UNION INTERNATIONALE DES TELECOMMUNICATIONS INTERNATIONAL TELECOMMUNICATION UNION UNIÓN INTERNACIONAL DE TELECOMUNICACIONES THE IMPLICATIONS OF GLOBAL TELECOMMUNICATION SYSTEMS FOR THE ITU Dr Pekka Tarjanne, Secretary-General, International Telecommunication Union Münchner Kreis Congress, "Global Players in Telecommunications" European Patent Office, Munich, April 20-21, 1994 Mr Chairman, Ladies and Gentlemen, It gives me great pleasure to address this distinguished conference on the subject of global telecommunications. The very raison d'être of the International Telecommunication Union is to be "global". Indeed, the purposes of the Union, as stated in the Geneva Constitution, include the provisions to "maintain and extend international co-operation ... " to "promote the extension of the benefits of the new telecommunication technologies to all the world's inhabitants" and to "promote, at the international level, the adoption of a broader approach to the issues of telecommunications in the global information economy and society ...". So the ITU has always been global in scope. But whereas our Members have traditionally represented sovereign national interests, they now increasingly also represent global interests. And whereas most of the services they provide were originally intended primarily for domestic customers, they are now increasingly targeted at foreign and multinational clients. In this paper, I wish to examine the nature of globalisation in the telecommunication sector and to consider what implications it has for the work of the ITU and its Members. Telecommunications and globalisation The idea that we are living in a global or borderless world is relatively new.The meaning we now attach so easily to the word global was unknown 100 years ago when the world was still in the process of being divided up into independent sovereign nation states. However, the dramatic events which have taken place in the twentieth century -- including the development of global transportation and telecommunication systems, and the rise of global products, markets, and corporations -- have convinced many people that we are indeed living in a new historical era in which the economic, social, cultural and political structures that shaped relations between people over the past two centuries will be transformed. Though accounts differ as to why this is so, most emphasise the central role played by developments in telecommunications, computer and information technology. This historical change is often described as the passage from an industrial to an information era. Today, the term global village conjures up the picture of a vast, worldwide communications network of interconnected satellite and land and undersea cable links enabling the rapid transfer of growing voice, data and image traffic. But if truth be told, the global village is still very much a dream because the majority of the world's population does not have the resources or the infrastructure to access communication networks (Figure 1). Yet the technological capability to reach distant places via microwave, cable or satellite is a reality and the expanding web of communications by land, sea and air, spurred by the dramatic growth in international voice, data, and image traffic brings us ever closer to a true village. Figure 1: Unequal shares of the global network: Telephone main lines per 100 inhabitants, 1992 Source: ITU (1994) "World Telecommunication Development Report". Perhaps the clearest evidence for globalisation is found in the continuing increase in the volume of international telecommunications traffic both in absolute terms and as a percentage of total traffic. International traffic is the fastest growing part of the telecommunications business and also the most profitable. International telephone traffic has been growing at some 17 per cent per year over the last decade, fuelled by growth in international trade, travel and immigration and a general expansion of the global economy. In 1992, the inhabitants of the globe generated more than 40 billion minutes of international telephone traffic (Figure 2). This equates to around seven minutes per person or 70 minutes per subscriber. Usage per telephone has more than doubled in the last ten years. Figure 2: The lines are busy International outgoing telephone traffic, 1983-92, and by region, 1992 Source: ITU/TeleGeography Inc (forthcoming, 1994) "Direction of Traffic: World Telephone Flows, 1983-92". A second measure of globalisation is the extent to which the activities of individual manufacturers and service providers cross national boundaries. The corporate strategies of today's global players, many of whom are represented at this conference, are increasingly taking them into foreign markets both as an aggressive move, to develop new business opportunities, and as a defensive move, because of incursions into their home market or due to declining growth in mature networks. This is occurring through mergers and acquisitions, through foreign direct investment and the establishment of subsidiaries, through the formation of consortia and alliances, and through an increase in export sales as a percentage of total sales. The top 16 telecommunications manufacturers, with combined sales of almost US$ 100 billion, gained more than 50 per cent of their sales from outside their domestic markets. For the public telecommunication operators, this share is much lower but is growing nonetheless. International telecommunication services generated just under 15 per cent of the US$415 market for public telecommunication services in 1992. Finally, perhaps the best measure of globalisation is the ability of companies to provide end-to-end service to users, wherever they may be located. Many countries still retain rules which limit the extent of service provision by foreign-owned companies and oblige foreign companies to interconnect with a monopolistic public telecommunications operators. However, the