Posted: 02/1998

By Kathleen Franklin

The holidays are over. Thanks to El Niqo, there are freak snowstorms in Guadalajara,
and, in most of the rest of North America, winter has dug its heels sharply and grimly
into the landscape. On the policy front, the Telecommunications Act of 1996 is two years
old, and the new members of the Federal Communications Commission (FCC) are busy learning
how to continue implementing the various facets of the law.

So, how does a smart telecom company climb out of the doldrums and set a new agenda for
itself for 1998? The answer: go global. After all, customers everywhere all want the same
things when it comes to telecom: fair prices, superior quality, responsive customer
service and efficient, easy-to-use communications products and services.

But, before you grab a Fodor’s travel guide and call the airline, you need to review
some of the factors that will affect not only the decision to explore international
markets, but also the preferred strategies if that decision is in the affirmative.

A review of the big picture shows that business opportunities are tremendous.
Washington-based Wallman Strategic Consulting, for example, estimates that the global
telecom industry is worth $600 billion per year. And the White House’s Office of the
United States Trade Representative forecasts that this figure could double or even triple
over the next 10 years.

The volume of traffic is staggering: The FCC’s records show that the total number of
interstate switched access minutes rose from approximately 170 billion in 1985 to a
whopping 432 billion in 1995. Some of that traffic growth was spurred by the steps taken
by long distance carriers to lower their rates; the average cost of a long distance call
dropped by more than 50 percent during that 10-year period.

According to the U.S. Department of Commerce, the United States, the 15 member states
of the European Union and Japan currently account for 75 percent of the world’s telecom
service revenues, two-thirds of the world’s $150 billion of investment in telecom network
facilities, two-thirds of the world’s international telecom traffic volume and 60 percent
of the world’s telecom primary lines.

All but one of the 16 national telephone operators whose 1995 earnings topped $10
billion are based in the United States, the European Union or Japan–and only three of
these are U.S.-based companies. But the United States continues to wield a certain
dominance: Five of the six busiest international telecom routes connect the United States
with other countries.

The United States, the European Union and Japan remain safe, stable targets for
investment and growth. Most of these 18 markets have become fairly liberalized; most have
well-developed telecom networks and are always on the lookout for making these networks
more robust and more efficient.

Developing countries, in particular, are ripe for the expertise and investment of
U.S.-based companies; they are, for the most part, eager for the technological expertise
(in network design, installation, and maintenance) that has distinguished U.S.-based
companies since the heyday of Ma Bell. In addition, many of these countries need
investment capital.

The multilateral negotiations that produced the World Trade Organization (WTO) basic
telecom services agreement have supposedly improved market access by removing the barriers
to foreign investment in telecom services in the member countries that signed the historic
accord, which was implemented Jan. 1. The WTO also encourages the acceptance of
pro-competitive regulatory principles that will ensure market access for new service
entrants.

Telecom equipment manufacturers and suppliers also stand to benefit from the WTO:
Commerce Department figures show that the annual telecom equipment markets for the 69 WTO
accord signatories total $160 billion. Fifty of these countries now permit competition in
their markets for domestic facilities, opening up vast competitive opportunities for U.S.
equipment exporters, potentially boosting U.S. equipment exports, which in 1996 totaled
slightly more than $16 billion.

Another factor in exporting U.S. telecom services involves the intricate system of
payments governed by international accounting rates. U.S. revenues for traffic billed as
"international" totaled $18 billion in 1996. The Commerce Department predicts
the number of international minutes of use will increase at a rate of approximately 20
percent per year over the next five years.

Last August, the FCC adopted new rules governing international rate settlements that
are designed to reduce international calling rates for customers and promote competition.
(PHONE+, November 1997, pg. 40) These new rules place each country into one of
four income categories. There is an additional category for low "teledensity"
countries–those nations with less than one line per 100 residents. The FCC created a
benchmark–and deadline to reach it–for each income category. These benchmarks range from
15 cents for upper income countries (with a deadline of Jan. 1, 1999) to 23 cents for
low-income countries (with a deadline of Jan. 1, 2002).

