Você está na página 1de 220

U.S.

Telecommunications Services in
European Markets

August 1993

OTA-TCT-548
NTIS order #PB93-231355
R ECOMMENDED C I T A T I O N:

U.S. Congress, Office of Technology Assessment, U.S. Telecommunications


Services in European A4arkefs, OTA-TCT-548 (Washington, DC: U.S. Gover-
nment Printing Office, August 1993).

F’t)r WIC h) [he (1 S. (;[I\crIIIncIl( PI intlng 011’Icc

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


ISBN O-16 -041895-X
The European T HE E UROPEAN
Foreword
MARKET FOR TELECOMMUNICATIONS SERVICES will grow rapidly over

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

This study of U.S. participation in European telecommunications markets


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

d-w== -
Roger C, Herdman
Director

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

Bruce Greenwald Marie-Monique Steckel


Professor President
Department of Economics France Telecom, Inc.
Columbia University School of Business

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

Page iv
CONTRACTORS
Project staff
P RINCIPAL STAFF

Vary Coates, Project Director Bruce Egan,


Columbia Business School
Todd LaPorte, Analyst
Louis Feldner,
Mark Young, Research Analyst Feldner Telecom Consulting
Rob Frieden, Telecommunication
OTA MANAGEMENT Consultant and Attorney
John Andel in, Assistant Director, OTA Dale Hatfield,
Science, Information, and Natural Hatfield Associates
Resources Division Manley Irwin,
James W. Curlin, Program Manager University of New Hampshire
Telecommunication and Computing Gligor Tashkovich, Consultant,
Technologies Program International Telecommunications
Deborah Workman, Consultant
A DMINISTRATIVE
OTA ADVISORY GROUP
Liz Emanuel, Office Adminisstrator
Michelle Smith, Secretary Peter Blair.
Karolyn St. Clair, PC Specialist Energy and Materials Program
Sylvester Boyd, Telecommunication and
Information Systems
Linda Garcia, Telecommunication and
Computing Technologies Program
Julie Gorte, industry, Technology, and
Employment Program
William Keller, Industry, Technology, and
Employment Program
Bill Westermeyer, Oceans and
Environment Program
Robert Weissler, Industry, Technology,
and Employment Program
Ray Williamson, International Security
and Commerce Program
David Wyc. Telecommunication and
Computing Technologies Program

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

2 Technological Trends and Issues 25


Changing technology 25
The evolution of advanced services 31
The implications of technological change 37
Standards 38

3 The European Market for Telecommunications Services 47


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

4 European Activities and Strategies of U.S. Telecommunications Firms 71


U.S. regulations and overseas expansion 72
U.S.,telecommunications firms’ European activities 74
Encouraging foreign expansion 88
Conclusions 89

5 Users’ Perspectives-Views of U. S. Services Exporters 91


Problems with European telecomnunications networks 92
European regulatory problems 97
Representative services export sectors 98
Policy issues 107

6 Telecommunications in Central and Eastern Europe 109


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

7 Domestic Deregulation and lnternational Trade Negotiations 135


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

9 international investment and Domestic infrastructure 181


International comparisons 182
The question of domestic disinvestment 188
Determinants of infrastructure investment 193
Conclusions 197

A Reviewers and Contributors 203


B Acronyms 211
Index 215

Page viii
Exporting
Telecommunications
Services to
Europe
CHAPTER
1
U.S. TELECOMMUNICATIONS FIRMS are send- by the Office of the United States Trade
ing a message to Europe—’ ‘we intend to Representative (USTR). The industry struc-
offer services to Europe’s under-served tele- ture, regulatory environment, and invest-
communications users, ’ They are watch- ment strategies that are conducive to free
fully assessing European progress toward trade and encouraged by the USTR may
liberalization of national markets and inte- not be equally appropriate for meeting the
gration into a single European market. Mean- broaderrange of national telecommunications
while, U.S. carriers and enhanced-services objectives.
providers 1 are entering the niche markets Inadequate investment in domestic tele-
that are open to them, such as cellular communications infrastructure could re-
communications and cable television. sult from continuing investment overseas
The entry into European markets for by regulated U.S. telecommunications op-
The entry of U.S. services by American telecommunications erators, according to some State regulators
telecormmmications firms, from major carriers to small niche- and public interest groups. (The Office of
firms into European services providcrs, is—at this early stage—a Technology Assessment finds eviidence
services markets striking success story. Growing U.S. export for this inconclusive, but concludes that
is-at this ear/y of telecommunications and related informa- investment trends should be monitored.)
stage-a striking tion services2 in the future can contribute
This report rests on the premise that
success story. significantly to national economic goals.
telecommunications is not just a set of
Further expansion appears to require little or
tradable services, but also a basic function of
no government intervention—in this area,
society, essential for effective governance
deregulation and pursuit of free trade has
social cohesion, and economic viability’ and
worked well.
equity. International telecommunications is
However, there are some major caveats to
a primary vehicle for U.S. participation in the
these conclusions: global polity, as well as the global market -
Emerging technological and institutional
place. Public policy interest in international
trends could adversely affect bilateral and
telecommunciations therefore goes beyond
multilateral trade agreements already ne-
the question of competitiveness in foreign
agotiated or being pursued by U.S. trade markets.
representatives, making them eithcr unsta-
This chapter summarizes findings from
ble or overly restrictive.
the analysis presented in more detail in the
U.S. international telecommunications pol-
follow in: eight chapters. It addresses several
icy is being defined almost singlehandedly
questions:

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

Growing U.S. C 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- THEIR HOME REGIONS--I.E., THE REGIONAL BELL

export of telecom- PEAN MARKETS FOR TELECOMMUNICATIONS AND HOLDING COMPANIES?

munications and RELATED SERVICES? Expansion into European markets by U.S.


related services Technological and political trends, espe- telecommunications firms can contribute
can contribute to cially the likely effects of the European significantly to maintaining a positive trade
U.S. economic Community’s Open Network Provision Di- balance in services, both directly and by
goals. rective, are converging to bring about wider supporting the competitive activities of other
access to European telecommunications mar- U.S. services providers, ranging from air-
kets. For U.S. firms, nearly 85 percent of the lines to wholesale merchants, in European
potential market is now closed. Continuing markets. It may also encourage the European
pressure from the U.S. Government through sales of U.S. telecommunications equipment
USTR may somewhat hasten broader market and other information technology. For politi-
access. However, U.S. telecommunications cal reasons most of this economic activity is
firms caution that such pressure should not in the form of joint ventures and similar
result in opening U.S. markets to entry of kinds of direct overseas investment, which
foreign telecommunications operators whose has given rise to fears that this will compete
home markets still exclude U.S. services with capital for domestic investment in
providers. infrastructure modernization and in research.
There is so far no clear evidence of such
C AN U . S . FIRMS SUCCESSFULLY COMPETE IN THE harmful effects, but investment patterns
EUROPEAN MARKETS? should be monitored to detect any emerging
U.S. services providers can be strong adverse effects so that corrective measures
competitors in European telecommunica- can be taken if appropriate.
tions markets. Technology and deregulation
have allowed them to develop innovative W HAT CAN THE U .S . GOVERNMENT , AND E S P E-

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

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

those markets for U.S. firms. Caution is tution process for international telecom -
ww-ranted, because negotiating positions de- munications.
veloped by the Office of the U.S. Trade
Representative may be undermined by tech-
Summary of findings
nological trends that challenge distinctions
between basic and enhanced services and
T HE EUROPEAN MARKET FOR BASIC AND E N-
between public and private networks.
HANCED TELECOMMUNICATIONS SERVICES WILL
Beyond this, there is little that the U.S.
EXPAND STRONGLY OVER THE NEXT FIVE TO TEN
Government needs to do or should do, at this
YEARS.
time, to improve the competitiveness of U.S.
Comparison of the consumption of tele-
carriers and services providers overseas.
communications services in Europe and the
There is little evidence that the domestic
restrictions imposed on carriers at divestiturc United States indicates that in all European
(however onerous or effective they maybe at $billion (1987 dollars)
100
home) now arc a significant factor in success
in European ventures.
50 Services balance >
Is THE POLICYMAKING STRUCTURE FOR IN-
TERNATIONAL TELECOMMUNICATIONS NETWORKS 0
ADEQUATE AND APPROPRIATE FOR THE COMING
DECADE? -50
Merchandise balance
U.S.policy for international telecommu-
nications has for the last 5 years been largely -100
determined by USTR. This is cause for
concern. The unidimensional focus of USTR -150
on forcing open world markets for services
may slight or diminish other public policy
-200
goals related to telecommunications, such as 1970 72 74 76 78 80 82 84 86 88 90 92
strengthening the domestic telecommunica- SOURCE U.S DEPARTMENT OF COMMERCE, 1993

tions infrastructure, extending the scope of


universal service, or assuring the interopera- countries there is a substantial unsatisfied Figure 1-1.
bility of networks. The mechanisms for demand for business-oriented telccommuni- U.S. Trade Balance,
coordinating policy formulation and regu- cations services. Monopoly control of net- 1970-92
latory actions have become ineffective and works and services, high tariffs, and strict
need to be strengthened. constraints on the development of private
This chapter summarizes these and other networks have kept this demand from being
findings discussed more fully in later chap- met.
ters, It then suggests some actions that The Commission of the European Com-
Congress may consider for monitoring the munity is pushing ahead with its effort to
long-term, indirect effects of overseas ac- create a single European market; it puts high
tivities of U.S. carriers, and for strengthen- priority on the integration of telecommuni-
ing the policy development and implemen- cations networks and deregulation of value- Page 3
u.s.
Telecommunications
Services in
European
Markets

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

F OREIGN T ELECOMMUNICATIONS C O M P A N I E S

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

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

access to satellite transmission capabilities in the United States. ’ Satellite transmission


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

1 An FCC ~llng on ~ ~etltlon from Reuters stated that the term “satellite terminal station” In the act meant Earth stations
connected to a terrestrial commumcahons network, but thm left the scope of the act unclear to many foreign frms.
2 Swtlon 214 of the Communlcatlons Act of 1934 requtresthat the establishment of clrcults between the United States and
other countrtes, or between the states of the Umted States, is subject to government approval The U.S. dom mant earners,
AT&T and COMSAT, are ob41ged to fde their pro~sed tariffs 45 days m advance, with cost justtftcatlon. Nondommant
earners, such as MCl and Sprint, have a streamlined requirement-14 days notice, with no cost justification necessary.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT 1993

telecommunications services will further in- is closed to even domestic competition. (In
tensify. Thus European markets for telecom- the United States, the local cxchangc market
munications services are attractive future for voice services is also closed to foreign
targets for exported telecommunications serv- competition. ) (See box 1 -A. ) Basic voice and
ices and reltitcd information services. data transmission is reserved to state-owned
monopolies (the PT()) in all European coun-
A CCESS TO EUROPEAN MARKETS FOR U .S . tries except the United Kingdom.
TELECOMMUNICATIONS FIRMS WILL NOW BROADEN Access to this rcscrvcd portion of the
RAPIDLY. market will almost certainly soon be forced
As much as 85 percent of the aggregate opened by the same kind of c(~mpctitive
European telecommunications market re- pressure that brought about CJ. S. deregula-
mains closed to U.S. firms chiefly because it tion and divestiture of AT&T--nanlely, the Page 5
Us.
Telecommunications
Services in
European
Markets

ability of large corporations to bypass the U.S. firms are already entering European
public switched networks by developing niche markets for enhanced or value-added
private networks. The EC Open Network services, largely through partnering with
Provision Directive, issued in 1992, requires European firms, often the monopoly PTOs.
each member-state to make leased lines A U.S. carrier can handle a global corpora-
available to customers with no restraints on tion’s needs only so long as one end of the
their use or on interconnection to the public traffic either originates or terminates in the
United States. Partners are necessary both to
600 $billions (1987 dollars) share capital and to provide national regula-
Figure 1-2.
U.S. International Imports tory standing and customer access in many
Transactions, countries.
Exports
1992 The three major U.S. long-distance carri-
400
ers (AT&T, MCI, Sprint) are actively pursu-
ing European partners for consortia to pro-
vide large multinational corporations with a
200 Exports full range of services (’ ‘one-stop shopping’
Imports on a global basis. AT&T hopes to earn 50
percent of its total revenues overseas by
0 2000.
Goods Services The seven regional Bell holding compa-
SOURCE U.S DEPARTMENT OF COMMERCE, 1993. nies are estimated to have invested about$12
billion overseas. RBHCs pursue three kinds
switched networks. This effectively opens of European activities. They are constructing
the door for bypass—i.e., for the use of and operating cellular networks, building on
private networks to deliver both voice and their solid expertise gained at home, both to
data traffic in competition with the public compete with monopoly local carriers in
networks. As corporations rush to develop Western Europe and to provide an alternative
private networks in order to get cheaper, to wire infrastructure in Central and Eastern
customized basic services, they will also Europe. They are experimenting with and
want to attach equipment of their own gaining experience in other kinds of infra-
choosing, and they will actively seek en- structure-Personal Communications Net-
hanced or value-added services customized works and, especially in the United King-
to meet their corporate needs. Thus broad- dom, cable television networks—hoping to
ened market access in the future may have bring this experience and expertise home
less to do with trade negotiations than with when there is a change in U.S. regulations.
technological and market imperatives. They are also investing in privatized foreign
PTOs, although these investments have mostly
U.S. TELECOMMUNICATIONS FIRMS ARE MAKING A been in non-European countries that have
STRONG ENTRANCE INTO EUROPEAN NICHE MAR- greater need for infusion of foreign capital
KETS, PREDOMINANTLY BY DIRECT INVESTMENT than do European countries.
ABROAD. Economists have assumed that most serv-
Page 6 ices must be produced where they are
Exporting
Telecommunications
Services to
Europe

delivered. Many telecommunications and constitute about 58 percent of all U.S.


