Market Structures in International Telecommunications

Anders Henten Center for Tele-Information Building 371 Technical University of Denmark DK-2800 Lyngby Denmark Tel +45 4525 5176 Fax+45 4596 3171 E-mail henten@cti.dtu.dk

Paper for Twelfth Biennial ITS Conference Stockholm 21-24 June 1998

Market Structures in International Telecommunications

Formerly, telecommunication markets were national monopoly markets with international correspondent relations and joint infrastructures for overseas communications. With liberalisation this situation changes. On basis of observations of relevant economic and political developments and of a discussion of the character of telecommunication services and of the strategies of operators, an analysis of the emerging market structures in international telecommunications is presented.

Paper for the Twelfth Biennial ITS conference Stockholm 21-24 June 1998

By Anders Henten Center for Tele-Information Technical University of Denmark Tel +45 4525 5176 Fax +45 4596 3171 E-mail henten@cti.dtu.dk

Market structures in international telecommunications

1. Introduction

Formerly, telecommunication markets were national monopolies with international correspondent relations and joint infrastructures for overseas communications (submarine cables and satellites). With liberalisation, this situation changes. We are witnessing a development with establishments and investments in foreign markets and the setting up of international competitive alliances of operators. We are moving from a system based on national monopolies and joint international provision towards a system based on competition in the national markets and competitive end-toend provision internationally.

In this new environment, operators aim at establishing themselves and acquiring market shares in the national markets and/ or developing international network connections in order to compete in the markets for international communications. For the different operators, these two main aims vary. Some operators primarily seek establishment in the national markets. Others give priority to international connections. But most often, both ambitions are at play.

Although these developments have taken place for at least the last decade in the telecommunication services industry, they are still relatively new. The purpose of this paper is, therefore, to give a description and analysis of the overall trends in the internationalisation of the provision of

telecommunication services and to provide a view into the structures and developments of the telecommunication markets in the coming years.

2. Drivers of internationalisation in telecommunication services

The basic premise of the above mentioned development is the liberalisation of telecommunication services. However, digital technology and the increasing internationalisation of the world economy as such are also important drivers of change.

Now and then, technology developments in the telecommunication area are portrayed as the primary reasons for the political and economic changes in the sector. Although this may be a convenient legitimisation for policy developments, it is only partly true. Digitalisation, internationalisation and liberalisation are all factors that have a relative autonomy. However, it is a correct observation that digitalisation has allowed for the development of a range of new services and that this process is more efficient in a competitive environment than under a monopoly regime. Furthermore, digitalisation provides a technological basis for increasing divisions of labour in the telecommunication services area and, thus, points in the direction of a liberalisation of the sector.

Concerning internationalisation, it may be claimed that the world economy already long before the liberalisation of telecommunication services was internationalised to a large extent. Nevertheless, it is indisputably true that internationalisation has increased in pace both in terms of trade and foreign investment. Telecommunication operators, on the basis of this development, have growing incentives to service their customers internationally. There was another period, from the late 19th century to the First World War, where the world economy in many ways was as internationalised as today. However, the organisation of the international economy at that time was based on the newly erected bourgeois national states and telecommunications was organised as national monopolies accordingly. At present, although nation states still play a crucial role, the provision of telecommunication services increasingly becomes more international.

Finally, liberalisation is not only a phenomenon of policy related to telecommunications. It affects almost all economic sectors of society. Thus, there are powerful drivers all pushing in the direction of a liberalisation and internationalisation of the provision of telecommunication services a development that cannot come as a big surprise although it took a while, from the second part of the 1980s till the beginning of the 1990s, for this understanding to settle broadly in the sector.

Today, this perception of telecommunications, as an area where national and international competition is beneficial to society, is widely accepted which, e.g., is expressed in the 1996 legislation on telecommunications in the US, in the 1998 deadline in the EU, and in the final decision in February 1998 by 72 countries to enter an agreement in a WTO (World Trade Organisation) context based on schedules of commitments regarding basic telecommunication services.

The fundamental WTO principles of market access, national treatment and MFN (most favoured nations) are being implemented which is a good illustration of the new direction of telecommunication services provision internationally.

All three principles run counter to the former monopoly organisation and to the kind of international relations that existed between operators. Market access gives way to the servicing by and the establishment of foreign operators in the national markets, and national treatment and MFN mean that all actors must be treated equally which also affects the accounting rate system that has prevailed in international telecommunications for decades. Thus, both aspects of the process of internationalisation are affected both settlement and international traffic.

