Subject: [NEXTEL-1] After the telecommunications bubble

From: [email-masked]
Date: Fri, 08 Aug 2003 03:01:14 -0400

After the telecommunications bubble
Source: Organisation for Economic Cooperation and Development. OECD
Economic Outlook
Publication date: 2003-06-01
Arrival time: 2003-08-05

Introduction

The turn of the century saw a "boom and bust" investment cycle in the
industries of information and communications technology (ICT) of most
OECD countries.1 The telecommunications sector, in particular, increased
its capital spending sharply in the 1990s, after governments opened the
market to new entrants. Investment was also spurred by the introduction of
marketable new technologies - notably mobile phones and Internet access
services. The new regulatory environment, rapid technological innovation
and potential for new service development excited the appetite of the
investment community. This led to large flows of equity issuance, debt
floatation and bank credit. Awash with cash, companies were able to
finance large-scale investment projects, notably the construction of vast
fibre-optic cable, and pay high prices for the rights to use third generation
wireless spectrum networks. When it became clear that the "hype" for the
telecommunications sector had gone too far, expectations returned to
more realistic levels, investors became much more prudent and financing
evaporated. This left companies with severely impaired balance sheets and
large non-profitable fixed assets. While demand for telecommunications
services continues to grow strongly, the path to recovery is requiring a
period of retrenchment and restructuring before investors' and creditors'
confidence can be restored.

In most cases, market forces have been allowed to correct past
imbalances, without public interference. It is generally considered that
competitive markets are the appropriate environment to encourage
adjustment through restructuring. Some participants and observers
nonetheless suggest that regulators should provide a degree of relief
during this difficult phase, to moderate competition and encourage new
investment. It has also been argued that a number of European
governments sold spectrum licences at excessive prices in 2000 and 2001
- at the peak of the bubble - and that consequently the "rules of the game"
should be relaxed in order to make new mobile telephony investments
profitable.

After examining the present economic situation of the telecommunications
sector, this chapter discusses these policy issues. Several findings
emerge:

* First, the restructuring of the sector is well underway. Companies have
entered into negotiations with creditors to reorganise their liabilities and
strengthen their balance sheets. This is facilitated in some countries by
legal provisions for debt renegotiations - such as Chapter 11 of the US
Bankruptcy Law - while elsewhere debt restructuring is more gradual.
Thanks to this progress, confidence is slowly coming back.

* Second, empirical evidence suggests that the macroeconomic impact of
the sector's restructuring is small, reflecting its relatively limited GDP
weight, but with significant upstream effects, notably on equipment
suppliers. Judged from the robust demand from consumers and
businesses, however, the telecommunications services and equipment
sectors should return to steady growth once financial restructuring is
completed.

* Third, present circumstances do not appear to justify a fundamental shift
in regulatory policy. Dynamic competition is still hampered in some
market segments, in particular high-speed Internet access, which deprives
consumers and businesses from some windfall benefits of ICT innovations.
Regulators are adapting their framework to changing circumstances,
rolling back regulation where competition has emerged, and strengthening
it where incumbents still retain dominant positions. They are also taking
steps to make regulation more technology-neutral, which would spur
inter-modal competition (cable, wireless, fixed lines, satellite) and help
resolve some of the present problems with the unbundling of local loops
(access of new entrants to subscribers' lines). More generally, financial
help from governments does not seem to be a promising way to support
the sector's recovery.

* Finally, available evidence does not clearly suggest that the European
auctions of Universal Mobile Telecommunications System (UMTS)
licences were inefficient. It does not show either that auctions were
responsible for the current financial stress of European operators, although
it was one of the various factors. Nonetheless, a reform of some regulatory
aspects of third generation (3G) licences might be considered, in particular
transferability, as this would facilitate market entry, spur competition and
speed up the launching of this new type of network. Changing this
important rule after having solid spectrum rights might however be seen as
providing a government subsidy, because it would make the rights more
valuable without changing their price.

