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Doctrine, decision and development in international telecommunications
Comment Doctrine, decision and development in international telecommunications Henry M. Boettinger
This is an edited version of a presentation to TELEVENT 83, Montreux, Switzerland, 23-25 October, 1983.
The author was formerly Assistant Vice President, Corporate Analysis, AT&T, and is First Vice President, E.F. Hutton and Co. He may be contacted at Gentle Knight, Crackington Haven, Near Bude, Cornwall, UK.
Exposed to the attitudes expressed by participants from all over the world at international gatherings, an American quickly becomes aware of the uniqueness of current telecommunications policy in the USA. Few agree that the massive socioeconomic experiment which substitutes competitive supply for regulated monopoly is the best route for their own nation's communications development. The ideal of what can be called 'universal service on a global scale' requires that the systems of all nations be connected to each o t h e r - a goal transcending differences in internal policies. If achieved, it will be based on mutual understanding and appreciation of each other's situations. Every nation's evolution and history has resulted in different values and preferred methods and arrangements for realizing them. Such values are rooted in experience and emotion, not in Aristotelian logic. The USA, for example, can he described as a nation whose values (or ideas of the good life) are British; its o r g a n i z a t i o n , G e r m a n ; a n d its rationales, explanations and excuses, French. Since their country was born in revolt against tyranny, Americans remain suspicious of any aggregations of power in political, social or economic life. They resent and distrust monopoly in any form, however, benign, efficient or nationalized. Though most Americans have not heard of them, the ideas of the English philosopher, Locke (on the sanctity of life, liberty and property), and those
T E L E C O M M U N I C A T I O N S P O L I C Y J u n e 1984
of the French lawyer, Montesquieu (on the necessity for separation of powers), are enshrined in their constitution. With such a background, America was the natural birthplace for two social inventions: regulatory commissions and antitrust laws. They continue to baffle persons whose communications systems have been established and operated as government monopolies, ie most of the world. Listening to advocates of various national policies and practice, one senses parallels with theological disputes. There, conflict springs from the premises, faiths and value judgements with which one begins, not in the reasoning process itself. Their ultimate truth or falsity cannot be ascertained this side of the grave. A synthesis satisfactory to all is as impossible as one which attempts to encompass the tenets of Hebrew, Catholic, Protestant, Muslim and Bhuddist. In this situation, to make progress in harmony and peace without a comprehensive reconciliation we need to respect the beliefs of others, and to emphasize the similarity of ultimate goals aimed for, rather than exacerbate the differences which separate us. Superficial conformity imposed by force or fear is both unstable and worse than nothing. It is the stuff of despotism. Common to all propositions for telecommunications policy is the fundamental need to avoid discrimination. Most statutes and manifestos prohibit 'undue discrimination' in rendering service. But in the last
89
Comment
twenty years two contrary doctrines have emerged for realizing this fundamental aim, and adherence to one or the other determines support or opposition to most policy issues in communications. Discrimination in prices can take two forms:
'Competitive supply is now the policy of the USA in long distance and equipment provision'
90
subsidies and those eager to demolish the barriers to entry which prevented them from participation in what they saw as high-growth, high-profit parts of the business. Since this called for competitive supply, it enjoyed latent popular support from the US bias against monopoly. • Social d i s c r i m i n a t i o n exists This clash of strongly held views whenever two persons pay two produced the controversies of the last different prices for the same serdecade, and culminated in the US vice. government's antitrust action against • Economic discrimination exists the Bell System. U n d e r J u d g e whenever two buyers of the same Greene's decree, that system is disservice at the same price cause solved, and competitive supply is now the seller to incur different costs. the policy of the USA in long distance Both cannot be avoided at the same and equipment provision. Enormous efforts are now undertime. Most people - and most statutory and regulatory tests of imple- way to substitute the new philosophy mentation - have used the social for the old. Its effects are similar to a discrimination standard in the past. It revolution for all who use or supply has a venerable history, reaching back communications. Not least affected at least to Thomas Aquinas, who felt are those countries who connect their that charging two different prices for systems to the USA. Michael Ford, the same thing was equivalent to who heads British Telecom's international business services, has told us fraud. With