer safety and The U.S. process for standards develop-health. Standard-setting is slow and cumber-some, and largely dominated by technologyproducers, with very limited participation byusers. This makes it difficult for standards torespond to customers’ emerging needs. Forrapidly advancing telecommunications tech-nologies, standards should also have threecharacteristics, according to Richard JaySolomon and Anthony M. Rutkowski:

ment is increasingly unsatisfactory to manycritics, and perhaps to most participants.28 Itis plagued with dissension and rivalry; it iscumbersome and arcane; it is dominated bya few organizations with the considerableresources and dedicated expertise necessaryfor sustained participation. Intellectual prop-erty issues are unresolved. The dissemina-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 ofnational, and international networks; and threads on a screw) is not appropriate fortimeliness --synchronization with evolu- advanced electronic technologies and serv-tion of technology and markets.27 ices to meet the highly varied and continu-

Page 40

27 Solomon and Rutkowski, op. cit., footnote 25.

28 Fora full description and analysis of the process and the growing dissatisfaction with It, see U.S. Congress,Office of Technology Assessment, G/oba/ Standards: E?uild;ng Hocks for the future, OTA-TCT-512(Washington, DC: U.S. Government Printing Office, March 1992).

TechnologicalTrends

andIssues

ally changing needs and desires of largeusers.

New ways of achieving interoperabilityThis widespread dissatisfaction. and the

implementation of packet networks in theearly 1970s, resulted in an effort to find anew way of assuring interoperability, bydefining a generic open systems interconnec-tion model.29 “ O p e n means that any twosystems conforming to a reference modeland its associated standards can intercon-nect. One such model was developed for theDepartment of Defense’s research computernetwork, ARPANet, and included a suite ofprotocols known as Transmission ControlProtocol and the Internet Protocol (TCP/IP).Another, called the Open Systems Intercon-nection (OSI ) model, was adopted by theInternational Standards Organization (IS0)and the International TelecommunicationUnion (ITU).30 Both define the functionsthat the communicating computers (as wellas some of the internal network components)must perform. Both define ‘‘protocols, ’ i.e.,

the precise stream of data bits that musttraverse from one computer to another.

In each standard, the definitions of func-tionality and the protocols arc organized intolayers. In the Department of Defense model,four layers are recognized; in the OSI model,there arc seven. Layers make it possible fordifferent committees to work in parallel onthe development of the standards. The refer-ence model defines the layers. A layerbounds the responsibility of each committee.A well-conccivcd reference model can greatlyspeed up standards development.

Producers vs. usersWhen products conforming to different

standards (including proprietary standards)must communicate with each other, devicesknown variously as protocol converters,translators, or gateways can sometimes beused. Such devices have limitations. Theirdevelopment depends on deep understand-ing of both standards; they can only supportfeatures that arc implemented in both prod-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 agencywhose members are 97 nat Ional standards-sett ing bodies. The I SO promulgates voluntary standards in allfields except elect rlcal and electronic engineering, where standards are promulgated by the InternationalElectrotechnlcal Comm Ission (lEC), also an independent specialized agency. Standards for interconnectingnat Ional networks are establ Ished by the International Telecommunication Union (ITU), now a specializedagency of the United Nations. In Its standards-setting activities the ITU works primarily through twocommittees, the Consultative Comm Ittee for International Telephone and Telegraphy (CCITT) and theConsultative Committee for International Radio (CCIR). The ITU recommendations do not carry the forceof law, but they are often Implemented and enforced at the national level.

The ITU, as a United Nations agency, recognizes only governments. PTTs automatically havegovernmental status but not the United States’ American National Standards Institute (ANSI) and theExchange Carriers’ T1 committee, whtch are private sector organizations. The U.S. Department of Statetherefore picks delegates to international standards meetings, but chooses largely representatwes of thetelecommun!catlons Industry and some large user corporations. Critics of the voluntary standards-settingprocess 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 bepolitically vetted. In the ISO, which unllke the ITU is not a treaty organization, ANSI IS the U.S.member-representat Ive. Page 41


Users tendto urge ear/yadoption ofstandards, whileequipmentproducers tendto resist earlyadoption.

when one or the other of the connecteddevices is upgraded. (See box 2-A.)

On the other hand, either the informaltriumph of one standard, or the voluntaryformal acceptance by the industry of onestandard, can cause nonconforming networkproducts to suddenly lose all value. Thestandard that prevails may not necessarily bethe best, and always some users will be leftwith incompatible equipment or networks.The large installed bases necessary for globalnetworks make it particularly costly for userslater to shift to newer, more technologicallyadvanced standards. But while standardsmay cut off innovation at one level bymandating one path of technological devel-opment, they make it possible to put one setof problems behind and move up anotherpath. There is always tension between uni-formity and optimality, between universalityand innovation. Compromises are necessary,and this may set producers against users. Thechallenge is to find just the right time tofreeze a standard.

Users, whose chief concern is with inter-operability of systems, are generally eager tosee the adoption of international standards solong as these do not unduly hinder thecontinuing evolution of technology and serv-ices. In a survey and several case studies oflarge-scale U.S. users of international tele-communications conducted by the Office ofTechnology Assessment for this assessmentthe need for international standards wasamong the points most frequently made byusers. (See chapter 5, Users’ Perspectives.)Telecommunications providers and equip-

ment producers tend to agree on the need forinternational standards but are much moreimmediately and urgently concerned withthe specifics of those standards. Their indi-vidual market goals often drive them to resistagreement on standards longer than is in theinterest of the industry as a whole. Thestandards-development organizations them-selves have self-aggrandizing motivationsand behaviors that often frustrate, rather thanadvance, the development ofvoluntary standards.

Standards and the futureCompetitiveness in foreign

consent to

markets isincreasingly tied to standards. The EuropeanCommunity is now giving strong attention tostandards as a fundamental mechanism forpursuing the goal of a single market, and hasparticularly targeted telecommunications tech-nologies as a high priority sector for Euro-pean standards development. The EC hasshown itself willing and able to develop newinstitutions and adopt new procedures forstandards development. In 1988 it created aspecial standards organization, the EuropeanTelecommunications Standards Institute(ETSI), which is developing approximately300 European standards. Most will be volun-tary but some will be mandatory, and theseare likely to include standards aimed atassuring interconnectivity.31

Europe is a large market that is potentiallyworth large investments by U.S. firms inmeeting its standards. U.S. firms active inEurope therefore have a strong incentive toparticipate 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 TradeAssociation, “E.C. Telecommunications,” release of Oct. 1, 1991. ETSI’S technical comm ittees are staffedby 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.

TechnologicalTrends

andIssues

Box 2-A. INTERNET STANDARDS DEVELOPMENT

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, hasexpanded to become Internet. Internet consists of many linked regional computer networkslike SuraNet, PrepNet, etc., and as many as 10,000 small networks, with an estimated 20million users worldwide. The actual connections are often modems connected to T1 leasedlines, paid for by universities, research institutions, or corporations to Iink themselves to a localcarrier that in turn connects them with T3 “backbones” between major locations. Severalgovernment agencies, especially the Department of Defense, NASA, and the NationalScience Foundation, continue to be heavily involved with funding and support of Internet forthe use of universities, research organizations, and government, but a number of privatesector companies provide access to it for corporations and individuals, at varying costs tousers.

A new form of standards-setting appears to be evolving in connection with lnternet. AnInternet Society has been formed as a global coalition of carriers, information servicesvendors, and equipment manufacturers. It includes a group called the Internet ArchitectureBoard (IAB), whose job is to develop the series of international standards through progressiveelectronic discussion and standard-drafting on the network, which is open to all users at veryIowcost. IAB has established a “cooperative relationship” with international bodies such asthe ITU to encourage the use of Internet to enhance global telecommunications collaborate ionin standards setting.

It should be noted, however, that in part as a result of the informality and rapid, randomgrowth celebrated by Internet enthusiasts, access to and use of Internet remain complicatedand 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 itscommercialization 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 ofgovernment regulation; hence many issues such as universal service, privacy and intellectualproperty rights are unresolved even as Internet approaches the status of a major public utility.

do so they must have a European presence.This is a powerful incentive for them todevelop joint ventures or other strong alli-ances with European firms, or find othermeans to establish European subsidiaries.

The U.S. process of standards develop-ment may require reform if it is to match thepace and increased effectiveness that is theaim of the EC current initiatives. This isunlikely to happen unless government policyprovides leadership for, coordination of, andstrong pressure on the contending factionswithin the private sector standards commu-


nity. In international standards-setting are-nas, the influence of European institutionswill be increasingly strong and effectivebecause of the support provided to, and theinsistence on, communitywidc standards de-velopment by the EC Commission. This tooimplies closer cooperation by U.S. partici-pants, and possibly a stronger leadership rolefor the Federal Government in pursuit ofstrong competitive policy goals.

National or regional standards can be useddeliberately to create trade barriers andinhibit competition. Every nation wants its Page 43


telecommunications companies to be majorplayers in world markets. In order to providea strong domestic base, many nations dis-criminate in favor of domestic firms throughprocurement or by adopting a national stand-ard that is different from that used by foreignproducers, thus effective y closing their mar-ket to foreigners by raising the costs ofpenetrating it.32 Some U.S. critics fear thatEC members may form a solid voting blockin international standards negotiations toimpede the introduction of superior network-ing technology because it is perceived asU.S. dominated.33

Thus standards inevitably become thesubject of trade negotiations. In the 1979GATT Agreement on Technical Barriers toTrade, signatories agreed to refrain fromusing national standards to frustrate trade inproducts. This agreement was embodied inthe U.S. Trade Agreements Act of 1979.However, since the GATT Standards Codeexplicitly does not apply to services or togovernment purchasing, European PTTs areusually exempt.

Along with a strong movement towardinternational standards, there are parallel andcomplementary movements to achieve inter-connectivity and interoperability by othermeans. The FCC’s Computer III decision

required that Bell operating companies pro-vide their competitors with “ComparablyEfficient Interconnection” (CEI) and anopen network architecture (ONA) acceptableto the FCC.34 ONA means that componentsof the telephone system must be madeavailable to competing suppliers on an un-bundled basis so that they can be combinedwith the services of these suppliers in anymanner desired. If components can be ob-tained on a bundled basis only, the interfacebetween them is inaccessible to the compet-ing supplier. The effect is the same as if theinterface were accessible but incompatible.3s

The nature of the unbundling and identity ofbasic service elements are contentious issuesbecause they affect the potential for competi-tion. Services suppliers and telephone com-panies want different levels of aggregation.

The European Community has issued adirective entitled “Open Network Provision(ONP) Framework and Services.”36 It callsfor open access to harmonized servicesacross national borders. Whereas ONA isaimed at technical interfaces, ONP is aimedat institutional change, but the intent is thesame: to foster the development of expandedmarkets with heightened competition, andallow translational companies to enjoy tele-communications and information services

Page 44

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 WorkingGroup on Telecommunications, information Technology, and Broadcasting, of the American BarAssociation Special Task Force on EC 1992, June 29, 1990.

~ This was a condition for waiving an earlier FCC requirement that the Bell operating companies offerenhanced services only through subsidiaries.

35 Stanley M. Besen and Gart h Saloner, “The Econom ics of Telecommunication Standards,” Crandall andFlamm, op. cit., footnote 32.

M 0. A/. P.: The Progress Report-European Te/ecornrnunications 2, Analysis Briefing Report Series(Cambridge, England: Analysis Publications, 1991).

TechnologicalTrends

andIssues

without regard to national boundaries.37

Implementation of the ONP Framework hasso far been uneven.38 Some EC membcr-states have not yet taken the first step ofseparating telecommunications operating func-tions from regulatory functions.

Expectations are, nevertheless, that intime the economies of scale made possibleby ONA and ONP policies will begin to

transform the market for telecommunica-tions equipment into a commodity-type mar-ket in which goods compete more on pricethan on features. This in turn will make thetelecommunications” services market highlycompetitive. However. given the global scaleof the market and the importance placed bylarge companies on having efficient access toa broad menu of facilities and services, the

likely outcome is not that many smallcompanies will be offering highly individu-alized services but that small numbers ofmajor players will provide internationalcompanies with services and Support.39

The U.S. opportunity to compete in Eu-rope in developing and delivering enhancedcommunications and information servicesdepends on both the increasing interopera-bility of U.S. and European networks, andthe increased inter-operability of networkswithin Europe. The competitive advantageof U.S. firms in Europe however also de-pends on their differential ability to offerinnovative, flexible, user-oriented servicesand technology. The challenge is to combinethose imperatives.

37 Japan has a comparable Imtlatlve, called Open Network Development (ON D), aimed at Ilmltlng thedom Inance of Nippon Telephone and Telegraph (NTT) by allowing access to Its network to competitiveoperators and resellers.

38 “Update on ONP,” /NTUG News (International Telecommunications Users Group, London), January1992, p. 12, and October 1992, p. 10.

39 Besen and Saloner, op. cit., footnote 35.

The EuropeanMarket forTelecommunicationsServices 3

C H A P T E R

The Europeanmarket shouldgrow more thanthe U.S. marketfor the nextdecade. . . andaccess forU.S. firmswill increase.

T H E E U R O P E A N T E L E C O M M U N I C A T I O N S S E R V -

ICES MARKET is ripe for profitable entry bycompetitive suppliers. Its growth potential isgreater than that in the United States becauseof the present low market penetration formany services. Barriers to entry and highprices have prevented much demand frombeing met. A recent European Communitydirective has opened the door for widespreadbypass of public switched networks, whichwill stimulate further demand for innovativeapplications and services.

This chapter describes the European mar-ket for basic and enhanced telecommunica-tions services’ and trends that arc changingits structure, and then summarizes availableprojections of its size and growth over thenext 5 to 10 years. The Office of TechnologyAssessment (OTA) concludes that the Euro-pean market for telecommunications serv-ices will grow strongly in the next decade,

regimes, institutional structures, trade barri-ers, and infrastructure characteristics.2 About85 percent of the aggregate market is cur-rently closed to competition, but technologi-cal and political events are combining toopen much of the market in the next fewyears. Meanwhile, the market is studded likea rich plum pudding with niche businessopportunities for U.S. telecommunicationscompanies.

A comparison of the scale and scope ofEuropean business and industry with itscurrent consumption of telecommunicationsservices indicates that there is a powerful,underserved demand for enhanced services.With the integration of a single Europeanmarket, geographical expansion and height-ened competition should increase this de-mand, Many U.S. telecommunications firmsare demonstrating that they can compete inEurope, and also strengthen the ability of

and that opportunities for U.S. firms in thismarket will greatly increase.

The European market for telecommunica-tions services is in reality many nationalmarkets, with wildly different regulatory

other U.S. services industries to operatesuccessfully in European markets.

Until recently, the European market fortelecommunications products and serviceswas completely closed to entry by non-

NOTE: This chapter draws heavily on an OTA contractor report: Bruce L. Egan, “European Telecoms: AMarket Assessment,” Nov. 10, 1992.

1 “Telecommunications services” is def!ned In this report as including all point-to-point, nonbroadcastcommunications 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 categorizedas value-added or enhanced may t hem selves d if fer); t hey indicate services t hat go beyond t he t ransm Isslonof voice or data to in some way collect, select, format, change, process, or selectively dellver the materialbeing 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), plus7 members of the European Free Trade Association (Austria, Finland, Iceland, Liechtenstein, Norway,Sweden, and Switzerland). Together these constitute the European Economic Area for purposes ofapplication of many of the directives of the European Communit y Commission. The countries of Central andEastern 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


Figure 3-1.Europe

Page 48

~~ European community~ European Free Trade Association~~ EC Associate countries I

Croatia ———_,


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).See ch. 1, box l-A.

The EuropeanMarket for

TelecommunicationsServices

combined activities and investments of Eu-ropean firms in U.S. markets. Successfulmarket entry by U.S. firms has so fargenerally required partnering, usually with

the incumbent monopoly telephone opera-tors (public telephone operators, or PTOS).5

The strong drive to achieve a single Euro-pean Community market suggests that therewill continue for some time to be powerfuladvantages for American firms in having alegally well-established European identity.

Foreign subsidiaries, joint ventures andalliances, and other forms of shared owner-ship make it difficult to measure preciselythe performance of U.S. telecommunicationsfirms overseas. It is not always easy toclassify a business as U.S. or European.More importantly, there arc theoretical andpractical problems in measuring trade inservices, which arc usually not embedded indiscrete, observable units that can be countedas they cross a border or enter a customsshed. h U.S. trade balance figures do notinclude sales of services by European sub-sidiaries of U.S. firms. The final section ofthis chaptcr, which described the current

status of U.S. trade in services, must beunderstood as indicative rather than precise.

The structure of theEuropean market

As a single market, the EC, with 345million consumers, will be the world’s

largest consumer market. Within the EC,four countries comprise over 80 percent ofthe potential market in terms of gross na-tional product (GNP) and income: the UnitedKingdom, France, Germany, and Italy.7

The United KingdomThe United Kingdom has the most broadly

liberalized telecommunications market inthe world. It began partially privatizing itsmonopoly operator, British Telecom (BT) in1984, 8 requiring it to face competition indomestic long-distance services from Mer-cury, a subsidiary)’ of Cable & Wireless. Theintent was to create effective competition forBT by limiting entry to one new firm andgiving that new competitor some entryassistance. 9

‘ Historically, the term for these organizations has been PTTs (Postal, Telephone, and Telegraphadmlnlstratlons). However In many cases they have been reorgamzed, separated, liberalized, or privatlzedand 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 onForeign 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 EuropeanFree Trade Assoclatlon members add another 32.5 mllllon people and $852 billion. Turkey, Cyprus, andMalta are seeking EC membership; they have an aggregate population of 58 m{lllon and GNPof $103.7bllllon. Czechoslovakia, Hungary, and Poland hold “EC Associate” status and Bulgaria and Romania areseeking 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 heCenter for Strategic and International Studies (CSIS), Washington, DC, Oct. 11, 1992; for proceedings seeCSIS International Telecommunlcatlons Studies, Global Issues, “UK-U.S. Stakes In the InternationalRegulatory Game,” no date. Page 49


Population (millions)600

vEurope North America

GNP ($ billions)8,000

----– Others6,000 ----- Mexico

— EC Associates -- – Canada— E F T A

oEurope North America

SOURCE: WORLD FACT BOOK, 1991.

Figure 3-2.EuropeanDemographics

In 1990 the United Kingdom moved tofull open-market licensing. Each new com-pany is to be offered some temporary entryassistance, in the form of reduced charges forinterconnection with BT networks. As ofFebruary 1993, 13 new carriers have beengranted licenses and 37 more applicationsare under consideration. These licensees andapplicants propose to provide a wide range

of services, with nearly a dozen companiesproposing to build domestic trunk networks.(The first of these was the U.S. firm Sprint.)Several other companies plan to providelocal delivery services.

The United Kingdom decided not to issueadditional licenses for international facilities-based competition, because an open-doorpolicy would require that access be grantedto all reasonable newcomers, including those(like Germany) that have not opened theirown market. But significant new freedomsto provide international services were intro-duced. These include international simpleresale, for firms of countries with similarregulatory arrangements. (International sim-ple resale is the right to sell capacity andservices on leased circuits connected at bothends to public-switched networks in twocountries.) (See box 3-A.) National Network,as a reseller, became the third competitor toBT and Mercury in November 1992. An-other five applications are under considera-tion. Operators may also now provide addi-tional satellite services, with interconnectionto the public network at both ends beingpermitted for data traffic, and interconnec-tion at one end permitted for voice. Eight

“ applications to provide such satellite serv-ices have been received to date.11

The United Kingdom is also fostering theestablishment of cable television to providecompetition in the local loop. It has licensed20 cable networks to provide telephoneservice as well as TV/radio channels, al-

Page 50

10 Seethe U.K. Government’s 1992 White Paper, CornpetWon and Choice: Te/ecomnunicahorts Po/icy forthe 1990s.

11 Information provided courtesy of Mark Hammond, First Secretary for Environment, Energy, andTelecommunications, British Embassy, Washington, DC.



though customer subscriptions for the tele-phone connection are said to be lagging.12

Further competition in local service wasassured by licensing five nationwide cellularnetworks.

Since competition began, BT tariffs havebeen significantly lowered, including a 10 to25 percent reduction in 1992. BT has becomea strong international competitor. It plans tohave its Global Network Services, withhigh-speed frame relay for data applications,serve 60 countries by 1994. 13

FranceIn France, telecommunications tradition-

ally was part of the responsibility of theMinistry of Posts, Telecommunications, andSpace. On January 1, 1991, France Telecombecame an autonomous, although completelystate-owned, entity with its own budget andmanagement. Regulatory authority was re-tained by the Ministry Directorate of Regu-latory Affairs (DRG). France Telecom stillhas a monopoly in basic voice telephony andtelex, but also operates competitively insome areas. Private operators may offer datatransmission and wireless communicationsunder regulated competition: i.e., they mustbe state-licensed. There is open competitionin cellular and paging services. Privatenetworks for closed user groups, i.e., corpo-rate networks, must get a license from DRG,although small ones may not require licens-ing. Value-added services have been open tocompetition since 1987.

France Telecom networks are highly digit-ized; Integrated Services Digital Network

(ISDN) services are universally available,and France Telecom’s videotext services(Minitel) are famous worldwide. FranceTelecom has entered into many internationaljoint ventures and alliances; it intends to bea global player, and says that 20 percent of itsrevenues will come from international activi-ties by 2000.

GermanyGermany’s market is the least liberalized

among the larger European countries, andGermany has consistently opposed EC movesto abolish telephone monopolies, How-ever, Deutsche Telekom, one of Europe’slargest telecommunications companies, be-came an independent public company in1991, when it was separated from the postaladministration. The Minister of Posts andTelecommunications has announced its in-tention to partially privatize Deutsche Tel-ekom by selling 49 percent of the organiza-tion’s stock, in order to raise capital for thetelecommunications infrastructure of EastGermany. Chancellor Helmut Kohl had ap-proved the plan in August 1992, but it wasthen postponed for political reasons; privati- The United Kingdom,

zation will require the approval of two-thirds France, Germany,

of the Parliament, and there is strong opposi - and ItaIy now have

tion from one political party and from the wide/y different

PTO’s employees, who want to protect their regulatory

civil service status. Meanwhile, the number strategies.

of telephone lines in East Germany has beenincreased from fewer than 12 per 100 people

‘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


Box 3-A. S IMPLE INTERNATIONAL RESALE

Customers with large international capacity requirements often lease circuits frominternational carriers to connect corporate offices. Since these are dedicated circuits, noswitching is required. The term international simple resale refers to the ability to connect theseprivate 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 tobecome “light carriers,” Ieasing high-volume capacity at reduced rates and reselling it tocustomers, often at lower rates than primary carriers can offer (since with private lines, thelight carriers avoid paying international accounting rates). The right to do this both empowersusers and challenges the traditional relationships between national carriers in providingservices and distributing the revenue from international calls.2 Rules permitting internationalresale will enable carriers themselves to offer services on an international basis, substitutinghead-to-head competition between national carriers for the traditional cooperative relation-ship in delivering international traffic. International simple resale is being pursued in a fewcountries, 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 onreselling capacity on domestic private leased lines, but announced that for international simpleresale, it would require equivalence in regulatory treatment from the corresponding country.The DTI has identified Canada, Sweden, New Zealand, and Australia as countries withsufficiently 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 theFrench model, a public corporation withautonomous management, but still understate ownership.

Meanwhile, the state retains a monopolyon terrestrial networks and telephone serv-ices, but cellular communications, satelliteservices, and data networks services havebeen opened to competition. Two cellularsystems have been licensed, and there arc anumber of licensed private mobile radio

systems for taxis, trucking companies, etc.By the mid- 1990s, the company hopes thatabout one-third of its revenue will be incompetitive areas. ISDN is to be fullyimplemented during the 1990s,

In addition to the massive task of rebuild-ing networks in caster-n Germany, Deutsche

Telekom faces other challenges: reorganiz-ing its internal structure and expanding intointernational markets.16 It has already initi-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 LiberalizedMarket,” Tekcornnwmca(lon Journa/, vol. 58, October 1991, p. 711.



September 1992, the DTI licensed ACC Long Distance to provide the service between theUnited Kingdom and Canada.

In the United States, the U.S. Federal Communications Commission (FCC) ruled inDecember 1991 that international carriers must permit the resale of private leased linecapacity, but stipulated that this rule would apply only where the foreign country permitsequivalent access. Despite objections from AT&T, the FCC has permitted resale between theUnited States and Canada, and has authorized Fonorola and EM I Communications to offerthe service.

No international simple resale is allowed directly between t he United States and the UnitedKingdom, despite their relatively harmonious approaches to liberalization. (Telephone ratesbetween the two countries are relatively low compared with other international rates.) Eachof the two regulatory agencies maintains that a reciprocal regulatory environment does notexist in the other country. The DTI objects to the FCC’s treatment of all foreign-owned commoncarriers as “dominant,” subjecting them to more rigorous filing requirements than somedomestic carriers.3 U.S. regulators point to rules in the United Kingdom that deny U.S. firmsinternational facilities licenses, which U.S. rules permit to foreigners. The DTI is reserving t heright to build, operate, and own international facilities to BT and Mercury, and competitorsmust bargain with one or the other for leased lines for international services. The intent is toprotect Mercury, whose share of the U.K. market is only about 10 percent, in an effort to assurecompetition for BT.

International simpleresale would likely

lead to growth of“light carriers,” who

would challengenational monopolies’

control of interna-tional services.

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.


countries, including one to build an elec-tronic data interchange (EDI) exchange forEurope, and one with France Telecom tooffer managed networks services.

ItalyIn Italy several entities provide different

kinds of telecommunications services, buteach has a monopoly in its own kind ofservices. Azienda di Stato per i ServiziTelefonici (ASST) is operated directly by theMinistry of Posts and Telecommunications,and provides trunk services between major

cities. international services for Europe, andsome data serv ices. Societa Italiana perl’Esercizio delle Telecommunicazioni (SIP)is the major carrier, operating the nationalnetwork and providing trunk services not runby ASST. SIP also holds the concessions formobile radio and packet-switched services, 7

The connection for all intercontinental com-munications services is provided by Italca-ble, which also provides a number of value-added services.

‘7 The packet-switched serwce (Itapac) began In 1984, but has expanded significantly in only the last fewyears. Page 53


The Italian Government-through its trad-ing corporation, the Instituto per la Ricos-truzione Industrial (IRI)--owns 85 percentof the Societa Finanziaria Telefonica, whichin turn owns most of the shares of SIP,Telespazio, and Italcable. The IRI group alsohas an research and development subsidiary,CSELT, which also serves equipment manu-facturers, in order to link carrier/manufac-turer research.18 The Ministry of Posts andTelecommunications has final authority overall of the companies, in addition to operatingASST directly.

Italy expects to rationalize this complic-ated market structure and to introducecompetition in services; it has ratified the ECServices Directives. The government policyputs high priority on increasing networkpenetration to 42 lines per 100 people andupgrading the infrastructure.

The EC aggregate marketThe total 1992 market for EC telecommu-

nications in terms of sales is estimated at

$150 billion, of which 70 percent or $120billion is for telecommunications services.19

Overall market growth for EC telecommuni-cations services for the early 1990s is ex-pected to be about 5 to 6 percent per year.20

The EC also represents about 25 percent ofthe world market for telecommunicationsequipment (for comparison, North Americaaccounts for 35 percent). It is widely re-ported that U.S. companies are doing well inEuropean sales of equipment needed forprivate networks, such as very small apertureterminal (VSATs).21 Sales of enhanced tele-communications and information servicesby U.S. firms also encourage the sale of U.S.equipment, even though some U.S. firms,such as MCI, make a point of using a mix ofU.S. and foreign equipment vendors.

Growth in PTO revenues and in marketpenetration (access lines relative to popula-tion) is much higher in EC countries than in

Page 54

‘6 Italy ’stelecommunicat ions equipment manufacturer, Italtel, is the fourth largest {n Europe. However, all ofthe major European equipment manufacturers hold significant market shares in Italy. (“Research andDevelopment 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. Thisrepresents the vast preponderance of the greater European telecommunlcat ions market. The est i mates andprojections unless otherwise noted were developed for OTA by Professor Bruce Egan, Columbia Institutefor Tele-information, Columbia University School of Business, on the basis of assessment and integrationof a large number of market analyses. The sources Include: McGraw-Hill and subsidiaries NorthernBusiness Information and Datapro; Dataquest; Communications and Information Technology Research(CIT); Intelidata; Logica; Input; the Commission of the EC; Organization for Economic Cooperation anDevelopment; North American Telecommunications Association; Observatolre Mondial des Syst&mes deCommunications (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. Theprojected growth rates for European telecommunications services revenues are very similar to thoseprojected for U.S. telephone company service revenues (slightly lower in real growth because inflation isslightly 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 heldin connection with COMNET Exposition, Washington, DC, Feb. 3, 1993.



the United States.zz Businesses account for26 percent of total access lines and 45percent of PTO revenues. Total EC trafficgrowth for the public-switched network isabout 6 percent per year. Toll call revenuesare growing somewhat faster, and interna-tional toll calls arc growing fastest—l 4percent per year. Of all international callsmade in the EC in 1991, 55 percent went toother EC countries, and 11 percent to the restof Europe.z? (See figure 3-3.)

In most EC countries the sole or majorityowner of the monopoly PTO is the centralgovernment, although the operating entity(the PTO) has been separated from the entityexercising regulatory authority. The PTOretains a monopoly on voice services.24 Theexception is the United Kingdom, which hasliberalized market entry. As a result, BT(fomerly British Telecom) is beginning tosee its monopoly on local voice serviceseroded by cable television companies thatprovide two-way telephone service. Most ofthese are now financed by U.S. telephonecompanies.

In major EC countries there are a few largeproviders of nonvoice services: i.e., thestructure of the market is oligopolist. Inpractice, these markets are characterized bywhat economists call "the dominant firmmodel . That is, the PTO—which has a

Value-added services >

Market status

❑,. Monopoly

❑ Opencompetition &

El Partial competition

I

I C e l l u l a r / m o b i l e ‘ I ’Nonbasic services

I Leased-line services &1 —J — x

“Basic” voiceservices$75 billion

I

telecom. —————market 7

Telecom. I$130 billion equipment I

I I$40 billionI I I

II

II

? Y ’1 – – – – ..’


monopoly on voice services-also domi- Figure 3-3.nates the major non-voice service market Europeansector and sets the prices; the other providers Telecommunicationsarc 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 isstable, Ilne growth is 2 to 3 percent per year, and nominal revenue growth is about 7 percent. The growthestimates are a broad average for 1980-90, and are different from some other growth estimates presentedm t hls chapter for a shorter, more recent time period. Commission oft he European Commu nl t Ies, ‘“TowardsCost Orient at Ion and t he Adjustment of Prlclng 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 andCommentary,” International Institute of Communication, 1992, p. 86.

24 In Denmark, Finland, and possibly some other countries, although there is a national governmentmonopoly 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


The EC ONPDirective openedthe way for com-petitive servicessuppliers andbusiness customersto bypass PTOsIn spite of theirlegal monopoly.

of competitive regional and niche marketsuppliers, including resellers and third-partynetwork management operations.

In most EC countries there arc two provid-ers of cellular communications; i.e., themarket is duopolist (as it is by regulation inthe United States). In a few countries, thePTO is still the only cellular services pro-vider for the initial analog system. But as thecellular communications markets begin togrow rapidly and new radio frequency spec-trum is allocated to cellular service, themonopoly/duopoly structure is tending togive way to oligopoly, This has happened inthe United Kingdom, which has the mostliberal entry policies for telecommunicationsin the world.

The introduction of competition in theEuropean cellular market is being speededby agreement on a new digital standard, theGlobal System Mobile Communications(GSM). 25 The United States has not adopteda compatible standard, but U.S. cellularoperators are aggressively pursuing Euro-pean market opportunities using the GSMstandard.

The structure of the telecommunicationsmarkets in Central and Eastern Europe, nowundergoing radical economic and socialchange, is discussed in a later chapter. Thesecountries are likely to maintain the monop-oly model for switched voice, data, and evencellular services for a long time, but probablythe monopoly entity will not in all cases bewholly government-owned. Foreign owner-ship is needed to provide capital for rebuild-ing infrastructure, and to attract this capitalit may be necessary to guarantee investors/operators that the PTO will enjoy a monop-

Page 56

oly for some fixed period. On the other hand,some sources of funds for infrastructureprojects, such as the World Bank and theInternational Finance Corporation, now tendto promote private sector control in a capital-istic market environment.

Trends shaping the Europeantelecommunications market

Over the next decade, the European mar-ket for telecommunications services will beshaped not only by technological trends, asdescribed in chapter 2, but by demandpatterns, price trends, market liberalization,and market unification.

Long-range demand patterns:Several trends in demand for telecommu-

nications services are discernible:the expansion of private networks (muchless advanced in Europe than in the UnitedStates, where a counter-trend is underway);the popularity of communications porta-bility;growing demand for multimedia services,andstrong and growing pressure from users.

In the United States, corporate privatenetworks using leased lines proliferated inthe 1980s, as large corporations sought lessexpensive and more flexible ways to obtainvoice and data services. Before the AT&Tdivestiture in 1984, 80 percent of toll usagewas billed per minute of use. Private net-works shifted much of this traffic away fromthe public-switched networks, and today lessthan half of all long-distance access servicesin the United States are purchased under

25 The acronym originally stood for “Groupe Sp6cial Mobile,” but as use of the standard has spread, it hasbecome more generally known by the new name.



traditional per-minute tariff rates. (‘‘Long-distance access services’ are the intercon-nections between local and long-distancetelephone companies. ) Very large corpora-tions, especially in the financial servicessector. may send over 90 percent of theirtraffic over dedicated lines. There is goodevidence. however, that the trend towardprivate networks is reversing in the UnitedStates, because of the fall in voice servicestariffs and the new ability of public carriersto provide "virtual private networks’ (software-controlled allocation, by the public carrier, ofdedicated lines to customers on demand).26

On the contrary, the movement towardprivate networks is just gathering steam inEurope. The substitution of private networksfor public-switched services (‘‘b)puss’ ) is aresult of market forces and deregulation,especially the ability legally to resell capac -

ity.27 Bypass cost U.S. telecommunicationscompanies bill ions of dollars in lost revenuein the 1980s.28 It is likely that the samephenomena will occur in Europe, although itis being strong] y resisted to protect the socialobjective of universal service .29

The EC Services Directive of 1990 calledfor liberalization of all telecommunicationsservices except for switched voice serviceand some data sin-vices, which member-states can continue to reserve for their PTOs.The EC Open Network Provision (ONP)Directive of June 1992, however, directlymandated non-discriminatory interconnec-tion for leased lines by 1993, with norestrictions on their use, even for voicesevices. 30 This provides an obvious back

. .door for business customers and competitivenetwork suppliers to bypass the PTOs' voiceservices 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, September1992),

2’ Well before t he AT&T dlvestlt ure, after years of Iltlgation, the FCC In 1976 recognized t he Iegalit y of MCI’SExecunet Service, which was a switched private Ilne serwce for large users. Private networks withoutInterconnect Ion had been allowed before 1976. Eventually this private network capacity expanded to mostU.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 madeIt 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 whosometimes 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 leasedIlne 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 tooverturn the Comm Isslon’s directives on telecommunications equipment and services. However, theComm Isslon has in a series of cases successfully defended Its authority under Article 90 of the Treaty ofRome 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 todefine them precisely, but (t upheld again the Iegallty of measures intended to abolish exclusive rights toexploltat Ion of telecom m u nlcat Ions serwces gra nted to PTOS. “Europea n Comm Isslon’s Powers Upheld InTelecommunlcatlons,” Telcom /+gh/lghfs /ntematmna/, Dec. 2, 1992, p. 2. Page 57


There is a largeunsatisfied marketfor telecommunica-tions services inEurope, wherebusiness consump-tion lags farbehind that in theUnited States.

Page 58

This “back door" will open the way formany innovative services arrangements tochallenge PTO-provided services with ad-vanced software, customer premises equip-ment, and information content and fomat-ting. American firms have the knowledgeand experience to develop such innovativeservices, and their prospects for successfulcompetition should grow.

Profits from software and value-addedservices are likely to grow in the future,while core facilities or ‘‘conduits’ becomerelatively less important as a source ofprofits. Two other factors will further driveprices for core network capacity close tocommodity costs: the growing usc of wire-less technology and the usc of other infra-structures as channels for telecommunica-tions. Railroads, highways, and canals in-clude rights-of-way that can accommodatefiber optic cable; electric power grids canprovide poles, towers, and power. Sprint, thethird largest U.S. long-distance carrier, hasbought the right to install cable along BritishWaterway canals.

Pm-table communications are now thefastest-growing communications mass mar-ket. As the technology improves, their con-venience becomes increasingly attractive.Demand for mobile phones is especiallystrong in Central and Eastern Europe be-cause there are long waiting lists for basictelephone service, and wireless is a relativelyfast and inexpensive way to satisfy thispent-up demand.

Multimedia telecommunications is theability to combine video, audio, text anddata, and also to provide interactivity be-tween end users and the network head-end.A growing demand for multimedia telecom-

munications can be expected in the long-

range future to meet business needs such as

three dimensional computer-aided designand videoconferencing, and to provide con-sumers with opportunities for distance learn-ing, shopping from home, entertainment,and transaction services. How swiftly thismarket demand will mature is, however,hotly debated.

There are many indicators of strong latentdemand for services in the European market.Greater Europe has a larger population andincome than has the United States. Yet theUnited States’ consumption of telecommu-nications services is over half of the world’stotal. In 1990 the four largest EC countriestogether accounted for only 19 percent ofworld sales of telecommunications services:the United Kingdom (5.6 percent), Germany(5.1 percent), France (4,5 percent), and Italy(3.8 percent). This indicates an unsatisfiedmarket for telecommunications in Europe.

Within the EC market, Germany has about30 percent of the total income, comparedwith the United Kingdom’s 16 percent, butits telecommunications sector is smaller.There is thus especially great potential forgrowth in the German market, but it is one ofthe least liberalized. In terms of real growthin telecommunications services revenues( 1985-90), both Germany at 2.6 percent andFrance at 2.4 percent lagged behind Spain(8.5 percent), Italy (4.9 percent). and theUnited Kingdom (4. 1 percent). Germany isstruggling to bring the infrastructure in theeastern part of the country up to par and hasindicated that this will delay the movetoward telecommunications liberalization.

The United States represents about two-thirds of the world market for ‘‘nonbasic’telephone services such as database servicesand cellular telephony, while the four largestEC countries together made up only 12percent in 1990, the latest figures available.



Telephone penetration is now growing abouttwice as fast in the EC as in the UnitedStates.~z In 1991 there were between 45 and50 telephone lines per 100 population in both

the United States and the larger EC coun-tries; more in the Scandinavian countries,and man y fewer in Central and EasternEurope (about 13).33 The latter area isaveraging 6 percent growth in telephonepenetration, and this is expected to speed upsubstantially during the decade. The goal inthese countries is 40 telephone lines per 100population by the year 2000; this wouldrequire nearly 15 percent annual growth.

People in the United States make threetimes more telephone calls than people in thefour largest EC countries; but calling ratesare increasing faster in those countries. 34 Theaverage annual expenditure per capita in theUnited States ($445) is more than twice theaverage for the large EC countries ($200) inspite of lower U.S. customer charges, butaverage growth rates for expenditures aremuch higher in the European countries (5percent compared with 1.5 percent).3s

EC average U.S average(1 980-90) (1984-91 )

Connection chargesMonthly line rentalLocal call chargesMonthly business lineIntracountry toll callIntrastate toll callInterstate toll callCumulative inflation during period

-39 ”/0 + 2%+20 +15+ 3

+ 8-29

-40-72

60 22

SOURCE: BRUCE EGAN, USING DATA FROM COMMISSION OF THE EUROPEAN COMMUNITIES,“TOWARDS COST ORIENTATION AND THE ADJUSTMENT OF PRICING STRUCTURES-ELECOMMUNICATIONS TARIFFS IN THE COMMUNITY,” BRUSSELS, JULY 15, 1992.

Price trendsTariff rationalization has not yet been

achieved in the EC, and there are widedifferences among countries in tariffing pol -icy.36 Prices are high compared with those inthe United States and this clearly depressesdemand and causes the telecommunicationsnetworks to be underutilized.37 Table 3-1shows relative price changes, 1980 through1990. Given the inflation rates, the averageEC tariff rates did not decline and perhapsincreased in real terms, whereas in the UnitedStates they declined as much as 72 percent in

Table 3-1.EC and U.S.Changes in

Prices forTelecommunications

Services(changes in

nominal prices)

32 “Telephone penetration” Is the number of telephones per 100 people. Average annual growth from 1985to 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 ServicesPolicies, Aug. 7, 1992, pp. 100-109.

34 Observatolre Mondlal des Syst6mes de Communications, op. cit., footnote 20, pp. 60-63. Calling rates percapita 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 aredifferent 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 PricingStructures—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 lineaveraged, 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


Page 60

real terms during the shorter time periodused in the table.

In 1992, the average toll call price perminute in the United States was less than

$0.20. In the EC it was $0.33 for intracountrycalls and about $1 for intercountry toll callswithin the EC.38 It may cost twice as muchto make a call across a nearby nationalboundary than to call many times thatdistance within one country. If the ECsucceeds in opening transborder communi-cations to competition (as may result from anongoing review of the EC Services Directiveof 1990), price cutting will surely enlargecalling rates; there is evidence from AT&Tand BT of the effects of aggressive pricecutting on growth in usage, 39

The average monthly rental for a 50-kmvoice grade leased line is reported to be morethan twice the U.S. price, although theaverage monthly prices for PTO leased lines(voice grade) fell about 20 percent in realterms from 1980 to 1991.40 In the EC, highercapacity circuits cost about $3,000 per month,or about three times the cost in the United

States, and except in the United Kingdom,any excess capacity on them cannot beresold .41

Cost declines due to technology adoptionshould be roughly similar in Europe and inthe United States, so most of the pricedifferential is due to political and institu-tional factors. The PTO prices appear toprovide heavy cross-subsidies to other serv-ices and markets. Such differences betweencosts and price levels indicate a large poten-tial for competitive entry.

Market liberalizationThe pace of liberalization slowed in 1992,

but the EC Commission has signaled itsdetermination that further liberalization oftelecommunications services markets willoccur. The Services Directive that specifi-cally reserved switched voice services toPTOs was scheduled to be reviewed in 1993.In spite of contention within the EC, prepara-tion for this review produced a consultativedocument that set out four alternatives forconsideration: 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 marketshare due to market I iberallzat ion, total market volumes and revenues increased substantially, as did prof itsand market values. AT&T tariff rates fell by over 70 percent in real terms between 1983 and 1991 and itsmarket share declined by 35 percent, yet AT&T revenues and profit rates held steady because of increaseddemand. BT toll prices have fallen and its market share has declined as competition is introduced, butt herehas been substantial growth in prof its. Bruce Egan and J. Wenders, “The Cost of State Regulation: In Theoryand Practice, ” Columbia Institute for Tele-lnformation, Research Working Paper No. 443, Colum biaBusiness School, revised, 1992, p. 26.

Whether all consumers also benefited, or benefited equally, is less clear. U.S. consumers Increased realspending 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 equivalentvoice 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 theaverage price is about 20 percent higher than the U.S. price; in France about two and a half times higher,in Germany about 11 times higher. Egan, op. cit., footnote 29, p. 59.



tional prices by the EC, 2) ending monopo-lies’ control of cross-border interconnec-tions, 3) opening up the entire regulatedtelecommunications market, and 4) freezingthe liberalization effort and maintaining thestatus quo.

There was opposition to further liberaliza-tion by most PTOs and in most govern-ments.42 In France, for example, members ofParliament declared opposition to furtherderegulation on the grounds that competitionwould led to higher prices for local calls(which have been subsidized), hurting smallbusinesses, and because it would enable U.S.operators to penetrate the European mar-ket.43 On the other hand, the internationalUsers Group (INTUG) strongly advocatedthe second alternative, opening transborderinfrastructure and voice services to competi-tion, in advertisements and in letters to theCommission president.

44 European newspa-

pers reported that ‘‘almost all consumersfavour far-reaching liberalisation and har-monisation" 45— but over a period of 10years, rather than immediately. When theEC’s 6-month period for comment ended in

April 1993, the EC backed away from itsproposal, and instead announced that liberal-ization would be accomplished more gradu-ally, between 1993 and 1998, under “awell-managed liberalization plan’ to beannounced in a ‘‘new green paper’ by theend of 1995.46

If the U.S. experience can be used toforesee likely events in Europe, the ability tobypass PTOs’ services that is implicit in theONP Directive is likely to lead to steadilyincreasing competition in the European mar-ket, in spite of the success in blocking ECformal procedures. While there are strongcultural, institutional, and political differ-ences between the U.S. situation in 1976through 1984 and Europe today, businessincentives and responses arc similar and themomentum already underway points to con-tinued erosion of monopoly protection. Ininternational long distance, a number ofentrepreneurs have begun to arbitrage asym-metrical customer charges in the UnitedStates and Europe with arrangements forcode-calling and automatic call-backschemes.47

If the U.S.experience is anyguide, bypass will/cad to increasing

competition inEuropean markets,in spite of political

opposition.

‘2 The newsletter of the International Telecommunications Users Group commented that”. . the forces ofreaction continue to dom Inate. . and to retain their hold on the political levers. ” “Presidents Letter, ” /NTUGNews, October 1992. The United Kingdom, Denmark, and the Netherlands are reported to supportproposals 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 TelecommunicationsReports, 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 theU.S. st nps off the number of the Incoming call, automatically returns the call (at U.S. rates), and connectsthe caller to a desired reclplent. In many of these arrangements, calls from one foreign country to anotherforeign country can be hubbed through the United States at U.S. rates—this gives the caller the benefit oflower rates, but Incidentally exacerbates the accounting rate problem for the United States, which isdescribed later In this chapter. Page 61


As European coun-tries reluctantlyallow greatercompetition, theirpolicies willcontinue to favorEuropean firms.

European monopolies are beginning to

crumble due to the pressure from the Com-mission for competition within the EC,pressure from the U.S. government, and theinfluence of the continuing general agree-ment on trade and tariffs (GATT’) negotia-tions. The United Kingdom has led the wayby offering permission for international re-sale to the firms of any country that willagree to bilateral symmetry in market accessand pricing. In October 1992, it granted thefirst license for international simple resale toACC Long Distance UK, which will initiallysell transmission services from the UnitedKingdom to Australia, Canada, and Sweden,and has applied to the U.S. Federal Commu-nications Commission (FCC) for authority toresell service to the United States.48 TheUnited States also requires bilateral symme-try, and neither country’s regulators are yetwilling to agree that symmetry exists, eachpointing to restrictions on access to theother’s market. (See chapter 1, box 1 -A.) InMarch 1993, BT’s U.S. subsidiary, BT-North America, asked the FCC for authorityto resell U.S. carriers’ international switchedand private line services, in order to puttogether global virtual private networks;49

this permission would require an FCC find-ing of regulatory equivalence.

The domestic long-distance market maybe the last segment to be liberalized inEurope. so As profits and subsidies fromservices to large businesses and from inter-national long distance begin to shrink due tocompetition, monopoly profits on domesticlong-distance services will become evenmore important. s1 If the EC succeeds inreducing intercountry toll service rates andintracountry rates do not drop, companiesmay route traffic via a neighboring countrywith lower tariffs or lease private lines.

The non-discriminatory interconnectionmandated by the Commission of the EC inthe ONP Directive does not go as far as the‘‘equal ease and convenience of access’ordered by the U.S. District Court in the

AT&T divestiture. In that case the court saidthat there must be punctually equal access forall competitors such that users would see nodifference, even to the number of digits thatmust be dialed. In Europe such issues asdialing parity, subscription procedures, andcontrol of telephone numbers still must beaddressed by regulators. However, as pointedout in chapter 2, advanced software and

48 John Williamson, “Competition Drives Down Global Tariffs,” Te/ephor?y, Nov. 2, 1992, p. 24. A number ofU.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 forresidential subscribers is still effectively a monopoly, even though in the United States and in ?he UnitedKingdom local loop competition is legal.

51 The comparable U.S. network segment ts intra-LATA long distance. (LATA stands for Local Access andTransport Area, a geographical term invented at the time of divestiture to denote the area within which aregional Bell operating company (RBOC), as a local exchange carrier, can legally provide end-to-end tollcall 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 todomestic long distance in a European country. Local carriers have lost over a fourt h of this market to privatenetworks, although legally this market is reserved for the carriers.



switching systems may be able to overcomesuch problems as dialing parity.

In short, it appears that there will eventu-ally be competition in nearly all telecommu-nications services markets in Europe, includ-ing toll voice services, not necessarilybecause open entry is explicitly allowed butbecause of the back door created by the ECONP Directive. This may, however, takesome time-possibly the rest of this decade—to become effective. It is likely to be at leastthat long before U.S. firms will have full oreasy access to these markets. Until then, thestrategy of partnering or joint ventures, asdescribed in the next chapter, is likely toprevail.

Market unificationEven as European countries move to allow

greater competition, they will continue topromote policies favoring their own domes-tic firms. They naturally prefer that if thedismantling of monopolies and cross-subsidy structures is to occur, it shouldbenefit first their own and then other ECbusinesses before it benefits foreign busi-nesses. The Commission of the EC appearsto concede this; market unification itself isdesigned to develop a strong domestic mar-ket base for leverage in the internationalmarketplace. 52 Explicit Commission supportfor favoring domestic firms in conjunctionwith EC market unification efforts wasreemphasized in the Eurostrategies Reportreleased in July 1992.53

The further unification of the EC marketwill thus enhance the competitiveness of ECfirms relative to foreign suppliers. Domesticfirms will benefit most directly and immedi-ately from liberalization of regulations, fromthe opportunity to expand into neighboringgeographic areas, and from more uniformbusiness law and technical standards. Expe-rience in the United States and in the UnitedKingdom indicates that when competition isintroduced the revenues, profits, and marketvalue of the former monopoly providerincrease rather than decrease.

