U.S. Telecommunications Services in

European Markets

August 1993

OTA-TCT-548

NTIS order #PB93-231355
R ECOMMENDED CITATIO N:

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

Services in European A4arkefs, OTA-TCT-548 (Washington, DC: U.S. Government 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
Foreword

The European

market for

telecommunications

services will grow

rapidly over the

next decade,

fueled by demand

from the European

business

community for fast

data transmission

and other advanced

services.

T HE E UROPEAN MARKET FOR TELECOMMUNICATIONS SERVICES will grow rapidly over

the next decade, fueled by demand from the European business community for fast

data transmission and other advanced services. In most European countries, the

telecommunications services market is still largely reserved for a state-owned

Public Telephone Operator, but this is likely to change in the near future.

Meanwhile, U.S. telecommunications firms-including regulated carriers-are

successfully competing in some European markets already open to them,

especially in cellular communications and cable television. U.S. firms appear to

have an edge in these markets because of their experience operating in competitive

markets and developing innovative services based on advanced network

technology and in response to changing user needs.

The U.S. economy can benefit both by increased export of telecommunications 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

NOTE: OTA appreciates

and is grateful for the

valuable assistance and

thoughtful critiques provided by the advisory panel

members. The panel does

not, however, necessarily

approve. disapprove, or

endorse this report. OTA

assumes full responsibility

for the report and the

accuracy of its contents.

John Diebold, Chairman

Diebold Institute for

Public Policy Studies, Inc.

James R. Beniger

Professor

Annenberg School of Communications

University of Southern California

Mark L. Bigelow

Network Architect, Information Services

Bechtel Corporation

Robert Bruce

Partner

Debevoise & Plimpton

Emilio DeLia

Department Director

International Communications Services

AT&T

Steven Flajser

Vice President for Space Systems

LORAL

Kenneth Gordon

Chief Commissioner

Massachusetts Department of

Public Telecommunications

Bruce Greenwald

Professor

Department of Economics

Columbia University School of Business

J. Donald Karmizin

Vice President

Management Infomation Systems

United Airlines

Gene Kimmelman

Consumer Federation of America

Michael Nugent

Vice President and

Associate General Counsel

Citibank, NA

Barbara O’Connor

Professor/Chairperson

Alliance for Public Technology

California State University

Department of Communications

Reynie U. Ortiz

Vice President for Public Policy

U.S. West

Frances Plude

Professor

Communications Department

John Carroll University

Michael J. Reilly, Sr.

Vice President for External Relations

Reuters America, Inc.

Tony Rutkowski

Director of Technology Assessment

SPRINT

Marie-Monique Steckel

President

France Telecom, Inc.

Reviewers and contributors

see Appendix A, pages 203-210.

Page iv
Project staff

P RINCIPAL STAFF C ONTRACTOR S

Vary Coates, Project Director

Todd LaPorte, Analyst

Mark Young, Research Analyst

OTA MANAGEMENT

John Andel in, Assistant Director, OTA

Science, Information, and Natural

Resources Division

James W. Curlin, Program Manager

Telecommunication and Computing

Technologies Program

A DMINISTRATIVE

Liz Emanuel, Office Adminisstrator

Michelle Smith, Secretary

Karolyn St. Clair, PC Specialist

Bruce Egan,

Columbia Business School

Louis Feldner,

Feldner Telecom Consulting

Rob Frieden, Telecommunication

Consultant and Attorney

Dale Hatfield,

Hatfield Associates

Manley Irwin,

University of New Hampshire

Gligor Tashkovich, Consultant,

International Telecommunications

Deborah Workman, Consultant

OTA ADVISORY GROUP

Peter Blair.

Energy and Materials Program

Sylvester Boyd, Telecommunication 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

CHAPTE

1

R

The entry of U.S.

telecormmmications

firms into European

services markets

is-at this ear/y

stage-a striking

success story.

U.S. TELECOMMUNICATIONS FIRMS are sending a message to Europe—’ ‘we intend to

offer services to Europe’s under-served telecommunications users, ’ They are watchfully assessing European progress toward

liberalization of national markets and integration into a single European market. Meanwhile, U.S. carriers and enhanced-services

providers1 are entering the niche markets

that are open to them, such as cellular

communications and cable television.

The entry into European markets for

services by American telecommunications

firms, from major carriers to small nicheservices providcrs, is—at this early stage—a

striking success story. Growing U.S. export

of telecommunications and related information services2 in the future can contribute

significantly to national economic goals.

Further expansion appears to require little or

no government intervention—in this area,

deregulation and pursuit of free trade has

worked well.

However, there are some major caveats to

these conclusions:

Emerging technological and institutional

trends could adversely affect bilateral and

multilateral trade agreements already negotiated or being pursued by U.S. trade a

representatives, making them eithcr unstable or overly restrictive.

U.S. international telecommunications policy is being defined almost singlehandedly

by the Office of the United States Trade

Representative (USTR). The industry structure, regulatory environment, and investment strategies that are conducive to free

trade and encouraged by the USTR may

not be equally appropriate for meeting the

broaderrange of national telecommunications

objectives.

Inadequate investment in domestic telecommunications infrastructure could result from continuing investment overseas

by regulated U.S. telecommunications operators, according to some State regulators

and public interest groups. (The Office of

Technology Assessment finds eviidence

for this inconclusive, but concludes that

investment trends should be monitored.)

This report rests on the premise that

telecommunications is not just a set of

tradable services, but also a basic function of

society, essential for effective governance

social cohesion, and economic viability’ and

equity. International telecommunications is

a primary vehicle for U.S. participation in the

global polity, as well as the global market -

place. Public policy interest in international

telecommunciations therefore goes beyond

the question of competitiveness in foreign

markets.

This chapter summarizes findings from

the analysis presented in more detail in the

follow in: eight chapters. It addresses several

questions:

Page 1

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,

as appropriate to analysis, these two phenomena WIII be clearly and expllc[tly dlsttnguished.
us.

Telecommunications

Services in

European

Markets

Growing U.S. C AN U .S . FIRMS GAIN WIDER ACCESS TO EUR Oexport of telecom- PEAN MARKETS FOR TELECOMMUNICATIONS AND

munications and RELATED SERVICES?

related services Technological and political trends, especan contribute to cially the likely effects of the European

U.S. economic Community’s Open Network Provision Digoals. rective, are converging to bring about wider

access to European telecommunications markets. For U.S. firms, nearly 85 percent of the

potential market is now closed. Continuing

pressure from the U.S. Government through

USTR may somewhat hasten broader market

access. However, U.S. telecommunications

firms caution that such pressure should not

result in opening U.S. markets to entry of

foreign telecommunications operators whose

home markets still exclude U.S. services

providers.

C AN U .S . FIRMS SUCCESSFULLY COMPETE IN THE

EUROPEAN MARKETS?

U.S. services providers can be strong

competitors in European telecommunications markets. Technology and deregulation

have allowed them to develop innovative

services attuned to the changing needs of

business users. European business users now

are relatively poorly served by the public

telephone operators (PTOS).3 U.S. firms,

including major long-distance carriers and

regional Bell holding companies (RBHCs)

have already invested billions of dollars in

Europe and are doing well in niche markets.

IS IT IN THE PUBLIC INTEREST TO ENCOURAGE

PARTICIPATION OF U.S. TELECOMMUNICATIONS FIRMS

IN OVERSEAS MARKETS, ESPECIALLY THOSE FIRMS

THAT ENJOY REGULATED MONOPOLY STATUS IN

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

HOLDING COMPANIES?

Expansion into European markets by U.S.

telecommunications firms can contribute

significantly to maintaining a positive trade

balance in services, both directly and by

supporting the competitive activities of other

U.S. services providers, ranging from airlines to wholesale merchants, in European

markets. It may also encourage the European

sales of U.S. telecommunications equipment

and other information technology. For political reasons most of this economic activity is

in the form of joint ventures and similar

kinds of direct overseas investment, which

has given rise to fears that this will compete

with capital for domestic investment in

infrastructure modernization and in research.

There is so far no clear evidence of such

harmful effects, but investment patterns

should be monitored to detect any emerging

adverse effects so that corrective measures

can be taken if appropriate.

W HAT CAN THE U .S . GOVERNMEN T , AND ESP ECIALLY THE U.S. CONGRESS, DO TO ENCOURAGE

BROADER MARKET ACCESS AND TO ENHANCE THE

COMPETITIVENESS OF U.S. TELECOMMUNICATIONS

FIRMS OVERSEAS?

Broader market access may come about

more as a result of pressure from users and

actions by the Commission of the European

Community (EC), than as a result of trade

negotiations. However, the U.S. Government should continue to press, through

bilateral and multilateral trade negotiations,

for further liberalization of European telecommunications markets and wider access to

Page 2

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

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

ww-ranted, because negotiating positions developed by the Office of the U.S. Trade

Representative may be undermined by technological trends that challenge distinctions

between basic and enhanced services and

between public and private networks.

Beyond this, there is little that the U.S.

Government needs to do or should do, at this

time, to improve the competitiveness of U.S.

carriers and services providers overseas.

There is little evidence that the domestic

restrictions imposed on carriers at divestiturc

(however onerous or effective they maybe at

home) now arc a significant factor in success

in European ventures.

Is THE POLICYMAKING STRUCTURE FOR INTERNATIONAL TELECOMMUNICATIONS NETWORKS

ADEQUATE AND APPROPRIATE FOR THE COMING

DECADE?

U.S. policy for international telecommunications has for the last 5 years been largely

determined by USTR. This is cause for

concern. The unidimensional focus of USTR

on forcing open world markets for services

may slight or diminish other public policy

goals related to telecommunications, such as

strengthening the domestic telecommunications infrastructure, extending the scope of

universal service, or assuring the interoperability of networks. The mechanisms for

coordinating policy formulation and regulatory actions have become ineffective and

need to be strengthened.

This chapter summarizes these and other

findings discussed more fully in later chapters, It then suggests some actions that

Congress may consider for monitoring the

long-term, indirect effects of overseas activities of U.S. carriers, and for strengthening the policy development and implementution process for international telecom -

munications.

Summary of findings

T HE EUROPEAN MARKET FOR BASIC AND E NHANCED TELECOMMUNICATIONS SERVICES WILL

EXPAND STRONGLY OVER THE NEXT FIVE TO TEN

YEARS.

Comparison of the consumption of telecommunications services in Europe and the

United States indicates that in all European

100

50

0

-50

-100

-150

-200

$billion (1987 dollars)

Services balance >

Merchandise balance

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

SOURCE U.S DEPARTMENT OF COMMERCE, 1993

countries there is a substantial unsatisfied Figure 1-1.

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

cations services. Monopoly control of net- 1970-92

works and services, high tariffs, and strict

constraints on the development of private

networks have kept this demand from being

met.

The Commission of the European Community is pushing ahead with its effort to

create a single European market; it puts high

priority on the integration of telecommunications networks and deregulation of value- Page 3
u.s.

Telecommunications

Services in

European

Markets

Box l-A. RESTRICTIONS ON ACCESS TO THE U.S. MARKET FOR

F OREIGN TELECOMMUNICATIONS C OMPANIES

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

resistance, the liberalization of the 12 European national markets is underway. In most

of these countries, the responsibility for

operating telecommunications networks has

been separated from telecommunications

regulatory authority and placed in a freestanding (but usually state-owned) corporation. Competition is allowed in some or most

value-added services. Progress toward liberal -

ization and curtailment of state monopolies

is likely to pick up speed because of pressure

on European governments from three sources:

large business users, the EC Commission,

and other participants in the Uruguay Round

of the General Agreement on Trade and

Tariffs (GAIT).

The European Community’s drive to a

single market promises to expand the geographical scale of many European corporations, increasing their need for translational

services. If the single market succeeds in

bringing about strong European economic

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

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,

or which has a foreign representative on its Board of Directors, be considered a “dominant

carrier” in the United States for purposes of regulation, and therefore be required to register

its proposed tariffs and costs with the FCC before offering its service to the public, and be

further required to file quarterly traffic and revenue reports with the FCC.2 Some foreign

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.

The opportunity to

bypass public networks will force

open the markets

now closed to

competition.

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.

telecommunications services will further intensify. Thus European markets for telecommunications services are attractive future

targets for exported telecommunications services and reltitcd information services.

A CCESS TO EUROPEAN MARKETS FOR U . S .

TELECOMMUNICATIONS FIRMS WILL NOW BROADEN

RAPIDLY.

As much as 85 percent of the aggregate

European telecommunications market remains closed to U.S. firms chiefly because it

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT 1993

is closed to even domestic competition. (In

the United States, the local cxchangc market

for voice services is also closed to foreign

competition. ) (See box 1 -A. ) Basic voice and

data transmission is reserved to state-owned

monopolies (the PT()) in all European countries except the United Kingdom.

Access to this rcscrvcd portion of the

market will almost certainly soon be forced

opened by the same kind of c(~mpctitive

pressure that brought about CJ. S. deregulation and divestiture of AT&T--nanlely, the Page 5
Us.

Telecommunications

Services in

European

Markets

Figure 1-2.

U.S. International

Transactions,

1992

Page 6

ability of large corporations to bypass the

public switched networks by developing

private networks. The EC Open Network

Provision Directive, issued in 1992, requires

each member-state to make leased lines

available to customers with no restraints on

their use or on interconnection to the public

600 $billions (1987 dollars)

Imports

400

200

0

Exports

Exports

Imports

Goods Services

SOURCE U.S DEPARTMENT OF COMMERCE, 1993.

switched networks. This effectively opens

the door for bypass—i.e., for the use of

private networks to deliver both voice and

data traffic in competition with the public

networks. As corporations rush to develop

private networks in order to get cheaper,

customized basic services, they will also

want to attach equipment of their own

choosing, and they will actively seek enhanced or value-added services customized

to meet their corporate needs. Thus broadened market access in the future may have

less to do with trade negotiations than with

technological and market imperatives.

U.S. TELECOMMUNICATIONS FIRMS ARE MAKING A

STRONG ENTRANCE INTO EUROPEAN NICHE MARKETS, PREDOMINANTLY BY DIRECT INVESTMENT

ABROAD.

U.S. firms are already entering European

niche markets for enhanced or value-added

services, largely through partnering with

European firms, often the monopoly PTOs.

A U.S. carrier can handle a global corporation’s needs only so long as one end of the

traffic either originates or terminates in the

United States. Partners are necessary both to

share capital and to provide national regulatory standing and customer access in many

countries.

The three major U.S. long-distance carriers (AT&T, MCI, Sprint) are actively pursuing European partners for consortia to provide large multinational corporations with a

full range of services (’ ‘one-stop shopping’

on a global basis. AT&T hopes to earn 50

percent of its total revenues overseas by

2000.

The seven regional Bell holding companies are estimated to have invested about$12

billion overseas. RBHCs pursue three kinds

of European activities. They are constructing

and operating cellular networks, building on

their solid expertise gained at home, both to

compete with monopoly local carriers in

Western Europe and to provide an alternative

to wire infrastructure in Central and Eastern

Europe. They are experimenting with and

gaining experience in other kinds of infrastructure-Personal Communications Networks and, especially in the United Kingdom, cable television networks—hoping to

bring this experience and expertise home

when there is a change in U.S. regulations.

They are also investing in privatized foreign

PTOs, although these investments have mostly

been in non-European countries that have

greater need for infusion of foreign capital

than do European countries.

Economists have assumed that most services must be produced where they are
Exporting

Telecommunications

Services to

Europe

delivered. Many telecommunications and

information services, however, could be

delivered electronically, directly from the

United States through international networks.

But even with liberalization and market

integration, European countries will try to

arrange matters so that both national laws

and EC regulations continue to favor European firms. The primary purpose of European market integration is to increase the

competitiveness of European industries vis-avis American and Japanese firms that have

benefited from larger domestic markets and

larger scale operations.4 The benefits of

transborder access and free movement of

goods will, however, accrue also to foreign

firms that have established a legal presence

in member-states; in theory, they will be

considered European firms. For this reason,

many U.S. services vendors will continue to

operate through European subsidiaries or

joint ventures.

T HE COMPETITIVE EDGE OF U .S . FIRMS IN BASIC

NETWORK SERVICES AND ENHANCED SERVICE>

BOTH IN TECHNOLOGY AND IN MANAGERIAL EXPERIENCE—IS WIDELY RECOGNIZED.

U.S. services exporters to Europe, heavily

dependent on international telecommunications networks, agree that they are well

served by U.S. carriers. (See chapter 5.)

American communications and computer

technology, they say, gives them a competitive edge in foreign markets by enabling

them to offer innovative services. Network

technologies and services are especially

important to providers of transportation.

freight, and travel-related services, which

constitute about 58 percent of all U.S.

services exports, and to financial services

and data processing services, which add

another 5 percent.

By comparison, American firms operating

in Europe feel seriously hampered by the

necessity of relying on European technology

and services for communications within

Europe and at the European end of international networks. Many of them complain of

the scarcity of high-grade leased lines, restrictions on the use of all leased lines, lack

of access to fast data networks, severe

restrictions on-or delays in—approving

customer-premise equipment, irregular and

inconsistent billings, and above all, excessively high costs. These problems beset

European users as well. If U.S. telecommunications firms are allowed broader access to

the market they may be able to capitalize on

these opportunities to prove greater efficiency and greater responsiveness to users’

needs.

E UROPEAN OPPORTUNITIE S, NOT U .S . REG ULATORY RESTRICTIONS, NOW DRIVE U.S. PARTICIPATION IN EUROPEAN MARKETS.

U.S. telecommunications firms have concluded that their future growth may depend

largely on foreign markets, where growth

rates are expected to be much higher than in

the now better-served U.S. markets. For

example, European consumer expenditures

for telecommunications (now much lower

than those in the United States) are projected

t. grow three times faster in the next few

years. Estimates of annual growth rates for

business-oriented enhanced services range

U.S. carriers

know how to

provide innovative

services wanted

by both European

and American

corporate users.

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

3 for detailed market projections).

U.S. Federal and state regulations—

especially the Modified Final Judgment

(MFJ) that has governed the activities of

RBHCs and their regional Bell operating

companies (RBOCs) since their divestiture

from AT&T—limit the range of opportunities for new services and new sources of

revenue in the United States. The MFJ

prevented RBOCs from engaging in information services, long-distance transmission,

and equipment manufacturing in the United

States. The prohibition on offering information services has now been lifted, and

legislation is pending that would allow

telecommunications companies to own and

operate cable television companies.s

Just after divestiture, being forbidden by

the MFJ to invest in many domestic telecommunications-related areas, RBHCs made widely

diversified investments beyond their line of

business, including, for example, real estate

development. The poor performance of these

noncornmunications investments strongly encouraged RBHCs to look abroad for expansion, divcrsification, and investment activities that would better match their corporate

experience and competence.

Now, however, it is likely that their

European initiatives arc pulled by opportunities abroad more strongly than they arc

pushed by regulatory limitations at home.

U.S. telecommunications firms would probably not pull back from overseas ventures if

MFJ restrictions were ended, as long as

opportunities in foreign markets remain

inviting and there is hope of wider market

access. Although some industry spokesmen

continue to bring up the issue of overseas

investment as a reason to end all remaining

MFJ restrictions (indirectly implying that

these discourage them from investment in

the United States), it is unlikely that resolution of this domestic policy issue, one way or

the other, would in itself have a decisive

impact on the rate of overseas investment.

On the other hand, the experience RBHCs

arc gaining overseas is likcly to affect what

new enterprises they pursue at home, when

and if regulatory restrictions arc lifted.

Just as RBHCs use their overseas investments as an argument for lifting MFJ restrictions on domestic activities, they also argue

that U.S. antitrust laws should be softened

because they prevent RBHCs from joining

together to respond to European competitive

contract bids. It is not clear that this is true.

U.S. Department of Justice rulings regarding

antitrust arc not generally considered exportable, and no effort has been made by the

government to prevent RBHCs from partnering with each other outside the United States.

Two RBOCs have in fact done so in New

Zealand, and other examples have occurred.

Corporate lawyers arc cautious in interpreting antitrust law, since judicial challenges

are expensive. It is likely, however, that

more important considerations are the perceived value of a European partner and the

perceived risk of sharing information and

technology with another RBHC.

Some telecom firms argue that they arc at

a competitive disadvantage vis-a-vis Euro5 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

United States of capital and because foreign

governments often subsidize low-cost capital for overseas expansion. However, there is

little evidence that any governmental financing support is needed. Most overseas telecommunications investments are funded from

retained earnings and the U.S. carriers are

generally cash-rich.

F OREIGN INVESTMENTS BY U .S . CARRIER S, ESP ECIALLY RBOCS, WHICH ARE REGULATED LOCAL

MONOPOLIES, MAY INVOLVE SOME RISKS TO U.S.

CONSUMERS.

Domestic investments by RBHCs soon

after divestiture, in fields unrelated to the

firms’ core business, were often unsuccessful. By contrast, recent overseas investments

reflect focused corporate strategies that fit

their proven expertise and may have a much

better chance of success. The potential costs

or risks of overseas competition have, however, not been satisfactorily addressed. Some

state regulators and public interest group

representatives fear that foreign investment

diverts funds that would otherwise go to

investment in domestic infrastructure modernization and development of innovative

services. Some also fear that business losses

or lack of adequate return on investment

overseas could lead to rising consumer

prices at home, or could by weakening the

viability of the regional holding companies

undermine the stability of their regulated

local subsidiaries.

The idea that a firm’s overseas investments might contribute to declining investment or disinvestment at home is based on

the assumption that since companies must

allocate scarce resources among competing

interests, a pool of investment capital (such

as the BOCs’ retained earnings) would be

spread more thinly in an organization with

many establishments than in one with few. In

addition, if some of those establishments

operate in faster growing markets or less

restrictive regulatory environments, a parent

company may invest more in the enterprises

located in these favorable environments.

These are legitimate concerns, although as

discussed above, in high-tech enterprises the

failure to operate in global markets could be

a brake on efficiency and innovation.

These concerns have only recently begun

to be voiced, and state regulators are moving

slowly to assess the risks. Only state regulators now have an obvious brake on the extent

of overseas investment by RBHCs, through

their regulation of tariffs and depreciation

rates and hence the ability to limit the

amount of retained earnings available for

investment—the major source of investment

financing. (See chapter 9.)

The evidence as to whether domestic

investment is declining is mixed and inconclusive. The value of U.S. carriers’ current plant

grew little in the 1980s (when inflation is

taken into account), and the value of annual

construction appears to have decreased strikCould overseas

investment mean a

decline in domestic

investment? Close

attention is

warranted.
Us.

Telecommunications

Services in

European

Markets

Network interoperability is essential

to both users and

providers of

international

services.

ingly between 1980 and 1990.6 However,

technology costs also declined significantly

during this period, and network architecture

changed in ways that affect the distribution

of investment. Expenditure for research and

development—by long-distance carriers, by

RBHCs, and by telecommunications equipment manufacturers-is far lower than that

of European counterparts. This is a significant concern, but R&D investment, although low, cannot be conclusively shown to

have declined since divestiture in 1984 or in

the period of high foreign investment beginning about 1988. (See chapter 9.)

Available time-series data are inadequate

for making conclusive statements about

either a continuing decline in investment or

causal relationships between high foreign

investment and low domestic investment.

This issue is potentially very important.

Investment trends, both in infrastructure and

in research and development, should be

carefully monitored by state regulators, the

FCC, and congressional committees.7

INTERNATIONAL CARRIERS AND USERS HAVE DIFFERENTPERSPECTIVES ON COMPETITIVENESS AND

TRADE POLICY ISSUES.

Accustomed to the expansive domestic

market and relatively homogeneous regulatory environment in the United States, American telecommunications users operating businesses in Europe resent the multitude of

disparate prices and billing procedures and

the conflicting rules and regulations over

relatively short distances. As discussed in

chapter 5, they often are even more eager for

liberalization of telecommunications markets within Europe than they are for the end

of remaining restrictions on market entry of

U.S. providers.

U.S. carriers want broader access to European markets, but they fear that they could be

hurt by multilateral trade negotiations that

result in the loss of some restrictions on

foreign telecommunications firms entering

the U.S. market, without assuring the full

dismantling of foreign state telecommunications monopolies that exclude them from

much of the European market. Some believe

that they might fare better under bilateral

than multilateral negotiations. However, since

each European country is a much smaller

market than the United States, most would

prefer a multilateral agreement.

The interests of providers and users also

diverge with regard to network interconnection and telecommunications standards. (See

chapter 2.) Both carriers and users give lip

service to the ideals of global interoperability and international standards. However,

telecommunications companies have strong

Page 10

c According to the U.S. Telephone Association, t he value of U.S. carriers’ current plant grew only 3 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

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

Telecommunications

Services to

Europe

reservations about traditional international

standards-setting bodies and procedures, and

tend to cling to proprietary protocols and the

use of specializcd interconnection technology to achieve interoperability. Users, however, generally want international standards

that will give them broad choice in using and

combining networks, customer-end equipment, and services from a variety of vendors.

The emphasis now being given by the

European Community to the development of

communitywidc telecommunications standards may put U.S. telecommunications firms

at a disadvantage both in gaining full access

to an integrated European market, and in

influencing international standards development. Some ad hoc, specialized standards

consortia are successfully pulling together

manufacturers, services providers, and users

to develop and implement standards in a

reasonable time frame, but many tensions

remain in the cumbersome U.S. standardssetting process.8

Interoperability is essential to both users

and providers, and while it can be achieved

by alternative strategies, the United States

cannot by itself dictate either the path to

achievement, nor the architecture that eventually determines interoperability. More leadership by the U.S. Government may, however be necessary to assure this interoperability,

U.S. INTERNATIONAL TELECOMMUNICATIONS POLICY HAS BEEN THOROUGHLY SUBORDINATED TO

TRADE POLICY. ACCESS TO FOREIGN MARKETS IS

NOW THE ONLY CLEARLY ARTICULATED GOAL.

U.S. trade policy is focused tightly on free

trade and open markets. The United States

initiated and consistently pushed for recognition of services as tradable entities, for

which terms of trade could be embodied in

bilateral and multilateral treaties and should

eventually be included in the framework of

the international General Agreement on Trade

and Tariffs. In the current Uruguay Round of

GATT negotiations, a “Telecommunications Annex’ has been tentatively agreed on,

pending acceptance of an overall trade agreement (which may now be receding into the

distance). The annex sets out the rights of

users and services providers to network

access, interconnect ion, and transparency of

terms and tariffs.

The U.S. negotiating position for the

Uruguay Round and its Telecommunications

Annex was worked out by USTR in consultation with Federal agencies and representatives of carriers, corporate telecommunications users, and labor groups. Because the

responsibility, and therefore the constituency, of USTR is very broad, cutting across

all industry sectors, it is a hospitable forum

for large corporate users of telecommunications and is especially attentive to their

concerns. Corporate users reinforce USTR’s

focus on unfettered access to services and

unlimited network interconnection, but are

concerned that USTR may not have pushed

vigorously enough for open markets in

Europe. US. telecommunications firms are

concerned about the degree to which the

domestic telecommunications market may

be “locked open” to EC firms by GATT,

while the EC nations continue to protect their

national monopoly carriers by reserving

large segments of the telecommunications

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

Trade agreements

that distinguish

“basic” from

“enhanced”

services will be

undercut by

changing technology

and industry

restructuring.

national treatment would assure only that

foreign firms have equal treatment with

national firms-who may not be allowed to

compete with the national carrier.) The

rough consensus that was hammered together to form USTR’s negotiating position

has tended to erode somewhat over the long

course of negotiations and the necessity of

compromises among nations participating in

the international give-and-take. Both U.S.

telecommunications firms and users now

tend to argue that a‘ ‘bad’ GATT conclusion

will be worse than no agreement at all.

U STR NEGOTIATING POSITIONS ARE BEING U NDERMINED BY INSTITUTIONAL AND TECHNOLOGICAL

DEVELOPMENTS.

The negotiating positions used by USTR

in multilateral and bilateral negotiations in

many regards rest on traditional distinctions

between public and private networks, between network operators and resellers, between competing technologies, and between

basic and enhanced communication services.

Many of these distinctions have already been

blurred by network interconnection and capacity resale. They are rapidly being challenged by clearly identifiable technological

trends and by the innovative services that

they make possible. The development of

“intelligent networks,’ in which programmable logic and customer databases are

distributed throughout the system and linked

by a common packet-switched signaling

system, as described in chapter 2, allows

network services to be thoroughly customized. This leads to pervasive commingling of

carrier-provided and user-provided network

facilities, logic, and databases. These technologies and services make it both difficult

and ultimately unproductive to maintain

distinctions between public and private networks and between basic and enhanced

services. Trade agreements based on distinctions that are already becoming obsolete

cannot be enforced or adhered to in the long

term.

The international telecommunications arena

is marked by increasing complexity in the

nature of relationships among industry participants and between industries and governments. There are many new players—

wireless communications companies, resellers, private network operators, value-added

service providers—in markets previously

dominated by single national firms. National

carriers are for the first time competing with

each other in global markets and at the same

time are partnering in joint ventures. National authorities are struggling to develop

transparent regulations where before they

acted by fiat. Governments are struggling

both to gain the advantages of competition

for their consumers and corporate users, and

to protect their national carriers and national

equipment manufacturers.

Even as the Uruguay Round labors toward

a conclusion after repeated suspensions and

extensions, the future of multilateral trade

regimes is being questioned because of the

coalescence of regional trading blocs and

waves of political change and restructuring

that increase the difficulty of concluding

stable trade agreements. It is unlikely, nevertheless, that the tradability of services, including telecommunications services, will ever

again be questioned. A series of bilateral and

regional agreements, most recently the North

American Free Trade Agreement (NAFTA),

have codified principles that have reached

widespread agreement. (See chapter 7.)

Page 12
Exporting

Telecommunications

Services to

Europe

Carriers

?

—

:,., :

Interexchange carriers

:1

Figure 1-3.

Enhanced” Local exchange carriers Us. /

$wvkM

‘+

, !--- ----- ~

U.S. Chamber ‘1 “~ Telecommunications

. . . . providers \\, of Commerce ———I Po/icy Structure

>

1 -- -7

‘+ _-I us. co”rlcll 1..-.. , ‘ Alternative , ‘, ,

access /

\\ \\ for Internat’1. //’ ‘ /

/

providers ‘“~ \,,Buslness,/;~.-’

x., \

,.

/ ,/

( Nat’l. Assoc. of ‘i

Regulatory Uttllty ‘

/

Commlssloners

State

utility

commissions

FEDERAL GOVERNMENT

. –7 ➤ ––—– – –.–

Congress (Senate in italics)

Telecommunications — ----- ----A L---- JEaE._..

L

lndlvldual firms

Resellers

u

c1

Schools,

hospitals

L_—–&- /“

Consumer

group

‘ representatwes

\

Small

businesses

Resldentlal

customers

Corporate users

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993
Us.

Telecommunications

Services in

European

Markets

When telecommunications policy is

subordinated to

trade policy,

other national

goals and

interests may

be ignored.

F ORMAL RESPONSIBILITY FOR DEVELOPMENT OF

U.S. TELECOMMUNICATIONS POLICY IS DISPERSED,

AND COORDINATION MECHANISMS ARE WEAK.

Policy concerning international telecommunications, until very recently, was an

incidental byproduct of domestic telecommunications policy. For over a decade, the

telecommunications industry has been allowed to frame and articulate the goals of

telecommunications policy with relatively

little effective counterbalance from the executive branch of government. The diversity of

“the telecommunications industry’ means

that there are many conflicting interests and

perspectives, but a narrow range of policy

goals on which to agree. Domestic telecommunications policy has since 1978 focused

almost exclusively on the divestiture of the

Bell system and deregulation.

The divided and dispersed structure of

Federal responsibility for telecommunications policy contributed to this outcome.

Organizational fragmentation has some advantages—it provides alternative fora for

competing interests to be heard and resolved.

The fragmentation may also be necessary,

since there is a role for both a policydevelopment organ within the executive

branch and an independent regulatory commission outside of Administration control.

Since their immediate goals are sometimes

divergent, there is probably also a need for a

coordinator or mediating mechanism, especially in dealing with international telecommunications, where it is desirable that

U.S. policy be articulated clearly and unambiguously. There is such a coordinating

mechanism located somewhat obscurely in

the Department of State—the Bureau of

Communications and Information Policy—

but for true coordination there needs to be

some coherent and comprehensive policy

that bridges the interests of carriers, services

providers, and large business users.

The National Information Infrastructure

advocated by the present Administration

could also become an appropriate model for

the evolution of a global information network—

if the United States takes the lead in developing and coordinating international telecommunications policy. U.S. telecommunications

policy should incorporate the national interest in global networks; for example, the

national interest calls for network interoperability and service for small as well as large

users. At present, there is no such policy, no

effective coordinating mechanism, and no

leadership in articulating the national interest in telecommunications.

The National Telecommunications and

Information Administration (NTIA) is embedded in the business-oriented Department

of Commerce, which has many competing

constituencies and has in the past had

relatively weak and diffuse channels to

Administration decisionmakers. NTIA is

strongly oriented toward representing carriers, but tends to be paralyzed by the often

conflicting interests among local exchange

carriers and interexchange carriers.

The FCC Common Carrier Bureau has

until the last 2 years tended to give little

attention to international issues, The FCC

Office of International Affairs is relatively

new and has primarily an internal coordination function. The FCC, as an independent

regulatory agency, is outside of and sometimes at odds with Administration policymaking. This often provides a valuable

‘‘check and balance’ on policy development, but the Commission sometimes acts

unpredictably, in violation of U.S. trade

Page 14
Exporting

Telecommunications

Services to

Europe

policies and its own standing rules and

policies. 9

The State Department’s Bureau of Communications and Information Policy (CIP)

has the legislative mandate to coordinate

telecommunications policymaking among

and between FCC, NTIA, and other executive agencies. The selection of the State

Department as the site for coordination of

telecommunication policy represented first

the perception held by the Administration at

that time that telecommunications is primarily a service for multinational corporations

engaged in world trade, 10 and secondly a way

of extending congressional oversight of

telecommunications trade issues.11 CIP has

however recently been largely ineffective

both in its coordinating role and in contributing substantively to development of telecommunications policy, functioning largely

as a clerical facilitator for industry/government participation in international meetings. Its effectiveness may be further lessened by a current State Department plan to

degrade it from Bureau status to that of an

office within another Bureau. To make CIP

an effective tool for coordination of telecommunications policy would require restructuring, refunding, and restaffing. It would also

require a hospitable environment within the

State Department, one that recognizes the

essential role of telecommunications in governance and in the conduct of foreign affairs.

E FFECTIVE RESPONSIBILITY FOR INTERNATIONAL

TELECOMMUNICATIONS POLICY HAS FALLEN TO

USTR, A TRADE AGENCY. THIS CONSTRICTS AND

DISTORTS THE FORMULATION OF TELECOMMUNICATIONS POLICY.

The formulation and implementation of

international telecommunications policy, because of the 1988 Trade Act, has come to be

dominated by trade negotiations. The United

States Trade Representative has in effect

played the role envisioned for CIP, USTR

consults other agencies in depth and at great

length, but when strong interagency differences arise, USTR generally prevails, especially since telecommunications agencies do

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 Carter Admmistration 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,

formal trade negotiations may be less critical

than technology and users’ needs in determining the competitiveness of U.S. telecommunications firms in foreign markets. The

industry structure, investment patterns, research expenditures, and risk exposure cannot be effectively monitored by trade negotiators.

The central role of USTR in international

telecommunications policy has had some

advantages: it has imposed a degree of unity

on representation of U.S. positions in global

issue resolution; it has kept telecommunications trade issues under scrutiny by several

congrcssional committees with a broad perspective on global economic trends: and it

has given increased representation and importance to large business users of telecommunications. to whom USTR has built

strong bridges, while telecommunications

agenies appear to listcn more attentively to

the major carriers. However, the dominance

of USTR further reinforces the compression

of policy formulation into a single dimension, the opening up of foreign markets. The

established relationships and operating procedures between the telecommunications

agencies (NTIA, FCC, and CIP) and internaational institutions such as the International

Teleccommunications Union (ITU) are being

superseded by trade negotiations, and some

historical principles and procedures for cooperation and control may be effectively lost

as a result.

The dominant role of USTR is also subject

to other criticism. Some communications

industry representatives fear that subjecting

telecommunications to broad trade principles may result in the asymmetrical opening

of U.S. markets without providing equal

access for U.S. firms to foreign monopolydominated markets. GATT agreements could

supersede provisions of domestic law and

regulation. Some stakeholders assert that

trade negotiators do not have full understanding of highly technical telecommunications issues, and work on the basis of

existing distinctions and categories that will

be rapidly made obsolete by already emerging technological changes.

U.S. POLICY FOR INTERNATIONAL TELECOMMUNICATIONS LACKS AN INFORMING VISION.

The fragmented structure for telecommunications policymaking and the narrow focus

of both domestic and international telecommunications policy has allowed policy formulation and implementation to be driven by

the needs of a relatively few private sector

stakeholders (carriers, equipmcnt manufacturers, certain large business users), with

government taking a hands-off position.

Communications is not merely a utility for

facilitating business competitiveness or a

tradable commodity. Communications is also

a basic prerequisite of effective democratic

governance, an essential foundation for scientific endeavors, a channel for conducting

foreign relations and cooperative activities,

and a critical element in national security and

global peacekeeping.

For over a decade, however, the national

administration has largely renounced any

voice in determining the structure, investment strategies, and technology development policies of this core industry. For

example, Europe and the United States

increasingly tend to differ in the approach to

network architecture. In Europe, relatively

more centralized ‘‘intelligence (computerization) is integral to the network, while in the

United States there is a tendency to use more

sophisticated termiinal equipment, owned by
Exporting

Telecommunications

Services to

Europe

the user. There arc many advantages to the

latter approach, but on the other hard,

building advanced capabilities into the network may facilitate uses of telecommunications

by middle-sized and even small firms that

could not afford the specialized customer

premises equipment. In a global economy,

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 initiatives of congressional committees and

attempts by a few congressional leaders to

put forward a vision of the possibilities of

b ‘electronic highway s,’ domestic telecommunications policy has largely been articulated by the judicial branch of government.

No agency, including the FCC as an independent regulatory agency, has attempted to

modernize or translate the old objective of

“Universal Service” in terms of new and

advancing technologies. ” Existing policy goals

remain narrow’: progressive deregulation at

the domestic level; opening of foreign markets at the international level. This may

result in:

Neglect of goals othcr than market access,

such as the most efficient interconnection

of networks and developmcnt of a full

spectrum of services for small business

and residential consumers as well as large

businesses;

Inattention to costs and risks such as

weakening of regulated domestic subsidi -

aries or disinvestment at home;

Complete subordination of telecommunicat ions policy to more general trade prin -

ciples, ignoring special characteristics of

telecommunications services;

■ Continuing confusion and conflict over

the question of what the national telecommunications infrastructure, and its connections to global networks, should be

like at the beginning of the 21st century.

/+,

CORPORATE LEADERS GATHER IN A FIELD OUTSIDE DARIEN CONNECTICUT, WHERE

ONE OF THEM CLAMS TO HAVE 5EEN THE INVISIBLE HAND OF THE MARKETPLACE.

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

Under the present, dispersed policymaking structure, attention to such aspects of

international telecommunications may not

be adequate.

U.S. PARTICIPATION IN EUROPEAN MARKETS FOR

TELECOMMUNICATIONS SERVICES IS IN ACCORD

WITH U.S. ECONOMIC INTERESTS AND SUPPORTS

U.S. TRADE GOALS.

Export of services is now, and increasingly in the future, important to the U.S.

economy. Concern about the Unitcd States’

long-term balance of payments has mostly

focused on the continuing trade deficit in

manufactured goods; but services exports are

now more than one-third as large as our

export of goods and growing faster, with Page 17
U.S.

Telecommunications

Services in

European

Markets

Europe as the primary foreign market. The

United States has a healthy trade surplus in

services, partially offsetting the troublesome

merchandise trade deficit. The increased

export of enhanced telecommunications services and closely related information services

can add significantly to this surplus. (See

chapter 3.)

Telecommunications and information services are a relatively small part of all U.S.

services exports--only about 2 percent-but

they hold the opportunity for strong growth.

U.S. firms have a competitive edge in

delivering telecommunications and information services because of their experience in

competitive markets and in developing innovative, user-tailored services based on advanced transmission and network technologies. Other U.S. firms operating in or selling

to Europe benefit by the availability of U.S.

telecommunications services. (See chapter

5.) The sale of telecommunications services

overseas can also stimulate foreign demand

for U.S. telecommunications and computer

equipment.

In contrast to the overall surplus in trade

of services, the United States now has an

overall trade deficit in telecommunications

services. (See figure 1-4.) This deficit, however, is not due to lack of competitiveness,

but to the excellent performance of U.S.

telecommunications providers in comparison with European telephone systems. The

deficit results from international accounting

rates. A carrier originating an international

call pays a foreign carrier to route the call to

its final destination. Countries from which

more calls are made thus see a net outflow of

payments. More international calls are made

from the United States than are made to it,

because of our large industrial base, large

population, and high per capita income, and

because we enjoy much lower communications tariffs and greater access to useful

services than most countries.

It is important to correct the accounting

rate deficit, but this will require both renegotiation of accounting rates to reflect real costs

(which will mean lower accounting rates),

and lower customer charges in foreign countries to reduce the asymmetry in telecommunications usage. But the accounting rate

deficit can also be partially counterbalanced

by growth of the still-small U.S. export of

enhanced services (in which we now have a

healthy trade surplus), with the additional

benefit of supporting the competitiveness of

other U.S. firms in Europe. (See figure 1-1.)

The success of U.S. telecommunications

and information services firms in international markets is important to the U.S.

economy. Most research on the employment

effects of trade has dealt exclusively with

export and import of merchandise, but available projections indicate that exports of

services create U.S. jobs and that these jobs

have relatively higher pay than other services

Page 18

12 Accounting rates are discussed further in chapter 3. They are negotiated between carriers and are

independent of customer charges and of actual costs of message delivery.
Exporting

Telecommunications

Services to

Europe

jobs. 13 However, there is relatively little

evidence for this proposition, probably because the concepts of ‘trade in services’ or

b ‘services exports’ are themselves new and

because statistics on trade in services are

inadequate (see chapter 8).

Some services, for example financial services, have been directly exported for centuries (e. g., bills of exchange), but the direct

electronic export of enhanced services has

burgeoned only recently.15 Most telecommunications services are delivered overseas

through direct overseas investment in subsidiaries and joint ventures. It is difficult to

judge the impact of such corporate overseas

investments on U.S. income, jobs, profits,

and general economic welfare. Offshore

operations financed by direct investment

generally create jobs and secondary income

in the foreign country, not in the United

States, but profit repatriation must also be

taken into account. Profits flowing back to a

~ Billions of minutes

~“

~ From United States

6 To United States

4

r-l nl

2

0

I Net settlements ($ billions) –—- >

‘

- \

-4 1 I I 1 1 1 1 I

1975 77 79 81 83 85

SOURCE FEDERAL COMMU~lCATIONS COMMISSION, 1992.

U.S. parent firm increase the value of the

domestic corporate enterprise, and arc assumed to strengthen its growth prospects and

stimulate domestic employment and income.

Foreign services firms entering our markets

‘

3 For example, the Department of Commerce has estimated that 7.2 mllllon U.S. jobs were directly 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.

87 89 91

Figure 1-4.

Telecommunications

Traffic Balance

NOTE Does not Include traffic with

Mex!co and Canada.
Us.

Telecommunications

Services in

European

Markets

Figure 1-5.

Accounting and

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 Common 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

Inltlal m mute] + 4x$1 .09 -.$6.13

(FCC), The collection rate for the

Germany -to-U.S. call IS derived from

5x$1 88 (TeleGeography 1992, international Inst{tute of Communications). The costs to the carriers are

estimated at SO.15 per m Inute at

both the US and German end;

thm number IS conservatwe.

Page 20

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

n rate

1

0

❑

❑

Ez2

1 2 3 4 5 6 7 8 9 10

Dollars

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

Amount retained by operator originating the call

Estimate of carriers’ costs

under trade agreements also create jobs here.

Unfortunately, economists have not developed a credible way to track and calculate the

net benefits of these competing effects,

especially for services firms. 16

In some industries, lower costs of production in foreign markets—often, lower labor

costs-have caused offshore facilities to

displace plants in the United States. But in

other industries, particularly those with global

sales and increasing “returns-to-scale,’ 17

the most able firms are those with extensive

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

global operations. In some businesses, too,

access to customers with different preferences, markets with different standards, and

researchers with a wide variety of approaches to problems is an asset, In such

industries, foreign investment is likely to

result in a bigger pool of investment capital

for all the company’s establishments.lg

Those industries where offshore operations are likely to displace domestic ones

consist mainly of commodities like wheat,

textiles, apparel, and lumber.19 In the other

‘G James K. Jackson, “American Direct Investment In the European Community,” Congressional 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

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 experienced and large-scale producers are the

most efficient and innovative, both because

of increasing returns-to-scale and because of

the enormous amount of know-how and

technology embodied in the production and

delivery of the output. The telecommunications

services industry is in this category. Increasing returns-to-scale was the justification for

its traditional status as a regulated monopoly. Provision of high-quality services is

highly dependent on vast inputs of technology and decades of accumulated know-how.

Limits on the ability of the telecommunications industry to invest in and serve

fast-growing, complex foreign markets would

likely prove a disastrous competitive disadvantage. The speed of innovation and the

shortening half-life of products is a powerful

argument for global operations. Slower market growth in the United States would not

continue indefinitely to encourage rapid

innovation, while in faster-growing foreign

markets there will be the opportunity to

experiment fruitfully with different technology

, different demands, and different standards.

The United States is now operating in a

global economy. It must begin to balance its

imports with exports-of services as well as

goods. Telecommunications equipment and

services is a sector in which U.S. firms excel.

The European market for telecommunications services is both growing and moving

toward liberalized entry. The U.S. Govcrnment can encourage and hasten this increased opportunity through trade negotiations and other actions. Whether U.S. firms

can remain competitive in this market will

also depend on other factors: technological

superiority, management skills, access to

affordable capital, well-trained human resources, and U.S. regulatory policies. The

strategies being used by U.S. telecommunications firms to compete in the European

market arc described in chapter 4.

Conclusions and policy options

U.S. telecommunications firms and enhanced-services providers are well positioned

to compete in European markets for services,

to the extent that those markets are now open

to them. A combination of technology,

market forces, and institutional pressures is

converging to force open much of the

telecommunications services market that is

now closed to all competition-the opportunity to bypass monopolistic public telephone

operators has been thrown open.

Congress need do little to enlarge the

competitive opportunities for U.S. telecommunications services providers in Europe,

except for encouraging the President and

USTR to continue to push for the liberalization of European telecommunications markets, and to support efforts of the European

Community to establish a single European

market for telecommunications. No other

actions are clearly needed. There is a strong

likelihood that European markets will continue slowly to liberalize and move toward

greater integration.

There are two other unresolved issues that

Congress may want to address:

B

■

The risk of disinvestment or inadequate

investment in domestic infrastructure as a

result of overseas investment by the major

long-distance carriers and the holding

companies that include regulated local

exchange carriers; and

The weak and ineffectively coordinated

Federal organizational structure through

which national telecommunications policy is developed and implemented. Page 21
Us.

Telecommunications

Services in

European

Markets

Page 22

The Office of Technology Assessment

found only mixed and inconclusive evidence

for inadequate or declining investment in

domestic infrastructure. There may be no

significant trend in that direction; yet if there

is, the long-term consequences would be

serious. In order to resolve this question for

purposes of future oversight and policymaking,

Congress has options:

■

D

Congress could instruct the FCC to monitor and report on all telecommunications

activities and investments overseas, on the

source of capital for these investments,

and on the financial condition and resources of carriers undertaking such activities.

An appropriate monitoring system would

also require reporting, in standardized

format, of annual investment in infrastructure modernization and in research and

development.

Congress could request consultation and

cooperation among State regulators

through the National Association of Regulatory Utility Commission (NARUC), with

support from the FCC, to develop joint

strategies for protecting consumer rates,

requiring minimum infrastructure investment, and other protective measures.

The publicly available data about carrier

investments in infrastructure modernization

or in research and development is not

adequate to allow decisionmakers either to

accept or to reject a trend toward ‘ ‘disinvestmerit. ’ The first step, therefore, is to create

a monitoring system that can track both

investment in plant and equipment and

investment in research and development.20 If

a consistent pattern or trend of disinvestment

appears, Congress and/or the states can then

consider legislative remedies, including deregulation, redefinition of depreciation rates,

tax inducements, or tax penalties to correct

the situation.

State regulators are vitally concerned with

this issue, but they may lack the resources

and the geographical span of authority to

track investments. Congress may therefore

wish to ask the FCC to report regularly on

patterns of investment.

In order to encourage the development of

more comprehensive, coherent, and vision -

ary international telecommunication.Y policy, Congress may wish to consider..

Declaring goals and priorities for international telecommunications development

and deployment that include, but arc not

limitcd to, export and trade goals:

Consulting with the Administration to call

attention to the importance of clear definition and location of responsibility for

executive policy articulation and implementation and to cooperatively create a

mechanism for consultation and coordination between executive agencies and FCC;

Mandating a restructuring of the policymaking structure, possibly

-creating a new Office of Telecommunications Policy within the Executive

Office, or

—restructuring, refunding, and restaffing

the coordinating function/position within

the Department of State. and

—limiting the responsibility of USTR by

setting congressional policy guidelines

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

internal decisionmaking, it is jealously guarded so t hat it will not fall into t he hands of compet Itors and crit ics.
Exporting

Telecommunications

Services to

Europe

lateral negotiating positions with respect to telecommunications.

The three primary options (congressional

restatement of policy goals, active consultation and collaboration with the Administration, and strengthening the policy implementation structure) are not mutually exclusive,

but could be strongly reinforcing. The most

active of these options, organizational restructuring, involves alternative approaches.

Creating a small policy office within the

Executive Office would signify the importance of telecommunications and the recognition that there is a national interest in the

health, structure, and operations of the industry that is responsible for this essential

infrastructure. It would provide a voice in

top-level deliberations. However, this action

to be effective must reflect the willingness

and intent of the Administration to make use

of such an office. Past experiment has shown

that additions to the Executive Office that are

forced on an unwilling President accomplish

little.

Revalidating and reinvigorating the role

of the State Department’s Bureau of Communications and Information Po] icy reasserts the interests of a number of congressional committees and subcommittees in

international telecommunications. It would,

however, also require the assent and collaboration of the Administration and Secretary of

State and a reversal of current plans to

downgrade the Bureau. Historically, the

Department has shown little understanding

of the effects of technology on the Nation

and on relations between nations, and has not

afforded much influence or prestige to its

bureaus that are concerned with science and

technology. A stronger position and voice

within the Department, which can only be

effected by those heading the Department, is

a necessary prerequisite for making CIP

effective. However, Congress can through its

funding and oversight roles encourage this to

happen.

While the United States Trade Representative is also an executive branch office,

restricting and directing the USTR role in

telecommunications policy fomlulation would

be an appropriate reassertion of Congress’

primary responsibility for U.S. trade policy,

trade relationships, and conduct of other,

nontrade, international relationships. Stating

such policy guidelines could take the form of

a general declaration of telecommunications

policy goals and need not unduly limit trade

representatives in active negotiations any

more than does any prior fomlulation of

negotiating positions. The difference is that

these positions have recently been formulated entirely within USTR, with little prior

congressional instruction, or discussion.

Uniformity, single-mindedness, and a narrow focus are not desirable in formulating

international telecommunications policy, but

ultimately some consensus and concerted

representation is needed in national and

international decisionmaking.

There is a national

interest in the

health, structure, and

operations of the

telecommunications

industry that

includes, but is

not limited to,

competitiveness in

world markets.

Page 23
Technological

Trends

and

Issues

CHAPTE

2

R

Technological

trends will increase

need for international

standards, and will

challenge the

viability of traditional

standards processes.

E MERGING TECHNOLOGIES AND INNOVATIV E,

SOFTWARE-BASED SERVICES are undermining

some U.S. telecommunications regulations

and policies. Intelligent networks and informationbased services will make it increasingly

difficult to draw clear boundaries between

public networks and private networks and

between regulated ‘‘basic’ telecommunications services and ‘‘enhanced’ services.

Such technological change may make the

negotiating positions developed by the Office of the United States Trade Representative (USTR) irrelevant by the time they arc

embodied in treaties, trapping the United

States in agreements no longer in its best

interests. These technological trends will

both increase the need for international

standards, and at the same time challenge the

viability of traditional means of developing

standards.

The broad technological trends that will

shape the networks of tomorrow stem from

three fundamental developments: 1 ) the

progressive increase in processing power of

microelectronnic circuitry, 2 ) the continuing

improvement in fiber optics, and 3) fiber

optics: extraordinary reduction in cost. The

first provides the necessary processing power

for advanced switching systems and for

compressing information signals into eversmaller bandwidths. The second provides

both vastly improved transmission quality

and the necessary transmission capacity for

bandwidth-intensive services that combine

voice, data, and video signals.

Changing technology

 Eight broad technological trends should

be noted:

conversion from analog to digital transmiss ion,

common channel signaling,

unbundling of stored-program control

switching functions,

advances in transmission systems,

advances in digital multiplexing,

advances in packet switching,

mobile communications, and

greater functionality in terminal equipment.

The most basic and important of these

trends is the progressive conversion from

analog to digital systems. The great advantages arc better performance, easier

multiplexing, 2

easier encryption, easier sig -

naling, better monitorability of performance,

integration of switching and transmission,

Page 25

NOTE: Much of the material In this chapter is based on an Office of Technology Assessment 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

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 Compression techniques are steadily reducing the

number of bits per second that must be

transmitted to reproduce a given signal, and

advanced modulation techniques allow higher

bit-rates to be transmitted per unit of bandwidth. (See figure 2-1 and 2-2. )

A second important trend is common

channel signaling, or separating voice traffic

from signaling. Signaling is the information

associated with setting up, maintaining, and

11’U”Y b

c

)

At

o

&/ ~+

( ))))))) (

Ampllfler Ampllfler >

)

~,:,:.:,, .,:,:,:,::

,.. ..:?::::::.:

/

I

‘pm

/

c

Signal strength rt

~ ~ Original signal

I

f’ti } Distofied Signal

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

Figure 2-1. taking down calls. Until recently, analog

Analog Transmission

NOTE In order to transmit a voice

over the telephone network, the

soundwaves (a) are converted to a

corresponding electrcal wave (b)

when the waves contact the mouthpmce of the telephone handset. The

signal weakens as It travels along

the wires of the network, and therefore must be ampllfwd at intervals

The signal mewtably picks up noise

and dwtortton, and this noise and

distortion slncluded with the ongmal

sound when the signal IS ampllfled

(c)

tones were used to convey signaling information, which was carried on the same

channel as the voice conversation. With

common channel signaling, all of the signaling associated with multiple conversations is

handled on a common packet-switched subnetwork. Conversation channels are circuitswitched, while signaling information in the

common channel is digitized and packetswitched. Common channel signaling is

faster than traditional analog signaling, allowing calls to be set up faster. The signaling

does not consume conversation capacity on

the trunk. The network can ‘ ‘look ahead” to

see if lines or trunks are busy before setting

up a call on the circuit-switched network,

and then pick a route through the network

that minimizes congestion. These improvements become even more powerful when

enhanced computer processors and databases are added to common channel signaling to create ‘‘intelligent networks.