the rise of economic theory, that 218 nations connect with the Bell cost accounting and concern with opti- System, and that he now has requests mum allocation of resources, it be- from ten different American comcame clear that avoidance of social munications companies for access to discrimination involved giving some Britain - and divestiture has not yet people more resources than they paid occurred. Such reverberations will be for, and some less. This was not only felt by every i n t e r n a t i o n a l comconsidered unfair, but also distorted munications entity. Judge G r e e n e ' s decree retains allocations of the nation's wealth. Arranging affairs so that market monopoly status for the 160 Local forces and costs dictated prices, pri- Exchange Areas throughout the counmarily through competition, became try, which will remain regulated. As increasingly attractive to many advo- islands of monopoly in a sea of competition, they are the gateways for cates, especially in the recent past. In the case of the public utility local service and the long distance services, like communications, power, networks. They will receive revenues transport, posts, water, etc, avoidance for long distance from both the conof social discrimination required limit- necting companies and from their ing entry of suppliers, so that inherent local customers in the form of access subsidies from one group to another charges, whose levels will be set by could be maintained. In addition, the regulators. Controversy on these technologies of public utilities made charges already abounds, and legislamonopoly supply far less inconvenient tors frantically attempt to offset their to the public, and, in fact, justified the effects on customers - contrary to the intent of the revolution in philosophy. concept of natural monopoly. Thus. such activities evolved along Here we can glimpse the coming natural monopoly lines, with social clashes which will unfold between goals more powerful than economic. those eager to seize the new opportuThis was true even of those not nities created by the decree, and those established as government agencies, devoted to salvaging and protecting as in the USA and Canada. But a things which they feel were never natural alliance was gradually forged intended to be harmed. Since every between those customers who paid the customer has enjoyed or paid sub-
TELECOMMUNICATIONS POLICY June 1984
Comment
'To be effective, the regulated monopoly local exchange areas must retain barriers to entry'
sidies, the change in their status under the new rules will be different for each. Thus, consensus and cooperation in making the transition will be elusive. Programmes aimed at the 'average customer' will find few who feel they fit its assumptions. To be effective, the regulated monopoly local-exchange-areas must retain barriers to entry. If the barriers are eroded, through technology, exemptions, or entrepreneurial innovations, then competitive supply will become comprehensive. Such anxieties are characterized as 'the problem of by-pass' - and access charges will have to be calculated carefully if they are to produce the revenues required and not become a target for avoidance by one means or another. Logically, Judge Greene's decree should cause the withering-away of regulation in those areas now declared competitive, but that is unlikely to happen in the real world. We should not expect any kind of steady-state until the end of this century. There will be many more side-effects from this large dose of classical economic medicine. It has been said that, 'competition brings out the best in products, and the worst in men'. We are not yet sure that it brings out the best in services, like communications, but revolutions do not go backward. Competition is now the fashion, and every nation will feel its effects. 'More powerful than armies is an idea whose time has come', wrote Victor Hugo, and the urge to embrace competitive systems to the greatest extent possible has never been more triumphant. Yet, its antithesis, cooperation, is responsible for some of civilization's greatest accomplishments, including the international communications system. It is too soon to say how these two powerful drives of cooperation and competition will interact, or to know how sovereign nations will respond to their contests for the minds of their citizens. In England, the two forces have played their drama for over a century. The Manchester School of economists, in the tradition of Darwin, believed that flat-out, vigorous competition was the key to improving a nation's wealth and welfare. A few
TELECOMMUNICATIONS POLICY June 1984