Finally, privatisation deserves mentioning among the drivers of internationalisation in telecommunications. Liberalisation and privatisation most often go hand in hand - but not always. A liberalisation may take place without a privatisation of the incumbent operator. Furthermore, a privatisation may take place without a liberalisation a policy that is, now and then, applied in poorer countries in order to attract foreign investors into their telecommunication services sectors. Monopoly (for a predetermined period) is traded for investments and experience. Either way, i.e. privatisation with or without liberalisation, privatisation of existing incumbent operators is an important aspect of the internationalisation of telecommunication services.

3. Modes of delivery In the WTO Marrakesh agreement from 19941 , 4 different modes of delivery/ internationalisation of services are dealt with: Cross-border trade, consumption abroad, presence of natural persons, and foreign investment. Although both consumption abroad (e.g. when using cellular handsets abroad) and producer presence (e.g. in relation to Build-Operate-Transfer operations) increasingly gain importance, cross-border trade and foreign settlement are, by far, the most important modes of internationalisation in the provision of telecommunication services.

Cross-border is both the traditional and a new and potential mode of internationalisation of telecommunication services. It is traditional in the sense that international telephone communications can be interpreted as a case of export/ import, as an operator in the country receiving the call may be considered as exporting access to its network. The operator of the customer initiating the call pays an accounting rate to the receiving operator.

However, this traditional kind of cross-border trade in telecommunication services changes character when operators are allowed to offer end-to-end services and are not obliged to use correspondent relationships. This leads to a change of situation from, e.g., co-operative consortium arrangements to competitive alliances.

Moreover, cross-border trade is also new and potential in the sense that it increasingly is possible to deliver telecommunication services from abroad. This has, of course, always been the case with switching services that can be performed at distance but very seldom have for regulatory and economic reasons. But with digital technology (allowing for increased possibilities for divisions between physical networks, network services and application services), it becomes possible to sell a large variety of services on a cross-border basis.

This applies, e.g., to value-added application services (e.g. information and transaction services). The Internet is, at present, the prime example of a network where services can be and are, to a large extent, delivered from abroad. However, it also applies to network services where virtual networks

can very well be operated at a distance. The only services that cannot be offered from abroad concern the delivery of physical infrastructures. (And even here satellite services are an exception)2 .

However, this does not mean that cross-border delivery actually will take place to any large extent with respect to (virtual) network services. Even though it may, in principle, be technically possible, it may not be technically optimal nor economically rational.

Delivery of network services is, therefore, mostly carried out by way of foreign establishment which is the second important mode of delivery of telecommunication services. It is, nevertheless, likely that cross-border delivery in the future will be still more feasible, especially in cases where companies have operations in adjoining countries with physical facilities in some countries and pure service operations in other countries. Operators may, in such a situation, reap the benefits of synergies between their operations in different countries.

4. Alliances

WorldPartners, Global One and Concert have been the icons of the new competitive relations in international telecommunications. They have been the clear illustrations of the development from co-operative consortia and correspondent relationships towards competitive alliances. They have, however, not proved to be all that important nor stable which is maybe not surprising as we are still in the uncertain first stages of a new development. The three alliances are expressions of the first jockeying for position after the start of the race.

All three alliances have common design features. Their main axis is a US-European connection and their American partners are the three older long distance operators in the US market (AT&T, MCI and Sprint). With respect to other dimensions, there are major differences between the alliances. WorldPartners is the most complex alliance with a large geographical spread, encompassing also Asian operators, and with an alliance inside the alliance (Unisource). Concert and Global One have been more similar with one or two European operators and an American competitor to AT&T. But

WTO: Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Marrakesh, 15 April 1994. 2 The tradability of telecommunication services is analysed in-depth in a report written by Anders Henten et al (Trade in Telecommunication Services) written for an UNCTAD Expert Group meeting, August 1996.

they have been different, e.g., with respect to the association of smaller operators to the alliances. Concert have had a larger following of smaller operators than Global One.

The purposes of the alliances are:

to deliver international end-to-end communications to strengthen the market positions of participants in the alliances vis--vis competitors to agree on a non-attack approach between participants in the alliances

Additionally, alliances have been used as test beds for possible tighter interrelationships, for instance mergers, between operators.

Competitive alliances are thus expressions of both of the main aspects of the internationalisation of telecommunication services the competitive delivery of end-to-end communications internationally and the conquering of national markets. Furthermore, as in most other alliances, there is both an aspect of common external action and mutual agreement on internal non-attack. This last aspect may not be the least important.

