The telecoms trade war the united states, the european union, and the world trade organisation

As we researched and wrote this book, we hoped to be able to tell our ers an uplifting story on about how the world was marching over the “bridge tothe 21st Century” and into the “inform

The Telecoms Trade War: The United States, The European Union and the World Trade Organization

Mark Naftel Lawrence J Spiwak

HART PUBLISHING

The Telecoms Trade War

The United States, The European Union and the World Trade Organisation

President, Phoenix Center for Advanced Legal and

Economic Public Policy Studies, Washington D.C

Foreword by

Professor Lucien Rapp University of Toulouse, France Partner, Serra, Michaud et Associés, Paris

OXFORD – PORTLAND OREGON

2000

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© Mark Naftel and Lawrence J Spiwak 2000

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and to our children, who must live tomorrow

in the world we create today

shall inquire how neither are made.”

Otto Von Bismark

“ it is always from a minority acting in ways different from what themajority would prescribe that the majority in the end learns to do better.”

F A Hayek

revolutionary—and indeed unique—book Rather than attempt to provideyet another hornbook on US and European telecoms law, the authors instead con-tribute to the public dialectic by seeking to expose the recent “cynical” attempts

to substitute political trade policies for sound legal and economic cations policy Since both authors bring to this work of great scope a convincedobstinacy of demonstration and a real intelligence of all political, legal, econom-ical and industrial matters relating to international telecommunications, theirwork demands respect I sincerely recommend this book to all governments, reg-ulators, competent international organisations officials, and also all concernedcitizens who should not remain strangers to this important subject

telecommuni-With restructuring and liberalisation of telecommunications markets duringthe past few years, it should be considered whether commercial conflicts amongnations have disappeared and been replaced by competition among companies.Does the World Trade Organisation Agreement on Basic Telecommunications,effective from February 1998, appear, despite its insufficiencies, as a peace treatyconcluded to permit the development of wide open relationships among the sig-natories? Are telecommunications markets really now free and competitive on

an international basis?

Moreover, how does this growing trade war impact the growth of theInternet? The Internet explores obviously new spaces of liberty, but poses, cru-cially, the question of how to organise the conditions of its usage so that it doesnot constrain liberty itself What difference exists between the prehistoric mansetting up new tools for hunting or for war and the show given nowadays by oursocieties, confronted by the excesses of the Internet—from spamming to misuse

of personal data, violations of intellectual property rights and so forth?Apparently none So, where is progress?

The question could remain philosophical if it has not been already ing social and international relations This raises the question of whether andhow we should regulate the Internet

influenc-This question is where the debate takes an international dimension—in theabsence of international conventions, nations create their own policy on thebasis of national sovereignty, and this in turn remains the legal basis of inter-national law and society

This goes beyond telecommunications networks Already we see circulation

of black lists, denouncing States whose regulation is obviously insufficient, just

as the worst times in history when informing was considered as proper But howdifferent could it be, considering there are no adapted rules in this area?

It is precisely these assertions, very generally expanded, that Naftel andSpiwak strongly challenge In other words, Naftel and Spiwak convincinglyillustrate that the market is neither free nor competitive—it is perverted by anapproach denounced by the authors as “neo-mercantilism” in the meaning given

by Adam Smith The necessary protection of consumers is neglected by this mercantilist policy

neo-The work of Naftel and Spiwak reminds us all that fundamental questionsstill need to be answered regarding telecommunications restructuring and com-petition.1What is competition in the domain of telecommunications? The fun-damental scope of any restructuring policy in this sector of activity, beingprimordial in the economic order, must search for the erosion of the beneficiarymargins or monopoly rents Prices will thereby align with costs and permit themaximum circulation of the technical improvements It stakes out the widest,domestic or international, opening of the market

As the authors amply demonstrate and prove through many examples in thisbook, however, the on-going “telecoms trade war” turns these first principles ontheir collective head Neo-mercantilism leads to statutory policies essentiallymarked by the protection of national interests Market openings imply accessi-bility from the outside National regulation today produces entry barriers—technical barriers to the intra-operability of infrastructures by a restrictiveinterconnection plan, economic barriers by a dissuasive system of settlementrates, exclusively made for the protection of the State’s sovereign interests, legalbarriers by a regulation of foreign investments, all the more inadequate since thetelecommunications systems tend to become general and therefore, ignore fron-tiers

Naftel and Spiwak make their points through comparing US and EU policiesand mistakes This is one of the virtues of the work, in addition to the mastery

of the subject matter the authors demonstrate The analysis escapes being too

“American centric,” and is placed somewhere in the Atlantic Ocean, half waybetween the political turbulences of the old and the new continent By attempt-ing to find uniform examples and principles, for example by reviewing EU and

US approaches in similar areas, the authors contribute an innovative and icant perspective to the public dialectic.2

signif-The first three sections of the book set the stage of the telecoms trade war inpainstaking detail To drive their points home, the fourth section of the book

1 The method employed should be the same as the primordial questions marked out by the terpiece of Siéyès’ “What is Third Estate?” written on the eve of the French Revolution (1789) The immediate questions were: “1 What is Third Estate? Everything 2 What role has it been playing in the economic order until now? None 3 What is it asking for? Becoming something.”

