Number network competition

Author: Zhou Qiren
Publisher:
Publishing Date: 2001-08-01
Features: In 1998, AT&T announced its merger with TCI, the second-largest cable TV company in the United States, with a total transaction value of $48 billion. Why did AT&T specifically choose to acquire TCI, a cable TV company that seemed "completely unrelated" at the time? Comparing with international experience, how will the opening and reform of China's telecommunications industry unfold? Please see the discussion on "network competition" in this book. Being regarded as an expert on China's telecommunications issues has been an unexpected accident for me. In the summer of 1998, I had the opportunity to attend a training program on infrastructure financing at the World Bank headquarters. At that time, the courses at Peking University ended relatively late, so by the time I arrived at the program location, the University of Maryland in Maryland, USA, on June 21, the training had already been going on for a full week. Due to my late arrival, I didn't really get into the content of the training. To my surprise, two days later, a major event in the U.S. telecommunications industry made me catch up. On June 24, major media outlets around the world almost featured it on the front page of the financial section, reporting that AT&T had announced its merger with TCI, the second-largest cable TV company in the United States, with a total transaction value of $48 billion. Mergers and acquisitions are not new in the United States. Between 1989 and 1996, when I studied in the U.S., I knew that mergers and splits were almost part of the daily life of American businesses, and I had long gotten used to it. However, AT&T's merger with TCI was still an eye-catching news. Everyone knew that AT&T was the leader in the U.S. telecommunications industry. In 1997, AT&T had 70 million long-distance users, 4 million wireless users, 1.1 million dial-up users, 15 million business users, and owned teleport local networks in 250 cities across the United States, with annual revenue reaching $51.32 billion. Such a global telecommunications giant, if it were to acquire any other long-distance or local telephone company, would not be surprising. The problem is that AT&T specifically chose to acquire TCI, a cable TV company that seemed "completely unrelated" at the time. Why is that? The report said that AT&T's acquisition of TCI was aimed at entering the U.S. local telephone market. This was even more puzzling: aren't telephone companies supposed to be in the phone business? Why would they need to "enter" the local telephone market? Additionally, as a cable TV service company, how could TCI become a channel for AT&T to enter the local telephone market? However, I had lived in the U.S. for several years and roughly remembered that the U.S. telecommunications market had long been a system of separate long-distance (long-distance) and local (local phone) operations, where long-distance companies were not allowed to operate local telephone services, and vice versa. At that time, even student users like us had to register with both a long-distance company and a local telephone company. I still remember that after the 1980s, the long-distance telephone market in the U.S. was competitive, and users could choose from any of the three major long-distance telephone companies (AT&T, MCI, and Sprint) nationwide; however, the local telephone market still maintained a monopoly, with only one provider in any given area, leaving users with no choice. Later, I learned that this "long-distance competition, local monopoly" system of separate telecommunications operations was the result of a famous lawsuit in the 1980s that broke the original U.S. "Bell System's" monopoly on the entire U.S. telecommunications market since 1910. The story of the opening and competition in the U.S. telecommunications industry in the 1980s is discussed multiple times in this book, and readers can savor it in detail. The question is how to view the local telephone service that still retains a monopoly status under the system of separate operations. According to popular understanding, establishing a second communication network to connect thousands of households in the same city is "economically inefficient," making local telephone a typical "natural monopoly." Since it is a natural monopoly, exclusive operation is only natural. As for reducing the social efficiency losses that come with natural monopolies, let the government take on the great responsibility of "regulating" the monopolistic suppliers. Isn't this a flawless and perfect logic? The intriguing part is that there is always someone in the market who challenges any existing logic! I noticed that the chairman of AT&T announced at the time that after acquiring TCI, the company would invest hundreds of millions of dollars to transform the cable TV network into a two-way broadband network to integrate long-distance and local telephone resources. On one hand, this would help seize the high ground of "triple convergence" (telecommunications networks, computer networks, and cable TV networks), and on the other hand, it would allow AT&T to enter the local telephone market and compete with the original exclusive local telephone monopoly. In an instant, I suddenly "saw" that technological innovation could actually be driven by the demand to break market monopolies, and that the so-called "natural monopoly" theory had always been based on the assumption of given demand and technology. The example was breaking the theory, and I happened to be there at the right time. So I had to apologize to the World Bank and leave the training materials on infrastructure financing for later, because the opportunity to break the myth