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Comprehensive Restructuring Needed to Kick-Start Moribund Telecom Industry

By Robert C. Atkinson

It is no secret that the telecommunications industry, including telecommunications carriers, equipment suppliers and Internet service providers, is in the midst of an unprecedented meltdown. What is not as widely understood is why this is so and what is needed to jumpstart this vital industry. Researchers from Columbia's Institute for Tele-Information (CITI), based at the Columbia Business School, have embarked on an ambitious project to get at the heart of this crisis and in a draft report recently released, they are providing some answers.

Consider the dimensions of the meltdown. Since the beginning of the year 2000, the U.S. industry alone has shed in excess of 400,000 jobs, and endured a continuous stream of bankruptcies. Losses have been much greater than for the savings and loan debacle of the late 1980s.

Parts of the industry also are mired in scandal. Worldwide, the industry has accumulated over $1 trillion in debt, investment has come to a standstill and stock values declined by $4 trillion. As network firms sought survival rather than expansion, the telecom equipment manufacturing sector has all but collapsed.  

Quite likely, the present downturn is only temporary, say the researchers. The real problem for the industry, however, is not a one-time recovery, they explain.

"The main problem of the telecom industry is that this once stable and predictable sector has entered a chronic pattern of volatility, with boom-bust patterns becoming a common occurrence rather than aberration," says CITI director and Business School Professor, Eli Noam.

The consequences of this volatility ripple far beyond the telecommunications industry itself, says Noam. Telecommunications was once an adjunct to industrial production; but today's telecommunications is a critical factor in the information economy and society. Furthermore, the importance to modern society of electronic communications makes the resilience of the network system a matter of national importance to the economy and security.  

Given the magnitude of the problems, a major overhaul is needed to jumpstart this troubled industry. The CITI study lays the ground work for such a comprehensive restructuring by pinpointing the fundamental and long-range trends contributing to the bursting of the telecom bubble, and provides a series of key recommendations for pulling the industry out of its slump.

"The telecommunications sector is no longer subject to the linearity of the traditional utility business," says Noam, "but rather is plagued by structural instability. Because it is such a capital-intensive business, competitive pressures to reduce pricing inevitably reduce margins to unsustainable levels. This is a flawed model for robust competition and leads to an oligopoly structure."

Short of embarking on an industrial policy of subsidies common in many countries, the researchers recommend that a U.S. policy identify and eliminate regulatory bottlenecks that stand in the way of broadband deployment and application development, including a temporary easing of copyright rules for music and video content and mainstreaming tele-work, distance education and tele-medicine.

Other crucial steps needed include deregulating retail rates where wholesale competition is likely to protect consumers; and requiring service providers to make their own bilateral agreements, with commercial arbitrators stepping in if the carriers are unable to reach agreement on interconnection issues.

Recent experience suggests that intra-model competition is not emerging on the infra-structure level. It will be important therefore to accelerate inter-modal competition among fixed line, cable and wireless operators and to treat each platform equally in terms of access to content and universal service support.

The study "Remedies for Telecom Recovery," was supported by the Alfred P. Sloan Foundation and a number of leading global telecommunications firms from diverse corners of the industry. The principal research areas were divided into seven modules. While Noam led "Why the Crisis?", the module on the causes for the downturn, the other topics were each led by the following CITI researchers: Policy Recommendations: Robert C. Atkinson (Co-director of the project); Financial Recovery : James H. Alleman; Managerial Strategies: Raul Katz; Network Resiliency Strategies: Jonathan Liebenau; Fundamental Research: A. Michael Noll. The findings and recommendations were released at a recent CITI conference on the Columbia university campus that drew leading experts from industry, government, academic, financial and not for profit sectors. Additional exchanges are planned with the various stakeholder groups, including a session at World Telecom, a quadrennial gathering in Geneva of the International Telecommunications Union (ITU), an arm of the United Nations.

Click for more information about CITI, the first research center for media and communications economics established at a U.S. management school, and an overview of the study.

Published: Oct 27, 2003
Last modified: Oct 24, 2003

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