Turmoil in Telecoms

The telecommunications realm has been in upheaval since the late 1970s. Much of the tumult stems from the microelectronics revolution. New electronics technologies have led to increasingly capable and efficient communications equipment, which makes possible myriad new services, which in turn strain the capacities of traditional institutional arrangements—namely, the PTTs. All these developments have been, and continue to be, exhaustively analyzed and commented on. I will therefore summarize as succinctly as possible the key technological and regulatory changes that have placed pressure on Europe's traditional telecoms structures.^[1]

A Changing World

Telecommunications involves the creation of electronic links between two locations for the purpose of sending and receiving information. In early voice telephony, the most basic of telecommunications services, an operator sitting in front of a switchboard established the connections by plugging a jack into a socket. After World War II telephone connections were created by electrome-chanical switches, in which an electrical impulse triggered the movement of a metal reed. Progress in microelectronics in the 1970s

[1] The revolution in telecommunications has been so dramatic that virtually innumerable books and studies on the subject have emerged. Most of what follows is general background knowledge, though I use primarily the following sources: Borrus et al., Telecommunications Development; Gilbert-François Caty and Herbert Ungerer, "Les télécommunications: nouvelle frontière de l'Europe"; Hart, "The Politics of Global Competition"; Jill Hills, Deregulating Telecoms: Competition and Control in the United States, Japan and Britain; Nguyen, "Telecommunications"; and OECD, Telecommunications .

made possible the development of fully electronic switches. In these switches the connections are made within the ICs themselves, involving no moving parts. Software programs control the switching. Thus, at one level today's telecommunications exchanges resemble computers: They are made of thousands of ICs and are controlled by preprogrammed series of instructions. Such "digital" switches can operate on digital or analog networks.^[2]

New transmission modes have also revolutionized communications. Microwave relays permit transmission without the need for laying cables. Satellites can perform a range of telecommunications functions by making point-to-point connections, linking several locations, or even broadcasting (point-to-multipoint communications). The emerging generation of transmission facilities capitalizes on fiber optics. Glass filaments carry information in the form of pulses of light. The advantages of fiber optics are enormous: greater capacity (a single filament can carry three times more voice conversations than can a current coaxial cable), immunity to electromagnetic noise and interference, and lower rates of signal attenuation (meaning fewer repeaters). Plus, the fibers are made of one of the earth's most abundant substances, silica.

The new switching and transmission techniques have made possible a proliferation of services beyond basic voice conversation. As computers spread throughout business and industry, the need to transmit vast quantities of data ballooned. New data-processing companies, like Electronic Data Systems, depended on telecommunications links to receive inputs and to return data after processing them in their large mainframes. Numerous industries now require constant, reliable, high-volume data communications—for example, banks clearing their accounts or airlines processing their worldwide reservations and ticketing. Other new services include

[2] Electronic switching is usually called digital because all the commands for running the exchange exist in the form of binary electronic bits—the same basis on which computers operate. A digital switch can, however, route traffic through an analog telephone network. In such "space-division switching," the transmission facilities do not carry digitized information but rather analog signals, which vary continuously over a range and mirror the modulations in the original message (for example, a voice). The digital switch simply completes the circuits through which the analog signals flow. Time-division switching involves a fully digital network: The original signals are converted into packets of digital information, which are fed into the network and routed through the switch unchanged. They are then reconverted if necessary into an analog form (voice, music) at the receiving end.

paging, mobile phones, videotex,^[3] teleconferencing,^[4] and electronic mail.

Up to now the different kinds of services have required physically distinct networks. For instance, telex, a text-transmission service, uses lines distinct from the telephone network. Presently, voice telephony and low-speed data transmission flow through the basic network. But high-volume data transmission and teleconferencing require circuits with greater capacity. Thus, users with extensive need for rapid data transmission frequently (in the United States, at least) use separate, fully digital networks. In the visual domain cable television employs a completely distinct network.

