Good Reading "Telecom" Red Herring>
Global telecom rout
As other nations struggle for telecom
dollars, the United States' superior
infrastructure is eating into their
political power.
By Kenneth Neil Cukier
The Red Herring magazine
From the February 1999 issue
It didn't look like a bad year for France and its large,
state-owned carrier, France Telecom: in 1998 the
company's share price (NYSE: FTE) doubled, Internet
traffic in France grew 400 percent, and the country's
soccer team won the World Cup tournament. Yet of the
four Internet servers hosting the World Cup's Web site,
only one was based in Paris; the others were hosted in
the United States by Electronic Data Systems. Despite
appearances of national success, the servers' locations
suggest that France is impotent when it comes to the
Internet. Today the nations with the best and cheapest
telecommunications service get the lion's share of
telecom revenues and are in the best position for
electronic commerce -- tomorrow's source of national
wealth and power.
France, along with other countries
that are only now opening their
telecom markets to competition, is
poorly positioned for the Internet
era. Web hosting, computer
equipment, and skilled labor are
vastly cheaper in the United States,
where most Internet users live. But
there's another, more important
reason for the country's
dominance: most of the world's Internet traffic passes
through the United States.
Although foreign Internet service providers have direct
connections to the U.S. backbone, it would be impossible
for them to link directly to every other nation. And it's
almost always cheaper for a foreign ISP to provide
service on lines leased from a U.S. carrier like MCI
WorldCom (Nasdaq: WCOM) than it is to buy service
from its national carrier. ISPs outside the Unites States
lease lines to the U.S. backbone to reach U.S. content
and to exchange traffic with other foreign ISPs -- and in
some cases, even with ISPs in their own countries.
The growth of the Internet and the globalization of
communications are creating a new balance of power
among nations. Network service for e-commerce is
almost always dominated by countries with a favorable
telecom climate -- liberalized and cheap -- like the United
States'. This places the newly privatizing telcos in Europe,
Asia, and elsewhere at a severe disadvantage -- with
important economic and national security implications.
And there's an insidious twist: to combat this loss of
telecom business to the United States, foreign
governments must unleash the forces of privatization and
market liberalization. But in so doing, governments around
the globe are set to lose a considerable amount of their
own power. Not quite as drastically as some
cyberlibertarians, predicting a borderless world of
crypto-anarchists spending nothing but digital money,
might imagine (see, for example, "A World of Money,"
September 1997). But certainly more than the balding
foreign-policy establishment, which insists that national
power will emerge unscathed, admits.
CENTER OF THE WORLD
Why is Internet service so much cheaper in the United
States than everywhere else? How has the Internet come
to use the United States as its international port of call?
The answer lies in the construction of the world's telecom
network.
Virtual or not, cyberspace traffic has to travel over
physical networks and pay real money for the privilege.
The myth that the Internet is a ganglion of interconnected
networks may be true domestically, but internationally it
looks more like a hub-and-spoke system, with the United
States at the center and circuits spiking out worldwide.
No Asian country has more than 155 mbps of bandwidth
to any other country in the region, while capacity from
Asia to the United States is around 2 gbps. In Europe, no
two nations are connected by more than 700 mbps, while
U.S.-bound bandwidth sailed to well over 4 gbps in 1998.
U.S. carriers own the majority of this international
capacity and lease it cheaply to foreign ISPs. Even
Europe's incumbent carriers are at a disadvantage. For
instance, Belgacom's Internet subsidiary is a customer of
MCI -- which partially explains why the Belgian telco
urged the European Commission to mandate the sale of
InternetMCI (which went to U.K.-based Cable &
Wireless for $1.8 billion) before it approved the merger of
MCI and WorldCom last year.
This state of affairs, disadvantageous to those outside the
United States, is dictated by the telecommunications
infrastructure. Because today's international telecom
networks -- sunk deep into the ocean or floating in the
heavens -- were based on call-traffic pattern
assumptions, the majority of bandwidth capacity streams
from the nation with the most international traffic: the
United States. That preponderance of bandwidth creates
economies of scale, a terrific incentive for new
investment, and lower prices.
North America originates twice as much voice traffic,
measured in calling time, to Europe than Europe to North
America. To Asia, the traffic imbalance is three times
larger. North America's 13.3 billion minutes of voice
communications to both regions vastly outstrips Europe's
and Asia's 1.7 billion minutes between themselves in
1997, according to the research group TeleGeography.
It's no surprise, then, that the best telecom infrastructure
is available via U.S. links.
CYBERTOPOLOGY
That's what France learned last year when most of the
World Cup's Web servers were based in California,
Texas, and New York and billed by a U.S. company. The
new landscape that has emerged from the radical change
in telecom prices and performance has wreaked havoc
on the traditional world of commerce and international
relations.
Singapore's situation demonstrates the powerful forces at
play. It takes a packet of Internet traffic a lethargic 885
milliseconds on average to travel round-trip from
Singapore to another destination within the Asia-Pacific
region, while between Singapore and North America it
zips at 382 milliseconds. It is faster and cheaper for
Singapore to send data to San Francisco, more than
13,000 km away, than to Indonesia, less than 900 km
away.
