The outlook for the telecommunications industry and the implications for the economy and for...

Information technology, of which telecommunications is a principal part, is going to be the biggest technological driver of economic and business change over the next decade. Understanding the nature and breadth of that change is critical for those who use business economics in their jobs.

The impacts of information technology will be spread across all sectors of the economy. It will enable business to improve customer service as well as reduce costs. The growth of electronic commerce will lead us toward a virtual market in retail and distribution. Information technology is also likely to raise the bar of global competition and require new policies that encourage flexibility in the economy.

The Telecommunication revolution will have a profound impact on us all -- on our everyday lives and on our jobs. Indeed, telecoms, together with the closely related but broader category of information technology, is going to be the biggest technological driver of economic and business change during the next decade and more. This paper focuses on the main forces driving the telecommunications sector, i.e., deregulation and technology, and on the impact of telecommunications and information technology on the economy and on business.

Telecoms and information technology already represent a significant and a growing part of the U.S. economy. Table 1 shows that U.S. telecommunications industry output totaled $334 billion in 1996, reflecting revenues from local exchange service, local and long-distance toll service, wireless service, cable TV, and telecommunications equipment. Information technology (IT) industry output, i.e., telecommunications output plus broadcasting services, computer equipment, and software products and services, totaled $675 billion in 1996, or 8.8 percent of GDP. Other analysts sometimes use a broader definition that puts IT output at well over 10 percent of GDP. Table 1 also shows that Telecoms and IT are growing as a proportion of GDP since 1993. That trend is expected to continue.

Table 1
The Size of the Telecoms and IT Industries

                                          Average
                            Billions $    Annual %
                          1993     1996    Change

Local Service(a)           80        96      6.3
Toll Service(a)            75        93      7.4
Wireless Service           12        27     31.0
Cable TV                   23        27      5.8
Telecom Equipment          63        91     13.0
Total                     253       334      9.7
Memo IT(b)                500       675     11.0
GDP                      6558      7636      5.2
IT Share of GDP           7.6%      8.8%

(a) FCC basis

(b) Telecoms services and equipment, broadcasting systems, computer equipment, software pro services.

DEREGULATION

The 1996 Telecommunications Act set the United States on a new round of deregulation. While the act is complicated and has numerous provisions, the main elements are: (1) it opens the $95 billion local telephone market to new competitors; and (2) it allows the regional Bell operating companies (RBOCs), such as Nynex, Bell Atlantic, and SBC, into the $75 billion a year long-distance toll (LD) market in their regions.

The complexity of the act partly reflects the importance of the correct sequencing of market entry: The RBOCs cannot enter the LD market in their regions until they prove to the Federal Communications Commission that they face meaningful and credible competition in their local markets. The reason for that sequencing is that, absent competition in the local exchange, the RBOCs will be able to keep prices for their monopoly local services at inflated levels and use the excess profits from those services to cross-subsidize their entry into the LD market.

LD companies can enter local markets in basically two ways. They can either build their own local networks, an extremely expensive proposition costing about $1,500-$2,000 a line (up to $200 billion for the entire United States), or they can resell RBOC local services that they purchase at a discount. That latter route is typically what LD companies are attempting. However, they have encountered enormous difficulty in negotiation appropriate prices and other resale terms with the local telecoms providers.

In contrast, the RBOCs would have little difficulty entering into the LD market in their regions, because many long-distance companies offer wholesale services in what has become an intensely competitive market.

The Telecommunications Act heralds a new era of joint ventures, alliances, and mergers. Some mergers are already underway, e.g., British Telecom and MCI, Southwestern Bell and PacTel, and Nynex and Bell Atlantic. In addition, the Act will enable consumers to experience a greater choice of providers and, in particular, more service offers, e.g., more bundling of services like long distance, local, wireless, and perhaps TV, all with one bill. Prices are likely to be lower overall as a result of this greater competition, compared with what otherwise would have occurred, and also tremendous cost pressures among existing telecommunications providers are likely.

TECHNOLOGY

Technology also is dramatically transforming the shape of the telecoms landscape, The technology behind computers, telecommunications and imaging is converging. Put simply, a microprocessor processes binary code the same way whether that code is data, voice or video -- the difference is in the software. And some of the software technology being developed is applicable to data, voice and video, such as compression technology. Broadband transmission, which allows greater access to video and interactive services, is becoming more widespread with the advent of faster modems and integrated services digital network (ISDN) lines. Wireless, already experiencing huge success, is likely to get a further boost as personal communications, services (PCS) that are wireless and feature-rich come to market during the next several years.