A reversal of fortunes

The regulatory framework of the telecommunications industry changed
radically during the past decade in almost all OECD countries, particularly
after 1996-97 (Box IV.1). As technological innovation made competition
increasingly possible in the long- distance and international telephony
markets, policy makers sought to liberalise the access of new entrants.
New independent regulatory agencies were established with a mandate to
open markets to competition, prevent incumbents from abusing their
position and avoid collusion between operators. Following these decisions,
telecommunications markets became more competitive (Figure IV.1).
Other actions were undertaken to liberalise the industry, including number
portability and carrier selection. In addition, progress was made towards
the privatisation of state-owned operators.

Fast market growth was projected...

The liberalisation of the sector, together with the emergence of new
telecommunications technologies (Box IV.2) resulted in high expectations
for future revenues and earnings, boosting share prices and allowing
unprecedented levels of borrowing. A bright future was predicted for the
industry.2 For instance, some analysts predicted a doubling of Internet
traffic every 90 days and double-digit growth in revenues for services and
equipment.3 Research analysts at large investment banks encouraged
investors to buy shares and bonds issued by telecommunications
companies, which they saw as having promising prospects.4

Figure IV.1. Market structure of fixed networks in the OECD area

... but expectations of double-digit revenue growth were over- optimistic...

These high expectations however were not realised. For example, while
Internet traffic did grow rapidly (doubling every year), its expansion was
significantly slower than earlier predictions.5 Also, double-digit increases
in telecommunications revenue never materialised. During 1996-2001,
telecommunications revenue in the OECD area grew by 7.2 per cent
annually on average, but slowed to 1.6 per cent in 2001 under the pressure
of the economic downturn. According to preliminary indications for the
United States and France,6 revenues may have been roughly flat in 2002,
reflecting a combination of price competition and growing traffic.7

... and borrowing was excessive

With revenues increasing much less rapidly than expected, the business
plans of telecommunications operators became highly vulnerable and
market sentiment changed rapidly. Creditors and investors revised their
expectations of earnings growth towards more realistic levels when they
became aware of the degradation of net margins and the increase in debt
stocks. It also became clear that the wave of mergers and acquisitions in
the sector, especially in Europe, had taken place at excessively high
prices, and that take- over companies might have to significantly
write-down the value of acquired assets. Confidence was further
undermined in June 2002 when Worldcom, one of the largest US
telecommunications long-distance operators, issued a first financial
restatement of $3.8 billion and subsequently defaulted on its debt
payments. This raised the fear that inappropriate accountancy and
governance practices had prevailed in the sector.8 Stock markets reacted
by pushing telecommunications equity prices down, notably in Europe and
Japan where they had previously recorded the most spectacular increases
(Figure IV.2). The negative sentiment spilled over to the bond market.
Rating firms downgraded many operators or put them under review.
Several large firms - including Worldcom and Global Crossing - filed for
bankruptcy under Chapter 11 in the United States and AT&T Canada
undertook a similar proceeding.9 This led to a wave of defaults on
telecommunications corporate bonds and contributed to the largest cycle
of defaults on bonds since the 1930s. Defaults on corporate bonds
worldwide reached $163 billion in 2002, of which 56.4 per cent in the
telecommunications sector,10 including some investment grade
companies11 (Figure IV.3). The fear of bankruptcy and default resulted into
a sharp increase in corporate bond spreads in the middle of 2002. The
overall impact on bond markets was, however, limited. Telecom defaults
represented 3.2 per cent of the value of bonds outstanding, more than
during the previous peak in 1991, but not enough to trigger systemic risk
or a credit crunch.12

Figure IV.2. Share price indices of selected telecommunications operators

Figure IV.3. 12-month rolling average default rates in the
telecommunications sector versus all industries

The combination \of financial excesses and corporate governance
malpractice has triggered a number of legal challenges. In the United
States, ongoing grand jury subpoenas into companies' accounting
practices and lawsuits filed by various groups (minority shareholders,
bondholders and other creditors) brought uncertainty regarding future
financial obligations. The quality of information provided to shareholders at
the time of mergers and acquisitions has also been challenged before the
courts in some European countries. Operators are still attempting to
unravel some complex legal issues linked to their international
expansion.13

