The changing international telecommunications environment: The view from 2008
Dr Pekka Tarjanne,
Coping with Convergence The future is now
This paper presents an irreverent look back on the changing environment for international telecommunications, from the standpoint of 2008. It concludes that the world only narrowly missed a trade war in 1998 and that the arguments presented at the time seem quite absurd with the benefit of hindsight.
THE FUTURE IS NOW, THE FUTURE IS 2008
Honoured Guests, Fellow Cyborgs,
Ladies, Gentlemen, Robots and Computers,
It is a pleasure and an honour for me to be invited out of retirement to address the 30th Annual Conference of the Pacific Telecommunications Council, held in 2008.
Before you ask me whether I am not mistaken about dates, or whether I wound forward the hours on my wristwatch rather too energetically while travelling on the Euro-Pacific Shuttle Express, let me remind you of the title of this conference: "Coping with Convergence: The future is now". I would like, in this paper, to use the benefit of ten years of hindsight to look back on the issues which were live in the year 1998, when I had the pleasure of being the Secretary-General of the International Internet Union, still known at the time under its antiquated name of International Telecommunication Union.
Indeed, it seems like only yesterday when I was addressing the membership of the ITU on the topic of the "Telecommunications Revolution of 1998". That speech might still found be somewhere in the cyberarchives of the Unions website, though I doubt if it could be read with todays Netscape release 47.3 browsers.
The year 1998 was regarded at the time as the beginning of a revolution because it was the year in which the so-called "Basic Telecommunication Agreement" of the old WTO was implemented. The WTO is now better known as the Global Talking Shop, in honour of those few remaining bureaucrats who still like to negotiate face to face rather than using the videonet.
We now remember 1998 for other reasons. This year we are celebrating the tenth anniversary of the launch in 1998 of the first generation of Global Mobile Personal Communications by Satellite Systems, though now it is the satellites which are personal rather than the communications.
1998 was also the year in which cross-border traffic over the Internet first exceeded that on the telephone network. Looking back, it seems rather quaint to think that this worried so many chief executives of public telecommunication operators at the time. They looked only at the threat, and nearly missed the opportunity. For years before, they had been searching for some new application that would help fill out their puny ATM networks. When it finally came, in the form of the World Wide Web, they nearly missed it. They were worried that Internet communications would cannibalise their profitable revenue streams for voice communications. How little they realised then that computers have an almost infinite capacity for talking to each other compared to that of the humans that had previously been their main customers.
THE TELECOMMUNICATIONS HERITAGE PRESERVATION ORDER, 2007
I know from consulting my telepathic polling device that the topic which is of main concern to many of you at this conference is the Telecoms Heritage Preservation Order, issued in August of last year by the US Federal Cyberspace Commission, or FCC. As you will know, the Telecoms Heritage Preservation Order aims to set so-called "benchmarks", or minimum payments that foreign operators must pay when landing each Gigabyte of traffic on US territory. The benchmarks are discriminatory: 23 micro-cents per Gigabyte for traffic coming from low income countries, 19 micro-cents for middle income countries, and 15 micro-cents for high income countries. The reason put forward by the FCC to justify these discriminatory rates is that they are afraid that low income countries have been dumping below-cost traffic onto the US market and destroying jobs in the US information-processing and entertainment industries.
Those of you with longer memories will remember the furore that surrounded an earlier FCC Orderthe Benchmark Order of August 1997. The Benchmark Order applied maximum rates that US carriers could pay for every minute of traffic landed on foreign territory and, by implication, on US territory. Those benchmarks were also discriminatory. The concerns then were that other countries were bringing above-cost traffic to the United States. Apparently, the US policy-makers had not learned lessons from other sectors such as ship-building, iron and steel, or car manufacture. They honestly thought that the US industry would be able to compete with other countries in producing low-cost telecommunications. What they failed to realise was that US carriers were spending so much on advertising and marketing to compete with each other, that they were highly vulnerable to foreign competition.
The US District Court of Columbia finally gave its judgement on the appeals against the Benchmark Order last year. Of course, the Benchmark final judgement was mainly of historical interest as most telephone traffic had long since migrated away from the Public Switched Telephone Network (PSTN) to the Internet. In a surprising move, the judge proposed to deliver his judgement over the PSTN rather than over the Internet. Many of those listening had not used the PSTN for some time and several commented that the level of voice quality compared favourably to that of the Internet.
Back in 1998, many felt that this had been the FCCs strategy all along: to impose such unacceptable and extraterritorial regulations on traffic over the PSTN that it would force traffic onto the Internet. They pointed out that while US carriers controlled only 30 per cent of PSTN traffic, they controlled more than 90 per cent of Internet traffic. The difficulty was that US carriers had still not worked out a viable business model for the Internet. While lecturing the rest of the world on the need to rebalance their domestic tariff structures, they had neglected to rebalance their own. Until last year, local calls in the United States were still free. Consequently, foreign carriers just established Points of Presence in every major US city and terminated their voice and data traffic over the local loop, paying a zero interconnect payment. The US Baby Bells were slowly brought to the point of bankruptcy. Only by lobbying the Congress to introduce the new Telecoms Heritage Preservation Order were they able to stave off their creditors.