information services, however, could be services exports, and to financial services
delivered electronically, directly from the and data processing services, which add
United States through international networks. another 5 percent.
But even with liberalization and market By comparison, American firms operating
integration, European countries will try to in Europe feel seriously hampered by the
arrange matters so that both national laws necessity of relying on European technology
and EC regulations continue to favor Euro- and services for communications within
pean firms. The primary purpose of Euro- Europe and at the European end of interna-
pean market integration is to increase the tional networks. Many of them complain of
competitiveness of European industries vis-a- the scarcity of high-grade leased lines, re-
vis American and Japanese firms that have strictions on the use of all leased lines, lack
benefited from larger domestic markets and of access to fast data networks, severe
larger scale operations.4 The benefits of restrictions on-or delays in—approving
transborder access and free movement of customer-premise equipment, irregular and
goods will, however, accrue also to foreign inconsistent billings, and above all, exces-
firms that have established a legal presence sively high costs. These problems beset
in member-states; in theory, they will be European users as well. If U.S. telecommu-
considered European firms. For this reason, nications firms are allowed broader access to
many U.S. services vendors will continue to the market they may be able to capitalize on
operate through European subsidiaries or these opportunities to prove greater effi-
joint ventures. ciency and greater responsiveness to users’
needs.
T HE COMPETITIVE EDGE OF U .S . FIRMS IN BASIC

NETWORK SERVICES AND ENHANCED SERVICE> EUROPEAN O P P O R T U N I T I E S, N O T U .S . R E G U-

BOTH IN TECHNOLOGY AND IN MANAGERIAL EXPE- LATORY RESTRICTIONS, NOW DRIVE U.S. PARTICI-
RIENCE—IS WIDELY RECOGNIZED. PATION IN EUROPEAN MARKETS.
U.S. services exporters to Europe, heavily U.S. telecommunications firms have con-
dependent on international telecommunica- cluded that their future growth may depend U.S. carriers
tions networks, agree that they are well largely on foreign markets, where growth know how to
served by U.S. carriers. (See chapter 5.) rates are expected to be much higher than in provide innovative
American communications and computer the now better-served U.S. markets. For services wanted
technology, they say, gives them a competi- example, European consumer expenditures by both European
tive edge in foreign markets by enabling for telecommunications (now much lower and American
them to offer innovative services. Network than those in the United States) are projected corporate users.
technologies and services are especially t. grow three times faster in the next few
important to providers of transportation. years. Estimates of annual growth rates for
freight, and travel-related services, which business-oriented enhanced services range

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

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

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

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

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

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

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

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

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

Page 12
Exporting
Telecommunications
Services to
Europe

Carriers

:,., : Interexchange carriers Figure 1-3.
/ Enhanced” Local exchange carriers :1 Us.
? $wvkM
. . . . providers \ \, U . S . C h a m b e r ‘1 “~
Telecommunications
, !--- of Commerce----- I ~ 1 -- -7
——— Po/icy Structure
‘+
Alternative> , ‘,_, - I u s . co”rlcll 1..-.. , ‘
‘+ access \\ \\ for Internat’1. //’ ‘ /
/
p r o v i d e r s ‘“~ \,,Buslness,/;~.-’
/ x., \ ,./ ,/

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

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

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

Resellers
u
lndlvldual firms
c1

Corporate users

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993


Us.
Telecommunications
Services in
European
Markets

F ORMAL RESPONSIBILITY FOR DEVELOPMENT OF


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

policies and its own standing rules and office within another Bureau. To make CIP
policies. 9 an effective tool for coordination of telecom-
The State Department’s Bureau of Com- munications policy would require restructur-
munications and Information Policy (CIP) ing, refunding, and restaffing. It would also
has the legislative mandate to coordinate require a hospitable environment within the
telecommunications policymaking among State Department, one that recognizes the
and between FCC, NTIA, and other execu- essential role of telecommunications in gov-
tive agencies. The selection of the State ernance and in the conduct of foreign affairs.
Department as the site for coordination of
telecommunication policy represented first E FFECTIVE RESPONSIBILITY FOR INTERNATIONAL

the perception held by the Administration at TELECOMMUNICATIONS POLICY HAS FALLEN TO


that time that telecommunications is primar- USTR, A TRADE AGENCY. THIS CONSTRICTS AND
ily a service for multinational corporations DISTORTS THE FORMULATION OF TELECOMMUNICA-
engaged in world trade, 10 and secondly a way TIONS POLICY.
of extending congressional oversight of The formulation and implementation of
telecommunications trade issues.11 CIP has international telecommunications policy, be-
however recently been largely ineffective cause of the 1988 Trade Act, has come to be
both in its coordinating role and in contribut- dominated by trade negotiations. The United
ing substantively to development of tele- States Trade Representative has in effect
communications policy, functioning largely played the role envisioned for CIP, USTR
as a clerical facilitator for industry/gov- consults other agencies in depth and at great
ernment participation in international meet- length, but when strong interagency differ-
ings. Its effectiveness may be further less- ences arise, USTR generally prevails, espe-
ened by a current State Department plan to cially since telecommunications agencies do
degrade it from Bureau status to that of an not have a seat on committees that resolve

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

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

the user. There arc many advantages to the ciples, ignoring special characteristics of
latter approach, but on the other hard, telecommunications services;
building advanced capabilities into the net- ■ Continuing confusion and conflict over

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

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

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

jobs. 13 However, there is relatively little ~ Billions of minutes


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

Some services, for example financial serv- r-l nl


ices, have been directly exported for centu- 2
ries (e. g., bills of exchange), but the direct
electronic export of enhanced services has 0
burgeoned only recently.15 Most telecom-
munications services are delivered overseas
Net settlements ($ billions) –—- >
through direct overseas investment in sub-
sidiaries and joint ventures. It is difficult to
I ‘ - \

-4 1 I I 1 1 1 1 I
judge the impact of such corporate overseas 1975 77 79 81 83 85 87 89 91
investments on U.S. income, jobs, profits, SOURCE FEDERAL COMMU~lCATIONS COMMISSION, 1992.
and general economic welfare. Offshore
operations financed by direct investment U.S. parent firm increase the value of the Figure 1-4.
generally create jobs and secondary income domestic corporate enterprise, and arc as- Telecommunications
in the foreign country, not in the United sumed to strengthen its growth prospects and Traffic Balance
States, but profit repatriation must also be stimulate domestic employment and income.
NOTE Does not Include traffic with
taken into account. Profits flowing back to a Foreign services firms entering our markets Mex!co and Canada.

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

Figure 1-5. A comparison of a 5-minute, peak-time call between the United Stated and Germany, 1991
Accounting and n rate
Collection Rates for
International
Telecommunications
Traffic

NOTES: The accounting rate


with Germany In 1992 was 0.8 sp~
clal drawing rights or $1.14 (FCC,
Stat6tlcs of Commumcatlons Com-
mon Carriers, 1991 /1 992 Ed.). The
collection rate (I e., what the caller IS
charged) for the U S.-tmGermany
call IS calculated as $1.77 [for the 1
Inltlal m mute] + 4x$1 .09 -.$6.13 0 1 2 3 4 5 6 7 8 9 10
(FCC), The collection rate for the
Dollars
Germany -to-U.S. call IS derived from
5x$1 88 (TeleGeography 1992, in-
ternational Inst{tute of Communica-
tions). The costs to the carriers are
estimated at SO.15 per m Inute at
❑ Amount paid to the correspondent carrier to complete the call, as per the accounting rate

both the US and German end;


thm number IS conservatwe. ❑ Amount retained by operator originating the call

Ez2 Estimate of carriers’ costs

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

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

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

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

tions services is both growing and moving investment in domestic infrastructure as a


toward liberalized entry. The U.S. Govcrn- result of overseas investment by the major
ment can encourage and hasten this in- long-distance carriers and the holding
creased opportunity through trade negotia- companies that include regulated local
tions and other actions. Whether U.S. firms exchange carriers; and
can remain competitive in this market will ■ The weak and ineffectively coordinated

also depend on other factors: technological Federal organizational structure through


superiority, management skills, access to which national telecommunications pol-
affordable capital, well-trained human re- icy is developed and implemented. Page 21
Us.
Telecommunications
Services in
European
Markets

The Office of Technology Assessment a consistent pattern or trend of disinvestment


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

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

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

Page 23
Technological
Trends
and
Issues
CHAPTER
2
E MERGING TECHNOLOGIES AND I N N O V A T I V E, compressing information signals into ever-
SOFTWARE-BASED SERVICES are undermining smaller bandwidths. The second provides
some U.S. telecommunications regulations both vastly improved transmission quality
and policies. Intelligent networks and information- and the necessary transmission capacity for
based services will make it increasingly bandwidth-intensive services that combine
difficult to draw clear boundaries between voice, data, and video signals.
public networks and private networks and
between regulated ‘‘basic’ telecommunica- Changing technology
tions services and ‘‘enhanced’ services.
Eight broad technological trends should
Such technological change may make the
be noted:
negotiating positions developed by the Of-
conversion from analog to digital trans-
fice of the United States Trade Representa-
miss ion,
Technological tive (USTR) irrelevant by the time they arc
common channel signaling,
trends will increase embodied in treaties, trapping the United
unbundling of stored-program control
need for international States in agreements no longer in its best
switching functions,
standards, and will interests. These technological trends will
advances in transmission systems,
challenge the both increase the need for international
advances in digital multiplexing,
viability of traditional standards, and at the same time challenge the
advances in packet switching,
standards processes. viability of traditional means of developing
mobile communications, and
standards.
greater functionality in terminal equip-
The broad technological trends that will
ment.
shape the networks of tomorrow stem from
three fundamental developments: 1 ) the The most basic and important of these
progressive increase in processing power of trends is the progressive conversion from
microelectronnic circuitry, 2 ) the continuing analog to digital systems. The great ad-
improvement in fiber optics, and 3) fiber vantages arc better performance, easier
optics: extraordinary reduction in cost. The multiplexing, 2 easier encryption, easier sig -
first provides the necessary processing power naling, better monitorability of performance,
for advanced switching systems and for integration of switching and transmission,

NOTE: Much of the material In this chapter is based on an Office of Technology Assessment contractor
report: Hatfield Associates, Inc., Advanced /ntematkma/ Te/ecommunicatbns Technologies and Serwces,
December 1992.
1 In an analog system, the signal weakens and becomes corrupted by noise and distortion as it moves along
a wire, unless It IS regularly boosted by am PI ifiers. But am pllflers cannot distinguish signal from noise, and
they boost both, while adding some additional noise and distortion. These distortions accumulate over a
long transmission path until the desired signal may become almost unintelligible. In a dtgltal system,
regenerators are used along the path rat her than am pl If Iers. Regenerators merely detect whether a pulse
IS present and, If so, they generate and send on tot he next regenerator a new (noise-free) pulse. The same
sequence of pulses presented at the beginning IS delivered at the end without weakening and without the
accumulation of nose and distortion.
z Multlplexlng IS the process of combin[ng multiple signals into a single channel for transm Isslon over a
Page 25 common faclllty, e.g., a Iightwave or radio carrier, thus Increasing effect!ve capaclt y.
us.
Telecommunications
Services in
European
Markets

and accommodation of other services.3 Com- does not consume conversation capacity on
pression techniques are steadily reducing the the trunk. The network can ‘ ‘look ahead” to
number of bits per second that must be see if lines or trunks are busy before setting
transmitted to reproduce a given signal, and up a call on the circuit-switched network,
advanced modulation techniques allow higher and then pick a route through the network
bit-rates to be transmitted per unit of band- that minimizes congestion. These improve-
width. (See figure 2-1 and 2-2. ) ments become even more powerful when
A second important trend is common enhanced computer processors and data-
channel signaling, or separating voice traffic bases are added to common channel signal-
from signaling. Signaling is the information ing to create ‘‘intelligent networks.
associated with setting up, maintaining, and A third trend is toward unbundling of
stored-program control switching. Modem
computerized or stored-program circuit

