From the International Competitive Carrier to the WTO: A Survey of the FCC's International Telecommunications Policy Initiatives 1985-1998.

• Author: Spiwak, Lawrence J.
• Position: World Trade Organization; Federal Communications Commission

1. INTRODUCTION

   As both the mainstream and trade press reports continue to herald, the world is in the midst of an international telecommunications revolution. With the creation and implementation of the February 1996 World Trade Organization Agreement on Basic Telecommunications Services (the February Accord or WTO Agreement), the international telecommunications community has (at least on paper) promised ostensibly to move away from markets characterized by monopolies and toward a world of competition and deregulation. The big question, however, is whether these efforts will actually lead to better economic performance in the market for international telecommunications products and services. The purpose of this Article is to examine one particular, yet extremely significant, portion of this inquiry--how much have U.S. international telecommunications policies specifically helped or hindered this process.

   This Article, after surveying Federal Communications Commission (FCC or Commission) precedent from the FCC's first major international policy decision (International Competitive Carrier) through the FCC's implementation of the WTO Agreement (January 1, 1998), concludes that despite a few laudable achievements, several key problematic themes run throughout this time period.(1) In particular, the FCC's efforts have been marred by both the demonstrable rise of neo-mercantilism over the past several years at the expense of consumer welfare, and substantial legal and economic analytical inconsistencies and outright errors resulting from the FCC's embarrassing attempts to implement and defend this neomercantilist policy.(2) By adopting such economically flawed policies, therefore, the United States has achieved neither trade policy's basic goals of promoting U.S. investment abroad nor the maximization of consumer welfare under the FCC's public interest mandate. Tragically, the only tangible achievement apparently has been the delay of effective World Trade Organization (WTO) implementation of the WTO Agreement and the rise of international ill-will against the United States and, a fortiori, U.S. firms.(3)

   To examine these issues in greater detail, this Article is comprised of three analytical strands: (1) The FCC's formulation, adaptation and modification of its International Competitive Carrier (also known as "dominant" carrier) paradigm during this period; (2) the FCC's policies toward international accounting rates and the implementation and adaptation of its International Settlement Policy (ISP) during this period; and (3) the FCC's attempts to reconcile and distinguish these sometimes contradictory, yet sometimes complementary, policies in the context of carrier-specific adjudications. Each of these strands will be examined in both a pre- and post-WTO context.

2. STRUCTURAL CHARACTERISTICS AND BASIC ECONOMIC CONDITIONS OF THE INTERNATIONAL MESSAGE TELECOMMUNICATIONS SERVICE (IMTS(4)) MARKET

   To put the concept of "international telecommunications" into context, it is initially necessary to identify some of the major structural characteristics and basic economic conditions of the market.

   1. Relevant Markets

      First, try not to visualize the market for international telecommunications products and services as some sort of generic, global information superhighway. Rather, this market is made up of a series of individual country-route markets between "originating" countries and "destination" or "terminating" countries.(5) Both supply-side and demand-side factors lead to this view.

      From a supply-side perspective, because carriers need to obtain operating agreements and/or regulatory approval from each terminating-country market, a carrier cannot freely provide service to a given country merely if it wishes to do so. In addition, it is very difficult for a carrier to shift its facilities from serving one country to serving another based upon market conditions because the use of relatively few cable and satellite facilities often provides less flexibility than the broader-based domestic facilities. Before reducing or adding facilities, carriers often have to obtain the acquiescence of the foreign correspondent in both the country in which facilities were reduced and in which they were increased.

      A demand-side perspective also supports a country-pair approach. Because the demand for international telecommunications services tends to be very "country-specific," consumers do not generally view international service as a homogeneous, worldwide service.(6) Rather, demand tends to be targeted to those countries where friends and relatives may be. This demand characteristic is quite different from the demand for domestic long-distance service, where consumers tend to view the market as a single, nationwide market. That is, a U.S. consumer in Chicago (the rough mid-point of the United States) will want to be able to call New York City just as easily as California.

