For Whom the Bells Toll: America Is a Global Laboratory for Telecoms Strategy and Policy Analysis. Sumit Majumdar Explains the Evolving Structure of the Industry and Highlights Research on the Effect That Inter-Network Access Pricing Has on US Telecoms Companies' Investment Strategies. (Business Telecoms)

Article excerpt

The emergence of new networks has been a critical element in the growth of the telecoms industry. At the same time, the willingness of new firms to enter the market has been based on the potential custom of entire populations. The use of telecoms services is a universal need, since all humans need to communicate, and the applications associated with today's technology are likely to turn many digital dreams into reality.

The advent of multiple communications networks causes its own regulatory and strategic problems, because the economics of a network-based industry are unique. One particularly important dimension is connectivity. Unless the entire telecoms industry in a country is owned by one organisation--a more common situation not so long ago--phone calls will often start on one network and end on another. Take, for example, a conversation using mobile phones in the UK. It's quite possible that a call starting on, say, the Orange network will terminate on the BT network. A dominant network operator--say, BT--will grant call termination facilities to a competing operator. This immediately raises the issue of how much BT should charge for such a service--after all, from the moment a call starting on another network accesses the BT network until its final delivery, BT incurs a cost in respect of that call.

Given the number of operators in competition today and the extraordinarily large volumes of voice and data traffic that are carried between their networks, massive sums of money also transfer between them. So BT's access revenues are access expenses for the other operators. Similarly, BT may incur costs for calls that start from its own customers and end on other networks. Given the huge importance of getting access pricing right, an extremely large and esoteric body of literature has built up on the subject over the past decade. Many people have contributed to the debate, and the issues have become sufficiently contentious for the US Supreme Court to have opined on the subject this year.

In the US, dominant firms in the local exchange sector account for more than 90 per cent of the telephone lines. The local exchange companies form the primary infrastructural backbone--"the last mile"--and operate over 150 million lines. The annual revenues of these operators total more than $100 billion. Access charges are substantial, comprising 30 per cent of local exchange operators' revenues and a large chunk of other operators' costs.

There are over 40 major local exchange firms, organised into holding companies. Contests for control in the 1990s led to their consolidation. The holding companies are Soutwestern Bell; Ameritech (now part of Southwestern Bell); Bell Atlantic (renamed Verizon); Bell South; GTE (now part of Verizon); Nynex (taken over by Bell Atlantic and now part of Verizon); Pacific Telesis (now part of Southwestern Bell); and US West (now owned by QWest).

Network competition in the US started in 1959 with the "above 890MHz" decision, which granted the use of those frequencies for microwave transmission. The "specialised common carrier" decision in 1971 opened the door further. The break-up of AT&T in 1984 brought equal access for competing long-distance companies, although it took about five years to be fully implemented. The Telecommunications Act 1996 charged the Federal Communications Commission with the development of definitions and rules about interconnection, and it also forced state regulators to open local networks to competition.

Although infrastructure competition in long-distance telecoms had started in earnest in the 1970s, it wasn't until the mid 1980s that the first alternative local infrastructure began to develop. …