11’U”Y
b
switches are composed of two basic parts—
the matrix where physical connections arc

/
c made between circuits, and a processor that
o contains the logic that controls the switch-
) ( ))))))) (
ing. In early ‘‘stored program control
Ampllfler Ampllfler >
&/
~,:,:.:,, ~+ .,:,:,:,:: switches, the switch (matrix) and processor
,.. ..:?::::::.:

‘pm
) I
At elements were integrated. (In computer terms,
/
c there was no separation between the “appli-
Signal strength cation program’ and the "operating sys-
rt
~ ~ Original signal tern, ’ The customer could not modify the
I switch software to create new or changed
f’ti } Distofied Signal
services-the switch manufacturer had to do
that, usually with a new switch.
SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993
Separating the switch control from the
Figure 2-1. taking down calls. Until recently, analog lower-level switching functions allows net-
Analog Transmission tones were used to convey signaling infor- works to be programmable by a carrier, an
mation, which was carried on the same enhanced services provider, or the customer/
NOTE In order to transmit a voice
over the telephone network, the
channel as the voice conversation. With end-user. In the case of a public network, a
soundwaves (a) are converted to a common channel signaling, all of the signal- local switch can suspend an incoming call,
corresponding electrcal wave (b)
when the waves contact the mouth-
ing associated with multiple conversations is look up the called number in a database, and
pmce of the telephone handset. The
signal weakens as It travels along
handled on a common packet-switched subnet- route the call to the intended recipient at
the wires of the network, and there- work. Conversation channels are circuit- another number and location (call forward-
fore must be ampllfwd at intervals
The signal mewtably picks up noise switched, while signaling information in the ing). In a corporate network, a private branch
and dwtortton, and this noise and common channel is digitized and packet- exchange (PBX) can be linked to external
distortion slncluded with the ongmal
sound when the signal IS ampllfled switched. Common channel signaling is computers; calls can be delivered to particu-
(c)
faster than traditional analog signaling, al- lar corporate agents along with different
lowing calls to be set up faster. The signaling screens of information depending on the

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

Figure 2-2.
Digital
Transmission

SOURCE OFFICE
OF TECHNOLOGY
ASSESSMENT, 1993.

...which is
1 ... encoded as ...and sent as
10000011 n f-l
10000010 J-1 n
10000001 n n
10000000 n
01111111 -J 1
01111110 -1 L
01111101 J L-It
01111100 -r L-

L ~ 20~8000 s e c o n d @
/
124-- 01111011
...

In a digital system, the soundwave is sampled (a) at sufficiently close intervals (1/8000 of a
second) to very accurately reproduce the wave’s shape. The amplitudes of the samples are then
quantized (b) -- or given approximate vaIues according to the range into which the amplitude
falls. The new signal IS encoded to an 8-character binary format (which permits 256 possible
levels) for transmission t/ through the network. In this example, the digitized signal would be:

/“” 10000000,01111111,10000000 ,.. (129, 128, 129...)


The digital signal is regenerated rather than amplified (as in analog) during transmission; the
/ repeater reads the deteriorating signal (c) and generates a fresh sequence of 1s and 0s (d).
/
// —
‘.
.
~———————- ——————
~’

Cr —J—,
“Repeater /)

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

I I Ill -1I1111~ 11I 1-


I II !
I I
.— ——J ~ I
U.s.
Telecommunications
Services in
European
Markets

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

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

digital mode, it switches 56/64 kbps (thou- Megabit Data Service (SMDS), described
sand bits per second) circuits, corresponding below.
to the uncompressed bandwidth require- Frame relay utilizes the same type of
ments of ordinary voice communications. variable length packets characteristic of tra-
For data communications, there are two ditional packet systems, but the individual
drawbacks to circuit-switching: the ineffi- packets--called frames-arc relayed through
ciency of having dedicatcd connections when the switch in: nodes with no effort to recover
traffic is intermittent or “bursty,’ and the from any errors detected. Much of the error
constrained 56/64 kbps transmission speed. detection and all error recovery is left to the
The lattcr can be partially overcome by terminal devices. Transmission rates in the 1
modifying or redesigning switches to handle to 2 Mbps range arc possible.
multiples of the 56/64 kbps rate. (This is
Cell relay operates similarly, except that
currently being done to achieve speeds up to the packets-here called cells—have a short,
1.5 Mbps. ) A wideband, circuit-switched fixed length, and because of this can be
service of this type is appropriate for bulk file
switched at extremely high speeds (in the
transfers, vidcoconfcrencing, and other ap-
plications with relatively constant bit-rates.
Traditional packet-switched networks arc
effective for handling bursty data, but are
currently 1 i m i ted to speeds of about 64 kbps.
:Q

This is because the packet switch at each
network nodc must read the address informa-
tion, check the data contained in the packet
for errors, correct the errors or request a
retransmission, reassemble the packet, and
forward it to another node. New technology,
known generically as ‘‘fast packet-switching, ’
can reduce these delays.
Frame relay and cell relay are two forms
SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993
of fast packet-switching. Both rely on the
fact that modern digital transmission sys-
tems have very low error rates compared range of hundreds of megabits per second). Figure 2-3.
with analog systems, and the end user’s The expectation is that the high speeds and Multiplexing
terminal equipment now has the processing small delay will allow integrated combina-
NOTE Multlplexlng IS the process
power to correct errors or ask for retransmis- tions of’ voice, data and video traffic to be of comblnlng multlple signals Into a
single channel for transmission over
sion. Both frame relay and cell relay are handled through a common switch. With all a common facll Ity (e.g , Ilghtwave or
the transmitted information divided into radio carrier). Multlplexlng IS used to
attempt to improve a situ at ion in which the Increase transm s.slon efffc!ency by
ability to transmit information at high speeds individually addressed cells, both variable allowlng mult @e clrcu[ts to be
earned by the common facility
exceeds the ability of switches to route it. bit-rate (i.e., data) and constant bit-rate (i.e.,
These technologies have given rise to the voice ) traffic can be switched. While early
important developments of Asynchronous applications of cell relay technology are for
Transfer Mode (ATM) and Switchcd Multi- data communications, the goal is to extend Page 29
Us.
Telecommunications
Services in
European
Markets

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

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

2-4.) Rapid growth9 has been encouraged by Thus advances in telecommunications serv-
government actions to reallocate spectrum ices will occur not just within networks but
for advanced mobile communications sys- at the edge as well. The time needed for such
tems. by the continued increase in processing developments is often shorter than for devel-
power (e.g., Digital Signal Processing chips, opments in the internal network infrastruc-
or DSP), by steady improvements in battery ture.
technology, and by increased use of comput-
ers within the supporting land-based infra-
The evolution of advanced services
structure.
The broad technological trends discussed
Still another trend shaping telecommuni-
above are the basis on which advanced
cations networks is increased functionality
services will evolve. Perhaps the most highly
in terminal equipment. The provision of
touted advanced telecommunications service is
terminal equipment has been deregulated in
ISDN. The concept of ISDN originally
many countries and the markets arc intensely
competitive. Intelligence and functionality Millions $billions
in terminal equipment at the edge of the 12 T 8

network can substitute for intelligence and


functionality within the network. For exam-
ple, frequently called telephone numbers can 9“ Subscribers d 6
be stored either: on a b ‘smart card’ that is
plugged into a handset. in the terminal
equipment itself. within a telecommunica- Revenues
6- 4
tions network (e.g., in a PBX or CENTREX),
or at some common location or database
accessible to the customer from any network.
Hard engineering or economic reasons arc 2
leading to locating intelligence and function-
ality at the edge of the network rather than
internal to it. It may also be done to respond 0
to customer preferences. Some customers 1984 1985 1986 1987 1988 1989 1990 1991 1992
want to develop proprietary solutions to their SOURCE CELLULAR TELEPHONE INDUSTRY ASSOCIATION, 1993.

communications needs to gain some compet-


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

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

Figure 2-5.
A Network —.—---———-——. . . ..—— .—.
=—r-
=511r m - — ? - .

+fl
——

Topology 1

NOTE The publlc-switched tele-


phone network consists of four
malor segments
Customer premises equipment “ \..
(CPE) refers to the commumcattons ‘\
devices (mcludlng the mslde wlnng)
In the user’s home or office, such as
telephones, facslmtle machines, and
computers and modems. The CPE of
,\\ \. w - - - - - + \ 1 f=%.
larger compames often includes pr-
// ~I
ivate branch exchanges (PBXS) and
Icd ar~ (computer) netvaks (lANS).
Local distribution network refers
m‘“

,/ / / ’ ‘—,
1-
“’:’:’’””O”
came
/
/1’bm
I I Swfld I I
\ + LN@ \

%L~ TcentraK&5’
to the portion of the network connect- ,/’
ing homes and offices to the tele-
phone company’s central office.
The metropolitan or regional net-
work cons(sts of the central office
switches and the mterofflce trunk
Imesconnectmgthose switches. Each
cmtraloffceswtch arespncfs muc$ly [bY!!.4i J Interoffice trunks
to a neighborhood so a city WIII be
served by multlple central offices. \
Telephone traffic for pcxnts outside
the metropolitan network is collected
:, -jw~:* ,: piiEFEq \
at and routed through a tandem
4 ,
switch. / 1’ I \
The most obwous part of the inter-
city or Iong-distance segment IS
the web of high-capacity trunk Imes
(mamly f~ber optic, but also mtcro-
wave) that carry the telephone con-
versations or messages; the packet- / \l
swltched data network (represented
by the thm dashed Ime) IS transpar-
ent to the user but IS cntlcal as It IS
the mtelllgence of the network—
determmmg the best route for a call
and allocating the clrcults, handllng
~fiSignal transfer point I
blllmg, etc. The mterexchange (or
Iongdlstance) carriers interconnect
for access to the local network at the
point of presence (POP).


! Interclty o r I
Iong-distance 1/
1/
/’
/

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

from the channel carrying customer mes-


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

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

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

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

Transport or call-carrying circuit


Figure 2-6.
Intelligent Network

,{
r‘&f-—’——— ((’l, NOTE Theadvanced mtelllgent net-
work (AI N), elemen!s of wh{ch are

/’
J/ ‘
)
L1 currently {nstalled In today’s publlc -

(TEM Local earner


A
Local
c
~-–Id
c Ier ~ ~ swltched telephone network, envt-
stons greatly lncreas~ operating
efficiency as well as a broad array of
sophtstlcated network services by
separat Ing the call t ran sport (I e., t he
voice clrcult) function from the slg-
\\ / \ I Signal nalmg and control funct~on and em-
L. ploylng the powerful software In the
swlfches.
Imagme, for example, an Instance
where a caller places a call to a
‘ 1 \A \ fam Ily member who while on vaca-
tion has Ind Icated that calls from
cerfam numbers are to be rerouted to
the new Iocatlon and given a unique
nng to Indicate pnorlty In this Illus-
tration, the vacationer would have
preprogrammed the pncmty telephone
numbers (other calls m Ight be routed
\ to an answering service or machine)
\J Signaling circuit v
and the new destmatton number by
dlalmg mto the Intelligent peripheral
and Inputt[ng these data When the
caller dials !he number, the local
SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993 swlfch quer!es the sgnal transfer
point for b[lling and accounting infor-
mation and ascertains from the serv-
database, the 800 number is translated into a cause the private network serves a limited ice control point a clear path through
the Iccal network to the point of
regular telephone number, which is sent back number of locations and telephones. An presence of Ihe caller’s long-
to the switch where the call was intercepted, inelligent public network can emulate that dlstance earner of choice The slg-
nahng networks of the two local
and the call is then handled as a regular feature on VPNs, translating a 7-digit num- exchange compantes and the long
distance carrier interact to learn the
circuit-switched call. It can be routed differ- ber dialed on a VPN into a normal 10-digit status of the called party and thus
ently depending on the place it originated, number, and muting it accordingly. Another how to set the cah up, In fhls case,
the call has been red lrecteC to a
the time of day, or other variables. Intelligent feature of private networks is the ability to telephone address In a new Iocatlon
restrict calling from certain telephones to so a third local company IS Involved
networks can route calls automatically to a
and once again the status of the
customer location nearest the caller (for reduce toll calling abuse (e.g., to prevent called party IS learneC (for example,
I f the hne were m use, the network
example, from a chain of retail stores or pizza employees from making unauthorized inter- would direct local carr!er A to trans-
parlors) and could take into account the national calls). The same type of restriction mit a busy signal to the caller) and
establishes a call!ng path Local car-
closing hours of the stores and the time at can be imposed by an intelligcnt public rier C IS also Instructed to del wer the
special nng
which the call is made. network by examining the calling and called
Another usc of the intelligent network numbers. Other features possible on VPNs
concept is the creation of Virtual Private include, for example, alternative destination
Network (VPN) services. One of the advan- routing, account codes for cost allocation
tages of a real private network is that purposes, management reports, hot lincs, and
corporate customers can employ their own call forwarding. VPN (and new tariffs for
numbering plans, using fewer digits than high volumc traffic) may already have swung
required by a public-switched network bc- the balance for large corporations away from
Page 35
Us.
Telecommunications
Services in
European
Markets

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

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

The implications of toward “light carriers,” providing interna-


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

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

work management with administrative and firms engaged in international commerce


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

19 R. van de Krol, “Ericsson Joins Hewlitt in Network Systems Venture,” Financia/ Times, Dec. 11, 1992.
20 Hatfield Associates, Inc.,Advanced /ntemationa/ Telecommunications Teclmo/ogies and Services, OTA
contractor report, December 1992.
2’ David Hack, “Telecommunications and Information-Systems Standardization—Is America Ready?”
Congressional Research Service, CRS 87-458 SPR, May 211987. Such informal standards can be taken
as a sign, Hack says, t hat “past creativit y has provided societ y with a solution which if adopted k)roadly and
consistently can move creative efforts to a new level.”
Technological
Trends
and
Issues

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

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

Figure 2-7.
Transatlantic
Communications
Cables
./
., ,,. , r, , !

o
0
‘ - - d


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

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

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

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


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

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

2’ Solomon and Rutkowskl, op. cit., footnote 25.