A third trend is toward unbundling of

stored-program control switching. Modem

computerized or stored-program circuit

switches are composed of two basic parts—

the matrix where physical connections arc

made between circuits, and a processor that

contains the logic that controls the switching. In early ‘‘stored program control

switches, the switch (matrix) and processor

elements were integrated. (In computer terms,

there was no separation between the “application program’ and the "operating systern, ’ The customer could not modify the

switch software to create new or changed

services-the switch manufacturer had to do

that, usually with a new switch.

Separating the switch control from the

lower-level switching functions allows networks to be programmable by a carrier, an

enhanced services provider, or the customer/

end-user. In the case of a public network, a

local switch can suspend an incoming call,

look up the called number in a database, and

route the call to the intended recipient at

another number and location (call forwarding). In a corporate network, a private branch

exchange (PBX) can be linked to external

computers; calls can be delivered to particular corporate agents along with different

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

1 . . . L~ 20~8000 second @

124--

/

. . .

Figure 2-2.

Digital

Transmission

SOURCE OFFICE

OF TECHNOLOGY

ASSESSMENT, 1993.

...which is

encoded as

10000011

10000010

10000001

10000000

01111111

01111110

01111101

01111100

01111011

...and sent as

n f-l

J-1 n

n n

n

-J 1

-1 L

J L-It

-r L-

/

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).

/

/

/ —

‘. ~———————-

.

—————— ~’

—J—, “Repeater

Cr /)

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

-————— ,r

e

I Ill I -11111~ I

I II

I 11

I I

1-

!

.— ——J~ I
U.s.

Telecommunications

Services in

European

Markets

The “Intelligent

Network’ ’-locating

processors and

databases throughout the network—

permits a wide

variety of

specialized

network services,

including virtual

private networks.

identity of the customer placing the call. This

ccm~putcr/telephone integration is one of the

most important trends changing telephony.

The “Intelligent Network” is a natural

extension of these advances in switching and

signaling. Computer processors and their

associated databases arc placed in the network where they can be accessed from the

signaling channel. The system uses the

calling and called numbers plus other information to handle calls in special ways--e. g.,

to route calls to different locations depending on the time of day and/or the originating

location. Public or private networks can be

reconfigured to reflect changing traffic conditions or to respond to network failures. An

intelligent network can also create softwaredefined virtual private networks.

One characteristic of intelligent network

concepts is that the call-handling logic and

databases can be stored at a handful of

centralized locations, to be accessed by a

large number of switches. This makes it easy

to reprogram them, since the software and

databases need be updated only at a limited

number of locations. As a result of these

developments, the logic and data associated

with the handling of individual calls can be

optimal] y distributed among customer premises equipment, the local or metropolitan or

regional portion of the network, or the

long-haul portion, and linked using advanced signaling systems.

Greatly improved transmission systems

arc a fourth broad technological trend. Transmission systems for traditional services

evolved from open wire line to twisted-pair

copper cable, coaxial cable, line-of-sight

microwave, satellite, and optical fiber cable.

While technological advances have produced significant capacity increases in even

the older technologies such as twisted-pair

copper cables, the largest increases are

associated with the deployment of optical

fibers or lightwave systems; these systems

operate routinely at speeds as high as 2.4

Gbps (billion bits per second) on a single

fiber.

A family of transmission standards now

being extensively implemented, called Synchronous Optical Network (SONET),4 allows transmission rates in the range of 51

Mbps (million bits per second) to 2.4 Gbps.

Because SONET uses synchronous transmission, individual channels can be efficiently added or dropped at intermediary

nodes without the usc of back-to-back multiplexer. This allows the creation of ring

architectures that can provide added reliabil -

ity. (See figure 2-3. ) Moreover, SONET

includes special data channels that facilitate

various network management functions such

as surveillance and rerouting from a central

location. By installing high-capacity facilities to the customer’s premises and using the

advanced network management features of

these systems, additional or reconfigured

channels can be provided to the customers

quickly, and without an on-site visit by a

technician. Through this ‘preprovisioning, ’

a customer can even get additional capacity

by directly accessing the network management system—a form of ‘‘bandwidth on

demand.

Packet-switching is another powerful technological trend. The public switched telephone network with circuit-switching was

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 (thousand bits per second) circuits, corresponding

to the uncompressed bandwidth requirements of ordinary voice communications.

For data communications, there are two

drawbacks to circuit-switching: the inefficiency of having dedicatcd connections when

traffic is intermittent or “bursty,’ and the

constrained 56/64 kbps transmission speed.

The lattcr can be partially overcome by

modifying or redesigning switches to handle

multiples of the 56/64 kbps rate. (This is

currently being done to achieve speeds up to

1.5 Mbps. ) A wideband, circuit-switched

service of this type is appropriate for bulk file

transfers, vidcoconfcrencing, and other applications 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.

This is because the packet switch at each

network nodc must read the address information, 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

of fast packet-switching. Both rely on the

fact that modern digital transmission systems have very low error rates compared

with analog systems, and the end user’s

terminal equipment now has the processing

power to correct errors or ask for retransmission. Both frame relay and cell relay are

attempt to improve a situ at ion in which the

ability to transmit information at high speeds

exceeds the ability of switches to route it.

These technologies have given rise to the

important developments of Asynchronous

Transfer Mode (ATM) and Switchcd MultiMegabit Data Service (SMDS), described

below.

Frame relay utilizes the same type of

variable length packets characteristic of traditional packet systems, but the individual

packets--called frames-arc relayed through

the switch in: nodes with no effort to recover

from any errors detected. Much of the error

detection and all error recovery is left to the

terminal devices. Transmission rates in the 1

to 2 Mbps range arc possible.

Cell relay operates similarly, except that

the packets-here called cells—have a short,

fixed length, and because of this can be

switched at extremely high speeds (in the

Q❑:

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

range of hundreds of megabits per second).

The expectation is that the high speeds and

small delay will allow integrated combinations of’ voice, data and video traffic to be

handled through a common switch. With all

the transmitted information divided into

individually addressed cells, both variable

bit-rate (i.e., data) and constant bit-rate (i.e.,

voice ) traffic can be switched. While early

applications of cell relay technology are for

data communications, the goal is to extend

Figure 2-3.

Multiplexing

NOTE Multlplexlng IS the process

of comblnlng multlple signals Into a

single channel for transmission over

a common facll Ity (e.g , Ilghtwave or

radio carrier). Multlplexlng IS used to

Increase transm s.slon efffc!ency by

allowlng mult @e clrcu[ts to be

earned by the common facility

Page 29
Us.

Telecommunications

Services in

European

Markets

Engineering or

economic forces

are shifting

telecommunications

intelligence and

functionality from the

center to the edge

of the networks.

the technique to voice and video. In addition,

cell relay works in a synergistic way with

SONET,

Frame relay is both a technology and a

service. It is designed to carry data communications and interconnect local area networks (LANs), and it may be used to

transport a variety of higher-level data communications protocols. Frame relay services

are being introduced both in the United

States and internationally, by U.S. carriers

and value-added network providers. European public telephone operators (PTOs) are

also planning to introduce public frame relay

services. 5 However, there are still unanswered quest ions about performance characteristics and about support from carriers in

several countries. A major unresolved issue

for the United States is the nature of interconnections between major carriers such as

AT&T and MCI. Some users say that national policy should insist on immediate

action to ensure interoperability.

Switched Multi-Megabit Data Service is a

broadband public data communications service based on the second form of fast packet

switching-cell relay. SMDS was developed

primarily for LAN-LAN interconnection (i.e.,

data communications). However, specifications for handling voice and video are being

developed. The cell relay structure is compatible with a new protocol known as

Asynchronous Transfer Mode intended for

use in switching and transmitting voice, data,

and video simultaneously.

ATM is the basis for Broadband Integrated Services Digital Network (ISDN), and

SMDS could be an interim step pending the

arrival of Broadband ISDN.6 The standards

for Broadband ISDN are not fully developed.

One configuration would provide for a

channel of approximately 150 Mbps to

customer premises, with integrated switching and multiplexing.7 This would allow

transmission of high-quality, two-way video

telephone and vidcoconferencing, and other

multimedia services combining audio, video,

graphics, text, and data. There is still much

uncertainty about architecture and standards

for this development.

Another marked trend is toward wireless

or mobile communications, with the rapid

growth of pm-table communications including cellular- mobile radio, specialized mobile

radio, cordless telephones, and radio pagers,

and in the future wireless forms of Personal

Communications Services (PCS).8 Some observers suggest that there may be a fundamental shift in the way people communicate,

with access to telecommunications services

through wireless technology becoming the

rule rather than the exception. (See figure

Page 30

5 Robin Gareiss, “lnternatlonal Frame-Relay Services Expand,” Comrnurvcabw Week, November 1992,

p. 27; Peter Heywood and Elke Gronert, ‘(Public Frame Relay Goes Global,” Data Cornrnm;cations, 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,

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

government actions to reallocate spectrum

for advanced mobile communications systems. by the continued increase in processing

power (e.g., Digital Signal Processing chips,

or DSP), by steady improvements in battery

technology, and by increased use of computers within the supporting land-based infrastructure.

Still another trend shaping telecommunications networks is increased functionality

in terminal equipment. The provision of

terminal equipment has been deregulated in

many countries and the markets arc intensely

competitive. Intelligence and functionality

in terminal equipment at the edge of the

network can substitute for intelligence and

functionality within the network. For example, frequently called telephone numbers can

be stored either: on a b ‘smart card’ that is

plugged into a handset. in the terminal

equipment itself. within a telecommunications 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

leading to locating intelligence and functionality at the edge of the network rather than

internal to it. It may also be done to respond

to customer preferences. Some customers

want to develop proprietary solutions to their

communications needs to gain some competitive advantage, and such customization may

be difficult on a network designed to serve

general requirements. Other customers may

feel more secure if information critical to

their competitiveness is embodied in software and hardware on their own premiscs.

Thus advances in telecommunications services will occur not just within networks but

at the edge as well. The time needed for such

developments is often shorter than for developments in the internal network infrastructure.

The evolution of advanced services

The broad technological trends discussed

above are the basis on which advanced

services will evolve. Perhaps the most highly

touted advanced telecommunications service is

ISDN. The concept of ISDN originally

Millions $billions

12 T

9“

Revenues

6-

Subscribersd

8

6

4

2

0

1984 1985 1986 1987 1988 1989 1990 1991 1992

SOURCE CELLULAR TELEPHONE INDUSTRY ASSOCIATION, 1993.

developed as an outgrowth of standards Figure 2-4.

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

represented a combination of two of the Cellular

technological trends identified above: the Subscribership

conversion from analog to digital networks, and Revenues,

and the separation of the signaling channel 1984-92

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

Topology

NOTE The publlc-switched telephone 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

larger compames often includes private branch exchanges (PBXS) and

Icd ar~ (computer) netvaks (lANS).

Local distribution network refers

to the portion of the network connecting homes and offices to the telephone company’s central office.

The metropolitan or regional network cons(sts of the central office

switches and the mterofflce trunk

Imesconnectmgthose switches. Each

cmtraloffceswtch arespncfs muc$ly

to a neighborhood so a city WIII be

served by multlple central offices.

Telephone traffic for pcxnts outside

the metropolitan network is collected

at and routed through a tandem

switch.

The most obwous part of the intercity or Iong-distance segment IS

the web of high-capacity trunk Imes

(mamly f~ber optic, but also mtcrowave) that carry the telephone conversations or messages; the packetswltched data network (represented

by the thm dashed Ime) IS transparent 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

blllmg, etc. The mterexchange (or

Iongdlstance) carriers interconnect

for access to the local network at the

point of presence (POP).

—.—---———-——. . . ..—— .—.

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

fl

=—+“ \

. . ‘\

r-

=511r m-? — -

——

1

1 f=%.

m1°

,///’ ‘—,

‘“

//

1-

~

came

“’:’:’’””O”

/ I I

/1’bmSwfld I I\

\

+ LN@

, / ’%L~ TcentraK&5’ [bY!!.4i J

Interoffice trunks

\

4

:, -jw~:*,: piiEFEq \

/ 1’ ,

I \

/ \l

~fiSignal transfer point I

—

! Interclty or 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 messages.

ISDN offers two primary transmission

speed- 144 kbps (the Basic Rate Interface)

and 1.544 Mbps (the Primary Rate Interface). The former is divided into two 64 kbps

voice and data (bearer) channels plus a 16

kbps signaling channel. The Primary Rate

Interface is divided into 23 voice and data 64

kbps data channels plus a 64 kbps signaling

channel. These speeds are compatible with

the bandwidth capabilities of twisted-pair

copper cable. The bearer channels can be

circuit-switched or packet-switched.

ISDN was designed to support many

applications, including mutimedia communications (i.e., simultaneous voice and document transmission). The National ISDN

Users Forum identified 16 important applications for ISDN: 10

1.

2.

3 . z

4.

5. .

6.

7.

8.

9.

1 0.

11.

high-speed file exchange,

videoconferencing,

data conferencing,

multipoint screen sharing,

customer service call handling,

telephone/workstation integration,

image Communicant ions,

remote terminal access to LANs,

automatic number ID/calling linc ID,

at-home agents,

multidocument image storage and

retrieval,

Belgium

Denmark

France

Germany

Ireland

Italy

Netherlands

Portugal

Spain

United Kingdom

Percent of

networks

converted

800/0

100

100

100

80

100

100

100

Target date

1992

1992

1991

1993

1993

“late 1990s”

1995

1994

“late 1990s”

1992

SOURCE

12.

13.

14.

15.

16.

In

Percent of

networks now ISDN

capable (1 991)

20%

o

100

60

0

0

0

0

0

60

.

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

multiple ISDN phones on a single Table 2-1.

ISDN basic rate interface loop, National ISDN

transparent feature operation between Status and

ISDN, Goals

frame relay support,

centralized fax server with ISDN

access, and

engineering workstation interface to

ISDN.

In 1990 the Federal Communications”

Commission (FCC) required Bell operating

companies (BOCS) to include plans for

ISDN in their open network architecture

plans.

11 According to these plans, the seven

BOCs expect to convert over 2,000 of their

9,000 switches by 1994, making over half of

their regional access lines ISDN capable.

Some European countries arc much further 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

Programmable

networks open the

opportunity to

customize them to

meet customers’

needs, either by

carriers, third

parties, or (corporate) customers

themselves.

concept evolved largely outside the United

States and was identified with European

Postal, Telephone, and Telegraph (administration) (PTTs). It was adopted by the

International Telecommunications Union’s

Consultative Committee for International

Telephone and Telegraph (CCITT) in 1972,

and was intended as the response of PTI’s to

the growing demand for data communications. It assumed a unitary ‘‘solution’ in a

monopoly environment.

In the United States there may now be

more critics than advocates of ISDN. ISDN

has not lived up to early expectations. Its

slow growth has been attributed to a number

of factors, including lack of user input in its

design, slow development of ISDN standards, the high cost of terminal equipment,

and competition from newer technologies.

Widespread acceptance of ISDN may have

lagged so far that other advanced technologies based on fiber optics and fast packetswitching will further limit the appeal of

ISDN. AT&T officials point out, however,

that these alternative technologies will benefit only big corporations, and the lack of

ISDN severely limits the services that can be

offered for middle-sized and small businesses, as well as for residences.

On the positive side, France and Germany

arc heavily committed to ISDN and the

European community is pushing it as a

means toward an integrated European network. There is now a greatly increased

demand for data services, and according to

the International Telecommunications Users

Group (INTUG), which is not a strong

advocate of ISDN, interconnection between

most of the various European ISDN systems

has now been substantial y achieved. ]3 However, ISDN may not increase PTT revenues

because it sometimes replaces higher revenue services.

The ISDN outcome could possibly affect

the pattern of suppliers of equipment in

international networks. ISDN is part of the

European pattern of centralized network

intelligence, whereas the U.S. trend is to

diffuse intelligence (i.e., computer logic)

throughout the network, making it effectively a web of computers. The former

strategy will encourage European telecommunications companies to stick with their

traditional equipment suppliers; the latter

strategy could benefit U.S. firms such as

IBM. On the other hand, long-lived ISDN

centralized switching and processing installations would, in the long run, work against

small new firms with rapidly changing

technologies, many of which arc U.S. firms.

A second category of emerging services

are those based on the ‘‘intelligent network

concept described above, The intelligent

network allows network switching elements

to interrogate remote processors and databases to determine how to route a call,

Making the network programmable in this

way opens up the opportunity to customize

it to meet the needs of individual customers,

whether this is done by the carrier, by a third

part y on behalf of the customer or customers,

or by a (corporate) customer alone. This was

the basis for ‘ ‘800’ service--when a customer dials an 800 number, the call is briefly

suspended while a remote database is consulted 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

r

‘&f-—’———

Transport or call-carrying circuit

((’l,

,{ L1 (TEM J/ ‘

/’ )

Local earner

Id

Local c Ier ~ ~

A c

~-–

\\

L. / \ I Signal

‘ 1 \A \

\

\J

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

database, the 800 number is translated into a

regular telephone number, which is sent back

to the switch where the call was intercepted,

and the call is then handled as a regular

circuit-switched call. It can be routed differently depending on the place it originated,

the time of day, or other variables. Intelligent

networks can route calls automatically to a

customer location nearest the caller (for

example, from a chain of retail stores or pizza

parlors) and could take into account the

closing hours of the stores and the time at

which the call is made.

Another usc of the intelligent network

concept is the creation of Virtual Private

Network (VPN) services. One of the advantages of a real private network is that

corporate customers can employ their own

numbering plans, using fewer digits than

required by a public-switched network bcSignaling circuit v

cause the private network serves a limited

number of locations and telephones. An

inelligent public network can emulate that

feature on VPNs, translating a 7-digit number dialed on a VPN into a normal 10-digit

number, and muting it accordingly. Another

feature of private networks is the ability to

restrict calling from certain telephones to

reduce toll calling abuse (e.g., to prevent

employees from making unauthorized international calls). The same type of restriction

can be imposed by an intelligcnt public

network by examining the calling and called

numbers. Other features possible on VPNs

include, for example, alternative destination

routing, account codes for cost allocation

purposes, management reports, hot lincs, and

call forwarding. VPN (and new tariffs for

high volumc traffic) may already have swung

the balance for large corporations away from

Figure 2-6.

Intelligent Network

NOTE Theadvanced mtelllgent network (AI N), elemen!s of wh{ch are

currently {nstalled In today’s publlc -

swltched telephone network, envtstons 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 slgnalmg and control funct~on and employlng the powerful software In the

swlfches.

Imagme, for example, an Instance

where a caller places a call to a

fam Ily member who while on vacation 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 Illustration, the vacationer would have

preprogrammed the pncmty telephone

numbers (other calls m Ight be routed

to an answering service or machine)

and the new destmatton number by

dlalmg mto the Intelligent peripheral

and Inputt[ng these data When the

caller dials !he number, the local

swlfch quer!es the sgnal transfer

point for b[lling and accounting information and ascertains from the service control point a clear path through

the Iccal network to the point of

presence of Ihe caller’s longdlstance earner of choice The slgnahng networks of the two local

exchange compantes and the long

distance carrier interact to learn the

status of the called party and thus

how to set the cah up, In fhls case,

the call has been red lrecteC to a

telephone address In a new Iocatlon

so a third local company IS Involved

and once again the status of the

called party IS learneC (for example,

I f the hne were m use, the network

would direct local carr!er A to transmit a busy signal to the caller) and

establishes a call!ng path Local carrier C IS also Instructed to del wer the

special nng

Page 35
Us.

Telecommunications

Services in

European

Markets

developing private networks and back toward reliance on public networks.14

VPN services are not limited to voice

communications; AT&T offers an international Software Defined Data Network in

about 20 countries. Intelligent networks will

be crucial to the development of Personal

Communications Services or Personal Number Calling, which will require use of data

concerning user identity, completion preferences among available alternative networks,

user-selected features, and billing procedures. 15

First-generation cordless telephones and

cellular mobile radio systems are now widely

available in most parts of the world. The

United States has lagged behind Europe in

development of cordless telephone standards. Here, the first-generation of analog

cordless phones operated on a few channels,

near 50 MHz in the radio spectrum. Some

manufacturers have recently introduced digital cordless telephones that operate in a band

in the 900 MHz region that is set aside for

low power, unlicensed devices. U.S. cellular

service providers are beginning to convert

their first generation systems (operating in

the 800 MHz region) from analog to digital

transmission. The FCC is expected to reallocate a substantial block of spectrum near 2

GHz for PCS.

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

developed, CT2 and DECT. CT2 is a lowpowcr system in accord with a standard

known as the Common Air Interface, that

allows a single handset to be used in

residential, business, and public (Telepoint)

applications.

There is a pan-European standard for a

digital cellular system operating in the 900

MHz band, the Global System for Mobiles

(GSM),16 The GSM network will support not

only ordinary speech transmission but transmission of short data messages, videotex,

teletex, and facsimile .17 The Digital Cellular

System, DCS1800, is another standard for a

Personal Communications Network that was

derived from the GSM standard, but operates

in a different region of the spectrum (1800

MHz) at lower powers with smaller cells.

The Europeans are also working on a thirdgeneration mobile system known as the

Universal Mobile Telecommunications System.

Satellites have proven to be especially

effective in delivering one-way video services and two-way data services utilizing

Very Small Aperture Terminals (VSATs).

VSATs arc extensively used in the United

States, but development of VSAT services in

Europe lagged because of regulatory restrictions. As discussed in chapter 5 (Users’

Perspectives), they may become: increasingly important in the near future.

‘

4 For discussion of this trend, see U.S. Congress, Off Ice of Technology Assessment, U.S. Banks and

/ntemationa/ 7ie/ecomrrrunicatlons, OTA-BP-TCT-1 00 (Washington, DC: U.S. Government Printing Office,

September 1992).

15 Irwin Dorros, “Diversity, Success, and Change,” Be//core Exchange, November/December 1992, p. 9.

‘G It is also known as Groupe Speciale Mobile. The GSM system was scheduled to begin commercial 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

technological change

Telecommunications networks are becoming more software-intensive and the costs Of

developing networks and services is increasingly in software rather than hardware. The

way in which networks and services are

competitively differentiated is in the software incorporated in them. Fortunately, this

plays to the strength of U.S. firms.

In early generations of switching equipment, hardware and software were tightly

coupled and had to come from the same

vendor. This is likcly to remain the case for

simple switching software, but carriers, third -

party services providers, and users all will in

the future have increasing ability to ‘‘progra m networks to meet specialized needs.

Carriers can be increasingly responsive to

customer needs, and decreasingly dependent

on hardware manufacturers and vendors.

Customization through software can help

private network operators, such as financial

services providers. develop and offer innovative services and maintain a competitive

edgc.

The pressure will thus grow to unbundle

applications software and make basic transmission a more commodity-like product.

There is likely to be more commingling of

carrier-provided and customer-provided logic

and databases. Both may be necessary. for

example, in call-routing that is sensitive to

time of day or changing recipient locations.

Internationtal traffic has traditionally been

carried over national carriers’ ‘‘half circuits"; that is, circuits were provided by

contractual agreement between two national

monopoly’ operators. Now there is a shift

toward “light carriers,” providing international service by reselling. rerouting. and

reprogramming capacity leased from the

traditional (’ ‘heavy”) carriers. This movement is driven by the ability to usc software

to provide "least-cost global routing’

through a wide choice of carriers (although

in fact none of the light carriers can yet offer

"globa" service).18

Carriers that have residual monopoly power

over basic telecommunications services will

have a continued means and incentive to

leverage that power into the provision of

enhanced services. For example, a carrier

might providc customer access to its internal

logic and databases more efficiently or

effectively than it would provide access to

external logic and databases belonging to a

competitor. This means that regulatory issues such as open network architecture and

open network provision will remain important topics in the future.

As private networks also become more

complex, some corporations arc contracting

with carriers, value-added network operators, and other outside firms to manage their

existing networks ("outsourcing"). But carriers arc also seeking help in network management, administration, and maintenance.

For example, Ericsson, the Swedish telecommunications company, and Hewlett-Packard,

the U.S. computer manufacturcr. recently

announced a joint venture to provide telecommunications operators with network management systems. This was described as

being “aimed at winning business from the

growing demand among telecommunications

operators to place orders outside their own

companies for systems that combine net-

“ Gregory Staple, “Winning the Global Telecommunications Market,” Telegeography 1992 (London:

International Institute of Communications, 1992).

Telecommunications

networks are

increasingly

software--intensive

and this plays to

the strength of

U.S. firms.

Page 37
Us.

Telecommunications

Services in

European

Markets

Regulators and

policymakers will

find it increasingly

difficult to separate

regulated basic

services from

unregulated enhanced services.

work management with administrative and

customer support systems. ’ 19

Because of the creation of services within

software rather than in hardware, regulators

and policy makers will find it increasingly

difficult to separate regulated telecommunications services from nonregulatcd enhanced

information services, or to distinguish definitively between public and private networks.

Similarly, agreements reached by trade negotiators that depend on distinctions between basic and enhanced services will be

difficult to implement and enforce----a- will

tend to stultify innovative developments.

As networks become more softwareintensive and more complex, like ‘ ‘giant

distributed computer systems,”20 they may

also find that they are increasingly vulnerable to various kinds of systems failure

resulting from software and hardware defects, human error, effects of natural disasters, and hostile and criminal intrusion. The

core cause of failure may be simply the

inability to comprehend and manage the

proliferating relationships and dependencies

within extremely complex systems. In international networks, coping with these vulnerabilities will require global cooperative actions.

Standards

Issues of standards development are increasingly important in the context of U.S.

competitiveness in European markets. U.S.

firms engaged in international commerce

want a communications infrastructure that is

seamless, reliable, cost-effective, and flexible. Above all, they want transoceanic and

pan-European networks that, whether public,

private, hybrid, or shared, are fully interconnected and interoperable. This implies the

necessity of international standards.

A standard is an agreed upon technical

specification or set of specifications used in

producing goods or services. ‘ ‘Product standards’ define a particular item, system, function, or service. “Process standards’ define

features or functions that must be the same in

all versions of a product or service in order

to assure their safety, reliability, or interoperability with other products or services. The

latter is of paramount importance for computers and telecommunications.

Many standards develop informally or de

facto; that is, one kind of product or services

captures the market, either by being first or

by winning nearly universal approval.21 Standards may also be formally set by agreement

among producers; these are called voluntary

standards. Finally, standards may be mandated by governments, usually for reasons of

safety, health, or environmental protection.

Standards traditionally were promulgated

long after a technology was invented, but

recently they are often ‘‘anticipatory

—that is, they may be agreed on at an early

stage of a technology’s development in order

to guide its design and make it attractive to

a larger market than it would otherwise find.

19 R. van de Krol, “Ericsson Joins Hewlitt in Network Systems Venture,” Financia/ Times, Dec. 11, 1992.

20 Hatfield Associates, Inc., Advanced /ntemationa/ Telecommunications Teclmo/ogies and Services, 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

which technology development can be directed.

While simple product standards deal with

the characteristics of stand-alone devices or

components, such as the 12-button keypad of

a modern telephone, integrated-systcm standards deal with the structure or architecture of

complex technological systems or networks.

Such standards assure that one part of a

system will not disallow something that is

important for another part of the system. For

example, Open Systems Interconnect ion is

an anticipatory integrated-systems standard

that may allow multiple development efforts

to be integrated into a cohesive structure. 23

Networks and interoperability

Because of the imperative of interoperability, there is a strong incentive for developing international network standards that span

many national markets.24 Telecommunications network standards were originally developed for analog, hierarchical systems

where the carrier was the dominant (or only)

decisionmaker and the users had, or were

treated as though they had, ‘ ‘monolithic,

invariant needs,"25 In analog networks, the

content of the message (e. g., whether it is

voice or data) determines how it is to be

treated or transmitted. Digital systems arc

fundamentally different: ‘‘a bit is a bit is a

bit,’ and what matters is what happens at the

interface to the user’s application. With

programmable or intelligent networks, as

described above, control of the network may

be shared between carrier and user, and

flexibility becomes essential. Carriers and

providers of services have a disproportionate

advantage here; standards, and user participation in standards-setting, are increasingly

important to assure users of full and costeffective interconnect ion.

In the 1980s, although computer costs

were dropping rapidly, telecommunications

network costs were soaring because of problems of incompatibility.26 which had to be

solved one at a time with converters, translators, and gateways, and other kinds of

customized connectors. In traditional methods of standards development, the costeffectiveness 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 or quallt y of com elementary goods and im prove t he qual It 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

./

‘-- d

., ,,. , r, , !

o

0

— Fiber optic cabl e

– – Copper cable

-— Proposed (fiber) cable

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

against protection for consumer safety and The U.S. process for standards develophealth. Standard-setting is slow and cumbersome, and largely dominated by technology

producers, with very limited participation by

users. This makes it difficult for standards to

respond to customers’ emerging needs. For

rapidly advancing telecommunications technologies, standards should also have three

characteristics, according to Richard Jay

Solomon and Anthony M. Rutkowski:

ment is increasingly unsatisfactory to many

critics, and perhaps to most participants.28 It

is plagued with dissension and rivalry; it is

cumbersome and arcane; it is dominated by

a few organizations with the considerable

resources and dedicated expertise necessary

for sustained participation. Intellectual property issues are unresolved. The dissemination of standards is often limited by copyectensibility --the ability to incorporate rights and costs. Critics say that the process,

evolving technology without complete developed for reaching consensus on relareplacement of components; tively simple and slow-changing manufacscalability --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 servtion of technology and markets.27 ices to meet the highly varied and continuPage 40

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

28 Fora full description and analysis of the process and the growing dissatisfaction with It, see U.S. Congress,

Office of Technology Assessment, G/oba/ Standards: E?uild;ng Hocks for the future, OTA-TCT-512

(Washington, DC: U.S. Government Printing Office, March 1992).
Technological

Trends

and

Issues

ally changing needs and desires of large

users.

New ways of achieving interoperability

This widespread dissatisfaction. and the

implementation of packet networks in the

early 1970s, resulted in an effort to find a

new way of assuring interoperability, by

defining a generic open systems interconnection model.29 “ Ope n means that any two

systems conforming to a reference model

and its associated standards can interconnect. One such model was developed for the

Department of Defense’s research computer

network, ARPANet, and included a suite of

protocols known as Transmission Control

Protocol and the Internet Protocol (TCP/IP).

Another, called the Open Systems Interconnection (OSI ) model, was adopted by the

International Standards Organization (IS0)

and the International Telecommunication

Union (ITU).30 Both define the functions

that the communicating computers (as well

as some of the internal network components)

must perform. Both define ‘‘protocols, ’ i.e.,

the precise stream of data bits that must

traverse from one computer to another.

In each standard, the definitions of functionality and the protocols arc organized into

layers. In the Department of Defense model,

four layers are recognized; in the OSI model,

there arc seven. Layers make it possible for

different committees to work in parallel on

the development of the standards. The reference model defines the layers. A layer

bounds the responsibility of each committee.

A well-conccivcd reference model can greatly

speed up standards development.

Producers vs. users

When products conforming to different

standards (including proprietary standards)

must communicate with each other, devices

known variously as protocol converters,

translators, or gateways can sometimes be

used. Such devices have limitations. Their

development depends on deep understanding of both standards; they can only support

features that arc implemented in both products, 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

Users tend

to urge ear/y

adoption of

standards, while

equipment

producers tend

to resist early

adoption.

when one or the other of the connected

devices is upgraded. (See box 2-A.)

On the other hand, either the informal

triumph of one standard, or the voluntary

formal acceptance by the industry of one

standard, can cause nonconforming network

products to suddenly lose all value. The

standard that prevails may not necessarily be

the best, and always some users will be left

with incompatible equipment or networks.

The large installed bases necessary for global

networks make it particularly costly for users

later to shift to newer, more technologically

advanced standards. But while standards

may cut off innovation at one level by

mandating one path of technological development, they make it possible to put one set

of problems behind and move up another

path. There is always tension between uniformity and optimality, between universality

and innovation. Compromises are necessary,

and this may set producers against users. The

challenge is to find just the right time to

freeze a standard.

Users, whose chief concern is with interoperability of systems, are generally eager to

see the adoption of international standards so

long as these do not unduly hinder the

continuing evolution of technology and services. In a survey and several case studies of

large-scale U.S. users of international telecommunications conducted by the Office of

Technology Assessment for this assessment

the need for international standards was

among the points most frequently made by

users. (See chapter 5, Users’ Perspectives.)

Telecommunications providers and equipment producers tend to agree on the need for

international standards but are much more

immediately and urgently concerned with

the specifics of those standards. Their individual market goals often drive them to resist

agreement on standards longer than is in the

interest of the industry as a whole. The

standards-development organizations themselves have self-aggrandizing motivations

and behaviors that often frustrate, rather than

advance, the development of

voluntary standards.

Standards and the future

Competitiveness in foreign

consent to

markets is

increasingly tied to standards. The European

Community is now giving strong attention to

standards as a fundamental mechanism for

pursuing the goal of a single market, and has

particularly targeted telecommunications technologies as a high priority sector for European standards development. The EC has

shown itself willing and able to develop new

institutions and adopt new procedures for

standards development. In 1988 it created a

special standards organization, the European

Telecommunications Standards Institute

(ETSI), which is developing approximately

300 European standards. Most will be voluntary but some will be mandatory, and these

are likely to include standards aimed at

assuring interconnectivity.31

Europe is a large market that is potentially

worth large investments by U.S. firms in

meeting its standards. U.S. firms active in

Europe therefore have a strong incentive to

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. INTERNET STANDARDS DEVELOPMENT

ARPANet, originally sponsored in 1969 by the National Aeronautics and Space Administration (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.

do so they must have a European presence.

This is a powerful incentive for them to

develop joint ventures or other strong alliances with European firms, or find other

means to establish European subsidiaries.

The U.S. process of standards development may require reform if it is to match the

pace and increased effectiveness that is the

aim of the EC current initiatives. This is

unlikely to happen unless government policy

provides leadership for, coordination of, and

strong pressure on the contending factions

within the private sector standards commuSOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

nity. In international standards-setting arenas, the influence of European institutions

will be increasingly strong and effective

because of the support provided to, and the

insistence on, communitywidc standards development by the EC Commission. This too

implies closer cooperation by U.S. participants, and possibly a stronger leadership role

for the Federal Government in pursuit of

strong competitive policy goals.

National or regional standards can be used

deliberately to create trade barriers and

inhibit competition. Every nation wants its Page 43
us.

Telecommunications

Services in

European

Markets

telecommunications companies to be major

players in world markets. In order to provide

a strong domestic base, many nations discriminate in favor of domestic firms through

procurement or by adopting a national standard that is different from that used by foreign

producers, thus effective y closing their market to foreigners by raising the costs of

penetrating it.32 Some U.S. critics fear that

EC members may form a solid voting block

in international standards negotiations to

impede the introduction of superior networking technology because it is perceived as

U.S. dominated.33

Thus standards inevitably become the

subject of trade negotiations. In the 1979

GATT Agreement on Technical Barriers to

Trade, signatories agreed to refrain from

using national standards to frustrate trade in

products. This agreement was embodied in

the U.S. Trade Agreements Act of 1979.

However, since the GATT Standards Code

explicitly does not apply to services or to

government purchasing, European PTTs are

usually exempt.

Along with a strong movement toward

international standards, there are parallel and

complementary movements to achieve interconnectivity and interoperability by other

means. The FCC’s Computer III decision

required that Bell operating companies provide their competitors with “Comparably

Efficient Interconnection” (CEI) and an

open network architecture (ONA) acceptable

to the FCC.34 ONA means that components

of the telephone system must be made

available to competing suppliers on an unbundled basis so that they can be combined

with the services of these suppliers in any

manner desired. If components can be obtained on a bundled basis only, the interface

between them is inaccessible to the competing supplier. The effect is the same as if the

interface were accessible but incompatible.3s

The nature of the unbundling and identity of

basic service elements are contentious issues

because they affect the potential for competition. Services suppliers and telephone companies want different levels of aggregation.

The European Community has issued a

directive entitled “Open Network Provision

(ONP) Framework and Services.”36 It calls

for open access to harmonized services

across national borders. Whereas ONA is

aimed at technical interfaces, ONP is aimed

at institutional change, but the intent is the

same: to foster the development of expanded

markets with heightened competition, and

allow translational companies to enjoy telecommunications and information services

Page 44

32 Robert W. Crandall and Kenneth Flamm (eds.), “Overview,” Changing the Roles: Techno/ogica/ Change,

/ntemafiona/ Con-rpeWon, and %gu/ation in Communications (Washington, DC: The Brookings Institution,

1989), pp. 1-10.

‘3 Sa’id Mosteshar, “Notes on Standard Setting: Bod ies in Telecommunicate ions,” in a Report of t he 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

(Cambridge, England: Analysis Publications, 1991).
Technological

Trends

and

Issues

without regard to national boundaries.37

Implementation of the ONP Framework has

so far been uneven.38 Some EC membcrstates have not yet taken the first step of

separating telecommunications operating functions from regulatory functions.

Expectations are, nevertheless, that in

time the economies of scale made possible

by ONA and ONP policies will begin to

transform the market for telecommunications equipment into a commodity-type market in which goods compete more on price

than on features. This in turn will make the

telecommunications” services market highly

competitive. However. given the global scale

of the market and the importance placed by

large companies on having efficient access to

a broad menu of facilities and services, the

likely outcome is not that many small

companies will be offering highly individualized services but that small numbers of

major players will provide international

companies with services and Support.39

The U.S. opportunity to compete in Europe in developing and delivering enhanced

communications and information services

depends on both the increasing interoperability of U.S. and European networks, and

the increased inter-operability of networks

within Europe. The competitive advantage

of U.S. firms in Europe however also depends on their differential ability to offer

innovative, flexible, user-oriented services

and technology. The challenge is to combine

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

CHAPTE

3

R

The European

market should

grow more than

the U.S. market

for the next

decade. . . and

access for

U.S. firms

will increase.

T HE EUROPEAN TELECOMMUNICATIONS SERV -

ICES MARKET is ripe for profitable entry by

competitive suppliers. Its growth potential is

greater than that in the United States because

of the present low market penetration for

many services. Barriers to entry and high

prices have prevented much demand from

being met. A recent European Community

directive has opened the door for widespread

bypass of public switched networks, which

will stimulate further demand for innovative

applications and services.

This chapter describes the European market for basic and enhanced telecommunications services’ and trends that arc changing

its structure, and then summarizes available

projections of its size and growth over the

next 5 to 10 years. The Office of Technology

Assessment (OTA) concludes that the European market for telecommunications services will grow strongly in the next decade,

regimes, institutional structures, trade barriers, and infrastructure characteristics.2 About

85 percent of the aggregate market is currently closed to competition, but technological and political events are combining to

open much of the market in the next few

years. Meanwhile, the market is studded like

a rich plum pudding with niche business

opportunities for U.S. telecommunications

companies.

A comparison of the scale and scope of

European business and industry with its

current consumption of telecommunications

services indicates that there is a powerful,

underserved demand for enhanced services.

With the integration of a single European

market, geographical expansion and heightened competition should increase this demand, Many U.S. telecommunications firms

are demonstrating that they can compete in

Europe, and also strengthen the ability of

and that opportunities for U.S. firms in this

market will greatly increase.

The European market for telecommunications services is in reality many national

markets, with wildly different regulatory

other U.S. services industries to operate

successfully in European markets.

Until recently, the European market for

telecommunications products and services

was completely closed to entry by nonNOTE: 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 if fer); t hey indicate services t hat go beyond t he t ransm 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

Page 48

~~ 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 martries 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?unicafiomin Europe (New York City, NY: Oxford University Press, 1992).

4 Europeans sometimes dispute this, and can point to many remaining U.S. barriers to entry (for example,

prohibit ion of foreign ownership of radio licenses, including nonwlre I inks In telecommunlcat Ions networks).

See ch. 1, box l-A.
The European

Market for

Telecommunications

Services

combined activities and investments of European firms in U.S. markets. Successful

market entry by U.S. firms has so far

generally required partnering, usually with

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

The strong drive to achieve a single European Community market suggests that there

will continue for some time to be powerful

advantages for American firms in having a

legally well-established European identity.

Foreign subsidiaries, joint ventures and

alliances, and other forms of shared ownership make it difficult to measure precisely

the performance of U.S. telecommunications

firms overseas. It is not always easy to

classify a business as U.S. or European.

More importantly, there arc theoretical and

practical problems in measuring trade in

services, which arc usually not embedded in

discrete, observable units that can be counted

as they cross a border or enter a customs

shed. h U.S. trade balance figures do not

include sales of services by European subsidiaries of U.S. firms. The final section of

this chaptcr, which described the current

status of U.S. trade in services, must be

understood as indicative rather than precise.

The structure of the

European market

As a single market, the EC, with 345

million consumers, will be the world’s

largest consumer market. Within the EC,

four countries comprise over 80 percent of

the potential market in terms of gross national product (GNP) and income: the United

Kingdom, France, Germany, and Italy.7

The United Kingdom

The United Kingdom has the most broadly

liberalized telecommunications market in

the world. It began partially privatizing its

monopoly operator, British Telecom (BT) in

1984, 8 requiring it to face competition in

domestic long-distance services from Mercury, a subsidiary)’ of Cable & Wireless. The

intent was to create effective competition for

BT by limiting entry to one new firm and

giving that new competitor some entry

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)

600

v

Europe North America

GNP ($ billions)

8,000

----– Others

6,000 ----- Mexico

— EC Associates -- – Canada

— EFT A

o

Europe North America

SOURCE: WORLD FACT BOOK, 1991.

Figure 3-2.

European

Demographics

In 1990 the United Kingdom moved to

full open-market licensing. Each new company is to be offered some temporary entry

assistance, in the form of reduced charges for

interconnection with BT networks. As of

February 1993, 13 new carriers have been

granted licenses and 37 more applications

are under consideration. These licensees and

applicants propose to provide a wide range

of services, with nearly a dozen companies

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 facilitiesbased competition, because an open-door

policy would require that access be granted

to all reasonable newcomers, including those

(like Germany) that have not opened their

own market. But significant new freedoms

to provide international services were introduced. These include international simple

resale, for firms of countries with similar

regulatory arrangements. (International simple resale is the right to sell capacity and

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. Another five applications are under consideration. Operators may also now provide additional satellite services, with interconnection

to the public network at both ends being

permitted for data traffic, and interconnection at one end permitted for voice. Eight

“ applications to provide such satellite services have been received to date.11

The United Kingdom is also fostering the

establishment of cable television to provide

competition in the local loop. It has licensed

20 cable networks to provide telephone

service as well as TV/radio channels, alPage 50

10 Seethe U.K. Government’s 1992 White Paper, CornpetWonand Choice: Te/ecomnunicahorts Po/icy for

the 1990s.

11 Information provided courtesy of Mark Hammond, First Secretary for Environment, Energy, and

Telecommunications, British Embassy, Washington, DC.
The European

Market for

Telecommunications

Services

though customer subscriptions for the telephone connection are said to be lagging.12

Further competition in local service was

assured by licensing five nationwide cellular

networks.

Since competition began, BT tariffs have

been significantly lowered, including a 10 to

25 percent reduction in 1992. BT has become

a strong international competitor. It plans to

have its Global Network Services, with

high-speed frame relay for data applications,

serve 60 countries by 1994. 13

France

In France, telecommunications traditionally was part of the responsibility of the

Ministry of Posts, Telecommunications, and

Space. On January 1, 1991, France Telecom

became an autonomous, although completely

state-owned, entity with its own budget and

management. Regulatory authority was retained by the Ministry Directorate of Regulatory Affairs (DRG). France Telecom still

has a monopoly in basic voice telephony and

telex, but also operates competitively in

some areas. Private operators may offer data

transmission and wireless communications

under regulated competition: i.e., they must

be state-licensed. There is open competition

in cellular and paging services. Private

networks for closed user groups, i.e., corporate networks, must get a license from DRG,

although small ones may not require licensing. Value-added services have been open to

competition since 1987.

France Telecom networks are highly digitized; Integrated Services Digital Network

(ISDN) services are universally available,

and France Telecom’s videotext services

(Minitel) are famous worldwide. France

Telecom has entered into many international

joint ventures and alliances; it intends to be

a global player, and says that 20 percent of its

revenues will come from international activities by 2000.

Germany

Germany’s market is the least liberalized

among the larger European countries, and

Germany has consistently opposed EC moves

to abolish telephone monopolies, However, Deutsche Telekom, one of Europe’s

largest telecommunications companies, became an independent public company in

1991, when it was separated from the postal

administration. The Minister of Posts and

Telecommunications has announced its intention to partially privatize Deutsche Telekom by selling 49 percent of the organization’s stock, in order to raise capital for the

telecommunications infrastructure of East

Germany. Chancellor Helmut Kohl had approved the plan in August 1992, but it was

then postponed for political reasons; privati- The United Kingdom,

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

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

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

PTO’s employees, who want to protect their regulatory

civil service status. Meanwhile, the number strategies.

of telephone lines in East Germany has been

increased from fewer than 12 per 100 people

‘2 New Sclent@ July 25, 1992.

‘

3 ‘(BT Expands Global Network Services Coverage,” Te/corn Fhghhghts /international, May 20, 1992, p. 1.

“ “Germany Defends EC Telephone Monopolies,” Telcorn Highlights /ntema~iona/, Oct. 16, 1991, p. 4. Page 51
U.S.

Telecommunications

Services in

European

Markets

Box 3-A. SIMPLE INTERNATIONAL RESALE

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 relationship 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

French model, a public corporation with

autonomous management, but still under

state ownership.

Meanwhile, the state retains a monopoly

on terrestrial networks and telephone services, but cellular communications, satellite

services, and data networks services have

been opened to competition. Two cellular

systems have been licensed, and there arc a

number of licensed private mobile radio

systems for taxis, trucking companies, etc.

By the mid- 1990s, the company hopes that

about one-third of its revenue will be in

competitive areas. ISDN is to be fully

implemented during the 1990s,

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

Telekom faces other challenges: reorganizing its internal structure and expanding into

international markets.16 It has already initiated 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

September 1992, the DTI licensed ACC Long Distance to provide the service between the

United Kingdom and Canada.

In the United States, the U.S. Federal Communications Commission (FCC) ruled in

December 1991 that international carriers must permit the resale of private leased line

capacity, but stipulated that this rule would apply only where the foreign country permits

equivalent access. Despite objections from AT&T, the FCC has permitted resale between the

United States and Canada, and has authorized Fonorola and EM I Communications to offer

the service.

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.

International simple

resale would likely

lead to growth of

“light carriers,” who

would challenge

national monopolies’

control of international services.

3 AT&T and all foreign carriers are .wqactad to more rigorous regulatory requirements (I.e., 45 days notice before filin9 for

“SectIon214“ authorlzahon to provide additional mternatlonal services) on the grounds that because of market dominance

or monopoly power they are able to restrict competition m thev home markets. The FCC has proposed to modify this rule so

that It WIII not apply to all foreign earners in regard to all serwces or geographical markets.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

countries, including one to build an electronic data interchange (EDI) exchange for

Europe, and one with France Telecom to

offer managed networks services.

Italy

In Italy several entities provide different

kinds of telecommunications services, but

each has a monopoly in its own kind of

services. Azienda di Stato per i Servizi

Telefonici (ASST) is operated directly by the

Ministry of Posts and Telecommunications,

and provides trunk services between major

cities. international services for Europe, and

some data serv ices. Societa Italiana per

l’Esercizio delle Telecommunicazioni (SIP)

is the major carrier, operating the national

network and providing trunk services not run

by ASST. SIP also holds the concessions for

mobile radio and packet-switched services, 7

The connection for all intercontinental communications services is provided by Italcable, which also provides a number of valueadded services.

‘

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 trading corporation, the Instituto per la Ricostruzione Industrial (IRI)--owns 85 percent

of the Societa Finanziaria Telefonica, which

in turn owns most of the shares of SIP,

Telespazio, and Italcable. The IRI group also

has an research and development subsidiary,

CSELT, which also serves equipment manufacturers, in order to link carrier/manufacturer research.18 The Ministry of Posts and

Telecommunications has final authority over

all of the companies, in addition to operating

ASST directly.

Italy expects to rationalize this complicated market structure and to introduce

competition in services; it has ratified the EC

Services Directives. The government policy

puts high priority on increasing network

penetration to 42 lines per 100 people and

upgrading the infrastructure.

The EC aggregate market

The total 1992 market for EC telecommunications in terms of sales is estimated at

$150 billion, of which 70 percent or $120

billion is for telecommunications services.19

Overall market growth for EC telecommunications services for the early 1990s is expected to be about 5 to 6 percent per year.20

The EC also represents about 25 percent of

the world market for telecommunications

equipment (for comparison, North America

accounts for 35 percent). It is widely reported that U.S. companies are doing well in

European sales of equipment needed for

private networks, such as very small aperture

terminal (VSATs).21 Sales of enhanced telecommunications and information services

by U.S. firms also encourage the sale of U.S.

equipment, even though some U.S. firms,

such as MCI, make a point of using a mix of

U.S. and foreign equipment vendors.

Growth in PTO revenues and in market

penetration (access lines relative to population) is much higher in EC countries than in

Page 54

‘6 Italy ’stelecommunicat ions equipment manufacturer, Italtel, is the fourth largest {n Europe. However, all of

the major European equipment manufacturers hold significant market shares in Italy. (“Research and

Development in Telecommunlcatlons,” Te/ecornrnunicahonsPo/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 European telecommunlcat 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

in connection with COMNET Exposition, Washington, DC, Feb. 3, 1993.
The European

Market for

Telecommunications

Services

the United States.zz Businesses account for

26 percent of total access lines and 45

percent of PTO revenues. Total EC traffic

growth for the public-switched network is

about 6 percent per year. Toll call revenues

are growing somewhat faster, and international toll calls arc growing fastest—l 4

percent per year. Of all international calls

made in the EC in 1991, 55 percent went to

other EC countries, and 11 percent to the rest

of Europe.z? (See figure 3-3.)

In most EC countries the sole or majority

owner of the monopoly PTO is the central

government, although the operating entity

(the PTO) has been separated from the entity

exercising regulatory authority. The PTO

retains a monopoly on voice services.24 The

exception is the United Kingdom, which has

liberalized market entry. As a result, BT

(fomerly British Telecom) is beginning to

see its monopoly on local voice services

eroded by cable television companies that

provide two-way telephone service. Most of

these are now financed by U.S. telephone

companies.

In major EC countries there are a few large

providers of nonvoice services: i.e., the

structure of the market is oligopolist. In

practice, these markets are characterized by

what economists call "the dominant firm

model. That is, the PTO—which has a

Value-added services >

Market status

❑,. Monopoly

❑ Open

competition &

El Partial competition

I

I Cellular/mobile ‘I ’

Nonbasic services

I Leased-line services &

1 —J — x

“Basic” voice

services

$75 billion

I

telecom. —————

market 7

Telecom. I

$130 billion equipment I

I I $40 billion

I I

I

I

I

I

I

? Y ’1 – – – – ..’

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

monopoly on voice services-also domi- Figure 3-3.

nates the major non-voice service market European

sector and sets the prices; the other providers Telecommunications

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 of Prlclng 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

The EC ONP

Directive opened

the way for competitive services

suppliers and

business customers

to bypass PTOs

In spite of their

legal monopoly.

of competitive regional and niche market

suppliers, including resellers and third-party

network management operations.

In most EC countries there arc two providers of cellular communications; i.e., the

market is duopolist (as it is by regulation in

the United States). In a few countries, the

PTO is still the only cellular services provider for the initial analog system. But as the

cellular communications markets begin to

grow rapidly and new radio frequency spectrum is allocated to cellular service, the

monopoly/duopoly structure is tending to

give way to oligopoly, This has happened in

the United Kingdom, which has the most

liberal entry policies for telecommunications

in the world.

The introduction of competition in the

European cellular market is being speeded

by agreement on a new digital standard, the

Global System Mobile Communications

(GSM). 25 The United States has not adopted

a compatible standard, but U.S. cellular

operators are aggressively pursuing European market opportunities using the GSM

standard.

The structure of the telecommunications

markets in Central and Eastern Europe, now

undergoing radical economic and social

change, is discussed in a later chapter. These

countries are likely to maintain the monopoly model for switched voice, data, and even

cellular services for a long time, but probably

the monopoly entity will not in all cases be

wholly government-owned. Foreign ownership is needed to provide capital for rebuilding infrastructure, and to attract this capital

it may be necessary to guarantee investors/

operators that the PTO will enjoy a monopPage 56

oly for some fixed period. On the other hand,

some sources of funds for infrastructure

projects, such as the World Bank and the

International Finance Corporation, now tend

to promote private sector control in a capitalistic market environment.

Trends shaping the European

telecommunications market

Over the next decade, the European market for telecommunications services will be

shaped not only by technological trends, as

described in chapter 2, but by demand

patterns, price trends, market liberalization,

and market unification.

Long-range demand patterns:

Several trends in demand for telecommunications services are discernible:

the expansion of private networks (much

less advanced in Europe than in the United

States, where a counter-trend is underway);

the popularity of communications portability;

growing demand for multimedia services,

and

strong and growing pressure from users.

In the United States, corporate private

networks using leased lines proliferated in

the 1980s, as large corporations sought less

expensive and more flexible ways to obtain

voice and data services. Before the AT&T

divestiture in 1984, 80 percent of toll usage

was billed per minute of use. Private networks shifted much of this traffic away from

the public-switched networks, and today less

than half of all long-distance access services

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

become more generally known by the new name.
The European

Market for

Telecommunications

Services

traditional per-minute tariff rates. (‘‘Longdistance access services’ are the interconnections between local and long-distance

telephone companies. ) Very large corporations, especially in the financial services

sector. may send over 90 percent of their

traffic over dedicated lines. There is good

evidence. however, that the trend toward

private networks is reversing in the United

States, because of the fall in voice services

tariffs and the new ability of public carriers

to provide "virtual private networks’ (softwarecontrolled allocation, by the public carrier, of

dedicated lines to customers on demand).26

On the contrary, the movement toward

private networks is just gathering steam in

Europe. The substitution of private networks

for public-switched services (‘‘b)puss’ ) is a

result of market forces and deregulation,

especially the ability legally to resell capac -

ity.27 Bypass cost U.S. telecommunications

companies bill ions of dollars in lost revenue

in the 1980s.28 It is likely that the same

phenomena will occur in Europe, although it

is being strong] y resisted to protect the social

objective of universal service .29

The EC Services Directive of 1990 called

for liberalization of all telecommunications

services except for switched voice service

and some data sin-vices, which memberstates can continue to reserve for their PTOs.

The EC Open Network Provision (ONP)

Directive of June 1992, however, directly

mandated non-discriminatory interconnection for leased lines by 1993, with no

restrictions on their use, even for voice

sevices. 30 This provides an obvious back

. .

door for business customers and competitive

network suppliers to bypass the PTOs' voice

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 he Iegalit 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

There is a large

unsatisfied market

for telecommunications services in

Europe, where

business consumption lags far

behind that in the

United States.

