Stand: 18.10.1998 (16. Ed.) – File: Docs/Death_of_distance.html
Der Economist hat im September 1997 eine Neufassung von "The death of distance" veröffentlicht. Inzwischen ist auch ein Buch "The death of distance" erschienen [mehr]. Die Text-Dokumentation des Artikels von 1995 erfolgt hier im Rahmen des Internet-Magazins "t-off", um Beleg-Links zu einzelnen Thesen anbringen zu können. Aktuelle Kommentare und Verweise sind mit [Ed: ...] hinzugefügt. [Übersetzungs-Service]
I n d e x :
THE ECONOMIST
September 30th, 1995
Thanks to technology and competition in telecoms, distance will soon be no object. The effect on people's lives will be dramatic, says Frances Cairncross
On Mothers' Day this year MCI, America's second-largest long-distance telephone company, offered many of its domestic customers free calls. Struck by an annual outbreak of filial sentiment, Americans make more long-distance calls on Mothers' Day than on any other day of the year. Americans also have almost a quarter of the world's telephone lines, so Mothers' Day traffic in the United States is probably the heaviest anywhere in the world. Yet MCI felt it could offer a free service without overloading its network.
In time, every day may well be Mothers' Day, everywhere. Relentless technological change is driving down many of the elements in the cost of a telephone call. Already, the cost of carrying an additional call is often so tiny that it might as well be free. More significant, carrying a call from London to New York costs virtually the same as carrying it from one house to the next.
The death of distance as a determinant of the cost of communications will probably be the single most important economic force shaping society in the first half of the next century. It will alter, in ways that are only dimly imaginable, decisions about where people live and work; concepts of national borders; patterns of international trade. Its effects will be as pervasive as those of the discovery of electricity. Who could have foreseen, in Michael Faraday's time, that electricity would eventually release women to go out to work, transforming the shape of the family, or allow the development of cities such as Manhattan and Hong Kong, whose skyscrapers could never have been built without the lift?
The discovery of electricity created new industries, but it killed some too. The change in the cost structure of telecommunications will do the same. For the moment, telecoms is a business on the crest of a wave (see chart). Profitability has climbed almost without interruption for a decade, and is still accelerating. In 1994 the ten largest telecoms giants made bigger profits than the 25 largest commercial banks (see chart). Demand is soaring: over 38m new subscribers were connected to the fixed network in 1994, more than twice as many newcomers as in 1986. Another 19m joined a mobile network in 1994 alone. Yet costs have tended to fall faster than prices, which is why the industry has been so profitable. Now those fat profits are coming under attack from an ever-growing band of competitors.
There was a time when telecoms seemed to be a natural monopoly. Most governments liked it that way because they owned the monopoly and siphoned off some of the profits. Even now, most homes are served by only one wire, so customers cannot switch telephone services in the way they can change their hairdresser or their lawyer. But as new technologies reduce the costs of entry, competition is spreading. Enthusiastically in some countries and gingerly in most, governments have begun to accept that competition offers the best way to ensure that changing technology is fully translated into lower tariffs.
In each of the world's three big markets, reforms are in train to foster competition. In the United States, if the telecommunications proposals that passed Congress in August become law, the long- distance carriers, the regional Bell companies and the cable-television operators will be able to compete freely in each other's markets. In Japan, the government is wondering how to reduce NTT's iron grip on the local network. In Europe, the commission in Brussels is determined to create a single market in telecommunications services.
The benefits to an economy of even a little competition are tremendous. A recent study by the OECD ("Telecommunications Infrastructure: The Benefits of Competition") concluded that liberalisation not only reduced prices, but expanded the market and improved customer choice. This is true not just in developed countries but in developing ones too. In the Philippines, for example, the government's decision in 1993 to allow new entrants to provide local telephone services on a large scale persuaded PLDT, the country's main operator, to make a serious effort to cut waiting lists.
The case for competition is dawning even on China. A new telecoms operator, United Telecommunications Co (Unicom), was set up in 1994 by the ministries of electronics, railways and power, the industries from which many competitors have emerged in the rich world. Using the railway ministry's routes as a backbone, Unicom is constructing a fibre-optic network, starting with 15,000–20,000 subscribers in each of four large cities.
Competition has already begun to transform some of the companies gathering in Geneva for next week's Telecom 95, a giant jamboree for the industry. A dramatic instance came on September 20th, when AT&T announced it was splitting into three. Where competition is toughest, telecoms giants are slimming their enormous workforces and trying to add value to their basic services. AT&T itself has built a popular credit card on its brand name and billing skills. Hongkong Telecom and Bell Atlantic, among others, are exploring ways to provide interactive entertainment. Several giants, including BT and MCI, are building alliances to provide sophisticated telephone packages for international business customers.
Their competitors are more diverse still. They now include not just other telecoms companies but also cable-television operators, software manufacturers, banks, water companies, railways and many more, all nibbling at the $500 billion market for global telecommunications. They are bringing new skills and new approaches, helping to transform telecommunications from an industry that builds and maintains networks into one that offers communications as an incidental part of a host of other services. In particular, telecommunications will vastly extend, and in its turn be extended by, the reach of the computer as the two technologies increasingly converge.
The direction of these changes is fairly clear, but their speed is uncertain. This survey will argue that the pace will be set not just by technology but by the interplay of regulation and competition. Governments can delay the revolution; they cannot prevent it. If they try, they will merely fail more spectacularly later.
From dearth to glut
The technological changes that have swept across the telecommunications industry have two distinct effects. One is to create glut instead of the capacity shortages of the past. The other is to reduce barriers to entry and make possible new sorts of competition. Together, they will transform the industry – although the pace at which they take effect will be partly set by regulation.
The increase in capacity is essentially due to two changes. The first is the increasing use of fibre-optic cables. These now cost much the same as copper wire to lay down and much less to maintain, but carry vastly more traffic. A single fibre thinner than a hair can carry 30,000 simultaneous telephone conversations. Second, switches – telephone exchanges – have moved on from eavesdropping operators and clunky electro-mechanical devices to become increasingly like computers, their costs falling and their capability expanding inexorably. New cable has been laid most lavishly across the Atlantic and Pacific oceans and on routes between cities in the United States. Gluts are already appearing: more than one-third of the capacity under the Atlantic is unused (see chart). The growth in capacity will continue as competitors lay cables of their own. The most ambitious such project, the Fibre-optic Link Around the Globe (FLAG), is run by a consortium in which Nynex, one of America's regional Bell companies, has the largest stake at 40%; but most of its partners are from outside the industry.
Technological change will also allow huge reductions in the running costs of the network. "Maintenance accounts for a quarter of the costs of running a network, and the maintenance costs of a fibre-optic network are around one-fifth those of a wired network. Sending guys out in trucks is expensive," says Jeffrey Camp, a senior analyst at Morgan Stanley in Tokyo, explaining the pressure on NTT to replace copper with fibre. Clever switching installed in the basements of business premises allows telephone companies to press a button rather than send a workman.
The implications of these changes are enormous. Unlike the computer industry, which thanks to a similar increase in power and memory has been able to offer customers more sophisticated devices at the same price, the telecoms industry will have to offer the same product at a small fraction of its former price. Operators everywhere are struggling to find ways to add value to the basic telephone call, but prices are likely to fall more quickly than premium products can be marketed.
Loopy
Up to now, the main impact of technological change has been on long-distance calls. In the United States, where four nationwide fibre networks have been built in a decade, long-distance revenue per minute has halved during that period. Now other technologies are cutting the cost of the "local loop" – the connection between the nearest exchange and the subscriber's home. This connection is usually made with a twisted pair of copper wires, a technology unchanged for almost 120 years. As a rule of thumb, local distribution accounts for 80% of a network's costs. Peter Huber, a telecoms specialist based in Washington, DC, reckons that it costs around $1,200–2,000 to connect a new customer with copper.