mas-2 Emmanuel Kohnstamm, vice-president of Time Warner Inc in Brussels, perhaps gave the best characterisation of the traditional differences which separate the European people from their North- American counterparts in the approach of the legal problem of State and liberty: “In Europe, people don’t trust companies, they trust government; in the US, it’s the opposite way around: Citizens must

be protected from actions of the government.” Stephen Baker et al., “Europe’s Privacy Cops”,

Business Week, 2 Nov 1998 at 21

provides a series of case studies illustrating policies that are so outlandish thatneophytes would believe to be fiction, rather than accepting them as a tragicreality Given my personal significant background in the satellite industry, Ifound the authors’ exegesis on the FCC’s international spectrum policies par-ticularly compelling Indeed, after reading Naftel and Spiwak’s case study, howcould we not be astonished by the difficulties encountered by all the operators

of the satellite systems (Iridium, ICO and in a lesser level, Skybridge orTeledesic)? Beyond the costs of purchasing frequency rights through auctionand actually deploying their satellites and services, the operators had to contendwith regulatory barriers and interference, to the extent of incurring re-locationcosts for other operators This is in addition to burdens such as limiting “for-eign” ownership to 20 per cent, extraordinary licensing costs and so forth.Unfortunately, the same mistakes seem to be occurring with the grant of thirdgeneration mobile licenses in the United States and Europe

In addressing such problems, Naftel and Spiwak’s work is infused both with

an energy of conviction yet a sadness at the present state of affairs Although thecurrent wind of “political cynicism” may try to drown out the authors’ impas-sioned cry, all of is must strain to listen and accept their message Although it isnot too late to pay attention, this may be our last chance to affect meaningfullythe emerging market structure of the telecoms industry and to maximise con-sumer welfare I sincerely hope that many will be convinced and join their causebefore the current “telecoms trade war” ruins any chance of progress towardspeace

Lucien RappProfessor of Public Law, University of Toulouse (France)

Partner, Serra, Michaud et Associés, Paris

Given the lightning pace of change in the the telecoms industry, writing a book

on the current status of the relevant laws and regulation is virtually an sible (and, moreover, probably useless) task Indeed, given personal experi-ence, we are confident that some major regulatory initiative from eitherWashington or Brussels will no doubt come out just after we have submittedthis manuscript for publication and before the ink is dry on the first print edi-tion of this book

impos-For this reason, we decided not to write a strict hornbook of internationaltelecoms law and regulation Rather, we decided to take an alternativeapproach to this topic, and instead explore the respective efforts of the UnitedStates (US) and the European Union (EU) to implement the World TradeOrganisation (WTO) Basic Agreement on Telecommunications Services, andhow these initiatives to open up local markets affect markets for internationaltelecoms services As such, because economic theory is not bound by geographicborders, we will switch, as appropriate, between US and EU law as circum-stances merit

As we researched and wrote this book, we hoped to be able to tell our ers an uplifting story on about how the world was marching over the “bridge tothe 21st Century” and into the “information society.” Instead, we discoveredtwo disturbing trends in recent telecoms regulation and competition lawenforcement: (1) a growing telecoms trade war that is dangerously close to spin-ning out of hand; and (2), given the first point, a growing politicisation of, andcynicism towards, the regulatory process generally Under both scenarios, there-fore, we find that many regulatory initiatives post-WTO harm—rather thanappropriately maximise—consumer welfare

read-To explore these issues in detail, this book is divided into four parts

In Part I, we set forth the analytical framework we use to analyse the growingtelecoms trade war specifically and growing cynicism of the regulatory processgenerally

In chapter 1, “Telecoms Policy for a New Millennium,” we explore the ing telecoms trade war and show that trade has no place in regulatory decision-making Moreover, we show that many policy-makers have no real desire topromote tangible competition Instead, they are more interested in creating

grow-“fair, competition-type outcomes accompanied by the benevolent use of

‘market-friendly regulation.’ ” As such, because many policy-makers perceiveerroneously competition as a “zero-sum game” (i.e., the discredited notion thatone firm can be made better off only if another firm can be made worse off),there is little opportunity or incentive to maximise consumer welfare

In chapter 2, given the analysis in chapter 1, we ask the basic question: Whyrestructure in the first instance? Is it really to maximise consumer welfare, orare we just interested in reallocating rents from one party to another? As weexplain, if the ostensible goal of restructuring is to move from a market char-acterised by monopoly (i.e., one firm) to a market characterised by competi-tion (i.e., many firms), then policy-makers must affirmatively and aggressivelypromote new facilities-based entry To help illustrate this point, we set forththe “Entry Condition” as an analytical framework to help determine whether,given a particular set of circumstances, new firms will find it profitable to enterand competition to occur As we see once again, however, many regulatorshave been averse to promoting new entry to the detriment of consumer wel-fare.

