(c) 2003 Charles G. Gray1 Telecommunications Regulation: Domestic and International MSIS 5600 Structural Models in International Telecommunications Charles G. Gray

(c) 2003 Charles G. Gray2 Early Telecom Companies Morse offered patents to the US Government Early telephone companies competed fiercely - fighting or ignoring Bell’s patents Bell had a “patent” monopoly until 1894 By 1900 there were about 12,000 telephone companies - mostly NOT interconnected Non- Bell companies have 50% of market AT&T “Vail Doctrine”

(c) 2003 Charles G. Gray3 Natural Monopoly Model Economist Richard Ely proposed the “natural monopoly concept” Public telephone monopoly –Patterned after water, gas and electricity –Virtually all countries except the US and Canada Private telephone monopoly –US model –Many companies, but AT&T dominated by far

(c) 2003 Charles G. Gray4 Public Monopoly Model Telecommunications typically included under the post office (PTT) No profit incentive –Cross subsidization is common, usually for postal service Little incentive to expand Telecommunications viewed as a luxury The PTT “must” be serving the public interest Users don’t have the knowledge to decide –“Trust the PTT to do what is best for you”

(c) 2003 Charles G. Gray5 The Traditional PTT Model Aimed at fulfilling social goals Combined both regulator and provider functions Usually included both service and equipment Long range planning - total system control Lack of innovation Generally poor service quality No incentive to economize

(c) 2003 Charles G. Gray6 Private Monopoly Model The US and Canada were the only private monopolists beginning in the early 1900s Strong profit motive –Incentive to expand - more customers means more profit –Led AT&T to drive out/take over other companies ICC control was ineffective or nonexistent Implementation of innovation driven by economics - not market demand

(c) 2003 Charles G. Gray7 The Seeds of Change Invention of the transistor –Replace vacuum tubes –Miniaturization possible with more power Computer communications Microwave radio New facsimile standards Rules favor “foreign attachments” –FCC Rules Part 68

(c) 2003 Charles G. Gray8 The Road to Competition Carterfone and MCI Decisions (US) Cellular phone duopoly (US) Europe followed reluctantly Rest of World (ROW) following slowly Sequence of opening markets –Terminal equipment (telephones, etc.) –Value-added networks/services, data networks –Cellular –Long distance –Local telephone service

(c) 2003 Charles G. Gray9 Telecommunications Competition Today The most competitive world markets today (in order) –New Zealand (Maybe!) –US/Canada –United Kingdom –Hong Kong –European Union

(c) 2003 Charles G. Gray10 Reregulation PTT model - government controlled all Liberalization –De Facto monopoly –Restricted competition –Interconnection rules needed –Imports may cause foreign exchange shortages –Price gouging can occur Result - Reregulation

(c) 2003 Charles G. Gray11 “New” Regulator Functions Guarantee equal access Price controls Reseller control Quality of service Cross-subsidies Technical standardization Universal service

(c) 2003 Charles G. Gray12 Universal Service Definition Accessibility Equity Connectivity Flexibility Quality

(c) 2003 Charles G. Gray13 The “Ideal” Structural Model Is there one? Historical background Cultural influences Favor business or residential users? National economic impact Worldwide economic impact