The health of telecommunications;
a user perspective
Ewan Sutherland
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Federal Communications Commission The health of telecommunications; a user perspective Ewan Sutherland |
| Introduction |
Firstly, my thanks for the opportunity
to address the staff of the FCC, it is a considerable privilege to do
so. In particular my thanks to Don Abelson and also to Irene Wu and Anita Dey. My text has been carefully prepared and will be posted on the INTUG web site and filed as ex parte comments under all the correct dockets. I suspect, that I am billed as being humorous and controversial, that sort of expectation is never easy to live up to, if you are talking about telecommunications policy. It is not an obvious a subject for humour. It is even worse for those of you who know that I used to teach in universities. I even spent a semester in the mid-1990s teaching at Georgetown University in the Business School. Indeed, that is the last time I spoke in the District until this week. |
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| User issues |
I should make the usual litany of gripes,
moans and whinges on behalf of users, they are my stock in trade:
If you would like, I can talk about international mobile roaming for at least a couple of hours. Instead, I want to try to look a little deeper into the issues. |
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| Frames of reference |
While in Hong Kong I encountered one Washington-based economist brought there by the incumbent operator to explain to politicians that it was the FCC that had brought the US telecommunications industry to its knees. That everything could be restored if they were but to abandon their policy of local loop unbundling, that they have had for a decade and gives them some of the fastest and cheapest broadband in the world. Hong Kong had a broadband teledensity of 14.6 per cent at the end of 2002, compared with 6.5 per cent for the USA. That counts everything from 256k to 12Mbit/s as "broadband", somewhat inflating the US position. If you boil that done to 256kbit/s equivalents, then Hong Kong would be much further ahead, since a typical household there has ten times the bandwidth of a US household. It is interesting to compare market offerings from PCCW with Verizon.
If one normalises these prices and calculates a nominal 1Mbit/s/month, the result is Verizon at US$ 123 and Netvigator in the range US$8 to US$12, though it might a little more if a customer uses some additional hours. It is still roughly an order of magnitude cheaper. There is no shortage of demand in Hong Kong SAR, it is on sale on the streets in the shopping malls and in the coffee shops. Hong Kong has twice the broadband teledensity, with each line several times the US line speed. Decisions taken here in Washington, for domestic politico-economic reasons are used and misused abroad for local purposes. The recent compromises over the Unbundled Network Element Platform (UNE-P) are an obvious example. Global and international comparisons are vitally important. However, we have to be careful. Some operators fell in love with the sharp upward slope of the i-mode customer chart. There are no signs, to date, of success in Belgium, Netherlands or Germany. This is despite posters of tragically hip Japanese teenagers. When Deutsche Telekom bought Voicestream it justified the high price it by claiming the USA was an emerging market for mobile telephony and that they would bring it up to the levels of Western Europe. Instead, Deustsche Telekom AG wrote off almost the entire purchase price, some € 20,000 millions. Maybe the guys at Deutsche Telekom AG would have been better off if they taken the advice of Fritz Hollings and stayed home. The greatest successes of broadband adoption are in Asia, especially in:
We will see on Monday and Tuesday, at the NECA/NARUC Broadband Summit, just how well people understand the global broadband policy and business spaces. I will be speaking there about the role of wireless in broadband. I should also say that Belgium has overtaken the United States of America in the OECD's broadband teledensity "league table". It has had a surprisingly rapid roll-out at respectable prices and high speeds. The two primary offers from the incumbent, Belgacom, are:
The difference between Denmark and Belgium is that Danish ADSL is typically 256kbit/s and using my nominal 1Mbit/s/month index, it is about twenty times as expensive as Belgium. The reason being that in Denmark, the incumbent operator and an affiliate of SBC is able to control the market, whereas in Belgium there is effective competition from cable operators, offering a 4Mbit/s service. It is hard to get through to people just how fast things are changing, how obsolete are the business models of the operators. It is important to understand in detail the quite different successes of South Korea and Japan. The operators there are experimenting with new business models, trying to work out how to make broadband viable. Not the least important factor in this is the achievement of economies of scale. I was brought into the domestic debate in Australia on behalf of our national association there, the Australian Telecommunications Users Group (ATUG). I