Page 58

This “back door" will open the way for

many innovative services arrangements to

challenge PTO-provided services with advanced software, customer premises equipment, and information content and fomatting. American firms have the knowledge

and experience to develop such innovative

services, and their prospects for successful

competition should grow.

Profits from software and value-added

services are likely to grow in the future,

while core facilities or ‘‘conduits’ become

relatively less important as a source of

profits. Two other factors will further drive

prices for core network capacity close to

commodity costs: the growing usc of wireless technology and the usc of other infrastructures as channels for telecommunications. Railroads, highways, and canals include rights-of-way that can accommodate

fiber optic cable; electric power grids can

provide poles, towers, and power. Sprint, the

third largest U.S. long-distance carrier, has

bought the right to install cable along British

Waterway canals.

Pm-table communications are now the

fastest-growing communications mass market. As the technology improves, their convenience becomes increasingly attractive.

Demand for mobile phones is especially

strong in Central and Eastern Europe because there are long waiting lists for basic

telephone service, and wireless is a relatively

fast and inexpensive way to satisfy this

pent-up demand.

Multimedia telecommunications is the

ability to combine video, audio, text and

data, and also to provide interactivity between end users and the network head-end.

A growing demand for multimedia telecommunications can be expected in the longrange future to meet business needs such as

three dimensional computer-aided design

and videoconferencing, and to provide consumers with opportunities for distance learning, shopping from home, entertainment,

and transaction services. How swiftly this

market demand will mature is, however,

hotly debated.

There are many indicators of strong latent

demand for services in the European market.

Greater Europe has a larger population and

income than has the United States. Yet the

United States’ consumption of telecommunications services is over half of the world’s

total. In 1990 the four largest EC countries

together accounted for only 19 percent of

world sales of telecommunications services:

the United Kingdom (5.6 percent), Germany

(5.1 percent), France (4,5 percent), and Italy

(3.8 percent). This indicates an unsatisfied

market for telecommunications in Europe.

Within the EC market, Germany has about

30 percent of the total income, compared

with the United Kingdom’s 16 percent, but

its telecommunications sector is smaller.

There is thus especially great potential for

growth in the German market, but it is one of

the least liberalized. In terms of real growth

in telecommunications services revenues

( 1985-90), both Germany at 2.6 percent and

France at 2.4 percent lagged behind Spain

(8.5 percent), Italy (4.9 percent). and the

United Kingdom (4. 1 percent). Germany is

struggling to bring the infrastructure in the

eastern part of the country up to par and has

indicated that this will delay the move

toward telecommunications liberalization.

The United States represents about twothirds of the world market for ‘‘nonbasic’

telephone services such as database services

and cellular telephony, while the four largest

EC countries together made up only 12

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

50 telephone lines per 100 population in both

the United States and the larger EC countries; more in the Scandinavian countries,

and man y fewer in Central and Eastern

Europe (about 13). 33 The latter area is

averaging 6 percent growth in telephone

penetration, and this is expected to speed up

substantially during the decade. The goal in

these countries is 40 telephone lines per 100

population by the year 2000; this would

require nearly 15 percent annual growth.

People in the United States make three

times more telephone calls than people in the

four largest EC countries; but calling rates

are increasing faster in those countries. 34 The

average annual expenditure per capita in the

United States ($445) is more than twice the

average for the large EC countries ($200) in

spite of lower U.S. customer charges, but

average growth rates for expenditures are

much higher in the European countries (5

percent compared with 1.5 percent).3s

EC average U.S average

(1 980-90) (1984-91 )

Connection charges

Monthly line rental

Local call charges

Monthly business line

Intracountry toll call

Intrastate toll call

Interstate toll call

Cumulative inflation during period

-39 ”/0 + 2%

+20 +15

+ 3

+ 8

-29

-40

-72

60 22

SOURCE: BRUCE EGAN, USING DATA FROM COMMISSION OF THE EUROPEAN COMMUNITIES,

“TOWARDS COST ORIENTATION AND THE ADJUSTMENT OF PRICING STRUCTURESELECOMMUNICATIONS TARIFFS IN THE COMMUNITY,” BRUSSELS, JULY 15, 1992.

Price trends

Tariff rationalization has not yet been

achieved in the EC, and there are wide

differences among countries in tariffing pol -

icy.36 Prices are high compared with those in

the United States and this clearly depresses

demand and causes the telecommunications

networks to be underutilized.37 Table 3-1

shows relative price changes, 1980 through

1990. Given the inflation rates, the average

EC tariff rates did not decline and perhaps

increased in real terms, whereas in the United

States they declined as much as 72 percent in

Table 3-1.

EC and U.S.

Changes in

Prices for

Telecommunications

Services

(changes in

nominal prices)

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

Page 60

real terms during the shorter time period

used in the table.

In 1992, the average toll call price per

minute in the United States was less than

$0.20. In the EC it was $0.33 for intracountry

calls and about $1 for intercountry toll calls

within the EC.38 It may cost twice as much

to make a call across a nearby national

boundary than to call many times that

distance within one country. If the EC

succeeds in opening transborder communications to competition (as may result from an

ongoing review of the EC Services Directive

of 1990), price cutting will surely enlarge

calling rates; there is evidence from AT&T

and BT of the effects of aggressive price

cutting on growth in usage, 39

The average monthly rental for a 50-km

voice grade leased line is reported to be more

than twice the U.S. price, although the

average monthly prices for PTO leased lines

(voice grade) fell about 20 percent in real

terms from 1980 to 1991.40 In the EC, higher

capacity circuits cost about $3,000 per month,

or about three times the cost in the United

States, and except in the United Kingdom,

any excess capacity on them cannot be

resold .41

Cost declines due to technology adoption

should be roughly similar in Europe and in

the United States, so most of the price

differential is due to political and institutional factors. The PTO prices appear to

provide heavy cross-subsidies to other services and markets. Such differences between

costs and price levels indicate a large potential for competitive entry.

Market liberalization

The pace of liberalization slowed in 1992,

but the EC Commission has signaled its

determination that further liberalization of

telecommunications services markets will

occur. The Services Directive that specifically reserved switched voice services to

PTOs was scheduled to be reviewed in 1993.

In spite of contention within the EC, preparation for this review produced a consultative

document that set out four alternatives for

consideration: 1 ) direct regulation of intcrna38 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,

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 monopolies’ control of cross-border interconnections, 3) opening up the entire regulated

telecommunications market, and 4) freezing

the liberalization effort and maintaining the

status quo.

There was opposition to further liberalization by most PTOs and in most governments.42 In France, for example, members of

Parliament declared opposition to further

deregulation on the grounds that competition

would led to higher prices for local calls

(which have been subsidized), hurting small

businesses, and because it would enable U.S.

operators to penetrate the European market. 43 On the other hand, the international

Users Group (INTUG) strongly advocated

the second alternative, opening transborder

infrastructure and voice services to competition, in advertisements and in letters to the

Commission president.

44 European newspapers reported that ‘‘almost all consumers

favour far-reaching liberalisation and harmonisation" 45— but over a period of 10

years, rather than immediately. When the

EC’s 6-month period for comment ended in

April 1993, the EC backed away from its

proposal, and instead announced that liberalization would be accomplished more gradually, between 1993 and 1998, under “a

well-managed liberalization plan’ to be

announced in a ‘‘new green paper’ by the

end of 1995.46

If the U.S. experience can be used to

foresee likely events in Europe, the ability to

bypass PTOs’ services that is implicit in the

ONP Directive is likely to lead to steadily

increasing competition in the European market, in spite of the success in blocking EC

formal procedures. While there are strong

cultural, institutional, and political differences between the U.S. situation in 1976

through 1984 and Europe today, business

incentives and responses arc similar and the

momentum already underway points to continued erosion of monopoly protection. In

international long distance, a number of

entrepreneurs have begun to arbitrage asymmetrical customer charges in the United

States and Europe with arrangements for

code-calling and automatic call-back

schemes.47

If the U.S.

experience is any

guide, bypass will

/cad to increasing

competition in

European markets,

in spite of political

opposition.

‘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

As European countries reluctantly

allow greater

competition, their

policies will

continue to favor

European firms.

European monopolies are beginning to

crumble due to the pressure from the Commission for competition within the EC,

pressure from the U.S. government, and the

influence of the continuing general agreement on trade and tariffs (GATT’) negotiations. The United Kingdom has led the way

by offering permission for international resale to the firms of any country that will

agree to bilateral symmetry in market access

and pricing. In October 1992, it granted the

first license for international simple resale to

ACC Long Distance UK, which will initially

sell transmission services from the United

Kingdom to Australia, Canada, and Sweden,

and has applied to the U.S. Federal Communications Commission (FCC) for authority to

resell service to the United States.48 The

United States also requires bilateral symmetry, and neither country’s regulators are yet

willing to agree that symmetry exists, each

pointing to restrictions on access to the

other’s market. (See chapter 1, box 1 -A.) In

March 1993, BT’s U.S. subsidiary, BTNorth America, asked the FCC for authority

to resell U.S. carriers’ international switched

and private line services, in order to put

together global virtual private networks;49

this permission would require an FCC finding of regulatory equivalence.

The domestic long-distance market may

be the last segment to be liberalized in

Europe. so As profits and subsidies from

services to large businesses and from international long distance begin to shrink due to

competition, monopoly profits on domestic

long-distance services will become even

more important.s1 If the EC succeeds in

reducing intercountry toll service rates and

intracountry rates do not drop, companies

may route traffic via a neighboring country

with lower tariffs or lease private lines.

The non-discriminatory interconnection

mandated by the Commission of the EC in

the ONP Directive does not go as far as the

‘‘equal ease and convenience of access’

ordered by the U.S. District Court in the

AT&T divestiture. In that case the court said

that there must be punctually equal access for

all competitors such that users would see no

difference, even to the number of digits that

must be dialed. In Europe such issues as

dialing parity, subscription procedures, and

control of telephone numbers still must be

addressed by regulators. However, as pointed

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

such problems as dialing parity.

In short, it appears that there will eventually be competition in nearly all telecommunications services markets in Europe, including toll voice services, not necessarily

because open entry is explicitly allowed but

because of the back door created by the EC

ONP Directive. This may, however, take

some time-possibly the rest of this decade—

to become effective. It is likely to be at least

that long before U.S. firms will have full or

easy access to these markets. Until then, the

strategy of partnering or joint ventures, as

described in the next chapter, is likely to

prevail.

Market unification

Even as European countries move to allow

greater competition, they will continue to

promote policies favoring their own domestic firms. They naturally prefer that if the

dismantling of monopolies and crosssubsidy structures is to occur, it should

benefit first their own and then other EC

businesses before it benefits foreign businesses. The Commission of the EC appears

to concede this; market unification itself is

designed to develop a strong domestic market base for leverage in the international

marketplace. 52 Explicit Commission support

for favoring domestic firms in conjunction

with EC market unification efforts was

reemphasized in the Eurostrategies Report

released in July 1992.53

The further unification of the EC market

will thus enhance the competitiveness of EC

firms relative to foreign suppliers. Domestic

firms will benefit most directly and immediately from liberalization of regulations, from

the opportunity to expand into neighboring

geographic areas, and from more uniform

business law and technical standards. Experience in the United States and in the United

Kingdom indicates that when competition is

introduced the revenues, profits, and market

value of the former monopoly provider

increase rather than decrease.

The EC rules for unification and free trade

will apply specifically only to firms of

member-states, while treatment of foreign

firms will still be governed by GATT and

other international conventions, as discussed

in chapter 7. The prevailing U.S. strategy of

partnering will continue. Joint venturing

qualifies U.S. firms as European firms. In

addition, firms in some of the smaller EC

member-states, not themselves large enough

to become strong players in an expanded

market, have recently been seeking to partner with large U.S. firms. Examples arc

STET (Italy) and Telefonica (Spain).

If market unification is likely to benefit at

least the stronger European firms, conventional wisdom would suggest that U.S. firms

might be relative losers. The perspectives of

U.S. services firms operating in Europe, on

54 suggest that the relative the contrary,

disadvantages to U.S. firms may be far

outweighed by the benefits to them of greater

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

In European

countries there

relatively few

lations, and institutional procedures, which

will allow them to offer additional innovative services in a more cost-effective way.

Some American business people fear that

once the EC Commission has consolidated

its regulatory authority it could assert centralized protectionist policies of its own,ss In

view of that possibility, however slim, it is

essential to make sure that there is parity in

the terms of trade between U.S. and European telecommunications services markets.

Market estimates and projections

Basic services

The PTOs control about 90 percent of the

European market for telecommunications

services; their share is about $110 billion per

year ( 199 I -92), with a growth rate of 6 to 7

percent. The monopoly voice services portion is, in turn, about 80 percent to 90 of total

PTO revenues. Thus 85 percent of the total

market is legally closed to competition at this

time. Nonvoice services (including leased

data lines) are growing about 10 per year.

Voice services have lower growth rates.

In most European countries, because

leased line interconnection is restricted and

prices are high, there are relatively few

private networks.56 The growth potential for

leased line services is phenomenal now that

technological improvements and the EC

ONP Directive will allow leased lines to

become a viable substitute for switched

services for large customers. Revenues from

the fast-growing data and value-added services markets already constitute a higher

portion of PTO revenues than do the monthly

rentals for leased lines. The growth potential

for leased line services should be double that

for traditional switched services for the next

decade, at least 10 to 15 percent per year, and

may be higher. The potential effect of the

ONP Directive may be gauged by looking at

the United Kingdom, where there are full

interconnection rights. The United Kingdom

represents only 16 percent of the total EC

market in terms of population and income,

but has well over half of the leased lines and

90 percent of the high capacity lines (2

Mbps),

In Europe, the OPN Directive should

make the market structure for private network suppliers oligopolist, not only for

facilities-based leased line suppliers57 but for

resellers and other value-added services

are 55 In a recent paper, Professor Eli Noam discusses the possibility of such a “power play” by the Cornmlsslon:

“Telecommunications Reforms at the Periphery: Role Models of Followers,” draft, Columbia Institute for

Telelnformation, Columbia University Business School, September 1992. The possibility may not be slim. re. private network=, On Februarv 1, 1993, the new U.S. Trade Re~resentative (Ambassador Michael Kantor) denounced the

the growth .

EC’s Ut I lit Ies Directive as containing “discrim inatory procurement pract ices [t hat] prevent some of our 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

to offer high-capacity (45 Mbps) DS3 leased

line services, not now available in Europe.

Value-added services

Value-added services58 include applications such as electronic mail (E-mail), facsimile, database services, cellular communications, paging, high-capacity data services,

EDI, transaction services (automated teller

machine services, credit card authorizations,

computerized reservation services. electronic

funds transfer), and networked computeraidcd design and manufacturing (CAD/

CAM). ‘‘Soft’ \aluc-added services include

network management and consulting, software engineering, network operations and

systems support services. Local area networks (LANs), wide area networks (WANs),

and metropolitan area networks (MANs) are

here also lumpcd with value-added services

because they are often used as the delivery

mechanism for services.

The United Kingdom at present constitutes most of the market for value-added

services, about 70 to 80 percent.59 The

market for Yaluc-added services is generally

compctitive, and full of niche suppliers. It is

possible for small innovative firms to compete successfully in these markets. However,

very large firms that span a wide range of

services offerings and have the capacity and

geographical presence to serve large, multinational corporations may dominate the

market in the long run.

Estimates of the total European valueadded services market vary widely depending on how broadly the category is defined.

A reasonable figure is about $5 to $6 billion

for the networking, infomation, and delivery portion of the market (not including

charges for private data nets, cellular, paging, and other mobile and satellite business

services). 60 Annual growth estimates are

generally as high as 20 to 30 percent.61 There

arc 3 million subscribers for cellular commu -

nications services in the EC, making up a

market estimatcd at $4.5 billion in 1990. In

the United Kingdom, BT provides less than

half of the cellular mobile services. but

elsewhere PTOs dominate this market segment.

New wireless technology applications arc

expanding rapidly; these include wide area

paging, private and trunked mobile radio.

mobile data transmission, GSM digital cellular communications, cordless phones. personal communications services, and satellite

mobile services. The potential for market

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.

Large firms that can

offer multinational

corporations a wide

range of enhanced

services may

dominate the

market in the

long run.
u.s.

Telecommunications

Services in

European

Markets

the United Kingdom, with relatively low

prices, have market penetration of about 20

mobile phones per 1,000 population. The

Nordic countries, which adopted a standard

very early and have lower prices than the

United States, have about 50 mobile phones

per 1,000 people. Germany and France have

7 and 5, respectively; and some European

countries do not yet have cellular services.

This should be a high-growth market

through the 1990s.62

Electronic data interchange (EDI) is computer-to-computer transfer of fixed-format

data such as orders, invoices, payment instructions, and legal documents. This market

is burgeoning in the United States. Only

about 7,500 of the EC’s 6 million companies

were using EDI in 1992, and the market is

only about $110 million, of which $65

million is in the United Kingdom. With

many potential applications and the effects

of public network interconnection, the market may grow at 50 percent per year for the

next few years.

Two related technological developments

may greatly expand the hitherto small European market for satellite communications.

High-powered direct broadcast satellites will

allow a large number of TV channels,

including new high-definition television, to

reach subscribers’ small, inexpensive receiving dishes. The use of VSATs with highpowered satellites allows point-to-point data

transmission where good wireline network

infrastructures do not exist, as in portions of

Central and Eastern Europe. The total market

for satellite business services is estimated to

grow from $350 million in 1991 to $1.3

billion by 2001 .63

The traditional public broadcasting monopolies are rapidly losing market share to

new channels on satellite and cable television. 64 In the United Kingdom, much of the

cable television activity is financed by U.S.

firms. Cable television penetration in the

United Kingdom is still only 1 percent but is

growing rapidly. In France it is 3.7 percent

and in Germany 31 percent; for comparison,

in the United States it is 55 percent. Cable

penetration is estimated to rise from 23

percent of European households in 1990 to

36 percent in 1995, with revenues increasing

300 percent by 1999 (from $4.6 billion in

1990).6s Satellite television is also expected

to grow rapidly. Penetration rates are now

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

— 1 Figure 3-4.

-

SOURCE FEDERAL COMMUNICATIONS COMMISSION, 1992

the United Kingdom. 66 Across Europe, penetration is expected to increase from 3 percent

in 1990 (o about 16 percent by 1995.67

Network management systems and services is a small and fast-growing niche market

estimated to grow about 40 percent per year

through the early 1990s. Networked data,

facsimile, E-mail, and online database services arc all expected to grow at about 20

percent per year. The United States dominates the field of on-linc database services,

except for Reuters, the British/international

firm specializing in financial data. The 1990

on-linc market for the United States, Europe,

and Japan together was estimated in 1990 to

be $10.3 billion, with the United States

I

U.S. International

Telephone Traffic,

1991

having 49 percent of the markct. Average

annual growth for Europe was estimated at

over 13 percent.68

The importance of U.S. trade

in services

Services exports arc increasingly important to the United States economy. They arc

now one-third the volume of merchandise

exports, and growing briskly. U.S. services

exports were $166,7 billion in 1992, 9.5

percent more than in 1991 and 41 percent

more than in 1989.69 The United States has

a healthy positive trade balance in services,

‘7 CARAT TV Market Forecast, 1992.

w Lydia Arossa, “Computerized Information Serwces: Economic and Trade Issues m the Database Market,”

OECD DST1/lCCP (92)6.

‘g Due to definitional and methodological changes m data collection In 1989, figures before and after that date

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

Telecommunications

Services in

European

Markets

Page 68

$59 billion in 1992 and $52.2 billion in

1991.70 This should be compared with a

merchandise trade deficit of –$ 105.3 billion

in 1992 and –$73.4 billion in 1991.71

The European Community is the primary

foreign market for U.S. service producers;

almost a third of all U.S. exports of business

services go to EC countries (an estimated

$37.5 billion in 1991).

These figures cover only direct transactions in services and do not include revenue

from sales of U.S. affiliates overseas. Such

foreign investments account for about half of

the total U.S. delivery of services to foreign

citizens and organizations.

72 In this category,

also, the United States has a favorable

balance of trade, $11 billion in 1991, up from

$8.5 billion in 1990.73

In telecommunications products and services taken together, the United States has a

large trade surplus; but it has an overall

deficit in telecommunications services, -$2.8

billion in 1991. This annual deficit has

doubled since 1987. Why should the United

States, which prides itself on being a leadcr

in basic and enhanced telecommunications

services, have a persistent and growing trade

deficit in this sector?

The deficit in telecommunications services trade is, by a strange twist, a measure of

U.S. strength in telecommunications, rather

than a sign of lack of competitiveness. The

telecommunications trade deficits are a result of asymmetrical traffic demand patterns

and of international accounting and revenue

settlement practices. When an international

call is made over a public-switched network,

the long-distance company in the country of

origin pays the Iong-distance company in the

receiving country for its services in routing

the call to a customer. The amount of the

payment, which is called the accounting rate,

has been negotiated between the two companies. It is the same regardless of the direction

of the call and is independent both of the

collection rates (what the customer is

charged) in either country, and of thc actual

70 The total internat ional t rade in services KS $700 billlon ( 1991 ). The world’s major serwces export ers are t 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

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

o 1 2 3 4 5 6

Dollars

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

Amount retained by operator originating the call

Estimate of carriers’ costs

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

cost to the phone company of de1ivering

calls.

In one sense, the deficits represent good

news; they are a side effect of lower telecommunications prices in the United States.

They arc also testimony to the size and vigor

of U.S. industry and its reliance on telecommunications. In the United States, customer

charges for overseas calls arc much lower

than in most other countries, because European countries subsidize basic services with

international and business revenues; some

countries also use telecommunications revenues to subsidize the postal system and

public transportation. Because of lower costs

and because of the size of the economy,

about twice as many international calls are

7 8 9

made from this country as arc received from

overseas. Thus accounting rates cause much

more money to flow out of the country than

they cause to flow in.74

The U.S. Federal Communications Commission, the International Telecommunication Union, and the Commission of the

European Communities are pressuring European telecommunications authorities to join

U.S. firms in negotiating lower, cost-based

accounting rates. To end the negative U.S.

trade balance in telecommunications” services, however, will require not only lower

accounting rates but also lower customer

charges in Europe for international calls, so

that the number of calls made in each

direction comes into better balance.

NOTES The accounting rate with

Germany m 1992 was 0.8 special

drawing rights or $1 14 (FCC, Statlstlcsof CommunlcatOns Common Carriers, 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 Germanyto-U.S call IS derwed from 5x$1 88

10 (TeleGeoraphy 1992, International

Institute of Communlcatlons)

The costs to the carriers are estimated at $015 per mmute at both

the U S. and German end, this number IS conservatwe.

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

balance will also be much improved if U.S.

exports of value-added or enhanced telecommunications services grow significantly. Just

as telecommunications services are a small

part of all international trade in services

(about 2 percent of U.S. exports and 5 to 6

percent of imports), value-added or enhanced services are a small segment of the

overall market in telecommunications services. The value-added services sector is,

however, likely to expand tremendously in

the next decade.

The United States had a positive trade

balance of $60 million in value-added services in 1991.75 In addition, there are massive

investments by U.S. telecommunications

companies in Europe that are too new to

show substantial profits as yet, but in the near

future are likely to become very profitable

ventures. Telecommunications services will

probably continue to be delivered primarily

through foreign-based subsidiaries. Some

economists assume this because communications are infrastructure-based services,76

but it should be noted that many telecommunications and information services can actually be delivered electronically, without

regard to geographic proximity. Nontariff

trade barriers are more potent reasons to

establish a presence within Europe. However, U.S. subsidiaries and joint venture

firms do not necessarily enjoy all of the

advantages of European firms, and as the

European market expands and is liberalized,

direct U.S. exports of value-added telecommunications services to Europe could grow

strongly.

Page 70

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

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

European

Activities and

Strategies of U.S.

Telecommunications Firms

CHAPTE R

U.S. telecommunications firms think

their future

growth increasingly

depends on

foreign markets.

AT&T CHAIRMAN ROBERT ALLEN’S BOLD GOAL

of drawing 50 percent of the company

revenues from overseas by 2000 reflects the

strong trend for U.S. telecommunications

service providers to expand their international activities (see table 4-l ). The seven

regional Bell holding companies (RBHCS)

l

have in the last few years also aggressively

pursued international investments. It is estimated that they have invested nearly $12

billion overseas since the divestiture of the

Bell Systcm, most of these investments since

1989.2

This trend extends to major carriers outside the United States as well. BT (formerly

British Telecom) is catering to the communications needs of largc multinational firms

through its Project Cyclone. Just as Sprint

dropped the ‘ ‘U. S.’ from its original name,

BT’s name change doubtless is intended to

blur the explicit association with the United

Kingdom. Telefonica, the Spanish national

carrier, has embarked on a series of overseas

investments in South and Central America,

and in Eastern Europe. ?

U.S. firms are looking abroad because of

new opportunities and because their future

depends increasingly on growth in foreign

markets. Increased spending on telephone

services in the United States is expected to

remain relatively small compared with increased spending on telephone service in

other countries, which as described in the

preceding chapter is expected to range from

30 to 80 percent.

In contrast with the European market, the

U.S. telecommunications” market is saturated. There are, in the United States, several

layers of providers and within each layer

there arc many firms. The two largest groups

arc the interexchange carriers (commonly

referred to as ‘‘IXCS’ and more commonly

known as long-distance carriers) and the

local exchange carriers (LECs). AT&T, MCI,

and Sprint dominate the long-distance business. so much so that it is easy to assume

mistakenly that they arc the only three

providers. In fact there are nearly 500 other

firms offering long-distance services in the

United States.J Similarly, the seven regional

Bell holding companies and General Telephonc and Electronics (GTE) arc by far the

largest local exchange companies. accounting for 118 million access lincs, nearly 85

percent of the 140 million telephone lines in

the United States. GTE. unlikc the ‘s Baby

Bells’ is not a regional company and does

not operate under the Modified Final Judgment (MFJ), the court order codifying the

divestiture agrement. In addition to these

eight largc firms. however. there arc some

1,300 other local "independent" telephone

Page 71

1 The seven regional Bell holding com panics (Amerltech, Bell Atlantic, Bell Sout h, NYNEX, Paci flc Telesls,

Southwestern Bell, and US West) are the parent companies for the 21 Bell operating companies (BOCS).

NYNEX, for example, consists of two operating companies, New York Telephone and New 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.
us.

Telecommunications

Services in

European

Markets

Table 4-1.

Crossborder

Acquisitions by

Telephone Companies

Worldwide

a only 2.8 percent ($463 mllhon) of the value of crossborder transactions in 1990

are for foreign companies investing in the United States.

Fmancjal Times, “Vkrld

Telecommumcatlons Survey,”

Oct. 7, 1991, p. xxi.

Value

Number ($millions)

1985 5 $ 399

1986 7 132

1987 7 63

1988 11 117

1989 50 2,694

1990 67 16,539a

SOURCE BOOZ, ALLEN & HAMILTON, AS CITED IN THE

F/iVANC/AL TIMES, WORLD TELECOMMUNICATIONS SURVEY,

OCT. 7, 1991, P. XXI.

companies, typically serving rural communi -

ties.s

Since the major long-distance companies

and LECs account for most of the telecommunications revenue in the United States,

these firms are also those in the best position

to exploit foreign opportunities, and will be

the focus of the analysis in this chapter.

However, the U.S. telecommunications industry consists of many other niche players,

in cellular and paging services, data networking, satellite services, and value-added

information services. Many of these companies, such as Millicom and EDS, have

extensive international operations.c There

are also several telecommunications equipment manufacturers with experience in foreign markets that are using their strengths for

entry into services. The two most notable

cases are Motorola, with its ambitious Iridium project,7

and IBM, which is offering

data networking and value-added services in

Europe. IBM recently announced its intention to add voice capability to its European

Information Network through the installation of asynchronous transfer mode (ATM)

switches. 8

U.S. regulations and

overseas expansion

RBHCs argue that they are prohibited

from entering some of the most promising

domestic markets due to the MFJ,9 which

Page 72

5 These were not spawned from the former Bell System. AT&T looked f irst to larger, Iucrat ive markets 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 a netwock. 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.

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

box 4-A), and certain laws, primarily the

Cable Communications Policy Act of 1984.

Under the MFJ, the seven RBHCs were

restricted from three lines of business: interLATA10 long-distance service, the manufacture of telecommunications network and

customer equipment, and the provision of

information services. Additionally, the consent decree originally barred RBHCs from

any service that was not b

‘ a natural monopoly service actually regulated by tariff."11

The prohibition on information services has

been lifted by the court. and several committees of the 103d Congress are working on

legislation related to provisions of the MFJ.

Many analysts believe that the present

regulatory structure and philosophy no longer

suit the communications marketplace because advances in communications technologies arc forcing a reexamination of what

services are competitive. Cable television

and telephone service, for example, could

with some significant modifications be provided over a single network. 13 RBHCs argue

that: 1 ) the prohibitions preventing them

from designing and manufacturing equipment 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;onsin the Age of /nforrnation, U.S. Department of Commerce,

October 1991, p. 229. Page 73
us.

Telecommunications

Services in

European

Markets

AT&T hopes to get

50 percent of its

revenue from internatlonal activities by

the end of this

decade.

Box 4-A. THE MODIFIED FINAL JUDGMENT

A consent decree entered into by the American Telephone& Telegraph company and t he

Justice Department in 1982 settled a decade-long antitrust suit. AT&T was broken up into

eight companies: the reorganized AT&T and seven regional holding companies. Local 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,

to properly upgrade their domestic networks,

and 2) domestic line-of-business restrictions

limit their options in overseas activities

because foreign government ministries are

wary of permitting them into areas that the

foreign ministries are forbidden to enter in

the U.S. market. 14

U.S. telecommunications firms’

European activities

Interexchange carriers

International telecommunications is an

extension of long-distance service. AT&T

delivers direct dial service to over 250

countries and territories, while MCI and

Sprint connect to nearly 200 foreign destinaPage 74

‘

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

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

AT&T facilities). Each of these carriers

owns a share of the capacity on the various

cables traversing the Atlantic and Pacific

Oceans to carry their outbound traffic, and

leases Intelsat satellite capacity through CornSat.

International traffic is a lucrative market,

and it is experiencing high growth as commerce becomes increasingly global in nature. 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

services to a national monopoly, U.S. longdistance carriers arc making inroads into the

European market for nonbasic services, such

as value-added data networking. 7

Change in the telecommunications market

is often rapid, so the description that follows

of the activities of the major U.S. telecommunications firms is a snapshot as of the

beginning of 1993.

AT&T. AT&T is one of the few operators in

the world that is vertically integrated to offer

both equipment and services. No other

company operates on the scale of AT&T in

both segments. AT&T Chairman Robert

Allen’s target of 50 percent of revenues

coming from international activities by the

end of the decade is nevertheless ambitious.

$billions

80

60

40

20

0

1984 1985 1986 1987 1988 1989 1990 1991

SOURCE FEDERAL COMMUNICATIONS COMMISSION, 1993.

It means increasing the company’s revenues

for international equipment and services

from about $12 to $90 billion and for

domestic telecommunications services from

$48 to $90 billion. IS The company purchased

NCR in 1991 and Istel, a British information

technology firm, in 1989. Both additions

solidify its European presence: with the

acquisition of NCR, which also strengthens

its computer business, AT&T more than

doubled its foreign workforce, most of which

19 Before the takeover, NCR is in Europe.

derived approximately 62 percent of its $6

billion in annual revenues from abroad.

AT&T has also expanded its stake in the

‘G “lnternatlonal Telephone Traffic Up 13 Percent Last Year,” Te/corn High/ighfs /nternationa/, Sept. 30,

1992, p. 2. AT&T’s traffic Increased 7.8 percent to 6.6 billion minutes; MCI grew 35.1 percent to 1.6 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.

Figure 4-1.

U.S. Toll Service

Revenues, 1984-91

Page 75
-.. . .

Us.

Telecommunications

Services in

European

Markets

AT&T's Iongdistance

competitors are also

among the world’s

fastest growing

international

carriers.

European market for value-added services

with purchases, through Istel, of service

providers in other countries, such as

DATAID in France.

AT&T is extending to Europe its managed

data network services developed for the U.S.

market, such as Clearchannel, Accunet Spectrum of Digital Services, and Accumaster

Management Services. The company offers

these services through separate subsidiaries

in countries where competitive entry is

permitted. AT&T currently has nodes in

eight countries, but has plans to locate in

seven others.20 Its International Network

Systems, originally started by Phillips but

later bought by AT&T, is located in the

Netherlands.

AT&T has a strategic alliance with the

Italian local carrier, ItalTel, involving equipment sales and consulting to develop Italy’s

infrastructure. It has an equipment manufacturing facility in Spain, and is involved in a

strategic relationship with Telefonica. The

company is participating in joint ventures

with the Ukraine State Committee of Communications and the Netherlands’ Postal,

Telephone, and Telegraph (administration)

(PTT) Telecom to build and operate a

modern telecommunications network in the

Ukraine. The Ukraine State Committee will

retain a controlling interest (51 percent),

while AT&T’s share in the project is 39

percent and the Netherlands PTT has the

remaining 10 Percent.21 This is the first

major effort by AT&T to build an overseas

network (though it has been involved with

operating a cable network, CANTV, in

Venezuela). The Ukraine State Committee

expects to increase the penetration of phones

from 7 to 22 million lines by 2000. In

November 1992, AT&T purchased for $28

million an 80 percent stake in a Polish

telecommunications equipment manufacturing plant, Telfa.

In May 1993, AT&T spearheaded the

formation of WorldSource, a joint venture

with five other operators, including Kokusai

Denshin Denwa of Japan and Singapore

Telecom—at the outset, the venture lacks a

European partner. WorldSource will provide

global voice and data communications to

multinational firms .

MCI. A relative newcomer to international

communications (1983), MCI has been one

of the fastest growing international carriers.

MCI expanded its outgoing traffic from 103

million minutes in 1986 to 2.2 billion

minutes in 199222 and has become the

6th-largest international carrier (see table

4-2), carrying 18 percent of U.S. international voice traffic. MCI international communications grew by 35 percent in 1991 and

again in 1992.

In recent years, the company has made

several key international acquisitions, including two international record carriers,

Western Union International and RCA Global

Communications. In addition, it bought Overseas Telecommunications Inc., a company

involved in long-distance services in New

Zealand and Australia. MCI also owns part

Page 76

m Information provided by AT&T; see also, Robin Gareiss, “AT&T Takes on European Data Nets; 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.

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

Ambitious to form global partnerships,

MCI spearheaded the fomation of the Financial Network Association, an association that

includes 11 other European carriers targeting

communications services for international

financial firms (potentially in competition

with the Society for Worldwide Interbank

Financial Telecommunications, SWIFT). MCI

is also in a loose partnership with 23 other

operators in Global Communications Services, which intends to provide ‘‘global onestop shopping or a full range of services to

multinationals. 24

Canada has been the most recent battleground for MCI and AT&T competition as

they build their global networks. When MCI

negotiated an operating agreement with Sten -

tor, the consortium of Bell Canada and the

provincial phone companies. AT&T responded

by purchasing 20 percent of Unitel Communications, a competitive long-distance company in Canada. and filing a patentinfringement case against MCI.

In June 1993, MCI reached an agreement

with BT for an alliance between the two

telecommunications firms that includes the

purchase by BT of 20 percent of MCI for

$4.3 billion and the creation of a joint

venture firm to offer global voice and data

services to multinational users. BT will name

three directors to MCI’s board. while MCI

chairman will join BT’s board. MCI will

invest 24.9 percent of the $1 billion to form

the new venture (yet to be named). and will

be responsible for marketing these global

Outgoing MITTa Growth in MITT

(millions) (1990-91 )

AT&T (U. S.) 6,557

DBP Telekom (Germany) 3,557

France Telecom (France) 2,295

BT (UK) 2,213

Cable & Wireless (UK) 1,660

MCI (U. S.) 1,600

SWISS PTT (Switzerland) 1,429

Stentor (Canada) 1,425

Netherlands PTT (Netherlands) 1,018

ASST (Italy) 980

KDD (Japan) 850

Belgacom (Belgium) 823

Sprint (U. S.) 723

Telefonlca (Spain) 719

Swedish Telecom (Sweden) 659

a Mlnules of lnlernatlonal telecommurucations Irafflc.

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

7.8%.

13.1

7.9

1.9

28.6

35.1

12.5

6.0

12.5

17.1

11.3

12.6

25.3

17.7

7.2

network services in North America and the

Caribbean.

SPRINT. Like MCI, Sprint has experienced

explosive growth in its share of international

telephone traffic: its share of outgoing traffic

increased from 43 million minutes in 1986 to

728 million minutes in 1991 (the last figures

Sprint has released), having doubled its

international outgoing traffic from I 990 to

1991.25 Sprint wants to penetrate the market

for intra-European long-distance service; it

is involved in a project (Hermes) to build a

pan-European network for voice and data.

This company is the leader in international

videoconferencing, with 1,200 video facilities in 30 countries. Sprint International

accounts for approximately $2 billion in

revenues compared with $8.8 billion for the

parent company.

Table 4-2.

Traffic Base

of Leading

International

Carriers

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

24 “MCI Pulllng Together Global Alliances,” Communications Week /nfernaflona/, Sept. 21, 1992, p. 7.

25 Telephone conversation with Sprint representatives, May 1993. Page 77
U.S.

Telecommunications

Services in

European

Markets

Sprint has applied for a license from the

Department of Trade and Industry to offer

long-distance and international service in the

United Kingdom. If this is approved, Sprint

will team with British Waterways, which

controls canal rights-of-way throughout the

country, to build a fiber-optic backbone

net work.

In February 1993, Sprint joined with

Alcatel NV, the French manufacturer of

telecommunications equipment, to form Alcatel Data Networks. The new company, of

which Sprint will own 49 percent, will be

headquartered in Paris with a unit in Reston,

Virginia. It w ill develop and market products

based on ATM technology (see chapter 2),

for the data networking needs of large

international business customers.26

Sprint has a close operating arrangement

with Unisource, which is a joint venture

between PTT Netherlands BV, Televerket in

Sweden, and Swiss Telecom PTT that offers

global network services. This arrangement,

which increases Sprint’s European presence,

includes collaboration on global data networking and on very small aperture terminal

satellite communications services, Unisource

uses Sprint’s European packet network and

Sprintnet, its international data network.27

In 1988, Sprint bought Private Telecommunications Services, Inc., which owned the

U.S. end of the first private transatlantic

fiber-optic cable, PTAT- 1. Cable & Wireless

owns the foreign portion of PTAT- 1, which

connects the United States and the United

Kingdom (and also lands in Ireland and

Bermuda).

The long-distance carriers’

strategy of expansion

The three major U.S. carriers have been

actively pursuing partnerships with public

telephone operators (PTOs)28 in major European and Asian countries to handle the

communications requirements of large corporate customers, who need to network with

and between several countries. These consortia enable carriers to spread large capital

requirements and to offer comprehensive

communications packages, including consolidated billing and equipment, instead of

users needing to piece together international

networks. BT, with its Syncordia project,29

has been at the forefront of this trend. More

recently, BT announced its intention to

Page 78

26 /ntema(ior?a/ Hera/d Tribune, “Sprint and Alcatel Set Venture,” Feb. 4, 1993.

27 Jennifer L. Schenker, “Unisource Adds Swiss,” Cornrnunicatior)s Week /rrternationa/, Feb. 1,1993, p. 24.

Donne Plnsky, “Sprint Targeting VSATS,” CornrnunicatiorrsWeek /nternationa/, Nov. 23, 1992, p. 3.

28 The traditional term, Postal, Telephone, and Telegraph (Authorities) or PTTs, is in most cases no 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

/ntemafiona/, Sept. 7, 1992, p. 2.
European

Activities and

Strategies

of U.S.

Telecommunications

Firms

purchase 20 percent of MCI and to forrn a

joint venture with the second-largest American carrier (and the sixth largest global

telecommunications firm), The acquisition

and the venture, which will strengthen BT’s

presence in North America, follow directly

on the he e 1s of AT&T unveiling its

Worldsource partnership with Kokusai Denshin Denwa of Japan and Singapore Telecom. MCI’s Financial Network Association

and Sprint’s Unisource consortium are other

examples.

The growing leverage of the user community in telecommunications policymaking is

at the center of this turbulence in the

organization of international telecommunications. The rise of multinational or global

companies is threatening to the national

monopolies, since a single carrier will have

trouble handling the communications needs

of a company with headquarters or main

offices in several countries. A U.S. carrier

can, for example, handle a firm international needs only so long as one end of the

traffic originates or terminates in the United

States. Given current restrictions on network

access in most countries, an American carrier

is not permitted to carry the traffic of a

company between, for example, Tokyo and

Amsterdam. Large users are pressing for

harmonious international equipment standards and service offerings; they arc also

demanding that levels of service that they

have come to expect at home be available

abroad. They want a single firm to be able to

provide for all their networking needs.

The desires of large users are often in

direct conflict with the modus operandi of

European PTOs, which have earned a reputation for being more responsive to politics

than to customers.30 Large corporations are

accumulating the political power, both individually and collectively through groups

such as the International Telecommunications Users Group (INTUG) and the International Communications Associations (ICA),

to challenge the PTOs when they are dissatisfied with the quality, the variety, or the cost

of services.

A second general strategy for the world’s

major carriers is the development of international data networks. Again the target audience is a limited set of customers with

multicountry, high-data requirements. Data

communications traffic is still small relative

to voice communications, but its growth is

impressive. PTOs arc clinging tightly to their

bread and butter, voice traffic, which may

account for as much as 90 percent of the

carrier’s revenue and 100 percent of its

profits. Data networking, therefore, appears

to be a U.S. carrier’s best opportunity to enter

foreign markets, and each of the major U.S.

carriers has a data networking subsidiary.

AT&T owns Accunet and Sprint, Telnet;

MCI owns 25 percent of Infonct.

Foreign carriers are following similar

strategies in an effort to make headway into

the U.S. market. BT purchased San JoseThe rise of

multinational

companies threatens

national

telecommunications

monopolies, since

single carriers will

have trouble

operating in several

countries.

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

$62

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

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

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

Telecommunlcatlons owned by 11 European PITs, in conjunction

Services ($billions) with MCI.

Carriers are also developing virtual private networks that behave to the client like a

private network. That is, the user does not

pay retail rates for long-distance or international calling, benefits from abbreviated

numbers, and is assured of bandwidth when

needed; this is accomplished through the

software in the switch rather than through

discrete physical facilities. Virtual private

networks relieve the user of the necessity of

running, monitoring, repairing, and upgrading networks. Each of the U.S. carriers offers

a virtual private network service under a

Page 80

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;

France Telecom, Colisee; PTT Netherlands,

GLOBAL; and KDD, Virnet. On an international 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

forms:

■ The construction and/or operation of cellular networks;

■ Experimentation with other infrastructure,

especially cable television; and

■ Investments in the privatization of state

telephone companies.

U.S. companies' involvement in cellular

communications has mainly occurred in

Europe. In Eastern Europe RBHCs have

helped construct networks that will serve as

alternate infrastructure; in Western Europe,

they are involved in cellular franchises

competing with the incumbent carriers’ operations. Their solid expertise m cellular

communications in the United States32 is

valued by countries building facilities to

complement or in some cases replace the

existing ‘‘wireline infrastructure. In parts

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

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

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 communications network cannot accommodate the burgeoning commerce. A cellular network,

though requiring large upfront capital costs,

is faster than repairing or modernizing the

existing network. Because the demand for

reliable communications is so critical, cellular operators are commanding high installation, equipment, and usage charges to cover

this high investment.

RBHCs are also joining in consortia for

the second or third licenses for cellular

service in Western Europe, typically in

competition with the PTO. Differences in the

technologies of mobile communications potentially permit the survival of several competing providers. GSM, the European standard for digital cellular communications, is

replacing analog cellular: some providers arc

betting that personal communications networks (PCN) or personal communications

services (PCS) represent the next evolution.

The second large area of activity that

several RBHCs arc pursuing is franchises for

cable television.33 These are expected to be

high]y profitable ventures that also represent

opportunisties for RBHCs to build infrastructure and establish a local presence in

anticipation of EC-mandated liberalization

of telecommunications markets. The United

Kingdom’s competition strategy permits a

fertile testbed for RBHCs to experiment with

video (i.e., TV) and voice over the same

network. RBHCs also are gaining experience

in a market they are vigorously trying to

enter in the United States; the ventures

abroad provide technical experience and

potentially political leverage. NYNEX and

U.S. West in particular are pursuing this

opportunity aggressively .x4

Investments in the privatization of telephone companies have mostly taken place

outside Europe, in Central and Latin America and in the Pacific Rim (notably Australia

and New Zealand). The European telecommunications operators are generally financially and technically secure enough that

they do not require large infusions of foreign

capital and operating expertise.

There are strong similarities in the activities of RBHCs abroad, but their intentions

and strategies are not always identical. They

arc referred to as one group here for the sake

of convenience and because they are often

allies in support of major legislative actions—

they all have an interest in removal of the .

MFJ restrictions that limit their business The opportunity to

activities. Since they were split from AT&T, build cable televihowever, they have formed markedly inde- slon systems abroad

pendent corporate strategies. offers a testbed for

.

U.S. carriers eager

33 Meanwhile, foreign ownership of cable franchises In the United States is a sensitive political Issue. In the to enter that market

102d Congress, a House version of the cable (re)regulatlonbill 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 national secunt y grounds-noting the cable industry’sconnectlon 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

Bell South is

RBHCs in

BELLSOUTH CORPORATION.

one of the most aggressive

pursuing international ventures. It is heavily

targeting Latin America, but it also is creating a substantial presence in Europe, mainly

in cellular and paging operations. A subsidiary, BellSouth Enterprises, Inc., controls all

nonregulated activities, including the company’s international ventures, while BellSouth Telecommunications, Inc. deals with

the regulated core businesses—the provision

of basic telephone service within its ninestate region. BellSouth Enterprises is comprised of Bell South Cellular, BellSouth Publishing, and BellSouth International (BSI),

which handles international operations and

opportunities. BSI has a corporate office in

Brussels for business development and technical expertise, but the strategy for its global

activities is established in the Atlanta headSOURCE: OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

quarters. The parent company expects that

BellSouth Enterprises will quickly increase

its percentage of revenues within the company to 25 percent.

The company’s main emphasis in Europe

is on cellular communications. It is prohibited in almost every country except the

United Kingdom from offering alternative

local service, which would draw on its great

networking expertise. BellSouth owns 29

percent of a consortium to build and operate

a mobile phone network in Denmark. In

Germany, a consortium that includes

BellSouth was awarded a license for the

country’s third cellular network; the cellular

network will operate at 1800 MHz (as

opposed to the more traditional 900 MHz)

and will compete against cellular networks

operated by Deutsche Telekom and Mannesmann (of which PacTel is a partner) .35 In

Page 82

35 “German Mobi Ie Phone Net work Won by Thyssen and Veba Consort ium,”Te/com Highlights /nternationa/,

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 Societe Francaise du Radiotelephone, which

holds a license for GSM, and a partnership

with France Telecom to offer cable TV.

Elsewhere, BellSouth owns 24.5 percent

of the Australian consortium, Optus Communications, in conjunction with Cable &

wireless and local investors, which will

build and operate a competing carrier for all

kinds of wireline and wireless services and

international long-distance (for which

BellSouth had to secure a U.S. regulatory

waiver). The company is providing cellular

service in New Zealand, and was awarded

the cellular license in Argentina, along with

Motorola, in February 1989. BellSouth also

purchased Cidcom, Pacific Telecom’s cellular operation in Chile, and operates cellular

systems in five Latin American countries:

Mexico (western), Argentina, Chile, Venezuela, and Uruguay.

NYNEX. New York-based NYNEX has vigorously pursued opportunities for foreign

ventures. Its nonregulated activities, including its international ventures, are separated

from its regulated local offerings (i.e., New

York Telephone and New England Telephone). which are handled through its Telecommunications Group. NYNEX Worldwide Services Group is organized into branches

covering cellular services in the United

States, publishing (which involves some

overseas activities), and its diversified operations, within which arc two subsidiaries that

deal explicitly with international ventures.

NYNEX Network Systems Company, with

regional headquarters in Brussels and Hong

Unregulated

I

I

I

I

I

I

I

I

I

BellSouth Telecommunications Inc.

I Regulated

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

Kong and offices throughout Europe and Figure 4-4.

Asia, is responsible for overseas communi- Organization of the

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

cable TV-telephony franchises in the United Corporation

Kingdom. NYNEX CableComms was awarded

franchises in July 1990 that make it the

largest cable franchise owner in Britain, with

an investment of $1.1 billion.36 NYNEX

Network Systems also owns 50 percent of

Gibraltar Tel and is helping the government

to modernize the communications infrastructure. The company is in Indonesia to

help manage network expansion, and in

Japan it owns a minority share of two mobile

communications firms. NYNEX is also involved in a consortium to install two million

lines in Bangkok, Thailand.

Various other subsidiaries of the company

have successfully marketed products around

the world. For example, its publishing arm,

NYNEX Information Resources Company,

36 NYNEX Cablecomms Increased Its presence [n the U.K. cable TV/telephony market through its acqulsltlon

of three franchises from PacTel Cable in March 1993. Page 83
. --- -. . . . . - . - . -

Us.

Telecommunications

Services in

European

Markets

In Central and

Eastern Europe,

cellular systems

are attractive

alternatives to

antiquated

wirelines.

is responsible for telephone directories and

Yellow Pages in Gibraltar and Prague and

was recently awarded the franchise for the

Czech Republic. NYNEX’s AGS Computers, Inc. is licensing software in Russia,

Mexico, Australia, and Spain. Finally, NYNEX

is spearheading a consortium to construct a

25,000-km fiber-optic cable from the United

Kingdom through the Middle East to Japan.

The project, entitled FLAG (Fiberoptic Link

Around the Globe), was initiated 2 years ago,

will cost $1 billion, and is expected to be

operational by 1997. The company is in the

process of negotiating landing agreements

with national carriers. NYNEX’s previous

attempt to purchase a stake in a private

transatlantic cable was rejected on the

grounds that RBOCs are restricted, under the

MFJ, from carrying traffic to or from the

United States.

U.S. WEST. Like the other RBHCs, U.S.

West is capitalizing on its experience with

cellular communications, but unlike the others it is targeting the countries of Eastern and

Central Europe. U.S. West expects that 10 to

20 percent of its revenues will come from

international operations by 2000; currently,

international operations contribute only a

small percentage. U.S. West is involved in a

venture along with Bell Atlantic and the state

telephone company to build and operate a

cellular network in Czechoslovakia. A cellular network, Westel Radiotelefon, Kft., jointly

owned by U.S. West and the Hungarian

Telecommunications Co., went on-line in

Budapest in October 1990. Though expensive, the cellular network, which is targeted

at office communications, enables customers

to circumvent the slow process for getting

connected to the antiquated wireline network 37

U.S. West International has established a

strong presence in Russia for telecommunications services. In January 1993, the Russian Communications Ministry selected U.S.

West and two domestic firms (Intertelcom

and VART) to coordinate the development

of digital cellular service (GSM) for Russia’s

12 cellular regions; in addition, U.S. West

and its partners won the rights to 8 of these

12 regions. 38 Previous ventures in Russia

include operating a cellular telephone system in St. Petersburg (starting in September

1991), and outfitting the regular phone

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

The company also was involved in a venture

to build a fiber optic line across Asia,

eventually linking Europe and Japan, but this

plan was delayed by U.S. security restrictions on fiber optic technology and highspeed processors,

U.S. West, allied with Tele-Communications, Inc. (TCI) in the United States to

pursue joint cable TV-telephone options, is

also actively mining similar opportunities in

Europe. In the United Kingdom, TeleWest

Communications Group Ltd., the joint venture between U.S. West Cable Communications and TCI, is the country’s largest cable

TV operator with 16 franchises and a potenPage 84

37 The service has surpassed projected use so far; 4,000 subscribers In the first 6 months saturated the

network, which was expecting 2,500 subscribers in the first year.

w “U.S. West Group Chosen by Ministry to Coordinate Russian GSM Digital Cellular System,” Telecommunications

Repotis, Jan. 25, 1993, p. 18.

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.

As of March 1993, TeleWest had enlisted

144,000 subscribers for cable TV services, of

which 60 percent additionally receive telephone service.

40 Through United Communications International, it is building cable TV

companies in Sweden (Swedish Cable &

Dish) and Norway (Norkabel), and it is

developing systems and programming in

Hungary with Time Warner. In the United

Kingdom, U.S. West and Cable & Wireless

merged their respective operations developing Personal communication networks in

March 1992. U.S. West headed the Unite]

partnership (which included Thorn EMI,

Northern Telecom, and Deutsche Bundespost Telekom ) that was awarded a license in

1989 to build a PCN system. U.S. west

lnternational has joined with BMW and GTE

to bid on a German PCN license.41

BELL ATLANTIC. Bell Atlantic is one of the

most aggressive at targeting foreign markets,

but its European ventures arc limited. Its

chairman expects 10 percent of company

revenuc to come from international operations by 1994; it is currently, at $1.5 billion,

about 5 percent. Bell Atlantic, along with

U.S. West and the state telephone company,

owns and operates Eurotel, a cellular network in Czechoslovakia that began operation in September 1991. The venture will

also build and operate cellular data networks

and modernize the basic telephone network.

Bell Atlantic in partnership with Ameritech

acquired the Telecom Corporation of New

Zealand for approximately $2.5 billion. The

company also acquired a controlling stake in

a New Zealand pay-TV operator, Sky Network Television. It intends to form a software joint venture company with STET SPA,

the Italian telecommunications group, to

develop software systems that will be used

by STET’s telephone subsidiary Societa

ltaliana per L’Esercizio delle Telecomunicazioni and Bell companies.42

PACIFIC TELESIS. Within the Pacific

Telesis family.

43 two companies are Primarily involved in international ventures. PacTel

Cable deals with opportunities in the “home

entertainment industry’ (the management of

cable television operations) in the United

Kingdom. while Pacific Telesis International

offers a variety of services, such as wireless

communications, value-added networks, and

international l(~ng-distance service, in Europe and Asia. The company’s flagship

European venture is a 26 percent share of

Mannesmann Mobilfunk, a consortium that

built and operates a digital cellular network

in Germany. Based on the European standard

for digital cellular service, GSM, D2 Privat

is the second national cellular franchise and

will compete with Deutsche Bundespost

Telekom. Pacific Telesis International also

owns 23 percent of a consortium that is

licensed to build a GSM-based digital cellular 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

involvement in cable TV services in the

United Kingdom. In April 1992, PacTel

Cable sold its interest in East London

Telecommunications Ltd., which owned six

franchises, to BCE Telecom International.44

In March 1993, PacTel sold three of its

original 14 cable TV franchises to NYNEX

Cablecomms. 45 PacTel International sold its

25 percent stake in Microtel Communications Ltd., a venture with Matra, to develop

a personal communications network in England.

