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The world of telecommunications market is undergoing enormous change, while at the same time experiencing major growth. Technological advances coupled with deregulation of markets and privatisation of national telecommunication operators are the main features of the rapidly evolving market.

Traditionally, international telecommunications were traded under a system of bilateral agreements between nations. The World Trade Organisation (WTO) telecommunication agreement by the Group on Basic Telecommunications, opens the way to a multilateral framework for freer trade, market opening and competition. Thus, resulting in the evolution from an old regime of inter-national telecommunications to a new regime of global competition. The major drives that are forcing changes in the telecommunications environment will also be considered.

Background

Historically, domestic and international telecommunications were controlled in each country by a national post and telecommunications organisation (PTO). In general, PTO's faced no competition, had little incentive to improve efficiency, introduce new services, or cut charges. As their foreign counterparts also enjoyed monopoly status, there was little opportunity to expand overseas. These monopoly operators collaborated in the joint provision of international services. International example, BT would pay American Telephone and Telegraph (AT&T) for delivery of UK calls in the US and vice versa. This cartel type arrangement ensured that international traffic was highly profitable.

By the mid 1980s, the industry began to restructure, which was driven by three inter-related forces:

• Privatisation
• Liberalisation
• Globalisation

This began with the court-appointed break-up of AT&T into the Regional Bell Operating Companies (RBOCs) and the introduction of competition to AT&T in the long-distance market. Other countries, led by the UK in Europe and Japan in the Far East, began to adopt policies designed to foster competition. Since then PTOs in many nations have been split into separate post and telecommunications administrations, with the telecommunications business sold to the private sector.

Size and Growth trends

It is estimated that the world of telecommunications market was worth US$300bn in 1991 and has been growing over the past 10 years at 10-15% per annum, mainly as a result of technology advances and a six-fold increase in international call traffic. The European telecommunications market in 1992 was valued ECU 110bn (£87bn) and Table 1 shows how the market has grown during the 1987-92 period.

Daiwa (1993) predicted that telecommunications would be Europe's fastest growing major industry in the 1990s, with annual growth averaging 8.5% and the sector constituting 4.5% of Gross Domestic Product (GDP) by 2000 - twice 1991 GDP value.

Technology Advances

The main driver in the growth of telecommunications is technology advancement. Developments in microelectronics have had a major impact on two of the main components in a telecommunications network:

The transmission element

The switching element

In the past 20 years, both these technologies have changed considerably. Transmission was traditionally effected through copper wires using electric signals. Both speed and the amount of information transmitted were limited. To increase capacity, new cable had to be installed. The introduction of fibre optic cable revolutionised transmission concepts by using light as the medium of transmission. Fibre optic cable is small, lighter, allows for faster transmission speed and much greater capacity.

Switching was originally based on electromechanical technology, and allows calls to be routed and connected through different area exchanges. The advance of microelectronics enabled the development of electronic based switching systems with corresponding size, cost and efficiency benefits. The development of switching system mirrored the development of computers that, increasingly, were being dependent on software operating systems.

These technology advances bring cost advantages, which translate for the consumer into both tariff reductions and also a greater range of services with added ease of use. A number of developments in technology look likely to stimulate further changes in the scales of telephone usage in the 1990s.

Convergence

The advance of microelectronics has meant that both voice and data are represented in digital format. Digital systems allow both ease of transmission and speed of processing or switching. In the past, voice and data networks were kept separated, but, with the advance of digital technology, these are merging and thus offering new opportunities for growth.

Television and video signals are currently represented in analogue technology and therefore are not easily handled in the digital telecommunications networks. However, continued technological development has led to video being processed digitally. Discrete digital video products such as video conferencing, high definition TV and videophones are being marketed.

The next step in the development process is the convergence of voice, data and video; known as 'multimedia'. This introduces the concept of an 'information superhighway' carrying telephone calls, pay-as-you-view movies, interactive shopping, electronic banking, video games, computer data and a limitless number of TV channels. The fibre optic cables can carry the data and the convergence of media can be processed on the digital technology.

