Keynote
Speech
Robert
Shaw
International
Telecommunication Union
before
II
Rio Telecom
July
30, 2002
Rio de Janeiro, Brazil
(as prepared for delivery)
Regulation:
what changes are needed?
Thank you for this opportunity to appear before
you. This is my second trip to Brazil within the last few months. On my
last trip, I spent most of my time in São Paulo and Brasília so I’m
extremely pleased to be able spend a few days in Rio de Janeiro,
particularly in this beautiful setting.
I see that you have a very
responsive regulator here in Brazil. When I was last here in April, I
obviously mentioned to some of the Counselors at Anatel that I was
disappointed I couldn’t use my GSM mobile. I think they must have
heard I was returning to Brazil, because I see that it now works and I
was able to call my wife on my mobile on the way to the hotel from the
airport. Now that’s what I call a very friendly regulator!
As I was flying here from Geneva
on Friday evening, I had quite a bit of time to think – in fact, about
15 hours. And we flew over the Atlantic, I was reminded of a book review
I had read in the New York Times last week. The book is entitled “A
Thread Across the Ocean”, and it tells the fascinating story of the
efforts to lay the first trans-Atlantic telegraph cable about 135 years
ago. It took 12 years of failures and lost cables before being completed
in 1866. That’s just one year after the International
Telecommunication Union was originally founded — as the International
Telegraph Union. The entire cost of the project was around US$ 12
million dollars, which was a huge sum in those days. To put the amount
into perspective, Alaska was purchased from Russia in 1867 for about US$
7 million dollars.
Napoleon once said that
“History is the version of past events that people have decided to
agree upon.” When we look
back over history at advancements in communications, we tend to forget
about the highs and the lows, the boom-bust cycles, the dubious
investment schemes, the sometimes irrational and excessive enthusiasm
for new technologies. Hindsight brings clarity but typically at the
price of historical simplification.
We have forgotten that the
invention of the telegraph was perceived, in many ways, as far more of a
revolution than the Internet was during the last ten years. Although it
is hard to believe now, it was a technology that gripped the imagination
of the mid-19th century. That’s because for the first time
in history, a communication means was available that was divorced from
physical transportation. Exchanging messages suddenly took minutes
instead of months. It was an invention that was described as the
“annihilation of space and time”.
And it had to be built from scratch. While the Internet was essentially
built on top of the global telephone network infrastructure, the
physical infrastructure for the telegraph was built from nothing. This
required massive business investments and there were a great number of
technical and business failures along the way. One example is
demonstrated by the early days of submarine cables. According to one
historian: “Of the 17,700 kilometers of cable laid by 1861, only 4,800
worked and the rest were lost”. However, eventually the problems were
solved and 20 years later, about 150,000 kilometers of submarine
telegraph cables were in place and working. The old world was finally
interconnected with the new.
****
The message here is that all new
communication revolutions, including the current “digital convergence
revolution” have their ups and downs. Technologies take time to
mature. Business models take time to evolve. Practical theories conflict
with reality. Bell originally thought the telephone would be used for
broadcasting. Mobile is a counter-example to the theory that metered
services cannot grow fast. Mobile operators never dreamed that text
messaging would represent a significant part of their revenues.
Someone once said that history
never looks like history when you’re living through it. But we’re
clearly living in an important part of history right now. The telecoms
industry appears to be in a total mess. Once high-flying telecom
companies like Worldcom and Global Crossing have suddenly and
dramatically gone bankrupt, leaving behind massive debts. Others teeter
on the edge of bankruptcy. Billions of dollars have evaporated in stock
market valuations. US telecom operators and equipment manufactures have
probably laid off close to half a million people since the beginning of
last year. Even worse, there appears to be odor of scandal in the
industry, with a number of telecommunication and Internet firms under
criminal investigation for accounting fraud.
Two weeks ago, Alan Greenspan,
the US Federal Reserve chairman told the US Senate Banking Committee
“an infectious greed seemed to grip much of our business community”.
As he describes it, the incentives created by poorly designed stock
options “overcame the good judgment of too many corporate managers.”
“It is not”, he added, “that humans have become any more greedy
than in generations past. It is that the avenues to express greed had
grown so enormously”. Stock options meant that executives could get
rich if they faked profits and that’s exactly what they did.
****
History is still unfolding so we
don’t yet have the benefit of hindsight. Also it’s likely that the
current meltdown is far from over and more giants are likely to stumble
or fall. However, some of the contours of the false assumptions and
moves behind the industry’s rapid rise and fall are starting to become
clearer.
I
can see that this is an important election year in Brazil. A tough
politician, Nikita Khruschev once joked, “Politicians are the same all
over. They promise to build bridges even when there are no rivers.”