Two less expensive and more flexible alternatives to copper have now become available. One is to run telephone services over the same system as cable television. A breakthrough in laser design in the late 1980s made it possible to send analogue television pictures along optical fibres. Since then cable systems, like telephone systems, have increasingly acquired backbones of optical fibre. Adding telephony to an existing cable system usually costs much less than extending the copper-wire network.
The trouble is that a cable-television system, like a telephone network, involves high fixed costs and passes homes that do not want it, as well as homes that do; so building one from scratch (as in Britain) is expensive. These problems are avoided by the other technological breakthrough: the use of wireless transmission. Its extraordinary flexibility and low cost will allow the development of a new kind of network – or networks – competing directly with fixed wires. "Wireless is the answer to the local monopoly," says Robert Pepper, head of the office of plans and policy at the Federal Communications Commission (FCC) in the United States.
"If local telcos were to rebuild from scratch today, they would do so mostly with radio, at a cost of about $800 per subscriber," say Peter Huber, Michael Kellogg and John Thorne in "The Geodesic Network II", a 1993 review of competition in the industry in the United States. Mobile telephones will increasingly compete head-on with fixed systems. But the most important innovation is likely to be a digital wireless link to a small fixed radio antenna in the home, which can make extraordinarily efficient use of the radio spectrum: unlike a mobile phone, the antenna is always tuned precisely to the correct base station.
Such systems of wireless local access are now being developed by several companies including Hughes in the United States and Ionica in Britain, but are not yet in commercial use in OECD countries. Nevertheless, calculations by Analysys, a British consultancy, bear out the enthusiasm of Mr Huber and his colleagues for fixed wireless access as potentially the least expensive way to make the final link to the home.
If cable companies can supply bandwidth – the capacity to send lots of information – and if wireless telephony will do almost everything else that wire connections can do more cheaply, what will that do to the established telephone operators? "Technological change always presents a problem for the owners of the old technology," says Philip Sirlin of Wertheim Schroder, analysts in New York. "Capital intensity worsens the problem, and the telephone industry is certainly capital intensive." The big operators still have immense advantages. But are they now doomed to be the railway magnates of the 21st century, saddled with vast fixed costs for a network of dwindling value? Certainly they will have to restructure their tariffs. Once costs are no longer distance-sensitive, a premium becomes harder to maintain. In Sweden, it costs the same to call from Malmo to Kiruna, 1,400km (870 miles) away, as to Helsingborg, some 80km away. "When you tell people," says Martin Bangemann, an EU commissioner who has been pushing for reform, "they think it is a fairy tale."
But why end the fairy tale at that point? When many parts of the network are no longer constrained by capacity, why charge subscribers by the number of seconds they spend on the telephone? Why not simply charge them a regular fee based on the speed and capacity of their line, and something extra for any fancy services they buy? The pressure for such a change will grow as charges decline and billing becomes an increasing burden.
That pressure is being reinforced by the growth of the Internet, most of whose users pay a flat-rate subscription to cover un-limited use, plus the cost of a local call to get connected. As more and more people communicate by Internet across continents for next to nothing, they will ask why telephone calls should be different.
Their question is now being answered by a New Jersey company, VocalTec, which is offering the software to enable telephone calls to be made over the Internet. Early versions of the software required both parties to have a computer and to speak in turns, as with citizens' band radio, but this has changed with the launch of "one-end-only" software and the technology to allow ordinary two-way conversations. As Bill Gates, chairman of Microsoft, said recently: "I'm not sure what the Internet is good for commercially, but I don't know why you would want to be in the long-distance market with that thing out there."
If the Internet were to become a serious rival to long-distance telephony, the increase in traffic would require a vast amount of additional investment – which probably only the existing telecoms operators could provide. But even with a tiny share of traffic, the Internet's impact on prices may be large. That presents the operators with a problem.
Until now, tariffs have been based on a cat's cradle of cross-subsidies. Although a high and rising share of the costs of a network are fixed, charges in most countries are still based mainly on us. (See chart) Moreover, the price of local calls is widely subsidised from long-distance and international calls, where tariffs have long been kept deliberately high. In many countries local calls are free or extremely cheap. Everywhere, too, domestic telephone users are subsidised and businesses overcharged.
Such cross-subsidies from business to domestic users – and presumably voters – have suited governments down to the ground, putting a lid on political enthusiasm for deregulation. Once competition hits the more profitable markets, cross- subsidy becomes untenable.
Farewell to those fat margins
For years, telecommunications was considered a natural monopoly. Just in case it was not, governments almost everywhere hedged it about with regulations to discourage competition. Gradually, and more quickly in some countries than others, competition has been allowed to creep in. To flourish, it needs not just the acquiescence of governments but their willing support.
New entrants come from three directions. Some have built networks of their own. Others have found ingenious ways to use infrastructure leased from other businesses. And some are using new kinds of infrastructure, mainly cable- television systems and the wireless spectrum. The effect everywhere is the same: to drive down prices and expand the range of services.
Long-distance rates and business customers – the two areas where tariffs were most out of line with costs – have felt the effect of competition first. Large business customers often begin by putting together their own internal networks, to link office telephones and personal computers. The European Commission reckons that there are now around 700,000 private networks in the United States, but only 14,000 in the less competitive European Union. The proliferation of personal computers encourages companies to link them into networks which can cover anything from a single office to the whole world. Examples of global networks include those used by the banking and airline industries, or the Internet, the largest of them all.
These networks may be purpose-built, or they may run on leased lines (of which some 20m are now in use). Once such networks are constructed, spare capacity on them can be resold to other businesses and operators, local legislation permitting. For example SITA (Société Internationale de Télécommunications Aéronautiques), the airline industry's immense global network, has plans to offer voice services to multinationals.
Many other businesses have suddenly noticed either that they have rights of way along which they can easily run fibre-optic cables, or that they already have networks for their internal communications. For example, a group of European railways has set up an organisation called Hermes to carry telephone traffic across Europe's many international borders; in France, Générale des Eaux expects telecommunications to provide 10% of its turnover by the end of the century; and in Japan a group of regional electricity utilities is building a network. MFS, an American company, has built 46 fibre-optics networks in the business districts of many big cities around the world, most recently in Frankfurt and Paris.
The market is still patchy. Marc Destrée, in charge of international development for MFS, complains about the cost of buying long-distance capacity in Europe: roughly ten times what his company pays in the United States. But the important thing about the market is that lines are usually charged at a fixed fee, not priced by the amount they are used. That creates an opportunity for arbitrage against the tariff structure of the big operators.
Everywhere, but especially in Europe, the big operators have fought a furious rearguard action to prevent space on the networks being resold, or to confine resale to closed-user groups such as the branches of a hotel chain or a bank. But as the market develops, they have as much interest as anyone in selling their spare capacity. In the United States in particular, this wholesale market is huge, with long-distance carriers such as MCI selling large amounts of spare capacity to specialist companies which have sprung up to take advantage of the pricing constraints imposed on the big companies.
As restrictions are loosened, these resellers will enter the domestic market too. With freedom to price on the basis of plenty rather than shortage, they will undercut the dominant players. There will be many more companies such as the bizarrely named 10297, which advertises itself in the United States as a long-distance wholesale club. It buys capacity in bulk from AT&T, MCI and Sprint and retails it to individuals, who need only dial the five digits that make up the company's name before calling any number to get price discounts of up to 50%. Such "systems integrators", as Eli Noam of the Columbia Institute of Tele-Information calls them, will proliferate, using their bargaining power to bring individuals benefits hitherto available only to companies, but not actually running the facilities themselves.