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

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

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

Box 2-A. I NTERNET S TANDARDS D EVELOPMENT

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

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

do so they must have a European presence. nity. In international standards-setting are-


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

telecommunications companies to be major required that Bell operating companies pro-


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

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

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

37 Japan has a comparable Imtlatlve, called Open Network Development (ON D), aimed at Ilmltlng the
dom Inance of Nippon Telephone and Telegraph (NTT) by allowing access to Its network to competitive
operators and resellers.
38 “Update on ONP,” /NTUG News (International Telecommunications Users Group, London), January
1992, p. 12, and October 1992, p. 10.
39 Besen and Saloner, op. cit., footnote 35.
The European
Market for
Telecommunications
Services
CHAPTER
3
T HE EUROPEAN TELECOMMUNICATIONS SERV- regimes, institutional structures, trade barri-
ICES MARKET is ripe for profitable entry by ers, and infrastructure characteristics.2 About
competitive suppliers. Its growth potential is 85 percent of the aggregate market is cur-
greater than that in the United States because rently closed to competition, but technologi-
of the present low market penetration for cal and political events are combining to
many services. Barriers to entry and high open much of the market in the next few
prices have prevented much demand from years. Meanwhile, the market is studded like
being met. A recent European Community a rich plum pudding with niche business
directive has opened the door for widespread opportunities for U.S. telecommunications
bypass of public switched networks, which companies.
will stimulate further demand for innovative A comparison of the scale and scope of
applications and services. European business and industry with its
The European This chapter describes the European mar- current consumption of telecommunications
market should ket for basic and enhanced telecommunica- services indicates that there is a powerful,
grow more than tions services’ and trends that arc changing underserved demand for enhanced services.
the U.S. market its structure, and then summarizes available With the integration of a single European
for the next projections of its size and growth over the market, geographical expansion and height-
decade. . . and next 5 to 10 years. The Office of Technology ened competition should increase this de-
access for Assessment (OTA) concludes that the Euro- mand, Many U.S. telecommunications firms
U.S. firms pean market for telecommunications serv- are demonstrating that they can compete in
will increase. ices will grow strongly in the next decade, Europe, and also strengthen the ability of
and that opportunities for U.S. firms in this other U.S. services industries to operate
market will greatly increase. successfully in European markets.
The European market for telecommunica- Until recently, the European market for
tions services is in reality many national telecommunications products and services
markets, with wildly different regulatory was completely closed to entry by non-

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

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

Croatia ———_,

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

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

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

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

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

Population (millions) of services, with nearly a dozen companies


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

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

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

‘2 New Sclent@ July 25, 1992.


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

Box 3-A. S IMPLE I NTERNATIONAL R ESALE

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

1 Re@ethat ISnOt’’SlrnpleO” lSthatlnwhCh Onlyoneend, orneltherend, of the pnvateclrcu ltlsattached toapubhc-switched


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

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

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

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

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

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

countries, including one to build an elec- for Europe, and


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

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

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

‘6 Italy ’stelecommunicat ions equipment manufacturer, Italtel, is the fourth largest {n Europe. However, all of
the major European equipment manufacturers hold significant market shares in Italy. (“Research and
Development in Telecommunlcatlons,” Te/ecornrnunicahons Po/Icy, January/February 1992, p. 49).
19 All market estimates in this section are for the 12 member-states of the EC unless otherwise noted. This
represents the vast preponderance of the greater Europeantelecommunlcat ions market. The est i mates and
projections unless otherwise noted were developed for OTA by Professor Bruce Egan, Columbia Institute
for Tele-information, Columbia University School of Business, on the basis of assessment and integration
of a large number of market analyses. The sources Include: McGraw-Hill and subsidiaries Northern
Business Information and Datapro; Dataquest; Communications and Information Technology Research
(CIT); Intelidata; Logica; Input; the Commission of the EC; Organization for Economic Cooperation an
Development; North American Telecommunications Association; Observatolre Mondial des Syst&mes de
Communications (France); Frost and Sullivan; the Gartner Group; Link; the Yankee Group.
n Market forecasts range from 5 percent to 9 percent for services. Growth projections fortelecomrnunicatlons
equipment ranged more widely, from 3 to 10 percent but concentrated at the lower end of the range. The
projected growth rates for European telecommunications services revenues are very similar to those
projected for U.S. telephone company service revenues (slightly lower in real growth because inflation is
slightly higher in Europe at present). Revenues of U.S. private network serwce providers are growing faster.
2’ David Gilhooly, publisher of CommurricafionsWeek,speaking at asemlnaron International Strategies held
Page 54 in connection with COMNET Exposition, Washington, DC, Feb. 3, 1993.
The European
Market for
Telecommunications
Services

the United States.zz Businesses account for Value-added services >


26 percent of total access lines and 45
percent of PTO revenues. Total EC traffic II Leased-line
Cellular/mobile ‘I’
Nonbasic services
services &
growth for the public-switched network is 1 —J — x
about 6 percent per year. Toll call revenues
Market status
are growing somewhat faster, and interna-
tional toll calls arc growing fastest—l 4 ❑,. Monopoly
percent per year. Of all international calls ❑ Open
made in the EC in 1991, 55 percent went to competition &
“Basic” voice
other EC countries, and 11 percent to the rest El Partial competition
services
of Europe.z? (See figure 3-3.) $75 billion
In most EC countries the sole or majority I
owner of the monopoly PTO is the central
government, although the operating entity
(the PTO) has been separated from the entity I
exercising regulatory authority. The PTO
retains a monopoly on voice services. 24 The
telecom. —————
exception is the United Kingdom, which has market Telecom. I 7
liberalized market entry. As a result, BT $130 billion equipment I
(fomerly British Telecom) is beginning to I
$40 billion I
I I I
see its monopoly on local voice services
I I
eroded by cable television companies that
provide two-way telephone service. Most of I I
these are now financed by U.S. telephone ? Y ’1 – – – – ..’

companies.
In major EC countries there are a few large SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993
providers of nonvoice services: i.e., the
structure of the market is oligopolist. In monopoly on voice services-also domi- Figure 3-3.
practice, these markets are characterized by nates the major non-voice service market European
what economists call "the dominant firm sector and sets the prices; the other providers Telecommunications
m o d e l . That is, the PTO—which has a arc price-followers. There may be a number Market

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

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

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

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

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

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

Telephone penetration is now growing about


twice as fast in the EC as in the United
States.~z In 1991 there were between 45 and EC average U.S average
(1 980-90) (1984-91 )
50 telephone lines per 100 population in both
Connection charges -39 ”/0 + 2%
the United States and the larger EC coun- Monthly line rental +20 +15
tries; more in the Scandinavian countries, Local call charges +3
Monthly business line +8
and man y fewer in Central and Eastern
Intracountry toll call -29
Europe (about 13). 33 The latter area is Intrastate toll call -40
averaging 6 percent growth in telephone Interstate toll call -72
Cumulative inflation during period 60 22
penetration, and this is expected to speed up
SOURCE: BRUCE EGAN, USING DATA FROM COMMISSION OF THE EUROPEAN COMMUNITIES,
substantially during the decade. The goal in “TOWARDS COST ORIENTATION AND THE ADJUSTMENT OF PRICING STRUCTURES-
these countries is 40 telephone lines per 100 ELECOMMUNICATIONS TARIFFS IN THE COMMUNITY,” BRUSSELS, JULY 15, 1992.

population by the year 2000; this would


require nearly 15 percent annual growth. Price trends
Tariff rationalization has not yet been Table 3-1.
People in the United States make three
achieved in the EC, and there are wide EC and U.S.
times more telephone calls than people in the
differences among countries in tariffing pol - Changes in
four largest EC countries; but calling rates
icy.36 Prices are high compared with those in Prices for
are increasing faster in those countries. 34 The Telecommunications
the United States and this clearly depresses
average annual expenditure per capita in the Services
demand and causes the telecommunications
United States ($445) is more than twice the (changes in
networks to be underutilized.37 Table 3-1
average for the large EC countries ($200) in nominal prices)
shows relative price changes, 1980 through
spite of lower U.S. customer charges, but
1990. Given the inflation rates, the average
average growth rates for expenditures are
EC tariff rates did not decline and perhaps
much higher in the European countries (5
increased in real terms, whereas in the United
percent compared with 1.5 percent).3s States they declined as much as 72 percent in

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

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

38 Commission of the European Communities, op. cit., footnote 22.


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

tional prices by the EC, 2) ending monopo- April 1993, the EC backed away from its
proposal, and instead announced that liberal- If the U.S.
lies’ control of cross-border interconnec-
tions, 3) opening up the entire regulated ization would be accomplished more gradu- experience is any
telecommunications market, and 4) freezing ally, between 1993 and 1998, under “a guide, bypass will
/cad to increasing
the liberalization effort and maintaining the well-managed liberalization plan’ to be
competition in
status quo. announced in a ‘‘new green paper’ by the
European markets,
There was opposition to further liberaliza- end of 1995.46
in spite of political
tion by most PTOs and in most govern- If the U.S. experience can be used to
opposition.
ments.42 In France, for example, members of foresee likely events in Europe, the ability to
Parliament declared opposition to further bypass PTOs’ services that is implicit in the
deregulation on the grounds that competition ONP Directive is likely to lead to steadily
would led to higher prices for local calls increasing competition in the European mar-
(which have been subsidized), hurting small ket, in spite of the success in blocking EC
businesses, and because it would enable U.S. formal procedures. While there are strong
operators to penetrate the European mar- cultural, institutional, and political differ-
ket. 43 On the other hand, the international ences between the U.S. situation in 1976
Users Group (INTUG) strongly advocated through 1984 and Europe today, business
the second alternative, opening transborder incentives and responses arc similar and the
infrastructure and voice services to competi- momentum already underway points to con-
tion, in advertisements 44and in letters to the tinued erosion of monopoly protection. In
Commission president. European newspa- international long distance, a number of
pers reported that ‘‘almost all consumers entrepreneurs have begun to arbitrage asym-
favour far-reaching liberalisation and har- metrical customer charges in the United
monisation" 45— but over a period of 10 States and Europe with arrangements for
years, rather than immediately. When the code-calling and automatic call-back
EC’s 6-month period for comment ended in schemes. 47

‘2 The newsletter of the International Telecommunications Users Group commented that”. . the forces of
reaction continue to dom Inate. . and to retain their hold on the political levers. ” “Presidents Letter, ” /NTUG
News, October 1992. The United Kingdom, Denmark, and the Netherlands are reported to support
proposals to open the European vo[ce market to competition. Dawn Hayes and John Blau, “Crack in
Serwces Market,” Comrnunicaflons Week /nterfraflor’ra/, Nov. 9, 1992, p. 3.
‘3 “France Hits EC Plans for Telecom Industry,” Te/corn High/ighfs /ntemahona/, Jan. 27, 1993, p. 3.
“ /NTUG News, October 1992 and January 1993, p. 3.
“ Andrew HIII, “Brussels Considers Widening Corn petition in EC Telecoms,” Flnarrcia/ Times, Mar. 10,1993,
p. 1.
‘G Statement by EC Commissioner Karel van Miert on Apr. 15, 1993, reported by Telecommunications
Reports, Apr. 19, 1993, p. 10.
‘7 For example, a European subscriber calls a U.S. number; the call IS not answered, but a computer in the
U.S. st nps off the number of the Incoming call, automatically returns the call (at U.S. rates), and connects
the caller to a desired reclplent. In many of these arrangements, calls from one foreign country to another
foreign country can be hubbed through the United States at U.S. rates—this gives the caller the benefit of
lower rates, but Incidentally exacerbates the accounting rate problem for the United States, which is
described later In this chapter. Page 61
Us.
Telecommunications
Services in
European
Markets

