Telecommunications Industry Research Paper

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The term telecommunications is defined as communicating over distance. Technological advancements in this area have enabled a large share of the world’s population to instantaneously communicate with others located all over the globe. Indeed, it is quite common to observe individuals in developed countries using electronic communication devices such as modular telephones, cellular phones, and personal computers to share ideas and information. But the widespread use of such equipment is a relatively new occurrence in the history of communications.

The modern telecommunications system uses a centralized network that relies on transmission facilities to send information between different locations. The origin of this network system developed from postal courier services established as early as the sixth century BCE in China (Xiong-jian and You-nong 1994). Postal service at that time was used primarily by the state to transmit commands and deliver orders to citizens and members of the armed forces. Providing an efficient long-distance communications system was key to governing a large geographic region and promoting economic growth. In succeeding years governments commonly sanctioned a single provider of courier service. Limiting communications services to one provider advanced efficient long-distance delivery of information by reducing costly duplication of services. Origins of a government-sanctioned monopoly can be traced back to Hapsburg’s Emperor Maximilian I in 1505. Establishment of the state-owned monopoly soon followed in 1614, as Prussia established a state-run courier service that handled letters and parcels for the entire empire (Stephan 1859). Prussia’s postal model served as the prototypical organizational structure for modern communications systems.

Over time, new technology such as the telegraph and telephone were generally integrated into the communications monopolies to form state-run post, telegraph, and telephone (PTT) companies in many countries. The development of the organizational structure of communications services in the United States is a notable exception to this form of integration. By the early nineteenth century privately owned telegraphic services in the United States were provided by Western Union, and postal service remained state-owned. Compared to postal delivery, telegraphy was a much faster way to transmit information because telegraphy used cables to transfer signals between locations. The invention of the telephone in 1876 by Alexander Graham Bell enhanced long-distance communications even further because it provided users the ability to transmit voice information over cable.

Telecommunications Growth In The Twentieth Century

Following the 1876 patent award for the telephone, Alexander Graham Bell, with support from a group of Boston financiers, established the Bell Telephone company. During its first years of operation Bell Telephone provided local communications services, and Western Union became the sole provider for telegraph communications. Over the next fifteen years Bell strengthened its monopoly status by extending its patent protection and developing a long-distance network to interconnect its operating companies. These operating companies formed the American Telegraph and Telephone Company (AT&T). The Bell system also integrated vertically into equipment production by acquiring Western Electric from Western Union. At the turn of the century Bell was continuing a pattern of acquiring independent companies and also had merged horizontally into telegraphy through partial acquisition of Western Union. These acquisitions contributed to the upsurge in the number of telephones in the Bell system, from 2,231,367 in 1905 to more than 15,000,000 by 1920.

Parallel industry growth occurred in other industrialized countries in western Europe and in Japan. By the late 1950s these countries had developed extensive wireline network systems that provided most of their citizens and businesses access to affordable telecommunications services. Protected from significant international and domestic competition, telecommunications monopolies became major employers offering high-wage jobs to telephone linemen, cable splicers, station installers, switchboard operators, and construction workers. The provision of well-paying jobs contributed to the expansion of these nations’ dynamic economies. Providing businesses the ability to communicate instantaneously over long distances created a competitive advantage domestically and internationally that further supported economic growth in industrialized countries.

Although maintaining an affordable and universal telecommunications system benefited society, government regulation of rates and subsidization of services introduced inefficiencies that grew as services expanded. The intent of rate regulation was to suppress price increases. In the United States this was achieved by setting maximum limits on telecommunications carriers’ returns on investment. This type of a regulation, however, lowers the incentive to contain costs by encouraging overinvestment in capital and equipment in an attempt to generate greater profits (Averch and Johnson 1962). Government-approved subsidization of less lucrative sectors of the telecommunications monopoly was intended to allow carriers to finance expensive services with revenue from more profitable ones. In the United States relatively high prices in the long-distance sector helped support low prices for local services. Revenue from telecommunications services often supported more costly postal operations in countries with PTT-integrated systems (Noam 1992).

