Remarks of

Commissioner Susan Ness

before the

Women's Foreign Policy Group

Washington, D.C.

January 23, 1997

"Global Competition in Telecommunications"

I am delighted to join you today.

Let's raise a glass in a toast to Madeleine K. Albright on her confirmation as Secretary of State -- the highest ranking woman -- ever -- in the U.S. Government.

Networking is vital. It expands our hopes and our horizons. It serves as a reality check, as well as an opportunity to check on potential career moves.

So I am always happy to do my part to encourage women to meet and work together. And I urge you to extend a ladder to other women coming along.

GLOBAL COMPETITION

Introduction

We are on the verge of an explosion of global competition in telecommunications. The Global Information Infrastructure (GII) -- which Vice President Gore heralded just three years ago -- is well under construction, even in the far reaches of this universe.

The 1995 world-wide domestic and international telecom market exceeded a half trillion dollars. The U.S. represents more than a quarter of that market -- a market that is growing at a rate of 7% a year.

Until recently, most nations operated with a government-run, monopoly telephone system. Service and choices were limited. Innovation was out of the question.

Today, many countries large and small are taking the giant step of privatizing their telecommunications companies and concurrently or sequentially, introducing competition into the marketplace.

What has prompted this dramatic change?

Today, I'd like to highlight the benefits of competition; note the forces promoting global telecom competition; examine the steps countries need to take to make competition a reality; and focus on multinational efforts to remove international barriers to competition through a WTO agreement on telecom services.

The Benefits of Competition

Competition is a catalyst for creativity, efficiency, innovation, and economic growth. In the U.S., over the past ten years, the introduction of competition in the long distance market caused a 30 percent drop in rates and the emergence of over 400 competitors. At the same time, there has been a 170% increase in long distance network usage, generating significant revenue gains for both local and long distance carriers.

International calling prices have also been driven significantly lower. Rate reductions have been accompanied by increases in consumption of international telephone services. U.S. domestic carriers net revenues from international telephone service quadrupled from 1985 to 1994, from $1.8 billion to $8.1 billion.

Competition has also contributed to sizeable increases in telephone subscribership. In Chile, for example, the telecommunications market has undergone significant liberalization and privatization. The number of Chilean telephones more than tripled from 591,000 lines to 1.8 million.

The United Kingdom introduced competition to British Telecom in the early 80's, inviting cable companies to construct competitive wired systems. Competition drove BT to improve its service; telephone penetration in the UK has risen substantially; and prices have declined.

Such tangible benefits have triggered a competitive movement around the world.

Forces Promoting Competition

The U.S. Government has promoted the word "competition" like a mantra at every opportunity and in every international forum.

In addition, pressure for competition has come from multinational firms needing sophisticated telecommunications services to communicate with their own offices as well as with clients. Telecom companies wanting to expand abroad have intensified the drumbeat.

Also, credit should be given to enlightened government leaders around the world. Commissioner Martin Bangemann of the European Union, in 1994, presented his vision of telecom competition in Europe. As a result, most European Union member states are required to introduce competition to the public switched voice network by January 1, 1998.

Impeding the spread of competition is the fact that many countries -- particularly developing nations -- rely heavily on the revenues generated by monopoly telephone service providers to fund their infrastructure and for other uses. These nations need to be convinced that competition will improve universal service and stimulate economic growth.

Government Action

The marketplace alone cannot advance competition. Government action is needed.

Generally, legislation must be enacted. We have urged countries to establish a truly independent regulatory authority, with rules and procedures that are non-discriminatory and transparent. Only then will competitors feel that they have a fair chance to succeed.

In many countries, the ministry of telecommunications both makes the rules and provides the service. Separation of these functions is a critical step in creating an environment conducive to competition.

Also, the rules should facilitate interconnection of competing networks to the public switched network, with safeguards to prevent the use of bottleneck facilities to control markets.