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

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

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

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

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

providers. Competition may force the PTOs very large firms that span a wide range of
to offer high-capacity (45 Mbps) DS3 leased services offerings and have the capacity and
line services, not now available in Europe. geographical presence to serve large, multi- Large firms that can
national corporations may dominate the offer multinational
corporations a wide
Value-added services market in the long run.
range of enhanced
Value-added services58 include applica- Estimates of the total European value-
services may
tions such as electronic mail (E-mail), fac- added services market vary widely depend-
dominate the
simile, database services, cellular communi- ing on how broadly the category is defined.
market in the
cations, paging, high-capacity data services, A reasonable figure is about $5 to $6 billion
long run.
EDI, transaction services (automated teller for the networking, infomation, and deliv-
machine services, credit card authorizations, ery portion of the market (not including
computerized reservation services. electronic charges for private data nets, cellular, pag-
funds transfer), and networked computer- ing, and other mobile and satellite business
aidcd design and manufacturing (CAD/ services). 60 Annual growth estimates are
CAM). ‘‘Soft’ \aluc-added services include generally as high as 20 to 30 percent.61 There
network management and consulting, soft- arc 3 million subscribers for cellular commu -
ware engineering, network operations and nications services in the EC, making up a
systems support services. Local area net- market estimatcd at $4.5 billion in 1990. In
works (LANs), wide area networks (WANs), the United Kingdom, BT provides less than
and metropolitan area networks (MANs) are half of the cellular mobile services. but
here also lumpcd with value-added services elsewhere PTOs dominate this market seg-
because they are often used as the delivery ment.
mechanism for services. New wireless technology applications arc
The United Kingdom at present consti- expanding rapidly; these include wide area
tutes most of the market for value-added paging, private and trunked mobile radio.
services, about 70 to 80 percent.59 The mobile data transmission, GSM digital cellu-
market for Yaluc-added services is generally lar communications, cordless phones. per-
compctitive, and full of niche suppliers. It is sonal communications services, and satellite
possible for small innovative firms to com- mobile services. The potential for market
pete successfully in these markets. However, growth is very high. The United States and

58 As here used, value-added or enhanced serwces are those that add value beyond pure transmission.
Basic services are traditional sw[tched services such as regulated local and toll voice services and some
leased line serwces.
59 In many EC countnes the PTO IS the dominant suppller of value-added services, but tariff charges for
PTO-provided network dellvery are excluded from market estimates.
w Datapro, July 1990; CIT Research, 1992; U.S. International Trade Commlsslon, April 1990. The U.S.
International Trade Comm isslon reported that In 1989 the EC value-added services market was S26 billion,
compared with S50 bllllon for the United States. This, however, Included computer services and software.
See Third Fo//owup Reporl on the Effects of Greater EconornIc /nfegration WIthIn the European Community
on the U. S., Pub. 2368, March 1991.
“ U.S. International Trade Comm Isslon, 1991; Northern Business Information, 1990; Communications and
Information Technology Research, 1992.
u.s.
Telecommunications
Services in
European
Markets

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

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

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

SOURCE FEDERAL COMMUNICATIONS COMMISSION, 1992

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

‘7 CARAT TV Market Forecast, 1992.


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

$59 billion in 1992 and $52.2 billion in States, which prides itself on being a leadcr
1991.70 This should be compared with a in basic and enhanced telecommunications
merchandise trade deficit of –$ 105.3 billion services, have a persistent and growing trade
in 1992 and –$73.4 billion in 1991. 71 deficit in this sector?
The European Community is the primary The deficit in telecommunications serv-
foreign market for U.S. service producers; ices trade is, by a strange twist, a measure of
almost a third of all U.S. exports of business U.S. strength in telecommunications, rather
services go to EC countries (an estimated than a sign of lack of competitiveness. The
$37.5 billion in 1991). telecommunications trade deficits are a re-
These figures cover only direct transac- sult of asymmetrical traffic demand patterns
tions in services and do not include revenue and of international accounting and revenue
from sales of U.S. affiliates overseas. Such settlement practices. When an international
foreign investments account for about half of call is made over a public-switched network,
the total U.S. delivery of services to foreign the long-distance company in the country of
72
citizens and organizations. In this category, origin pays the Iong-distance company in the
also, the United States has a favorable receiving country for its services in routing
balance of trade, $11 billion in 1991, up from the call to a customer. The amount of the
$8.5 billion in 1990.73 payment, which is called the accounting rate,
In telecommunications products and serv- has been negotiated between the two compa-
ices taken together, the United States has a nies. It is the same regardless of the direction
large trade surplus; but it has an overall of the call and is independent both of the
deficit in telecommunications services, -$2.8 collection rates (what the customer is
billion in 1991. This annual deficit has charged) in either country, and of thc actual
doubled since 1987. Why should the United

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

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

NOTES The accounting rate with


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

Amount retained by operator originating the call

Estimate of carriers’ costs

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

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

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

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

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


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

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

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

1 The seven regional Bell holding com panics (Amerltech, Bell Atlantic, Bell Sout h, NYNEX, Paci flc Telesls,
Southwestern Bell, and US West) are the parent companies for the 21 Bell operating companies (BOCS).
NYNEX, for example, consists of two operating companies, New York Telephone and New England
Telephone. While the operating companies are by far the most significant component of the holding
companies’ assets, NYNEX, like the SIX other RBHCS, also controls other nonregulated businesses such
as cellular properties and a publishing arm.. (Due to several reorga nlzat ions since d(vestlture, the number
of BOCS has fluctuated. At the time of the divestiture, there were 22 BOCS; currently there are 21).
2 Charles Mason, “Study Calls for Divestiture I l,” Te/ephony, Aug. 3, 1992, p. 9.
~ Maria Bird Pico, “Telefonica Pursues Overseas Opportunities, ” Telephony, Aug. 3, 1992, p. 9.
4
U.S. Department of Commerce, 1992 U.S. /ndusfrM Out/ook, January 1992.
Page 71
us.
Telecommunications
Services in
European
Markets

Table 4-1. working, satellite services, and value-added


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

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

REPRINTED WITH SPECIAL PERMISSION OF KING FEATURES SYNDICATE,

settled the antitrust case against AT&T (see tees of the 103d Congress are working on
box 4-A), and certain laws, primarily the legislation related to provisions of the MFJ.
Cable Communications Policy Act of 1984. Many analysts believe that the present
Under the MFJ, the seven RBHCs were regulatory structure and philosophy no longer
restricted from three lines of business: inter- suit the communications marketplace be-
LATA 10 long-distance service, the manufac- cause advances in communications technol-
ture of telecommunications network and ogies arc forcing a reexamination of what
customer equipment, and the provision of services are competitive. Cable television
information services. Additionally, the con- and telephone service, for example, could
sent decree originally barred RBHCs from with some significant modifications be pro-
any service that was not b‘ a natural monop- vided over a single network. 13 RBHCs argue
oly service actually regulated by tariff." 11 that: 1 ) the prohibitions preventing them
The prohibition on information services has from designing and manufacturing equip-
been lifted by the court. and several commit- ment unduly stifle or discourage their ability

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

Box 4-A. THE MODIFIED FINAL J UDGMENT


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

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993,

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

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

tions (though many of these are through $billions Figure 4-1.


80
AT&T facilities). Each of these carriers U.S. Toll Service
owns a share of the capacity on the various Revenues, 1984-91
cables traversing the Atlantic and Pacific
60
Oceans to carry their outbound traffic, and
leases Intelsat satellite capacity through Corn-
Sat.
40
International traffic is a lucrative market,
and it is experiencing high growth as com-
merce becomes increasingly global in na-
20
ture. International traffic grew by 13 percent
to 35 billion total minutes in 1991, the latest
figures available.16 Though most foreign
governments continue to reserve basic voice 0
1984 1985 1986 1987 1988 1989 1990 1991
services to a national monopoly, U.S. long-
distance carriers arc making inroads into the SOURCE FEDERAL COMMUNICATIONS COMMISSION, 1993.

European market for nonbasic services, such


It means increasing the company’s revenues
as value-added data networking. 7
Change in the telecommunications market for international equipment and services
is often rapid, so the description that follows from about $12 to $90 billion and for
of the activities of the major U.S. telecom- domestic telecommunications services from
munications firms is a snapshot as of the $48 to $90 billion. IS The company purchased
beginning of 1993. NCR in 1991 and Istel, a British information
technology firm, in 1989. Both additions
AT&T. AT&T is one of the few operators in solidify its European presence: with the
the world that is vertically integrated to offer acquisition of NCR, which also strengthens
both equipment and services. No other its computer business, AT&T more than
company operates on the scale of AT&T in doubled its foreign
19
workforce, most of which
both segments. AT&T Chairman Robert is in Europe. Before the takeover, NCR
Allen’s target of 50 percent of revenues derived approximately 62 percent of its $6
coming from international activities by the billion in annual revenues from abroad.
end of the decade is nevertheless ambitious. AT&T has also expanded its stake in the

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

Us.
Telecommunications
Services in
European
Markets

European market for value-added services operating a cable network, CANTV, in


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

m Information provided by AT&T; see also, Robin Gareiss, “AT&T Takes on European Data Nets; Expands
outsourcing,” ConwnunicationsVVeek, Mar. 16, 1992, p. 5.
2’ “AT&T, PTT Telecom-Netherlands in Joint Venture With State Committee of Ukraine; Plan Includes
Expanded International, Long Distance, Local Access Networks, Manufacturing,” Te/ecornrnunicafions
Repotts, Jan. 20, 1992, p. 21.
Page 76 22 Information provided by MCI’S Business Analysis Group, May 1993.
European
Activities and
Strategies
of Us.
Telecommunications
Firms

of Clear Communications, a competitive


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

2’ ‘(MCI Steers Global IN,” CornrnunlcatlonsWeek /ntemafiorra/, Sept. 21, 1992, p. 1.


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

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

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

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

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

trade name: MCI offers Vnet, AT&T offers


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

RBHCs overseas
In the last few years, the seven RBHCs
have also turned their attention outward,
beyond their domestic networks. The RBHCs’
overseas activities have mainly taken three
SOURCE: 1993 INDUSTRIAL OUTLOOK, U.S. DEPARTMENT OF COMMERCE. forms:
■ The construction and/or operation of cel-

Figure 4-2. based Tymnet from McDonnell-Douglas in lular networks;


Estimated 1993 U.S. 1989. 31 Infonet, based in California, is jointly ■ Experimentation with other infrastructure,

Telecommunlcatlons owned by 11 European PITs, in conjunction especially cable television; and


Services ($billions) with MCI. ■ Investments in the privatization of state

Carriers are also developing virtual pri- telephone companies.


vate networks that behave to the client like a U.S. companies' involvement in cellular
private network. That is, the user does not communications has mainly occurred in
pay retail rates for long-distance or intern- Europe. In Eastern Europe RBHCs have
ational calling, benefits from abbreviated helped construct networks that will serve as
numbers, and is assured of bandwidth when alternate infrastructure; in Western Europe,
needed; this is accomplished through the they are involved in cellular franchises
software in the switch rather than through competing with the incumbent carriers’ op-
discrete physical facilities. Virtual private erations. Their solid expertise m cellular
networks relieve the user of the necessity of communications in the United States32 is
running, monitoring, repairing, and upgrad- valued by countries building facilities to
ing networks. Each of the U.S. carriers offers complement or in some cases replace the
a virtual private network service under a existing ‘‘wireline infrastructure. In parts

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

of Eastern Europe, the existing communica- Kingdom’s competition strategy permits a


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

Figure 4-3.
Regions of the
Seven RBHCs

SOURCE: OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

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

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

France, it has shares in several diverse


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

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

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

Us.
Telecommunications
Services in
European
Markets

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

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

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

4C Donna Pinsky, “U.K. Cable TV Ups Telecoms Ante,” CcmrnurwcafionsW eek /nfemakma/,” Mar. 8, 1993,
p. 6. Slgnlficantly, TeleWest IS Investing S70.2 m Ill ion over 5 years to purchase its own switches to gain
greater control of network services, rather than buy switching from Mercury Communlcatlons.
“ “U.S. West Third Quarter Earmngs,” Te/corn l-lighhghts /ntemaflona/, Nov. 4, 1992, p. 12.
‘2 “Bell Atlantlc In Itallan Venture,” New Techrro/ogy Week, Dec. 16, 1991, p. 7.
‘q Pacific Teleslsl pending regulatory and shareholder approval, IS plann!ng a major reorganization of its
corporate operations to spl It off Its unregulated business from its regulated operations. Page 85
- - —. . . - . . . . . . -.