      Given the above, the conventional way to view IMTS markets is from a vertical perspective, either unilaterally-originated service on country-pair specific routes, or on specific country-pair routes including both domestic and foreign originating traffic. As such, most U.S. regulatory initiatives are ostensibly concerned with preventing, or mitigating, the effects from the economic harms traditionally associated with vertical integration. These harms often include (1) raising rivals' costs (e.g., forcing rivals to enter at two levels or input foreclosure); (2) cross-subsidy/predation; or (3) a "price squeeze."(7) This is not to say, however, that vertical integration cannot produce procompetitive benefits. The most frequently acknowledged benefits of vertical efficiency include: (1) economies of scale and scope; (2) eliminating free-rider problems; (3) spreading the risk of investing/losing sunk costs; (4) coordination in design and production; (5) the elimination of double mark-up of costs; and (6) the minimization of efficiency losses suffered by foreclosed competitors.(8) Accordingly, under conventional economic and legal thought, when reviewing vertical issues, decision makers must balance procompetitive effects against likely anticompetitive harms.(9)

      Notwithstanding the above, significant horizontal aspects also affect market performance. For example, there is a well-documented trend of increasing industry reconcentration, both domestically and internationally. Economies of scope can certainly have procompetitive benefits; however, economies of scope can also create the ability to engage in strategic anticompetitive conduct. Therefore, because of the significant costs of entry, entry rarely occurs in "waves of competition" on a large scale basis. Rather, entry usually occurs in pin-point attacks wherever the incumbent may be the most vulnerable. Yet, if the incumbent enjoys significant economies of scope, it may attempt to allocate the defense costs of these attacks over a much wider customer base where competitive pressures may not be present. The more captive customers an incumbent may have, the more the per-unit share of defense costs will decrease. If there are enough customers to make the per-unit/customer share sufficiently de minimis--such that neither captive consumers nor regulators notice (or care about) this de minimis increase in price--then the incumbent has used its economies of scope both to deter entry and evade regulation successfully.(10)

   2. Supply and Demand Elasticities

      As explained more fully below, there is a sufficient amount of public data to support the conclusion that U.S. carriers face a high own-price elasticity of demand, such that customers will readily switch carriers if there is an increase in price or diminution in service. However, this demand is characterized by country-specific preferences, rather than by a preference for a homogeneous worldwide market.(11) Regarding the elasticity of supply of international facilities, there has been a demonstrable upward trend in both the number of suppliers as well as in underlying facilities. This is not to say, however, that there have not been short-term supply shortages from time to time. Given the incredible increase in international traffic minutes, there have been several periods where undersea cable capacity has in fact been constrained. In each case, however, the FCC has determined that these shortages would only be temporary as both additional capacity and new technologies would relieve these constraints.

   3. Major Exogenous Regulatory Factors

      It is impossible to discuss international telecommunications without understanding the international settlement-of-accounts regime. The international settlement-of-accounts regime was developed in 1865 by twenty European countries to provide for a standard, common method to divide the revenues for international service between originating and destination countries.(12) However, neither the "accounting" nor the "settlement" rate is a rate charged to end consumers. The rate charged to end consumers is called the collection rate, and comes under the FCC's jurisdiction under Title II of the Communications Act of 1934.

      In contrast, the "accounting rate" is the privately negotiated internal price between originating and terminating carriers. The accounting rate is related, sometimes very loosely, to the carriers' end-to-end facilities cost. The carriers then agree to a "settlement" rate--usually one-half of the accounting rate--to hand-off and terminate traffic to each other in the middle of the ocean (hence the phrase "half circuit"). If there is an exact equal amount of traffic exchanged between the originating market and the destination market, then the originating and terminating carriers' "settlement of accounts" will be zero. Unfortunately, for those countries which generally have more outbound traffic than incoming traffic for nearly every international route (i.e., the United States), these settlement rates--which, because of...