The United States exports Telecommunications Act

Jan. 1, 1997

The United States exports Telecommunications Act

StePHen n. brown, mev inc.

Seeking to expand markets abroad for U.S. telecommunications firms, U.S. officials offer the Telecommunications Reform Act of 1996 as a lesson to the world, but encounter resistance

Federal Communications Commission (FCC) chairman Reed Hundt has expanded his political role in the telecommunications arena. With missionary zeal, he preached the word of competition to unbelievers in Beijing and Hong Kong while also preaching to the faithful in London and Washington, DC. In each locale, Hundt delivered speeches that make the U.S. Telecommunications Act a spearhead of American foreign policy or a Cupid`s arrow, depending on the audience. Speaking at the Royal Institute of International Affairs in London during September, Hundt said, "I`m here on a break from the battle lines of the seminal revolution of the twenty-first century... the most global since the Russian [revolution], and, yes, the most American since the American." Hundt`s new American revolution invites the British into the United States rather than throwing them out. Hundt`s British audience apparently took his words as a love token beckoning entry into the American telecommunications market because British Telecom (BT) is on its way to a complete buyout of MCI--a big step up from BT`s 20% minority ownership (see Lightwave, Dec. 1996, page 1). Hundt gave BT the go-ahead in his speech: "Let me note that in 1995, the FCC has liberalized its treatment of foreign investment, and the United States has offered to drop its remaining limits on foreign investment as part of the World Trade Organization negotiation on basic telecommunications."

BT`s purchase of MCI is a perfect fit with the simple dictum of U.S. foreign trade policy: "We will let you into our markets if you let us into yours." However, this policy may be derailed by the recent decision of the Eighth Circuit of U.S. Appeals court, which may limit domestic and foreign competitors` access to local telecommunications markets in the United States (see Lightwave, Dec. 1996, page 30). There is a strong link between U.S. domestic telecommunications policy and foreign telecommunications policy. If domestic policy is awry, foreign policy suffers, too. The BT takeover of MCI will proceed because it is economic reciprocity on the part of the U.S. government. American telephone and cable companies have been pumping investments into Britain for several years, thanks to a change in British law that occurred during Margaret Thatcher`s terms as Prime Minister. BT`s move into the American market is the culmination of a friendly relationship between the U.S. and British governments, where cultural affinities make for similar views on foreign penetration of domestic telecommunications market. This coincidence of culture does not apply worldwide.

For example, from an economic perspective, the Chinese government is probably puzzled about BT`s actions. Speaking during October at Beijing`s Center for Information Infrastructure and Economic Development, Hundt told his audience: "At any given moment in the United States, we use only 9% of our long-distance network." Knowing this, an economist in Beijing may wonder why BT would purchase MCI. Hundt anticipated puzzlement in his audience, and he tried to clarify American policy for them by posing a rhetorical question with its own answer: "Do we hear anyone in the United States talking about overbuilding? No, ...networks seem like roadways: No matter how fast you build them, users clog them to capacity as soon as they [networks] are finished." Hundt`s Chinese audience probably detected the contradiction in his statement: How can networks be clogged to capacity as soon as they are finished if the United States is using only 9% of its long-distance network at any one time? The FCC chairman probably did not persuade China`s leaders that American policy is worth emulating any time soon.

Importance of excess capacity

Hidden in Hundt`s statement about "overbuilding" is the importance of excess capacity to competition. Supposedly, excess capacity works to keep telecommunications prices low because if a service provider raises prices, consumers would switch to competitors that have sufficient capacity to meet the demands of their newly acquired customers. As long as providers have excess capacity, no one company or group has incentive to collude and divide up the market. This conventional wisdom is challenged by David Barth of Northwestern University in his study titled "Post-divestiture Investments in Long Distance Transmission Facilities: Excess Capacity in Fiber Optics." Barth`s analysis reveals important facts for all observers of the U.S. telecommunications policy. He says, "The excess capacity that observers have taken as a fact for so long is primarily found in unlit fiber." For fiber-optic enthusiasts, the term "unlit" is a synonym for dark fiber, which is installed without the electronics and photonics needed to bring the service to the end-user. Barth`s most-interesting finding is that "the results indicate that the long-distance industry... does not have the immediate capacity available to discipline [in a credible way] a collusive or cartel outcome." Barth adds, "The vast amount of unlit capacity could be waiting for future demand [as suggested by Hundt], but it appears that it is more the result of aggressive network planning, which was designed to limit the number of entrants into long distance,... the vast amount of sunk fiber may have raised the minimum efficient scale of competitors in the industry... rais[ing] barriers to entry and reduc[ing] the expected number of industry participants."

