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Preface

The title of composer John Cage’s autobiography, How to Improve the World (You Will Only Make Matters Worse), captures the sentiment of many observers of the telecommunications industry about government control. Throughout the world there has been a movement toward privatization of telecommunications services and the introduction of competition. Where private monopoly prevailed, as in the United States and the most populous provinces of Canada, there has been a clear trend toward the introduction of competition at every level of service and in every equipment sector. As for public ownership, this book joins in its general rejection. The 1989 fall of the Berlin Wall signaled the dismal failure of public ownership as a system of production and distribution. In the West it is difficult to find an example of a publicly owned enterprise that is operated efficiently. The U.S. Postal Corporation is widely viewed as the American model of everything that is wrong with public ownership.

Rejecting public ownership, however, does not mean that government should play no role in shaping market structure or behavior. I eschew any attempt to provide a general theory distinguishing proper and improper governmental intervention throughout the complex modern economy; this book is about the telecommunications industry and its interfaces with other sectors. A historical view of that industry shows that the relationships between government intervention and market structure are complex and that the appropriate relationship has varied over time. There have been circumstances in which private monopolies subject to certain forms of government regulation or subsidy have resulted in excellent market performance. The static measures of such performance include technological progressiveness, relative efficiency of production, and the level of price relative to production costs. And, of course, these aspects can be measured over time. At times when technology is advancing slowly, the service is homogeneous (plain old telephone service), and there are clear scale economies, monopoly subject to regulation has led to excellent performance. AT&T and Bell Canada’s experiences over long periods of time show that this has been the case. Indeed, taking a historical view of the telecommunications industry undermines the sweeping view that competition is always better.

How do we know when monopolies’ moment should be over? The history of customer premises equipment manufacture in the United States illustrates the dynamic. In an open, entrepreneurial society there are always people who have entrepreneurial skills, capital, and a capacity for technological innovation. If the pecuniary rewards are sufficiently large, the three resources will be combined. The odds in favor of overturning or eroding a monopoly may initially be low, but history is replete with examples of persistent people and firms overcoming such odds. Before World War II the typical kinds of customer premises equipment were simple devices with little utility to customers. A typical question addressed to a regulatory commission was, for example, whether a local hotel might control telephone booths in its lobby. Regulators, as we will see, were unwilling to abrogate telephone company end-to-end responsibility in favor of such minor advances. Technological developments during and after World War II began to alter the tradeoffs. The development of telephone answering machines and recording devices coupled with wartime advances in electronics gradually triggered the introduction of many new products that could be plugged into the telephone network. Homogeneity was supplanted by heterogeneity, and entrepreneurs eventually persuaded regulators to allow the introduction of their products into the telephone network. In summary, technological possibilities triggered entrepreneurial activity which, in turn, led to reshaping the structure of the telecommunications industry.

At other times the convergence of technologies can lead to the reshaping of an industry. As we will see in Chapter 8, computers have an ancient lineage. Government support during World War II dramatically accelerated technological progress. Postwar progress was rapid as well, largely because of Bell Telephone Laboratories’ invention of the transistor. Older firms such as IBM and newer ones as well, together with educational and governmental institutions, began the tentative steps that led to the convergence of computers and communications. If data could be transformed and stored, could it not also be transmitted? Thus, the traditional telecommunications industry was reshaped not only by new entrepreneurs but also by the expanding horizons of a vast new business. In a somewhat different way, the traditional telecommunications industry came into conflict with the television industry. Voice was by far the most important product carried through the network in the prewar era, but the dramatic growth of television in the postwar era inexorably led to the issue of who should carry video information. In more recent times, as the process of digitalization has advanced rapidly, we may be on the road to still another structural transformation. If all information—voice, video, data, fax, photo and so on—can be reduced to digital information as “0”s and “1”s, we may be entering a new era of product homogeneity whose future structural implications can now only be dimly seen. But on the other hand, the wide variety of service offerings, potential content, and transmission media could lead to a variety of networks, each offering heterogeneous sets of packages.

Technological possibility is thus the engine of entrepreneurship and industrial structure in telecommunications. But we should not enshrine the vision of a small inventor working in his or her laboratory to develop a new product or service on a relatively small budget. Clearly, as this book will show, there are many such people. But they are not the only—or even the primary—engine for bringing new technologies to market. No institution on earth has been responsible for more technological progress than the former monopolist AT&T through its Bell Telephone Laboratories (Bell Labs) Division. Much the same can be said about other large firms with dominant positions, such as IBM. Governmental and non-profit institutions can also play major roles. As we will see in Chapter 8, the Internet and its progeny, the World Wide Web, would probably have not been possible without university and government development and subsidies. Only after enormous expenditure and full-scale development of the Internet, a system that is becoming a full-scale alternative to the conventional telephone system, were its commercial opportunities exploited.

