Global Telecommunications Rules: The Race with Technology

New services and capabilities are undermining the old monopolistic regime; to be relevant, international rule-makers must get in step.

In February, the telecommunications industry was hit by the advance of two revolutions. The advance of the digital technology revolution was marked by the launch of the first toll-quality Internet telephony service that makes it possible to use an ordinary phone to make an international call at a sharply reduced rate. The event was hailed by the Financial Times, one of the few to cover the story, as one “that will change the competitive landscape of telecommunications forever.” Meanwhile in Geneva, with considerably more fanfare and media attention, more than 60 nations concluded a landmark agreement under the auspices of the World Trade Organization (WTO) to open the global telecommunications market to competition and foreign investors. The century-old tradition of monopolies and closed markets has now been replaced, declared acting U.S. Trade Representative Charlene Barshevsky, “by market opening, deregulation, and competition.” The agreement establishes the first multilateral framework of binding rules and procompetitive regulatory principles in basic telecommunication services.

The 10 years spent discussing the WTO agreement contrast with the breathtaking speed with which the Internet and the digital revolution are transforming the communications business. When the multilateral talks on telecommunications first started in the late 1980s under the Uruguay Round, the World Wide Web didn’t even exist yet. When the latest round of talks opened in 1994, the Internet was just beginning its metamorphosis from nerd’s network to global communications and computing medium. In 1996, Microsoft announced that the Internet was the force driving all its development, and AT&T proclaimed that it is on a “mission to bring the Internet, the multimedia dial-tone of the 1990s, to everybody.”

In this chaotic environment of converging markets and complex competition, the Internet phenomenon reflects the trends in technology and user demand that are breaking down barriers between industries and nations at a pace far faster than formal rulemaking institutions can react to. Competition in international telecommunications will continue to intensify in the next few years irrespective of what happens with the WTO rulemaking revolution. Quick and full implementation of the WTO rules would provide a significant boost to this trend, but increased competition is not dependent on it. That’s good news, because quick implementation will be difficult if not impossible.

The 10 years needed to conclude the agreement reflect the inordinate difficulty of getting countries with a diverse range of political and regulatory regimes to agree on a common set of rules. Unlike past trade issues, which focused on tariff rates imposed at the border, the issues in telecommunication services intrude much further into the domain of domestic politics, touching on sensitive issues such as a nation’s control of its communications infrastructure, the funding of social objectives such as universal service, and employment policies (the national telephone system is often the largest single entity and employer), as well as regulatory principles.

Given these circumstances, the euphoria surrounding the WTO’s remarkable achievement is understandable. But the hard work is just beginning. The pact needs to be extended to include many of the emerging and developing countries that represent 40 percent of the world’s population. Work will also need to be done to improve the commitments of the 10 Asian countries, which offer some of the greatest growth opportunities for U.S. firms but need to do much more to reduce restrictions on foreign investment in their phone companies.

It will also take many years, if not decades, to interpret and fully implement the new rules. Getting countries to live up to their commitments is always hard, and in telecommunications the transition path will be particularly difficult because of the novel nature of the regulatory policy issues and the many key details yet to be discussed. If implementation of the United States’s own rulemaking revolution (the 1996 Telecommunications Act) is any model of what we can expect in this situation, the process will be contentious and lengthy. And remember that whereas the United States has been debating this step for more than two decades, most of the other WTO members are just getting started. The lawyers will be busy.

Even after the domestic rules have been changed to conform with the WTO agreement, firms wanting to do business in other countries will still need to confront foreign regulatory agencies that can be expected to be particularly creative in their tactics to delay or impede interconnection. The telecommunication rules under the WTO include “regulator rights”-loopholes that permit access conditions to be imposed to safeguard public service responsibilities such as universal service or to protect the “technical integrity” of the public telecommunications system. When and how such restrictions could be attacked as an illegitimate nontariff trade barrier will have to be resolved through the WTO dispute settlement process.

The settlement process itself will be time-consuming. Because of the government-to-government nature of the WTO process, companies must first convince their own governments to champion their case. If the United States accepts a case, it will need to prove that a foreign regulatory agency finding on an interconnection ruling, for example, is inconsistent with the law and spirit of the WTO agreement. Even if the U.S. wins its case, the firm may gain little. If the foreign government is unable or unwilling to change the offending practice, the United States may choose to retaliate under the WTO by taking away benefits in an area unrelated to telecommunications, leaving the original dispute unresolved.