Foreign gold. Even before that, the market in spare capacity will have a dramatic impact on international tariffs. International calls produce only 12–15% of the revenues of the big operators, says the International Telecommunication Union (ITU), but generate 30–40% of profits (see chart). Margins are high everywhere, but especially in continental Europe. The share of operators in high-cost markets has come under increasing pressure from the use of calling cards, which allow callers to charge calls at lower rates, and from the call-back market.
Call-back services have been so effective in keeping a lid on international rates that some countries, including China and Singapore, are trying to ban them. A caller in a high-cost country, say Germany, telephones a number in a low-cost country, usually the United States. A computer identifies the caller without answering the telephone, rings back and connects the subscriber to a third country, say France. "All over the world," says Howard Jonas, head of IDT, a New York call-back company which he says is the world's largest, "countries 500 miles apart have rates double or triple or quadruple the cost of calls from the United States. Rates are not so much distance-sensitive as politically sensitive." Used mainly by small and medium-sized companies, the call-back market is not huge – perhaps $300m a year, guesses Mr Jonas – but its impact on rates is disproportionately large.
Some governments are now trying to use the spare-capacity market to break the complex settlements system for splitting the proceeds of international calls among an oligopoly of big operators. Already, sales of spare capacity between the gateways at which international tolls are collected mean that international calls take increasingly complicated routes, making the settlement process harder to police. Some governments have turned a blind eye to a bit of bypassing. But now the United States, Canada, Australia, New Zealand, Britain, Finland and Sweden specifically allow resellers of capacity to bypass the gateways. This has caused rates between these countries to be slashed. (See chart) For instance, after Britain's agreement with the United States, BT's transatlantic tariffs promptly dropped by a third.
As their fattest margins are squeezed, the large operators will be forced to charge domestic subscribers more realistic prices. Up to now, the combination of high costs and cross-subsidies has made local distribution the least attractive part of the system for would-be competitors. It has also been the part guarded most fiercely by telephone operators. As a result, fewer than 1m people worldwide have any choice in the fixed-line telephone they can have. The remaining 650m or so subscribers have to take what the local operator offers. But restructuring not only encourages more rational local pricing; it also makes many governments keener to see competition in the local loop. That is likely to come from cable companies and from wireless.
Bandwidth delivered to your doorstep
Would people rather have bandwidth or mobility? The answer will determine which of the two main competitors to the telecom giants will come out on top. Cable – provided by the cable-television operators – offers the bandwidth; wireless – used by the mobile telephone companies – the mobility. The global test-bed for cable is Britain, where cable companies have been offering public telephone services in their own right since 1991, longer than anywhere else.
The cable-television operators have much in common with telephone companies. They tend to have a local monopoly; they have a fixed link with their subscribers; they bill their customers, and they know quite a lot about their habits. The main difference until now has been that their system is designed to pump information in one direction only, while the telephone companies send it two ways, and can switch it among many different subscribers. Yet the coaxial cable traditionally used for cable systems provides much more bandwidth than the telephone network's copper wires.
Now these differences are starting to matter less. Cable companies are rebuilding their systems with optical fibre, and their costs are coming down further as switching capacity gets ever cheaper. Doug Regan of TeleWest, Britain's biggest cable company, says that adding telephony increases the capital cost of a cable system by 20–25%, but boosts revenue per customer by over 50%. Customers who take the telephone service are also less likely to drop out than those who take television alone, which means the cable company saves on disconnecting customers and selling to new ones.
Mr Regan's arithmetic shows why, wherever they are allowed, cable-television operators are offering telephone services as well. Not only is the market much larger, but the double set of revenues makes it easier to justify the vast cost – some $10 billion of investment in Britain, only half of it spent so far – of digging up the streets. Britain's cable operators are now investing as much annually as BT. In some parts of the country they are signing up one-third of BT's customers. But not one of them is yet making an operating profit. Moreover, they now face a nasty squeeze on their margins. BSkyB, the satellite- television company that provides most of their programmes, has been pushing up its charges. At the same time, BT has begun to cut its prices aggressively. The cable companies have to follow suit: the main selling point of their telephone service is that it costs 10–15% less than BT's.
Is Britain's experience a cautionary tale for cable companies elsewhere? Not necessarily: Britain has been building a cable network from scratch. Besides, one of the main attractions of cable television in the United States – the quality of transmission – counts for nothing in Britain, which has high-quality terrestrial coverage. And because the cable companies depend heavily for their programming on BSkyB, which already supplies a well-developed market for satellite television, the quality of their entertainment has not been a big selling point.
In some other countries cable telephony may well be more competitive. In Hong Kong, for example, where the local monopoly of Hongkong Telecom expired at the end of June, Alex Arena, the director-general of telecommunications, licensed three new local telephone carriers. One of them, New T&T, is owned by the Wharf group, a large property conglomerate which also owns Wharf Cable. In June 1993 this company won a 12-year licence to provide cable television, with a guarantee of no competition for the first three years. Up to now, it has distributed programmes mainly with a microwave link. The group is now running an optical-fibre loop around Hong Kong's subway system, a stone's throw from the basements of most of the island's tower blocks. Servicing tower blocks that house perhaps 500 families a time clearly costs less than digging up Britain's suburban streets.
Competitors offering cable television and telephone together are springing up in more and more countries. In Japan, two consortia of Japanese and American companies are amalgamating the fragmented cable-television companies. One of them is Jupiter, which hopes to launch a telephone service by the end of 1996. Its president, Yasushige Nishimura, notes that NTT, the former state monopoly, charges €72,800 (about $750) for installing not just the first line but each and every subsequent one as well. "If you can offer a second line for free, that is attractive in a country where grown-up children tend to live with their parents until they marry," he points out. As the company's capital expenditure per customer connected is less than €72,000, the economics makes sense – for the moment.
By running telephony on the back of existing cable-television networks, systems operators in several countries can offer telephone services more cheaply than the established telephone operators. But to win a big chunk of the market, they will have to offer something more than price competition.
In the United States, the move into cable telephony will be led by a group built around Tele-Communications Inc (TCI), America's biggest systems owner, and two other large cable operators, Cox Cable and Comcast, which have allied themselves with Sprint, the third-largest long-distance carrier. Their path will be smoothed if this year's telecommunications bill becomes law: it will then become much harder for a state to veto cable telephony. With 60% of households subscribing to cable television, and almost all homes within easy reach of a systems operator, the cable companies are keen to get going.
They still face formidable obstacles. "The great weakness of the cable industry is its fragmentation. Every one of the regional Bells is bigger in its region than all the cable operators in that region combined," admits Brendan Clouston, executive vice-president of TCI. Moreover, in America "the cable industry does not have a great perceived reputation for service. And it has no national brand."
Interactive too
Bandwidth is the key advantage the cable companies have over the telephone operators. It allows them to offer any number of fancy interactive video services – and even more once they carry digital broadcasting. TeleWest's Mr Regan talks of providing 700 channels once his customers have boxes to decode the digital signals coming into their homes. That might happen in 1997. Such capacity will not only offer more television programmes than the most ardent fan could conceivably want, but allow the interactive use of the screen, with messages or pictures being sent to and from the home or office.
Not many telephone operators can yet rival that. One that may do so is Hongkong Telecom, where William Lo is exuberantly inventing new services to offer on the company's state-of-the-art fibre-optic, digitally switched network. He has already set up a trial based on 400 households, offering them digital video on demand: by clicking a mouse, they can order a film, pause or rewind it. In time, they will be able to shop, bank, draw money from their account by swiping a smart card through a set-top box and perhaps even gamble: the Royal Hongkong Jockey Club is one of the partners in the scheme. Mr Lo plans to have the service commercially available by July next year. "If we cannot make this work in Hong Kong, with the great interest in new products and the low cost of additional investment, it cannot work anywhere," he says.