Yet the history of government enterprise is often a history of economic failure. The economic shambles that was the Soviet Union is a testament to the dangers of government overreach. Even in non-socialist countries, public enterprise has usually been badly run. Telecommunications in Europe, as we will see in Chapter 6, has been improving dramatically since the movement toward privatization that began when the British government privatized British Telecom (BT) in 1984. That company is incomparably more efficient and progressive than it was as a public monopoly. How can we reconcile the successes of government intervention with its numerous failures? First, the cases of successful government intervention have generally occurred in connection with the pursuit of values other than pecuniary ones. Defense preparations and the conduct of war triggered many of the most important telecommunications advances. Second, there can be very costly infrastructural goals that private firms are unwilling or unable to undertake. Sometimes those goals (for example, provision of a clean water supply) have clear positive external effects that would ramify through much of the society. Subsidies to private firms can be useful in such situations. Third, while there is a general presumption against government intervention, because market competition will ordinarily lead to better economic performances and provide superior incentives to individuals and firms, that presumption can be overcome. When the presumption is overcome, government intervention should be as light as possible. A private monopoly is superior to government enterprise. Regulation, when indicated (as in the case of a natural monopoly), should assign reasonable goals that private firms are expected to achieve rather than require a public authority to design the means and details of achieving such goals and interfere deeply in a company’s day-to-day affairs. The reason is obvious. Those who operate daily in the marketplace have a better understanding of the innumerable details involved in operating a business than bureaucrats and legislators do, and they can adjust their activities far more flexibly and quickly than central planners can.

While I believe that these principles help to distinguish many of the cases of successful government intervention from the many failures, a final word of caution is necessary. Government intervention should be conducted under the sunset principle. That is, periodic re-investigation of the conditions that initially led to intervention are in order so that an established relationship does not become entrenched, as it has in the case of American agriculture. The rumblings of invention, innovation, and potential entrepreneurship should alert government and the attentive public to the changed conditions that call for new relationships or, more likely, the entry of competition. Technological changes and the possibility of market convergence between previously discrete sectors should send the same sort of signal as they did when communicating became an important function of computers. I do not for a moment underestimate the political efforts needed to dislodge an entrenched relationship. Nevertheless, as we will see, government actors have responded to such situations, helping the telecommunications industry to adjust to new realities.

The new realities are moving more rapidly in telecommunications today than ever before. One would be foolhardy, indeed, to predict the implications of technologies now coming to the fore. For example, what are the implications of web broadcasting, in which data are “pushed” to users at determined intervals rather than users having to “pull” information from various sources that they must contact? Again, what impact will Internet telephony have on the traditional long-distance carriers? Extranets (such as the one developed by Federal Express) that extend enterprise networks to suppliers, customers, and others are in their infancy. Their probable impact can now be only dimly seen. New, powerful, digital spread spectrum cordless phones that enhance security and sound quality, and can offer a range of eight-tenths of a mile from the phone base, will undoubtedly affect wire line firms in ways that we cannot yet fathom. And these are only a few of the newer technologies now coming on line. When one adds to the difficulty of predicting how new technologies will shape the future of telecommunications, the added uncertainties of how the F.C.C. and other regulators will respond, and the shifting structures of corporate alliances, it is evident that any precise prediction of the future is impossible. Nevertheless, the last chapter does attempt to make general judgments about the future of the increasingly important telecommunications sector.

Returning to the John Cage quotation with which I began this preface: mistakes have been made, and policies have changed, but, as this book intends to show, the complex and changing government-business relations in telecommunications have not made matters worse; they have improved the world.

I could fill two pages with the names of academics, consultants, attorneys, engineers, and business people who have aided my understanding of telecommunications and its relationships with other industries. The insights provided by these people in Canada, Germany, the United Kingdom, and the United States continuously challenged me to rethink, and often change, my views on many topics. I would like to single out my wife Celeste Stone, to whom this book is dedicated, for editing, typing, and most importantly, compelling me to reconsider a great deal in this book. I would also like to thank Michael Weber, Patricia Kolb, Steven Martin, Ana Erlic, and Elizabeth Granda at M. E. Sharpe for their exemplary efforts.