Telecommunications Analysis: All-out competition or new social contract?
There's a new "common sense" prevailing in the field of telecommunications policy. It says that the kind of pragmatic social regulation which made universal access to affordable telecommunications service a reality in this country must be rejected, to be replaced by deregulation and the "free market." Contrary to what the competition advocates think, however, the North American telecommunications industry may be undermined if they continue their mindless promotion of deregulation and liberalization. The view that laissez-faire competition should prevail in North American telecommunications has some powerful proponents. These include the Federal Communications Commission (FCC) in the U.S. and the Ministry of Industry in Canada. In addition, countless companies are anxious to skim the cream off of the existing telecommunications system by entering the lucrative parts of the business and avoiding any responsibility for ensuring that service is provided on a universal, affordable basis.
Fortunately, other pressures are being brought to bear on the telecommunications industry by consumer groups, unions and the incumbent telephone companies themselves. Consumers and unionists are concerned because they have seen the downsides of increased competition: unbundled services, higher local rates, and unprecedented downsizing of the people who provide the service. Phone companies are worried that as competitive pressure on the industry increases, they alone will be saddled with responsibility for universality, affordability and access, while their competitors will be left free to pick and choose the classes of customer and geographic areas they want to serve.
Why is the subject of telecommunications (de- )regulation relevant right now? Because the subject of telecommunications will be on the negotiating table when governments from around the world sit down at the next round of World Trade Organization (WTO) talks in January 1997. The outcome of these negotiations could have enormous effects on the future of the North American telecommunications industry. So it is essential that our trade negotiators be made aware that many North American carriers are too small to survive in a no holds barred competitive battle against with telecommunications giants like British Telecom.
The situation facing the Canadian industry illustrates our concerns. U.S.-based companies have more than enough spare capacity to carry all of Canada's telecommunications traffic without constructing a single facility or providing a single job in Canada. Canada's traffic could easily be bled off in this manner if foreign super companies receive permission -- either from the Canadian government or from an international organization like the WTO -- to carry traffic originating in Canada.
Unless the current momentum toward all-out competition is reversed, the Canadian industry could be forced to go toe-to-toe with the biggest companies in the world on terms that disadvantage Canadian phone companies, consumers and workers alike.
With companies downsizing and cutting costs to increase their competitiveness, service quality is already declining. As competitive pressures increase and the industry moves to cost-based pricing, who will have the responsibility for servicing low revenue, high cost customers? What will happen to customers who are unable to pay dramatically higher prices for their service? Unless governments and regulators come to grips with these issues, the task of providing universal, affordable access to communications will be left to governments or abandoned altogether.
What will be the overall effect of allowing companies to enter markets on a selective basis? It has long been our position that new competitors -- particularly foreign super corporations -- should not be allowed to enter the Canadian market and skim profits off the top. All companies should be required to bear a portion of the costs of universal, affordable service as a condition of being granted access to the Canadian telecommunications market.
Until recently, only countries like Canada, with relatively small telecommunications sectors, have expressed concern about the downside of competition and deregulation in the context of international telecommunications negotiations. But in this incredibly dynamic sector, everything is subject to change. In the world of contemporary telecommunications, today's shark is tomorrow's sardine.
Case in point: AT&T.
But British Telecom's recent move to buy a controlling interest in the MCI company may alter AT&T's perspective on the virtues of competition in international telecommunications. The huge British company plans to swallow MCI in a deal worth US$21 billion. If the deal goes through, it will create what the Globe and Mail describes as "an international telecommunications powerhouse with enormous financial muscle and global reach."
This would be the largest deal in the history of the telecommunications industry as well as the largest foreign takeover of a U.S.-owned company.
Executives of both companies are enthusiastic about the pending agreement. It will allow BT to use its financial clout and experience in the $100 billion U.S. local phone service market, which was only recently opened to competition. In addition, MCI's marketing and technological know-how will enhance BT's expansionary drive in Europe and elsewhere.
BT's chairman, Sir Iain Vallance, bragged that when the two companies combine, "our would-be competitors won't see us for dust."
Not surprisingly, AT&T, the biggest of BT-MCI's potential competitors, reacted negatively to the news of the proposed takeover. Who would be enthusiastic at the prospect of doing battle with such a huge and powerful opponent? AT&T chairman Robert Allen said it all when he commented that "The ability of a company with this kind of market power to negatively impact competition and reduce customer choice makes the evaluation of this proposed merger a global priority of the highest order."