made a speech detailing the failings of the existing policies. The minister in charge of telecommunications had tried to dismiss the successes of South Korea in terms of gaming and pornography. Yet Australia is sinking down the OECD list, now to something like 18th in the OECD and 21st or 22nd in the world, overtaken by Estonia, Italy and the former colonial power. The need there is to get competition between telephone operators and the cable television network. A consequence of the pace of change is the need to modify the regulatory frameworks for telecommunications to accommodate technological change. It is important not to live in the past either in terms of regulation or in protecting vested interests. There are times when the USA can be very "insular", when it declines to see how things are going in the rest of the world. A recent example was from Congressman Darrell Issa who dismissed GSM as an outdated French standard. Of course it is not especially French and, arguably, all standards are "obsolete". Doubtless, he has vented his unhappiness on the person from Qualcomm who wrote his press release. The GSM Association came out with all its guns blazing. There was considerable disappointment in Belgium that their chance to claim responsibility for fries was lost. They are now Freedom Fries and not Belgian Fries as they rightly should. Actually the choice between GSM and CDMA for Iraq is an interesting policy question. It is not merely one of which technology is in some sense "superior". For a significant group in society, international roaming is a useful facility, favouring GSM. Looking to the future, the upgrade path to 3G looks to be easier with CDMA. However, the real argument is likely to be around Wireless Local Loop (WLL). In both India and South Africa there have been some difficult debates about where WLL ends and cellular begins. What we think of as a clear division between fixed and mobile is far from that. |
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| Policy models |
Policy towards the telecommunications sector
can be seen in terms of:
What is the added value of a sector regulator? The creative destruction brought about by the adoption and adaptation of new technologies remains a major factor in the sector. As telecommunication merges with the broader ICT sector, then it has become more exposed to this Schumpterian anarchy. Out from Silicon Valley come ideas such as:
I will skip over the subject of differences in governmental policies towards technology and the extent to which government can usefully and effectively support innovation. Instead, I will turn to innovative legislation. Some months ago Scott Marcus wrote a paper comparing the US Telecommunications Act of 1996 with the new European Union telecommunications package, due to take effect in July 2003. These sorts of comparisons are very valuable, even if they sometimes they tell you more about your own system than the foreign. There is a willingness to pass primary legislation at European Union level, something not seen in the US Congress. However, it is clear that transposition is proving very much harder than anticipated and in places that are not normally problem. It will certainly not be in place by July. To make matter worse, the single market may be further away, as national interpretations look likely to diverge and possibly wildly. I hope this will not happen, but would not like to bet on it. One reason, is that operators have abandoned their foreign operations and have retrenched to being incumbent operators. This is true in Europe and in North America. At the same time, there are the complex and sometimes acrimonious debates about the WTO Doha Development Round. Most of the heat is far away from telecommunications. It is agriculture that seems the most difficult. It will not be until the next WTO Trade Round that competition law will be included. That leaves open the difficult question of how to harmonise trade agreements with competition law for several years. It also leave competitive law in a state of only modest international agreement. The OECD and ICN play useful roles, but there are still enormous divergences. An obvious question with an equally obvious answer is whether policies for trade, competition and telecommunications regulation are aligned? These are handled by different bureaucracies, with different politico-legal traditions who have had little incentive to agree with one another. A specific problem for ICT is whether competition law and trade policies react in Internet time? Again, self-evidently they do not. The anti-trust actions against AT&T, IBM and Microsoft are classic examples, they ran for years and years. Cases taken on appeal to the European Court of Justice or to the Supreme Court, just down the road, take several years. The lawyers would defend that as proportionate for significant cases. In talking to someone from IBM about that period I commented on the problems of having meetings which were all attended by a lawyer. He turned on me, asking why I thought it was only one lawyer! It is not even clear that we know how to conduct competition law any faster. It is just slow. Whether it is slower than GATT and WTO trade rounds, is harder to say. Let's just say neither is fast. If neither trade policy not competition law is sufficiently fast and certain, then one is forced back to two solutions. The first is traditional sector regulation, the second is to contrive to make the market players compete. I am not sure I would like to attend an EU-US bilateral meetings on trade. The sums of money involved are enormous and the potential acrimony and vituperation unpleasant. There are issues such as bananas (which neither grows in significant numbers), steel, foreign sales corporations, hormones in beef, genetically modified organisms and a whole lot more. Only then do you get to the items from the 1377 Report:
