Given the strategic importance of telecommunications as a vital sector of the economy, it would seem imprudent for governments to leave the recovery of the golden goose entirely to the mercy of market forces.
IT is clearly not the best of times for telecommunications. Worldwide, PTOs (public telecommunication operators) as well as telecommunication equipment manufacturers are not faring well. One major PTO, WorldCom - the second largest long-distance service provider (after AT&T) in the U.S. - had recently to file for bankruptcy protection. Another, France Telecom (in the midst of a major crisis) is being rescued by the government. In several countries, developed and developing, the PTO - the goose that once laid the golden egg - seems to be in poor health. Overall, the prevailing sentiment in the telecommunication industry appears to be one of gloom.
The story of how things have come to such a pass is worth recalling. It all began in 1982 with U.S. District Court Judge Harold Green's MFJ (modified final judgment) on the divestiture of AT&T, and the subsequent break-up of the Bell system. Although this introduced competition into most of the Bell network, local service continued to be treated as a natural monopoly characterised by economies of scale. Only years later did that position change with the adoption of the Telecommunications Act of 1996 and the subsequent opening up of the local service as well to competition.
From the early days of telegraphy and telephony and up to the 1980s, nearly all over the world PTOs were state monopolies run by government departments. The U.S. was one of the few countries where private companies, like AT&T, were the PTOs. AT&T's divestiture, however, set in motion in Western Europe as well as Japan a trend for services other than the local being opened up for competition. As a first step, a number of PTOs in these regions began to be privatised.
Soon liberalisation, privatisation, competition and deregulation came to be marketed as preferred policy options for reform. There was even talk of self-regulation despite doubts about its effectiveness. (To the sceptics, self-regulation seemed as unrealistic as leaving it to motorists to set and respect speed limits for the roads.) There was also pressure on PTOs to reduce their prices for long-distance and international services.
It was on those very services, however, that PTOs had traditionally depended for a major part of their profits. Local services had often been under-priced in the interests of promoting universal service. But with privatisation and competition, the imbalances between the prices of long-distance (and international) calls on the one hand, and local calls on the other, began to be reduced - by the orientation of prices towards costs, a process that came to be known as re-balancing.
Concurrently, there was mounting pressure from the developed world to have telecommunications looked at as a product for trade. That ultimately led to telecommunication services being included in the Uruguay Round of negotiations of the GATT (General Agreement on Tariffs and Trade). Following the completion of that round in 1994 at Marrakesh, certain aspects of telecommunications such as market access and pricing were also brought within the purview of GATT. In 1995, GATT became the WTO (World Trade Organisation).
From the quiet backwaters of a public utility, telecommunications thus entered the stormy seas of the market - for trade as a service.
Currently, the two most interesting segments of the telecommunications market are cellular mobile and the Internet, a network of computer networks that use Internet Protocols. Despite their relatively late arrival on the scene, the growth of these segments over the last decade has been phenomenal. In this period, the percentage of the world's population subscribing to the mobile service is reported to have increased from about 0.4 to more than 15. Similarly, the percentage of the world's people connected to the Net appears to have grown from 0.1 to over eight.
Mobile was introduced in the early 1980s as an analogue cellular radio service for voice telephony. Subsequently, it was upgraded to become a digital service enabling it to also provide limited data services such the short message service (SMS). 3G (or third generation) mobile, the latest version of mobile, is designed to provide multimedia services, combining voice, music, text, data and video to different degrees as required.
Another significant development in the 1980s was the convergence of communication and computer technologies. This led to the realisation of a wide range of new services, providing diverse combinations of information and entertainment. Noteworthy among these were the Internet services. Such services (and applications like the World Wide Web - the universe of network accessible information) included a variety of e-services (or electronic services) such as e-mail and e-commerce, as well as other applications such as portals and shopping malls on the Web. Of these, the most widely used at present are e-mail and the Web portals.
A more recent application is IP telephony. This uses the Net to provide a telephone service (with the sales pitch of global phone calls at local rates) and could well prove to be for the PSTN (Public Switched Telephone Network, inclusive of associated network elements providing other public non-voice services) the ultimate bypass. It would, however, seem odd that having gained access to the voice network to provide non-voice services, an ISP (Internet service provider) would begin using that very same access to undercut the business of the operator who had provided the access in the first place. Such behaviour would seem to be like that of the proverbial camel in the tent, and has major legal, regulatory and economic implications. Thus the comment of an ITU (International Telecommunication Union) analyst that "operators in developing countries may be better advised to embrace IP telephony'' seems rather curious.
There is a common perception that access to the Net is free. Yet a closer look would reveal the underlying charges. Some ISPs providing free access do in fact either get a share of the local-calling revenue they earn for the phone companies, or generate their own advertising revenue. Even ISPs like AOL (America Online) that charge a fee rely for a major part of their income on advertisements. In any case, there is a substantial cost associated with the use of a personal computer (without which no Net based service is feasible) that is almost invariably overlooked. There is also an invisible indirect price to be paid for using the Net. This relates to the risks on the Net from exposure to harmful things like spam (unsolicited e-mail carrying dubious propositions) - and worse.