In the near future that will change. The next step in network evolution will probably be something that is now loosely called ISDN: Integrated Services Digital Network. ISDN will be fully digital (switching and transmission) and will integrate voice, data, and text services. Further in the future is broadband communications, which will likely be based on optical fiber, microwave, and satellite transmission. The increased bandwidth of broadband systems is like additional lanes in a freeway: It can carry more traffic at once. Broadband systems will be able to carry more bits of digitized information; whereas ISDN will carry two Mbit/s (two million bits per second), broadband telecoms should be capable of at least 140 Mbit/s, with some systems currently being designed for 600–1,440 Mbits/s. Broadband systems will permit a single network to carry everything from basic voice conversation to high-speed data to high-quality moving pictures (HDTV).

As technology made possible ever more advanced uses of telecommunications, the demand for new equipment and services took off, especially among major business and industrial users. As Bar and Borrus put it, "In ways never before possible, companies are able consciously to design and build telecommunications networks that decisively enhance their competitive position."^[5] The burgeoning

[3] Videotex is the name for a range of information services aimed at the mass (residential) market. The services are sometimes divided into teletext and videotext. Teletext is one-way transmission of text, such as news headlines or stock-market quotations. Videotext combines text and graphics and is interactive—that is, the user can interrogate the information service and give instructions. For example, with a personal computer and a modem a home user can now go on electronic shopping sprees, ordering from a videotext "store." Or the home user can peruse airline schedules and purchase a ticket herself. Videotext systems are frequently a gateway to dozens of different services. The best-known American videotext systems are probably The Source, CompuServe, and Prodigy.

[4] Teleconferencing allows meetings among groups at geographically distant locations via linkups that transmit both sound and video pictures of the participants.

[5] Bar and Borrus, From Public Access, 1.

demand among businesses for new telecoms services has placed strains on traditional institutional and regulatory arrangements. The pressures erupted in the 1980s into a continuous debate, in public as well as trade forums, over deregulation and liberalization. Policy adaptation was universal. In Chapter 6 I described how aggressive regulatory change in the United States and Japan exerted powerful pressures on Europe's traditional telecoms structures. Freed from past restrictions, IBM and AT&T entered new sectors (telecoms and computers, respectively) and made Europe a prime target for expansion. Japan's well-organized efforts to prepare for broadband communications threatened to place Japanese firms in the lead in the future for equipment and services.

In short both technological and regulatory changes were sweeping across the advanced countries by the early 1980s. Europe's PTTs could not find refuge in their entrenched monopolies. The national governments were (and are, and will be) adapting their telecommunications policies and regulatory structures. The Commission's proposals for European cooperation in managing the changes thus arrived at an extremely opportune moment. Everybody was preparing for an overhaul of telecommunications, but the precise lines of future networks (ISDN, broadband) and institutions could not yet be discerned. The Commission proposals therefore entailed not an upsetting of otherwise stable arrangements but a coordinated, regionally planned management of the changes underway. Of course, that did not mean there would be no disagreements over the direction and rate of adjustment. But national leaders in an adaptive mode were more receptive to new ideas than they otherwise would have been.

Adaptation in Europe

In telecommunications Europe in the early 1980s was not a community but a collection of fiefdoms. Each national telecoms fiefdom was ruled by the administration of posts, telegraph, and telephone. The acronym PTT reveals the origins and nature of the administrative structure: Telegraphs had been added onto the postal services, and telephones were an extension of telegraphs. Telecommunications was seen as a natural monopoly and a public utility. Because telecommunications was considered a natural monopoly, it was believed that only a single supplier of networks and services

could achieve economies of scale. Thus, European PTTs were public monopolies of telecoms networks, terminals, and services. Telecommunications constituted a public utility because, as with roads and electricity, there were social gains from providing universal service. Opening segments of the telecommunications system to competition cuts against the public-utility ideology that has dominated telecoms policies in Europe.

Naturally, the national telecoms administrations resist any such encroachments on their domain, the kind of defense of bureaucratic turf one would expect of any organization. In addition the postal services in most European countries are heavily unionized, and telecommunications revenues have long underwritten postal losses. Thus, the postal unions resist anything that might cause layoffs or cut budgets.