How much will customers, or the companies that want to reach them, pay for such novelties? Enough, maybe, to justify the relatively small extra investment that existing cable companies have to make; not enough to reimburse the telephone operators for replacing their copper wires. So the telephone companies are racing to find ways of cramming more into their present networks. These include Asynchronous Digital Subscriber Line or ADSL, a technology which allows television pictures to travel along copper wires. At present this is expensive, and the quality of the pictures is not as good as the alternatives. Meanwhile, many telecoms operators are pinning their hopes on ISDN (Integrated Services Digital Network) as a stopgap to expand the capacity of copper wires. [Ed: ISDN in Germany 1998]
If their stopgaps work, and they can squeeze more bandwidth out of their elderly networks, what will the telecoms operators do with it? All are desperate for ways to charge their customers more than they can for a plain old telephone service. "Rich people in Nassau County spend well over $100 a month on magazines and videos," says Ivan Seidenberg, boss of Nynex, the Bell in the New York region. "They spend only one-third as much on Nynex services."
To extract more, Nynex and two other Bells have set up their own television venture; other Bells formed an alliance with Disney, in the days before Disney itself owned a television network. MCI bought a 20% stake in Rupert Murdoch's News Corp. All may find they have wasted their time and money. It is difficult to imagine America's telephone companies as future media moguls.
More fruitful may be the attempts by some to become Internet service providers: the personal computer and the Internet are more likely to be the model for future interactive services than are fancy experiments with television sets. Undoubtedly, demands for bandwidth will increase as more people own computers with modems, and want to use them to contact each other. The launch of Microsoft's Windows 95, with its built-in capacity for Internet access, will give a boost to this market. But it will be many years before on-line services or the Internet make much money. France has the world's nearest approximation to a mass-market interactive service with its Minitel, which offers 26,000 services. The most popular, after directory inquiries, is train timetables. No wonder Minitel has taken ten years to turn a profit.
In the contest with the cable companies, the telecoms operators can point to considerable strengths. Frank Biondi, chief executive of Viacom (which is getting out of operating cable systems to concentrate on content), points out that the telecoms operators tend to be bigger and richer than the cable companies. They cover large regions, whereas the cable companies tend to cover only patches. The telecoms operators have the cash, the skills and the customer base to develop new software applications and charge extra for them.
But they are still vulnerable. Moreover, their grip on the local loop faces a potent threat from another direction: the wireless spectrum.
Wonderful wireless
The advent of mobility is by far the most striking change in telecommunications in the past decade. It amounts to the introduction of an entirely new product, with huge new potential. Many people working in telecommunications assume that mobility poses no threat to the existing networks. They are almost certainly wrong. But wireless technologies will also change the economics of fixed networks, providing another inexpensive way of linking up with customers.
Worldwide, one new telephone subscriber in six gets a mobile phone (see chart). At the moment, wired and wireless coexist, often owned by the same big operator. Almost all the world's 50m cellular subscribers also have a fixed-wire telephone. But Simon Forge of Cambridge Strategic Management Consultants, author of an influential study of "near-zero tariff tele-communications", argues that mobile telephones may in time do to the public networks what the railways did to the canals. The canals initially saw railways as feeder lines, bringing them traffic rather than competition. The railways, in turn, initially thought the roads would increase their total traffic. Both were cannibalised. Owning a network counts for little if others can build a better one.
Not everybody in the telecoms business is complacent about the impact of mobility on their business. Sir Iain Vallance, chairman of BT (which has a stake in Cellnet, a mobile service), accepts that most conversations will eventually shift from fixed to mobile telephones: "It has already begun in Scandinavia, driven by all those second homes."
In Sweden one person in six has a mobile phone. Indeed, fixed-line connections are now declining: flighty young people choose to have a mobile phone when they leave home, rather than pay for a new fixed-line connection every time they move. Signs of head-on competition are emerging elsewhere. In parts of Asia, the cost of a long-distance call between mobile subscribers is well below the cost using the public network, which has boosted mobile connections. In Europe, a proposed EU directive allowing mobile operators to use leased capacity could produce the same result. In most parts of the world, mobile phones still represent a triumph of hope over experience. Britain's Consumers' Association claims to have been inundated with complaints from mobile-phone users, mainly about the terms of the contracts they had to sign. And quality of reception is often maddeningly poor. "Cellular is full of holes, but consumers buy it anyway," says David Goodtree of Forrester Research in Cambridge, Massachusetts.
At present, few countries allow more than one or two mobile operators. Regulation hamstrings demand. Jerry Hausman, economics professor at the Massachusetts Institute of Technology, has compared American states that regulate prices and terms for cellular telephony and those that do not. He has found that in the regulating states prices are about 17% higher and the use of cellular phones lower. For the state of California, he estimates the overall annual loss to consumers caused by regulation at about $1.4 billion a year. "Even imperfect competition", he concludes, "usually provides greater consumer welfare than regulation."
Japan, notes Alastair Grieve of Cable & Wireless in Tokyo, had the world's first public cellular service in 1979. Yet by the start of 1994 it had only 2m subscribers. In April that year, the rule preventing customers from buying their telephones was dropped; two more competitors entered the market; differentiated tariffs were introduced; and prices fell. Within a year the number of subscribers had doubled.
Competition will grow as new sorts of wireless telephone evolve. Eric Gan of Goldman Sachs in Japan envisages a sort of pyramid, rather like that in the airline industry. At the apex, the Concorde equivalent will be expensive global satellite systems that will allow subscribers to cross national borders. The next layer, akin to club class, will be cellular services, used mainly by businesses. In the United States, for example, Fortune 1,000 companies account for only 5% of subscribers but 19% of revenues, estimates Forrester Research. In time, digital services will lure customers away from analogue, solving three of the system's most irritating shortcomings: crackle, lack of security and fraud (but not fade-out). Operators will also be able to cram more services into the same spectrum.
Enter economy class
"What you are missing in the mobile-telecoms market is the equivalent of the airlines' economy class, where they make 70% of their money," says Mr Gan. That is now about to arrive. In the United States, the FCC, in a move of great importance, is auctioning an immense amount of radio spectrum: "Vastly more", says Peter Huber, "than is currently allocated to local television stations. And the transition to digital will eventually expand its carrying capacity between tenfold and a hundredfold."
The aim is to encourage the growth of Personal Communications Services (PCS), a new generation of wireless telephones that will be combined in all sorts of flexible ways with cordless and fixed-wire telephones. Other countries are following suit: in Hong Kong, for example, up to six new PCS licences are being made available (but not auctioned).
In Japan, a promising economy class is already up and flying. The "personal handiphone system" (PHS) was launched in July by two operators, an affiliate of NTT and DDI Personal Pocketphone. A third service, Astel, will be launched next month. Using small, low-powered base stations sited close together in large cities, it offers a telephone about the size of a powder compact. The best-selling model has 400 hours of battery life on standby, and five hours of talking time. Its airtime charges are only a fifth of those of cellular systems, and local calls cost less than calls from payphones. They are priced to compete with pagers and aimed at a new market: teenagers and housewives. Sachio Senmoto, DDI's ebullient co-founder, remarks modestly: "As it costs €72,800 to get a phone installed by NTT and only €7,200 to join the PHS, a student might prefer our system."
Inevitably there are snags. The monthly subscription, at €2,700, is higher than NTT's €1,900. And the PHS cannot be used in fast-moving cars. That should not stunt its popularity in the dense cities of Asia, where Japan hopes to promote it, but it will be a handicap in countries such as the United States, where car use is high and density low.
