Rogue Missives - Friday, February 21, 1997 - The Furture is Here: Are we Ready? by Jim Surowiecki

Rogue Missives

ROGUE ARCHIVES

Friday, February 21, 1997

The Future is Here: Are We Ready?
by Jim Surowiecki (Surowiecki)
Global telecom reform. It may sound a bit abstract, but consumers are going to feel the impact on their pocketbooks and investors on their portfolios. The world is becoming a smaller and smaller place, and the companies that are positioned to dominate that place are becoming more and more powerful.
Last weekend, negotiators from 68 different countries signed a new telecommunications reform agreement that is intended to break down state monopolies on phone and information services and turn the $600 billion telecommunications business into a free-market free-for-all. Telephone industries have traditionally been among the most protected in the world, both because of security concerns -- most countries don't want a foreign company owning their information infrastructure -- and because they've provided comfortable sinecures for corrupt politicians to use as rewards for allies and family members. But the United States put on a full-court press in favor of reforming the global system, and the result is that every major developed and developing country -- with the exception, obviously, of China -- will now be opening its borders to foreign capital.
Three countries, including ironically enough the U.S.' two closest neighbors, retained restrictions on foreign ownership. Canada, which has been one of the few nations to resist the full force of globalization, refused to let foreign carriers own more than 46.7 percent of any company that provides land-based phone service. (Imagine the haggling that took place to get that extra 0.7 percent.) Japan is protecting its largest local and long-distance companies, NTT and KDD, from any foreign ownership stake larger than 20 percent, although some kind of alliance with other companies is likely. And Mexico will keep foreign ownership to 49 percent, which is curious since MCI <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCIC)") else Response.Write("(NYSE: MCIC)") end if %> is involved in a joint venture with a Mexican bank to build the first genuinely private telephone company in Mexico's history.
The refusal of these countries to go along with the seemingly inevitable trend toward open markets and the increasing erosion of national sovereignty has prompted some odd remarks. The vice president for regulatory affairs at Sprint, for example, told The New York Times, "For a developed country like Canada not to allow a foreign carrier to offer service there is less than generous," as if national governments were supposed to be in the business of giving gifts to multinational corporations.
Regardless of these genuinely minor hitches in the WTO agreement, the new accord will eventually have the effect of reshaping the telecommunications industry's current landscape. The changes will take time, and in many respects telecom reform will merely accentuate tendencies that were already dominant in the industry. But when the dust has settled, expect that industry landscape to feature higher mountains and fewer hills than ever. As seems to be true almost across the board, when it comes to global competition, bigger simply is better.
What that means is that we should see two different kinds of deals in the near future. The WTO agreement essentially means that foreign carriers can own all of a local company as long as that foreign carrier's native country offers equally open markets. AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATT)") else Response.Write("(NYSE: ATT)") end if %>, then, has the option of no longer fiddling around with the confusing network of alliances that has hurt its global performance in the 1990s. Instead of forging partnerships, it can simply buy local carriers and create an integrated system, which should lower its own costs as well as costs to consumers, allow it to deliver better and more reliable service, and give it a stronger position in the market for corporate customers.
On the other hand, while this may mean that most consumers in Colombia or Malaysia are going to be getting their phone service from AT&T or Deutsche Telekom, it's likely that in the developed countries deals will take the form of mergers, along the lines of the MCI-British Telecom merger. AT&T, for example, is supposedly talking to the British company Cable and Wireless, which has a majority stake in Hong Kong's leading carrier, while on Friday rumors were rampant that Ma Bell was also planning to acquire an equity stake in Germany's Mannesmann, which has a plan for laying new wire.
The effect of these mergers may eventually be to reshape the global telecommunications industry in the shape of America's, with a few major players and then a larger number of smaller companies with strong niche positions. What seems clear, in any case, is that corporations with strong brand recognition, an already-existing market presence, and the financial resources to invest in foreign carriers are the corporations it would be smart to bet on. And in the United States, the only companies that fit that bill are AT&T, MCI, and to a lesser extent Sprint.
