Friday, February 25, 2005

Reading :: Telecommunication Infrastructure

Originally posted: Fri, 25 Feb 2005 10:33:23

Telecommunication Infrastructure: The Benefits of Competition

by Sam Paltridge

This 1995 policy report by the Organisation for Economic Co-operation and Development, like another recent reading, provides us with the international perspective on telecommunications policy. In particular, the report concludes that liberalizing telecommunications infrastructure can result in significant benefits over state-owned and operated monopolies. For the present discussion, it's important that liberalization is justified in terms of universal service: "there is no evidence that universal service has been impaired by market liberalisation" and "facilities competition can be applied to complement and enhance universal service" (p.7). How far this humble notion of universal service has traveled since 1907, when Theodore Vail coined the term to suppress facilities competition and establish a monopoly!

We'll get to what Paltridge means by "universal service" in a minute. First, some history. Paltridge discusses how the "first challenge" to public telecommunications monopolies came when users wanted to connect their own devices to the network (p.11). (This isn't true in the US.) But, says Paltridge, the industry is currently changing from a supply-led to a demand-led industry: Companies "are following their major customers into international markets and seeking greater regulatory freedom to meet user requirements nationally and internationally" (p.12). The US has led in regulatory freedom: It never had a state-owned monopoly, and the regulated monopoly was ended with the Modification of Final Judgment in 1983. Despite industry predictions, the cost of long distance service plummeted after the long distance market was liberalized: "AT&T tariff rates fell by over 70 per cent in real terms between 1983 and 1991" (p.16). After 1984, business 800 services dropped 67.9% and "the cost of direct dialled interstate calls has been reduced by about 40 per cent attributable to competition and regulatory policies" (p.16). At the same time, quality of service measures went up and, at the time of writing, 98% of the rural US had phone service. (Elsewhere the report states that overasll household penetration in 1989-90 was 93.3% (p.29).) And "In 1993 nearly 400 firms purchased the premium access needed to provide direct dial long distance service" (p.16). Two of these three measures -- price and quality of service (including market penetration) -- are associated with the second articulation of universal service. The third was the precipitating factor in the Department of Justice case against Bell: competition.

But internationally, policymakers were dubious. In a 1993 survey, "the most common reason cited for excluding infrastructure competition was the objective of universal service" (p.16). "Seemingly inherent in the argument against liberalisation was the notion that competition was a threat to universal service and the presumed economies of a single network" (p.17). This is curiously similar to AT&T's argument in the 1970s. The report spends most of its time trying to debunk that argument, drawing on market liberalization data from a variety of countries. The key assumption of the argument -- universal service in its second articulation -- is uncontested.

Here's an interesting fact. In 1992, "Sprint's interconnection expense (money paid for access to the networks of other carriers) as a percentage of net operating revenues in 1992 was 46 per cent. On the other hand 17.5 per cent of Sprint's long distance operating revenues was from providing access services to AT&T" (p.46). Amazing how things changed in less than ten years.

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