In chapter 3, we set forth what we believe to be the appropriate analyticalframework to assess the expanding restructuring process Indeed, we try to gobeyond the rhetoric and—in this era of convergence—explore how we shouldthink about the market given the current technological developments Amongother things, we recommend that policy-makers should not only take a staticreview of the market as they currently find it but, as telecoms is an industry char-acterised by rapid technological change, also undertake a dynamic approach.Moreover, given such potential for change, we also caution against the use ofoverly broad—and, more importantly, overly narrow—market definitions and,

a fortiori, exaggerations of the relevance of the Herfindahl-Hirschman Index

(HHI) as a measure of market power Finally, we outline what we believe is theappropriate role of regulation and competition law in this process, and examinethe various tools government has at its disposal to make this restructuringprocess a success

In chapter 4, “Evaluating Competition in a Post-WTO World,” we return tofirst principles and examine some of the salient economic characteristics of var-ious telecommunications markets using the Structure-Conduct-Performance(“SCP”) paradigm of industrial organisation economics as an analytical “check-list.” In so doing, we can attempt to glean an accurate picture of where thesemarkets are currently and are likely to go in the future

Section I of this book concludes with chapter 5, in which we explore the cific provisions of the WTO and the Basic Agreement on TelecommunicationsServices and, in particular, how the “telecoms trade war” fits into the largertrade skirmishes now raging among the community of nations In addition,given many people’s misconception of how the WTO process actually works,

spe-we briefly examine what the WTO does and, just as importantly, what it doesnot Finally, in light of the specific provisions of the WTO, we seek to exploreexactly what policy goals the WTO intended originally to achieve and theresulting market structure it hopes to produce

From this analytical predicate, parts II and III of this book examine therespective efforts of the US and the EU to implement the WTO and promoteinternational telecommunications competition

Part II examines US efforts to promote both domestic and international coms competition Chapter 6 begins with an analysis of the Federal

tele-Communications Commission’s (FCC’s) International Carrier Paradigm, which was nothing more that the FCC’s introduction of its domestic “Competitive Carrier” paradigm to the international market This decision marks the first

clear statement by the FCC that, with proper regulatory incentives and straints, it was possible to promote competition for international service—inaddition to domestic long-distance service Despite this constructive start,

con-however, this Chapter concludes with an analysis of the FCC’s “Effective Competitive Opportunities” analysis for international service applications.

Although the FCC claimed that this policy would both promote entry by US riers on the foreign end and also promote foreign entry into the US market, inreality this decision marked the debut of naked (of course, relative to the com-monly accepted, historically implicit) trade concerns—rather than consumerconcerns—as the top priority for FCC international policies

car-In chapters 7 and 8, we discuss probably the most contentious battle in thegrowing telecoms trade war—the FCC’s unilateral decision to impose settle-ment rate benchmarks on the rest of the international community Claimingthat such “competitive safeguards” were necessary because it did not trust therest of the WTO community to meaningfully enforce their respective MemberCommitments, the next two chapters show that both the FCC’s economic ratio-nal behind these actions and the legal justification upholding the FCC’s orderswere at best flimsy We also show the naked politicisation of the American legalsystem by demonstrating that the judicial decision upholding the FCC’s actionnot only ignored numerous areas of well-settled jurisprudence, but also lackedthe professional courtesy of even citing the International TelecommunicationUnion’s charter and name correctly

In chapter 9, which we call “Do as I Say, Not as I Do”, we examine the FCC’sefforts to promote local competition in US markets As we show in this chapter,the FCC’s actions since the passage of the US Telecommunications Act of 1996reveal that it has absolutely no vision of an efficient, long-term industry market

structure Instead, all we see is a cynical regulatory quid pro quo between

incumbents and new entrants, leaving the maximisation of consumer welfareout of the question entirely To facilitate this analysis, we explore in this chap-ter the underlying theory of unbundling, and examine how the FCC has per-verted this theory to such a significant degree as to make tangible facilities-basedcompetition a far-off ephemeral dream To further give some context to theFCC’s recent actions, we also compare the FCC’s actions today to the FCC’ssuccessful efforts to restructure the US long-distance markets in the early 1980’s

In part III, we cross the Atlantic and examine whether EU tions policies have promoted competition This part III begins with chapter 10,where we look at the foundations and institutions of the EU, as well as itsimportant competition policy Telecommunications competition in Europehappened largely through application of EU competition law to the sector so a

telecommunica-thorough understanding of EU law and policy—particularly regarding findings

of dominance and the curious EU essential facilities doctrine—is necessary for

an appreciation of how the EU arrived at where it is today regarding munications competition and regulation

In chapter 11, we look at the EU’s first efforts towards promotion of munications competition, beginning with a judicial examination of competition,

telecom-continuing through the European Commission’s seminal Telecommunications Green Paper, and the first wave of Directives mandating competition in telecom-

munications equipment and services

In chapter 12, we examine how well the EU framework is working Real-lifeexamples are closely examined in: the European Commission’s efforts to bringdown international calling prices through the promotion of international inter-connection, the European Commission’s and the European Court of Justice’sapplication and interpretation of the concept of “special and exclusive rights”;the EU’s Telecommunications Access Notice and finally the EuropeanCommission’s on-going efforts to force incumbent telecommunications opera-tors to unbundle local loops for competitor use