As a result, 71.6 percent of Singapore's Internet traffic
travels to North America, regardless of its final
destination. Much of it is likely forwarded elsewhere,
often back to Asia; only 8.2 percent of Singapore's voice
traffic ends in North America. In the meantime, North
American carriers -- like Montreal-based Teleglobe,
which handles much of Singapore's Net traffic -- receive
a handsome slice of revenue. But without foreign telecom
firms, Singapore, a major Asian trading port, would be
reduced to a digital backwater -- an obvious concern for
policy makers, who are grappling to understand
technology's impact on national power. "The closest
markets are now those with the best network
performance, and the farthest market might be the
geographically closest," declares Sam Paltridge, an
economist with the Paris-based Organisation for
Economic Co-operation and Development (OECD), an
intergovernmental think tank overseen by the world's 29
wealthiest nations.
Europe's partially privatized, but still largely state-owned,
telcos are beginning to recognize these monumental
stakes, as are the politicians in those countries. As a
result, European national carriers have unveiled sweeping
plans for network construction, and governments have
done the same to encourage high-tech investment and
Internet penetration. They can't afford to wait; their
telecom markets were either liberalized last year or will
be over the next three years. And unless their home
markets are open for competition, the national carriers
won't be able to enter new markets elsewhere under the
World Trade Organization's 1997 telecom liberalization
agreement.
The effects of liberalization and deregulation are
staggering in terms of e-commerce -- a key factor for
national wealth in the future. The greatest number of
e-commerce Web sites exist in countries with competitive
telecom markets. Looking at the number of Web sites in
the domain name system that use encryption for
authentication, presumably for e-commerce purposes, the
OECD notes that with few exceptions, the per capita
number of e-commerce sites is as much as ten times
greater in open telecommunications markets than in those
that aren't open or that just opened in the past year.
THE BIG GET BIGGER
The economic and political stakes rise as U.S. carriers
invade new international markets. For instance, in 1997
Ameritech bought a 42.2 percent stake in Tele Danmark,
and in 1998 MCI bought a 20 percent equity stake and
51.8 percent voting interest in Brazil's Embratel. MCI
WorldCom is already constructing national networks in
Europe and Asia.
To be sure, telecommunications has always been critical
to national well-being, economic power, and security.
Approximately 2.5 percent of the industrialized world's
collective gross domestic product, or $600 billion's worth
annually, is generated by telecom revenues, which lend
significant support to the national tax base. France
Telecom's tax rate, for example, is around 40 percent;
last year the carrier owed FFr7.9 billion ($1.4 billion) in
taxes.
Newly privatized telcos are often among the
best-capitalized companies on the national stock
exchanges. From 1990 to 1997 there were more than 75
privatization transactions, through which foreign
governments raised around $130 billion from the public
markets -- a third of that in 1997 alone.
All these technological and commercial factors make
today's world different. As telecommunications was
transformed from a public utility to a commercial service,
it also went from being an industry in itself to being a vital
enabler of all other industrial sectors.
Without national monopoly operators, nations no longer
control the communications gateways into their countries.
Governments can no longer manipulate the rates of
state-run telcos in order to garner new revenues. And the
local players find it tough to compete with the
technologically superior U.S. firms now that their markets
are no longer protected. As states relinquish control of
their telcos, they forgo a large slice of their national
economic and policy-making power.
Some fail to acknowledge the speed with which this will
happen. In the September/October issue of Foreign
Affairs, Robert O. Keohane and Joseph S. Nye Jr.
argue, "The continuity of beliefs, the persistence of
institutions, [and] the strategic options available to
statesmen" will protect national power for some time,
despite an "information revolution."
They err in focusing on the content that rides along the
infrastructure instead of the transmission network itself.
It's as though they are admiring car engines in a country
devoid of roads. In so doing, Mr. Keohane and Mr. Nye
forget that somebody must be paid for carrying the bits --
and that certain countries and their companies stand to
gain above others.
Mr. Nye, a former U.S. assistant secretary of defense
and currently the dean of the John F. Kennedy School of
Government at Harvard, admits that he defines
information in the phrase information revolution as
content, disregarding the physical network, but asserts
that "the location of the server does not seem to give that
much power." The current trends of telecommunications
competition and e-commerce Web site deployment don't
"mean that you're going to have a big reallocation of GDP
from Europe to America," he said in an interview, though
"projected 40 years out, it may be a different world."
It's true that today's GDP isn't much changed by
connectivity. And maybe it's irrelevant which companies
provide the telecom service so long as a country has
access to it. But the authors' view that national power
derives from information is superficial; it misses the real
revolution in the underlying infrastructure. National
markets are no longer well protected when digital
industries can relocate at the speed of light. National
security -- predominantly economic security during
peacetime -- is jeopardized if one nation is beholden to
another for a resource as vital as connectivity.
Internationally, telecom executives and policy makers are
beginning to learn the hard way that there's something to
this digital economy after all. In one pleasingly symbolic
event, Disney's Web sites for the European market,
formerly hosted by AT&T in Amsterdam, moved this
year to Hawaii to benefit from the terrific telecom
infrastructure left when a U.S. military base moved out.
It's a fitting example of how sources of power are
shifting in an age of transformation.
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