Technology push and consumer pull

Given the institutional limits of the WTO, we should not expect too much too soon from its rulemaking revolution, but this does not mean that consumers will not receive any of the promised $1 trillion in benefits that is supposed to accompany restructuring of the industry. The savings from increased innovation and lower prices over the near term do not hinge on the new WTO rules, lawyers, or even U.S. strong-arm negotiating tactics. The most powerful forces pushing for liberalization did not even have seats at the negotiating table.

Excessive regulation and artificially high international rates have created an engine of their own destruction. Technological innovations are giving consumers the power to bypass overpriced systems at the same time as bloated profit margins are attracting competition from entrepreneurial firms. Even before the WTO agreement was concluded, digital technologies and demanding consumers were tearing down market barriers, undermining monopolies once seen as unassailable, and forcing governments to open up. “The progress made towards competition and open, private markets has been nothing less than astonishing,” remarked a former Federal Communications Commission (FCC) official. From Germany to Guatemala, competition is now being promoted in some shape on every continent and in every region.

The first cracks in the monopoly structure started to appear in the 1950s with the development of microwave communications, which opened the door to the possibility of competition in long-distance service and substantially weakened the case for protecting the dominant national firm as a natural monopoly. Since then, advances in processing and transmission technologies have dramatically cut the cost of international communication and led to the emergence of high-capacity transmission systems. In 1960, a transatlantic telephone cable could carry 138 conversations simultaneously; today, a fiber optic cable can carry 1.6 million.

The advances have transformed the economics of the international telecommunications industry so that distance is no longer a meaningful determinant of a phone call’s underlying cost. In the process, the advances have changed the rules of the international telecommunications game and opened the phone companies to a new range of competitors from within and outside the traditional telecommunications industry.

The telecommunication companies are vulnerable because only a small part of the cost savings made possible by technological advances have been passed on to consumers. The price-cost gap has been particularly wide on international routes, with markups as high as 500 percent. National monopolies, insulated by a century of protection from competition, have also failed to develop the flexibility and cost discipline necessary to respond to growing corporate demands for customized telecommunication solutions, mobility, and advanced communication services.

Driven by the rising pressures of international competition and the shift toward an information-based economy, corporate customers are now looking beyond their national carriers to satisfy their communication needs. They have become much more aggressive in managing their telecommunication cost centers and in their use of new technologies to devise routes around inefficient pricing systems. Circuitous routing systems are proliferating that make use of lower-cost carriers in more open countries such as Chile and the United States for traffic that might otherwise have originated and terminated within a single country.

The WTO can accelerate progress by shifting away from sector specific negotiations.

Bypass revolution

Inflated profit margins are also drawing competitors into the business to exploit the opportunities presented by unmet consumer demands and low-cost networking technologies. Plunging transmission costs coupled with deregulation trends in the United States, for example, have made it possible for a new breed of telephone companies to compete in the international marketplace without owning their own facilities, undersea cables, or satellites. They purchase from the phone companies the right to use the excess capacity of their transmission infrastructure (an estimated 44 percent on transoceanic routes in 1995) and then sell it at a discount.

The surging “callback” industry is an example of how computer advances are being exploited to increase consumer options even in markets closed to direct competition. Through callback operators, consumers can establish a virtual presence in a lower-cost telecommunication market and bypass their own overpriced phone systems. Callback is essentially a high-tech version of an old college practice: Call home, let the phone ring twice, hang up, and wait for your parents to call you back. Using a callback service, someone in Argentina would place a call to a number in the United States and then hang up. A computer would then call back and give the caller in Argentina a U.S. dial tone. The person could then dial a number anywhere in the world and be charged what it would cost to call from the United States. Callback services can save customers from 20 to 70 percent on their international calls. In fact, phone rates in Argentina are so high that consumers can even save on domestic calls that take an 11,000-mile detour via a U.S. callback operator.

To the frustration of monopolies from Uruguay to Uganda, callback services are undercutting their profit margins and outwitting their regulators. Twenty-five countries have tried without success to stop the growth of callback services. But unlike imports that can be seized at the border, dial tones and low-cost telecommunication services from other countries are difficult to block. For example, when Uganda tried to block all calls to the Seattle area code where a callback service was located, the company routed their calls through a different area code. Countries are grudgingly coming to the realization that they cannot hold back the tide of innovation and competition. Singapore, for example, decided that improving service and lowering prices is the only way to counter the callback challenge.