However, the alliances hitherto seen have neither been strong nor stable. It may even be claimed that they have been more powerful as icons of the new development than they have actually been in the market. An expression of this is that companies in the alliances have not followed the alliance borders in their joint venture investments in foreign countries. These investments have time and again crossed the alliance lines, with companies from different alliances forming joint ventures and even competing with joint ventures comprising their own alliance partners. Another expression or maybe explanation is the unclear management structures in parts of these alliances pointing at large disagreements between the involved partners.

This has led some observers to predict the downfall of the known alliances and the probable success of other types of international operations3 , either looser alliances as in the case of the new cooperation between Cable & Wireless and Telecom Italia or more definite company constructions

See, e.g., CommunicationsWeek International, issue 204, 4 May 1998.

with independent management structures. In both cases, management structures should be easier to handle as they are either purely co-operative or unified and not something in-between.

To what extent this will turn out to be a correct description of the future developments is difficult to say. However, there is enough documentation concerning the instability of the large alliances. The failure of the BT-MCI merger and the downfall of the Concert alliance is the most prominent example. However, the WorldPartners alliance is not stable either. Telefnica left Unisource and the Unisource construction as such is not too stable in itself.

Nevertheless, the purposes of such alliances in an emerging competitive international market still exist and will persist to force operators into different kinds of alliances. Their more specific nature may change, but the basic drivers are the same.

5. Operators

In spite of much focus on international strategic alliances in descriptions of trends in international telecommunications, the operators are the essential building blocks. Most of these operators are the old incumbent monopoly operators and bear the birthmark of their origin.

Attempts have been made to structure development patterns for telecommunication operators in their internationalisation4 . Such attempts have contributed to a structuring of different kinds of operators. In spite of the common point of departure in the former monopoly markets, strategies and options of operators are largely different.

The primary reason for such differences concerns the differences in size, ownership structure and involvement in local access or long distance markets (with regard to the US operators). It is not likely that operators in general will follow a development path from a national orientation, through a regional, towards an international orientation and ending with a de-nationalised status. Such development paths much more depend on the sizes of operators and other characteristics in their points of departure.
4

See, for instance, Ove Granstrand and Ola Johansson: Internationalization of Telcos An Early Analysis of Behavior and Strategies. In Mads Christoffersen and Anders Henten: Limits to Deregulation?, IOS Press, Amsterdam, 1993, pp.51-71.

Tele Danmark, for instance, focuses its attention on the sub-regional North and Central European area. France Tlcom, on the other hand, clearly has larger regional ambitions, while AT&T is seeking to become an international operator. Finally, Cable & Wireless may, to some extent, be characterised as a de-nationalised operator. However, the reason for this status is a very specific historical development.

If we look at the point of departure regarding local access and/ or long distance, there is an obvious reason for the differences in strategies between, say, AT&T, BT and Ameritech. AT&T is the worlds largest operator in international telephone communications5 . The primary reason for this is, of course, the large traffic in and out of the US. But it has also affected its strategy for internationalisation that AT&T is a long distance operator in the US. AT&T gives priority to international settlements, e.g. representative offices, and co-operations that will increase the span of its international connections. BT also gives priority to international connection, but focuses more than AT&T on establishments in national markets for the sake of servicing these national markets with national communications. This can be seen by the fact that the international part of the total assets of BT is a much larger percentage of BTs overall assets than in the case of AT&T6 . Looking at Ameritech, this priority is even more outspoken. The regional US Bell company, Ameritech, has its experience in local access markets and extends this experience in buy-outs of incumbent operators in Europe (Hungary, Belgium and Denmark).

Furthermore, when discussing international strategies of operators, there is an important aspect to take into consideration, namely trial and error. As internationalisation other than correspondent relationships is new to practically all operators, there is a large amount of trial and error in their strategy. This may account for some of the expansion/ contraction moves seen in the internationalisation of operators.

All in all, there are many factors affecting the strategies of operators that can be summarised under the headings of point of departure, international market conditions under which operators work, and the direction in which they want to go. Regarding this last point, there is a large number of different strategic options that operators have to contemplate (see table 1). Apart from the geographical reach, operators have to consider focusing, e.g., on mobile and/ or fixed network operations, green
5

CommunicationsWeek International, issue 195, 24 November 1997.

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field investments and/ or investments in incumbents, etc. All these options paint a very diversified picture that is difficult to describe in just one or two dimensions.

Table 1: Strategic options of operators in internationalisation

Domestic/ international Residential/ business Network/ services Fixed/ mobile Many services/ few services Geographically focused/ spread

Full ownership/ joint venture Control/ non-control Active/ passive Greenfield/ existing Incumbent/ new entrant Permanent/ intermediate Stable alliances/ independent

6. American operators

An interesting sub-issue under the general heading of operators concerns the developments in the US market and the repercussions that these developments have on the international markets. This applies not only to the above mentioned international alliances that all three have had a US long distance operator as participant. It also applies to the developments among the regional operators in the US.