Package switching technology, the kind of technology used in the Internet, is also developing rapidly.(1)

Technology is also resulting in much lower costs for both switching and transmission. Switching costs are declining for the same reason computer costs are falling -- the advent of faster microprocessors. Transmission costs are declining particularly because of the advent of fiber optic cables, and the new ways to put additional streams of data down that fiber using additional wave lengths of light (wave length multiplexing).

The Internet has a much bigger role to play in telecommunications in the future, although many issues will impact the pace and manner of its development. For example, will we move away from a flat-rate price structure in accessing the Internet to a price more clearly related to resources used? A related issue is congestion, i.e., the structuring of prices so that sufficient revenue will be generated to justify the required investment in new capacity, e.g., via a differential price structure that reflects the different priority of users on the web. Also substantial concerns remain about security, particularly relating to financial and personal information over the Internet, as well as some knotty regulatory issues concerning access and settlements charges that Internet providers do not pay but telecoms companies do (those are the payments given to local telephone companies, whether in the United States or abroad, for the use of their lines and switches).

E-mail, fax and data transmission increasingly are moving to the Internet. Voice also has the potential to move to the Internet for both business and consumers, although the technology is only now becoming available. One problem with voice-over-Internet applications is a delay that can occur during conversations ("latency"). That problem is being dealt with by technology, and it will also be ameliorated through increasing Internet capacity, and perhaps by having priority traffic based on price premiums. Business telephony is likely to expand, first over the corporate intranets, where latency problems tend to be relatively minor. Indeed, companies like Boeing and IBM are already looking to transmit both data and voice over their internal networks. The equipment and software to be able to do that is just now coming out from the research labs.

IMPACT ON THE ECONOMY

Information technology is going to have a huge influence on our economy over the next decade and more. The futurists tell us the four main technologies that will drive the economy in the future will be genetic engineering (in agriculture and medicine), materials science, energy extraction and conservation, and information technology.

Information technology is different from the other drivers in terms of its broad enabling impact across all sectors of the economy. However, because its effects are diffused, its benefits are difficult to estimate. The assessments that have been done, rough and uncertain as they are, indicate that IT could raise U.S. productivity and hence growth rates by 0.25 and 0.4 percentage points a year, compared with what otherwise would happen. Although that is not much in a single year, compounded over a decade or more it is very significant. Those enabling and broadly spread characteristics of IT may also explain the difficulty of measuring the impact of past investments in IT, and the apparent lag in the benefits of past IT investments.

At the corporate level, IT can both enable customer service improvement and reduce costs. Indeed, an essential learning about information technology is that it allows one to re-engineer business processes and to do things that were not possible before that are of benefit to customers, e.g., reduced cycle times, better ordering turnarounds, and less stock unavailability. One should not just look at IT as a means of doing at a lower cost what one does now.

In the global economy, lower distance costs are facilitating integration in traditional industries, i.e., increasing trade as a proportion of GDP. For example, corporations are increasingly hiring or subcontracting with computer programmers in India and the Caribbean. That kind of work is enabled by the fact that one can send back the output from the day's coding, if necessary, to the headquarters program managers for feedback. Magazine subscription lists can be managed from the Caribbean. Medical claim forms can be processed in Ireland.

IT therefore heightens the intensity of global competition. Companies, industries or countries will be quicker to rise or quicker to slide depending upon their international competitiveness. And this greater competition will improve productivity and raise global real GDP growth.

ELECTRONIC COMMERCE

One of the new applications of IT is electronic commerce. A broad definition of electronic commerce is any commercial interaction between individuals, or an individual and a business, or between businesses, that is wholly or partly processed electronically. That broad definition includes transactions using the traditional telephone and Internet networks. Using this definition, electronic commerce includes purchasing goods by telephone from a catalogue and paying by credit card. In the future, electronic commerce will involve not just payments processing but end-to-end processing, including ordering, fulfillment, customer service, and reporting. The vision of electronic commerce is for potentially large improvements in customer service and lower costs.

The full realization of that electronic commerce vision requires simpler electronic interfaces between companies, increased integration of the packet and circuit switched telecommunications networks, and continued integration of voice, data and video when customers are online. Imagine that you are online on your PC looking at a possible purchase in a consumer Internet catalog, and you decide you want some questions answered before you order, so you click on an 800 icon on your screen and get to speak to an account executive over your telephone, i.e., you are talking over the same telephone line that is connected to the Internet. This technology is now available.

The number of online households is expected to grow very fast. The Yankee Group has estimated the number of online households at 66 million worldwide in the year 2000, with 38 million in North America. That's probably an underestimate because it implicitly assumes that the PC is the only way that people will be accessing the Internet. However, other possibilities are being worked on actively, including a web TV.

