Initially, the government might simply get out of the way of private market forces. By removing artificial or outdated barriers to entry and investment, the government will be stimulating development.29 Reliance on competition, however, is sometimes an incomplete answer. Consequently, approaches to encourage accelerated development may be considered.
One such approach might involve trying to persuade market entrants to exploit existing communities of interest. Experience suggests that communications networks evolve out of such communities, whether they are geographic, economic, substantive (such as the medical or legal communities), or political. Under this approach, entrants should be allowed significant flexibility in deciding how to structure their networks to attract the relevant communities. Once these communities have been attracted, a mechanism permitting interconnection must be developed. The value of communication networks increases as the reach of such networks increases; a network serving a particular community will be especially valuable if the members of that community can communicate with members of other communities as well. This additional feature will provide added value which, if properly priced, should produce increased network usage and revenue flow.30
This approach is by no means the only approach that could be tried. To some extent, however, any development plan will have to allow for the natural desire of members of identifiable communities to communicate with each other. It should not be difficult, in many cases, to exploit this desire. Thus, the approach may be packaged with, or incorporated into, other development strategies as part of a broad restructuring plan.
Should development focus its attention first on businesses or consumers?
Each is a community of interest that can, and should, be exploited. Moreover, for political and economic reasons, the government will want to bring benefits to both segments of the population. No restructuring plan should ignore one segment or the other.
In general, businesses will value additional or improved service more highly, will have greater capacity to pay, and will produce more widespread benefits for the economy generally if they receive improved and/or expanded telecommunication service. Residential users (consumers), on the other hand, are more numerous and, as a political, moral, and ethical matter, will have a more compelling claim to reliable and affordable basic service. Business service may improve the quality of the economy, but residential service may be essential to improve the quality of life.
Under one approach, new market entrants, operating relatively free of regulation, might be permitted to offer advanced systems and services for businesses. If such offerings were made available through overlay systems that could be priced on a "value" basis, they might generate significant revenues.31 Part of these revenues might then be expended to expand residential service, either through direct investment in additional residential facilities or through payment of interconnection charges to the backbone network.
Alternatively, the government might seek a "contract" arrangement with a new or existing company. The bargain struck might permit the company to offer unregulated business service, provided that the company commits itself to a certain level of investment in consumer services. Commitments regarding the pricing of such consumer services might also be exacted from the company, with the prospect of increased regulation looming as a threat to assure the company's compliance with the terms of the bargain. (In addition, the government's contract might provide for the payment of "liquidated damages" in the event the company fails to honor its commitments.)
Proponents of competition would argue that an open, competitive market will produce the most desirable results, so long as business and residential demand exist at minimal levels. Under these circumstances, it is contended, companies will build networks and offer service to all potential users willing to pay at least a minimal price. Without government supervision, however, companies may be more interested in business and wealthy residential markets. The government's response need not be broad-based or heavy-handed regulation. It may be possible to encourage relatively universal investment and development with relatively little government intervention, if the government is sufficiently flexible. The government probably would not be able to require all companies to observe similar rules on pricing, technology, or features; but minimal standards, especially for technological interconnection, would be necessary. Companies would have to be allowed to adapt their own structures and operations, as well as those of their networks, to the various markets being served. For example, cooperative ownership arrangements may be optimal to encourage development in some communities.32 Overall, this relatively open approach would give new and existing companies maximum flexibility. The government would refrain from intervention, unless substantial market failures were perceived.
If an effort is to be made to exploit the "communities of interest," should certain basic conditions be present to encourage network development within such communities?
Perhaps the most important condition is that there should be no legal barriers to the interconnection of members of an identifiable community. Typically, such barriers have been created to protect the financial interests of a state-owned monopolist by ensuring that the historic monopoly will not face meaningful competition.
Prohibitions on "private networks" that may be used to connect manufacturers with suppliers, or vendors with their customers, eliminate necessary prerequisites to network creation. Similarly, limitations on the geographic scope of a network may inhibit network development if the boundary lines that are drawn do not coincide with the boundaries of the "community of interest" that wants to be interconnected. For example, if a single neighborhood is split by the government into two "network areas" and the two networks cannot readily be interconnected, the potential users may have no interest in the proposed network.33 Unless members of the community can be connected with all other members of the community, they may value the proposed network at less than the cost of constructing the network.
Are there other fairly fundamental preconditions to encouraging network development?
Potential network owners or operators would like to see many other matters addressed before committing their time and money to network development. Some basic issues, which would be relevant regardless of the general approach to network development, include the following:
First, the property rights of the network owner and operator must be defined by existing laws and rules. If an individual or a company is expected to invest in developing a network, the investor is entitled to know the scope of the rights that will accompany the investment. For example, the investor will want to know whether the network will be a monopoly, have limited competition, or be subject to unfettered competition. An investor also will want to know (1) whether the government will be an impartial overseer or arbitrator, a competitor, or both; (2) what group of users and what geographic areas the network will be permitted to serve; and (3) whether the law includes protection against state confiscation of the investment.34 In short, property rights must be established and defined, and a process must exist to ensure that the property will not be confiscated arbitrarily or unfairly. The process may be administrative or judicial -- or, as in the United States, both -- but in any event it must exist.