Us.
Telecommunications
Services in
European
Markets

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

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

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

50 “U.S. Cable-TV and Telephone Company Get Together for UK Cable,” Te/corn /-/igh/igh/s /ntemationa/,
Mar. 10, 1993, p. 5.
5’ Tlch, op. cit., footnote 48.
52 Ronald M. Serrano, P. William Bane, and W. Brooke Tunstall, “Reshaping the Global Telecom Industry,”
Te/ephorry, Oct. 7, 1991, pp. 38-42.
53 More than 93 percent of U.S. households have telephone service (Federal Communications Comm ission,
Statistics ot Corrrrr?unicatfons Common Cw;ers, 1991 /1 992 Edition). Many of the remaining 6.6 percent of
households are thought to be without service by choice rather than necessity. The mandate for “universal
service” has effect ively been achieved. Sweden boasts a higher number of telephones main I ines per capita
than the United States, however; Sweden has approximately two telephone main lines for every three
people compared with about one for two in the United States. Page 87
. ——

us.
Telecommunications
Services in
European
Markets

Encouraging foreign expansion and insurance.54 The issue of whether U.S.


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

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

losing out to foreign firms that rely on more $billlons


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

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

Box 4-B. FOREIGN C ARRIERS O PERATIONS IN THE U NITED STATES

The robustness of the U.S. telecommunications environment makes it attractive to foreign


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

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

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

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

Page 90
Users’ Perspectives–
Views of
U.S. Services
Exporters
CHAPTER
5
U.S. TELECOMMUNICATIONS FIRMS not only lomatic contacts, for further opening of
compete successfully in the European mar- European markets and removal of trade
ket, they support and often provide the barriers for both services and manufac-
competitive edge for other U.S. firms that tured goods;
deliver services to Europe. This chapter Pay special attention to reducing restric-
captures some of the perspectives of these tions on telecommunications services,
users of U.S. and European telecommunica- since for most of these companies the use
tions networks.1 Providers of travel and of American equipment and American-
transportation services, financial services, provided enhanced information services is
and architectural, engineering, and construc- highly desirable; and
tion services are given particular attention Encourage both U.S. and European firms
either because the y contribute strongly to the to move toward international standards as
Service-exporting volume of U.S. services exports, or because the most cost-effective way of getting the
firms agree they they represent sectors where considerable most out of information technology re-
are generally growth in services exports is possible with sources.
we// served by more intensive use of telecommunications.
In all services-exporting industries sur-
U.S. carriers. Exporters of these and other kinds of services
veyed, most firms agreed that they are well
provided information for this chapter
served by U.S. telecommunications carriers,
through interviews, letters, and responses to
and that American communications and
a written questionnaire.
computer technology gives them a competi-
Many of the corporate officials that re-
tive edge in developing innovative services.2
sponded to inquiries of the Office of Tech-
Accustomed to a geographically expansive
nology Assessment (OTA) argued that the
domestic market, the firms complain bitterly
U.S. Government has a role to play in
about the wide difference across European
encouraging both the liberalization of Euro-
countries in availability of telecommunica-
pean markets and the efforts of U.S. indus-
tions services and the difficulties of dealing
tries to expand the export of services. The
with many regulatory regimes within what
themes most commonly expressed were that
seems to them one natural market. From their
government should:
perspective, the benefits of an integrated
■ Apply strong and persistent pressure,
European marketplace seemingly are more
through trade negotiations and other dip-

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

Us.
Telecommunications
Services in
European
Markets

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

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

Exports Imports Figure 5-1.


Total value=$152.3 billion Total value=$100.0 billion U.S. Services Trade
by Sector, 1991
($billions)

~ Telecom.
$5.56

Financial services
$2.43
Computer, ~ Financial services
I $4.69
data processing ‘-
$1.71

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

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

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

Us.
Telecommunications
Services in
European
Markets

Figure 5-2.
Leased-Line Private
Network

A (dedecated) Ieased-line private net-


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

PBX

SOURCE. OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

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

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

Figure 5-3.
Virtual Private
Network

To the user, a virtual private network


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

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

PBX
Regional
office
Supplier

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

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

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

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

planning and pricing new communications- among the various telecom operators

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

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

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

Netherlands — - 1
1 Europe, 1992
J
I
Switzerland 1

United Kingdom -- BT ——— — —


-— —.. .
7
J
~
I

United Kingdom – Mercury

o 10,000 20,000 30,000 40,000 50,000


Dollar cost per month

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

problems will be their biggest marketing


opportunity.

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

us.
Telecommunications
Services in
European
Markets

AT&T equipment and complains that it had was to be issued in October 1992, but has not
to struggle to adapt BT hardware to its yet appeared. There is a separate proposed
network. ’9 When approval to use imported Directive on protection of personal data in
technology is granted, the approval process the context of public digital telecommunica-
may take many months or even several years. tions networks. According to the U.S. Inter-
There is little that U.S. telecommunica- national Trade Administration, ‘‘ l-J. S. indus-
tions companies can do to solve these try believes that the proposed umbrella data
institutional problems, which make it diffi- protection Directive and the Council of
cult to offer the ‘‘one-stop shopping’ and Europe Convention will provide adequate
‘‘seamless global networks’ that U.S. multi- protection. . . . [and] a sector-specific digital
national corporations say they need. For services Directive is therefore unnecessary
users, these problems add up to greatly and could create uncertainty and disruption
increased costs of doing business. Added to in the provision of telecommunications serv-
tariffs that are very high by U.S. bench- ices. ’ ’20
marks, are high equipment costs, mainte- Various national laws also restrict the flow
nance costs, and value-added taxes that U.S. of data. This is seen as an attempt to keep
services firms say prevent them from offer- data processing jobs within the country, by
ing services at the lower prices they could many U.S. firms that want to consolidate
otherwise aim for. their own data processing in a few large
Another regulatory issue of particular centers for greater efficiency. This concen-
concern to providers of financial services tration would have another benefit for the
and data processing services is national United States, in that large computer systems
legislation aimed at privacy protection. An are most often supplied by U.S. manufactur-
EC privacy directive that was proposed in ers such as DEC and IBM.
1990 could have disrupted the use of transna-
tional financial data systems by restricting
Representative services
the flow of data across national boundaries or
by requiring explicit consent for each use (or
export sectors
processing) of certain personal data. The Travel and transportation services21
proposed Directive was strongly criticized Travel and transportation accounted for 58
by the European Parliament. A new version percent of exported services in 1991, but
that reportedly will be much less restrictive contributed only one-third of the services

‘g Letter f rom Joseph 1. Dione, Chief Execut ive Off ice of McGraw-Hill, Inc., to John Dlebold, Chair of the OTA
project’s advisory panel, July 27, 1992.
20 U.S. Department of Commerce, International Trade Administration, “E.C. Telecommunicate ions,” release
of Oct. 1, 1991.
2 ’ This section draws on an OTA contractor report: Gligor Tashkowch, “The Use of International
Telecommunications Net works in t he Delivery of Transportation and Travel-Related Services,” September
1992. Interviews were conducted in, and corporate profiles were constructed for, two major airlines, three
network support or computer processing firms serving airlines, two hotel chains, two package delivery f irms,
and a diversified travel services firms. Other travel-related firms contributed Information directly to OTA
through participation in mail surveys or workshops.

Users’
Perspectives-
Views of
US. Services
Exporters

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

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

U.S.
Telecommunications
Services in
European
Markets

Figure 5-5.
The Programmed
Airline Reservation
System Network

I I

SOURCE PROGRAMMED AIRLINE RESERVATION SYSTEM, JUNE 1992.

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

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

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

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

U.S.
Telecommunications
Services in
European
Markets

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

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

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

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

Us.
Telecommunications
Services in
European
Markets

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

Construction services 37
Not all services exports are at present
highly dependent on international telecom-

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

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

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

U.S.
Telecommunications
Services in
European
Markets

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

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

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

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

Specifically, government intervention is network interconnectivity. Some user firms


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

Page 108
Telecommunications
in Central
and Eastern
Europe
CHAPTER
6
T HE DRAMATIC POLITICAL DEVELOPMENTS that exactly how telecommunications fits into
have transformed Central and Eastern Eu- economic, social, and political development
rope (CEE) appear to be closely linked to is often not placed in context. The absence or
communictions. Radio and television broad- dilapidation of the telephone network is not
casting provided a window on Western the only problem in Central and Eastern
democracies and markets, and their appeal Europe; many other urgent needs, such as
proved difficult to resist compared to Stalin- energy production and environmental cleanup,
ist central planning and political structures. will require attention and resources. Thus
Many observers predict that the successful telecommunications, while critically impor-
development of competitive market econo- tant to these countries, competes with other
mies and free democratic organizations will needs.
depend critically on the installation and Each country has distinct political and
Successful availability of modern telecommunications economic characteristics that lead to differ-
development of services. ‘‘Improved communication chan- ing strategies on future economic develop-
market economies nels will assist the free flow of information ment, legislation, and the role of private
and democratic and stimulate economic growth."2 enterprise.~ The challenge these govern-
governments Improved telecommunications capability ments face is to carefully match their socie-
depends on modern is presumed to be positively correlated with ties’ communications needs with the desired
telecommunications economic development, the strengthening of characteristics of their economies, societies,
democracy, the broadening of culture, and and politics, in order to facilitate the transi-
greater educational opportunities. However, tion from centrally planned socialist regimes

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

Us.
Telecommunications
Services in
European
Markets

to market-oriented capitalism. Developing a has little leverage over developments in


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

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

remains of Yugoslavia.7 In effect, Eastern


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

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

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

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

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

Telecommunications
in Central
and Eastern
Europe

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

Us.
Telecommunications
Services in
European
Markets

Figure 6-3. much as 30 years, compared with less than 2


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

o 5 10 15 20 and facsimile transmission. The number of


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

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

Europe, with 317 subscribers in Hungary and Waiting list for main lines (millions)
3 ‘—
Bulgaria in 1990, but 761 in 1991, while r~ 1981 1991
Western Europe has an extensive X.25 [
I
service in place, with over 337,000 subscrib- 21
ers in 1991.
Finally, productivity of telecommunica-

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

20 Data for 1990 taken from ITU Indicators, 1990, op. cit., footnote 16; and ITU Indicators, 1991, op. cit.,
footnote 16, table 24, p. 24.
2’ Jurgen Muller, “Closing the Capacity and Technology Gap In Eastern European Telecommunlcat ions,”
European Regional Development Conference (E U-RDS), Prague, Nov. 19-23,1991, doc. no. EU-RDC-91/8-E
(Geneva: International Telecommunication Union, 1991), p. 1.
22 Jurgen Muller, op. cit., footnote 21, p, 1.
23 OTA Interview with Pal Horvath, op. cit., footnote 13. Horvath clalms this IS demanded by Hungarian banks,
whose loans prowde 50 percent of the financing.
‘d OTA noted on a t np to Hungary that want ads for apartments to rent usually specify “has telephone” even
before mentioning how many rooms are [n the apartment.
25 OTA interview wlt h And ras Sugar, general manager, a nd JohnHandley, operat Ions director, WESTEL (a
U.S./Hungarian cellular telephone joint venture), and Jlm Russell, manager of direct dist nbutlon, U.S. West
Newvector Group (U.S. West IS the U.S. joint venture partner In WESTEL), Budapest, Oct. 8, 1991. Page 115
Us.
Telecommunications
Services in
European
Markets

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

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

Telecommunications
in Central
and Eastern
Europe

were not high for telecommunications serv- Main lines per employee
175 ~ I
ices. (See table 6-1.) Much of the little i——-— 4

spending that did occur, according to a


31
World Bank study, went to new lines rather
than maintenance, so figures on CEE tele-
phone density mask poor service and anti-
quated and nonperforming equipment, as the
figures on line faults and completed calls
show.
u
The network deteriorated as a result, Bulgaria CSFR b
Hungary Poland Romania Yugoslavia
necessitating the parallel development of
‘‘closed purpose networks’ for the more SOURCE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT,
INTERNATIONAL TELECOMMUNICATION UNION, FEDERAL COMMUNICATIONS COMMISSION, 1992.
sensitive government activities such as the
defense and interior ministries. For example,
from readily changing goals, strategies, or Figure 6-6.
in the former Soviet Union three separate
internal structures. Furthermore, telecom- Telephone Operator
telephone networks existed: one for a very
munications operators were closely super- Productivity, 1991
small circle of the political and military elite
vised by finance ministries as they set prices
(for which special keys are needed), another a L~l exchange carriers
and collected and distributed revenues. Tele-
for the party bureaucracy, and a third for the (regional Bell operating
communications supported the postal serv- compames and the major
general public.32
ice and contributed to the general treasury. Independents).
Despite the lack of reinvestment, telecom- b Czech and Slovak
Until recently, for example, the Czechoslo-
munications nevertheless proved a reliable Federal Repubhc
vakian PTT turned over 87 percent of
money maker. Following the traditional
telecommunications profits to the general
European model, telephone service in CEE
treasury. 33 The awakening of users to the
countries was vested in Postal, Telephone,
value of communications has strained old
and Telegraph (administrations) (PITs), also
telecommunications operating models in many
responsible for postal and telegraph services
countries. A major challenge to these coun-
and in some cases for broadcasting, and tries will be to become much more respon-
typically under the control of the ministry in sive to users’ needs.
charge of communications. (See table 6-2. )
As state-owned enterprises, telephone serv-
ice operators, therefore, were both highly Regional relationships
political and highly bureaucratic: telecom- Western approaches
munications was used as a political tool for Other aspects of telecommunications mod-
social and economic control, and telephone ernization are cooperation among countries
enterprises were bound by administrative in the region and assistance from interna-
public-service structures that prevented them tional agencies. As noted above, for years the