Privatization

Some countries are privatizing their telephone companies before introducing full competition. Both Deutsche Telekom and France Telecom have initiated a staged in privatization, where, ultimately, up to 49% ownership of those companies will be publicly traded. The capital markets responded well to the partial DT offering this fall -- although the terms of the deal all but removed the risk from the investment.

Wireless Licenses

While delaying the introduction of wired, facilities-based switched voice competition, some countries are testing the competitive waters by issuing multiple wireless licenses. Portugal and Spain have recently expanded the number of wireless carriers. In Israel, an aggressive wireless policy has resulted in wireless calls actually costing less than wired network calls.

Satellite Licensing

In the longer term, competition will also arise from global mobile satellite systems. These systems will allow an individual to travel around the world making and receiving phone calls with one handset and one telephone number.

These voice and data services will be handled through a collection of satellites orbiting several hundred miles above the earth. Calls may be handed off from one satellite to the other. Several such multinational systems on the drawing board are competing both in the capital markets and in the global marketplace to line up strategic partners. With global mobile systems, countries have the opportunity to get the private sector to build and finance communications technology in extremely remote areas, where terrestrial infrastructure development is difficult and expensive.

Of course, satellite providers will have to secure permission in each country where they wish to provide service and be assigned appropriate spectrum to offer service.

Global spectrum coordination becomes critical to their success.

Private Competition

The privatization of telecom carriers has placed enormous pressure on the capital markets to provide funding. Governments realized that private sector capital is needed to meet the huge investment requirements for expansion of telecommunications infrastructure.

In addition, national carriers are increasingly making equity plays in the domestic and international markets of another country. A web of global partnerships is forming.

Singapore Telecom's overseas holdings stretch from Belgium to the Philippines. Similarly, Telefonica of Spain has investments in over seven Latin American countries.

Sprint, France Telecom and Deutsche Telekom have a joint venture -- "Global One" to provide international voice, data, and video services.

AT&T has formed non-equity alliances with several national telecom providers.

And BT/MCI have agreed to merge, after BT invested $4.3 billion in the second largest US long distance provider. For the first time, a foreign company has proposed to acquire a major US telecom provider. Approval by the Justice Department, the FCC, and in Europe, DG-IV, will be necessary to consummate the transaction.

Among the issues to be reviewed in that merger is the existence of a "golden share," which the British Government holds, entitling it to approve the CEO, and any acquisition of more than 15% of company stock.

These global forces can create dislocations as well as competition in the markets they penetrate. Combined with the dominant provider, such alliances have the potential to redirect traffic anticompetitively. Cooperation among the Antitrust or Competition Bureaus of governments will be increasingly helpful to prevent abuses.

Stronger competitors can also put downward pressure on the rates that telecom providers pay to terminate international calls.

Accounting Rates

These accounting rates are artificially maintained at a high level. Net settlements represent a $5 billion dollar deficit in the U.S. Balance of Payments. Rates have come down over the past few years, but continue to be well in excess of cost. High rates provide incentive to game the market.

As a result, the Commission recently proposed the equivalent of price caps for settlement rates paid to foreign carriers, with deadlines for compliance and proposed enforcement mechanisms. These benchmark accounting rates would consider the wealth of the country and development of its network.

I am personally looking to US carriers to share with consumers the benefit of lower rates from a reduction in accounting rates. And I am also looking forward to our achieving a positive resolution to the trade negotiations in Geneva.

WTO Negotiations

The World Trade Organization negotiations on basic telecommunications services -- like telephone calls and faxes -- could vastly expand competition starting January 1, 1998.

Negotiations are scheduled to conclude February 15. We probably will not know until then if these negotiations will succeed.

No single measure will do more to provide a solid foundation for global competition than a strong WTO agreement. The 53 countries participating in the negotiations represent about 80% of the world market.

Not all of them are making extensive offers to open their market to U.S. companies, but we do have very substantial offers from most industrial nations. Key markets in South America have also made substantial commitments.

A successful deal would vastly strengthen the ability of US companies to compete globally. They could build their own local networks in foreign countries. Or they could compete by creating their own networks to pick up and deliver international telephone calls in every corner of the world. Whole new strategies for winning in the world market will be open.