miles away, in Rochdale, the cooperative movement was born, in reaction to the exploitation, excesses and social misery condoned by the economists' ruthless dogmas. This debate is echoed throughout the world. Sweden believes their network must remain an integrated monopoly, with perhaps some competition at the terminals. Italy, true to Pareto, sees competition as resulting in one ultimate, efficient winner, so why go through all the battles to return to the same point? France puts its faith in a grand, rational, national plan; Germany continues to support posts from telephones; and the UK aims to privatize its ownership and prepare for competitive arenas. Each policy can be justified and represents a commingling of political, social and economic goals. Still, I believe that wherever price and value, as perceived by customers, are too far out of line with costs, that the crowbars of competition, aided by dynamic, focused technologies, will find a place to enter, no matter how high or sturdy the present barriers may be. Should a nation's communications not keep pace with the needs of business and government, the impulse toward alternative supply will be accelerated, perhaps irresistibly. History shows that we experience authentic innovations only when technical feasibility and market viability occur simultaneously. In their search for markets, technologists now direct their energies toward: those existing designs, systems and products where unit costs are no longer being reduced, or are rising; where performance has reached its inherent limits; or where potential mass markets require radical improvement in size, convenience, cost or other features, as in consumer electronics. The pace is so swift that high technology is now properly seen as high risk investment. Shakeouts, such as that affecting the 200 manufacturers of personal computers will be severe. At the beginning of my engineering career, Bigger was Better; we were then told that Small is Beautiful; with the transistor we believed Tiny is Good; and in microelectronics we know that Invisible is Best. Such rapid
91
Comment
' T h e acide test for any idea or suggested alteration s h o u l d be its effect on c u s t o m e r satisfaction'
92
progress in size, cost and performance allows communications and computing services undreamt of only a few years ago. But they also allow the entrance of many more players in the contests for markets. Their assaults on established communications entities everywhere will be unrelenting. One of the alleged virtues for competitive supply is the constant pressure exerted on prices, causing them to converge on costs. Used this way, the word "cost' seems easily understood. Yet we have a plethora of cost concepts from the economist's kit now added to the accountant's methods. Disputes as to which is the correct concept and data to use for marketing, negotiation, regulation, finance, antitrust, privatization, and international purposes add their compexities to resolution of issues. Little agreement is in sight, but some standards or conventions are required if we are to escape endless controversies. This is of more than academic interest, since the sale of their excess capacity by communications suppliers at their lowest, out-of-pocket costs is an attractive weapon for competitive incursions. This has already happened in the USA. Communications system capacity is not built in the smooth, continuous curves of elementary economic analysis, and its 'lumpiness' creates widely different results in cost determinations. Those called on to settle disputes so generated will have full hands for a long time. Communications are now so important - from village exchange to global networks - that the policy which sets in train skills, efforts and scarce resources must be both wise and effective for the long run. Quick fixes and improvised tinkering to deal with unintended side effects of previous policy judgements are hazardous and wasteful. Every person who influences these strategic decisions should be aware of Jay Forrester's Law: 'Any intuitive intervention in a complex system will cause it to become worse off'. We
should be as wary of uninformed intuition in communications matters as we would be in operating a submarine, nuclear reactor, airliner or even jumping a horse. The world network of telecommunications is not merely a clever collection of artifacts, like some gigantic Meccano or Erector set. It is a constantly changing, almost biological organism, responsive to the stimuli of customer demand, and capable of growth in size and sophistication. Though robust to physical changes in requirements, it is not immune to policy changes which may demand more than it can give. It must be nourished by knowledge and resources, and sustained by cooperation and shared aims among those in charge of various parts. I asked a friend what he thought was the ultimate goal of all our efforts. His reply was simple and profound: 'It seems to be something like building a Great Exchange in the Sky, to which every person and organization on earth would have access so as to communicate with any other person, at the lowest possible cost, with the greatest choice in services'. I agree with that humane vision. I submit that, in pursuing this goal, the acid test for any idea or suggested alteration should be its effect o n cust o m e r s a t i s f a c t i o n , judged not by ideological purity, but by results. To achieve it, we will need respect for and attention to opposing views. Without a proper load to work into, all physical systems become unstable. Intellectual and political systems also need constructive opposition to prevent loss of vigour, to stimulate innovative impulse, and to prevent those wide swings in policy and approach which so demoralize those who have to do the work. In this dialectical process, arrogance and ignorance have no place. Policy has many facets, and each should be examined in the harsh light of the best knowledge available before irreversible decisions affecting millions of people are made.