The EC rules for unification and free tradewill apply specifically only to firms ofmember-states, while treatment of foreignfirms will still be governed by GATT andother international conventions, as discussedin chapter 7. The prevailing U.S. strategy ofpartnering will continue. Joint venturingqualifies U.S. firms as European firms. Inaddition, firms in some of the smaller ECmember-states, not themselves large enoughto become strong players in an expandedmarket, have recently been seeking to part-ner with large U.S. firms. Examples arcSTET (Italy) and Telefonica (Spain).

If market unification is likely to benefit atleast the stronger European firms, conven-tional wisdom would suggest that U.S. firmsmight be relative losers. The perspectives ofU.S. services firms operating in Europe, on

54 suggest that the relativethe contrary,disadvantages to U.S. firms may be faroutweighed by the benefits to them of greateruniformity in equipment and services, regu-

‘2 See discussions in Commmon of the European Communities, 1992 Review of Ihe Sjlualim in /heTe/ecornmunlcatlons Services Sector, Brussels, July 10, 1992, pp. 33-41.

53 Commlsslon of the European Communities, The European Telecommunications Equipment /ndustry-TheState 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


In Europeancountries thererelatively few

lations, and institutional procedures, whichwill allow them to offer additional innova-tive services in a more cost-effective way.

Some American business people fear thatonce the EC Commission has consolidatedits regulatory authority it could assert cen-tralized protectionist policies of its own,ss Inview of that possibility, however slim, it isessential to make sure that there is parity inthe terms of trade between U.S. and Euro-pean telecommunications services markets.

Market estimates and projectionsBasic services

The PTOs control about 90 percent of theEuropean market for telecommunicationsservices; their share is about $110 billion peryear ( 199 I -92), with a growth rate of 6 to 7percent. The monopoly voice services por-tion is, in turn, about 80 percent to 90 of totalPTO revenues. Thus 85 percent of the totalmarket is legally closed to competition at thistime. Nonvoice services (including leaseddata lines) are growing about 10 per year.Voice services have lower growth rates.

In most European countries, becauseleased line interconnection is restricted and

prices are high, there are relatively fewprivate networks.56 The growth potential forleased line services is phenomenal now thattechnological improvements and the ECONP Directive will allow leased lines tobecome a viable substitute for switchedservices for large customers. Revenues fromthe fast-growing data and value-added serv-ices markets already constitute a higherportion of PTO revenues than do the monthlyrentals for leased lines. The growth potentialfor leased line services should be double thatfor traditional switched services for the nextdecade, at least 10 to 15 percent per year, andmay be higher. The potential effect of theONP Directive may be gauged by looking atthe United Kingdom, where there are fullinterconnection rights. The United Kingdomrepresents only 16 percent of the total ECmarket in terms of population and income,but has well over half of the leased lines and90 percent of the high capacity lines (2Mbps),

In Europe, the OPN Directive shouldmake the market structure for private net-work suppliers oligopolist, not only forfacilities-based leased line suppliers57 but forresellers and other value-added services

are 55 In a recent paper, Professor Eli Noam discusses the possibility of such a “power play” by the Cornmlsslon:“Telecommunications Reforms at the Periphery: Role Models of Followers,” draft, Columbia Institute forTelelnformation, Columbia University Business School, September 1992. The possibility may not be slim.re.private network=,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 mostpotentjal is competitive companies from selling products such as telecommunications amd power generatingenormous. 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 othersecurity-related agreements, and will also consider the feasibility y of withdrawing from the GATT governmentprocurement 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 andequipment that they use to deliver services, or that build and lease such networks and equipments to ot herservices providers.Page 64



providers. Competition may force the PTOsto offer high-capacity (45 Mbps) DS3 leasedline services, not now available in Europe.

Value-added servicesValue-added services58 include applica-

tions such as electronic mail (E-mail), fac-simile, database services, cellular communi-cations, paging, high-capacity data services,EDI, transaction services (automated tellermachine services, credit card authorizations,computerized reservation services. electronicfunds transfer), and networked computer-aidcd design and manufacturing (CAD/CAM). ‘‘Soft’ \aluc-added services includenetwork management and consulting, soft-ware engineering, network operations andsystems support services. Local area net-works (LANs), wide area networks (WANs),and metropolitan area networks (MANs) arehere also lumpcd with value-added servicesbecause they are often used as the deliverymechanism for services.

The United Kingdom at present consti-tutes most of the market for value-addedservices, about 70 to 80 percent.59 Themarket for Yaluc-added services is generallycompctitive, and full of niche suppliers. It ispossible for small innovative firms to com-pete successfully in these markets. However,

very large firms that span a wide range of

services offerings and have the capacity andgeographical presence to serve large, multi-national corporations may dominate themarket in the long run.

Estimates of the total European value-added services market vary widely depend-ing on how broadly the category is defined.

A reasonable figure is about $5 to $6 billionfor the networking, infomation, and deliv-ery portion of the market (not includingcharges for private data nets, cellular, pag-

ing, and other mobile and satellite business

services). 60 Annual growth estimates are

generally as high as 20 to 30 percent.61 Therearc 3 million subscribers for cellular commu -nications services in the EC, making up amarket estimatcd at $4.5 billion in 1990. Inthe United Kingdom, BT provides less thanhalf of the cellular mobile services. butelsewhere PTOs dominate this market seg-ment.

New wireless technology applications arcexpanding rapidly; these include wide areapaging, private and trunked mobile radio.

mobile data transmission, GSM digital cellu-lar communications, cordless phones. per-sonal communications services, and satellitemobile services. The potential for marketgrowth 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 someleased line serwces.

59 In many EC countnes the PTO IS the dominant suppller of value-added services, but tariff charges forPTO-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 Communityon the U. S., Pub. 2368, March 1991.

“ U.S. International Trade Comm Isslon, 1991; Northern Business Information, 1990; Communications andInformation Technology Research, 1992.

Large firms that canoffer multinational

corporations a widerange of enhanced

services maydominate themarket in the

long run.

u.s.TelecommunicationsServices inEuropeanMarkets

the United Kingdom, with relatively lowprices, have market penetration of about 20mobile phones per 1,000 population. TheNordic countries, which adopted a standardvery early and have lower prices than theUnited States, have about 50 mobile phonesper 1,000 people. Germany and France have7 and 5, respectively; and some Europeancountries do not yet have cellular services.This should be a high-growth marketthrough the 1990s.62

Electronic data interchange (EDI) is com-puter-to-computer transfer of fixed-formatdata such as orders, invoices, payment in-structions, and legal documents. This marketis burgeoning in the United States. Onlyabout 7,500 of the EC’s 6 million companieswere using EDI in 1992, and the market isonly about $110 million, of which $65million is in the United Kingdom. Withmany potential applications and the effectsof public network interconnection, the mar-ket may grow at 50 percent per year for thenext few years.

Two related technological developmentsmay greatly expand the hitherto small Euro-pean market for satellite communications.High-powered direct broadcast satellites will

allow a large number of TV channels,including new high-definition television, toreach subscribers’ small, inexpensive receiv-ing dishes. The use of VSATs with high-powered satellites allows point-to-point datatransmission where good wireline networkinfrastructures do not exist, as in portions ofCentral and Eastern Europe. The total marketfor satellite business services is estimated togrow from $350 million in 1991 to $1.3billion by 2001 .63

The traditional public broadcasting mo-nopolies are rapidly losing market share tonew channels on satellite and cable televi-sion. 64 In the United Kingdom, much of the

cable television activity is financed by U.S.firms. Cable television penetration in theUnited Kingdom is still only 1 percent but isgrowing rapidly. In France it is 3.7 percentand in Germany 31 percent; for comparison,in the United States it is 55 percent. Cablepenetration is estimated to rise from 23percent of European households in 1990 to36 percent in 1995, with revenues increasing300 percent by 1999 (from $4.6 billion in1990).6s Satellite television is also expectedto grow rapidly. Penetration rates are nowvery 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 ofOpportunity,” 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. Muchof this growth was reruns of U.S. television programs. Strong growth (32 percent) is expected over the nextdecade, much of it from purchase of reruns. Until recently, most growth was in in-house productions by t hemonopoly (public) broadcaster. From 1985 to 1990, France’s public television lost 67 percent of publicviewing, 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 (whichmember-states are rushing to implement) setup a single EC market for television broadcasting and providedthat broadcasters must reserve a majority of entertainment programming for European works. Theimplementation 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.



—1 Figure 3-4.

-

SOURCE FEDERAL COMMUNICATIONS COMMISSION, 1992

the United Kingdom.66 Across Europe, pene-

tration is expected to increase from 3 percentin 1990 (o about 16 percent by 1995.67

Network management systems and serv-ices is a small and fast-growing niche marketestimated to grow about 40 percent per yearthrough the early 1990s. Networked data,facsimile, E-mail, and online database serv-ices arc all expected to grow at about 20percent per year. The United States domi-nates the field of on-linc database services,except for Reuters, the British/internationalfirm specializing in financial data. The 1990on-linc market for the United States, Europe,and Japan together was estimated in 1990 tobe $10.3 billion, with the United States

IU.S. International

Telephone Traffic,1991

having 49 percent of the markct. Averageannual growth for Europe was estimated atover 13 percent.68

The importance of U.S. tradein services

Services exports arc increasingly impor-tant to the United States economy. They arcnow one-third the volume of merchandiseexports, and growing briskly. U.S. servicesexports were $166,7 billion in 1992, 9.5percent more than in 1991 and 41 percentmore than in 1989.69 The United States has

a healthy positive trade balance in services,

‘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 dateare not comparable. However, In 1988 serwces exports were 23 percent greater than in 1986. Page 67


Page 68

$59 billion in 1992 and $52.2 billion in1991.70 This should be compared with amerchandise trade deficit of –$ 105.3 billionin 1992 and –$73.4 billion in 1991.71

The European Community is the primary

foreign market for U.S. service producers;almost a third of all U.S. exports of businessservices go to EC countries (an estimated$37.5 billion in 1991).

These figures cover only direct transac-tions in services and do not include revenuefrom sales of U.S. affiliates overseas. Suchforeign investments account for about half ofthe total U.S. delivery of services to foreigncitizens and organizations.

72 In this category,

also, the United States has a favorablebalance of trade, $11 billion in 1991, up from$8.5 billion in 1990.73

In telecommunications products and serv-ices taken together, the United States has alarge trade surplus; but it has an overalldeficit in telecommunications services, -$2.8billion in 1991. This annual deficit hasdoubled since 1987. Why should the United

States, which prides itself on being a leadcrin basic and enhanced telecommunicationsservices, have a persistent and growing tradedeficit in this sector?

The deficit in telecommunications serv-ices trade is, by a strange twist, a measure ofU.S. strength in telecommunications, ratherthan a sign of lack of competitiveness. Thetelecommunications trade deficits are a re-sult of asymmetrical traffic demand patternsand of international accounting and revenuesettlement practices. When an internationalcall is made over a public-switched network,the long-distance company in the country oforigin pays the Iong-distance company in thereceiving country for its services in routingthe call to a customer. The amount of thepayment, which is called the accounting rate,has been negotiated between the two compa-nies. It is the same regardless of the directionof the call and is independent both of thecollection rates (what the customer ischarged) in either country, and of thc actual

70 The total internat ional t rade in services KS $700 billlon ( 1991 ). The world’s major serwces export ers are t heUnited States, France, Germany, the United Kingdom, and Japan. Most of the International trade In servicesis among the Organization for Econom IC Cooperation and Development countries, and these five countriestogether account for about 30 percent of t he OECD total. James Brian Quinn, “Technology In Services: PastMyths 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 thesurplus in trade in services and other net income (direct investment receipts and payments, governmentreceipts 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 andafter 1989 are not exactly comparable because of “definitional and methodological improvements” inBureau of Economic Analysis’ 1989 Benchmark Survey. However, the proportion of crossbordertransactions to the total is roughly 50 percent in 1987 and 1988 and 54 percent for 1989 and 1990; figuresfor 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. exportsand about 73 percent of U.S. imports, as a 5-year average, 1987-91. The second largest part of trade inservices is royalties and license fees (12 percent of exports, 3 percent of imports).



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

Accounting andCollection Rates

o 1 2 3 4 5 6Dollars

Amount paid to the correspondent carrier to complete the call, as per the accounting rate

Amount retained by operator originating the call

Estimate of carriers’ costs


cost to the phone company of de1iveringcalls.

In one sense, the deficits represent goodnews; they are a side effect of lower telecom-munications prices in the United States.They arc also testimony to the size and vigorof U.S. industry and its reliance on telecom-munications. In the United States, customercharges for overseas calls arc much lowerthan in most other countries, because Euro-pean countries subsidize basic services withinternational and business revenues; somecountries also use telecommunications reve-nues to subsidize the postal system andpublic transportation. Because of lower costs

and because of the size of the economy,about twice as many international calls are

7 8 9

made from this country as arc received fromoverseas. Thus accounting rates cause muchmore money to flow out of the country thanthey cause to flow in.74

The U.S. Federal Communications Com-mission, the International Telecommunica-tion Union, and the Commission of theEuropean Communities are pressuring Euro-pean telecommunications authorities to joinU.S. firms in negotiating lower, cost-basedaccounting rates. To end the negative U.S.trade balance in telecommunications” serv-ices, however, will require not only loweraccounting rates but also lower customercharges in Europe for international calls, so

that the number of calls made in eachdirection comes into better balance.

NOTES The accounting rate withGermany 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 thecaller 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

10 (TeleGeoraphy 1992, InternationalInstitute of Communlcatlons)

The costs to the carriers are esti-mated at $015 per mmute at both

the U S. and German end, this num-ber IS conservatwe.

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


The telecommunications services tradebalance will also be much improved if U.S.exports of value-added or enhanced telecom-munications services grow significantly. Justas telecommunications services are a smallpart of all international trade in services(about 2 percent of U.S. exports and 5 to 6percent of imports), value-added or en-hanced services are a small segment of theoverall market in telecommunications serv-ices. The value-added services sector is,however, likely to expand tremendously inthe next decade.

The United States had a positive tradebalance of $60 million in value-added serv-ices in 1991.75 In addition, there are massiveinvestments by U.S. telecommunicationscompanies in Europe that are too new toshow substantial profits as yet, but in the near

future are likely to become very profitableventures. Telecommunications services willprobably continue to be delivered primarilythrough foreign-based subsidiaries. Someeconomists assume this because communi-cations are infrastructure-based services,76

but it should be noted that many telecommu-nications and information services can actu-ally be delivered electronically, withoutregard to geographic proximity. Nontarifftrade barriers are more potent reasons toestablish a presence within Europe. How-ever, U.S. subsidiaries and joint venturefirms do not necessarily enjoy all of theadvantages of European firms, and as theEuropean market expands and is liberalized,direct U.S. exports of value-added telecom-munications services to Europe could growstrongly.

Page 7075 Bureau of Economic Affairs, Current Survey of Business, September 1992, table 2.

‘G See Bruce R. Guile and James Brian Quinn, op. cit., footnote 70.

. . . .

EuropeanActivities andStrategies of U.S.Telecommunications Firms

C H A P T E R

U.S. telecommunica-tions firms thinktheir futuregrowth increasinglydepends onforeign markets.

AT&T CHAIRMAN ROBERT ALLEN’S BOLD GOAL

of drawing 50 percent of the companyrevenues from overseas by 2000 reflects thestrong trend for U.S. telecommunicationsservice providers to expand their interna-tional activities (see table 4-l ). The sevenregional Bell holding companies (RBHCS)l

have in the last few years also aggressivelypursued international investments. It is esti-mated that they have invested nearly $12billion overseas since the divestiture of theBell Systcm, most of these investments since1989.2

This trend extends to major carriers out-side the United States as well. BT (formerlyBritish Telecom) is catering to the communi-cations needs of largc multinational firmsthrough its Project Cyclone. Just as Sprintdropped the ‘ ‘U. S.’ from its original name,BT’s name change doubtless is intended toblur the explicit association with the UnitedKingdom. Telefonica, the Spanish nationalcarrier, has embarked on a series of overseasinvestments in South and Central America,and in Eastern Europe. ?

U.S. firms are looking abroad because ofnew opportunities and because their futuredepends increasingly on growth in foreignmarkets. Increased spending on telephoneservices in the United States is expected toremain relatively small compared with in-

creased spending on telephone service inother countries, which as described in thepreceding chapter is expected to range from30 to 80 percent.

In contrast with the European market, theU.S. telecommunications” market is satu-rated. There are, in the United States, severallayers of providers and within each layerthere arc many firms. The two largest groupsarc the interexchange carriers (commonlyreferred to as ‘‘IXCS’ and more commonlyknown as long-distance carriers) and thelocal exchange carriers (LECs). AT&T, MCI,and Sprint dominate the long-distance busi-ness. so much so that it is easy to assumemistakenly that they arc the only threeproviders. In fact there are nearly 500 otherfirms offering long-distance services in theUnited States.J Similarly, the seven regionalBell holding companies and General Tele-phonc and Electronics (GTE) arc by far thelargest local exchange companies. account-ing for 118 million access lincs, nearly 85

percent of the 140 million telephone lines inthe United States. GTE. unlikc the ‘s BabyBells’ is not a regional company and doesnot operate under the Modified Final Judg-ment (MFJ), the court order codifying thedivestiture agrement. In addition to theseeight largc firms. however. there arc some

1,300 other local "independent" telephone

Page 71

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 EnglandTelephone. 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 suchas cellular properties and a publishing arm.. (Due to several reorga nlzat ions since d(vestlture, the numberof 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 U.S. Department of Commerce, 1992 U.S. /ndusfrM Out/ook, January 1992.


Table 4-1.CrossborderAcquisitions byTelephone CompaniesWorldwide

a only 2.8 percent ($463 mll-hon) of the value of cross-border transactions in 1990are for foreign companies in-vesting in the United States.Fmancjal Times, “VkrldTelecommumcatlons Survey,”Oct. 7, 1991, p. xxi.

ValueNumber ($millions)

1985 5 $ 3991986 7 1321987 7 631988 11 1171989 50 2,6941990 67 16,539a

SOURCE BOOZ, ALLEN & HAMILTON, AS CITED IN THEF/iVANC/AL TIMES, WORLD TELECOMMUNICATIONS SURVEY,

OCT. 7, 1991, P. XXI.

companies, typically serving rural communi -ties.s

Since the major long-distance companiesand LECs account for most of the telecom-munications revenue in the United States,these firms are also those in the best positionto exploit foreign opportunities, and will bethe focus of the analysis in this chapter.However, the U.S. telecommunications in-dustry consists of many other niche players,in cellular and paging services, data net-

working, satellite services, and value-addedinformation services. Many of these compa-nies, such as Millicom and EDS, haveextensive international operations.c Thereare also several telecommunications equip-ment manufacturers with experience in for-eign markets that are using their strengths forentry into services. The two most notablecases are Motorola, with its ambitious Irid-ium project,7 and IBM, which is offeringdata networking and value-added services inEurope. IBM recently announced its inten-tion to add voice capability to its EuropeanInformation Network through the installa-tion of asynchronous transfer mode (ATM)switches. 8

U.S. regulations andoverseas expansion

RBHCs argue that they are prohibitedfrom entering some of the most promisingdomestic markets due to the MFJ,9 which

Page 72

5 These were not spawned from the former Bell System. AT&T looked f irst to larger, Iucrat ive markets whenconsolidating its nationwide operations. Smaller communities were left to build their own telephonenetworks. With the help of funding from the Rural Electrification Admlnistratlon of the Department ofAgriculture, these independents have survived and even thrived.

G For example, Millicom was recently awarded one of four licenses by the United Kingdom’s Department ofTrade and Industry to offer telecommunications services in competition with BT and Mercury. “TelecomSector 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 communicationssystem. Countries or communities with inadequate telephone service could benefit from global communicationsbut be spared t he cost of installing such a netwock. A massive project, Iridium is st i II in t he design phase andthere 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 forU.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 AdministrativeRadio Conference: Tec/mo/ogy and Po/icy /mp/ications, OTA-TCT-549 (Washington, DC: U.S. GovernmentPrinting Office, May 1993).

e John Blau, “IBM Plans Voice,” CommunicationsWeek /nfernationa/, Feb. 1, 1993, p. 1.9 United States v. AT&T, 552 F. Supp. at 228.

EuropeanActivities and

Strategiesof U.S.

TelecommunicationsFirms

REPRINTED WITH SPECIAL PERMISSION OF KING FEATURES SYNDICATE,

settled the antitrust case against AT&T (seebox 4-A), and certain laws, primarily theCable Communications Policy Act of 1984.Under the MFJ, the seven RBHCs wererestricted from three lines of business: inter-LATA10 long-distance service, the manufac-ture of telecommunications network andcustomer equipment, and the provision ofinformation services. Additionally, the con-sent decree originally barred RBHCs fromany service that was not b

‘ a natural monop-oly service actually regulated by tariff."11

The prohibition on information services hasbeen lifted by the court. and several commit-

tees of the 103d Congress are working onlegislation related to provisions of the MFJ.

Many analysts believe that the presentregulatory structure and philosophy no longersuit the communications marketplace be-cause advances in communications technol-ogies arc forcing a reexamination of what

services are competitive. Cable televisionand telephone service, for example, couldwith some significant modifications be pro-vided over a single network. 13 RBHCs arguethat: 1 ) the prohibitions preventing themfrom designing and manufacturing equip-ment unduly stifle or discourage their ability

‘“ In the divestiture, the country was dlwded Into 161 “local access and transport areas” (LATAs). All callsthat cross a LATA boundary must be handled by one of t he compet it ive long-distance carriers, whl Ie callswithin 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. Thisrestriction, which effectively prevented the companies from non-telecommunications businesses, wassubsequently removed at the triennial rewew In 1987.

‘2 For one of the most provocative discussions of the increasing incompatibility between the organization ofthe Industry and the technologies, see The Geodesic Network //and its antecedent report, The GeodesicNetwork. Peter W. Huber, Michael K. Kellogg, and John Thorne, The Geodesic Network //: 1993 Repoti onCornpetdlon 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 onInfrastructure, 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 networkinefficient 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


AT&T hopes to get50 percent of itsrevenue from interna-tlonal activities bythe end of thisdecade.

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 servicewas assigned to the newly formed holding companies under certain restrictions, developedand administered by Federal District Court Judge Harold Greene. The basic premise of thisdivestiture settlement was that the Bell System’s competitive markets should be separatedfrom their noncompetitive monopoly markets in order to prevent unfair monopoly abuses, suchas AT&T forcing captive local ratepayers to bear the burden of subsidizing equipment andlong-distance service against emerging rivals. The competitive markets had begun with MCI’Schallenge to AT&T’s monopoly on long-distance service, starting in 1968, and the entranceof competing manufacturers of customer premise equipment.

A Modified Final Judgment (MFJ) went into effect at the beginning of 1964, clarifying andexpanding the terms of the 1982 consent decree. The Bell System’s 22 local telephoneoperating companies (BOCs) were separated from the parent company (AT&T) and groupedinto seven regional Bell holding companies (RBHCs), which were entrusted with providinglocal services. The seven regional Bell holding companies (Ameritech, Bell Atlantic,BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and U.S. West) were specificallyprohibited under the MFJ from entering the three lines of business deemed competitive andtherefore assigned to AT&T: 1) designing and manufacturing telecommunications networkand customer premises equipment, 2) providing information services (such as electronicyellow pages), and 3) providing Iong-distance service.

The information-services ban was to prevent RBHCs from using their control of the localloop “bottleneck” to engage in anticompetitive conduct toward other information-servicesproviders. The prohibition was subsequently amended at the triennial review in 1987, and laterreversed and remanded by the U.S. Court of Appeals for the District of Columbia. The othertwo provisions of the MFJ are the subject of intensifying congressional activity.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993,

to properly upgrade their domestic networks,and 2) domestic line-of-business restrictionslimit their options in overseas activitiesbecause foreign government ministries arewary of permitting them into areas that the

foreign ministries are forbidden to enter inthe U.S. market. 14

U.S. telecommunications firms’European activitiesInterexchange carriers

International telecommunications is anextension of long-distance service. AT&Tdelivers direct dial service to over 250countries and territories, while MCI andSprint connect to nearly 200 foreign destina-

Page 74

‘4 NYNEX, however, in discussions with the Office of Technology Assessment, noted its ability to offer cableservices in the United Kingdom as a counterexample.

‘5 Under Section 214 of the Communications Act, international carriers must file with the FederalCommunications Commission for authorization for each connection to a foreign point.


Strategiesof U.S.


tions (though many of these are throughAT&T facilities). Each of these carriersowns a share of the capacity on the variouscables traversing the Atlantic and PacificOceans to carry their outbound traffic, andleases Intelsat satellite capacity through Corn-Sat.

International traffic is a lucrative market,and it is experiencing high growth as com-merce becomes increasingly global in na-ture. International traffic grew by 13 percentto 35 billion total minutes in 1991, the latestfigures available.16 Though most foreigngovernments continue to reserve basic voiceservices to a national monopoly, U.S. long-distance carriers arc making inroads into theEuropean market for nonbasic services, suchas value-added data networking. 7

Change in the telecommunications marketis often rapid, so the description that followsof the activities of the major U.S. telecom-munications firms is a snapshot as of thebeginning of 1993.

AT&T. AT&T is one of the few operators inthe world that is vertically integrated to offerboth equipment and services. No othercompany operates on the scale of AT&T inboth segments. AT&T Chairman RobertAllen’s target of 50 percent of revenuescoming from international activities by theend of the decade is nevertheless ambitious.

$billions80

60

40

20

01984 1985 1986 1987 1988 1989 1990 1991

SOURCE FEDERAL COMMUNICATIONS COMMISSION, 1993.

It means increasing the company’s revenuesfor international equipment and servicesfrom about $12 to $90 billion and fordomestic telecommunications services from$48 to $90 billion. IS The company purchasedNCR in 1991 and Istel, a British informationtechnology firm, in 1989. Both additionssolidify its European presence: with theacquisition of NCR, which also strengthensits computer business, AT&T more thandoubled its foreign workforce, most of which

19 Before the takeover, NCRis in Europe.derived approximately 62 percent of its $6billion in annual revenues from abroad.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 billionminutes, 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, whereIong-dist ance serwce us competttlvely provided. The European connotat Ion includes t he notion of ensuringnetwork 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 ofNCR’s 54,000 employees are overseas. John J. Keller, “AT&T Plans to Name Toblas to Direct OverseasLines in Bld to Speed Growth,” Wa// Street Jouma/, June 25, 1991.

Figure 4-1.U.S. Toll Service

Revenues, 1984-91

Page 75

-.. . .


AT&T's Iongdistancecompetitors are alsoamong the world’sfastest growinginternationalcarriers.

European market for value-added serviceswith purchases, through Istel, of serviceproviders in other countries, such asDATAID in France.

AT&T is extending to Europe its manageddata network services developed for the U.S.market, such as Clearchannel, Accunet Spec-trum of Digital Services, and AccumasterManagement Services. The company offersthese services through separate subsidiariesin countries where competitive entry ispermitted. AT&T currently has nodes ineight countries, but has plans to locate inseven others.20 Its International Network

Systems, originally started by Phillips butlater bought by AT&T, is located in theNetherlands.

AT&T has a strategic alliance with theItalian local carrier, ItalTel, involving equip-ment sales and consulting to develop Italy’sinfrastructure. It has an equipment manufac-turing facility in Spain, and is involved in astrategic relationship with Telefonica. Thecompany is participating in joint ventureswith the Ukraine State Committee of Com-munications and the Netherlands’ Postal,Telephone, and Telegraph (administration)(PTT) Telecom to build and operate amodern telecommunications network in theUkraine. The Ukraine State Committee willretain a controlling interest (51 percent),while AT&T’s share in the project is 39percent and the Netherlands PTT has theremaining 10 Percent.21 This is the firstmajor effort by AT&T to build an overseasnetwork (though it has been involved with

operating a cable network, CANTV, inVenezuela). The Ukraine State Committeeexpects to increase the penetration of phonesfrom 7 to 22 million lines by 2000. InNovember 1992, AT&T purchased for $28million an 80 percent stake in a Polishtelecommunications equipment manufactur-ing plant, Telfa.

In May 1993, AT&T spearheaded theformation of WorldSource, a joint venturewith five other operators, including KokusaiDenshin Denwa of Japan and SingaporeTelecom—at the outset, the venture lacks aEuropean partner. WorldSource will provideglobal voice and data communications tomultinational firms .

MCI. A relative newcomer to internationalcommunications (1983), MCI has been oneof the fastest growing international carriers.MCI expanded its outgoing traffic from 103million minutes in 1986 to 2.2 billionminutes in 199222 and has become the6th-largest international carrier (see table4-2), carrying 18 percent of U.S. interna-tional voice traffic. MCI international com-munications grew by 35 percent in 1991 andagain in 1992.

In recent years, the company has madeseveral key international acquisitions, in-cluding two international record carriers,Western Union International and RCA GlobalCommunications. In addition, it bought Over-seas Telecommunications Inc., a companyinvolved in long-distance services in NewZealand and Australia. MCI also owns part

Page 76

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

2’ “AT&T, PTT Telecom-Netherlands in Joint Venture With State Committee of Ukraine; Plan IncludesExpanded International, Long Distance, Local Access Networks, Manufacturing,” Te/ecornrnunicafionsRepotts, Jan. 20, 1992, p. 21.

22 Information provided by MCI’S Business Analysis Group, May 1993.


Strategiesof Us.


of Clear Communications, a competitivelong-distance carrier in New Zealand.23

Ambitious to form global partnerships,MCI spearheaded the fomation of the Finan-cial Network Association, an association thatincludes 11 other European carriers targetingcommunications services for internationalfinancial firms (potentially in competitionwith the Society for Worldwide InterbankFinancial Telecommunications, SWIFT). MCIis also in a loose partnership with 23 otheroperators in Global Communications Serv-ices, which intends to provide ‘‘global one-stop shopping or a full range of services tomultinationals. 24

Canada has been the most recent battle-ground for MCI and AT&T competition asthey build their global networks. When MCInegotiated an operating agreement with Sten -

tor, the consortium of Bell Canada and theprovincial phone companies. AT&T respondedby purchasing 20 percent of Unitel Commu-nications, a competitive long-distance com-pany in Canada. and filing a patent-infringement case against MCI.

In June 1993, MCI reached an agreementwith BT for an alliance between the twotelecommunications firms that includes thepurchase by BT of 20 percent of MCI for

$4.3 billion and the creation of a jointventure firm to offer global voice and dataservices to multinational users. BT will namethree directors to MCI’s board. while MCIchairman will join BT’s board. MCI willinvest 24.9 percent of the $1 billion to formthe new venture (yet to be named). and willbe responsible for marketing these global

Outgoing MITTa Growth in MITT(millions) (1990-91 )

AT&T (U. S.) 6,557DBP Telekom (Germany) 3,557France Telecom (France) 2,295BT (UK) 2,213Cable & Wireless (UK) 1,660MCI (U. S.) 1,600SWISS PTT (Switzerland) 1,429Stentor (Canada) 1,425Netherlands PTT (Netherlands) 1,018ASST (Italy) 980KDD (Japan) 850Belgacom (Belgium) 823Sprint (U. S.) 723Telefonlca (Spain) 719Swedish Telecom (Sweden) 659

a Mlnules of lnlernatlonal telecommurucations Irafflc.

SOURCE CCWfA4UNlCAT/0M5 WEEK INTERNATIONAL, SEPT. 21, 1992, P. 8.

7.8%.13.17.91.9

28.635.112.56.0

12.517.111.312.625.317.77.2

network services in North America and theCaribbean.

SPRINT. Like MCI, Sprint has experiencedexplosive growth in its share of internationaltelephone traffic: its share of outgoing trafficincreased from 43 million minutes in 1986 to728 million minutes in 1991 (the last figuresSprint has released), having doubled itsinternational outgoing traffic from I 990 to1991.25 Sprint wants to penetrate the market

for intra-European long-distance service; itis involved in a project (Hermes) to build apan-European network for voice and data.This company is the leader in internationalvideoconferencing, with 1,200 video facili-ties in 30 countries. Sprint Internationalaccounts for approximately $2 billion inrevenues compared with $8.8 billion for theparent company.

Table 4-2.Traffic Base

of LeadingInternational

Carriers

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


Sprint has applied for a license from theDepartment of Trade and Industry to offerlong-distance and international service in theUnited Kingdom. If this is approved, Sprintwill team with British Waterways, whichcontrols canal rights-of-way throughout thecountry, to build a fiber-optic backbonenet work.

In February 1993, Sprint joined withAlcatel NV, the French manufacturer oftelecommunications equipment, to form Al-catel Data Networks. The new company, ofwhich Sprint will own 49 percent, will beheadquartered in Paris with a unit in Reston,Virginia. It w ill develop and market productsbased on ATM technology (see chapter 2),for the data networking needs of largeinternational business customers.26

Sprint has a close operating arrangementwith Unisource, which is a joint venturebetween PTT Netherlands BV, Televerket inSweden, and Swiss Telecom PTT that offersglobal network services. This arrangement,which increases Sprint’s European presence,includes collaboration on global data net-working and on very small aperture terminal

satellite communications services, Unisource

uses Sprint’s European packet network andSprintnet, its international data network.27

In 1988, Sprint bought Private Telecom-munications Services, Inc., which owned theU.S. end of the first private transatlanticfiber-optic cable, PTAT- 1. Cable & Wirelessowns the foreign portion of PTAT- 1, whichconnects the United States and the UnitedKingdom (and also lands in Ireland andBermuda).

The long-distance carriers’strategy of expansion

The three major U.S. carriers have beenactively pursuing partnerships with publictelephone operators (PTOs)28 in major Euro-pean and Asian countries to handle thecommunications requirements of large cor-porate customers, who need to network withand between several countries. These con-sortia enable carriers to spread large capitalrequirements and to offer comprehensivecommunications packages, including con-solidated billing and equipment, instead ofusers needing to piece together internationalnetworks. BT, with its Syncordia project,29

has been at the forefront of this trend. Morerecently, BT announced its intention to

Page 78

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 longeraccurate, 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 andDeutsches Bundespost Telekom (DBT). However, NTT and DBT balked at their respective stlares in theproject—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 andFrance Telecom then formed t heir own venture, Eunetcom. BT more recently launched Project Cyclone, anattempt to coordinate BT’s various international operations, including: Syncordia for network outsourcing,Global Network Services for managed data networking, International Featurenet for international virtualnet works, and Prlmex for internat ional private circuit management. “BT Bolts Forward,” Cornrnunicafions kVeek/ntemafiona/, Sept. 7, 1992, p. 2.


Strategiesof U.S.


purchase 20 percent of MCI and to forrn ajoint venture with the second-largest Ameri-can carrier (and the sixth largest globaltelecommunications firm), The acquisitionand the venture, which will strengthen BT’spresence in North America, follow directlyon the he e 1s of AT&T unveiling itsWorldsource partnership with Kokusai Den-shin Denwa of Japan and Singapore Tele-com. MCI’s Financial Network Associationand Sprint’s Unisource consortium are otherexamples.

The growing leverage of the user commu-nity in telecommunications policymaking isat the center of this turbulence in theorganization of international telecommuni-cations. The rise of multinational or globalcompanies is threatening to the nationalmonopolies, since a single carrier will havetrouble handling the communications needsof a company with headquarters or mainoffices in several countries. A U.S. carriercan, for example, handle a firm interna-tional needs only so long as one end of thetraffic originates or terminates in the UnitedStates. Given current restrictions on networkaccess in most countries, an American carrieris not permitted to carry the traffic of acompany between, for example, Tokyo andAmsterdam. Large users are pressing forharmonious international equipment stand-ards and service offerings; they arc alsodemanding that levels of service that theyhave come to expect at home be available

abroad. They want a single firm to be able toprovide for all their networking needs.

The desires of large users are often indirect conflict with the modus operandi ofEuropean PTOs, which have earned a reputa-tion for being more responsive to politicsthan to customers.30 Large corporations areaccumulating the political power, both indi-vidually and collectively through groupssuch as the International Telecommunica-tions Users Group (INTUG) and the Interna-tional Communications Associations (ICA),to challenge the PTOs when they are dissatis-fied with the quality, the variety, or the costof services.

A second general strategy for the world’smajor carriers is the development of interna-tional data networks. Again the target audi-ence is a limited set of customers withmulticountry, high-data requirements. Datacommunications traffic is still small relativeto voice communications, but its growth isimpressive. PTOs arc clinging tightly to theirbread and butter, voice traffic, which mayaccount for as much as 90 percent of thecarrier’s revenue and 100 percent of itsprofits. Data networking, therefore, appearsto be a U.S. carrier’s best opportunity to enterforeign markets, and each of the major U.S.carriers has a data networking subsidiary.AT&T owns Accunet and Sprint, Telnet;MCI owns 25 percent of Infonct.

Foreign carriers are following similarstrategies in an effort to make headway intothe U.S. market. BT purchased San Jose-

The rise ofmultinational

companies threatensnational

telecommunicationsmonopolies, sincesingle carriers will

have troubleoperating in several

countries.

30 In particular, high international tariffs, which are important to telecommunications managers of firms withsubstantial international traffic, are typically used by governments to subsidize other areas, includingnontelephone 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 thecountry originating a call remunerates the carrier in the foreign country for terminating the call. Theaccounting rates, which in theory are intended to relate to cost, are artificially large In many cases so thatthe country terminating the call receives a large windfall for doing very little. (See ch. 3.)


$62

SOURCE: 1993 INDUSTRIAL OUTLOOK, U.S. DEPARTMENT OF COMMERCE.

Figure 4-2. based Tymnet from McDonnell-Douglas in

Estimated 1993 U.S. 1989. 31 Infonet, based in California, is jointly

Telecommunlcatlons owned by 11 European PITs, in conjunctionServices ($billions) with MCI.

Carriers are also developing virtual pri-vate networks that behave to the client like aprivate network. That is, the user does notpay retail rates for long-distance or intern-ational calling, benefits from abbreviatednumbers, and is assured of bandwidth whenneeded; this is accomplished through thesoftware in the switch rather than throughdiscrete physical facilities. Virtual privatenetworks relieve the user of the necessity ofrunning, monitoring, repairing, and upgrad-ing networks. Each of the U.S. carriers offersa virtual private network service under a

Page 80

trade name: MCI offers Vnet, AT&T offersGSDN (Global Switched Digital Network),and Sprint offers GVPN (Global VirtualPrivate Network). Foreign national carriershave similar products: BT has FeatureNet;France Telecom, Colisee; PTT Netherlands,GLOBAL; and KDD, Virnet. On an interna-tional level these require close collaborationbetween national carriers.

RBHCs overseas

In the last few years, the seven RBHCshave also turned their attention outward,beyond their domestic networks. The RBHCs’overseas activities have mainly taken threeforms:■ The construction and/or operation of cel-

lular networks;■ Experimentation with other infrastructure,

especially cable television; and■ Investments in the privatization of state

telephone companies.

U.S. companies' involvement in cellularcommunications has mainly occurred inEurope. In Eastern Europe RBHCs havehelped construct networks that will serve asalternate infrastructure; in Western Europe,they are involved in cellular franchisescompeting with the incumbent carriers’ op-erations. Their solid expertise m cellularcommunications in the United States32 isvalued by countries building facilities tocomplement or in some cases replace theexisting ‘‘wireline infrastructure. In parts

31 Under the agreement recently announced between BTand MCI, the ownership of the Tymnet aata networkwill 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. After McCaw

and GTE, the independent telephone giant, the seven RBHCS have the next largest cellular franchises. TheFederal Communications Commission, in 1983, automatically awarded the local telephone provider one ofthe two franchises in each metropolitan service area. See Cellular Telecommunications IndustryAssociation, State o~the Ce//u/ar /nd.My, Washington, DC, 1992.


Strategiesof U.S.


of Eastern Europe, the existing communica-tions network cannot accommodate the bur-geoning commerce. A cellular network,though requiring large upfront capital costs,is faster than repairing or modernizing theexisting network. Because the demand forreliable communications is so critical, cellu-lar operators are commanding high installa-tion, equipment, and usage charges to coverthis high investment.

RBHCs are also joining in consortia forthe second or third licenses for cellularservice in Western Europe, typically incompetition with the PTO. Differences in thetechnologies of mobile communications po-tentially permit the survival of several com-peting providers. GSM, the European stand-ard for digital cellular communications, isreplacing analog cellular: some providers arcbetting that personal communications net-works (PCN) or personal communicationsservices (PCS) represent the next evolution.

The second large area of activity thatseveral RBHCs arc pursuing is franchises forcable television.33 These are expected to behigh]y profitable ventures that also represent

opportunisties for RBHCs to build infra-structure and establish a local presence inanticipation of EC-mandated liberalizationof telecommunications markets. The United

Kingdom’s competition strategy permits afertile testbed for RBHCs to experiment withvideo (i.e., TV) and voice over the samenetwork. RBHCs also are gaining experiencein a market they are vigorously trying toenter in the United States; the venturesabroad provide technical experience andpotentially political leverage. NYNEX andU.S. West in particular are pursuing thisopportunity aggressively .x4

Investments in the privatization of tele-phone companies have mostly taken placeoutside Europe, in Central and Latin Amer-ica and in the Pacific Rim (notably Australiaand New Zealand). The European telecom-munications operators are generally finan-cially and technically secure enough thatthey do not require large infusions of foreigncapital and operating expertise.

There are strong similarities in the activi-ties of RBHCs abroad, but their intentionsand strategies are not always identical. Theyarc referred to as one group here for the sakeof convenience and because they are oftenallies in support of major legislative actions—they all have an interest in removal of the.MFJ restrictions that limit their business The opportunity to

activities. Since they were split from AT&T, build cable televi-

however, they have formed markedly inde- slon systems abroad

pendent corporate strategies. offers a testbed for.U.S. carriers eager

33 Meanwhile, foreign ownership of cable franchises In the United States is a sensitive political Issue. In the to enter that market102d 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 telephonecom pames and broadcasters. (Section 310 of the Communications Act Ilm its foreign ownership of radioIlcenses—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 onTelecommunications and Finance of the House Committee on Energy and Commerce, argued for theprovision on national secunt y grounds-noting the cable industry’sconnect lon to the country’s “telecommunicationsnervous 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 othercount ries. Several European PTOS have staked their future on other technologies, such as direct broadcastsatellite (DBS).


Figure 4-3.Regions of theSeven RBHCs

Bell South is

RBHCs inBELLSOUTH CORPORATION.one of the most aggressivepursuing international ventures. It is heavilytargeting Latin America, but it also is creat-ing a substantial presence in Europe, mainlyin cellular and paging operations. A subsidi-ary, BellSouth Enterprises, Inc., controls allnonregulated activities, including the com-pany’s international ventures, while Bell-South Telecommunications, Inc. deals withthe regulated core businesses—the provisionof basic telephone service within its nine-state region. BellSouth Enterprises is com-prised of Bell South Cellular, BellSouth Pub-lishing, and BellSouth International (BSI),which handles international operations andopportunities. BSI has a corporate office inBrussels for business development and tech-nical expertise, but the strategy for its globalactivities is established in the Atlanta head-

SOURCE: OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

quarters. The parent company expects thatBellSouth Enterprises will quickly increaseits percentage of revenues within the com-pany to 25 percent.

The company’s main emphasis in Europeis on cellular communications. It is prohib-ited in almost every country except theUnited Kingdom from offering alternativelocal service, which would draw on its greatnetworking expertise. BellSouth owns 29percent of a consortium to build and operatea mobile phone network in Denmark. InGermany, a consortium that includesBellSouth was awarded a license for thecountry’s third cellular network; the cellularnetwork will operate at 1800 MHz (asopposed to the more traditional 900 MHz)and will compete against cellular networksoperated by Deutsche Telekom and Mannes-mann (of which PacTel is a partner) .35 In

Page 8235 “German Mobi Ie Phone Net work Won by Thyssen and Veba Consort ium,”Te/com Highlights /nternationa/,Feb. 10, 1993, pp. 2-3.


Strategiesof U.S.


France, it has shares in several diverseenterprises, including a small stake in Soci-ete Francaise du Radiotelephone, whichholds a license for GSM, and a partnershipwith France Telecom to offer cable TV.

Elsewhere, BellSouth owns 24.5 percentof the Australian consortium, Optus Com-munications, in conjunction with Cable &

wireless and local investors, which willbuild and operate a competing carrier for allkinds of wireline and wireless services and

international long-distance (for whichBellSouth had to secure a U.S. regulatorywaiver). The company is providing cellularservice in New Zealand, and was awardedthe cellular license in Argentina, along withMotorola, in February 1989. BellSouth alsopurchased Cidcom, Pacific Telecom’s cellu-lar operation in Chile, and operates cellularsystems in five Latin American countries:Mexico (western), Argentina, Chile, Vene-zuela, and Uruguay.

NYNEX. New York-based NYNEX has vig-orously pursued opportunities for foreignventures. Its nonregulated activities, includ-ing its international ventures, are separated

from its regulated local offerings (i.e., NewYork Telephone and New England Tele-phone). which are handled through its Tele-communications Group. NYNEX World-wide Services Group is organized into branchescovering cellular services in the UnitedStates, publishing (which involves someoverseas activities), and its diversified opera-tions, within which arc two subsidiaries thatdeal explicitly with international ventures.

NYNEX Network Systems Company, withregional headquarters in Brussels and Hong

Unregulated

I

I

I

I

IIIII

BellSouth Telecommunications Inc.

I Regulated

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993, BELLSOUTH ANNUAL REPORT.

Kong and offices throughout Europe and Figure 4-4.

Asia, is responsible for overseas communi- Organization of the

cation networks and services, notably its 14 Be//South

cable TV-telephony franchises in the United Corporation

Kingdom. NYNEX CableComms was awardedfranchises in July 1990 that make it thelargest cable franchise owner in Britain, withan investment of $1.1 billion.36 NYNEXNetwork Systems also owns 50 percent ofGibraltar Tel and is helping the governmentto modernize the communications infra-structure. The company is in Indonesia tohelp manage network expansion, and inJapan it owns a minority share of two mobilecommunications firms. NYNEX is also in-volved in a consortium to install two millionlines in Bangkok, Thailand.

Various other subsidiaries of the companyhave successfully marketed products aroundthe world. For example, its publishing arm,NYNEX Information Resources Company,

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

. --- -. . . . . - . - . -


In Central andEastern Europe,cellular systemsare attractivealternatives toantiquatedwirelines.

is responsible for telephone directories andYellow Pages in Gibraltar and Prague andwas recently awarded the franchise for theCzech Republic. NYNEX’s AGS Comput-ers, Inc. is licensing software in Russia,Mexico, Australia, and Spain. Finally, NYNEXis spearheading a consortium to construct a25,000-km fiber-optic cable from the UnitedKingdom through the Middle East to Japan.The project, entitled FLAG (Fiberoptic LinkAround the Globe), was initiated 2 years ago,will cost $1 billion, and is expected to beoperational by 1997. The company is in theprocess of negotiating landing agreementswith national carriers. NYNEX’s previousattempt to purchase a stake in a privatetransatlantic cable was rejected on thegrounds that RBOCs are restricted, under theMFJ, from carrying traffic to or from theUnited States.

U.S. WEST. Like the other RBHCs, U.S.West is capitalizing on its experience withcellular communications, but unlike the oth-ers it is targeting the countries of Eastern andCentral Europe. U.S. West expects that 10 to20 percent of its revenues will come frominternational operations by 2000; currently,international operations contribute only asmall percentage. U.S. West is involved in aventure along with Bell Atlantic and the statetelephone company to build and operate acellular network in Czechoslovakia. A cellu-lar network, Westel Radiotelefon, Kft., jointlyowned by U.S. West and the HungarianTelecommunications Co., went on-line in

Budapest in October 1990. Though expen-sive, the cellular network, which is targetedat office communications, enables customersto circumvent the slow process for gettingconnected to the antiquated wireline net-work 37

U.S. West International has established astrong presence in Russia for telecommuni-cations services. In January 1993, the Rus-sian Communications Ministry selected U.S.West and two domestic firms (Intertelcomand VART) to coordinate the developmentof digital cellular service (GSM) for Russia’s12 cellular regions; in addition, U.S. Westand its partners won the rights to 8 of these12 regions. 38 Previous ventures in Russia

include operating a cellular telephone sys-tem in St. Petersburg (starting in September1991), and outfitting the regular phone

networks in Kiev, Moscow, and St. Peters-burg with international long-distance switches.~9

The company also was involved in a ventureto build a fiber optic line across Asia,eventually linking Europe and Japan, but thisplan was delayed by U.S. security restric-tions on fiber optic technology and high-speed processors,

U.S. West, allied with Tele-Communica-tions, Inc. (TCI) in the United States topursue joint cable TV-telephone options, isalso actively mining similar opportunities inEurope. In the United Kingdom, TeleWestCommunications Group Ltd., the joint ven-ture between U.S. West Cable Communica-tions and TCI, is the country’s largest cableTV operator with 16 franchises and a poten-

Page 84

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,” TelecommunicationsRepotis, Jan. 25, 1993, p. 18.

39 Andrew Kupfer, “Ma Bell and Seven Babies Go Global,” Fortune, Nov. 14, 1991, p. 124.


Strategiesof U.S.


tial customer base of 3 million households.As of March 1993, TeleWest had enlisted144,000 subscribers for cable TV services, ofwhich 60 percent additionally receive tele-phone service.