In Asia, PacTel International is involved

in consortia bidding for cellular franchises

for Tokyo (through a 15 percent stake in

Tokyo Digital Phone) and Osaka-Kansai

(through a 13 percent stake in Kansai Digital

Phone). 46 PacTel International also owns 10

percent of International Digital Communications (IDC), a new competitor to Kokusai

Denshin Denwa offering long-distance and

international services in Japan. IDC, which is

the primary Japanese partner in an undersea

fiber-optic cable connecting Japan and the

United States, also will be the Japanese

partner in the FLAG project, which NYNEX

is spearheading to link Europe and Japan.

AMERITECH. Ameritech has been one of the

most cautious of the Baby Bells in overseas

investments, and its activities in Europe are

small by comparison. Ameritech’s most

visible venture has been its acquisition,

along with Bell Atlantic and two local firms,

of Telecom Corporation of New Zealand. As

part of the stipulation to reduce the combined

U.S. RBHC holding to 49.9 percent, 31

percent of New Zealand Telecom’s stock

was offered for sale, resulting in an aftertax

profit for each RBHC of $73.6 million.47

In Europe, the company joined with

France Telecom to help the Polish PIT build

and operate a national cellular network. The

PIT retains 51 percent of the venture, Polska

Telefonica Komorkowa, while Ameritech

and France Telecom split the remaining 49

percent. In Norway, Ameritech (along with

Singapore Telecom) purchased a quarter

stake in Netcom GSM, the country’s second

provider of digital cellular services.48 Ameritech subsidiary Tigon offers voice-mail

service in a number of countries throughout

the world.49

SOUTHWESTERN BELL. The jewel in Southwestern Bell’s international crown is its

acquisition of 20 percent of the Mexican

telephone operator Telefonos de Mexico

(TeIMex), including 24.5 percent of the

voting rights. Through Southwestern Bell

International Holding Company, the company teamed with France Telecom and

Grupo Carso, a local industrial group, to

purchase a controlling 51 percent of the

company from the government. The initial

Page 86

@ “BCE Unit Agrees to Buy PacTel, Jones Intercable Interests in U.K. Cable Franchises,” Te/ecomwunicat/ons

Reports, Apr. 27, 1992, p. 34.

45 “Business Briefs,” Wa// Street Jouma/, Mar. 23, 1993, p. B4.

46 Pacific Telesis Group, 1991 Summary Annual Report.

47 Andrew Kupfer, “Ma Bell and Seven Babies Go Global,” Fortune, Nov. 14, 1991, pp. 118-128; Ameritech,

1992 Annual Report.

48 Steven Tich, “Around the Loop: Norway Beckons,” Te/ephony, Jan. 4, 1993, p. 10.

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

Activities and

Strategies

of U.S.

Telecommunications

Firms

investment after exercising options totaled

$950 million, though the value of the investment has increased significantly since then.

Like several other RBHCs, Southwestern

Bell also has stakes in cable TV/telephony

operations in the United Kingdom. The

company controls eight franchises in Britain

covering over a million households; it recently announced a plan to sell 25 percent of

its U.K. cable holdings to Cox Cable, the

second-largest U.S. cable operator.so Before

the Israeli Government decided to postpone

the sale of Bezeq, the Israeli telephone

company, Southwestern Bell was rumored to

be negotiating to bid for the company in

alliance with a large Israeli industrial group,

Clal Industries.sl

The overseas strategies of RBHCs

U.S. RBHCs, along with Western European PTOs and U.S. interexchange carriers,

arc among the corporate leaders in pursuing

investment options in foreign markets. It is

difficult to track precisely the number and

value of foreign investments that RBHCs

have made since divestiture since many of

these arc small, unrelated to telecmnmunications, and often not newsworthy. The scale

of these ventures and the fervor surrounding

them increased with the privatization of

telephone operators and the opening of new

markets in Central and Eastern Europe.

Earlier international investments by telephone operators were typically more ‘*opportunistic” than “strategic”; companies

would seek deals primarily on the basis of an

attractive rate of return, with little attention

to whether the ventures reflected the companies’ characteristic strengths or coincided

with any long-term strategies.52 More recently, the telephone companies are taking

advantage of the niche strengths that separate

them from other carriers and give them a For an RBHC, the

competitive edge. These opportunities abroad most important

permit U.S. telecommunications firms to criterion for foreign

extend the strengths from their domestic ventures is the

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

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

expertise in managing and operating local

telecommunications 53 while forging strategic relations with other firms.

For an RBHC, the most important criterion for foreign ventures and investments is

the ability to earn high returns. A second

important criterion is the experience and

political leverage that the RBHC can bring

back to the United States. Overseas, RBHCs

can experiment with services and businesses

that they are barred from in the United States

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

Should the U.S. Congress want to do more

to support and encourage further exports of

telecommunications services and additional

foreign investment by U.S. telecommunications companies, it has several options:

continue to promote the opening of foreign markets to U.S. entry;

remove domestic restrictions or regulations that allegedly affect the pattern of

investment by foreign telecommunications companies (this action is urged by

some, however, as a way to de-emphasize

foreign investment); and

provide positive assistance, e.g., low-cost

capital for overseas expansion.

United States’ efforts to open European

markets through trade negotiations are discussed in chapter 7. The complex pros and

cons of the current investment patterns, and

the effect of domestic regulations, are discussed in chapter 9; it does not appear that

domestic restrictions are now determining

factors in decisions to expand overseas.

Some telecommunications industry representatives have suggested that the U.S.

Government should provide more support to

U.S. firms for telecommunications services

exports, in the form of financial assistance

and insurance.54 The issue of whether U.S.

firms are unduly handicapped in international ventures for lack of access to low-cost

capital, which often foreign competitors

often enjoy, usually arises regarding equipment exports rather than service exports.

Yet, U.S. Government financing assistance

is in fact biased toward manufactured goods

because, compared with services, these appear more tangible and readily quantifiable.

For example, the benefits of supporting the

sale of several million-dollar switches abroad

are politically more readily apparent than

assisting a U.S. firm to purchase a portion of

a foreign telephone operator, the value of

which may not materialize for several years.

Some foreign governments actively support national champion manufacturers in

securing foreign deals by low-interest loans

or other means.ss They may also permit an

indirect subsidy in the form of over-priced

procurement of equipment by the national

network operator (paid for by high customer

services charges), allowing the equipment

provider to sell in foreign markets at artificially low prices. U.S. export subsidies are

limited, and are intended to ‘ ‘level the

playing field” when U.S. firms are clearly

Page 88

~ These suggestions were made in response to questions f rom the Office of Technology Assessment as to

whet her government act ion was needed to enhance t he com pet it iveness of U.S. telecommunicate ions f Irms

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

Utilities Directive).
European

Activities and

Strategies

of us.

Telecommunications

Firms

losing out to foreign firms that rely on more

aggressive or explicit subsidies.sfi

U.S. Government mechanisms that could

potentially assist foreign telecommunications services ventures include the Agency

for International Development (AID), the

Export-Import Bank, the Overseas Private

Investment Corporation (OPIC), and the

Trade and Development Program.57 However, these program-when they include

services providers—generally target developing countries rather than Europe (some

Central and Eastern European countries may

be covered). Such foreign services investments typically require financing insurance,

since they generally target developing countries, which are potentially susceptible to

political instability}. Few commercial banks

arc willing to fund these ventures.

There is, however, little reason to believe

that U.S. telecommunicitions companies arc

constrained in overseas ventures by lack of

financing. Most such ventures arc financed

out of retained earnings.

Stockholders reportedly arc uneasy that

the RBHCs capital is financing overseas

ventures, the payoff for which is long term

and, by comparison to their reliable monopoly service, uncertain. There is a growing

tension between the expectations that stockholders have come to hold and the RBHCs’

plans for overseas expansion. The Bell

stocks have earned a solid reputation for

steadily increasing value and for rising

$billlons

5 ~ 1

4-

3 U.S. investment abroad m ~ ~!

2 Foreign investment in the U.S.

1

-~di-.],j ~ ~

o

m .= ~—

-1 I I 1981 1983 1985 1987 1989 1991

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

dividend payments. (RBHCs have had 56 Figure 4-5.

opportunities to increase dividends in the 8 Direct Foreign

years since their inception in 1984, and they Investments in

have in fact increased dividends 54 times.58) Communications,

The pressure to maintain this traditional 1981-91

performance for stockholders is increasingly

at odds with the cornpanies desire to diversify into overseas ventures.59 (See box 4-B.)

Conclusions

The increasing attention of RBHCe to

European markets is largely a result of new

opportunities there, compared with more

nearly saturated and competitive markets

here. RBHCs have had most of the tools to

exploit foreign markets since their inception

in the divestiture of AT&T: large cash

reserves, unsurpassed management and network operating experience, and slowgrowing 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 CARRIERS OPERATIONS IN THE UNITED 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.

2 ~flon cr~kett, 4( 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

CHAPTE

5

R

Service-exporting

firms agree they

are generally

we// served by

U.S. carriers.

U.S. TELECOMMUNICATIONS FIRMS not only

compete successfully in the European market, they support and often provide the

competitive edge for other U.S. firms that

deliver services to Europe. This chapter

captures some of the perspectives of these

users of U.S. and European telecommunications networks.1 Providers of travel and

transportation services, financial services,

and architectural, engineering, and construction services are given particular attention

either because the y contribute strongly to the

volume of U.S. services exports, or because

they represent sectors where considerable

growth in services exports is possible with

more intensive use of telecommunications.

Exporters of these and other kinds of services

provided information for this chapter

through interviews, letters, and responses to

a written questionnaire.

Many of the corporate officials that responded to inquiries of the Office of Technology Assessment (OTA) argued that the

U.S. Government has a role to play in

encouraging both the liberalization of European markets and the efforts of U.S. industries to expand the export of services. The

themes most commonly expressed were that

government should:

■ Apply strong and persistent pressure,

through trade negotiations and other diplomatic contacts, for further opening of

European markets and removal of trade

barriers for both services and manufactured goods;

Pay special attention to reducing restrictions on telecommunications services,

since for most of these companies the use

of American equipment and Americanprovided enhanced information services is

highly desirable; and

Encourage both U.S. and European firms

to move toward international standards as

the most cost-effective way of getting the

most out of information technology resources.

In all services-exporting industries surveyed, most firms agreed that they are well

served by U.S. telecommunications carriers,

and that American communications and

computer technology gives them a competitive edge in developing innovative services.2

Accustomed to a geographically expansive

domestic market, the firms complain bitterly

about the wide difference across European

countries in availability of telecommunications services and the difficulties of dealing

with many regulatory regimes within what

seems to them one natural market. From their

perspective, the benefits of an integrated

European marketplace seemingly are more

Page 91

1 In preparing this chapter, the Office of Technology Assessment (OTA), with the help of contractors,

conducted three case studies of the use of international telecommunications by major sectors 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.)
.- .

Us.

Telecommunications

Services in

European

Markets

obvious than the risk that a “Fortress Europ e will try to exclude them. Many firms

said that if serious regulatory problems can

be alleviated there arc good prospects for

expanding and diversifying their services

exports.

Many of the problems encountered by

American services industries in dealing with

European public telephone operators (PTOs)

are problems just as much for European

firms as they arc for U.S. competitors. If U.S.

telecommunications firms can gain wider

access to the European market, their biggest

marketing opportunity will be the challenge

to solve these problems not just for American firms but for potential European customers.

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,

our experience with European telecommunications operators has been positive. The

variety, quality and availability of communications services is, with few exceptions,

excellent. (At the same time, the firm noted

that services sometimes cost ‘‘5 to 10 times

their equivalent in the United States."3

) A

large financial institution said: “. . .we have

had little or no difficulty with the financial

services regulatory policy bodies or with the

telecommunications regulatory authorities

in developed countries that already have

state-of-the-art information networks infrastructure. These strongly positive comments were not typical. However, many of

the business people that contributed to this

chapter, anticipating that the move toward

deregulation or liberalization in Europe will

continue, said conditions in Europe are likely

to improve steadily.

The general outline of the community of

U.S. services exporters is shown in figure

5-1. Over half of all U.S. services exports are

transportation-related services (which include airline fares, shipping and port fees,

and all tourist-related services provided in

this country and other countries to foreigners).s Licenses and royalties (intellectual

property earnings such as income from

movies and music) are the second largest

group, but account for only 12 percent of

total services exports. All other services

combined account for less than one-third.

Problems with European

telecommunications networks

Many serious or frustrating technical problems beset U.S. services providers using

telecommunications in Europe. Some of

these problems are regulatory or institutional, but many simply result from the

necessity for U.S. firms to rely on European

technology and services at the far end of their

international networks and for their intraEuropean communications. In some countries the infrastructure is technologically

behind that in the United States, in other

cases it is not interoperable with U.S. networks, and in all cases it is unfamiliar. U.S.

firms must often depend on the very organizations 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’

PerspectivesViews of

U.S. Services

Exporters

Exports

Total value=$152.3 billion

Imports

Total value=$100.0 billion

Computer,

I

~ Financial services

data processing ‘- $4.69

$1.71

~ Telecom.

$5.56

— Financial services

$2.43

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

the final delivery of their services, or they

must deal with government bureaucracies

that have only recently and reluctantly opened

their markets to foreigncrs.

The nonavailability of leased lines in

some countries and the long delays in

installing them in others arc common complaints of U.S. users. 6 Financial institutions,

for example, put high priority on the freedom

to usc private line services as they choose,

and emphasize the need for leased line prices

based on costs. They want permission to

interconnect private networks with public

networks and to connect preferred terminal

and network equipment. Several firms complained about the lack of reliability of leased

lines. In confirmation, a recent survey conducted by the International Telecommunications Users Group (INTUG) reported that

only one-third of all leased circuits was

available 100 percent of the 3-month period

examined, and 64 kbps circuits had an

availability rate of 99.0 percent, Availability

of 99 percent means that downtime averaged

G This situat Ion should gradually Improve as the result of t he EC Dlrectlve on Open Net work Provision, 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.

Figure 5-1.

U.S. Services Trade

by Sector, 1991

($billions)

Page 93
. . -.

Us.

Telecommunications

Services in

European

Markets

Figure 5-2.

Leased-Line Private

Network

A (dedecated) Ieased-line private network IS preferable for a user requlring 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’) facilities, 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

Operating Company) or through an

alternate access provider, such as

Teleport or Metropolitan Fiber

Systems.

PBX

1 hour, 40 minutes per week, and is well

below recommendations by the Consultive

Committee for International Telephone and

Telegraph (CCIIT) of a minimum 99.6

percent availability.7 This is especially disruptive for users of higher bandwidth digital

links because such lines handle more traffic

than analog circuits.

The lack of fast data transmission is a

serious problem both for U.S. firms and for

their European competitors. A European

bank told OTA that in some countries it

Factory

SOURCE. OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

could not get data transmission as fast as 2

Mbps, or there are problems with getting and

maintaining transmission.8 Said the bank

official:

This situation has to be compared with

the options available to U.S. firms in

their domestic market, [where], . . even

45 Mb/s channels can be obtained at

prices designed to encourage the experimentation and learning needed to inte -

grate new applications with a firm’s

operations. 9

Page 94

7 Ibid.

8 In Spain, a travel services company reported that speed on leased lines in some areas does not exceed

.3 kbps or 300 baud.

9 Comments provided by Ulrich Cartellieri of the Deutsche Bank AG to John Diebold, Chairman of the OTA

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

PerspectivesViews of

U.S. Services

Exporters

Headquarters

Regional

office

PBX

Supplier

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

Enhanced services such as virtual private

networks, packet-switching, and interactive

very small aperture terminals (VSAT) are

not available in some areas at any price.

Where they are available from public telephone operators, they are often not interoperable across national boundaries. They may

be at different stages of development or there

may be differing national standards. As U.S.

services producers increasingly move to the

use of frame relay technology, they are

finding that features and functions available

Figure 5-3.

Virtual Private

Network

To the user, a virtual private network

(VPN) appears to be identical to a

Ieased-line network in terms of functionality-presubscribed bandwidth,

abbreviated dialing, etc. However,

while the "intellitgence” in a dedicated network resides m the cusLongdistance inferconnect many sites with moderate traffic (enough that direct dial

in the United States are not the same as those

available in Europe.

Crossborder payments are a special problem for financial services firms. National

clearing systems differ in degree of automation, formats, access, and reporting systems. 10 Integrated fault resolution is either

not available or requires users to put their

own support personnel at both ends of a

circuit. 11 Concerns about data security are

not addressed by most European carriers and

‘“ See U.S. Congress, Office of Technology Assessment, Trading Around the C/ock: G/oba/ 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

European PTO high

tariffs, billing

practices, installation

delays, and other

problems constrain

business use of

telecommunications.

companies must provide their own engineering and technical support for this purpose.

A nearly univeresal complaint is the high

cost of telecommunications. Voice calls

from Europe to U.S. headquarters can be 50

to 100 percent higher than calls in the other

direction. lntracountry costs are also high. ’2

Leased line costs, although they have recently declined somewhat, arc still high.

This constrains private network optimization

and business operations. Nevertheless, and

in spite of complaints. these costs are to a

large extent accepted as the price of doing

business in Europe. They do not generally

discriminate against U.S. firms.13 (See figure

5-4. )

The problems resulting from technological incompatibilities are compounded by

institutional inconsistencies and vagaries.

U.S. firms complain of excessive variability

in European ordering and payment procedures and contracting arrangements, and of

uninformative. confusing, and irregularly

timed billing. In some countries bills are

reported to arrive up to 2 years late, and in

other countries firms may be requested to

pay for a year’s service in advance. At best,

planning and pricing new communicationsbased services are difficult because of the

wide variety of billing cycles and formats

and currency conversion problems.14

Another major complaint is the long time

required for PTOs to install circuits. One

U.S. travel-related company reports that

promised installation dates are not met 85

percent of the time, and very commonly it

takes double the estimated time.

American firms are typically impatient

with the need to negotiate separately with

many countries to install one network. A

General European Network (GEN) becomes

operational in the spring of 1993, with 16

Mb/s capacity, operating between Frankfurt,

London, Madrid, Paris, and Rome. This is to

bean infrastructure, not a service, and should

shorten time for getting private circuits

operating across several countries. GEN was

designed by European Telephone Operators

to preempt pan-European networks that might

be offered by American firms.16 It is a joint

venture by France Telecom, BT, Deutsche

Telekom, Telefonica (Spain), and ASST/

STET (Italy).

GEN will not end the coordination problem. A spokesman for INTUG says:

Differcnces in rules and regulution s

among the various telecom operator s

make the management of business tele -

Page 96

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

Ilberallzed. “Euro-Broadband Net Set,’) Corr?rnurricatiorw Week /ntema/iona/, July 20, 1992, p. 3.
Users’

Perspectives--

Views of

U.S. Services

Exporters

Belgium

France

Germany

Ireland

Netherlands

Switzerland

United Kingdom -- BT

United Kingdom – Mercury

— I

I -J 1 — - 1

J

I

1

————— 7 ~

I -— —.. .J

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. ”

Figure 5-4.

MoM/y Charge

for Half of Private

Line to the United

States From

Europe, 1992

Page 97
. — — . . -. . . . .

us.

Telecommunications

Services in

European

Markets

AT&T equipment and complains that it had

to struggle to adapt BT hardware to its

network. ’9 When approval to use imported

technology is granted, the approval process

may take many months or even several years.

There is little that U.S. telecommunications companies can do to solve these

institutional problems, which make it difficult to offer the ‘‘one-stop shopping’ and

‘‘seamless global networks’ that U.S. multinational corporations say they need. For

users, these problems add up to greatly

increased costs of doing business. Added to

tariffs that are very high by U.S. benchmarks, are high equipment costs, maintenance costs, and value-added taxes that U.S.

services firms say prevent them from offering services at the lower prices they could

otherwise aim for.

Another regulatory issue of particular

concern to providers of financial services

and data processing services is national

legislation aimed at privacy protection. An

EC privacy directive that was proposed in

1990 could have disrupted the use of transnational financial data systems by restricting

the flow of data across national boundaries or

by requiring explicit consent for each use (or

processing) of certain personal data. The

proposed Directive was strongly criticized

by the European Parliament. A new version

that reportedly will be much less restrictive

was to be issued in October 1992, but has not

yet appeared. There is a separate proposed

Directive on protection of personal data in

the context of public digital telecommunications networks. According to the U.S. International Trade Administration, ‘‘ l-J. S. industry believes that the proposed umbrella data

protection Directive and the Council of

Europe Convention will provide adequate

protection. . . . [and] a sector-specific digital

services Directive is therefore unnecessary

and could create uncertainty and disruption

in the provision of telecommunications services. ’ ’20

Various national laws also restrict the flow

of data. This is seen as an attempt to keep

data processing jobs within the country, by

many U.S. firms that want to consolidate

their own data processing in a few large

centers for greater efficiency. This concentration would have another benefit for the

United States, in that large computer systems

are most often supplied by U.S. manufacturers such as DEC and IBM.

Representative services

export sectors

Travel and transportation services21

Travel and transportation accounted for 58

percent of exported services in 1991, but

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’

PerspectivesViews of

US. Services

Exporters

trade surplus.22 About 10 percent of the total

trade surplus came from airline passenger

fares.

Airlines depend heavily on satellite communications for navigation, position reporting, weather information, and traffic control

(and more recently, for passenger telephone

calling). It is, however, their electronic

reservation systems that arc considered major

factors in intraindustry competition.23

Airlines use private leased lines, public

switched networks, shared networks and

third-party networks, usually with satellitc

back up, to connect reservation centers,

airports, and travel agencies. They are constantly seeking ways to get higher bandwidth

and decreased costs. For example, American

Airlines’ SABRE travel information and

reservations computer system operates in

10.000 locations and has 225.000 terminals,

of which 4.500 arc outsidc North America.24

Of the overseas locations, about 500 arc on

a private network and 4,000 arc interconnected through SITA (Societe Internationale

de Telecommunications Aeronautiques).

SITA is a network serving the international airline industry. It operates in 187

countries. has 24 hub sites interconnected by

three separate communications paths using

both cable and satellites, and is one of the

worlds heaviest users of international leased

circuits. A French company, SITA appears to

be recognized not as a competitor but as the

critical backbone that holds the entire airline

industry together.25 Other third-party service

providers also provide data processing or

network support for airlines or handle their

reservations and ticketing; most of these are

U.S. companies. and some are jointly owned

by several airlines.26

Freight transport also relies heavily on

telecommunications. One of the difficulties

here is coordinating and tracking goods

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;cahonsWeek, 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).

Electonic reservation systems are

considered a major

factor in airline

competition.
-. — . . . -- -- .- - — - - -

U.S.

Telecommunications

Services in

European

Markets

Figure 5-5.

The Programmed

Airline Reservation

System Network

Page 100

I I

SOURCE PROGRAMMED AIRLINE RESERVATION SYSTEM, JUNE 1992.

modes (sea or air, rail, truck) and may cross

several national boundaries and time zones.

A triumvirate of U.S. companies has formed

Encompass Europe, NV, to offer a datanetwork tracking service for multinational

corporations that send inventory worldwide.

This will allow shippers, consignees, forwarders, and carriers to communicate

through a single electronic interface regardless of the kinds of computer systems they

use.

U.S. package delivery systems operating

in Europe are in direct competition with

national postal systems, serving primarily

business customers looking for speedier

services than postal authorities offer.27 The

challenge is to operate ground-based delivery systems that must be fed through an

international air network and must delivcr

within a tight time frame. Package delivery

firms said that telecommunications is the

single most critical factor in success in the

European market, and U.S. technological

know-how gives them a competitive edge,

United Parcel Service (UPS), for example,

has four communications systems using both

public and private international networks

and local packet-switched data networks.

These systems are used for package routing

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

Messenger,” Business Week, May 25, 1992, p. 124.
Users’

PerspectivesViews of

U.S. Services

Exporters

billing and receivables transmission; electronic messaging for company coordination;

and electronic data interchange (ED I ) for

package tracing, links to financial institutions, and links to other services such as

weather reporting. UPS recently got Federal

Communications Commission approval to

provide common carrier services by acquiring capacity in three transoceanic cables

(two of which cross the Atlantic) .28

Hotels, like airlines, depend on international telecommunications to handle reservations, as well as for intrafirm coordination

and handling and charging for calls made by

guests. U.S. hotels in Europe say that they

need, but do not yet have, integrated reservation networks operating across countries and

linked to airline reservation systems. They

also report that they need better software that

can be continually updated for changing area

Codes.

The Sheraton reservation network, for

example, consists of interconnected star

networks with hubs in major European cities,

each hub connected by 56 kbps leased lines

to hotels and reservation centers. However,

the network in fact covers only 10 percent of

the hotel chain’s properties, because the

number of facilities changes rapidly but also

because in some countries the telecommunications options are ‘‘very limited. ’

Holiday Inn Worldwide has about 150

locations and 14 reservation offices in Europe. The company uses the TAT-8 and

TAT-9 transatlantic cables for a 64 kbps link

from Brussels to London to New York (its

headquarters is in Atlanta). It had been using

a conventional terrestrial star network within

Europe, with the hub in Brussels, but in 1992

the company began a transition to a VSAT

network operated by MCI, using INTELSAT.

which will have 120 to 150 Earth stations in

the United Kingdom. Belgium, France, Germany. Italy, and the Netherlands.2

’

) This will

connect all of the chain’s proper-tics in these

countries, but MCI cannot offer a panEurope network under existing regulations.

It will provide terrestrial links until it obtains

licenses needed to operate VSATS in the six

countries. Holiday Inn Worldwide says that

the reason for the move is to ‘circumvent the

problem of long (and often unpredictable)

service delivery times required for leased

lines." 30

Financial services31

About 3 to 5 percent of U.S. services

exports are financial services, primarily in

commercial and investment banking. In 1991,

the United States exported about $4.7 bill ion

in banking services, which accounted for 3

percent of total services exports and about 4

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

U.S. banks maintain a

competitive edge

in creating and

supplying innovative

value-added

services.

a score of U.S. banks actively compete in

European markets; middle-sized and smaller

banks serve their domestic customers’ overseas needs through correspondent banks and

the use of shared networks such as SWIFT

and CHIPS.

Banks operating overseas use networks in

two ways: for intracorporate business support such as might be used by other large

multinational corporations-voice, data transmission, fax, electronic mail (E-mail) and

voice mail—and as a means to create and

deliver financial products and services. U.S.

banks say that they have many disadvantages

in European markets,32 but that American

computer and communications technology

has nevertheless given them offsetting advantages. Their competitive edge has been

the ability to create and supply innovative

value-added financial services.

During the 1980s, several U.S. banks

aggressively developed global networks with

packet switches, multiplexer, and multiprotocol bridges/routers to connect local area

networks (LANs) and wide area networks

(WANs) serving their dispersed facilities.

Alternatively they used third-party services

providers to interconnect LANs with X.25,

TCP/IP, frame relay, or other fast data

transmission technologies.33 Recently there

Page 102

are signs that U.S. international banks are

moving toward greater user of publicswitched networks or hybrid networks, sometimes outsourcing their own networks. One

reason for this move is to reduce the costs of

maintaining network management personnel; a more positive driver is the availability

since 1990 of virtual private networks, less

expensive than traditional leased line networks because they make more efficient use

of network facilities by dynamically allocating dedicated lines to customers on demand.

In addition to private networks, banks use

several shared networks or third-party networks for credit authorization and validation, and for payments and settlements.

These include SWIFT, CEBAMAIL, MasterCard International, VISA International,

and payment netting systems. The most

widely used is SWIFT (the Society for

Worldwide Interbank Financial Telecommunications), which has over 1,800 member

banks and links over 3,000 financial institutions in 84 countries. SWIFT is currently

being upgraded to offer EDI services, a

netting service for banks trading in European

Community units (ECUs), and the automatic

matching of foreign exchange and money

market transactions. CEBAMAIL is a data

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

communicate with each other and with the Bank of International Settlements in Basel, Switzerland.
Users’

PerspectivesViews of

U.S. Services

Exporters

Increasingly, international banks want to

have access to technologies such as Integrated Services Digital Network (ISDN),

frame relay and Switched Multi-megabit

Data Services (SMDS), EDI, 34 and electronic document imaging. They want more

efficient forms of packet switching to

squeeze more out of their existing networks.

Frame relay and SMDS are especial] y important for high-speed data transfer and to let

financial institutions send bulk data in irregular bursts. Electronic document imaging is

a promising way to computerize and use old

paper records as well as to store and transmit

current documents.

As users of international telecommunications networks, banks are especially concerned about data security and reliability;

they are threatened to varying degrees by

criminal actions, human error, and systems

failure. Yet banks are reported to be laggard

in demanding from carriers, or providing for

themselves, badly needed security safeguards

such as encryption technology, in part because of the costs and in part because of a

long-standing dispute with the U.S. National

Security Agency about the role of the U.S.

intelligence agency in defining standards for

this technology.3s

Financial institutions find, in some countries, that they have special regulatory problems beyond those that affect all telecommunications user groups. In most countries both

banking and telecommunications36 are regulated industries and banks with private networks may run into a double regulatory

burden. In some countries, electronic funds

transfer, credit card authorization, and switching for automatic teller machines (ATMs)

are considered telecommunications services

w EDI IS both a competitive threat and atechnologlcal opportunity. Provided by third-party service providers,

ED I Intervenes between banks and their tradlt ional clients so t hat the bank provides little or no value-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 act Ivel 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

Architectural,

engineering, and

construction services

are typically not

big users of

international

telecommunication

because of tradition

and unintegrated

industrial structure.

and are so regulated. Cash netting and cash

management services for multinational corporate clients may have particular problemsmost such systems accommodate some message transmission in the form of instructions

or explanations, but some foreign regulators

consider this to be resale, or an unlawful

messaging activity by the banks. It may not

be clear whether an online transaction is a

regulated banking service, a telecommunications service that is regulated in some

jurisdictions, or an unregulated data processing service. ATM networks or other shared

networks may also be held to violate antitrust

regulations or other policies designed to

require competition,

While they may face dual regulation in

some countries, a few U.S. banks have also

used international networks to escape regulation and taxation, by locating offices or

branches “offshore ‘‘ in countries with few

or no regulations. This allows them to

engage in ‘“money laundering’ and other

forms of illicit or unethical behavior.

Construction services37

Not all services exports are at present

highly dependent on international telecommunications. Architectural, engineering, and

construction services, sometimes called AEC

services, show relatively little reliance on

telecommunications now, but in the future,

information technology and telecommunications networks could lead to significant

expansion of exports, which is unlikely to

occur otherwise.

This sector is highly fragmented across

disciplinary lines: most firms offer either

architectural design, engineering design and

consulting, construction and construction

management, or a combination of two of

these.ss Although referred to as AEC firms,

in reality there arc few integrated companies

that offer the full range of services. A given

facility’s construction project almost always

is conducted by a number of contractors and

subcontractors working for, but usually not

closely managed by, a developer.:{9

The pace of internationalization in the

AEC industry has quickened since the mid1970s. The international market for such

Page 104

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,

however, also often rely on the Engineering News Record.
Users’

PerspectivesViews of

U.S. Services

Exporters

services, in 1991, was about $130.2 million. 40 About 25 percent of this was in

Europe.

41 AEC services accounted for less

than 1 percent of U.S. services exports in

1991, producing revenues of $1.3 billion,

and contributed 1.9 percent of the U.S. trade

surplus, Nevertheless, U.S. firms win 36

percent of all engineering and construction

contracts awarded around the world to nonnational firms, and they take 41 percent of

architectural design contracts. 42 European

firms win 43 and 46 percent, respectively. In

the European market, U.S. firms get nearly

44 percent of nonnational awards for construction and 56 percent of design contracts;

other European but nonnational firms win 50

and 40 percent, respectively.43 U.S. firms are

strongly competitive in Europe, and European firms are their chief rivals both in

Europe and in the rest of the world.44 The

United States leads its closest individual

rival, the United Kingdom. by a wide margin. But even though the value of their

foreign billings has continued to rise, U.S.

firms have lost market share over the last

decade.

The AEC industry now makes very limited use of telecommunications networks,

and especially of international networks.

This is not principally because of costs or

band with limitations but because the industry’s traditional procedures have not been

conducive to wide area networking and

because of the peculiarly non integrated structure of work units. Most firms hold to the

philosophy that they cannot “compete from

hom e and need a presence abroad. Overseas projects arc typically managed overseas

with relatively little dependence on oversight from the home office. Several contractors, providing services ranging from design

through procurement to construction, typi40 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

mostly done on the site to minimize the

inefficiencies that result from fragmentation,

Sometimes a client will demand that the

various contractors create a common technology platform for project communications

and information exchange, but this is rare at

present. A few firms are now beginning to

integrate—that is, to present themselves as

full AEC firms with a complete range of

services. This integration at the firm level

may stimulate demand for integration of

information systems that support these varied functions.

Information technology and telecommunications will someday transform this industry. The earliest stages of construction consist almost entirely of generating and sharing

information: formulating client goals and

plans, creating architectural designs, developing specifications, identifying and communicating legal and budget guidelines,

checking standards and codes, making engineering shop drawings, etc. Yet, much of this

work is still done by exchanging paper. At

the next stage, a major problem is managing

procurement and scheduling construction so

that there are no delays to cause resources to

remain idle. Change in architectural or engineering design during the project requires

major changes in material procurement needs,

yet supplier input must be current, complete,

and quickly accessible. Financial managers

must monitor project expenses and release

funds on schedule. The technology exists for

thoroughly transforming the work through

integrated databases, interactive threedimensional computer assisted design (3-D

CAD),45 and greater use of telecommunications.

But the adoption of advanced information

technology in this industry has been very

slow because of its costs, its human resources demands, industry fragmentation,

and inadequate telecommunications.% Five

or six of the largest U.S. AEC firms,

especially Bechtel, are experimenting with

3-D CAD and have found that even dedicated 56 kbps links produce inferior results;

well over 100 kbps or even megabit speeds

will be needed. These links may be available

in the future between major cities in this

country and Europe, but large construction

projects such as petrochemical or nuclear

plants most often occur in rural, sparsely

populated areas where such telecommunications are least likely to be available.

The number of U.S. AEC firms that now

use advanced international telecommunications is therefore small. Probably only about

140 U.S. firms are engaged in foreign

competition and the top dozen of these

account for nearly 90 percent of all U.S.

Page 106

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

to drive development. Workman, op. cit., footnote 37.
Users’

PerspectivesViews of

U.S. Services

Exporters

foreign billings.

47 Currently, small AEC

firms require nothing more than one or a few

standard voice lines for voice, fax, and

low-speed modem communications. E-mail

is popular and there is some experimentation

with EDI. Sometimes clients install special

temporary communications facilities for the

duration of the project to connect the client

firm, AEC vendors, and the project site. The

transfer of 2-D CAD files is usually done by

physical delivery of software copies. The

firms with European operations tend to

connect one major European office, most

often London, to the U.S. headquarters for

c-mail traffic and data related to financial

management and business development. The

link may be used occasionally to transfer 2-D

and 3-D CAD files in batch mode.

The firms with significant international

billings, among the largest U.S. AEC firms,

typically need to connect four to six major

U.S. locations and two or three foreign

locations for exchange of corporate and

engineering data. Most of their U.S. sites arc

connected with 56 or 64 kbps, sometimes on

public-switched networks and sometimes

leased lines with bridges, routers, and multiplexers. The networks of the largest firms

usually support TCP/IP, SNA, and DECnet

traffic. X.25 may be losing ground to these

competitors but it remains important as a

network access protocol.

Those firms that are subsidiaries of large

conglomerates usually have the widest range

of technology options; they may have private

frame relay backbones, and even 384 kbps

videoconferencing.

The competitiveness of U.S. AEC firms in

Europe is little affected, at this time, by

telecommunications availability or costs;

other factors are much more important,

including financing of foreign projects, distribution of information about foreign contract opportunities, education of technical

personnel, software standards development,

and most critically the fragmentation and

lack of coordination within the industry. The

latter hinders the adoption of modem information technology that would enormously

enhance the creation, sharing, and coordination of design and the complex tasks of

coordinating and managing the construction

process, which in turn would also help lower

costs and increase industry competitiveness

and profitability. However, as the more

immediate problems of financing projects

and integrating the industry are addressed,

greater information-sharing will result within

the industry, leading to greater use of domestic telecommunications networks, and ultimately to more use of international networks, This progression may become significant before the end of this decade if

obstacles constraining the usc of advanced

information technology within the industry

can be overcome.

Policy issues

U.S. services exporters want more involvement of U.S. telecommunications firms

in Europe, and greater availability of U.S.

telecommunications and information services. This requires, as they see it, U.S.

Government pressure on European countries

to further open their telecommunications

markets. According to some user firms, it

also may require full domestic deregulation

of telecommunications so that U.S. carriers

will have the incentive to ‘‘maximize information-based services.

Information

technology will

someday transform

this industry,

as firms see

advantages in

sharing information,

designs, and

schedules

electronically.

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

wanted to negotiate the end of restrictive

‘‘homologation’ (equipment approval or

certification) practices that inhibit the deployment of U.S. equipment and thereby

access to, or the ability to offer, innovative

information-based services.

Service providers that rely on international telecommunications networks seem

universally to want more international standards. Many favor a stronger role for the U.S.

Government in standards development. Some

firms see the need for government intervention in standards-setting to discourage European standards organizations from adopting

standards that would shut U.S. firms out of

European markets, or that would delay

network interconnectivity. Some user firms

said that government involvement might be

necessary to push U.S. manufacturers, as

well as European manufacturers, to agree to

global standards.

User firms have come to realize that they

have interests to protect in the process of

standards development, and some arc demanding the right to participate in the

process. At the same time, pallicipation

incurs significant costs, that relatively few

large user firms have been willing to assume.

For example, financial institutions increasingly want to be included, yet in many banks

senior managers with little understanding of

technology are reluctant to approve costly

participation in standards development.

Page 108
Telecommunications

in Central

and Eastern

Europe

CHAPTE

6

R

Successful

development of

market economies

and democratic

governments

depends on modern

telecommunications

Page 109

T HE DRAMATIC POLITICAL DEVELOPMENTS tha t

have transformed Central and Eastern Europe (CEE) appear to be closely linked to

communictions. Radio and television broadcasting provided a window on Western

democracies and markets, and their appeal

proved difficult to resist compared to Stalinist central planning and political structures.

Many observers predict that the successful

development of competitive market economies and free democratic organizations will

depend critically on the installation and

availability of modern telecommunications

services. ‘‘Improved communication channels will assist the free flow of information

and stimulate economic growth."2

Improved telecommunications capability

is presumed to be positively correlated with

economic development, the strengthening of

democracy, the broadening of culture, and

greater educational opportunities. However,

exactly how telecommunications fits into

economic, social, and political development

is often not placed in context. The absence or

dilapidation of the telephone network is not

the only problem in Central and Eastern

Europe; many other urgent needs, such as

energy production and environmental cleanup,

will require attention and resources. Thus

telecommunications, while critically important to these countries, competes with other

needs.

Each country has distinct political and

economic characteristics that lead to differing strategies on future economic development, legislation, and the role of private

enterprise.~ The challenge these governments face is to carefully match their societies’ communications needs with the desired

characteristics of their economies, societies,

and politics, in order to facilitate the transition 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 econom ic

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.
—

Us.

Telecommunications

Services in

European

Markets

to market-oriented capitalism. Developing a

telecommunications modernization strategy

is one step.

In the past, public telecommunications has

not been a priority in these countries. Information has been tightly controlled, and

development of public telecommunications

rigorously curtailed. As a consequence, telecommunications networks cannot meet the

requirements of contemporary social and

economic interaction. Recognizing the critical importance of communications to economic activity, however, most of these

countries have begun to develop ambitious

plans for basic telecommunications system

expansion and modernization.4

This chapter will characterize the state of

telecommunications in the CEE region and

discuss strategies for modernizing the networks, in order to identify implications for

the telecommunications industry and policymakers in the United States. Growing ties

between East and West are making effective

telecommunications critical for the conduct

of business and public affairs. The chapter

concludes, however, that the U.S. Government, and in particular the U.S. Congress,

has little leverage over developments in

those countries, apart from trade, foreign aid,

and technical assistance tools already in use.

Defining and characterizing Central

and Eastern Europe

Eastern Europe has for many years been

the shorthand reference for those countries in

the political/military and economic sphere of

the Soviet Union,s i.e., under the Warsaw

Pact and the Council for Mutual Economic

Assistance (CMEA or Comecon). Comecon

was the economic trading bloc set up by the

Soviet Union (Comecon is now defunct). For

the most part, Eastern Europe was usually

defined by geography (see figure 6-1). The

countries of the region themselves refer to

the area as Central and Eastern Europe,

which conveys a degree of differentiation to

which the United States has until recently not

been sensitive. Though there is consensus

that Poland, Hungary, Czechoslovakia,6 Romania, and Bulgaria are members of this

group, there is some ambiguity about how to

classify other countries, such as Albania, the

republics of the former Soviet Union, and the

Page 110

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

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 purposes of this chapter, the focus is mainly on

the countries that were not part of the former

Soviet Union.

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

among and between the countries, especial] y

regarding their economic transformation.

Czechoslovakia, Poland, and Hungary are

expected to move successfully toward modern market economies and democracy. Both

the European Community (EC) and the

European Free Trade Association (EFTA)

have negotiated trade agreements with these

three countries, anticipating eventual integration within the economic and political

West.R The United States has begun to view

them as it does other trading partners; the

United States Trade Representative (USTR)

annual report on foreign trade barriers listed

Poland, Hungary, and Czechoslovakia for

the first time in 1992.9 President George

Russia

Ukraine

Italy

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

Bush extended to Hungary and Czechoslo- Figure 6-1.

vakia permanent most-favored nation (MFN) Central and Eastern

status in April 1992; this had previously been Europe

B Poland, Czechoslovakia, and Hungary signed slmilardeclarat ions of intention with both the EFTA and 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

100, 7

Bulgaria CSFRa Hungary Poland Romania Yugoslavia

SOURCE: ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT,

INTERNATIONAL TELECOMMUNICATION UNION, 1992.

Figure 6-2. subject to annual review. 10 The prospects for

Telephone MFN status for Albania, Bulgaria, Romania,

Penetration Levels: political units of the former Yugoslavia, the

A Comparison Baltic republics, and republics of the Com-

(1991) monwealth of Independent States and Georgia arc less clear.

a Czech and Slovak

Federal Republic legacy of Soviet economic and

trade policies

The West generally had a false perception

that the countries behind the Iron Curtain

were economically and socially integrated.

The Soviet Union-dominated trade bloc,

Page 112

Comecon, was dissolved in January 1991

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 economic interaction between the countries and

instead imposed a system in which the Soviet

Union supplied these countries with energy

and raw materials and in return they sold

manufactured goods back to the U.S.S.R,

The pattern of international telephone lines

shows clearly the lines of dominance, and the

extent to which the individual countries of

Comecon were cut off from one another.

The former Soviet Union used its energy

supply to force a set of bilateral barter trading

systems on the CEE nations. ’ 2 The Soviet

Union exchanged cheap oil and other raw

materials for machine goods and food, and

coordinated the trading of manufactured

goods throughout Central and Eastern Europe.

13 Early in the democratization process

begun in 1989 it became apparent that as the

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 the Comecon 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,

Budapest, Hungary, Oct. 7, 1991.
—.

Telecommunications

in Central

and Eastern

Europe

ics were being hurt as well, due to this

trading system centered on Moscow. CEE

countries now see that they must diversify

trade relationships, with one another as well

as with the outside world, if they want to

develop rapidly.14

The condition of

telecommunications in Central

and Eastern Europe

Telecommunications in Central and Eastern Europe are in dismal disarray. Communications networks in these countries are

several generations behind the West technologically and cannot provide the services

required for these countries to achieve economic parity with the West. Though telecommunications operators are aggressively

modernizing facilities for important business

and government centers, these networks

main] y rely on decades-old transmission and

switching equipment, and have few international connections. even among CEE countries. Telephone penetration levels are low,

the number of disconnections is high, and

waiting lists for service are long.

Digital switching technology has only

very recently been introduced. Most of the

networks consist of electromechanical or

semielectronic technologies, such as crossbar or step-by-step switches, that are antiquated by Western standards. For example,

electromechanical crossbar switching technology comprised 47 percent of Czechoslovakia’s telecommunications switching infrastructure in 1991, and electromechanical

step-by-step switches accounted for 48 percent of capacity; only 3 percent of exchange

capacity was digital, and nearly all of that

was used in international service.15

Levels of telephone penetration are significantly behind those in Western European

countries (see figure 6-2). ’6 Bulgaria, with

the highest telephone density of Eastern

European countries, [7 in 1991 had approximately 25 main lines per 100 people, while Central and European

telecommunications

“ Some observers advocated that foreign assistance to the CEE countries was best delivered via money

cannot now provide

sent to the USSR, which could then continue to buy goods and serwces from the CEE countries. services required

‘

5 Calculated from data In International Telecommunication Union, “Summary of the Survey on Present State for their countries

and Plans for Telecom Development In Central and Eastern Europe,” European Regional Development to 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/ecornrnunlcationDeve/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.

Waiting Time for Bulgaria

Telephone Service,

1992 CSFRa

a Czech and Slovak Hungary

Federal Republic

Poland

Romania

Yugoslavia

I I )

o 5 10 15 20

SOURCE: INTERNATIONAL TELECOMMUNICATION UNION, 1992.

the average for the region was 13.18 By

comparison, the number of main lines per

100 people in the industrialized countries

ranges from 34 (Spain) to 69 (Sweden), with

the average for the developed countries of

Western Europe at 43. Levels in Canada and

the United States hover around 50. (See

figure 6-2.)

As a consequence, waiting lists for connection are lengthening, and some areas have

no service at all. In Poland, for example, the

waiting list for a telephone grew from around

1 million in 1981 to 2.3 million in 1991. On

average, waiting lists for the CEE countries

increased by 9 percent a year between 1981

and 1990; in Western Europe these lists

shrank by 12 percent over the same period. ’9

The CEE average waiting time for telephone

installation is 11.5 years and it is not

uncommon to hear accounts of delays as

much as 30 years, compared with less than 2

weeks in Western Europe. These figures

probably understate true demand. which is

likely to grow as the waiting lists shrink and

people who were not bothering to sign up see

better chances of getting connected. (See

figures 6-3 and 6-4.)

Neglect is most critically manifest in the

limited range and poor quality of services

available. Lines only marginally reliable for

basic voice service are unreliable for data

and facsimile transmission. The number of

annual faults reported per 100 lines ranged

from 18 (in Croatia) to 97 (in Romania); by

contrast, reports of faults in Sweden were 10

per 100 lines, in France 9, and in the United

Kingdom 15. In Romania, 70 percent of calls

were not completed, and in Hungary, 45

percent of local calls failed to go through.

(See figure 6-5.)

Services available to businesses and residences are limited, but are growing fast. In

1990 there were only 28,000 fax machines in

all of Central and Eastern Europe (compared

with over 3.3 million in Western Europe),

but by 1991 there were more than 72,000

(Western Europe had nearly 3,9 million in

1991). In 1990 Western Europe had 3.4

million mobile phone subscribers, and in

1991 4.3 million, while in Central and

Eastern European countries there were only

4,500 in 1990, but 9,000 in 1991. Public

packet-switched data networks are barely off

the drawing boards in Central and Eastern

Page 114

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.

‘

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

Bulgaria in 1990, but 761 in 1991, while

Western Europe has an extensive X.25

service in place, with over 337,000 subscribers in 1991.

Finally, productivity of telecommunications operators varies a great deal between

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,

compared with 158 in Western Europe in

1991 and 152 in 1990.20 (See figure 6-6.)

Services to rural communities have been

especially poor. The telephone network is

often concentrated in the major cities and

administrative centers, so the outlying rural

areas have much lower telephone penetration

than suggested by the national averages.21

For example, approximately 7,500 Polish

villages arc without telephones, and nearly

two-thirds of those villages with phones arc

sevred by manual switches:22 service effectively stops when the switchboard operator

leaves for the evening. The same situation

can be found all over Central and Eastern

Europe. While several CEE telecommunications authorities have told the Office of

Technology Assessment (OTA) that rural

service is a priority, the focus of modernizaWaiting list for main lines (millions)

3 ‘—

[

r~ 1981 1991

I

21

1

0L

Bulgarla CSFRa Hungary Poland Romania Yugoslavia

SOURCE INTERNATIONAL TELECOMMUNICATION UNION, 1992

tion thus far has been overwhelmingly on Figure 6-4.

business users, on the presumption that Waiting Lists for

businesses can absorb the increased costs.23 Service, 1981 and 1991

(See figure 6-7. )

The case of Hungary illustrates the condi- a Czech and Slovak

tion of CEE telecommunications networks. Federal Republlc

b 1990

The average wait for telephone connection

over the past two decades has been 12 years,

and even then there is considerable difficulty

in securing a dial tone or in completing a

call .24 There were only 10.9 telephone main

lincs per 100 people in 1991, and one source

indicated that three-quarters of these are in

the government.~s Only 7 percent of switches

were digital. While in the main cities 90

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 John Handley, 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.

Service Quality: Bulgariab

Telephone Faults, 1991 CSFRa

a Czech and Slovak Hungary b

Federal Republic

b lggo Romania

France

Sweden

United

Kingdom

Annual faults per 100 main lines

Central

and

Eastern

Europe

Western

Europe

1 1

0 20 40 60 80 100

SOURCE INTERNATIONAL TELECOMMUNICATION UNION, 1992.

1990, automatic dialing was available to

only 50 percent of main lines in rural areas.26

In a great number of Hungarian villages the telephone provides a link with

the outside world only in the daylight

hours. . . 78 percent of the 2,024 main

exchanges operating in Hungary at the

end of 1988, for example, were manu -

ally operated exchanges representing

50 year old technology. . .[which means

that] 78 percent of the locations in

Hungary are not connected to longdistance dialing, 60 percent of the cities

in Hungary are not connected to domestic long-distance dialing and 80

percent are not connected to international long-distance dialing."27

Causes of decay

In the political environment of Central and

Eastern Europe until recently, information

was deliberately and tightly controlled and

the development of public telecommunications services and facilities was rigorously

curtailed. International and even much regional direct dialing was prohibited, circuits

were extremely limited in number and quality, and telephone books were made classified documents.28 Horvath of the Hungarian

Telecommunications Company (HTA) told

OTA that the Marxist government had deliberately neglected infrastructure and discouraged communications except among the few

authorized decisionmakers. In the early 1980s

there was a debate over the importance of

29 According to Horvath, telecommunications.

the new leaders do not yet realize that poor

communications ‘‘is a deadly brake on the

economy.

Telephony and other services were not

considered industrial production in socialist

economics and, since they had no quantifiable output, were seen as parasites on the real

30 Investment priorities industrial economy.

Page 116

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.

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 services. (See table 6-1.) Much of the little

spending that did occur, according to a

World Bank study,

31 went to new lines rather

than maintenance, so figures on CEE telephone density mask poor service and antiquated and nonperforming equipment, as the

figures on line faults and completed calls

show.

The network deteriorated as a result,

necessitating the parallel development of

‘‘closed purpose networks’ for the more

sensitive government activities such as the

defense and interior ministries. For example,

in the former Soviet Union three separate

telephone networks existed: one for a very

small circle of the political and military elite

(for which special keys are needed), another

for the party bureaucracy, and a third for the

general public.32

Despite the lack of reinvestment, telecommunications nevertheless proved a reliable

money maker. Following the traditional

European model, telephone service in CEE

countries was vested in Postal, Telephone,

and Telegraph (administrations) (PITs), also

responsible for postal and telegraph services

and in some cases for broadcasting, and

typically under the control of the ministry in

charge of communications. (See table 6-2. )

As state-owned enterprises, telephone service operators, therefore, were both highly

political and highly bureaucratic: telecommunications was used as a political tool for

social and economic control, and telephone

enterprises were bound by administrative

public-service structures that prevented them

Main lines per employee

175 ~ I

i——-— 4

u

Bulgaria CSFR b Hungary Poland Romania Yugoslavia

SOURCE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT,

INTERNATIONAL TELECOMMUNICATION UNION, FEDERAL COMMUNICATIONS COMMISSION, 1992.

from readily changing goals, strategies, or

internal structures. Furthermore, telecommunications operators were closely supervised by finance ministries as they set prices

and collected and distributed revenues. Telecommunications supported the postal service and contributed to the general treasury.

Until recently, for example, the Czechoslovakian PTT turned over 87 percent of

telecommunications profits to the general

treasury. 33 The awakening of users to the

value of communications has strained old

telecommunications operating models in many

countries. A major challenge to these countries will be to become much more responsive to users’ needs.

Regional relationships

Western approaches

Other aspects of telecommunications modernization are cooperation among countries

in the region and assistance from international agencies. As noted above, for years the

Figure 6-6.

Telephone Operator

Productivity, 1991

a L~l exchange carriers

(regional Bell operating

compames and the major

Independents).

b Czech and Slovak

Federal Repubhc

3’ Timothy Nulty, Corwderafions m Te/ecom /nvesfrnent in Eastern Europe (Washington, DC: World Bank,

1 990).

32 Discussion with Gordon Cook, former OTA analyst and specialist on Soviet telecommunications networks.

33 Tlm Kelly, op. cit., footnote 28. Page 117
.-

U.S.

Telecommunications

Services in

European

Markets

Figure 6-7. ~~ Telephone main lines per 100 population

Urban and Rural

7U

Service 35

30

Fi c~~h and Slovak

Federal Republic 25

20

15

10

5

0

I

Page 118

CSFRa

average

penetration

I

I

Prague Brno Bratislava

—

—

SOURCE: INTERNATIONAL TELECOMMUNICATION UNION,

AT&T’S THE WORLD’S TELEPHONES, 1991.

Soviet Union presided over a set of unilateral

telecommunications arrangements with its

satellites and limited their interaction with

one another. In the mid- 1980s, the United

Nations Development Program (UNDP) and

the International Telecommunication Union

(ITU) proposed to reduce this isolation by

sponsoring a regional telecommunications

development program, which became known

as Euroteldev.34 Its formal goal was to

establish projects relating to new equipment,

services, and network structures. Informally,

however, it was intended to provide money

and motivation for CEE telecommunications

officials to begin to emulate the telecommunications world outside of the Soviet

sphere. 3s Euroteldev has so far only produced plans, though those who have participated agree that its work should continue.

Now that free political and commercial

relationships between the East and West are

possible, Euroteldev mission may however

have less justification.

In addition, the ITU itself is attempting to

play a larger role in helping developing

countries modernize their telecommunications networks. Under the auspices of the

newly created Bureau of Telecommunication Development36 (BDT, after the French

acronym), the ITU organized its second

Regional Development Conference on telecommunications development in Central and

Eastern Europe, which was held in Prague in

November 1991 .37

The conference focused on four main

areas: regulatory policy and structure of the

telecommunications sector (i.e. privatization, creation of a separate regulatory body);

telecommunications standards and network

harmonization with Western Europe; needs

for and sources of financing; and human

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

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

close of the conference, such as financing,

network development, and human resources

development. This group, the Central and

Eastern European Telecommunications Cooperative Mechanism (CEETEC), builds on

the experience of Euroteldev. Recent reports

on these cooperative ITU activities suggest

they are likely to move slowly .78 Most

cooperative activities will occur on a companyto-company basis, as financing questions can

be resolved.