The industry is in the middle of a deep financial restructuring

Burdened by high debts, many operators have embarked on restructuring
programmes to cut costs, reduce debt, sell assets and strengthen
balance sheets. In the United States, firms that filed for bankruptcy under
Chapter 11 are negotiating with the various groups of claimants to obtain
majority approval14 for the reorganisation of their liabilities. During the
re-negotiation period, firms do not exit the market and continue to provide
their services. Management in some companies was able to gain majority
approval for the restructuring of their debts. Reorganisation plans have
typically cancelled all existing equity shares, which ceased to be valid,
and provided for an exchange of bonds against newly floated shares, at a
fraction of the face value. Some firms have also bought back or traded their
liabilities (or their subsidiaries' debts) at a significant discount from face
value, thus reducing their indebtedness. In Canada, similar steps were
taken.15 In continental Europe, where bankruptcy procedures similar to
Chapter 11 do not exist, several incumbents that have accumulated very
large debts have embarked on gradual approaches to reduce their
obligations. They typically combine sales of non-essential assets,
reductions in investment and current spending, debt refinancing and new
equity issuance. In countries where companies are still partially
state-owned, government funding and loan guarantees are also
envisaged.16

The direct macroeconomic impact of this restructuring is not substantial,
reflecting the telecommunications sector's relatively small weight in
national economies (between 2 and 4 per cent of GDP), but it has a
significant upstream impact on equipment suppliers and technology firms
and contributes to reduced high-tech share prices.

Investment is being sharply cut back...

The telecommunications industry invested heavily until 2000, when
spending on infrastructure reached nearly $230 billion in the OECD (about
4 per cent of total business fixed investment). Starting in 2001,
long-distance carriers severely slashed their capital expenditure, having no
inventories to run down and little operating costs to cut in the short-term.
In 2001, investment fell to $194 billion. Anecdotal evidence regarding
telephone equipment manufacturers suggests that capital expenditure was
cut even more aggressively in 2002. According to some estimates,17
capital spending by US telecommunications service providers may have
dropped by 47 per cent in 2002, bringing it back to the level recorded in
1997.18 This retrenchment of capital spending is hurting companies
upstream, notably equipment suppliers which had to downsize their
activities (Figure IV.4).

For the time being, investment spending cuts appear to be a sensible
response to current conditions, and there are no signs that the quality of
services has deteriorated. If sustained for a long period, such low level of
capital spending may however eventually weaken the capacity of operators
to deliver higher-quality services and deploy new technologies. Mobile
phone operators must for instance invest to launch their UMTS network,
even though they have postponed and downscaled their plans. Internet
service providers need to invest to increase their capacity in offering
broadband services.

Figure IV.4. United States: Capacity utilisation rate of the communications
equipment suppliers1

... but evidence on R&D spending cuts is inconclusive

The telecommunications industry is likely to have cut back its spending on
research and development to improve financial results, although available
evidence suggests that this was not the case for all operators. Until 2001,
leading telecommunications carriers maintained research and development
(R&D) expenditure in the order of $6 to $7 billion, in part because some
countries regulation require them to allocate a certain amount of their
turnover for this activity. In less regulated environments, however, private
firms reduced their spending on research and development back to levels
of the mid-1990s. Telephone equipment suppliers, which make the bulk of
R&D spending on telecommunications technologies, appear to have
sharply curtailed their R&D activities in the face of financial challenges.19

Confidence seems to be returning slowly

Notwithstanding the financial difficulties, the medium-term prospect for
telecommunications services appears promising. Consumer demand for
telecommunications services continues to grow, as judged by the increase
in the number of subscribers (Figure IV.5). OECD- wide data on this point
goes only to 2001 but evidence from large markets suggests that the
number of subscribers expanded further in 2002. Forthcoming
technologies are likely to stimulate it further. The future of individual
market segments is however difficult to predict, not least because of
technological uncertainties. Households may also shift away from fixed
lines to mobile phones, thus exacerbating the problems of fixed line
operators, although the magnitude of this substitution is difficult to predict.