In chapter 13, we look at the EU’s approach to the Internet, contrasting the EU’s Information Society outlook with the US-styled InformationSuperhighway Europe lags behind the US in terms of Internet penetration anduse, a matter of great concern to Europe’s political leaders What, if anything,governments can or should do about this situation is problematic, but policiesdesigned to promote Internet penetration are coming to the fore in the EU nev-ertheless This chapter examines the EU’s Internet policies to date, specificallyregarding possible regulation of Internet telephony, data protection (an areawhere the EU leads the world), and e-commerce initiatives

In chapter 14, we examine the future of EU telecommunications regulation asexpressed in the 1999 Telecommunications Review This policy documentmakes many of the right noises in favour of consumer welfare, but the proof will

be in what actually emerges from the political process over the followingmonths

In part IV, we examine various “hot spots” of contention in the growing

“Telecoms Trade War,” such as universal service, cable landing petitions, national spectrum issues, and regulatory and competition law authority review

inter-of international mergers, acquisitions and joint ventures

In chapter 15, we compare and contrast the United States’ and the EuropeanUnion’s approach to universal service, an area where the worst regulatory cyn-icism on the part of US officials may be observed The actions of US regulators

in imposing a huge tax in the name of universal service, in the form of the called e-rate, on all US interstate telecommunications providers, constitutes ahuge dead-weight loss on the market This is an expense that must be paid by allmarket participants and therefore consumers, all for the sake of a few politicians

so-to score points by having their pictures taken with “kids ’n computers.” Moreimportunately, however, we also show that the improper politicisation of US

universal service policies significantly deter new entry, thus rendering the entireprocess of universal service a self-defeating exercise In contrast, the EU under-stands what universal service is all about, and has taken effective steps to reduceits application to what is essential The result is that only one EU nation, France,even has a universal service fund today This is a chance for the EU to steal amarch on the US, whose telecommunications markets are now weighed downwith an expensive universal service tax that in reality has nothing to do with uni-versal service.

In chapter 16, we examine US international satellite spectrum policies Thischapter seeks to address a very simple and direct question: if the community ofnations has made a collective decision that a vibrant global commercial satellitemarket is in the public interest, then why is the US, via the FCC, threatening tokill this industry (including America’s own significant private space industry) byforcing new entrants into international satellite markets to pay spectrum relo-cation fees just as new entrants had to pay in the US domestic PCS context Such

a “cookie-cutter” approach to spectrum management is per se arbitrary and

capricious, however, because what is good for the US domestic wireless

indus-try is not a fortiori good for the international commercial satellite indusindus-try as

well While it is true that there are certain valuable lessons that can be learnedfrom the US domestic experience and applied to the international market,because the domestic and international markets (as the FCC often readilyadmits) have very different structural economic characteristics, these marketstherefore do not warrant homogeneous regulatory treatment

In chapter 17, we examine how something as seemingly innocuous and isterial as undersea cable landing petitions can become a major battleground inthe growing telecoms trade war Among other case studies, we examine therecent case of the Japan US Cable Consortium’s petition to land a cable upon

min-US shores This case represents a textbook example of regulatory cynicism, notbecause of the merits of the case, but because it represents the epitome of howpolitical connections and the “revolving door” are becoming more importantthan the law, economic theory, or even the facts

In chapter 18, we examine how international mergers and acquisitions havebecome favourite forums to advance trade concerns It appears impossible forenforcement officials in both the US and the EU to avoid the temptation to reg-ulate through merger review Given the incredible number of recent mergers inthe telecommunications industry, enforcement officials are like children in acandy store Although some mergers may alter market conditions so as to callfor restructuring mergers or radical regulatory remedies, often enforcement offi-cials engage in the worst forms of mercantilist aggression against foreign inter-ests This chapter gives a detailed look at how recent significant attempts atglobal, multi-national mergers in the telecommunications industry have faredunder multi-jurisdictional review

We realise that some readers may meet our analysis with incredulity Readers

should note, however, that the criticisms levelled in this book are not intended

to be partisan in any way Instead, we are just trying to report accurately recentdevelopments as they occurred

In a similar vein, nothing contained in this book should be read to mean that

we think all people working in government service are regulatory acs who could care less about the outcome of their actions Both of us have hadthe privilege of working closely with regulatory staffers during the eventsdescribed in this book (in fact, one of us worked for over five years in the FCC’snow defunct Competition Division) and we know of many people in govern-ment who are trying to do the right thing in the face of intense political pressure

megalomani-In sum, given the huge societal implications raised by telecommunicationsrestructuring, any discussion of these complex issues must be approached withthe solemnity and seriousness they deserve Indeed, the issues we talk about in

this book literally affect the lives of billions of people around the globe and,

therefore, cannot be taken lightly by any of the stakeholders in the debate Forthese reasons, we intend this book to be provocative, because we do not likewhat we see Certainly, we do not believe our story to be a pleasant tale, but we

do believe it to be an accurate one We hope that in exposing this growing icism, policy-makers will return to their prime directive and original mandate—

cyn-the maximisation of consumer welfare.

