Crossed Wires Cause International Sparks

March 2001
By Henry S. Kenyon

Regulatory differences heat up trans-Atlantic telecommunications talks.

As the United States and the European Union begin to implement policies designed to open their markets to foreign competition, issues such as wireless spectrum allocation, telephone interconnections and Internet access continue to vex negotiations. While both parties understand the importance of free trade and cooperation, these differences may impede bilateral trade liberalization and deregulation.

The two entities cooperate on many telecommunications issues to open national markets. According to U.S. and European Commission (EC) trade officials speaking on the condition that they remain anonymous, both sides work actively within international frameworks such as the World Trade Organization (WTO) to press for continuing telecommunications liberalization. “We are basically on the same page with these people,” a U.S. official says.

But potential sources of friction exist. One such issue is the unbundling of cable television and data services. The United States and the United Kingdom recently resolved a similar situation regarding the resale of television and Internet services to customers via cable television lines. U.S. firms wanted to provide both services simultaneously to customers in the United Kingdom, but British regulators resisted this and encouraged the creation of duplicate networks that specifically provided only data or television services. The United Kingdom did, however, encourage investment in cable television lines, which spurred competition in the British market. Competitors now provide some 30 percent of local line service in England—a very high amount compared with that of U.S. markets. However, a U.S. official notes that the U.S. data market is more competitive than is the United Kingdom’s. In essence, both nations’ approaches have been proven right, he says.

On January 1, 2001, the European Union (EU) mandated that its member nations begin unbundling their telephone services. Compliance with the rule has been far from uniform, the U.S. official says, noting that Denmark, Great Britain and Germany are only now beginning to implement the regulation. The European Union contends that mandated unbundling has already been accomplished in six or seven countries. Rather than allowing member nations to do this in their own time, accelerating the process for local loop unbundling was made mandatory, an EC official says.

Some EU nations have also been faster than others in opening their last mile and wire line markets to competition. Germany and the United Kingdom are complying, but France, Spain and Belgium have been slow to unbundle. The U.S. official notes that this change is for the better because all of the participating countries know that liberalizing cable competition helps markets, such as banking, that rely on data transfers.

Interconnection for voice networks is another issue under negotiation. The EC official notes that the European Union is reforming its regulatory framework for local access and interconnection. One issue will be the imposition of regulations on service providers controlling 25 percent or more of their local markets. The proposed reform of the system is more an issue of controlling bottlenecks and improving and opening markets, the EC official explains. The proposal aims to both strengthen competition to benefit consumers and harmonize the rules for licensing and interconnection agreements for European Union-wide services.

The U.S. official contends, however, that the European Union has disregarded attempts to encourage the adoption of best practices, such as allowing competitors to place calls into other networks to offer competitive rates. Peer pressure exists in the European Union to lower rates, and European providers can undercut incumbent competition, the U.S. official says, because they are vertically integrated. They handle both local and long-distance services within their markets, something many U.S. firms cannot provide.

Despite such differences, U.S. companies have done very well in Europe, the U.S. official says, noting that more than 300 compete in Germany alone. American firms also dominate the pan-European backbone network. European governments are not pleased with the idea of foreign firms controlling network infrastructure. But, high consumer demand and the belief that it is important to have these resources influenced the decision to allow U.S. carriers in, the U.S. official says.

Third-generation wireless technology and its application on both sides of the Atlantic constitute another contentious issue between the United States and the European Union. Europe has adopted the global system mobile (GSM) wireless standard as the single universal standard across the continent (see page 50). The U.S. official notes that Europeans look down on the U.S. wireless market, which, compared with the European Union’s market, is more of a patchwork of providers and technologies.

Four technologies are active in the U.S. market: code division multiple access (CDMA), time division multiple access (TDMA), GSM and some analog systems. The American philosophy is to get the government out of standard making, the U.S. official says. Unlike that of North America, Europe’s geography creates special issues because the European Union member nations must harmonize their networks to allow for roaming calls and transmissions across each other’s borders.

The standardized European market makes it difficult for other wireless technologies to enter and compete. The United States is seeking inroads for CDMA technology, but because the European Union uses GSM, it is difficult to compete, the U.S. official explains. The European Union has noted that incumbent American firms can compete with the technology in Europe by working through the European Technology Standards Institute (ETSI). However, the U.S. official is skeptical about the offer, noting that the ETSI is dominated by European equipment makers who heavily favor the GSM standard.

The ongoing question is whether alternative U.S standards such as CDMA can compete in Europe, the American official says. The United States is not trying to mandate the inclusion of CDMA or other products in Europe. It has left the choice to auction off segments of spectrum for licensing purposes to the European Union member nations. The goal of the proposal is to allow multiple wireless standards in European countries, as long as one technology choice is the European Union standard, he says.