A contradiction to Barth`s findings may be the recent announcement by Qwest Communications Corp. and Frontier Corp. that they will build a 13,000 mile fiber network to approximately 100 cities (see Lightwave, Dec. 1996, page 1). It is unclear, however, if the announcement refers to investment strictly within the United States or if investment in Mexico is a part of the network. Qwest is a subsidiary of Anschut¥Co. Its owner and chief executive is the largest shareholder in Union Pacific railroad, which owns the rights-of-way that will house the network. According to published sources, Qwest`s network may extend deep into Mexico because Qwest has rights to install fiber along the routes followed by the Mexican National Railroad. But if Barth is correct, then Qwest`s aggressive network planning in Mexico may ultimately limit the number of competitors in that country.

Barth`s finding raises a problem for those countries now considering whether their domestic telecommunications infrastructure should be foreign-owned and operated. They have to assess whether the benefits of such ownership are worth the risk of their domestic telecommunications markets being supplied by a handful of skilled and powerful companies. For most of the world, foreign ownership means ownership by an American or Western European firm. Deutsche Telekom, the former state-run monopoly in Germany, is now a private entity and has acquired a substantial minority ownership of Asiacom Philippines, a major telecommunications service provider. Asiacom also operates cellular networks, which also attracted Deutsche Telekom`s attention. With some prodding from the U.S. government, Brazil is dismantling its state-run monopoly, Telebras, and transforming it into a private company. But Brazil is capping foreign ownership at 49%, a limit that brought disapproval from former U.S. Representative Jack Fields (R-TX), who said, "There is no justification at all for a foreign ownership limitation." Fields, who retired from Congress after the 1996 election, visited Brazil in late 1996 as chairman of the U.S. House of Representative`s Telecommunication and Finance Subcommittee. He also said, "Brazil and China are the number one interest of our telecom companies."

Field`s trip to Brazil and Hundt`s world travels reflect the notion that politics and economics are the same thing. This presents a problem to Brazil, China, and other countries in Asia because if U.S. political interests are no different from its economic interests, then American telecommunications investment in these countries is just an extension of the U.S.`s international political agenda. These countries are likely to temper their acceptance of American investment by imposing limits on it. Brazil`s example may be followed, and certain legal restrictions may be added, particularly regarding a country`s national security interest. In London, Hundt indicated an apparent willingness by U.S. firms to comply with a nation`s domestic law. "Foreign-owned networks are just as subject as domestic [ones]... to any nation`s privacy laws or police powers." In Hong Kong, Hundt said, "Some countries fear that telecommunications is a strategic industry whose control must remain in the hands of the government to protect national security. I agree that telecommunications is a strategic industry. That`s why countries cannot afford not to have competition build them reliable, modern, and to some degree, redundant networks."

Hundt`s remarkable transformation from chief regulator to diplomat and national security expert raises a difficult question for U.S. foreign policy. In addition to providing countries with advanced telecommunications networks, should American companies also provide the same surveillance capabilities that are now being built into the U.S. domestic networks? Only a little more than a year ago, U.S. Congress passed a bill authorizing $500 million to the Federal Bureau of Investigation to develop and improve its telecommunications-monitoring capabilities. Congressional debates about the makeup of the Telecommunications Act occasionally focused on terrorism. Is this not a legitimate concern for those nations that are the number one interest of American telecommunications firms? It will be interesting to see how the FCC and others resolve this predicament. q

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