PART I: ANALYTICAL AND LEGAL FRAMEWORK

CHAPTER 1: Telecoms Policy for the New Millennium 3

III The Growing Regulatory Cynicism Has No Place In Policy-Making 9

V Case Study: The United States’ International Telecoms Policy 18

A Case Study: The US versus the European Mobile Industry 25

D Public Policy Should Seek to Promote Good Market

E Many Policy-Makers Have Neither Articulated a

Long-Term View of Industry Structure nor Sought

Aggressively to Improve Market Performance (and Eventual

V Aggressively Promoting Entry is the Sine Qua Non of this Entire

VI So Why are So Many Regulators Really Against New Entry? 44

II Basic Economic Characteristics of Dynamic Versus Static Markets 47

IV Case Study: Dynamic Change and the Need for the 1996 US

1 The Role of the Antitrust and Competition Law

2 The Role of Administrative Agencies Responsible for

CHAPTER 4: Evaluating Competition in a Post-WTO World 73

I Structural Market Conditions in the Post-WTO World—

CHAPTER 5: The WTO and the Reference Paper: An Ostensible

III WTO Disputes and Resolution Procedure 95

PART II: US EFFORTS TO PROMOTE TELECOMS COMPETITION

CHAPTER 6: From International Competitive Carrier Paradigm to

Effective Competitive Opportunities: The FCC’s

IV Questions of Dominance and Effective Competitive

A Generic Worldwide Dominance: The AT&T International

B Does the FCC View Competition/Antitrust Laws as Effective

V Who Needs Market Power to Apply ECO? The MAP and APC

CHAPTER 7: US Policies Post-WTO Part I—Benchmarks and Entry

II The FCC’s Foreign Participation Order (WTO Implementation

A Problem No 1: “Mercantilism Rising”—that is Arguably

More Difficult to Enter US Markets Post-WTO Than it Was

B Problem No 2: Despite Rhetoric, FCC Orders Reveal that

the United States Apparently Has Little Desire to Move to a Full-Circuit World and Eliminate the International

C Problem No 3: Bringing Settlement Rates in Line with

“Costs” Does Not a fortiori Mean that Either (a) Prices will Decline,

D Problem No 4: In the FCC’s View, What is Good for the

Goose Apparently Does Not Necessarily Have to be Good

for the Gander—Even When the Goose Refuses to Lay Any

CHAPTER 8: US Policies Post-WTO Part 2—The Naked

Politicisation of the American Legal System 173

A The FCC Apparently Believes that the Mere Potential for

Foreign Carriers To Think “Evil Thoughts” is Sufficient

Justification to Impose Stringent Regulation as a

CHAPTER 9: “Do As I Say, Not As I Do”—US Efforts at Promoting

A Competition Law Provisions of the Treaty of Rome 239

c The Relationship of Market Shares to Dominance 243

III The European Commission’s Telecommunications Green Paper 269

CHAPTER 12: Does the EU Regulatory Framework Work in the

D World Trade and WTO Telecommunications Treaty

V Shared Access: Leapfrogging to the Next Generation of Local

C Subsequent European Commission Unbundling

Communication and Recommendation: Unbundling Comes

CHAPTER 13: The EU Approach to the Internet and Data Protection 323

B The Telecommunications Data Protection Directive 327

VI Europe: Blueprint for the Future of the Information Society? 342

B Legislative Simplification: A New Regulatory Approach 349

PART IV: CASE STUDIES IN REGULATORY CYNICISM

CHAPTER 15: Case Study: Comparing the US and EU Approaches to

B Analytical Problems 364

IV International Implications of US Domestic USF Policies 375

A Common Examples of Entry Costs for the Global Satellite

B How Regulation Effects Entry Into the Global Satellite Industry 389

IV International Spectrum Policy: How Do We Maximise the

A Regulators Must Formulate Policies that Promote

Competition and Reduce Entry Barriers in Light of the

Special Conditions of the International Satellite Industry 390

B Why the FCC’s Current Approach is both Inappropriate and

V How the FCC’s International Spectrum Policies also

Exacerbates a Growing “Telecoms Trade War” that is

A The FCC’s Actions Close Markets and Call Into Question

2 Effect on US International Commitments in the WTO 396

B By Taxing Entry, the FCC a fortiori Taxes the Internet and

Deprives Consumers Who Live in Poor and Rural Areas of

CHAPTER 17: Case Study: International Submarine Cable Landing

IV ECO and Submarine Cable Landing Rights: The TLD and

1 The Role of the US Antitrust Enforcement Agencies 424

2 The Role of Administrative Agencies Responsible for

6 The Lessons of the MCI WorldCom case 462

APPENDIX: The FCC’s Competitive Carrier Paradigm 477

We hope that readers will find this book both educational and enlightening.Given the provocative nature of our book, however, it is important at the out-set for us to disclaim that the views expressed herein are ours exclusively, and

do not represent the views of either: (a) the Phoenix Center, its adjunct fellows,

or any of its individual editorial advisory board members; (b) Norton Rose andany of its partners and staff; or (c) any of our respective clients

This being said, we nonetheless received invaluable insights and suggestionsfrom a wide variety of friends and colleagues in the process of writing this book