Furthermore, it is by no means clear that deregulation American style is socially or economically optimal in the long run. Deregulation has led to a plethora of different public and private networks in the United States, providing advanced services to that part of the business community that can afford them. At some point the fragmentation may prove a handicap. With much of the telecoms realm in the United States privately owned by large users, innovation may be privatized. The existence of diverse networks may spread out revenues so much that no one can make the huge investments needed for network modernization (toward broadband, for instance).^[6] By contrast, a single, universal network—guaranteed by a state administration—could carry the same services for business and make them compatible with each other but also provide access to advanced services for residential customers.

No one can predict unequivocally which will be the best route to liberalization and modernization—wide-open laissez faire or PTT-led evolution. Because of Europe's administrative heritage, the PTTs will have a major say in planning the transition to next-generation telecommunications. The reforms have begun, and in each country they follow a distinct path. Table 8.1 provides a chronology of the major events in European telecommunications policy.

The United Kingdom

Of the European countries the United Kingdom has proceeded farthest along the path of liberalization. The government commissioned in 1976 a review of the operations

[6] These concerns are explored in ibid., and in Borrus et al., Telecommunications Development , 12–15.

of the BPO, a public corporation that at the time encompassed both postal and telecommunications services. The Carter Report, which resulted (1977), recommended that the postal and telecoms activities be split into two different public corporations, and that the telecommunications network be modernized by rapid introduction of the System X electronic exchange. Thatcher's Conservative government acted quickly on the Carter recommendations, creating a nationalized company in 1981, British Telecom (BT). In December 1984 the government sold 50.2 percent of BT stock in a public offering. The new government also initiated in 1981 a study on the telecoms monopoly of BT. Following the Beesley Report, which resulted

from the study, the government began to liberalize the markets for telecommunications networks, terminals, and services.

The first step was the authorization of a new carrier (network operator), Mercury, in 1981. The new company, now wholly owned by Cable and Wireless, laid fiber-optic cables along British Rail tracks, linking major cities in a fully digital network. Mercury aimed initially at the business market (especially in downtown London) and trunk (intercity) and international communications. Though Mercury remained small compared with BT (total revenues for 1987–88 of about £380 million versus £9,880 million for BT), the threat of competition forced BT to rationalize and formulate new strategies. Competition on network provision also remained limited because the government could not authorize any new carriers before the end of 1990.^[7]

Liberalization touched other important areas of British communications. A new Office of Telecommunications (Oftel) regulates the industry (somewhat as the FCC does in the United States), ensuring competition and fair rates. The market for terminal equipment has been open since 1984, meaning that users can purchase telephones, modems, PABXs, and other devices from competing suppliers. Previously BT had a complete monopoly on customer-premises equipment. Even in switching equipment BT has introduced competition in its purchasing practices. BT has made clear that it will no longer buy solely from the traditional U.K. suppliers, Plessey and GEC (which merged their telecoms interests in April 1988) and STC. In fact BT has already placed some orders with Thorn-Ericsson and an AT&T-Philips joint venture, Pye TMC.

To modernize, BT has announced plans to merge its voice, data, and telex networks into an ISDN. The goal is to have 80 percent of customers connected to ISDN by 1992.^[8] An experimental ISDN, called Integrated Digital Access (IDA), began operating in the fall of 1984. In preparation for ISDN, interexchange lines were fully digitized by 1989. One potential problem is that Britain has chosen an ISDN model different from that favored by other European countries and the CCITT.^[9] The British expect to upgrade their system

[7] Bar, "Telecommunications in the United Kingdom," Appendix, 76–79.

[8] "Grande-Bretagne: des 'Points d'acces,'" 49.

[9] The CCITT, a body of the International Telecommunications Union, formulates recommendations on international telecommunications standards. The British system comprises one channel for voice and data at sixty-four Kbit/s plus two channels for simultaneous data and signaling at eight Kbit/s each. The CCITT proposed standard includes two voice and data channels of sixty-four Kbit/s each and a single sixteen Kbit/s signaling channel.

to fit the CCITT standards, while the current standard allows early use.