traditional model of jointly-provided international services is slowly breaking down and a growing number of countries now permit competition in the provision of both telecommunication services and infrastructures. Experience with liberalisation has shown that, once competition has been introduced, it is difficult to place arbitrary limits on the extent to which new market players can compete with the monopoly service provider: mobile communications companies want to construct their own high-speed fixed-link networks between cities; value-added network suppliers want to be able to provide services direct to client sites; private network owners want to be able to resell spare capacity. In all cases, the new market entrants will sooner or later want to provide international services independently from the incumbent carriers. Thus globalisation almost always brings new pressures on national competition policy. Globalisation and market structure It has become the conventional wisdom within the telecommunication services industry that, over time, there will be a shake-out of the number of major players. According to this view, a process of market rationalisation -- achieved through acquisitions, mergers and global alliances -- will create a two-tier market structure. At the top level will be a handful of truly global players offering a full range of telecommunication services. They will draw upon the services of a much larger second tier of operators with strengths either in one national market or in one particular technology (e.g., mobile, satellite). This scenario is easy to believe. Looking at other industries, say the automobile, soft drinks or even a closely related industry such as telecommunication switch manufacturing, it can be seen how market rationalisation has reduced the number of players possessing global brands to single figures. In other industries which have traditionally been highly regulated -- airlines, postal services or railways -- national companies still dominate their home market. A second possible scenario is one in which the foreign ventures of public telecommunication operators increase and a number of smaller countries invite in foreign operators, but the activity remains at the margin and most large countries retain national carriers. This second scenario would represent a continuity in the history of the industry which has hitherto been based on national sovereignty and international co-operation. However, there is also a third, and equally plausible scenario for the future evolution of the telecommunication services industry. Here the driving force is neither economies of scope and scale nor national sovereignty, rather it is rapid technological change. It can be argued that the development of new communication technologies, particularly radio-based but also interactive multi- media services carried over high bandwidth cables, is introducing to the telecommunications market a set of new players without the history or the installed base of traditional public telecommunication operators. For instance, companies such as Vodafone (UK) and Millicom (registered in Luxembourg), are pursuing aggressive foreign investment strategies as new market players without an existing fixed-link installed base. Under this scenario, traditional public telecommunication operators will continue to grow, but theirs would be a diminished share of a much larger, and far more fragmented total communications market based on different technological platforms such as copper, or fibre, or radio or satellite. Competition will be expressed as much in concepts such as value for money, quality of service and customisation to individual clients as in technical differences between service offerings. Thus the overall level of concentration in the industry may decline, at least in the short term. Global players may emerge, but only in specific market segments. These three scenarios are summarised in Figure 3. In practice they are not incompatible and all three might co-exist in different parts of the industry or in different regions of the world. All three scenarios would provide logical outcomes from the processes of globalisation described earlier and it would be possible to make a transition from one stage to another. However, each scenario would have different implications for the role of the ITU. These are discussed below. Global telecommunication systems: Do we need global regulation? Of the three scenarios listed above, the ITU in its current form is optimised towards the "national sovereignty" scenario (2). ITU could cope well with the "fragmented markets" scenario (3), in that it already has a decentralised, federal structure in which each of the three sectors has a high degree of autonomy. But the "global players" scenario (1) would require a substantial rethink of the ITU's mission and strategic direction. Some would argue that a legitimate response to the globalisation of the telecommunications industry is to move towards a system of global regulation. There are several powerful arguments which would appear to favour this viewpoint: Figure 3: Alternative scenarios for the future evolution of the telecommunication services industry Scenario 1 :Market rationalisation combined with globalisation. Characteristics : A handful of global telecommunication services companies come to dominate the industry.They gain market position through mergers and acquisitions and form alliances with a secondary tier of smaller players specialised on one country or one market sector. Assumptions : Economies of scale and scope are main driving factor meaning that only a few players can achieve sufficient scale to offer a full range of services across the globe. Ownership of global cable network and/or satellite system is vital. Similar industries : Telecom switching manufacture. Automobiles. Chemicals. Softdrinks. ------------------- Scenario 2. : Continuing status quo with national carriers