The Outlook for the Telecommunications Industry and the Implications for the Economy and for Business
Dadd, C. Mark, Business Economics
Information technology, of which telecommunications is a principal part, is going to be the biggest technological driver of economic and business change over the next decade. Understanding the nature and breadth of that change is critical for those who use business economics in their jobs. The impacts of information technology will be spread across all sectors of the economy. It will enable business to improve customer service as well as reduce costs. The growth of electronic commerce will lead us toward a virtual market in retail and distribution. Information technology is also likely to raise the bar of global competition and require new policies that encourage flexibility in the economy.
The Telecommunication revolution will have a profound impact on us all -- on our everyday lives and on our jobs. Indeed, telecoms, together with the closely related but broader category of information technology, is going to be the biggest technological driver of economic and business change during the next decade and more. This paper focuses on the main forces driving the telecommunications sector, i.e., deregulation and technology, and on the impact of telecommunications and information technology on the economy and on business.
Telecoms and information technology already represent a significant and a growing part of the U.S. economy. Table 1 shows that U.S. telecommunications industry output totaled $334 billion in 1996, reflecting revenues from local exchange service, local and long-distance toll service, wireless service, cable TV, and telecommunications equipment. Information technology (IT) industry output, i.e., telecommunications output plus broadcasting services, computer equipment, and software products and services, totaled $675 billion in 1996, or 8.8 percent of GDP. Other analysts sometimes use a broader definition that puts IT output at well over 10 percent of GDP. Table 1 also shows that Telecoms and IT are growing as a proportion of GDP since 1993. That trend is expected to continue.
Table 1 The Size of the Telecoms and IT Industries Average Billions $ Annual % 1993 1996 Change Local Service(a) 80 96 6.3 Toll Service(a) 75 93 7.4 Wireless Service 12 27 31.0 Cable TV 23 27 5.8 Telecom Equipment 63 91 13.0 Total 253 334 9.7 Memo IT(b) 500 675 11.0 GDP 6558 7636 5.2 IT Share of GDP 7.6% 8.8%
(a) FCC basis
(b) Telecoms services and equipment, broadcasting systems, computer equipment, software pro services.
The 1996 Telecommunications Act set the United States on a new round of deregulation. While the act is complicated and has numerous provisions, the main elements are: (1) it opens the $95 billion local telephone market to new competitors; and (2) it allows the regional Bell operating companies (RBOCs), such as Nynex, Bell Atlantic, and SBC, into the $75 billion a year long-distance toll (LD) market in their regions.
The complexity of the act partly reflects the importance of the correct sequencing of market entry: The RBOCs cannot enter the LD market in their regions until they prove to the Federal Communications Commission that they face meaningful and credible competition in their local markets. The reason for that sequencing is that, absent competition in the local exchange, the RBOCs will be able to keep prices for their monopoly local services at inflated levels and use the excess profits from those services to cross-subsidize their entry into the LD market.
LD companies can enter local markets in basically two ways. They can either build their own local networks, an extremely expensive proposition costing about $1,500-$2,000 a line (up to $200 billion for the entire United States), or they can resell RBOC local services that they purchase at a discount. …