40 Through United Communi-

cations International, it is building cable TVcompanies in Sweden (Swedish Cable &Dish) and Norway (Norkabel), and it isdeveloping systems and programming inHungary with Time Warner. In the UnitedKingdom, U.S. West and Cable & Wirelessmerged their respective operations develop-ing Personal communication networks in

March 1992. U.S. West headed the Unite]partnership (which included Thorn EMI,Northern Telecom, and Deutsche Bunde-spost Telekom ) that was awarded a license in1989 to build a PCN system. U.S. west

lnternational has joined with BMW and GTEto bid on a German PCN license.41

BELL ATLANTIC. Bell Atlantic is one of themost aggressive at targeting foreign markets,but its European ventures arc limited. Itschairman expects 10 percent of companyrevenuc to come from international opera-tions by 1994; it is currently, at $1.5 billion,about 5 percent. Bell Atlantic, along withU.S. West and the state telephone company,owns and operates Eurotel, a cellular net-work in Czechoslovakia that began opera-tion in September 1991. The venture willalso build and operate cellular data networksand modernize the basic telephone network.Bell Atlantic in partnership with Ameritech

acquired the Telecom Corporation of NewZealand for approximately $2.5 billion. Thecompany also acquired a controlling stake ina New Zealand pay-TV operator, Sky Net-work Television. It intends to form a soft-ware joint venture company with STET SPA,

the Italian telecommunications group, todevelop software systems that will be usedby STET’s telephone subsidiary Societaltaliana per L’Esercizio delle Telecomuni-cazioni and Bell companies.42

PACIFIC TELESIS. Within the PacificTelesis family.

43 two companies are Primar-

ily involved in international ventures. PacTelCable deals with opportunities in the “homeentertainment industry’ (the management ofcable television operations) in the United

Kingdom. while Pacific Telesis Internationaloffers a variety of services, such as wirelesscommunications, value-added networks, andinternational l(~ng-distance service, in Eu-rope and Asia. The company’s flagshipEuropean venture is a 26 percent share ofMannesmann Mobilfunk, a consortium thatbuilt and operates a digital cellular networkin Germany. Based on the European standardfor digital cellular service, GSM, D2 Privatis the second national cellular franchise andwill compete with Deutsche Bundespost

Telekom. Pacific Telesis International alsoowns 23 percent of a consortium that islicensed to build a GSM-based digital cellu-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 gaingreater 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

- - —. . . - . . . . . . -.


PacTel Cable has recently lessened itsinvolvement in cable TV services in theUnited Kingdom. In April 1992, PacTelCable sold its interest in East LondonTelecommunications Ltd., which owned sixfranchises, to BCE Telecom International.44

In March 1993, PacTel sold three of itsoriginal 14 cable TV franchises to NYNEXCablecomms. 45 PacTel International sold its25 percent stake in Microtel Communica-tions Ltd., a venture with Matra, to developa personal communications network in Eng-land.

In Asia, PacTel International is involvedin consortia bidding for cellular franchisesfor Tokyo (through a 15 percent stake inTokyo Digital Phone) and Osaka-Kansai(through a 13 percent stake in Kansai DigitalPhone). 46 PacTel International also owns 10percent of International Digital Communica-tions (IDC), a new competitor to KokusaiDenshin Denwa offering long-distance andinternational services in Japan. IDC, which isthe primary Japanese partner in an underseafiber-optic cable connecting Japan and theUnited States, also will be the Japanesepartner in the FLAG project, which NYNEXis spearheading to link Europe and Japan.

AMERITECH. Ameritech has been one of themost cautious of the Baby Bells in overseasinvestments, and its activities in Europe aresmall by comparison. Ameritech’s most

visible venture has been its acquisition,along with Bell Atlantic and two local firms,of Telecom Corporation of New Zealand. Aspart of the stipulation to reduce the combinedU.S. RBHC holding to 49.9 percent, 31percent of New Zealand Telecom’s stockwas offered for sale, resulting in an aftertaxprofit for each RBHC of $73.6 million.47

In Europe, the company joined withFrance Telecom to help the Polish PIT buildand operate a national cellular network. ThePIT retains 51 percent of the venture, PolskaTelefonica Komorkowa, while Ameritechand France Telecom split the remaining 49percent. In Norway, Ameritech (along withSingapore Telecom) purchased a quarterstake in Netcom GSM, the country’s secondprovider of digital cellular services.48 Amer-itech subsidiary Tigon offers voice-mailservice in a number of countries throughoutthe world.49

SOUTHWESTERN BELL. The jewel in South-western Bell’s international crown is itsacquisition of 20 percent of the Mexicantelephone operator Telefonos de Mexico(TeIMex), including 24.5 percent of thevoting rights. Through Southwestern BellInternational Holding Company, the com-pany teamed with France Telecom andGrupo Carso, a local industrial group, topurchase a controlling 51 percent of thecompany from the government. The initial

Page 86

@ “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.

49 Ameritech’s 1991 Annual Report, p. 20.


Strategiesof U.S.


investment after exercising options totaled

$950 million, though the value of the invest-ment has increased significantly since then.

Like several other RBHCs, SouthwesternBell also has stakes in cable TV/telephonyoperations in the United Kingdom. Thecompany controls eight franchises in Britaincovering over a million households; it re-cently announced a plan to sell 25 percent ofits U.K. cable holdings to Cox Cable, thesecond-largest U.S. cable operator.so Beforethe Israeli Government decided to postponethe sale of Bezeq, the Israeli telephonecompany, Southwestern Bell was rumored tobe negotiating to bid for the company inalliance with a large Israeli industrial group,Clal Industries.sl

The overseas strategies of RBHCsU.S. RBHCs, along with Western Euro-

pean PTOs and U.S. interexchange carriers,arc among the corporate leaders in pursuinginvestment options in foreign markets. It isdifficult to track precisely the number andvalue of foreign investments that RBHCshave made since divestiture since many ofthese arc small, unrelated to telecmnmunica-tions, and often not newsworthy. The scaleof these ventures and the fervor surroundingthem increased with the privatization of

telephone operators and the opening of newmarkets in Central and Eastern Europe.Earlier international investments by tele-phone operators were typically more ‘*op-portunistic” than “strategic”; companieswould seek deals primarily on the basis of anattractive rate of return, with little attentionto whether the ventures reflected the compa-nies’ characteristic strengths or coincidedwith any long-term strategies.52 More re-cently, the telephone companies are takingadvantage of the niche strengths that separatethem from other carriers and give them a For an RBHC, the

competitive edge. These opportunities abroad most important

permit U.S. telecommunications firms to criterion for foreign

extend the strengths from their domestic ventures is the

businesses in network, wireless, and busi- prospect of high

ness systems, profiting from their U.S. returns.

expertise in managing and operating localtelecommunications 53 while forging strate-gic relations with other firms.

For an RBHC, the most important crite-rion for foreign ventures and investments isthe ability to earn high returns. A secondimportant criterion is the experience andpolitical leverage that the RBHC can bringback to the United States. Overseas, RBHCscan experiment with services and businessesthat they are barred from in the United Statesas 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 ofhouseholds 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 capitathan the United States, however; Sweden has approximately two telephone main lines for every threepeople compared with about one for two in the United States. Page 87

. ——


Encouraging foreign expansionShould the U.S. Congress want to do more

to support and encourage further exports oftelecommunications services and additionalforeign investment by U.S. telecommunica-tions companies, it has several options:

continue to promote the opening of for-eign markets to U.S. entry;remove domestic restrictions or regula-tions that allegedly affect the pattern ofinvestment by foreign telecommunica-tions companies (this action is urged bysome, however, as a way to de-emphasizeforeign investment); andprovide positive assistance, e.g., low-costcapital for overseas expansion.

United States’ efforts to open Europeanmarkets through trade negotiations are dis-cussed in chapter 7. The complex pros andcons of the current investment patterns, andthe effect of domestic regulations, are dis-cussed in chapter 9; it does not appear thatdomestic restrictions are now determiningfactors in decisions to expand overseas.

Some telecommunications industry repre-sentatives have suggested that the U.S.Government should provide more support toU.S. firms for telecommunications servicesexports, in the form of financial assistance

and insurance.54 The issue of whether U.S.firms are unduly handicapped in interna-tional ventures for lack of access to low-costcapital, which often foreign competitorsoften enjoy, usually arises regarding equip-ment exports rather than service exports.Yet, U.S. Government financing assistanceis in fact biased toward manufactured goodsbecause, compared with services, these ap-pear more tangible and readily quantifiable.For example, the benefits of supporting thesale of several million-dollar switches abroadare politically more readily apparent thanassisting a U.S. firm to purchase a portion ofa foreign telephone operator, the value ofwhich may not materialize for several years.

Some foreign governments actively sup-port national champion manufacturers insecuring foreign deals by low-interest loansor other means.ss They may also permit anindirect subsidy in the form of over-pricedprocurement of equipment by the nationalnetwork operator (paid for by high customerservices charges), allowing the equipmentprovider to sell in foreign markets at artifi-

cially low prices. U.S. export subsidies arelimited, and are intended to ‘ ‘level theplaying field” when U.S. firms are clearly

Page 88

~ These suggestions were made in response to questions f rom the Office of Technology Assessment as towhet her government act ion was needed to enhance t he com pet it iveness of U.S. telecommunicate ions f Irmsoverseas.

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 isoriented toward the financing of export of telecommunications equipment sales rather t han services. Whereit 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 areAT&T and GTE. The other carriers often cultivate relations with several key suppllers, including foreignmanufacturers such as Siemens, Alcatel, and Northern Telecom. MCI, whose network relies on equipmentfrom 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

Utilities Directive).


Strategiesof us.


losing out to foreign firms that rely on moreaggressive or explicit subsidies.sfi

U.S. Government mechanisms that couldpotentially assist foreign telecommunica-tions services ventures include the Agencyfor International Development (AID), theExport-Import Bank, the Overseas PrivateInvestment Corporation (OPIC), and theTrade and Development Program.57 How-ever, these program-when they includeservices providers—generally target devel-oping countries rather than Europe (someCentral and Eastern European countries maybe covered). Such foreign services invest-ments typically require financing insurance,since they generally target developing coun-tries, which are potentially susceptible topolitical instability}. Few commercial banksarc willing to fund these ventures.

There is, however, little reason to believethat U.S. telecommunicitions companies arcconstrained in overseas ventures by lack offinancing. Most such ventures arc financedout of retained earnings.

Stockholders reportedly arc uneasy thatthe RBHCs capital is financing overseasventures, the payoff for which is long termand, by comparison to their reliable monop-oly service, uncertain. There is a growingtension between the expectations that stock-holders have come to hold and the RBHCs’plans for overseas expansion. The Bellstocks have earned a solid reputation forsteadily increasing value and for rising

$billlons

5 ~ 14-

3 U.S. investment abroad m ~ ~!

2 Foreign investment in the U.S.

1-~di -.],j ~ ~

o m .= ~—

-1 I I

1981 1983 1985 1987 1989 1991

SOURCE SURVEY OF CURRENT BUSINESS, BUREAU OF ECONOMIC ANALYSIS, 1993

dividend payments. (RBHCs have had 56 Figure 4-5.opportunities to increase dividends in the 8 Direct Foreignyears since their inception in 1984, and they Investments inhave in fact increased dividends 54 times.58) Communications,The pressure to maintain this traditional 1981-91performance for stockholders is increasinglyat odds with the cornpanies desire to diver-sify into overseas ventures.59 (See box 4-B.)

ConclusionsThe increasing attention of RBHCe to

European markets is largely a result of newopportunities there, compared with morenearly saturated and competitive marketshere. RBHCs have had most of the tools toexploit foreign markets since their inceptionin the divestiture of AT&T: large cashreserves, unsurpassed management and net-work operating experience, and slow-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 nodirect 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


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

The robustness of the U.S. telecommunications environment makes it attractive to foreignfirms. Most major foreign telecommunications operators aspiring to an international markethave 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 topurchase 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 andits location of Syncordia, its consortium offering global network services, in Atlanta. ’ BT’salliance with MCI comes shortly after the company sold its 20-percent stake in McCaw toAT&T, the leading U.S. cellular firm. Telefonica, t he Spanish telephone operator, is attemptingto purchase 80 percent of the long-distance carrier in Puerto Rico, and France Telecom hasindicated its interest in acquiring Westinghouse Communications, which offers a variety ofswitched, virtual, and private-line voice and data services to more than 100 companies,including its parent company, Westinghouse Electric.2 Cable & Wireless operates a smallinterexchange carrier in the United States with approximately 1 percent share of the totalinternational 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.


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

Page 90

Users’ Perspectives–Views ofU.S. ServicesExporters 5

C H A P T E R

Service-exportingfirms agree theyare generallywe// served byU.S. carriers.

U.S. TELECOMMUNICATIONS FIRMS not only

compete successfully in the European mar-ket, they support and often provide thecompetitive edge for other U.S. firms thatdeliver services to Europe. This chaptercaptures some of the perspectives of theseusers of U.S. and European telecommunica-tions networks.1 Providers of travel andtransportation services, financial services,and architectural, engineering, and construc-tion services are given particular attentioneither because the y contribute strongly to thevolume of U.S. services exports, or becausethey represent sectors where considerablegrowth in services exports is possible withmore intensive use of telecommunications.Exporters of these and other kinds of servicesprovided information for this chapterthrough interviews, letters, and responses toa written questionnaire.

Many of the corporate officials that re-sponded to inquiries of the Office of Tech-nology Assessment (OTA) argued that theU.S. Government has a role to play inencouraging both the liberalization of Euro-pean markets and the efforts of U.S. indus-tries to expand the export of services. Thethemes most commonly expressed were thatgovernment should:■ Apply strong and persistent pressure,

through trade negotiations and other dip-

lomatic contacts, for further opening ofEuropean markets and removal of tradebarriers for both services and manufac-tured goods;Pay special attention to reducing restric-tions on telecommunications services,since for most of these companies the useof American equipment and American-provided enhanced information services ishighly desirable; andEncourage both U.S. and European firmsto move toward international standards asthe most cost-effective way of getting themost out of information technology re-sources.

In all services-exporting industries sur-veyed, most firms agreed that they are wellserved by U.S. telecommunications carriers,and that American communications andcomputer technology gives them a competi-tive edge in developing innovative services.2

Accustomed to a geographically expansivedomestic market, the firms complain bitterlyabout the wide difference across Europeancountries in availability of telecommunica-tions services and the difficulties of dealingwith many regulatory regimes within whatseems to them one natural market. From theirperspective, the benefits of an integratedEuropean marketplace seemingly are more

Page 91

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 exportingservices 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 chairmanof the project’s advisory panel.

p For example, an energy firm said: “. . .U. S. competence In telecommunications and computer technologyprovides advantageous Information and deosion support processing capabilities that are reflected inImproved accuracy, tlmellness, analysis, and integration of products that support our objectives forcustomer service. ” (Thomas M. Woods, Vice President for Information Services, the Hall iburton Company,correspondence with OTA, July 30, 1992.)

.- .


obvious than the risk that a “Fortress Eu-r o p e will try to exclude them. Many firmssaid that if serious regulatory problems canbe alleviated there arc good prospects forexpanding and diversifying their servicesexports.

Many of the problems encountered byAmerican services industries in dealing withEuropean public telephone operators (PTOs)are problems just as much for Europeanfirms as they arc for U.S. competitors. If U.S.telecommunications firms can gain wideraccess to the European market, their biggestmarketing opportunity will be the challengeto solve these problems not just for Ameri-can firms but for potential European custom-ers.

Some U.S. firms operating in Europe hada more positive view of their experience thanothers had. A news firm said, ‘‘On the whole,our experience with European telecommuni-cations operators has been positive. Thevariety, quality and availability of communi-cations services is, with few exceptions,excellent. (At the same time, the firm notedthat services sometimes cost ‘‘5 to 10 timestheir equivalent in the United States."3) Alarge financial institution said: “. . .we havehad little or no difficulty with the financialservices regulatory policy bodies or with thetelecommunications regulatory authoritiesin developed countries that already havestate-of-the-art information networks infra-s tructure. These strongly positive com-ments were not typical. However, many ofthe business people that contributed to this

chapter, anticipating that the move towardderegulation or liberalization in Europe willcontinue, said conditions in Europe are likelyto improve steadily.

The general outline of the community ofU.S. services exporters is shown in figure5-1. Over half of all U.S. services exports aretransportation-related services (which in-clude airline fares, shipping and port fees,and all tourist-related services provided inthis country and other countries to foreign-ers). s Licenses and royalties (intellectualproperty earnings such as income frommovies and music) are the second largestgroup, but account for only 12 percent oftotal services exports. All other servicescombined account for less than one-third.

Problems with Europeantelecommunications networks

Many serious or frustrating technical prob-lems beset U.S. services providers usingtelecommunications in Europe. Some ofthese problems are regulatory or institu-tional, but many simply result from thenecessity for U.S. firms to rely on Europeantechnology and services at the far end of theirinternational networks and for their intra-European communications. In some coun-tries the infrastructure is technologicallybehind that in the United States, in othercases it is not interoperable with U.S. net-works, and in all cases it is unfamiliar. U.S.firms must often depend on the very organi-zations with which they arc competing for

3 Letter from Martin Fuhr, Director of Telecommunications, The /nternationa/ Hera/d Tribune, to JohnDlebold, OTA Advisory Panel Chairman, Sept. 25, 1992.4 Letter f rom Richard M. Rosenberg, Chief Executive Officer, Bank of America National Trust and SavingsAssociation, 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 ofU.S. Services

Exporters

ExportsTotal value=$152.3 billion

ImportsTotal value=$100.0 billion

Computer,I~ Financial services

data processing ‘- $4.69

$1.71

~ Telecom.$5.56

— Financial services$2.43

SOURCE U S DEPARTMENT OF COMMERCE, BUREAU OF ECONOMIC ANAL Y’SIS, 1993

the final delivery of their services, or theymust deal with government bureaucraciesthat have only recently and reluctantly openedtheir markets to foreigncrs.

The nonavailability of leased lines insome countries and the long delays ininstalling them in others arc common com-plaints of U.S. users. 6 Financial institutions,for example, put high priority on the freedomto usc private line services as they choose,and emphasize the need for leased line pricesbased on costs. They want permission to

interconnect private networks with publicnetworks and to connect preferred terminaland network equipment. Several firms com-plained about the lack of reliability of leasedlines. In confirmation, a recent survey con-ducted by the International Telecommunica-tions Users Group (INTUG) reported thatonly one-third of all leased circuits wasavailable 100 percent of the 3-month periodexamined, and 64 kbps circuits had anavailability rate of 99.0 percent, Availabilityof 99 percent means that downtime averaged

G This situat Ion should gradually Improve as the result of t he EC Dlrectlve on Open Net work Provision, whichcalls for every member state to make aval I able five categories of leased Ilnes, with no restrictions on theiruse. (See ch. 3.) Although the Directive called for full Implementation by June 1993, European observerssay It may take much longer before this dlrectlve IS fully Implemented. International TelecommunicationsUsers Group, INTUG News, London, October 1992.

Figure 5-1.U.S. Services Trade

by Sector, 1991($billions)

Page 93

. . -.


Figure 5-2.Leased-Line PrivateNetwork

A (dedecated) Ieased-line private net-work IS preferable for a user requlr-ing the interconnection of severalIocations with high traffic volumes.The transmission capacity that theuser leases from the public earner(s)goes through the earner’s(s’) facili-ties, but revolves no switching sincethe routes are dedicated solely tothat user. Note that the user canconnect to a Iong-dstance carrierdirectly or through either the localexchange company (e. g., a BellOperating Company) or through analternate access provider, such asTeleport or Metropolitan FiberSystems.

PBX

1 hour, 40 minutes per week, and is wellbelow recommendations by the ConsultiveCommittee for International Telephone andTelegraph (CCIIT) of a minimum 99.6percent availability.7 This is especially dis-ruptive for users of higher bandwidth digitallinks because such lines handle more trafficthan analog circuits.

The lack of fast data transmission is aserious problem both for U.S. firms and fortheir European competitors. A Europeanbank told OTA that in some countries it

Factory

SOURCE. OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

could not get data transmission as fast as 2Mbps, or there are problems with getting andmaintaining transmission.8 Said the bankofficial:

This situation has to be compared with

the options available to U.S. firms in

their domestic market, [where], . . even

45 Mb/s channels can be obtained atprices designed to encourage the exper-

imentation and learning needed to inte -grate new applications with a firm’s

operations. 9

Page 94

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 OTAproject’s advisory panel, for OTA use, Aug. 19, 1992.



Exporters

Headquarters

Regionaloffice

PBX

Supplier


Enhanced services such as virtual privatenetworks, packet-switching, and interactivevery small aperture terminals (VSAT) arenot available in some areas at any price.Where they are available from public tele-phone operators, they are often not interoper-able across national boundaries. They maybe at different stages of development or theremay be differing national standards. As U.S.services producers increasingly move to theuse of frame relay technology, they arefinding that features and functions available

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-

Longdistanceinferconnect many sites with moder-

ate traffic (enough that direct dial

in the United States are not the same as thoseavailable in Europe.

Crossborder payments are a special prob-lem for financial services firms. Nationalclearing systems differ in degree of automa-tion, formats, access, and reporting sys-tems. 10 Integrated fault resolution is eithernot available or requires users to put theirown support personnel at both ends of acircuit. 11 Concerns about data security are

not addressed by most European carriers and

‘“ See U.S. Congress, Office of Technology Assessment, Trading Around the C/ock: G/oba/ SecuritiesMarkets 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 JohnDlebold, Chairman of the OTA project’s advisory panel, July 2, 1992. Page 95


European PTO hightariffs, billingpractices, installationdelays, and otherproblems constrainbusiness use oftelecommunications.

companies must provide their own engineer-ing and technical support for this purpose.

A nearly univeresal complaint is the highcost of telecommunications. Voice callsfrom Europe to U.S. headquarters can be 50to 100 percent higher than calls in the otherdirection. lntracountry costs are also high. ’2Leased line costs, although they have re-cently declined somewhat, arc still high.This constrains private network optimizationand business operations. Nevertheless, andin spite of complaints. these costs are to alarge extent accepted as the price of doingbusiness in Europe. They do not generallydiscriminate against U.S. firms.13 (See figure5-4. )

The problems resulting from technologi-cal incompatibilities are compounded byinstitutional inconsistencies and vagaries.U.S. firms complain of excessive variabilityin European ordering and payment proce-dures and contracting arrangements, and ofuninformative. confusing, and irregularlytimed billing. In some countries bills arereported to arrive up to 2 years late, and inother countries firms may be requested topay for a year’s service in advance. At best,planning and pricing new communications-based services are difficult because of the

wide variety of billing cycles and formatsand currency conversion problems.14

Another major complaint is the long timerequired for PTOs to install circuits. OneU.S. travel-related company reports thatpromised installation dates are not met 85percent of the time, and very commonly ittakes double the estimated time.

American firms are typically impatientwith the need to negotiate separately withmany countries to install one network. AGeneral European Network (GEN) becomesoperational in the spring of 1993, with 16Mb/s capacity, operating between Frankfurt,London, Madrid, Paris, and Rome. This is tobean infrastructure, not a service, and shouldshorten time for getting private circuitsoperating across several countries. GEN wasdesigned by European Telephone Operatorsto preempt pan-European networks that mightbe offered by American firms.16 It is a jointventure by France Telecom, BT, DeutscheTelekom, Telefonica (Spain), and ASST/STET (Italy).

GEN will not end the coordination prob-lem. A spokesman for INTUG says:

D i f f e r c n c e s i n r u l e s a n d r e g u l u t i o n s

a m o n g t h e v a r i o u s t e l e c o m o p e r a t o r s

make the management o f business te le -

Page 96

12 Amcmcan Alrllnes, for example, says that an average 70 percent of reservation communications costs arein 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 arecompounded by the demand for bribes.

14 In Germany, a group has been formed to protest the refusal of Deutsche Bundespost Telekom to Item Izecharges rather than Issue blanket statements, as well as to protest Its high tariffs. “Providers BandTogether,” CmnrnunicatIons Week /nferna/icma/, May 1991, p. 3. The group, the Association of PrivateTelecommunications 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 Italyand Greece.

‘~ Reportedly the fear is that AT&T would be the first to build a pan-European network as regulations areIlberallzed. “Euro-Broadband Net Set,’) Corr?rnurricatiorw Week /ntema/iona/, July 20, 1992, p. 3.

Users’Perspectives--


Exporters

Belgium

France

Germany

Ireland

Netherlands

Switzerland

United Kingdom -- BT

United Kingdom – Mercury

I—

I -J 1— - 1J

I1

——— — — 7 ~I-— —.. .J

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

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

problems will be their biggest marketingopportunity.

‘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 somecountries 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 atopening public procurement in telecommunications/com puter equipment to com petltlon allows preferencefor 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 specificallycovered by trade agreements and threatened other actions In response to EC “dlscrim Inatory procurementpractices. ”

Figure 5-4.MoM/y Charge

for Half of PrivateLine to the United

States FromEurope, 1992

Page 97

. — — . . -. . . . .


AT&T equipment and complains that it hadto struggle to adapt BT hardware to itsnetwork. ’9 When approval to use importedtechnology is granted, the approval processmay take many months or even several years.

There is little that U.S. telecommunica-tions companies can do to solve theseinstitutional problems, which make it diffi-cult to offer the ‘‘one-stop shopping’ and‘‘seamless global networks’ that U.S. multi-national corporations say they need. Forusers, these problems add up to greatlyincreased costs of doing business. Added totariffs that are very high by U.S. bench-marks, are high equipment costs, mainte-nance costs, and value-added taxes that U.S.services firms say prevent them from offer-ing services at the lower prices they couldotherwise aim for.

Another regulatory issue of particularconcern to providers of financial servicesand data processing services is nationallegislation aimed at privacy protection. AnEC privacy directive that was proposed in1990 could have disrupted the use of transna-tional financial data systems by restrictingthe flow of data across national boundaries orby requiring explicit consent for each use (orprocessing) of certain personal data. Theproposed Directive was strongly criticizedby the European Parliament. A new versionthat reportedly will be much less restrictive

was to be issued in October 1992, but has notyet appeared. There is a separate proposedDirective on protection of personal data inthe context of public digital telecommunica-tions networks. According to the U.S. Inter-national Trade Administration, ‘‘ l-J. S. indus-try believes that the proposed umbrella dataprotection Directive and the Council ofEurope Convention will provide adequateprotection. . . . [and] a sector-specific digitalservices Directive is therefore unnecessaryand could create uncertainty and disruptionin the provision of telecommunications serv-ices. ’ ’20

Various national laws also restrict the flowof data. This is seen as an attempt to keepdata processing jobs within the country, bymany U.S. firms that want to consolidatetheir own data processing in a few largecenters for greater efficiency. This concen-tration would have another benefit for theUnited States, in that large computer systemsare most often supplied by U.S. manufactur-ers such as DEC and IBM.

Representative servicesexport sectorsTravel and transportation services21

Travel and transportation accounted for 58percent of exported services in 1991, butcontributed 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 OTAproject’s advisory panel, July 27, 1992.

20 U.S. Department of Commerce, International Trade Administration, “E.C. Telecommunicate ions,” releaseof Oct. 1, 1991.

2 ’ This section draws on an OTA contractor report: Gligor Tashkowch, “The Use of InternationalTelecommunications Net works in t he Delivery of Transportation and Travel-Related Services,” September1992. Interviews were conducted in, and corporate profiles were constructed for, two major airlines, threenetwork 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 OTAthrough participation in mail surveys or workshops.

—


Views ofUS. Services

Exporters

trade surplus.22About 10 percent of the total

trade surplus came from airline passengerfares.

Airlines depend heavily on satellite com-munications for navigation, position report-ing, weather information, and traffic control

(and more recently, for passenger telephonecalling). It is, however, their electronicreservation systems that arc considered majorfactors in intraindustry competition.23

Airlines use private leased lines, publicswitched networks, shared networks andthird-party networks, usually with satellitcback up, to connect reservation centers,airports, and travel agencies. They are con-stantly seeking ways to get higher bandwidthand decreased costs. For example, AmericanAirlines’ SABRE travel information andreservations computer system operates in10.000 locations and has 225.000 terminals,of which 4.500 arc outsidc North America.24

Of the overseas locations, about 500 arc on

a private network and 4,000 arc intercon-nected through SITA (Societe Internationalede Telecommunications Aeronautiques).

SITA is a network serving the interna-tional airline industry. It operates in 187countries. has 24 hub sites interconnected bythree separate communications paths usingboth cable and satellites, and is one of theworlds heaviest users of international leasedcircuits. A French company, SITA appears tobe recognized not as a competitor but as thecritical backbone that holds the entire airlineindustry together.25 Other third-party serviceproviders also provide data processing ornetwork support for airlines or handle theirreservations and ticketing; most of these areU.S. companies. and some are jointly ownedby several airlines.26

Freight transport also relies heavily ontelecommunications. One of the difficultieshere is coordinating and tracking goodsmovements that may require several travel

2Z In 1991, the large trade surplus In passenger fares ($5 billion), travel services ($1 1.8 billion), and portserwces ($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 sponsoringalrllnes are booked first. This charge was made against U.S. computerized reservation systems In their earlydays.

24 During recent “fare wars” in the United States, Amerfcan Airlines set a record by processing over 3,100messages In 1 second on Its SABRE system, and United Airllnes doubled the usual number of reservationstransactions on its system to 2,100 per second. It was also reported that AT&T itself set a dally record of177.4 m Ill ion calls on t hat same day, as compared with an average volume of 135 to 140 m ill ion calls. “AirfareWar 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 wasrenamed 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. andHilton Internat lonal Co., linking t hem Into t he SABRE system. SITA IS said to have taken t his step “becauseIt sees little room for growth in the airl ine communications sector. ““SITA Broadens Base,” Comrrrunlca~ionsWeek /n/emationa/, Apr. 6, 1992.

26 For example, PARS Service Partnership provides data processing or network serwces or both to TransWorld Alrllnes, Northwest Alrllnes, and some regional carriers. WORLDSPAN, which provides airlineschedules 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 systemswhich In turn IS owned by nine airlines in the Far East).

Electonic reserva-tion systems are

considered a majorfactor in airline

competition.

-. — . . . -- -- .- - — - - -


Figure 5-5.The ProgrammedAirline ReservationSystem Network

Page 100

I I

SOURCE PROGRAMMED AIRLINE RESERVATION SYSTEM, JUNE 1992.

modes (sea or air, rail, truck) and may crossseveral national boundaries and time zones.A triumvirate of U.S. companies has formedEncompass Europe, NV, to offer a data-network tracking service for multinationalcorporations that send inventory worldwide.This will allow shippers, consignees, for-warders, and carriers to communicatethrough a single electronic interface regard-less of the kinds of computer systems theyuse.

U.S. package delivery systems operatingin Europe are in direct competition withnational postal systems, serving primarilybusiness customers looking for speedier

services than postal authorities offer.27 Thechallenge is to operate ground-based deliv-ery systems that must be fed through aninternational air network and must delivcrwithin a tight time frame. Package deliveryfirms said that telecommunications is the

single most critical factor in success in theEuropean market, and U.S. technologicalknow-how gives them a competitive edge,

United Parcel Service (UPS), for example,has four communications systems using bothpublic and private international networksand local packet-switched data networks.These systems are used for package routingand vehiclc/aircraft control; international

27 The Federal Express Corporation in 1992 drastically reduced its operations in Europe, shutting downoperations In over 100 cities; it will continue to serve 16 major business centers directly for intercontinentalshipments. The company was reported to have lost $1.2 billion In 4 years. “FedEx: Europe Nearly Killed t heMessenger,” Business Week, May 25, 1992, p. 124.



Exporters

billing and receivables transmission; elec-tronic messaging for company coordination;and electronic data interchange (ED I ) forpackage tracing, links to financial institu-tions, and links to other services such asweather reporting. UPS recently got FederalCommunications Commission approval toprovide common carrier services by acquir-ing capacity in three transoceanic cables(two of which cross the Atlantic) .28

Hotels, like airlines, depend on interna-tional telecommunications to handle reser-vations, as well as for intrafirm coordination

and handling and charging for calls made byguests. U.S. hotels in Europe say that theyneed, but do not yet have, integrated reserva-tion networks operating across countries andlinked to airline reservation systems. Theyalso report that they need better software thatcan be continually updated for changing areaCodes.

The Sheraton reservation network, forexample, consists of interconnected starnetworks with hubs in major European cities,each hub connected by 56 kbps leased linesto hotels and reservation centers. However,the network in fact covers only 10 percent ofthe hotel chain’s properties, because thenumber of facilities changes rapidly but alsobecause in some countries the telecommuni-cations options are ‘‘very limited. ’

Holiday Inn Worldwide has about 150locations and 14 reservation offices in Eu-rope. The company uses the TAT-8 andTAT-9 transatlantic cables for a 64 kbps linkfrom Brussels to London to New York (itsheadquarters is in Atlanta). It had been usinga conventional terrestrial star network withinEurope, with the hub in Brussels, but in 1992the company began a transition to a VSATnetwork operated by MCI, using INTELSAT.which will have 120 to 150 Earth stations inthe United Kingdom. Belgium, France, Ger-many. Italy, and the Netherlands.2’) This willconnect all of the chain’s proper-tics in thesecountries, but MCI cannot offer a pan-Europe network under existing regulations.It will provide terrestrial links until it obtainslicenses needed to operate VSATS in the sixcountries. Holiday Inn Worldwide says thatthe reason for the move is to ‘circumvent theproblem of long (and often unpredictable)service delivery times required for leasedlines." 30

Financial services31

About 3 to 5 percent of U.S. servicesexports are financial services, primarily incommercial and investment banking. In 1991,the United States exported about $4.7 bill ionin banking services, which accounted for 3percent of total services exports and about 4percent of the total trade surplus. Less than

29 The UPS application to the FCC was unopposed; the company ts thought to be strategically positioningItself 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 isbrought mto the system.

30 “Freedom of Choice,” Communications Week /nfernatlona/, Apr. 6, 1992, pp. 18-19; also “MCI VSATPush,” 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 ofTechnology 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. banks maintain acompetitive edgein creating andsupplying innovativevalue-addedservices.

a score of U.S. banks actively compete inEuropean markets; middle-sized and smallerbanks serve their domestic customers’ over-seas needs through correspondent banks andthe use of shared networks such as SWIFTand CHIPS.

Banks operating overseas use networks intwo ways: for intracorporate business sup-port such as might be used by other largemultinational corporations-voice, data trans-mission, fax, electronic mail (E-mail) andvoice mail—and as a means to create anddeliver financial products and services. U.S.banks say that they have many disadvantagesin European markets,32 but that Americancomputer and communications technologyhas nevertheless given them offsetting ad-vantages. Their competitive edge has beenthe ability to create and supply innovativevalue-added financial services.

During the 1980s, several U.S. banksaggressively developed global networks withpacket switches, multiplexer, and multipro-tocol bridges/routers to connect local areanetworks (LANs) and wide area networks(WANs) serving their dispersed facilities.Alternatively they used third-party servicesproviders to interconnect LANs with X.25,TCP/IP, frame relay, or other fast datatransmission technologies.33 Recently there

Page 102

are signs that U.S. international banks aremoving toward greater user of public-switched networks or hybrid networks, some-times outsourcing their own networks. Onereason for this move is to reduce the costs ofmaintaining network management person-nel; a more positive driver is the availabilitysince 1990 of virtual private networks, lessexpensive than traditional leased line net-works because they make more efficient useof network facilities by dynamically allocat-ing dedicated lines to customers on demand.

In addition to private networks, banks useseveral shared networks or third-party net-works for credit authorization and valida-tion, and for payments and settlements.These include SWIFT, CEBAMAIL, Mas-terCard International, VISA International,and payment netting systems. The mostwidely used is SWIFT (the Society forWorldwide Interbank Financial Telecommu-nications), which has over 1,800 memberbanks and links over 3,000 financial institu-tions in 84 countries. SWIFT is currentlybeing upgraded to offer EDI services, anetting service for banks trading in EuropeanCommunity units (ECUs), and the automaticmatching of foreign exchange and moneymarket transactions. CEBAMAIL is a datanetwork established by European central banks.

32 They are generally smaller and less diversified than foreign competitors as a result of U.S. laws andregulations 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 Actcorporations). 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 throughcommercial paper. Moreover, retail deposits have been migrating to nonbank competitors such as mutualfunds. U.S. banks have been hurt recently by the large U.S. trade deficit, a low savings rate, and losses ondeveloping countries debts and on commercial real estate. Finally, banks are usually at some disadvantageoutside 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 tocommunicate with each other and with the Bank of International Settlements in Basel, Switzerland.



Exporters

Increasingly, international banks want tohave access to technologies such as Inte-grated Services Digital Network (ISDN),frame relay and Switched Multi-megabitData Services (SMDS), EDI,34 and elec-tronic document imaging. They want moreefficient forms of packet switching tosqueeze more out of their existing networks.Frame relay and SMDS are especial] y impor-tant for high-speed data transfer and to letfinancial institutions send bulk data in irreg-ular bursts. Electronic document imaging isa promising way to computerize and use oldpaper records as well as to store and transmitcurrent documents.

As users of international telecommunica-tions networks, banks are especially con-cerned about data security and reliability;they are threatened to varying degrees bycriminal actions, human error, and systems

failure. Yet banks are reported to be laggardin demanding from carriers, or providing forthemselves, badly needed security safeguardssuch as encryption technology, in part be-cause of the costs and in part because of along-standing dispute with the U.S. NationalSecurity Agency about the role of the U.S.intelligence agency in defining standards forthis technology.3s

Financial institutions find, in some coun-tries, that they have special regulatory prob-lems beyond those that affect all telecommu-nications user groups. In most countries bothbanking and telecommunications36 are regu-lated industries and banks with private net-works may run into a double regulatoryburden. In some countries, electronic fundstransfer, credit card authorization, and switch-ing for automatic teller machines (ATMs)

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-addedserwce and might be able to charge only commod!ty prices for passing money through Its system. Acorporate EDI system, or an ED I system operated by a third-party services vendor, can continually nettransactions between companies and their suppllers and customers, with consolidated payments to eachat the end of the day; this would greatly reduce the role of the banks. However, the banks themselves canmove to become ED I hubs, adding ths to their exlstlng cash management services and offering theadvantage of their ab~ Ilt y to transfer funds (I.e., make final payment, which nonbanks cannot do) and theircom putenzed processing capabi I It y. To take advantage of t hs, banks WI II have to participate act Ivel y In t herapidly progressing development of EDI standards.

35 In the 1980s, the Reagan Admlnistratlon expanded the military/intelligence role in communications anddata securlt y, and the National Secunt y Agency was given responsibil it y for certifying cryptographic designsfor use by U.S. companies. Concerns about costs and availability and about the appropriateness of sucha 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 encouragedtelecommunications companies and Information services vendors to compete with banks m offeringfinancial serwces. For example, the AT&T Universal Card prowdes general consumer credit as well ascalllng privileges. Telecommunlcat Ions companies increasingly offer cash management functions for theirlarge business customers and home banking for residential and small business customers. They are alsomoving to prowde electronic trading systems for government bonds, currencies, and derlvatwe financialproducts. The large customer base and well-developed billlng systems of telecommunications companiesmaket 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. GovernmentPrinting Office, October 1992).

. . .— .- -


Architectural,engineering, andconstruction servicesare typically notbig users ofinternationaltelecommunicationbecause of traditionand unintegratedindustrial structure.

and are so regulated. Cash netting and cashmanagement services for multinational cor-porate clients may have particular problems-most such systems accommodate some mes-sage transmission in the form of instructionsor explanations, but some foreign regulatorsconsider this to be resale, or an unlawfulmessaging activity by the banks. It may notbe clear whether an online transaction is aregulated banking service, a telecommunica-tions service that is regulated in somejurisdictions, or an unregulated data process-ing service. ATM networks or other sharednetworks may also be held to violate antitrustregulations or other policies designed torequire competition,

While they may face dual regulation insome countries, a few U.S. banks have alsoused international networks to escape regula-tion and taxation, by locating offices orbranches “offshore ‘‘ in countries with fewor no regulations. This allows them toengage in ‘“money laundering’ and otherforms of illicit or unethical behavior.

Construction services37

Not all services exports are at presenthighly dependent on international telecom-

munications. Architectural, engineering, andconstruction services, sometimes called AECservices, show relatively little reliance ontelecommunications now, but in the future,information technology and telecommunica-tions networks could lead to significantexpansion of exports, which is unlikely tooccur otherwise.

This sector is highly fragmented acrossdisciplinary lines: most firms offer eitherarchitectural design, engineering design andconsulting, construction and constructionmanagement, or a combination of two ofthese.ss Although referred to as AEC firms,in reality there arc few integrated companiesthat offer the full range of services. A givenfacility’s construction project almost alwaysis conducted by a number of contractors andsubcontractors working for, but usually notclosely managed by, a developer.:{9

The pace of internationalization in theAEC industry has quickened since the mid-1970s. The international market for such

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37 This section relies on an OTA contractor report: Deburah Workman, “Emerging Applications of Informationand 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 afew 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 than20 people.

39 In the United States, the AEC sector includes nearly 1 million establishments, employs nearly 10 m illionpeople, 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 CurrentBusiness, September 1992. According to Workman there is no single comprehensive source of statisticalmeasures for the U.S. construction industry. The data used in this section is drawn principally fromEngineering News Record’s annual ranking of the top firms and from U.S. Government reports, which,however, also often rely on the Engineering News Record.



Exporters

services, in 1991, was about $130.2 mil-lion. 40 About 25 percent of this was inEurope.

41 AEC services accounted for less

than 1 percent of U.S. services exports in1991, producing revenues of $1.3 billion,and contributed 1.9 percent of the U.S. tradesurplus, Nevertheless, U.S. firms win 36percent of all engineering and constructioncontracts awarded around the world to non-national firms, and they take 41 percent ofarchitectural design contracts. 42 Europeanfirms win 43 and 46 percent, respectively. Inthe European market, U.S. firms get nearly44 percent of nonnational awards for con-struction and 56 percent of design contracts;other European but nonnational firms win 50and 40 percent, respectively.43 U.S. firms arestrongly competitive in Europe, and Euro-pean firms are their chief rivals both inEurope and in the rest of the world.44 TheUnited States leads its closest individual

rival, the United Kingdom. by a wide mar-gin. But even though the value of theirforeign billings has continued to rise, U.S.firms have lost market share over the lastdecade.

The AEC industry now makes very lim-ited use of telecommunications networks,and especially of international networks.This is not principally because of costs orband with limitations but because the indus-try’s traditional procedures have not beenconducive to wide area networking andbecause of the peculiarly non integrated struc-ture of work units. Most firms hold to thephilosophy that they cannot “compete fromh o m e and need a presence abroad. Over-seas projects arc typically managed overseaswith relatively little dependence on over-sight from the home office. Several contrac-tors, providing services ranging from designthrough procurement to construction, typi-

40 The “lnternatlonal market” is taken to be the sum across countries of the value of contract awards tononnational 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 architecturaldesign billings. The latter rose in 1991 to $4.2 billion (1991 billings from engineering and constructioncontracts are not yet available). Able the apparerrt discrepancy between these figures, supplied by theEngineering 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 in1990), supplled by t he Bureau of Economic Analysis. The explanation Is that the figure for billings, prowdedby t he AEC firms, often includes multiyear contract awards, large umbrella contracts in which much or evenmost of the work is subcontracted to European firms, contracts awarded to multinational consortia led byU.S. firms, etc. The Bureau of Economic Analysis (BEA) figures are more restrictive, representing the moneythat 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 ofEuropean contracts. In design services Japan IS not, currently, a strong competitor; It takes just over 3percent of the total international market, none of the European market, and under 9 percent of the Asianinternational market. “Other” (not European, U. S., or Japanese) firms take 6.6 percent of the totalmternatlonal 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, andenvironmental work. The largest projects undertaken by U.S. International design firms are probablyindustrial/petroleum projects, which have an average value of about S300 m illlon. Workman, op. cit.,footnote 37.

. .-


cally work on a project, but coordination ismostly done on the site to minimize theinefficiencies that result from fragmentation,Sometimes a client will demand that thevarious contractors create a common tech-nology platform for project communicationsand information exchange, but this is rare atpresent. A few firms are now beginning tointegrate—that is, to present themselves asfull AEC firms with a complete range ofservices. This integration at the firm levelmay stimulate demand for integration ofinformation systems that support these var-ied functions.

Information technology and telecommu-nications will someday transform this indus-try. The earliest stages of construction con-sist almost entirely of generating and sharinginformation: formulating client goals andplans, creating architectural designs, devel-oping specifications, identifying and com-municating legal and budget guidelines,checking standards and codes, making engi-neering shop drawings, etc. Yet, much of thiswork is still done by exchanging paper. Atthe next stage, a major problem is managingprocurement and scheduling construction sothat there are no delays to cause resources toremain idle. Change in architectural or engi-neering design during the project requiresmajor changes in material procurement needs,yet supplier input must be current, complete,

and quickly accessible. Financial managersmust monitor project expenses and releasefunds on schedule. The technology exists forthoroughly transforming the work throughintegrated databases, interactive three-dimensional computer assisted design (3-DCAD),45 and greater use of telecommunica-tions.

But the adoption of advanced informationtechnology in this industry has been veryslow because of its costs, its human re-sources demands, industry fragmentation,and inadequate telecommunications.% Fiveor six of the largest U.S. AEC firms,especially Bechtel, are experimenting with3-D CAD and have found that even dedi-cated 56 kbps links produce inferior results;well over 100 kbps or even megabit speedswill be needed. These links may be availablein the future between major cities in thiscountry and Europe, but large constructionprojects such as petrochemical or nuclearplants most often occur in rural, sparselypopulated areas where such telecommunica-tions are least likely to be available.

The number of U.S. AEC firms that nowuse advanced international telecommunica-tions is therefore small. Probably only about140 U.S. firms are engaged in foreigncompetition and the top dozen of theseaccount for nearly 90 percent of all U.S.

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45 This is three-dimensional imaging of the facility to be constructed. At its most advanced, 3-D CAD wouldallow continual updating and interactive modification at dispersed computer locations. This 3-D imagingwould guide procurement, scheduling, and construction management throughout the project and allowcontinuing 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 tosupport 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 fewerthan 150 major project offices in the United States, the market generated by their needs may not be sufficientto drive development. Workman, op. cit., footnote 37.



Exporters

foreign billings.47 Currently, small AEC

firms require nothing more than one or a fewstandard voice lines for voice, fax, andlow-speed modem communications. E-mailis popular and there is some experimentationwith EDI. Sometimes clients install specialtemporary communications facilities for theduration of the project to connect the clientfirm, AEC vendors, and the project site. Thetransfer of 2-D CAD files is usually done byphysical delivery of software copies. Thefirms with European operations tend toconnect one major European office, mostoften London, to the U.S. headquarters forc-mail traffic and data related to financialmanagement and business development. Thelink may be used occasionally to transfer 2-Dand 3-D CAD files in batch mode.

The firms with significant internationalbillings, among the largest U.S. AEC firms,typically need to connect four to six majorU.S. locations and two or three foreignlocations for exchange of corporate andengineering data. Most of their U.S. sites arcconnected with 56 or 64 kbps, sometimes onpublic-switched networks and sometimesleased lines with bridges, routers, and multi-plexers. The networks of the largest firmsusually support TCP/IP, SNA, and DECnettraffic. X.25 may be losing ground to thesecompetitors but it remains important as anetwork access protocol.

Those firms that are subsidiaries of largeconglomerates usually have the widest rangeof technology options; they may have privateframe relay backbones, and even 384 kbpsvideoconferencing.

The competitiveness of U.S. AEC firms inEurope is little affected, at this time, bytelecommunications availability or costs;

other factors are much more important,including financing of foreign projects, dis-tribution of information about foreign con-tract opportunities, education of technicalpersonnel, software standards development,and most critically the fragmentation andlack of coordination within the industry. Thelatter hinders the adoption of modem infor-mation technology that would enormouslyenhance the creation, sharing, and coordina-tion of design and the complex tasks ofcoordinating and managing the constructionprocess, which in turn would also help lowercosts and increase industry competitivenessand profitability. However, as the moreimmediate problems of financing projectsand integrating the industry are addressed,greater information-sharing will result withinthe industry, leading to greater use of domes-tic telecommunications networks, and ulti-mately to more use of international net-works, This progression may become signif-icant before the end of this decade ifobstacles constraining the usc of advancedinformation technology within the industrycan be overcome.

Policy issuesU.S. services exporters want more in-

volvement of U.S. telecommunications firmsin Europe, and greater availability of U.S.telecommunications and information serv-ices. This requires, as they see it, U.S.Government pressure on European countriesto further open their telecommunicationsmarkets. According to some user firms, italso may require full domestic deregulationof telecommunications so that U.S. carrierswill have the incentive to ‘‘maximize infor-mation-based services.

Informationtechnology will

someday transformthis industry,as firms see

advantages insharing information,

designs, andschedules

electronically.

47 The 10 largest U.S. firms consistently rank among the top 20 firms worldwide. Page 107


Specifically, government intervention iswanted to negotiate the end of restrictive‘‘homologation’ (equipment approval orcertification) practices that inhibit the de-ployment of U.S. equipment and therebyaccess to, or the ability to offer, innovativeinformation-based services.

Service providers that rely on interna-tional telecommunications networks seemuniversally to want more international stand-ards. Many favor a stronger role for the U.S.Government in standards development. Somefirms see the need for government interven-tion in standards-setting to discourage Euro-pean standards organizations from adoptingstandards that would shut U.S. firms out ofEuropean markets, or that would delay

network interconnectivity. Some user firmssaid that government involvement might benecessary to push U.S. manufacturers, aswell as European manufacturers, to agree toglobal standards.