Technological Advancements And Telecommunications Policy Reform

New low-cost microwave technology changed the telecommunications industry because it became an economically attractive alternative to traditional long-distance services. The introduction of this technology in the late 1950s enhanced the competitiveness of long-distance carriers by nearly removing the additional cost of transmitting information over additional distances (Waverman 1975). In the United States the 1982 AT&T consent decree required Bell operating companies to provide all long-distance carriers the same access to local customers that AT&T enjoyed. The decree also required the 1984 divestiture of the Bell operating companies from AT&T, and provided these companies the option of purchasing telecommunications equipment from suppliers other than AT&T’s manufacturing business.

Divestiture had the desired effect of promoting competition in the long-distance market. At the time of the breakup in 1984, AT&T had 96 percent of the business; by 1994 that share had fallen to 61 percent (Hendricks 1998). Long-distance users benefited tremendously from competitive prices offered by AT&T’s rivals. Ten years after divestiture, interstate long-distance prices had fallen 22 percent. This competitive pricing environment also promoted significant growth in this sector, as the overall value of long-distance service rose from $34 billion in 1984 to $64 billion in 1994.

Twelve years after divestiture, the 1996 Telecommunications Act continued the shift toward less government intervention in telecommunications by providing additional support for competitive pricing of local services. Encouraged by the increasing array of potential competitors for local telephone service—made possible by technical advances in switching technology, cable, and cellular services—this act allowed long-distance and cable providers access to local markets (Crandall and Waverman 1995). This act also made it easier for local carriers to enter the long-distance market.

Regional Telecommunications Markets

Technological advancements that contributed to the changing telecommunications market in the United States also helped bring about changes in telecommunications services in the rest of the world. Many regions have privatized their PTT monopoly in an attempt to promote greater production efficiency. The pace of change toward privatization varies considerably across regions, though, and is influenced in large part by the quality of their network infrastructures.

Europe By the latter part of the twentieth century, greater demand for specialized telecommunications services made the maintenance of a large integrated system increasingly impractical, especially for European carriers operating extensive wireline systems. Encumbered by the use of older equipment, telecommunications companies faced high costs associated with extending the network system to provide universal service to businesses and residential customers. In addition, heavy reliance on in-house equipment manufacturing limited access to alternative cost reducing technology (Noam 1992, pp. 81-82). Pressure from the United States and the European Union to open markets, and the opportunity to provide low-cost competitive services encouraged privatization of services.

A shift toward market-oriented policy in Europe originated in the United Kingdom with the 1981 British Telecommunications Act. This act separated telecommunications services from the postal service, privatized the public telecommunications network system, and liberalized the equipment sector. Funding accrued from selling shares of British Telecommunications, the newly privatized company, helped to finance acquisition of new equipment. Liberalization of the equipment sector gave British Telecommunications the opportunity to take advantage of competitive bidding from equipment suppliers. In this more competitive telecommunications industry British businesses benefited from lower rates and lower waiting time for phone installation (Noam 1992, pp. 129-131).

Asia Although changes in telecommunications policy and the industry’s growing significance as an engine for economic growth is nearly global, since the 1980s the transformations have been most marked in Asia. Societal support for change in this region is tied to overall support for growth in electronics and technology, especially in the Pacific Rim (Noam et al. 1994, pp. v-vi). The geography of this region—where countries along the Pacific Rim are physically separated by vast amounts of water, and immense countries such as China and India have inhabitants that live great distances from each other—underscores the importance of constructing a reliable system for transmitting information over long distances (Noam et al. 1994, p 13).

Policies aimed at developing reliable, low-cost telecommunications operations varied greatly during the last quarter of the twentieth century. For instance, Japan was the Asian front-runner in privatizing its domestic and international services in 1984. Greater competition led to declining rates, to more efficient self-selection of carriers, and to easier interconnection of networks (Ito and Iwata 1994, pp. 449-451). In contrast, the Chinese government limited foreign participation in the operations of telecommunications networks by investing heavily in this industry through the extension of loans and preferential tax policies in the mid 1980s. Carriers in the telecommunications industry were exempt from repaying 90 percent of government loans, and could retain 90 percent of their profits, which translates to a tax rate of 10 percent compared to a rate of 55 percent for nonpreferred industries (Wauchkuhn 2001). Under this policy, telecommunications in China grew at an annual rate of 24.6 percent by 1999.