Some might argue that some of the telecommunication industry politicians
and networking companies have also been building bridges over
non-existent rivers.
One
false assumption was the combination of
liberalization and increase in data traffic would send volume demands to
unprecedented rates. As an example, one of the most common myths
propagated was that Internet traffic was doubling every 100 days — a
widely repeated statistic. In other words, this meant it was growing by
a factor of 12 every year — an astounding rate. But with some careful
research and traffic measurements, Andrew Odlyzko of the University of
Minnesota, has shown that this was wildly optimistic. He and a
co-researcher showed that the real traffic growth of the Internet is
closer to a factor of 2 every year — which admittedly is still
impressive when compared to the growth of other communication
technologies. However, the doubling every 100 days statistic was widely
cited by industry analysts and the financial sector as justification for
an expected astronomical increase in capacity demand.
Following
the maxim that bigger was better and looking for economies of
scale, new start-ups began massive investments in laying fibre and
developing a global telecoms infrastructure. A historic
investment spree took root in the sector. Capital
expenditures of many US telecoms companies grew enormously in the late
1990s’s — in some cases, close to 30% a year. Mergers, acquisitions
and strategic alliances were seen as key to gaining a global foothold in
all markets. Expecting a similar “mobile Internet” revolution with 3rd
generation mobile, operators in Europe splurged for more than US$ 90
billion on spectrum licenses — even before understanding exactly what
services they would be offering and, more important, whether the users
would be willing to pay for them. From
1996-2000, telecommunication companies took on more than US$ 1.5
trillion in bank debt.
The result
of a large number of new market entrants coupled with the demand myth
was a massive overbuilding of capacity compared to real need. Dozens of
national backbone networks and huge submarine cable projects were
deployed. To give one example, total submarine cable capacity to South
America increased from 13 Gbps in 1999 to close to 400 Gbps in 2001, an
increase of 3000% in only two years. Further advances in technology
increased the transmission capacity of single fibre optic strands to new
highs. Eventually the industry experienced an oversupply, which in a
highly competitive market, triggered large price cuts. Market share,
revenue projections and business plans based on high demand and high
prices turned out to be all but meaningless.
To a
cocktail of statistical myth and network overbuilding, we can add the
hype that is historically common with new communication technologies. This
week’s Economist magazine recounts how George Gilder, a popular
technology guru, stated in February 2001: “Today there is no economy
but the global economy, no Internet but the global Internet, and no
network but the global network”. He predicted that two telecoms firms,
Global Crossing and 360networks would “battle for worldwide supremacy,
but in a trillion-dollar market, there will be no losers”. Now, only a
year later, both companies have gone bankrupt, as has Mr. Gilder who
also invested in his stock picks.
****
Reacting to the “infectious
greed” mentioned by Mr. Greenspan, US policy makers and legislators
are rushing through a number of new laws and measures that will get
tough with dishonest executives and overly creative financial officers.
However, when it comes to deciding what to do to bring some stability to
the telecommunications industry, nobody seems yet to know what to do.
Michael Powell, Chairman of America’s Federal Communications
Commission, said recently that the industry was in “utter crisis”
and surprised almost everyone when he suggested in a recent interview
with the Wall Street Journal that one of the remaining regional Bell
Operating Companies might be allowed to buy Worldcom, the US’
second-largest long-distance carrier and a major provider of Internet
backbone services. This was a startling reversal as it went against the
regulatory provisions in the 1996 Telecom Reform Act, which prohibited
the regional Bell Operating Companies from offering long distance
services until they demonstrated they had sufficiently opened their
local markets to competition. This is a notable example that politically
sensitive regulators will worry more about stability and quality of
service levels instead of a “free-market” absolutism.
Somewhat surprisingly, there are
many voices that are now saying that the origins of the current debacle
and the oceans of red ink lies in the historical trend of deregulation
put into place during the last 20 years. The belief was that a golden
age of competition was going to emerge where prices would fall,
innovative services would be quickly deployed, and there would be plenty
of competition and profits for everyone. The critics are contending just
the opposite has happened. They are saying that telecommunications
deregulation has failed to live up to its promises, just as it has in
the airline, banking, and energy industries. Instead of liberalization
and deregulation, it has produced cartels or oligopolies. Instead of
competition, it has produced cooperation and consolidation. As an
example, they cite that just after the US 1996 Telecom Reform Act, the
US had eight local phone companies; today there are four and they
control 85% of all US phone lines. They argue that an era of natural
monopoly economics of telecommunications is re-emerging and
liberalization was a big mistake.
****
Of course,
that is, as the British would say, completely over the top.