Some countries are not so sanguine about these changes, claiming that the FCC’s ruling
is too unilateral. Many of these countries depend on accounting rates and the
international settlements process to subsidize other services (such as postal services or
domestic telecom services), and they naturally are concerned about being faced with the
prospect of raising rates for these services and the potential negative effects such
action will have on their own economies.

The way that this issue is resolved obviously could have not only a direct impact on
the cost of setting up and maintaining communications networks and providing associated
services in foreign markets, but it also could have an indirect impact on the tenor of
whatever negotiations U.S. businesses may need to make with those foreign governments that
still maintain a strong grip on their indigenous carriers.

For the most part, however, foreign markets have never been more open to U.S. telecom
products and services as they are now, and dozens of U.S. carriers are looking beyond our
borders for growth opportunities.

Moreover, expanding into international markets not only makes good business sense from
the standpoint of broadening a company’s revenue stream, it also can boost a company’s
appeal to customers here at home. STAR Telecom, for example, is barely three years old but
already serves more than 90 carrier-customers. Part of STAR’s appeal to these
carrier-customers, according to founder and CEO Christopher Edgecomb, is that the company
has a switching facility in London and is constructing eight more overseas–four in
Germany and one each in Belgium, the Netherlands, France and Italy.

Despite its age and sophistication, Europe still finds U.S. telecom products and
services attractive. For U.S. businesses, Western Europe, in particular, is characterized
by high incomes, high employment, and a well-educated customer base that has embraced
technology and competition but still struggles in many areas with under-developed
communications infrastructures.

But as Larry Hendrickson, a partner of DDV Telecommunications Strategy, a Brussels,
Belgium-based telecom consulting firm, noted at a recent Competitive Telecommunications
Association (CompTel) educational seminar on international issues, there really is no
"Europe," despite repeated efforts to erase enough political and cultural
boundaries to forge a unified, economic powerhouse. Rather, there are more than 40
independent nations with different levels of demand and penetration, and different degrees
of competition.

Seeking out local partners (or at least advisers) can help U.S. companies identify
their objectives and understand and capitalize on the political, legal, regulatory, and
business ramifications of making an investment in Europe–or any other region.

In addition, Hendrickson noted, making forays into Western Europe is not risk-free.
Despite efforts to unify, the region remains divided into relatively small markets whose
differences in culture and regulatory regimes can confound even the most careful company
strategists. Network service costs and interconnection rules often differ from one country
to the next.

For these reasons and others, U.S. companies also should not forget about the Southern
Hemisphere: John C. Rahming, general manager of the Inter-American Investment Corporation
(IIC), a multilateral investment corporation based in Washington, D.C., told attendees of
a CompTel seminar that Latin America and the Caribbean offer myriad business opportunities
and numerous financing options available to U.S. telecom companies. Rahming noted that
Ecuador, Guatemala, Honduras, and Nicaragua all are privatizing their telecom carriers,
and Colombia and Venezuela are encouraging competition in their markets for services as
diverse as long distance, cellular and cable television.

As international markets continue to evolve into the kinds of open, export-led,
market-based economies that will alternately nurture and test the mettle of U.S. telecom
companies, policymakers here at home undoubtedly are mindful of the responsibilities and
challenges borne out of the Telecom Act. As the U.S. government’s various institutions
implement that law and all its regulatory progeny, it will behoove U.S. telecom companies
to be both vigilant in ensuring that domestic policies are pro-competitive and aggressive
in taking advantage of similar opportunities overseas–by being there, not just going
there.

Kathleen Franklin is director of communications for the Competitive
Telecommunications Association (CompTel), the principal national industry association
representing more than 200 competitive telecommunications carriers and their suppliers.
Contact CompTel at (202) 296-6650 or visit the website at www.comptel.org/