The Telecommunications Revolution

Past, Present and Future

Harvey M. Sapolsky, Rhonda J Crane, W Russell Neuman, Eli M Noam

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351115681
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Originally published in 1992 this book charts the global restructuring of telecommunications industries away from the monopoly structures of the past towards increased competition, deregulation and privatization. The book's authors are international policy-makers and scholars, who examine the regulatory environment within a theoretical and historical context. The book looks at the roots of regulatory and legislative changes by discussing individually the countries at the forefront of the revolution: the UK, France, Germany, Japan and the United States. It examines the impact of new technology for consequences of change in trade and government policies.

Chapter 1

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Is telecommunications truly revolutionary?

Lester C. Thurow

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More than a decade ago I heard Ithiel Pool say there was going to be a computer telecommunications revolution. I was skeptical. Now I am much less of a skeptic. Historically only two inventions have revolutionized our industrial world.

The train speeded up transportation from one point to another. I much remember a history book pointing out that Napoleon’s army did not move any faster than Julius Caesar’s army. Two thousand years, and armies moved exactly the same way with horses and carts moving as fast as human beings could walk. The internal combustion engine and the automobile are not that important. If they had not been invented, we would have had a lot more street railways, and perhaps not quite as much suburbanization, but the world would look approximately the same without the automobile as it looks with it.

The other major invention is electricity. It clearly revolutionized the world in all kinds of ways. It made night usable. I periodically climb mountains in the Himalayas and get to villages where there is still no electricity. To live in a world with absolutely no electricity, no batteries, no lights, is a very different experience from the life most of us are used to. Electricity essentially changed night into day and altered human habits in profound ways.

Is the computer telecommunications revolution equivalent to trains and electricity? We will not be sure until we look back on it, but I am more persuaded today that Ithiel Pool was on to something, and that this could be a third major revolution.

In business schools we talk about MIS (management information systems) and refer to telecommunications systems as if they were ways to bring information to managers for them to do a better job. I am convinced that what is going on is more fundamental in the sense that the telecommunications industry is becoming the production technology of many industries. Finance is a good example. Finance has become a technological enterprise. The financial institution that can bring information from Hong Kong to New York five seconds faster than some other group does not make part of the arbitrage profits – it makes all of the arbitrage profits.

Look at who the banks have been hiring recently. Salomon Brothers last year hired as many computer programmers and telecommunications experts as they did financial experts. A gentleman came into my office the other day and was absolutely convinced that the Japanese banks were going to drive every other bank in the world out of business because they were willing to put up satellites and build better telecommunications networks than the banks in Europe and the United States. They were going to be able to move information around the world faster and a few pennies cheaper per document than anybody else. They were going to turn finance into manufacturing. The one who can produce a product the cheapest and the fastest wins; and they were going to win because of their superior technology. He may be wrong about the Japanese advantage. At Citibank the person in charge of computer telecommunications has a budget of one billion dollars. One company one billion dollars to invest in telecommunications in one year.

Technology certainly changes the world capital markets. In one sense, Alan Greenspan, the Chairman of the Federal Reserve Board, and every other central banker in the world, has become technologically obsolete. Alan Greenspan is in charge of the American money supply. But in today’s world, because of technology, there is no ‘the American money supply.’ There is a world money supply. We can instantly borrow dollars or Euro dollars or Euro yen or Euro marks in London without ever being there. Those transactions do not have anything to do with any central banker in the world. I could buy and sell a house in Boston by using German marks. You could do a deal in the Bahamas without ever being in the Bahamas. We have major institutions like national central banks that are becoming obsolete.

Central banks can collectively control the world money supply – and there is a world money supply – but they cannot control it individually. The way we regulate, operate, and do our economics will have to be quite different because of the telecommunications revolution that has occurred.

After the Second World War, we had capital controls. They were difficult to enforce in the good old days, but today we could not make them work at all. How would you monitor financial transactions across national boundaries if they are done with personal computers (PCs)?

If you look at the Brady Commission’s report on why the stock market fell in October 1987, it perfectly illustrates a group of human beings who are presumably intelligent, writing a report that is technologically obsolete. The Brady Commission wrote about the fall of the American stock market as if it was the only stock market in the world that fell. Almost no word about any other markets falling. They blamed the fall on telecommunications computer trading. Portfolio insurance and program trading supposedly brought the system down. The interesting point is that London was crashing for five hours before New York crashed and London does very little portfolio insurance or computer trading compared to New York. Stock markets have also managed to crash hundreds of times, hundreds of years before anybody invented this technology. The Mississippi Bubble, Tulip Mania, the South Sea Bubble, the Great Crash of 1929, all managed to occur without computers and telecommunications.