One of the interesting things about the new accord is that it will put in sharp relief the performance of state-owned companies like Deutsche Telekom and France Telecom (both of which, incidentally, own 10 percent of Sprint). The agreement does not, after all, require the dissolution of these companies. It simply requires them to compete against domestic and now foreign carriers. It's possible, of course, that we will discover that these companies have been coasting on their monopoly status and that they will soon flounder. But both corporations had already begun to make changes in anticipation of the European Union's opening of markets on Jan. 1, 1998, and their existing installed base is such that they have a natural advantage over their competitors. And in any case, AT&T seemed to adjust relatively well to the end of its monopoly in the early 1980s. One of the ironies of free-market globalization is that we may discover that there's nothing inherently inefficient about state-run companies.
What we almost certainly will discover, in any case, is that competition will be almost universally better for consumers. In the simplest sense, if MCI-British Telecom can offer service over its own wires from beginning to end, customers are going to reap the rewards. More than that, though, the accord will break down artificially high rates propped up by monopoly pricing and should encourage technological innovation, since those companies that don't improve their technology will find it harder and harder to compete. Calling Brazil may no longer cost twenty times what it costs to call Florida.
At the same time, the impact of this accord on developing countries in particular remains unclear. For the vast majority of citizens in these countries, after all, the price of a call to the United States is not the first thing on their mind. And an end to telecom monopolies, while a spur to foreign investment, will almost certainly mean a slashing of payrolls and, in at least some places, an end to subsidized service. It's possible to see the latter effect on a much smaller scale in the U.S. today. In New York City, for example, residential customers pay a little more than a dime for every local call, and there is no flat rate available. In poorer countries, the end of subsidized service may have a more dramatic impact in the short term.
In that sense, it's not surprising that it took three years of tortuous negotiations to ratify the WTO agreement. Ultimately, the approval of the accord might be taken as testimony to the developing world's voracious appetite for foreign dollars. It might also be taken as proof of the United States' ability to use its own current economic performance as justification for the efficacy of free-market reforms, and its willingness to push as hard as it can for these changes.
The thing about global telecom reform, after all, is that everyone's not leaving from the same starting line. The companies that are already huge conglomerates, and that have sizeable positions in the world's largest markets, are going to be next to impossible to push out of the way. When AT&T goes into India looking for possible acquisitions, it's qualitatively different from an Indian telecom company arriving in America looking for the same. The winner is a foregone conclusion.
Before this pact was signed, just 17 percent of the world's markets were open to American telecommunications companies. After it's implemented, the number of open markets will quadruple. And some analysts estimate that in the next decade the telecom industry will triple in size. All of which makes companies like AT&T and MCI seem like very solid bets for the long term.
All of which also, though, makes the United States' continued efforts to implement sanctions against the rest of the world for trading with Cuba look more nonsensical than ever. Even as the U.S. was pushing the WTO toward liberalized markets and an end to tariffs, it continued to insist that it would reject any injunction the organization handed down against it for the Helms-Burton Act, which among other things limits the ability of foreign companies doing business in Cuba to trade with the U.S. "Free trade for thee, but not for me," seems to be the Clinton Administration's position, at least with regard to Havana. The U.S. has said it may argue that Cuba represents a national security threat, but that position only subjects the U.S. to further ridicule.
Because American corporations stand to be among the biggest winners in the telecom sweepstakes, it's natural that other nations would be skeptical about American motives in fostering market liberalization. And while the U.S. may be genuine in its faith that the free movement of capital and an end to state-run monopolies represent the best path to lower prices, the spread of technological innovation, and development, its failure to be consistent in its support of the WTO makes it look more cynical than pure. If the WTO is to be the mechanism by which globalization occurs, it cannot be perpetually at risk of having its decisions subverted by the world's most powerful state.
One world: here it comes, ready or not.