TELECOMMUNICATIONS POLICY June 1984
This is an edited version of a presentation to TELEVENT 83, Montreux, Switzerland, 23-25 October, 1983.
The author was formerly Assistant Vice President, Corporate Analysis, AT&T, and is First Vice President, E.F. Hutton and Co. He may be contacted at Gentle Knight, Crackington Haven, Near Bude, Cornwall, UK.
Exposed to the attitudes expressed by participants from all over the world at international gatherings, an American quickly becomes aware of the uniqueness of current telecommunications policy in the USA. Few agree that the massive socioeconomic experiment which substitutes competitive supply for regulated monopoly is the best route for their own nation's communications development. The ideal of what can be called 'universal service on a global scale' requires that the systems of all nations be connected to each o t h e r - a goal transcending differences in internal policies. If achieved, it will be based on mutual understanding and appreciation of each other's situations. Every nation's evolution and history has resulted in different values and preferred methods and arrangements for realizing them. Such values are rooted in experience and emotion, not in Aristotelian logic. The USA, for example, can he described as a nation whose values (or ideas of the good life) are British; its o r g a n i z a t i o n , G e r m a n ; a n d its rationales, explanations and excuses, French. Since their country was born in revolt against tyranny, Americans remain suspicious of any aggregations of power in political, social or economic life. They resent and distrust monopoly in any form, however, benign, efficient or nationalized. Though most Americans have not heard of them, the ideas of the English philosopher, Locke (on the sanctity of life, liberty and property), and those
T E L E C O M M U N I C A T I O N S P O L I C Y J u n e 1984
of the French lawyer, Montesquieu (on the necessity for separation of powers), are enshrined in their constitution. With such a background, America was the natural birthplace for two social inventions: regulatory commissions and antitrust laws. They continue to baffle persons whose communications systems have been established and operated as government monopolies, ie most of the world. Listening to advocates of various national policies and practice, one senses parallels with theological disputes. There, conflict springs from the premises, faiths and value judgements with which one begins, not in the reasoning process itself. Their ultimate truth or falsity cannot be ascertained this side of the grave. A synthesis satisfactory to all is as impossible as one which attempts to encompass the tenets of Hebrew, Catholic, Protestant, Muslim and Bhuddist. In this situation, to make progress in harmony and peace without a comprehensive reconciliation we need to respect the beliefs of others, and to emphasize the similarity of ultimate goals aimed for, rather than exacerbate the differences which separate us. Superficial conformity imposed by force or fear is both unstable and worse than nothing. It is the stuff of despotism. Common to all propositions for telecommunications policy is the fundamental need to avoid discrimination. Most statutes and manifestos prohibit 'undue discrimination' in rendering service. But in the last
89
Comment
twenty years two contrary doctrines have emerged for realizing this fundamental aim, and adherence to one or the other determines support or opposition to most policy issues in communications. Discrimination in prices can take two forms:
'Competitive supply is now the policy of the USA in long distance and equipment provision'
90
subsidies and those eager to demolish the barriers to entry which prevented them from participation in what they saw as high-growth, high-profit parts of the business. Since this called for competitive supply, it enjoyed latent popular support from the US bias against monopoly. • Social d i s c r i m i n a t i o n exists This clash of strongly held views whenever two persons pay two produced the controversies of the last different prices for the same serdecade, and culminated in the US vice. government's antitrust action against • Economic discrimination exists the Bell System. U n d e r J u d g e whenever two buyers of the same Greene's decree, that system is disservice at the same price cause solved, and competitive supply is now the seller to incur different costs. the policy of the USA in long distance Both cannot be avoided at the same and equipment provision. Enormous efforts are now undertime. Most people - and most statutory and regulatory tests of imple- way to substitute the new philosophy mentation - have used the social for the old. Its effects are similar to a discrimination standard in the past. It revolution for all who use or supply has a venerable history, reaching back communications. Not least affected at least to Thomas Aquinas, who felt are those countries who connect their that charging two different prices for systems to the USA. Michael Ford, the same thing was equivalent to who heads British Telecom's international business services, has told us fraud. With the rise of economic theory, that 218 nations connect with the Bell cost accounting and concern with opti- System, and that he now has