As such, we thank from the bottom of our collective hearts: Bernard Amory,Bob Berger, Richard Cawley, Kevin Coates, Fran Coleman, Richard Dammery,Jerry Duvall, Jim Earl, Jade Eaton, Dan Fling, George Ford, Gitte Forsberg,David Graham, Jason Hoida, Flemming Dehn Jespersen, Valentine Korah,Tom Koutsky, Jeff Lanning, Scott Marcus, Barry Mendelsohn, Doug Metcalfe,Kent Nakamura, Kent Nilsson, Rick Oliver, Sam Paltridge, Lucien Rapp,Patrick Rey, Alan Silverstein, Hal Varian and Glen Woroch All of their respec-tive contributions made the drafting process a far more focused and effectiveeffort

Finally, and most significantly of all, we again want to thank our wives andkids for putting up with us during the writing process

JMN & LJS

Table of Abbreviations

ADSL Asymmetric Digital Subscriber Line

CLEC Competitive Local Exchange Carrier

DBS Direct Broadcast Satellite

DSLAMs Digital Subscriber Line Access Multiplexers

ECO Effective Competitive Opportunities

GATS General Agreement on Trade in Services

GATT General Agreement on Trade and Tariffs

IMTS International Message Telecommunications Service

MVPD Multi-channel Video Programming Distributor

NRAs National Regulatory Authorities

OECD Organisation for Economic Co-operation and Development

POTS Plain Old Telephone Service

PTTs Post, Telegraph and Telephone administrations

SMATV Single Mast Antenna TV

TELRIC Total Service Long Run Incremental Cost

TRIPS (Agreement on Trade-Related Aspects of Intellectual Property

Rights)

UMTS Universal Mobile Telecommunications System

xDSL Generic Digital Subscriber Line Service

PA RT I

A NA LY T I C A L A N D L E G A L

F R A M E WO R K

Telecoms Policy for the New Millennium

of the 1997 World Trade Agreement on Basic Telecommunications Services,the world is ostensibly is in midst of a “telecoms revolution.” This may be true.Unfortunately, however, the actions of many regulators and competition lawenforcement agencies more accurately reveal not a telecoms “revolution” but

instead a growing telecoms trade war that is dangerously close to spiralling out

of hand

That is to say, over the last several years, people have realised around theglobe that it is, in fact, possible to have competition in the telecoms industryand, with such competition, maximise consumer welfare on a wide variety oflevels What we show in this book, however, is that this basic idea has become,

in many instances, so perverted by naked cynicism and political narcissism as tomake the maximisation of consumer welfare an almost Quixotic ideal In ourview, despite the appearance of “short-term” achievements,1it is actually theheretofore unimaginable cynical and cavalier approach to towards the regula-tory process and competition law enforcement—and its concurrent adverseeffect on market structure—which harms consumer welfare in the long-run.Moreover, this growing mercantile “Telecoms Trade War” spills over ontoother areas of international trade, damaging consumer welfare even further Accordingly, the criticisms levelled in this book should not be taken to mean that we are somehow against lowering settlement rates or opening upmarkets That argument simply is not true, and to defend these regulators’actions against our analysis in such a way would be just another typical and

cheap ad hominem attack As explained passim, we are dismayed by the huge

degree of the blatant politicisation of the process and the removal of any form

1 For example, the United States claims that as the result of its aggressive international telecoms policies, international calling rates have fallen dramatically While rates have indeed fallen over the last several years, can the FCC really claim primary credit? No On one hand, restructuring initia- tives were already well underway in many parts of Europe and elsewhere (e.g., the UK, New Zealand) well before the FCC started to proscribe settlement rate benchmarks for US carriers Similarly, with the WTO, other Member Countries are starting to follow suit On the other hand,

telecoms is a declining cost industry and, as such, a monopolist will still lower its price sua sponte

if its underlying costs decrease As such the real question posited by this book is whether the FCC’s policies will lead to sustained competition in the long run.

of analytical foundation from policy decision-making, because in the absence ofsuch a foundation, policy-making is now conducted in an environment akin to

“Alice through the Looking-Glass.” Given such a cynical environment, there is

no constituency (or even ability) for discussing these issues rationally by ing the law and economic theory to the facts Instead, it is far easier just toengage in “litigation by Rolodex.”

apply-This is not to say that politics never play a role in the process and to argueotherwise is both nạve and unrealistic One theme that is constant around theworld is that consumers consider the telecoms business—unlike the wheat mar-ket or car industry—to a higher degree, and politicians around the worldrespond as such However, if we truly want to maximise consumer welfare inthe long run, then we must not sacrifice sustainable competition just to give theappearance of immediate competition in the present Remember, when every-one is just reselling the exact same service from the exact same provider,

“choices” are just not the same as “competition.” If we really want ing to work therefore, then policy-makers will have to show both leadership andpolitical will in the on-going public policy debate.2

Over 200 years ago, Adam Smith, in his classic treatise The Wealth of Nations,

powerfully demonstrated that whenever government attempts to co-ordinatethe efforts of entrepreneurs, such policies almost invariably discourage economic growth and reduce economic well-being Smith called this system

“mercantilism.”3 Over the last eight years, however, many governments haveimproperly introduced trade considerations into both competition lawenforcement and regulatory rulemakings and adjudications as a legitimate publicinterest factor.4By improperly attempting to reintroduce mercantilism under anew guise of “fair trade” in the “global economy”, all that has been accom-

2 See, e.g., Kevin J Delaney, “France Government Withdraws an Amendment on Local Calls”,

Wall Street Journal 27 April 2000 (reporting that the French government withdrew a legislative

amendment that would have opened France Telecom to new competition via unbundling following

a request by Communist Party leaders).