-- Jim Surowiecki (Surowiecki)

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

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ROGUE ARCHIVES

Friday, February 21, 1997
The Future is Here: Are We Ready? by Jim Surowiecki (Surowiecki) Global telecom reform. It may sound a bit abstract, but consumers are going to feel the impact on their pocketbooks and investors on their portfolios. The world is becoming a smaller and smaller place, and the companies that are positioned to dominate that place are becoming more and more powerful. Last weekend, negotiators from 68 different countries signed a new telecommunications reform agreement that is intended to break down state monopolies on phone and information services and turn the $600 billion telecommunications business into a free-market free-for-all. Telephone industries have traditionally been among the most protected in the world, both because of security concerns -- most countries don't want a foreign company owning their information infrastructure -- and because they've provided comfortable sinecures for corrupt politicians to use as rewards for allies and family members. But the United States put on a full-court press in favor of reforming the global system, and the result is that every major developed and developing country -- with the exception, obviously, of China -- will now be opening its borders to foreign capital. Three countries, including ironically enough the U.S.' two closest neighbors, retained restrictions on foreign ownership. Canada, which has been one of the few nations to resist the full force of globalization, refused to let foreign carriers own more than 46.7 percent of any company that provides land-based phone service. (Imagine the haggling that took place to get that extra 0.7 percent.) Japan is protecting its largest local and long-distance companies, NTT and KDD, from any foreign ownership stake larger than 20 percent, although some kind of alliance with other companies is likely. And Mexico will keep foreign ownership to 49 percent, which is curious since MCI <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCIC)") else Response.Write("(NYSE: MCIC)") end if %> is involved in a joint venture with a Mexican bank to build the first genuinely private telephone company in Mexico's history. The refusal of these countries to go along with the seemingly inevitable trend toward open markets and the increasing erosion of national sovereignty has prompted some odd remarks. The vice president for regulatory affairs at Sprint, for example, told The New York Times, "For a developed country like Canada not to allow a foreign carrier to offer service there is less than generous," as if national governments were supposed to be in the business of giving gifts to multinational corporations. Regardless of these genuinely minor hitches in the WTO agreement, the new accord will eventually have the effect of reshaping the telecommunications industry's current landscape. The changes will take time, and in many respects telecom reform will merely accentuate tendencies that were already dominant in the industry. But when the dust has settled, expect that industry landscape to feature higher mountains and fewer hills than ever. As seems to be true almost across the board, when it comes to global competition, bigger simply is better. What that means is that we should see two different kinds of deals in the near future. The WTO agreement essentially means that foreign carriers can own all of a local company as long as that foreign carrier's native country offers equally open markets. AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATT)") else Response.Write("(NYSE: ATT)") end if %>, then, has the option of no longer fiddling around with the confusing network of alliances that has hurt its global performance in the 1990s. Instead of forging partnerships, it can simply buy local carriers and create an integrated system, which should lower its own costs as well as costs to consumers, allow it to deliver better and more reliable service, and give it a stronger position in the market for corporate customers. On the other hand, while this may mean that most consumers in Colombia or Malaysia are going to be getting their phone service from AT&T or Deutsche Telekom, it's likely that in the developed countries deals will take the form of mergers, along the lines of the MCI-British Telecom merger. AT&T, for example, is supposedly talking to the British company Cable and Wireless, which has a majority stake in Hong Kong's leading carrier, while on Friday rumors were rampant that Ma Bell was also planning to acquire an equity stake in Germany's Mannesmann, which has a plan for laying new wire. The effect of these mergers may eventually be to reshape the global telecommunications industry in the shape of America's, with a few major players and then a larger number of smaller companies with strong niche positions. What seems clear, in any case, is that corporations with strong brand recognition, an already-existing market presence, and the financial resources to invest in foreign carriers are the corporations it would be smart to bet on. And in the United States, the only companies that fit that bill are AT&T, MCI, and to a lesser