Importance of Interconnection

In a competitive marketplace, there are a number of reasons why service providers need to interconnect with each other:

• New entrants need access to the networks of incumbents so that they can resell services.
  
• Competitive voice, data, and wireless carriers need access to "last mile" facilities to deliver services to end users.
  
• All carriers need access to each other's back-office systems to fulfil number portability mandates and to exchange the forms and messages involved in fulfilling customer orders.

Thus, in the telecom industry, interconnection or e-commerce is not just a way to make business relations easier. It is, literally, the key to competition. Without those linkages, competition would simply not be possible.

On a national level, interconnection is complicated enough, involving a tangled web of relationships among different types of providers. Interconnection on a global scale is further complicated by diverse languages, cultures, markets, regulatory environments, and technical idiosyncrasies. That's why the "technique" used to achieve interconnection is all-important. That technique becomes either the facilitator of or obstacle to competition and the spread of communications services around the world.

Figure 3-1 below illustrates the answer to the problem of nationwide and global interconnection which has emerged in the form of the interconnection application service provider (ASP). The interconnection ASP serves as a centralized, automated clearinghouse for carrier communications and transactions.

This type of electronic clearinghouse is a market-tested concept that has proven invaluable to other industries. For example, in the banking industry, it has accelerated and simplified the processing of billions of checks, which must be received from and routed to thousands of different banks. Similarly, in the telecom industry, service providers of all types and sizes need just one link into the clearinghouse, rather than multiple links to each of their trading partners. The clearinghouse or ASP receives all messages and order and pre-order information, automatically translates them to the right protocols, and directs them to the appropriate carriers.

The business rules of all participating trading partners are programmed into the clearinghouse, where they are updated as soon as a carrier's issue changes. Service providers can access the ASP via traditional gateways or the Internet.

There is nothing theoretical about this type of service. It is already operating in the United States, where it has made nationwide interconnection simple, efficient, and virtually error-free [1].

Figure 3-1:

Interconnection Application Service Provider and the Trading Partners

The Strategy

While there are regional variations in timetables, specific regulatory directives, and technological penetration, communications and interconnection around the world are, for the most part, being driven by four universal trends.

Deregulation or Market Liberalization

Countries on every continent are abandoning the old models in which communications were controlled by state-run monopolies. Instead, markets are being opened to competitive carriers—throughout Europe they are known as other licensed operators (OLOs)—and incumbents are being forced to modernize, compete for customers based on price and service quality, and grant network access to competitors.

New Regulatory Mandates

To support competition; voice, video, and data convergence; and broad access to advanced services, regulatory bodies are issuing mandates directing carriers to participate in number portability, carrier pre-selection, emergency services such as enhanced 911, and network unbundling—all of which require carrier-to-carrier interaction.

Digital Subscriber Line (DSL) Explosion

Skyrocketing demand for data and Internet access is a global phenomenon that is driving the adoption of DSL technology, which turns traditional voice networks into data highways. It has also spawned a new industry of data local-exchange carriers (DLECs)—another segment of competitors needing "last mile" access to end users. [1]

Table 1:

Installed Base of Access Network Lines (000s) for Beginning of Each Year Shown

Figure 3-2:

Proliferation of Players

The telecom industry is no longer populated by a homogeneous community of voice carriers. Carriers today represent a mix of players that grows bigger and more diverse every day thanks to the demand for and advances in wireless technologies and data services.

These drivers do not just make an airtight case for interconnection. But just as we have seen in the United States, they also make the case for an approach to interconnection that can handle a multitude of diverse players operating on national, regional, and global.

Inter-operability

Through interconnection, users can achieve interoperability of their applications. Interoperability has been defined as "the ability of two or more systems (such as devices, databases, networks, or technologies) to interact in concert with one another, in accordance with a prescribed method, to achieve a predictable result; the ability of diverse systems made by different vendors to communicate with each other so that users do not have to make major adjustments to account for differences in products or services; and compatibility among systems at specified levels of interaction, including physical compatibility."