Figure IV.5. Telephone and Internet subscribers in the OECD

Policy implications

A debate is underway on the appropriate regulatory policy response to
telecommunications' companies financial stress

Despite promising medium-term prospects, the present telecom sector
retrenchment is painful, some companies are liquidated, spending is cut
and jobs are lost. In these circumstances, some observers have argued
that regulators should ease their pro- competition stance to help operators
restore healthy balance sheets. Available evidence does not demonstrate,
however, that the present financial stress stems from regulatory policy
decisions made since the mid-1990s. Incumbents have lost market shares
to new entrants following liberalisation but, as noted, the overall market
size has grown rapidly and incumbents have generally been able to
maintain or even increase revenues. Regulatory policy is of course not a
goal in itself and measures constraining firm behaviour should eventually
be rolled-back, once a competitive environment has been established.
Available evidence suggests however that regulatory interventions are still
necessary. In some markets, the ongoing consolidation reduces the
number of competitors, which alleviates competitive pressure. In addition,
incumbents still dominate certain services.

The consolidation underway may reduce competitive pressure

Like in other sectors that saw many entrants fail, the telecommunications
sector is presently consolidating as small firms are going out of business
or are being acquired by larger firms. This reduces the number of
competitors and may have an upward impact on prices. Available evidence
suggests for instance that telecommunications services are contributing
much less to disinflation in the euro area, after having been an important
moderating factor and despite the ongoing price decline of technology
equipment (Figure IV.6). In the United States, long- distance prices are
still on the decline, but there is little sign that the pace of increase in local
charges is slowing, despite the opening of this market to competition.20

- Figure IV.6. Telecom services contribution to core inflation in the euro
area1

Competition is making slow progress in services requiring access to local
loops in the European Union

Available evidence suggests that competition does not yet prevail in a
number of market segments. In some wireless communication markets,
the small number of operators requires the intervention of regulators to
prevent collusion. The unbundling of the local loop is also exemplary of the
difficulties encountered by regulators. Indeed, mixed progress has been
made across countries in fostering the penetration of Internet broadband
access (Figure IV.7). In the European Union, the opening of local loops
was required by a decision of July 2000 and by subsequent national
decisions. Implementing legislation is however raising difficult regulatory
issues, notably in relation to access prices. Incumbents initially set prices
for the use of their infrastructure and lines at levels high enough to
discourage access. In addition, they have used delaying tactics related for
instance to the need for "collocation" in the operator premises. The
pressure of regulators eventually improved conditions for competition, and
notably helped reduce the prices charged by incumbent operators.21 As a
result, the number of subscribers has been growing relatively fast and, by
October 2002, about 4 per cent of the European Union's 187 million lines
had broadband access.22 The bulk of this is, however, provided by
incumbent telecommunications companies. New entrants are pursuing
aggressive marketing strategies to gain market shares, with limited results
so far.

Figure IV.7. Broadband penetration rates in OECD countries, June 2002

Recent decisions by the US Federal Communication Commission
removed some unbundling obligations

In the United States, the 1996 Telecommunications Act required that
Incumbent Local Exchange Carriers unbundle their networks and provide
access to new entrants, both for voice telephony and broadband Internet
access. The Act allowed long-distance companies to enter the market for
local calls, hence introducin\g competition in a segment of the market
where "Baby Bell" companies23 previously had a monopoly. It also made
it possible for new entrants to provide high-speed Internet access services
via a connection to copper wire networks. In its Triennial Review
proceeding concerning incumbent local exchange carriers' network
unbundling obligations in February 2003, the Federal Communication
Commission (FCC) decided to soften its direct pressure on Baby Bells by
delegating unbundling rulings to individual States, which were deemed
better placed to assess inter-modal on local competition conditions.
States will therefore be responsible for deciding whether local loops should
be unbundled and for regulating the prices of such services. At the same
time, the FCC lifted Baby Bells' obligations to open their fibre-optic cable
network to competitors, which may encourage local companies to invest
into such networks, but may also weaken competition in related services.
In addition, line-sharing obligations, which are seen as an important form
of access for broadband access providers, will be eliminated over a
three-year period.