of the "natural monopoly" in the local telephone market was rare and could not be missed. I know my own thinking habits well and have never been particularly motivated by the "proof" of a hypothesis, but as long as the prevailing authoritative theory encounters an "exception," it excites me immensely. A week later, I returned full of insights. Upon arriving in Beijing, I met with Hu Shuli, the editor-in-chief of the Finance Monthly, and suggested that the magazine report on the story of AT&T's acquisition of TCI. Hu Shuli agreed to the suggestion, but then she said, "You've already done some work on this—why not write it for our readers?" The article included in this book, "Triple Convergence, Network Competition," was written as a rushed piece after being "reversed." What I didn't know beforehand was that China was in the process of preparing for another wave of reform and opening up in the telecommunications industry to counter the entry obligations of the WTO. Between 1998 and 2000, the issue of telecommunications became a persistent hot topic in Chinese media, so this rushed piece made me a "telecommunications issues expert." Another small matter that added fuel to the fire was that during my studies in the U.S., I had picked up some "academic writing habits" there: once the topic is clear, not only must one clearly summarize the views of predecessors, but one must also highlight the differences between one's own views and those of predecessors. This approach, when applied to the telecommunications articles I wrote for the Finance Monthly, was spotted by Liu Zhouwei, a reporter from the Nanfang Zhoumo based in Beijing. With a stroke of his pen, he effortlessly placed me in the position of advocating the opening of China's telecommunications industry as the "third eye." Many of my journalistic friends completely ignored the fact that I was a "stubborn old-timer" who had studied rural issues in the 1980s, assuming that my studies abroad were specifically on telecommunications opening, making it a "perfect match." What they didn't know was that whether it was rural issues or telecommunications issues, the only difference for me was that the technical and institutional constraints on economic behavior were different. As for human economic behavior, it is largely the same everywhere, and it doesn't require a special "expert" to explain it. However, encountering such research without any prior planning or intention has its own thrills, forcing you to constantly do your homework. I have always believed that the true difficulty of understanding the world lies in grasping the specific constraints on people's economic behavior. Detached from the specific constraints of specific problems, and simply reciting the hypotheses of the sages about economic behavior, you could still be miles off the mark. Therefore, the other articles included in this book can be seen by readers as a series of notes on understanding the specific constraints of China's telecommunications issues. First and foremost, I would like to thank Gao Xiaoyong, the editor-in-chief of the Economics News, who saw that the reports about my third voice in various newspapers had highlighted the arguments but lacked detailed reasoning. He asked me to explain the economic behavior of the parties involved through the various limitations of the telecommunications market opening issue. Gao Editor-in-chief's reasoning was very convincing, and I couldn't refuse. The result was that I took on the task of writing a weekly telecommunications commentary for life. During this period, the editors and readers of the newspaper gave me a lot of encouragement, which made me even more reluctant to give up and forced me to write for several months with my head held high. I finally realized that while discussing real-world economic issues can be interesting, having to submit a commentary every few days is indeed a tough job. During the tough times, I often thought of the idiom "the donkey's skill is exhausted." However, a miracle happened in the end. Several months later, the Economics News published a scathing "major article" on the front page, condemning my comments on opening China's telecommunications market. So I called Gao Editor-in-chief and said that instead of engaging in such a debate, it would be better to meet and have a heated argument. What relieved me was that from then on, I no longer had to write weekly telecommunications articles for the Economics News. The last article included in this book was originally written at the invitation of the Electronics Information Research Center of the Ministry of Information Industry, as a commentary on the second wave of opening and restructuring in China's telecommunications industry in 1999–2000. I had already agreed to include it in a collection of telecommunications issues they planned to publish. However, after writing it, I found that the criticism was too strong and that it didn't match the style of a collection published by an official institution. To avoid causing any trouble for the organizers, I decided on my own to publish most of the content of this article in IT Manager World, considering it a conclusion to the exploration of telecommunications issues. In the end, I would like to thank all the editors, reporters, professional researchers, readers, and classmates from universities that invited me to give lectures on telecommunications issues over the past two years for turning me into a "China telecommunications issues expert," whether they appreciated or opposed my personal views on China's telecommunications market opening included in this book. I would also like to express my sincere gratitude to Jia Baolan, the editor of Sanlian Bookstore, for her efforts in publishing this book.