If one reflects on the Brady recommendations, how would you stop program trading? Suppose you wanted to stop it. How would you do that, in a technical sense? This is a little like stopping sex between consenting adults. Can one really stop people in the privacy of their own office from looking at their computers and using their telephone to trade stocks, bonds, and commodities around the world?

Computer telecommunications has effectively become the modern devil that is blamed for everything wrong. If a package does not get delivered to my house, what went wrong? Well, the computer did it. Exactly the same thing happening on the stock market. We needed a convenient scapegoat to blame for what went wrong, and computer telecommunications took the blame.

The telecommunications revolution has two important economic puzzles. It was widely predicted when the revolution began that computer telecommunications would decentralize economic activity because it would make it much cheaper to move information from one place to another. And you can find examples of decentralization, like Citibank processing all its credit cards in Sioux Falls, South Dakota rather than in New York City. But the aggregate data show precisely the opposite. We are piling up, in record amounts, in narrower geographic areas. Big central cities around the world are growing. If a city is a financial capital plus a government capital, probably 40 per cent of all the people in the entire country live there. This is true in South America, in Japan, in Britain. Where you would predict decentralization, the technology somehow seems to be contributing to centralization. It is clear that, in the aggregate – despite dramatic examples like Citibank out in Sioux Falls – something very different is happening.

The second puzzle concerns productivity. Computer telecommunications is a wonderful new technology, with wondrous capabilities. It should make productivity grow faster, which makes the standard of living grow faster. Thus this technology is going to pay off in a higher standard of living than we would otherwise have.

Again, the data belie these expectations. Precisely those industries that are most intensively using this technology have the worst productivity performance. In fact, the industries using it the most generally have negative productivity growth, like financial services. Financial services are certainly using telecommunications to move information around the world, to do new things such as computer accounting, to service customers with ATM machines, the robots of the financial world. But no matter how you measure productivity in financial services in the United States, it is falling. For every employee exiled from a little branch bank that no longer has any employees in it, banks are adding two employees in the telecommunications office to replace the one from the old-fashioned office.

Financial services in the United States have had negative productivity growth for the last ten years. Every year productivity is falling about 1 percent. Part of the explanation is reasonably clear. We find that maintenance expenses are soaring. The conventional computer system that a company might buy requires annual maintenance expenses that are half the original purchase price. It takes an enormous amount of labor and supplies to keep these systems running. The enormous labor force necessary to maintain the systems has more than offset the productivity gains.

This problem is not limited to finance. The worse the productivity performance the more that industry is using computer telecommunications systems. Is this just a temporary phenomenon – that it takes a while to get used to new technology so people can use it efficiently? Or is this something where the payoff ultimately comes much later when ways of doing business actually change? One could argue the issue both ways. One answer may be that Ithiel Pool was right: It is a real revolution, which means we have to do things differently as opposed to just automate the old.

Consider office automation. If you think about the model office, it is remarkably similar to the office that was invented in Florence during the Renaissance. The way we shuffle paper around the system has not changed much in 500 years. And then we bring in office automation and we simply automate exactly the same paper shuffling that we were doing before we automated. That may very well be a way you cannot make the system pay off. When I walk into business firms in the United States, every desk has a computer terminal and a telecommunications system attached to it, and I would bet that 95 percent of them are seldom turned on.

Recently we have been putting about half of the total investment in the United States into computers and telecommunications. Putting half of the investment for an entire country into an area that does not pay off in productivity creates a major problem. At some point we will either have to do it differently or quit doing it at all. From an industrial point of view, that is going to be the key question over the next five or ten years.

Chapter 2

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Beyond the Golden Age of the public network

Eli M. Noam

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Telecommunications policy today is an environment in which there are many battle-hardened troops, but too few strategists. There is an abundance of activities, plans, facts, fights, but only a limited analytical apparatus. We are in short supply of the Ithiel de Sola Pools, just who we need the most to get us beyond the traditional concepts that have organized thinking in this field.

What are these concepts? I find four main ones that are the golden calves worshipped by professional associations and denominations. For technologists, the primary organizing concepts in telecommunications policy are economies of scale and their first cousin, standardization. Economists worship at the altar of competition – in this case genuflecting to the triad of structure, conduct, and performance. What is an increasing disenchantment with this view is represented more in academia than in the regulatory environment Lawyers, third in this field, judge policy issues in terms of conflict of interest, which translates here into a potential for cross-subsidies. Structures that make such cross-subsidies theoretically possible must be avoided, hence the AT&T divestiture. Finally, many social scientists, as well as most politicians and journalists, organize reality in telecommunications policy around the concept of income distribution, that is, around the question of who pays more, who pays less.