CoCom

Central to the telecommunications modernization plans of CEE countries is investment in advanced transmission and switching equipment. This equipment is not available from the former Comecon trading

partners, but only from the Western countries. However, during the Cold War the

West, through the Coordinating Committee

on Multilateral Export Control (CoCom),

established strict controls on the export of

goods with military applications to Sovietbloc countries and China.39

CoCom restrictions on importing hightech communicantions equipment to the United

States have, until very recently, hindered

CEE governments in modernizing their networks, Telecommunications exports were a

bitterly fought export-control issue within

the Bush Administration and in other WestAverage telcom

investment, 1989-91 Investment

(US $ mil.) per capita (US$)

Bulgaria 160 28

Czechoslovakia 113 10

Hungary 195 30

Poland 42 4

Central and Eastern Europe 630 9

Western Europe 43,810 128

SOURCE INTERNATIONAL TELECOMMUNICATION UNION (IW),

ITU INDICATORS, 1991, TABLE 30, P 30.

ern industrialized countries because of com- Table 6-1.

peting goals, military security, and free Telephone Investment

trade. Principally at issue are fiber optics and Levels, Comparing

32-bit digital computer processors, both of Hungary,

which may have military and civilian uses. Czechoslovakia,

Fiber optics permit vastly greater transmis- Poland, with

sion capacity than coaxial copper c-able or United States and

microwave but are much more difficult to Western Europe

tap, which makes monitoring of military and

military industrial activities more difficult.40

CoCom has set a limit of 140 Mbps data

transmission rate on systems installed between Russian cities, and 565 Mbps on

systems terminating in some Russian cities,

including Moscow, St. Petersburg, and Vladivostok. Intracity communications in restricted countries would have to continue

using microwave or copper cables, 41 As late

as 1992, this ban prevented U.S. West from

constructing a trans-Siberian fiber optic network. According to officials in Hungary,

however, Cocom should not now be a

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 allow sigruf 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

Telephone revenues, Revenues

1991, (US$ mil.) per capita (US$)

Bulgaria 112 12

Czechoslovakia 543 35

Hungary 533 52

Poland 520 14

Central and Eastern Europe 3,188 24

Western Europe 128,426 355

Table 6-2.

Telephone Revenues

for Hungary,

Czechoslovakia,

Poland and/or

CEE Average

SOURCE: INTERNATIONAL TELECOMMUNICATION UNION (ITU),

ITU INDICATORS, 1991, TABLE 28, P. 28.

presently available to them is acceptable and

appropriate .42

In the United States, the Department of

Defense and the various agencies of the

intelligence community argue that maintaining CoCom restrictions is essential for national security. Firms such as AT&T, on the

other hand, claim restrictions are no longer

needed. 43 It appears that proponents of trade

liberalization are prevailing. As it becomes

apparent that Eastern European countries no

longer pose a direct military threat to NATO

Page 120

(North Atlantic Treaty Association), the

CoCom countries recently have taken a

number of steps to modify their restrictions,

in order to nurture new potentially lucrative

trading partnerships.

44 Further, fiber Optic

technology is becoming available to these

countries. Because German firms are permitted to honor contracts made in the former

East Germany, the former East German firm,

Carl Zeiss, can export advanced fiber optic

technology to the CEE countries and Russia.

This loophole is putting pressure on CoCom

members to modify the restriction.

Change is quickest for the three most

politically progressive and stable countries,

Poland, Czechoslovakia, and Hungary, which

have begun to institute export control procedures that satisfy CoCom.45 Hungary, which

has had an export control regime in operation

since October 1990, is the farthest along;

CoCom agreed in May 1992 to remove

Hungary from the list of proscribed destinations.46 The prospect of relaxing or elinlinat42 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

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

is an important leverage to impel these

countries to progress toward Western political and economic practices.

Efforts are underway in CEE countries to

correct major structural flaws that have

contributed to the disintegration of both the

economic structure in general and the telecommunications sector specifically. Modernizing telecommunications” addresses only

a single, but critical, element of the broader

need for reform. In recognition of its fundamental importance to their economies, both

as an industry in its own right and as a

multiplier for other economic activities, the

CEE countries are planning major organizational and legal changes. This liberalization

is aimed at both improving the communications networks and creating an environment

conducive to foreign financial and technical

assistance for modernization.

The World Bank and the Organization for

Economic Cooperation and Development

(OECD) estimate that the total cost of

modernizing will be around $50 to 60 billion

over the next decade, and considerably more

if the countries of the former Soviet Union

are included.~’ The ITU estimates that the

cost for Central and Eastern Europe, including the former Soviet Union, would be $94

billion just to bring service levels to Ireland’s

current standard.48 Expectations of improving penetration levels to Western levels by

the end of the century arc ambitious, perhaps

unrealistic; and these figures only represent

additional lines, not replacements of dilapidated network and terminal equipment. (See

table 6-3.)

How telecommunications modernization

will be paid for is a difficult issue for all CEE

countries, as their economies are relatively

unproductive in world markets, their foreign

exchange reserves are low, and their prospects for short-term improvements arc bleak.

It is likely that some combination of selfgenerated revenues, capital raised in foreign

markets and eventually from domestic markets as these develop, and foreign aid or

loans, will be necessary.

The prospects for raising revenue internally from telecommunications service and

allocating it for network modernization are

not encouraging. Profits from telecommunications services generally arc returned to the

general treasury, rather than being reinvested

in telecommunications. Tariff structures in

each country provide subsidies to local calls

and handset rental charges, depriving the

operator of revenues that could be used for

network modernization. Modernizing

CEE financial markets are as yet weak, telecommunications

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) mult iplled by t he number of add it ional lines t hat the government/operator

forecasts putting In. Timothy Nult y, Comsuderatmns m Te/ecom /rrvestrnent in Eastern Europe (Washington, pay is still

DC: World Bank, 1990). According to OECD’S calculations, the $50 billion in investment necessary to unclear.

Increasing the telephone penetration rate to levels on par with the West do not include the 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/

Trade Repotier, vol. 9, No. 41, Oct. 14, 1992, pp. 1758-59. Ireland has one of the lowest telephone

penetration rates In Western Europe, at 29 telephones per 100 Inhabitants. Page 121
Us.

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Services in

European

Markets

Box 6-A. U.S. WEST TRANS-SIBERIAN LINK PROJECT

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 of investment capital than the government, either through the Treasury or the

government-owned banks. International capital markets could be used, but the rules on

investing are not yet clearly delineated.

Horvath of the Hungarian Telecommunications Company (HTC) told OTA that he

attempts to get financing as much as possible

from Hungarian banks, but while HTC is a

preferred customer, the banks’ resources arc

insufficient to meet HTC’s needs. Horvath

noted that there would be limits to foreign

investment because Hungary is a small

country, and it is already getting half of all

foreign capital coming into Eastern Europe

(of that, more than half comes from the

United States). Aid money from the West

and from multilateral lending agencies is not

available in the amounts required. Estimates

provided by telecommunications authorities

SOURCE: OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

to the ITU show that Hungary, Czechoslovakia, and Poland each expect 45 to 70 percent

of modernization investment to come from

internal sources, 15 to 35 percent from bank

loans, and 10 to 15 percent from private

sources, including foreign investment.~9

Thus, reform of telecommunications financing will involve several elements, First,

it will be necessary to reform the PTTs in

order to make them more responsive to

private business needs. All the Central and

Eastern Europe PITs arc slated to break into

several parts, splitting the telecommunications,

postal and in some cases, broadcasting

operations off from the ministry, which will

retain oversight and regulatory authority. At

the same time, tariffs arc likely to be changed

to bring prices more in line with costs, and to

reduce telephone rental and local calling

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.

Finally, privatization, as is projected in

Hungary and discussed in other countries,

will open telecommunications firms to private capital. Capital will be sought on

domestic markets, as these develop, and on

international markets, through the sale of

shares in the national firm when the state

sells off its assets. The need for external

investment may entail a significant amount

of foreign ownership, eithcr through share

purchases of privatized firms, or through

participation in joint ventures or other cooperative arrangement.

A number of CEE countries, especially

Poland, Hungary, and Czechoslovakia, anticipate becoming members of the European

Community, where they will be required to

follow EC directives, including those regarding telecommunications. Several are already

pursuing or intend to follow these requirements for liberalization in order to improve

their prospects for membership. Additional

pressure for liberalization or reform is coming from potential investors and financing

sources, who, against the backdrop of general uncertainty about political stability, are

reluctant to invest without the proper legal

Main lines to be added Estimated investments

from 1992-2000 (millions) 1992-2000 (US$ bil.)

Bulgaria .69 1.0

Czechoslovakia 2.6 3.8

Hungary 2.2 3.3

Poland 8.8 13.1

Central and Eastern Europe 24.2 36.3

SOURCE. INTERNATIONAL TELECOMMUNICATION UNION, EUROPEAN TELECOMMUNICATION M31CATOf?S (GENEVA INTERNATIONAL TELECOMMUNICATION UNION, OCTOBER 1992), TABLE 33, P. 33.

framework, especially regarding private property and repatriation of profit.so Table 6-3.

Major sources of financing, such as the Telecommunications

European Bank for Reconstruction and De- Modernization,

velopment (EBRD) and the World Bank, are Main Lines and

making liberalization a precondition to as- Investments,

sistance. For example, the EBRD, which was 1992-2000

created in 1990 specifically for the purpose

of providing financial assistance in the

transition to market economies,51 lent $377

million (268 mill ion ecus) for telecommunications projects in Central and Eastern Europe in 1991, while the World Bank lent

$270 million for telecommunications improvement to Poland and Hungary. The

European Investment Bank provided an

additional $211 million (150 million ecus).52

Strategies for liberalization

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
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Table 6-4.

Foreign

Participation Country/city Partners ownership Award date Comments

in Cellular Czechoslovakia Eurotel

Licenses of

Eastern Europe

and the

Former

US West (US)

Bell Atlantic (US)

Czech & Slovak PTTs

Hungary WesTel

U.S. West (US)

Soviet Union Hungarian Telephone Company

Poland Polska Telefonia Komorkowa

Ameritech (US)

France Telecom

Polish PTT

Romania Nationwide Cellular (U. S.)

Romanian PTT

Russia

Moscow Moscow Cellular Communications

US West (US)

Millicom International Cellular Sweden

(Us.)

Ministry of Posts and Telecommunications

Fyodorov Eye Microsurgery Science and

Technology Complex of Moscow

Euronet

Plexys International (US)

Information Transfer Technical System

Center

(Russian Ministry of Foreign Affairs)

Vimpel Corp. (Russian military elextronics

contractor)

Russia

St. Petersburg Delta Telecom

U.S. West (US)

St. Petersburg City Telephone Network

Production Association

St. Petersburg Station Technical Radio

Control

Ukraine Ukrainian Mobile Company

DBP Telekom (Germany)

PTT Telecom (Netherlands)

Telecom Denmark

Ukranian Government

24.5%

24.5

51.0

49.0

51.0

24.5

24.5

51.0

51.0

49.0

22.0

20.0

50.0

8.0

40.0

55.0

1990 Eurotel wiII invest $60 million

over next 10 years.

1989 To date, US West has invested $13 million.

1991 $50 million investment over

3-4 years.

Reportedly, Ameritech and

France Telecom paid $70-80

million for the license,

1991

1991 Initial investment: $7 million.

1992 Reportedly awarded a test

license by the RussIan mlitary to operate an 800 MHz

cellular system.

1991 Priority connection to international gateway switch. $7 million investment.

1992 The consortium IS licensed to

16.3 provide paging, analog cellu16.3 Iar, GSM cellular and PCN

16.3 services. Reportedly, PTT

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

Latvia

Lithuania

Byleorussla

Russia

Uzbekistan

Hungary

Eestl Mobiil Telefon (EMT)

Telecom Finland

Swedish Telecom

Estonian PTT

Latvian Mobile Telephone Company

Swedish Telecom

Telecom Finland

VEF (Latvia)

Latvian State Radio & Television Centre

Latvian Telecommunication Centre

Comliet

Millicom International Cellular

(Sweden/U. S.)

Vilnius Telephone Network (Lithuania)

UAB Antena (Lithuania)

CommStruct international (U S )

Byleorussian PTT

Uzbanrobita

ICG

Uzbek Communications Ministry

245

24.5

51.0

24.5

24.5

23.0

23.0

5 0

490

41 0

10.0

50.0

50.0

45.0

550

1990

1991

1991

1991

Expected

early 1993

1992

1993

Baltic Systems are interoperable with the Scandlnavian,

Moscow, and St. Petersburg

cellular networks.

Comliet wiII also establish international satellite Iink.

Government has announced

bidding for GSM Incenses in

12 Russian cities, including

Moscow and St. Petersburg.

ICG is providing hard currency and operating expertise.

2 nationwlde, 15-year GSM

Iicenses, One IS reserved for

Hungarian Telecommunications Company/foreign company joint venture; the other

wIII be 100 percent private.

Likely foreign bidders:

WesTel for the HTC joint venture; 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
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Services in

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Markets

The European

Community is the

model for liberalizing

Central and Eastern

European telecommunications. However,

much uncertainty

has accompanied

liberalization efforts,

and many are still

incomplete.

Page 126

the EC telecommunications directives and

the precedents established by EC member

countries are a guide to the liberalization

measures. For example, Czechoslovakia’s

new telecommunications law, passed in March

1992, is consistent with European Community directives.53 In Romania, the EC Green

Paper is also a guide for telecommunications

liberalization.54 As the senior legal analyst in

the Hungarian Ministry of Communications

put it recently,ss

The intention of the Hungarian telecommunications policy is to follow the

directives of the EEC [European Eco -

nomic Community]. The reason for this

is not only because it is a political aim,

but also because EEC directives are

based on large scale compromises between the various players, especially

the pro- and anti competitive ones.

Nevertheless, U.S. regulators feel they arc

successfully communicating the elements of

the U.S. regulatory structures, process, and

philosophy to CEE telecommunications authorities. The recasting of the public telephone operators (PTO) relationship with the

government is the critical first step to modernization. Modernization will be impossible

so long as revenues from telephone service

arc turned over to the government rather than

reinvested in the network. Operators have

been unable to raise domestic rates because

of pressure from finance ministries, which

respond to political pressure from users who

would suffer if rates were raised.

Privatization is an opportunity for the

government to raise much-needed funds and

get large infusions of hard currency. The

recent privatization of Mexico’s telephone

company is setting a precedent for CEE

countries. Hungary, Poland, and Czechoslovakia have all separated the operator from

the government in a carefully planned evolution eventually leading to privatization.56

This separation necessitates the creation

of a regulatory agency. Under the old PTT

system, no functional distinction was made

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,

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

general public good and ensure that social

goals were met. Also, the distrust of monopoly that necessitated regulation in the United

States theoretically did not exist in centrally

planned economies.

A great deal of uncertainty has accompanied the drafting of new laws, despite the

mode] of the 1987 EC Green Paper. The new

Hungarian telecommunications law has been

through many drafts, changing almost daily.

The Polish bidding process for a foreignowned new cellular network was nearly

completed when the government decided to

reverse legislation allowing 1 ()()-percent foreign ownership, instead requiring majority

57 

Polish ownership. - political opposition to

privatization in Poland and Czechoslovakia

may constrain the types of services that may

be privately provided.

Since several of the countries of the region

aspire to economic parity with western

Europe in short order, they are acutely

concerned with the provision of advanced

telecommunications services, such as highspeed data and mobile communications.

This was one of four main issues highlighted

at the ITU’s Regional Telecommunications

Development Conference. Business customers, especially those accustomed to Western

standards of service options and quality, will

need modern services and thus may shoulder

much of the costs of modernization.58

The establishment of cellular networks

has high priority, to supplement (or perhaps

supplant) the existing public wireline networks for office communications as well as

for mobile communication. Cellular networks are targeted first at incoming Western

businesses and investors, to whom the dilapidated telephone system seems an unmanageable impediment. New foreign entrants

will also focus on more lucrative and easierto-serve centralized business clients.

Another immediate goal is the establishment of overlay digital backbones to provide

international access for business and government, and to link major business centers.

These networks are typically either microwave systems, or fiber optic networks, as are

planned in Hungary and Poland. Given the

difficulty of raising tariffs for the whole

public-switched network, there are some

important benefits from the fact that overlay

and cellular networks can be tariffed at

higher rates. Business customers are willing

to pay these higher rates for better service

until telecommunications operators reform

national tariffing schemes for both landbased and cellular systems.59

Problems with liberalization

Some skepticism is justified with regard to

telecommunications liberalization in this region. First, there is a question whether the

rhetoric for telecommunications reform matches

the genuine intentions of these governments

and the ability or inclination of the system

operators. While significant strides have

been made quickly in upgrading the facilities

and the services in primary cities, modernizing 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
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If modernization is not integrally tied to

changing corporate and social demand, this

goal may not be met. Residential customers

arc accustomed to paying artificially low

prices for telephone service and may not be

able to afford the higher rates for modernization. 60 Though initially successful, Bulgaria

was unable to sustain a telecommunications

modernization effort in the 1980s. Poland,

too, has twice announced ambitious intentions to improve services, both of which fell

far short of expectations. However, the

financial participation from multilateral agencies and foreign investment from the West

marks a major difference with previous

reforms. There is strong interest among these

countries, the European Community, and the

United States in developing telecommunications networks rapidly.

Second, the pressure to liberalize telecommunications and open markets to foreign

involvement creates an acute dilemma regarding procurement and manufacture of

telecommunications equipment. The pressure to assure the economical construction of

modern communications infrastructure, which

in the short term will require purchasing

Western products (or joint ventures with

Western firms), conflicts with the need to

solidify their own h igh-tech industrial bases.61

Telecommunications equipment firms, 80

percent of whose production was until recently absorbed by the Soviet market, have

been devastated by the breakdown of intrabloc Comecon trade and the shift to hard

currency transactions.

62 Efforts to keep these

companies afloat will likely require some

form of industrial policy as countries decide

to what extent they will subsidize, privatize,

or direct firms to engage in joint ventures

with Western companies.

Third, resorting to advanced business

services, overlay networks, and differential

tariffs, while expedient for attracting foreign

business, risks widening the gap between

communication haves and have-nets. While

there are some plans to improve rural and

public pay phone services, investment and

attention will go to those who can pay,

leaving the public network to be modernized

later.

Finally, the initial enthusiasm for wholesale reforms is beginning to subside. Plans to

privatize telephone companies havc been

delayed as the view reemerges that telephone

service still should be entrusted to government. Problems with wholesale sectoral

reforml in society in general are dampening

plans for privatization and liberalization of

the telecommunications sector. France has

emphasized that its model of development

may be more appropriate for CEE countries

than that of the United States or the United

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

of excellence without privatization, by means

of thorough internal reorganization.

The process of transforming the centrally

planned economy into a market economy in

Poland, in particular, has been beset with

problems.

63 Reports of fraud and scandal and

troubles with effective tax collection are

rife.64 The telecommunications reforms have

not so far delivered improvements in telephone service. The parliament has turned to

a more cautionary plan of bolstering state

industries and slowing down privatization.65

Whether Poland’s troubles will prove to be

a foreshadowing of problems for the rest of

Central and Eastern Europe or a guide to

more successful transitions is yet to be seen.

Involvement of the United States

Western Europe, and particularly Germany. is deeply interested in economic and

social reform in Central and Eastern Europe.

In addition to being neighbors, Western and

Eastern Europe share a similar heritage, and

economic cooperation seems imminent. Nev -

ertheless, the United States also has signifi -

cant stakes in the future of the region.

Beyond matters of national security, the

opening of the CEE countries represents

sizable new markets, and their success in the

transformation to democratic governancc

represents an affirmation of important economic and political ideals.

CEE countries also have an interest in

participating in global markets, and are

clearly looking to the United States for

financial and technical assistance. For them,

the United States presence represents a

potential counterbalance to the influence of

other Western European countries, principally but not exclusively Germany. The

Overseas Private Investment Corporation

and the Export-Import Bank encourage trade

development by providing insurance and

financing to U.S. exporters. U.S. participation in the World Bank, the International

Monetary Fund, and the European Bank for

Reconstruction and Development represents

a major locus of financial assistance to

Central and Eastern Europe.

Congress has acted to assist the economic

and social transformation of the region; in

1989, Congress passed the Support for

Eastern European Democracies Act (SEED),

which allotted $1.5 billion in grants for

1990-92 to encourage political reforms, economic development, and social reforms (especially recognition of human rights) in

Central and Eastern Europe. The SEED Act

was an expanded version of President Bush

proposal for $350 million in assistance to

Poland and Hungar).

Congress has also been particularly interested in energy, environment. and telecommunications as the keys to these general

market and political reforms in the CEE

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

U.S. involvement

in reforming

telecommunications

in the region

emphasizes advice,

technical assistance,

and private sector

involvement, rather

than direct aid.

Page 130

Affairs, for example, sent a delegation to

Poland, Hungary, and Czechoslovakia in

November 1990, which issued a report on

“Eastern European Telecommunications,

Broadcasting, and Environment. ’ Congressional requests to the Office of Technology

Assessment include policy information for

Central and Eastern Europe on issues such as

telecommunications and energy efficiency.

OTA people have been involved in informal

and formal discussions on developing science policy and technology assessment institutions in these countries.

The Office of International Communications in the Federal Communications Commission (FCC), along with the National

Telecommunications and Information Administration, is working closely with several

of the CEE countries to help establish

regulatory mechanisms and spectrum management technique and expertise. Though

significant constitutional differences make it

difficult to exactly duplicate the U.S. FCC

(an independent regulatory agency) elsewhere,66 several countries have created telecommunications regulatory bodies with U.S.

assistance, and others are in the process. The

U.S. Telecommunications Training Institute,

a private organization, works under contract

to the U.S. Agency for International Development, and other private sector organizations work to bring management skills to

Central and Eastern European telecommunications operators.

Despite these initiatives, some observers

feel that the U.S. effort is meager relative to

the magnitude of the problems CEE countries face. U.S. budget difficulties and economic conditions make it difficult politically

to allocate much money to the region, and

U.S. policy emphasizes advice and technical

assistance rather than direct aid. This leaves

a relatively greater role for U.S. private

sector involvement in economic development in the region.

American companies have been active in

telecommunications rehabilitation in the region, and in increasing numbers are capitalizing on the opportunity to tap into new

markets, for both equipment manufacturers

and service providers. Regional Bell operating companies (RBOCs) are involved in

numbers of projects to build and/or operate

cellular networks and data networks in key

cities of the region (see chapter 4). U.S. West

and Bell Atlantic joined the Czechoslovakian Ministry of Posts and Telecommunications to form Eurotel, a joint venture to build

and run a cellular mobile system and construct a public packet-switched (data) network. Eurotel, of which each RBOC owns

24,5 percent, began operation in September

1991 with an initial capacity of 4,000 subscribers; the cellular system is expected to

reach 50,000 within 5 years.67 U.S. West is

also involved in a venture to operate a

cellular network with the Hungarian Telecommunications Company, Westel RadioM 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.

3.
Telecommunications

in Central

and Eastern

Europe

telefon, Kft. Westel went online in Budapest

in October 1990 and attracted 4,000 subscribers 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 double Poland’s current capacity for international calls.69 Additionally. AT&T is involved 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 investment. 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. Government.

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

It is in the

political interest of

the United States

to promote

telecommunications,

in order to solidify

democratic gains in

Central and Eastern

Europe.

President Lech Walesa has claimed that

foreign companies are reaping the benefits of

Poland’s privatization without contributing

anything to the culture, economics, or infrastructure of the country.

73 There is growing

frustration in Poland over a perceivcd lack of

involvement and investment by the United

States in Poland’s modernization. The division of Czechoslovakia into the Czech Republic and Slovakia signals not only abiding

nationalist sentiments, but also differences

over industrial development strategies, including reliance on market mechanisms in

economic development.

The relation between economic activity

and telecommunications is well known,

though not always well understood. It is no

coincidence that the conditions of telecommunications networks in these countries

deteriorated (or failed to develop) alongside

ruinous economic policy; and it will be no

coincidence if these networks improve handin-hand with economic reforms. However, to

suggest that telecommunications directly

leads to economic development is to overstate its place in a far more intricate social/

political/economic/cultural dynamic; indeed.

the quality of the communications network

may be as much a consequence as a cause of

a strong economy. Modem telecommunications may be necessary but is not sufficient

for development of a modern industrial and

service economy.

Conclusion

The countries of Central and Eastern

Europe are in need of quick repair to their

telecommunications networks; they are also

in need of quick repair to other critical

infrastructure and institutions. In the telecommunications sector, the United States is

pressing for an aggressive “liberalization”

agenda. This entails primarily the divestiture

of the telephone operator from the government and its eventual privatization, open

entry and free-market competition for services and equipment. This approach, paced by

strong industry input, is based on selfinterest as well as a commitment to improve

welfare in the CEE. The opportunity for U.S.

equipment and service suppliers to receive

contracts is greatly improved by a competitive free-market environment, where Western products are generally superior to indigenously-produced equipment, at least for the

time being. A competitive free-market environment depends on the existence of an independent oversight body and the replacement

of political criteria by economic and operational factors. There may also be benefits

associated with roughly similar regulatory

approaches among nations as well.

Finally, the United States is motivated in

part by a sense of democratic purpose. It is in

the U.S. Government’s political interest to

promote broader and deeper access and use

of telecommunications in order to solidify

democratic gains in the region, which would

hedge against a return to antidemocratic

regimes in the future.

The fuller implications of liberalization

and competition, or even privatization, seem

to be often overlooked for short-term considerations. What is good for U.S. firms is

presumed to be good for these countries.

While a number of agreements have already

been struck by U.S. firms to provide investment, products, or services, CEE policy makers

Page 132

73 Blaine Hard in, “Poles Sour on Capitalism: Walesa Accuses West of Preying on Country,” Washington

Post, Feb. 5, 1992, p. Al.
Telecommunications

in Central

and Eastern

Europe

are somewhat ambivalent about the appropriateness of U.S. recommendations for their

needs and circumstances. They have not

rushed to embrace the U.S. regulatory model,

and have considered more statist models,

such as European telecommunications, particularly France, as possibly more appropriate to their needs. They also undoubtedly

have hesitated because of their own inexperience, uncertainty, and lack of consensus

about what direction they should take. The

challenge facing the United States generally

is how to encourage CEE countries to adopt

particular types of reforms that most further

U.S. interest in an area where U.S. leverage

is generally weak. The EC member countries

are also attempting to persuade CEE countries to reform in particular ways, not all of

which are exactly as U.S. interests would

wish. Thus North America and Western

Europe are struggling over Central and

Eastern Europe, trying to influence structures and regulations and ultimately gain

access to new markets.

Page 133
Domestic

Deregulation and

International

Trade Negotiations

CHAPTE

7

R

Telecommunications

deregulation in

the United States

has led to

pressure for new

international trading

arrangements.

T HOUGH SERVICES SUCH AS TELECOMMUN ICATIONS w-c increasingly central to the operation of the global economy, rules governing

international trade in services arc still being

established. This chapter describes the process that is generating these rules, and examines the principal forum in which they have

been debated, the General Agreement on

Trade in Services, a component of the

General Agreement on Tariffs and Trade

(GATT). U.S. policy and negotiating positions for GATT talks arc then discussed,

because these have become major determinants of U.S. international telecommunications policy.

U.S. deregulation and the

worldwide consequences

Before the 1980s, the concepts of natural

monopoly and universal service dominated

telecommunictions. Telephone systems were

conceived as intricate technical systems

presided over by engineers and regulators

whose main responsibility was to ensure the

smooth operation of networks. Since telecommunications operators were national monopolies and each monopoly dealt directly

with its foreign counterparts, there was no

need for an international trading system.

Public telephone operators (PTOs) struck

political bargains that set stable patterns of

relationships for many years. The International Teecommunication Union (ITU) coordinated the relationships of these national

bodies. The ITU consultation process developcd technical standards to permit interconnection, and the international settlements

process assured that accounts between countries would be reconciled.

With countries (through their national

telephone operators) negotiating prices and

terms of service with one another under the

ITU, more generally applicable rules for

trade were thought to be unnecessary. Because international telecommunications were

provided by monopolies over circuits that

the monopolies each half-owned, services

were considered the result of joint investment, and not traded items.

In the late 1970s, telecommunications

deregulation in the United States began to

change these assumptions. Pressure for new

international telecommunications trading arrangements mounted in the United States. as

a result of deregulation, technological

change, the entry of new suppliers, and the

beginnings of political organization of telecommunications users.

Telecommunications competition in the

United States began with microwave technology, which made long-distance competition possible in the 1970s, and with digitization of data, which blurred the distinction

between computing and telecommunications.

With the divestiturc of AT&T in 1984, the

Modified Final Judgment (MFJ) laid down

by a U.S. District Court became a key aspect

of U.S. teleccommunications policy. Telecommunications costs and terms of use

became a prime factor in profitability and

competitiveness for many large businesses.

Large corporate users of telecommnunications began to form active interest groups.

The largest users arc concentrated in a small

number of firms: it is widely believed that 20

percent of users generate 80 percent of

revenues, and less than 5 percent of users

generate 20 percent of local traffic and over e

50 percent of long-distance traffic. This

concentration made it easy for large users to

organize. They began to pressure political

decisionmakers to allow them to interconPage 135
U.S.

Telecommunications

Services in

European

Markets

Competition in

the United States

challenged the

monopoly service

providers in other

countries, who have

come under fire from

international users

and from domestic

users as well.

nect their offices independently of the telephone company.

The development of microelectronics

brought new suppliers into the telecommunications equipment market. Computer equipment firms such as IBM and Control Data

now wanted telephone monopolies opened

up so that they could compete in the equipment markets. Some firms such as Electronic

Data Services (EDS) and IBM saw new

opportunities to offer information services,

but needed access to the national network to

do so. New network operators, first MCI and

later Sprint, wanted to compete with AT&T

for long-distance traffic.

Deregulation resulted in opening the U.S.

telecommunications equipment market to

foreign as well as American firms. This had

immediate and significant trade consequences.

The U.S. balance of trade in telecommunications equipment went from a surplus of $275

million in 1982 to a deficit of $2.6 billion 6

years later, due largely to the lack of

reciprocal overseas markets for customer

premises equipment (handsets and other

terminal equipment). ]

With U.S. deregulation, the government

monopoly mode] of Postal, Telephone, and

Telegraph (PTTs) administrations began to

come under strain. Competition in one country presented problems for other countries. It

raised questions about systems organization

and operation, especially flows of funds

between countries to settle international

telephone financial accounts, How were

national monopoly telephone operators to

negotiate with several competing telecommunications firms in one country? How was

“plain old telephone service” (soon known

as POTS) to be distinguished from newer

value-added services? Where competition

was allowed, what conditions would be

imposed on foreign competitors, especially

those from countries where competition was

not permitted? Who would be allowed to

own what kinds of facilities or radio frequencies? How could competing service providers deliver enhanced and value-added services without having their own facilities?

How could countries maintain distinctions

between basic voice telephony and enhanced

services (and so preserve the 1 ion’s share of

business for the monopoly provider), when

technological change, such as digitization of

voice signals, rendered them meaningless?2

The basic business practices and profitability of most foreign PTTs, as well as those

of AT&T and its operating companies in the

United States, were directly challenged by

competition. Their stable organizational environment came under fire, along with their

elaborate systems of cross-subsidies, which

had been set up to achieve a variety of

economic, social, and political goals, such as

universal service,

In many countries, long-distance and international telephone services subsidized

local telephone service, business telephone

service subsidized residential telephone service, and urban telephone service subsidized

rural telephone service. In some countries

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

the postal services These cross-subsidies

would be difficult to sustain in a more

competitive world, where companies are

forced to reduce prices and costs. Furthermore, strong PIT telecommunications unions resist the inevitable change in employment levels and practices that result from

deregulation and the attendant cost-cutting.

PTTs, which in the remainder of this

chapter will be called public telephone

operators (PTOs), arc also concerned about

eroding market share and their perceived

inability to finance network modernization

unless they control the new high-value

enhanced information and data services—

the most profitable business traffic and also

that traffic most likely to migrate to the

competition. On the other hand, lower telecommunications prices mean lower costs for

both business and residential consumers, and

may ultimately result in increased revenues

for the telephone operator due to greater

calling volume. 4 Finally, PTOs worry that

the presence of competitors will seriously

undermine their control over their own

operations. 5

Liberalization of telecommunications occurred first in those countries where the

political mobilization of business interests

was greatest: the United States, the United

Kingdom, and Japan. As one analyst has

observed:

While winning the regulator-y battle at

home, [U. S.] firms calculated that the

U.S. bargaining power made global

reform feasible, and they became the

most prominent exponents of regulatory reform in many countries. But in

the 1980s, a translational corporate

coalition .for reform emerged as firms in

other countries wanted to match the

terms offered to U.S. companies.6

Thus change in the United States brought

about change in other countries. Large users

in the EC saw that to be competitive with

U.S. and Japanese firms, they needed to

reduce their costs, increase their scale, and

improve their ability to deliver flexible and

timely services. 7 The Commission of the

European Community acted to open parts of

the European market to reduce telecommunications costs and thereby improve operating

efficiency for all firms. To do this, users

required (but did not immediately get) more

favorable operating terms from PTOs.

3 Tlmot hy E. Nult y, “Emerging Issues In World Telecommunicate ens,” In Bjorn Well lnius et al. (eds.) op. cit.,

footnote 2, pp. 17-18.

4 This has been the experience in Europe, Latin America, and Asia.

5 European PTOS have been working over the past decade to strengthen their control of t he evolutlon of bot 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

services and trade

The globalization of business pushes firms

to seek telecommunications operations that

can help them deliver similar services worldwide, and this may mean bypassing national

networks or locating operations elsewhere.

The country with the environment most

conducive to telecommunications for business sets the standard for all others.8

As major users tried to modernize their

networks, they sought more flexible terms of

access and prices and the right to attach new

equipment. Foreign telephone operators were

unwilling to provide these terms, arguing

that such changes would require new investment or new operating procedures. In reality,

these restrictions protected foreign markets

from inroads by U.S. or other foreign firms.

Meanwhile, U.S. telecommunications equipment manufacturers, in particular AT&T,

were alarmed by their eroding share of the

equipment market (as noted above). While

the portion of the market initially most

affected was consumer premises equipment

(e.g., telephone handsets), U.S. switching

equipment manufacturers saw their market

share threatened over the long run.9 It is

widely believed that there is significant

world overcapacity in manufacturing of central office equipment, as the cost of designing, developing and producing it rises precipitously.

U.S. equipment manufacturers believe the

way to gain access to European telecommunications equipment markets is to break the

link between PTOs and their national preferred monopoly suppliers. One way would

be to liberalize services markets, which

would engender competing service providers, and, in turn, result in more competitive

equipment markets, since each national competitor would try to develop its own sources

of supplies.

In essence, U.S. users want access to

foreign markets on nondiscriminatory terms.

But large users in the United States cannot

achieve their objectives without outside

allies, as changes in foreign regulatory regimes will be necessary. Foreign users want

terms and service similar to their U.S.

counterparts to protect their competitive

advantages. Under serious pressure from the

EC Commission, beginning notably with its

1987 Green Paper on telecommunications

services, PTOs now realize that they must

respond to their large users to keep control of

their own domestic telecommunications systems. They have begun, reluctantly, to reduce cross-subsidies to small users in order

to relax barriers to terminal equipment trade.

The United States, the United Kingdom,

Japan, Australia, Canada and Sweden have

now introduced some forms of competition

in basic services and in network facilities

Page 138

8 Jonathon David Aronson and Peter F. Cowhey, When Countries Ta/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

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

the international telecommunications regime

toward competition has been difficult because the traditional monopoly regime in

most countries is supported by institutional

and governmental interests. PTOs arc usually powerful government ministries that

often contribute substantial funds to their

general treasuries. Many PTOs assume that

they would fail to compete effectively with

U.S. firms that have had nearly a decade of

experience in a competitive marketplace.

There is usually resistance from a PTO labor

force, which in many European countries is

organized and extremely powerful. Some

countries also see their PTO as important to

the maintenance of national sovereignty.11

Altering the telecommunications regime significantly will thus require sustained political dedication and effort. Many EC governments are resisting the efforts of the EC

Commission to liberalize telecommunications.

Moving toward GATT

As the consensus on telecommunications

as a natural monopoly began to crode in the

1970s, the lack of rules covering trade in

services could be seen as blocking the

expansion of free trade. U.S. banking, telecommunications, data processing, and other

service firms saw that new technologies put

within their reach lucrative markets that they

could not go into under the existing trade

regime. Thus, a small number of firms, led

by the American International Group (an

insurance company), American Express, Citicorp, Merrill Lynch, and Sea-Land (a shipping firm), began to press for services to be

included in GATT Congress acceded to this

pressure: with the passage of the Trade Act

of 1974, Congress for the first time asserted

that services were to be included in the

definition of international trade, and directed

the Administration to work toward an expansion of GATT to include trade in services.

The United States was unable to make

much headway in the Tokyo Round of

GATT in the 1970s, but this failure led to

efforts by the United States to take the issue

up in the Organization for Economic Cooperation and Development (OECD), where it

was believed that a more analytic approach

to developing the conceptual framework

might be possible. The members of OECD

were persuaded to begin a study of service

trade issues. Trade-oriented service firms

succeeded in persuading Congress to give

services equal footing with merchandise

trade in the 1979 Trade Agreements Act,

which then led to the 1984 Trade and Tariff

Act specifying that the President should give

high priority to the negotiation of multilateral and bilateral agreements governing services trade. 12 By 1982, U.S. efforts came to

fruition in the form of an agreement in GATT

Shifting the

international

telecommunications

regime toward

competition has been

difficult as poweful

interests in many

countries resist.

‘

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 telecommunicate Ions 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

As the consensus that

telecommunications

is a natural monopoly

began to erode, the

lack of rules covering

trade in services

became an impediment

to free trade.

that countries that wished could undertake

national studies of trade in services.13

Political support for including services in

an international trading regime based on

GATT grew in the mid- 1980s when increasing U.S. trade deficits prompted American

free trade supporters, concerned with what

they saw as increasing protectionism, to seek

new allies to protect free trade. In the 1988

Trade Act, Congress explicitly included

telecommunications trade as a priority for

U.S. trade negotiations, and specified a set of

general and specific objectives that the

United States Trade Representative (USTR)

was to seek in opening foreign markets to

U.S. suppliers of both equipment and services.14 If U.S. services firms could gain

access to foreign markets more readily, then

U.S. equipment sales would improve as well.

Also, if PTO monopolies were forced open,

U.S. equipment firms would stand to gain

from sales to the new competitors. The

coming together of these interests led to real

innovation in trade policy.

In the U.S. Government, conceptual work

began in the mid-1980s to clarify the notion

of trade in services, hitherto not recognized

as a legitimate subject of multilateral negotiation. In economic theory, services were

generally not thought of as tradeable items;

therefore measurement of such services that

were traded was practically nonexistent.

With no conceptual framework or data,

governments typically believed that services

trade was insignificant, and therefore unnecessary to include in multilateral negotiations.

Lacking both adequate measures of trade and

conceptual frameworks on which to hang

policy, support for services exports was

almost nonexistent. For example, financing

of goods trade is well understood, and there

are a variety of Federal programs to promote

goods trade abroad, but services do not

receive financing proportionate to their significance in overall U.S. exports.15

In the case of telecommunications services, the negotiation of the U.S.-Israel and

U.S.-Canada Free Trade Agreements in the

Page 140

13 The events leading to GATT signatories agreement to consider discussing trade in services is a 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,

1992.
Domestic

Deregulation and

International

Trade

Negotiations

1980s laid much of the intellectual groundwork. 16 The concepts of trading telecommunications services and their coverage by

GATT principles are now widely embraced,

but less than 10 years ago, they were thought

to be radical innovations.

In general, the United States led the way

to relaxation of restrictions on international

telecommunications during the 1980s. For

example, there was growing interest in the

idea of deploying telecommunications satellites outside the monopoly international

telecommunications satellite consortium, Intelsat. Under U.S. pressure, INTELSAT

liberalized its process for approving competitive satellite systems and, and in return, the

United States has refrained from attacking

Intelsat's exclusive carriage of international

public switched international telephone traffic. INMARSAT, the international maritime

satellite communications organization, has

begun to explore new business opportunities

considered beyond its purview a decade ago,

such as aeronautical and Iand-mobile personal communications services.

Choosing a forum

The choice of GATT as the arena for

changing international trade relationships

with regard to telecommunications was made

carefully. The European PTOs’ resistance to

change had been buttressed by the fact that

there was only one international forum for

discussion of telecommunications issues, the

International Telecommunication Union (ITU).

The ITU has always been the province of

national telecommunications authorities and,

therefore, has never been sympathetic to

competition. Although the ITU has little real

power in the enforcement of international

agreements, it is important in creating frameworks in which rules and regulations operate.

OECD has also played an important role

in issues such as privacy, accounting rates,

and financial and capital flows, but it is

considered to reflect the interests only of the

richest countries. The United Nations Conference on Trade and Development

(UNCTAD) has long played a role in coordinating international shipping and insurance

services, and could well have assumed some

jurisdiction over telecommunications. This

was rebuffed by the industrialized nations,

because of the weakness of UNCTAD’s

dispute-resolution mechanisms.

GATT was ultimately chosen by the

United States as the venue for pressing for

changes in the international telecommunica -

tions regime, in part due to the perception

that only GATT has a dispute-resolution

mechanism with teeth for enforcement. The

choice of GATT meant that services, and

telecommunications services in particular,

had to be cast into terms that the traditional

trade community would accept; their tradability had to be established. Given the

institutional opposition to change in both the

ITU, which would lose some control of

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 by USTR. The agency played an im port ant role in elaborat Ing

these Ideas. Page 141
- —. .

us.

Telecommunications

Services in

European

Markets

Against significant

opposition, the

United States has

constructed an

intellectual

framework and

a political

foundation for

more liberal trade

in services.

Page 142

within GATT, which had seen its mission

solely in terms of trade in goods, the United

States found it necessary to attempt to effect

changes on two fronts. In these efforts the

United States was joined by the United

Kingdom and later by several other countries.

Building an international constituency

An important series of negotiations affecting telecommunications services trade occurred at the ITU World Administrative

Telegraph and Telephone Conference

(WATTC) in 1988 in Melbourne, Australia.17 This conference established a new set

of International Telecommunication Regulations, which on July 1, 1990, superseded

those written 25 years before. The main issue

in Melbourne was how ITU members, no

longer all public telephone operator monopolies, would deal with the questions of

deregulation, privatization and competition.

Many countries feat-cd the United States

would induce the ITU to accept regulations

that would force competition, which would

run against their own national policies and

might infringe on national sovereignty.

At the root of U.S. concerns in Melbourne

was an interest in facilitating the deployment

of specialized, private intracorporate networks. ITU regulations have the force of

international law, and the ITU Consultative Committee on International Telegraph

and Telephone (CCITT) regulations, though

voluntary, are widely adopted by member

countries. The United States wanted to make

sure that these regulations did not provide

countries with a means to prohibit private

networks or competitive service offerings. A

compromise position was adopted (Article

9), stating that countries wishing to permit

special arrangements for value-added services or private networks could do so. ] 8

Large telecommunications users in the

United States saw the results of WATTC as

crucial to their ability to conduct their

business internationally and, to underline the

importance of these results, there is now

some concern that the subsequent GATT

trade in service negotiations may actually

reduce firms’ scope of activity. Other U.S.

service industries, such as construction, maritime shipping, and air transport, were less

enthusiastic about submitting services to a

GATT regime. The U.S. construction industry, for example, wants help competing with

foreign firms that have access to government

financing for overseas business, and resists

opening the U.S. market to such foreign

firms. Maritime shipping and air transportation have separate trade agreements that set

their trade rules, and these industries tend to

see open markets as disruptive.

The United States also had to convince

other countries to allow services to be put on

the agenda. Many countries wanted to con17 G. Russell Pipe, “Telecommunlcatl ons Services: Considerations for Developing Countries In Uruguay

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 internat ional telecommunicate ions regulatory affairs

for the International Communications Association, a U.S. industry assoaation of international telecommunications

users, Nov. 12, 1992.
Domestic

Deregulation and

International

Trade

Negotiations

tinue to trade with the United States on a

preferential basis, and would go along with

the United States only to an extent.

While Canada, the United Kingdom, Sweden. and Japan were the earliest supporters of

the U.S. position on services, some European

countries were more reluctant to follow the

U.S. lead. France wanted more assurances

but later become a vigorous supporter of a

GATT services agreement. Germany was

concerned about the future position of the

Bundespost, the largest German employer,

under a new services trade regime. The EC

has jurisdiction in Europe on trade, but not

on services; however, the EC came to

support the general idea of trade in service

negotiations by March 1985.

Once the United States had secured EC

support for service negotiations, other developing countries had to be persuaded not to

oppose the idea. Opening GATT to services

was viewed with suspicion by developing

countries, who saw the dominance of the

United States and other advanced nations in

high-tech services as a threat. Brazil and

India led the developing countries in opposing services in GATT. However, free trade

gradually came to be seen as potentially

compatible with economic development objectives. Due to lower unit labor costs,

developing countries may have advantages

in some subsectors of services.20 Increased

service trade also can benefit developing

countries because cheaper inputs, such as

telecommunications, can make other economic activities more competitive. The Unitcd

States was willing to make political concessions to developing countries on interest

rates and debt arrangements, and threatened

that it would turn to bilateral service trade

agreements (which would benefit only those

who participated) unless GATT was used as

a forum. In September 1986, the United

States won its struggle to get services trade

on the agenda.

GATT

GATT is a wide-ranging agreement, covering many countries. For most of its history,

GATT dealt with trade in commodities and

merchandise. When it was established in

1948, the most fundamental elements of

world trade were steel. coal, and manufactured goods. Services were thought to comprise an insignificant proportion of world

trade.

The United States argued that established

GATT principles of market access, fair

competition, and resolution of trade disputes

should apply to services, including telecommunications. Because trade in services is

more difficult to measure than trade in

goods, and barriers to trade arc likewise

difficult to define, GATT would be a valuable forum for resolving grievances over

market access. This principle is of fundamental importance to U.S. negotiators and to

U.S. companies.

GATT rules arc designed to be applied

across al I commodities and signatories.21

This general principle gave rise to a serious

dispute over the U.S. position that services

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

Page 144

argued that since services are so varied in

their characteristics, it was not practical to

negotiate a single set of trade rules for them.

Others argued that a general framework

would be more likely to lead to liberalization

than would an approach dealing only with

individual sectors. General principles are at

the heart of GATT’ rules on trade, and the

effort in the services negotiations has been to

find ways to apply these rules, derived from

trade in goods, to service sectors.22

This argument was resolved with a compromise that general principles would be

agreed on through a separate parallel negotiation on services, to take place alongside the

negotiations on trade in goods. This would

keep the services agreement from becoming

too quickly incorporated into GATT without

giving countries an opportunity to mitigate

its effect on various sectors of their economies. 23 Second, there were to be sectorspecific negotiations, codified in annexes,

including one for telecommunications. This

compromise permitted concerns for general

principles and maximum flexibility both to

be satisfied. Finally, it was agreed that the

rights enumerated in the annex would come

into force only if there was agreement on

terms of access to markets in specific sectors,

such as telecommunications services.

Most disagreements among GATT signatories stem from governments’ efforts to

protect their domestic industries while attempting to gain access to sectors of others’

markets. The concepts outlined below were

agreed on in principle at the 1989 Uruguay

Round Mid-term Review in Montreal. It was

also agreed that the negotiations should next

turn to the application of these general

principles to specific sectors. This has been

underway since 1990.

General principles

NONDISCRIMINATION. Nondiscrimination

is a core principle of GATT. It asserts that

any advantage extended to one signatory

must be applied to all signatories, and that

withdrawal of trading privileges for one

country must mean withdrawal for all. This

is the most-favored-nation (MFN) principle.

Applying it to international telecommunications services conceivably could require

important changes to the way in which

services arrangements are set up, since these

arrangements (i.e., accounting rates) are

negotiated bilaterally. Existing arrangements

would, however, likely be accepted as preexisting commitments.

MFN could permit free-riding by some

signatories, who could take advantage of

other countries having already reducing sectoral trade barriers. Country A may not have

a reason to drop its telecommunications

trade barriers with the United States if the

United States has already dropped its own.

Efforts have been made in successive GATT

rounds to reduce this problem by negotiating

concessions on specific products, as has

occurred with respect to telecommunications

procurement. This aspect of GATT has,

however, become less important as countries

increasingly negotiate bilateral concessions

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.

24 Richard H. Snape, op. cit., footnote 21, p. 8.
Domestic

Deregulation and

International

Trade

Negotiations

NATIONAL TREATMENT. National treatment

differs from MFN in that it requires that there

be no less favorable treatment of foreign

firms than of national firms. Restrictions

may be imposed, but must apply to all firms

equally, foreign or national. It does not imp] y

a requirement to permit unconditional access

to a market. Where no competition by

domestic firms is allowed for a national

monopoly, there will also be no competition

by foreign firms.

MARKET ACCESS.

the most important

denotes the extent to

Market access is one of

principles of GATT. It

which service providers

wishing to offer a service in a foreign market

can enter without confronting entry barriers

or other requirements. The 1988 Montreal

declaration states that firms may supply their

services by whatever means they prefer, and

especially identified the telecommunications

sector as covered. For telecommunications

services. market access includes:

the right to lease lines for data transmission within and between countries:

reasonable prices for services;

freedom of choice in the types of equipment to attach to the network;

reasonable flexibility in interconnection

standards; and

the right to store and process information.

LIBERALIZATION. Liberalization is often

grouped with transparency and predictability as principles of GATT Liberalization is

the general promotion of trade across borders, especially by means of increased market access and international competition, but

with allowance for national policy objectives. Transparency is the public availability

of the rules and regulations, including tariff

schedules, that govern services in any country in order to limit the possibility of petty or

covert bureaucratic or political limitations to

legitimate trade. Predictability of trade rules

follows from the consistent application of

these principles.

SAFEGUARDS AND EXCEPTlONS. Safeguards

and exceptions from international rules must

be allowed if political agreement is to be

achieved, since countries will generally not

agree to bind themselves to inflexible principles. Safeguards and exceptions are permitted under GATT rules, and are very important in the telecommunications sector. National sovereignty has long been a concern of

nations with respect to their telecommunications networks, and social, and political

objectives are often sought through the use

of telecommunications networks and pricing

structures. Safeguards and exceptions allow

countries with such concerns to reserve

access to parts of their markets. Nations

retain the right to regulate to achieve national

policy objectives, with the proviso that such

regulations are consistent with the liberalization commitments under the framework.

These general principles have been the

basis for negotiations since they were agreed

to in 1989. However, their actual formal

acceptance is not a foregone conclusion.

Some arc especially troublesome as applied

to services.

Trade economists, until recently, generally believed that services were only consumable at the point where they are produced, and thus arc limited to domestic

markets. To the extent that such services

were provided by foreign firms, it was

thought that these firms generally are required to invest in or rent local facilities.

With the market access principle, GATT

could for the first time play a role in limiting

Non-discrimination

and national

treatment are

important GATT

principles; their

application to

telecommunications

services must be

negotiated.

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 margins in cfder to cut costs, w to scrimP on

capital investment, it may engender lower reliability.

3 uosc ~wrw, ~f~ of Technology Assessment, U.S. Banks arrd Irrterrratlorral ~*~~urrk8ti~s, oTA+P-T’cT-100

(Washington, DC: U.S. Government Printing Office, September 1992).

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

national restrictions on foreign investment.25

Market access, apart from direct imports,

also deals with the right of foreigners to

establish businesses in a signatory country.

This means permission to setup telecommunications networks to deliver services and

the right to make investments in such networks (’‘the right of establishment’ ‘). Since

service delivery often involves a specialized

or private network, firms need to be able to

create and operate corporate networks with

minimum hindrance. Services firms also

want ‘‘the right of nonestablishment," the

right to operate without having to set up a

subsidiary or other local presence if services

can be delivered directly. Essentially, firms

want to structure their operations according

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

provided.

Network design is important in delivering

services, and therefore standards-setting is

part of market access. This implies that

national networks should have diverse representation in their standards-setting processes. including input by users as well as

carriers and equipment providers. Currently,

the ITU standards process gives great latitude for national or regional variation in

standards, allowing some nations to close

their markets behind a wall of national

standards. Foreign services providers and

equipment companies want to play a more

direct role in standards-setting to prevent

this. This notion of vesting large users with

what amount to minimum rights through

GATT is a new concept.zh

Market access would also require more

GATT oversight of signatory policies on

telecommunications service pricing, customer service levels, and procedures for

redress of grievances in disputes between

users and telecommunications operating authorities. Treating these as trade issues would

benefit large foreign users who depend on

local telephone companies to make the final

connection to customers.

The Telecommunications Annex

A GATT Telecommunications Annex was

informally agreed to by GATT member

states in spite of the stalled GATT general

negotiations. Negotiators say that the principles embodied in this annex were partly

worked out in the course of negotiations of

the U.S.-Israel and U.S.-Canada Free Trade

Agreements, and latcr some of the essential

elements of this annex were adopted in the

North American Free Trade Agreement

(NAFTA). 27

The current telecommunications annex to

the General Agreement on Trade in Services

has been called the Telecommunications

Users’ Bill of Rights, because it lays out for

the first time explicit rights of users. The

basic outlines of the annex provisions are:

Transparency must be ensured, including information on tariffs and conditions

of service, specifications of technical interfaces, information on standards organizations, information on conditions of attaching terminal equipment, and licensing

or recgistration information.

Network access must be assured on reasonable and nondiscriminatory terms, and

pricing of public telecommunications must

be cost-oriented. Leased lines will be

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 hose In GATT. The CommunlcatIons Workers of America (CWA) argues that cert ain

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.

Service providers

and equipment

manufacturers are

demanding a direct

role in standardssetting so that

markets won’t be

closed to them

through technical

Incompatibility.
U.S.

Telecommunications

Services in

European

Markets

able to attach terminal equipment to the

network. Private circuits must be connectable to the public-switched network,

and users must be permitted to use their

own operating protocols over these networks.

Intracorporate and other communications

may move within and pass across national borders of signatory countries,

including those aimed at gaining access to

foreign databases.

The signing parties also agreed to impose

no conditions on access and use of public

networks other than as necessary to safeguard the public service responsibilities of

suppliers of public telecommunications networks or services. Examples are protecting

the technical integrity of the networks or

making sure that only services that have been

agreed to are supplied.

In the view of large users, the theoretical

application of GATT principles to telecommunications turned out, in the political arena

of trade policy formulation and diplomacy,

to be less than perfect. Some argue that U.S.

trade negotiators did not push hard enough to

extend market access and favorable operating conditions for big users. 28 In particular,

companies find that they do not have much

latitude in making arrangements for capacity

resale: while they are given the right to set up

networks in the first part of the annex, in

another part this right is subject to restrictions, with the balance appearing to favor

continued restriction. According to Michael

Nugent of Citicorp, which is a major user of

international telecommunications services

and operator of extensive private corporate

networks,

[t]he way the annex is shaping up, it

is turning into a bill of rights for the

telephone administrations and for those

who seek restrictions on usage of the

network. 29

In the view of large users, the original U.S.

submission, which was not accepted, reflects

a much better compromise between the U.S.

