Prepare to ring the changes

The term creative destruction quite clearly describes the phenomena technological changes are bringing about in the communications sector. Just as fundamental changes such as the invention of the jet engine and its deployment in civil aviation have opened up the exploration of the world to the common man in the past four decades, so the radical advances being made in the communications sector promise the enhancement of several dimensions of living. We are promised a "brave new world". A rethinking of all conceptual aspects that describe the sector is not only called for but is overdue.

Some of the conceptual aspects to be dealt with are: the economic structure of consumption and production in the sector; the way that firms, particularly telecommunications firms, are to be regulated, if at all; what new firms are going to enter the sector; the effect of this on service offerings and customer choices; how firms are going to compete; what fundamental organisational mechanisms are necessary to implement firms' strategies in this brave new world; how value is to be created for the variety of firms that enter the fray; and how the industry structure is going to evolve. The agenda is wide open, the opportunities for scholarship immense, and the possibilities to contribute large. These are exhilarating times for the interested scholar.

Jean-Jacques Laffont and Jean Tirole set out to specifically explore the regulatory contours of this competitive landscape. The book is based on lectures that Tirole gave at the University of Munich, but encapsulates several ideas that both authors have been writing about for a number of years. It is primarily about the nature of regulation in the telecommunications sector, and what these regulations ought to be as the sector evolves towards full competition. Several issues are covered: the nature of incentives in regulation; theoretical and policy issues related to regulating dominant telecommunications carriers (such as BT, Deutsche Telekom or France Telecom) that provide access for other network operators to customer bases that these carriers control by virtue of their history; the regulatory issues involved when the forces of technology and competition permit several network operators to be present in the market, allowing customers a choice; and the issue of universal service so that groups of individuals receiving basic services are not disadvantaged when the forces of competition finally take off.

The authors reach six principal conclusions. First, they suggest that there has to be a degree of price discrimination at the retail level. In other words, customer characteristics have to be kept in mind by firms when designing pricing strategies. Second, as networks multiply, there has to be differentiation in wholesale pricing (pricing of access). Third, regulation cannot discriminate against individual firms, as has happened in the United Kingdom and the United States, it has to be symmetric. This allows the firms to deal with their retail and wholesale customers on a commercial basis. Fourth, price controls are not a panacea but only a temporary palliative. Fifth, there are significant complexities involved when assessing the nature of competition that will ensue when networks multiply. Finally, universal service has to be efficiently provided.

No one can cavil at the above insights and the book goes into a marvellous display of technical virtuosity that involves application of economic concepts to deal with the complex problems that make up the present-day world of telecommunications regulation. In the words of the late Kurt Lewin, "there is nothing so practical as a good theory", and the authors apply important theoretical concepts to the issues in a meaningful manner so that the insights can be drawn out for future implementation. These concepts have been developed by many researchers and scholars, including the authors themselves, over the past two decades or so and have been judiciously selected for application. However, I expected to see considerably more citations of the literature. Nevertheless, the authors thoughtfully raise several issues and deal with them in a thoroughly professional and analytical manner. The book will reward motivated regulators and initiated economists interested in the specialised topic of telecommunications regulation.

The approach is pro-regulation and the ethos is one of top-down command and control. Hierarchy matters. The implicit theme is that competition might go only so far, because of the complexities of the industry, and that the regulatory or consultative process has explicit benefits in enhancing consumer welfare. On this issue, the emergence of a mobile telecommunications standard (GSM) through a process of coordination in Europe has yielded considerably more benefits relative to the US, where a competitive standard-setting process has yielded far less benefits to the consumer. It is open to debate whether such regulation will work in the brave new world to which technical change will elevate the communications sector. Take the internet. It is an alternative communications and information transmission network allowing customer connectivity and is a component of this new world that has developed largely without regulation. Its success shows that regulation may not be necessary or that only minimal regulation may be required. Thus, markets also matter quite a lot.

There is no doubt here that both markets and hierarchies matter. What also matters a lot in the communications sector is the nature of organisation and administration of the regulatory process, and the nature of organisation and management of the firms within the sector. The recent traumas of erstwhile monopoly operators, such as BT in the UK and AT&T in the US, show that the capabilities that firms' management possess have a crucial role to play in delivering performance. Thus, issues of creative organisational innovation and managerial quality are critical and should figure prominently on the agenda as we continue our explorations of the competitive process in a sector that is experiencing creative destruction.

Sumit K. Majumdar is professor of strategic management, Imperial College, University of London.