3 See James C Miller et al., “Industrial Policy: Reindustrialization Through Competition or

Co-ordinated Action?” (1984) 2 Yale J on Reg 1 at 5.

According to Adam Smith, mercantilism “retards, instead of accelerating, the progress of the ety towards real wealth and greatness; and diminishes, instead of increasing, the real value of the annual produce of its land and labour” for two basic reasons: a tendency of special interests to turn government programs to their own narrow advantages, and a tendency of joint business efforts to result in collusion to reduce output and raise prices, especially when government willingly permits such collusion As such, although “the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.” (Citations omitted.) It would seem, therefore, that “FCC” should not stand for

soci-“Facilitating Cartels and Collusion.”

4 See Catherine Yang, “Commentary: When Protectionism Wears Camouflage”, Business Week,

2 June 1997, at 60.

plished is the re-baptism of Smith’s original concept of mercantilism into thenew, but equally flawed, “neo-mercantilism.”5Yet, as trade concerns become anacceptable factor in competition law and regulatory lexicon, not one proponent

of “neo-mercantilism” school has bothered to demonstrate what economic ditions have actually changed since Smith was alive that would merit a depar-ture from his work.6

con-As a general proposition, it is very important to recognise that competition

law and trade policy seek to promote very different goals Antitrust and petition law policy appropriately focuses on consumers, not competitors Trade policy, on the other hand, by its very definition, seeks to promote competitors

com-(i.e., competitors of the “domestic” sort) Thus, while competition law is tainly one of a number of policies affecting international trade, the variousnational trade policies (which are very often not even in harmony with eachother) may at times be in tension with competition law policies.7

cer-This reasoning should apply equally to economic regulatory paradigms Forexample, in the case of the United States, the US Supreme Court holds thatadministrative agencies responsible for economic regulation must

“make findings related to the pertinent antitrust policies, draw conclusions from the findings, and weigh these conclusions along with other important public interest con- siderations.” 8

When the case law and economic literature are reviewed, these “other publicinterest considerations” should be limited to identifying and eliminating “pol-icy-relevant” barriers to entry Thus, because economic regulators also haveresponsibility for maximising consumer welfare, and therefore these regula-tors—just as under antitrust jurisprudence—are similarly “not at liberty to sub-ordinate the public interest to the interest of equalising competition amongcompetitors,”9trade considerations correspondingly should not be a legitimate

“public interest factor” in regulatory decision-making Unfortunately, researchreveals that both competition law enforcement agencies and economic regula-tors on both sides of the Atlantic often lately are ignoring this basic principle.10

5 See, e.g., Miller, supra n 3 (doctrine of “neo-mercantilism” can be characterised as the principle

that “in a world of monopolies, the nation with the biggest and strongest industries and firms can reign supreme and recoup for the mother country the supra-competitive profits earned from abroad”).

6 See Paul Magnusson, “Getting a Grip on Trade Sanctions”, Business Week, 17 Nov 1997, at

115 Magnusson reports that in the past four years, President Clinton has signed 62 laws and utive actions targeting 35 countries These numbers account “for more than half the sanctions

exec-imposed [by the US] in the past 80 years.” Moreover, Magnusson reported that the direct cost to US

exporters in lost sales in 1995 alone was as high as $20 billion, an estimated 250,000 US jobs

disap-peared and “no one can measure the damage to relations with angry allies.” (Emphasis supplied.)

7 See Antitrust Law Developments (Fourth) 991 (American Bar Association, 1997).

8 See, e.g., Gulf States Utilities Company v FPC, 411 U.S 747, 755–62 (1973); see also United States v FCC, 652 F.2d 72, 81–82 (D.C Cir 1980) (en banc) (quoting Northern Natural Gas Co v FPC, 399 F.2d 953, 961 (D.C Cir 1968)).

9 See SBC Communications v FCC, 56 F.3d 1484 (D.C Cir 1995).

10 As noted in n 3 supra, the rise of neo-mercantilism is clearly originating from the Executive

Branch of the U.S Government See generally Clay Chandler, “Will the [National Economic

Many people nonetheless respond that there is absolutely no reason to be cerned about this recent “neo-mercantilist” influence on antitrust and “publicinterest” adjudications They are wrong.

con-For example, once trade concerns enter regulatory decision-making, a

“reci-procity” approach actually creates—rather than eliminates—significant

barri-ers to entry for both new foreign firms into domestic telecommunications

markets and domestic firms into foreign markets Specifically, by adopting an

aggressive “my country first” approach, both foreign governments and carriers

will probably have a (if not exacerbating an existing) substantial disincentive to

engage in good faith negotiations with domestic carriers to enter their homemarkets (which, paradoxically, is supposed to be the whole goal of such anapproach in the first place).11