Second, there must be some set of legal standards that will define the basis on which the network owner or operator will be subject to government action. Even if there is a competitive market with little or no regulation, the government may want the authority to supervise prices or to prohibit network operation that causes harm or frustrates communication, under appropriate circumstances; but the government ought to inform the network operator of the circumstances under which it may take action. Of course, the greater the regulatory power, the greater the concern about the conditions under which that power may be exercised. For example, if a network may be subject to price regulation, it is essential to know why and under what circumstances. If a license may be revoked, or if network expansion may be limited or prohibited, the potential investor will want to know the standards and the process to be employed in making the decision. Will the revocation or limitation be based upon the considered needs and interests of the local community, the financial conditions of other competitive networks, or the financial condition of the government? Will the affected network operator be able to present evidence to the decision maker or to appeal an adverse decision to a court? Will interested people be permitted to participate in the process? Will the decision be made by an individual not familiar with the relevant community, a group of people from mixed backgrounds, the network owner's competitors, or a number of local individuals? Will the decision reflect negotiation among interested parties or the pronouncement of an impartial third party?
Third, it is increasingly important for the government to permit networks to develop in technologically diverse ways. In large part, this means avoidance of efforts to limit the use of newer radio frequency services. Because many of these services have been considered potential competitive threats to the long-standing wire network operated by monopoly telephone companies, severe limits often have been imposed on the use of radio services by companies other than the historic monopoly provider of telephone service. If network development is to be sensitive to the economic and pragmatic considerations of diverse communities, network operators must be given the flexibility to exploit different technologies, some of which may provide economies that are essential preconditions for the offering or expansion of service to particular areas.
Although cellular, microwave, and newer developing radio services certainly can compete with some wire services, there is significant potential for these technologies to develop in a complementary way, especially in markets where the wireline network has not historically been extended to much of the population. Radio technology may be a quick and relatively inexpensive means for extending networks and providing new services. Cellular telephony, mobile telephony, specialized mobile radio service (SMRS), enhanced SMRS, and Personal Communications Services (PCS) all may have roles to play in different parts of the market.35 Some or all of these services could be used, for example, for costly "last mile" connections between a central office and user premises. The use of radio "tails" to the wire network would be a substantial improvement over wire networks that terminate in multiparty terminals, such as public pay telephone or party-line arrangements.36
Different technologies also could be combined to respond to price concerns or to provide specialized solutions. Second generation cordless telephony, combined with paging, might create a useful two-way communications link that will be less costly than cellular telephony.
There has been substantial interest in a "regional" model, as compared to a "national" model, for development of telecommunications infrastructure and services. Would a "regional," or even "local," development approach be better suited to exploiting communities of interest?
As an initial matter, the distinction between these general models should be clarified. A "national" model is essentially a unitary approach to development. One horizontally and vertically integrated company would provide facilities and service throughout the country. There may be a single company providing all facilities and services, or multiple companies, each of which provides a distinct product. In either event, however, entry and development occur on a national scale. This approach should be viewed as "top down" development, because facilities and services tend to branch out from central points to more distant ones.
The national model does not seem particularly useful in the current market environment. A single entity is not likely to have sufficient financial, technological, or managerial resources to address the varied demands of a national market -- particularly where development is at a low level. National development will impose too many burdens on the company, and, inevitably, some parts of the market will be left unserved or underserved for significant periods of time.37
In the "regional" model, the market is structured to permit entry by multiple regional companies that provide local and "intraregion" long distance service. These companies must be connected by a backbone transport network that operates between regions. This approach might be described as "bottom up" development, because activity at the local level will determine the extent of service ultimately offered to users. The interregional network provides interconnection among the regions.38
A significant advantage of the regional approach is that development is permitted to occur within communities, in accordance with their individual needs and interests. A central force cannot be expected to adapt itself to local conditions. More importantly, however, uniform goals and objectives will not be imposed on varied communities by a distinct centralized entity. In other words, regional differences will be reflected in the differing natures of the regional networks and service arrangements. A national provider will not be expected to do the impossible: harmonize regional variations.
The regional model, of course, requires that technical and interconnection issues be handled either by specific rules or by mandatory processes that rely on private entrants to reach reasonable agreements. Regional development cannot, and should not, be viewed as synonymous with fragmentation. In fact, the approach seeks to aggregate potentially disparate pieces.
In addition, the regional approach does not presuppose a plan to break apart an existing monopoly company. This is especially significant in less developed markets, where networks and services in many regions are inadequate or nonexistent. The existing monopoly company may be left intact to serve as a national backbone that will support the emerging local networks. Strong regional components of the national company may be required to observe certain "nonstructural" safeguards, such as nondiscriminatory dealing with the affiliated backbone company. If necessary, these pieces may be structurally separated, i.e., divested.
Regional development also does not necessarily mean that each region will have a single entrant. Entry should depend upon market conditions. Once again, providing investors sufficient flexibility to decide the terms on which they will enter will permit entry that reflects the economic conditions of the region. These terms might include whether they will provide wireline or radio frequency service to users, and how they propose to make connections between switches and user premises. Legal and regulatory action can be reserved for situations in which the resulting entry patterns do not produce acceptable minimum levels of service. In some cases, limited entry may be necessary during a transition period. Such limits, however, should not be perceived as typical conditions for regional development. Limits should be considered strong measures, to be applied only in the face of a serious problem.
Attempting to exploit communities of interest is not, of course, the only strategy for developing telecommunications facilities and services. However, understanding the relationship between such communities and the challenge of development can encourage policy makers to consider the alternative of trying to align telecommunications development plans with existing patterns of socioeconomic development, instead of attempting to impose a grand, uniform approach on a national market. Any national market almost certainly will have many varied needs and interests.