Government and industry.3o It contained

substantial rights for users and service providers, whereas the current draft at many

points allows a PTO or national regulatory

body to limit access, usage, and bypass, in

the name of safeguarding public service

rcsponsibility. 31 Large users, like carriers,

also believe that no agreement on telecommunications is probably better than a bad

agreement. Some have argued that this

would permit the negotiation of trade agreements without the hindrance of multilateral

coverage.

In contrast to either U.S. industry position,

EC believes that MFN under the terms

outlined in the telecommunications annex

should be granted now. This may be driven

by institutional dynamics: EC is trying to

increase its leverage over telecommunications regulation so it can enforce the agreement itself, thereby taking control of this

aspect of EC economic regulation from

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

trade and telecommunications regulation.

The problem of basic

telecommunications services

The final major issue under discussion in

the current round of talks on telecommunications is market access for basic telephony,

specifically the ability of firms to offer basic

long-distance telephone service in foreign

countries. This market is open in the United

States, although not without restrictions.

(See ch. 1, box 1-A; for example, foreign

firms cannot hold radio licenses and hence

cannot directly offer some forms of longdistance service. ) Long-distance services are

not competitive in most other countries.

The Telecommunications Annex did not

resolve the issue of liberalization of basic

services. The United States wants, as a

matter of policy, to promote the opening of

other long-distance markets to a level comparable to its own. Therefore, at the same

time that the draft Telecommunications Annex

was published. USTR proposed in a derogation, or partial exemption from the general

agreement, that as soon as a GATT agreement is reached (now scheduled for December 1993) the major telecommunications

signatory parties will seek to agree on terms

to liberalize their basic long-distance telephony markets over the next 3 years, under

conditions set forth by USTR in its proposal.

These conditions basically consisted of commitments by foreign governments to break

up their telecommunications monopolies:

There would be no limit on number of

competitors.

Foreign firms would be allowed to offer

basic long-distance service through facilities-based competition and through resale.

Foreign investment would be permitted in

basic long-distance services.

There would be transparent, nondiscriminatory and cost-based access to basic

telecommunications services.

There would be a fair and transparent

regulatory process overseen by an independent regulatory body.

If all the conditions were met, the full

basic long-distance telecommunications market would be subjected to MFN by all

parties. 32 U.S. trade negotiators’ reasoning

for not insisting on extending MFN to basic U.S. negotiators

telephone service, but including it in the hold out for furfher

derogation offer. is that other countries were talks on liberalizing

not willing to liberalize as quickly as U.S. basic long-distance

carriers would like.33 In the absence of services.

specific market-access commitments, other

countries would have limited the liberalization of their markets while attempting to

enter the U.S. market. Application of MFN

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

with market access as outlined by the U.S.

proposal would put pressure on nations to

mutually exchange commitments in order to

get MFN treatment. It would make opening

up telecommunications markets somewhat

less difficult for some countries, in that the

agreement allows better control over concessions to be granted. Finally, the U.S. proposal recognizes that MFN works when there

is a large enough number of countries

offering the same terms of access, thereby

minimizing the problem of free riders; the

U.S. position is that there is not yet a

sufficient number of countries to permit this

in telecommunications services.3s

The asymmetry in the degree of market

openness between the United States and

elsewhere is damaging to U.S. domestic

interests, it is argued, and gives away an

important bargaining lever that the United

States might usc in bilateral negotiations to

open other countries’ markets.36 This point is

of particular importance to AT&T, which

reportedly vigorously lobbied USTR to refrain from applying MFN to basic telecommunications services. 37

Other U.S. long-distance carriers differ

only marginally with AT&T on these points.

For example, Sprint relies heavily on international leased lines and resale of voice

services in Europe, and needs an agreement

that allows them to do this easily. All service

providers reportedly feel that no agreement

is better than one that would lock open the

U.S. market without the possibility of competing in others’ markets.

Divisions between the U.S. interexchange

carriers and their major users on the issue of

basic services reflect different positions on

the amount of competition to be permitted in

the United States, and the degree to which

the U.S. Federal Communications Commission (FCC) will continue to have the power

to control the U.S. operations of foreign

carriers. After the divestiture of AT&T in

1984, when the U.S. telecommunications

market was unilaterally opened (except for

local service), the FCC retained authority

over foreign carriers (through its section 214

filings requirement) in order to protect the

interexchange carriers from unfair foreign

competition in services. This could occur

because foreign carriers can cross-subsidize

their competitive operations from their domestic monopoly service operations.

Large telecommunications users, on the

other hand, want as much competition as

possible to assure themselves of favorable

prices and a wide choice of services. They

would like foreign carriers to operate freely

in the United States. If basic services are

subject to the GATT agreement, the FCC

will have less ability to restrict foreign

carriers operations in the United States.

This disagreement among countries, however, is symptomatic of a deeper issue: trade

negotiations in GATT reflect nations’ dePage 150

~ 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.

37 OTA interviews with representatives from USTR, Nov. 5, 1992.
Domestic

Deregulation and

International

Trade

Negotiations

sires to retain control of their telecommunications infrastructures for reasons of economic sovereignty, wealth creation, privacy

protection, civil defense, and national security. To the extent that countries are concerned about loss of sovereignty, they will

inflate the definition of basic as opposed to

enhanced services in an effort to minimize

the domain of negotiable issues.38

At the core of the debate about deregulation and competition and thus about tradeability of services lies the question of defining

basic telecommunications services and enhanced telecommunications services. The

usual technical distinction is simply that

basic services arc those where messages are

delivered with little or no enhancement by

computer or other manipulation, whereas

value-added or enhanced services are those

where signals have been manipulated in

some way—selected, formatted, processed,

stored, forwarded, etc.39 Basic services are

assumed to be best provided by monopoly

service providers, to gain economics o f

scale. Enhanced services, it is assumed, may

be provided competitively. But efforts to

arrive at clear and useful definitions for trade

purposes have encountered a theoretical

difficulty: there is no agreement among

economists about the extent to which modern telecommunications are inherently mo-

. 

40 There is agreement that some nopolistic.

enhanced services can be easily provided

competitively; the question is how close to

plain old telephone service can deregulation

come without decreasing economic or social

welfare, Countries that wish to protect their

telecommunications market and traditional

telecommunications providers seek to define

as much as possible as basic services. Nontelecommunications firms that seek to offer

new services seek to define as much activity

as possible as enhanced or value-added.

Negotiating GATT

How GATT negotiations work

GATT agreements arc generally arrived at

by the mutual exchange of concessions

between countries. One country may offer to

reduce restrictions on foreign banking, for

example, in exchange for another country

lowering barriers to trade in insurance.

While the classical economic theory of

comparative advantage would emphasize the

benefits of free trade for both the exporting

At the core

of the debate over

telecommunications

market access are

the definitions of

“basic” and

“enhanced”

services.

38 Peter Robinson, “Globallzat Ion, Telecommunications and Trade,” Futures, October 1991, pp. 810-813.

39 Aronson and Cowhey argue also that a distinction between irrhstructwe /aci/ities and 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

The United States

has argued that

services should be

liberalized unless

specifically

excluded, whereas

other countries

believe that services

should be restricted

unless specifically

/liberalized.

and importing countries, trade barriers are

the consequence of political factors.41

Once the basic framework and the sectoral

agreements are struck, the issue in GATT

negotiations becomes the terms under which

access to markets will be granted. This is a

particularly sensitive issue where countries

have monopoly service providers. An agreement to open markets under the most-favorednation principle can hurt countries that have

unilaterally liberalized earlier; MFN can

lock open the markets of liberalized countries without obtaining equally open access

to markets in countries that maintain a

monopoly.

The United States and other countries

have taken different approaches to the procedures for deciding what should be liberalized. The U.S. position, spelled out in detail

in its October 23, 1989 proposal, is that every

services sector should be opened unless

specifically excluded (and defined in a

schedule list). Exclusions or reservations

would be periodically reconsidered and withdrawn when circumstances permitted, This

flexible approach offers some protection to

countries unwilling to embark on massive

liberalization immediately, but also provides

the opportunity for the United States to

continue to press for market liberalization in

the future.42 Other countries argued that all

services sectors should be restricted unless

specifically liberalized. In the U.S. view, this

would limit the number of items that could

be reviewed, and would limit the ability of

signatories to press for reopening issues in

the future.

The U.S. position did not prevail. Each

country agreed to put on the table its

sector-by-sector offers, i.e., those specific

liberalizing commitments it was willing to

make. At the same time, each country was

permitted to list restrictions in other countries that it wished to see removed.

Initially, no country except the United

States proposed a list of offers, while the

U.S. list of sectors that it wished to restrict

was so short that other countries were visibly

embarrassed. 43 Currently, however, there are

offers on the table from 27 countries (with

EC counting as one country) on all sectors of

the services negotiations, with 20 proposals

specifically covering telecommunications services. In the view of some U.S. observers, the

offers merely describe the status quo and

promise little additional liberalization.

The process of deciding what U.S. offers

will be extended, while not strictly speaking

secret, is largely shrouded from public view.

By and large it consists of the process

described below and in chapter 8, through

which USTR solicits input from other government agencies and listens to lobbying by

various firms, industries, and interest groups

with a stake in the outcome, as required

under the 1988 Telecommunications Trade

Act. With the complexity of the issues, and

with the paucity of data about services

(discussed in chapter 8), there is no way for

trade negotiators to assess the likely consequences and effects of their offers, restric41 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

private sector to analyze the likely costs and

benefits, and then to press for a negotiating

position that retlects their assessments of

advantages and disadvantages of any particular position. In this process, those with

direct economic stakes in the outcome may

have a voice, but there is no direct voice for

the interest of consumers and jobholders in

affected industries.

Formulation of U.S. negotiating

positions in GATT

Congress is concerned about the degree of

access to the U.S. market that is afforded

other countries compared to the access that

U.S. firms have overseas. The 1988 Trade

Act established telecommunications as an

area of particular concern, and directed

USTR to assume the lead in both telecommunications equipmcnt and services negoti -

ations. Congress’ intervention, exercising its

constitutional power to regulate foreign trade

and commerce, reflected its suspicion of the

free trade policies of recent Administrations

and the reluctance during those Administrations to take action against U.S. trading

partners who engage in unfair trading practices.

Congress typically does not have much

interaction with USTR whilc negotiations

arc proceeding. Trade negotiation documents are sometimes classified to prevent

leaks that could affect the U.S. bargaining

position,44 which tends to make Congress

less well-informed about the issues, some of

which are highly technical.45

The U.S. negotiating position on trade in

services and telecommunications is remarkably clear-cut for a relatively new policy

issue. A number of participants note that

significant policy innovation has occurred

over the past decade. The fragmentation of

policymaking (see chapter 8) sometimes

results in trade policy conflicts, but these

conflicts are usually over details of the trade

agreements or over negotiating strategies,

with only a few over fundamental issues.

General principles of transparency, progressive liberalization, national treatment, mostfavored-nation, nondiscrimination, and market access all arc relatively noncontroversial

for government. network operators, equipment providers, and large users. Government

and business share a common view of the

benefits of liberalization in trade in services,

and business plays a significant role in

advising trade negotiators on their positions.

The trade negotiation positions of the

United States arc formally the responsibility

of USTR, in conjunction with the Treasury

Department. USTR. however, has a small

staff, and is dependent on other agencies for

specific sector-al expertise. USTR assembles

teams of negotiators from a number of

agencies, such as the International Trade

Administration (ITA) and the National Telecommunications and Information Administration, both in the Department of Commerce. The FCC, through its Common

Carrier Bureau, plays an important role,

because of its technical expertise. Representatives are also drawn from the Bureau of

Communications and Information Policy

(CIP) at the State Department, although CIP

is thought by some trade participants and by

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

Page 154

contribution to trade policy.% The Antitrust

Division of the Department of Justice is also

part of the team,47 and other agencies sometimes participate.

Formal and informal advisory committees

and task forces also are consulted by USTR

in developing positions. Formal committees

include an Advisory Committee on Trade

Policy and Negotiations, composed of chief

executive officers (CEOs) of large firms,

labor unions, and trade associations; and five

sectoral Policy Advisory Committees, also

drawn from the CEOs or executive vicepresidents of service companies. There are in

addition 17 Industry Sector Advisory Committees, one of which is devoted to services.

Trade associations and lobbying groups

also contribute to USTR deliberations. The

U.S. Chamber of Commerce has an International Telecommunications Subcommittee

that marshals and elaborates U.S. users’

views, as does the U.S. Council for International Business. The International Telecommunications User Group (INTUG), based in

London, speaks for users of international

telecommunications here and in Europe and

is a vigorous and outspoken proponent of

liberalization and freer rnarket access. Its

membership is composed chiefly of national

communications users associations of the

developed countries. A U.S. member is the

International Communications Association

(ICA), the largest U.S. user group, which

itself deals mostly with domestic issues.

Another important user group is the Coalition of Service Industries (CSI), which

represents 14 very large firms.48

In most policy areas industry groups or

interest groups line up behind different

government agencies; these alignments are

clear in the area of international telecommunications services.49 The natural interest

groups are:

the dominant long-distance wrier (AT&T);

the alternativc interexchange carriers (MCI

and Sprint);

the regional Bell holding companies

(RBHCs);

large users with an interest in operating

private networks for themselvcs and others (such as EDS, IBM); and

other, usually smaller users, with an interest in service at favorable costs and

flexible operating conditions.

It appears that AT&T receives considerable support from the FCC, USTR and, at

times CIP; the regional Bell operating companies from the FCC and NTIA; and alternative 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 am bassadorial 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 William Brock, 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 more cross-cutt Ing interests on t rade issues. On t he ot 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.

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

strong support from USTR. The smaller

users have only weak representation, chiefly

in the Service industries branch of the

International Trade Administration.

While the FCC’s deregulatory orientation

has largely benefited the alternative longdistance carriers and their users on the

domestic level, the health of U.S. carriers in

the international arena is a different question,

and the FCC seems averse to policies that

could harm AT&T. NTIA takes a strong

promotional and supportive stance toward

U.S. telecommunications operators. particularly RBHCs. The agency’s Infrastructure

Report and Telecom 2000 Report recognizes

the importance of the domestic infrastructure

in promoting economic growth and asserted

that competition is the best means to promote

domestic telecommunications development,

but NTIA does not support trade policies that

would potentially challenge domestic operators. There does not seem to be an explicit

NTIA focus on users.50

USTR appears to be strongly influenced

by AT&T and by large users, while other

long-distance carriers and users complain

that USTR pays insufficient heed to their

needs. 51 Since USTR is at the center of

overall trade negotiations, its function is to

assimilate and aggregate input from a wide

range of industries. USTR needs to have

some distance from all interest groups in

order to be able to adjust U.S. policy overall,

and horse-trade with other countries. This

may explain why USTR appears to many

observers as standoffish.

Nevertheless, users may find a more

sympathetic ear at USTR than at the telecommunications agencies. Users are drawn from

a variety of industries, and so are not a

natural constituency for telecommunications

agencies. They typically spread their lobbying efforrts, since telecommunications is not

their only regulatory or operating concern.

Users’ telecommunications requirements beyond plain old telephone service are also

relatively new.

Long-range consequences

of a GATT agreement

The success of GATT negotiations on

services would represent important challenges to the traditional control of nations

over their domestic affairs. With reliance on

market access principles, trade officials would

play a much greater role in international and

even domestic telecommunications policy.

This was recognized by Congress in the 1988

Telecommunications Trade Act, which gave

USTR the leading role in multilateral telecommunicate ions trade negotiations.

USTR has already begun to intervene in

specific telecommunications policy areas,

even beyond the GATT setting. For example, USTR halted the FCC’s proposed international simple resale initiative in late 1991,

on the grounds that the FCC’s timing on

changing the ‘‘dominant carrier regulation’

would interfere with USTR's negotiations in

GAIT (The FCC proposed to remove some

reporting requirements on foreign carriers

operating in U.S. markets; these carriers

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,

With reliance on

market access

principles, trade

officials play a much

greater role in

international and

even domestic

telecommunications

policy.

Page 155
——— . . . . . . . . . — .-

U.S.

Telecommunications

Services in

European

Markets

carriers or monopolies with the power to

restrict competition in their home markets. )

The FCC complied with USTR’s request to

delay its action: later USTR gave the FCC its

approval to go ahead. Such conflict among

agencies is likely to increase.52

The fact that trade officials have emerged

as important players in international telecommunications negotiations is important

because their ministries have multiple constituencies with less specific focus on telecommunications issues than do telecommunications agencies. Some observers believe

that trade officials should not be given too

much authority, as they lack subject matter

expertise. Furthermore, trade officials arc

not necessarily concerned or knowledgeable

about efforts to improve the competitiveness

of national industries. In the United States,

this responsibility is presumably lodged in

NTIA, if anywhere, and NTIA plays a

limited role in trade negotiations.

One potential consequence of the increasing trade focus of international telecommunications may be that as political leaders

increasingly come to preside over international telecommunications through trade ministries, they may negotiate telecommunications trade deals that are suboptimal from the

standpoint of telecommunications users or

carriers, It sometimes is politically expedient

to agree to trade policies, such as asymmetrical market access, which are harmful to one

segment of a national industry. In other

words, national competitiveness and free

markets are not always compatible goals.

The web of negotiating relationships is

further complicated by the fact that separately and within GATT, bilateral negotiations take place among countries, and not all

countries arc party to all multilateral negotiations. The 1988 Trade Act specifically requires the President to negotiate access to

foreign markets in telecommunications, and

authorizes him to use sanctions if such

access is not achieved (section 301). These

arc necessarily bilateral negotiations:53 

parties that recently have been identified as

having serious barriers to U.S. telecommunications trade are South Korea, which has

reduced its trade barriers through bilateral

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 EC Ut ilities Directive, an equtpmentissue. 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

in importance of computing and other electronic media in telecommunications, a complex network of standards organizations now

has a role in telecommunications policy

debates. sq

Given that countries have differing telecommunications history, politics. and infrastructure, they will not all move smoothly or

at the same pace from the stable domcstic

monopoly/ITU model toward a relatively

stable competitive market. Some may experiment with a variety of telecommunications

structures and policies. This could result in

persistent failure to eliminate obstacles to

efficient interconnection of equipment and

networks, which could hurt U.S. firms wishing to take advantage of their installed

technical base, their experience, and their

established operating procedures. This in

turn may affect the competitiveness of U.S.

companies in areas of the world that following a telecommunications trade path differ--

ent from that favored by the United States.

Are there clear winners and losers in the

changes occurring in global telecommunications services trade patterns’? So far, there

appear to be few losers. Although much of

the change came at the behest of large

telecommunications users, the cost reductions and improved flexibility in operating

terms seems to have significant spillover

benefits for residential and small and medium business users. Computer equipment

and electronics firms and enhanced services

providers have benefited by lowcr costs and

improved terms of access. Although many

services providers arc now saying that no

GATT agreement is better than a bad agreement (i.e., one that would lock open the U.S.

market without giving them full rights to

compete in others’ markets), it is likely that

they will acquiesce in an agreement that has

broad political support. Even organized labor,

which may have less bargaining power with

the opening up of the telecommunications

system, expects to endorse the Uruguay

Round GATT agreement, when and if it is

finalized. 55

‘“ For a recent discussion of the standards-making process In relation to U.S. competitiveness, see U.S.

Congress, Off Ice of Technology Assessment, G/oba/ Standards: f3ul/ding f3/ocks for the future,

OTA-TCT-512 (Washington, DC: U.S. Government Prlntlng Off Ice, March 1992).

55 Morgan, op. cit., footnote 27.
How

Telecommunications

Policy Is

Made 8

CHAPTE R

The fragmentation

of the policymaking

structure invites

“forum shopping. ”

Page 159

IT IS DIFFICULT TO DEFINE U.S. POLICY FOR

INTERNATIONAL TELECOMMUNICATIONS, and even

more difficult to identify the locus of responsibility for its development. International

telecommunications policy was for many

years an incidental byproduct of domestic

telecommunications policy; now it is a

subheading in foreign trade negotiations.

Yet, the political and economic relationships

of the United States with the rest of the world

depend heavily on global networks—for

diplomatic and military communications; for

directing business, coordinating trade, and

settling financial transactions; and for the

myriad cooperative efforts ranging from

environmental amelioration to disaster relief

tiations could be thrown awry as a result of

unilateral actions by regulators. Some private sector observers fear that with negotiators powerfully motivated to reach agreement in the waning days of the current round

of the General Agreement on Trade and

Tariffs (GATT), there is an increasing possibility that telecommunications objectives

might be sacrificed for unrelated trade objectives.

The fragmentation of the policymaking

structure provides an opportunity for ‘forum

shopping’ in which competing interests can

play one agency against another. In practice,

it has created a situation in which the

interests and demands of major telecommuthat arc made necessary by today’s highly

interdependent global community.

This chapter first describes the governmental structure is responsible for formulating international telecommunications policy, and then relates this to the structure for

developing trade policy. At best, telecommunications decisionmaking works well because it includes many fora for the expression of competing interests, and because of

the commitment and cooperation of experienced people whose responsibilities have

over time spanned both industry and government. At worst, decisions about international

telecommunications are a secondary byproduct of international agreements reached in

broad trade negotiations, and as a result may

be unidimensional and shortsighted. Broader

telecommunications objectives may be ignored. Conversely, international trade negonications providers and some large users are

well represented, with relatively little attention to the interests of other users, including

small businesses.1 The public as a whole

appears to be considered chiefly as secondary consumers whose only recognized interest is the relative prices of goods and services

delivered with the aid of telecommunications.

Policy makers, regulators, trade negotiators, and consumer interests groups alike arc

further handicapped by the often inadequate,

incomplete, or misleading data related to

telecommunications. Especially in the area

of competitive trade in telecommunications

services, a growing need for better data has

been frustrated first by single-minded adherence to a goal of reducing industry ‘‘paperwork burden, ’ and more recently by the

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).
.- — -— . . . -- - -. - - - -- — -

Us.

Telecommunications

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Page 160

The telecommunications

policymaking structure

In 1978, President Carter removed an

existing Office of Telecommunications Policy from the Executive Office, and by

Executive Order combined it with an Office

of Telecommunications in the Department of

Commerce to form the National Telecommunications and Information Administration (NTIA).

This move effectively signaled a change

in perspectives on telecommunications. "Shifting communications policy functions from

the White House to the Commerce Department in 1978 was an effort to depoliticize

communications policy, acknowledges policy analyst Howard Symons, ‘‘. . .howevcr,

the move also appeared to diminish the

importance of communications policy.

The existence of an Office of Telecommunications Po] icy in the White House had

indicated symbolically that telecommunications was a core element in national infrastructure and a uniquely valuable tool for

policy implementation (although in reality

this concept had seldom been exercised). ~

The move to the Department of Commerce,

together with the beginning of deregulation,

meant that telecommunications was henceforth viewed primarily as an industry producing goods and services for business users.

“The United States is unique in regarding

telecommunications primarily as a trade

factor rather than as a social policy tool,”

acknowledges the State Department’s first

Telecommunications Coordinator.4

Four decades earlier, the 1934 Communications Act, which established the Federal

Communications Commission (FCC), had

set forth the guiding Federal communications policy as one of

. . . regulating interstate and foreign

commerce in communications by wire

and radio so as to make available, so

far as possible, to all the people of the

United States a rapid, efficient, Nationwide, and world-wide wire and radio

communications service with adequate

facilities at reasonable charges, for the

purpose of the national defense, [and)

for the purpose of promoting safety of

life and property . . . . [47 U.S. C, 151].

Commerce, national defense, and maintenance of civil order provided the rationale for

Federal responsibilities for telecommunications (otherwise a state regulatory responsibility). But the major thrust of Federal policy

was to achieve universal service through the

regulation of rates, service offerings, and

infrastructure development. That goal essentially secured. in 1978 the driving policy

goals became deregulation and opening up

markets for equipment and services. This

effort intensified after the Democratic Administration was succeeded by a Republican

Administration in 1981.

From 1934 until the mid-l980s, U.S.

telecommunications policy was largely gen2 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 that It was ef feet ive because it was In 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

with OTA staff.
How

Telecommunications

Policy Is

Made

Carriers

I

Figure 8-1.

Us.

Telecommunications

Policy Structure

Schools,

hospitals

I

Small

I

businesses

Residential

customers

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993
—— . . . . . -. . - -- - - — - - - - -

us.

Telecommunications

Services in

European

Markets

In practice,

international/

teleommunications

policy has

effectively

been made in

the Office of the

United States

Trade

Representative.

Page 162

erated within the framework of the FCC’s

relationship with the regulated monopoly,

AT&T. Since the divestiture of AT&T in

1984, a “troika’ of Federal agencies has

formally been responsible for telecommunications policy, through an often uneasy

process of consultation and negotiation. The

three agencies are NTIA in the Department

of Commerce, the Bureau of International

Communications and Information Policy

(CIP) in the Department of State, and the

FCC, which is not part of the executive

branch, as are the other two, but is an

independent regulatory commission. (The

FCC’s five-member bipartisan Commission

is, however, appointed by the President.) In

practice, international telecommunications

policy has effectively been made by the

Office of the United States Trade Representative (USTR).

In the United States, trade policy—like

telecommunications policy—involves several agencies: USTR within the Executive

Office of the President, the Department of

Commerce and its International Trade Administration (ITA), the Department of State,

and somewhat more peripherally, the Department of Justice, the Department of the

Treasury, and at times, the Department of

Defense.s

Increasingly the responsibilities of the

multiagency telecommunications policymaking structure interact with and overlap

those of the multiagency trade policymaking

structure. USTR emphasizes that representatives of NTIA, CIP, and the FCC ‘‘have, over

the years, played an active and important role

in the development and negotiations of

telecommunications trade policy. ’ At a

minimum, this puts USTR in the de facto

position of reconciling or coordinating the

three telecommunications agencies’ sometimes divergent positions.

Some participants see the fragmentation

of policymaking within each structure and

the uncertain borders between the telecommunications and trade policy structures as

serious problems. Others see the same characteristics as a positive benefit that allows for

flexibility and representation of diverse interests. At best, some crucial aspects of

future international telecommunications escape all of these agencies. The complex and

highly controversial issues surrounding Federal sponsorship of a national high-speed

data network-i. e., the National Research

and Education Network (NREN)—-have developed in or been contested by the National

Science Foundation, the Department of Defense, the Department of Energy, and the

National Aeronautics and Space Administration, but telecommunications agencies have

been on the sidelines.

National Telecommunications and

Information Administration

NTIA, within the Department of Commerce, is supposed to lead in formulating

telecommunications policy and to speak for

the Administration to Congress. It comments

on FCC proceedings either singly or as

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

bodies is considered to develop or initiate trade policy.
How

Telecommunications

Policy Is

Made

a key member of U.S. delegations in various

international fora. NTIA also manages the

Federal Government’s use of the electromagnetic spectrum. (This duty, in fact,

constitutes by far the largest part of NTIA’s

workload as measured by staff assignments.)6

NTIA’s Office of International Affairs

prepares position papers on international

trade issues, monitors private sector development of technical standards, works with

the Departments of State and Defense on

submarine cable issues, and oversees

COMSAT and its activities in INTELSAT

and INMARSAT. Its people serve on U.S.

trade and regulatory delegations to foreign

governments and international organizations

such as the International Telecommunications Union (ITU) and Organization for

Economic Cooperation and Development

(OECD). A major part of the work of the

Office is in preparing for international meetings; this preparation is carried on in close

liaison with industry, and to a lesser extent

with major user groups.

Does NTIA “initiate” policies’? That

depends in part on the activism and the

agenda of the Assistant Secretary of Commerce for Communications and information,

who is also the Administrator of NTIA. The

Administrator may, for example, initiate a

“public inquiry’ on policy issues, in which

industry and other groups will present their

often conflicting viewpoints. The public

inquiry may then be followed up with a

major report, such as the Infrastructure

Report and the Spectrum Report, both in

1991.7

For the most part, however, the agency’s

agenda is set reactively, through responding

to initiatives of other agencies within the

Department of Commerce and other parts of

the Administration, or to the expressed

concerns of the telecommunications industry. NTIA constantly receives and responds

to questions, requests, or initiatives from

other agencies or from industry lobbyists.

NTIA’s attention has generally been concentrated on domestic issues, and particularly on

the thrust toward deregulation, since that is

where most of the interest of the telecommunications industry is directed, and the agency

has paid relatively little attention to internaational issues. When trade negotiations are

impending, however. NTIA will be asked to

prepare a draft issue paper for the Office of

USTR, or to review trade position papers

prepared by USTR or other agencies, to help

in developing a bargaining position.

The approach to all of these activities is

shaped by NTIA’s commitment to fostering

the U.S. telecommunications industry, promoting competition in domestic markets,

and opening greater access to foreign markets. Trade issues are not in fact a part of

NTIA’s legislative mandate, but the agency

provides technical expertise in support of the

agencies that take the lead in trade negotiations, and speaks to them for its industry

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 “encourage further infrastructure development

by removing government-imposed barriers

to competition and efficient investment in

telecommunications facilities and markets."8

It was the position of the last two (Reagan

and Bush) Administrations that ‘‘govcmment policies should not attempt to direct the

selection of particular technologies or the

pace of infrastructure investment by or for

private-sector firms.’”) NTIA applied the

same deregulatory position to international

markets, pressing other countries to allow

facilities-based competition. This explicitly

stated position has the possible disadvantage

of limiting or removing NTIA's maneuver in

developing policy or in responding to deregulatory demands of industry, or initiatives by

U.S. agencies or other countries in standardsdevelopment or trade-agreement negotiating

sessions. 10 NTIA tends to be seen in both

domestic and international fora as representing the positions of the telecommunications

industry rather than as a policy-development

organ.

Henry Geller, a former Assistant Secretary

of Commerce for Communications and Information and NTIA Administrator, has said

that “. . . in practice, NTIA has encountered

considerable difficulties. It cannot inplement the policies it proposes and has had

problems establishing a partnership with

other agencies, particularly with the Department of State. 11

On both domestic and international issues,

NTIA’s position within the Department of

Commerce, not generally a powerful department, has in the past been a handicap. NTIA

had trouble getting attention at a high level

of the last two Administrations because there

was no telecommunications spokesman in

the Executive Office. This may change under

the present Administration, especially since

Vice President Gore has long demonstrated

a strong interest in telecommunications, but

there have been no clear signals of strengthened NTIA effectiveness as yet.

Federal Communications Commission

The FCC is the source as well as the means

of implementation of much telecommunications policy, although as an independent

regulatory commission, it is not part of the

executive branch policymaking structure.

The FCC was created by the Communications Act of 1934 to regulate interstate and

foreign communications. The 1934 Act made

it responsible for the development and regulation of both radio and wire services, and its

Page 164

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 Off Ice of International Affairs, NT IA, correspondence of Nov. 6,1992.

‘

0 An NTIA brochure says, however, that”. .FCC or NTIA act Ion to expedite the standards process could

be justified. . . in areas, such as the development of standards, that would require competitors to agree 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

2, p. 320.
How

Telecommunications

Policy Is

Made

authority now extends to television, satellite,

and cable as well.12

The Commission is composed of five

members appointed by the President, with

the approval of the Senate; no more than

three of the five members can be from the

same party. The President designates one of

the members as Chairman. The Chairman

usually plays a dominant role in Commission decisionmaking.

The Common Carrier Bureau regulates

international and foreign communications

services provided by common carrier.13 Other

bureaus and offices also participate in international issues and organizations.14

The Common Carrier Bureau has always

overwhelmingly emphasized domestic interstate communications with relatively littlc

attention to international aspects. This may

be changing, as evidenced by the concerted

attention recently given to accounting rates,

the dominant carrier status for international

firms. and other issues discussed in this

report. The FCC is considered by many in the

industry to have ‘‘unilaterally opened the

U.S. market to foreigners, and it is criticized

for doing so without determining whether

there is the same degree of openness in

foreign markets. For example, the FCC was

criticized for allowing Spains Telefonica to

buy the Puerto Rico Telephone Company in

early 1993. The FCC has managed to maintain its authority over foreign operators in

this country.

The Commission has a Director of International Communications, who is responsible for representing it in international fora

and for coordinating FCC activities and

policies that relate to international issues.

The International Communications Office

carries out these coordinating functions, but

is small and relatively new. It lacks the clout

commanded by the largcr Common Carrier

Bureau, which can bring to trade negotiations, for example, greater technical and

legal expertise and experience.15

Under the last two

Administrations

there was no

telecommunications

spokesman jn the

Executive Office;

this may change.

‘

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 has responsiblllt 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

The Department

of State was an

unlikely site for

coordination of

international

telecommunications

policy among 14

Federal agencies.

Because of the way the Commission is

appointed, it clearly reflects the party and

policy orientation of the President.16 Nevertheless the FCC’s relative independence is

attested to by the fact that it is sometimes

spoken of within the executive branch agencies as “a congressional agency. ’ FCC

decisions, as directives of an independent

regulatory agency, are not subject to presidential veto, yet these decisions may have

important international ramifications (as in

recent FCC decisions on accounting rates).

Critics speak of a ‘‘presidential veto issue,’

arguing that ‘‘when FCC gets into international policy it is intruding on Presidential

turf. ‘ ‘‘7 This is a source of some strain

between the FCC and executive agencies.

The Department of State and the

Bureau of Communications and

Information Policy

After the Office of Information Policy was

taken out of the White House, it became clear

that some mechanism was needed to “coordinate’’—or mediate-–between NTIA, the

FCC, and other agencies sometimes involved in telecommunications policy issues.

Tension often ran high between NTIA, with

its pronounced pro-competition stance, and

the FCC, which some critics (in the executive branch) said was less wholly committed

to free market ideas, at least where these

would diminish its own authority.

The Administration that took office in

1981 reportedly did not want dominance in

Page 166

setting telecommunications policy lodged

either in the FCC, a nonexecutive agency, or

in the Department of Commerce, 18 which fell

within the oversight of active congressional

committees that would have their own telecommunications agenda.

The position of U.S. Coordinator for

International Communications and Information Policy was therefore created by statute

in 1983, placed in the State Department, and

assigned the rank of Ambassador. The Bureau of Communications and Information

Policy was established by the Department to

support this position. The Coordinator was

to chair a Senior Interagency Group that

would be the primary coordination mechanism for about 14 Federal agencies and

subagencies.

The Department of State was an unlikely

site for coordination of telecommunications

policy, since the desired coordination was to

apply to domestic as well as international

issues and since the Department has never

been a hospitable environment for scientific

or technological initiatives. Its sciencerelated divisions have not had much power

or prestige. However, this location could be

justified on the grounds that it was necessary

for the United States to speak with one voice

in international teleccommunications fora. It

also gave leaders of congressional trade and

foreign affairs committees some oversight

over international telecommunications (the

House, in 1983, was controlled by the

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.

18 Interview with Dougan, cited, footnote 17, Nov. 28, 1990.
How

Telecommunications

Policy Is

Made

held the Senate and the White House).

Finally, the State Department had the advantage of being somewhat removcd from the

internecine struggles cm the domestic scene

over divestiture and deregulation.

CIP is designated in legislation as the

principal adviser to the Secretary of State on

international telecommunications policy issues, and as ‘ ‘coordinator with other U.S.

Government agencies and the private sector

in the formulation and implementation of

international policies relating to a widc range

of rapidly evolving communications and

information technologies."19 The Bureau is

the official overseas spokesman on telecommunications issues and to some extent on

trade issues related to telecommunications.

CIP is not however empowered to negotiate

legally binding trade treaties, as is USTR.

In reality, CIP acts in international fora as

the spokesperson and facilitator for teams

made up of industry reprentatives and

experts drawn from other Federal agencies.20

CIP has a very small staff and little technical

expertise: State Department policy has been

to depend on industry expertise. On these

national delegations, there may be “user

group" representation, drawn chiefly from

multinational corporations that rely heavily

on telecommunications networks, but there

is no provision for direct representation of a

more general public interest except as may

be assumed to be represented by the FCC.

Only in its first few years did CIP actively

exereise its role of coordinating Federal

communications policy development among

the various agencies. It now confines itself

chiefly to an administrative role in coordinating participation in international conferences, and is not considered by other agencies to be a serious factor in developing

policy positions. It has been ineffective as a

generator, implementor, or articulator of

policy. The real coordination among agencies on telecommunications policy comes

about less fomally, through the interactions

of a relatively small group of people who

have, over the last 10 or 12 years, moved

about the Washington telecommunications

scene, holding positions in two or more

agencies and in the Washington offices of

telecommunications firms and industry assoc i at ions.21

The Department of Defense (DOD), with

a broad mandate to protect national security,

with broad telecommunications networks of

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

73 For example, a U.S. delegation cochaired by CIP and NTIA to an ITU meeting In Prague in November 1991,

Included 35 people, including 11 from government (NTIA, Cl P, the FCC, and Office of 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

telecommunications networks, often has a

strong influence over telecommunications

policy. DOD opposed the divestiture of

AT&T on grounds of national security, but

was overruled. It has been responsible for

some restrictions on the export of telecommunications equipment. DOD opposed the

separate satellite policy pushed by the FCC

and NTIA; this dispute was mediated within

the White House, (During the first years of

CIP there was regular coordination between

the Communications Coordinator and DOD,

the CIA, and the National Security Administration, but this was allowed to lapse.)

The Department of Justice is almost always present at trade negotiations. The

antitrust division of the Department of Justice has been deeply involved in promulgating and implementing domestic telecommunications policies since divestiture. While its

judgments do not enjoy extra-territoriality as

a general rule, it continues to affect the

overseas as well as domestic behavior of

U.S. telecommunications firms and services

providers because of the respect, or fear, with

which it is regarded by corporate lawyers.

Increasingly there is a strong need for

better coordination not only among those

agencies that deal with telecommunications

policy but between them and agencies that

develop and implement trade policies. As the

telecommunications industry is restructured

because of deregulation, globalization, and

technological change, the need for an improved policymaking structure will become

more pressing. Because of the inclusion of

trade in services in the current round of

GATT negotiations and the special attention

paid to international telecommunications in

the integration efforts of the European Community, and also because of international

disagreements over accounting rates and a

variety of other issues identified in this

report, there is increasing interaction between telecommunications and trade agencies. The need for coordination is also

greater, to make sure that these interactions

are based on a consistent, collectively developed policy that takes into account the full

range of national telecommunications goals

and objectives.

The policymaking structure for

trade in services

Trade policy, because of its important role

in national economic affairs, is assumed to

be made at the top levels of government, in

Congress and in the Executive Office. The

Constitution allocates to Congress the power

"

. . . to regulate Commerce will foreign

Nations. . .’ (Art. I, sec. 8), but the details of

trade policy implementation, and even its

development, arc largely generated in the

executive branch. For more than a decade

U.S. trade policy has been strongly aimed at

broad access to markets and the progressive

dismantling of trade barriers. The source of

this policy appears to have been rooted in a

broad, although not universal, political consensus, analytically supported within the

Executive Office by economic advisers to

Page 168

22 Note that DOD has an Assistant Secretary for Command, Control, Communications, and Intelligence who

is responsible for computing, systems security, telecommunications, and information management within

the military system.
How

Telecommunications

Policy Is

Made

recent President\.~? The Department of Commerce helps to provide background infomation and contributes to the development of

policy. but the lead agency for the United

States in all foreign trade negotiations and

agreements is USTR.

United States Trade Representative

All foreign trade negotiations, at least in

theory. are conducted by USTR. For telecommunications, the 1988 Trade Act specifically gives USTR the statutory mandate to

conduct all trade talks. USTR negotiators

work from position negociated among contending domestic interest groups and usually

approved at the upper (political) levels of the

government. These policy positions begin

with paper-s prepared by USTR in consultation with various agencies. In the case of

telecommunications services or equipment

issues, NT I A, the FCC, CIP, and sometimes

the Department of Justice, as well as trade -

related agencies. will be involved. USTR

points out that the diverse inputs to fomulating telecommunications trade policy are

beneficial because they reflect the highly

diverse nature of the current telecommunications environment and permit relevant

constituency groups to be represented in

trade policy development.

Where there are incconsistencies or disagreements in the positions of the agencies,

these problems are mostly worked out in

informal meetings and telephone communications. If they recquirc slightly more formal

negotiations they may go before an interagency Trade Policy Staff Committee (TPSC).

Neither NTIA nor the FCC has a seat on this

committee, FCC because it is not an Executive agency. NTIA because the Department

of Commerce is represented by the International Trade Administration. Representatives of both NTIA and the FCC attend

meetings as observers, and USTR emphasizes that ‘‘for a number of years both

agencies have played key roles i n developing

and participating in trade policy negotiations.

TPSC is described by some inside observers as ‘‘a central point for policy formulation." Thus. it matters that the two telecommunications agencies do not have a strong

voice in TPSC deliberations. For example,

according to some participants or observers,

there have been times when international

bilateral discussions being pursued by the

telecommunications” agencies were authoritatively ‘‘subordinated to GATT’ by the

TPRC. Even at the level of the TPRC there

is sometimes strong and persistent interagcncy disagreement; there will then be

negotiations at the agency-head or Assistant

Secretary level, where an Interagency Trade

Policy Rview Group resolves issues among

Departments.

For international negotiations on trade

issues, whether they are to be bilateral or

multilateral (for example, the Canadian Free

Tradc Agreement and GATT negotiations),

USTR will assemble a negotiating team. The

negotiations are led by USTR staffcrs, who

arc not sector-specific specialists; this makes

the team as a whole and its associated experts

very important. For trade issues involving

telecommunications services. the delegation

would typically includc people from the

The lead

agency

for all

foreign trade

negotiationsincluding

those on

telecommunications

—is USTR.

23 For a reasoned exposition of the rationale underlying the official U.S. position on trade barriers, see Geza

Feketekuty, /nterrtatmna/ Trade In Serwces (Cambridge, MA: American Enterprise Institute, 1988). For 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

Page 170

FCC’s Common Carrier Bureau and International Communications Office, from NTIA,

from ITA’s Office of Telecommunications,

from the State Department’s CIP and Economics and Business Bureau, and from the

Department of Justice. Industry representatives are consulted but are not on the official

delegation.

Private sector representatives (both telecommunications firms and large users) are

consulted throughout the process of developing USTR’s negotiating positions. USTR

has a formal and informal industry liaison

structure and holds frequent meetings with a

cross-section of industry representatives. For

example, on telecommunications issues, meetings may be called to try to develop a

consensus among representatives of longdistance carriers, Bell operating companies,

enhanced services providers, and other user

groups as well as the formally constituted

Services Policy Advisory Committee. The

U.S. Chamber of Commerce has a Task

Force on Telecommunications, and both it

and the U.S. Council on International Business frequently advise and counsel USTR.

Inevitably, however, tensions among competitors and between sectors of the industry

are reflected in wrangles about the negotiating positions of USTR.

State regulators, the Consumer Federation

of America, and the Communications Workers of America (a labor union) also are

consulted in developing USTR negotiating

positions. However, some of their representatives complain that their participation in

the process is usually invited well after the

critical elements in the negotiating position

have been worked out between USTR, carriers, and large users.

International Trade Administration

In development of foreign trade policy,

the Department of Commerce acts as liaison

between industry and government, and in

most cases, is assumed to speak for industry

to the rest of government. This is formalized

at the top levels of the Department in 25

Industry Sector Advisory Committees (ISACs),

jointly administered by the Department of

Commerce and USTR. Among these are

ISAC V, which deals with electronics, including telecommunications equipment, and

ISAC XIII, which deals with services, including telecommunications services. Although the United States, as well as other

advanced industrial countries, is often said to

have a “services’ economy, at least until

recently services were presumed to play a

minor role in export trade. This may explain

why only 1 of 25 ISACs deals with the

services sector, in spite of its wide diversity.

The mission of ITA, within the Department of Commerce, is to aid U.S. companies

in developing and participating in export

trade by promotional events, provision of

analytical services, and other forms of advice

and assistance. ITA interfaces with companies and industry associations through constant meetings, telephone calls, etc.24

ITA has a Foreign Commercial Service,

an International Economic Policy Section

(with country desks), an Import Administration Section, and a Trade Development

Section. Included in the latter is an Office of

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

Specialist in the Office of Telecommunications (Aug. 14, 1991 and June 23, 1992).
How

Telecommunications

Policy Is

Made

15 people. Its tasks include counseling

companies on the potential and characteristics of foreign markets, helping firms compete on major telecommunications procurements, preparing competitive assessments of

industry sectors, and writing chapter-s on

telecommunications for the Department of

Commerce’s annual Industrial Outlook and

other trade-related reports. 25 Other assignments, chiefly of an analytical nature, may

originate in requests from the Secretary,

other Federal agencies, or industry, to help in

developing policy positions within ITA and

upper levels of the Department of Commerce,

In the first years of the communications

Coordinator and the State Departments CIP,

a formal telecommunications attache program was established in key foreign ports to

support trade in telecmmunications services and work closely with ITA, This program, along with some other activities of

CIP, has been allowed to lapse.

The adequacy of data

for decisionmaking

The fragmentation of policy responsibility

becomes more troublesome because it is

compounded by lack of data needed to

monitor trends and detect problems.26 The

great expansion of international trade in

services increases the need for data to assess

its status and outlook. It has, however, long

been recognizcd that the dimensions of

international trade in services are poorly

defined, the real volume and value of transact ions is uncertain, and the data available to

analysts and decisionmakers is inadequate.27

Moreover, since the Paperwork Reduction

Act of 1980, Federal policy has been to

reduce the amount of data reporting required

Data on

international

service trade

are poor.

25 The analysts use data from the Department of Commerce’s Bureau of Economic Analysis and Bureau of

the Census, and from other sources; the ITA Itself is not a collector of primary data.

26A report prepared for the Off Ice of Technology Assessment Ident I f led man y I im i tat ions and inadequacies

in data relevant to telecommunications issues. Louis Feldner, Feldner Telecom Consult Ing, “The Status of

Data Collection on International Telecommunications Services Between the U.S. and Europe,” Sept. 1,

1992. This report was based on rewew of FCC flllngs and dockets, a literature search, and over 45 direct

or telephone interviews with current and former Federal agency employees, representatives of major

carriers, representatives of trade assoclatlons, and other experts.

27 A.Y. Kester, Behind the Numbers: U.S. Tradejn the Wor/d Economy, Report of the Panel on Foreign Trade

Statistics, National Research Council, 1992. Theoretical and emplrlcal problems in measuring services

delivery or export are complex and longstanding. The same services (for example, data processing) may

be imbedded in technology (a magnetic tape or floppy disk) or may be dellvered electronically. Many

services cannot be counted at the border as can goods. Many must be created and delivered

simultaneously, but services dellvered by an aff Illate or subsidiary overseas are not counted in trade f igures.

The Council of Professional Assoclatlons on Federal Statrstlcs has also crltlclzed government data

collection (Annual Report, 1991 ). The Office of Technology Assessment [n 1986 and again In 1987 strongly

called attention to def iciencies in t he data on serwces, saying t hey were “subject to major sources of error.”

U.S. Congress, Office of Technology Assessment, Trade in Services: Exports and Foreign Revenues,

OTA-ITE-316 (Washington, DC: U.S. Government Prlntlng office, September 1986), p. iii; and U.S.

Congress, Office of Technology Assessment, /nternahona/ Cornpehhonin Serwces: Banking, Buik%ng,

Software, Know-how, OTA-ITE-328 (Washington, DC: U.S. Government Prlntlng Office, July 1987). Page 171
. . . .

Us.

Telecommunications

Services in

European

Markets

Much information

that was once

concentrated and

routinely reported

is now dispersed

or proprietary,

unavailable to

policymakers.

of industry. This policy has been strongly

criticized. 28 Congress called for better trade

data collection in the Trade and Tariff Act of

1984 and again in the Omnibus Trade and

Competitiveness Act of 1988. Recent NTIA

reports have also pointed to important gaps

in data.29

In response to such criticism, some steps

have been taken to improve coverage,30” but

all efforts to increase data collection or

change reporting requirements are still given

stem scrutiny by the Office of Management

and Budget (OMB) in the Executive Office

of the President. In 1991, President Bush

approved a multiyear initiative involving all

major statistical agencies to implement recommendations developed by a working group

of the Economic Policy Council. Throughout the government, however, progress has

been slowed or reversed by budget cuts.

Major statistical agencies lost 13 percent of

constant-dollar funding and more than 10

percent of their staff from 1980 to 1988.31

It might be expected, in spite of these

problems, that data on telecommunications

services would be plentiful and readily

available since this is an industry still

dominated by regulated monopolies and for

which there have long been international

coordinating mechanisms. Here too, however, there are often inadequate data. For

example, it is nearly impossible to develop

comprehensive or consistent data about patterns in or changing levels of investment in

physical infrastructure and in research and

development since the burgeoning of overseas investment by U.S. telephone companies. This information is needed by Federal

and state regulators to address the question

of whether there is a possible decline in

telecommunications investment.

Much of the data now reported by telephone operators in Europe and in the United

States are considered proprietary and confidential since competition has become a

factor,

32 and much of the rest are not

comparable across national boundaries. In

the United States the divestiture of AT&T

and the proliferation of large numbers of

alternative carriers, resellers, and value-

-added services networks means that much

information that was once concentrated and

routinely reported is now widely dispersed

m Katherine K. Wall man has argued that “Federal statistics need to be evaluated in terms of their intrinsic

worth. . . not merely as the burden they might impose.”” Losing Count: The Federal Statistical System,”

~op,dat~on Trends and Pub/ic Po/icy, No. 16 (Washington, DC: Population Reference Bureau, September

1988).

m U.S. Department of Commerce, National Telecommunications and Information Information Adm inistrat ion,

The /infrastructure I?epofl, 1991, and U.S. Te/ecornrnunicatiortsin a G/oba/ Economy, 1990

w B. Ascher and O. Whichard, “Developing a Data System for International Sales of Services: F)rograms,

Problems, and Prospects,” P. Hooper and J.D. Richardson, /nternationa/ Economic Transactions: /ssues

in Measurement and Ernpirica/ Research (Chicago, IL: University of Chicago, 1991) conclude that efforts

to improve U.S. statistics on trade in services have resulted in “a lengthy list of improvements.” See also

“Technical Notes” in BEA, Survey of Current Business, June 1989, for a description of some recent

improvements to U.S. data on international services.

3’ David Hamilton, “Blind Data,” The Washington Month/y, October 1991, p. 41.

22 Since the mid-1980s some nations that have deregulated customer telephones do not even make public

the number of telephone lines or stations. Feldner, op. cit., footnote 26.
How

Telecommunications

Policy Is

Made

and less subject to mandatory reporting.~1

The loss of a central point for data collection

both in industry and in government is

causing problems for international telecommunications organizations and for trade

reporting organizations.34 More and more

services are provided by unregulated networks that do not report data at all.

There are two Federal primary data collectors for international telecommunications:

the FCC and the Bureau of Economic

Analysis (BEA) in the Department of Commerce. Both have statutory mandates to

collect some data, and legal authority to

obligate respondents to furnish some data.

Both make most of their data available to the

public, and therefore to public interest

groups, by periodically reporting aggregated

data and publishing reports on international

telecommunications. However, the FCC collects international revenue and traffic data

relevant to its regulatory mission, and in format ion about international trade is incidental

to that purpose. BEA collects a wide range of

trade data including some on telecommunications services. Both gaps and overlaps of

coverage arc fortuitous.

BEA is legally prohibited from disclosing

data of individual companies; FCC data on

individual companies is, for the most part,

public, although data on international operating agreements, licensing arrangements, and

authorizations and concessions to foreign

entities is classified confidential.ss The FCC

does not have the resources to thoroughly

check and verify data submitted by the

private sector, so for the most part it is

merely assumed to be complete, accurate,

and comparable.

All international carriers must report traffic and revenue data to the FCC each July 31

for the preceding calendar year; current data

arc never available. FCC data is on international message telephone services (IMTS)

and non-IMTS (private lines, record messages, etc.). Most of the available statistics

deal with voice messaging, not with data

transmission and value-added services, which

will be especially important in the future.

33 Feldner reports that there maybe more categories of carrier services reported to the FCC since divestiture,

but the nature of these reports IS not as detailed as in the past and there are fewer FCC staff to conduct

thorough data reviews. Feldner, op. cit., footnote 26, p. 9. On the other hand, U.S. international transactions

m telecommunications services used to be reported to t he Bureau of Econom ic Analy.ws on a voluntary bas~s

but are now mandatory reporting, beginning with 1988 data.

3“ For example, AT&T publlshes The Wor/d’s Telephones, but no edition has been publlshed since 1988.

More than 30 percent of the world’s carriers do not report any Information, and some of the world’s largest

countries (mc!udmg Germany, the UnJted Kingdom, China, India, and the former U. S. S. R.) have not reported

any Information since 1979.

35 See CFR 47, chap. 1, par. 43.51. Carriers can request conf identiallty on the grounds that public access to

the data would cause “compet It Ive harm. ” The FCC grants requests for conf ident Ial It y at its discretion, and

says It is generally reluctant to do so. The publlc may oppose such requests for confidentiality and could

Invoke the Freedom of Information Act. Carriers prowding data on international service to the FCC may

request confidential treatment for reported data on operating agreements, I icenslng arrangements, and

authorizations and concessions to foreign entities Involved (n providing foreign services. The amount of data

that is classified IS not reprted, This confidentiality could affect the ability of pollcymakers and congressional

oversight committees to gauge the competitive Impact of FCC decisions on the market.
. . . .

Us.

Telecommunications

Services in

European

Markets

Other Federal agencies, such as NTIA,

sometimes conduct public inquiries or publish studies of trade in telecommunications

services, but these generally do not produce

new primary data or build consistent timeseries data banks,36 U.S. trade agencies

depend on the FCC and BEA for primary

data.

BEA has instituted mandatory annual

surveys of selected services transactions that

cover basic and enhanced telecommunications services; previously, on] y data on basic

transmission services were available and

only from carriers that voluntarily submitted

data to BEA.37 The FCC has begun collecting traffic data for U.S.-Canada and U. S.-

Mexico traffic, which was not collected

before.

Both the FCC and BEA are modifying

their data collection and reporting mechanisms or installing new data systems. The

FCC’s attempts to revise its data collection

have sometimes run into resistance from

OMB, and also suffer from ‘*institutional

lag. ’ ‘ As a regulatory body operating under

the rules of the Administrative Procedures

Act, the Commission is subject to detailed

procedural requirements, which require provision for public comment before a major

change in data collection rules. This has, for

some changes, taken as long as 6 years.

An Interagency Task Force on Services

Trade Data was established by USTR in

1982, but became inactive in early 1991 for

over 18 months; it began meeting again in

September 1992.38 All participants seemed

to agree that efforts to improve the collection

of international telecommunications data,

slowed by budget cuts, are not keeping pace

with accelerating changes in the structure of

services and the nature and volume of their

trade.