User firms have come to realize that theyhave interests to protect in the process ofstandards development, and some arc de-manding the right to participate in theprocess. At the same time, pallicipationincurs significant costs, that relatively fewlarge user firms have been willing to assume.For example, financial institutions increas-ingly want to be included, yet in many bankssenior managers with little understanding oftechnology are reluctant to approve costlyparticipation in standards development.

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Telecommunicationsin Centraland EasternEurope 6

C H A P T E R

Successfuldevelopment ofmarket economiesand democraticgovernmentsdepends on moderntelecommunications

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T H E D R A M A T I C P O L I T I C A L D E V E L O P M E N T S t h a t

have transformed Central and Eastern Eu-rope (CEE) appear to be closely linked tocommunictions. Radio and television broad-casting provided a window on Westerndemocracies and markets, and their appealproved difficult to resist compared to Stalin-ist central planning and political structures.Many observers predict that the successfuldevelopment of competitive market econo-mies and free democratic organizations willdepend critically on the installation andavailability of modern telecommunicationsservices. ‘‘Improved communication chan-nels will assist the free flow of informationand stimulate economic growth."2

Improved telecommunications capabilityis presumed to be positively correlated witheconomic development, the strengthening ofdemocracy, the broadening of culture, andgreater educational opportunities. However,

exactly how telecommunications fits intoeconomic, social, and political developmentis often not placed in context. The absence ordilapidation of the telephone network is notthe only problem in Central and EasternEurope; many other urgent needs, such asenergy production and environmental cleanup,will require attention and resources. Thustelecommunications, while critically impor-tant to these countries, competes with otherneeds.

Each country has distinct political andeconomic characteristics that lead to differ-ing strategies on future economic develop-ment, legislation, and the role of privateenterprise.~ The challenge these govern-ments face is to carefully match their socie-ties’ communications needs with the desiredcharacteristics of their economies, societies,and politics, in order to facilitate the transi-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 StateDepartment Task Force on Telecommunications in Eastern Europe. Observers say that the telephone, thefax, and the photocopier were critical In the erosion of Soviet control. James O’Toole, “lnformatlon andPower: Social and Political Consequences of Advanced Tele/Computing Tech nology,” The Aspen /nsfitufeQuarter/y, vol. 3, No. 4, autumn 1991, pp. 42-73. O’Toole notes that “the unprecedented events in thecommunist world were seized upon . . as illustrative of the positwe consequences of the new informationtech 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 wellunderstood: “It would require an unconscionable act of Intellectual selectivity to portray technology assimply 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 theOff ice of Technology Assessment (OTA) t hat whl Ie telecommunicate ions was clearly im port ant to econom icdevelopment, energy and environmental problems WIII also require significant resources. Presentation atthe Hungarian Embassy, Washington, DC, Dec. 11, 1991. A theme running through the 1991 InternationalTelecommunlcatlons Union Regional Development conference in Prague was the question of how toemphasize government assistance to telecommunications. U.S. concerns at the Conference were, as aconsequence, to discourage the participants from establishing too strong a role for antlcompetitive Statetelecommunications monopolies.

—


to market-oriented capitalism. Developing atelecommunications modernization strategyis one step.

In the past, public telecommunications hasnot been a priority in these countries. Infor-mation has been tightly controlled, anddevelopment of public telecommunicationsrigorously curtailed. As a consequence, tele-communications networks cannot meet therequirements of contemporary social andeconomic interaction. Recognizing the criti-cal importance of communications to eco-nomic activity, however, most of thesecountries have begun to develop ambitiousplans for basic telecommunications systemexpansion and modernization.4

This chapter will characterize the state oftelecommunications in the CEE region anddiscuss strategies for modernizing the net-works, in order to identify implications forthe telecommunications industry and policy-makers in the United States. Growing tiesbetween East and West are making effectivetelecommunications critical for the conductof business and public affairs. The chapterconcludes, however, that the U.S. Govern-ment, and in particular the U.S. Congress,

has little leverage over developments inthose countries, apart from trade, foreign aid,and technical assistance tools already in use.

Defining and characterizing Centraland Eastern Europe

Eastern Europe has for many years beenthe shorthand reference for those countries inthe political/military and economic sphere ofthe Soviet Union,s i.e., under the WarsawPact and the Council for Mutual EconomicAssistance (CMEA or Comecon). Comeconwas the economic trading bloc set up by theSoviet Union (Comecon is now defunct). Forthe most part, Eastern Europe was usuallydefined by geography (see figure 6-1). Thecountries of the region themselves refer tothe area as Central and Eastern Europe,which conveys a degree of differentiation towhich the United States has until recently notbeen sensitive. Though there is consensusthat Poland, Hungary, Czechoslovakia,6 Ro-mania, and Bulgaria are members of thisgroup, there is some ambiguity about how toclassify other countries, such as Albania, therepublics of the former Soviet Union, and the

Page 110

4 The most advanced planning is in Hungary, Czechoslovakia, and Poland; Bulgaria and Romania have alsobegun 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 signedin May 1955 Included Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, andthe Soviet Union; China was an observer to the conference. Albania, however, formally withdrew from thetreaty 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 CzechRepublic and Slovakia in January 1993, following a national referendum on the political future of theFederation. 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 EasternEurope. At the time of this writing, the status of Yugoslavia is highly uncertain. The disintegration of theSoviet Union and the independence oft he Baltic republics has occurred so recently that t hey have onl y justbegun to act as independent nations. Until its integration into the Federal Republic of Germany in 1990, theGerman Democratic Republic (formerly East Germany) was considered part of Eastern Europe.

Telecommunicationsin Central

and EasternEurope

remains of Yugoslavia.7 In effect, EasternEurope is as often determined by politics andeconomics as by geography. For the pur-poses of this chapter, the focus is mainly onthe countries that were not part of the formerSoviet Union.

Regional differencesBecause the economic and political ties

between the United States and the countriesof this region are growing, it is necessary tobe sensitive to the significant differencesamong and between the countries, especial] yregarding their economic transformation.Czechoslovakia, Poland, and Hungary areexpected to move successfully toward mod-ern market economies and democracy. Boththe European Community (EC) and theEuropean Free Trade Association (EFTA)have negotiated trade agreements with thesethree countries, anticipating eventual inte-gration within the economic and politicalWest.R The United States has begun to viewthem as it does other trading partners; theUnited States Trade Representative (USTR)annual report on foreign trade barriers listedPoland, Hungary, and Czechoslovakia forthe first time in 1992.9 President George

Russia

Ukraine

Italy


Bush extended to Hungary and Czechoslo- Figure 6-1.

vakia permanent most-favored nation (MFN) Central and Eastern

status in April 1992; this had previously been Europe

B Poland, Czechoslovakia, and Hungary signed slmilardeclarat ions of intention with both the EFTA and theEC, that stipulate a 10-year transition period eventually leading to free trade. The three countries “signedagreements forging closer commercial and political ties” with the EC in December 1991, which will dovetailwith EFTA negotiations, which are expected to be made official in the spring 1992. “EC-Central EuropeAssociation 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 EasternNations 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//StreelJouma/, Mar. 30, 1992, p. Al 8. The New York Times notes that the USTR’S annual report, which is requiredby Congress, is “a propaganda exercise” as well as a harbinger of Impending trade investigations. KeithBradsher, “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 productsimported 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


Telephone main lines per 100 population100, 7

Bulgaria CSFR a Hungary Poland Romania Yugoslavia

SOURCE: ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT,INTERNATIONAL TELECOMMUNICATION UNION, 1992.

Figure 6-2. subject to annual review. 10 The prospects for

Telephone MFN status for Albania, Bulgaria, Romania,

Penetration Levels: political units of the former Yugoslavia, the

A Comparison Baltic republics, and republics of the Com-

(1991) monwealth of Independent States and Geor-gia arc less clear.

a Czech and SlovakFederal Republic

legacy of Soviet economic andtrade policies

The West generally had a false perception

that the countries behind the Iron Curtainwere economically and socially integrated.The Soviet Union-dominated trade bloc,

Page 112

Comecon, was dissolved in January 1991under pressure from the countries of EasternEurope to substitute the barter system with a

hard-currency-based trading system. Whilesome trade and professional bonds wereforged as a result of years of participation inComecon, 11 overall the structure of tradewithin the organization minimized the eco-nomic interaction between the countries andinstead imposed a system in which the SovietUnion supplied these countries with energyand raw materials and in return they soldmanufactured goods back to the U.S.S.R,The pattern of international telephone linesshows clearly the lines of dominance, and theextent to which the individual countries ofComecon were cut off from one another.

The former Soviet Union used its energysupply to force a set of bilateral barter tradingsystems on the CEE nations. ’ 2 The SovietUnion exchanged cheap oil and other rawmaterials for machine goods and food, andcoordinated the trading of manufacturedgoods throughout Central and Eastern Eu-rope. 13 Early in the democratization process

begun in 1989 it became apparent that as theSoviet economy deteriorated, CEE econom-

‘0 “President Signs Measure Extending Permanent MFN to Hungary, C. S. F.R.,” /nternatior@ TradeReporter, 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 ResearchService report suggested that being behind the Iron Curtain together for many years spawned fairly closeand collegial relationships among the nations of the region. See Francis T. Mike, “East European Nationaland Ethnic Relations in the 1990s,” CRS Review, vol. 11, Nos. 3-4, March-April 1990, p. 13. In spite of thetremendous ethnic tensions t hat characterize the region now, and have for centuries past, it maybe t rue thatComecon tempered t hese ethnic and religious conflicts by forging professional ties where previously t heydid 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 the Comecon system, see Martin Schrenk, “WhitherComecon?” 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, generalmanager and director general of the Hungarian Telecommunications Company, told OTA that over 70percent of Hungarian telecommunications equipment was shipped to the Soviet Union. OTA interview,Budapest, Hungary, Oct. 7, 1991.

—.


and EasternEurope

ics were being hurt as well, due to thistrading system centered on Moscow. CEEcountries now see that they must diversifytrade relationships, with one another as wellas with the outside world, if they want todevelop rapidly.14

The condition oftelecommunications in Centraland Eastern Europe

Telecommunications in Central and East-ern Europe are in dismal disarray. Communi-cations networks in these countries areseveral generations behind the West techno-logically and cannot provide the servicesrequired for these countries to achieve eco-nomic parity with the West. Though tele-communications operators are aggressivelymodernizing facilities for important businessand government centers, these networksmain] y rely on decades-old transmission andswitching equipment, and have few interna-tional connections. even among CEE coun-

tries. Telephone penetration levels are low,the number of disconnections is high, andwaiting lists for service are long.

Digital switching technology has onlyvery recently been introduced. Most of thenetworks consist of electromechanical orsemielectronic technologies, such as cross-bar or step-by-step switches, that are anti-quated by Western standards. For example,electromechanical crossbar switching tech-nology comprised 47 percent of Czechoslo-vakia’s telecommunications switching infra-structure in 1991, and electromechanicalstep-by-step switches accounted for 48 per-cent of capacity; only 3 percent of exchangecapacity was digital, and nearly all of thatwas used in international service.15

Levels of telephone penetration are signif-icantly behind those in Western Europeancountries (see figure 6-2). ’6 Bulgaria, withthe highest telephone density of EasternEuropean countries, [7 in 1991 had approxi-mately 25 main lines per 100 people, while Central and European

telecommunications

“ Some observers advocated that foreign assistance to the CEE countries was best delivered via moneycannot now provide

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 developConference (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, EuropeanTe/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, EuropeanTekcornmumcahons /rrdicators, (Geneva: International Telecommunicate ion Union, October 1992), hereinafterreferred to as ITU Indicators, 1991.

‘7 ITU Indicators, 1991, op. cit., footnote 16, table 5, p. 5. This measure, which gauges the number oftelephone main Ilnes per 100 people, is the standard international measure for telephone penetration. Asa rule, this measure fairly accurately depicts the relatlve development and extension of a country’scommunications network. Svetoslav Tlnchev, chief expert, Digital Switching and Network Planning, PTTMlnlstry, Bulgaria, oral presentation, noted in “Report of a Seminar With Central and Eastern EuropeanCount nes,” In Po/icy Dla/ogue on Te/ecornrnunlcation Deve/oprnenf: A Sernmar With Centra/ and EasternEuropean 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

. . . . .


Figure 6-3.Waiting Time for

BulgariaTelephone Service,1992 CSFR a

a Czech and Slovak Hungary

Federal Republic

Poland

Romania

YugoslaviaI I )

o 5 10 15 20

SOURCE: INTERNATIONAL TELECOMMUNICATION UNION, 1992.

the average for the region was 13.18 B ycomparison, the number of main lines per100 people in the industrialized countriesranges from 34 (Spain) to 69 (Sweden), withthe average for the developed countries ofWestern Europe at 43. Levels in Canada andthe United States hover around 50. (Seefigure 6-2.)

As a consequence, waiting lists for con-nection are lengthening, and some areas haveno service at all. In Poland, for example, thewaiting list for a telephone grew from around1 million in 1981 to 2.3 million in 1991. Onaverage, waiting lists for the CEE countriesincreased by 9 percent a year between 1981and 1990; in Western Europe these listsshrank by 12 percent over the same period. ’9The CEE average waiting time for telephoneinstallation is 11.5 years and it is notuncommon to hear accounts of delays as

much as 30 years, compared with less than 2weeks in Western Europe. These figuresprobably understate true demand. which islikely to grow as the waiting lists shrink andpeople who were not bothering to sign up seebetter chances of getting connected. (Seefigures 6-3 and 6-4.)

Neglect is most critically manifest in thelimited range and poor quality of servicesavailable. Lines only marginally reliable forbasic voice service are unreliable for dataand facsimile transmission. The number ofannual faults reported per 100 lines rangedfrom 18 (in Croatia) to 97 (in Romania); bycontrast, reports of faults in Sweden were 10per 100 lines, in France 9, and in the UnitedKingdom 15. In Romania, 70 percent of callswere not completed, and in Hungary, 45percent of local calls failed to go through.(See figure 6-5.)

Services available to businesses and resi-dences are limited, but are growing fast. In1990 there were only 28,000 fax machines inall of Central and Eastern Europe (comparedwith over 3.3 million in Western Europe),but by 1991 there were more than 72,000(Western Europe had nearly 3,9 million in1991). In 1990 Western Europe had 3.4million mobile phone subscribers, and in1991 4.3 million, while in Central andEastern European countries there were only4,500 in 1990, but 9,000 in 1991. Publicpacket-switched data networks are barely offthe drawing boards in Central and Eastern

Page 114

18 Bulgaria expanded numbers of telephones at the expense of quality of service and infrastructureinvestment. For example, in 1990, 48 percent of local calls were not completed in Bulgaria, compared withless 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 levelsinmproved madaxfly by 1991: Bulgaria spent $28 per capita, Hungary spent $30, and the Western Europeanaverage 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.

‘g See data in ITU Indicators, 1990, op. cit., footnote 16, table 7, p. 7.


and EasternEurope

Europe, with 317 subscribers in Hungary andBulgaria in 1990, but 761 in 1991, whileWestern Europe has an extensive X.25service in place, with over 337,000 subscrib-ers in 1991.

Finally, productivity of telecommunica-tions operators varies a great deal betweenthe two parts of Europe: in 1991, the numberof main lines per employee in Central andEastern Europe was 67, up from 58 in 1990,compared with 158 in Western Europe in1991 and 152 in 1990.20 (See figure 6-6.)

Services to rural communities have beenespecially poor. The telephone network isoften concentrated in the major cities andadministrative centers, so the outlying ruralareas have much lower telephone penetrationthan suggested by the national averages.21

For example, approximately 7,500 Polishvillages arc without telephones, and nearlytwo-thirds of those villages with phones arcsevred by manual switches:22 service effec-tively stops when the switchboard operatorleaves for the evening. The same situationcan be found all over Central and EasternEurope. While several CEE telecommunica-tions authorities have told the Office ofTechnology Assessment (OTA) that ruralservice is a priority, the focus of moderniza-

Waiting list for main lines (millions)3 ‘—

[r~ 1981 1991

I21

1

0 LBulgarla CSFR a Hungary Poland Romania Yugoslavia

SOURCE INTERNATIONAL TELECOMMUNICATION UNION, 1992

tion thus far has been overwhelmingly on Figure 6-4.business users, on the presumption that Waiting Lists forbusinesses can absorb the increased costs.23

Service, 1981 and 1991(See figure 6-7. )

The case of Hungary illustrates the condi- a Czech and Slovak

tion of CEE telecommunications networks. Federal Republlcb 1990

The average wait for telephone connectionover the past two decades has been 12 years,and even then there is considerable difficultyin securing a dial tone or in completing acall .24 There were only 10.9 telephone mainlincs per 100 people in 1991, and one sourceindicated that three-quarters of these are inthe government.~s Only 7 percent of switcheswere digital. While in the main cities 90percent 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” evenbefore 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 (aU.S./Hungarian cellular telephone joint venture), and Jlm Russell, manager of direct dist nbutlon, U.S. WestNewvector Group (U.S. West IS the U.S. joint venture partner In WESTEL), Budapest, Oct. 8, 1991. Page 115


Figure 6-5.Service Quality: Bulgariab

Telephone Faults, 1991CSFRa

a Czech and Slovak Hungary b

Federal Republicb lggo Romania

France

Sweden

UnitedKingdom

Annual faults per 100 main lines

CentralandEasternEurope

WesternEurope

1 1

0 20 40 60 80 100

SOURCE INTERNATIONAL TELECOMMUNICATION UNION, 1992.

1990, automatic dialing was available toonly 50 percent of main lines in rural areas.26

In a great number of Hungarian vil-lages the telephone provides a link withthe outside world only in the daylighthours. . . 78 percent of the 2,024 main

exchanges operating in Hungary at theend of 1988, for example, were manu -

ally operated exchanges representing50 year old technology. . .[which meansthat] 78 percent of the locations inHungary are not connected to long-

distance dialing, 60 percent of the citiesin Hungary are not connected to do-

mestic long-distance dialing and 80

percent are not connected to interna-tional long-distance dialing."27

Causes of decayIn the political environment of Central and

Eastern Europe until recently, informationwas deliberately and tightly controlled andthe development of public telecommunica-tions services and facilities was rigorouslycurtailed. International and even much re-gional direct dialing was prohibited, circuitswere extremely limited in number and qual-ity, and telephone books were made classi-fied documents.28 Horvath of the HungarianTelecommunications Company (HTA) toldOTA that the Marxist government had delib-erately neglected infrastructure and discour-aged communications except among the fewauthorized decisionmakers. In the early 1980sthere was a debate over the importance of

29 According to Horvath,telecommunications.the new leaders do not yet realize that poorcommunications ‘‘is a deadly brake on theeconomy.

Telephony and other services were notconsidered industrial production in socialisteconomics and, since they had no quantifia-ble output, were seen as parasites on the real

30 Investment prioritiesindustrial economy.

Page 116

26 OTA interview with Pal Horvath, op. cit., footnote 13. Horvath suggests that because more revenue willhaveto 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. Theauthor 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 probablyunderestimates 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.

30 Measuring service productivity has been difficult for classlcal and neoclassical economics as well.

— —


and EasternEurope

were not high for telecommunications serv-ices. (See table 6-1.) Much of the littlespending that did occur, according to aWorld Bank study,

31 went to new lines rather

than maintenance, so figures on CEE tele-phone density mask poor service and anti-quated and nonperforming equipment, as thefigures on line faults and completed calls

show.The network deteriorated as a result,

necessitating the parallel development of‘‘closed purpose networks’ for the moresensitive government activities such as thedefense and interior ministries. For example,in the former Soviet Union three separatetelephone networks existed: one for a verysmall circle of the political and military elite(for which special keys are needed), anotherfor the party bureaucracy, and a third for thegeneral public.32

Despite the lack of reinvestment, telecom-munications nevertheless proved a reliablemoney maker. Following the traditionalEuropean model, telephone service in CEEcountries was vested in Postal, Telephone,and Telegraph (administrations) (PITs), alsoresponsible for postal and telegraph servicesand in some cases for broadcasting, andtypically under the control of the ministry in

charge of communications. (See table 6-2. )As state-owned enterprises, telephone serv-

ice operators, therefore, were both highlypolitical and highly bureaucratic: telecom-munications was used as a political tool forsocial and economic control, and telephoneenterprises were bound by administrativepublic-service structures that prevented them

Main lines per employee175 ~ I

i——-— 4

uBulgaria CSFR b Hungary Poland Romania Yugoslavia

SOURCE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT,INTERNATIONAL TELECOMMUNICATION UNION, FEDERAL COMMUNICATIONS COMMISSION, 1992.

from readily changing goals, strategies, orinternal structures. Furthermore, telecom-munications operators were closely super-vised by finance ministries as they set pricesand collected and distributed revenues. Tele-communications supported the postal serv-ice and contributed to the general treasury.Until recently, for example, the Czechoslo-vakian PTT turned over 87 percent oftelecommunications profits to the generaltreasury. 33 The awakening of users to thevalue of communications has strained oldtelecommunications operating models in manycountries. A major challenge to these coun-tries will be to become much more respon-sive to users’ needs.

Regional relationshipsWestern approaches

Other aspects of telecommunications mod-ernization are cooperation among countriesin the region and assistance from interna-tional agencies. As noted above, for years the

Figure 6-6.Telephone Operator

Productivity, 1991

a L~l exchange carriers

(regional Bell operatingcompames and the major

Independents).b Czech and Slovak

Federal Repubhc

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

.-


Figure 6-7. ~~ Telephone main lines per 100 population

Urban and Rural7U

Service 35

30Fi c~~h and Slovak

Federal Republic 25

20

15

10

5

0I

Page 118

CSFR a

averagepenetration

I

IPrague Brno Bratislava

—

—

SOURCE: INTERNATIONAL TELECOMMUNICATION UNION,AT&T’S THE WORLD’S TELEPHONES, 1991.

Soviet Union presided over a set of unilateraltelecommunications arrangements with itssatellites and limited their interaction withone another. In the mid- 1980s, the UnitedNations Development Program (UNDP) andthe International Telecommunication Union(ITU) proposed to reduce this isolation bysponsoring a regional telecommunicationsdevelopment program, which became knownas Euroteldev.34 Its formal goal was toestablish projects relating to new equipment,services, and network structures. Informally,however, it was intended to provide moneyand motivation for CEE telecommunications

officials to begin to emulate the telecommu-nications world outside of the Sovietsphere. 3s Euroteldev has so far only pro-duced plans, though those who have partici-pated agree that its work should continue.Now that free political and commercialrelationships between the East and West arepossible, Euroteldev mission may howeverhave less justification.

In addition, the ITU itself is attempting toplay a larger role in helping developingcountries modernize their telecommunica-tions networks. Under the auspices of thenewly created Bureau of Telecommunica-tion Development36 (BDT, after the Frenchacronym), the ITU organized its secondRegional Development Conference on tele-communications development in Central andEastern Europe, which was held in Prague inNovember 1991 .37

The conference focused on four mainareas: regulatory policy and structure of thetelecommunications sector (i.e. privatiza-tion, creation of a separate regulatory body);telecommunications standards and networkharmonization with Western Europe; needsfor and sources of financing; and humanresource training and development.

34 For a thorough description of Euroteldev, see John F. Healy and Ronald A. Davidson, UNDP//TUEvacuation Mission, European Tekxommunications Deve/oprnen&-Phase //, Project RER/87/025, EvaluationReport (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 equalbranches: telecommunications development, standards, and radio communications. The BDT is thesuccessor 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 LatinAmerica. Participating in the conference were officials from the telecommunications authorities of all thecountries in Europe. Attending as observers, but with full participation in committees, were such countriesas the United States, Canada, Mexico, and Japan, and such international organizations as Inmarsat,Intelsat, the European Commission, the Organization for Economic Cooperation and Development, theWorld Bank, and the European Bank for Reconstruction and Development.


and EasternEurope

The conferees agreed to create a workinggroup of members from the subregion tojointly tackle issues left unresolved at theclose of the conference, such as financing,network development, and human resourcesdevelopment. This group, the Central andEastern European Telecommunications Co-operative Mechanism (CEETEC), builds onthe experience of Euroteldev. Recent reportson these cooperative ITU activities suggestthey are likely to move slowly .78 Mostcooperative activities will occur on a company-to-company basis, as financing questions canbe resolved.

CoComCentral to the telecommunications mod-

ernization plans of CEE countries is invest-ment in advanced transmission and switch-ing equipment. This equipment is not avail-

able from the former Comecon tradingpartners, but only from the Western coun-tries. However, during the Cold War theWest, through the Coordinating Committeeon Multilateral Export Control (CoCom),established strict controls on the export ofgoods with military applications to Soviet-

bloc countries and China.39

CoCom restrictions on importing high-tech communicantions equipment to the UnitedStates have, until very recently, hinderedCEE governments in modernizing their net-works, Telecommunications exports were abitterly fought export-control issue withinthe Bush Administration and in other West-

Average telcominvestment, 1989-91 Investment

(US $ mil.) per capita (US$)

Bulgaria 160 28Czechoslovakia 113 10Hungary 195 30Poland 42 4Central and Eastern Europe 630 9Western Europe 43,810 128

SOURCE INTERNATIONAL TELECOMMUNICATION UNION (IW),ITU INDICATORS, 1991, TABLE 30, P 30.

ern industrialized countries because of com- Table 6-1.

peting goals, military security, and free Telephone Investment

trade. Principally at issue are fiber optics and Levels, Comparing

32-bit digital computer processors, both of Hungary,

which may have military and civilian uses. Czechoslovakia,

Fiber optics permit vastly greater transmis- Poland, with

sion capacity than coaxial copper c-able or United States and

microwave but are much more difficult to Western Europe

tap, which makes monitoring of military andmilitary industrial activities more difficult.40

CoCom has set a limit of 140 Mbps datatransmission rate on systems installed be-tween Russian cities, and 565 Mbps onsystems terminating in some Russian cities,including Moscow, St. Petersburg, and Vlad-ivostok. Intracity communications in re-stricted countries would have to continueusing microwave or copper cables, 41 As lateas 1992, this ban prevented U.S. West fromconstructing a trans-Siberian fiber optic net-work. According to officials in Hungary,however, Cocom should not now be aproblem 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 allow sigruf icant advances in computmgspeed for weapon design, targeting, encryption and other m II itary operations.

4’ In developing ciwlian telecommunications, reliance on microwave systems can beofgreat benefit, as thesystems are capable of carrying substantial traffic, are well understood, are relatively inexpensive, and areeasy to set up and reconfigure. Page 119


Telephone revenues, Revenues1991, (US$ mil.) per capita (US$)

Bulgaria 112 12Czechoslovakia 543 35Hungary 533 52Poland 520 14Central and Eastern Europe 3,188 24Western Europe 128,426 355

Table 6-2.Telephone Revenuesfor Hungary,Czechoslovakia,Poland and/orCEE Average

SOURCE: INTERNATIONAL TELECOMMUNICATION UNION (ITU),ITU INDICATORS, 1991, TABLE 28, P. 28.

presently available to them is acceptable andappropriate .42

In the United States, the Department ofDefense and the various agencies of theintelligence community argue that maintain-ing CoCom restrictions is essential for na-tional security. Firms such as AT&T, on theother hand, claim restrictions are no longerneeded. 43 It appears that proponents of tradeliberalization are prevailing. As it becomesapparent that Eastern European countries nolonger pose a direct military threat to NATO

Page 120

(North Atlantic Treaty Association), theCoCom countries recently have taken anumber of steps to modify their restrictions,in order to nurture new potentially lucrativetrading partnerships.

44 Further, fiber Optic

technology is becoming available to thesecountries. Because German firms are permit-ted to honor contracts made in the formerEast Germany, the former East German firm,Carl Zeiss, can export advanced fiber optictechnology to the CEE countries and Russia.This loophole is putting pressure on CoCommembers to modify the restriction.

Change is quickest for the three mostpolitically progressive and stable countries,Poland, Czechoslovakia, and Hungary, whichhave begun to institute export control proce-dures that satisfy CoCom.45 Hungary, whichhas had an export control regime in operationsince October 1990, is the farthest along;CoCom agreed in May 1992 to removeHungary from the list of proscribed destina-tions.46 The prospect of relaxing or elinlinat-

42 Also, it was—and still is—a matter of national pride in Hungary, for example, to successfully circumventthe 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 onInternational Economic Policy and Trade ventilated these arguments. OTA has not attempted to evaluatethese 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 fiberexports are warranted. OTA interview with John Scheibel, staff director, House Foreign Affairs Comm ittee’sSubcommittee on International Economic Policy and Trade.

44 “U. S., Allies Preparing to Ease Curbs on Exports to Baltics, Other Countries,” /ntemat~ona/ TradeReporfer, 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 tobe 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 andrequiring 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 onlytargeted 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 Polandand the Czech and Slovak Federal Republic (CSFR) was given more favorable consideration, butconsideration of removal from the proscribed list is to be delayed.


and EasternEurope

ing bans on importation of high-tech goods

is an important leverage to impel thesecountries to progress toward Western politi-cal and economic practices.

Efforts are underway in CEE countries tocorrect major structural flaws that havecontributed to the disintegration of both theeconomic structure in general and the tele-communications sector specifically. Mod-ernizing telecommunications” addresses onlya single, but critical, element of the broaderneed for reform. In recognition of its funda-mental importance to their economies, bothas an industry in its own right and as amultiplier for other economic activities, theCEE countries are planning major organiza-tional and legal changes. This liberalizationis aimed at both improving the communica-tions networks and creating an environmentconducive to foreign financial and technicalassistance for modernization.

The World Bank and the Organization forEconomic Cooperation and Development( O E C D ) estimate that the total cost of

modernizing will be around $50 to 60 billionover the next decade, and considerably moreif the countries of the former Soviet Unionare included.~’ The ITU estimates that thecost for Central and Eastern Europe, includ-ing the former Soviet Union, would be $94billion just to bring service levels to Ireland’s

current standard.48 Expectations of improv-ing penetration levels to Western levels bythe end of the century arc ambitious, perhapsunrealistic; and these figures only representadditional lines, not replacements of dilapi-dated network and terminal equipment. (Seetable 6-3.)

How telecommunications modernizationwill be paid for is a difficult issue for all CEEcountries, as their economies are relativelyunproductive in world markets, their foreignexchange reserves are low, and their pros-pects for short-term improvements arc bleak.It is likely that some combination of self-generated revenues, capital raised in foreignmarkets and eventually from domestic mar-kets as these develop, and foreign aid orloans, will be necessary.

The prospects for raising revenue inter-nally from telecommunications service andallocating it for network modernization arenot encouraging. Profits from telecommuni-cations services generally arc returned to thegeneral treasury, rather than being reinvestedin telecommunications. Tariff structures ineach country provide subsidies to local callsand handset rental charges, depriving theoperator of revenues that could be used fornetwork modernization.

ModernizingCEE financial markets are as yet weak, telecommunications

and in some cases there is no other domestic systems will costabout $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 willsingle telephone line (about S2,000) mult iplled by t he number of add it ional lines t hat the government/operatorforecasts putting In. Timothy Nult y, Comsuderatmns m Te/ecom /rrvestrnent in Eastern Europe (Washington,

pay is still

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 investmentrequired 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 ofReconstruction,” 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

penet ra t ion ra tes In Western Europe, a t 29 te lephones per 100 Inhab i tants . Page 121


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

CoCom restrictions have prevented a U.S. West-led consortium from constructing a fiberoptic link across Siberia. One proposal is to lay a 565 mbit/second fiber line totaling 11,528miles from Nakhodka, in the east, to Moscow, where the line would split, one branch going toSt. 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, theUnited States, and the Atlantic. Sending calls across Asia would reduce the transmissionlength by 30 percent. With traffic between Europe and the Far East projected to rise by 15percent annually, U.S. West estimates that the fiber line’s full capacity would probably becompletely used as soon as deployed. Furthermore, internal demand for both Iong-distancedomestic and international telecommunications services is likely to be enormous.

With CoCom restrictions still in place, calls will Iikely be routed around Russia, with most ofthe network not within the country at all. High capacity links from certain Russian cities wouldsend Russian calls to switching centers outside the country. The calls would then be routedto 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-speedmicrowave equipment (156 mbit/second), which does not violate CoCom restrictions. Fromthe Russian point of view this is less desirable than a fiber link, but would improve substantiallycapacity and reliability while observing existing CoCom restrictions.

source of investment capital than the govern-ment, either through the Treasury or thegovernment-owned banks. International cap-ital markets could be used, but the rules oninvesting are not yet clearly delineated.Horvath of the Hungarian Telecommunica-tions Company (HTC) told OTA that heattempts to get financing as much as possiblefrom Hungarian banks, but while HTC is apreferred customer, the banks’ resources arcinsufficient to meet HTC’s needs. Horvathnoted that there would be limits to foreigninvestment because Hungary is a smallcountry, and it is already getting half of allforeign capital coming into Eastern Europe(of that, more than half comes from theUnited States). Aid money from the Westand from multilateral lending agencies is notavailable in the amounts required. Estimatesprovided by telecommunications authorities


to the ITU show that Hungary, Czechoslova-kia, and Poland each expect 45 to 70 percentof modernization investment to come frominternal sources, 15 to 35 percent from bankloans, and 10 to 15 percent from privatesources, including foreign investment.~9

Thus, reform of telecommunications fi-nancing will involve several elements, First,it will be necessary to reform the PTTs inorder to make them more responsive toprivate business needs. All the Central andEastern Europe PITs arc slated to break intoseveral parts, splitting the telecommunications,postal and in some cases, broadcastingoperations off from the ministry, which willretain oversight and regulatory authority. Atthe same time, tariffs arc likely to be changedto bring prices more in line with costs, and toreduce telephone rental and local callingsubsidies. Second, financial and regulatory

Page 122 4’ Calculated from data in ITU Summary, op. cit., footnote 15, chart, p. 3.


and EasternEurope

policies will have to be made predictable sothat companies will conclude that it is notunduly risky to invest in these countries.Finally, privatization, as is projected inHungary and discussed in other countries,will open telecommunications firms to pri-vate capital. Capital will be sought ondomestic markets, as these develop, and oninternational markets, through the sale ofshares in the national firm when the statesells off its assets. The need for externalinvestment may entail a significant amountof foreign ownership, eithcr through sharepurchases of privatized firms, or throughparticipation in joint ventures or other coop-erative arrangement.

A number of CEE countries, especiallyPoland, Hungary, and Czechoslovakia, an-ticipate becoming members of the EuropeanCommunity, where they will be required tofollow EC directives, including those regard-ing telecommunications. Several are alreadypursuing or intend to follow these require-ments for liberalization in order to improvetheir prospects for membership. Additionalpressure for liberalization or reform is com-ing from potential investors and financing

sources, who, against the backdrop of gen-eral uncertainty about political stability, arereluctant to invest without the proper legal

Main lines to be added Estimated investmentsfrom 1992-2000 (millions) 1992-2000 (US$ bil.)

Bulgaria .69 1.0Czechoslovakia 2.6 3.8Hungary 2.2 3.3Poland 8.8 13.1Central and Eastern Europe 24.2 36.3

SOURCE. INTERNATIONAL TELECOMMUNICATION UNION, EUROPEAN TELECOMMUNICATION M31CA-TOf?S (GENEVA INTERNATIONAL TELECOMMUNICATION UNION, OCTOBER 1992), TABLE 33, P. 33.

framework, especially regarding private prop-erty and repatriation of profit.so Table 6-3.

Major sources of financing, such as the TelecommunicationsEuropean Bank for Reconstruction and De- Modernization,velopment (EBRD) and the World Bank, are Main Lines andmaking liberalization a precondition to as- Investments,sistance. For example, the EBRD, which was 1992-2000created in 1990 specifically for the purposeof providing financial assistance in thetransition to market economies,51 lent $377million (268 mill ion ecus) for telecommuni-cations projects in Central and Eastern Eu-rope in 1991, while the World Bank lent$270 million for telecommunications im-provement to Poland and Hungary. TheEuropean Investment Bank provided anadditional $211 million (150 million ecus).52

Strategies for liberalizationBecause 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 legaluncertalnt y: as one analyst pointed out to OTA, U.S. firms hope to hide behind t heir joint ventures with CE Eenterprises, who, they say, wt II understand the laws and deal with t he regulators. OTA interview wlt h RobertBruce, attorney, Debevolse and Pllmpton, Washington, DC, Sept. 23, 1991. A senior State Departmentoff 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 andDevelopment, a mult i Iat eral bank modeled after t he World Bank “as a major vehicle for channeling Westernresources Into the reconstruction of the economies of Eastern Europe. ” Holliday and Harrison, “TheEconomics 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


Table 6-4.ForeignParticipation Country/city Partners ownership Award date Comments

in Cellular Czechoslovakia Eurotel

Licenses ofEastern Europeand theFormer

US West (US)Bell Atlantic (US)Czech & Slovak PTTs

Hungary WesTelU.S. West (US)

Soviet Union Hungarian Telephone Company

Poland Polska Telefonia KomorkowaAmeritech (US)France TelecomPolish PTT

Romania Nationwide Cellular (U. S.)Romanian PTT

RussiaMoscow Moscow Cellular Communications

US West (US)Millicom International Cellular Sweden(Us.)Ministry of Posts and TelecommunicationsFyodorov Eye Microsurgery Science andTechnology Complex of Moscow

EuronetPlexys International (US)

Information Transfer Technical SystemCenter

(Russian Ministry of Foreign Affairs)Vimpel Corp. (Russian military elextronics

contractor)

RussiaSt. Petersburg Delta Telecom

U.S. West (US)St. Petersburg City Telephone NetworkProduction AssociationSt. Petersburg Station Technical Radio

Control

Ukraine Ukrainian Mobile CompanyDBP Telekom (Germany)PTT Telecom (Netherlands)Telecom DenmarkUkranian Government

24.5%24.551.0

49.051.0

24.524.551.0

51.049.0

22.020.050.08.0

40.055.0

1990 Eurotel wiII invest $60 millionover next 10 years.

1989 To date, US West has in-vested $13 million.

1991 $50 million investment over3-4 years.Reportedly, Ameritech andFrance Telecom paid $70-80million for the license,

1991

1991 Initial investment: $7 million.

1992 Reportedly awarded a testlicense by the RussIan mli-tary to operate an 800 MHzcellular system.

1991 Priority connection to interna-tional gateway switch. $7 mil-lion investment.

1992 The consortium IS licensed to16.3 provide paging, analog cellu-16.3 Iar, GSM cellular and PCN16.3 services. Reportedly, PTT51.0 Netherlands has relinquished

its stake to DBP Telekom.

Page 124


and EasternEurope

Country/city Partners Ownership Award date Comments

Estonia

Latvia

Lithuania

Byleorussla

Russia

Uzbekistan

Hungary

Eestl Mobiil Telefon (EMT)Telecom FinlandSwedish TelecomEstonian PTT

Latvian Mobile Telephone CompanySwedish TelecomTelecom FinlandVEF (Latvia)Latvian State Radio & Television CentreLatvian Telecommunication Centre

ComlietMillicom International Cellular(Sweden/U. S.)Vilnius Telephone Network (Lithuania)UAB Antena (Lithuania)

CommStruct international (U S )Byleorussian PTT

UzbanrobitaICGUzbek Communications Ministry

24524.551.0

24.5

24.5

23.0

23.0

5 0

49041 010.0

50.050.0

45.0550

1990

1991

1991

1991

Expectedearly 1993

1992

1993

Baltic Systems are interoper-able with the Scandlnavian,Moscow, and St. Petersburgcellular networks.

Comliet wiII also establish in-ternational satellite Iink.

Government has announcedbidding for GSM Incenses in12 Russian cities, includingMoscow and St. Petersburg.

ICG is providing hard cur-rency and operating expertise.

2 nationwlde, 15-year GSMIicenses, One IS reserved forHungarian Telecommunica-tions Company/foreign com-pany joint venture; the otherwIII be 100 percent private.Likely foreign bidders:WesTel for the HTC joint ven-ture; BT, France Telecom,DBP Telekom consortium forthe private license. Upfront$30 million fee and $1 millionannual radio frequency usagefee,

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

Page 125


The EuropeanCommunity is themodel for liberalizingCentral and EasternEuropean telecommu-nications. However,much uncertaintyhas accompaniedliberalization efforts,and many are stillincomplete.

Page 126

the EC telecommunications directives andthe precedents established by EC membercountries are a guide to the liberalizationmeasures. For example, Czechoslovakia’snew telecommunications law, passed in March1992, is consistent with European Commu-

nity directives.53 In Romania, the EC GreenPaper is also a guide for telecommunicationsliberalization.54 As the senior legal analyst inthe Hungarian Ministry of Communicationsput it recently,ss

The intention of the Hungarian tele-communications policy is to follow thedirectives of the EEC [European Eco -nomic Community]. The reason for thisis not only because it is a political aim,but also because EEC directives arebased on large scale compromises be-tween the various players, especiallythe pro- and anti competitive ones.

Nevertheless, U.S. regulators feel they arcsuccessfully communicating the elements ofthe U.S. regulatory structures, process, andphilosophy to CEE telecommunications au-

thorities. The recasting of the public tele-phone operators (PTO) relationship with thegovernment is the critical first step to mod-ernization. Modernization will be impossibleso long as revenues from telephone servicearc turned over to the government rather thanreinvested in the network. Operators havebeen unable to raise domestic rates becauseof pressure from finance ministries, whichrespond to political pressure from users whowould suffer if rates were raised.

Privatization is an opportunity for thegovernment to raise much-needed funds andget large infusions of hard currency. Therecent privatization of Mexico’s telephonecompany is setting a precedent for CEEcountries. Hungary, Poland, and Czechoslo-vakia have all separated the operator fromthe government in a carefully planned evolu-tion eventually leading to privatization.56

This separation necessitates the creationof a regulatory agency. Under the old PTTsystem, no functional distinction was madebetween operations and regulation because

53 “Czechoslovakia Passes Law,” CornrnunicatiorwWeek /ntema(iona/, Apr. 6, 1992, p. 34. The lawstipulates the creation of a regulatory body separate from the operator and anticipates competition mcommunications services, except for basic voice telephony, for which the service providers in the tworepublics (SPT Praha and SPT Bratlslava) retain exclusive rights.

w Dan Stenfanescu, “Telecommunications in Romania,” paper in FWcy Dia/ogue on TelecommunicationDevelopment: 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 DevelopmentConference (EU-RDS), Prague, Nov. 19-23, 1991, doc. no. EU-RDC-91/13-E (Geneva: InternationalTelecommunication Union, 1991), p. 1.

56 Privatlzat ion maybe accompl ished in a variet y of ways, and is a complex process for which governmentsin Central and Eastern Europe may be unprepared. Telecommunications attorney Robert Bruce told OTAthat in Hungary, the debate on privatization also dealt with decentralization of telecommunications. TimNulty, senior economist at the World Bank, notes that developing countries should proceed slowly onprivatization, and that a variet y of “bottom-up” forms of privatization can occur without selling off t he wholetelephone net work. See Timothy E. Nult y, “Telecommunications in Developing Countries: The World Bank’sPerspective and Role,” European Regional Development Conference (EU-RDS), Prague, Nov. 19-23,

1991, doc. no. EU-RDC-91/14-E (Geneva: International Telecommunication Union, 1991 ), p. 4.


and EasternEurope

the government was presumed to protect thegeneral public good and ensure that socialgoals were met. Also, the distrust of monop-oly that necessitated regulation in the UnitedStates theoretically did not exist in centrallyplanned economies.

A great deal of uncertainty has accompa-nied the drafting of new laws, despite themode] of the 1987 EC Green Paper. The newHungarian telecommunications law has beenthrough many drafts, changing almost daily.The Polish bidding process for a foreign-owned new cellular network was nearlycompleted when the government decided toreverse legislation allowing 1 ()()-percent for-eign ownership, instead requiring majority

57 political opposition toPolish ownership. -privatization in Poland and Czechoslovakiamay constrain the types of services that maybe privately provided.

Since several of the countries of the regionaspire to economic parity with westernEurope in short order, they are acutelyconcerned with the provision of advancedtelecommunications services, such as high-speed data and mobile communications.This was one of four main issues highlightedat the ITU’s Regional TelecommunicationsDevelopment Conference. Business custom-ers, especially those accustomed to Westernstandards of service options and quality, willneed modern services and thus may shouldermuch of the costs of modernization.58

The establishment of cellular networkshas high priority, to supplement (or perhapssupplant) the existing public wireline net-

works for office communications as well asfor mobile communication. Cellular net-works are targeted first at incoming Westernbusinesses and investors, to whom the dilap-idated telephone system seems an unman-ageable impediment. New foreign entrantswill also focus on more lucrative and easier-to-serve centralized business clients.

Another immediate goal is the establish-ment of overlay digital backbones to provideinternational access for business and govern-ment, and to link major business centers.These networks are typically either micro-wave systems, or fiber optic networks, as areplanned in Hungary and Poland. Given thedifficulty of raising tariffs for the wholepublic-switched network, there are someimportant benefits from the fact that overlayand cellular networks can be tariffed athigher rates. Business customers are willingto pay these higher rates for better serviceuntil telecommunications operators reformnational tariffing schemes for both land-based and cellular systems.59

Problems with liberalizationSome skepticism is justified with regard to

telecommunications liberalization in this re-gion. First, there is a question whether therhetoric for telecommunications reform matchesthe genuine intentions of these governmentsand the ability or inclination of the systemoperators. While significant strides havebeen made quickly in upgrading the facilitiesand the services in primary cities, moderniz-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


If modernization is not integrally tied tochanging corporate and social demand, thisgoal may not be met. Residential customersarc accustomed to paying artificially lowprices for telephone service and may not beable to afford the higher rates for moderniza-tion. 60 Though initially successful, Bulgaria

was unable to sustain a telecommunicationsmodernization effort in the 1980s. Poland,too, has twice announced ambitious inten-tions to improve services, both of which fellfar short of expectations. However, thefinancial participation from multilateral agen-cies and foreign investment from the Westmarks a major difference with previousreforms. There is strong interest among thesecountries, the European Community, and theUnited States in developing telecommunica-tions networks rapidly.

Second, the pressure to liberalize telecom-munications and open markets to foreigninvolvement creates an acute dilemma re-garding procurement and manufacture oftelecommunications equipment. The pres-sure to assure the economical construction ofmodern communications infrastructure, whichin the short term will require purchasingWestern products (or joint ventures withWestern firms), conflicts with the need tosolidify their own h igh-tech industrial bases.61

Telecommunications equipment firms, 80percent of whose production was until re-

cently absorbed by the Soviet market, havebeen devastated by the breakdown of intra-bloc Comecon trade and the shift to hardcurrency transactions.

62 Efforts to keep these

companies afloat will likely require someform of industrial policy as countries decideto what extent they will subsidize, privatize,or direct firms to engage in joint ventureswith Western companies.

Third, resorting to advanced businessservices, overlay networks, and differentialtariffs, while expedient for attracting foreignbusiness, risks widening the gap betweencommunication haves and have-nets. Whilethere are some plans to improve rural andpublic pay phone services, investment andattention will go to those who can pay,leaving the public network to be modernizedlater.

Finally, the initial enthusiasm for whole-sale reforms is beginning to subside. Plans toprivatize telephone companies havc beendelayed as the view reemerges that telephoneservice still should be entrusted to govern-ment. Problems with wholesale sectoralreforml in society in general are dampeningplans for privatization and liberalization ofthe telecommunications sector. France hasemphasized that its model of developmentmay be more appropriate for CEE countriesthan that of the United States or the UnitedKingdom, 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 formodernization—will be difficult, as rate increases are Ilkely to raise social tensions. This has happenedelsewhere. Business Week reported that an Intended rate increase for telephone service in Venezuela hadto 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.


and EasternEurope

deteriorating telephone system up to a levelof excellence without privatization, by meansof thorough internal reorganization.

The process of transforming the centrallyplanned economy into a market economy inPoland, in particular, has been beset withproblems.

63 Reports of fraud and scandal and

troubles with effective tax collection arerife.64 The telecommunications reforms have

not so far delivered improvements in tele-phone service. The parliament has turned toa more cautionary plan of bolstering stateindustries and slowing down privatization.65

Whether Poland’s troubles will prove to bea foreshadowing of problems for the rest ofCentral and Eastern Europe or a guide tomore successful transitions is yet to be seen.

Involvement of the United StatesWestern Europe, and particularly Ger-

many. is deeply interested in economic andsocial reform in Central and Eastern Europe.In addition to being neighbors, Western andEastern Europe share a similar heritage, andeconomic cooperation seems imminent. Nev -ertheless, the United States also has signifi -cant stakes in the future of the region.Beyond matters of national security, theopening of the CEE countries representssizable new markets, and their success in thetransformation to democratic governanccrepresents an affirmation of important eco-nomic and political ideals.

CEE countries also have an interest inparticipating in global markets, and are

clearly looking to the United States forfinancial and technical assistance. For them,the United States presence represents apotential counterbalance to the influence ofother Western European countries, princi-pally but not exclusively Germany. TheOverseas Private Investment Corporationand the Export-Import Bank encourage tradedevelopment by providing insurance andfinancing to U.S. exporters. U.S. participa-tion in the World Bank, the InternationalMonetary Fund, and the European Bank forReconstruction and Development representsa major locus of financial assistance toCentral and Eastern Europe.

Congress has acted to assist the economicand social transformation of the region; in1989, Congress passed the Support forEastern European Democracies Act (SEED),which allotted $1.5 billion in grants for1990-92 to encourage political reforms, eco-

nomic development, and social reforms (es-pecially recognition of human rights) inCentral and Eastern Europe. The SEED Actwas an expanded version of President Bushproposal for $350 million in assistance toPoland and Hungar).