All of these concepts have legitimacy but they have been carried by their proponents to the edge of explanatory power and then some. Used single-mindedly, these notions have degenerated to rallying slogans. Perhaps the greatest common failing is that they engage in what I would call supply-side telecommunications. That is, they look at the subject from the angle of production and producers: AT&T versus MCI, interexchange carriers versus local exchange companies, enhanced versus basic services providers, voice versus record, and so on.

It is not surprising that this should be the natural way to look at things. After all, regulators deal primarily with carriers, technologists with networks, economists with competitors, and journalists have a horse race angle to their coverage. But this supply-oriented perspective obscures its reverse. What we need to do is engage in what could be called a demand-side telecommunications analysis. What does this perspective mean? At its most basic, we should not think of telecommunications as a service produced by carriers but as an interaction of groups and subgroups in society, facilitated by service vendors that we call carriers. The supply structure, if left to its own devices, is a reflection of the underlying interaction of communication users with each other within an all-encompassing user coalition, which we call the public network, or in several smaller user groupings along other dimensions.

Thus, we should not see deregulation and divestiture as a policy of primarily liberalizing the entry of suppliers. Just as important, it is the liberalization of an exit by some partners from a previously existing sharing coalition. Telecommunications are only one instance for widespread ascendancy in recent years of centrifugalism in previously shared social arrangements. Wherever you look, people break up all kinds of networks of interaction and form new ones. Examples abound – the public school system, the mass transit system, public safety, dispute resolution, health provision, to name a few. The departure from the public school system, for example, cannot be explained primarily by the supply of new options or by new technology but rather by an increased demand to exit. In a similar sense, recent centrifugal development in independent electric power generation had very little to do with new technology.

Perhaps it is useful to ask ourselves why it seems that there is usually only one public telephone network in each country. It is not the inter-connectedness of all participants or else we would have only one large bank for all financial transactions. Interaction does not usually require institutional integrations, and this was one of Adam Smith’s major insights. To distinguish telecommunications from this observation by labeling it ‘infrastructure’ requires us to define that term, which is almost impossible to do.

No explanation is natural monopoly. Maybe it exists for a local exchange area, but the examples of the United States, Canada, Denmark, Finland, and several other countries show that this does not prove that a widespread horizontal integration of local exchange areas is required. And if it were, why do they miraculously have national frontiers? If we look at the birth of the monopoly system in the sixteenth and seventeenth centuries and the establishment of European postal monopolies, we see that the monopoly was unnaturally caused by politics of the revenue needs of the state, rather than by second-order conditions of production functions.

Perhaps the best way to look at the network is as a cost sharing arrangement among several users. If fixed costs are low, a new participant C can help A and B to lower the costs. This situation could be compared with the economics of swimming pools or national defense, both of which may be regarded as a public good. But although there is only one national defense system, there are many swimming pools – some of them public communals, others private communals, and still others exclusive ones.

There is a wide spectrum between the pure private good and the pure public good. We may want to share the pool with a few dozen families but not necessarily with thousands. A few might admit everyone; some maybe only admit one. The many cases in between include the telecommunications network. It is not a private good, yet it does not meet the two conditions for a public good, namely non-excludability and non-rival consumption. Indeed, non-excludability had to be established by law, and we call it universal service obligation.

What has been happening in recent years to telecommunications is what goes by the more dramatic label of ‘divestiture.’ Deregulation is merely a shift in the degree of intermediateness – of the intermediate position between public and private. The formation of such intermediate collective consumption and production arrangements is carefully analyzed by theorists of clubs. One can apply economic club theory to networks and show that different user groups tend to cluster together in associations according to dimensions of price, interactive density, and ease of internal decisionmaking, provided that they have mobility of choice. This can be called voting with one’s telecommunications node. A reasonable assumption is that economically optimal association size will not encompass the entire population. Alfred Kahn used to put it as follows, ‘People who don’t have a telephone, I don’t want to talk to.’

It is generally inefficient to attempt income transfers by integrating diverse groups and imposing varying c...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Notes on Contributors
• Preface: Decentralization and deregulation on the march
• 1 Is telecommunications truly revolutionary?
• 2 Beyond the Golden Age of the public network
• 3 The politics of deregulation
• 4 Did regulation keep pace with technology?
• 5 The significance of Telecom 2000
• 6 On thinking about deregulation and competition
• 7 Viewing divestment from afar
• 8 The ecology of games in telecommunications policy
• 9 The economics of international competition
• 10 The economics of international telecommunications
• 11 A history of recent German telecommunications policy
• 12 The future of German telecommunications
• 13 Telecommunications policy in France
• 14 Telecommunications policy in Japan
• 15 The politics of international telecommunications reform
• 16 The struggle for control within the telecommunications networks
• 17 The future of the telecommunications marketplace
• 18 TV technology and government policy
• 19 Negotiating the world information economy
• Epilogue: Communications policy in crisis
• Glossary
• Index