Conclusions and options

International telecommunications policy

has become more important in the last few

years, as foreign markets for communications services and equipment began to open

to U.S. competition. It is perhaps not surprising that U.S. policymaking about international telecommunications has been a combination of domestic regulatory policy (focusing on deregulation) on the one hand and

general trade or export policy (opening up

foreign markets) on the other. Thus a consisPage 174

36 The Census Bureau also collects data on communications services establishments. Its Ar?nua/ Survey of

Communications Services identifies firms engaged in providing point-to-point communications services

including telephone, telegraph, other message communications (such as E-mail, facsim ile, and telex), radio

and television broadcasting, cable television, and other communications services such as satellite Earth

stations. The survey provides estimates of operating revenue and expenses, and it breaks out telephone

communications by local, long distance, and t ype of customer. However, it does not break out international

services. The Census Bureau is undertaking its largest program expansion in over 40 years in the 1992

Quinquennial Economic Census, including expansion of coverage of communications. This will not include

data on international services but It is possible that the next economic census, in 1997, will do so.

(Information provided by Dennis Shoemaker and Mary Beth Morris, Division of Business Services, Bureau

of the Census).

37 According to Obie G. Whichard, Chief of the Research Branch, International Investment Division, BEA,

Oct. 26, 1992.

38 In 1989 the Interagency Task Force set up a Working Group on Information, Computers, and

Communication Services.
How

Telecommunications

Policy Is

Made

tency is established between the two, but the

increasing dominance of USTR in telecommunications issues tends to override or

restrict consideration of other goals or interests.

Currently, most of the effective decisionmaking about international telecommunications within the executive branch appears to

be done by the Office of the United States

Trade Representative, with NTIA in a secondary, contributing role. The FCC sometimes plays lone wolf, taking actions that

may be out of step. mistimed, or discordant

with the views and objectives of trade

negotiators. Both the telecommunications

industry, large telecommunications users,

and regulatory officials fear trade negotiators

may make tradeoffs that they regard as

undesirable or may inadvertently lock into

binding agreements old categories and distinctions that could become technologically

obsolete (for example, de fin it ions of basic

and enhanced services ).

The development of telecommunications”

policy within the executive branch is a

process of continuing arbitration or negotiation among several agencies, sometimes

brought together only by their collective

resistance to policies proposed by Congress,

or to judicial mandates. The latter have been

almost entirely directed at domestic, rather

than international, activities and structural

characteristics of the industry.

National policy with regard to international telecommunications-so far as there

is such a policy-may be both too narrow

(driven by trade considerations alone), and at

the same time unfocused and ineffective.

The single-minded emphasis on opening

foreign markets is not the same thing as

fostering the competitiveness of U.S. firms

in foreign markets, both because there are

tradeoffs to be made in negotiating such

agreements and because it may neglect other

factors necessary to enhance competitiveness (e. g., standards development, financing,

domestic regulatory changes, antitrust considerations, etc. ). An effective competitivenessenhancement policy implies a more integrated telecommunications policy than now

exists.

There has, for example, been little attention given to long-range issues of standardssetting, interoperability, or infrastructure development. Europe and the United States

increasingly tend to differ in the approach to

network architecture. In Europe, relatively

more centralized ‘‘intelligence’ (computerization) is integral to the network, while in the

United States there is a tendency to use

sophisticated terminal equipment, owned by

the user. There are many advantages to the

latter approach, but building advanced capabilities into the network may facilitate advanced uses of telecommunications by middlesized and even small firms that could not

afford the specialized customer premises

equipment. In a global economy, the competitiveness of smaller firms may turn out to

be important; 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.

Effective development of an international

telecommunications policy may require reorganization or strengthening of the policymaking structure for telecommunications.

It is becoming increasingly obvious that

. .

. . . Domestic telecommunications policy

Single-minded

emphasis on

opening markets

is not the same

thing as fostering

the competitiveness

of U.S. telecommunications firms.
. .

us.

Telecommunications

Services in

European

Markets

Without coherent

vision of what

telecommunication

networks should be,

the United Sfates

will be at a

disadvantage as

national networks

merge into global

networks.

choices have international components and

effects," 39 and that the reverse is equally

true. The lack of coherence and integration in

telecommunications policymaking has been

recognized as a problem for many years. A

1951 Communications Policy Board established by President Truman found that telecommunications problems were being dealt

with on a “piecemeal basis” with little

prospect for developing “a total national

communications policy."40 During the 1960s

and 1970s there were proposals from many

sources for reorganizing or reforming the

policymaking structure.41

Some commentators have proposed “a

single, integrated, Executive branch agency. 42

This does not, however, fully recognize the

responsibility of Congress for telecommunications as a mode of interstate commerce and

international relations, or the persistent necessity of balancing or prioritizing competing goals for telecommunications. It is necessary in policymaking not merely to resolve

the differences in interests within the telecommunications industry, or between large

producers and large users. but also to mediate among competing ‘‘public interests, ’

such as domestic universal service (defined

in modern terms of advanced network technology), competition in world markets, stateof-the-art infrastructure, consumer equity,

continuing innovation, reliability, and broad

interoperability. The sometimes conflicting

demands made on a national telecommunications system (or more accurately, merging

public and private systems) is testimony to

the central importance of telecommunications in modern society. Without a coherent

v is ion of what telecommunications networks

should be and do, the United States will be

at a disadvantage as national networks merge

into global networks and international rules

of cooperation and trade are developed.

Given this complexity, there will continue

to be a need for executive branch statement

of a national telecommunications policy that

can reconcile the views of diverse interests.

There will continue to be a need for broad

Congressional direction and legislative mandates to provide the framework for national

telecommunications policy. Finally, there

will continue to be a need for an independent

bipartisan regulatory agency like the FCC

that implements those legislative mandates.

This indicates the importance both of

attention to telecommunications a t the highest level of policy fomulation, and of an

effective coordination mechanism at the

agency level where the details of policy are

developed. The legislatively-designated coordination mechanism is the Communications Coordinator within the Department of

State; to provide staff support for the Coordinator, the Department created the Bureau of

International Communications and Information Policy. CIP, as it is now constituted, is

not an active and effective coordination

mechanism for interagency activities and

policies. That role has been partly filled by

USTR, in the course of carrying out its duties

39 Symons, op. cit., footnote 2, p. 294.

40 Symons, op. cit., footnote 2.

4’ For example the Presidential Task Force on Communications Policy (the “Rostow Commission”) in

1967-1968, the Ash Council in 1971, and other inltiat ives described by Howard J. Symons, op. cit., footnote

2, and Henry Geller, op. cit., footnote 11.

42 For example, Henry Geller, op. cit., footnote 11.
How

Telecommunications

Policy Is

Made

under the 1988 Trade Act. But USTR is not

a suitable vehicle for intenational telecommunications policy coordination, because its

responsibility extends only to trade relationships.

CIP had, and still has, a potential advantage as the locus for coordinating telecommunications policy. CIP’s location in the

Department of State appropriately extends

Congressional oversight of telecommunications policy to a broad range of Congressional Committees. including those concerned with foreign relations and with trade.

This meets the need to consider many

national goals and interests in formulating

teleccommunications policy--epecially when

treaty obligations must be evaluated in the

light of Federal and State responsibilities and

perogatives. The Department of State also

has experience in operating at the interface of

domestic and international policy and speaking for the United States in international fora

of many kinds.

However, CIP also has serious disadvantages as a mechanism for effective telecommunications policy coordination. It has a

small staff, without depth in technical, engineering, and regulatory expertise; it is there -

fore almost entirely dependent on industryand especially on the narrow segment of

industry that is able to invest considerablc

money and personnel to participate in international meetings and negotiating sessions.

These are large corporations. In attempting

to "coordinate the initiatives of one or

more executive branch agencies and those of

an independent regulatory body (the FCC is

generally considered to be a “congressional

agency")—all of which operate primarily on

agendas framed around domestic issues—

CIP is doubly handicapped by its location in

the State Department. It is regarded by the

other agencies as peripheral or irrelevent in

domestic policy struggles that shape the

sister agencies own approach to international telecommunications. It is also regarded as peripheral in agenda-setting and

decisionmaking within its own department,

where technological questions arc seldom at

the forefront. The Department of State has

generally neglected science and technology

in managing international relations and its

technology-oriented bureaus have had little

clout with departmental leadership. The

1992 Report by the Carnegie Commission on

Science, Technology, and Government

blamed this on the prevalence of ‘gentlemen

diplomats’ with ‘‘nineteenth century values, ‘ ‘ and callcd for steps to strengthen the

knowledge of science and technology within

the Department of State and U.S. embassies

abroad. 43

CIP status within the Department has been

further diminished because only USTR is

empowered to negotiate telecommunications

trade treaties and agreements,44 and the FCC

and NT I A largely determine the position of

the United States with regard to spectrum

“3 Carnegie Commlsslon on Science, Technology, and Government, Science and Technology In U.S.

/ntemaflona/ ,4/fairs: a Reporl (New York: The Commlsslon on Science, Technology, and Government,

1992),

“ Cl P does have responslblllty for negotiating some bilateral agreements, on International value-added

networks, called IVAN agreements; It also has responslbl hi y for coordinating some multilateral nontrade

agreements, such as frequency allocations (World Adm inlstratlve Radio Conference).
Us.

Telecommunications

Services in

European

Markets

Page 178

allocation issues .45 This effectively deprives

CIP of several vital functions with regard to

international telecommunications policy.

There are several structural options for

improving this situation; the broad alternatives are:

1. to strengthen and enhance the capabilities of CIP as a policy coordination

mechanism, or

2. to abolish CIP and create an effective

policy coordination mechanism elsewhere, possibly in the Executive Office of the President or in NTIA.

The State Department is (in the summer of

1993) about to adopt a third option—that of

downgrading CIP, now a Bureau headed by

the Coordinator, and placing its functions

within the Department’s Bureau of Economics, Business, and Agriculture. Telecommunications responsibility would no longer be

vested in an assistant secretary but in a

deputy assistant secretary, one of five within

the bureau, This would require legislative

ratification, since the post of Coordinator,

with ambassadorial status, is statutorally

established.

This appears to be the least desirable of the

three broad options. Reorganization of this

kind is unlikely to enhance CIP’s ability to

coordinate or provide policy leadership. It

would instead further diminish CIP’s ability

to coordinate or negotiate with the other

agencies, already nearly non-existent because CIP is a small bureau attempting to

“coordinate” large agencies. It would be

perceived abroad as a downgrading of the

importance of telecommunications policy

and would lessen the authority of CIP in

international fora where foreign government

representatives are highly sensitive to status.

It could weaken the oversight of several

congressional committees in telecommunications policy. It would leave open the

option of creating a real, effective coordination mechanism somewhere else, such as in

the Executive Office, but even this could be

confused by the continuing existence in the

Department of State of the legislatively

mandated position of Telecommunications

Coordinator with Ambassadorial rank.

One possible option for achieving better

coordination of telecommunications policy

formulation is to abolish CIP and shift its

functions to some other part of the Federal

structure. Old line State Department officials

would probably be unlikely to object to this,

since CIP is not embedded in the Department’s power structure and is said to be

regarded as something of an anomo]y within

the Department. This option would however

presumably require Congressional action,

because the position of U.S. Coordinator is

set by legislation. It would be resisted by the

industry groups on whom CIP relies for

making up or supporting its delegations to

international meetings, since it could deprive

them of entree into some negotiating fora. A

greater objection to abolishing CIP and

transferring its mandated role as coordinating mechanism is that this would probably

remove international telecommunications policy formulation and implementation from

oversight by congressional committees responsible for foreign affairs and trade.

It would also leave open the question of

the appropriate locus for the necessary coor45 U.S. Congress, Office of Technology Assessment, The 1992 U/odd Administrative Radio Conference:

Tmhno/ogy and Po/icy /rnp/ications,OTA-TCT-549 (Washington, DC: U.S. Government Printing Office,

May 1993).
—

How

Telecommunications

Policy Is

Made

dination between NTIA and the FCC or

among the several other government agencies that will from time to time have strong

positions on teleccommunications issues. The

obvious place for such coordination to occur,

provided the new Administration places high

priority on telecommunications issues, is

within the Executive Office, possibly within

the National Economic Council or in the

Office of the Vice President, who has taken

the lead in discussions about the future

telecommunications infrastructure. The Office of Telecommunications Policy (OTP),

which existed in the Executive Office of the

President from 1970 until 1978, could be

reconstituted. This opt ion, however, cannot

be effective unless it is initiated and fully

supported by the President.

Alternatively, CIP itself might be strengthened and reinvested with its original mission

of active policy development and coordination. This suggests that international telecommunications policy would be recognized

as an important part of domestic telecommunications policy and distinct from, yet closely

related to, general trade policy. To reinvigorate CIP would likely require decisive reorganization, restaffing, and refunding. CIP

would need a still small but highly qualified

staff with knowledge of advanced communications and computer technology and of

political, economic, and regulatory conditions affecting the telecommunications industry here and globally. It would also be

possible to mandate a larger, perhaps coequal, role for CIP in telecommunications

trade issues that now fall entirely to USTR.

This would improve CIP’s relative power

status with its parent Department, and to

some extent with the other executive agencies. However, in the interest of CIP’s

primary role of coordination, care would

have to be taken that its role not be limited

solely to international or trade issues.

Improving ClP’s position within the State

Department could be done only with the full

support of, and ideally at the initiative of. the

Department’s top-level administrators and

decisionmakers. Improving CIP’s ability to

act as a leader and as a mediator of other

agencies on telecommunications issues would .

require the political attention and nurturing

of executive and congressional leadership.

Page 179
International

Investment and

Domestic

Infrastructure

CHAPTE

9

R

Some analysts

believe that there

is a decline in

U.S. infrastructure

quality relative to

that in other

advanced nations.

A MAJOR PUBLIC POLICY DEBATE is shaping

up over the modernization of the U.S.

telecommunications infrastructure. The debate is framed primarily in terms of domestic

technology policy. but is closely linked to

the subject of international teleconmmnications and trade in services. The linkage is in

two prevalent assertions:

A highly advanced domestic communications infrastructure may be necessary to

sustain long-term competitiveness in world

markets, but

excessive investment overseas by U.S.

telecommunications firms could lead to

‘‘disinvestment’ in domestic communications networks, or in research and development (R&D).

The latter concern has been expressed by

some State regulators, public interest group

representatives, and independent analysts,

who say the drain of capital from local and

regional operating companies for investment

in overseas ventures is causing a decline in

telephone industry investment in domestic

networks. Some believe there is already a

decline in infrastructure quality compared

with that in other advanced nations.

The objection to overseas expansion is not

to international trade in services, which is

almost invariably seen in positive terms, but

to the preponderance of overseas direct

investment through subsidiaries and joint

ventures. These investments by carriers are

sometimes assumed to compete for capital

and for management attention with domestic

infrastructure modernization.

On the other side, some state regulators

and consumer group representatives object

to proposed large investments in modernizing public networks, on the grounds that

residential and small business subscribers

will find themselves paying for capabilities

and services that benefit only large corporations.

The term ‘telecommunications infrastructure’ has become popular to denote the

facilities, networks, and equipment used to

deliver telecommunications services; it is

often extended to include organizations and

people. The term acknowledges that telecommunications is not merely a set of

tradeable services but also a basic part of the

structure of industrial societies that is essential to social cohesion, governance, economic viability and equity. Even in purely

economic terms, many people hold that

“investments made in an advanced telecommunications infrastructure are justified on

the basis of benefits that are realized at the

macroeconomics level, over and above any

direct benefits to individual enterprises. ’

On the other hand, critics have warned that

the use of the term, especially by U.S.

carriers, is sometimes ‘‘self-serving and

instrumental because it is intended to

suggest that the networks are imbued with

the public interest and, thereby, merit direct

public investment and regulatory relief.2

Within the scope of this report on U.S.

telecommunications firms in European markets, there is no room to address the complex

arguments and counterarguments about how

Page 181

I Bruce L. Egan and Steven S. Wlldman, “Investing in the Telecommunications Infrastructure: Econom ics

and Policy Considerations,” Institute for Information Studies, Annual Review, A Afationa/ /r? fonnafbn

Network-Changing Our Lwes m the 21st Century, 1992, p. 29.

p Oscar H. Gandy, Jr., “Infrastructure: A Chaotic Disturbance in the Policy Discourse,” Institute for

Information Studies, op. cit., footnote 1, pp. ix ff.
. ——.

us.

Telecommunications

Services in

European

Markets

much domestic infrastructure modernization

should occur and who should pay for it, or

whether the United States should construct a

“National Information Infrastructure’ or

“electronic superhighway, ’ This chapter

will, however, address the narrower question

that directly relates international trade in

telecommunications services to this domestic telecommunications policy issue:

Is there evidence that growing overseas

investment by regulated U.S. telecommunications operators is resulting in a

significant decline in domestic investment, either in modernizing of physical

facilities or in research and develop -

ment?

International comparisons

Two kinds of investment must be considered: investment in infrastructure modernization, and longer-term industry investment

in R&D. According to many researchers on

innovation and competitiveness:

Facilities for basic research. . . can be

considered as an increasingly important part of the infrastructure for down -

stream technological and production ac -

tivities. 3

Infrastructure modernization

The superiority of the U.S. network was

generally accepted for decades, but is now

being questioned. Some analysts claim the

Nation’s telecommunications infrastructure

is, if not deteriorating, at least no longer

clearly the world’s best. Robert G. Harris of

the University of California at Berkeley,

William Davidson of the Management Education Services Association, and Kenneth

Robinson, former assistant to Chairman

Alfred Sikes of the Federal Communications

Commission (FCC), are among those who

believe that the quality of the U.S. telecommunications infrastructure is slipping and

could fall behind that in Europe.4 Harris

says:

[B]y the late 1980’s the United States

no longer [had] a telecommunications

sector far superior to that of other

nations, in the quality or extent of the

network, in the range of communications or information services available

through the network, or even in the

underlying technological prowess. s

Others suggest that the United States has

already been surpassed.6 These charges were

made so frequently and strongly that the

Page 182

3 K. Pavitt, “What Makes Basic Research Economically Useful?” Research Po/Icy20, 1992, p. 109.

4 Robert G. Harris is Chairperson of the Business & Public Policy Group of the Walter A. Haas School of

Business, University of California, Berkeley; William Davidson is a professor at the University of Southern

California and President of the Management Education Services Association (MESA), a consulting group

often used by RBOCS; see MESA, Comparative Assessment of Nationa/ Pub/ic Te/ecommunicatiorrs

/nfrasfructures, April 1990.

5 Robert G. Harris, “Telecommunications Services as a Strategic Industry: Implications for U.S. Public

Policy,” Michael A. Crew (cd.), Competition and (he Regdation 01 LMities (Norwell, MA: Kluwer Academic

Publishers, 1991 ).

G For example, Shlomo Maital argues that “the French phone system may now be the world’s best.” Shlomo

Maital, “The Global Telecommunications Pict ure: Is America Being Outstripped by France?” The Brookings

Review, summer 1992, p. 41.
International

Investment and

Domestic

Infrastructure

National Telecommunications and Information Administration (NTIA) in 1991 undertook a detailed assessment of the evidence

for infrastructure deterioration.’ While the

study was underway, a series of service

outages occurred in the summer of 1991 that

involved failures of software switching and

signaling; these raised further suspicions

about the quality of the network.

The NTIA report concluded that the United

States still holds a high ranking in international comparisons of telecommunications

infrastructure. By NTIA assessment, the

United States was in 1991 first in network

utilization, first in network reliability, and

first in fiber optics deployment and common

channel signaling. It was seventh in number

of lines per 100 persons, but it was exceeded

only by the Nordic countries, Switzerland,

Canada, and Iceland, all of which for reasons

of geography, climatic, and population dispersion put especially great emphasis on

access to telephone lines. The United States

is far down the list in Integrated Services

Digital Network (ISDN) capability, but ISDN

is not necessarily a good indicator of modernization. The lower rate of ISDN deployment in United States reflects a trend toward

a different philosophy of network architecture, oriented toward dispersed intelligence

or computerization rather than centralization

and integration (see chapter 2).

In international comparisons, the United

States ranked 13th in average annual industry investment per main line during the

1980s, according to NTIA, falling behind the

major European countries except for the

United Kingdom.8 However, when the expenditures were partitioned into two categories, ‘‘expansion’ and ‘‘modernization, ’

the United States ranked higher on industry

investment in modernization.9

The NTIA report concluded that “. . .thc

United States is a nation with an advanced

telecommunications infrastructure, a very

high access-line density, a robust level of

telephone usage, and a heavy emphasis on

modernization. 10 It noted, however, that

‘‘other countries may be planning to deploy

several new technologies, such as digital

switching and Signaling System 7 (SS7),

more rapidly than companies in the United

States.’ NTIA then advocated increased

competition in local exchange markets and

the elimination of government-imposed barriers to competition such as those in the

Modified Final Judgment (MFJ) and crossownership provision of the cable-telephone

company. (See chapter 1, box 1 -A,)

There was, according to William F. Maher,

the NTIA Associate Administrator responsible for the report, ‘‘a political bias toward a

competitive solution’ to the infrastructure

issue in the NTIA report. In a statement

7 U.S. Department of Commerce, National Telecommunications and Information Administration: The NT/A

/infrastructure Report: Te/ecornrnunlcatlorrs in the Age of /n/orrnatlon, October 1991.

‘ NTIA, op. cit., footnote 7, pp. 153 ff.

9 NTIA used several measures for investment in modernlzatlon, making adjustments for factors such as

accounting treatment for labor costs and varying patterns of responsibility for consumer premises

equipment. In t he several resultlng analyses, the United States ranked from first to sixth, either ahead of or

close to the major European countries.

‘“ NTIA, op. cit., footnote 7, Executive Summary, pp. i-ii.

There may

have been a

“political bias

toward the

competitive

solution”

to infrastructure

issues.

Page 183
Us.

Telecommunications

Services in

European

Markets

It is difficult to

tell how large the

gap in investment

is, or what

causes it.

provided to OTA by Maher in 1992,11 he

acknowledged that prior to its release, the

NTIA study was thoroughly examined to

ensure that it was fully congruent with

prevailing deregulatory policy. Thus the

report recommendations and international

comparisons should be accepted with at least

a grain of salt.

Maher said that the NTIA data, although

‘‘limited,"

. . . appeared to contain indications that

a straight competitive market approach

may not be the most efffective way to

develop a superior telecommunications

infrastructrure, e.g. . . . The U. S., the

world’s most competitive country, is

being eclipsed in key areas of technology (e.g., SS7 and digital switching) by

countries that have retained a single

supplier telecommunications environment (e.g., France). . . ."

The NTIA infrastructure report itself cautions that other countries are rapidly catching

up, especially those countries in which

investments for network modernization are

supported by government policy. The United

Kingdom, France, Japan, and Singapore

have all made telecommunications modernization a high priority,

Most international comparisons look only

at investments by the public telephone operators (PTOs) for public networks, but in the

United States, more than in any other country, there is also much corporate investment

in private network technology. Moreover,

the figures for the United States exclude

customer premises equipment, while those

for foreign countries arc likely to include

functionally-comparable equipment belonging to the PTOs. The FCC says that annual

infrastructure investment in the United

States totals more that $50 billion, which is

split almost evenly between network equipment and customer premises equipment. 12

Thus, while it is widely accepted that

investment by U.S. carriers in physical

infrastructure is lower than such investment

by many foreign PTOs, both as a percentage

of revenues and a percentage of net profits,

it is difficult to determine how large the gap

really is, what causes it, and whether all or

any part of it is related to overseas investment.

International R&D expenditures

Successful competition in international

telecommunications markets may in the long

run depend on continuing investment in

R&D:

Where innovation is an important aspect of competition, the ability of a firm

to survive depends on the effectiveness

of its research and development laboratories [and] on its ability to exploit its

innovations and protect them, or to

quickly match anything its competitors

may do.13

Page 184

‘1 Maher made these statements personally in an informal meeting at George Washington University, and

himself distributed the typed version, which does not however bear his name but that of J.C, Barry,

Regulatory Research, and the date Nov. 12, 1991.

‘

2 Statement of Robert Pepper, Chief, Office of Plans and Poltcy, FCC, In Hearings on National “Technology

Policy, before the Subcommittee on Technology, Enwronment, and Aviation of the House Committee on

Science, Space, and Technology, Mar. 23, 1993.

13 Richard Nelson, Understanding Technica/ Change as an Evolutionary Process (New York: Elsevier

Science Publishers, 1987), p. 6.
.—

International

Investment and

Domestic

Infrastructure

R&D expenditures ($millions)

Company 1985 1986 1987 1988 1989 1990 6 yr. total 6 yr. avg.

BOC composite

Alcatel

AT&T

Ericsson

Fujitsu

NEC

Northern Telecom

Siemens

s 91

200

2,228

314

530

1,146

430

1,561

$ 112

237

2,278

424

884

1,841

475

2,303

$ 126

316

2,453

507

1,141

2,634

588

3,443

R&D expenditures as a percentage of revenue

$ 306

330

2,572

601

1,529

3,482

711

3,913

$ 325

297

2,652

673

1,862

3,665

730

3,629

$ 319

386

2,433

803

1,891

3,496

774

4,123

$ 1,279

1,766

14,616

3,322

7,837

16,264

3,708

18,972

$ 213

294

2,436

554

1,306

2,711

618

3,162

Company

.—

BOC composite

Alcatel

AT&T

Ericsson

Fujitsu

NEC

Northern Telecom

Siemens

1985

0.1 %

16.7

6.5

8.6

8.5

12.7

10.0

8.8

1986

0.2%

16,0

6.7

9.9

9.3

14.0

10,7

11.5

1987 1988 1989 1990 6 yr. avg

0,2%

18,4

7,3

9.9

9.3

15.7

12.0

12.1

0.4%

19.5

7.3

11.3

9.3

15.9

13.1

10.9

0.4%

20.2

7.3

11.0

10,3

15.8

12.0

11.2

0.4%

22.9

6.5

10.7

11.7

16.1

11.4

11.0

0.3%

18.3

6.9

10.4

10.0

15.4

11.6

11.0

SOURCE ROBERT G HARRIS, “RESEARCH AND DEVELOPMENT EXPENDITURES BY THE BELL OPERATING COMPANIES

A COMPARATIVE ASSESSMENT,” 23RD ANNUAL CONFERENCE, INSTITUTE OF PUBLIC UTILITIES,

MICHIGAN STATE UNIVERSITY, DEC. 9, 1991

Investment in R&D by telecomnmunications companies is said by many experts

(even within the industry) to be lower in the

United States than in Europe and Japan, both

for equipment manufacturers and for services companies. ( See table 9-1. )14 AT&T’s

annual expenditures for R&D from 1985

through 1990 averaged about 6.9 percent of

revenues: those for European equipment

manufacturers were all higher, ranging from

10 to 18 percent. However, AT&T is a carrier

as well as an equipment manufacturer, a

factor that would be expected to dilute its

R&D expenditure relative to purely technologydevelopment firms.

Other analysts have compared the R&D

expenditures of the three largest U.S. firms

manufacturing telecommunications equipment (AT&T, GTE, and Rockwell) with that

of the five largest European manufacturers

for the years 1985 through 1990. U.S.

spending on R&D increased about 2 percent

in these years (i.e., was essentially flat),

while the Europeans’ R&D investments

Table 9-1.

R&D Expenditure

Comparison: Bell

Operating Companies

vs. Domestic and

Foreign Equipment

Vendors, Fiscal Years

1985-90

‘

4 Robert G. Harris, “R&D Expenditures by the Bell Operating Companies: A Comparative Assessment,”

paper presented to the 23rd Annual Conference of the Institute of Publlc Utilities of the Michigan State

University, m Williamsburg, VA, Dec. 9, 1991. Professor Harr~s’ data were gathered in an audit performed

on behalf of the National Association of Regulatory Utility Comm Issioners. Page 185
. . —

Us.

Telecommunications

Services in

European

Markets

Table 9-2.

R&D Expenditure

Comparison: Bell

Operating Companies

vs. Foreign

Telecommunications

Companies, Fiscal

Years 1985-90

R&D expenditures ($millions)

Company 1985 1986 1987 1988 1989 1990 6 yr. total 6 yr. avg.

BOC composite $91 $112 $ 126 $ 306 $ 325 $ 319 $1,279 $ 213

British Telecom 226 239 305 368 361 376 1,875 313

France Telecom 298 431 449 730 595 723 3,226 538

NTT 507 767 1,024 1,461 1,672 1,568 6,999 1,167

R&D expenditures as a percentage of revenue

Company 1985 1986 1987 1988 1989 1990 6 yr. total

BOC composite 0.1 % 0.2% 0.2% 0.5% 0.4% 0.4% 0.3%

British Telecom 2.4 1.9 2,0 1.9 1.9 1.9 2.0

France Telecom 3.3 3.4 2.8 4.6 3.5 4

4.0 3.6

NTT 2.7 2.7 2.8 3.2 3.8 4.1 3.3

SOURCE ROBERT G HARRIS, “RESEARCH AND DEVELOPMENT EXPENDITURES BY THE BELL OPERATING COMPANIES

A COMPARATIVE ASSESSMENT,” 23RD ANNUAL CONFERENCE, INSTITUTE OF PUBLIC UTILITIES,

increased by 17 percent.’s The annual average number of U.S. patents granted to the

U.S. companies decreased by 3.2 percent

during this period, while the number granted

to the European companies rose by 11

percent. overseas expansion by U.S. carriers

began growing significantly during this period (about 1987-88), but the period also saw

a serious recession begin.

Table 9-1 includes for comparison the

R&D investments of the Bell operating

companies (BOCs), which are only 0.3

percent of revenue annually. This is again a

misleading comparison because the BOCs

are precluded from equipment manufacturing, which is generally more researchintensive than services. Nevertheless, investment in R&D is very likely depressed by the

regulatory separation of manufacturing and

services.1’

MICHIGAN STATE UNIVERSITY, DEC. 9, 1991

Table 9-2 compares R&D expenditures by

the regional Bell holding companies (RBHCs)

(including support for their shared research

facility, Bellcore) with expenditures by BT

and France Telecom, a more suitable comparison because those firms are also carriers

that do not manufacture equipment and serve

populations and geographical areas comparable to those of some RBHCs. The expenditures for R&D, as percentage of income, are

respectively 7 to 12 times greater for the

European PTOs than for the RBHCs. Here

also there are caveats. In Europe the trend is

toward building intelligence into the network, whereas in the United States the trend

is toward placing intelligence at the periphery of networks, including more of it in

advanced terminal or customer-premise equipment. This affects where investment in R&D

occurs and by whom it is made.

Page 186

15 Robert T. Blau, “IS Technology the Key to Competing in Global Telecommunications Markets?”

%chrdogy in Transition, 1993 BellSouth Environmental Scan, pp. 44-51. R&D expenditures by Japan’s

NTT increased 19 percent in the same period, and its number of U.S. patents grew by 11 percent.

‘G Robert G. Harris, op. cit., footnote 5.
—.

International

Investment and

Domestic

Infrastructure

Table 9-3.

R&D Expenditure on

South Telecommunications in

U.S. Japan Germany France U.K. Italy Sweden Korea Netherlands Spain—- Selected Countries,

R&D expenditure on 1987

telecommunications 13 4.7 2.5 2.1 2.1 0.5 0.48 0.41 0.2 0.11

Military sector 5 0a 0.2a 1.0 0.7 na O.1 a na O

a

na ($ billions)

Civil sector 8 4.7 2.3 1.1 1.4 na 0.38 na 0.2 na

R&D expenditure on

telecommunications as

percentage of total national

R&D expenditure 10 10 11 13 13 6 14 9 5 5

NOTES Estimates Conversion factor of nat(lonal currencies with purchasing power parity m U S dollars

a Approxlmatlon.

SOURCE HARIOLF GRUPP AND THOMAS SCHNORING, “RESEARCH AND DEVELOPMENT IN TELECOMMUNICATIONS

NATIONAL SYSTEMS UNDER PRESSURE,” TELECOMMUNICATIONS POLICY, JANUARY/FEBRUARY 1991, PP 46%5.

According to this reasoning, European

expenditures attributed to industry research

on telecommunications equipment probably

include much research that in the United

States is conducted by computer manufacturers.

Since the PTOs are largely state-owned,

they may be a channel for national R&D

support that in the United States would be

directed at military research or at the national

laboratories. Hariolf Grupp and Thomas

Schnoring, German researchers, compared

10 countries in terms of R&D expenditures

on telecommunications in 1987, and concluded that levels of spending reflected the

size of national economies (see table 9-3. )

They ranked the United States first ($13

bill ion), followed by Japan ($4.7 billion) and

the four large European countries (Germany,

$2.5 billion; France, $2.1 billion; the United

Kingdom, $2.1 billion: and Italy, $0.5 billion). The conclusions of Grupp and Schnoring are thus at odds with most other analysts,

probably because they include all sources of

R&D funding, including military spending.17 Nearly all nonmilitary R&D spending

in the United States comes from the carriers,

the German analysts claim, compared with

about 60 percent in France and only 7

percent in Germany. In the United States,

much government funding of R&D has been

carried out through the Department of Defense,18 while in other countries it may come

from nonmilitary agencies; so this comparison may reflect national differences in public

administration rather than differences in

government/industry research funding,

‘

7 M[lltary R&Don telecommunications, according to Gruppand Schnoring, has significant splllover benefits

for clvlllan telecommunications. Harlolf Grupp and Thomas Schnoring, “Research and Development In

Telecommunications: National Systems Under Pressure,” Telecommunications Policy, January/February

1991, pp. 46-65. See also Thomas Schnoring, “European Telecommunlcatlons R&D Systems m

Transltlon,” Wissenschaftliches Institut fur Kommunikationsdienste GmbH, Bad Honnef, Germany,

December 1992.

‘

8 Federal Government funding supports nearly half of the communications R&El performed by Industry,

according to the National Science Foundation, /Vationa/ Patterns 01 R&D Resources: 1992, NSF 92-220,

October 1992, table 3, p. 19. Page 187
.-

U.S.

Telecommunications

Services in

European ‘

Markets

Telecommunications Plant

Exchange Carrier

Most of the available international comparisons are highly questionable on several

grounds, including differences in industry

structure, regulatory requirements, and accounting procedures. What is included in

“R&D expenditures” and the meaning of

“net income’ may differ.

The question of domestic

disinvestment

Assuming that investment by U.S. telecommunications firms in physical modernization and in R&D is below that in Europe,

this still does not address the narrower

questions of whether it is declining, and

specifically whether it declined after overseas expansion became common and as a

result of the increasing overseas investment.

Plant and

Revenues,

1980-89 120

80

Trends in infrastructure modernization

According to the U.S. Telephone Association, the value of U.S. carriers’ current plant

grew only 3 percent from 1980 to 1989 (in

constant 1980 dollars), and the value of

annual construction appears to have decreased strikingly between 1980 and 1989.

(See figure 9-1.) In 1980 dollars, it decreased

40 percent from 1980 ($21.2 billion) to 1989

($12.6 billion). In 8 of the 9 years, construction declined from the previous year or was

stable (increasing 1 percent or less).

FCC figures for ‘reporting local carriers

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 to

1989. 19 (See figure 9-2. ) Each year from

1986 through 1989, the value of annual

construction declined from 2 to 10 percent

over the preceding year, from $15, 1 billion

in 1985 to $12.3 billion in 1989, in 1980

dollars. (Annual revenues also declined by 3

percent in constant dollars in the same

period.) Construction increased slightly in

1990 and 1991, as did revenues. During the

4 years 1988-91 (the only years for which

data is available), the value of gross plant for

the seven RBOCs declined just over 3

percent in constant dollars; the value of

annual construction was steady.zo These

figures include both expansion and modernization expenditures.

Interpreting these trends is complicated,

however, by the fact that the cost of computer and telecommunications equipment

(e.g., fiber optics) was decreasing during

Page 188

19 FCC figures are for reporting carriers only, i.e., all regulated local exchange carriers. In 1984

RBHCs/RBOCs were separated from AT&T, and those figures may not be comparable to later figures.

20 FCC Statistics of ComrnorJ Carriers, 1988-89, 1989-90, 1990-91, 1991-92, table 2-7, each volume.
International

Investment and

Domestic

Infrastructure

these years, The way in which several

factors--cost trends, divestiture and separation of equipment and services provision,

and overseas investment—interacted rides

conclusions on the basis of this evidence

questionable. A decade or less, in which

there were several major disruptions, does

not provide reliable trend data. Further, the

numbers are themselves suspect because of

several industrywide changes in accounting

procedures promulgated by the Financial

Accounting Standards Board.21

Trends in research and development

Expenditures for research, development,

and engineering are also a long-range investment in infrastructure modernization. As

noted by political scientist John Zysman:

. . .[C]ertain industries may be more

important than others because they

generate benefits for the rest of the

economy, and government policies to

promote or protect them can improve

welfare by fostering these spillover

effects. High-technologogy industries are

likely to generate positive externalities

because of the knowledge generated by

their research and development activities, and because the benefits of this

know’ledge cannot be completely appropriated by the private agents who

pay the costs for the generation of such

knowledge. 22

Telecommunications is among the industries that have generated positive social

externalities from R&D; it can be shown that

advances in telecommunications systems

and services have benefited most sectors of

American life and society, have been essential to national security, and have supported

the rise of major industries. Professor of

business Robert C. Harris says that R&D

expenditures in leading-edge technologies

such as telecommunications equipment and

services generate tremendous positive spillovers that accrue to those who use and those

who supply the product or process innovations that flow from R& D."23 But the recent

status and future prospects for telecommunications R&D is obscured, for public poli1980 $billions

200 Figure 9-2.

Local

Telecommunications

160 Gross plant Exchange Carrier

Gross Plant

1 2 0

and Revenues,

1984-91

2’ The Financial Accounting Standards Board (FASB) is a nongovernmental entity authorized by the U.S.

Securltjes and Exchanges Commission to set financial accounting and reporting standards for business

organizations for which stocks are publicly traded. It made changes in accounting procedures for

telecommunications carriers m 1982, 1986, 1987, and 1989 (FASB Statements 71, 86, 87, 89). This

Introduces dlscontlnulties in time-series data. Information courtesy of Mark Card In, FASB.

22 John Zysman, “Trade, Technology, and National Competition,” International Journal of Technology

Management, vol. 7, No. 1-3, 1992, p. 169.

23 Robert G. Harris, op. cit., footnote 14, p. 2. Page 189
Us.

Telecommunications

Services in

European

Markets

cymakers, by a dearth of reliable data. As

pointed out in chapter 8, divestiture and

deregulation together with longstanding government policy toward industry data collection have resulted in deficiencies in the

information available to policy makers.

The Bureau of the Census conducts an

annual Survey of Industrial Research and

Development on behalf of the National

Science Foundation (NSF) .24 Individual corporate responses are protected by law and

only highly aggregated data are available to

policy makers and the public; the way categories are defined makes it impossible to get

a comprehensive value that includes all

telecommunications R&D,25 Telephone operating companies with revenues over $100

million must report research expenditures

annually to the FCC; but this data is available

only since 1988, and it covers only regulated

common carriers, including the RBOCS.

26

The research performed or funded by the

parent RBHCs on nonregulatcd services and

technologies (such as cellular communications), including RBHCs’ support for

Bellcore, is not reported. Financial statements that the RHOCs make to the Securities

and Exchanges Commission (Form I Ok)

unanimously list R&D expenditures as "N.A."

(nonavailable).

Attempts to identify trend lines in research

expenditures by major carriers are further

confused by the lack of consistent timeseries data resulting from the many discontinuities: divestiture and reorganization,

changes in accounting procedures, and acquisitions. *7 The implications of the observations reported below, therefore, contain

significant uncertainties and can be considered as indicators only.

The NSF reports based on Bureau of

Census data indicate that R&D performed by

U.S. telecommunications equipment manufacturers, including AT&T, was 117 percent

higher in 1985 than in 1980, but had

increased only another 10 percent by 1990.

For comparison, R&D performed by all

manufacturers was only 89 percent higher in

24 A “controlled sample” of enterprises is designed to include all large companies known to be “major

performers of R& D,” according to analysts at the Bureau of the Census. A long detailed questionnaire is

used in odd years and a shorter form in even years. See National Science Foundation, Surveys of Science

Resources Series (latest edition, Research and Deve/ojmentirr /r@stry: 1989, NSF 92-307), and Nationa/

Patterns otRt?D Resources: 1992, NSF-930, October 1992, which covers government and university R&D

performance and expenditures as well as industry performance and expenditures.

25 The annual dollar value of R&D performed by telecommunicate ions equipment manufacturers is reported.

This would include AT&T, since company identif icat ion is by standard industrial classif ication code. Closely

related R&D on telecommunicate ions performed by computer manufacturers is in a different category that

aggregates all computer R&D, and telecommunications services companies are lumped with construction,

engineering, and all other services providers in the single category of “nonmanufacturing companies.”

26 The data is published annually in the FCC’s Statistics of Common Carriers. R&D expenditures were not

reported prior to 1988, when a new FCC reporting rule was implemented, according to the FCC’s Industry

Analysis Division.

27 Research expenditures are not specifically reported to the Securities and Exchanges Commission by

telecommunications companies, and the chief source of information about them are the companies’ annual

reports and “Form Ms” filed with the FCC. However, the FCC doubts such figures are fully comparable

across companies. (Discussions wit h Industry Analysis Section, FCC). See chapter 8 for a discussion of t he

inadequacy of data for policy analysls.
International

Investment and

Domestic

Infrastructure

1985 than in 1980 but increased 24 percent

from 1985 to 1990.

Information supplied by AT&T indicates

that in constant dollars, AT&T’s annual

research expenditures (chiefly for Bell Labs)

have fluctuated slightly from year to year,

but essential y remained flat from divestiture

in 1984 through 1991 (see table 9-4). They

increased in constant dollars about 2 percent

from 1987 through 1991, the period of

overseas expansion. In 1992 there was a

significant decrease in research expenditures, about 9 percent less than 1991 in

constant dollars. AT&T’s comptroller attributed this in part to a real decline and in part

to a ‘ ‘bookkeeping artifact” related to the

NCR acquisition. Looked at as a percentage

of reported operating revenues, research

expenditures have been declining since 1990.

The AT&T Annual Report says that this

"

. . .reflects streamlined efforts for telecommunications network products and systems

and a consolidation of research and development efforts for computer products and

systems following the merger [with NCR]. ’

The new president of Bell Labs, John S.

Mayo, promised in July 1990 that he would

make the institution ‘‘. . more of a profitminded industrial laboratory. ’28 An AT&T

spokesman said that the outlook for research

expenditures is to remain flat, or shrink

slightly, over the next few years.29 This, the

spokesman said, is a result of competitive

pressure. Although AT&T remains “deeply

committed to research, ’ in recent years

R&D expenditures have been subjected to

more critical scrutiny within the company

Year

1984

1985

1986

1987

1988

1989

1990’b

1991

1992

Total

R&D operating R&D as % of

expenditures Constant $ % Change revenue revenue

$2,188 $2,404 $33,187 6.59

2,228 2,360 -1.8 34,417 6.47

2,278 2,373 0.6 34,087 6.68

2,453 2,453 3.4 33,768 7.26

2,572 2,475 0.5 35,210 7.30

2,652 2,444 1.2 36,112 7.53

2,935 2,593 6.0 62,191 4.72

3,114 2,643 1.9 63,089 4.94

2,911 2,414 -8.7 64,904 4.49

a The fluctuation 1990-91 Includes the effect of software capltalizatlon, a change In accounting

procedures.

b The large jump In total operating revenue results frm mcluslon, after 1989, of access charges.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT R&D EXPENDITURES AND TOTAL OPERATING

REVENUE FROM AT&T ANNUAL REPORTS TO STOCKHOLDERS, 197S-92.

than they were in AT&T’s years as a

Table 9-4. regulated monopoly, and are often ‘‘hotly

AT& T Research and contested’ by the company’s business units.

The profile of R&D expenditure is also Development

Expenditures, changing. Infrastructure modernization de- 1978-92

pends heavily on software. Bell Labs has

25,000 scientists and engineers, plus 5,000 ($millions)

administrators and support staff, located in Constant $: 1987=0 29 facilities in six states; of these, approximately 4,000 have doctorates.30 Software

development is now the dominant activity—

there are now more computer scientists than

electrical engineers at Bell Labs. In 1992,90

percent of the budget went to “developmerit," under the control of the managers of

the 20 lines of business. This allocation

between development and research does not

appear to have changed a great deal since

divestiture, but the physics and materials

‘a Peter Coy, “The Man Who’s Running a Nutsier-Boltsier Bell Labs,” Business Week, Aug. 5, 1991, p. 69.

29 OTA interview with Gale Jackson, AT&T Comptroller, Mar. 10, 1993.

30 Michael Maccoby, “Transforming R&D Services at Bell Labs,” Research & Technology Management,

January/February 1992, pp. 46-47. Page 191
Us.

Telecommunications

Services in

European

Markets

Evidence of

declining

investment in

infrastructure and

R&D is mixed.. .

but investment

in both is

almost surely

less than

needed.

science laboratories within the research division are being “de-emphasized.” 31

AT&T officials say they are putting strong

emphasis on making the “development”

component of R&D more cost-effective, by

shortening the development cycle and getting new products to market faster, and

therefore the number of people in “development’ is shrinking. As a result, AT&T

officials say, the basic research component

of the R&D expenditure is probably rising

relative to the development component. Critics dispute this, saying that there has been a

pronounced shift from the long-range “nearbasic” research for which the old Bell Labs

had long been famous, to much more shortrange market-oriented research. To the extent that this is true, it would more likely be

an indirect effect of divestiture, deregulation,

and increased market competition than an

effect of alternative investment overseas.

Bell Communications Research, Inc., commonly known as ‘‘ Bellcore," was incorporated October 20, 1983, to provide its

shareholders, the RBHCs, with technical

support including research, engineering, and

services related to emergency preparedness

and national security. Bellcore does R&D in

those technical areas where its owners, the

RBOCs, are not in direct competition (i.e.,

basic communications services). Most of its

research results are available to all of the

owners, but occasionally there are “private’

projects. 32 It also does research for some

other telephone industry clients such as Bell

Canada.

Bellcore’s RBHC owners provide most of

the institution’s revenue, sharing the cost

according to a formula based on the number

of access lines owned by each company.

Their expenditures ranged, in 1992, from

$125.9 million for Pacific Bell upto$174.8

million for Bell Atlantic,33 Other income

comes from research or services done for

independent telecommunications operating

companies, government, or vendors, and

from licensing sales. Together, these accounted for about 18 percent of total revenue

in 1992.

Bellcore’s budget from its inception

through the current year has grown 4.9

percent in constant dollars. (See table 9-5.) It

increased by 7.5 percent in real terms in the

shorter period of the RBHCs’ overseas

expansion, from 1987 through 1992, after

having shrunk through inflation. (It is possible that some of this growth is an artifact of

changes in accounting practices that occurred at about this time. ) However, the

proportion of Bellcore’s income provided by

the RBHC owners also changed in that

period; RBHCs contributions grew less than

2 percent from 1987 through 1992.

George Heilmeier, president of Bellcore,

has said that his aim is faster product

development. He has stepped up research in

information technologies such as objectoriented computing and multimedia services, and is putting less emphasis on physical

sciences. Bellcore ‘‘will move away from the

Page 192

31 Peter Coy, op. cit., footnote 27, and William Sweet, “Bell Labs Reorganizes Research for More Competitive

Environment,” F%ysics Today, June 1991, pp. 97-102.

32 Gary H. Anthes, “Bellcore in Search of New Ideas,” Cornpufenvor/c/, Feb. 25, 1991, p. 83. For example,

U.S. West persuaded Bellcore to keep a project proprietary for 2 years.

33 Bellcore, 1992 Annual Report.
International

Investment and

Domestic

Infrastructure

academic model..."34 and its operating

budget may continue to shrink over the next

few years.

Several of the RBHCs also have their own

R&D units, apart from Bellcore, in order to

protect the proprietary nature of the R&D.

The most elaborate of these is NYNEX’s

Science & Technology, lnc.,35 which has

346 employees in four laboratory facilities

and does research in areas such as expert

systems, speech reccognition and synthesis,

and wireless technology. U.S. West has a

somewhat smaller Advanced Technology

Group, and Southwestcm Bell also has an

internal R&D staff. The R&D expenditures

for- these organizations are not made public.

Determinants of infrastructure

investment

The evidence of declining telephone industry investment, in infrastructure or in

R&D, is mixed and indeterminate, but the

clues are sufficient to assume that U.S.

industry investment in both is almost surely

less than that needed to assume the United

States of continued leadership, and there are

no signs that it is rising There is, at a

minimum, logical justification for raising

two questions:

Will investment in infrastructure moderization decline, at least in the short term.

through competition with investment opportunities overseas?

Has R&D spending declined because of

the change from a monopoly market, with

protected rates of return, to highly comDeflated 0

/0 Revenue

Year Revenue revenuea Change from owners Employees Change ——-—

984

985

986

987

988

989

990

991

848,357

864,626

873,930

909,902

984,330

,043,537

,097,198

,139,042

931,748

916,208

901,702

909,902

947,838

962,495

972,090

972,709

86

-1.7 91

-1.2 93

0.9 93

4.2 92

1.5 92

1.0 91

0.1 90

n/a

n/a

n/a

7,652

8,237 -7.6

8,124 -1.4

8,635 +6.3

8,239 -4.6

34 Hellmeler, quoted in Em Ily Sm (t h and Peter Coy, “Pumping up the Baby Bells’ R&D Arm,” Business Week,

hg. 5, 1991, pp. 68-70.

35 NYNEX Science & Technology began m 1985 but was Incorporated as a wholly-owned subsidiary In

August 1991. It has laboratories In White Plalns, NY; New York City; and Cambridge and Framlngton,

Massachusetts.

Tab/e 9-5.

Be//core Revenue

and Employees,

1984-92

1992 $1,180,636 $977,752 0,5% 880/0 7,208 -1 2.50/o

Real change, 1984-1992 = +4.9% real change in owners’ contribution = +17.9%

Real change, 1987-1992 = +7,5% real change in owners’ contribution = +1.7%

—

a 1987 dollars

SOURCE BE LLCORE ANNUAL REPORTS, 1984 TO 1992

petitive markets where the investment

horizon is shorter’?

On the other hand, there are good reasons

to argue that competition in domestic markets and in thc global marketplace is necessary to maintain high rates of innovation in

high-tech companies.

Those who perceivec a decline in domestic

investment and blame it on the rush of

telecommunications carriers to take advantage of overseas investment opportunitiesargue that more rapidly expanding markets

in Europe offer the opportunity for highcr

returns and more immediate payoff than

does modernization of the domestic infrastructure. Domestic investments also may

suffer, they suggest, because they must meet

the inspection and challenge of state regulators. Since companies must allocatc resources among competing interests, a pool of

Page 193
Us.

Telecommunications

Services in

European

Markets

investment capital (such as the RBHCs’

retained earnings) is likely to be invested

disproportionately in enterprises located in

economically more favorable environments.

Since local telephone services are growing

slowly, RBHCs are looking to expand their

portfolios of revenue-producing services,

particularly video programming. However,

as monopoly providers of local telephone

service, they currently face a number of

constraints on the services they arc permitted

to offer. and these restrictions are cited as

significant disincentives for network investment.

The 1992 Economic Report of the President asserted:

. . . it may be regulation that is discouraging firms from investing in new

infrastructure. When regulatory barriers are removed, competition and the

ability of firms to reap the rewards of

their success provide sufficient incen -

tives to invest in commercially viable

telecommunications technologies. There

are firms, however, that are reluctant to

invest because they cannot be assured

of fully capturing all the benefits of

their investments.36

The most frequently cited impediment is

the Modified Final Judgment,37 which prevents the RBOCs from manufacturing telecommunications equipment and offering longdistance service, and until recently from

offering information services (see chapter 4,

box 4-A).38 RBHCs claim these restrictions

constitute significant disincentives for continued robust investment in the publicswitched network. The removal of the MFJ

restrictions, they promise, will result in new

industry investments in the network—

justified by their entry into promising new

markets. This has been interpreted by some

people to mean that they would increase

domestic investments at the expense of

investments overseas. That would not be

necessary (telecommunications companies

have very high ratings in capital markets).

Nor would it be likely, given the growth

opportunities projected for overseas markets

(see chapters 3 and 4).

A U.S. investment analyst, assessing the

risk that overseas expansion will create a

capital drain on U.S. telephone operators,

concludes that:

In most cases, this risk is minimal and

has not been sufficient to warrant

consideration of lower ratings for the

‘G The Economic Report of the President, Transmitted to Congress January 1993, p. 179.

37 After the divestiture of AT&T in 1982, RBOCS were granted the exclusive franchise for local telephone

service, which was widely regarded as a natural monopoly, and were kept out of lines of business deemed

competitive. Fears of cross-subsidizing competitive or nonregulated markets (equipment manufacturing,

long-distance service) with revenue from noncompetitive or regulated markets (i.e., local telephony)

informed this policy choice.

3* The manufacturing ban continues to prevent RBOCS from making changes to the software in their

switches. The prohibition on long-distance carriage prevents RBOCS from centralizing information services

on a single gateway for their entire regions and instead requires that they install database and switching

equipment in each local access and t ransport area (LATA). National Telecommunications and Informat ion

Administration, The NT/A /ntrastructure Report: Telecornrnun;cafions in the Age of /n/orrnatior?, U.S.

Department of Commerce, October 1991, p.215. NTIA has advocated the removal of the line-of-business

restrictions contained m the MFJ and the cross-ownership prohibitions on cable-telephone company

accepting the BOCS’ promise of deployment of new services and technology.
International

Investment and

Domestic

Infrastructure

U.S. telephone subsidiaries. Moreover,

U.S. regulatory agencies would take a

dim view of any attempt to seriously

weaken the financial health of the local

telephone companies.39

In addition to the MFJ, the local telephone

companies arc confronted with a tangle of

other federal and state regulatory obligations. The domestic investment plans of the

telephone companies are subject to the

review of state public utility commissions

(PUCs), whose priorities for telecommunications delelopment may differ from state to

state even within an RBOC’s service area.

Regulators have conflicting priorities: in the

absence of a competitive market environment, regulators arc responsible for curbing

imprudent investments and possible overinvestment that would burden customers with

unnecessary costs, and at the same time, they

must assure a sufficient level of industry

investment to prevent telephone service

from degrading and to assure that it continues to develop and improve.

Under traditional rate-of-return regulation

(the prevailing regulatory model for several

decades), the carriers had an incentive to

invest in facilities; some critics said it was an

incentive to overinvest. After divestiture and

the end of cross-subsidization of local residential rates by business and long-distance

rates, regulators sought to stabilize consumer

prices. Beginning in the late 1980s, more

than half of the states adopted some form of

“incentive regulation. ” This is a modified

form of rate-of-return regulation, under which

the regulators set a base rate of return;

earnings above that rate are allowed but must

be shared between ratepayers and shareholders.

40 Regulators retain control over the price

of basic residential and small business access, but give the carrier pricing flexibility

on competitive services offered to large

companies. The carrier has an incentive to

reduce costs and thus increase earnings. 4l

Incentive regulation encourages shortterm cost reductions rather than long-term

investment in infrastructure and in R&D,

Critics

say that

incentive

regulation

encourages

short-term cost

reduction

rather than

long-term

investment.