Congress has also been particularly inter-ested in energy, environment. and telecom-munications as the keys to these generalmarket and political reforms in the CEEcountries. The House Committee on Foreign

‘3 For a very detailed account of Poland’s experience with reform, see Lawrence Weschler, “Deficit,” TheA/ew Yorker, May 11, 1992, pp. 41-77. See also Stephen Engelberg, “Poland’s New Cllmate Yields BumperCrop 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 findingways 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


U.S. involvementin reformingtelecommunicationsin the regionemphasizes advice,technical assistance,and private sectorinvolvement, ratherthan direct aid.

Page 130

Affairs, for example, sent a delegation toPoland, Hungary, and Czechoslovakia inNovember 1990, which issued a report on“Eastern European Telecommunications,Broadcasting, and Environment. ’ Congres-sional requests to the Office of TechnologyAssessment include policy information forCentral and Eastern Europe on issues such astelecommunications and energy efficiency.OTA people have been involved in informaland formal discussions on developing sci-ence policy and technology assessment institu-tions in these countries.

The Office of International Communica-tions in the Federal Communications Com-mission (FCC), along with the NationalTelecommunications and Information Ad-ministration, is working closely with severalof the CEE countries to help establishregulatory mechanisms and spectrum man-agement technique and expertise. Thoughsignificant constitutional differences make itdifficult to exactly duplicate the U.S. FCC(an independent regulatory agency) else-where,66 several countries have created tele-communications regulatory bodies with U.S.assistance, and others are in the process. TheU.S. Telecommunications Training Institute,a private organization, works under contractto the U.S. Agency for International Devel-opment, and other private sector organiza-tions work to bring management skills toCentral and Eastern European telecommuni-cations operators.

Despite these initiatives, some observersfeel that the U.S. effort is meager relative tothe magnitude of the problems CEE coun-tries face. U.S. budget difficulties and eco-nomic conditions make it difficult politicallyto allocate much money to the region, andU.S. policy emphasizes advice and technicalassistance rather than direct aid. This leavesa relatively greater role for U.S. privatesector involvement in economic develop-ment in the region.

American companies have been active intelecommunications rehabilitation in the re-gion, and in increasing numbers are capital-izing on the opportunity to tap into newmarkets, for both equipment manufacturersand service providers. Regional Bell operat-ing companies (RBOCs) are involved innumbers of projects to build and/or operatecellular networks and data networks in keycities of the region (see chapter 4). U.S. Westand Bell Atlantic joined the Czechoslova-kian Ministry of Posts and Telecommunica-tions to form Eurotel, a joint venture to buildand run a cellular mobile system and con-struct a public packet-switched (data) net-work. Eurotel, of which each RBOC owns24,5 percent, began operation in September1991 with an initial capacity of 4,000 sub-scribers; the cellular system is expected toreach 50,000 within 5 years.67 U.S. West isalso involved in a venture to operate acellular network with the Hungarian Tele-communications Company, Westel Radio-

M The FCC’s “independence” is the carefully constructed result of t he tension between adm inistrat ive andexecutive (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, whichcharacterize 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.3.


and EasternEurope

telefon, Kft. Westel went online in Budapestin October 1990 and attracted 4,000 sub-scribers in the first 6 months, surpassing theprojected usc by 2,500 subscribers in the firstyear.h~

AT&T is pursuing contracts in Centraland Eastern Europe and the republics of theformer Soviet Union. It is installing a newinternational exchange in Warsaw for thePolish 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 inMarch 1992. to build a 1,400-km fiber-optictelephone network.

These deals require creative financing:AT&T is taking significant risks in gettingpaid, since all of the republics in the regionhave little if any hard currency reserves. andtheir currencies are not yet convertible. Thecompany may end up with in-kind paymentsin oil or copper. 70 Businesses require clear

rules and a stable political environmentbefore they will undertake large-scale invest-ment. Such stability is not yet present inmany countries in the region. Wall Street isreluctant to commit much capital to venturesin the region, and has pressed for increasedpolitical 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 WorldBank loans, will Invest another $20 m Ill Ion. OTA Interview with Andras Sugar, general manager, and JohnHandley, 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// StreetJouma/, 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


It is in thepolitical interest ofthe United Statesto promotetelecommunications,in order to solidifydemocratic gains inCentral and EasternEurope.

President Lech Walesa has claimed thatforeign companies are reaping the benefits ofPoland’s privatization without contributinganything to the culture, economics, or infra-structure of the country.

73 There is growing

frustration in Poland over a perceivcd lack ofinvolvement and investment by the UnitedStates in Poland’s modernization. The divi-sion of Czechoslovakia into the Czech Re-public and Slovakia signals not only abidingnationalist sentiments, but also differencesover industrial development strategies, in-cluding reliance on market mechanisms ineconomic development.

The relation between economic activityand telecommunications is well known,though not always well understood. It is nocoincidence that the conditions of telecom-munications networks in these countriesdeteriorated (or failed to develop) alongsideruinous economic policy; and it will be nocoincidence if these networks improve hand-in-hand with economic reforms. However, tosuggest that telecommunications directlyleads to economic development is to over-state its place in a far more intricate social/political/economic/cultural dynamic; indeed.the quality of the communications networkmay be as much a consequence as a cause ofa strong economy. Modem telecommunica-tions may be necessary but is not sufficientfor development of a modern industrial andservice economy.

ConclusionThe countries of Central and Eastern

Europe are in need of quick repair to theirtelecommunications networks; they are alsoin need of quick repair to other critical

infrastructure and institutions. In the tele-communications sector, the United States ispressing for an aggressive “liberalization”agenda. This entails primarily the divestiture

of the telephone operator from the govern-ment and its eventual privatization, openentry and free-market competition for serv-ices and equipment. This approach, paced bystrong industry input, is based on self-interest as well as a commitment to improvewelfare in the CEE. The opportunity for U.S.equipment and service suppliers to receivecontracts is greatly improved by a competi-tive free-market environment, where West-ern products are generally superior to indig-enously-produced equipment, at least for thetime being. A competitive free-market environ-ment depends on the existence of an inde-pendent oversight body and the replacementof political criteria by economic and opera-tional factors. There may also be benefitsassociated with roughly similar regulatoryapproaches among nations as well.

Finally, the United States is motivated inpart by a sense of democratic purpose. It is inthe U.S. Government’s political interest topromote broader and deeper access and useof telecommunications in order to solidifydemocratic gains in the region, which wouldhedge against a return to antidemocraticregimes in the future.

The fuller implications of liberalizationand competition, or even privatization, seemto be often overlooked for short-term consid-erations. What is good for U.S. firms ispresumed to be good for these countries.While a number of agreements have alreadybeen struck by U.S. firms to provide invest-ment, products, or services, CEE policy makers

Page 13273 Blaine Hard in, “Poles Sour on Capitalism: Walesa Accuses West of Preying on Country,” WashingtonPost, Feb. 5, 1992, p. Al.


and EasternEurope

are somewhat ambivalent about the appro-priateness of U.S. recommendations for theirneeds and circumstances. They have notrushed to embrace the U.S. regulatory model,and have considered more statist models,such as European telecommunications, par-ticularly France, as possibly more appropri-ate to their needs. They also undoubtedlyhave hesitated because of their own inexperi-ence, uncertainty, and lack of consensusabout what direction they should take. Thechallenge facing the United States generally

is how to encourage CEE countries to adoptparticular types of reforms that most furtherU.S. interest in an area where U.S. leverageis generally weak. The EC member countriesare also attempting to persuade CEE coun-tries to reform in particular ways, not all ofwhich are exactly as U.S. interests wouldwish. Thus North America and WesternEurope are struggling over Central andEastern Europe, trying to influence struc-tures and regulations and ultimately gainaccess to new markets.

Page 133

DomesticDeregulation andInternationalTrade Negotiations 7

C H A P T E R

Telecommunicationsderegulation inthe United Stateshas led topressure for newinternational tradingarrangements.

T H O U G H S E R V I C E S S U C H A S T E L E C O M M U N I-

CATIONS w-c increasingly central to the opera-tion of the global economy, rules governinginternational trade in services arc still beingestablished. This chapter describes the proc-ess that is generating these rules, and exam-ines the principal forum in which they havebeen debated, the General Agreement onTrade in Services, a component of theGeneral Agreement on Tariffs and Trade(GATT). U.S. policy and negotiating posi-tions for GATT talks arc then discussed,because these have become major determi-nants of U.S. international telecommunica-tions policy.

U.S. deregulation and theworldwide consequences

Before the 1980s, the concepts of naturalmonopoly and universal service dominatedtelecommunictions. Telephone systems wereconceived as intricate technical systemspresided over by engineers and regulatorswhose main responsibility was to ensure thesmooth operation of networks. Since tele-communications operators were national mo-nopolies and each monopoly dealt directlywith its foreign counterparts, there was noneed for an international trading system.Public telephone operators (PTOs) struckpolitical bargains that set stable patterns ofrelationships for many years. The Interna-tional Teecommunication Union (ITU) co-ordinated the relationships of these nationalbodies. The ITU consultation process devel-opcd technical standards to permit intercon-nection, and the international settlementsprocess assured that accounts between coun-tries would be reconciled.

With countries (through their nationaltelephone operators) negotiating prices and

terms of service with one another under theITU, more generally applicable rules fortrade were thought to be unnecessary. Be-cause international telecommunications wereprovided by monopolies over circuits thatthe monopolies each half-owned, serviceswere considered the result of joint invest-ment, and not traded items.

In the late 1970s, telecommunicationsderegulation in the United States began tochange these assumptions. Pressure for newinternational telecommunications trading ar-rangements mounted in the United States. asa result of deregulation, technologicalchange, the entry of new suppliers, and thebeginnings of political organization of tele-

communications users.Telecommunications competition in the

United States began with microwave tech-nology, which made long-distance competi-tion possible in the 1970s, and with digitiza-tion of data, which blurred the distinctionbetween computing and telecommunications.With the divestiturc of AT&T in 1984, theModified Final Judgment (MFJ) laid downby a U.S. District Court became a key aspectof U.S. teleccommunications policy. Tele-communications costs and terms of usebecame a prime factor in profitability andcompetitiveness for many large businesses.

Large corporate users of telecommnunica-tions began to form active interest groups.The largest users arc concentrated in a smallnumber of firms: it is widely believed that 20percent of users generate 80 percent ofrevenues, and less than 5 percent of usersgenerate 20 percent of local traffic and overe50 percent of long-distance traffic. Thisconcentration made it easy for large users toorganize. They began to pressure political

decisionmakers to allow them to intercon-

Page 135


Competition inthe United Stateschallenged themonopoly serviceproviders in othercountries, who havecome under fire frominternational usersand from domesticusers as well.

nect their offices independently of the tele-phone company.

The development of microelectronicsbrought new suppliers into the telecommuni-cations equipment market. Computer equip-ment firms such as IBM and Control Datanow wanted telephone monopolies openedup so that they could compete in the equip-ment markets. Some firms such as ElectronicData Services (EDS) and IBM saw newopportunities to offer information services,but needed access to the national network todo so. New network operators, first MCI andlater Sprint, wanted to compete with AT&Tfor long-distance traffic.

Deregulation resulted in opening the U.S.telecommunications equipment market toforeign as well as American firms. This hadimmediate and significant trade consequences.The U.S. balance of trade in telecommunica-tions equipment went from a surplus of $275million in 1982 to a deficit of $2.6 billion 6years later, due largely to the lack ofreciprocal overseas markets for customerpremises equipment (handsets and otherterminal equipment). ]

With U.S. deregulation, the governmentmonopoly mode] of Postal, Telephone, andTelegraph (PTTs) administrations began tocome under strain. Competition in one coun-try presented problems for other countries. Itraised questions about systems organizationand operation, especially flows of fundsbetween countries to settle internationaltelephone financial accounts, How werenational monopoly telephone operators to

negotiate with several competing telecom-munications firms in one country? How was“plain old telephone service” (soon knownas POTS) to be distinguished from newervalue-added services? Where competitionwas allowed, what conditions would beimposed on foreign competitors, especiallythose from countries where competition wasnot permitted? Who would be allowed toown what kinds of facilities or radio frequen-cies? How could competing service provid-ers deliver enhanced and value-added serv-ices without having their own facilities?How could countries maintain distinctionsbetween basic voice telephony and enhancedservices (and so preserve the 1 ion’s share ofbusiness for the monopoly provider), whentechnological change, such as digitization ofvoice signals, rendered them meaningless?2

The basic business practices and profita-bility of most foreign PTTs, as well as thoseof AT&T and its operating companies in theUnited States, were directly challenged bycompetition. Their stable organizational en-vironment came under fire, along with theirelaborate systems of cross-subsidies, whichhad been set up to achieve a variety ofeconomic, social, and political goals, such asuniversal service,

In many countries, long-distance and in-ternational telephone services subsidizedlocal telephone service, business telephoneservice subsidized residential telephone serv-ice, and urban telephone service subsidizedrural telephone service. In some countriesalso, revenues from telecommunications

1 Kenneth Robinson et al., “International Telecommunications Trade,” Affer fhe Breakup: Assessing theNew 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 andManaging the Te/ecornrnunications Sector, Bjorn Wellenius et al. (eds.) (Washington, DC: The World Bank,1989), pp. 19-21.

DomesticDeregulation and

InternationalTrade

Negotiations

contribute to both the general treasury andthe postal services These cross-subsidieswould be difficult to sustain in a morecompetitive world, where companies areforced to reduce prices and costs. Further-more, strong PIT telecommunications un-ions resist the inevitable change in employ-ment levels and practices that result fromderegulation and the attendant cost-cutting.

PTTs, which in the remainder of thischapter will be called public telephoneoperators (PTOs), arc also concerned abouteroding market share and their perceivedinability to finance network modernizationunless they control the new high-valueenhanced information and data services—the most profitable business traffic and alsothat traffic most likely to migrate to thecompetition. On the other hand, lower tele-communications prices mean lower costs forboth business and residential consumers, andmay ultimately result in increased revenuesfor the telephone operator due to greatercalling volume. 4 Finally, PTOs worry thatthe presence of competitors will seriouslyundermine their control over their ownoperations. 5

Liberalization of telecommunications oc-curred first in those countries where the

political mobilization of business interestswas greatest: the United States, the United

Kingdom, and Japan. As one analyst hasobserved:

While winning the regulator-y battle athome, [U. S.] firms calculated that theU.S. bargaining power made globalreform feasible, and they became themost prominent exponents of regula-tory reform in many countries. But in

the 1980s, a translational corporatecoalition .for reform emerged as firms inother countries wanted to match theterms offered to U.S. companies.6

Thus change in the United States broughtabout change in other countries. Large usersin the EC saw that to be competitive withU.S. and Japanese firms, they needed toreduce their costs, increase their scale, andimprove their ability to deliver flexible andtimely services. 7 The Commission of theEuropean Community acted to open parts ofthe European market to reduce telecommuni-cations costs and thereby improve operatingefficiency for all firms. To do this, usersrequired (but did not immediately get) morefavorable operating terms from PTOs.

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 he evolutlon of bot htechnology and the pollcies that shape it. In general, European PTOS are politically more powerful t han theircountries’ computer and electrorucs industries, whereas in the United States the reverse tends to be thecase. For example, the stronger role of PTOS is reflected in the scarcit y of corporate private networks andthe widespread use of X.25 protocols in Europe for data networks, while in the United States computerequipment 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 HighTechnology,” /nternationa/ Orgarrizatlon, vol. 44, No. 2, spring, 1990, p. 188.7 See Giandomenico Majone, “Cross-National Sources of Regulatory Policymaking In Europe and theUnited States,” Jouma/ of F%bhc Poky, vol. 11, No. 1, pp. 79-106. Page 137


Changing attitudes towardservices and trade

The globalization of business pushes firmsto seek telecommunications operations thatcan help them deliver similar services world-wide, and this may mean bypassing nationalnetworks or locating operations elsewhere.The country with the environment mostconducive to telecommunications for busi-ness sets the standard for all others.8

As major users tried to modernize theirnetworks, they sought more flexible terms ofaccess and prices and the right to attach newequipment. Foreign telephone operators wereunwilling to provide these terms, arguingthat such changes would require new invest-ment or new operating procedures. In reality,these restrictions protected foreign marketsfrom inroads by U.S. or other foreign firms.

Meanwhile, U.S. telecommunications equip-ment manufacturers, in particular AT&T,were alarmed by their eroding share of theequipment market (as noted above). Whilethe portion of the market initially mostaffected was consumer premises equipment(e.g., telephone handsets), U.S. switchingequipment manufacturers saw their marketshare threatened over the long run.9 It iswidely believed that there is significantworld overcapacity in manufacturing of cen-tral office equipment, as the cost of design-ing, developing and producing it rises pre-cipitously.

U.S. equipment manufacturers believe theway to gain access to European telecommu-nications equipment markets is to break thelink between PTOs and their national pre-ferred monopoly suppliers. One way would

be to liberalize services markets, whichwould engender competing service provid-ers, and, in turn, result in more competitiveequipment markets, since each national com-petitor would try to develop its own sourcesof supplies.

In essence, U.S. users want access toforeign markets on nondiscriminatory terms.But large users in the United States cannotachieve their objectives without outsideallies, as changes in foreign regulatory re-gimes will be necessary. Foreign users wantterms and service similar to their U.S.counterparts to protect their competitiveadvantages. Under serious pressure from theEC Commission, beginning notably with its1987 Green Paper on telecommunicationsservices, PTOs now realize that they mustrespond to their large users to keep control oftheir own domestic telecommunications sys-tems. They have begun, reluctantly, to re-duce cross-subsidies to small users in orderto relax barriers to terminal equipment trade.

The United States, the United Kingdom,Japan, Australia, Canada and Sweden havenow introduced some forms of competitionin basic services and in network facilities

Page 138

8 Jonathon David Aronson and Peter F. Cowhey, When Countries Ta/k:/ntemafiona/ Trade in Te/ecomnunicatiomServices (Cambridge, MA: Ballinger Publishing Company, 1988), p. 33.9 AT&T claimed that Siemens, the German telecommunications equipment giant, was sell ing its equipmentin the United States for less than a quarter of what the Deutsche Bundespost Telekom, the Germantelephone operator, was paying, in essence dumping telecommunications switching equipment in theUnited States and cutting into AT&T’s markets. AT&T declines to pursue Siemens in trade courts at thecurrent time. OTA interview with International Trade Administration official, Dec. 4, 1992.


InternationalTrade

Negotiations

(i.e., facilities-based competition).l” Shiftingthe international telecommunications regimetoward competition has been difficult be-cause the traditional monopoly regime inmost countries is supported by institutionaland governmental interests. PTOs arc usu-

ally powerful government ministries thatoften contribute substantial funds to theirgeneral treasuries. Many PTOs assume thatthey would fail to compete effectively withU.S. firms that have had nearly a decade ofexperience in a competitive marketplace.There is usually resistance from a PTO laborforce, which in many European countries isorganized and extremely powerful. Somecountries also see their PTO as important tothe maintenance of national sovereignty.11

Altering the telecommunications regime sig-nificantly will thus require sustained politi-cal dedication and effort. Many EC govern-ments are resisting the efforts of the ECCommission to liberalize telecommunica-tions.

Moving toward GATTAs the consensus on telecommunications

as a natural monopoly began to crode in the1970s, the lack of rules covering trade inservices could be seen as blocking theexpansion of free trade. U.S. banking, tele-communications, data processing, and otherservice firms saw that new technologies putwithin their reach lucrative markets that they

could not go into under the existing traderegime. Thus, a small number of firms, led

by the American International Group (aninsurance company), American Express, Citi-corp, Merrill Lynch, and Sea-Land (a ship-ping firm), began to press for services to beincluded in GATT Congress acceded to thispressure: with the passage of the Trade Actof 1974, Congress for the first time assertedthat services were to be included in thedefinition of international trade, and directedthe Administration to work toward an expan-sion of GATT to include trade in services.

The United States was unable to makemuch headway in the Tokyo Round ofGATT in the 1970s, but this failure led toefforts by the United States to take the issueup in the Organization for Economic Coop-eration and Development (OECD), where itwas believed that a more analytic approachto developing the conceptual frameworkmight be possible. The members of OECDwere persuaded to begin a study of servicetrade issues. Trade-oriented service firmssucceeded in persuading Congress to giveservices equal footing with merchandisetrade in the 1979 Trade Agreements Act,which then led to the 1984 Trade and TariffAct specifying that the President should givehigh priority to the negotiation of multilat-eral and bilateral agreements governing serv-ices trade. 12 By 1982, U.S. efforts came tofruition in the form of an agreement in GATT

Shifting theinternational

telecommunicationsregime toward

competition has beendifficult as poweful

interests in manycountries resist.

‘0 The first three countries have been on the forefront of regulatory change. The United States, the UnitedKingdom, and Japan comprise about 60 percent of the world telecommunicate Ions market. They are also t helargest 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 theprlvatizat Ion of telecommunications authorities in some countries in Eastern and Central Europe attest tothe sigmflcance nations continue to attach to their own telecommunications systems.

‘2 Jonathon Dawd Aronson and Peter F. Cowhey, op. cit., footnote 8, p. 37.

—


As the consensus thattelecommunicationsis a natural monopolybegan to erode, thelack of rules coveringtrade in servicesbecame an impedimentto free trade.

that countries that wished could undertakenational studies of trade in services.13

Political support for including services inan international trading regime based onGATT grew in the mid- 1980s when increas-ing U.S. trade deficits prompted Americanfree trade supporters, concerned with whatthey saw as increasing protectionism, to seeknew allies to protect free trade. In the 1988Trade Act, Congress explicitly includedtelecommunications trade as a priority forU.S. trade negotiations, and specified a set ofgeneral and specific objectives that theUnited States Trade Representative (USTR)was to seek in opening foreign markets toU.S. suppliers of both equipment and serv-ices.14 If U.S. services firms could gain

access to foreign markets more readily, thenU.S. equipment sales would improve as well.Also, if PTO monopolies were forced open,U.S. equipment firms would stand to gainfrom sales to the new competitors. Thecoming together of these interests led to realinnovation in trade policy.

In the U.S. Government, conceptual workbegan in the mid-1980s to clarify the notionof trade in services, hitherto not recognizedas a legitimate subject of multilateral negoti-ation. In economic theory, services weregenerally not thought of as tradeable items;therefore measurement of such services thatwere traded was practically nonexistent.With no conceptual framework or data,governments typically believed that servicestrade was insignificant, and therefore unnec-essary to include in multilateral negotiations.Lacking both adequate measures of trade andconceptual frameworks on which to hangpolicy, support for services exports wasalmost nonexistent. For example, financingof goods trade is well understood, and thereare a variety of Federal programs to promotegoods trade abroad, but services do notreceive financing proportionate to their sig-nificance in overall U.S. exports.15

In the case of telecommunications serv-ices, the negotiation of the U.S.-Israel andU.S.-Canada Free Trade Agreements in the

Page 140

13 The events leading to GATT signatories agreement to consider discussing trade in services is a complexstory. 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 continueto support GATT, see Clyde V. Prestowitz, Jr., Alan Tonelson, and Robert W. Jerome, “The Last Gasp ofGATTism,” 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 oftrade 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. 1,1992.


InternationalTrade

Negotiations

1980s laid much of the intellectual ground-work.16 The concepts of trading telecommu-

nications services and their coverage byGATT principles are now widely embraced,but less than 10 years ago, they were thoughtto be radical innovations.

In general, the United States led the wayto relaxation of restrictions on internationaltelecommunications during the 1980s. Forexample, there was growing interest in theidea of deploying telecommunications satel-lites outside the monopoly internationaltelecommunications satellite consortium, In-telsat. Under U.S. pressure, INTELSATliberalized its process for approving compet-itive satellite systems and, and in return, theUnited States has refrained from attackingIntelsat's exclusive carriage of internationalpublic switched international telephone traf-fic. INMARSAT, the international maritimesatellite communications organization, hasbegun to explore new business opportunitiesconsidered beyond its purview a decade ago,such as aeronautical and Iand-mobile per-sonal communications services.

Choosing a forumThe choice of GATT as the arena for

changing international trade relationshipswith regard to telecommunications was madecarefully. The European PTOs’ resistance tochange had been buttressed by the fact thatthere was only one international forum fordiscussion of telecommunications issues, theInternational Telecommunication Union (ITU).

The ITU has always been the province ofnational telecommunications authorities and,therefore, has never been sympathetic tocompetition. Although the ITU has little realpower in the enforcement of internationalagreements, it is important in creating frame-works in which rules and regulations oper-ate.

OECD has also played an important rolein issues such as privacy, accounting rates,and financial and capital flows, but it isconsidered to reflect the interests only of therichest countries. The United Nations Con-ference on Trade and Development(UNCTAD) has long played a role in coordi-nating international shipping and insuranceservices, and could well have assumed somejurisdiction over telecommunications. Thiswas rebuffed by the industrialized nations,because of the weakness of UNCTAD’sdispute-resolution mechanisms.

GATT was ultimately chosen by theUnited States as the venue for pressing forchanges in the international telecommunica -tions regime, in part due to the perceptionthat only GATT has a dispute-resolutionmechanism with teeth for enforcement. Thechoice of GATT meant that services, andtelecommunications services in particular,had to be cast into terms that the traditionaltrade community would accept; their trada-bility had to be established. Given theinstitutional opposition to change in both theITU, which would lose some control ofinternational telecommunicate ions, and

‘G For a clear and complete discussion of the U.S.-Israel Free Trade Area Agreement, and the role it playedIn 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 generaltreatment 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 wasdriven by user Issues, and was fully supported by USTR. The agency played an im port ant role in elaborat Ingthese Ideas. Page 141

- —. .


Against significantopposition, theUnited States hasconstructed anintellectualframework anda politicalfoundation formore liberal tradein services.

Page 142

within GATT, which had seen its missionsolely in terms of trade in goods, the UnitedStates found it necessary to attempt to effectchanges on two fronts. In these efforts theUnited States was joined by the UnitedKingdom and later by several other coun-tries.

Building an international constituencyAn important series of negotiations affect-

ing telecommunications services trade oc-curred at the ITU World AdministrativeTelegraph and Telephone Conference(WATTC) in 1988 in Melbourne, Austra-lia.17 This conference established a new setof International Telecommunication Regula-tions, which on July 1, 1990, supersededthose written 25 years before. The main issuein Melbourne was how ITU members, nolonger all public telephone operator monop-olies, would deal with the questions ofderegulation, privatization and competition.Many countries feat-cd the United Stateswould induce the ITU to accept regulationsthat would force competition, which wouldrun against their own national policies andmight infringe on national sovereignty.

At the root of U.S. concerns in Melbournewas an interest in facilitating the deploymentof specialized, private intracorporate net-works. ITU regulations have the force ofinternational law, and the ITU Consulta-tive Committee on International Telegraph

and Telephone (CCITT) regulations, thoughvoluntary, are widely adopted by membercountries. The United States wanted to makesure that these regulations did not providecountries with a means to prohibit privatenetworks or competitive service offerings. Acompromise position was adopted (Article9), stating that countries wishing to permitspecial arrangements for value-added serv-ices or private networks could do so. ] 8

Large telecommunications users in theUnited States saw the results of WATTC ascrucial to their ability to conduct theirbusiness internationally and, to underline theimportance of these results, there is nowsome concern that the subsequent GATTtrade in service negotiations may actuallyreduce firms’ scope of activity. Other U.S.service industries, such as construction, mari-time shipping, and air transport, were lessenthusiastic about submitting services to aGATT regime. The U.S. construction indus-try, for example, wants help competing withforeign firms that have access to governmentfinancing for overseas business, and resistsopening the U.S. market to such foreignfirms. Maritime shipping and air transporta-tion have separate trade agreements that settheir trade rules, and these industries tend tosee open markets as disruptive.

The United States also had to convinceother countries to allow services to be put onthe agenda. Many countries wanted to con-

17 G. Russell Pipe, “Telecommunlcatl ons Services: Considerations for Developing Countries In UruguayRound 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. tradeofficials attended these meetings and watched closely to see that t he resulting regulations or resolutions didnot 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 internat ional telecommunicate ions regulatory affairsfor the International Communications Association, a U.S. industry assoaation of international telecommunicationsusers, Nov. 12, 1992.


InternationalTrade

Negotiations

tinue to trade with the United States on apreferential basis, and would go along withthe United States only to an extent.

While Canada, the United Kingdom, Swe-den. and Japan were the earliest supporters ofthe U.S. position on services, some Europeancountries were more reluctant to follow theU.S. lead. France wanted more assurancesbut later become a vigorous supporter of aGATT services agreement. Germany wasconcerned about the future position of theBundespost, the largest German employer,under a new services trade regime. The EChas jurisdiction in Europe on trade, but noton services; however, the EC came tosupport the general idea of trade in servicenegotiations by March 1985.

Once the United States had secured ECsupport for service negotiations, other devel-oping countries had to be persuaded not tooppose the idea. Opening GATT to serviceswas viewed with suspicion by developingcountries, who saw the dominance of theUnited States and other advanced nations inhigh-tech services as a threat. Brazil andIndia led the developing countries in oppos-ing services in GATT. However, free tradegradually came to be seen as potentiallycompatible with economic development ob-jectives. Due to lower unit labor costs,developing countries may have advantagesin some subsectors of services.20 Increasedservice trade also can benefit developingcountries because cheaper inputs, such astelecommunications, can make other eco-nomic activities more competitive. The UnitcdStates was willing to make political conces-

sions to developing countries on interestrates and debt arrangements, and threatenedthat it would turn to bilateral service tradeagreements (which would benefit only thosewho participated) unless GATT was used asa forum. In September 1986, the UnitedStates won its struggle to get services tradeon the agenda.

GATTGATT is a wide-ranging agreement, cov-

ering many countries. For most of its history,GATT dealt with trade in commodities andmerchandise. When it was established in1948, the most fundamental elements ofworld trade were steel. coal, and manufac-tured goods. Services were thought to com-prise an insignificant proportion of worldtrade.

The United States argued that establishedGATT principles of market access, faircompetition, and resolution of trade disputesshould apply to services, including telecom-munications. Because trade in services ismore difficult to measure than trade ingoods, and barriers to trade arc likewisedifficult to define, GATT would be a valua-ble forum for resolving grievances overmarket access. This principle is of funda-mental importance to U.S. negotiators and toU.S. companies.

GATT rules arc designed to be appliedacross al I commodities and signatories.21

This general principle gave rise to a seriousdispute over the U.S. position that servicescould 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


Page 144

argued that since services are so varied in

their characteristics, it was not practical to

negotiate a single set of trade rules for them.Others argued that a general frameworkwould be more likely to lead to liberalizationthan would an approach dealing only withindividual sectors. General principles are atthe heart of GATT’ rules on trade, and theeffort in the services negotiations has been tofind ways to apply these rules, derived fromtrade in goods, to service sectors.22

This argument was resolved with a com-promise that general principles would beagreed on through a separate parallel negoti-ation on services, to take place alongside thenegotiations on trade in goods. This wouldkeep the services agreement from becomingtoo quickly incorporated into GATT withoutgiving countries an opportunity to mitigateits effect on various sectors of their econo-

mies.23 Second, there were to be sector-specific negotiations, codified in annexes,including one for telecommunications. Thiscompromise permitted concerns for generalprinciples and maximum flexibility both tobe satisfied. Finally, it was agreed that therights enumerated in the annex would comeinto force only if there was agreement onterms of access to markets in specific sectors,such as telecommunications services.

Most disagreements among GATT signa-tories stem from governments’ efforts toprotect their domestic industries while at-tempting to gain access to sectors of others’markets. The concepts outlined below wereagreed on in principle at the 1989 UruguayRound Mid-term Review in Montreal. It was

also agreed that the negotiations should nextturn to the application of these generalprinciples to specific sectors. This has beenunderway since 1990.

General principles

NONDISCRIMINATION. Nondiscriminationis a core principle of GATT. It asserts thatany advantage extended to one signatorymust be applied to all signatories, and thatwithdrawal of trading privileges for onecountry must mean withdrawal for all. Thisis the most-favored-nation (MFN) principle.Applying it to international telecommunica-tions services conceivably could requireimportant changes to the way in whichservices arrangements are set up, since thesearrangements (i.e., accounting rates) arenegotiated bilaterally. Existing arrangementswould, however, likely be accepted as preex-isting commitments.

MFN could permit free-riding by somesignatories, who could take advantage ofother countries having already reducing sec-toral trade barriers. Country A may not havea reason to drop its telecommunicationstrade barriers with the United States if theUnited States has already dropped its own.Efforts have been made in successive GATTrounds to reduce this problem by negotiatingconcessions on specific products, as hasoccurred with respect to telecommunicationsprocurement. This aspect of GATT has,however, become less important as countriesincreasingly negotiate bilateral concessionsrather 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.

24 Richard H. Snape, op. cit., footnote 21, p. 8.


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NATIONAL TREATMENT. National treatmentdiffers from MFN in that it requires that therebe no less favorable treatment of foreignfirms than of national firms. Restrictionsmay be imposed, but must apply to all firmsequally, foreign or national. It does not imp] ya requirement to permit unconditional accessto a market. Where no competition bydomestic firms is allowed for a nationalmonopoly, there will also be no competitionby foreign firms.

MARKET ACCESS.the most importantdenotes the extent to

Market access is one ofprinciples of GATT. Itwhich service providers

wishing to offer a service in a foreign marketcan enter without confronting entry barriersor other requirements. The 1988 Montrealdeclaration states that firms may supply theirservices by whatever means they prefer, andespecially identified the telecommunicationssector as covered. For telecommunicationsservices. market access includes:

the right to lease lines for data transmis-sion within and between countries:reasonable prices for services;freedom of choice in the types of equip-ment to attach to the network;reasonable flexibility in interconnectionstandards; andthe right to store and process information.

LIBERALIZATION. Liberalization is oftengrouped with transparency and predictabil-

ity as principles of GATT Liberalization isthe general promotion of trade across bor-ders, especially by means of increased mar-ket access and international competition, butwith allowance for national policy objec-tives. Transparency is the public availabilityof the rules and regulations, including tariffschedules, that govern services in any coun-

try in order to limit the possibility of petty orcovert bureaucratic or political limitations tolegitimate trade. Predictability of trade rulesfollows from the consistent application ofthese principles.

SAFEGUARDS AND EXCEPTlONS. Safeguardsand exceptions from international rules mustbe allowed if political agreement is to beachieved, since countries will generally notagree to bind themselves to inflexible princi-ples. Safeguards and exceptions are permit-ted under GATT rules, and are very impor-tant in the telecommunications sector. Na-tional sovereignty has long been a concern ofnations with respect to their telecommunica-tions networks, and social, and politicalobjectives are often sought through the useof telecommunications networks and pricingstructures. Safeguards and exceptions allowcountries with such concerns to reserveaccess to parts of their markets. Nationsretain the right to regulate to achieve nationalpolicy objectives, with the proviso that suchregulations are consistent with the liberaliza-tion commitments under the framework.

These general principles have been thebasis for negotiations since they were agreedto in 1989. However, their actual formalacceptance is not a foregone conclusion.Some arc especially troublesome as appliedto services.

Trade economists, until recently, gener-ally believed that services were only con-sumable at the point where they are pro-duced, and thus arc limited to domesticmarkets. To the extent that such serviceswere provided by foreign firms, it wasthought that these firms generally are re-quired to invest in or rent local facilities.With the market access principle, GATTcould for the first time play a role in limiting

Non-discriminationand national

treatment areimportant GATTprinciples; their

application totelecommunications

services must benegotiated.

Page 145


Box 7-A. TELECOMMUNICATIONA ANDNATIONAL SOVEREIGNTY

National sovereignty has been a critical issue in control of telecommunications networkssince 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 foreconomic independence and national security (control of communications for militarypurposes). In the late 1970s, the U.S. Department of Defense argued in court that AT&T oughtnot to be divested of its local operating companies on the grounds that this would harmnational 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 isconcerned 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, particularlywhen it involves separate facilities, may provide increased security through having multiplesuppliers 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 ornationalization during wartime, to control the activities of telecommunications firms, whetherdomestic or foreign-owned.

However, national sovereignty is still a significant concern. Israel has recently rejected a bidto privatize its network, for fear of compromising national security and sovereign y, and manydeveloping 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 theirdistinctive cultures. Many experts warn that the huge volume of funds electronicallytransmitted around the globe daily seriously decrease the control a country can exert over itscurrency 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 margins in 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).


national restrictions on foreign investment.25

Market access, apart from direct imports,also deals with the right of foreigners toestablish businesses in a signatory country.This means permission to setup telecommu-nications networks to deliver services andthe right to make investments in such net-works (’‘the right of establishment’ ‘). Sinceservice delivery often involves a specialized

or private network, firms need to be able tocreate and operate corporate networks withminimum hindrance. Services firms alsowant ‘‘the right of nonestablishment," theright to operate without having to set up asubsidiary or other local presence if servicescan be delivered directly. Essentially, firmswant to structure their operations according

Page 146 25 Peter F. Cowhey, op. cit., footnote 6, p. 194.


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to the requirements of the services to beprovided.

Network design is important in deliveringservices, and therefore standards-setting ispart of market access. This implies thatnational networks should have diverse repre-sentation in their standards-setting proc-esses. including input by users as well ascarriers and equipment providers. Currently,the ITU standards process gives great lati-tude for national or regional variation instandards, allowing some nations to closetheir markets behind a wall of nationalstandards. Foreign services providers andequipment companies want to play a moredirect role in standards-setting to preventthis. This notion of vesting large users withwhat amount to minimum rights throughGATT is a new concept.zh

Market access would also require moreGATT oversight of signatory policies ontelecommunications service pricing, cus-tomer service levels, and procedures forredress of grievances in disputes betweenusers and telecommunications operating au-thorities. Treating these as trade issues wouldbenefit large foreign users who depend onlocal telephone companies to make the finalconnection to customers.

The Telecommunications Annex

A GATT Telecommunications Annex wasinformally agreed to by GATT memberstates in spite of the stalled GATT generalnegotiations. Negotiators say that the princi-

ples embodied in this annex were partlyworked out in the course of negotiations ofthe U.S.-Israel and U.S.-Canada Free TradeAgreements, and latcr some of the essentialelements of this annex were adopted in theNorth American Free Trade Agreement(NAFTA). 27

The current telecommunications annex tothe General Agreement on Trade in Serviceshas been called the TelecommunicationsUsers’ Bill of Rights, because it lays out forthe first time explicit rights of users. Thebasic outlines of the annex provisions are:

Transparency must be ensured, includ-ing information on tariffs and conditionsof service, specifications of technical in-terfaces, information on standards organi-zations, information on conditions of at-taching terminal equipment, and licensingor recgistration information.Network access must be assured on rea-sonable and nondiscriminatory terms, andpricing of public telecommunications mustbe cost-oriented. Leased lines will beavailable 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, itmust be noted that some observers sharply disagree that NAFTA telecommunications prowsions areessent I ally t he same as t hose In GATT. The Communlcat Ions Workers of America (CWA) argues that cert ainprowslons of the NAFTA treaty would preempt some State and Federal regulations, In v(olation of theCommunlcatlons Act of 1934. Under NAFTA, CWA argues, States would lose regulatory oversight oversome aspects of domestic telecommumcatlons, and the Federal Communications Comm Isslon in someareas would be Improperly subordinated to executive branch authority. USTR, which negotiated theagreement, argues that loss of such oversight IS exaggerated. See John Morgan, Adm Inistratlve Assistanttot he Secretary-Treasurer, Communlcat ions Workers of America, “Testimony before the U.S. InternationalTrade Commlsslon,” Nov. 17, 1992.

Service providersand equipment

manufacturers aredemanding a direct

role in standards-setting so that

markets won’t beclosed to them

through technicalIncompatibility.


able to attach terminal equipment to thenetwork. Private circuits must be con-nectable to the public-switched network,and users must be permitted to use theirown operating protocols over these net-works.Intracorporate and other communicationsmay move within and pass across na-tional borders of signatory countries,including those aimed at gaining access toforeign databases.

The signing parties also agreed to imposeno conditions on access and use of publicnetworks other than as necessary to safe-guard the public service responsibilities ofsuppliers of public telecommunications net-works or services. Examples are protectingthe technical integrity of the networks ormaking sure that only services that have beenagreed to are supplied.

In the view of large users, the theoreticalapplication of GATT principles to telecom-munications turned out, in the political arenaof trade policy formulation and diplomacy,to be less than perfect. Some argue that U.S.trade negotiators did not push hard enough toextend market access and favorable operat-ing conditions for big users. 28 In particular,companies find that they do not have muchlatitude in making arrangements for capacityresale: while they are given the right to set upnetworks in the first part of the annex, inanother part this right is subject to restric-tions, with the balance appearing to favorcontinued restriction. According to Michael

Nugent of Citicorp, which is a major user ofinternational telecommunications servicesand operator of extensive private corporatenetworks,

[t]he way the annex is shaping up, it

is turning into a bill of rights for thetelephone administrations and for thosewho seek restrictions on usage of thenetwork. 29

In the view of large users, the original U.S.submission, which was not accepted, reflectsa much better compromise between the U.S.Government and industry.3o It containedsubstantial rights for users and service pro-viders, whereas the current draft at manypoints allows a PTO or national regulatorybody to limit access, usage, and bypass, inthe name of safeguarding public servicercsponsibility. 31 Large users, like carriers,also believe that no agreement on telecom-munications is probably better than a badagreement. Some have argued that thiswould permit the negotiation of trade agree-ments without the hindrance of multilateralcoverage.

In contrast to either U.S. industry position,EC believes that MFN under the termsoutlined in the telecommunications annexshould be granted now. This may be drivenby institutional dynamics: EC is trying toincrease its leverage over telecommunica-tions regulation so it can enforce the agree-ment itself, thereby taking control of thisaspect of EC economic regulation frommember states. With this agreement, EC may

2a OTA interviews with service indust ry represent at ives; see also Bob Davis, “GATT Talks Near Collapse atthe 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.


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come to play a more central role on bothtrade and telecommunications regulation.

The problem of basictelecommunications services

The final major issue under discussion inthe current round of talks on telecommunica-tions is market access for basic telephony,specifically the ability of firms to offer basiclong-distance telephone service in foreigncountries. This market is open in the UnitedStates, although not without restrictions.(See ch. 1, box 1-A; for example, foreignfirms cannot hold radio licenses and hencecannot directly offer some forms of long-distance service. ) Long-distance services arenot competitive in most other countries.

The Telecommunications Annex did notresolve the issue of liberalization of basicservices. The United States wants, as amatter of policy, to promote the opening ofother long-distance markets to a level com-parable to its own. Therefore, at the sametime that the draft Telecommunications Annexwas published. USTR proposed in a deroga-tion, or partial exemption from the generalagreement, that as soon as a GATT agree-ment is reached (now scheduled for Decem-ber 1993) the major telecommunicationssignatory parties will seek to agree on termsto liberalize their basic long-distance te-lephony markets over the next 3 years, underconditions set forth by USTR in its proposal.

These conditions basically consisted of com-mitments by foreign governments to breakup their telecommunications monopolies:

There would be no limit on number ofcompetitors.

Foreign firms would be allowed to offerbasic long-distance service through facil-ities-based competition and through re-sale.

Foreign investment would be permitted inbasic long-distance services.There would be transparent, nondiscrimi-natory and cost-based access to basictelecommunications services.There would be a fair and transparentregulatory process overseen by an inde-pendent regulatory body.

If all the conditions were met, the fullbasic long-distance telecommunications mar-ket would be subjected to MFN by allparties. 32 U.S. trade negotiators’ reasoningfor not insisting on extending MFN to basic U.S. negotiatorstelephone service, but including it in the hold out for furfherderogation offer. is that other countries were talks on liberalizingnot willing to liberalize as quickly as U.S. basic long-distancecarriers would like.33 In the absence of services.specific market-access commitments, othercountries would have limited the liberaliza-tion of their markets while attempting toenter the U.S. market. Application of MFNto basic telecommunications services would

32 The GATT negotiating process permits countries to take derogations from specific sections of anagreement, 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 mayhave played a signlf Icant role In weakening t he large users’ posit Ion wlt h USTR, resulting in concessions tothe European PTOS.

33 Inlt Ially, USTR dld support extending MFN to basic services, but changed Its position after strong protestsby AT&T and MCI. Page 149


lead to less market access.14 Linking MFNwith market access as outlined by the U.S.proposal would put pressure on nations tomutually exchange commitments in order toget MFN treatment. It would make openingup telecommunications markets somewhatless difficult for some countries, in that theagreement allows better control over conces-sions to be granted. Finally, the U.S. pro-posal recognizes that MFN works when thereis a large enough number of countriesoffering the same terms of access, therebyminimizing the problem of free riders; theU.S. position is that there is not yet asufficient number of countries to permit thisin telecommunications services.3s

The asymmetry in the degree of marketopenness between the United States andelsewhere is damaging to U.S. domesticinterests, it is argued, and gives away animportant bargaining lever that the UnitedStates might usc in bilateral negotiations toopen other countries’ markets.36 This point isof particular importance to AT&T, whichreportedly vigorously lobbied USTR to re-frain from applying MFN to basic telecom-munications services. 37

Other U.S. long-distance carriers differonly marginally with AT&T on these points.For example, Sprint relies heavily on inter-national leased lines and resale of voiceservices in Europe, and needs an agreementthat allows them to do this easily. All serviceproviders reportedly feel that no agreement

is better than one that would lock open theU.S. market without the possibility of com-peting in others’ markets.

Divisions between the U.S. interexchangecarriers and their major users on the issue ofbasic services reflect different positions onthe amount of competition to be permitted inthe United States, and the degree to whichthe U.S. Federal Communications Commis-sion (FCC) will continue to have the powerto control the U.S. operations of foreigncarriers. After the divestiture of AT&T in1984, when the U.S. telecommunicationsmarket was unilaterally opened (except forlocal service), the FCC retained authorityover foreign carriers (through its section 214filings requirement) in order to protect theinterexchange carriers from unfair foreigncompetition in services. This could occurbecause foreign carriers can cross-subsidizetheir competitive operations from their do-mestic monopoly service operations.

Large telecommunications users, on theother hand, want as much competition aspossible to assure themselves of favorableprices and a wide choice of services. Theywould like foreign carriers to operate freelyin the United States. If basic services aresubject to the GATT agreement, the FCCwill have less ability to restrict foreigncarriers operations in the United States.

This disagreement among countries, how-ever, is symptomatic of a deeper issue: tradenegotiations in GATT reflect nations’ de-

Page 150

~ Ambassador S. Lynn Williams, Deputy U.S. Trade Representative, cited in Craig Johnson, “IS There LifeStill in the Uruguay Round?” Tr’ar?snationa/ Data and Communications Report, vol. 14, No. 2, March/April1991, p. 6.

35 Ambassador S. Lynn Williams, Deput y U.S. Trade Representative, cited in Craig Johnson, op. cit., footnote34.

36 Randolph Lumb, AT&T vice-president for international regulatory affairs, cited in Craig Johnson, op. cit.,footnote 34, p. 6.

37 OTA interviews with representatives from USTR, Nov. 5, 1992.


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sires to retain control of their telecommuni-cations infrastructures for reasons of eco-nomic sovereignty, wealth creation, privacyprotection, civil defense, and national secu-rity. To the extent that countries are con-cerned about loss of sovereignty, they willinflate the definition of basic as opposed toenhanced services in an effort to minimizethe domain of negotiable issues.38

At the core of the debate about deregula-tion and competition and thus about tradea-bility of services lies the question of definingbasic telecommunications services and en-hanced telecommunications services. Theusual technical distinction is simply thatbasic services arc those where messages aredelivered with little or no enhancement bycomputer or other manipulation, whereasvalue-added or enhanced services are thosewhere signals have been manipulated insome way—selected, formatted, processed,stored, forwarded, etc.39 Basic services areassumed to be best provided by monopolyservice providers, to gain economics o fscale. Enhanced services, it is assumed, may

be provided competitively. But efforts toarrive at clear and useful definitions for tradepurposes have encountered a theoretical

difficulty: there is no agreement amongeconomists about the extent to which mod-ern telecommunications are inherently mo-

. 40 There is agreement that somenopolistic.enhanced services can be easily providedcompetitively; the question is how close toplain old telephone service can deregulationcome without decreasing economic or socialwelfare, Countries that wish to protect theirtelecommunications market and traditionaltelecommunications providers seek to defineas much as possible as basic services. Non-telecommunications firms that seek to offernew services seek to define as much activityas possible as enhanced or value-added.

Negotiating GATTHow GATT negotiations work

GATT agreements arc generally arrived atby the mutual exchange of concessionsbetween countries. One country may offer toreduce restrictions on foreign banking, forexample, in exchange for another countrylowering barriers to trade in insurance.While the classical economic theory ofcomparative advantage would emphasize thebenefits of free trade for both the exporting

At the coreof the debate over

telecommunicationsmarket access are

the definitions of“basic” and“enhanced”

services.

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 mhstructureservlcesought 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 competitionin 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 communicationstechnologies, which will Ilkely be international from the outset. See U.S. Congress, Office of TechnologyAssessment, 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 onServices, Trade In Telecommunications Services, doc. no. MTN. GNS/W/52, May 19, 1989, p. 4; JonathanDawd Aronson and Peter F. Cowhey, op. cit., footnote 8, p. 61. The distinction between basic and enhancedor value-added services was adopted essentially to avoid having services t hat can be offered competitivelyhamstrung by regulations designed for common carriers. Page 151


The United Stateshas argued thatservices should beliberalized unlessspecificallyexcluded, whereasother countriesbelieve that servicesshould be restrictedunless specifically/liberalized.

and importing countries, trade barriers arethe consequence of political factors.41

Once the basic framework and the sectoralagreements are struck, the issue in GATTnegotiations becomes the terms under whichaccess to markets will be granted. This is aparticularly sensitive issue where countrieshave monopoly service providers. An agree-ment to open markets under the most-favored-nation principle can hurt countries that haveunilaterally liberalized earlier; MFN canlock open the markets of liberalized coun-tries without obtaining equally open accessto markets in countries that maintain amonopoly.