Rapid progress was made recently in Japan

In Japan, regulators required local loop unbundling in March 2000. The
incumbents tried however to retain their dominant positions by setting high
access prices. Further pressure was exercised by regulators to ease
access.24 Measures were introduced to set rules for collocation, allow for
self-installation of equipment by new entrants and prevent the incumbent
companies (Nippon Telegraph and Telephone Corporation, NTT, East
and West) from accessing privileged information on subscribers. NTT
companies were also obliged to provide the necessary information to
support competitors in getting access. The overall effect has been to make
Japan a fast growing market for high-speed Internet access. New entrants
were providing over 60 per cent of the broadband lines in Japan by
end-2002.

Overall, the example of local loop unbundling shows that the task of
opening markets to competition is not yet completed, and that incumbents
are still successful in dominating some market segments. While they may
eventually relent to regulatory pressure, delaying tactics seem to have
been used by incumbents to gain dominant market shares in new
markets, which then makes it difficult for new entrants to carve a niche.
Hence, there does not seem to be a strong case for providing regulatory
relief to distressed incumbents. This would deprive the overall economy
from the productivity gains that have been associated with rapid advance in
technological innovation.25

Although a softer policy stance does not appear to be warranted, there is,
however, evidence that regulatory policy should become more
technology-neutral in several OECD countries. Technological innovation in
recent years has made it possible to provide the same services through
different technologies. Voice telephony can be provided via fixed lines,
mobile phones, and increasingly via cable television networks, satellite
and Internet, with power lines perhaps an additional transmission channel
in the future. New networks can compete with old networks. In some
cases, however, the same company owns both old and new networks,
which may impede competition. While progress has been made in some
countries to promote inter-modal competition, many restrictions still prevail
in others. The decision by the European Union to introduce a new
technology-neutral Regulatory Framework in July 2003 is a step in this
direction.

Should the allocation of UMTS licences in Europe be revisited?

In addition to fixed spending on assets, telecommunications operators
spent considerable amounts to purchase spectrum licences, notably in
the European Union. The amount committed to buy licences for UMTS
services reached close to euro 100 billion (Table IV. 1). Initially heralded
as successful market-based sales of public goods, the allocation of
licences in Europe has come under growing scrutiny and debate.

Table IV. I. Allocation of G3 licences in OECD countries

A debate has emerged on the efficiency of 3G licences in Europe

The European Union required in late 1998 that member states allocate 3G
licences before end-2001, preferably through auctions. The United
Kingdom and Germany, which were among the early movers, were able to
raise considerable revenues. All other member states sold their licences
at much lower prices. The diversity of outcomes at the European auctions
raises a number of important questions. If the same scarce public good
(radio spectrum) was sold in similar countries at very different prices, this
might suggest that the auction mechanism was not efficient. Empirical
evidence does not indicate that this was the case, licence prices fell in
2001 because market sentiment towards the telecom sector cooled
dramatically during the period, reducing the amounts that firms and their
share- holders were ready to bid. In addition, some auctions appear to
have been poorly tailored and failed to attract new entrants. Using the
same auction technique as previous governments did prove to be a
mistake, as bidders learnt from past experience how to avoid paying
excessively high prices. Well-designed auctions appear to have been
efficient. While there is therefore no obvious basis for changing the
regulatory stance on grounds that the winners paid too much, careful
consideration is required for the implementation of auctions, as the final
price may be too high or too low under the influence of the auction
design.26

Irrespective of the analysis on the efficiency of spectrum auctions, the high
price paid for UMTS licences is not the main explanatory factor of the
financial difficulties experienced by telecommunications operators. In the
United States, where these licences have not yet been allocated, financial
distress in the telecommunications sector is at least as severe as in
Europe. Also, there is no empirical evidence that the share prices of
auction winners fared worse than those of auction losers.