Even the traditional phone companies have gotten into the bypass business, apparently persuaded by the principle that if “someone is going to eat your lunch, it may as well be you.” The research of Rob Frieden at Pennsylvania State University details, for example, how telecommunication carriers are being forced by technological advances and globalization pressures to put aside their fears of cannibalizing existing activities in order to focus on the larger goal of holding onto their high-volume customers. In the process, they are creating a grey market of low-cost software-intensive services (large-scale virtual private networks and seamless international service networks) that make the regulations and national boundaries that have long protected their profit margins more porous.

The phone companies will have to continue to evolve because more competitors from other industries are on the way. The networking of computers, the digitalization of telecommunications, and deregulation trends are making possible the creation of integrated service networks that include voice as only one component in a bundle of applications. Desktop computers are becoming in effect “communication cockpits” that can handle e-mail, phone calls, and faxes as well as share computing applications with other users around the world. Phone companies, as a result, are being forced to compete in a much larger and more competitive information service marketplace.

The ultimate ally

U.S. negotiators seeking to open global telecommunication markets could not have asked for a more effective ally than the Internet. The Internet is a global medium that didn’t require a multilateral agreement to advance traditional U.S. trade objectives. It is dramatically reducing the cost and increasing the speed with which services can cross national borders. The speed with which the Internet has surged onto the scene has also disarmed many that might have otherwise opposed or tried to manage its entry. Telecommunication providers around the world have been left scrambling to get on the Internet bandwagon, while regulators have been left wondering what just passed them. While they figure that out, the Internet is being used to interject competition and provide telecommunication services that bypass the excessive rates charged in Asia and Europe.

The Internet is also opening up the international marketplace by expanding the player roster to include small and medium-sized firms. Just as callback has generated cost savings for firms and individuals who lacked the scale to get the volume discounts available to multinational firms, the Internet enables firms to cut transaction costs and expand their global reach.

Until prices come into line with costs for traditional telecommunication services, other options such as callback and the Internet will continue to emerge. This will be true not only for services that are suited for Internet delivery, such as the fax, but also for services that are not, such as voice. Indeed, services such as Internet telephony are just the leading edge of the shock wave that is shaking up the industry. “Technology,” notes Andrew Grove, chief executive officer of Intel, is “a natural force that is impossible to hold back. It finds its way no matter what obstacles people put in its path.”

Complex competition

Thanks to the twin forces of digitalization and globalization, the telecommunications marketplace is becoming a dense web of multimedia alliances and networks that is eroding the boundaries between nations and industries. With digital advances making it possible for a single bit stream to carry voice, data, video, and entertainment, telecommunication is no longer limited to voice transmission. Yet, audiovisual and telecommunication services are treated as two distinct sets of negotiations at the WTO, national governments have taken very differenct approaches to multimedia regulation..

The problem of compartmentalized rulemaking was evident in the clash over the treatment of video services at the WTO telecommunication talks. The negotiations first ran into problems over the discussion of satellite services. The United States regards satellite delivery of video services direct to the home (DTH) as a telecommunication service. In Europe, DTH is considered a broadcast service like conventional television and is therefore part of a different regulatory regime. The French were opposed to the inclusion of DTH as a telecommunication service under the agreement because they perceived it as another avenue for the United States to influence French culture with its TV programs and movies. For the same reason, the French worry that the Internet could become an unregulated backdoor for foreign audiovisual material to enter the country.

Three months before the end of the WTO negotiations, the Europeans announced that they wanted to limit their commitments to analog voice and fax transmissions, meaning that all video services would be excluded. The United States and international news organizations protested because they use the phone system to transmit audiovisual material from remote reporters to home offices. The Europeans relented by saying that video services would be covered by the agreement as long as they were not broadcast services.

But what is a broadcast service these days? The WTO was limited in its ability to address the issue, in part because the rules governing telecommunications and broadcasting are negotiated separately. The European Union (EU) was also in the midst of a fierce debate over the same issue. In the absence of a common EU position, it was impossible to secure binding commitments from the EU for the liberal treatment of video services that may also be characterized as broadcasting.

Much of the work for resolving conflicts over market access, standards, and pro investment rules is shifting to private organizations.

But even without such an agreement, restrictions on broadcasting will be increasingly difficult to enforce. Technology and new services are creating their own loopholes, blurring the line between broadcasting and other information services, while opening more pathways for delivery of audiovisual material. The potential for Internet “broadcasting” has already stimulated the creation of several dozen startup companies and attracted the interest of NBC, Microsoft, and ARD (Germany’s main public broadcasting network).