The United States and other countrieshave taken different approaches to the proce-dures for deciding what should be liberal-ized. The U.S. position, spelled out in detailin its October 23, 1989 proposal, is that everyservices sector should be opened unlessspecifically excluded (and defined in aschedule list). Exclusions or reservationswould be periodically reconsidered and with-drawn when circumstances permitted, Thisflexible approach offers some protection tocountries unwilling to embark on massiveliberalization immediately, but also providesthe opportunity for the United States tocontinue to press for market liberalization inthe future.42 Other countries argued that allservices sectors should be restricted unlessspecifically liberalized. In the U.S. view, thiswould limit the number of items that couldbe reviewed, and would limit the ability of

signatories to press for reopening issues inthe future.

The U.S. position did not prevail. Eachcountry agreed to put on the table itssector-by-sector offers, i.e., those specificliberalizing commitments it was willing tomake. At the same time, each country waspermitted to list restrictions in other coun-tries that it wished to see removed.

Initially, no country except the UnitedStates proposed a list of offers, while theU.S. list of sectors that it wished to restrictwas so short that other countries were visiblyembarrassed. 43 Currently, however, there areoffers on the table from 27 countries (withEC counting as one country) on all sectors ofthe services negotiations, with 20 proposalsspecifically covering telecommunications serv-ices. In the view of some U.S. observers, theoffers merely describe the status quo andpromise little additional liberalization.

The process of deciding what U.S. offerswill be extended, while not strictly speakingsecret, is largely shrouded from public view.By and large it consists of the processdescribed below and in chapter 8, throughwhich USTR solicits input from other gov-ernment agencies and listens to lobbying byvarious firms, industries, and interest groupswith a stake in the outcome, as requiredunder the 1988 Telecommunications TradeAct. With the complexity of the issues, andwith the paucity of data about services(discussed in chapter 8), there is no way fortrade negotiators to assess the likely conse-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 alsoRichard H. Snape, op. cit., footnote 21, pp. 10-11.


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tions, or final agreements. It falls to theprivate sector to analyze the likely costs andbenefits, and then to press for a negotiatingposition that retlects their assessments ofadvantages and disadvantages of any partic-ular position. In this process, those withdirect economic stakes in the outcome mayhave a voice, but there is no direct voice forthe interest of consumers and jobholders inaffected industries.

Formulation of U.S. negotiatingpositions in GATT

Congress is concerned about the degree ofaccess to the U.S. market that is affordedother countries compared to the access thatU.S. firms have overseas. The 1988 TradeAct established telecommunications as anarea of particular concern, and directedUSTR to assume the lead in both telecom-munications equipmcnt and services negoti -ations. Congress’ intervention, exercising itsconstitutional power to regulate foreign tradeand commerce, reflected its suspicion of thefree trade policies of recent Administrationsand the reluctance during those Administra-tions to take action against U.S. tradingpartners who engage in unfair trading prac-tices.

Congress typically does not have muchinteraction with USTR whilc negotiationsarc proceeding. Trade negotiation docu-ments are sometimes classified to preventleaks that could affect the U.S. bargainingposition,44 which tends to make Congressless well-informed about the issues, some ofwhich are highly technical.45

The U.S. negotiating position on trade inservices and telecommunications is remark-

ably clear-cut for a relatively new policyissue. A number of participants note thatsignificant policy innovation has occurred

over the past decade. The fragmentation ofpolicymaking (see chapter 8) sometimesresults in trade policy conflicts, but theseconflicts are usually over details of the tradeagreements or over negotiating strategies,

with only a few over fundamental issues.General principles of transparency, progres-sive liberalization, national treatment, most-favored-nation, nondiscrimination, and mar-ket access all arc relatively noncontroversialfor government. network operators, equip-ment providers, and large users. Governmentand business share a common view of thebenefits of liberalization in trade in services,and business plays a significant role inadvising trade negotiators on their positions.

The trade negotiation positions of theUnited States arc formally the responsibilityof USTR, in conjunction with the TreasuryDepartment. USTR. however, has a smallstaff, and is dependent on other agencies forspecific sector-al expertise. USTR assemblesteams of negotiators from a number ofagencies, such as the International Trade

Administration (ITA) and the National Tele-communications and Information Adminis-tration, both in the Department of Com-merce. The FCC, through its CommonCarrier Bureau, plays an important role,because of its technical expertise. Represen-tatives are also drawn from the Bureau ofCommunications and Information Policy(CIP) at the State Department, although CIPis thought by some trade participants and bysome 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

- . . — - - -- - - - -


Page 154

contribution to trade policy.% The AntitrustDivision of the Department of Justice is alsopart of the team,47 and other agencies some-times participate.

Formal and informal advisory committeesand task forces also are consulted by USTRin developing positions. Formal committeesinclude an Advisory Committee on TradePolicy and Negotiations, composed of chiefexecutive officers (CEOs) of large firms,labor unions, and trade associations; and fivesectoral Policy Advisory Committees, alsodrawn from the CEOs or executive vice-presidents of service companies. There are inaddition 17 Industry Sector Advisory Com-mittees, one of which is devoted to services.

Trade associations and lobbying groupsalso contribute to USTR deliberations. TheU.S. Chamber of Commerce has an Interna-tional Telecommunications Subcommitteethat marshals and elaborates U.S. users’views, as does the U.S. Council for Interna-tional Business. The International Telecom-munications User Group (INTUG), based inLondon, speaks for users of internationaltelecommunications here and in Europe andis a vigorous and outspoken proponent ofliberalization and freer rnarket access. Itsmembership is composed chiefly of nationalcommunications users associations of the

developed countries. A U.S. member is theInternational Communications Association(ICA), the largest U.S. user group, whichitself deals mostly with domestic issues.Another important user group is the Coali-tion of Service Industries (CSI), whichrepresents 14 very large firms.48

In most policy areas industry groups orinterest groups line up behind differentgovernment agencies; these alignments areclear in the area of international telecommu-nications services.49 The natural interest

groups are:the dominant long-distance wrier (AT&T);the alternativc interexchange carriers (MCIand Sprint);the regional Bell holding companies(RBHCs);large users with an interest in operatingprivate networks for themselvcs and oth-ers (such as EDS, IBM); andother, usually smaller users, with an inter-est in service at favorable costs andflexible operating conditions.

It appears that AT&T receives consider-able support from the FCC, USTR and, attimes CIP; the regional Bell operating com-panies from the FCC and NTIA; and alterna-tive long-distance carriers from the FCC and

‘G OTA interviews with senior State Department officials, USTR officials, and with senior staff members of theCommittee on House Foreign Affairs. A proposed reorganization of the State Department (State 2000Reporf) indicates that CIP is to be downgraded and put under the Economics, Business and AgricultureBureau, although the head of Cl P will cent inue to enjoy am bassadorial rank, under exist ing Iegislat ion. Cl Phas 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 rolein negotiations.

48 CSI was started in 1982 at the suggestion of William Brock, U.S. Trade Representative. Because It has only14 members, CSI finds it easier to take strong positions on issues than most other t rade associations, whosemembers often have more cross-cutt Ing interests on t rade issues. On t he ot her hand, because CSI has bot hlarge users and network operators as members, it cannot take a vigorous stand on some other userissues.

49 Chapter 8 has more detailed descriptions of these agencies and their relationships.


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the Justice Department. The large users havestrong support from USTR. The smallerusers have only weak representation, chieflyin the Service industries branch of theInternational Trade Administration.

While the FCC’s deregulatory orientationhas largely benefited the alternative long-distance carriers and their users on thedomestic level, the health of U.S. carriers inthe international arena is a different question,and the FCC seems averse to policies thatcould harm AT&T. NTIA takes a strongpromotional and supportive stance towardU.S. telecommunications operators. particu-larly RBHCs. The agency’s InfrastructureReport and Telecom 2000 Report recognizesthe importance of the domestic infrastructurein promoting economic growth and assertedthat competition is the best means to promotedomestic telecommunications development,but NTIA does not support trade policies thatwould potentially challenge domestic opera-tors. There does not seem to be an explicitNTIA focus on users.50

USTR appears to be strongly influencedby AT&T and by large users, while otherlong-distance carriers and users complainthat USTR pays insufficient heed to theirneeds. 51 Since USTR is at the center ofoverall trade negotiations, its function is toassimilate and aggregate input from a widerange of industries. USTR needs to have

some distance from all interest groups inorder to be able to adjust U.S. policy overall,and horse-trade with other countries. Thismay explain why USTR appears to manyobservers as standoffish.

Nevertheless, users may find a moresympathetic ear at USTR than at the telecom-munications agencies. Users are drawn froma variety of industries, and so are not anatural constituency for telecommunicationsagencies. They typically spread their lobby-ing efforrts, since telecommunications is not

their only regulatory or operating concern.Users’ telecommunications requirements be-yond plain old telephone service are alsorelatively new.

Long-range consequencesof a GATT agreement

The success of GATT negotiations onservices would represent important chal-lenges to the traditional control of nationsover their domestic affairs. With reliance onmarket access principles, trade officials wouldplay a much greater role in international andeven domestic telecommunications policy.This was recognized by Congress in the 1988Telecommunications Trade Act, which gaveUSTR the leading role in multilateral tele-communicate ions trade negotiations.

USTR has already begun to intervene inspecific telecommunications policy areas,even beyond the GATT setting. For exam-ple, USTR halted the FCC’s proposed inter-national simple resale initiative in late 1991,on the grounds that the FCC’s timing onchanging the ‘‘dominant carrier regulation’would interfere with USTR's negotiations inGAIT (The FCC proposed to remove somereporting requirements on foreign carriers

operating in U.S. markets; these carrierswere all treated by the FCC as ‘‘dominant

30 This maybe changing In regard to spect rum management, where NTIA has established a private sectorIlalson office.

“ For example, In OTA interviews with of flclals of the International Communlcatlons Association, July 22,1992,

With reliance onmarket access

principles, tradeofficials play a much

greater role ininternational and

even domestictelecommunications

policy.

Page 155

——— . . . . . . . . . — .-


carriers or monopolies with the power torestrict competition in their home markets. )The FCC complied with USTR’s request todelay its action: later USTR gave the FCC itsapproval to go ahead. Such conflict amongagencies is likely to increase.52

The fact that trade officials have emergedas important players in international tele-communications negotiations is importantbecause their ministries have multiple con-stituencies with less specific focus on tele-communications issues than do telecommu-nications agencies. Some observers believethat trade officials should not be given toomuch authority, as they lack subject matterexpertise. Furthermore, trade officials arcnot necessarily concerned or knowledgeableabout efforts to improve the competitivenessof national industries. In the United States,this responsibility is presumably lodged inNTIA, if anywhere, and NTIA plays alimited role in trade negotiations.

One potential consequence of the increas-ing trade focus of international telecommu-nications may be that as political leadersincreasingly come to preside over interna-

tional telecommunications through trade min-istries, they may negotiate telecommunica-tions trade deals that are suboptimal from thestandpoint of telecommunications users orcarriers, It sometimes is politically expedientto agree to trade policies, such as asymmetri-cal market access, which are harmful to onesegment of a national industry. In otherwords, national competitiveness and freemarkets are not always compatible goals.

The web of negotiating relationships isfurther complicated by the fact that sepa-rately and within GATT, bilateral negotia-tions take place among countries, and not allcountries arc party to all multilateral negotia-tions. The 1988 Trade Act specifically re-quires the President to negotiate access toforeign markets in telecommunications, andauthorizes him to use sanctions if suchaccess is not achieved (section 301). Thesearc necessarily bilateral negotiations:53 par-ties that recently have been identified ashaving serious barriers to U.S. telecommuni-cations trade are South Korea, which hasreduced its trade barriers through bilateralnegotiations, and the European Community,

52 Peter Cowhey argues that this may bring about an equilibrium outcome or stalemate because no one willhave 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 EC Ut ilities Directive, an equtpment issue. Thisdlrectlve went Into effect on Jan. 1,1993, after the failure to reach agreement with the United States on theGATT Government Procurement Code. It requires that EC countries have open bidding proceciures, but inthe absence of an international or bilateral agreement they are to give preference to EC firms inprocurements. A 50 percent EC-content requirement was established, with a 3 percent price differentialfavoring EC companies.

The United States is seeking the elimination of such Buy National rules in the GATT GovernmentProcurement Code negotiations. See United States, Off Ice of the United States Trade Representative, 1992Nationa/ Trade Estimate Repori cm Foreign Trade Barriers (Washington, DC: U.S. Government PrintingOffice, 1992), pp. 75-76. Agreement in GATT would provide rules specifying open, nondiscriminatoryprocurement. Furthermore, the United States and the EC disagree on the status of the Bell operatingcompanies 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 aservice 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 ECwould waive the discriminatory provisions of the Utilities Directive.


InternationalTrade

Negotiations

which has not. Furthermore, with the growthin importance of computing and other elec-tronic media in telecommunications, a com-plex network of standards organizations nowhas a role in telecommunications policydebates. sq

Given that countries have differing tele-communications history, politics. and infra-structure, they will not all move smoothly orat the same pace from the stable domcsticmonopoly/ITU model toward a relativelystable competitive market. Some may exper-iment with a variety of telecommunicationsstructures and policies. This could result inpersistent failure to eliminate obstacles toefficient interconnection of equipment andnetworks, which could hurt U.S. firms wish-ing to take advantage of their installedtechnical base, their experience, and theirestablished operating procedures. This inturn may affect the competitiveness of U.S.companies in areas of the world that follow-ing a telecommunications trade path differ--ent from that favored by the United States.

Are there clear winners and losers in thechanges occurring in global telecommunica-

tions services trade patterns’? So far, thereappear to be few losers. Although much ofthe change came at the behest of largetelecommunications users, the cost reduc-tions and improved flexibility in operatingterms seems to have significant spilloverbenefits for residential and small and me-dium business users. Computer equipmentand electronics firms and enhanced servicesproviders have benefited by lowcr costs andimproved terms of access. Although manyservices providers arc now saying that noGATT agreement is better than a bad agree-ment (i.e., one that would lock open the U.S.market without giving them full rights tocompete in others’ markets), it is likely thatthey will acquiesce in an agreement that hasbroad political support. Even organized labor,which may have less bargaining power withthe opening up of the telecommunicationssystem, expects to endorse the Uruguay

Round GATT agreement, when and if it isfinalized. 55

‘“ 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.

HowTelecommunicationsPolicy IsMade

8C H A P T E R

The fragmentationof the policymakingstructure invites“forum shopping. ”

Page 159

IT IS DIFFICULT TO DEFINE U.S. POLICY FOR

INTERNATIONAL TELECOMMUNICATIONS, and evenmore difficult to identify the locus of respon-sibility for its development. Internationaltelecommunications policy was for manyyears an incidental byproduct of domestictelecommunications policy; now it is asubheading in foreign trade negotiations.Yet, the political and economic relationshipsof the United States with the rest of the worlddepend heavily on global networks—fordiplomatic and military communications; fordirecting business, coordinating trade, andsettling financial transactions; and for themyriad cooperative efforts ranging fromenvironmental amelioration to disaster relief

tiations could be thrown awry as a result ofunilateral actions by regulators. Some pri-vate sector observers fear that with negotia-tors powerfully motivated to reach agree-ment in the waning days of the current roundof the General Agreement on Trade andTariffs (GATT), there is an increasing possi-bility that telecommunications objectivesmight be sacrificed for unrelated trade objec-tives.

The fragmentation of the policymakingstructure provides an opportunity for ‘forumshopping’ in which competing interests canplay one agency against another. In practice,it has created a situation in which theinterests and demands of major telecommu-

that arc made necessary by today’s highlyinterdependent global community.

This chapter first describes the govern-mental structure is responsible for formulat-ing international telecommunications pol-icy, and then relates this to the structure fordeveloping trade policy. At best, telecom-munications decisionmaking works well be-cause it includes many fora for the expres-sion of competing interests, and because ofthe commitment and cooperation of experi-enced people whose responsibilities haveover time spanned both industry and govern-ment. At worst, decisions about internationaltelecommunications are a secondary byprod-uct of international agreements reached inbroad trade negotiations, and as a result maybe unidimensional and shortsighted. Broadertelecommunications objectives may be ig-nored. Conversely, international trade nego-

nications providers and some large users arewell represented, with relatively little atten-tion to the interests of other users, includingsmall businesses.1 The public as a wholeappears to be considered chiefly as second-ary consumers whose only recognized inter-est is the relative prices of goods and servicesdelivered with the aid of telecommunica-tions.

Policy makers, regulators, trade negotia-tors, and consumer interests groups alike arcfurther handicapped by the often inadequate,incomplete, or misleading data related totelecommunications. Especially in the areaof competitive trade in telecommunicationsservices, a growing need for better data hasbeen frustrated first by single-minded adher-ence to a goal of reducing industry ‘‘paper-work burden, ’ and more recently by thenecessity of budget trimming.

‘ The Federal Communications Commission (FCC) is supposed to speak for small users and consumers informulat mg telecommunications regulatory policy. The White House Bureau of Consumer Affairs ES used bythe Off Ice of the United States Trade Representative to represent consumer interests In its consultativegroups advising on telecommunications trade negotiations positions. The Consumer Federation of Americamay also part Iclpate, along with the Communications Workers of Amertca (a labor union).

.- — -— . . . -- - -. - - - -- — -


Page 160

The telecommunicationspolicymaking structure

In 1978, President Carter removed anexisting Office of Telecommunications Pol-icy from the Executive Office, and byExecutive Order combined it with an Officeof Telecommunications in the Department ofCommerce to form the National Telecom-munications and Information Administra-tion (NTIA).

This move effectively signaled a changein perspectives on telecommunications. "Shift-ing communications policy functions fromthe White House to the Commerce Depart-ment in 1978 was an effort to depoliticizecommunications policy, acknowledges pol-icy analyst Howard Symons, ‘‘. . .howevcr,the move also appeared to diminish theimportance of communications policy.The existence of an Office of Telecommuni-cations Po] icy in the White House hadindicated symbolically that telecommunica-tions was a core element in national infra-structure and a uniquely valuable tool forpolicy implementation (although in realitythis concept had seldom been exercised). ~The move to the Department of Commerce,together with the beginning of deregulation,meant that telecommunications was hence-forth viewed primarily as an industry pro-ducing goods and services for business users.“The United States is unique in regardingtelecommunications primarily as a tradefactor rather than as a social policy tool,”

acknowledges the State Department’s firstTelecommunications Coordinator.4

Four decades earlier, the 1934 Communi-cations Act, which established the FederalCommunications Commission (FCC), hadset forth the guiding Federal communica-tions policy as one of

. . . regulating interstate and foreigncommerce in communications by wireand radio so as to make available, sofar as possible, to all the people of theUnited States a rapid, efficient, Nation-

wide, and world-wide wire and radiocommunications service with adequatefacilities at reasonable charges, for thepurpose of the national defense, [and)for the purpose of promoting safety oflife and property . . . . [47 U.S. C, 151].

Commerce, national defense, and mainte-nance of civil order provided the rationale forFederal responsibilities for telecommunica-tions (otherwise a state regulatory responsi-bility). But the major thrust of Federal policywas to achieve universal service through theregulation of rates, service offerings, andinfrastructure development. That goal essen-tially secured. in 1978 the driving policygoals became deregulation and opening upmarkets for equipment and services. Thiseffort intensified after the Democratic Ad-ministration was succeeded by a RepublicanAdministration in 1981.

From 1934 until the mid-l980s, U.S.telecommunications policy was largely gen-

2 Howard J. Symons, “The Communicant ions Policy Process,” in Paula R. Newberg (cd.), New Directions inTe/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 ofthe move to deregulat e telecommunicate ions, and that It was ef feet ive because it was In the Execut Ive Off Iceand 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 scusslonwith OTA staff.

HowTelecommunications

Policy IsMade

Carriers

I

Figure 8-1.Us.

TelecommunicationsPolicy Structure

Schools,hospitals

ISmall

I businesses

Residentialcustomers


—— . . . . . -. . - -- - - — - - - - -


In practice,international/teleommunicationspolicy haseffectivelybeen made inthe Office of theUnited StatesTradeRepresentative.

Page 162

erated within the framework of the FCC’srelationship with the regulated monopoly,AT&T. Since the divestiture of AT&T in1984, a “troika’ of Federal agencies hasformally been responsible for telecommuni-cations policy, through an often uneasyprocess of consultation and negotiation. Thethree agencies are NTIA in the Departmentof Commerce, the Bureau of InternationalCommunications and Information Policy(CIP) in the Department of State, and theFCC, which is not part of the executivebranch, as are the other two, but is anindependent regulatory commission. (TheFCC’s five-member bipartisan Commissionis, however, appointed by the President.) Inpractice, international telecommunicationspolicy has effectively been made by theOffice of the United States Trade Represen-tative (USTR).

In the United States, trade policy—liketelecommunications policy—involves sev-eral agencies: USTR within the ExecutiveOffice of the President, the Department ofCommerce and its International Trade Ad-ministration (ITA), the Department of State,and somewhat more peripherally, the De-partment of Justice, the Department of theTreasury, and at times, the Department ofDefense. s

Increasingly the responsibilities of themultiagency telecommunications policy-making structure interact with and overlapthose of the multiagency trade policymakingstructure. USTR emphasizes that representa-tives of NTIA, CIP, and the FCC ‘‘have, over

the years, played an active and important rolein the development and negotiations oftelecommunications trade policy. ’ At aminimum, this puts USTR in the de factoposition of reconciling or coordinating thethree telecommunications agencies’ some-times divergent positions.

Some participants see the fragmentationof policymaking within each structure andthe uncertain borders between the telecom-munications and trade policy structures asserious problems. Others see the same char-acteristics as a positive benefit that allows forflexibility and representation of diverse in-terests. At best, some crucial aspects offuture international telecommunications es-cape all of these agencies. The complex andhighly controversial issues surrounding Fed-eral sponsorship of a national high-speeddata network-i. e., the National Researchand Education Network (NREN)—-have de-veloped in or been contested by the NationalScience Foundation, the Department of De-fense, the Department of Energy, and theNational Aeronautics and Space Administra-tion, but telecommunications agencies havebeen on the sidelines.

National Telecommunications andInformation Administration

NTIA, within the Department of Com-merce, is supposed to lead in formulatingtelecommunications policy and to speak forthe Administration to Congress. It commentson FCC proceedings either singly or asrepresenting Executive branch agencies. It is

5 In addition, the U.S. International Trade Commission provides studies, reports, and recommendationsinvolving international trade and tariffs to the President and Congress. It has a number of statutory functionsrelated to adm inistration and enforcement oft rade agreements, customs laws, and tariff acts. The Bureauof Export Administration in the Department of Commerce administers export controls, including exportlicensing and control or decontrol of technologies that may Impinge on national securlt y. Neither of thesebodies is considered to develop or initiate trade policy.


Policy IsMade

a key member of U.S. delegations in variousinternational fora. NTIA also manages theFederal Government’s use of the electro-magnetic spectrum. (This duty, in fact,constitutes by far the largest part of NTIA’sworkload as measured by staff assignments.)6

NTIA’s Office of International Affairsprepares position papers on internationaltrade issues, monitors private sector devel-opment of technical standards, works withthe Departments of State and Defense onsubmarine cable issues, and overseesCOMSAT and its activities in INTELSATand INMARSAT. Its people serve on U.S.trade and regulatory delegations to foreigngovernments and international organizationssuch as the International Telecommunica-tions Union (ITU) and Organization forEconomic Cooperation and Development(OECD). A major part of the work of theOffice is in preparing for international meet-ings; this preparation is carried on in closeliaison with industry, and to a lesser extentwith major user groups.

Does NTIA “initiate” policies’? Thatdepends in part on the activism and theagenda of the Assistant Secretary of Com-merce for Communications and information,who is also the Administrator of NTIA. TheAdministrator may, for example, initiate a“public inquiry’ on policy issues, in whichindustry and other groups will present theiroften conflicting viewpoints. The publicinquiry may then be followed up with amajor report, such as the Infrastructure

Report and the Spectrum Report, both in1991.7

For the most part, however, the agency’sagenda is set reactively, through respondingto initiatives of other agencies within theDepartment of Commerce and other parts ofthe Administration, or to the expressedconcerns of the telecommunications indus-try. NTIA constantly receives and respondsto questions, requests, or initiatives fromother agencies or from industry lobbyists.NTIA’s attention has generally been concen-trated on domestic issues, and particularly onthe thrust toward deregulation, since that iswhere most of the interest of the telecommu-nications industry is directed, and the agencyhas paid relatively little attention to interna-ational issues. When trade negotiations areimpending, however. NTIA will be asked toprepare a draft issue paper for the Office ofUSTR, or to review trade position papersprepared by USTR or other agencies, to helpin developing a bargaining position.

The approach to all of these activities isshaped by NTIA’s commitment to fosteringthe U.S. telecommunications industry, pro-moting competition in domestic markets,and opening greater access to foreign mar-kets. Trade issues are not in fact a part ofNTIA’s legislative mandate, but the agencyprovides technical expertise in support of theagencies that take the lead in trade negotia-tions, and speaks to them for its industryconstituents.

fi Other mandated responslbllltles include administering Federal grants to public radio and television andoperating the government’s telecommunications research and engineering laboratory, the Institute forTelecommunications 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 ReportTe/ecornrnunicafiorrs m the Age of /n/orrnah’on, October 1991; and U.S. Spectrum Po/icy: Agenda for theFuture, 1991. Page 163

. - -- - - - —


NTIA’s explicit policy has been to “en-courage further infrastructure developmentby removing government-imposed barriersto competition and efficient investment intelecommunications facilities and markets."8

It was the position of the last two (Reaganand Bush) Administrations that ‘‘govcm-ment policies should not attempt to direct theselection of particular technologies or thepace of infrastructure investment by or forprivate-sector firms.’”) NTIA applied thesame deregulatory position to internationalmarkets, pressing other countries to allowfacilities-based competition. This explicitlystated position has the possible disadvantageof limiting or removing NTIA's maneuver indeveloping policy or in responding to dereg-ulatory demands of industry, or initiatives byU.S. agencies or other countries in standards-development or trade-agreement negotiatingsessions. 10 NTIA tends to be seen in both

domestic and international fora as represent-ing the positions of the telecommunicationsindustry rather than as a policy-developmentorgan.

Henry Geller, a former Assistant Secretaryof Commerce for Communications and In-formation and NTIA Administrator, has saidthat “. . . in practice, NTIA has encounteredconsiderable difficulties. It cannot inple-

ment the policies it proposes and has hadproblems establishing a partnership withother agencies, particularly with the Depart-ment of State. 11

On both domestic and international issues,NTIA’s position within the Department ofCommerce, not generally a powerful depart-ment, has in the past been a handicap. NTIAhad trouble getting attention at a high levelof the last two Administrations because therewas no telecommunications spokesman inthe Executive Office. This may change underthe present Administration, especially sinceVice President Gore has long demonstrateda strong interest in telecommunications, butthere have been no clear signals of strength-ened NTIA effectiveness as yet.

Federal Communications Commission

The FCC is the source as well as the meansof implementation of much telecommunica-tions policy, although as an independentregulatory commission, it is not part of theexecutive branch policymaking structure.The FCC was created by the Communica-tions Act of 1934 to regulate interstate andforeign communications. The 1934 Act madeit responsible for the development and regu-lation of both radio and wire services, and its

Page 164

E Under the Reagan and Bush Administrations, NTIA advocated allowing the Bell operating companies toenter the information services and equipment manufacturing markets, allowlng telephone companies toenter the cable television market, and allowlng competition in the local exchange; and opposed legislationderegulating 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 onmatters 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., footnote2, p. 320.


Policy IsMade

authority now extends to television, satellite,and cable as well.12

The Commission is composed of fivemembers appointed by the President, withthe approval of the Senate; no more thanthree of the five members can be from thesame party. The President designates one ofthe members as Chairman. The Chairmanusually plays a dominant role in Commis-sion decisionmaking.

The Common Carrier Bureau regulatesinternational and foreign communicationsservices provided by common carrier.13 Otherbureaus and offices also participate in inter-national issues and organizations.14

The Common Carrier Bureau has alwaysoverwhelmingly emphasized domestic inter-state communications with relatively littlcattention to international aspects. This maybe changing, as evidenced by the concertedattention recently given to accounting rates,the dominant carrier status for internationalfirms. and other issues discussed in this

report. The FCC is considered by many in theindustry to have ‘‘unilaterally opened theU.S. market to foreigners, and it is criticizedfor doing so without determining whetherthere is the same degree of openness inforeign markets. For example, the FCC wascriticized for allowing Spains Telefonica tobuy the Puerto Rico Telephone Company inearly 1993. The FCC has managed to main-tain its authority over foreign operators inthis country.

The Commission has a Director of Inter-national Communications, who is responsi-ble for representing it in international foraand for coordinating FCC activities andpolicies that relate to international issues.The International Communications Officecarries out these coordinating functions, butis small and relatively new. It lacks the cloutcommanded by the largcr Common CarrierBureau, which can bring to trade negotia-tions, for example, greater technical and

legal expertise and experience.15

Under the last twoAdministrations

there was notelecommunications

spokesman jn theExecutive Office;this may change.

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

13 A “common carrier” IS an organization that prowdes transm ission communicant ions serwces to t he publicfor 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 radioincludlng 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 has responsiblllt y for frequency allocat ion and technical standards, andthe 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] technicaland legal expertise and experience” oft he Bureaus. Trade Issues often cut across a num ber of bureaus andoffices 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

. . — ----


The Departmentof State was anunlikely site forcoordination ofinternationaltelecommunicationspolicy among 14Federal agencies.

Because of the way the Commission isappointed, it clearly reflects the party andpolicy orientation of the President.16 Never-theless the FCC’s relative independence isattested to by the fact that it is sometimesspoken of within the executive branch agen-cies as “a congressional agency. ’ FCCdecisions, as directives of an independentregulatory agency, are not subject to presi-dential veto, yet these decisions may haveimportant international ramifications (as inrecent FCC decisions on accounting rates).Critics speak of a ‘‘presidential veto issue,’arguing that ‘‘when FCC gets into interna-tional policy it is intruding on Presidentialturf. ‘ ‘‘7 This is a source of some strainbetween the FCC and executive agencies.

The Department of State and theBureau of Communications andInformation Policy

After the Office of Information Policy wastaken out of the White House, it became clearthat some mechanism was needed to “coor-dinate’’—or mediate-–between NTIA, theFCC, and other agencies sometimes in-volved in telecommunications policy issues.Tension often ran high between NTIA, withits pronounced pro-competition stance, andthe FCC, which some critics (in the execu-tive branch) said was less wholly committedto free market ideas, at least where thesewould diminish its own authority.

The Administration that took office in1981 reportedly did not want dominance in

Page 166

setting telecommunications policy lodgedeither in the FCC, a nonexecutive agency, orin the Department of Commerce, 18 which fellwithin the oversight of active congressionalcommittees that would have their own tele-communications agenda.

The position of U.S. Coordinator forInternational Communications and Informa-tion Policy was therefore created by statutein 1983, placed in the State Department, andassigned the rank of Ambassador. The Bu-reau of Communications and InformationPolicy was established by the Department tosupport this position. The Coordinator wasto chair a Senior Interagency Group thatwould be the primary coordination mecha-nism for about 14 Federal agencies andsubagencies.

The Department of State was an unlikelysite for coordination of telecommunicationspolicy, since the desired coordination was toapply to domestic as well as internationalissues and since the Department has neverbeen a hospitable environment for scientificor technological initiatives. Its science-related divisions have not had much poweror prestige. However, this location could bejustified on the grounds that it was necessaryfor the United States to speak with one voicein international teleccommunications fora. Italso gave leaders of congressional trade andforeign affairs committees some oversightover international telecommunications (theHouse, in 1983, was controlled by theDemocratic 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 beonly 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.

18 Interview with Dougan, cited, footnote 17, Nov. 28, 1990.


Policy IsMade

held the Senate and the White House).Finally, the State Department had the advan-tage of being somewhat removcd from the

internecine struggles cm the domestic sceneover divestiture and deregulation.

CIP is designated in legislation as theprincipal adviser to the Secretary of State oninternational telecommunications policy is-sues, and as ‘ ‘coordinator with other U.S.Government agencies and the private sectorin the formulation and implementation ofinternational policies relating to a widc rangeof rapidly evolving communications andinformation technologies."19 The Bureau isthe official overseas spokesman on telecom-munications issues and to some extent ontrade issues related to telecommunications.CIP is not however empowered to negotiatelegally binding trade treaties, as is USTR.

In reality, CIP acts in international fora asthe spokesperson and facilitator for teamsmade up of industry reprentatives andexperts drawn from other Federal agencies.20

CIP has a very small staff and little technicalexpertise: State Department policy has beento depend on industry expertise. On thesenational delegations, there may be “usergroup" representation, drawn chiefly from

multinational corporations that rely heavilyon telecommunications networks, but thereis no provision for direct representation of amore general public interest except as maybe assumed to be represented by the FCC.

Only in its first few years did CIP activelyexereise its role of coordinating Federalcommunications policy development amongthe various agencies. It now confines itselfchiefly to an administrative role in coordi-nating participation in international confer-ences, and is not considered by other agen-cies to be a serious factor in developingpolicy positions. It has been ineffective as agenerator, implementor, or articulator ofpolicy. The real coordination among agen-cies on telecommunications policy comesabout less fomally, through the interactionsof a relatively small group of people whohave, over the last 10 or 12 years, movedabout the Washington telecommunicationsscene, holding positions in two or moreagencies and in the Washington offices of

telecommunications firms and industry asso-c i at ions.21

The Department of Defense (DOD), witha broad mandate to protect national security,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 TechnologyAssessment) and 24 from Industry and law firms. (The Agency for International Development wasrepresent 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 peoplewere sent by the long-distance common carriers and Bell operating companies, mostly from theirWashington 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 15years. Many more have served at lower levels In two or more of the agencies. This is neither unexpectedor negat Ive; there are a I Im Ited number of people with the required expert lse wi Illng to work In governmentrather than In Industry, with Its higher pay.

—. . . . . .- . - - - -


its own,22 and as a major user of public

telecommunications networks, often has astrong influence over telecommunicationspolicy. DOD opposed the divestiture ofAT&T on grounds of national security, butwas overruled. It has been responsible forsome restrictions on the export of telecom-munications equipment. DOD opposed theseparate satellite policy pushed by the FCCand NTIA; this dispute was mediated withinthe White House, (During the first years ofCIP there was regular coordination betweenthe Communications Coordinator and DOD,the CIA, and the National Security Adminis-tration, but this was allowed to lapse.)

The Department of Justice is almost al-ways present at trade negotiations. Theantitrust division of the Department of Jus-tice has been deeply involved in promulgat-ing and implementing domestic telecommu-nications policies since divestiture. While itsjudgments do not enjoy extra-territoriality asa general rule, it continues to affect theoverseas as well as domestic behavior ofU.S. telecommunications firms and servicesproviders because of the respect, or fear, withwhich it is regarded by corporate lawyers.

Increasingly there is a strong need forbetter coordination not only among thoseagencies that deal with telecommunicationspolicy but between them and agencies thatdevelop and implement trade policies. As thetelecommunications industry is restructuredbecause of deregulation, globalization, andtechnological change, the need for an im-proved policymaking structure will becomemore pressing. Because of the inclusion of

trade in services in the current round ofGATT negotiations and the special attentionpaid to international telecommunications inthe integration efforts of the European Com-munity, and also because of internationaldisagreements over accounting rates and avariety of other issues identified in thisreport, there is increasing interaction be-tween telecommunications and trade agen-cies. The need for coordination is alsogreater, to make sure that these interactionsare based on a consistent, collectively devel-oped policy that takes into account the full

range of national telecommunications goals

and objectives.

The policymaking structure fortrade in services

Trade policy, because of its important rolein national economic affairs, is assumed tobe made at the top levels of government, inCongress and in the Executive Office. TheConstitution allocates to Congress the power" . . . to regulate Commerce will foreignNations. . .’ (Art. I, sec. 8), but the details oftrade policy implementation, and even itsdevelopment, arc largely generated in theexecutive branch. For more than a decadeU.S. trade policy has been strongly aimed atbroad access to markets and the progressivedismantling of trade barriers. The source ofthis policy appears to have been rooted in abroad, although not universal, political con-sensus, analytically supported within theExecutive Office by economic advisers to

Page 168

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 withinthe military system.


Policy IsMade

recent President\.~? The Department of Com-merce helps to provide background infoma-tion and contributes to the development ofpolicy. but the lead agency for the UnitedStates in all foreign trade negotiations andagreements is USTR.

United States Trade Representative

All foreign trade negotiations, at least intheory. are conducted by USTR. For tele-communications, the 1988 Trade Act specif-ically gives USTR the statutory mandate toconduct all trade talks. USTR negotiatorswork from position negociated among con-tending domestic interest groups and usuallyapproved at the upper (political) levels of thegovernment. These policy positions beginwith paper-s prepared by USTR in consulta-tion with various agencies. In the case oftelecommunications services or equipmentissues, NT I A, the FCC, CIP, and sometimesthe Department of Justice, as well as trade -related agencies. will be involved. USTRpoints out that the diverse inputs to fomulat-ing telecommunications trade policy arebeneficial because they reflect the highlydiverse nature of the current telecommunica-tions environment and permit relevantconstituency groups to be represented intrade policy development.

Where there are incconsistencies or disa-greements in the positions of the agencies,these problems are mostly worked out ininformal meetings and telephone communi-cations. If they recquirc slightly more formalnegotiations they may go before an intera-gency Trade Policy Staff Committee (TPSC).Neither NTIA nor the FCC has a seat on this

committee, FCC because it is not an Execu-tive agency. NTIA because the Departmentof Commerce is represented by the Interna-tional Trade Administration. Representa-tives of both NTIA and the FCC attendmeetings as observers, and USTR empha-sizes that ‘‘for a number of years bothagencies have played key roles i n developingand participating in trade policy negotia-t ions.

TPSC is described by some inside observ-ers as ‘‘a central point for policy formula-tion." Thus. it matters that the two telecom-munications agencies do not have a strongvoice in TPSC deliberations. For example,according to some participants or observers,there have been times when internationalbilateral discussions being pursued by thetelecommunications” agencies were authori-tatively ‘‘subordinated to GATT’ by theTPRC. Even at the level of the TPRC thereis sometimes strong and persistent inter-agcncy disagreement; there will then benegotiations at the agency-head or AssistantSecretary level, where an Interagency TradePolicy Rview Group resolves issues amongDepartments.

For international negotiations on tradeissues, whether they are to be bilateral ormultilateral (for example, the Canadian FreeTradc Agreement and GATT negotiations),USTR will assemble a negotiating team. Thenegotiations are led by USTR staffcrs, whoarc not sector-specific specialists; this makesthe team as a whole and its associated expertsvery important. For trade issues involvingtelecommunications services. the delegationwould typically includc people from the

The leadagency

for allforeign trade

negotiations-includingthose on

telecommunications—is USTR.

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 anopposing point of wew, see Clyde V. Prestowltz, Jr., Alan Tonelson, and Robert W. Jerome, “The Last Gaspof GATTlsm,” Harvard .9uslr?ess Rewew, March-Aprl I 1991,


Page 170

FCC’s Common Carrier Bureau and Interna-tional Communications Office, from NTIA,from ITA’s Office of Telecommunications,from the State Department’s CIP and Eco-nomics and Business Bureau, and from theDepartment of Justice. Industry representa-tives are consulted but are not on the officialdelegation.

Private sector representatives (both tele-communications firms and large users) areconsulted throughout the process of develop-ing USTR’s negotiating positions. USTRhas a formal and informal industry liaisonstructure and holds frequent meetings with across-section of industry representatives. Forexample, on telecommunications issues, meet-ings may be called to try to develop aconsensus among representatives of long-distance carriers, Bell operating companies,enhanced services providers, and other usergroups as well as the formally constitutedServices Policy Advisory Committee. TheU.S. Chamber of Commerce has a TaskForce on Telecommunications, and both itand the U.S. Council on International Busi-ness frequently advise and counsel USTR.Inevitably, however, tensions among com-petitors and between sectors of the industryare reflected in wrangles about the negotiat-ing positions of USTR.

State regulators, the Consumer Federationof America, and the Communications Work-ers of America (a labor union) also areconsulted in developing USTR negotiatingpositions. However, some of their represen-tatives complain that their participation inthe process is usually invited well after thecritical elements in the negotiating position

have been worked out between USTR, carri-ers, and large users.

International Trade AdministrationIn development of foreign trade policy,

the Department of Commerce acts as liaisonbetween industry and government, and inmost cases, is assumed to speak for industryto the rest of government. This is formalizedat the top levels of the Department in 25Industry Sector Advisory Committees (ISACs),jointly administered by the Department ofCommerce and USTR. Among these areISAC V, which deals with electronics, in-cluding telecommunications equipment, andISAC XIII, which deals with services, in-cluding telecommunications services. Al-

though the United States, as well as otheradvanced industrial countries, is often said tohave a “services’ economy, at least untilrecently services were presumed to play aminor role in export trade. This may explainwhy only 1 of 25 ISACs deals with theservices sector, in spite of its wide diversity.

The mission of ITA, within the Depart-ment of Commerce, is to aid U.S. companiesin developing and participating in exporttrade by promotional events, provision ofanalytical services, and other forms of adviceand assistance. ITA interfaces with compa-nies and industry associations through con-stant meetings, telephone calls, etc.24

ITA has a Foreign Commercial Service,an International Economic Policy Section(with country desks), an Import Administra-tion Section, and a Trade DevelopmentSection. Included in the latter is an Office ofTelecommunications, with a staff of about

24 Much of the descriptions in this section rely on interviews with ITA personnel, including RogerStechschulte, Director of the Trade Development Section (Aug. 14, 1991), and Ivan Shefrin, Industry TradeSpecialist in the Office of Telecommunications (Aug. 14, 1991 and June 23, 1992).


Policy IsMade

15 people. Its tasks include counselingcompanies on the potential and characteris-tics of foreign markets, helping firms com-pete on major telecommunications procure-ments, preparing competitive assessments ofindustry sectors, and writing chapter-s ontelecommunications for the Department ofCommerce’s annual Industrial Outlook andother trade-related reports. 25 Other assign-ments, chiefly of an analytical nature, mayoriginate in requests from the Secretary,other Federal agencies, or industry, to help indeveloping policy positions within ITA andupper levels of the Department of Com-merce,

In the first years of the communicationsCoordinator and the State Departments CIP,a formal telecommunications attache pro-gram was established in key foreign ports tosupport trade in telecmmunications serv-ices and work closely with ITA, This pro-

gram, along with some other activities of

CIP, has been allowed to lapse.

The adequacy of datafor decisionmaking

The fragmentation of policy responsibilitybecomes more troublesome because it iscompounded by lack of data needed tomonitor trends and detect problems.26 Thegreat expansion of international trade inservices increases the need for data to assessits status and outlook. It has, however, longbeen recognizcd that the dimensions ofinternational trade in services are poorlydefined, the real volume and value of trans-act ions is uncertain, and the data available toanalysts and decisionmakers is inadequate.27

Moreover, since the Paperwork ReductionAct of 1980, Federal policy has been toreduce the amount of data reporting required

Data oninternationalservice trade

are poor.

25 The analysts use data from the Department of Commerce’s Bureau of Economic Analysis and Bureau ofthe Census, and from other sources; the ITA Itself is not a collector of primary data.

26A report prepared for the Off Ice of Technology Assessment Ident I f led man y I im i tat ions and inadequaciesin data relevant to telecommunications issues. Louis Feldner, Feldner Telecom Consult Ing, “The Status ofData 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 director telephone interviews with current and former Federal agency employees, representatives of majorcarriers, 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 TradeStatistics, National Research Council, 1992. Theoretical and emplrlcal problems in measuring servicesdelivery or export are complex and longstanding. The same services (for example, data processing) maybe imbedded in technology (a magnetic tape or floppy disk) or may be dellvered electronically. Manyservices cannot be counted at the border as can goods. Many must be created and deliveredsimultaneously, 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 datacollection (Annual Report, 1991 ). The Office of Technology Assessment [n 1986 and again In 1987 stronglycalled 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

. . . .


Much informationthat was onceconcentrated androutinely reportedis now dispersedor proprietary,unavailable topolicymakers.

of industry. This policy has been stronglycriticized. 28 Congress called for better tradedata collection in the Trade and Tariff Act of1984 and again in the Omnibus Trade andCompetitiveness Act of 1988. Recent NTIAreports have also pointed to important gapsin data.29

In response to such criticism, some stepshave been taken to improve coverage,30” butall efforts to increase data collection orchange reporting requirements are still givenstem scrutiny by the Office of Managementand Budget (OMB) in the Executive Officeof the President. In 1991, President Bushapproved a multiyear initiative involving allmajor statistical agencies to implement rec-ommendations developed by a working groupof the Economic Policy Council. Through-out the government, however, progress hasbeen slowed or reversed by budget cuts.Major statistical agencies lost 13 percent ofconstant-dollar funding and more than 10percent of their staff from 1980 to 1988.31

It might be expected, in spite of theseproblems, that data on telecommunicationsservices would be plentiful and readilyavailable since this is an industry still

dominated by regulated monopolies and forwhich there have long been international

coordinating mechanisms. Here too, how-ever, there are often inadequate data. Forexample, it is nearly impossible to developcomprehensive or consistent data about pat-terns in or changing levels of investment inphysical infrastructure and in research anddevelopment since the burgeoning of over-seas investment by U.S. telephone compa-nies. This information is needed by Federaland state regulators to address the questionof whether there is a possible decline intelecommunications investment.

Much of the data now reported by tele-phone operators in Europe and in the UnitedStates are considered proprietary and confi-dential since competition has become afactor ,32 and much of the rest are notcomparable across national boundaries. Inthe United States the divestiture of AT&Tand the proliferation of large numbers ofalternative carriers, resellers, and value--added services networks means that muchinformation that was once concentrated androutinely reported is now widely dispersed

m Katherine K. Wall man has argued that “Federal statistics need to be evaluated in terms of their intrinsicworth. . . 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, September1988).

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: /ssuesin Measurement and Ernpirica/ Research (Chicago, IL: University of Chicago, 1991) conclude that effortsto 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.


Policy IsMade

and less subject to mandatory reporting.~1The loss of a central point for data collectionboth in industry and in government iscausing problems for international telecom-munications organizations and for tradereporting organizations.34 More and moreservices are provided by unregulated net-works that do not report data at all.

There are two Federal primary data collec-tors for international telecommunications:the FCC and the Bureau of EconomicAnalysis (BEA) in the Department of Com-merce. Both have statutory mandates tocollect some data, and legal authority toobligate respondents to furnish some data.Both make most of their data available to thepublic, and therefore to public interestgroups, by periodically reporting aggregateddata and publishing reports on internationaltelecommunications. However, the FCC col-lects international revenue and traffic datarelevant to its regulatory mission, and in for-mat ion about international trade is incidentalto that purpose. BEA collects a wide range oftrade data including some on telecommuni-

cations services. Both gaps and overlaps ofcoverage arc fortuitous.

BEA is legally prohibited from disclosingdata of individual companies; FCC data onindividual companies is, for the most part,public, although data on international operat-ing agreements, licensing arrangements, and

authorizations and concessions to foreignentities is classified confidential.ss The FCCdoes not have the resources to thoroughlycheck and verify data submitted by theprivate sector, so for the most part it ismerely assumed to be complete, accurate,and comparable.

All international carriers must report traf-fic and revenue data to the FCC each July 31for the preceding calendar year; current dataarc never available. FCC data is on interna-tional message telephone services (IMTS)and non-IMTS (private lines, record mes-sages, etc.). Most of the available statisticsdeal with voice messaging, not with datatransmission and value-added services, whichwill 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 conductthorough data reviews. Feldner, op. cit., footnote 26, p. 9. On the other hand, U.S. international transactionsm telecommunications services used to be reported to t he Bureau of Econom ic Analy.ws on a voluntary bas~sbut 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 largestcountries (mc!udmg Germany, the UnJted Kingdom, China, India, and the former U. S. S. R.) have not reportedany Information since 1979.

35 See CFR 47, chap. 1, par. 43.51. Carriers can request conf identiallty on the grounds that public access tothe data would cause “compet It Ive harm. ” The FCC grants requests for conf ident Ial It y at its discretion, andsays It is generally reluctant to do so. The publlc may oppose such requests for confidentiality and couldInvoke the Freedom of Information Act. Carriers prowding data on international service to the FCC mayrequest confidential treatment for reported data on operating agreements, I icenslng arrangements, andauthorizations and concessions to foreign entities Involved (n providing foreign services. The amount of datathat 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.

. . . .


Other Federal agencies, such as NTIA,sometimes conduct public inquiries or pub-lish studies of trade in telecommunicationsservices, but these generally do not producenew primary data or build consistent time-series data banks,36 U.S. trade agenciesdepend on the FCC and BEA for primarydata.

BEA has instituted mandatory annualsurveys of selected services transactions thatcover basic and enhanced telecommunica-tions services; previously, on] y data on basictransmission services were available andonly from carriers that voluntarily submitteddata to BEA.37 The FCC has begun collect-ing traffic data for U.S.-Canada and U. S.-Mexico traffic, which was not collectedbefore.

Both the FCC and BEA are modifyingtheir data collection and reporting mecha-nisms or installing new data systems. TheFCC’s attempts to revise its data collectionhave sometimes run into resistance fromOMB, and also suffer from ‘*institutionallag. ’ ‘ As a regulatory body operating underthe rules of the Administrative ProceduresAct, the Commission is subject to detailedprocedural requirements, which require pro-

vision for public comment before a majorchange in data collection rules. This has, forsome changes, taken as long as 6 years.