extent Sprint. One of the interesting things about the new accord is that it will put in sharp relief the performance of state-owned companies like Deutsche Telekom and France Telecom (both of which, incidentally, own 10 percent of Sprint). The agreement does not, after all, require the dissolution of these companies. It simply requires them to compete against domestic and now foreign carriers. It's possible, of course, that we will discover that these companies have been coasting on their monopoly status and that they will soon flounder. But both corporations had already begun to make changes in anticipation of the European Union's opening of markets on Jan. 1, 1998, and their existing installed base is such that they have a natural advantage over their competitors. And in any case, AT&T seemed to adjust relatively well to the end of its monopoly in the early 1980s. One of the ironies of free-market globalization is that we may discover that there's nothing inherently inefficient about state-run companies. What we almost certainly will discover, in any case, is that competition will be almost universally better for consumers. In the simplest sense, if MCI-British Telecom can offer service over its own wires from beginning to end, customers are going to reap the rewards. More than that, though, the accord will break down artificially high rates propped up by monopoly pricing and should encourage technological innovation, since those companies that don't improve their technology will find it harder and harder to compete. Calling Brazil may no longer cost twenty times what it costs to call Florida. At the same time, the impact of this accord on developing countries in particular remains unclear. For the vast majority of citizens in these countries, after all, the price of a call to the United States is not the first thing on their mind. And an end to telecom monopolies, while a spur to foreign investment, will almost certainly mean a slashing of payrolls and, in at least some places, an end to subsidized service. It's possible to see the latter effect on a much smaller scale in the U.S. today. In New York City, for example, residential customers pay a little more than a dime for every local call, and there is no flat rate available. In poorer countries, the end of subsidized service may have a more dramatic impact in the short term. In that sense, it's not surprising that it took three years of tortuous negotiations to ratify the WTO agreement. Ultimately, the approval of the accord might be taken as testimony to the developing world's voracious appetite for foreign dollars. It might also be taken as proof of the United States' ability to use its own current economic performance as justification for the efficacy of free-market reforms, and its willingness to push as hard as it can for these changes. The thing about global telecom reform, after all, is that everyone's not leaving from the same starting line. The companies that are already huge conglomerates, and that have sizeable positions in the world's largest markets, are going to be next to impossible to push out of the way. When AT&T goes into India looking for possible acquisitions, it's qualitatively different from an Indian telecom company arriving in America looking for the same. The winner is a foregone conclusion. Before this pact was signed, just 17 percent of the world's markets were open to American telecommunications companies. After it's implemented, the number of open markets will quadruple. And some analysts estimate that in the next decade the telecom industry will triple in size. All of which makes companies like AT&T and MCI seem like very solid bets for the long term. All of which also, though, makes the United States' continued efforts to implement sanctions against the rest of the world for trading with Cuba look more nonsensical than ever. Even as the U.S. was pushing the WTO toward liberalized markets and an end to tariffs, it continued to insist that it would reject any injunction the organization handed down against it for the Helms-Burton Act, which among other things limits the ability of foreign companies doing business in Cuba to trade with the U.S. "Free trade for thee, but not for me," seems to be the Clinton Administration's position, at least with regard to Havana. The U.S. has said it may argue that Cuba represents a national security threat, but that position only subjects the U.S. to further ridicule. Because American corporations stand to be among the biggest winners in the telecom sweepstakes, it's natural that other nations would be skeptical about American motives in fostering market liberalization. And while the U.S. may be genuine in its faith that the free movement of capital and an end to state-run monopolies represent the best path to lower prices, the spread of technological innovation, and development, its failure to be consistent in its support of the WTO makes it look more cynical than pure. If the WTO is to be the mechanism by which globalization occurs, it cannot be perpetually at risk of having its decisions subverted by the world's most powerful state. One world: here it comes, ready or not. -- Jim Surowiecki (Surowiecki) (c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.