HOW THE WEST WAS WON BUT THE EAST WAS LOST
Back in 1998, the US still liked to characterise itself as a free trade telecommunication market. Indeed, in many ways it was US pressure which had generated the first stirrings of telecom policy reform in the rest of the world in the 1980s and 1990s. It is fair to say that the US philosophy of competition and market liberalisation succeeded in winning over the West. So why then did the US not follow its own advice and open its own telecommunication markets to foreign competition? The answer, I believe, lies not in the West but in the East: specifically in the Asia-Pacific region.
As telecommunication traffic shifted decisively from the PSTN to the Internet, around the turn of the Millennium, the economics of the industry shifted. Previously, it had been the ownership and control of infrastructure which determined each companys ability to compete in the marketplace. The so-called "club" of large public telecommunication operators owned much of the international infrastructure, either directly or through jointly-owned satellite and cable consortia. Thus they were able to dictate price trends: or the price at which they sold themselves raw capacity.
The ability of the "club" to manage these price trends began to dissipate in the early part of this decade as private infrastructure providerssuch as Teledesic and Project Oxygencame on stream. They were happy to sell capacity to whoever wanted to buy it, and the price of circuits began to tumble. As a result of this fundamental change, other cost factors came into play. The US carriers were stuck with a high cost-base of oversized engineering, sales and marketing departments, as well as ownership of out-dated switches and transmission equipment, at precisely the time when new players were entering the market with an almost zero cost-base. The majority of the new operators came from the Asia-Pacific region which had seen high rates of new firm formation in the second half of the 1990s.
For this new generation of service providers, ownership of infrastructure would have been more of a handicap than an advantage. By buying and selling "capacity futures" they were able to gain the best market price. Similarly, by situating their routing and billing operations in least-cost locations, such as Bangalore and Manila, they were able to route traffic according to where capacity prices were cheapest and to switch its direction to arbitrage differences in termination charges. US and European carriers were unable to compete on price with the new generation of Asia-Pacific carriers and soon they moved their own call centres off-shore. As infrastructure costs became less important, labour costs became more important as a factor of location.
"WEB WEB", NOT "WAR WAR"
Looking back on 1998, it is clear that the world only narrowly avoided a trade war over telecommunications. Incredible as it may seem, at exactly the time when the world should have been celebrating a major trade victory following the WTO agreement, the barricades went up, the lawyers were called in, and the battle lines drawn up. Fortunately, the ITU World Telecommunication Policy Forum, held in March 1998, helped to defuse some of that tension and it laid the groundwork for a multilateral agreement on termination charges.
What lessons can we learn from the débâcle of 1998 that are relevant to us in 2008? I guess that the main lesson, to paraphrase Winston Churchill, is that "web web" is better than "war war". Once the lawyers started to be involved, positions hardened and communications between the parties broke down. Ultimately, most of the parties wanted the same thingsopen markets, cost-oriented rates, lower prices for consumersbut when the lawsuits started to fly, the parties lost sight of those shared objectives. Fortunately, the world wide web remained as an open channel for communication so that, even when governments fell out with each other, their citizens continued to communicate.
THE INTERNATIONAL INTERNET UNION
In closing, I would like to offer a few observations on how my former employersthe ITU, now the International Internet Unionhave fared since those exciting times of 1998.
At their 2006 Plenipotentiary Meeting, held here in Honolulu , there was spontaneous applause when the current Secretary-General (whose name temporarily escapes me) announced the latest dividend to shareholders. How different this was from my day when the Member States (as we still called them then) argued for days over the size of the contributory unit. How did the Union manage this transition from being a net receiver to a net payer of dividends to its shareholders?
The answer is simple: by doing what it had always done in acting as a custodian for the worlds common resources of radio spectrum and the numbering plan and by providing a forum for the worlds telecommunication community to meet and discuss. The only difference is that now the cost of the Unions services is charged directly to the beneficiaries rather than being shared between all Members.
This new funding approach was introduced during my time and was applied in the first instance to Universal International Freephone Numbers, or Global Brand Numbers as we now call them. It was later extended to satellite notifications, and eventually to many other areas of ITUs activities. The income from the Global Brand Numbers and the satellite notifications alone is now more than sufficient to pay the running costs of the Union, especially since the 2002 Plenipotentiary took the historic decision to allow the Union to engage in revenue generation as well as simple cost recovery. Last years TELECOM 07 exhibition and forum was another major source of revenue, though that income goes to fund the Unions work in the 15 remaining Least Developed Countries rather than going to the shareholders.
To conclude, therefore, I would like to return to the main theme of this conference: "Coping with convergence: The future is now". Convergence had already happened by 1998, but many commentators did not recognise it at the time. That is probably because, at the start of 1998, the Internet still had less than one hundred million users worldwide and was plagued with terrible congestion and transmission delays. How, people asked, could this unreliable, insecure, toy network ever be the information superhighway of the future? Now, of course, in 2008, we know better!
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