The Impetus to Deregulate

Parts of Europe were deregulated in 1997 and Asia, including Japan and Singapore, are just opening their markets as is Australia. Latin America began opening its markets in 1997. Two factors are pushing deregulation: the desire to be part of the World Trade Organization (WTO) and the prospect of upgraded network infrastructures. A requirement for joining the WTO is that countries liberalize their market for imports and foreign companies. WTO members derive benefits from having more companies to buy and sell services with on a quid-pro-quo basis.

Many countries created telecommunications monopolies to ensure the presence of secure telecommunications. Given the availability of new technologies, this is no longer required. However, over the years, incumbent telephone companies had no incentive to upgrade networks, improve customer service, lower prices or improve technology. Many countries looked to events in the United States where free market conditions in the 1980s and 90s resulted in innovation, lower prices for long distance and more choices for end users.

Steps in Deregulation

In some areas of the world, particularly Latin America, incumbents were first privatized but given a period of time in which to prepare for competition. In addition, governments raised money from the sale of shares in incumbents. During the period after they were privatized but before competition was allowed, they improved infrastructure and balanced prices. Previously, long distance prices were high to subsidize local services. With balanced prices, long distance costs were lowered by incumbents to compete with potential new carriers who were expected (and, in fact, did) offer lower prices for these services when they were given licenses to provide telecommunications.

After a period of time, licenses generally were issued to both foreign and domestic carriers for long distance, cellular and data networking products. In Latin America and Asia, this period was longer than in Europe where the network infrastructure was more modern.

Challenges

Telecommunications networks in much of the Middle East, Africa and Asia are run by incumbents with monopolies in telecommunications. Elsewhere, British Telecommunications PLC in the United Kingdom (UK), Deutsche Telekom AG in Germany, Telebras in Brazil and NTT in Japan, are losing market share in their long distance and data communications networking markets. They all, however, continue to dominate their markets for fixed-line and local services.

Opening local loops for competition requires multiple connections to central offices, billing systems and copper facilities in locations where competitors don't have their own fiber or fixed wireless facilities. Incumbents that have often lost market share in long distance and other service are reluctant to cooperate with companies that are in competition with them. Each of these connections requires fees as well as technical agreements. Incumbents argue that fees are too low and competitors feel that they are too high to allow for profits. In the UK, most of the companies that are conducting trials of digital subscriber line (DSL) connections backed out of DSL service. They cited British Telecom's high interconnection fees and the fact that British Telecom is not making central office space available for placement (collocation) of local competitors' equipment.

Establishing long distance service is much less complex than competing for local service. Connections for long distance and international service generally only require connections in a few central offices per metropolitan area as opposed to interconnections and resale of many different pieces of the incumbent's network in order to reach customers to sell local services.

Trends in Global Markets

Voice over IP, cellular and prepaid cellular services are key technologies driving competition and enabling more populations worldwide to have access to telephone service. In addition to making services more widely available, they have lowered the cost of telephone calls.

VoIP

Voice over IP (VoIP) is a driving force in opening up competition in emerging markets. Alternative methods of making calls often are present before markets are officially open. In some cases, people find ways to make calls at a lower cost using, for example, voice over IP, call-back for international calls and prepaid calling cards to save money on long distance to other parts of the world. In China, people started making calls from their computers before other carriers were ostensibly allowed to provide service. This is happening in Africa and the Middle East as well as Thailand and Peru. People with a computer equipped with speakers and a microphone use their Internet connections to place low cost long distance calls. Small operators in these countries also carry voice over IP calls for customers.

Prepaid for Cellular

Because of the lack of credit, most new cellular subscribers sign up for prepaid service. However, revenues per subscriber for prepaid services are lower than those for monthly subscribers. According to Q4 2000 Business Monitor, published by Business Monitor International, page 35, in Brazil, prepaid phones account for 52% of the mobile service.

Cellular and Fixed Wireless

According to the International Telecommunications Union (ITU), by December 2000, there were more mobile than landline phones in Hong Kong, Japan, the Republic of Korea, Singapore and Taiwan. A key contributor to cellular growth is that in most of these countries, callers pay only for cellular calls they make. Customers do not pay for calls they receive. Therefore, they are not reluctant to give out their cell phone numbers and use their mobile phones more frequently often as a replacement of their fixed-line phones.

A key factor driving growth in cellular service and fixed wireless service is the lower costs to build wireless infrastructures compared to laying cable to each subscriber. After paying for spectrum, carriers install central offices and cell site antennas and controllers. The only fiber they need are in backbone connections between their switches and for connections to other carriers. Costs for these backbone connections are lower than laying cable to each customer location.

Because cellular margins are being squeezed and third generation (3G) licenses are costly in most countries, carriers are exploring joint ventures with each other to share the expense of upgrading infrastructure for broadband mobile service. The article, “Viag Interkom Seeks Cooperation from Rivals on Mobile Networks,” a Wall Street Journal News Roundup, published in WSJ.com The Wall Street Journal, 27 February 2001, reported that Viag, owned by British Telecom, is exploring joint efforts with other carriers to share the cost of creating new infrastructure in Germany.