The Impact of Telecommunications Liberalization in Germany on Deutsche Telekom AG, Its Future Competitors and the Economy at Large

Abstract

Telecommunications plays such an important role in modem developed economies that any significant change in its structure and organization will have impacts on the economy as a whole through changes in costs of production to firms, new methods of production and by direct and indirect effects on employment. This paper introduces the reader to the very dynamic and increasingly complicated telecommunications markets in Germany and the European Union. New methods of communication have profound effects on business techniques. In the same way, changes in the prices for existing telecommunications services change the way businesses deal with customers and suppliers. As with any normal good or service, a drop in the price of telecommunications services will precipitate an increase in the demand for it. Firms and customers remain in closer contact, even with distance separating them. The hindrance of distance when performing transactions is minimized and the geographical concept of a market is turned on its head. The European Union recognized that it was in danger of falling behind in the development of advanced telecommunications infrastructures and services and it commissioned a High Level Group to investigate the importance of telecommunications to the European economy from many perspectives and to make recommendations to the European Commission for a plan of action. The result of this forward thinking is the Union requirement that all member states fully liberalize all telecommunications equipment, infrastructure and service markets by 1 January 1998. Germany is now in the process of incorporating EU guidelines into German law. Since the telecommunications industry is growing so fast, many firms with capacity already available are competing with Deutsche Telekom in the already liberalized markets for value added services and are actively preparing themselves to compete for a share of the large market for voice transmission services, i.e. standard telephone service. Competition on German markets will come faster than they did in liberalized US markets because many financially strong companies already have infrastructure that needs little adjustment to be connected to the public network. Energy and electricity providers have spun off telecommunications subsidiaries in order to focus their efforts on the daunting task of organizing an offensive against Deutsche Telekom. The German and European economies will benefit from the impact of new alternative network infrastructures in 1996 and the authorization of competition in voice services in 1998. The lines between mobile and fixed services will become blurred as new wireless technologies link the home to public networks and network providers will scramble to add value to their networks as the price of the raw material, bandwidth, fall. German telecommunications markets will not become fully competitive after 1 January 1998 since the required investments pose a serious barrier; they will, however, gain a degree of competitiveness that will be sufficient to bring prices down to levels comparable with those of other liberalized markets like the USA, Finland and the UK. When this happens, Germany, under pressure from the EU, will have taken a step towards improving the competitiveness of the Standort Deutschland.