Business process redesign

Companies continue to redesign fundamentally the very way they do business, taking advantage of information technology (IT) and the associated telecommunications technology to process information from around the world in real time. The convergence of voice, data and video through micro technology and ease of transport on modern digital telecommunications networks is allowing companies to develop in new directions.

The concept of a centralised business is consequently redefined, from companies employing teleworkers ('telecommuting') to multinationals exploiting national communications advantages. 'Telecommuting' allow employees to work from home with access to the office through a laptop computer, telephone and fax machine. A growing number of US companies are adopting this method of work in order to cut down real estate costs and to encourage more productive working hours (employees benefit from a lack of office distractions and elimination of travelling hours). AT&T have launched the concept of 'virtual office' (a mobile office) to meet increased demand in telecommuting. Buck Consultants in the US estimate that 10-20% of the US workforce will spend a significant amount of time working at home by the end of the century. Today, more than one-third of the IBM workforce does some portion of their work at home.

In Ireland, due to telecommunications technology, American companies have been setting up their primary customer service bureau. For example, all bookings for the Sheraton Hotels across the US are answered and processed in Ireland. There are 15 such projects currently in operation.

The linkage of the computer to the telephone system allows better customer service. For example, when a customer rings into Frizzells, the insurance group, the computer recognises the origin number and prompts the database so that the customer's file is on the screen of the operator, allowing a more efficient service.

Note: Based on the results from public telecommunication operators in 94 countries in 1994.

National markets throughout the world are gradually deregulating and introducing competition following the example of the US, Japan and UK markets. The pace of change varies from country to country. For example, telecommunications equipment markets in the EC were deregulated in 1998, although some are more liberalised than others. The development of new data networks has been more or less free of regulation. However, voice telephony in the EC is still a closed market.

In June 1993, EC States agreed to open their telecommunications markets from January 1998, although a number of member States (Belgium, Luxembourg, Ireland, Spain, Portugal and Greece) have been given extended deadlines for introducing competition). Detailed legislation has yet to be prepared for the deregulation of EC markets. Table 2 shows Daiwa's current and future estimates of the competitive position of selective European markets.

Privatisation

The privatisation of state telecommunications companies is a world-wide trend, which coincides with the deregulation and introduction of competition in many markets. Over the past 15 years, some 40 countries have engaged in partial or total privatisation of their national telecommunication operator. By 2000, most telecommunication companies in developed/developing countries are expected to be wholly or partially privatised.

Governments have different reasons for privatisation. As regards to the telecommunications sector, the three most common reasons currently for privatisation are:

• Private ownership generally results in greater efficiency (as evidenced by BT in the UK) and therefore lowers consumer prices.
• Central government does not have to find the resources to finance high capital costs for modernising networks.
• The prospect of high privatisation sale receipts, due to the perceived potential of the telecommunications sector, reduces government budget deficits.

The telecommunications environment is changing in the direction of more competitive market structures. Telecommunication services in the European Union should be fully liberalised by 1998 and other countries have made steps to open their markets as part of their schedule of commitments in the World Trade Organisation negotiations on basic telecommunications. A PTO facing well-financed competitors may not be such an attractive purchase as one with a guaranteed monopoly. For the seller, therefore, there may be conflict between the desire to get the best price and the desire to introduce competition. From the buyer's perspective, competition in the home market as a spur to foreign investment. There is the hope that revenues lost to competition in domestic markets can be partially compensated by revenues raised abroad.

The current structure of Europe's telecommunications operators is summarised in Table 3. Only in the UK has the national operator been fully privatised.

Background

During the past 20 years, there has been a development of global companies with global brands, particularly from Japan and the US. Companies such as Coca-Cola, Sony, Canon and McDonalds are readily thought of as global companies. These companies have benefited from the 'californisation of needs' and the economies of scale derived from operating globally given the shorter product life cycles and increasing investment demands.