Following the 1996 telecommunication legislation in the US with its ambition to tear down the walls between local and long distance operators, the regional Bell companies have started merging in order to position themselves in the American market, but also to reach out to the world at a greater speed to acquire an international footing.

Bell Atlantic and Nynex have merged. SBC Communications has taken over Pacific Telesis and is now merging with Ameritech. This leaves only 4 of the original 7 regional Bell operating companies, and the merger process has probably not ended.

ITU: World Telecommunication Development Report, 1996/ 97, ITU, Geneva, p.12.

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None of the regional US companies have any large international reach. To a large extent, they still are the products of the divestiture construction with regional local access companies without any right to long distance communications. Furthermore, the prime driver in the merging process is the ambition to acquire market shares on the American market. It is primarily an American perspective. However, the regional companies have, during the 1990s, started acquiring some international reach, first and foremost in Europe and Latin America.

With the merger between SBC Communications and Ameritech, SBC Communications has taken over the substantial interests that Ameritech has built up lately in Europe. SBC Communications has also emphasised this aspect in their public announcements regarding the SBC Ameritech merger. SBC Communications states that the new company will build on its growing international presence to serve a worldwide market 7 .

The regional US operators apparently see themselves in direct competition with the US long distance companies. Now that the division of labour in the American market between long distance and local access is intended to end, the regional operators not only focus on getting into the US long distance home market but also on getting on to the international market to be part of the small league of companies that in the coming years will be the global players.

Their point of departure is different from the long distance companies. They dont have any experience in operating long distance connections, let alone international communications. Their strategy is, therefore, also different. They focus on establishing themselves in the national market and use these positions to enter the markets for international communications.

7. Market structures

But how will the international structures then look, now that national markets are being liberalised, operators privatised, services becoming more tradable, alliances being created, and former national operators reach out to the international markets?

SBC Communications News Releases: SBC Communications and Ameritech to Merge, 11 May 1998.

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The answer to this question naturally depends on a multitude of factors of which only some have been dealt with in the preceding sections. Furthermore, there are factors that can totally topple the game such as a fast development of IP-telephony or steeply falling prices for the new GMPCS systems (building on LEO/ MEO satellites).

However, if such developments do not turn the game upside down, it seems likely that there will be somewhere between 10 and 15 large global players (among them approximately 5 US-based and less than 5 Europe-based). Under the segment where operators will have a global reach but still primarily will be based in their own region, there are layers of companies that either have regional or sub-regional aspirations or that focus on national/ local markets.

It does not seem likely that the large players will take over the markets completely as some predictions assume. Former monopolies will, for a long time, continue to dominate the national markets. There are, of course, competitors that acquire market shares in the national markets, especially in the areas of mobile and international communications, but increasingly also in fixed national communications. But many of these new operators are affiliates or joint ventures set up by incumbents from other countries.

Therefore, seen from a regional perspective, the market may be dominated by a small number of oligopolies when large operators from a national base extend their reach by buyouts or establishments in foreign markets. However, seen from a national perspective, markets will still be dominated by former monopolies (possibly owned by foreign capital/ operators).

The entrants into the former monopoly markets are primarily incumbents from other countries and utilities from other infrastructural areas such as railways, electricity, gas or water. There will, however, also be other types of entrants coming from the Internet world and/ or the computer industry. Furthermore, broadcasting and entertainment will also play a role (e.g. cable TV operators) as may initiatives from totally new players in the communication business.

In spite of the many prospective and already existing players, there is a danger that oligopolistic structures in the industry will limit competition. Formerly, there was only co-operation between operators in the international sphere a co-operation that among other things functioned as a cartel

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that kept international tariffs high. Today, there is both co-operation and competition, but it would be nave to underestimate co-operation both inside international alliances, but also between competing alliances regarding maintaining international tariffs at a (in their opinion) sufficiently high level. Alliances are formed in order to compete in the delivery of international services. However, one should not underestimate the traditions in the telecommunication services sector for co-operation which has both positive results in terms of interconnection and interoperability and more negative implications in terms of high tariffs.

8. Theory

The question should be raised to what extent economic theories help explain the patterns of development in the internationalisation of telecommunication services. As a point of departure, there is nothing to indicate that this area should escape general theories. At a point of time in the beginning of the process where GATT/ WTO took up telecommunication services as a trade issue, it was claimed from the more traditionalist quarters that telecommunication services could not be analysed as a trade issue. It was something special which was related to the infrastructural nature of telecommunications, it was said. However, it turned out that telecommunication services could very well be understood and dealt with in the context of trade concepts.