requests mum allocation of resources, it be- from ten different American comcame clear that avoidance of social munications companies for access to discrimination involved giving some Britain - and divestiture has not yet people more resources than they paid occurred. Such reverberations will be for, and some less. This was not only felt by every i n t e r n a t i o n a l comconsidered unfair, but also distorted munications entity. Judge G r e e n e ' s decree retains allocations of the nation's wealth. Arranging affairs so that market monopoly status for the 160 Local forces and costs dictated prices, pri- Exchange Areas throughout the counmarily through competition, became try, which will remain regulated. As increasingly attractive to many advo- islands of monopoly in a sea of competition, they are the gateways for cates, especially in the recent past. In the case of the public utility local service and the long distance services, like communications, power, networks. They will receive revenues transport, posts, water, etc, avoidance for long distance from both the conof social discrimination required limit- necting companies and from their ing entry of suppliers, so that inherent local customers in the form of access subsidies from one group to another charges, whose levels will be set by could be maintained. In addition, the regulators. Controversy on these technologies of public utilities made charges already abounds, and legislamonopoly supply far less inconvenient tors frantically attempt to offset their to the public, and, in fact, justified the effects on customers - contrary to the intent of the revolution in philosophy. concept of natural monopoly. Thus. such activities evolved along Here we can glimpse the coming natural monopoly lines, with social clashes which will unfold between goals more powerful than economic. those eager to seize the new opportuThis was true even of those not nities created by the decree, and those established as government agencies, devoted to salvaging and protecting as in the USA and Canada. But a things which they feel were never natural alliance was gradually forged intended to be harmed. Since every between those customers who paid the customer has enjoyed or paid sub-
TELECOMMUNICATIONS POLICY June 1984
Comment
'To be effective, the regulated monopoly local exchange areas must retain barriers to entry'
sidies, the change in their status under the new rules will be different for each. Thus, consensus and cooperation in making the transition will be elusive. Programmes aimed at the 'average customer' will find few who feel they fit its assumptions. To be effective, the regulated monopoly local-exchange-areas must retain barriers to entry. If the barriers are eroded, through technology, exemptions, or entrepreneurial innovations, then competitive supply will become comprehensive. Such anxieties are characterized as 'the problem of by-pass' - and access charges will have to be calculated carefully if they are to produce the revenues required and not become a target for avoidance by one means or another. Logically, Judge Greene's decree should cause the withering-away of regulation in those areas now declared competitive, but that is unlikely to happen in the real world. We should not expect any kind of steady-state until the end of this century. There will be many more side-effects from this large dose of classical economic medicine. It has been said that, 'competition brings out the best in products, and the worst in men'. We are not yet sure that it brings out the best in services, like communications, but revolutions do not go backward. Competition is now the fashion, and every nation will feel its effects. 'More powerful than armies is an idea whose time has come', wrote Victor Hugo, and the urge to embrace competitive systems to the greatest extent possible has never been more triumphant. Yet, its antithesis, cooperation, is responsible for some of civilization's greatest accomplishments, including the international communications system. It is too soon to say how these two powerful drives of cooperation and competition will interact, or to know how sovereign nations will respond to their contests for the minds of their citizens. In England, the two forces have played their drama for over a century. The Manchester School of economists, in the tradition of Darwin, believed that flat-out, vigorous competition was the key to improving a nation's wealth and welfare. A few
TELECOMMUNICATIONS POLICY June 1984