dominant in home market. Characteristics : Most of the major countries retain a national carrier with majority ownership. Some competition and foreign ownership in marginal areas such as mobile, satellite or VANs. Assumptions : National sovereignty is the dominant factor based on concerns of national security and industrial policy. Similar industries : The railway industry. The airline industry. Postal services. -------------------- Scenario 3. : Multiple and diverse players entering fragmented telecom market. Characteristics : High levels of market entry in fields such as mobile communications, data communications and multimedia to challenge fixed-link PTOs. Competition between different technologies. Fragmentation of telecommunications industry into a series of technology-specific and regional markets. Assumptions : Rapid technological change reduces economies of scale permitting firms in other industries (computers, entertainment, etc.) to invest in telecommunications. Traditional PTOs hold declining share of growing market and face competition from companies with alternative technology platforms (radio, satellite, cable TV). Similar industries : Industries experiencing rapid technological change such as computer industry in the early 1980s, pharmaceuticals industry, biotechnology. Note: PTO = Public Telecommunication Operator. Source: ITU (1994) World Telecommunication Development Report. * The first argument is based on the sheer size of the public telecommunication industry. In 1992, the public telecommunications industry, services and equipment combined, was worth some US$535 billion and contributed around 2.4 per cent of global Gross Domestic Product (GDP). Some 42 public telecommunications operators now have annual sales in excess of US$1.5 billion. Of these companies, the majority are privately-owned, or are expected to be privatised in the near future. By contrast, more than 50 of the ITU's 183 Member countries have a GDP of less than US$1.5 billion. Many national governments do not have the ability or the resources to regulate the new generation of global telecommunication players. Even fewer countries can systematically ensure that regulations are enforced. * Second, many of the problems that face telecommunication policy-makers today are fundamentally global, rather than national or regional, in nature. By the end of this decade, we could see the development of global mobile satellite services offering personal communication services to handheld receivers anywhere in the world. The promise of this technology is that it makes any locality potentially accessible to the global telecommunication network. But at the same time it raises issues of global co-ordination, co- operation and competition that have not previously been faced. Several national administrations are currently competing to establish pre-emptive regulatory structures which would license carriers for the provision of services which are essentially international in character; * Other resource allocation issues also demand a global approach. Many new services being developed need access to the radio frequency spectrum and the global numbering plan. But traditional first come, first served allocation mechanisms do not lend themselves to competitive markets or those in which scarcity is an important factor. Often, market access in telecommunications is equivalent to access to resources or to public networks, and the fact that companies wishing to create global services have to make separate agreements in each of the countries in which they wish to operate imposes substantial extra costs. This can deter them from entering smaller or more marginal markets which is to the detriment of the goal of universality; * The reform of the accounting rate process needs to be tackled on a multi- lateral basis Accounting rate payments provide an important source of income to some of the developing countries but they also tend to keep telephone charges to end users high, and they can act as a disincentive to economic efficiency. The challenge here is to reform the system while still maintaining the vital flow of investment funds to assist with network development. * Finally, as noted above, the liberalisation of international trade in services, the rise of foreign direct investment and the forging of inter-firm alliances has created a new set of global players in the international telecommunications market. What forms of global competition policy would be necessary to ensure that global corporations continue to work for the benefit of their customers as well as their shareholders? At face value, there would appear to be a strong case for a new, powerful regulatory body that would bring together the activities of national regulatory authorities. But there are problems associated with such an approach: * The lack of appropriate public institutions. The two existing bodies that could fulfil such a role -- the ITU and the WTO -- do not have the appropriate expertise. The ITU's staff profile is heavily biased towards engineering and administration skills and we have relatively little experience in policy-making or regulation, though we are taking steps to remedy this. The World Trade Organisation, the successor to the GATT, is even less able to take on the mantle of becoming a global regulator because of its lack of expertise in this area, though the recent General Agreement on Trade in Services includes a specific annex on telecommunications; * The dominance of industrial policy interests. For much of its history, ITU has been hamstrung in its ability to act by World Wars, by the Cold War and by conflict between first and third world interests. For this reason, the ITU has opted to take technocratic approach, specialising in those areas in which ideology has little to contribute and little to detract, such as technical interface standards or frequency assignment and registration. But, with the emergence of the so-called triad of