From a general point of view, there is thus nothing to indicate that general economic theories do not apply to telecommunication services. However, the specific explanatory capacities of theories have to be discussed.

In the paper, at least two aspects of more general theories have been discussed. One relates to the theory of international specialisation based on the possibilities for dividing up production of telecommunication services and of trading parts of or the whole of these services. The answer in the paper is that such possibilities, to an increasing extent, exist, but that market presence in terms of production facilities often is needed or perhaps just more rational. This applies especially to the delivery of infrastructural services.

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Another piece of theory is dealt with in relation to the internationalisation of the economy as such. There is certainly an element of follow-your-customer in relation to the internationalisation of the provision of telecommunication services.

Apart from these two pieces of theory, it could be discussed to what extent scale and scope theory has any explanatory capacity in relation to the patterns of internationalisation of telecommunication services. In the sense that scale and scope theory should be able to explain the market expansion possibilities of different operators like, say for instance, BT and Tele Danmark, this does not seem to be the case. It is difficult to substantiate that BT can produce services more cheaply than Tele Danmark because of a larger production capacity8 or a wider offer of services.

From a production point of view, scale and scope theory does not seem to be a useful explanatory tool. However, if one approaches the matter from a demand point of view, it is fairly easy to understand that the bigger geographic reach and the larger number of services offered by BT makes it more convenient for customers in the international markets to have BT as the supplier. BT is accessible in a large number of places and offers a one-stop-shopping capability based on its large portfolio of services.

To sum up, general economic theories do have explanatory capacities in relation to the provision of telecommunication services internationally. However, the field is still relatively weak on theory and needs elaboration.

9. Summary

There are three main drivers of the processes of internationalisation of the provision of telecommunication services: Digitalisation of services and networks, internationalisation of the economy as such, and the liberalisation of telecommunications nationally and internationally.

Cross-border delivery and foreign settlement are the two main modes of internationalisation in telecommunication services. Cross-border delivery is both the traditional and a new and prospective mode of delivery, while foreign settlement has been made possible with liberalisation.

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There are increased possibilities for trading telecommunication services on a cross-border basis, both for technical, economic and political reasons. However, the internationalisation of telecommunication services mostly relies on foreign settlement.

Telecommunication operators have basically two main goals when internationalising. The first concerns the establishment in national markets; the other one concerns the competitive provision of end-to-end services.

Alliances between operators can be helpful in achieving both goals. Alliances not only provide means to offer international end-to-end services, but are also mechanisms for market sharing. However, the large hitherto known international alliances have proved to be unstable. Joint ventures in the national markets often do not follow the alliance borders, and management structures in the alliances are weak. New types of alliances are on their way, either looser cooperations or tighter company structures.

There are many strategic options for operators in their internationalisation. However, operators depend very much on their point of departure with respect to size, ownership and experience in the provision of different services.

There are strong repercussions on the international alliances and co-operative arrangements from the US market. The bid from Worldcom toppled the merger of BT and MCI. Furthermore, the regional Bell companies are moving to get out on the international markets.

The regional US operators clearly see themselves in direct competition with their long distance counterparts. The regional companies do not want to be confined to the local access market any more.

In the coming 5-10 years, there will be 10-15 large global players in the provision of telecommunication services. Under this segment there will be an underwood of numerous local, sub-regional and regional operators.

The traditional incumbents will mostly still be the dominating operators in the national markets. They may, however, be owned by or in partnership with foreign operators. From a regional perspective, the markets can, therefore, be characterised as oligopolistic: A limited number of large players and an immanent danger that competition will also be limited.

See, e.g. Morten Falch: Cost and Demand Characteristics of Telecom Networks. In William H. Melody (ed.): Telecom Reform Principles, Policies and Regulatory Practices, Lyngby, DTU, p.118.

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10. References

Christoffersen, Mads and Anders Henten (ed.): Limits to Deregulation? IOS Press, Amsterdam, 1993. CommunicationsWeek International, issues 195 and 204. Henten, Anders et al: Trade in Telecommunication Services. Report to an UNCTAD Expert Group Meeting, August 1996. ITU: World Telecommunication Development Report 1996/97, ITU, Geneva, 1997. Melody, William H. (ed.): Telecom Reform Principles, Policies and Regulatory Practices. Technical University of Denmark, Lyngby, 1997. SBC Communications: News Releases SBC Communications and Ameritech to Merge, 11 May 1998. WTO: Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations. Marrakesh, 15 April 1994.

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