39 Fitch Investors Service, Inc., “U.S. Telephone Companies Seek Fortunes Overseas,” 1993.

40 Joseph S. Kraemer, “lm proving LEC In cent ive Regulation Plans,” Pub/ic Ufihties Fortnight/y, Feb. 1,1991.

4’ The local exchange carriers are also com Ing under competitive pressure to cut costs. The alternative

carriers, such as Metropolitan Fiber Systems (MFS), which are setting up local area networks to serve

business customers, can undercut the local carrier because they serve only high volume users with new,

high-capac[t y equipment and nonunion workers. (One report says that MFS can install a private line at a cost

40 percent below t hat oft he primary carrier. Half of t he reduction was said to come f rom lower compen sat Ion

for employees.) Ron Bohlln, AlIan Roth, and David L. Wenner, “Do LECS Need Magic to Cut Costs?”

Telephony, Apr. 19, 1991, p. 31.

The move by local carriers to cut costs has so far largely taken the form of reducing the workforce. Paclflc

Telesis, for example, has cut Its workforce by 18 percent since 1984 and plans another 18 percent reduction

over the next 5 years; this IS a total of about 25,000 jobs out of a 1984 workforce of 77,000. There IS concern

that this com pet It Ive pressure on local earners may also discourage or delay investment in infrast ructure and

In R&D. Page 195
Us.

Telecommunications

Services in

European

Markets

Page 196

according to its critics.42 The cost and risk of

investment is shifted in part from ratepayers

to shareholders. Cost reductions are easier to

predict and quantify than uncertain future

revenue from facilities enhancement.

Some states have recognized these problems and arc experimenting with new forms

of incentive regulation. Tennessee, for example, specifies special network investment

requirements and allows faster capital recovery in return for accelerated investment in

infrastructure. The most ambitious plans are

in Illinois, New Jersey, New York, Tennessee, and Washington. New Jersey Bell is

investing $1 billion by 1999 to expand

narrowband capabilities and begin installing

broadband network services. Tennessee has

a similar 10 year plan to achieve universal

ISDN availability in urban areas.43

State commissions and the FCC have

another handle on investment decisions

through the rules for equipment depreciation. PUCs typically require of telephone

companies very long depreciation schedules

for net work equipment. This keeps rates low,

but also slows down the replacement of old

equipment with modern equipment.44 The

FCC has just proposed new incentives for

local telephone companies to invest in fiber

optics and computerized switches by allowing them to depreciate their investment in old

equipment more rapidly. The FCC regulates

interstate access charges through price caps;

these set a mandated ceiling on consumer

prices and, within that range, telephone

companies can increase their profits (up to

about 13 percent) by cutting their costs. If the

rate of return exceeds 13 percent, customer

charges must be lowered to return half of the

surplus profit to customers. Big depreciation

expenses reduce a company’s reportable

profits. This can mean as much as $0.50

additional profit for each additional dollar of

depreciation .45

Telecommunications has become a major

factor in corporate site selection, especially

for corporate headquarters, airlines, financial

services, and business services. States are

caught in a dilemma of wanting good telecommunications to attract economic development, yet also wanting to keep their

residential rates low and to reduce their

intrastate long-distance rates to discourage

corporate bypass.46

Some consumer advocates insist infrastructure modernization could be wasteful; it

could benefit only RBHCs and their shareholders, and not the small businesses and

42 Bohlin, Roth, and Wenner, op. cit., footnote 40. For a counterview, see Chris Gadrowski, “Counterpoint:

Don’t Shackle Incentive Regulation,” Pub/ic LMhlies Fortnight/y, Apr. 15, 1991. Gadrowski objects to

regulators specifying inputs (investments) rather than outputs (level and quality of services) but

acknowledges that incentive regulation can create the incentive to reduce network investment unless it is

coupled with penalties for reduced service quality levels (in the form of making refunds to customers).

43 Information provided by Ronald G. Choura of the Michigan Public Service Comm ission and the Alliance

for Public Technology, February 1993.

44 In Louisiana PUCV. FCC, 476 US 355 (1986), an FCC order preempting conflicting state depreciation

policy was set aside.

45 “FCC Proposes Incentives for Local Phone Companies,” Te/ecom Highlights /nlemationa/, Dec. 16,1992,

p. 11.

46 Paul E. Teske, “State Telecommunications Policy in the 1980s,” Po/icy Studies Review, spring 1992, vol.

11, No. 1, p. 118.
International

Investment and

Domestic

Infrastructure

households who will pay a large part of the

costs. Also, it could squeeze out investments

that might otherwise go to smaller and more

innovative companies. The alternative to

network modernization, however, appears to

be reliance on very fast, high capacity

packet-switching services and other new

technologies, often provided by alternative

carriers, that will benefit very large corporate

users concentrated in some urban centers,

and will offer Iittle or no support for middlesized and small businesses.

At current rates of industry investment.

the domestic infrastructure may be upgraded

slowly and unevenly. 47 Much more modernization

will be on private networks. This at Ieast

would mean that those who benefit most

directly will pay. But some economists warn

that corporations may not promote interconnectivity at the most desirable levels. Even

large users may not by themselves generate

enough traffic to justify some of the benefits

that would be possible with broad access.

Alternative carriers will be attracted only in

cities large enough to allow several companies, or many companies, to reach economies of scale.

Conclusions

The argument that the U.S. telecommunications infrastructure is in perilous decline

cannot be supported on the basis of publicly

available information. Usage of the telecommunications network continues to increase

and is significantly higher than in European

countries. U.S. companies operating in Europe attest to the general superiority of U.S.

telecommunications and information services (as discussed in chapter 5). The number

of new domestic services continues to in- There is

crease: the last 1() years have seen the no strong

explosion in facsimile communications, data public policy

networking, and cellular services. New play- encouraging

ers are crowding into the industry, such as planning for the

cable TV companies and alternative access networks of

providers. There is vigorous competition the future.

among equipment manufacturers, many of

which are small, new operations carving out

niche markets. Corporations have created

substantial and finely-tailored private networks that arc now being integrated with the

public switched telephone network. As the

NTIA infrastructure report concludes, the

United States has ‘‘a well-developed, advanced infrastructure, characterized by a

very high access-line density, a robust level

of telephone usage, and a heavy emphasis on

‘‘modernization."48

Meanwhile, there is no strong public

policy guiding or encouraging planning for

the networks of the future. It is by no means

certain that the highly competitive market

that has developed in the last decade provides the incentives necessary for a level of

investment--in infrastructure modernization

and in R&D—that will be needed to keep the

U.S. teleccommunications industry and the

U.S. telecommunications infrastructure in

excellent condition. Many economists say a

competitive market economy does not automatically generate the optimal magnitude

and allocation of R&D. 49

The evidence is inconclusive at best as to

whether industry investment in infrastructure and R&D has significantly declined in

the short period (about 5 years) of overseas

‘~ Egan and Wlldman, op. ctt., footnote 1, p. 40.

“B NTIA, op. cit., footnote 7, p. 197.

‘g R/chard Nelson, op. cit., footnote 13. Page 197
U.S.

Telecommunications

Services in

European

Markets

Box 9A. TELECOMMUNICATIONS INDUSTRY INVESTMENT : SOURCES OF

UNcERTAINTY OR C ONFUSION

Investment Examples/

categories Caveats explanation

Domestic:

Infrastructure Historical

modernization discontinuities

and

R&D expenditure

Divestiture

Changes in accounting and

reporting procedures

Acquisitions, mergers, joint

ventures, sales of company

components

Decreasing technological

costs

Technological change

expansion, or even whether it has declined as

Introduction of competition; total market

includes MCI, Sprint, as well as AT&T.

Separation of Bell operating companies

from AT&T. Separation of services from

equipment manufacturing.

Financial Standards Accounting Board

changes; comparability of income and

expenditure categories before and after

change is reduced or uncertain.

AT&T acquisition of NCR; RBOCs entry

into cellular market.

Costs of computer power, fiber cable,

other components decreasing; possibly

more plant/equipment per constant

dollar.

Shift from hardware to software with

different cost structure for research, development, deployment; movement toward “intelligent networks,” with changing distribution of costs between network

and customer premises equipment, also

differing depreciation schedules.

As the debate over the future of communi -

a result of divestiture, several years earlier cations infrastructure builds to a head in

(although this appears more likely). (See box Congress—with strong sentiment both for

9-A.) The possibility of a sustained decline repealing and for temporarily codifying the

in infrastructure investment, or in long-range MFJ restrictions--RBHCs are walking a

R&D, merits very close monitoring, by very thin tightrope. In making the case to

regulatory agencies and by Congress, for the legislators that the present regulatory condinext several years. (ion disfavors their core business to the point

Page 198
International

Investment and

Domestic

Infrastructure

Investment

categories Caveats

Data quality

Examples/

explanation

Deregulation and Paperwork Reduction

Programs reduce regulatory reporting requirements; telecom companies refuse to

divulge proprietary data, especially on

R&D.

International Industry structure Government ownership vs. private seccomparisons tor; monopoly vs. oligopoly; geographical

scale.

Accounting practices National differences in accounting practices and categories.

Regulatory differences Varying degrees and kinds of data kept;

varying public access to data.

Overly broad reporting Lumping of military, civilian, public and

categories private investment or expenditure. Lumping of network expansion (addition of

access lines) and modernization (technological upgrading).

Inappropriate comparisons AT&T and European equipment manufacturers (i.e. mixed services/technology development vs. pure technology

development). RBHCs and European

equipment manufacturers (i.e. services

providers vs. technology developers).

SOURCE: OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

that overseas investments represent significantly better options, RBHCs potentially

heighten the concern that their captive domestic customers are being neglected. The

companies are wary of violating MFJ rules,

and the operations for regulated local telephone service are separated from the nonregulated side of the business. There is no

evidence of wrongdoing, but RBHCs have

failed to assuage fears about cross-subsidization.

The case cannot be made, from the evidence at hand, that R&D expenditures are

declining as a direct result of the flow of

funds to investment overseas. It is clear,

however, that industry R&D expenditures

are likely to shrink, or at best to remain flat,

in the foreseeable future, and that R&D is Page 199
Us.

Telecommunications

Services in

European

Markets

also likely to be more tightly focused on

near-term products and services innovation.

By industry self-reports, this is an effect of

the move toward competition in regulated as

well as unregulated markets, and in both

domestic and international markets.

Many people in the industry argue that

more R&D would be performed or funded by

the RBHCs if they were not prohibited from

manufacturing telecommunications equipment. It is likely that the allocation of R&D

expenditures across sciences (i.e., physical

sciences as compared with information sciences) might change, but whether the total

volume of R&D expenditures would increase is less certain. It should be noted that

even with the prohibition on equipment

manufacturing in place, there is a strong

technological linkage between manufacturers and users of telecommunications equipment, due to continuing need to modify

network equipment, once it is in place,

through modular hardware expansion or

replacement and generic software revisions.so

Through Bellcore RBHCs play a central role

in the development of technical advisories

and requirements, specifications and standards for telecommunications equipment that

will be part of or connected to the publicswitched networks and that will support the

development of services for domestic customers and for export to overseas markets.

The ability of U.S. telecommunications firms

to compete in overseas markets, for services

as well as equipment, will very likely suffer

if levels of R&D funding and performance

drop significantly.

Close monitoring is needed to detect any

trends toward harmful domestic effects from

overseas activities, and any harmful effects

on overseas competitiveness as a result of

unnecessary and unintended domestic policy

or regulatory constraints. This monitoring

would probably have to be legislatively

mandated. Major carriers have said they

strongly object to any additional monitoring

or mandatory data reporting. However, the

FCC already requires common carriers to

report expenditures for R&D as well as for

infrastructure modernization and expansion

in a standard format that could allow comparison of expenditures over time and integration of data across reporting carriers. A

new legislative mandate would probably be

needed to extend the R&D performance

reporting to the regional Bell holding companies and to other telecommunications

services providers. Alternately, a new legislative mandate could allow data now collected by the Bureau of the Census and

analyzed by the National Science Foundation to be aggregated into smaller, appropriately designed categories to reveal longrange trends in telecommunications-related

R&D and make this information available to

policy makers in a way that would protect

company privacy, Standardized data on all

foreign investments would also be needed.

However, the Bureau of Economic Analysis

already collects some information on direct

investment in foreign communicant ions, in

highly aggregated form.

New reporting requirements would run

directly counter to the strong effort over the

last decade to reduce corporate reporting

requirements (as described in chapter 8), and

would possible strain the current budget of

the FCC and the data collection agencies.

Since much of this data is already reported in

one form or another, however, the additional

50 Harris, op. cit., footnote 14.
International

Investment and

Domestic

Infrastructure

reporting burden for industry would be

small. Government would incur some additional costs for processing and analysis.

A less direct alternative would be a request

from Congress for consultation and cooperation among state regulators, through the

National Association of Regulatory Utility

Commissioners, with the same end in view.

The State regulators, by harmonizing their

regulatory practices and reporting requirements, could create a monitoring system and

integrate information about infrastructure

modernization across state boundaries. They

would then be able to develop joint strategies, if needed. for setting infrastructure

modernization goals and consumer protection strategies. However, as already noted,

state regulators have some conflicting interests with regard to infrastructure modernization, which in part depend on the varying

economic development strategies of their

states. As a group, nationwide, they may lack

both the resources to carry out systematic

and coordinated monitoring. and the comprehensive viewpoint to agree on priorities

for national and international network development, Moreover, this approach is not as

directly applicable to monitoring R&D

trends, since this activity is less widely

dispersed and the information, considered

more proprietary, may be more difficult to

extract from telecommunications holding

companies. However, unless some action is

taken to develop better information, public

policy makcrs at both the Federal and state

levels will remain in the dark about potentially damaging trends in telecommunications investment.

Page 201
Reviewers

and

Contributors

APPENDI

A

X

Lester M. Alberthal, Jr,

Chairman, President and CEO

Electronic Data Systems Corporation

Peter Allen

Consultant, Telecom Regulations

American Express Europe, Ltd.

Dennis Amari

Legislative Analyst

Bellcore

Robert W. Anthony

Research Staff Member

Operational Evaluation Division

Institute for Defense Analyses

Robert G. Atkins

International Trade Specialist

Office of Service Industries

International Trade Administration

U.S. Department of Commerce

Kim M. AuBuchon

District Manager

Federal Government Affairs

AT&T

Carol Balassa

Director

Telecommunication Services and Trade

Office of the U.S. Trade

Representative

Jim Ball

Associate Director

office of International

Communications

U.S. Federal Communications

Commission

Malcolm R. Bates

Deputy Managing Director

The General Electric Co,

Abdelhak Benkirane

Counselor, Technical Cooperation

United Nations International

Telecommunication Union

Keith Bernard

Vice President

International & Regulatory Affairs

Cable & Wireless North America, Inc.

Fred J. Bieganski

Infrastructure Development Officer

Agency for International Development

William Bien

International Trade Analyst

International Trade Commission

Mary Ann Blatch

Chief of Government Affairs

Readers Digest

Robert T. Blau

Director

Policy Analysis

Bell South

Kenneth W. Bleakley

Senior Deputy Coordinator

and Director

Bureau of International

Communications and Information

Policy

U.S. Department of State

Henning Boe

Staff Director

Telecom Denmark

Robert R. Bohannon

Managing Director

HQ/International Communications

American Airlines

Bruce Bond

Vice President, International Affairs

British Telecom

Peter Bonfield

Chairman and Chief Executive

ICL plc

United Kingdom

Evelyn Boyd

Motorola

Maureen Breitenberg

National Institute of Science and

Technology

Sir Leon Brittan

Vice President

Commission of the European

Communities

William R. Brittingham

Director

Pacific Telesis Group

Joachim Broudre-Groger

Foreign Office

Germany

C.J. Buckley

Vice President

Communications and Operations

PARS Service Partnership

Jimmy Burk

Director

Engineering and Planning

Federal Express Corporation

Dan Burton

Executive Vice President

Council on Competitiveness

Ellen Burton

Director

Federal Relations

U.S. West, Inc.

David Carpenter

International Trade Consultant

Czechoslovakia

Page 203
Us.

Telecommunications

Services in

European

Markets

Ulrich Cartellieri

Member

Board of Managing Directors

Deutsche Bank AC

Germany

Johann Cas

Technology Assessment Unit

Postgass, Austria

Margaret K. Cassidy

Attorney

Worldspan

Stu Chiron

Sprint International

Carin Christian

IC&C

Howard L. Clark Jr.

Vice Chairman

Lehman Brothers

Warren Clark

Special Advisor

Bureau of International

Communications and Information

Policy

U.S. Department of State

John L. Clendenin

Chairman, President and CEO

Bell South Corporation

Kathleen Collins

Assistant Director

Office of International

Communications

U.S. Federal Communications

Commission

Peter Courtney

ITI International Finance, Ltd.

Ireland

Peter Cowhey

Department of Political Science

University of California, San Diego

Rhonda J. Crane

Director

Federal Government Affairs

AT&T

William A. Crane

Manager

BT Government Relations

Raymond Crowell

Director

Industry Government Planning

COMSAT

Imre Csorba

Deputy Head of Department

Hungarian Telecommunications

Company

Arpad I. Csurgay

Deputy Secretary General

Hungarian Academy of Sciences

Marion Dabrowski

Manager, Information Technology

ABB Lummus Crest, Inc.

Diane Davis

AEC Solutions

Parke Davis

Department of Communications

Canada

Jan Degraeuwe

Director

Betelcom, Belgium

Robert Devaney

Executive Director, International

NYNEX Worldwide Services Group

Marty Dickens

BellSouth International

Joseph 1. Dionne

Chairman and CEO

McGraw-Hill, Inc.

Janis Doran

Policy Analyst

Department of Comrnunications

Canada

Ambassador Diana Lady Dougan

Center for Strategic & International

Studies

John A. Dubret

Managing Director

Communications Engineering

SABRE Computer Services

American Airlines

Georges Dupont

Project Manager

UNESCO, France

Stephen Dutton

International Affairs

NYNEX

Peter Eisler

General Manager

Hungirocom Telecommunications, Ltd.

Hungary

Bernard Ennis

Vice President

Advanced Engineering

ABB Lummus Crest, Inc.

Helle R. Eriksen

Head of Section

General Directorate

Post and Telecommunications

Denmark

Douglas Caffrey Fields

Vice President

Information Services

United Parcel Service

Page 204
Reviewers

and

Contributors

Judith Fincher

EDI/CALS Marketing Manager

HFSI

Stephen C, Finch

International Telecommunications

Users Group

United Kingdom

Tim Finton

Counselor for Telcommunications Trade

Bureau of International

Communications and Information

Policy

U.S. Department of State

James M. Flynn

EDI Services Manager

United Parcel Service

Charles E.H. Franklin

Head of Division

Telecommunications &

Information Policies

International Chamber of Commerce

Gabor Frischmann

Director

Hungarian Telecommunications

Company

Martin Fuhr

Director of Telecommunications

The International Herald Tribune

France

Lynne Gallagher

Director

International Regulatory Affairs

Sprint International

Oswald H. Ganley

Executive Director

Program on Information Policy

Harvard University

Hans-Peter Gassmann

Organization for Economic

Cooperation and Development

Peter Gerard

Deutsche Bank AG

Germany

Angela A. Gilroy

Economics Division

U.S. Library of Congress

Paul Glaser

Consultant

Jack Gleason

Office of International Affairs

National Telecommunications and

Information Agency

U.S. Department of Commerce

William R. Godwin

Network Engineering

Encompass

Douglas Goldschmidt

Alpha Lyracom

Steven N. Goldstein

Program Director

Interagency & International

Coordination

U.S. National Science Foundation

M. Etienne Gorog

Director

Worldwide Networking Practice

IBM France

Natasha Gospic

Acting Assistant Director General

for R&D

Community of Yugoslav PT&T

Richard Grainson

Administratcur General Adjoint

Regie des Telegraphed at Telephones

Belgium

George V. Grune

Chairman and CEO

The Reader’s Digest Association, Inc.

Jan Gruntorad

Head of Data Communications

Department

Charles University

Czechoslovakia

Wendell Harris

Assistant Bureau Chief

International Division

FCC Common Carrier Bureau

Dale Hatfield

Hatfield Associates, Inc.

Gerhard Hausmann

Director General

Federal Ministry of Post and

Telecommunications

Germany

Hanno Hausmann

Assistant Director

International Affairs

Deutschc Telekom, Germany

John F. Healy

Senior Advisor

United Nations Development Programme

John Henry

Office of Telecommunications

International Trade Administration

U.S. Department of Commerce

Mary L. Henze

Staff Manager

Public Policy Analysis

Bell South

Ken Herold

Director of Information Technology

HOK

Page 205
Us.

Telecommunications

Services in

European

Markets

Pierre Hessler

Chairman

IBM France

Mark Hill

Manager, Business Planning

PARS Service Partnership

Lyell Holmes

Director

Local Area Telecommunications

Fluor Daniel

Pal Horvath

Director General

Hungarian Telecommunications

Company

Casten Jensby

Director Business Development

Telecom Denmark

Volker Jung

Senior Vice President

Siemens, Germany

Laurel B. Kamen

Vice President, Government Affairs

American Express Company

Tim Kelly

Communications Policy Analyst

Organization for Economic

Cooperation and Development

Earl Kennett

Vice President, CCB Programs

National Institute of Building

Sciences

Hal Kimball

Office of International Affairs

National Telecommunications and

Information Administration

U.S. Department of Commerce

Steve Kindel

Financial World

Page 206

Lothar A. Kneifel

Debevoise & Plimpton

Zsolt Kohalmi

Chairman

Interagency Committee on Tech

Transfer and Export Administration

Ministry of International Economic

Relations

Hungary

Peter Kral

Software Engineer Consultant

Debra M. Kriete

Pennsylvania Public Utility

Commission

Andrzej Ksiezny

Director

State Agency of

Radiocommunications

Poland

Joanne K. Kumekawa

Telecommunication Analyst

Office of Plans and Policy

U.S. Federal Communications

Commission

Ann Lane

Director

Federal Relations

Bell Atlantic Network

Lawrence E. Levinson

Senior Vice President

Service, Inc.

Government Relations

Paramount Communications, Inc.

W. Kenneth Lindhorst

Vice President, International Services

AT&T

John K. Livingstone

Manager, Correspondent Relations

BT North America

Randolph C. Lumb

Vice President

Government Relations

AT&T

Mark MacCarthy

Vice President

Government Relations

Capital Cities/ABC, Inc.

Clyde Manning

Executive Assistant

BellSouth Corporation

Herbert E. Marks

Squire, Sanders and Company

Johan Martin-Lof

Director, International Affairs

Swedish Telecom

Tim May

Freedom of Technologies, Inc.

Doreen F. McGirr

Bureau of International

Communications and Information

Policy

U.S. Department of State

TK. Mclnernay

Deputy Director

Global Network Bids

AT&T

James K. McKean

Communications Manager

The Church of Jesus Christ

of Latter-Day Saints

Des McLauglin

Vice President

Marketing

Telecom Ireland

Andy Mecklinberg

Regulatory Policy

Bell Atlantic
Reviewers

and

Contributors

Rudolf Meijer

Principal Administrator

Commission of the European

Community

Linda Meyer

Meyer Enterprises

Loretta Michaels

Manager

Market Analysis

Northern Telecom Europe, Ltd.

United Kingdom

Sam Midkiff

Managcr

Communications Planning

PARS Service Partnership

Greg Millert

Vice President

Federal Government Affairs

AT&T

Mahal Mohan

District Manager

Government Affair-s

Technology and Infrastructure

AT&T

Brian Moir

Fisher, Wayland, Cooper, and Leader

Martin Morell

Principal

Network Dynamics Associates, Inc.

John Morgan

Vice President

Government Relations

Communications Workers of America

Mike Morris

Vice Chairman CEPT Telecom

Deportment of Trade and Industry

David Mulcaster

Director General, CD&P

Department of Communications

Canada

Jan Muller

Czech National Council IT Consultant

Ceska Narodni Rada

Czechoslovakia

Rupert Murdoch

Chief Executive

The News Corp.. Ltd.

United Kingdom

Mark B. Myers

Senior Vice President

Corporate Research & Technology

XEROX Corporation

Tom Nadelhoffer

Manager, Communications Planning

Worldspan

Kaneo Nakamura

Counselor

The Industrial Bank of Japan, Ltd.

Eric Nelson

Director of International Affairs

Telecommunications Industry

Associ at ion

Derek Nicholas

Vice President

International Telecommunications

Systems

United Kingdom

Emmanouil Nicolaidis

CEPT Telecom Chairman

Hellenic Telecommunications Org (OTE)

Greece

Cynthia Nila

Telecommunications Policy Analyst

Telecom Statistics

International Trade Administration

U.S. Department of Commerce

Tim Nulty

Senior Economist

World Bank

David P. O’Neill

Staff Vice President

Telecommunications

Inter-Continental Hotels Group

United Kingdom

Judith O’Neill

Steptoe & Johnson

William G, Oates

Director of Telecommunications

World Headquarters

ITT Sheraton Corporation

Janice Obuchowski

President

Freedom Technologies, Inc.

Philip C. Onstad

Manager

International Public Policy

International Communications

Association

Rolf Orrsten

Coordinator International Affairs

Swedish Telecom

Jiri Orsag

Computer Centre

Prague Institute of Chemical

Technology

Czechoslovakia

Bruno Oudet

Scientific Attache, Information Tech.

Embassy of France

Page 207
Us.

Telecommunications

Services in

European

Markets

David Palmer

Chief Executive

Financial Times of London

Gabor Patocs

Manager International

Alcatel-Standard Electrica, Spain

Scott D. Pearson

Office of the U.S. Trade

Representative

Kenneth Philips

Office of Telecommunications Policy

Citibank, N.A.

Bob Phillips

Deputy General Manager

Land Mobile

INMARSAT

Tony Phipps

Abt Associates

Paul Pisjak

Technology Assessment Unit

Postgasse, Austria

Dietmar Plesse

Executive Officer

Federal Ministry of Post and

Telecommunications

Germany

David Porter

Government Affairs Director

AT&T

Melanie Posey

Telecommunications Specialist

International Trade Commission

Jean Prewitt

Associate Administrator

Office of International Affairs

National Telecommunications and

Information Administration

U.S. Department of Commerce

Page 208

William Ramage

Bechtcl Corporation

J. Bradford Ramsey

Deputy Assistant General Counsel

National Association of Regulatory

Utility Commissioners

Gerold Reichle

Deputy Director

Federal Ministry of Post and

Telecommunications

Germany

Paul Reid

Head

Technical Organization Department

European Telecommunications

Standards Institute, France

Mogens Ritsholm

Senior Engineer

General Directorate of Post and

Telecommunications

Denmark

Frank A. Robert

Commstrategies, Int.

Kenneth Robinson

Attorney

Larry Rocha

Wimbley Allison Tong Goo

Karen S. Rogers

Director

Government & International Relations

Southwestern Bell Corp.

Walda Roseman

President

CompassRose, Inc.

Richard M. Rosenberg

Chairman and CEO

Bank America Corporation

Bert de Ruiter

Head Telecommunications and

Post Department

Ministry of Transport and Public Works

The Netherlands

Charles Rush

Associate Administrator for

International Affairs

National Telecommunications and

Information Administration

U.S. Department of Commerce

Jim Russell

US West Newvector Group, Inc.

Thomas R. Rutherford

Assistant Director of Engineering and

Construction

Office of the Assistant Secretary of

Defense

Anthony M. Rutkowski

Vice President

Sprint

Katrina Saarinen

Chief Inspector

Department for Communications Admin.

Ministry of Transport and

Communications

Finland

Martin Salamon

Head of Section

National Telecom Agency

Denmark

Dana Sauer

Executive Director

Integrated Construction Association

Jeanne Schaaf

Assistant Vice President

Government Affairs

BT North America
Reviewers

and

Contributors

Thomas Schnoring

WIK GmbH

Germany

John L. Segall

Vice Chairman

Corporate Planning and Development

GTE Corporation

Eugene Sekulow

Executive Vice President

Worldwide Services Group

NYNEX

Suzanne Settle

Office of International Affairs

National Telecommunications and

Information Administration

U.S. Department of Commerce

Helen Anderson Shaw

Director

Division of International

Telecommunications

National Telecommunications and

Information Administration

U.S. Department of Commerce

Irvan H, Shefrin

President

Network Performance Systems

Jerry Sincoff

President

HOK

Cathy Slesinger

Government Affairs

NYNEX

Peter Smith

Manager

International Communications

Reuters, Ltd., United Kingdom

Oliver Smoot

Executive Vice President

Computer and Business Equipment

Manufacturers Association

Anna Snow

Commission of the European

Community

Stefan Stanislawski

Senior Consultant

Analysis Limited, United Kingdom

Paul Startz

Paul, Weiss, Rifkind, Wharton

Roger F. Stechschulte

Director

Office of Telecommunications

International Trade Administration

U.S. Department of Commerce

Dan Stefanescu

Directeur General (Develop.)

Ministere des Communications

Romania

Milan Sterba

Ingenieur

INRIA Rocquencourt, France

Kathy Stewart

AT&T

Ken Stowe

Walt Disney Imaginering

John Streeter

Vice President for CSFR

Bell Atlantic International

Andras Sugar

General Manager

WESTEL, Hungary

David Sun

Assistant Vice President

Communications Management

CIGNA

S. Blake Swensrud

Editor in Chief

Eastern European & Soviet Telecom

Report

Paul Teicholz

Director

Center for Integrated Facility

Engineering

Terman Engineering Center

Richard Thayer

Director

Federal Government Affairs

AT&T

Dana Theus

International Technology

Representative

Office of Government Affairs

EDS

Moira Thornett

Director, Technical Support

Corporate Headquarters

Holiday Inn Worldwide

Donald Tice

Booze, Allen & Hamilton

Svetoslav Tinchev

Dept. Head/Project Implementation

Committee of Post Telecommunications and Information

Bulgaria

Russ Tirella

Consultant

Greg Tolander

Corporate Director

Application Systems Delivery

Holiday Inn Worldwide

Page 209
Us.

Telecommunications

Services in

European

Markets

Hal Turner

President

Rockefeller Center

ITT Telecom Netherlands US, Inc.

Anton Valk

Rockefeller Center

PIT Telecom Netherlands, US, Inc.

Rick van Leeuwen

Director

Wide Area Telecommunications

Lawrence K. Vanston

Technology Futures, Inc.

Olympia Vassiliadou

Chief Engineer

Hellenic Telecommunications

Organization

Greece

Martin Wassell

Economic Director

Policy and Programme

International Chamber of Commerce

Bjorn Wellenius

Telecommunications Specialist

The World Bank

Obie Whichard

Chief Research Branch

International Investment Division

Bureau of Economic Analysis

U.S. Department of Commerce

John White

President

Information Technology Group

Texas Instruments, Inc.

Robert M. White

Undersecretary of Technology

U.S. Department of Commerce

Margaret Wigglesworth

Executive Director

Coalition of Service Industries

Peyton Wynns

Chief

Industry Analysis Division

U.S. Federal Communications

Commission

Roxane Wiser

Ameritech International

Thomas M. Woods

Vice President

Information Services

Halliburton Company

Robert E. Woodyard

Assistant Vice President

Communications & Information

Services Tech.

Delta Air Lines, Inc.

Henrikas Yushkiavitshus

Assistant Director General for CI&I

UNESCO

Amy Zirkle

Manager

Government Affairs

American Express Company

Gelencser Zsolt

Financial Analyst

Hungarian Telecommunications

Company

Page 210
Acronyms

APPENDI

B

X

Page 211

AEC

AID

ASST

AT&T

ATM

ATM

BDT

BEA

BOC

BSI

BT

CAD/CAM

CCITT

CEE

CEETEC

CEI

CENTREX

CEO

CIP

CMEA

COCOM

CSl

DRG

DSP

EBRD

EC

EDI

EDS

EFTA

ETSI

FCC

FLAG

GATT

Gbps

GEN

GSDN

GSM

GTE

GVPN

HTC

IAB

ICA

architectural, engineering, and construction

Agency for International Development (U. S.)

Azienda di Stato per i Servizi Telefonici (Italy)

American Telephone and Telegraph (Company)

Asynchronous Transfer Mode

Automated Teller Machine

Bureau of Telecommunications Development (ITU)

Bureau of Economic Analysis, U.S. Department of Commerce

Bell operating company

BellSouth International

British Telecom

computer-aided design/computcr-aided manufacturing

Consultative Committee for International Telephone and

Telegraph, ITU

Central and Eastern Europe

Central and Eastern European Telecommunications Cooperative

Mechanism

comparably efficient interconnection

central exchange

chief executive officer

Communications and Information Policy (Bureau of,

U.S. Department of State)

Council for Mutual Economic Assistance, or Comecon

Coordinating Committee on Multilateral Export Control

Coalition of Service Industries

Directorate of Regulatory Affairs (France)

digital system processing (chips)

European Bank for Reconstruction and Development

European Community

electronic data interchange

Electronic Data Services, Inc.

European Free Trade Association

European Telecommunications Standards Institute

Federal Communications Commission (U. S.)

Fiberoptic Link Around the Globe (NYNEX)

General Agreement on Trade and Tariffs

billion bits per second

General European Network

Global Switched Digital Network (AT&T)

Global System for Mobile (communications), Groupe Speciale

Mobile

General Telephone and Electronics

Global Virtual Private Network (Sprint)

Hungarian Telecommunications Company

Internet Architecture Board

International Communications Association
us.

Telecommunications

Services in

European

Markets

Page 212

IDC

WITS

INTUG

IRI

ISAC

ISDN

ISO

ITA

ITU

IXS

kbps

KDD

LAN

LEC

MFJ

MFN

MAN

Mbps

NAFTA

NARUC

NREN

NTIA

OECD

OMB

ONA

ON?

OPIC

OSI

PBX

PCN

PCS

POTS

PTO

Pi-r

PUC

RBHC

RBOC

SEED

SIP

SITA

SMDS

SONET

SS7

SWIFT

TCI

International Digital Communications

international message telephone services

International Telecommunications Users Group

Instituto per la Ricostruzione Industrial (Italy)

Industry Sector Advisory Committee

Integrated Services Digital Network

International Standards Organization

International Trade Administration, U.S. Department of Commerce

International Telecommunication Union

interexchange carriers

thousand bits per second

Kokusai Denshin Denwa Co., Ltd.

local area network

local exchange carrier

Modified Final Judgement

most favored nation (clause)

metropolitan area network

million bits per second

North American Free Trade Agreement

National Association of Regulatory Utility Commissions

National Research and Education Network

National Telecommunications and Information Administration,

U.S. Department of Commerce

Organization for Economic Cooperation and Development

Office of Management and Budget (U. S.)

Open Network Architecture

Open Network Provision

Overseas Private Investment Corporation

Open Systems Interconnection

private branch exchange

Personal Communications Network

Personal Communications Services

“plain old telephone service”

public telephone operator

Postal, Telephone, and Telegraph (Administration)

Public Utility Commission

regional Bell holding company

regional Bell operating company

Support for Eastern European Democracies Act

Societa Italiana per l’Esercizio delle Telecommunicazioni (Italy)

Societe Internationale de Telecommunications Acronautiques

Switched Multi-Megabit Data Service

Synchronous Optical Network

Signaling System 7

Society for Worldwide Interbank Financial Telecommunications

Telecommunications, Inc.
TPSC

UNCTAD

UNDP

UPS

USTR

VPN

VSAT

WAN

WATTC

Trade Policy Staff Committee (U. S.)

United Nations Conference on Trade and Development

United Nations Development Program

United Parcel Service

United States Trade Representative, Office of (U. S.)

virtual private network

very small aperture terminal

wide area network

World Administrative Telegraph and Telephone Conference
U.S. Telecommunications

Services in

European

Markets I

INDE X

A

Accounting rates, 68-69

Administrative Procedures Act, 174

Advanced Intelligent Network, 35

AEC services. See Construction services

AIN. See Advanced Intelligent Network

Airline reservation systems, 99, 100

Alcatel Data Networks, 78

American Telephone and Telegraph.

See also Regional Bell holding

companies

antitrust case, 74

deregulation, 135-136

effect of market Iiberali/ation, 60n

European activities, 75-76, 131

international investments, 71

R&D expenditures, 191-192

strategy for international expansion,

78-80

Ameritech, 86

Analog systems, 25n, 26

Architectural services, 104-107

ARPANet, 41, 43

ASST. See Azienda di Stato per i Servizi

Telefonici

Asynchronous Transfer Mode, 30

ATM. See Asynchronous Transfer Mode

AT&T. See American Telephone and

Telegraph

Azienda di Stato per i Servizi Telefonici,

53-54

B

Banking. See Financial services

Basic services

market estimates, 64-65

problems with market access, 149-151

BDT. See Bureau of Telecommunication

Development

BEA. See Bureau of Economic Analysis

Bell Atlantic, 85

Bell Communications Research, Inc.,

192-193

Bell Labs, 191-192

Page 215

Bell operating companies. See also

Regional Bell holding companies;

Regional Bell operating companies

effect of market liberalization, 60n

ISDN plans, 33

R&D expenditures, 185-186

Bellcore. See Bell Communications

Research, Inc.

BellSouth Corporation, 82-83

BOCS. See Bell operating companies

British Telecom

competitors, 49-51

effect of market liberalization, 60n

Syncordia project, 78n

Broadband Integrated Services Digital

Network, 30

13T. See British Telecom

Bureau of Communications and Information Policy

description, 166-168

GAIT negotiation, 153-154

structural options, 176-179

Bureau of Economic Analysis,

Bureau of Telecommunication

Development, 118

Bush Administration, 164, 172

c

Cable Communications Policy

of 1984, 73

Cable television

market estimates, 66

173-174

Act

RBHCS international activities, 81

Carter Administration, 160

CCITE See Consultative Committee

for International Telephone and

Telegraph

CEE. See Central and Eastern Europe

CEETEC. See Central and Eastern

European Telecommunications

Cooperative Mechanism

CEI. See Comparably Eflicient Interconnection

Cell relay, 29-30

Cellular communications

foreign investment in Central and

Eastern Europe, 124-125, 127

RBHCS international activities, 80-81

Central and Eastern Europe

causes of decay, 116-117

CoCorn, 119-123

conclusions, 132-133

condition of telecommunications,

113-116

defining, 1 IO- I 11

effect of Soviet policies, 112-113

problems with liberalization, 127-129

regional differences, 111-112

role of telecommunications, 109-110

strategies for liberalization, 123-127

U.S. involvement, 129-132

Western approaches to regional relationships,

1 17- I 19

Central and Eastern European

Telecommunications Cooperative

Mechanism, 119

CIP. See Bureau of Communications and

Information Policy

CMEA. See Council for Mutual Economic

Assistance

Coalition of Service Industries, 154

CoCorn. See Coordinating Committee on

Multilateral Export Control

Collection rates, 68-69

Comecon. See Council for Mutual

Economic Assistance

Common Air Interface, 36

Common Carrier Bureau, 165

Common channel signaling, 26

Communications Act of 1934

Federal communications policy, 160

formation of FCC, 164, 165n

preemption by provisions of NAFTA

treaty, 147n

Section 214, 74n

Section 310, 4, 81n

Communications Policy Board, 176

Communications Satellite Act of 1962,

4-5, 165n
Us.

Telecommunications

Services in

European

Markets

Comparably Efficient Interconnection,

33n, 44

Congressional considerations

encouraging export of telecommunications

services, 88-89

policy options, 21-23

Construction services, 104-107

Consultative Committee for International

Telephone and Telegraph, 34, 142

Coordinating Committee on Multilateral

Export Control, 119-123

Cordless telephones. See Mobile

communications

Council for Mutual Economic Assistance,

110

effect on ethnic relations, 112n

CSI. See Coalition of Service Industries

D

Data networks, 79-80

Data protection directive, 98

Data transmission, 94

Defense Production Act of 1950, 5

Demand patterns, 56-59

Department of Defense

research computer network, 41

telecommunications policy, 167-168

Department of Justice, 168

Department of State, 166-168

Department of Trade and Industry, 52-53

Deregulation, worldwide consequences,

135-137

Deutsche Telekom, 51-53

Digital systems, 25n, 27

DOD, See Department of Defense

DTI. See Department of Trade and

Industry

E

Eastern Europe, See Central and Eastern

Europe

EBRD. See European Bank for Reconstruction and Development

EC. See European Community

Page 216

EDI. See Electronic data interchange

E17A. See European Free Trade

Association

800 service, 34-35

Electronic data interchange

description, 103n

market estimates, 66

Encompass Europe, NV, 100

Engineering services, 104-107

Enhanced services. See YMue-added

services

Equipment. See Telecommunications

equipment

ETSI. See European Telecommunications

Standards Institute

European Bank for Reconstruction and

Development, 123

European Community, trade agreements,

I l l

European Community Services Directives

description, 57

EC Green Paper, 126, 127

Italy ratification, 54

Open Network Provision Directive,

2, 44-45,57

telecommunications directives, 126

Utilities Directive, 156n

European Free Trade Association, 111

European market

aggregate telecommunications market,

54-56

description, 47-49

estimates and projections, 64-67

importance of U.S. trade, 67-70

long-range demand patterns, 56-59

market liberalization, 60-63

market unification, 63-64

price trends, 59-60

structure, 49-54

European Telecommunications Standards

Institute, 42

Eurotel, 130

Euroteldev, 118

Exon-Florio Amendment, 5

F

Facilities-based suppliers, 64n

FASB, See Financial Accounting

Standards Board

FCC. See Federal Communications

Commission

Federal Communications Commission

Computer 111 decision, 44

data collection, 173-174

description, 164-166

FCC Decision, 5

international simple resale, 53

requirement of BOCS for ISDN

plans, 33

supportof international telecommunications

services, I 54-155

Federal Express Corporation, IOOn

Fiber optics, export restrictions,

119-120, 122

Financial Accounting Standards Board,

189n

Financial Network Association, 77

Financial services, 101-104

Frame relay, 29-30

France, telecommunications market, 51

Freedom of Information Act, 173n

Freight transport, 99-100

G

GATT. See General Agreement on Trade

and Tariffs

GEN. See General European Network

General Agreement on Trade and Tariffs

Agreement on Technical Bamiers to

Trade, 44

building an international constituency,

142-143

changing international trade relations,

141-142

description, 143-144

general principles, 144-147

Government Procurement Code, 156n

long-range consequences, 155-157

movement toward trade policy, 139-141
Index

negotiating GATL 15 I -155

problem of basic telecommunications

services, 149-151

Telecommunications Annex. 147-149

Uruguay Round, I 1

General European Network, 96

General Telephone and Electronics, 71

Germany, telecommunications market,

5 I -53

Global System for Mobiles, 36

Government Procurement Code, 156n

GSM. See Global S)stem for Mobiles

GTE. See General Telephone and

Electronics

H

Holiday Inn Worldwide, 10 I

Hotel reservation systems, 101

HTC. See Hungarian Telecommunications

Compan)

Hungarian Telecommunications Company,

I ~~

I

IBM, international investments, 72

ICA. See International Communications

Association

IEC. See tntcmational Electrotechnical

Commission

Incentive regulations, 195-196

Industry Sector Advisory Committees, 170

Infrastructure. See Telecommunications

infrastructure

Institute for Telccomrnun ications Sciences,

163n

Instituto per la Rico~truzione Im!ustriale,

54

Integrated Services Digital Network

Broadband, 30

description, 31, 33-34

Intelligent Nett!ork

description, 28

routing 800 service calls, 34-35

Interagency Task Force on Services Trade

Data, 174

Interagency Trade Policy Review Group,

169

Interexchange carriers, 71, 74-78

International Communications Association,

79, 154

international ConlpctitiJ’e Cmricr, 5

International Electrotechnical Commission,

41 n

International simple resale, 52-53

International Standards Organization, 41 n

International Telecommunication

Regulations, 142

International Telecommunication Union

Central and Eastern Europe, I 18

description, 41 n

purpose, 135, 141

International telecommunications

foreign carriers in U. S., 90

interexchange carriers, 74-78

investments, 71

International Telecommunications Users

Group, 34, 79, 154

International telephone traffic, 67-68

International Trade Administration,

I 70-171

1nternct, 43

INTUG. See International Telecommunications Users Group

IRI. See Instituto per la Ricostruzione

Industrial

Iridium project, 72n

ISACs. See Industry Sector Advisory

Committees

ISDN. See Integrated Services Digital

Network

1S0. See International Standards Organization

ITA. See International Trade

Administration

Italy, telecommunications market, 53-54

ITU. See International Telecommunication

Union

IXCS. See Interexchange carriers

L

LANs. See Imcal area networks

LATA. See bcal Access and Transport

Area

based line services

market estimates, 64

problems with European networks,

93-94

LECS. See bcal exchange carriers

LEOS. See Lmw-Earth-orbit satellites

Liberalization

basic services problems, 149-15 I

defined, 145

European countries, 60-63

negotiations, 151-153

problems in Central and Eastern Europe,

127-129

strategies in Central and Eastern

Europe, 123-127

Local Access and Transport Area, 62n, 73n

bcal area networks, 30

Local exchange carriers, 71

plant value, I On, 188-189

Lmng-distance services

carriers, 71

problems with market access, 149-151

Low-Earth-orbit satellites, 72n

M

Market

Market

Market

MCI

access principle, 145-146

liberalization. See Liberalization

unification, 63-64

European activities, 76-77

Execunet Service, 57n

strategy for international expansion,

78-80

Mercury, 49, 50

Metropolitan Fiber Systems, 195n

MFJ. See Modification of Final Judgment

MFN, See Most-favored na(ion status

MFS. See Metropolitan Fiber Systems

Millicom, 72n

Mobile communications

Page 217
U.S.

Telecommunications

Services in

European

Markets

cordless telephones, 36

demand for, 58

description, 30-31

market estimates, 65-66

Modification of Final Judgment

and decline in domestic infrastructure

development, 194

effect on international expansion, 72-74

Section II(D)(3), 73n

Montreal declaration of 1988, 145

Most-favored nation status

basic telephone service, 149-150

Central and Eastern European countries,

111-112

description, 144

Motorola, 72n

Multimedia services, 58

Multiplexing, 25n, 29

N

NAFI’A. See North American Free Trade

Agreement

NARUC. See National Association of

Regulatory Utility Commission

National Association of Regulatory Utility

Commission, 22

National Information Infrastructure, 14

National Network, 50

National sovereignty, 146

National Telecommunications and Information Administration

assessment of infrastructure deterioration,

183

description, 162-164

formation, 160

single network transmission, 73n

support of telecommunications

services, 155

Network management systems, 67

Networks, interoperability, 39-41

1934 Communications Act. See Communications Act of 1934

1979 Trade Agreements Act, 139

1984 Trade and Tariff Act, 139, 172

Page 218

1988 Montreal declaration, 145

1988 Trade Act, 140, 153

section 301, 156

USTR mandate to conduct trade talks,

155, 169

Nippon Telephone and Telegraph, 45n

North American Free Trade Agreement,

147

NTIA. See National Telecommunications

and Information Administration

NYNEX, 83-84

0

OECD. See Organization for Economic

Cooperation and Development

Office of International Communications,

165n

Office of Telecommunications Policy, 179

Office of the United States Trade

Representative

GA1’T derogation, 149

international telecommunications

policy, 1

negotiating positions in GATT, 153-155

opening foreign markets, 140

trade policy, 169-170

OIC, See Office of International

Communications

Omnibus Trade and Competitiveness Act

of 1988, 172

ONA. See Open network architecture

OND. See Open Network Development

ONP. See Open Network Provision

Open network architecture, 44

Open Network Development, 45n

Open Network Provision, 2,44-45, 57

Open Systems Interconnection model, 41

Organization for Economic Cooperation

and Development

cost of modernizing European systems,

121

role in international agreements, 141

0S1. See Open Systems Interconnection

model

OTP. See Office of Telecommunications

Policy

P

Pacific Telesis, 85-86

Package delivery systems, 100-101

Packet switching, 28-29

Paperwork Reduction Act of 1980, 171-

172

PCS. See Personal Communications

Services

Personal Communications Ser\ices, 30

Portable communications. See Mobile

communications

Postal, Telephone, and Telegraph administrations. See also Public

telephone operators

effect of deregulation, 136-137

ISDN technology, 34

Price trends, 59-60

Privacy Directive, 98

Private networks, 35-36, 56-57

Privatization

in Central and Eastern Europe, 126

RBHCS international activities, 81

PTOS. See Public telephone opcratom

PITs. See Postal, Telephone, and Telegraph administrations

Public telephone operators

partnerships with long-distance carriers,

78-79

public frame relay services, 30

strength of European operations, 137n

Public utility commissions, 195

PUCS. See Public utility commissions

R

Rate-of-return regulations, 195

RBHCS. See Regional Bell holding

companies

RBOCS. See Regional Bell operating

companies

R&D. See Research and development

Reagan Administration, 164
Index

Regional Bell holding companies. See afso

Bell operating companies; Regional

Bell operating companies

AT&T antitrust case, 74

Bellcore R&D, 192-193

decline in domestic infrastructure

development, 194

international activities, 7 I, 80-87

regulations effecting international

expansion, 72-74

strategies for international expansion,

87

Regional Bell operating companies.

See a/so Regional Bell holding

companies

inter-LATA toll service, 62n

Regional Development Conference,

1 I 8- I I 9

Regulations

European regulatory problems, 97-98

and overseas expansion, 72-74

Research and development

expenditures, 1 84- I 88

question of decline in expenditures,

1 97_20 1

trends, 189-193

Resellers. Sre International simple resale

Rural service, 115, 118

s

Satellite business services, 66

Satellite television, 66-67

SEED Act. SCP Support for Eastern

European Democracies Act

Services exports

construction services, I (M-107

earnings of service industries, 92, 93

encouraging expansion in telecommunications, 88-89

European regulatory problems, 97-98

financial services, 101-104

policy issues, 107-108

problems with European telecommunications networks, 92-97

role of LJ.S. Government. 9 I

travel and transportation services,

98- Iol

Sheraton reservation system, IO]

Signaling, 26

SIP. See Societa Italiana per l’Escrcizio

delle Telecommunicayioni

SITA. See Socicte International de Telecommunications Aemnautiques

SMDS. See Switched Multi- lMegabit Data

Service

Socicta Italiana per l’Escrcizio dclle Telecommunicazioni, 53-54

Societe Intemationalc de Telecommunications

Aeronaut iques, 99

Society for Worldwide Interbank Financial

Telecommunications, 102

SONET. See Synchronous Optical

Network

Southwestern Bell, 86-87

Soviet Union policies. 1 I 2-1 I 3

Sprint

European activities. 77-78

strategy for international expansion,

78-80

Standards

defined, 38-39

development, 108

and the future, 42-45

networks and interopcrability, 39-41

producers vs. users, 41-42

Stored-program contro] switching, description,

26, 28

Submarine Cable Landing Act, 4

Support for Eastern European Democracies Act, 129

SWIFT. See Society for Worldwide Intcrbank Financial Telecommunications

Switched Multi-Megabit Data Service, 30

Switching, 26, 28

Synchronous Optical Network, 28

Syncordia project, 78n

T

Telecommunications Annex, 147-149

Telecommunications costs, 96-97

Telecommunications equipment

discriminatory procurement practices,

97-98

export restrictions, 119

exporting, 88n

sale of German equipment in U. S., 138n

Telecommunications infrastructure

comparisons of modernization

internationally, 182-184

conclusions, 197-201

determinants of investment, 193-197

modernization debate, 181-182

question of domestic disinvestment,

188-193, 197-199

R&D expenditures, 184-188

Telecommunications policy

adequacy of data, 171-174

CIP, 166-168

conclusions, 174-179

Department of State, 166-168

FCC, 164-166

ITA, 170-171

NTIA, 162-164

options, 174-179

overview, 159

structure, 160-162

trade in services policy structure,

168-169

USTR, 169-170

Telecommunications services

changing attitudes toward services trade,

138-143

considerations for European export,

1-21

defined, 47n

encouraging foreign expansion, 88-89

European investment levels, 116-117,

119

export policy options, 21-23

foreign carriers’ operations in U. S.,

89,90

Page 219
U.S.

Telecommunications

Services in

European

Markets

modernization of European systems,

121, 123

problems with European networks,

92-97

problems with market access for basic

service, 149-151

restrictions on access to U.S. market,

4-5

trade deficit, 18-19

Telegraph Act, 4

Telephone networks

implications of change, 37

infrastructure, 31, 32

privatization, 81

Telephone penetration

defined, 59n

levels, 112, 113-114

Telephone service

market estimates, 64-67

operator productivity, 115, 117

problems with market access, 149-151

quality faults, 114, 116

revenues for European countries,

117, 120

waiting time for installation, 114, 115

Television. See also Cable television;

Satellite television

EC directive concerning broadcasting,

66n

Terminal equipment, functionality, 31

Three-dimensional computer assisted

design, 106

3-D CAD. See Three-dimensional

computer assisted design

TPSC. See Trade Policy Staff Committee

Trade Act of 1974, 139, 172

Trade Act of 1988, 140, 153, 155-156, 169

Trade Agreements Act of 1979, 139

Trade and ‘Ikriff Act of 1984, 172

Trade balance, United States, 68-70

Trade policy. See Telecommunications

policy

Trade Policy Staff Committee, 169

Transmission systems, 28

Transparency, 145, 147

Transportation services, 98-101

Travel services, 98-101

Treaty of Rome, 57n

Truman Administration, 176

u

UNCTAD, See United Nations Conference

on Trade and Development

UNDP. See United Nations Development

Program

Unisource, 78

United Kingdom

international simple resale, 52-53

telecommunications market, 49-51

United Nations Conference on Trade and

Development, 141

United Nations Development Program,

118

United Parcel Service, 100-101

United States

considerations for exporting telecommunications services, 1-21

encouraging foreign expansion, 88-89

foreign carriers’ operations, 89, 90

formulation of negotiating positions in

GATT, 153-155

international activities, 71-72

international telephone traffic, 67-68

involvement in Central and Eastern

Europe, 129-132

regulations concerning international

expansion, 72-74

telecommunications services trade,

68-70

trade balance, 3, 68

worldwide consequences of deregulation,

135-137

United States v. AT&T, 73n

Universal service, 57n

UPS. See United Parcel Service

Urban service, 115, 118

U.S.-Canada Free Trade Agreement,

140-141

U.S. Coordinator for International

Communications and Information

Policy, 166

U.S.-Israel Free Trade Agreement,

140-141

U.S. Trade Agreements Act of 1979, 44

U.S. West

European cellular network, 130-131

international activities, 84-85

USTR. See Office of the United States

Trade Representative

Utilities Directive, 156n

v

Value-added services

description, In, 151

market estimates, 65-67

problems with European networks, 95

Very Small Aperture Terminals, 36

Virtual Private Networks

description, 35-36

international expansion, 80

problems with European networks, 95

VPN. See Virtual Private Networks

VSATS. See Very Small Aperture

Terminals

w

Warsaw Treaty of Friendship, Cooperation, and Mutual Assistance, 1 I On

WAITC. See World Administrative Telegraph and Telephone Conference

Wireless communications. See ?vlobile

communications

World Administrative Telegraph and

Telephone Conference, 142

World Bank

cost of modernizing European systems,

121

market liberalization, 123

Worldsource, 76

Page 220

*U.S. G. P.O. : 1993-343-283:86959