Rethinking market led reform of telecom industry

Having anecdotal evidence of unsuccessful attempts of scientists, including Laplace, Ampère, and Gauss, the history of experiments on communication technology with electricity dates back to 1726. With the issuance of the master patent to Alexander Graham Bell in 1876, the telephone industry started its journey. The 20th century witnessed the continued advancement of Bell's telephone, consequentially establishing telecom as the vital infrastructure of modern society. During the 2nd half of the 20th century, telecom service delivery grew as a state-owned monopoly across the world. To overcome the limitation of monopoly, the US government initiated the journey of deregulation in the 1980s, opening market-led reform. The rest of the world, rich and poor alike, immediately followed the USA's lead. But the lesson from this journey of market-led reform, particularly in developing countries, is raising the necessity of rethinking the course. It may be time to analyse the 40 year-long experimentation of the market-led reform to figure out a smarter way of governing this vital sector.

Due to the economics of scale, scope, and network externality effects, the telecom industry has a natural tendency of monopoly. Due to this reason, the telecom market used to be governed as a state-owned monopoly. In developed countries like the USA, western Europe, and Japan, state monopolies succeeded in building nationwide telephone networks, as those governments were supplying adequate capital to lay the network first, followed by offering subscription at negligible marginal cost. But as monopolies were practising profit-maximising pricing, society was suffering from the deadweight loss. On the other hand, monopolies were reluctant to risk investment to pursue innovation for offering higher quality products at a lower cost. Due to information asymmetry, the regulator was failing to have full control over monopolies for optimally regulating price as well as quality for minimising deadweight loss. It's being argued that innovation success was basically achieved by posing the threat of breaking monopolies. It was perceived that competition would reduce the deadweight loss and compel competing operators to risk investment for pursuing innovation. As a result, the benefit from competition would likely outweigh the loss due to the lower scale, scope, and externality advantage, caused by the segmentation of the customer base among multiple operators.

On the other hand, state monopiles in developing countries like Bangladesh, India, and Indonesia were suffering from low-scale advantage, as due to capital shortage, they could not pursue a supply-driven strategy for building a large nationwide network. As a result, the cost of the telephone in less developed or developing countries was higher than their rich counterparts. Moreover, corruption, lack of responsiveness, and inefficiencies also plagued state-owned monopolies. Therefore, to overcome the limitation of monopiles, governments of both rich and poor countries alike took the decision of introducing competition through market-led reform. Such a move was termed deregulation. 

Although to overcome the limitation of state-owned monopoly, market-led reform has been practised in most of the developing countries, the dominant operator has emerged. This dominant operator has attained a price-setting capability to make a profit while compelling competing operators to take lower prices and keep incurring a loss. As a result, the purpose of overcoming the limitation of monopoly has been lost, often through the transfer of monopoly from state-owned operators to the private hands. But due to private capital flow, developing countries have benefited from scale advantage as operators pursued the supply-driven strategy. This private capital flow also coincided with the emergence of cellular technology, which contributed to the rapid growth of telephone subscriptions terming it as the triumph of market-led reform. But such capital flow has led to the coverage of the same geography with multiple networks, often leading to wastage of resources. Moreover, due to the lack of local innovation and manufacturing capacity of telecom equipment, such wastage in deploying redundant networks is also leading to drainage of foreign currency from developing countries.

In certain countries, particularly in India, a high debt burden of telecom operators, often caused by unhealthy predatory pricing practices, is posing a threat to the stability of the financial market. In most of the developing countries, except the dominant operator, as all other operators are virtually caught in inescapable loss trap, the risk to investors' funds have been growing. In some cases, such investments came from pension and other social security funds. On the other hand, as network operators are not pursuing technology development and innovation, hefty profit earned by the dominant operator is often leaving the industry as cash dividend for the shareholders. As a result, the surplus cash generated by the industry is not being reinvested in job creation in the local economy. Rather, operators are competing in deploying labour-saving technology, leading to job cuts.

Due to the vertical segmentation of the Telcom industry, access network operators like cellular operators are no longer in the business of technology development and innovation. As a result, market-led reform is not benefiting from the innovation endeavour of network operators. Rather due to the segmentation of local market among multiple operators, individual operators are often shying away from making the aggressive investment to deploy next-generation technologies, as often business case of fragmented customer base does not support aggressive investment. On the other hand, due to the rapid technology obsolesce, some countries suffered from major wastage for making an investment in inappropriate technologies. For example, local wireless loop technology-based PSTN operators suffered a major loss as the investment in imported technology became obsolete before the expire of a lifetime. Similarly, WiMax operators also drained significant resources. On the other hand, only a handful of telecom equipment makers of developed countries are benefiting from the wasteful investments being made by developing or poorer countries.    

In the given scenario, it appears that the benefit from market-led reform has reached the saturation point. In certain countries, loss from wasted resources could easily outweigh the benefit from market ked reform. Predatory pricing-based competition practices in certain countries are also wasting resources and imposing a threat to the healthy functioning of the financial market. As the telecom's revenue is as high as 1 to 2 per cent of GDP in certain countries, optimum benefit and minimisation of wasteful investment is a serious concern. It might be time to develop clear insights about the cost-benefit analysis of market-led reform of the telecom industry. We should not be surprised by the finding that wastage from market-led reform has reached a point where the society is suffering from a net loss. Therefore, it may be time to undertake a thorough investigation and prepare for a major restructuring of the telecom sector, leading to a smarter regulation-based state monopoly or a new form of competitive market. 

M. Rokonuzzaman, Ph.D is academic and researcher on technology, innovation and policy. [email protected]