But the handyphone has one enormous advantage that may catapult it to the top in Asia. Unlike conventional cellular telephones, which use lots of their bandwidth to switch quickly among base stations, its many base stations mean it uses bandwidth extremely economically. (Britain's Rabbit, a sort of early PHS, failed because it had too few stations and could not receive incoming calls.) The PHS will have enough bandwidth to transmit moving pictures as well as sound. By 1997 users should be able to use it to download games software. Fitted into a personal stereo, it will allow parents to contact roaming teenagers. Attached to a notebook computer, it will allow the transmission of slow-moving pictures or digital fax. Small wonder Mr Senmoto describes his little device as "wireless multimedia", and boasts that DDI will one day be larger than NTT.
At the very bottom of the pyramid, the pager offers the equivalent of the airlines' charter class. Although it may one day be driven out of business by Mr Senmoto's gadget, for the moment it is flourishing. Hong Kong's 6m people carry more than 1m pagers, provided by 37 companies. Anybody who wants a vision of the mobile-telephone market of the future will find it here. Companies enter and leave the business all the time, endlessly innovating, chasing different markets. Ask Peter Tsang, managing director of New World Telephone, one of the three new local-service licensees, how he expects to make money in a city where a residential telephone line costs HK$62 ($8) a month and local calls are free, and he points to the pager market. "It's because services are so cheap that we expect to make money," he says. "People want more value, and don't mind paying."
Mr Tsang helped to set up New World Paging in 1990, even though 700,000 people already had pagers. He offered Asia's first secretarial paging service. Calls to the colony's myriad owners of small businesses can be routed to a communal switchboard which tells callers that Mr Chan will call them back. Mr Chan, bleeped by his pager on a street corner, can pretend that he has been summoned from a meeting to return the call.
If wireless is a potentially devastating competitor for the telephone companies, it could also be their saviour. They, too, can use it, to connect subscribers to the network much more cheaply than with copper. As that realisation has dawned, television stations have become hot properties in the United States, valued not for their viewers but for their spectrum allocation (see chart).
Two of America's long-distance carriers are using wireless to build direct links with their customers. In 1994 AT&T spent $11.5 billion to buy McCaw Cellular, which made it America's largest mobile operator. It spent a further $1.7 billion at the FCC's spectrum auctions. Some observers, such as MIT's Professor Hausman, wonder whether it will eventually team up with Time Warner too. Meanwhile, It is following the same strategy abroad, buying stakes in wireless operators in a number of countries, often in exchange for equipment it manufactures.
Sprint and its three cable partners invested $2.1 billion in the March auction for wireless spectrum, making the consortium the biggest successful bidder. It now has enough coverage to provide a national digital service on a single-frequency band. It will also be able to use wireless to connect customers who do not have cable television.
Increasingly, what the vast majority of customers will want most from their telephone will be portability. They will be able to get a single device, containing what would now be two or three different sorts of telephone (say satellite, cellular and PHS), capable of switching automatically among systems and allowing a subscriber to be reached at any time on a single number.
Mobility will create all sorts of new gadgets and applications. Already, says Forrester's Mr Goodtree, a Ford car contains some 50 tiny computers: link them to a mobile phone, and they could be used to tune an engine or do spot maintenance, in effect servicing the car by phone. Other car-borne telephones, linked with global positioning devices, are being developed by Germany's Mannesmann to direct a driver to a less congested route, track stolen cars – or, perhaps, charge a motorist for driving down certain streets.
For the big telephone operators, the development of wireless represents an opportunity. But it forces them to confront a harsh reality. Their most valuable assets are not their copper wires, but their customers, their billing ability and their brand names. There is nothing much that a fixed network can do that wireless will not, quite soon, do as well and more cheaply. An established, capital-intensive business with high costs and an entrenched culture will find it hard to make the most of a rival technology. It was neither the 18th-century canal magnates nor the Victorian railway bosses who built this century's successful trucking companies.
Can't just be left to the market
Competition in telecommunications may appear to be thriving wherever governments have allowed it. But it is an odd sort of competition. A new entrant must be able to connect to the existing network. A telephone is useful only because it connects to other telephones, and the larger the network, the more useful it is. Yet the network is owned by the very operator with whom the new entrant plans to compete. It is as if a supermarket had to use its competitor's in-house distribution system. So the key to opening markets lies in the terms on which a new entrant has access to the existing network. How much (to use the supermarket analogy) does it pay for distribution? Can it use its own drivers, and paint its name on the vans? If so, who pays? And how are disputes settled? By the existing supermarket's board?
Bizarre as such questions may seem, they are central to telecommunications policy. The power of the incumbent operator to fight off would-be rivals is so great that governments have to intervene to restrain it. As a result, competitors – whether they be America's MCI, Britain's Mercury or Japan's IDC – frequently owe their existence to government-imposed constraints on their larger rivals.
Using such asymmetry to kickstart competition is a Faustian bargain. In Britain, the government has found itself trying to shelter the cable-television companies – most of them subsidiaries of large, mainly American telephone companies – from possible inroads into their returns. "They are building an alternative local telephone network," goes the implicit bargain, "so we should limit the risk to their investors."
The greatest threat to the investment made by new entrants everywhere is that their competition will achieve the very goal that governments hope for: a sharp drop in the tariffs charged by the main operator. If competition succeeds, a regulator may eventually have to persuade or compel the incumbent to moderate its price cuts, going against both its own interest (the pursuit of greater market share) and that of its customers (cheap calls) for long enough to allow rivals to get established.
Without intervention, though, the big operators can be guaranteed to make life difficult for would- be rivals. They benefit from a familiar brand and (usually) a protected cash flow to finance new products. A would-be telecoms company in France grumbles: "It's hard to compete with a company that uses the France Télécom name to advertise mobile services." Bernd Jäger, a telecoms consultant in Bonn who advises potential new players, argues that Deutsche Telekom has used revenue from its monopoly services to halve the cost of services which have been liberalised, such as data transmission. The result has been to confine competitors to a 10% share of these markets. Even without such cross-subsidies, DT's brand name, experience and ownership of a largely depreciated network give it huge power. "The first winner of liberalisation is always the former monopoly," observes Mr Jäger.
In most countries, one of the strongest cards in the hand of the former monopoly is numbering. Customers are often reluctant to switch to a competing telephone company if it means changing their telephone number. They may risk losing business. Hong Kong's telecoms watchdog, Mr Arena, calculated that even discounts of 10–15% were not enough to compensate. He therefore took over the allocation of numbers from Hongkong Telecom, the island's erstwhile monopoly, and insists that customers who change operators should automatically be given the option of keeping their number. The luckiest numbers will be auctioned for charity, just as lucky car numbers already are.
As ever, regulation in the face of a truly determined dominant player is not straightforward. Last year Don Cruickshank, Britain's director-general of telecommunications, removed responsibility for numbering from BT and demanded portability. After much wrangling, the Monopolies and Mergers Commission is now adjudicating on who should foot the bill. Mr Cruickshank believes that "the true cost is very low." BT disagrees.
Only interconnect
Important though numbering is, the fiercest battles have always been over interconnection, and in particular over the rates charged for access to the local network – the hardest part to make money out of (see chart). As almost every call either starts or finishes on the fixed network, such charges set a floor to the price competitors can offer.
That competitors who share the network should pay some part of its cost seems, on the face of it, entirely fair. But how big a part? Most of the costs of the network are capital: the electrical pulses that new entrants send down the wires do not add to the wear and tear. In most countries, much of that capital has been stumped up by taxpayers. Even where it has not, there is plenty of room for argument over how to share the cost. A network owner who is allowed to recover his costs has little incentive to curb them. And where the operator is obliged to guarantee universal service – affordable access for every citizen to a telephone – the debate shifts to a new plane. A monopoly can cover the extra cost with cross-subsidies. But if there is competition, the most lucrative customers are picked off and offered price discounts, leaving no one to foot the bill.