British deregulation has placed pressures on continental telecoms authorities. For instance, international telephone calls are significantly cheaper from London than from most other European capitals.^[10] As a consequence, some firms are relocating their communications centers to London. The DGT in France had to adjust its tariff schedule, raising local rates to reduce international charges, in order to keep customers from routing their transatlantic calls through the United Kingdom.^[11]

France

French telecommunications has followed the typical French high-technology policy: state-engineered corporate mergers and ambitious plans. The DGT was until 1987 the French agency charged with responsibility for telecommunications policy; it falls under the Ministry of Posts, Telegraph, and Telephone but generates its own revenues and has a budget independent of the national budget. The DGT, through its research arm, the Centre National d'Etudes des Télécommunications, pioneered research on fully electronic exchanges and in 1972 began installing CGE's E-10 switch, the world's first fully digital exchange.

The DGT also had a hand in industrial policy for the telecoms sector until 1987. The DGT folded ITT and Ericsson subsidiaries into a telecommunications division for Thomson in 1975. The Socialist government nationalized Thomson and CGE (the other main telecoms equipment supplier) in 1981, and two years later merged the telecommunications divisions of both companies into Alcatel, a CGE subsidiary. The DGT opposed that move because it ruined the policy of maintaining competition among suppliers. The DGT also protested when the government diverted a major share of its revenues to fund the filière électronique and to aid the national budget. All of a sudden the DGT lost its surpluses and had to borrow in order to make necessary investments. Alcatel created the world's second largest equipment maker by purchasing ITT's European telecoms subsidiaries in a deal finalized in January 1987. Later, the

[10] Sabine Delanglade and Eric Rohde, "PTT: Déréglementation accélérée en Europe," La Tribune , 26 November 1985, p. 6.

[11] John Wilke, "Can Europe Untangle Its Telecommunications Mess?" 47.

French government sold a small equipment firm, CGCT, to a group including Ericsson (Sweden) and Matra (France). Finally, under the government of Jacques Chirac, responsibility for the telecoms industry was transferred out of the DGT to the Ministry of Industry.^[12]

From 1975 to 1980 the DGT presided over the aggressive expansion of the telephone system to bring the penetration rate up to the level of other advanced countries. It sponsored in 1978 the Plan télématique , which aimed at the rapid introduction of advanced telematics (combining computers and communications) services. The Plan included experiments with a public videotex system, an electronic directory, broadband optical-fiber facilities, and plans for a new telecoms satellite. Transpac, a packet-switched network for data transmission, came on line in 1979.

The French have been among the most ambitious in Europe in planning for advanced services and future networks. In 1987 their level of digitization of the network (55 percent of switches, 70 percent of transmission) was the highest in Europe.^[13] France has had a pilot ISDN project since 1987 at Renan, and by 1988 the telecoms administration was preparing the transition from its separate specialized networks (the four "Trans" systems) to a single ISDN network.^[14] An experimental broadband system has been in operation since 1983 in Biarritz with some 1,500 subscribers.

One of France's great successes has been the Teletel/Minitel system, a videotex service aimed at the mass market. The system offers the DGT's Electronic Directory Service (an on-line telephone directory for the whole country) as well as the Kiosque. Private companies offer information services through Kiosque; by April 1986 1,900 data services were available to professional or residential customers. Use of the Minitel by the public has skyrocketed, largely because of the policy of the DGT to "lend" Minitel terminals free of charge. The terminals were introduced on a trial basis in 1981, and by the end of 1985 1.3 million were in use.^[15] Through December 1987, 3.37 million terminals had been installed.^[16]

[12] Thierry Vedel, "La 'Dérèglementation' des Télécommunications en France," no page numbers.

[13] "France: Le Pays le Plus Numérisé," 49.

[14] See Marie-Laure Théodule, "La gamme Trans en pleine mutation vers le RNIS."

[15] Jeffrey A. Hart, "The Teletel/Minitel System in France," 21–25.

[16] Paul Betts, "A Frenzy of Alliances," Financial Times , 11 May 1988, European Telecommunications Survey, p. 10.