Multimedia advances and the Internet have also opened a Pandora’s box of questions for regulators. In the wake of the Net’s surging popularity and recent advances in areas such as Internet telephony, countries are struggling to define for themselves what should be treated as a basic telecommunications service. The United States has traditionally accorded special treatment to enhanced services such as the Internet, which include some value-added component. The Telecommunications Act of 1996 reaffirmed the distinction, but before the ink on the new law was dry, the phone companies were battling Internet service providers over access charges and universal service responsibilities. At issue is whether Internet service providers should be treated as telecommunications carriers and charged the access fees that long-distance carriers pay. On the international front, a key issue is whether during the transition to full competition under the WTO rules the Internet will be considered in the enhanced-service category or in one of the more heavily regulated areas of basic telecommunication or broadcasting.

The definitions may ultimately matter very little. First, there is no simple way to distinguish Internet video or Internet telephony from other digital transmissions. How, for example, would a regulator know whether someone is talking instead of typing or watching a video on their computer screen instead of reading? Second, by the time official decisions are made on infringement and liability issues, the marketplace will look fundamentally different. One industry rule of thumb is that one human year is equal to about five Internet years.

Such trends highlight the growing importance of marketplace developments in setting the de facto rules of the game for the new telecommunication environment. Major communication innovations used to emerge gradually, giving governments decades to develop the rules for incorporating them into the international system. But the information revolution and the arrival of the Internet have been equated with “going from horse and carriage to jet planes in less than a year.” Written off just three years ago by industry titans as a toy for the technical elite, the Internet is now heralded by the chairman of the FCC as “a technology that is as revolutionary as the invention of the telegraph was over 150 years ago.” The first stage of the formal rulemaking revolution, by contrast, has taken more than 10 years domestically (the U.S. 1996 Telecommunications Act) and internationally (the WTO Telecommunications Agreement).

Protection’s punishment

Technological advances are not only making protection less effective, they are also changing the interests of governments in maintaining that protection. Computer-driven advances in telecommunication services have in particular turned the spotlight on the financial burden of protecting monopolies. Europe, for example, lags behind the United States in the use of information technology such as e-mail and the development of electronic commerce applications. Access to the Internet is, according to reports from the Organization for Economic Cooperation and Development, five times higher in member countries with competitive markets than in those with monopoly providers.

Such gaps increasingly matter to government because the cost-saving potential of the Internet is exploding across a wide range of service and manufacturing industries, prompting the Financial Times last year to list it as the number one technology for gaining competitive advantage. Design times can be reduced, financial systems can be set up faster, and millions can be saved in the training of a geographically dispersed workforce. Rather than considering an Internet address a luxury, not having one is now viewed as a handicap.

Countries around the globe are desperately trying to catch up by improving their infrastructure and access to advanced communication technologies. More than 160 countries are linked to the Internet. Even with its high fees, Brazil has watched Internet use climb from 60,000 subscribers in 1994 to more than 400,000 in 1996. New wireless and satellite technologies have also become the focus of plans for improving access to basic voice services. The cost of these infrastructure plans, however, far exceeds domestic capital pools and the abilities of domestic firms. As a result, nations are being forced to turn to competition and foreign investors to meet their infrastructure demands. Foreign direct investment has become the most important source of external financing for developing countries.

Beyond the telecommunication talks

Although innovative bypass services such as callback and the Internet stimulate competition and increase internal momentum for reform, there is no substitute for a uniform set of rules and the unique role that the WTO plays in setting these rules. Harmonized, multilateral rules are needed to create a transparent, stable framework for promoting the growth of international investment flows and the expansion of global trading systems. The WTO is also unique in its ability to conclude binding agreements, which member countries are bound to apply under a legal obligation that is enforceable in court. The WTO thus helps to prevent the rollback of liberalization commitments once they are made. The negotiations themselves help to promote liberalization commitments by providing a forum that challenges individual countries to reexamine their policies in the context of their economic growth objectives and their participation in the global trading community.

The WTO can, as a result, promote, ratify, and secure some of the competitive advances being produced by the other (technological, economic, and political) revolutions taking place. But it cannot move beyond what individual countries are willing to pursue. The skill, creativity, and tireless work of the negotiators involved in the telecommunication talks pushed the limits of that negotiating process.