Nonetheless, a number of decisions regarding UMTS services regulations
are under debate in the current, more difficult environment. Regulatory
measures have been suggested to facilitate the financial viability of UMTS
networks and accelerate the launching of services. A first proposal is to
allow the sharing of infrastructure. Some national regulators are allowing
operators to share small parts of their networks, mostly for environmental
reasons and to reduce negative externalities.27 Allowing the sharing of
larger parts of infrastructure may however reduce competition and
encourage the collusion of operators. Another initiative under consideration
would allow operators to transfer their licence through secondary market
trading. This could be equivalent to a subsidy, however, because it would
make a product more valuable after its price has been set. In addition, if
spectrum trading is allowed for part of licences, it might lead to a situation
where licences are fragmented among several licence holders for the same
frequency band. Nonetheless, such a measure would promote
competition, because it would put back on the market licences bought by
operators now unable to invest in 3G infrastructure. As such, it might be a
good measure to avoid a reduction in the number of operators and a
decline in competition (Didier and Lorenzi, 2002). A third suggestion is to
extend the time period during which the radio spectrum rights can be
utilised, in view of the delays in launching services. While suggestions for
changing the "rules of the game" are plentiful, it may prove difficult to put
them into practice. Changing the rules after having allocated the spectrum
may encourage auction losers to challenge regulators in courts and create
further legal uncertainties.

The burst of the bubble left telecom firms with impaired balance sheets

Governments have let market forces drive the restructuring

Confidence is slowly coming back

Demand for telecom services remains strong

A fundamental shift in regulatory policy is not justified at this stage

The high prices of UMTS licences in Europe is one of several factors of
stress

Governments have opened telecom markets to new entrants

Box IV.1. The OECD-wide regulatory reform in telecommunications
markets

All OECD countries are committed to having competitive markets for
telecommunications.1 Regulatory frameworks were adapted during the
second half of the 1990s to open telecommunications markets to
competition and establish an environment conducive to lower prices. New
legislation was adopted in the United States under the
Telecommunications Act of 1996 and in the European Union under the
Telecommunications Directive of 1997. Sector-specific National Regulatory
Agencies (NRAs) were set up to complement the roles of economy-wide
competition authorities. Fixed line telecommunications markets were
opened for a broad range of services - from international to local calls.
Incumbents were required to grant new entrants access to their networks
both for voice telephony and high- speed Internet access. Other
liberalisation measures included the privatisation or partial privatisation of
incumbent public operators; the opening of the sector to foreign ownership;
price regulation for services where dominant positions prevail; and other
mea-sures such as number portability that enhance consumer choice. As
a result of these regulatory measures, competition has intensified and
consumers have benefited from greater choice, lower prices and higher
quality services. New entrants have gained sizeable shares in the markets
for long-distance national and international calls (OECD, 2003a), although
the degree of competition prevailing in the United States - which opened
its long distance market in the mid-1980s - is not yet matched in all
OECD countries. In the new markets of mobile telephony and Internet
access services\, the absence of pre-established market positions has
facilitated competition. In mobile telephony, nearly all countries have at
least three operators, but the subsidiaries of the incumbent fixed operators
often have established predominant market share.2 All countries have a
plethora of companies providing Internet dial-up (low-speed) access, but
little competition prevails for broadband (high-speed) access as the
subsidiaries of fixed line often incumbents dominate the market.

1. Turkey, the last country to open its market, will do so in early-2004 and
has already established a regulatory framework for competition.

2. Except in the United Kingdom and the United States where incumbents
do not dominate the mobile telephone market.

Investors expected rapid increases in revenue and earnings

Box IV.2. New telecommunications technologies

Many technological innovations reached the telecommunications market in
the 1990s. New optical technologies made it possible to multiply the
transmission capacity of fibre-optic cables. Together with innovation in
computers and software this raised the speed at which computers send
and receive data and access the Internet. Asymmetric digital subscriber
line (ADSL) helped to upgrade traditional copper wires and offer broadband
(high-speed) access. Cellular mobile operators constructed second
generation networks and, in many OECD countries, their customer base
grew rapidly, in some cases surpassing the number of fixed network
subscribers. The third generation of mobile telephones (Universal mobile
telecommunications systems) was promised to become a breakthrough in
mobile access to Internet. Technological innovation remains dynamic,
which is likely to further change the telecommunications landscape in the
future. New wireless technologies - such as Wireless- Fidelity (Wi-Fi) and
other wireless networks - are likely to influence future trends in the sector.