In practice, nations bidding on licenses tend to select the European Union standard. The U.S. official explains that bidders are motivated to choose GSM over CDMA because they believe their neighbors are using GSM, and they do not want to be isolated. The U.S. official notes that to his knowledge no European nation has chosen the U.S.-developed CDMA 2000 technology.

Upgrading wireless technology is another factor in choosing a standard. The European Union is planning to move from second-generation GSM to wideband CDMA (WCDMA), a third-generation wireless system. The United States has not yet moved to WCDMA because the spectrum has not been allocated for it, the U.S. official says. However, it will be easier to upgrade from CDMA—than from GSM—to WCDMA, he observes.

A critical issue for European businesses will be whether money can be made from high-bandwidth wireless services based on a mobile platform, because capital markets are reluctant to fund such ventures, according to the U.S. official. One complication is the cost of national licenses, which often can reach tens of millions of dollars. “No one is sure the market is there,” he explains. This is a major concern for companies that have paid for the spectrum and are now rolling out services. The U.S. official believes that this was a move by the European Union to outflank the U.S. position in the market. Whether this choice was a sound one will be determined in the near future. “The rubber hits the road here, and we’ll see where it goes,” he says.

Conversely, the European Union has raised concerns regarding access to U.S. markets with the U.S. Federal Communications Commission (FCC). “When it comes to third-generation wireless, the U.S. has only set aside spectrum for PCS [personal communications systems],” the EC official says. This issue affects new entrants because the United States has not identified any new spectrum other than that set aside for PCS.

The EC official notes that the World Radio Conference has identified three bands for wireless spectrum use. In Europe, these have been allocated and set aside for third-generation wireless. The EC official questions how European Union will enter the U.S. market, noting that U.S. officials are still deciding how to approach the issue

There have also been recent attempts to keep government-owned European firms out of the U.S. wireless market. One example is the proposed merger of Deutche Telecom with Voice Stream and Powertel, which is under review by the FCC. U.S. Senator Ernest F. Hollings (D-SC) unsuccessfully attempted to pass legislation denying nationalized European firms access to the U.S. market, which would have effectively prevented the merger. 

The European Union believes the issue encompasses more than privatization. “What is important is not if a company is or is not privatized, but if a government has opened its markets to WTO measures,” the EC official says. “What is crucial is if a government has subscribed to WTO systems, if it has a pro-competitive regime in place that subscribes to a level playing field and if it has independent regulators.”

Data encryption is another potential stumbling block. The European Union has issued a privacy directive mandating how companies address privacy concerns. In comparison, the U.S. Commerce Department developed Safe Harbor principles to protect U.S. firms from stringent European Union regulations. The European privacy directive applies more to a paper-based environment than a digital one, the U.S. official says, explaining that it was adopted before possible implications could be determined fully.

While no U.S. companies have yet been called to task for noncompliance with the rule, it is only a matter of time, the U.S. official says. European Union member nations are now beginning to put regulations in place. These rules could conceivably be cumbersome for businesses that wish to pass data across borders. “If you’re doing data processing in Europe, you would have to put all these rules into place to handle personal data traveling across national borders,” the U.S. official explains.

Satellite broadcasting for wireless communications is another area that has failed to meet market and investor expectations. The technology has not developed substantially compared with other broadcasting technologies in Europe, the U.S. official says. The advent of high-speed Internet access and the ability to download broadcast quality entertainment are viewed in some European Union circles as an encroachment on national broadcasting rights. Many Europeans feel very strongly about protecting cultural products, such as films, against U.S. competition from Hollywood, the U.S. official observes. However, high-speed Internet connections may constitute less of an issue than the European Union believes because they might actually help local artists and stimulate domestic production, he adds. The U.S. official cites the example of South Korea. When the first major Internet connections were made available, the majority of Koreans logged onto U.S. Web sites. Instead of overwhelming the national market, numerous local sites sprang up to meet consumer demands. These Korean Web sites are now more popular than the U.S. ones. This local industry grew as a result of an open market, he points out.

Privatization is another issue. Europe is making progress, but it is not moving quickly, another U.S. official says. Privatization versus national carriers is not an absolute condition for trade liberalization, but it helps, he explains. Low markets have prompted the European Union to take its time, leading to potential conflicts of interest. The EC official notes that both sides have been engaged in market liberalization since 1998. As a result of market regulations, the European Union is now working to remove barriers to its markets by providing services and ensuring competition through laws designed for that purpose, the official adds.