Industry Perspective ---- Telecommunication    

©Simon Xi ZHANG
11/19/01

This is my presentation to the International Business Transaction class at UMKC School of Law. Each student is to choose an industry topic to be addressed. The goal is to identify issues to be considered, for that US industry, in an international business context.  As required, it does not exceed 10 pages and is 1.5 spaced.  I may produce a revised version in more details and paste it on-line in the incoming month, because Telecommunication is Fun!!!

This article analyzes certain issues faced by the United States telecommunication companies when they are considering extending business abroad, i.e., undertaking international provision of telecommunication service. By using the term "telecommunication", that part of information-transmission dependent on celestial facility is not included in this article, because satellite telecom industry has its own distinctive characteristics; TV or broadcasting service is not addressed too, since what really matters in that industry is the information-content that floats over wires or flows wirelessly, rather than the very business of information-transmission.

A.     Market and Technology

The international telecommunication service involves at least two geographical areas: the home country, and the foreign market. Access to foreign markets is therefore prerequisite to the provision of international service by US telecom companies.[1] Countries have agreed among themselves, by bilateral treaties and multilateral trade agreements, to give full or partial market access to foreign telecom carriers. In spite of these arrangements, incumbents in foreign markets, and not unusually, the foreign governments as well, because of their proprietary interest in local incumbents, always set up other market barriers against US telecom companies by exploiting their own dominant positions in foreign (destination) markets. The level of market access, with related anti-competitive measures, is an important issue entangling the international business of US telecommunication industry.

Since Alexander Graham Bell's historic summon of his next-room assistant, telecommunication has witnessed substantial technological progress in the past 125 years and this has fundamentally changed the whole industry. Voice-over-line is now only one of various types of service. Telecommunication service today combines transmission of voice, text, image, and video content together. The telecom bandwidth now provides as much as 38-gigabits-per-second capacity[2]. It no longer has to rely on copper lines; there is submarine cable, coaxial cable, fiber-optic cable, and the wireless web. On October 1, 2001, NTT DoCoMo[3] launched FOMA (Freedom Of Mobile multimedia Access), the world's first commercial "third-generation" (3G) mobile phone service. Although FOMA is now only covering an area within 30km radius of the center of Tokyo[4], there are currently 28 million DoCoMo consumers all over Japan[5] who are willing to upgrade from their present "2.5G" i-Mode service to that enticing Freedom. International telecommunication competition thus inevitably takes into consideration of technology advancement and various business opportunities arising there from.

Market factor and technology consideration are interwoven. Therefore, though this article is divided into two parts, US telecommunication companies do not operate like Scott Adam's Dilbert.

 B. Market Access Factor

B1. General Introduction.

The Basic Telecommunications Service Agreement, as the Fourth Protocol to the General Agreement on Trade in Services of the World Trade Organization, was made on April 30,1996. This agreement represents a change of profound importance. A 60-year tradition of telecommunications monopolies and closed markets has been replaced by market opening, deregulation and competition. The Agreement covers over 95% of world telecom revenue and was negotiated among 70 countries -- both developed and developing, from Canada to Liechtenstein, extending to Iceland and reaching South Africa. "It ensures that U.S. companies can compete against and invest in all existing carriers. Before this agreement, only 17 percent of the top 20 telecom markets were open to U.S. companies; now they have access to nearly 100 percent of these markets".[6] 

The Agreement covers a list of fourteen types of telecommunication services (sectors), divided between "basic" and "value-added" telecommunication services. That includes basic voice telephone service to electronic data interchange.[7]

With regard to each service, parties to the Agreement grant market access and national treatment to foreign telecommunication carriers from each other. Both market access and national treatment obligations apply to three modes of supply of telecommunication service: cross border, consumption abroad, and commercial presence. Parties are bound to the extent of their commitments and entitle to exemptions made in their individual Schedule of Accession to the Basic Telecommunications Services Agreement.[8] The level of commitments (full, partial, none) is thus mode-of-supply specifically.

Generally, for industrialized economies, cross border and consumption abroad are much more open than commercial presence; whereas emerging economies have recorded a higher commitments, overall, on commercial presence.[9] However, industrialized economies are two to three times more likely than the norm to commit to unlimited market access for cross border supply of basic telecom services, and all industrialized countries committed either fully or partially on all basic services.