miles away, in Rochdale, the cooperative movement was born, in reaction to the exploitation, excesses and social misery condoned by the economists' ruthless dogmas. This debate is echoed throughout the world. Sweden believes their network must remain an integrated monopoly, with perhaps some competition at the terminals. Italy, true to Pareto, sees competition as resulting in one ultimate, efficient winner, so why go through all the battles to return to the same point? France puts its faith in a grand, rational, national plan; Germany continues to support posts from telephones; and the UK aims to privatize its ownership and prepare for competitive arenas. Each policy can be justified and represents a commingling of political, social and economic goals. Still, I believe that wherever price and value, as perceived by customers, are too far out of line with costs, that the crowbars of competition, aided by dynamic, focused technologies, will find a place to enter, no matter how high or sturdy the present barriers may be. Should a nation's communications not keep pace with the needs of business and government, the impulse toward alternative supply will be accelerated, perhaps irresistibly. History shows that we experience authentic innovations only when technical feasibility and market viability occur simultaneously. In their search for markets, technologists now direct their energies toward: those existing designs, systems and products where unit costs are no longer being reduced, or are rising; where performance has reached its inherent limits; or where potential mass markets require radical improvement in size, convenience, cost or other features, as in consumer electronics. The pace is so swift that high technology is now properly seen as high risk investment. Shakeouts, such as that affecting the 200 manufacturers of personal computers will be severe. At the beginning of my engineering career, Bigger was Better; we were then told that Small is Beautiful; with the transistor we believed Tiny is Good; and in microelectronics we know that Invisible is Best. Such rapid
91
Comment
' T h e acide test for any idea or suggested alteration s h o u l d be its effect on c u s t o m e r satisfaction'
92
progress in size, cost and performance allows communications and computing services undreamt of only a few years ago. But they also allow the entrance of many more players in the contests for markets. Their assaults on established communications entities everywhere will be unrelenting. One of the alleged virtues for competitive supply is the constant pressure exerted on prices, causing them to converge on costs. Used this way, the word "cost' seems easily understood. Yet we have a plethora of cost concepts from the economist's kit now added to the accountant's methods. Disputes as to which is the correct concept and data to use for marketing, negotiation, regulation, finance, antitrust, privatization, and international purposes add their compexities to resolution of issues. Little agreement is in sight, but some standards or conventions are required if we are to escape endless controversies. This is of more than academic interest, since the sale of their excess capacity by communications suppliers at their lowest, out-of-pocket costs is an attractive weapon for competitive incursions. This has already happened in the USA. Communications system capacity is not built in the smooth, continuous curves of elementary economic analysis, and its 'lumpiness' creates widely different results in cost determinations. Those called on to settle disputes so generated will have full hands for a long time. Communications are now so important - from village exchange to global networks - that the policy which sets in train skills, efforts and scarce resources must be both wise and effective for the long run. Quick fixes and improvised tinkering to deal with unintended side effects of previous policy judgements are hazardous and wasteful. Every person who influences these strategic decisions should be aware of Jay Forrester's Law: 'Any intuitive intervention in a complex system will cause it to become worse off'. We
should be as wary of uninformed intuition in communications matters as we would be in operating a submarine, nuclear reactor, airliner or even jumping a horse. The world network of telecommunications is not merely a clever collection of artifacts, like some gigantic Meccano or Erector set. It is a constantly changing, almost biological organism, responsive to the stimuli of customer demand, and capable of growth in size and sophistication. Though robust to physical changes in requirements, it is not immune to policy changes which may demand more than it can give. It must be nourished by knowledge and resources, and sustained by cooperation and shared aims among those in charge of various parts. I asked a friend what he thought was the ultimate goal of all our efforts. His reply was simple and profound: 'It seems to be something like building a Great Exchange in the Sky, to which every person and organization on earth would have access so as to communicate with any other person, at the lowest possible cost, with the greatest choice in services'. I agree with that humane vision. I submit that, in pursuing this goal, the acid test for any idea or suggested alteration should be its effect o n cust o m e r s a t i s f a c t i o n , judged not by ideological purity, but by results. To achieve it, we will need respect for and attention to opposing views. Without a proper load to work into, all physical systems become unstable. Intellectual and political systems also need constructive opposition to prevent loss of vigour, to stimulate innovative impulse, and to prevent those wide swings in policy and approach which so demoralize those who have to do the work. In this dialectical process, arrogance and ignorance have no place. Policy has many facets, and each should be examined in the harsh light of the best knowledge available before irreversible decisions affecting millions of people are made.
TELECOMMUNICATIONS POLICY June 1984