Further changes liberalized several other aspects of French telecommunications. In September 1986 the Chirac government created the Commission Nationale pour les Communications et les Libertés (CNCL). The CNCL was supposed to regulate telecommunications and broadcasting much as the FCC does in the United States; formerly the DGT both ran and regulated the system. Also, the CNCL could authorize private networks for internal use. In September 1987 the government published a new law opening up the provision of VANs to competition. The law did not permit competition in basic voice telephony, which would remain the province of the DGT. Consortia began to form to offer VANs, including one joining IBM, Crédit Agricole, and Paribas. The next step was to open competition in the provision of mobile telephone systems; two groups were authorized. The Chirac government also renamed the DGT France Telecom and spoke of plans to privatize it. But the Mitterrand electoral victory in the spring of 1988 and the opposition of the Socialists and the unions brought an end to these plans. The second Socialist government replaced the CNCL with a Conseil Supérieur de l'Audiovisuel (CSA). The CSA has the responsibility of authorizing large private networks and new VANs. A decree of May 1989 created the Direction de la Réglementation, which functions much like the American FCC; its charter was fully worked out in 1990.^[17]

France, during the period of reorientation after the failure of the early Mitterrand project (see Chapter 7), became a vigorous promoter of European collaboration. The government announced its intention to "work for the creation of a European telecommunications space." In a lengthy article published in Le Monde the minister in charge of the PTT, Louis Mexandeau, called for increased European collaboration and expressed support for the Commission's telecoms initiatives. His statement stressed reciprocal market opening and common European standards.^[18] The shift in France from national-autonomy strategies to a European outlook helped ease the way for the Commission's proposals leading to RACE.

Germany

The Bundespost in the Federal Republic of Germany was for a long time Europe's most stubborn defender of traditional

[17] Benjamin Coriat, "Régime réglementaire, structure de marché et competitivité d'entreprise."

[18] Louis Mexandeau, "Pour une politique européenne des télécommunications," Le Monde , 3 April 1984, p. 35.

PTT roles and monopolies. To be sure, the basic communications law of 1928 and the Fundamental Law of 1949 granted the Bundespost the exclusive responsibility for building and running telecommunications networks. The Bundespost has interpreted this responsibility to include the networks, services, and even terminal equipment.

As late as the mid-1980s private networks were permitted only for in-house use and could not be connected to the public network. The Bundespost retained its monopoly on the sale of the first telephone handset to every customer and until 1988 was the sole supplier of modems. The Bundespost even forbade the sale of computers with internal modems. Any company that wished to sell terminal equipment directly to users (rather than to the Bundespost) had to have each product approved by the Bundespost. For its network equipment purchases the Bundespost relied on a small circle of German firms headed by Siemens, then SEL (the ITT subsidiary now owned by Alcatel), along with Nixdorf and IBM Germany for data communications and VAN equipment.

The Bundespost developed specialized networks to try to meet the growing demand for enhanced services. The Integrated Digital Network includes data transmission, packet-switched data, telex, and teletex. In 1985 the Bundespost was pushing for broad expansion of Bildschirmtext, a videotex system, apparently with only moderate success. In particularly close collaboration with Siemens the Bundespost developed plans for ISDN. Because of a major error in exchange development strategy, Germany lagged well behind in digitization of the public network, the first digital switches being installed only in 1984. The public ISDN, integrating voice and data services, had nevertheless been installed in thirty-nine cities by 1990 and is to be completed nationwide by 1993. The next step will be to integrate narrowband and wideband ISDN (adding videophone and videoconferencing to the public network). Eventually, a universal broadband system based on fiber optics will be in place, adding radio and television to the public network. Trials were underway in 1985 for wideband ISDN in seven major cities under the Bigfon project; the next step was to link the local networks via fiber-optic trunk lines in the Bigfern project.^[19]

[19] Patrick Cogez, "Telecommunications in West Germany," 54–56; "ISDN Makes Strides in West Germany," 22.