The countries providing market access for telecommunications services account for 99 percent of all revenues from telecom services worldwide. Ambassador Barshefsky optimistically predicted that "[O]ur international long distance industry will gain ¡­the right to use their own facilities and to work directly with their customers everywhere their customers go -- providing seamless end-to-end services, not handing calls off to monopoly providers elsewhere. From the European Community to Korea, from Japan to El Salvador, Mexico and Canada, countries have made these commitments. And the range of services that can be provided internationally includes all voice and data services, provided by fixed or by mobile service networks or both."[10]

Nevertheless, this is not the real situation.

 B2. Technical Standards Barrier

The Agreement members have devised technical standards for telecommunication equipments as a barrier to US companies' access to their telecom markets.

Japanese telecom sector has long been encumbered by excessive, outdated regulations.[11] Its system for Certification of Conformity with Technical Regulations (CCTR) on terminal equipment and radio equipment was ill-fitted for the rapid progress in radio communications and the trend toward globalization. U.S. exporters and manufactures of such apparatus had to wait for lengthy inspection and approval period, to combat with fussy codes and directives, before products or services were allowed entering Japanese market.

The United States pressed for the establishment of the Enhanced Initiative on Deregulation and Competition Policy ("Enhanced Initiative") with the Japanese Government, which took the start on June 19, 1997.[12] The next year, Japan revised its Telecommunications Business Law and Radio Law. The CCTR system was modified and a Recognized Foreign Certification Body System (RFCB) was established. The recognized US certification body can perform inspection and testing services in accordance with systems based on relevant US laws[13]. The Specified Radio Equipment (SRE) certified by US inspector, according to the new legislations, shall be accepted as an SRE granted a CCTR and therefore being able to pierce into Japanese telecom market.[14]

In 2000, the European Union promulgated a Protocol to the Europe Agreement on Conformity Assessment and Acceptance of Industrial Products (PECA) and concluded the PECAs with Hungary, Czech, and Latvia. EU is currently negotiating with a number of other countries in line for EU membership. Under a PECA, the EU and the accession candidate agree to recognize the results of each other's designated conformity assessment bodies/notified bodies, thereby eliminating the need for further product testing of EU products upon importation into that country. Only those products exported to the third country which are: (i) of EU country origin, and (ii) certified by an EU notified body with the CE mark illustrating compliance with EU standards, will benefit from the provisions of the PECA.

It appears that products originating in the United States and certified by authorized U.S. labs to carry the CE mark, would not benefit from the PECA. Feeling uncertain about this PECA measure, the US Government is currently discussing these agreement provisions with the European Commission and indicates an intention to continue monitoring implementation of the PECAs.[15]

 B3. "Unbundle the Local Loops" & Interconnection Fee.

Besides the government-initiated technical conformity systems, local incumbents in both industrialized and emerging economies have tried hard to deter new entrants coming into the market.[16] For international telecom services, the new entrant from a foreign country has to rely on the local telecom network in carrying on its business in the host country. No surprise, the "60-year tradition of telecommunications monopolies and closed markets", as mentioned by Ambassador Barshefsky, has enabled big local incumbents accumulating dominant power over the local telecom market.

Not only the Agreement grants market access to new foreign entrants, the Reference Paper on Regulatory Principles attached to the Agreement also requires member governments, through backbone networks owned or operated by domestic incumbents, providing timely interconnection service to these newly arrived competitors "under non-discriminatory terms, conditions  and rates and of a quality no less favorable than that provided for its own like services"[17]. This is the issue of "unbundling the local loops". The defensive strategies adopted by domestic incumbents are essentially the same: "deny, delay and degrade"[18].

The typical de facto denial to unbundling the local loops is to charge exceedingly high, non cost-oriented interconnection fees. It is also called as "price squeeze".

Until 2000, Mexico's monopolistic Telmex[19] charged competitive domestic long distance carrier a "resale" tariff rate that was greater than 9 cents per minute without justification, while similar regional interconnection was routinely available in competitive countries for 2 to 3 cents per minute. The international interconnection rate charged by Telmex was nearly five times higher than the cost-based rate routinely available in competitive countries elsewhere. US filed a request to establish a WTO dispute settlement panel on November 10, 2000, which was one month after prior fruitless consultation with Mexico. Thereafter, Mexico began to take steps addressing certain issues but it failed to enforce its dominant carrier rules against Telmex.[20]

Japan's NTT was another example of interconnection over-charging incumbent. This essentially prevented US telecom companies from developing profitable business in Japan. Through the US-Japan Enhanced Initiative negotiation, the interconnection rates paid to NTT now is reduced by about 50 percent at the regional level and 20 percent at the local level. This was effective only from April, 2001, nearly four years after the Agreement came into effect.

In Germany, the Deutsche Telekom is demanding interconnection fee from market entrants while providing retail flat rate Internet access that cannot be duplicated by any of its competitors. No competitor's network equals that of Deutsche Telekom. This effectively compromises the market access promise.