The issue of international settlement rates is one which involves both trade and regulatory policies and, if you believe the Australians, competition law and perhaps the Racketeer Influenced and Corrupt Organizations Act (RICO). The question is one of how to address the high termination rates for fixed-to-mobile and for certain countries, such as the recent FCC action on the Philippines. |
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| Business models |
In the last decade we have seen:
We have a relatively small number of US-based companies complaining to the US Trade Representative about how terrible are a small number of foreign governments and their state-owned incumbent operators. When we look to see the pattern of investment of the big US-based operators it is unimpressive. There really is no business model for overseas expansion. It does not compare with GM, EDS, IBM or the other Fortune 500 corporations. They tried being new entrants, they tried making acquisitions and they tried partnerships. Almost without exception they were failures. The born-again MCI is the most obvious exception. If I take, SBC which I have to deal with more often that others. As at 31 December 2002, it had a total of US$ $60,603 millions in assets, of these some US$ 54,934 were in the USA and the residual value was invested abroad.
Source: SBC Annual Report, 2002.
You will forgive me, if I fail to see a pattern in these investments or, indeed, any significance. Any sensible board member would be arguing to sell out of those foreign investments, if there was anyone willing to buy them. The SBC idea of a level playing field is one under which its rivals rest in peace. It is a concept very familiar to Richard II and Robert II. The SBC presence in South Africa has set back telecommunications there at least a decade. It has exported its belligerent incumbent mentality; litigate first, ask questions later. Yet there is a bigger problem, it is that globalisation has failed in telecommunications. Convergence is not much better. We are getting voice-data convergence. However, we had been told to expect fixed-mobile convergence, but that is not in sight and we will not see it any time soon. |
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| Conclusion |
Ladies and gentlemen Users complain because operators fail to deliver. That is sometimes because of regulatory impediments, but more often because operators are protecting some existing stream of revenue or simply lack the imagination to change. Their responses are not those of corporations in open and competitive markets. They are not afraid of new entrants. The great plans for liberalization have, to a significant extent failed or at least become stuck. Rather than compete on the market, it is easier for the operators to contrive to tilt the regulation in their favour. Perhaps to exclude their rivals from the market, to make it uneconomic for them or to tie them up in court actions for years. The USA seems to be locked into an extremely legalistic model, one characterised by heavy lobbying by specialist law firms, some of which happen to own telecommunications networks. Absent the agreement between the interested parties, there tends to be gridlock on the Hill, narrowing the scope for intervention, to rule-making here at the Commission and somewhat greater scope in appeals to the courts. It is a long drawn out process that kills off many new entrants. It is easy to work out how much capital they have, what their "burn rate" is and when they will die. It is tough for users to intervene with such large economic interests throwing their weight into the battle. We are a comparatively small voice. Best practice seems to be located in South Korea, Japan and, perhaps, China. It is not so much that they are shining examples of regulation, even they would not claim that, so much as they still have the bold vision and risk taking of the operators and manufacturers. Operators that recognise the need to build new business models. Operators that deploy networks rather than lobbyists and lawyers. While US operators remain so keen on litigation, it makes it a very real challenge for the FCC to be at the cutting edge of global best practice. Thank you for your attention. |
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| FCC Dockets |
IB Docket No. 02-324 International Settlements Policy
Reform IB Docket No. 96-261 International Settlement Rates CC Docket No. 95-116, First Report and Order and Further Notice of Proposed Rulemaking, 11 FCC Rcd 8352 (1996). |
| copyright © INTUG, 2003. |
http://www.intug.net/talks/2003_04_FCC.html |