For example, take the case of international interconnection rates which, tostate it politely, still remain high in many parts of the world In many of thesecountries, however, regulators nonetheless want to do the proverbial “rightthing” and lower these rates (because they know that their constituents wouldbenefit from such an action) Yet, just when these regulators are buildingsufficient internal political consensus to lower interconnection rates, the FCC

aggressively orders the international telecoms community to comply with its

settlement rate benchmarks or be prohibited from delivering traffic to the US In

so doing, the FCC’s aggressive actions have obliterated any internal politicalconsensus to lower rates, because fighting the “Great Satan’s” aggressive andmercantile policies has transformed the debate into a matter of national priderather than an examination of sound economic principles

Moreover, international commerce, by its very definition, raises far more

Council] Continue to be Clinton’s Neglected Child?”, Washington Post, 9 Nov 1996, at H01,

reporting that President Clinton often rewarded advisors seeking to circumvent the NEC and the specific advice of his chief economist, Laura D’Andrea-Tyson—e.g., when USTR Ambassador Mickey Kantor pushed Clinton directly to take a much tougher line with Japan in a dispute over auto exports Just to refresh everyone’s collective memory, this was the dispute where, at Detroit’s urging, the US threatened to slap a 100 per cent tariff on all Japanese luxury cars—thus potentially throwing thousands of Americans who work at Lexus and Infinity dealerships out of jobs—if Japan did not permit Detroit to sell its cars in Tokyo As this passion play was carried out, however, all of the Mercedes, Porche, BMW, Saab, Volvo, Jaguar, et al dealerships were standing in the wings, chuckling at the notion that Detroit manufacturers actually believed that only they would gain US market share if the U.S government removed their Japanese rivals from the market See also Bob

Woodward & Ann Devroy, “An Unusual Meeting of Chief Executives”, Washington Post, 21 Aug.

1997, at A01 (reporting that when Tyson, fearing a trade war between Washington and Tokyo, objected to private, one-on-one meeting between President Clinton and Federal Express Chairman Fred Smith (who, along with Fed Ex, coincidentally just donated $275,000 to the Democratic National Committee) to discuss Fed Ex’s trade concerns with Japan, D’Andrea-Tyson’s objections were specifically overridden by former Clinton Chief of Staff and close personal friend Thomas

coun-immediately Free trade delayed is free trade denied.” (emphasis in original and supplied)).

investment risks than domestic commerce does (e.g., through different or

inef-fective legal systems, political graft and retroactive or post-hoc “windfall”

taxes) In order to reflect this risk, the prices for international goods that requirethe investment of substantial sunk costs are usually higher An aggressive tradeapproach, therefore, merely exacerbates the possibility that a foreign countrymay, in an act of trade retaliation, “nationalise” a firm’s sunk assets—oftenwithout adequate compensation.12This “uncertainty” can raise prices for con-sumers in two ways first, the greater the risk, the higher a firm’s cost of capitalbecomes; as a firm’s cost of capital becomes higher, end-user prices for con-sumers increase Second, as risk increases, a firm will have a greater incentive

to raise its prices to ensure that it can recover its costs in the shortest time

possible.13

More importantly, however, it is quite unclear how lower prices and new

products and services—even if provided by foreign firms—are actually bad for

domestic consumers.14 Indeed, as former United States Federal TradeCommissioner Jim Miller noted well over ten years ago, in order for a dominantforeign firm to successfully lever its dominant foreign position to predate andtake over the domestic industry, the targeted industry must be able to recoup itslosses either by driving out its rivals in the domestic market and then chargingconsumers supra-competitive prices or by capturing monopoly rents from itshome market According to Miller,

“to succeed just in the mother country is not enough In fact, that would be productive, since the losers would be that nation’s own consumers and taxpayers, who must pay higher prices and underwrite the subsidies.”

counter-Moreover, if the attempted predation fails, the gainers would be “the sumers, the public, in those other nations, including the United States, whoseindustries have been targeted” because consumers would get the “benefits oflower prices.”15As such, Miller argues,

con-12 For example, take the hypothetical case (although loosely based on truth) where a foreign country, after nationalising substantial sunk assets, simply informed its investors that while it is a poor country (and therefore has no money to compensate its investors with), it nonetheless wanted

to compensate its investors with its leading export: canned corned-beef As such, the country vided its investors with a large container ship filled to the brim with canned corn beef that the investors were supposed to sell on the open market for whatever amount they could get.

pro-13 See Miller et al., supra n 3 Moreover, retaliation can lead to violence as well After all, it really

is rather difficult to have a true “trade war” unless some kind of violence is actually involved See,

e.g., Paul Bluestein, “U.S Plans to Ban Ships, Pushed Japan to Act”, Washington Post, 19 Oct 1997,

at AO1 (Clinton Administration calls out the U.S Coast Guard to enforce reciprocity policies against Japan in harbour dispute).

14 See Robert Eisner, “A Free Trade Primer”, Wall Street Journal, 13 Oct 1997, at A22; James K Glassman, “Consumers First”, Washington Post, 24 Oct 1997, at A21 (“If we make it easy for Italy

to export inexpensive shoes to us, the U.S shoemakers may have to find work in other fields But, meanwhile, the 260 million Americans who wear shoes everyday get a bargain The money they save can be used to buy other things and start businesses, such as software, in which Americans have a clear advantage”).

15 See Miller, supra n 3 (citations omitted).