The dramatic technological innovation that this industry experienced transformed the once stable role of the state in telecommunications. Until recent years telecommunications policy amounted to a rather narrow one, that of determining fair rates of basic service provided by a regulated telephone monopoly. The introduction of these new technologies has led to a high segmentation of this industry and to a proliferation in the number and kind of firms providing telecommunications services.
This chapter examines technological change in the telecommunications industry through the analytical lens provided by the public interest theory of regulation. This perspective argues that the driving force behind policy reform is the emergence and diffusion of new technologies. Once the fundamental principles of the theory of the public interest are examined, the immediate sections of this chapter provide an analysis of the traditional technologies available in telecommunications and the emergence of new technologies. This chapter will identify what was considered the optimal scale for telephone systems as well as the transformations this criteria experienced given technological innovations in this sector. The objective in the following sections is to identify how technological innovation affected costs and allowed the entry of new competitors.
The policy consequences of technological innovation were to erode the natural monopoly standing of this industry. New technologies have transformed the market structure in this sector and as a consequence the nature of government policy. In the transition to a more competitive market, regulation still has a role to play in the telecommunications sector. Regulatory policy must secure a level playing field and promote widespread access to telecommunications services.