Table 2
The Number of Online Households
Millions of Households

                    1996     2000

North America       15.4     38.2
Europe               3.7     16.5
Asia/Pacific         3.4     10.0
Other Markets        0.9      1.9
Total               23.4     66.6

Source: Yankee Group

Initially, electronic commerce involving individuals is not likely to be as significant economically as business-to-business commerce. Much of the benefits from electronic commerce in business will result from supply chain integration -- the process by which organizations share information, make operational decisions and even develop strategy with others at different stages in the supply chain. Supply chain integration is not simply the exchange of information, i.e., it is not just EDI. Imagine, a large retail company analyzing its company-wide sales at the end of each day, automatically reordering replacement stock from the supplier overnight, the supplier automatically transmitting that information to its manufacturing process the next day -- all driven from that original retail transmission. Supply chain integration also enables better customer service with fewer out-6f-stocks, quicker reorder cycle time, all at lower cost. Such a world strengthens relationships with suppliers, and probably will result in companies having fewer suppliers on average.

Electronic commerce is allowing us to move towards a virtual market in retail and distribution, with management based on real-time information, and an economy that requires more and better quality information.

The dramatic and rapidly evolving developments that are taking place in telecommunications and IT have important implications for U.S. global effectiveness and policy. For example, IT has helped to increase the international competitiveness of U.S. businesses by reducing costs and increasing overall efficiency. In so doing, IT has "raised the competitive bar," providing already competitive businesses with an even greater ability to compete, while making it far more difficult for less competitive corporations to survive.

The ways in which work is organized are also being affected by IT. The virtual office is now a reality, and the more flexible workforce arrangements that are being fostered by IT have created the need for new methods of assessing and rewarding employees. In this rapidly changing environment, skills quickly become outdated, with a resultant need for continuing education and training.

Government policies are also being affected by IT. That is especially so in the areas of telecommunications and the Internet, where rapid technical changes are causing increasing strains in the existing regulatory framework. In addition, as IT leads to an increasingly global economy, trade issues are going to become more important than they have in the past. So too will issues of pension and healthcare portability, as well as access to lifetime training -- all related to the need for increased economic flexibility that has resulted from the spread of IT.

CONCLUSION

The telecommunications and information technology developments described above will be revolutionary in their impact on the economy and business. All companies are likely to be affected by this revolution to a greater or lesser extent. Companies that understand the nature of those changes, that see the potential to enhance customer service through reengineering while reducing costs, will gain a competitive advantage in an increasing competitive and unforgiving global economy.

FOOTNOTE

(1) In packet switched networks, information is sent in discrete packets down the line until it reaches a routing computer, where it is sent in the direction of the recipient. A packet may go through many routes until it reaches its final destination. By contrast, in circuit switched network, like the traditional telephone system, after the call originator picks up the handset and dials the recipient, the circuit is opened while connected, whether or not either party is talking.

(1) See footnote at end of text.

REFERENCES

AT&T Economic Analysis Section, Employment and Economic Growth Impacts of Implementing Local Competition and Bell Company Entry into Long Distance, March 20, 1997.

Cattaneo, Gabriella, The Macroeconomic Impacts of Advanced Communications in Europe, Technibank, Milan, Italy, 1993.

Cohen, Robert B., The Impact of Broadband Communications on the U.S. Economy and on Competitiveness, Economic Strategy Institute, 1992

Donaldson, Lufkin and Jenrette, The Wireless Communications Industry, Spring 1997.

Federal Communications Commission, Industry Analysis Division, Common Carrier Bureau, Trends in Telephone Service, March 1997.

Input, Global Electronic Commerce: The Internet Revolution, December 1996.

International Data Corporation (IDC), The Global Market for International Commerce, November 1996.

International Data Corporation (IDC), Electronic Commerce Services, 1996-2001: Enhancing the Business Continuum, February 1997.

International Data Corporation (IDC), Internet Telephony: An Alternative to Dial Tone?, January 1997.

Sears, Andrew, The Effect of Internet Telephony on the Long Distance Voice Market. Available on the Web at http: /rpcp.mit.edu/~itel/ldeffect. html.

Yankee Group, Mining the Web: Fool's Gold or Fortune?, October 1996.

Yankee Group, Internet Service Provider Market Analysis, July 1997

C. Mark Dadd is Financial Vice President, Competitive and Industry Analysis, and Chief Economist, AT&T, Basking Ridge, NJ. He was the 1996-97 President of NABE; this Presidential Address was given at the 39th Annual Meeting of NABE, New Orleans, LA, September 14-17, 1997.