If the proposed merger is approved by shareholders and regulators, it will lead to the creation of a company known as Concert PLC, with $42-billion in revenue and annual profit of $4.7-billion. Concert would rank fourth in the world in revenue among telecom companies, after Nippon Telegraph & Telephone, Deutsche Telekom and AT&T. Its combined profits for 1996 would place the company ahead of such giants as IBM, Ford Motor Company and Citicorp.
According to MCI chairman Bert Roberts, the new company will be "the premiere telecommunications company of the new millennium ... Concert's scale will allow it to pursue major opportunities in new markets while maintaining the financial stability that comes from strong core businesses in the developed markets of the U.S. and the United Kingdom."
The move is the latest in the dogfight that MCI has been waging with AT&T since the latter lost its monopoly in the U.S. long distance market. Both are preparing to go toe-to-toe in the battle for local phone business, which was deregulated earlier this year. AT&T is seen as particularly vulnerable because it is in the middle of reorganizing its operations.
The company is expected to launch a vigorous lobbying campaign in Washington against the merger deal, which threatens its supremacy in the long distance market. Its chairman, Mr. Allen, sounds nervous.
Complaining that the competitive playing field is not level, Allen urges regulators to make scrutiny of the proposed merger "a global priority of the highest order." Understating his concern, Allen says "... this proposed merger must get the scrutiny it deserves."
The takeover is subject to review by regulators in the U.S., Britain and the European Union. MCI's Roberts told the press that he expects the deal to be very intensely reviewed by all of the agencies. At the same time, pressures are increasing on other companies to strike similar deals. "Communications is going to end up like the car industry," says Sprint Canada chairman Juri Koor. In the end, he believes, "There will be three or four large companies and very little else."
If the sector ends up dominated by a handful of enormous international corporations, do we really want them to function with no regulation of their behaviour?
In the run-up to the February 15, 1997 WTO negotiating deadline, the U.S. has been pressuring global telecom companies and governments to end their limits on foreign ownership and to facilitate the entry of foreign-owned companies into previously regulated domestic markets.
Given AT&T's concerns about the effects of a BT-MCI partnership, however, it remains to be seen whether the FCC and other organisations will continue to promote further deregulation and competition. There is a real possibility that the threat from BT will temper the American enthusiasm for competition if it means giving foreign companies wide open access to their telecommunications market. If the reaction to the threat is strong enough, the debate about the future of telecommunications policy could change radically.
These developments, together with the increasing tendency toward for huge oligopolies to dominate the telecommunications industry, provide us with a real opportunity. We can and should insist that international companies be allowed access to other countries' telecommunications markets only after social obligations have been incorporated into national regulatory frameworks. All companies should be required to provide service on a universal, affordable basis as a condition for receiving permission to enter the market. Similar provisions should also be included in international trade agreements like the WTO.
In the alternative, domestic companies which are required to address such social obligations should be financially compensated by a levy on would-be competitors. This would compensate them for their losses when the high revenue, low cost portions of national telecommunications markets are captured by the selective entry of competitors motivated solely by the desire to improve their bottom lines.
To the extent that competition is accepted as a guiding principle for telecommunications policy, policy must compel all companies seeking permission to enter the sector to pay a proportionate share of the costs associated with providing universal, affordable access to both telephone and high end telecommunications services. Given that existing and potential competitors are some of the largest companies in the world, there is absolutely no reason to grant them special incentives or discounts to encourage them to enter the market.
In other words, all companies participating in a telecommunications market should be required to make service and cost undertakings of the obligations they are willing bear as a condition for being allowed to operate in the low cost, high revenue portions of the market. All competitors, domestic and international, must shoulder the responsibility for providing universal, affordable access to high end telecommunications services as a condition of receiving permission to function in domestic telecommunications markets.
The approach we're advocating can put governments back in the driver's seat when it comes to shaping the telecommunications industry of the future. The laissez-faire alternative, which allows companies to set their own servicing priorities, has led to the situation facing the phone industry in places like Oregon and New York, where service quality is abominable and costs have risen through the roof.
This should be avoided at all cost. There is an alternative.
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