industrial policy interests -- North America, the European Union, Japan -- even these technocratic areas are now cut through by commercial interests. Thus the ITU's ability to act in emerging technologies such as high definition television, asynchronous transmission mode or personal communications mobile satellite systems is seriously impaired. There is no reason to believe that giving the ITU a formal regulatory role would make reconciling these divergent commercial interests any easier; * The lack of appropriate regulatory mechanisms. The regulatory tradition is still relatively young in telecommunications, at least outside North America, and the models which have been established for regulatory procedure can be rapidly overtaken by technological change. The public telecommunications industry has historically been "carrier regulated", in contrast to the "content regulation" of the broadcasting sector. But neither model lends itself well to the international stage. Furthermore, concepts such as universal service, open access, free and fair competition, reciprocal market access or cost-oriented pricing become increasingly elusive when taken out of a particular national context. Also, the ability to regulate effectively has to be backed up by the ability to take sanctions against a particular service provider, such as financial penalties, licence withdrawal or price-caps. It is unlikely that such sanctions could be applied in an international context. For these reasons and more, it is unlikely that there could be any acceptable legal or political basis for global regulation in the telecommunications sector, even though the arguments in favour of it may seem quite powerful. It would be better therefore to concentrate on what can be done to improve global co- ordination, between national and regional regulatory bodies, rather than seeking to impose global regulation. Within the context of our strategic planning for the forthcoming ITU Plenipotentiary Conference in Kyoto later this year, the ITU is building on its existing strengths and proposing a number of initiatives which would help to address this issue: * The ITU should continue to be guided by the goals and principles that are set out in the Constitution. They are the "moral compass" of the ITU. They help to define our role and distinguish it from those of other members of the telecommunications community. First and foremost among these is the goal of fostering and facilitating the global development of telecommunications for the universal benefit of mankind. This is a practical challenge of immense importance to the international community. In the twenty-first century economic, social and cultural development, as well as global peace and security, will depend on good communications. The symbolic functions of the ITU are also very important. Symbolically, the ITU represents the rights and obligations of all members of the global community. It seeks to advance the common interests of mankind in telecommunications through the rule of law, mutual consent and co-operative action. Its actions are based on fundamental respect for the human need to communicate and recognition of the role that telecommunications increasingly plays in sustainable economic, social, cultural and political development. * In the 1995-99 draft strategic plan for the Union, we have proposed the development of an ITU core competence in the area of telecommunications policy analysis and regulation, and the creation of a forum for Members to exchange information and share ideas on how to tackle the major policy issues of the day. These steps will build on the success of the ITU regulatory colloquia which were established in 1993. Now that the functions of operation and regulation are split in most ITU Member countries, it is important that the ITU provides an appropriate meeting place for regulators as well as telecommunication manufacturers and operators. * The trends towards globalisation outlined above clearly have important implications for all ITU members, both in the public and in the private sector. To deal with them effectively, new patterns of partnership will have to be developed to unite the interests of government and the private sector in the development of global telecommunications. This will almost certainly require enhanced participation in the affairs of the Union by our growing number of private sector members. * Against this background, the mission of the ITU should be "to provide the products and services required by the global telecommunications community that are best provided by an international organisation". Carrying out this mission in the changing telecommunications environment will require the ITU to become an open organisation, responsive to the needs of all members of the telecommunications community, client-oriented, entrepreneurial and risk- taking in its behaviour. This will almost certainly entail a re-evaluation of the portfolio of products and services which are offered by the Union to its Members. In conclusion, it is clear that the telecommunications environment in which we work is changing at an ever more rapid pace. It is sometimes difficult for a 130-year old organisation such as the ITU to keep up with what is new in our industry. But fortunately most of our members are much younger and continue to push us to respond to the changing environment. The central strategic challenge facing the ITU is to adapt an intergovernmental organisation based on national sovereignty to the emerging requirements of the global information society, in which telecommunication is becoming an increasingly important business activity, as well as remaining a key socio-economic infrastructure and an essential public service. ITU does not have the capability or the desire to become a global regulator. But its role as a forum for information exchange and for global co- ordination of national and regional regulatory policy is more important than ever.