Classroom Companion: Business

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Chapter 5 · Digital Market Evolution

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Definition 5.2
The telephone operator (or carrier) that existed before de-monopolization is usually 
referred to as the incumbent operator (or just the incumbent) to distinguish it from 
new operators. The incumbent had the advantage of having built the network infra-
structure from “monopoly money” or by government subsidies. This advantage had 
to be eliminated by govern regulations before real competition could take place.
Note that in 1998, fixed-telephone services were still regarded as the most impor-
tant business in the telecommunications industry despite that mobile phone and 
data services were growing rapidly. Mobile communications had already been de-
monopolized. The Internet had existed for several years as an independent net-
work not owned by anyone. In 1998, Internet had just started to be included in 
the business portfolio of the telecommunications operators in Europe but was still 
regarded as a rather minor addition to their portfolio. Almost unrecognizably, the 
Internet had started to replace the X.25 data network as carrier for data commu-
nication services. While the network operators could levy differentiated charges 
on the services offered by the telephone network (local calls, long-distance calls, 
international calls, calls to value-added services, and so on), it turned out that this 
was not possible for Internet services. The revenue basis of the telecommunications 
industry was about to change.
Both the Internet and the mobile phone have altered the business landscape 
of telecommunications entirely. Now, about 20 years after de-monopolization, the 
fixed telephone service is about to be replaced by cellular mobile networks, and 
the telephone service, fixed or mobile, is itself soon incorporated as one out of 
numerous data services on the Internet using voice over IP technology. This is the 
convergence of technologies and services described in 
7
Chap. 
3
.
The deregulation process took several years because the telecommunications 
network was regarded as a public utility that was best served by the old state monop-
olies (the incumbents). Moreover, it was a long and difficult process to establish 
the rules and procedures for regulating the market so that new entrants had a fair 
chance to compete with the incumbents. As already mentioned, the GSM network 
was an exception because this was a new network and the cost of building the net-
work was regarded to be the same for all competitors. If the incumbent also owned a 
mobile network, this network had to be commercially separated from the telephone 
network, and no cross subsidizing and other value exchange was allowed between 
them. Moreover, if required by the competitor, the incumbent had to provide leased 
lines, at a competitive price, as feeder lines to base stations and other equipment.
In the USA, the telecommunication market was opened for free competition in 
1996. The rules governing the competition were stated in the Telecommunications 
Act of 1996. Note that the divestiture of AT&T in 1984 was not de- monopolization 
of telecommunications in the USA. AT&T was broken up into seven regional 
monopolies offering telecommunications services in non-overlapping regions. The 
purpose was to reduce the market power AT&T had built up over several years. 
Telecommunications still existed as a monopoly business until 1996.