VIEWPOINTS : TELECOMMUNICATIONS TAKES OFF : While the U.S. Dithers, Other Nations Are Aggressively Modernizing to Compete
Within months a high-tech bridge--the first fiber-optic cable to span the Pacific--will connect California and Asia. As with the transcontinental railroad completed a century ago, this new link signals a new era of economic expansion.
It also will trigger a new era of competition in the Pacific Rim. And the resulting competition between companies that once were isolated from each other by the Pacific could mean big trouble for the U.S. telecommunications industry. Despite American Telephone & Telegraph’s involvement in the first transpacific cable and Pacific Telesis’ recently announced minority interest in a second cable project, Asian firms stand to gain the most from these developments.
Until recently, the telephone industry and many other service businesses have been largely protected from foreign competition. International differences in price and quality were meaningless to customers because they could not take advantage of foreign offerings. A haircut might cost $15 in Los Angeles and 15 cents in India, but no one is going to fly to Delhi for a trim. That same logic applied to the telephone industry. But no more.
With the ability to move information at the speed of light over intercontinental fiber-optic cables, the location of the telephone company is irrelevant. Calls between Osaka and Tokyo could be processed in San Francisco, and calls between Los Angeles and the San Francisco Bay Area could be switched in Japan. The nation with the superior telephone system will be able to attract business and revenue from abroad. The question is: Who will be the winners and losers?
Many Americans believe that we have the best telephone system in the world. They are in for a rude shock.
In recent years, France and Japan have passed us in the deployment of modern telecommunications technology and the introduction of services ranging from call screening to video teleconferencing. The French Minitel system currently provides more than 5,000 information services to the public and is available in two U.S. cities today. The United Kingdom, Canada and Singapore, among others, are moving ahead of us, too.
It is already possible, on a limited basis, to export and import certain telephone services. This is already happening with international calls, and it will soon apply to 800 number, credit card and operator services among others.
And today, many international calls can be switched from Hong Kong or Singapore at half the price of making the call from the United States. Consequently, many firms lease private circuits on existing cables, transmit their international calls to Hong Kong or Singapore over the private circuit and use the switching system in those countries rather than their own to reach their destination.
Singapore and Hong Kong are already adept at attracting international telephone traffic. Outbound international traffic--that is, calls switched to other countries--from these two nations has grown more than 60% annually over the past three years. With new fiber-optic connections, this business will grow even more rapidly.
The extra business will produce jobs, taxes and balance of payments benefits. It also funds investment in even more sophisticated public telecommunications networks--at the expense of nations that lose the traffic.
While the United States dithers, other nations are aggressively modernizing their public networks and developing new services to compete in the global information industry. Last year, the U.S. telephone industry invected about $110 per subscriber in new plants and equipment. France and Britain are investing at twice that rate, and Japan and Singapore at almost three times that level. We have seen this pattern before in the steel, automotive, consumer electronics and semiconductor industries.
In this case, though, you can blame the regulatory system for the relatively skimpy investment. Under current regulation, telephone companies are allowed to earn no more than a prescribed rate of return (12% to 14%) on their existing rate base of assets in use.
Regulators, whose mission is to hold down telephone rates, are generally opposed to investment since it increases the asset base and could increase prices. At the same time, telephone companies are reluctant to remove assets from the rate base, even if they are old and obsolete. The result is a rate of modernization that is staggeringly slow by international standards. Other nations are modernizing at rates three or four times faster than we are.
In California alone, regulators have disallowed (not permitted investments to be included in the rate base) more than $500 million of new plant and equipment investment in the past several years. The message to the telephone companies is clear.
Efficient, sophisticated information services are critical to American industry. Because we have a second-class public network, many large corporations are moving to alternative services. More money was invested in private information networks last year than in the public telephone system. Without the big users, the fixed cost of maintaining the public network will be borne by small businesses and the average consumer. That means higher prices and second-class services. Surely there is a more attractive scenario than this.
It begins with the recognition that a new global era in the information industry requires a new set of public and corporate policies. Given the current structure of the industry, the breakthroughs must occur at the state level. Fortunately, programs encouraging increased investment and price freezes on basic telephone services in exchange for regulatory relief are being introduced in a dozen states.
A number of states--including Georgia and Texas, but not California--are adopting or developing programs to aggressively modernize their telephone systems. These programs will produce important and perhaps profound economic and social advantages. For a dozen reasons, California, of all the states, should be at the forefront of this movement.