Revenue growth has declined, but traffic keeps on increasing

Telecom companies have encountered severe financial difficulties...

... and some legal challenges

Firms are restructuring their balance sheets

The direct macroeconomic impact is limited...

... but upstream ripple effects are negative for equipment suppliers

Investment remains sufficient for high-quality services

Some companies are cutting back on R&D, but not all

Demand for telecom services is strong

Should regulatory policy be softened to help financial restructuring?

The number of competitors is declining

Unbundling is progressing, after a slow start

Some regulatory relief to incumbents in the United States

In Japan, competition has promoted high-speed Internet access

The time has not come to roll-back regulatory action

Towards a technology-neutral regulatory policy?

The European Union allocation of 3G licences has come under debate

Available evidence does not demonstrate that auctions were inefficient

licences are one of many factors behind current financial difficulties

A number of regulatory aspects of UMTS services are debated

1. This chapter was drafted jointly by the OECD's Economics Department
and the Directorate for Science, Technology and Industry. It draws heavily
on OECD Communications Outlook: 2003 Edition.

2. In May 1997, for instance, William Moroney, President of the Multi
Media Telecommunications Association predicted that "the road signs all
indicate that, basically, the sky is the limit for communication
companies".

(C) OECD 2003

3. Telecommucations Industry Association (TIA) (1997).

4. See for instance the testimony of J.B. Grubman before the US House
Committee on Financial Services Hearing regarding Worldcom, 8 July
2002.

5. Coffman and Odlyzko (2001).

6. Fixed line telecommunications revenue in the United States is
estimated by Merrill Lynch to have declined by 7 per cent in 2002. In
contrast, revenue from wireless telephony increased by 17 per cent in
2002 and revenues from data transfer by 33 per cent. In France, overall
telecommunications revenue was stagnating by mid- 2002, according to
the regulatory agency (Autorite de regulation des telecommunications),
while traffic increased by 5.6 per cent at constant prices. These numbers
should be used with caution, however, because the definition of
telecommunications revenue may vary considerably, as well as their
consolidation.

7. The overall growth of communication traffic reflects diverging trends
across market segments. Fixed line voice telephony traffic tends to
stagnate or decline, whereas wireless and Internet access grow strongly.

8. The role of research analysts at large investment banks was also put
into questions, and some banks agreed to pay fines in settlement of
cases regarding their dealings.

9. According to Bankruptcy.com, among the largest 15 public companies
in the United States that went bankrupt in 2002, eight were
communications operators: Worldcom (assets of $104 billion), Global
Crossing ($31 billion), Adelphia Communications ($22 billion), NTL ($13
billion), XO Communications ($8 billion), Williams Communications ($6
billion), McLeod USA ($5 billion) and Asia Global Crossing ($4 billion).

10. Moody' Investors Services (2003), Default and Recovery Rates of
Corporate Bond Issuers, Global Credit Research, February.

11. Investment grade companies that defaulted in North America included
AT&T Canada, MCI Wordcom, Inc., and its subsidiary Sky Tel
Communications, Teleglobe and Qwest Communications International.

12. Bernanke (2003).

13. For instance, France Telecom has been involved in complex legal
issues involving its stake in a German wireless company (Mobilcom).

14. Under the provisions of the US Bankruptcy Reform Act of 1978 and
supplementary legislation in 1994, the management of firms that file for
bankruptcy under Chapter 11 has 120 days to prepare a reorganisation
plan (this period can be extended by the courts), and a further two months
to gain the approval of the creditors. The reorganisation plan must be
approved by the majority of creditors (representing two-thirds of claims) in
each class of claimants.