• Limits to growth in home markets - the company's home market may be saturated and intensely competitive. Growth opportunities at home are therefore limited. Global expansion provides a viable option for continued growth.
• New Opportunities - even if national markets are not mature or declining, the global arena may provide an opportunity for new expanding and undeveloped markets, often translating into higher margins and profitability.
• The firm has no choice - in industries where increased commoditisation of products has occurred or where the firm's competitions are reaping the scale economies of global market presence, a firm has no choice. It goes global or faces a threat to its very existence.

These drivers are particularly relevant to the telecommunications industry. Although there is growing demand for telecommunications services, the deregulation and introduction of competition in home markets mean that relative market share of existing operators will decline over time. The global expansion drivers pushing their existing customers to expand overseas translate into new opportunities as global telecommunications suppliers.

Telecom equipment exports cover product categories SITC 764.1, 764.3, 764.81 and 764.91.

Settlement payments shows estimated payments made under the accounting rate system to terminate international phone calls.

Other is an estimate of other types of telecommunications trades achieved, for instance, by foreign direct investment in privatisations, mobile ventures, Build/Transfer arrangements, license awards, loans and aid, telecommunications consultancy, mobile roaming, etc. The right chart shows the total value of the telecommunication market.

Current Globalisation Strategies of Telecommunication Companies

In looking at the progress of other telecommunications in attempting to go global, three strategies prevail:

• Enter joint venture with host Company in developing country or countries. Government support is an important element.
• Develop penetration through manufactured goods before introducing services;
• Acquisition of and alliance with companies in developed economies.

The developing world

The developing world presents rapid growth opportunities. Funding remains a problem, therefore no corporation can enter these economies without the support of their own government, local governments, and relevant funding packages for the developing country. The US government has been particularly supportive of its companies' drive into these new markets. It will actively canvass on behalf of US companies against foreign competitors as long as one US company is involved.

AT&T enlisted the support of the Commerce, Treasury and State departments to secure a US$250m contract to upgrade the Indonesian network. The government agreed to finance the deal through the Export-Import bank.

The importance of each deal may be small but the significance in the overall picture is more important. These new economies may well be tomorrow's major economies. The 'new Tigers' in the Far East may challenge Japan in the next century. It is perhaps easier to enter these growing economies than to enter existing developed markets against established competitors. This allows the development of an 'encirclement strategy'; to take over the Far Eastern market, a company could develop markets in Malaysia, Thailand, Singapore, Taiwan and Korea without directly attempting to tackle Japan. Table 5 shows the major telecommunication deals abroad and it is seen that half the deals are in the developing economies.

Manufacture products

The development of markets through the introduction of manufactured products is increasingly important. By selling telecommunications products overseas a company can increase profitability by the increased market potential and the greater scale of economies.

Since there are no ubiquitous world telecommunications standards, by gaining foreign markets, a company is increasing the penetration of their standard. Compatibility standards of equipment and systems make it easier to extend the network in a region. By supplying the equipment, it is then a small step to run the overseas network or indeed run it as an alliance with the host PTO.

For example, Deutsche Telekom predominantly uses Siemens equipment. Siemens is selling this equipment to Eastern Europe to allow for modernisation of infrastructures. These new networks will therefore be compatible with the German network and Deutsche Telekom would be able to run a network of familiar equipment on behalf of the host government or in alliance with the host PTO.

In terms of market capitalisation, the telecommunication industry ranks third behind health care and banking, while telecommunication and office equipment was the fastest growing sector of merchandise exports during 1995. The telecommunication sector achieved combined sales of US$788 billion in 1995, of which three-quarters came from services and one quarter from equipment sales.

 Table 6: Key indicators for the world telecommunication service sector

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There has been a proliferation of acquisitions and alliances in the developed economies in an effort to become global carriers as Table 3.1 shows. The acquisitions initially centred on data networks where sovereignty and regulation were less of an issue. For example BT's acquisition of Tymnet and AT&T's acquisition of Istel. These were effectively profitable Strategic Business Units (SBU's) which did not need to be integrated immediately. Alliance rather than acquisition will be the way forward in the globalisation of telecommunications services.

Conclusion