Talk is cheap - liberalizing the telecommunications industry

Reason, August-Sept, 1996 by Cynthia Beltz

The benefits from opening telecommunications markets worldwide will be substantial. According to estimates from the Institute for International Economics in Washington, D.C., consumers stand to gain more than $1 trillion from lower rates, better service, and improved technology. But open markets do not hinge on U.S. tactics in the WTO negotiations. The strongest forces pushing for liberalization are not even at the table. Consumer demands and new technologies are tearing down barriers that have protected telecommunications operators from domestic and foreign competition. National governments from Argentina to Australia are opening their telecommunications sectors to competition and dismantling state-owned monopolies. More than 50 privatizations are under way or have been announced.

In developing countries, infrastructure and capital needs are driving the shift toward open markets. In Asia alone, according to the Asian Development Bank, more than $200 billion will be needed during the next decade to bolster the telecommunications infrastructure. The demands far exceed domestic capital pools and the abilities of local firms. Foreign direct investment therefore has become the most important source of financing for developing countries. Leon Brittan, the European trade commissioner, notes that "developing countries have never been as receptive as they are today to the message that foreign direct investment is not a threat but a positive tool for economic growth, bringing capital, technology, and management expertise."

Even advanced economies like Singapore, which has been reluctant to open its telecommunications market, are being forced by technology and market trends to accelerate their plans to open their markets to domestic and international competition. Europe has been forced by its own infrastructure crisis to break the stranglehold of public monopolies faster than anyone believed possible just three years ago. Under European Union rules, all telecommunications services and infrastructure must be open to competition by January 1, 1998 - the date that the WTO's telecommunications agreement would go into effect.

Last year the European Commission ordered the EU's 15 member states to allow alternative networks used by cable companies, railways, and other utilities to compete against state-run monopolies, except in voice telephony, after July 1, 1996. The utilities or third parties may use the networks for private corporate services, mobile communications, and data services. In the past, a firm such as British Telecommunication in Germany could offer these services only by leasing capacity from Deutsche Telekom. The recent EU decisions allow new telecommunications operators to bypass the lines owned by state phone companies and lease lines from alternative providers. After January 1998 they will be permitted to supply voice services as well.

Monopolies and barriers to competition still exist, but the price of sustaining them is rapidly rising. Insulated from competition, monopolies have failed to develop the flexibility and cost discipline necessary to respond to user demands for customized telecommunications solutions, mobility, and new services such as Internet access. At the same time, their in-rated profit margins (more than 40 percent) have attracted the attention of new competitors seeking to exploit the opportunities presented by unmet consumer demands and the revolution in networking technologies.