An Interagency Task Force on ServicesTrade Data was established by USTR in1982, but became inactive in early 1991 forover 18 months; it began meeting again inSeptember 1992.38 All participants seemedto agree that efforts to improve the collectionof international telecommunications data,slowed by budget cuts, are not keeping pacewith accelerating changes in the structure ofservices and the nature and volume of theirtrade.

Conclusions and optionsInternational telecommunications policy

has become more important in the last fewyears, as foreign markets for communica-tions services and equipment began to opento U.S. competition. It is perhaps not surpris-ing that U.S. policymaking about interna-tional telecommunications has been a com-bination of domestic regulatory policy (fo-cusing on deregulation) on the one hand andgeneral trade or export policy (opening upforeign markets) on the other. Thus a consis-

Page 174

36 The Census Bureau also collects data on communications services establishments. Its Ar?nua/ Survey ofCommunications Services identifies firms engaged in providing point-to-point communications servicesincluding telephone, telegraph, other message communications (such as E-mail, facsim ile, and telex), radioand television broadcasting, cable television, and other communications services such as satellite Earthstations. The survey provides estimates of operating revenue and expenses, and it breaks out telephonecommunications by local, long distance, and t ype of customer. However, it does not break out internationalservices. The Census Bureau is undertaking its largest program expansion in over 40 years in the 1992Quinquennial Economic Census, including expansion of coverage of communications. This will not includedata 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, andCommunication Services.


Policy IsMade

tency is established between the two, but theincreasing dominance of USTR in telecom-munications issues tends to override orrestrict consideration of other goals or inter-ests.

Currently, most of the effective decision-making about international telecommunica-tions within the executive branch appears tobe done by the Office of the United StatesTrade Representative, with NTIA in a sec-ondary, contributing role. The FCC some-times plays lone wolf, taking actions thatmay be out of step. mistimed, or discordantwith the views and objectives of tradenegotiators. Both the telecommunicationsindustry, large telecommunications users,and regulatory officials fear trade negotiatorsmay make tradeoffs that they regard asundesirable or may inadvertently lock intobinding agreements old categories and dis-tinctions that could become technologicallyobsolete (for example, de fin it ions of basicand enhanced services ).

The development of telecommunications”policy within the executive branch is aprocess of continuing arbitration or negotia-tion among several agencies, sometimesbrought together only by their collectiveresistance to policies proposed by Congress,or to judicial mandates. The latter have beenalmost entirely directed at domestic, ratherthan international, activities and structuralcharacteristics of the industry.

National policy with regard to interna-tional telecommunications-so far as thereis such a policy-may be both too narrow(driven by trade considerations alone), and atthe same time unfocused and ineffective.The single-minded emphasis on openingforeign markets is not the same thing asfostering the competitiveness of U.S. firms

in foreign markets, both because there aretradeoffs to be made in negotiating suchagreements and because it may neglect otherfactors necessary to enhance competitive-ness (e. g., standards development, financing,domestic regulatory changes, antitrust con-siderations, etc. ). An effective competitiveness-enhancement policy implies a more inte-grated telecommunications policy than now

exists.There has, for example, been little atten-

tion given to long-range issues of standards-setting, interoperability, or infrastructure de-velopment. Europe and the United Statesincreasingly tend to differ in the approach tonetwork architecture. In Europe, relativelymore centralized ‘‘intelligence’ (computeri-zation) is integral to the network, while in theUnited States there is a tendency to usesophisticated terminal equipment, owned bythe user. There are many advantages to thelatter approach, but building advanced capa-bilities into the network may facilitate ad-vanced uses of telecommunications by middle-sized and even small firms that could notafford the specialized customer premisesequipment. In a global economy, the com-petitiveness of smaller firms may turn out tobe important; smaller firms have a bettertrack record in the United States of creatingjobs than have large corporations. Telecom-munications policy, not trade policy, is theappropriate vehicle for considering strategicalternatives of this kind.

Effective development of an internationaltelecommunications policy may require re-organization or strengthening of the poli-

cymaking structure for telecommunications.It is becoming increasingly obvious that. . . . . Domestic telecommunications policy

Single-mindedemphasis on

opening marketsis not the same

thing as fosteringthe competitivenessof U.S. telecommu-

nications firms.

. .


Without coherentvision of whattelecommunicationnetworks should be,the United Sfateswill be at adisadvantage asnational networksmerge into globalnetworks.

choices have international components andeffects," 39 and that the reverse is equallytrue. The lack of coherence and integration intelecommunications policymaking has beenrecognized as a problem for many years. A1951 Communications Policy Board estab-lished by President Truman found that tele-communications problems were being dealtwith on a “piecemeal basis” with littleprospect for developing “a total nationalcommunications policy."40 During the 1960sand 1970s there were proposals from manysources for reorganizing or reforming thepolicymaking structure.41

Some commentators have proposed “asingle, integrated, Executive branch agency. 42

This does not, however, fully recognize theresponsibility of Congress for telecommuni-cations as a mode of interstate commerce andinternational relations, or the persistent ne-cessity of balancing or prioritizing compet-ing goals for telecommunications. It is nec-essary in policymaking not merely to resolvethe differences in interests within the tele-communications industry, or between largeproducers and large users. but also to medi-ate among competing ‘‘public interests, ’such as domestic universal service (definedin modern terms of advanced network tech-nology), competition in world markets, state-of-the-art infrastructure, consumer equity,continuing innovation, reliability, and broadinteroperability. The sometimes conflictingdemands made on a national telecommuni-cations system (or more accurately, merging

public and private systems) is testimony tothe central importance of telecommunica-tions in modern society. Without a coherentv is ion of what telecommunications networksshould be and do, the United States will beat a disadvantage as national networks merge

into global networks and international rulesof cooperation and trade are developed.

Given this complexity, there will continueto be a need for executive branch statementof a national telecommunications policy thatcan reconcile the views of diverse interests.There will continue to be a need for broadCongressional direction and legislative man-dates to provide the framework for nationaltelecommunications policy. Finally, therewill continue to be a need for an independentbipartisan regulatory agency like the FCCthat implements those legislative mandates.

This indicates the importance both ofattention to telecommunications a t the high-est level of policy fomulation, and of aneffective coordination mechanism at theagency level where the details of policy aredeveloped. The legislatively-designated co-ordination mechanism is the Communica-tions Coordinator within the Department ofState; to provide staff support for the Coordi-nator, the Department created the Bureau ofInternational Communications and Informa-tion Policy. CIP, as it is now constituted, isnot an active and effective coordinationmechanism for interagency activities andpolicies. That role has been partly filled byUSTR, 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”) in1967-1968, the Ash Council in 1971, and other inltiat ives described by Howard J. Symons, op. cit., footnote2, and Henry Geller, op. cit., footnote 11.

42 For example, Henry Geller, op. cit., footnote 11.


Policy IsMade

under the 1988 Trade Act. But USTR is nota suitable vehicle for intenational telecom-munications policy coordination, because itsresponsibility extends only to trade relation-ships.

CIP had, and still has, a potential advan-tage as the locus for coordinating telecom-

munications policy. CIP’s location in theDepartment of State appropriately extendsCongressional oversight of telecommunica-tions policy to a broad range of Congres-sional Committees. including those con-cerned with foreign relations and with trade.This meets the need to consider manynational goals and interests in formulatingteleccommunications policy--epecially whentreaty obligations must be evaluated in thelight of Federal and State responsibilities andperogatives. The Department of State alsohas experience in operating at the interface ofdomestic and international policy and speak-ing for the United States in international fora

of many kinds.However, CIP also has serious disadvan-

tages as a mechanism for effective telecom-

munications policy coordination. It has asmall staff, without depth in technical, engi-neering, and regulatory expertise; it is there -fore almost entirely dependent on industry-and especially on the narrow segment ofindustry that is able to invest considerablcmoney and personnel to participate in inter-national meetings and negotiating sessions.These are large corporations. In attempting

to "coordinate the initiatives of one ormore executive branch agencies and those ofan independent regulatory body (the FCC isgenerally considered to be a “congressionalagency")—all of which operate primarily onagendas framed around domestic issues—

CIP is doubly handicapped by its location inthe State Department. It is regarded by theother agencies as peripheral or irrelevent indomestic policy struggles that shape thesister agencies own approach to interna-tional telecommunications. It is also re-garded as peripheral in agenda-setting anddecisionmaking within its own department,where technological questions arc seldom atthe forefront. The Department of State hasgenerally neglected science and technology

in managing international relations and itstechnology-oriented bureaus have had littleclout with departmental leadership. The1992 Report by the Carnegie Commission on

Science, Techno logy, and Government

blamed this on the prevalence of ‘gentlemendiplomats’ with ‘‘nineteenth century val-ues, ‘ ‘ and callcd for steps to strengthen theknowledge of science and technology withinthe Department of State and U.S. embassiesabroad. 43

CIP status within the Department has beenfurther diminished because only USTR isempowered to negotiate telecommunicationstrade treaties and agreements,44 and the FCCand NT I A largely determine the position ofthe 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-addednetworks, called IVAN agreements; It also has responslbl hi y for coordinating some multilateral nontradeagreements, such as frequency allocations (World Adm inlstratlve Radio Conference).


Page 178

allocation issues .45 This effectively deprivesCIP of several vital functions with regard tointernational telecommunications policy.

There are several structural options forimproving this situation; the broad alterna-tives are:

1. to strengthen and enhance the capabili-ties of CIP as a policy coordinationmechanism, or

2. to abolish CIP and create an effectivepolicy coordination mechanism else-where, possibly in the Executive Of-fice of the President or in NTIA.

The State Department is (in the summer of1993) about to adopt a third option—that ofdowngrading CIP, now a Bureau headed bythe Coordinator, and placing its functionswithin the Department’s Bureau of Econom-ics, Business, and Agriculture. Telecommu-nications responsibility would no longer bevested in an assistant secretary but in adeputy assistant secretary, one of five withinthe bureau, This would require legislativeratification, since the post of Coordinator,with ambassadorial status, is statutorallyestablished.

This appears to be the least desirable of thethree broad options. Reorganization of thiskind is unlikely to enhance CIP’s ability tocoordinate or provide policy leadership. Itwould instead further diminish CIP’s abilityto coordinate or negotiate with the otheragencies, already nearly non-existent be-cause CIP is a small bureau attempting to“coordinate” large agencies. It would beperceived abroad as a downgrading of theimportance of telecommunications policyand would lessen the authority of CIP in

international fora where foreign governmentrepresentatives are highly sensitive to status.It could weaken the oversight of severalcongressional committees in telecommuni-cations policy. It would leave open theoption of creating a real, effective coordina-tion mechanism somewhere else, such as inthe Executive Office, but even this could beconfused by the continuing existence in theDepartment of State of the legislativelymandated position of TelecommunicationsCoordinator with Ambassadorial rank.

One possible option for achieving bettercoordination of telecommunications policyformulation is to abolish CIP and shift itsfunctions to some other part of the Federalstructure. Old line State Department officialswould probably be unlikely to object to this,since CIP is not embedded in the Depart-ment’s power structure and is said to beregarded as something of an anomo]y withinthe Department. This option would howeverpresumably require Congressional action,because the position of U.S. Coordinator isset by legislation. It would be resisted by theindustry groups on whom CIP relies formaking up or supporting its delegations tointernational meetings, since it could deprivethem of entree into some negotiating fora. Agreater objection to abolishing CIP andtransferring its mandated role as coordinat-ing mechanism is that this would probablyremove international telecommunications pol-icy formulation and implementation fromoversight by congressional committees re-sponsible for foreign affairs and trade.

It would also leave open the question ofthe 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,May 1993).

—


Policy IsMade

dination between NTIA and the FCC oramong the several other government agen-cies that will from time to time have strongpositions on teleccommunications issues. Theobvious place for such coordination to occur,provided the new Administration places highpriority on telecommunications issues, iswithin the Executive Office, possibly withinthe National Economic Council or in theOffice of the Vice President, who has takenthe lead in discussions about the futuretelecommunications infrastructure. The Of-fice of Telecommunications Policy (OTP),which existed in the Executive Office of thePresident from 1970 until 1978, could bereconstituted. This opt ion, however, cannotbe effective unless it is initiated and fullysupported by the President.

Alternatively, CIP itself might be strength-ened and reinvested with its original missionof active policy development and coordina-tion. This suggests that international tele-communications policy would be recognizedas an important part of domestic telecommu-nications policy and distinct from, yet closelyrelated to, general trade policy. To reinvigor-ate CIP would likely require decisive reor-

ganization, restaffing, and refunding. CIPwould need a still small but highly qualifiedstaff with knowledge of advanced communi-

cations and computer technology and ofpolitical, economic, and regulatory condi-tions affecting the telecommunications in-dustry here and globally. It would also bepossible to mandate a larger, perhaps co-equal, role for CIP in telecommunicationstrade issues that now fall entirely to USTR.This would improve CIP’s relative powerstatus with its parent Department, and tosome extent with the other executive agen-cies. However, in the interest of CIP’sprimary role of coordination, care wouldhave to be taken that its role not be limitedsolely to international or trade issues.

Improving ClP’s position within the State

Department could be done only with the fullsupport of, and ideally at the initiative of. theDepartment’s top-level administrators anddecisionmakers. Improving CIP’s ability toact as a leader and as a mediator of otheragencies on telecommunications issues would.

require the political attention and nurturingof executive and congressional leadership.

Page 179

InternationalInvestment andDomesticInfrastructure 9

C H A P T E R

Some analystsbelieve that thereis a decline inU.S. infrastructurequality relative tothat in otheradvanced nations.

A MAJOR PUBLIC POLICY DEBATE is shapingup over the modernization of the U.S.telecommunications infrastructure. The de-bate is framed primarily in terms of domestictechnology policy. but is closely linked tothe subject of international teleconmmnica-tions and trade in services. The linkage is intwo prevalent assertions:

A highly advanced domestic communica-tions infrastructure may be necessary tosustain long-term competitiveness in worldmarkets, butexcessive investment overseas by U.S.telecommunications firms could lead to‘‘disinvestment’ in domestic communi-cations networks, or in research and devel-opment (R&D).

The latter concern has been expressed bysome State regulators, public interest grouprepresentatives, and independent analysts,who say the drain of capital from local andregional operating companies for investmentin overseas ventures is causing a decline intelephone industry investment in domesticnetworks. Some believe there is already adecline in infrastructure quality comparedwith that in other advanced nations.

The objection to overseas expansion is notto international trade in services, which isalmost invariably seen in positive terms, butto the preponderance of overseas directinvestment through subsidiaries and jointventures. These investments by carriers aresometimes assumed to compete for capitaland for management attention with domesticinfrastructure modernization.

On the other side, some state regulatorsand consumer group representatives objectto proposed large investments in moderniz-ing public networks, on the grounds thatresidential and small business subscriberswill find themselves paying for capabilitiesand services that benefit only large corpora-tions.

The term ‘telecommunications infrastruc-ture’ has become popular to denote thefacilities, networks, and equipment used todeliver telecommunications services; it isoften extended to include organizations andpeople. The term acknowledges that tele-communications is not merely a set oftradeable services but also a basic part of thestructure of industrial societies that is essen-tial to social cohesion, governance, eco-nomic viability and equity. Even in purelyeconomic terms, many people hold that“investments made in an advanced telecom-munications infrastructure are justified onthe basis of benefits that are realized at themacroeconomics level, over and above anydirect benefits to individual enterprises. ’On the other hand, critics have warned thatthe use of the term, especially by U.S.carriers, is sometimes ‘‘self-serving andinstrumental because it is intended tosuggest that the networks are imbued withthe public interest and, thereby, merit directpublic investment and regulatory relief.2

Within the scope of this report on U.S.telecommunications firms in European mar-kets, there is no room to address the complexarguments and counterarguments about how

Page 181

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? fonnafbnNetwork-Changing Our Lwes m the 21st Century, 1992, p. 29.

p Oscar H. Gandy, Jr., “Infrastructure: A Chaotic Disturbance in the Policy Discourse,” Institute forInformation Studies, op. cit., footnote 1, pp. ix ff.

. ——.


much domestic infrastructure modernizationshould occur and who should pay for it, orwhether the United States should construct a“National Information Infrastructure’ or“electronic superhighway, ’ This chapterwill, however, address the narrower questionthat directly relates international trade intelecommunications services to this domes-tic telecommunications policy issue:

Is there evidence that growing overseasinvestment by regulated U.S. telecom-munications operators is resulting in asignificant decline in domestic invest-ment, either in modernizing of physicalfacilities or in research and develop -ment?

International comparisonsTwo kinds of investment must be consid-

ered: investment in infrastructure moderni-zation, and longer-term industry investmentin R&D. According to many researchers oninnovation and competitiveness:

Facilities for basic research. . . can beconsidered as an increasingly impor-tant part of the infrastructure for down -stream technological and production ac -tivities. 3

Infrastructure modernizationThe superiority of the U.S. network was

generally accepted for decades, but is nowbeing questioned. Some analysts claim theNation’s telecommunications infrastructureis, if not deteriorating, at least no longerclearly the world’s best. Robert G. Harris ofthe University of California at Berkeley,William Davidson of the Management Edu-cation Services Association, and KennethRobinson, former assistant to ChairmanAlfred Sikes of the Federal CommunicationsCommission (FCC), are among those whobelieve that the quality of the U.S. telecom-munications infrastructure is slipping andcould fall behind that in Europe.4 Harrissays:

[B]y the late 1980’s the United Statesno longer [had] a telecommunicationssector far superior to that of othernations, in the quality or extent of thenetwork, in the range of communica-tions or information services availablethrough the network, or even in theunderlying technological prowess. s

Others suggest that the United States hasalready been surpassed.6 These charges weremade so frequently and strongly that the

Page 182

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 ofBusiness, University of California, Berkeley; William Davidson is a professor at the University of SouthernCalifornia and President of the Management Education Services Association (MESA), a consulting groupoften 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. PublicPolicy,” Michael A. Crew (cd.), Competition and (he Regdation 01 LMities (Norwell, MA: Kluwer AcademicPublishers, 1991 ).

G For example, Shlomo Maital argues that “the French phone system may now be the world’s best.” ShlomoMaital, “The Global Telecommunications Pict ure: Is America Being Outstripped by France?” The BrookingsReview, summer 1992, p. 41.

InternationalInvestment and

DomesticInfrastructure

National Telecommunications and Informa-tion Administration (NTIA) in 1991 under-took a detailed assessment of the evidencefor infrastructure deterioration.’ While thestudy was underway, a series of serviceoutages occurred in the summer of 1991 thatinvolved failures of software switching andsignaling; these raised further suspicionsabout the quality of the network.

The NTIA report concluded that the UnitedStates still holds a high ranking in interna-tional comparisons of telecommunicationsinfrastructure. By NTIA assessment, theUnited States was in 1991 first in networkutilization, first in network reliability, andfirst in fiber optics deployment and commonchannel signaling. It was seventh in numberof lines per 100 persons, but it was exceededonly by the Nordic countries, Switzerland,Canada, and Iceland, all of which for reasonsof geography, climatic, and population dis-persion put especially great emphasis onaccess to telephone lines. The United Statesis far down the list in Integrated ServicesDigital Network (ISDN) capability, but ISDNis not necessarily a good indicator of mod-ernization. The lower rate of ISDN deploy-ment in United States reflects a trend towarda different philosophy of network architec-ture, oriented toward dispersed intelligenceor computerization rather than centralizationand integration (see chapter 2).

In international comparisons, the UnitedStates ranked 13th in average annual indus-try investment per main line during the1980s, according to NTIA, falling behind themajor European countries except for theUnited Kingdom.8 However, when the ex-penditures were partitioned into two catego-ries, ‘‘expansion’ and ‘‘modernization, ’the United States ranked higher on industryinvestment in modernization.9

The NTIA report concluded that “. . .thcUnited States is a nation with an advancedtelecommunications infrastructure, a veryhigh access-line density, a robust level oftelephone usage, and a heavy emphasis onmodernization. 10 It noted, however, that‘‘other countries may be planning to deployseveral new technologies, such as digitalswitching and Signaling System 7 (SS7),more rapidly than companies in the UnitedStates.’ NTIA then advocated increasedcompetition in local exchange markets andthe elimination of government-imposed bar-riers to competition such as those in theModified Final Judgment (MFJ) and cross-ownership provision of the cable-telephonecompany. (See chapter 1, box 1 -A,)

There was, according to William F. Maher,the NTIA Associate Administrator responsi-ble for the report, ‘‘a political bias toward acompetitive solution’ to the infrastructureissue 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 asaccounting treatment for labor costs and varying patterns of responsibility for consumer premisesequipment. In t he several resultlng analyses, the United States ranked from first to sixth, either ahead of orclose to the major European countries.

‘“ NTIA, op. cit., footnote 7, Executive Summary, pp. i-ii.

There mayhave been a

“political biastoward the

competitivesolution”

to infrastructureissues.

Page 183


It is difficult totell how large thegap in investmentis, or whatcauses it.

provided to OTA by Maher in 1992,11 heacknowledged that prior to its release, theNTIA study was thoroughly examined toensure that it was fully congruent withprevailing deregulatory policy. Thus thereport recommendations and internationalcomparisons should be accepted with at leasta grain of salt.

Maher said that the NTIA data, although‘‘limited,"

. . . appeared to contain indications that

a straight competitive market approach

may not be the most efffective way to

develop a superior telecommunications

infrastructrure, e.g. . . . The U. S., theworld’s most competitive country, isbeing eclipsed in key areas of technol-ogy (e.g., SS7 and digital switching) bycountries that have retained a singlesupplier telecommunications environ-ment (e.g., France). . . ."

The NTIA infrastructure report itself cau-tions that other countries are rapidly catchingup, especially those countries in whichinvestments for network modernization aresupported by government policy. The UnitedKingdom, France, Japan, and Singaporehave all made telecommunications moderni-zation a high priority,

Most international comparisons look onlyat investments by the public telephone oper-ators (PTOs) for public networks, but in theUnited States, more than in any other coun-

try, there is also much corporate investmentin private network technology. Moreover,the figures for the United States excludecustomer premises equipment, while thosefor foreign countries arc likely to includefunctionally-comparable equipment belong-ing to the PTOs. The FCC says that annualinfrastructure investment in the UnitedStates totals more that $50 billion, which issplit almost evenly between network equip-ment and customer premises equipment. 12

Thus, while it is widely accepted thatinvestment by U.S. carriers in physicalinfrastructure is lower than such investmentby many foreign PTOs, both as a percentageof revenues and a percentage of net profits,it is difficult to determine how large the gapreally is, what causes it, and whether all orany part of it is related to overseas invest-ment.

International R&D expenditures

Successful competition in internationaltelecommunications markets may in the longrun depend on continuing investment inR&D:

Where innovation is an important as-pect of competition, the ability of a firmto survive depends on the effectivenessof its research and development labora-tories [and] on its ability to exploit itsinnovations and protect them, or toquickly match anything its competitorsmay do.13

Page 184

‘1 Maher made these statements personally in an informal meeting at George Washington University, andhimself 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 “TechnologyPolicy, 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: ElsevierScience Publishers, 1987), p. 6.

.—



R&D expenditures ($millions)

Company 1985 1986 1987 1988 1989 1990 6 yr. total 6 yr. avg.

BOC compositeAlcatelAT&TEricssonFujitsuNECNorthern TelecomSiemens

s 91200

2,228314530

1,146430

1,561

$ 112237

2,278424884

1,841475

2,303

$ 126316

2,453507

1,1412,634

5883,443

R&D expenditures as a percentage of revenue

$ 306330

2,572601

1,5293,482

7113,913

$ 325297

2,652673

1,8623,665

7303,629

$ 319386

2,433803

1,8913,496

7744,123

$ 1,2791,766

14,6163,3227,837

16,2643,708

18,972

$ 213294

2,436554

1,3062,711

6183,162

Company .—BOC compositeAlcatelAT&TEricssonFujitsuNECNorthern TelecomSiemens

1985

0.1 %16.76.58.68.5

12.710.08.8

1986

0.2%16,06.79.99.3

14.010,711.5

1987 1988 1989 1990 6 yr. avg

0,2%18,4

7,39.99.3

15.712.012.1

0.4%19.57.3

11.39.3

15.913.110.9

0.4%20.2

7.311.010,315.812.011.2

0.4%22.9

6.510.711.716.111.411.0

0.3%18.36.9

10.410.015.411.611.0

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

Investment in R&D by telecomnmunica-tions companies is said by many experts(even within the industry) to be lower in theUnited States than in Europe and Japan, bothfor equipment manufacturers and for serv-ices companies. ( See table 9-1. )14 AT&T’sannual expenditures for R&D from 1985through 1990 averaged about 6.9 percent ofrevenues: those for European equipmentmanufacturers were all higher, ranging from10 to 18 percent. However, AT&T is a carrieras well as an equipment manufacturer, a

factor that would be expected to dilute itsR&D expenditure relative to purely technology-development firms.

Other analysts have compared the R&Dexpenditures of the three largest U.S. firmsmanufacturing telecommunications equip-ment (AT&T, GTE, and Rockwell) with thatof the five largest European manufacturersfor the years 1985 through 1990. U.S.spending on R&D increased about 2 percent

in these years (i.e., was essentially flat),while the Europeans’ R&D investments

Table 9-1.R&D ExpenditureComparison: Bell

Operating Companiesvs. Domestic and

Foreign EquipmentVendors, Fiscal Years

1985-90

‘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 StateUniversity, m Williamsburg, VA, Dec. 9, 1991. Professor Harr~s’ data were gathered in an audit performedon behalf of the National Association of Regulatory Utility Comm Issioners. Page 185

. . —


Table 9-2.R&D ExpenditureComparison: BellOperating Companiesvs. ForeignTelecommunicationsCompanies, FiscalYears 1985-90

R&D expenditures ($millions)

Company 1985 1986 1987 1988 1989 1990 6 yr. total 6 yr. avg.

BOC composite $91 $112 $ 126 $ 306 $ 325 $ 319 $1,279 $ 213British Telecom 226 239 305 368 361 376 1,875 313France Telecom 298 431 449 730 595 723 3,226 538NTT 507 767 1,024 1,461 1,672 1,568 6,999 1,167

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 2.0France Telecom 3.3 3.4 2.8 4.6 3.5 4 4.0 3.6NTT 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 COMPANIESA COMPARATIVE ASSESSMENT,” 23RD ANNUAL CONFERENCE, INSTITUTE OF PUBLIC UTILITIES,

increased by 17 percent.’s The annual aver-age number of U.S. patents granted to theU.S. companies decreased by 3.2 percentduring this period, while the number grantedto the European companies rose by 11percent. overseas expansion by U.S. carriersbegan growing significantly during this pe-riod (about 1987-88), but the period also sawa serious recession begin.

Table 9-1 includes for comparison theR&D investments of the Bell operatingcompanies (BOCs), which are only 0.3percent of revenue annually. This is again amisleading comparison because the BOCsare precluded from equipment manufactur-ing, which is generally more research-intensive than services. Nevertheless, invest-ment in R&D is very likely depressed by theregulatory separation of manufacturing andservices.1’

MICHIGAN STATE UNIVERSITY, DEC. 9, 1991

Table 9-2 compares R&D expenditures bythe regional Bell holding companies (RBHCs)(including support for their shared researchfacility, Bellcore) with expenditures by BTand France Telecom, a more suitable com-parison because those firms are also carriersthat do not manufacture equipment and servepopulations and geographical areas compa-rable to those of some RBHCs. The expendi-tures for R&D, as percentage of income, arerespectively 7 to 12 times greater for theEuropean PTOs than for the RBHCs. Herealso there are caveats. In Europe the trend istoward building intelligence into the net-work, whereas in the United States the trendis toward placing intelligence at the periph-ery of networks, including more of it inadvanced terminal or customer-premise equip-ment. This affects where investment in R&D

occurs and by whom it is made.

Page 186

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’sNTT increased 19 percent in the same period, and its number of U.S. patents grew by 11 percent.

‘G Robert G. Harris, op. cit., footnote 5.

—.



Table 9-3.R&D Expenditure on

South Telecommunications inU.S. Japan Germany France U.K. Italy Sweden Korea Netherlands Spain Selected Countries,—-

R&D expenditure on 1987telecommunications 13 4.7 2.5 2.1 2.1 0.5 0.48 0.41 0.2 0.11

Military sector 5 0a 0.2a 1.0 0.7 na O.1 a na Oa

na ($ billions)Civil sector 8 4.7 2.3 1.1 1.4 na 0.38 na 0.2 na

R&D expenditure ontelecommunications aspercentage of total nationalR&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 TELECOMMUNICATIONSNATIONAL SYSTEMS UNDER PRESSURE,” TELECOMMUNICATIONS POLICY, JANUARY/FEBRUARY 1991, PP 46%5.

According to this reasoning, Europeanexpenditures attributed to industry researchon telecommunications equipment probablyinclude much research that in the UnitedStates is conducted by computer manufac-turers.

Since the PTOs are largely state-owned,they may be a channel for national R&Dsupport that in the United States would bedirected at military research or at the nationallaboratories. Hariolf Grupp and ThomasSchnoring, German researchers, compared10 countries in terms of R&D expenditureson telecommunications in 1987, and con-cluded that levels of spending reflected thesize of national economies (see table 9-3. )They ranked the United States first ($13bill ion), followed by Japan ($4.7 billion) andthe four large European countries (Germany,

$2.5 billion; France, $2.1 billion; the UnitedKingdom, $2.1 billion: and Italy, $0.5 bil-lion). The conclusions of Grupp and Schnor-ing are thus at odds with most other analysts,probably because they include all sources ofR&D funding, including military spend-ing.17 Nearly all nonmilitary R&D spending

in the United States comes from the carriers,the German analysts claim, compared withabout 60 percent in France and only 7percent in Germany. In the United States,much government funding of R&D has beencarried out through the Department of De-fense,18 while in other countries it may comefrom nonmilitary agencies; so this compari-son may reflect national differences in publicadministration rather than differences ingovernment/industry research funding,

‘7 M[lltary R&Don telecommunications, according to Gruppand Schnoring, has significant splllover benefitsfor 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.TelecommunicationsServices inEuropean ‘Markets

Telecommunications Plant

Exchange Carrier

Most of the available international com-parisons are highly questionable on severalgrounds, including differences in industrystructure, regulatory requirements, and ac-counting procedures. What is included in“R&D expenditures” and the meaning of“net income’ may differ.

The question of domesticdisinvestment

Assuming that investment by U.S. tele-communications firms in physical modern-ization and in R&D is below that in Europe,this still does not address the narrowerquestions of whether it is declining, andspecifically whether it declined after over-seas expansion became common and as aresult of the increasing overseas investment.

Plant andRevenues,1980-89 120

80

Trends in infrastructure modernizationAccording to the U.S. Telephone Associa-

tion, the value of U.S. carriers’ current plantgrew only 3 percent from 1980 to 1989 (inconstant 1980 dollars), and the value ofannual construction appears to have de-creased strikingly between 1980 and 1989.(See figure 9-1.) In 1980 dollars, it decreased40 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 wasstable (increasing 1 percent or less).

FCC figures for ‘reporting local carriersindicate that from 1985 to 1989, the value ofgross plant grew by 6 percent (in constantdollars) but it did not increase from 1987 to1989. 19 (See figure 9-2. ) Each year from1986 through 1989, the value of annualconstruction declined from 2 to 10 percentover the preceding year, from $15, 1 billionin 1985 to $12.3 billion in 1989, in 1980dollars. (Annual revenues also declined by 3percent in constant dollars in the sameperiod.) Construction increased slightly in1990 and 1991, as did revenues. During the4 years 1988-91 (the only years for whichdata is available), the value of gross plant forthe seven RBOCs declined just over 3percent in constant dollars; the value ofannual construction was steady.zo Thesefigures include both expansion and moderni-zation expenditures.

Interpreting these trends is complicated,however, by the fact that the cost of com-puter and telecommunications equipment(e.g., fiber optics) was decreasing during

Page 188

19 FCC figures are for reporting carriers only, i.e., all regulated local exchange carriers. In 1984RBHCs/RBOCs were separated from AT&T, and those figures may not be comparable to later figures.

20 FCC Statistics of ComrnorJ Carriers, 1988-89, 1989-90, 1990-91, 1991-92, table 2-7, each volume.



these years, The way in which severalfactors--cost trends, divestiture and separa-tion of equipment and services provision,and overseas investment—interacted ridesconclusions on the basis of this evidencequestionable. A decade or less, in whichthere were several major disruptions, doesnot provide reliable trend data. Further, thenumbers are themselves suspect because ofseveral industrywide changes in accountingprocedures promulgated by the FinancialAccounting Standards Board.21

Trends in research and development

Expenditures for research, development,and engineering are also a long-range invest-ment in infrastructure modernization. Asnoted by political scientist John Zysman:

. . . [C]ertain industries may be moreimportant than others because theygenerate benefits for the rest of theeconomy, and government policies topromote or protect them can improvewelfare by fostering these spillover

effects. High-technologogy industries arelikely to generate positive externalitiesbecause of the knowledge generated bytheir research and development activi-

ties, and because the benefits of thisknow’ledge cannot be completely ap-propriated by the private agents whopay the costs for the generation of such

knowledge. 22

Telecommunications is among the indus-tries that have generated positive socialexternalities from R&D; it can be shown thatadvances in telecommunications systemsand services have benefited most sectors ofAmerican life and society, have been essen-tial to national security, and have supportedthe rise of major industries. Professor ofbusiness Robert C. Harris says that R&Dexpenditures in leading-edge technologiessuch as telecommunications equipment andservices generate tremendous positive spill-overs that accrue to those who use and thosewho supply the product or process innova-tions that flow from R& D."23 But the recentstatus and future prospects for telecommuni-

cations R&D is obscured, for public poli-

1980 $billions200 Figure 9-2.

LocalTelecommunications

160 Gross plant Exchange CarrierGross Plant

1 2 0 and Revenues,1984-91

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 businessorganizations for which stocks are publicly traded. It made changes in accounting procedures fortelecommunications carriers m 1982, 1986, 1987, and 1989 (FASB Statements 71, 86, 87, 89). ThisIntroduces dlscontlnulties in time-series data. Information courtesy of Mark Card In, FASB.

22 John Zysman, “Trade, Technology, and National Competition,” International Journal of TechnologyManagement, vol. 7, No. 1-3, 1992, p. 169.

23 Robert G. Harris, op. cit., footnote 14, p. 2. Page 189


cymakers, by a dearth of reliable data. Aspointed out in chapter 8, divestiture andderegulation together with longstanding gov-ernment policy toward industry data collec-tion have resulted in deficiencies in theinformation available to policy makers.

The Bureau of the Census conducts anannual Survey of Industrial Research andDevelopment on behalf of the NationalScience Foundation (NSF) .24 Individual cor-porate responses are protected by law andonly highly aggregated data are available topolicy makers and the public; the way cate-gories are defined makes it impossible to geta comprehensive value that includes alltelecommunications R&D,25 Telephone op-erating companies with revenues over $100million must report research expendituresannually to the FCC; but this data is availableonly since 1988, and it covers only regulatedcommon carriers, including the RBOCS.26

The research performed or funded by theparent RBHCs on nonregulatcd services andtechnologies (such as cellular communica-

tions), including RBHCs’ support forBellcore, is not reported. Financial state-ments that the RHOCs make to the Securitiesand Exchanges Commission (Form I Ok)unanimously list R&D expenditures as "N.A."(nonavailable).

Attempts to identify trend lines in researchexpenditures by major carriers are furtherconfused by the lack of consistent time-series data resulting from the many disconti-nuities: divestiture and reorganization,changes in accounting procedures, and ac-quisitions. *7 The implications of the obser-

vations reported below, therefore, containsignificant uncertainties and can be consid-ered as indicators only.

The NSF reports based on Bureau ofCensus data indicate that R&D performed byU.S. telecommunications equipment manu-facturers, including AT&T, was 117 percenthigher in 1985 than in 1980, but hadincreased only another 10 percent by 1990.For comparison, R&D performed by allmanufacturers was only 89 percent higher in

24 A “controlled sample” of enterprises is designed to include all large companies known to be “majorperformers of R& D,” according to analysts at the Bureau of the Census. A long detailed questionnaire isused in odd years and a shorter form in even years. See National Science Foundation, Surveys of ScienceResources 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&Dperformance 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. Closelyrelated R&D on telecommunicate ions performed by computer manufacturers is in a different category thataggregates 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 notreported 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 bytelecommunications companies, and the chief source of information about them are the companies’ annualreports and “Form Ms” filed with the FCC. However, the FCC doubts such figures are fully comparableacross companies. (Discussions wit h Industry Analysis Section, FCC). See chapter 8 for a discussion of t heinadequacy of data for policy analysls.



1985 than in 1980 but increased 24 percent

from 1985 to 1990.Information supplied by AT&T indicates

that in constant dollars, AT&T’s annualresearch expenditures (chiefly for Bell Labs)have fluctuated slightly from year to year,but essential y remained flat from divestiturein 1984 through 1991 (see table 9-4). Theyincreased in constant dollars about 2 percentfrom 1987 through 1991, the period ofoverseas expansion. In 1992 there was asignificant decrease in research expendi-tures, about 9 percent less than 1991 inconstant dollars. AT&T’s comptroller attrib-uted this in part to a real decline and in partto a ‘ ‘bookkeeping artifact” related to theNCR acquisition. Looked at as a percentageof reported operating revenues, researchexpenditures have been declining since 1990.The AT&T Annual Report says that this" . . .reflects streamlined efforts for telecom-munications network products and systemsand a consolidation of research and develop-ment efforts for computer products andsystems following the merger [with NCR]. ’

The new president of Bell Labs, John S.Mayo, promised in July 1990 that he wouldmake the institution ‘‘. . more of a profit-minded industrial laboratory. ’28 An AT&Tspokesman said that the outlook for researchexpenditures is to remain flat, or shrinkslightly, over the next few years.29 This, thespokesman said, is a result of competitivepressure. Although AT&T remains “deeplycommitted to research, ’ in recent yearsR&D expenditures have been subjected tomore critical scrutiny within the company

Year

1984198519861987198819891990’b19911992

TotalR&D operating R&D as % of

expenditures Constant $ % Change revenue revenue

$2,188 $2,404 $33,187 6.592,228 2,360 -1.8 34,417 6.472,278 2,373 0.6 34,087 6.682,453 2,453 3.4 33,768 7.262,572 2,475 0.5 35,210 7.302,652 2,444 1.2 36,112 7.532,935 2,593 6.0 62,191 4.723,114 2,643 1.9 63,089 4.942,911 2,414 -8.7 64,904 4.49

a The fluctuation 1990-91 Includes the effect of software capltalizatlon, a change In accountingprocedures.b The large jump In total operating revenue results frm mcluslon, after 1989, of access charges.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT R&D EXPENDITURES AND TOTAL OPERATINGREVENUE FROM AT&T ANNUAL REPORTS TO STOCKHOLDERS, 197S-92.

than they were in AT&T’s years as aTable 9-4.regulated monopoly, and are often ‘‘hotly

AT& T Research andcontested’ by the company’s business units.

The profile of R&D expenditure is alsoDevelopment

Expenditures,changing. Infrastructure modernization de-

1978-92pends heavily on software. Bell Labs has25,000 scientists and engineers, plus 5,000 ($millions)administrators and support staff, located in Constant $: 1987=029 facilities in six states; of these, approxi-

mately 4,000 have doctorates.30 Softwaredevelopment is now the dominant activity—there are now more computer scientists thanelectrical engineers at Bell Labs. In 1992,90percent of the budget went to “develop-merit," under the control of the managers ofthe 20 lines of business. This allocationbetween development and research does notappear to have changed a great deal since

divestiture, but the physics and materials

‘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


Evidence ofdeclininginvestment ininfrastructure andR&D is mixed.. .but investmentin both isalmost surelyless thanneeded.

science laboratories within the research divi-sion are being “de-emphasized.” 31

AT&T officials say they are putting strongemphasis on making the “development”component of R&D more cost-effective, byshortening the development cycle and get-ting new products to market faster, andtherefore the number of people in “develop-ment’ is shrinking. As a result, AT&Tofficials say, the basic research componentof the R&D expenditure is probably risingrelative to the development component. Crit-ics dispute this, saying that there has been apronounced shift from the long-range “near-basic” research for which the old Bell Labshad long been famous, to much more short-range market-oriented research. To the ex-tent that this is true, it would more likely bean indirect effect of divestiture, deregulation,and increased market competition than aneffect of alternative investment overseas.

Bell Communications Research, Inc., com-monly known as ‘‘ Bellcore," was incorpo-rated October 20, 1983, to provide itsshareholders, the RBHCs, with technicalsupport including research, engineering, andservices related to emergency preparednessand national security. Bellcore does R&D inthose technical areas where its owners, theRBOCs, are not in direct competition (i.e.,basic communications services). Most of itsresearch results are available to all of theowners, but occasionally there are “private’projects. 32 It also does research for someother telephone industry clients such as BellCanada.

Bellcore’s RBHC owners provide most ofthe institution’s revenue, sharing the costaccording to a formula based on the numberof access lines owned by each company.Their expenditures ranged, in 1992, from

$125.9 million for Pacific Bell upto$174.8million for Bell Atlantic,33 Other incomecomes from research or services done forindependent telecommunications operatingcompanies, government, or vendors, andfrom licensing sales. Together, these ac-counted for about 18 percent of total revenuein 1992.

Bellcore’s budget from its inceptionthrough the current year has grown 4.9percent in constant dollars. (See table 9-5.) Itincreased by 7.5 percent in real terms in theshorter period of the RBHCs’ overseasexpansion, from 1987 through 1992, afterhaving shrunk through inflation. (It is possi-ble that some of this growth is an artifact ofchanges in accounting practices that oc-curred at about this time. ) However, theproportion of Bellcore’s income provided bythe RBHC owners also changed in thatperiod; RBHCs contributions grew less than2 percent from 1987 through 1992.

George Heilmeier, president of Bellcore,has said that his aim is faster productdevelopment. He has stepped up research ininformation technologies such as object-oriented computing and multimedia serv-ices, and is putting less emphasis on physicalsciences. Bellcore ‘‘will move away from the

Page 192

31 Peter Coy, op. cit., footnote 27, and William Sweet, “Bell Labs Reorganizes Research for More CompetitiveEnvironment,” 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.

33 Bellcore, 1992 Annual Report.



academic model..."34 and its operatingbudget may continue to shrink over the nextfew years.

Several of the RBHCs also have their ownR&D units, apart from Bellcore, in order toprotect the proprietary nature of the R&D.The most elaborate of these is NYNEX’sScience & Technology, lnc.,35 which has346 employees in four laboratory facilitiesand does research in areas such as expertsystems, speech reccognition and synthesis,and wireless technology. U.S. West has asomewhat smaller Advanced TechnologyGroup, and Southwestcm Bell also has aninternal R&D staff. The R&D expendituresfor- these organizations are not made public.

Determinants of infrastructureinvestment

The evidence of declining telephone in-dustry investment, in infrastructure or inR&D, is mixed and indeterminate, but theclues are sufficient to assume that U.S.industry investment in both is almost surelyless than that needed to assume the UnitedStates of continued leadership, and there areno signs that it is rising There is, at aminimum, logical justification for raisingtwo questions:

Will investment in infrastructure moderi-zation decline, at least in the short term.through competition with investment op-portunities overseas?Has R&D spending declined because ofthe change from a monopoly market, withprotected rates of return, to highly com-

Deflated 0/0 RevenueYear Revenue revenuea Change from owners Employees Change——-—984985986987988989990991

848,357864,626873,930909,902984,330,043,537,097,198,139,042

931,748916,208901,702909,902947,838962,495972,090972,709

86-1.7 91-1.2 93

0.9 934.2 921.5 921.0 910.1 90

n/an/an/a

7,6528,237 -7.68,124 -1.48,635 +6.38,239 -4.6

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 InAugust 1991. It has laboratories In White Plalns, NY; New York City; and Cambridge and Framlngton,Massachusetts.

Tab/e 9-5.Be//core Revenue

and Employees,1984-92

1992 $1,180,636 $977,752 0,5% 880/0 7,208 -1 2.50/o

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%

—a 1987 dollars

SOURCE BE LLCORE ANNUAL REPORTS, 1984 TO 1992

petitive markets where the investmenthorizon is shorter’?

On the other hand, there are good reasonsto argue that competition in domestic mar-kets and in thc global marketplace is neces-sary to maintain high rates of innovation inhigh-tech companies.

Those who perceivec a decline in domesticinvestment and blame it on the rush oftelecommunications carriers to take advan-tage of overseas investment opportunities-argue that more rapidly expanding markets

in Europe offer the opportunity for highcrreturns and more immediate payoff thandoes modernization of the domestic infra-structure. Domestic investments also maysuffer, they suggest, because they must meetthe inspection and challenge of state regula-tors. Since companies must allocatc re-sources among competing interests, a pool of

Page 193


investment capital (such as the RBHCs’retained earnings) is likely to be invested

disproportionately in enterprises located ineconomically more favorable environments.

Since local telephone services are growingslowly, RBHCs are looking to expand theirportfolios of revenue-producing services,particularly video programming. However,as monopoly providers of local telephoneservice, they currently face a number ofconstraints on the services they arc permittedto offer. and these restrictions are cited assignificant disincentives for network invest-

ment.The 1992 Economic Report of the Presi-

dent asserted:

. . . it may be regulation that is discour-aging firms from investing in new

infrastructure. When regulatory barri-ers are removed, competition and theability of firms to reap the rewards oftheir success provide sufficient incen -tives to invest in commercially viabletelecommunications technologies. There

are firms, however, that are reluctant to

invest because they cannot be assuredof fully capturing all the benefits oftheir investments.36

The most frequently cited impediment isthe Modified Final Judgment,37 which pre-vents the RBOCs from manufacturing tele-communications equipment and offering long-distance service, and until recently fromoffering information services (see chapter 4,box 4-A).38 RBHCs claim these restrictionsconstitute significant disincentives for con-tinued robust investment in the public-switched network. The removal of the MFJrestrictions, they promise, will result in newindustry investments in the network—justified by their entry into promising newmarkets. This has been interpreted by somepeople to mean that they would increasedomestic investments at the expense ofinvestments overseas. That would not benecessary (telecommunications companieshave very high ratings in capital markets).Nor would it be likely, given the growthopportunities projected for overseas markets(see chapters 3 and 4).

A U.S. investment analyst, assessing therisk that overseas expansion will create acapital drain on U.S. telephone operators,concludes that:

In most cases, this risk is minimal andhas not been sufficient to warrantconsideration 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 telephoneservice, which was widely regarded as a natural monopoly, and were kept out of lines of business deemedcompetitive. 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 serviceson a single gateway for their entire regions and instead requires that they install database and switchingequipment in each local access and t ransport area (LATA). National Telecommunications and Informat ionAdministration, 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-businessrestrictions contained m the MFJ and the cross-ownership prohibitions on cable-telephone companyaccepting the BOCS’ promise of deployment of new services and technology.



U.S. telephone subsidiaries. Moreover,

U.S. regulatory agencies would take adim view of any attempt to seriously

weaken the financial health of the localtelephone companies.39

In addition to the MFJ, the local telephonecompanies arc confronted with a tangle ofother federal and state regulatory obliga-tions. The domestic investment plans of thetelephone companies are subject to thereview of state public utility commissions(PUCs), whose priorities for telecommuni-cations delelopment may differ from state tostate even within an RBOC’s service area.Regulators have conflicting priorities: in theabsence of a competitive market environ-ment, regulators arc responsible for curbingimprudent investments and possible overin-vestment that would burden customers withunnecessary costs, and at the same time, theymust assure a sufficient level of industryinvestment to prevent telephone servicefrom degrading and to assure that it contin-ues to develop and improve.

Under traditional rate-of-return regulation

(the prevailing regulatory model for severaldecades), the carriers had an incentive toinvest in facilities; some critics said it was anincentive to overinvest. After divestiture andthe end of cross-subsidization of local resi-dential rates by business and long-distancerates, regulators sought to stabilize consumerprices. Beginning in the late 1980s, morethan half of the states adopted some form of

“incentive regulation. ” This is a modifiedform of rate-of-return regulation, under whichthe regulators set a base rate of return;earnings above that rate are allowed but mustbe shared between ratepayers and sharehold-ers.40 Regulators retain control over the price

of basic residential and small business ac-cess, but give the carrier pricing flexibilityon competitive services offered to largecompanies. The carrier has an incentive toreduce costs and thus increase earnings. 4l

Incentive regulation encourages short-term cost reductions rather than long-terminvestment in infrastructure and in R&D,

Criticssay that

incentiveregulation

encouragesshort-term cost

reductionrather than

long-terminvestment.

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 alternativecarriers, such as Metropolitan Fiber Systems (MFS), which are setting up local area networks to servebusiness 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 cost40 percent below t hat oft he primary carrier. Half of t he reduction was said to come f rom lower compen sat Ionfor 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. PaclflcTelesis, for example, has cut Its workforce by 18 percent since 1984 and plans another 18 percent reductionover the next 5 years; this IS a total of about 25,000 jobs out of a 1984 workforce of 77,000. There IS concernthat this com pet It Ive pressure on local earners may also discourage or delay investment in infrast ructure andIn R&D. Page 195


Page 196

according to its critics.42 The cost and risk ofinvestment is shifted in part from ratepayersto shareholders. Cost reductions are easier topredict and quantify than uncertain futurerevenue from facilities enhancement.