Pressures for liberalization from German business and pressures for increased openness to trade from the United States began in the mid-1980s.^[20] The Kohl government appointed the high-level Witte Commission to study telecommunications reform, and it began its work in early 1985. The report finally emerged in September 1987. The Witte Commission majority recommended a set of reforms that fell short of full deregulation or privatization. In fact four members of the Commission issued a separate opinion, arguing that the proposals did not go far enough and that "only replacement of the monopoly with competition at all levels can lead to a market capable of withstanding the future."^[21] The most important recommendations were these:

Moderate as they were, the proposals drew intense criticism. Only the Free Democrats strongly supported liberalization. Some Christian Democrat Länder governments objected to the reforms, even though Chancellor Kohl committed himself to seeing them through. The Social Democrats and Greens opposed the changes. In this position they supported the postal workers' union, which represents

[20] Hart, "The Politics of Global Competition," 187; Peter Bruce, "Bickering Bonn Tackles Bundespost Monopoly with Reluctance," Financial Times , 2 June 1987, p. 2.

[21] "From Bundespost to Telekom," 407.

[22] "RFA: Les recommendations (en substance) de la commission Witte," 91.

463,000 of the Bundespost's 500,000 employees (making the Bundespost the largest single employer in Germany). The union feared "tens of thousands" of layoffs, rising tariffs, and diminished quality of services. Even the Christian Democrat coalition partner from Bavaria, the Christian Social Union, was reluctant.^[23] Still, the changes were approved by the cabinet in May 1988, after court challenges by the unions failed. The Witte reforms became law in July 1988.

Elsewhere in Europe

Telecommunications reform was not limited to the three major countries of Europe. Italy's fragmented system felt the first breaths of rationalization. A government agency, Azienda di Stato per i Servizi Telefonici (ASST, under the Ministry of Posts and Telecommunications), runs the trunk lines. SIP, part of the state-owned STET conglomerate, manages most of the local networks and linkups to customers. A third company, Italcable (also part of STET), handles international connections. The Italian National Plan for Telecommunications (for 1985–94) foresaw open competition for VAN provision and for the supply of customer premises equipment. In 1987 the leadership of the Istituto per la Ricostruzione Industriale (IRI) group (which owns STET) proposed reorganizing STET into an operating company resembling BT. The new STET would include SIP, Italtel, Italcable, the satellite division, and an alliance with a foreign equipment manufacturer.^[24] AT&T formed an alliance with Italtel, but the rest of the plan has not been realized.

The Netherlands, with the most tightly regulated telecommunications system in the EC, also moved toward competition. The Steenbergen Report of 1985 contained a number of deregulation proposals that found their way into a bill passed by parliament in 1987. Under the new law, which took effect on 1 January 1989, the postal services of the PTT and the telecommunications services were split into separate subsidiaries of a new state-owned enterprise, NV PTT Nederland. PTT Telecommunications retains its monopoly on network provision but must compete with private companies

[23] Peter Bruce, "Bickering Bonn Tackles Bundespost Monopoly with Reluctance," Financial Times , 2 June 1987, p. 2; and David Goodhart, "Reforms Firmly on Track," Financial Times , 11 May 1988, European Telecommunications Survey, p. 10.

[24] James Buxton, "Good Progress after a Swift Change of Direction in Italy," Financial Times , 24 October 1983, Survey, p. 12; Alan Friedman, "A Crucial Year," Financial Times , 11 May 1988, Survey, p. 12.

in an open market for terminal equipment and VANs. The Dutch are also planning to convert the network to ISDN after 1995 and to broadband by the turn of the century.^[25]

The report of a Wise Men Commission in Belgium in 1987 recommended changes similar to those planned in the Netherlands. The Wise Men recommended that the RTT (Régie des Téléphones et Télégraphes) be converted into an independent state-owned enterprise. Under legislation proposed in 1988, the RTT will retain a monopoly over the network and over "essential" VANs (though these remained to be defined). The market for terminal equipment will be opened to competition. Belgium also began an exploratory technical study for broadband networks.^[26]

From these snapshots of situations in various European countries, it is clear that telecommunications in Europe was undergoing profound alterations. The changes were both technological, as networks moved toward ISDN and broadband, and institutional, as the PTTs found that they would have to share some of their traditional markets with private competitors.