15. For instance, AT&T Canada obtained approval from its bondholders on
a plan to restructure the company's balance sheet and equity. Under the
plan, bondholders and other affected creditors receive approximately 17.4
per cent on their claims (part in cash, part in shares of the company).

16. France Telecom for instance announced a three-pronged approach to
restructure its debt of euro 68 billion. The company is seeking to reduce
spending by euro 15 billion, raise euro 15 billion in new equity (including
euro 9 billion from the government) and refinance euro 15 billion in
maturities.

17. TIA (2002).

18. The investment level in 1997 was relatively high historically, but the
investment retrenchment is nonetheless severe.

19. According to TIA (2002), the following cuts have been announced:
Lucent's Bell Labs reduced R&D spending by about a third from fiscal year
2001 ($3.5 billion) to fiscal year 2002 ($2.3 billion); CIENA cut R&D
spending by 26 per cent between 31 October 2001 and 31 July 2002;
Cisco's R&D spending was down 10 per cent from 31 October 2001 to 31
July 2002; Nortel Networks reduced R&D spending by 28 per cent for the
period from 30 September 2001 to 30 June 2002; Tellabs cut its R&D
spending by 13 per cent between June 2001 and 31 March 2002; and
Ericsson announced plans in 2002 to cut its R&D costs by $773 million
and to close half of its 80 R&D offices world-wide.

20. While measuring consumer spending on telecommunications services
is straightforward, the average price of such services is more difficult to
assess. Wireless telephone and Internet access providers offer flat
monthly subscription packages, covering different menus of services,
which makes it difficult to assess the average price of services really
supplied (such as the cost of telephone calls per minute). Hence, some
national statistical agencies for the time being exclude mobile phone and
Internet services from their consumer price baskets.

21. In the European Union, the monthly rental of fully unbundled loop
averages euro 12.8 and the connection charges euro 103.6, with
considerable variance across countries.

22. European Commission (2002).

23. "Baby Bells" are the local exchange carriers that were created
following the break-up of AT&T. They are specialised in local services
(local calls, Internet access).

24. In December 2000, the charge for unbundled line sharing was reduced
from Y 800 to Y 187 per month (from about $6.15 to only $1.45).

25. OECD(2003b).

26. Binmore and Klemperer (2002); Klemperer (2002); and Cable, Henley
and Holland (2002).

27. In Germany, for instance, the sharing of sites, masts, antennas,
cables and combiners is permitted under certain conditions.

BIBLIOGRAPHY

BERNANKE, B.S. (2003), Balance Sheets and the Recovery, Remarks
delivered at the 41st Winter Institute, St. Cloud State University,
Minnesota, February.

BINMORE, K. and P. KLEMPERER (2002), "The biggest auction ever: the
sale of the British 3G Telecom licences", The Economic Journal, No. 112,
March.

CABLE, J., A. HENLEY and K. HOLLAND (2002), "Pot of Gold or
Winner's Curse? An Event Study of the Auctions of 3G Mobile Telephone
licences in the UK", Fiscal Studies, Vol. 23, No. 4.

COFFMAN, K.G. and A.M. ODLYZKO (2001), Growth of the Internet,
AT&T Labs, mimeo.

DIDIER, M. and J.H. LORENZI (2002), Enjeux economiques de l'UMTS,
Rapport du Conseil d'analyse economique, La Documentation francaise,
Paris.

EUROPEAN COMMISSION (2002), Eighth implementation report on the
telecommunications regulatory package, Brussels, December.

KLEMPERER, P. (2002), "Some observations on the Dutch and German
2G Telecom Auctions", mimeo, September.

OECD (2003a), Communications Outlook 2003, Paris.

OECD (2003b), The Sources of Economic Growth in OECD Countries,
Paris.

TIA (Telecommunications Industry Association) (1997), "Telecom Market
Projected to Achieve Double-Digit Growth through year 2000", Pres\s
Release, May 1997, Washington, DC.

TIA (Telecommunications Industry Association) (2002), Investment, capital
spending and service quality in US telecommunications networks: a
symbiotic relationship, mimeo.

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