Besides the exorbitant interconnection fee charging behavior, Telefónica (Spain), British Telecom, Deutsche Telekom, and French Telecom, sometimes even including the foreign government entities, plainly refuse to or unnecessary delay in offering "non-discriminatory collocation", i.e., provision of efficient available location for telecommunication equipment of the new entrant[21].

The European Parliament and the Council promulgated the Regulation on Unbundled Access to Local Loop on December 5, 2000[22]. The legislation itself is congruent with the obligations assumed in the Schedule of Specific Commitments of the European Communities and their Member States, including the Reference Paper. Nevertheless, according to a US telecom company, this legislation is "brief, not dispositive of the barriers to market entry that [the U.S. telecom company] has experienced in the United States at the hands of incumbent local exchange carriers"[23].

 C.     Technology Consideration.

 C1. Cable or DSL?

When the US telecom company enters into a foreign market, or is considering following suit of a successful business strategy adapted by a foreign telecom company in that foreign market, particular attention should be paid to the local telecom infrastructure, and sometimes the specific cultural-societal factors prevailing in the foreign market.

As in continental Europe, the Digital Subscriber Line (DSL) is a promising business for broadband telecom access market. The DSL is based on the existing copper telephone line, with the advanced digital technology employed only on "the last one mile" at the consumer terminal. Thus, it saves capital and effort of the telecom industry in building totally new, expensive networks. Meanwhile, the consumer is benefited by enjoying speedy telecom connection without heavily investing in the infrastructure.

A US telecom company tends to work out a competitive telecom network based on existing cable lines. No doubt the coaxial cable used by cable television service transmits information more quickly than copper telephone line. However, the penetration rate of cable television in Europe, overall, is far behind that of the United States. While Europe has more than 200 million telephone lines reaching almost all households and business, cable reaches only half of all households and even fewer business.[24]

Further obstruction to the cable-based US entrant is: many of Europe's cable networks still belong to incumbent telecom companies. Although partial or complete separation of ownership has taken place in France, Germany, Ireland, the Netherlands, and Switzerland, the incumbent telecom operator still controls or has a minority stake in the cable system that pass by more than 40 percent of the European homes that are now accessible to cable.[25] It is hard to imagine how the US company's cable-based strategy can compete with those European incumbents that control local cable networks or the other European companies fully dedicating its technology advantage and R&D efforts to the existing web of telephony lines across the Continent.

 C2. Special Societal Situation and "Telecom Culture"

In the recent two years, VOIP (voice-over-internet protocol) becomes popular in the United States. In the meantime, Japan's NTT DoCoMo is leading ahead the rest world in putting 3G (third generation) mobile phone into commercial use, such as SMS (short message service) and WAP (Wireless Access Protocol) services. This provides for a contrast for "telecom cultures" of the two countries.

Averagely, nearly 60 percent of US inhabitants have access to Personal Computer (PC) and US consumers do not pay additional telephone service fee for internet connection. No other nation has a higher penetration of PC than the US. In comparison, only around 35 of 100 Japanese have access to PC.[26] The PC is also comparatively more expensive than the mobile phone handset, so the Japanese consumers have special interest in using the latter equipment.

SMS service permits mobile phone users transmit text message to each other, it can be thought as an "Email over the mobile phone". Unlike the email service, telecom carriers charge 0.1 dollar per message transmitted over SMS. This creates a golden pot for telecom carriers. However, in the United States, it is very unwise for a telecom carrier to blindly follow NTT DoCoMo's strategy hoping grab a piece off the big cake.[27] It is because most DoCoMo users enjoying sending SMS with friends, or playing mini-game on their mobile phone handset while there are commuting over the public transportation in the crowded Tokyo, while the United States is basically a "mobile country" rather than "home of mobile phone users". Who will utilize SMS or play wireless on-line Blackjack over that small screen of the handset while driving at 55mph on highway early in the morning or under the dim twilight?

Therefore, it is not accidentally that NTT DoCoMo succeeds in offering the first 3G service in the world. Japan has its own social accommodations and huge pool of passionate ¡°mini electro¡± lover consumers to support the profitable 3G business. From 1999 to early 2001, the international business community were amazed to see the fierce competition in, predominantly in Europe, 3G license auctions. The mobile-network operators around the world collectively paid more than $100 billion for the 3G license auction.[28] The huge debts incurred by operators in buying licenses has forced them to cut spending in order to service their debts, and this is arguably one of the causes of the downturn of the technology sector.
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