Evolution of the Telecommunication Sector

As a result of its massive benefits to consumers and businesses, the telecommunications industry is of high interest to economists, governments, and citizens whom governments aim to protect from the effects of restricted competition, which is endemic in the industry.

When telecommunications networks were first created, they were generally government-owned monopolies. They were considered ‘natural monopolies’, like power and water utilities, where the most cost-effective way of providing for customers was to have one company running the cable networks and the switches that routed calls. Laying down more than one network of cables was considered wasteful, although separate regional companies did evolve in some countries.

Once a country-wide network was established, calls could be routed within one exchange, between nearby exchanges, or might need routing over long-distance wires, possibly into the territory or even country of another company. At first, calls took the form of telegrams and Morse Code, but as handsets developed to translate voices into electrical pulses and back again, voice dominated, supplemented later by facsimile and telex traffic, and then eventually data traffic translated into pulses and packets and sent by ‘modems’ (modulator/demodulators).

From the earliest days, governments regulated telecommunications, whether a state-owned monopoly or private firms, not just because there was a risk of consumers being exploited by being offered poor prices or services, but also because telecommunication was essential to national economic, social, and security interests. Prices were controlled and service standards monitored. Obligations were imposed on telecommunications companies, such as connecting remote areas. These connections were often uneconomic, as were connections to infrequent users. This led to cross-subsidy in telecommunications pricing — urban users subsidized rural users and frequent users subsidized infrequent users.

As a result of monopoly conditions, pricing could be based entirely on customers’ willingness to pay, rather than the cost of provision. Pricing was high at peak times, low at off-peak times, high for long-distance (especially international) calls, and low for local calls. Higher prices partly reflected higher costs (more wiring was required for long-distance networks, for example, or capacity might be limited relative to demand at peak), but often the profit margin on higher-priced services was very high.

An additional problem posed by monopoly supply was that it was hard to determine whether the supplier was efficient. In some Western countries, by the 1960s (by which time networks covered whole countries), telecommunications suppliers were the largest employer, after the armed forces or health services, and questions were asked about whether such a large labor force was necessary.

?From analog to digital

In most countries, in the later twentieth century (generally in the 1980s), the technical situation changed radically, due to the advent of digital rather than analog signaling. This greatly increased the technical efficiency of the network and reduced the need for labor, allowing a more efficient service. Digital technology also facilitated the break-up of the value chain. Earlier, calls were billed using what now seems very archaic meters — usage could not be checked later. Calls transferred between networks owned by different organizations had to be paid for using complex accounting techniques.

Once digital technology arrived, every call could be accurately metered and its usage of particular parts of the network tracked. This opened the door to different business arrangements and greater competition. For example, a call could be ‘delivered’ to a local exchange by one company and then to the final customer using what was called the ‘local loop’. Although delivery to the local exchange might require some duplication, in fact even this could be avoided by regulators obliging the company that owned any particular section of wire to lease part of its capacity at attractive prices to other companies. In some countries, the first physical competition to the original monopoly network was a fiber-optic cable. This had a higher transmission capacity than the copper cabling used by the original (or incumbent) telecommunications companies. Regulators forced incumbents to allow interconnection with their services at attractive prices to the new entrants.

The arrival of digital transmission was followed by mobile telephony, which already existed in a more basic wireless form (eg, pagers). From the late 1980s onwards, mobile telephony expanded rapidly, and today, in many countries, most voice traffic is carried by it and a significant proportion of data transfers take place on mobiles. Initially using analog wireless techniques, it moved quickly to digital techniques, and underwent the same revolution as fixed line telephony, so that capacity could be leased and resold, allowing mobile phone companies to provide services even though they owned no capacity