Some states have recognized these prob-lems and arc experimenting with new formsof incentive regulation. Tennessee, for ex-ample, specifies special network investmentrequirements and allows faster capital recov-ery in return for accelerated investment ininfrastructure. The most ambitious plans arein Illinois, New Jersey, New York, Tennes-see, and Washington. New Jersey Bell isinvesting $1 billion by 1999 to expandnarrowband capabilities and begin installingbroadband network services. Tennessee hasa similar 10 year plan to achieve universalISDN availability in urban areas.43

State commissions and the FCC haveanother handle on investment decisionsthrough the rules for equipment deprecia-tion. PUCs typically require of telephonecompanies very long depreciation schedules

for net work equipment. This keeps rates low,but also slows down the replacement of oldequipment with modern equipment.44 TheFCC has just proposed new incentives forlocal telephone companies to invest in fiber

optics and computerized switches by allow-ing them to depreciate their investment in oldequipment more rapidly. The FCC regulatesinterstate access charges through price caps;these set a mandated ceiling on consumerprices and, within that range, telephonecompanies can increase their profits (up toabout 13 percent) by cutting their costs. If therate of return exceeds 13 percent, customercharges must be lowered to return half of thesurplus profit to customers. Big depreciationexpenses reduce a company’s reportableprofits. This can mean as much as $0.50additional profit for each additional dollar ofdepreciation .45

Telecommunications has become a majorfactor in corporate site selection, especiallyfor corporate headquarters, airlines, financialservices, and business services. States arecaught in a dilemma of wanting good tele-communications to attract economic devel-opment, yet also wanting to keep theirresidential rates low and to reduce theirintrastate long-distance rates to discouragecorporate bypass.46

Some consumer advocates insist infra-structure modernization could be wasteful; itcould benefit only RBHCs and their share-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 toregulators 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 Alliancefor Public Technology, February 1993.

44 In Louisiana PUCV. FCC, 476 US 355 (1986), an FCC order preempting conflicting state depreciationpolicy 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.11, No. 1, p. 118.



households who will pay a large part of thecosts. Also, it could squeeze out investmentsthat might otherwise go to smaller and moreinnovative companies. The alternative tonetwork modernization, however, appears tobe reliance on very fast, high capacitypacket-switching services and other newtechnologies, often provided by alternativecarriers, that will benefit very large corporateusers concentrated in some urban centers,and will offer Iittle or no support for middle-sized and small businesses.

At current rates of industry investment.the domestic infrastructure may be upgradedslowly and unevenly. 47 Much more modernization

will be on private networks. This at Ieastwould mean that those who benefit mostdirectly will pay. But some economists warnthat corporations may not promote intercon-nectivity at the most desirable levels. Evenlarge users may not by themselves generateenough traffic to justify some of the benefitsthat would be possible with broad access.Alternative carriers will be attracted only incities large enough to allow several compa-nies, or many companies, to reach econo-mies of scale.

ConclusionsThe argument that the U.S. telecommuni-

cations infrastructure is in perilous declinecannot be supported on the basis of publiclyavailable information. Usage of the telecom-munications network continues to increaseand is significantly higher than in Europeancountries. U.S. companies operating in Eu-rope attest to the general superiority of U.S.telecommunications and information serv-

ices (as discussed in chapter 5). The numberof new domestic services continues to in- There iscrease: the last 1() years have seen the no strong

explosion in facsimile communications, data public policynetworking, and cellular services. New play- encouraging

ers are crowding into the industry, such as planning for the

cable TV companies and alternative access networks of

providers. There is vigorous competition the future.

among equipment manufacturers, many ofwhich are small, new operations carving outniche markets. Corporations have createdsubstantial and finely-tailored private net-works that arc now being integrated with thepublic switched telephone network. As theNTIA infrastructure report concludes, theUnited States has ‘‘a well-developed, ad-vanced infrastructure, characterized by avery high access-line density, a robust levelof telephone usage, and a heavy emphasis on‘‘modernization."48

Meanwhile, there is no strong publicpolicy guiding or encouraging planning forthe networks of the future. It is by no meanscertain that the highly competitive marketthat has developed in the last decade pro-vides the incentives necessary for a level ofinvestment--in infrastructure modernizationand in R&D—that will be needed to keep theU.S. teleccommunications industry and theU.S. telecommunications infrastructure inexcellent condition. Many economists say acompetitive market economy does not auto-matically generate the optimal magnitudeand allocation of R&D. 49

The evidence is inconclusive at best as to

whether industry investment in infrastruc-

ture and R&D has significantly declined inthe 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


Box 9A. TELECOMMUNICATIONS INDUSTRY INVESTMENT : SOURCES OF

U NcERTAINTY OR C ONFUSION

Investment Examples/categories Caveats explanation

Domestic:Infrastructure Historicalmodernization discontinuitiesand

R&D expenditure

Divestiture

Changes in accounting andreporting procedures

Acquisitions, mergers, joint

ventures, sales of company

components

Decreasing technological

costs

Technological change

expansion, or even whether it has declined as

Introduction of competition; total marketincludes MCI, Sprint, as well as AT&T.

Separation of Bell operating companiesfrom AT&T. Separation of services fromequipment manufacturing.

Financial Standards Accounting Boardchanges; comparability of income andexpenditure categories before and afterchange is reduced or uncertain.

AT&T acquisition of NCR; RBOCs entryinto cellular market.

Costs of computer power, fiber cable,other components decreasing; possiblymore plant/equipment per constantdollar.

Shift from hardware to software withdifferent cost structure for research, de-velopment, deployment; movement to-ward “intelligent networks,” with chang-ing distribution of costs between networkand customer premises equipment, alsodiffering depreciation schedules.

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 for9-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 aR&D, merits very close monitoring, by very thin tightrope. In making the case toregulatory 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



Investmentcategories Caveats

Data quality

Examples/explanation

Deregulation and Paperwork ReductionPrograms reduce regulatory reporting re-quirements; telecom companies refuse todivulge proprietary data, especially onR&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).


that overseas investments represent signifi-cantly better options, RBHCs potentiallyheighten the concern that their captive do-mestic customers are being neglected. The

companies are wary of violating MFJ rules,and the operations for regulated local tele-phone service are separated from the nonreg-ulated side of the business. There is noevidence of wrongdoing, but RBHCs have

failed to assuage fears about cross-subsi-dization.

The case cannot be made, from the evi-dence at hand, that R&D expenditures are

declining as a direct result of the flow offunds to investment overseas. It is clear,however, that industry R&D expendituresare likely to shrink, or at best to remain flat,in the foreseeable future, and that R&D is Page 199


also likely to be more tightly focused onnear-term products and services innovation.By industry self-reports, this is an effect ofthe move toward competition in regulated aswell as unregulated markets, and in bothdomestic and international markets.

Many people in the industry argue thatmore R&D would be performed or funded bythe RBHCs if they were not prohibited frommanufacturing telecommunications equip-ment. It is likely that the allocation of R&Dexpenditures across sciences (i.e., physicalsciences as compared with information sci-ences) might change, but whether the totalvolume of R&D expenditures would in-crease is less certain. It should be noted thateven with the prohibition on equipmentmanufacturing in place, there is a strongtechnological linkage between manufactur-ers and users of telecommunications equip-ment, due to continuing need to modifynetwork equipment, once it is in place,through modular hardware expansion orreplacement and generic software revisions.so

Through Bellcore RBHCs play a central rolein the development of technical advisoriesand requirements, specifications and stand-ards for telecommunications equipment thatwill be part of or connected to the public-switched networks and that will support thedevelopment of services for domestic cus-tomers and for export to overseas markets.The ability of U.S. telecommunications firmsto compete in overseas markets, for servicesas well as equipment, will very likely sufferif levels of R&D funding and performancedrop significantly.

Close monitoring is needed to detect anytrends toward harmful domestic effects fromoverseas activities, and any harmful effects

on overseas competitiveness as a result ofunnecessary and unintended domestic policyor regulatory constraints. This monitoringwould probably have to be legislativelymandated. Major carriers have said theystrongly object to any additional monitoringor mandatory data reporting. However, theFCC already requires common carriers toreport expenditures for R&D as well as forinfrastructure modernization and expansionin a standard format that could allow com-parison of expenditures over time and inte-gration of data across reporting carriers. Anew legislative mandate would probably beneeded to extend the R&D performancereporting to the regional Bell holding com-panies and to other telecommunicationsservices providers. Alternately, a new legis-lative mandate could allow data now col-lected by the Bureau of the Census andanalyzed by the National Science Founda-tion to be aggregated into smaller, appropri-ately designed categories to reveal long-range trends in telecommunications-relatedR&D and make this information available topolicy makers in a way that would protectcompany privacy, Standardized data on allforeign investments would also be needed.However, the Bureau of Economic Analysisalready collects some information on directinvestment in foreign communicant ions, inhighly aggregated form.

New reporting requirements would rundirectly counter to the strong effort over thelast decade to reduce corporate reportingrequirements (as described in chapter 8), andwould possible strain the current budget ofthe FCC and the data collection agencies.Since much of this data is already reported inone form or another, however, the additional

50 Harris, op. cit., footnote 14.



reporting burden for industry would besmall. Government would incur some addi-tional costs for processing and analysis.

A less direct alternative would be a requestfrom Congress for consultation and coopera-tion among state regulators, through theNational Association of Regulatory UtilityCommissioners, with the same end in view.The State regulators, by harmonizing theirregulatory practices and reporting require-ments, could create a monitoring system andintegrate information about infrastructuremodernization across state boundaries. Theywould then be able to develop joint strate-gies, if needed. for setting infrastructuremodernization goals and consumer protec-tion strategies. However, as already noted,state regulators have some conflicting inter-ests with regard to infrastructure moderniza-

tion, which in part depend on the varyingeconomic development strategies of theirstates. As a group, nationwide, they may lackboth the resources to carry out systematicand coordinated monitoring. and the com-prehensive viewpoint to agree on prioritiesfor national and international network devel-opment, Moreover, this approach is not asdirectly applicable to monitoring R&Dtrends, since this activity is less widelydispersed and the information, consideredmore proprietary, may be more difficult toextract from telecommunications holdingcompanies. However, unless some action istaken to develop better information, publicpolicy makcrs at both the Federal and statelevels will remain in the dark about poten-tially damaging trends in telecommunica-tions investment.

Page 201

ReviewersandContributors A

A P P E N D I X

Lester M. Alberthal, Jr,Chairman, President and CEOElectronic Data Systems Corporation

Peter AllenConsultant, Telecom RegulationsAmerican Express Europe, Ltd.

Dennis AmariLegislative AnalystBellcore

Robert W. AnthonyResearch Staff MemberOperational Evaluation DivisionInstitute for Defense Analyses

Robert G. AtkinsInternational Trade SpecialistOffice of Service IndustriesInternational Trade AdministrationU.S. Department of Commerce

Kim M. AuBuchonDistrict ManagerFederal Government AffairsAT&T

Carol BalassaDirectorTelecommunication Services and TradeOffice of the U.S. Trade

Representative

Jim BallAssociate Directoroffice of International

CommunicationsU.S. Federal Communications

Commission

Malcolm R. BatesDeputy Managing DirectorThe General Electric Co,

Abdelhak BenkiraneCounselor, Technical CooperationUnited Nations International

Telecommunication Union

Keith BernardVice PresidentInternational & Regulatory AffairsCable & Wireless North America, Inc.

Fred J. BieganskiInfrastructure Development OfficerAgency for International Development

William BienInternational Trade AnalystInternational Trade Commission

Mary Ann BlatchChief of Government AffairsReaders Digest

Robert T. BlauDirectorPolicy AnalysisBell South

Kenneth W. BleakleySenior Deputy Coordinator

and DirectorBureau of International

Communications and InformationPolicy

U.S. Department of State

Henning BoeStaff DirectorTelecom Denmark

Robert R. BohannonManaging DirectorHQ/International CommunicationsAmerican Airlines

Bruce BondVice President, International AffairsBritish Telecom

Peter BonfieldChairman and Chief ExecutiveICL plcUnited Kingdom

Evelyn BoydMotorola

Maureen BreitenbergNational Institute of Science andTechnology

Sir Leon BrittanVice PresidentCommission of the European

Communities

William R. BrittinghamDirectorPacific Telesis Group

Joachim Broudre-GrogerForeign OfficeGermany

C.J. BuckleyVice PresidentCommunications and OperationsPARS Service Partnership

Jimmy BurkDirectorEngineering and PlanningFederal Express Corporation

Dan BurtonExecutive Vice PresidentCouncil on Competitiveness

Ellen BurtonDirectorFederal RelationsU.S. West, Inc.

David CarpenterInternational Trade ConsultantCzechoslovakia

Page 203


Ulrich CartellieriMemberBoard of Managing DirectorsDeutsche Bank ACGermany

Johann CasTechnology Assessment UnitPostgass, Austria

Margaret K. CassidyAttorneyWorldspan

Stu ChironSprint International

Carin ChristianIC&C

Howard L. Clark Jr.Vice ChairmanLehman Brothers

Warren ClarkSpecial AdvisorBureau of International



John L. ClendeninChairman, President and CEOBell South Corporation

Kathleen CollinsAssistant DirectorOffice of International

CommunicationsU.S. Federal Communications

Commission

Peter CourtneyITI International Finance, Ltd.Ireland

Peter CowheyDepartment of Political ScienceUniversity of California, San Diego

Rhonda J. CraneDirectorFederal Government AffairsAT&T

William A. CraneManagerBT Government Relations

Raymond CrowellDirectorIndustry Government PlanningCOMSAT

Imre CsorbaDeputy Head of DepartmentHungarian Telecommunications

Company

Arpad I. CsurgayDeputy Secretary GeneralHungarian Academy of Sciences

Marion DabrowskiManager, Information TechnologyABB Lummus Crest, Inc.

Diane DavisAEC Solutions

Parke DavisDepartment of CommunicationsCanada

Jan DegraeuweDirectorBetelcom, Belgium

Robert DevaneyExecutive Director, InternationalNYNEX Worldwide Services Group

Marty DickensBellSouth International

Joseph 1. DionneChairman and CEOMcGraw-Hill, Inc.

Janis DoranPolicy AnalystDepartment of ComrnunicationsCanada

Ambassador Diana Lady DouganCenter for Strategic & International

Studies

John A. DubretManaging DirectorCommunications EngineeringSABRE Computer ServicesAmerican Airlines

Georges DupontProject ManagerUNESCO, France

Stephen DuttonInternational AffairsNYNEX

Peter EislerGeneral ManagerHungirocom Telecommunications, Ltd.Hungary

Bernard EnnisVice PresidentAdvanced EngineeringABB Lummus Crest, Inc.

Helle R. EriksenHead of SectionGeneral DirectoratePost and TelecommunicationsDenmark

Douglas Caffrey FieldsVice PresidentInformation ServicesUnited Parcel Service

Page 204

Reviewersand

Contributors

Judith FincherEDI/CALS Marketing ManagerHFSI

Stephen C, FinchInternational Telecommunications

Users GroupUnited Kingdom

Tim FintonCounselor for Telcommunications TradeBureau of International



James M. FlynnEDI Services ManagerUnited Parcel Service

Charles E.H. FranklinHead of DivisionTelecommunications &

Information PoliciesInternational Chamber of Commerce

Gabor FrischmannDirectorHungarian Telecommunications

Company

Martin FuhrDirector of TelecommunicationsThe International Herald TribuneFrance

Lynne GallagherDirectorInternational Regulatory AffairsSprint International

Oswald H. GanleyExecutive DirectorProgram on Information PolicyHarvard University

Hans-Peter GassmannOrganization for EconomicCooperation and Development

Peter GerardDeutsche Bank AGGermany

Angela A. GilroyEconomics DivisionU.S. Library of Congress

Paul GlaserConsultant

Jack GleasonOffice of International AffairsNational Telecommunications and

Information AgencyU.S. Department of Commerce

William R. GodwinNetwork EngineeringEncompass

Douglas GoldschmidtAlpha Lyracom

Steven N. GoldsteinProgram DirectorInteragency & International

CoordinationU.S. National Science Foundation

M. Etienne GorogDirectorWorldwide Networking PracticeIBM France

Natasha GospicActing Assistant Director General

for R&DCommunity of Yugoslav PT&T

Richard GrainsonAdministratcur General AdjointRegie des Telegraphed at TelephonesBelgium

George V. GruneChairman and CEOThe Reader’s Digest Association, Inc.

Jan GruntoradHead of Data CommunicationsDepartmentCharles UniversityCzechoslovakia

Wendell HarrisAssistant Bureau ChiefInternational DivisionFCC Common Carrier Bureau

Dale HatfieldHatfield Associates, Inc.

Gerhard HausmannDirector GeneralFederal Ministry of Post andTelecommunicationsGermany

Hanno HausmannAssistant DirectorInternational AffairsDeutschc Telekom, Germany

John F. HealySenior AdvisorUnited Nations Development Programme

John HenryOffice of TelecommunicationsInternational Trade AdministrationU.S. Department of Commerce

Mary L. HenzeStaff ManagerPublic Policy AnalysisBell South

Ken HeroldDirector of Information TechnologyHOK

Page 205


Pierre HesslerChairmanIBM France

Mark HillManager, Business PlanningPARS Service Partnership

Lyell HolmesDirectorLocal Area TelecommunicationsFluor Daniel

Pal HorvathDirector GeneralHungarian Telecommunications

Company

Casten JensbyDirector Business DevelopmentTelecom Denmark

Volker JungSenior Vice PresidentSiemens, Germany

Laurel B. KamenVice President, Government AffairsAmerican Express Company

Tim KellyCommunications Policy AnalystOrganization for Economic

Cooperation and Development

Earl KennettVice President, CCB ProgramsNational Institute of Building

Sciences

Hal KimballOffice of International AffairsNational Telecommunications and

Information AdministrationU.S. Department of Commerce

Steve KindelFinancial World

Page 206

Lothar A. KneifelDebevoise & Plimpton

Zsolt KohalmiChairmanInteragency Committee on TechTransfer and Export AdministrationMinistry of International Economic

RelationsHungary

Peter KralSoftware Engineer Consultant

Debra M. KrietePennsylvania Public UtilityCommission

Andrzej KsieznyDirectorState Agency of

RadiocommunicationsPoland

Joanne K. KumekawaTelecommunication AnalystOffice of Plans and PolicyU.S. Federal Communications

Commission

Ann LaneDirectorFederal RelationsBell Atlantic Network

Lawrence E. LevinsonSenior Vice President

Service, Inc.

Government RelationsParamount Communications, Inc.

W. Kenneth LindhorstVice President, International ServicesAT&T

John K. LivingstoneManager, Correspondent RelationsBT North America

Randolph C. LumbVice PresidentGovernment RelationsAT&T

Mark MacCarthyVice PresidentGovernment RelationsCapital Cities/ABC, Inc.

Clyde ManningExecutive AssistantBellSouth Corporation

Herbert E. MarksSquire, Sanders and Company

Johan Martin-LofDirector, International AffairsSwedish Telecom

Tim MayFreedom of Technologies, Inc.

Doreen F. McGirrBureau of International



TK. MclnernayDeputy DirectorGlobal Network BidsAT&T

James K. McKeanCommunications ManagerThe Church of Jesus Christ

of Latter-Day Saints

Des McLauglinVice PresidentMarketingTelecom Ireland

Andy MecklinbergRegulatory PolicyBell Atlantic

Reviewersand

Contributors

Rudolf MeijerPrincipal AdministratorCommission of the European

Community

Linda MeyerMeyer Enterprises

Loretta MichaelsManagerMarket AnalysisNorthern Telecom Europe, Ltd.United Kingdom

Sam MidkiffManagcrCommunications PlanningPARS Service Partnership

Greg MillertVice PresidentFederal Government AffairsAT&T

Mahal MohanDistrict ManagerGovernment Affair-sTechnology and InfrastructureAT&T

Brian MoirFisher, Wayland, Cooper, and Leader

Martin MorellPrincipalNetwork Dynamics Associates, Inc.

John MorganVice PresidentGovernment RelationsCommunications Workers of America

Mike MorrisVice Chairman CEPT TelecomDeportment of Trade and Industry

David MulcasterDirector General, CD&PDepartment of CommunicationsCanada

Jan MullerCzech National Council IT ConsultantCeska Narodni RadaCzechoslovakia

Rupert MurdochChief ExecutiveThe News Corp.. Ltd.United Kingdom

Mark B. MyersSenior Vice PresidentCorporate Research & TechnologyXEROX Corporation

Tom NadelhofferManager, Communications PlanningWorldspan

Kaneo NakamuraCounselorThe Industrial Bank of Japan, Ltd.

Eric NelsonDirector of International AffairsTelecommunications Industry

Associ at ion

Derek NicholasVice PresidentInternational Telecommunications

SystemsUnited Kingdom

Emmanouil NicolaidisCEPT Telecom ChairmanHellenic Telecommunications Org (OTE)Greece

Cynthia NilaTelecommunications Policy AnalystTelecom StatisticsInternational Trade AdministrationU.S. Department of Commerce

Tim NultySenior EconomistWorld Bank

David P. O’NeillStaff Vice PresidentTelecommunicationsInter-Continental Hotels GroupUnited Kingdom

Judith O’NeillSteptoe & Johnson

William G, OatesDirector of TelecommunicationsWorld HeadquartersITT Sheraton Corporation

Janice ObuchowskiPresidentFreedom Technologies, Inc.

Philip C. OnstadManagerInternational Public PolicyInternational Communications

Association

Rolf OrrstenCoordinator International AffairsSwedish Telecom

Jiri OrsagComputer CentrePrague Institute of Chemical

TechnologyCzechoslovakia

Bruno OudetScientific Attache, Information Tech.Embassy of France

Page 207


David PalmerChief ExecutiveFinancial Times of London

Gabor PatocsManager InternationalAlcatel-Standard Electrica, Spain

Scott D. PearsonOffice of the U.S. Trade

Representative

Kenneth PhilipsOffice of Telecommunications PolicyCitibank, N.A.

Bob PhillipsDeputy General ManagerLand MobileINMARSAT

Tony PhippsAbt Associates

Paul PisjakTechnology Assessment UnitPostgasse, Austria

Dietmar PlesseExecutive OfficerFederal Ministry of Post and

TelecommunicationsGermany

David PorterGovernment Affairs DirectorAT&T

Melanie PoseyTelecommunications SpecialistInternational Trade Commission

Jean PrewittAssociate AdministratorOffice of International AffairsNational Telecommunications and


Page 208

William RamageBechtcl Corporation

J. Bradford RamseyDeputy Assistant General CounselNational Association of Regulatory

Utility Commissioners

Gerold ReichleDeputy DirectorFederal Ministry of Post and

TelecommunicationsGermany

Paul ReidHeadTechnical Organization DepartmentEuropean Telecommunications

Standards Institute, France

Mogens RitsholmSenior EngineerGeneral Directorate of Post and

TelecommunicationsDenmark

Frank A. RobertCommstrategies, Int.

Kenneth RobinsonAttorney

Larry RochaWimbley Allison Tong Goo

Karen S. RogersDirectorGovernment & International RelationsSouthwestern Bell Corp.

Walda RosemanPresidentCompassRose, Inc.

Richard M. RosenbergChairman and CEOBank America Corporation

Bert de RuiterHead Telecommunications and

Post DepartmentMinistry of Transport and Public WorksThe Netherlands

Charles RushAssociate Administrator for

International AffairsNational Telecommunications and


Jim RussellUS West Newvector Group, Inc.

Thomas R. RutherfordAssistant Director of Engineering and

ConstructionOffice of the Assistant Secretary of

Defense

Anthony M. RutkowskiVice PresidentSprint

Katrina SaarinenChief InspectorDepartment for Communications Admin.Ministry of Transport and

CommunicationsFinland

Martin SalamonHead of SectionNational Telecom AgencyDenmark

Dana SauerExecutive DirectorIntegrated Construction Association

Jeanne SchaafAssistant Vice PresidentGovernment AffairsBT North America

Reviewersand

Contributors

Thomas SchnoringWIK GmbHGermany

John L. SegallVice ChairmanCorporate Planning and DevelopmentGTE Corporation

Eugene SekulowExecutive Vice PresidentWorldwide Services GroupNYNEX

Suzanne SettleOffice of International AffairsNational Telecommunications and


Helen Anderson ShawDirectorDivision of International

TelecommunicationsNational Telecommunications and


Irvan H, ShefrinPresidentNetwork Performance Systems

Jerry SincoffPresidentHOK

Cathy SlesingerGovernment AffairsNYNEX

Peter SmithManagerInternational CommunicationsReuters, Ltd., United Kingdom

Oliver SmootExecutive Vice PresidentComputer and Business Equipment

Manufacturers Association

Anna SnowCommission of the European

Community

Stefan StanislawskiSenior ConsultantAnalysis Limited, United Kingdom

Paul StartzPaul, Weiss, Rifkind, Wharton

Roger F. StechschulteDirectorOffice of TelecommunicationsInternational Trade AdministrationU.S. Department of Commerce

Dan StefanescuDirecteur General (Develop.)Ministere des CommunicationsRomania

Milan SterbaIngenieurINRIA Rocquencourt, France

Kathy StewartAT&T

Ken StoweWalt Disney Imaginering

John StreeterVice President for CSFRBell Atlantic International

Andras SugarGeneral ManagerWESTEL, Hungary

David SunAssistant Vice PresidentCommunications ManagementCIGNA

S. Blake SwensrudEditor in ChiefEastern European & Soviet Telecom

Report

Paul TeicholzDirectorCenter for Integrated FacilityEngineeringTerman Engineering Center

Richard ThayerDirectorFederal Government AffairsAT&T

Dana TheusInternational Technology

RepresentativeOffice of Government AffairsEDS

Moira ThornettDirector, Technical SupportCorporate HeadquartersHoliday Inn Worldwide

Donald TiceBooze, Allen & Hamilton

Svetoslav TinchevDept. Head/Project ImplementationCommittee of Post Telecom-

munications and InformationBulgaria

Russ TirellaConsultant

Greg TolanderCorporate DirectorApplication Systems DeliveryHoliday Inn Worldwide

Page 209


Hal TurnerPresidentRockefeller CenterITT Telecom Netherlands US, Inc.

Anton ValkRockefeller CenterPIT Telecom Netherlands, US, Inc.

Rick van LeeuwenDirectorWide Area Telecommunications

Lawrence K. VanstonTechnology Futures, Inc.

Olympia VassiliadouChief EngineerHellenic Telecommunications

OrganizationGreece

Martin WassellEconomic DirectorPolicy and ProgrammeInternational Chamber of Commerce

Bjorn WelleniusTelecommunications SpecialistThe World Bank

Obie WhichardChief Research BranchInternational Investment DivisionBureau of Economic AnalysisU.S. Department of Commerce

John WhitePresidentInformation Technology GroupTexas Instruments, Inc.

Robert M. WhiteUndersecretary of TechnologyU.S. Department of Commerce

Margaret WigglesworthExecutive DirectorCoalition of Service Industries

Peyton WynnsChiefIndustry Analysis DivisionU.S. Federal Communications

Commission

Roxane WiserAmeritech International

Thomas M. WoodsVice PresidentInformation ServicesHalliburton Company

Robert E. WoodyardAssistant Vice PresidentCommunications & Information

Services Tech.Delta Air Lines, Inc.

Henrikas YushkiavitshusAssistant Director General for CI&IUNESCOAmy ZirkleManagerGovernment AffairsAmerican Express Company

Gelencser ZsoltFinancial AnalystHungarian Telecommunications

Company

Page 210

Acronyms

BA P P E N D I X

Page 211

AECAIDASSTAT&TATMATMBDTBEABOCBSIBTCAD/CAMCCITT

CEECEETEC

CEICENTREXCEOCIP

CMEACOCOMCSlDRGDSPEBRDECEDIEDSEFTAETSIFCCFLAGGATTGbpsGENGSDNGSM

GTEGVPNHTCIABICA

architectural, engineering, and constructionAgency for International Development (U. S.)Azienda di Stato per i Servizi Telefonici (Italy)American Telephone and Telegraph (Company)Asynchronous Transfer ModeAutomated Teller MachineBureau of Telecommunications Development (ITU)Bureau of Economic Analysis, U.S. Department of CommerceBell operating companyBellSouth InternationalBritish Telecomcomputer-aided design/computcr-aided manufacturingConsultative Committee for International Telephone andTelegraph, ITUCentral and Eastern EuropeCentral and Eastern European Telecommunications CooperativeMechanismcomparably efficient interconnectioncentral exchangechief executive officerCommunications and Information Policy (Bureau of,U.S. Department of State)Council for Mutual Economic Assistance, or ComeconCoordinating Committee on Multilateral Export ControlCoalition of Service IndustriesDirectorate of Regulatory Affairs (France)digital system processing (chips)European Bank for Reconstruction and DevelopmentEuropean Communityelectronic data interchangeElectronic Data Services, Inc.European Free Trade AssociationEuropean Telecommunications Standards InstituteFederal Communications Commission (U. S.)Fiberoptic Link Around the Globe (NYNEX)General Agreement on Trade and Tariffsbillion bits per secondGeneral European NetworkGlobal Switched Digital Network (AT&T)Global System for Mobile (communications), Groupe SpecialeMobileGeneral Telephone and ElectronicsGlobal Virtual Private Network (Sprint)Hungarian Telecommunications CompanyInternet Architecture BoardInternational Communications Association


Page 212

IDCWITSINTUGIRIISACISDNISOITAITUIXSkbpsKDDLANLECMFJMFNMANMbpsNAFTANARUCNRENNTIA

OECDOMBONAON?OPICOSIPBXPCNPCSPOTSPTOPi-rPUCRBHCRBOCSEEDSIPSITASMDSSONETSS7SWIFTTCI

International Digital Communicationsinternational message telephone servicesInternational Telecommunications Users GroupInstituto per la Ricostruzione Industrial (Italy)Industry Sector Advisory CommitteeIntegrated Services Digital NetworkInternational Standards OrganizationInternational Trade Administration, U.S. Department of CommerceInternational Telecommunication Unioninterexchange carriersthousand bits per secondKokusai Denshin Denwa Co., Ltd.local area networklocal exchange carrierModified Final Judgementmost favored nation (clause)metropolitan area networkmillion bits per secondNorth American Free Trade AgreementNational Association of Regulatory Utility CommissionsNational Research and Education NetworkNational Telecommunications and Information Administration,U.S. Department of CommerceOrganization for Economic Cooperation and DevelopmentOffice of Management and Budget (U. S.)Open Network ArchitectureOpen Network ProvisionOverseas Private Investment CorporationOpen Systems Interconnectionprivate branch exchangePersonal Communications NetworkPersonal Communications Services“plain old telephone service”public telephone operatorPostal, Telephone, and Telegraph (Administration)Public Utility Commissionregional Bell holding companyregional Bell operating companySupport for Eastern European Democracies ActSocieta Italiana per l’Esercizio delle Telecommunicazioni (Italy)Societe Internationale de Telecommunications AcronautiquesSwitched Multi-Megabit Data ServiceSynchronous Optical NetworkSignaling System 7Society for Worldwide Interbank Financial TelecommunicationsTelecommunications, Inc.

TPSCUNCTADUNDPUPSUSTRVPNVSATWANWATTC

Trade Policy Staff Committee (U. S.)United Nations Conference on Trade and DevelopmentUnited Nations Development ProgramUnited Parcel ServiceUnited States Trade Representative, Office of (U. S.)virtual private networkvery small aperture terminalwide area networkWorld Administrative Telegraph and Telephone Conference

U.S. TelecommunicationsServices inEuropeanMarkets I

I N D E X

AAccounting rates, 68-69Administrative Procedures Act, 174Advanced Intelligent Network, 35AEC services. See Construction servicesAIN. See Advanced Intelligent NetworkAirline reservation systems, 99, 100Alcatel Data Networks, 78American Telephone and Telegraph.

See also Regional Bell holdingcompanies

antitrust case, 74deregulation, 135-136effect of market Iiberali/ation, 60nEuropean activities, 75-76, 131international investments, 71R&D expenditures, 191-192strategy for international expansion,

78-80

Ameritech, 86

Analog systems, 25n, 26

Architectural services, 104-107

ARPANet, 41, 43ASST. See Azienda di Stato per i Servizi

TelefoniciAsynchronous Transfer Mode, 30ATM. See Asynchronous Transfer ModeAT&T. See American Telephone and

TelegraphAzienda di Stato per i Servizi Telefonici,

53-54

BBanking. See Financial servicesBasic services

market estimates, 64-65problems with market access, 149-151

BDT. See Bureau of Telecommunication

DevelopmentBEA. See Bureau of Economic AnalysisBell Atlantic, 85Bell Communications Research, Inc.,

192-193Bell Labs, 191-192

Bell operating companies. See also

Regional Bell holding companies;Regional Bell operating companies

effect of market liberalization, 60nISDN plans, 33R&D expenditures, 185-186

Bellcore. See Bell CommunicationsResearch, Inc.

BellSouth Corporation, 82-83BOCS. See Bell operating companiesBritish Telecom

competitors, 49-51effect of market liberalization, 60nSyncordia project, 78n

Broadband Integrated Services DigitalNetwork, 30

13T. See British TelecomBureau of Communications and Infor-

mation Policydescription, 166-168GAIT negotiation, 153-154structural options, 176-179

Bureau of Economic Analysis,Bureau of Telecommunication

Development, 118Bush Administration, 164, 172

cCable Communications Policy

of 1984, 73Cable television

market estimates, 66

173-174

Act

RBHCS international activities, 81Carter Administration, 160CCITE See Consultative Committee

for International Telephone andTelegraph

CEE. See Central and Eastern EuropeCEETEC. See Central and Eastern

European Telecommunications

Cooperative MechanismCEI. See Comparably Eflicient InterconnectionCell relay, 29-30Cellular communications

foreign investment in Central andEastern Europe, 124-125, 127

RBHCS international activities, 80-81Central and Eastern Europe

causes of decay, 116-117CoCorn, 119-123conclusions, 132-133condition of telecommunications,

113-116defining, 1 IO- I 11effect of Soviet policies, 112-113problems with liberalization, 127-129regional differences, 111-112role of telecommunications, 109-110strategies for liberalization, 123-127U.S. involvement, 129-132Western approaches to regional relationships,

1 17- I 19Central and Eastern European

Telecommunications CooperativeMechanism, 119

CIP. See Bureau of Communications andInformation Policy

CMEA. See Council for Mutual EconomicAssistance

Coalition of Service Industries, 154CoCorn. See Coordinating Committee on

Multilateral Export ControlCollection rates, 68-69Comecon. See Council for Mutual

Economic AssistanceCommon Air Interface, 36Common Carrier Bureau, 165Common channel signaling, 26Communications Act of 1934

Federal communications policy, 160formation of FCC, 164, 165npreemption by provisions of NAFTA

treaty, 147nSection 214, 74nSection 310, 4, 81n

Communications Policy Board, 176Communications Satellite Act of 1962,

4-5, 165n


Comparably Efficient Interconnection,33n, 44

Congressional considerationsencouraging export of telecommunications

services, 88-89policy options, 21-23

Construction services, 104-107Consultative Committee for International

Telephone and Telegraph, 34, 142Coordinating Committee on Multilateral

Export Control, 119-123Cordless telephones. See Mobile

communicationsCouncil for Mutual Economic Assistance,

110effect on ethnic relations, 112n

CSI. See Coalition of Service Industries

DData networks, 79-80Data protection directive, 98Data transmission, 94Defense Production Act of 1950, 5Demand patterns, 56-59Department of Defense

research computer network, 41

telecommunications policy, 167-168

Department of Justice, 168

Department of State, 166-168

Department of Trade and Industry, 52-53Deregulation, worldwide consequences,

135-137Deutsche Telekom, 51-53Digital systems, 25n, 27DOD, See Department of DefenseDTI. See Department of Trade and

Industry

EEastern Europe, See Central and Eastern

EuropeEBRD. See European Bank for Recon-

struction and DevelopmentEC. See European Community

EDI. See Electronic data interchangeE17A. See European Free Trade

Association800 service, 34-35Electronic data interchange

description, 103nmarket estimates, 66

Encompass Europe, NV, 100Engineering services, 104-107Enhanced services. See YMue-added

servicesEquipment. See Telecommunications

equipmentETSI. See European Telecommunications

Standards InstituteEuropean Bank for Reconstruction and

Development, 123European Community, trade agreements,

I l lEuropean Community Services Directives

description, 57EC Green Paper, 126, 127Italy ratification, 54Open Network Provision Directive,

2, 44-45,57telecommunications directives, 126Utilities Directive, 156n

European Free Trade Association, 111European market

aggregate telecommunications market,54-56

description, 47-49estimates and projections, 64-67importance of U.S. trade, 67-70long-range demand patterns, 56-59market liberalization, 60-63market unification, 63-64price trends, 59-60structure, 49-54

European Telecommunications StandardsInstitute, 42

Eurotel, 130Euroteldev, 118Exon-Florio Amendment, 5

FFacilities-based suppliers, 64nFASB, See Financial Accounting

Standards BoardFCC. See Federal Communications

CommissionFederal Communications Commission

Computer 111 decision, 44data collection, 173-174description, 164-166FCC Decision, 5international simple resale, 53requirement of BOCS for ISDN

plans, 33supportof international telecommunications

services, I 54-155Federal Express Corporation, IOOnFiber optics, export restrictions,

119-120, 122Financial Accounting Standards Board,

189nFinancial Network Association, 77Financial services, 101-104Frame relay, 29-30France, telecommunications market, 51Freedom of Information Act, 173nFreight transport, 99-100

GGATT. See General Agreement on Trade

and TariffsGEN. See General European NetworkGeneral Agreement on Trade and Tariffs

Agreement on Technical Bamiers toTrade, 44

building an international constituency,142-143

changing international trade relations,141-142

description, 143-144general principles, 144-147Government Procurement Code, 156nlong-range consequences, 155-157movement toward trade policy, 139-141

Index

negotiating GATL 15 I -155problem of basic telecommunications

services, 149-151Telecommunications Annex. 147-149Uruguay Round, I 1

General European Network, 96General Telephone and Electronics, 71Germany, telecommunications market,

5 I -53Global System for Mobiles, 36Government Procurement Code, 156nGSM. See Global S)stem for MobilesGTE. See General Telephone and

Electronics

HHoliday Inn Worldwide, 10 IHotel reservation systems, 101HTC. See Hungarian Telecommunications

Compan)Hungarian Telecommunications Company,

I ~~

IIBM, international investments, 72ICA. See International Communications

AssociationIEC. See tntcmational Electrotechnical

CommissionIncentive regulations, 195-196Industry Sector Advisory Committees, 170Infrastructure. See Telecommunications

infrastructureInstitute for Telccomrnun ications Sciences,

163nInstituto per la Rico~truzione Im!ustriale,

54Integrated Services Digital Network

Broadband, 30description, 31, 33-34

Intelligent Nett!ork

description, 28routing 800 service calls, 34-35

Interagency Task Force on Services Trade

Data, 174Interagency Trade Policy Review Group,

169

Interexchange carriers, 71, 74-78

International Communications Association,79, 154

in ternat iona l ConlpctitiJ’e Cmricr, 5

International Electrotechnical Commission,

41 n

International simple resale, 52-53International Standards Organization, 41 n

International TelecommunicationRegulations, 142

International Telecommunication UnionCentral and Eastern Europe, I 18description, 41 npurpose, 135, 141

International telecommunicationsforeign carriers in U. S., 90interexchange carriers, 74-78

investments, 71International Telecommunications Users

Group, 34, 79, 154International telephone traffic, 67-68International Trade Administration,

I 70-171

1nternct, 43

INTUG. See International Telecom-munications Users Group

IRI. See Instituto per la RicostruzioneIndustrial

Iridium project, 72nISACs. See Industry Sector Advisory

CommitteesISDN. See Integrated Services Digital

Network1S0. See International Standards OrganizationITA. See International Trade

Administration

Italy, telecommunications market, 53-54ITU. See International Telecommunication

UnionIXCS. See Interexchange carriers

LLANs. See Imcal area networksLATA. See bcal Access and Transport

Areabased line services

market estimates, 64problems with European networks,

93-94LECS. See bcal exchange carriersLEOS. See Lmw-Earth-orbit satellitesLiberalization

basic services problems, 149-15 Idefined, 145European countries, 60-63negotiations, 151-153problems in Central and Eastern Europe,

127-129strategies in Central and Eastern

Europe, 123-127Local Access and Transport Area, 62n, 73nbcal area networks, 30Local exchange carriers, 71

plant value, I On, 188-189Lmng-distance services

carriers, 71problems with market access, 149-151

Low-Earth-orbit satellites, 72n

MMarketMarketMarketMCI

access principle, 145-146liberalization. See Liberalizationunification, 63-64

European activities, 76-77Execunet Service, 57nstrategy for international expansion,

78-80Mercury, 49, 50Metropolitan Fiber Systems, 195nMFJ. See Modification of Final Judgment

MFN, See Most-favored na(ion statusMFS. See Metropolitan Fiber SystemsMillicom, 72nMobile communications


cordless telephones, 36demand for, 58description, 30-31market estimates, 65-66

Modification of Final Judgmentand decline in domestic infrastructure

development, 194effect on international expansion, 72-74Section II(D)(3), 73n

Montreal declaration of 1988, 145Most-favored nation status

basic telephone service, 149-150Central and Eastern European countries,

111-112description, 144

Motorola, 72nMultimedia services, 58Multiplexing, 25n, 29

NNAFI’A. See North American Free Trade

AgreementNARUC. See National Association of

Regulatory Utility CommissionNational Association of Regulatory Utility

Commission, 22National Information Infrastructure, 14National Network, 50National sovereignty, 146National Telecommunications and Infor-

mation Administrationassessment of infrastructure deterioration,

183description, 162-164formation, 160single network transmission, 73nsupport of telecommunications

services, 155Network management systems, 67Networks, interoperability, 39-411934 Communications Act. See Com-

munications Act of 19341979 Trade Agreements Act, 1391984 Trade and Tariff Act, 139, 172

1988 Montreal declaration, 1451988 Trade Act, 140, 153

section 301, 156USTR mandate to conduct trade talks,

155, 169Nippon Telephone and Telegraph, 45nNorth American Free Trade Agreement,

147NTIA. See National Telecommunications

and Information AdministrationNYNEX, 83-84

0OECD. See Organization for Economic

Cooperation and Development

Office of International Communications,165n

Office of Telecommunications Policy, 179Office of the United States Trade

RepresentativeGA1’T derogation, 149international telecommunications

policy, 1negotiating positions in GATT, 153-155opening foreign markets, 140trade policy, 169-170

OIC, See Office of InternationalCommunications

Omnibus Trade and Competitiveness Actof 1988, 172

ONA. See Open network architectureOND. See Open Network DevelopmentONP. See Open Network ProvisionOpen network architecture, 44Open Network Development, 45nOpen Network Provision, 2,44-45, 57Open Systems Interconnection model, 41Organization for Economic Cooperation

and Developmentcost of modernizing European systems,

121role in international agreements, 141

0S1. See Open Systems Interconnectionmodel

OTP. See Office of TelecommunicationsPolicy

PPacific Telesis, 85-86Package delivery systems, 100-101Packet switching, 28-29Paperwork Reduction Act of 1980, 171-

172PCS. See Personal Communications

ServicesPersonal Communications Ser\ices, 30Portable communications. See Mobile

communicationsPostal, Telephone, and Telegraph ad-

ministrations. See also Publictelephone operators

effect of deregulation, 136-137ISDN technology, 34

Price trends, 59-60Privacy Directive, 98Private networks, 35-36, 56-57Privatization

in Central and Eastern Europe, 126RBHCS international activities, 81

PTOS. See Public telephone opcratomPITs. See Postal, Telephone, and Tele-

graph administrationsPublic telephone operators

partnerships with long-distance carriers,78-79

public frame relay services, 30strength of European operations, 137n

Public utility commissions, 195PUCS. See Public utility commissions

RRate-of-return regulations, 195RBHCS. See Regional Bell holding

companiesRBOCS. See Regional Bell operating

companiesR&D. See Research and developmentReagan Administration, 164

Index

Regional Bell holding companies. See afso

Bell operating companies; RegionalBell operating companies

AT&T antitrust case, 74Bellcore R&D, 192-193decline in domestic infrastructure

development, 194international activities, 7 I, 80-87regulations effecting international

expansion, 72-74strategies for international expansion,

87Regional Bell operating companies.

See a/so Regional Bell holdingcompanies

inter-LATA toll service, 62nRegional Development Conference,

1 I 8- I I 9Regulations

European regulatory problems, 97-98and overseas expansion, 72-74

Research and developmentexpenditures, 1 84- I 88question of decline in expenditures,

1 97_20 1

trends, 189-193Resellers. Sre International simple resaleRural service, 115, 118

sSatellite business services, 66Satellite television, 66-67SEED Act. SCP Support for Eastern

European Democracies ActServices exports

construction services, I (M-107earnings of service industries, 92, 93encouraging expansion in telecom-

munications, 88-89European regulatory problems, 97-98financial services, 101-104policy issues, 107-108problems with European telecommu-

nications networks, 92-97

role of LJ.S. Government. 9 I

travel and transportation services,

98- IolSheraton reservation system, IO]

Signaling, 26

SIP. See Societa Italiana per l’Escrcizio

delle Telecommunicayioni

SITA. See Socicte International de Tele-communications Aemnautiques

SMDS. See Switched Multi- lMegabit Data

Service

Socicta Italiana per l’Escrcizio dclle Tele-communicazioni, 53-54

Societe Intemationalc de Telecommunications

Aeronaut iques, 99

Society for Worldwide Interbank FinancialTelecommunications, 102

SONET. See Synchronous OpticalNetwork

Southwestern Bell, 86-87

Soviet Union policies. 1 I 2-1 I 3

Sprint

European activities. 77-78

strategy for international expansion,78-80

Standards

defined, 38-39

development, 108

and the future, 42-45networks and interopcrability, 39-41

producers vs. users, 41-42

Stored-program contro] switching, description,

26, 28

Submarine Cable Landing Act, 4

Support for Eastern European Democ-

racies Act, 129

SWIFT. See Society for Worldwide Intcr-bank Financial Telecommunications

Switched Multi-Megabit Data Service, 30

Switching, 26, 28

Synchronous Optical Network, 28

Syncordia project, 78n

TTelecommunications Annex, 147-149Telecommunications costs, 96-97Telecommunications equipment

discriminatory procurement practices,97-98

export restrictions, 119exporting, 88nsale of German equipment in U. S., 138n

Telecommunications infrastructurecomparisons of modernization

internationally, 182-184conclusions, 197-201determinants of investment, 193-197modernization debate, 181-182question of domestic disinvestment,

188-193, 197-199R&D expenditures, 184-188

Telecommunications policyadequacy of data, 171-174CIP, 166-168conclusions, 174-179Department of State, 166-168FCC, 164-166ITA, 170-171NTIA, 162-164options, 174-179overview, 159structure, 160-162trade in services policy structure,

168-169USTR, 169-170

Telecommunications serviceschanging attitudes toward services trade,

138-143considerations for European export,

1-21defined, 47nencouraging foreign expansion, 88-89European investment levels, 116-117,

119

export policy options, 21-23foreign carriers’ operations in U. S.,

89,90


modernization of European systems,121, 123

problems with European networks,92-97

problems with market access for basicservice, 149-151

restrictions on access to U.S. market,4-5

trade deficit, 18-19Telegraph Act, 4Telephone networks

implications of change, 37infrastructure, 31, 32privatization, 81

Telephone penetrationdefined, 59nlevels, 112, 113-114

Telephone servicemarket estimates, 64-67operator productivity, 115, 117problems with market access, 149-151quality faults, 114, 116revenues for European countries,

117, 120waiting time for installation, 114, 115

Television. See also Cable television;Satellite television

EC directive concerning broadcasting,66n

Terminal equipment, functionality, 31Three-dimensional computer assisted

design, 1063-D CAD. See Three-dimensional

computer assisted designTPSC. See Trade Policy Staff CommitteeTrade Act of 1974, 139, 172Trade Act of 1988, 140, 153, 155-156, 169Trade Agreements Act of 1979, 139Trade and ‘Ikriff Act of 1984, 172Trade balance, United States, 68-70Trade policy. See Telecommunications

policyTrade Policy Staff Committee, 169

Transmission systems, 28Transparency, 145, 147Transportation services, 98-101Travel services, 98-101Treaty of Rome, 57nTruman Administration, 176

uUNCTAD, See United Nations Conference

on Trade and DevelopmentUNDP. See United Nations Development

ProgramUnisource, 78United Kingdom

international simple resale, 52-53telecommunications market, 49-51

United Nations Conference on Trade andDevelopment, 141

United Nations Development Program,118

United Parcel Service, 100-101United States

considerations for exporting tele-communications services, 1-21

encouraging foreign expansion, 88-89foreign carriers’ operations, 89, 90formulation of negotiating positions in

GATT, 153-155international activities, 71-72international telephone traffic, 67-68involvement in Central and Eastern

Europe, 129-132regulations concerning international

expansion, 72-74telecommunications services trade,

68-70trade balance, 3, 68worldwide consequences of deregulation,

135-137United States v. AT&T, 73nUniversal service, 57nUPS. See United Parcel ServiceUrban service, 115, 118

U.S.-Canada Free Trade Agreement,140-141

U.S. Coordinator for InternationalCommunications and InformationPolicy, 166

U.S.-Israel Free Trade Agreement,140-141

U.S. Trade Agreements Act of 1979, 44U.S. West

European cellular network, 130-131international activities, 84-85

USTR. See Office of the United StatesTrade Representative

Utilities Directive, 156n

vValue-added services

description, In, 151market estimates, 65-67problems with European networks, 95

Very Small Aperture Terminals, 36Virtual Private Networks

description, 35-36international expansion, 80problems with European networks, 95

VPN. See Virtual Private NetworksVSATS. See Very Small Aperture

Terminals

wWarsaw Treaty of Friendship, Cooper-

ation, and Mutual Assistance, 1 I OnWAITC. See World Administrative Tele-

graph and Telephone ConferenceWireless communications. See ?vlobile

communicationsWorld Administrative Telegraph and

Telephone Conference, 142World Bank

cost of modernizing European systems,121

market liberalization, 123Worldsource, 76

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

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