In the case of universal service, most governments allow the main network operator to recoup some of the cost from competitors – who promptly complain that the operator inflates the numbers. Often with reason: studies suggest the true cost of providing a basic telephone service for unprofitable customers and areas is usually tiny. Indeed, some think it is ludicrous to regard universal service as a burden. "We say it's a franchise," says Robert Annunziata, chairman of Teleport, a company that plans to offer a telephone service in New York. He argues that serving low-income customers could be profitable, and would like to see a negative auction in which companies would bid to serve a high- cost area at the lowest subsidy.
Large operators are not usually keen to help new rivals (or regulators) by providing them with the basis for their calculations. It was just such a point that persuaded America's Department of Justice to order the Bells to be hived off from AT&T's long- distance operation in 1984. AT&T had been haggling over the proper price of access to its network ever since 1969, when Microwave Communication Inc (now MCI) was given permission by the Federal Communications Commission to build a microwave link between Chicago and St Louis and sell space on it to outsiders.
But while the split created competition in long- distance traffic, it left a monopoly in the local network. So the arguments about interconnection go on. AT&T and its long-distance rivals, MCI and Sprint, complain constantly about having to pay 40–45% of the cost of a call over to the Bells. "Local access is our largest single cost," says Mike Rowny, vice-president responsible for MCI's strategic planning. That may merely reflect the true cost of the local loop: but as long as local access is, in effect, a monopoly, it remains a grievance.
America's proposed telecommunications bill is, in part, an attempt to promote competition in the local network. If adopted, it will remove the regulatory barriers that have kept the long-distance carriers, the Bells and the cable-television operators from competing for each other's business. Once the long-distance carriers take calls directly from customers, perhaps by wireless links, the argument about interconnection will change: in time, perhaps, no single carrier will dominate the network.
In Japan, the three long-distance carriers sound just like Mr Rowny when they talk about NTT. They pay some 40% of their revenues to NTT in interconnection charges. Although Japan has allowed competition in every area of telephony since 1985, NTT has kept its grip on the local network mainly by its power to set access charges. The government has set up a review and aims to decide by next spring whether to split up NTT.
At the Ministry of Posts and Telecommunications, Kouji Hamada, director-general of the telecommunications business department, admires the American model of deliberately setting a number of companies at each other's throats. The break-up of AT&T, he says, has created several world-class companies in place of one. Splitting NTT into a group of local companies and a long-distance carrier would allow it to team up with one of the international companies and compete in the global market, from which ("like Gulliver", says Mr Hamada) it is now largely barred. In fact, the best reason for splitting NTT is rather different. If NTT's local and long-distance activities were separated, the local company would almost certainly have to raise its charges to reflect the real cost of local distribution. Since local calls cost next to nothing in Japan, that prospect makes politicians quail.
Splitting the network is one way to bring clarity to the argument about costs. Jonathan Solomon and Dawson Walker of Cable & Wireless have recently argued for separating the provision of telecommunications services from the operation of the infrastructure. The network owner would manage the wires and exchanges, offering access on the same terms to providers of services of all kinds. At present, the owner of a local network has every incentive to make it hard for competitors to use it. But separation would create a powerful incentive to fill the pipe rather than keep traffic away.
Better unbundle?
In the United States, a few companies are already voluntarily "unbundling". Ameritech is planning to split into a network business unit, levying a non- discriminatory access charge, and a dozen retail units marketing capacity. In New York state, Rochester Tel has split itself into a network and a competitive retail arm. One reason for that, say critics, is that the company wants to deter others from building rival networks. Another approach has been used in Stockholm, where the city has set up a company to build a fibre network which rents capacity to all comers.
Should unbundling be imposed by law? The difficulty with the Solomon-Dawson version, say critics (including, not surprisingly, BT), is that separating the network from services is technically difficult. The more intelligence is built into the network, the harder it is to disentangle the parts, and the greater the danger that mandatory separation will create new distortions.
In any case, unbundling alone does not resolve the basic issue: how should the underlying cost of the network be allocated? "The options range from supporting new entrants to protecting the established monopoly," argues Professor Noam. An instance of the first approach would be to adopt an Internet model, basing access charges not on length of use but on a flat fee plus some charge for maximum capacity, and letting the company that sent the calls keep the proceeds. This would work in favour of new entrants, since they would send far more calls to the main network than vice versa. But it would leave the question of capital costs unresolved, as they are for the Internet itself.
This kind of solution turns the problem of asymmetry on its head. If the true cost of putting an extra call over a network is almost zero, will any charging structure allow a network operator to make a living, especially if he cannot discriminate between customers by price? With such a model, the regulator's job may one day be to protect the network, not its users. In most countries, though, that day is an aeon away.
With ever-cheaper international calls
To call Penzance from London during the working day costs 9.9p (15 cents) for a minute; to call Paris or Bonn, a similar distance, 35.5p. The members of the European Union (EU) treat each other, from a telephonic point of view, as lands sufficiently distant to justify a premium tariff. The European Commission wants them to behave like the single market they say they are. Nothing illustrates more clearly the political, as well as the economic, gains that could flow from making charges insensitive to distance. Moreover, if the commission triumphs, the whole structure of international call rates will change.
At present, international calls are often a monopoly or at least a cartel. Usually only one operator – the national giant – has the right to hand calls across the international gateway that separates one country's telephone network from another's. At the gate, predictably enough, it pockets a charge. This lucrative custom is backed up by the system of international accounting rates, which allocates the cost of a call between countries. The two operators agree on a price for handling the call and split it, usually down the middle. If one operator puts through more calls to another than it receives, it hands over a settlement payment to even things up.
For some developing countries, such payments are an important source of hard currency – more important than foreign aid. They allow Guyana, for example, to make a tidy living as a base for sex-chat lines. But most settlement payments go to rich, overpriced markets. The system is biased against countries that send more calls than they get because they have relatively low tariffs. In countries where prices have fallen fastest, the rates at which operators are now having to settle are above what they charge their customers. The system particularly irritates the United States, which has a deficit of some $4 billion, aggravated by a lively charge-card and call-back business. "It is a way for carriers to extract monopoly profits," says Scott Harris, chief of the international bureau of the FCC. "We want to drive them down to cost."
Nowhere do these arcane rules appear more anachronistic than in the EU. Prodded by the commission, the EU countries have committed themselves to opening every market for telecoms services – voice, mobile and satellite – at the start of 1998. Except for the poorer countries of southern Europe, which can delay a bit, every market should then become even more open than those of Britain, Sweden and Finland already are.
In theory. But Europe has set off down this path before, and been waylaid. On paper, many of these markets were opened by the 1990 telecommunications services directive. In practice, progress has been patchy. The two EU commissioners steering the latest attempt, Martin Bangemann and Karel Van Miert, are only too aware of the gap between agreement and implementation. Mr Van Miert cautiously argues that "the mentality in the Community has changed considerably in the past four to five years." But the main reason for the failure of the 1990 directive, he says, was that the market in infrastructure was not open: would-be competitors could not acquire spare capacity to carry their calls. This time he is determined to avoid that mistake.
He is therefore threatening to push through a directive that would allow alternative infrastructure to be used from January 1996 for services that are already liberalised. That essentially means everything except public voice telephony (which, however, still constitutes 85–90% of the market). Moreover, mobile operators can either own or lease the infrastructure they use. Mr Van Miert is using article 90 of the Treaty of Rome, which does not require the agreement of the Council of Ministers, but he knows that he needs to carry member governments with him.