Liberalization has provided many benefits for consumers, dramatically
lowered prices and has opened the door to new services. Policy makers
and regulators will now need to be careful to not overreact and let the
current political and market climate swing the pendulum too far in the
other direction. Equally we should be very cautious in believing that
the particular circumstances of the US market and regulatory environment
will have exactly the same applicability elsewhere.
The
modern day story of liberalisation starts about 20 years ago when
AT&T formally agreed to the break-up of the Bell System. About 10
years ago, around 10 countries had some form of fixed-line competition.
About 5 years ago, in concluding the WTO Basic Telecoms Agreement, some
70 countries committed to telecoms market liberalization. Today, countries
with privatized operators and some degree of competition are in the
majority among ITU Member States.
This
group includes Brazil, which has made some
remarkable achievements. Brazil’s telecommunications sector
legislation and regulation is widely regarded as very progressive due to
large-scale privatization and pro-competitive regulation. The
achievement of this started with the adoption of the General
Telecommunications Law of 1997, which called for the creation of an
independent regulator, Anatel. After the privatization of its incumbent
operator and opening of the market to new entrants, there has been
extensive investment in expanding national networks. In a few years,
through market liberalization and pro-competitive regulation, the
government has dramatically increased access to basic telecom services
for its citizens.
It’s also clear that the
government’s goals are much broader than just providing basic
telephone service. As you have learned at this conference yesterday from
Vanda Scartezini of the Ministry of Science and Technology, the Federal
government already offers a broad range of services over the Internet
and has even more ambitious plans in the coming years to promote
Internet access and provide new applications to citizens. In certain
areas, such as on-line tax filing, Brazil leads the world.
****
A key role of
regulation is to create conditions that attract capital and investment.
A country needs transparent, non-discriminatory regulatory regimes. It
needs to abide by established technical and business standards and it
needs to establish the rule of law. A strong, independent, impartial
regulatory agency can lay the foundation for a dynamic competitive
market, investment and economic growth.
From all signs, Brazil is on the
right path. Anatel,
in its short existence is widely praised by industry and other
regulators around the globe as one of the most transparent and
independent in the world. Under Anatel’s
initiatives, the number of fixed telephone lines has grown substantively
to 47,8 million to which can be added 28,7 million mobile subscribers.
Make that 28.7 million + 1. As I said, I’m
now roaming on a Brazilian GSM network with my mobile.
If I get invited back to speak to you next year, I’ll tell you then
how much my calls back to Switzerland cost!
That’s not
to say that the current framework for telecommunications regulation
doesn’t require a fresh new look. There are number of reasons to think
that it does.
- First,
digital convergence will continue, albeit not as fast as many of us
had imagined, and it’s clear from the many regulatory tensions in
the marketplace that it has clearly overtaken many of our old ideas
on regulation. Before the “digital revolution”, specific
services and networks were not at all closely intertwined. The
public switched telephone network was optimised for person-to-person
voice communications. Broadcast networks were optimised for one-way
delivery over radio or television. The Internet in its foundations
was designed for non-real-time transport of packets with no
guaranteed quality of service. These networks and services are
converging and the bits flowing over the networks are
“co-mingling”, to steal a term from Nicholas Negroponte. The
days when legislation and regulation could assume distinct services
running over distinct technologies and networks are disappearing
fast.
- Second,
most of the legislative foundations of today’s telecom regulatory
frameworks were articulated and predicated on the concept of
increasing basic fixed line telephony density and dealing with
incumbent monopolies. However, mobile voice and data networks have
gained more prominence. Globally, mobile will soon overtake fixed
lines as the prominent means for voice communications. Recently,
Qualcomm announced it would produce a combined Wireless LAN or Wi-Fi/CDMA2000
chip set. Services over Wi-Fi technologies using unlicensed spectrum
will co-mingle with services over 3G licensed spectrum. Where the
transport of bits and services become “co-mingled” and are
treated with asymmetric regulation, our legislative and regulatory
frameworks will equally need to adapt.
- Third,
and perhaps most important, the public policy stakes have become
much higher. A national telecommunication infrastructure has now
become much more important than a platform for voice: it is now the
fundamental underpinning layer of networked economies and
information societies. The development of
advanced info-communication networks is now a key policy objective
for most governments around the world. Not only are these networks
seen as an important determinant of national competitiveness in an
increasingly globalized knowledge economy, they are also seen as
offering new opportunities in areas such as education, health and
social advancement. For example, here in Brazil, a country of wide
ranges of social and economic development, we have seen that the
government has put a high priority on improving access to advanced
info-communications technologies, promoting digital literacy and
improved access to government public services.