ALL has not been smooth-sailing, however, for either the Net or the mobile. In the case of the former, there was one dismal failure that stands out. This was the collapse of the dot-com bubble when many new e-commerce ventures that enthusiastically joined the Internet gold rush, flush with venture capital, could not go the distance and had eventually to fold up.
It now seems that mobile also is headed for a similar fate. With 3G mobile struggling to take off, it is hard to believe that only three years ago mobile was being hailed as a service with a glorious future, with one ITU analyst even saying it could be "an effective means of achieving social policy objectives like universal access". In retrospect, some of the expectations about mobile seem to have been extravagant.
As with the dot-com bubble, it is hype that has inflated the mobile bubble. Resort to spin such as "mobile Internet" in the promotion of 3G mobile camouflaged the truth and created unrealistic expectations. The situation has also been aggravated by the fact that technology rather than demand was driving the launch of this service. In addition, the contracted price for 3G mobile auctioned spectrum seems to have been exorbitant. This coupled with system glitches delaying service rollout, and weaker than anticipated demand, have made the waiting time for the service to become profitable intolerably long.
Given the strategic importance of telecommunications as a vital sector of the economy, it would seem imprudent for governments to leave the recovery of the golden goose entirely to the mercy of market forces.
To those who might object to governments intervening in the markets, Joseph Stiglitz, George Akerlof and Michael Spence, all of the U.S., and joint winners of the 2001 Nobel Prize in Economics, have something to say. In their prize-winning work they argue that most consumers know much less than sellers about the sophisticated products they buy. Akerlof and Spence looked into this "asymmetry of information" in the used car and employment markets. Stiglitz took their work and applying it to markets in general demonstrated how inadequacies of information (implying inefficient and imperfect markets) led to financial as well as other crises. His work goes to prove the need for astute, active government to compensate for market shortcomings.
That one failing or the other has of late plagued the telecommunication services market (and by domino effect the equipment market as well) is undeniable. Such failings have included: depressed revenues following regulatory decisions leading to lower prices as well as traffic, exorbitant licence fees for 3G spectrum use, and corporate misjudgments, spurred by astonishing market hype and spin. But given the prevailing political, social and economic differences from country to country, it should be up to each government to determine how best, and to what extent, it could venture to help its telecommunication industry.
One possibility would be for the government itself to become a significant stakeholder in the nation's primary PTO. Another would be to consider extending financial assistance to any major PTO in crisis, provided that such crisis was caused by genuine market failings (not other factors such as boardroom banditry). The assistance to be provided could take the shape, for instance, of special grants or loans, tax concessions, or rescheduling of payments due for spectrum licence.
In any event, one entirely feasible action would be the initiation of specific steps towards redressing information asymmetries vitiating the market. Taking a cue from the old saying, "he who buys needs a hundred eyes; he who sells but one", the overall responsibility for coordinating suitable corrective measures in this regard could be entrusted to the ITU's general secretariat.
TODAY'S telecommunication network could be basically regarded as a troika of three segments, namely the PSTN, mobile and the Internet. While there are many similarities between the PSTN and mobile segments, there is hardly any similarity between these two on the one hand and the Internet segment on the other. Actually the differences are so significant as to make the Internet segment and the other two appear as coming from distinctly different worlds. This is but natural, however, considering that the Internet segment has its roots in the computer industry whereas the PSTN and mobile segments have theirs in the world of telecommunications.
Should there be some sort of control over communication content? The Internet segment thinks not, as any kind of control could imply some sort of undesirable censorship. The PSTN and mobile segments, on the other hand, hold the opposite view, in line with their long-held tradition on this issue. But clearly there is so much junk - and worse - circulating on the Internet that some compromise needs to be found on how best the undesirable traffic could be dealt with.
Despite the many differences, it is clear that as integral parts of the Information and Communication infrastructure, these segments are closely interconnected for now as well as the future. It would therefore seem imperative that a suitable model be developed for the harmonious growth and development of this infrastructure, on the basis of a balanced and mutually reinforcing association of all the three segments.
The complex work of developing such a model could very well be undertaken by the ITU in collaboration with other interested agencies and entities. In carrying out the required work, special attention should be given to ensure that the model also responds to the needs of the information poor, particularly in the rural and disadvantaged areas of the developing world. At the very minimum such people should be provided the basic means to communicate; otherwise, their human right to communicate would continue to be remain seriously abridged. The Information Age would realise its full potential for peace and prosperity only when none are left information-starved, and when information is also used to serve its larger end: to build knowledge - and hopefully wisdom.
John Francis is a former senior counsellor of the International Telecommunication Union in Geneva.
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