Latin America The lack of an extensive network system presented a major challenge to the growth of Latin American economies, and the need for funding to finance the upgrading of systems created openness toward privatization. This openness was also influenced by trade liberalization policies such as the North American Free Trade Agreement (NAFTA).

Early privatization during the 1980s saw heavy investment in wireline systems by foreign owners, but the more significant growth in telecommunications services occurred with a second wave of international operators investing in wireless technologies (Hughes 2002). Research on postprivatization telecommunications in Latin America shows appreciable modernization of network systems and marked reductions of phone rates for differing market structures. For instance, following privatization, the Mexican government supported a single dominant provider of telecommunications services, whereas Brazil divested its former state-owned monopoly into separate competing companies (Hughes 2002). Both of these countries enjoyed declining prices for telecommunications services. These findings reveal that a large number of competitors is not always necessary to achieve low phone rates; rather, the low-cost operations associated with modernization contribute to higher profits from increasing customer demand at low prices. This prospect of greater profits creates an incentive for price reductions, even in industries dominated by a single firm. However, for the longer term, price pressures from competitors may be needed to help ensure the continuance of low prices (Hughes 2002).

Africa Countries in Africa, especially those in sub-Saharan Africa, face a daunting task in developing their telecommunications industry. By the late 1990s African nations accounted for only 2 percent of the world’s telecommunications, even though these nations comprised 12 percent of the world’s population (Noam 1999, p. 3). The absence of an extensive telecommunications network can be traced to the lack of infrastructure investment by colonialists during the early and mid-twentieth century. Following decolonization in the 1960s, African governments were left with outdated telecommunications equipment and a severely undertrained workforce. In response to the need for improved intra-African telecommunications services, African nations agreed to the development of the Pan-African Telecommunications Network (Panaftel) in 1962. This project resulted in significant expansion of the continent’s network. Gains from this project slowed dramatically by the late 1980s as problems arose with standardizing switching systems, and incompatibility among carrier techniques hampered further development (Nuruddin 1999, pp. 258-259). These difficulties ultimately led to the discontinuation of international funding for the Panaftel project.

International support for modernizing the telecommunications system in Africa did not stop with the decline of the Panaftel project, though: international development organizations such as the World Bank have pushed cooperation and privatization schemes for public telecommunications operations (Kone 1999, p. 161). Advanced wireless technology that avoids the need for heavy investment in wireline equipment offers the promise of speedy progress toward modernization for developing nations in Africa and elsewhere.

Societal Benefits

Modernization of telecommunication services provides important societal benefits other than simple economic growth; for example, modern systems make it easier to quickly obtain vital information needed to provide quality healthcare, and they provide quick access to critical information needed to lower safety and security risks. In addition, new technologies provide workers with well-paying jobs (Peoples 1998). These employment gains do come at a cost, though, as labor-saving technology such as digital-switching systems have significantly reduced demand for switchboard operators. Jobs as union telecommunications workers are also less prevalent in this industry as liberalization policies facilitated an influx of nonunion carriers in the United States. Nonetheless, policies promoting competition have contributed to increased industry employment.

Despite the impressive societal gains associated with modernization and competition in telecommunications, challenges still remain. The disparity in the quality and availability of telecommunications services between developed and developing countries remains high, even though mobile service has made access to the telecommunications network easier for citizens in developing countries. There is room for greater societal gains even in developed countries. For instance, phone rates for local service increased following liberalization policies in the United States in large part because the high cost of connecting to access lines presents a significant entry barrier into local telecommunications markets. Still, if the recent history of this industry is a reasonable guide, it is highly probable that technological advances will contribute to overcoming these lingering challenges.


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