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

U.S.
Telecommunications
Services in
European
Markets

Figure 6-7. ~~ Telephone main lines per 100 population officials to begin to emulate the telecommu-
7U
Urban and Rural a nications world outside of the Soviet
35 CSFR
Service average sphere. 3s Euroteldev has so far only pro-
30 penetration duced plans, though those who have partici-
Fi c~~h and Slovak
Federal Republic
25 I pated agree that its work should continue.
20 Now that free political and commercial
15 — relationships between the East and West are
possible, Euroteldev mission may however
10
have less justification.
5 In addition, the ITU itself is attempting to
0I I — play a larger role in helping developing
Prague Brno Bratislava
countries modernize their telecommunica-
SOURCE: INTERNATIONAL TELECOMMUNICATION UNION, tions networks. Under the auspices of the
AT&T’S THE WORLD’S TELEPHONES, 1991.
newly created Bureau of Telecommunica-
Soviet Union presided over a set of unilateral tion Development36 (BDT, after the French
telecommunications arrangements with its acronym), the ITU organized its second
satellites and limited their interaction with Regional Development Conference on tele-
one another. In the mid- 1980s, the United communications development in Central and
Nations Development Program (UNDP) and Eastern Europe, which was held in Prague in
the International Telecommunication Union November 1991 .37
(ITU) proposed to reduce this isolation by The conference focused on four main
sponsoring a regional telecommunications areas: regulatory policy and structure of the
development program, which became known telecommunications sector (i.e. privatiza-
as Euroteldev. 34 Its formal goal was to tion, creation of a separate regulatory body);
establish projects relating to new equipment, telecommunications standards and network
services, and network structures. Informally, harmonization with Western Europe; needs
however, it was intended to provide money for and sources of financing; and human
and motivation for CEE telecommunications resource training and development.

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

The conferees agreed to create a working


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

38 Interview with senior State Department official, Washington, DC, Apr. 29, 1992.
39 CoCorn consists of 18 countries: the NATO countries except Iceland, plus Japan and Australla.
40 Advanced digital processors are controversial because they could allowsigruf icant advances in computmg
speed for weapon design, targeting, encryption and other m II itary operations.
4’ In developing ciwlian telecommunications, reliance on microwave systems can beofgreat benefit, as the
systems are capable of carrying substantial traffic, are well understood, are relatively inexpensive, and are
easy to set up and reconfigure. Page 119
Us.
Telecommunications
Services in
European
Markets

(North Atlantic Treaty Association), the


CoCom countries recently have taken a
Telephone revenues, Revenues number of steps to modify their restrictions,
1991, (US$ mil.) per capita (US$)
in order to nurture new potentially lucrative
Bulgaria 112 12 44
trading partnerships. Further, fiber Optic
Czechoslovakia 543 35
Hungary 533 52 technology is becoming available to these
Poland 520 14 countries. Because German firms are permit-
Central and Eastern Europe 3,188 24
Western Europe 128,426 355
ted to honor contracts made in the former
East Germany, the former East German firm,
SOURCE: INTERNATIONAL TELECOMMUNICATION UNION (ITU),
ITU INDICATORS, 1991, TABLE 28, P. 28.
Carl Zeiss, can export advanced fiber optic
technology to the CEE countries and Russia.
Table 6-2. presently available to them is acceptable and This loophole is putting pressure on CoCom
Telephone Revenues appropriate .42 members to modify the restriction.
for Hungary, In the United States, the Department of Change is quickest for the three most
Czechoslovakia, Defense and the various agencies of the politically progressive and stable countries,
Poland and/or intelligence community argue that maintain- Poland, Czechoslovakia, and Hungary, which
CEE Average ing CoCom restrictions is essential for na- have begun to institute export control proce-
tional security. Firms such as AT&T, on the dures that satisfy CoCom.45 Hungary, which
other hand, claim restrictions are no longer has had an export control regime in operation
needed. 43 It appears that proponents of trade since October 1990, is the farthest along;
liberalization are prevailing. As it becomes CoCom agreed in May 1992 to remove
apparent that Eastern European countries no Hungary from the list of proscribed destina-
longer pose a direct military threat to NATO 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 circumvent
the restrictions. OTA Interview with Erno Pungor, Hungarian minister for technological development,
Washington, DC, Oct. 31, 1991.
43 Hearings in the 102d Congress before the House Foreign Affairs Committee’s Subcommittee on
International Economic Policy and Trade ventilated these arguments. OTA has not attempted to evaluate
these claims independently, as this would require use of classified material. Subcommittee staff believe,
however, that nothing they have seen in the record suggests that continued restrictions on high capacity fiber
exports are warranted. OTA interview with John Scheibel, staff director, House Foreign Affairs Comm ittee’s
Subcommittee on International Economic Policy and Trade.
44 “U. S., Allies Preparing to Ease Curbs on Exports to Baltics, Other Countries,” /ntemat~ona/ Trade
Reporfer, vol. 9, Mar. 11, 1992, p. 434.
45 Some barriers remain for export to t he Commonweal h of Independent States, part icularly for systems to
be used for internal traffic. “U. S., Allies Agree to Liberalize Telecommunications Exports to Ex-USSR,”
/ntematior?a/ Trade Reporfer, vol. 9, Mar. 11, 1992, pp. 430-31.
46 This move is cent ingent on establishing new guidelines covering nuclear technologies and munitions and
requiring that rest rict ions be placed on t he export of Hungarian technologies and goods as well. Previously,
Hungary’s export rules only restricted the reexport of high-tech goods to t he former Soviet Union and only
targeted dual-use technologies. “Hungary to Comply Soon With CoCorn Requirement for Freeing
High-Tech Trade,” /ntemationa/ Trade Repoder, vol. 9, No. 10, Mar. 4, 1992, p. 390. The status of Poland
and the Czech and Slovak Federal Republic (CSFR) was given more favorable consideration, but
Page 120 consideration of removal from the proscribed list is to be delayed.
Telecommunications
in Central
and Eastern
Europe

ing bans on importation of high-tech goods current standard.48 Expectations of improv-


is an important leverage to impel these ing penetration levels to Western levels by
countries to progress toward Western politi- the end of the century arc ambitious, perhaps
cal and economic practices. unrealistic; and these figures only represent
Efforts are underway in CEE countries to additional lines, not replacements of dilapi-
correct major structural flaws that have dated network and terminal equipment. (See
contributed to the disintegration of both the table 6-3.)
economic structure in general and the tele- How telecommunications modernization
communications sector specifically. Mod- will be paid for is a difficult issue for all CEE
ernizing telecommunications” addresses only countries, as their economies are relatively
a single, but critical, element of the broader unproductive in world markets, their foreign
need for reform. In recognition of its funda- exchange reserves are low, and their pros-
mental importance to their economies, both pects for short-term improvements arc bleak.
as an industry in its own right and as a It is likely that some combination of self-
multiplier for other economic activities, the generated revenues, capital raised in foreign
CEE countries are planning major organiza- markets and eventually from domestic mar-
tional and legal changes. This liberalization kets as these develop, and foreign aid or
is aimed at both improving the communica- loans, will be necessary.
tions networks and creating an environment The prospects for raising revenue inter-
conducive to foreign financial and technical nally from telecommunications service and
assistance for modernization. allocating it for network modernization are
The World Bank and the Organization for not encouraging. Profits from telecommuni-
Economic Cooperation and Development cations services generally arc returned to the
( O E C D ) estimate that the total cost of general treasury, rather than being reinvested
modernizing will be around $50 to 60 billion in telecommunications. Tariff structures in
over the next decade, and considerably more each country provide subsidies to local calls
if the countries of the former Soviet Union and handset rental charges, depriving the
are included.~’ The ITU estimates that the operator of revenues that could be used for
cost for Central and Eastern Europe, includ- network modernization.
Modernizing
ing the former Soviet Union, would be $94 CEE financial markets are as yet weak,
telecommunications
billion just to bring service levels to Ireland’s and in some cases there is no other domestic
systems will cost
about $50 to $60
‘7 The World Bank’s project Ion of costs IS generated by a rough estimate of the average cost of installing a billion. Who will
single telephone line (about S2,000) multiplled by t he number of add itional lines t hat the government/operator
pay is still
forecasts putting In. Timothy Nult y, Comsuderatmns m Te/ecom /rrvestrnent in Eastern Europe (Washington,
DC: World Bank, 1990). According to OECD’S calculations, the $50 billion in investment necessary to unclear.
Increasing the telephone penetration rate to levels on par with the West do not include the investment
required to Improve services. Moreover, this amount does not account for the former Soviet Union. See
“Finding Their Voice,” The Econormst, Feb. 8, 1992; “Central and Eastern Europe: The Problems of
Reconstruction,” Te/ecornmunlcabw, October 1991, p. 158; and Tim Kelly, “Telecommunlcatl ons in the
Rebirth of Eastern Europe,” The OECD Observer, No. 167, December 1990, pp. 19-20.
48 “New St udy Says Eastern Europe, ex-USSR Need to Spend S94 BI II ion to Upgrade Phones,” /r?temat/ona/
T r a d e Repotier, vol. 9, No. 41, Oct. 14, 1992, pp. 1758-59. Ireland has one of the lowest telephone
penetration r a t e s In W e s t e r n E u r o p e , a t 2 9 t e l e p h o n e s p e r 1 0 0 I n h a b i t a n t s . Page 121
Us.
Telecommunications
Services in
European
Markets

Box 6-A. U.S. WEST T RANS -SIBERIAN LINK P ROJECT


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

SOURCE: OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

source of investment capital than the govern- to the ITU show that Hungary, Czechoslova-

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

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

policies will have to be made predictable so


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

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

Table 6-4.
Foreign
Participation Country/city Partners ownership Award date Comments

in Cellular Czechoslovakia Eurotel 1990 Eurotel wiII invest $60 million


US West (US) 24.5% over next 10 years.
Licenses of Bell Atlantic (US) 24.5
Eastern Europe Czech & Slovak PTTs 51.0
and the Hungary WesTel 1989 To date, US West has in-
Former U.S. West (US) 49.0 vested $13 million.
Hungarian Telephone Company 51.0
Soviet Union
Poland Polska Telefonia Komorkowa 1991 $50 million investment over
Ameritech (US) 24.5 3-4 years.
France Telecom 24.5 Reportedly, Ameritech and
Polish PTT 51.0 France Telecom paid $70-80
million for the license,

Romania Nationwide Cellular (U. S.) 51.0 1991


Romanian PTT 49.0

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

Euronet 1992 Reportedly awarded a test


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

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

Ukraine Ukrainian Mobile Company 1992 The consortium IS licensed to


DBP Telekom (Germany) 16.3 provide paging, analog cellu-
PTT Telecom (Netherlands) 16.3 Iar, GSM cellular and PCN
Telecom Denmark 16.3 services. Reportedly, PTT
Ukranian Government 51.0 Netherlands has relinquished
its stake to DBP Telekom.

Page 124
Telecommunications
in Central
and Eastern
Europe

Country/city Partners Ownership Award date Comments


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

Latvia Latvian Mobile Telephone Company 1991


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

Lithuania Comliet 1991 Comliet wiII also establish in-


Millicom International Cellular 490 ternational satellite Iink.
(Sweden/U. S.) 41 0
Vilnius Telephone Network (Lithuania) 10.0
UAB Antena (Lithuania)

Byleorussla CommStruct international (U S ) 50.0 1991


Byleorussian PTT 50.0

Russia Expected Government has announced


early 1993 bidding for GSM Incenses in
12 Russian cities, including
Moscow and St. Petersburg.