Changing the circumstances that limited the process is a major challenge confronting the WTO. The process can never be perfect, but it can be improved. A shift away from service-specific negotiations may help to reduce the time needed to conclude a deal. Sector-specific negotiations limit the tradeoff of concessions across sectors that may otherwise facilitate the closing of a deal. The final stage of the WTO basic telecommunication talks received, for example, a significant boost from the simultaneous promotion of a multilateral information technology agreement (ITA). Malaysia, a holdout in the telecommunication talks until the final days, has a great deal to gain from the zero tariffs on goods being advanced under the ITA. Commitments to decrease tariffs on microchips and other information technology products under the ITA may have been the turning point for Malaysia (a major exporter of computer chips) that made its participation in the telecommunication accord possible. Since the WTO information technology agreement was successfully concluded this March, Malaysia may also be more forthcoming in improving its commitments regarding basic telecommunications.

A more manageable step in the near term is helping developing countries identify their interests in information technology, competition, and multilateral rules. Some of this work is already being done through international organizations such as the World Bank. Over the next three years, the technical support and analysis that these efforts provide in building domestic support in favor of liberalization could make it possible for developing countries to significantly expand their WTO commitments in the next round of negotiations.

Meanwhile, during the transition to full implementation of the WTO rules, the United States could boost the cause of increased competition by promoting more bypass services such as international simple resale (ISR). ISR operators purchase capacity wholesale on the international networks of carriers such as MFS Worldcom and then sell it a price that undercuts the national carrier. FCC regulations currently limit the number of countries that can provide services to the United States. The FCC permits U.S. and foreign carriers to resell their international private lines only when the destination foreign country affords competitive opportunities equivalent to those provided in U.S. law. But such a tit-for-tat strategy of market opening has a perverse impact on competition, according to the research of Leonard Waverman at the University of Toronto. It sacrifices the objective (increased competition and lower prices) for trade tactics that should not be the concern of the FCC. If the FCC believes that competition drives down rates, it should be expanding ISR opportunities beyond the three countries (the United Kingdom, Canada, and Sweden) that have received the FCC’s blessing of equivalent market access. Applications from four countries are pending, but access should be extended to many more countries.

The United States could boost the cause of increased competition by promoting more bypass services.

In addition, private-sector institutions need to play a more active role in building an international consensus in favor of open global information networks. Given the complexity of the issues, the limitations of the WTO process, and the difficulties involved in improving it, much of the work for resolving conflicts over market access, standards, and pro-investment regulations is shifting to private organizations. This shift was reflected in the recent WTO negotiations and was credited in part for enabling the conclusion of an agreement. In addition to U.S. trade associations, new transnational organizations are emerging, such as the Global Information Infrastructure Commission, which is made up of chief executive officers from around the world.

The WTO provides a unique framework for measuring and securing the progress made in opening markets, but it is not an organization for the impatient. In an ideal world, firms would not have to struggle with restrictive market conditions. But until that world emerges, the firms fueling the global communications revolution will continue to find ways into closed markets through creative uses of international alliances and the Internet or whatever the digital revolution produces next. With digital and wireless technologies maturing and markets converging, the trend in international telecommunications toward increased international competition is inescapable and irreversible. Technology and deregulation trends around the world have dramatically simplified the operating equation for national governments-adjust now or be left behind.

Recommended Reading

  • Jonathan Aronson and Peter F. Cowhey, When Countries Talk: International Trade in Telecommunication Services. Washington, D.C.: Ballinger/AEI Press, 1988.
  • Wilson Dizard, MegaNet: Building the Global Information Highway. New York: Harper-Collins and Westfield, forthcoming, 1997.
  • Robert Frieden, International Telecommunications Handbook. New York: Artech House, Inc., 1996.
  • Tim Jackson, “Net Calls Could Take Their Toll,” Financial Times, February 3, 1997.
  • Organization for Economic Cooperation and Development, Information Infrastructure Convergence and Pricing: The Internet (Paris, 1996).
  • Sam Paltridge, “How Competition Helps the Internet,” The OECD Observer, August/September 1996.
  • Gene Retske, “1997 International Simple Resale Prediction, Projections,” International Insider, January 1997.
  • Anthony Rutkowski, “Multilateral Cooperation in Telecommunications: Implications of the Great Transformation, ” in The New Information Infrastructure, William Drake (ed.). New York: Twentieth Century Fund, 1995.
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Cite this Article

Beltz, Cynthia. “Global Telecommunications Rules: The Race with Technology.” Issues in Science and Technology 13, no. 3 (Spring 1997).

Vol. XIII, No. 3, Spring 1997