If Mr Van Miert succeeds, the implications for long-distance tariffs could be tremendous. All over Europe, companies with distribution networks in businesses other than telephony have been laying fibre-optic cables along their routes. At present, they cannot lease out capacity at will, as they could in the United States or Britain. But once traffic is allowed to travel across borders along capacity that does not belong to the established operator, the forces for change will become irresistible. Mr Van Miert's proposal would mean that, from the start of 1996, BT and its partner Viag, a German utility group, could build their own network and deliver calls directly to large business customers.
Even more significant changes could follow once public voice telephony is liberalised. From the start of 1998, says Andrew Entwistle of Analysys, BT will have an incentive to deliver the international traffic it pipes into Germany not to Deutsche Telekom, as it does now, but to Viag – which would then deliver the calls to Deutsche Telekom, which would not know whether they came from Birmingham or Bonn. Until now, Deutsche Telekom with its high rates has done well out of the international settlement system because Germany has tended to receive more calls than it makes. But if BT and Viag were to by-pass the settlements system, DT would become a large net exporter of calls. The stability of the settlements system would be threatened.
Will it happen?
At first the telephone companies might hold on to some of the cash they now hand over in settlements. But as competition on international and long-distance routes in Europe hotted up, rates would have to come down with a bump. In continental Europe, these tariffs are even further out of line with costs than they were in America when that market was liberalised a decade ago, says Mr Entwistle. And the floor in Europe would fall faster as all those fibre- optic cables come on stream, causing a capacity glut just like that in the United States. It is easy to find sceptics, especially in the companies that have most to lose. Reform in Europe always takes longer than expected. The telecoms giants have considerable opportunities for obstruction, which are being brutally exploited in Germany. Gerd Tenzer, a board member of Deutsche Telekom, is adamantly opposed to the liberalisation of infrastructure in 1996. It would, he complains, pre-empt the decisions needed to translate the broader liberalisation of 1998 into German law (which is, of course, precisely why the commission wants it). The German government plans to privatise DT next year in what will be the country's largest ever flotation; its officials are torn between a desire to open the market and anxiety about the effect.
Yet the benign impact on European unity of eliminating distance from Europe's telephone tariffs will surely be greater than anything else the EU has ever done. If calling from Tipperary to Thessalonika cost no more than ringing next door, the squabbling Europeans might at last begin to think of each other as neighbours. Certainly Europe's businesses would think again about location.
If Europe liberalises, can the rest of the world be far behind? In Geneva, a committee chaired by Neil McMillan of Britain's industry ministry is racing to meet an April 1996 deadline to open global markets in telecommunications services. Now that the countries of the European Union, which negotiate as a block, have agreed to open their markets to each other, they could – if they wished – agree to do the same to the rest of the world. If the Geneva talks were to succeed, as they may well do, unrestricted competition on the larger routes would take effect by the end of next year. That would probably deal a fatal blow to the system of accounting rates. Countries might move towards one of two systems. One, "sender keeps all", would copy the Internet model. The other, favoured by the OECD, would impose a single access charge: whether France Télécom took a call from BT or AT&T, the sender would pay the same.
Either way, inflated international tariffs and a goodly slice of telecoms operators' profits would vanish. With so much of their revenue under threat, what is the future of the old giants?
To keep on top, it is no longer enough to be big
At the start of the 1980s, the international airline industry was booming. Ten years later, after privatisation, deregulation and cut-throat competition, it was in deep trouble. In 1990–92, it arguably lost more money than it had made in profits in all of the first 60 years of its history. Only this year have airlines in the United States begun to creep back into profit. Elsewhere in the world the shake-out continues.
Over the coming decade telecoms, an industry now at least twice as big as the airline industry, faces even greater upheavals. Airlines have not had to cope with the relentless onrush of technological change in telecoms that is destroying old barriers between industries. Liberalisation will attract new entrants lured by huge returns on capital, especially in Europe. If America's telecommunications bill becomes law, the competition it will trigger will be just a foretaste of what lies ahead elsewhere. Companies as diverse as America's Microsoft, Japan's Toshiba and Germany's RWE all expect a slice of a business now in the hands of a relatively small number of giant oligopolies or monopolies.
Such competition will carry considerable risks. "In a business with small variable costs and huge overcapacity, a price war would be nuclear annihilation," says Wertheim Schroder's Mr Sirlin. "Serious price competition in telecommunications would make the airline business look terrific."
Even without an all-out price war, the industry will head in two different directions at once: fragmentation and consolidation. The first will follow from the sheer range of activities covered by the term "telecommunications". A host of smallish companies will flourish, especially in the areas closest to the customer, trading on their skill in buying commodity transmission capacity and adding value with ingenious new services.
For the big established operators, (see chart) life will be rougher. They will have to cut costs, shed thousands of employees and innovate as never before. To survive, they may have to bring in fresh blood. "We have found a direct correlation between corporate success and managers who don't have phone-company backgrounds," says Robert Morris, director of international equity research at Goldman Sachs in London. He points to the examples of Alex Mandl, a former shipping-company boss now at the helm of AT&T Communications Services, and Michael Hepher, who came from the life-assurance industry to BT. Deutsche Telekom's new boss, Ron Sommer, used to work for Sony Europe.
Where an established operator is well run, it will still have huge advantages. In a business with massive overheads and very low marginal costs, notes MIT's Professor Hausman, the number of competitors is likely to be small. The winners will tend to be vertically integrated and have good access to the customer. Size will also make it easier to carry the costs of developing ever more fancy services: not necessarily entertainment or home shopping, although those will come, but more ingenious ways to integrate the technology of the telephone into everyday products and services. "This is essentially a consumer-services business. The product is the software that sits on the switch," says Mr Morris. But software development costs AT&T or BT the same as it costs Mercury or US West. What is different is the size of the customer base over which the development cost can be spread.
The incumbent giants have other strengths, such as their billing skills and their financial muscle. They also have a well-recognised brand, which AT&T has taken great care to preserve. Victor Pelson, chairman of the company's global operations team, says its highly successful credit card was launched because "we were concerned that we didn't have a direct link with our customers. They got their bills from the local exchange company. We found that a customer with an AT&T card was much more likely to stay with us as a long-distance carrier." According to a review of prospects for the Bells by Salomon Brothers in New York, two Americans in five still believe that AT&T is their local phone company.
The benefits of size will encourage mergers. Ten years from now, America's 11 large telephone companies – the successors of the seven Bells, GTE and the three long-distance carriers – are likely to have taken on a different shape. Some will have merged with each other; some will have found new lives in adjacent markets such as television, computer services, finance and travel. For some other countries, mergers will raise political problems. Will they be willing to accept part or full foreign ownership of their national giant, or will they prop it up in the same way as they have subsidised national airlines?
Going global
The economies of scale and scope in the transmission of information are such that, by the second quarter of the next century, only a handful of really big international providers may be left. Most national operators will shrink and mutate as their peripheral business is picked off by competitors. The big operators in the rich world are getting ready to grab a share in the global market by forming alliances with partners in other countries.
Global business is still only a tiny teaspoon of most operators' revenues, but many hope that it will provide tomorrow's jam. As the operators' business customers become more global, says Ted Schell, head of corporate development at Sprint, "they will want one global provider to integrate services such as voice mail and electronic mail." Several international alliances, such as AT&T's WorldPartners, hope to win contracts to run big companies' global telecoms networks.