Uzbekistan Uzbanrobita 1992 ICG is providing hard cur-


ICG 45.0 rency and operating expertise.
Uzbek Communications Ministry 550

Hungary 1993 2 nationwlde, 15-year GSM


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

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

Page 125
us.
Telecommunications
Services in
European
Markets

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

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

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

57 Jullan Brtght, “Poland,” Te/ecornrnur?icatmns, October 1991, p. 164.


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

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

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

deteriorating telephone system up to a level CEE countries also have an interest in


of excellence without privatization, by means participating in global markets, and are
of thorough internal reorganization. clearly looking to the United States for
The process of transforming the centrally financial and technical assistance. For them,
planned economy into a market economy in the United States presence represents a
Poland, in63 particular, has been beset with potential counterbalance to the influence of
problems. Reports of fraud and scandal and other Western European countries, princi-
troubles with effective tax collection are pally but not exclusively Germany. The
rife.64 The telecommunications reforms have Overseas Private Investment Corporation
not so far delivered improvements in tele- and the Export-Import Bank encourage trade
phone service. The parliament has turned to development by providing insurance and
a more cautionary plan of bolstering state financing to U.S. exporters. U.S. participa-
industries and slowing down privatization.65 tion in the World Bank, the International
Whether Poland’s troubles will prove to be Monetary Fund, and the European Bank for
a foreshadowing of problems for the rest of Reconstruction and Development represents
Central and Eastern Europe or a guide to a major locus of financial assistance to
more successful transitions is yet to be seen. Central and Eastern Europe.
Congress has acted to assist the economic
and social transformation of the region; in
Involvement of the United States 1989, Congress passed the Support for
Western Europe, and particularly Ger- Eastern European Democracies Act (SEED),
many. is deeply interested in economic and which allotted $1.5 billion in grants for
social reform in Central and Eastern Europe. 1990-92 to encourage political reforms, eco-
In addition to being neighbors, Western and nomic development, and social reforms (es-
Eastern Europe share a similar heritage, and pecially recognition of human rights) in
economic cooperation seems imminent. Nev - Central and Eastern Europe. The SEED Act
ertheless, the United States also has signifi - was an expanded version of President Bush
cant stakes in the future of the region. proposal for $350 million in assistance to
Beyond matters of national security, the Poland and Hungar).
opening of the CEE countries represents Congress has also been particularly inter-
sizable new markets, and their success in the ested in energy, environment. and telecom-
transformation to democratic governancc munications as the keys to these general
represents an affirmation of important eco- market and political reforms in the CEE
nomic and political ideals. countries. The House Committee on Foreign

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

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

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

telefon, Kft. Westel went online in Budapest


in October 1990 and attracted 4,000 sub-
scribers in the first 6 months, surpassing the
projected usc by 2,500 subscribers in the first
year.h~
AT&T is pursuing contracts in Central
and Eastern Europe and the republics of the
former Soviet Union. It is installing a new
international exchange in Warsaw for the
Polish telephone company, which will dou-
ble Poland’s current capacity for interna-
tional calls.69 Additionally. AT&T is in-
volved in a deal worth $26 million, signed in
March 1992. to build a 1,400-km fiber-optic
telephone network.
These deals require creative financing:
AT&T is taking significant risks in getting
paid, since all of the republics in the region
have little if any hard currency reserves. and
their currencies are not yet convertible. The
company may end up with in-kind payments
in oil or copper. 70 Businesses require clear
rules and a stable political environment
before they will undertake large-scale invest-
ment. Such stability is not yet present in
many countries in the region. Wall Street is
reluctant to commit much capital to ventures
in the region, and has pressed for increased
political risk insurance from the U.S. Gov-
ernment.

m U.S. West WIII contribute S20 million over the f irst 2 years to build t he system, while HTC, through World
Bank loans, will Invest another $20 m Ill Ion. OTA Interview with Andras Sugar, general manager, and John
Handley, operat Ions director, WESTEL (a U.S./Hungarian cellular telephone joint vent ure), and Jlm Russell,
manager of direct dist nbut ion, U.S. West NewVector Group, Budapest, Oct. 8, 1991. See also Steven Tltch,
“The Llberallzatlon Express Roars Through Hungary,” Te/ephony, June 3, 1991, p. 40.
‘g This deal IS worth $12 m Ill Ion. “AT&T Signs Polish Accord,” Te/corn Hfgh/ights /nternationa/, vol. 14, No.
16, Apr. 15, 1992, p. 1.
70 John Keller, “AT&T Signs Big Contract to Supply Former Soviet Republic With Phone Gear,” Wa// Street
Jouma/, Mar. 3, 1992, p. A2.
7’ Madeleine Albnght, “The Role of the United States In Central Europe,” Proceedings of the Academy of
Polltlcal Science, NIIS H. Wessell (cd.), New York, 1991, vol. 38, No. 1, p. 80.
72 Ibid. Page 131
U.S.
Telecommunications
Services in
European
Markets

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

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

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

Page 133
Domestic
Deregulation and
International
Trade Negotiations
CHAPTER
7
T HOUGH SERVICES SUCH AS T E L E C O M M U N I- terms of service with one another under the
CATIONS w-c increasingly central to the opera- ITU, more generally applicable rules for
tion of the global economy, rules governing trade were thought to be unnecessary. Be-
international trade in services arc still being cause international telecommunications were
established. This chapter describes the proc- provided by monopolies over circuits that
ess that is generating these rules, and exam- the monopolies each half-owned, services
ines the principal forum in which they have were considered the result of joint invest-
been debated, the General Agreement on ment, and not traded items.
Trade in Services, a component of the In the late 1970s, telecommunications
General Agreement on Tariffs and Trade deregulation in the United States began to
(GATT). U.S. policy and negotiating posi- change these assumptions. Pressure for new
tions for GATT talks arc then discussed, international telecommunications trading ar-
Telecommunications because these have become major determi- rangements mounted in the United States. as
deregulation in nants of U.S. international telecommunica- a result of deregulation, technological
the United States tions policy. change, the entry of new suppliers, and the
has led to beginnings of political organization of tele-
pressure for new communications users.
U.S. deregulation and the
international trading Telecommunications competition in the
arrangements.
worldwide consequences
United States began with microwave tech-
Before the 1980s, the concepts of natural nology, which made long-distance competi-
monopoly and universal service dominated tion possible in the 1970s, and with digitiza-
telecommunictions. Telephone systems were tion of data, which blurred the distinction
conceived as intricate technical systems between computing and telecommunications.
presided over by engineers and regulators With the divestiturc of AT&T in 1984, the
whose main responsibility was to ensure the Modified Final Judgment (MFJ) laid down
smooth operation of networks. Since tele- by a U.S. District Court became a key aspect
communications operators were national mo- of U.S. teleccommunications policy. Tele-
nopolies and each monopoly dealt directly communications costs and terms of use
with its foreign counterparts, there was no became a prime factor in profitability and
need for an international trading system. competitiveness for many large businesses.
Public telephone operators (PTOs) struck Large corporate users of telecommnunica-
political bargains that set stable patterns of tions began to form active interest groups.
relationships for many years. The Interna- The largest users arc concentrated in a small
tional Teecommunication Union (ITU) co- number of firms: it is widely believed that 20
ordinated the relationships of these national percent of users generate 80 percent of
bodies. The ITU consultation process devel- revenues, and less than 5 percent of users
opcd technical standards to permit intercon-
egenerate 20 percent of local traffic and over
nection, and the international settlements 50 percent of long-distance traffic. This
process assured that accounts between coun- concentration made it easy for large users to
tries would be reconciled. organize. They began to pressure political
With countries (through their national decisionmakers to allow them to intercon-
telephone operators) negotiating prices and
Page 135
U.S.
Telecommunications
Services in
European
Markets

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

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

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

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

Changing attitudes toward U.S. equipment manufacturers believe the


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

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

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

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

U.S.
Telecommunications
Services in
European
Markets

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

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

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

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

us.
Telecommunications
Services in
European
Markets

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

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

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

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

22 Richard H. Snape, op. cit., footnote 21, pp. 5-7.


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

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

Box 7-A. TELECOMMUNICATIONA ANDNATIONAL SOVEREIGNTY


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

1 ~m~ R. \win, “Natbnat Sovereignty ancf Global Networks,” OTA Contractor rePOfl. July 1992.
2 ~ever, if cornp~iiiorl cwws companies to operate tcm close to safety marginsin cfder to cut costs, w to scrimP on
capital investment, it may engender lower reliability.
3 uosc ~wrw, ~f~ of Technology Assessment, U.S. Banks arrd Irrterrratlorral ~*~~urrk8ti~s, oTA+P-T’cT-100
(Washington, DC: U.S. Government Printing Office, September 1992).

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

national restrictions on foreign investment.25 or private network, firms need to be able to


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

Page 146 25 Peter F. Cowhey, op. cit., footnote 6, p. 194.


Domestic
Deregulation and
International
Trade
Negotiations

to the requirements of the services to be The Telecommunications Annex


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

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

able to attach terminal equipment to the Nugent of Citicorp, which is a major user of
network. Private circuits must be con- international telecommunications services
nectable to the public-switched network, and operator of extensive private corporate
and users must be permitted to use their networks,
own operating protocols over these net- [t]he way the annex is shaping up, it
works. is turning into a bill of rights for the

Intracorporate and other communications telephone administrations and for those


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

2a OTA interviews with service indust ry represent at ives; see also Bob Davis, “GATT Talks Near Collapse at
the Deadline,” The Wa// Street Jouma/, Dec. 18, 1991, p. Al 1.
29 Michael Nugent, Citicorp, cited in Craig Johnson, “IS There Life Still in the Uruguay Round?” ~ransnationa/
Data and Communications Report, vol. 14, No. 2, March/April 1991, p. 7.

30 OTA interview with service industry representative, June 4, 1992.


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

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

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

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

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

sires to retain control of their telecommuni- difficulty: there is no agreement among


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

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

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

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

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

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

U.S.
Telecommunications
Services in
European
Markets

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

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

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

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

U.S.
Telecommunications
Services in
European
Markets

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

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

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

‘“ For a recent discussion of the standards-making process In relation to U.S. competitiveness, see U.S.
Congress, Off Ice of Technology Assessment, G/oba/ Standards: f3ul/ding f3/ocks for the future,
OTA-TCT-512 (Washington, DC: U.S. Government Prlntlng Off Ice, March 1992).
55 Morgan, op. cit., footnote 27.
How
Telecommunications
Policy Is
Made 8
CHAPTER

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

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

Us.
Telecommunications
Services in
European
Markets

The telecommunications acknowledges the State Department’s first


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

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

Figure 8-1.
Carriers
Us.
Telecommunications
Policy Structure

Schools,
hospitals
I

I
Small
businesses
I Residential
customers

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993


—— . . . . . -. . - -- - - — - - - - -

us.
Telecommunications
Services in
European
Markets

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

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

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

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

Us.
Telecommunications
Services in
European
Markets

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

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

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

‘2 The Communications Act gives the Comm Is.won responslblllt y for, among other things: 1 ) the allocation of
spectrum for nonfederal uses; 2) the assignment of licenses for broadcast, satellite, common carrier and
prwate radio services In interstate and foreign commerce; 3) the monitoring and regulation of tariff Ing, cost
allocation, and interconnection of common carriage service; 4) type acceptance and registration of
telecommunications equipment; and 5) the development of communications policy and rules In these and
related areas. The Communications Satelllte Act of 1962 gave t he FCC speclflc authord y to regulate Comsat
in the provision of international satellite services. FCC authority has been supplemented with the Cable
Telewslon Consumer Protection and Competition Act of 1992.
13 A “common carrier” IS an organization that prowdes transm ission communicant ions serwces to t he public
for hire, and that must provide serwces to all who wish them, at established rates. Common carriers offer
services over Iandllne wire, (electrical or optical) cable, point-to-point m Icrowave radio, land mobl Ie radio
includlng cellular systems, or satellite systems.
14 The Mass Media Bureau IS responsible for policy and rulemaking in the areas of tradlt!onal broadcasting,
cable television, and emerging video technologies. The Private Radio Bureau regulates private radio use.
In addition, t he Off Ice of Engineering hasresponsiblllt y for frequency allocat ion and technical standards, and
the Field Operations Bureau is responsible for radio enforcement activities. All part iclpate In, for example,
proceedings of the International Telecommunlcatlons Union.
‘5 The Office of International Communications (OIC) notes t hat it “E not intended to replace [the] technical
and legal expertise and experience” oft he Bureaus. Trade Issues often cut across a num ber of bureaus and
offices and are coordinated by OIC; since these issues most often concern common carriers, “continued
participation In trade negotiations by the Common Carrier Bureau IS deemed essential.” Page 165
. . — ----

Us.
Telecommunications
Services in
European
Markets

Because of the way the Commission is setting telecommunications policy lodged


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

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

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

‘9 The United States Government Manua/, 1991/92, p. 429.


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

us.
Telecommunications
Services in
European
Markets

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

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

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

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

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

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

15 people. Its tasks include counseling gram, along with some other activities of
companies on the potential and characteris- CIP, has been allowed to lapse.
tics of foreign markets, helping firms com- Data on
pete on major telecommunications procure- international
The adequacy of data service trade
ments, preparing competitive assessments of
industry sectors, and writing chapter-s on
for decisionmaking are poor.
telecommunications for the Department of The fragmentation of policy responsibility
Commerce’s annual Industrial Outlook and becomes more troublesome because it