Interoperability allows heterogeneity of technologies while allowing users to work together (as the definition suggests). The difficulty of interoperability with respect to interconnection agreements is that different interconnection architectures may affect interoperability differently.

The implication of the importance of interoperability is that interconnection agreements may be application driven. Therefore, when designing network protocols, engineers must consider the interoperability implications at the application layer. Furthermore, by taking an application view of interoperability, economists, who traditionally have looked at applications and their effect on economic measures such as productivity, may be able to study the cost and benefits of the Internet. The difficulty with designing interconnection agreements is that applications on the Internet are dynamic--new applications are constantly being developed.

[Joseph P. Bailey, Economics and Internet Interconnection Agreements, Presented at MIT workshop on Internet Economics March 1995]

 1.4 Barriers to market entry

Apart from the other problems that come in with the competitive industry, the telecommunications industry is subject to other teething problems like the settling in of competitors. This is mainly due to the entry barriers that may be posed by the other companies already established in the market. It can be said these barriers are premeditated to block the new entrants from entering markets profitably.

Joseph Sigler, the economist, defines entry barriers as a cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry.

The costs stated in the definition above for sure indicate how unbalanced are between the already established operator and the one vying for entry. The already established company may use its sufficient knowledge and base of the market to exploit these barriers to market entry. One of the most common tactic used is where the incumbent lowers its prices when a new entrant comes in making it impossible for the new entrant to make profit. Examples of barriers to market entry are:   advertising and marketing, cost advantages, international trade restrictions, limit pricing, patents, presence of sunk costs, research and development expenditure.

As the above mentioned barriers to market entry are defined below, see how they relate to the telecommunications market in your country.

Advertising and marketing

Some firms develop consumer loyalty by providing services that are totally unique. These services may be attached to a specific brand of product or a way of operation. This may provide a big challenge to new firms entering the market and in return making the entry expensive 

Cost advantages

Companies that have been long in the market may lower costs using the acquired experience of being long in the market. These lower costs allows these companies to cut prices and still win price wars

International trade restrictions

Some of the international trade restrictions such as tariffs and quotas have been used in certain markets as a barrier to the entry of international competition in protected domestic markets

Limit pricing

Apart from providing different kinds of services, it is a common fact that companies get into business to make profits. When competition comes into play, some firms adopt predatory pricing policies in order to kill competition by lowering prices to a level that would force any new entrants to operate at a loss

Patents

This refers to a case where a company is given legal protection to produce a patented product and cannot be produced by another company for a number of years. This may as well refer to a case where a company is given total exclusivity to producing some kind of service

Presence of sunk costs

Sunk costs are defined as costs that cannot be recovered if a business decides to leave an industry. These may involve capital inputs that are specific to a particular industry and which have little or no resale value such as money spent on advertising, marketing and research.

High start-up costs or a high ratio of fixed to variable costs in some industries act as a deterrent to market entry. There are cases when a new entrant decides to leave the market due to various reasons and such costs may not be recoverable. When a new entrant takes this into consideration it may stop them from venturing into such a market. 

Research and development expenditure

Research always results in better products and services. Some monopolistic companies have used this as a deterrent to new entrants in the market. The company which is always improving its products and services by investing heavily in research prevents the potential entrants as it creates very dynamic competition to cope with.
 1.5 Changes in interconnectivity
In the mobile industry, there a lot of technical factors that impede or disrupt optimum interconnectivity. These may be due to: 
§ the location of the point of interconnectivity 
§ the  interlinking material  used ( e.g copper, air-interface )
§ attenuation and signal loss in mobile telecommunication equipment.

1.6 Learning Activity
List some of the noticeable barriers of entry in your country as regards the telecommunication industry and what effects do they have to the development of telecommunications industry.
Can barriers of entry be justified? Discuss.