Some of these groupings – such as Unisource, a bunch of operators in some of Europe's smaller countries – consist of national networks tacked loosely together. Some, such as Atlas, an alliance between France TÈlÈcom and Deutsche Telekom, and Phoenix, their joint alliance with America's Sprint, are awaiting approval from suspicious regulators. Others, such as Cable & Wireless's minority stake in Germany's Veba, amount to little more than a memorandum of understanding.
Can such cross-border alliances really work? One of the more coherent ones is led by BT, which has chosen second-division players as allies. It now has a 20% stake in MCI Communications, and marketing partnerships with Viag in Germany and with a couple of banks in Italy and Spain. "We reckoned", says Sir Iain Vallance, "that the joining of any two major players would be fraught with regulatory difficulty." Concentrating on banks and utilities brings access to large networks, large customer bases and lots of money. It also allows BT to insist that its partners accept its network architecture. Even so, some customers claim that BT and MCI quote them different prices for the same services.
For the time being, rich-country telecoms giants have this business to themselves. They are also pouring money into the world's fastest-growing markets – in the developing world. (See chart) "Half the world's population has never made a phone call," says Richard Klugman of PaineWebber in New York. While operators in the rich world worry about getting more people to use their systems, poor countries worry about their immense waiting lists. "Almost without exception, there is huge unmet demand, even at the prices the incumbent monopolies charge," says Björn Wellenius, telecoms adviser at the World Bank.
For the rest of this decade, demand will grow fastest in Asia. Andrew Harrington, director of research at Salomon Brothers in Hong Kong, expects the region to install 15m–20m new lines annually for the next half- dozen years: three to four times as many as are being added in the United States every year. China alone is now adding the equivalent of a new Bell a year. By 2000 it hopes to have 140m lines, which would put it not far behind America's figure of some 160m today.
The boom in the developing world is a golden opportunity for the telecoms operators of the rich world – for the moment. It has been seized eagerly by those operators whose domestic markets are most competitive, and therefore most under threat. Thus Nynex is one of the most active foreign companies in Asia, with stakes in Thailand and the Philippines, a small joint venture in China and a bid for a fixed-wire licence in India. Telstra of Australia, one of the first foreign companies to invest in Asia, is active in Vietnam and Cambodia. Among other things, it has installed payphones in Phnom Penh. Bell Atlantic, together with a large Mexican cellular operator, hopes to install a fixed-wire network in Mexico; Bell South has stakes in several Latin American cellular operators; US West has permission for a build-operate-transfer scheme in southern India.
What if, as privatisation and liberalisation progress, the concept of national operators becomes an anachronism? Odd though it may seem for one country to provide the telephone service of another, there are precedents: for example, the service in the Maldives (as in many other small countries) is run by Cable & Wireless. If C&W in the Maldives, why not Nynex in Belgium or AT&T in Britain? And if some global giants emerge from the rich world, might the developing countries not grow their own? Already China makes many of the world's telephones. By the late 2020s, might it not handle many of the calls too?
Near-zero tariffs will change the world
What will it be like to live in a world where it costs hardly any more to make a phone call to another continent than to the house next door? Some countries will be well on the way to such a world before the end of this century. And what will happen when the cost of communications comes down to next to nothing, as seems likely some time in the first decade of the next century?
The death of distance will mean that any activity that relies on a screen or a telephone can be carried out anywhere in the world. Services as diverse as designing an engine, monitoring a security camera, selling insurance or running a secretarial paging service will become as easily exportable as car parts or refrigerators.
Already, first glimpses of this world are beginning to appear. India has built a flourishing computer-software industry around Bangalore. Its exports more than doubled between 1990 and 1993, to $270m. India is now attracting back-office work from airlines such as Swissair and British Airways. Some of Hong Kong's paging services are manned from China. In Perth, in Western Australia, EMS Control Systems monitors the air-conditioning, lighting, lifts and security in office blocks in Singapore, Malaysia, Sri Lanka, Indonesia and Taiwan. Telecom Ireland has been trying to build itself up as the main call-centre for Europe, handling toll-free 0800 calls from all over the continent. Last April it launched an intercontinental service to allow companies to link their European and American call- centres and to take advantage of the time differences between them.
All this will expose white-collar workers in rich countries to the same competitive pressures that have already squeezed manufacturing workers. But it will also offer educated workers in poor countries the chance to attain a standard of living that they can now get only by emigrating.
Countries that want to take a share of such markets have a huge incentive to make telecommunications as inexpensive as possible. That is a lesson few developing countries have yet learnt. Among the exceptions are some Asian countries such as Malaysia and South Korea, which are installing state-of-the- art telecommunications networks and have a relatively high density of telephone lines.
As prices fall, companies will change the way they do business. Detlef Linssen, in AT&T's office in Bonn, remembers that when he first joined from a German telecoms company, he was amazed to discover that once a month AT&T held an hour-long telephone conference with 120 participants from all over the world. "In Germany [Ed: Deutsche Telekom AG], the one that arranges the call carries the whole cost; in the US, each participant carries his own share," he points out.
Within countries, work-related travel may decline, and so may the demand for office buildings, as people increasingly work from home. Big cities will thus increasingly have to look to a future as entertainment centres. Regional development policies may at last become effective when white-collar jobs can be relocated more easily than manufacturing ones ever could.
Many services now provided by government will be changed out of recognition. Welfare and social-insurance payments will increasingly be made by plastic card rather than by relays of officials. Monitoring crime will be made easier by remote surveillance, perhaps carried out by people in a different time zone, and by global positioning devices to track cars and miscreants.
Teaching, too, will be less constrained by distance. At present, Kentucky's National Guardsmen frequently have to be flown to retraining sessions. Richard Jay Solomon and his colleagues at the Massachusetts Institute of Technology are developing a way to use distance-learning instead. "We're going to teach them to kill people in their homes," he says jovially, "but train them in paramedicine first." Health care will benefit in similar ways. In Alaska, more than 100 villages are linked by a dedicated medical telephone network on which local health workers can have regular telephone consultations with doctors at the regional hospital.
For the old and the isolated, cheap communications will be a godsend. If a telephone costs nothing but the initial subscription, why not keep a line open all day, just as people now leave the television on all the time? For women racing from job to nursery to home, accessibility on the move will make life easier. Staying in touch will acquire a new meaning. Starting next month, customers of New World in Hong Kong can have their calls switched to wherever they want them: their mobile telephone, hotel room abroad, voice mail or computer.
Inevitably, with all these benefits will come drawbacks. Privacy and security may suffer as everybody leaves a trail of data and transactions across the globe. Theft of ideas, films and music will become ever more difficult to stop. Policing shipments of information across borders is infinitely harder than policing shipments of goods and human beings (which is hard enough). That may be all to the good when the information flow brings useful knowledge or helps political freedom, but unwelcome when it serves pornography, sedition or crime. Just as the death of distance brings far-flung communities closer together, so it undermines national sovereignty, without a countervailing improvement in global regulation.
The unknowable and the predictable
Predicting the future of a new technology is a mug's game. Marconi thought radio would be useful mainly for ship-to-shore calls. Guessing the social impact of a new technology is even more hazardous. Who would have foreseen that the invention of the post box would contribute to women's liberation – by enabling new generations of young ladies to post letters to their sweethearts without their parents' knowledge?
It is possible, then, only to ask questions. Will everyone acquire, in time, a telephone number or name for life on which they can be reached anywhere in the world? How will society regulate the intrusion of near-free communications? How will national governments, their power bounded by geography, be affected by a technology that makes distance irrelevant?
Big changes driven by technology can happen relatively quickly in the economy. Social changes lag behind. People will take many years to come to terms with many of the consequences of near-costless communications. But as they do, the world will become, on balance, a better place.
© Copyright 1995 – The Economist Newspaper Limited. All Rights Reserved.
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Last Update: 20.11.2005 3.06 Uhr