Even more remarkably, this negotiation has created a strong consensus on core principles to guide domestic telecommunications regulation. We have learned in the United States that it is not enough to declare a market open for competition. You also must have regulatory safeguards to allow new competitors to thrive.

This negotiation has distilled our experience into a set of guidelines that all the major industrial countries, and many of the developing nations, have accepted. Every country can still craft its own unique path to implementing competition. But US companies can bring enforcement actions at the WTO if national regulators do not create and implement a procompetitive regulatory regime.

In short, a WTO deal on basic telecoms could be a big win for consumers and suppliers. More competition will help everyone.

BUT....some problems still remain. A few are technical. We have to get them right but there seems to be plenty of goodwill in Geneva to do so.

Others involve the fundamental balance of US benefits and obligations under a WTO deal. I'd like to mention four such issues:

1) Not enough good offers.

Last April the United States refused to accept a WTO deal on basic telecoms because not enough other countries had offers of market opening comparable to our own. Since then, the members of the European Union have significantly improved their offers. And the offers of Singapore, Hong Kong, Japan, and other key countries are improved -- although they should be better. There are unacceptable restrictions on foreign investment opportunities in many national offers.

2) The European position on video services.

The European Union recently insisted that any video service would fall outside of its trade commitments. Now, we all acknowledged that the broadcast industry was outside of the scope of the negotiations. But the European Union is trying to keep the option of treating future telecommunication technologies -- such as movies being "broadcast" over the Internet -- as broadcast services. We don't fully understand the European position. Frankly, we wonder if they do. So, we are cautious in assessing the value of the European offer.

3) The treatment of INC.

Every country is a stockholder in Intelsat, a global satellite organization headquartered in this city. Intelsat is one part international organization, one part commercial competitor. As an international organization, it has immunities from competition law that require special vigilance in the new competitive era. And it has inherited huge holdings of invaluable spectrum from the days when it was a global monopoly. Now it is spinning off a purely commercial venture called INC that will compete with the private sector in direct-to-home television broadcasting and in the delivery of broadband multimedia services. These services represent the future core market for communications satellites.

Now a spinoff can be blessed or penalized by its parent. The dowry bequeathed to INC is rich in satellites and spectrum. Also, Intelsat members will control a significant percentage of INC's ownership. Quite frankly, we fear the creation of an entity enjoying unfair competitive advantages in the market. Any WTO deal has to have a practical method of addressing such problems.

4) Preventing anticompetitive behavior in international telecoms services.

As I mentioned, the huge profit margins created by high accounting rates fuel the potential for anticompetitive behavior. We could not agree with other countries last April on how to respond to this problem. But, the accounting rate benchmarks the FCC proposed in December offer a constructive solution. By using benchmarks to reduce accounting rates we will remove the financial basis for anticompetitive conduct. And we are acting in a manner that is consistent with our WTO obligations to allow entry into our market by the carriers of WTO members.

So, where do we stand?

We have the basic foundations of a sound deal that will give us a common approach to introducing global competition.

We have a key set of countries, led by the US and now the EU, committed to significant market opening.

We have a chance for a very big win for the entire world trade system. Everyone knows that trade authorities need to do better in handling service industry issues. The Uruguay Round established their general authority on the issues. But no significant service deal has yet emerged. Telecommunications could show the way.

We still have the problems of countries -- particularly in Asia -- who have made little effort to match us on market opening. That's a minus.

We have questions and worries about how to address problems posed by coverage of video services and the introduction of INC.

We have the possibility that our competition measures to deal with international telecommunications services could come under attack.

So, it is still a negotiation. Like most trade negotiations, it won't be decided until the end. A good WTO deal is a "pearl." But we won't make a bad one.

Conclusion

Telecom competition has sparked the privatization of national providers, the formation of a web of global alliances, and the need for multilateral agreements to open markets.

The world is set on a course that will provide consumers with greater choices, more innovation and lower prices. It is not an easy course, and pressures to retreat are great.

Let us work together to achieve these goals.