Fortunately,
those involved with the admittedly arcane subject of regulatory reform
have invested lots of intellectual capital in the problem and we are
seeing practical results — particularly in the area of convergence
regulation. For example, the European Union’s telecommunication
regulatory framework, adopted this year in March 2002, represents an
attempt to move away from technology-specific and service-specific
legislation. It attempts to proactively address convergence regulation
issues by focusing more on market definitions related to competition law
rather than embedding technology-specific definitions in legislation.
Interestingly, just this month, the FCC’s Office of Plans and Policy,
released a paper: “The Potential Relevance to the United States of the
European Union’s Newly Adopted Regulatory Framework for
Telecommunications”.
The paper reviews and contrasts the US telecoms framework with the new
EU framework and it’s recommended reading as a primer comparing both
frameworks and their particular history and objectives.
There are
those who argue that the key point of regulation is
that it exists to deal
with potential and real abuses of market power. This “competition
policy” view of regulation is one of preventing or constraining
certain behaviour. Some of the tools used are unbundling, licensing of
new operators, and interconnection agreements. However, there are others
who are taking a much broader view. They see the role of regulation not
so much as a constraining force but rather as a necessary and proactive
force to encourage deployment of advanced
networks for network
economies and development of information societies.
In this
vein, there are some thoughtful ideas and discussion going on at a
project entitled: “The World Dialogue on Regulation of Network
Economies”.
You can find them on the web at www.regulateonline.org.
It’s an initiative supported by the World Bank, the ITU and two
European universities and involves some people who used to be
telecommunication regulators themselves and have a good grounding in the
issues. Their goal is to develop a dialogue on where next generation
regulation should be heading to foster build-out and set policies for
information infrastructures.
In
a series of discussion papers, they note that the major infrastructure
industries of industrial economies have always been treated differently
from other industries in general. These include transport, energy, water
and sewage. They note that without broad access to these infrastructure
services, all other economic activity is difficult, costly or
impossible. They also note that government policy in all countries has
generally treated these particular industries differently for two key
reasons:
the potential for market failure and public interest. As an example of
market failure, they point to historical examples of about a century ago
in the US, which led to major instabilities in supply and prices,
destructive competition, monopolies and oligopolies. Does this sound at
all familiar? The result back then was social unrest and a strong
political movement that forced the US government to take a much stronger
role vis-à-vis the power of large corporations. However, the solutions
that eventually did emerge were monopolies with government oversight or
private sector self-regulation. We now know that these, in turn, created
their own set of problems including lack of innovation and major
inefficiencies. Ironically, the last 20 years of telecoms liberalization
have been a direct response to those problems. So have we now come full
circle?
This
is clearly a complex topic and it’s going to require a lot of debate
by policy makers, regulators and scholars. It’s also apparent that one
regulatory framework is not going to fit all. In the FCC review of the
new EU regulatory framework, particularly in its discussion of its
relevance to the US environment, the report noted that while the new
framework was “elegant”, the Europeans were able to make such a
monumental overhaul of their system because “they had far less
relevant regulatory history to contend with”. If this is true, this
suggests that it is the new young and dynamic telecom regulators, such
as you have here in Brazil, who may have the distinct advantage in
taking up the challenges.
Unfortunately, as any regulator
knows, it is extremely difficult to have any discussion about regulation
or deregulation without it quickly devolving into ideological debates
about free enterprise and markets. A lot of confusion comes from how
these terms have been historically used – as well as a lack of
knowledge of the history of telecommunications and infrastructure
industry regulation. However, if we accept as a premise that telecoms is
increasingly an important infrastructure industry that underlies the
development of advanced networks and we accept that their
build-out is a key public policy objective of most governments, it will
be increasingly untenable to remain a free-market absolutist. Both the
history of regulation of infrastructure industries as well as the recent
telecoms crisis argue that perhaps that isn’t the best approach.
One danger with the current
telecoms crisis is that everyone is going to be searching for somebody
else to blame.
Historically, a variety of interest groups have always clashed over the
rules governing this industry. It should come as no surprise that both
are now going to attempt to use the current crisis to advance their own
causes. But the foundations of the current crisis is not grounded in
liberalization or regulation but rather a historically common business
cycle where too much investment and build-out was done compared to what
was required.
I’ll close
my talk with a quote from a speech in 1775 by the English statesman,
Edmund Burke:
“All government,
indeed every human benefit and enjoyment, every virtue, and every
prudent act, is founded on compromise and barter we give and take; we
remit some rights, that we may enjoy others."
Speech,
Conciliation with America, 1775
The history of regulation has
always been about constant compromise and bartering of privileges and
responsibilities to achieve policy objectives. The current crisis will
probably shift the direction of policy objectives somewhat but that’s
why regulators, the instruments of regulation, are a necessary constant
influence — to remit some rights so that we may enjoy the benefits of
others.
Thank you.
