Is telecom still a monopoly?
Once an inherently monopolistic industry, telecom is now a brutally competitive network market
For almost 100 years, late into the 20th century, American Telephone and Telegraph Company (AT&T) was a government-sanctioned monopoly providing local and long distance telephony. It was also one of the most profitable companies. Its origins go back to Alexander Graham Bell, the inventor of the telephone system. Its monopoly ownership also gave lucrative captive business of all telecom equipment and leasing of lines to its subsidiary called Western Electric. AT&T’s long-lived monopoly status is quite remarkable in a country that prides itself on the intensity of anti-trust scrutiny.
Indeed, AT&T escaped anti-trust action several times, most notably the one initiated in 1949. The government dropped this anti-trust case, implicitly acknowledging that telephony was a “natural monopoly”, and it was in the national interest if served by just one company. As far back as 1907, the president of AT&T had also proclaimed the slogan of “one policy, one system, universal service (i.e. one company)”. Because of being a monopoly, it was regulated by public utility commissions in the states, and by the Federal Communications Commission (FCC) at the federal level.
The company’s monopoly was broken up in 1984, with the parent retaining long-distance telephony and the seven regional “Baby Bells” becoming de facto local monopolies providing local services. Long-distance services became heated with competition, with the entry of MCI and Sprint. Due to AT&T’s break-up, the charges that long-distance carriers had to pay regional Bells became transparent. Until 1984, these charges were opaque, and mother AT&T actually used to subsidize local calls. In fact, after the break-up, the local calls became more expensive, rising faster than the rate of inflation. This was also the period of the entry of VOIP (voice over Internet protocol) into telephony.
As we look back at the saga of the AT&T break-up, it looks strange and archaic. That’s because the emergence of the Internet, the mobile phone and cable plus satellite television was mostly post 1984 (that Orwellian year!). In most of the world, there is intense competition fuelled by multiple communication technologies. Telecom has become the bedrock and architecture on which reside other services like finance, education, entertainment and e-governance. The revolution caused by mobile telephony is yet to be fully understood. We are in the midst of the fast evolving age of convergence, where the distinction between telephony, television and the Internet is fast blurring.
But let’s revisit the question of whether telecom is a natural monopoly. This question is related to whether it has inherent features of large economies of scale and scope. When marginal cost of providing service to an additional customer is close to zero, such a business is a candidate for being considered as a single and natural monopoly. Take the case of two of the biggest telephony markets in the world—India and China. At peak growth rates, they were both adding 2 million mobile subscribers per month. But the market structure models followed in the two countries are starkly different. In India, the sector is led by private sector dynamism, whereas in China, the companies are state-owned. China is mostly served by just two national mobile telephony service providers. India has a crowded field of more than a dozen companies (a new one just joined the club last week). Of course, not all companies in India are profitable, unlike the two in China. India has also the distinction of possibly the lowest cost telephony in the world. Additionally, unlike China, in India the service providers also bear a disproportionately heavy burden of spectrum cost, won through punishingly expensive auctions. Some of them no doubt suffer from the winners’ curse. Their financial health can be a concern not just to shareholders but also to their bankers. Competition can become cut-throat, leading to unhealthy predatory pricing. So, is there a case for fewer players, for the sake of better financial health, efficiency and better-quality service?
When AT&T was broken up, the public woke up to the fact that telephone costs were borne both by originator and terminator. Seen holistically, the network is one. In a competitive scenario, customers are “owned” by one service provider, in that the revenues are collected only at one point. But the work of the telephone call or data transmission is done jointly by two or more networks. These costs are shared according to a formula set by the regulator, called termination charges. These were the charges that were opaque in the pre-1984 era. These charges are very difficult to compute, and are based on the assumption of reasonable outgoing and incoming traffic ratios. In a competitive scenario, all service provider companies are sometimes originators and sometimes terminators. So, it balances out. But if this crucial mechanism fails due to cut-throat or predatory pricing, then it can clog rival networks. It can cause large spillover costs imposed on others, especially if the origination to termination ratios are wildly asymmetric.
What was an inherently monopolistic industry is now a brutally competitive network market, thanks to the conceptual breakthrough called “interconnect charges”. These charges are not determined by market forces, but by a regulator, who now has the supreme responsibility of ensuring fair and equitable competition.
The economics of telecommunication is a complex subject. Suffice to say that there is still a gentle tussle between the monopolistic and competitive nature of telephony. But don’t worry; we are not going back to 1984.
Ajit Ranade is chief economist at Aditya Birla Group.
Comments are welcome at firstname.lastname@example.org
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