The telecommunications market in Germany is the largest in Europe and one of the largest in the world, but until recently it has also been one of the most tightly restricted. Virtually every aspect of telecommunications, including provision of both services and equipment, has been a monopoly of the state PTT, the Deutsche Bundespost ("German Federal Post Office," abbreviated here as DBP). Even when other countries moved to open their telecommunications to some degree of competition during the 1970s and 1980s, Germany held to its traditional structure.

But since July, 1989 Germany has begun a restructuring of its telecommunications market, moving--tentatively so far--from a model of monopoly toward one of competition. The movement toward competition is thus far not nearly so radical as the divestiture of AT&T in the U.S. or the privatization of British Telecom, but there are signs that the current changes in the German telecommunications market are only the first steps in what may become still more significant liberalization and privatization. Given the size of the German economy (about 40% of the European Community) and of the German telecommunications market, even relatively small openings for market share represent significant opportunities for private companies, including U.S. carriers and suppliers.

The following paper examines the background of the liberalization of telecommunications in Germany, recent developments that have resulted in the restructured market, and the prospects for further opening toward competition in the future. In each case the focus is on the conflict between the economic and social forces that have traditionally favored--and continue to favor--monopoly and those forces that favor liberalization and competition. Nearly all analysts agree that the future of the German telecommunications market remains in doubt; but it will be argued here that certain technological as well as economic and political factors point toward further liberalization.

Unlike in other European countries such as France or Britain, where telephone service went through a period of competition before the state PTT assumed its monopoly status, telecommunications has been a state monopoly in Germany from the beginning. But other factors beyond mere tradition have contributed to the maintenance of a telecommunications monopoly. In sketching the history of German telecommunications, Duch (1991) shows that from the beginning political and social considerations were as important as economic ones in determining German telecommunications policy. Duch argues that throughout the century preceding the current debate on monopoly vs. market, German telecommunications policy has been governed by what he calls "corporatist" structures in German decision making, which have attempted to adjudicate the interests of certain major social forces: labor, the principal industrial players supplying the PTT with telecommunications equipment, and the government (no matter which political party was in power). Each of the three members of what at first (and especially to foreigners) may seem an unlikely coalition has benefitted from the traditional PTT monopoly. Labor has used the monopoly and civil service status to guarantee excellent benefits and nearly complete job security. The handful of large firms supplying equipment have benefitted from an arrangement in which each company was virtually guaranteed a predictable share of new contracts--at high prices the Post Office could pass through to its captive customers. (Until now four domestic firms have supplied the DBP with 90% of its equipment purchases; basic switching equipment has nearly always been designed by Siemens, whose representatives have usually sat on the policy-setting Postal Administrative Council; manufacturing was allocated to the other big firms by tacit quotas.) The government itself has benefitted from the enormous surpluses generated by the telecommunications functions of the PTT, which it has used as a kind of invisible taxation and means of quietly cross-subsidizing unprofitable undertakings such as letter and parcel post.

Everyone within this coalition had every reason to want to keep costs and prices high, and thus no reason to want to encourage competition. Noticeably absent from this coalition of interests are customers, who never had effective representation on the Postal Administrative Council and its predecessors. The government could argue that its real aim was to assure excellent and equal service to all citizens, even those in the most rural areas, but business customers in urban centers remained largely excluded from the "silent coalition" of decision-making telecommunication interest groups.

The policy of high prices favored by this coalition necessarily had the effect of depressing demand and inhibiting innovation. Duch shows that even though telecommunications in Germany grew at a substantial rate both in the early part of the century and after World War II, its growth was less than what one would predict considering the growth of the German economy as a whole. German telecommunications policy was built on an assumption of relatively inelastic demand for basic telephony: customers--especially businesses--needed to use the telephone to about the same degree no matter how much the PTT charged. It was also built on an assumption that telecommunications costs amount to such a relatively small proportion of a firm's expenses that most companies would not object too strenuously to the traditional system and would not demand more market-oriented pricing and more flexible service. The traditional system also assumes that telecommunications is essentially a national matter and that firms compete mainly with other domestic companies, who are thus subject to the same high prices and inflexible regulations.

In recent years these assumptions have become more and more obviously invalid. Telecommunications has become increasingly central to the business of most companies; data communications, requiring flexible and innovative solutions for individual customers, has joined traditional voice telephony as an essential means of doing business; and business has increasingly come to take place in an international rather than national environment. Under these conditions, the traditional policies and structures of the DBP, which like other highly protected PTTs has felt "little incentive to improve efficiency, introduce new services, or cut prices," increasingly put the competitiveness of German industry at risk. In a world economy it becomes more and more difficult for companies to accept that leased lines needed for data networks may be eight times more expensive in Europe than those used by firms in the U.S.. During the 1980s it became clear to many people that such conditions would lead firms to avoid locating in Germany, and would seriously undercut the competitiveness of those that remained. Along with growing international (especially U.S.) pressure to open the German telecommunications market and with the demands for liberalization coming from the European Community in connection with its plan to create a single European market, these pressures from German business interests were eventually able to convince most factions controlling German telecommunications policy that it was time for a serious change.

Pfeiffer and Wieland (1990), Schmidt (1991), and Duch (1991) describe the laborious process that eventually led to the reform of German telecommunications in 1989. Schmidt argues that the process was so slow largely because of the German tendency to seek consensus among all the major social partners at every stage--the kind of "corporatist" decision making that Duch sees as characteristic of German telecommunications throughout its history. Consensus could of course be sought only on the basis of significant compromises all around.

Reform moved slowly through various widely-debated studies commissioned by branches of the government (1981 and 1987), to a government proposal (1988), and finally to actual legislation debated and passed by the parliament (1989). The 1981 recommendations of the Monopoly Commission to open both services and equipment to competition met with no particular interest either from the Social Democratic government in power when they were issued or from the Conservative government that came to power in 1982. Only the Liberals (the Free Democratic Party, "liberal" in the European sense of the word of favoring free trade and representing the interests of business), who were the junior coalition partner of both governments, consistently pushed for reform. A second commission was instituted in 1985 and delivered its report in September 1987. The "Witte Commission," as it was called, took so long partly because it attempted to consult all social partners and to formulate proposals that were backed by a strong consensus, but its report was nevertheless accompanied by dissenting minority statements: one from the unions and the Social Democrats arguing that it went to far toward liberalization, and one from the lobby of German industry and the Liberals, who argued that it did not go far enough.

By the time the Witte Commission finally issued its report, the European Community had already begun to take actions that would force member states to liberalize their telecommunications markets, and that thus helped shape the reform plans of individual governments. In June, 1987 the European Commission issued a "Green Paper" on telecommunications calling for a liberalized telecommunications market to complement the European single market that was to go into effect at the end of 1992. The Commission followed up its recommendations with a series of directives mandating that states open up most sectors of their telecommunications equipment and services markets to competitive forces. Schmidt points out that one could argue that telecommunications reform in Germany in fact did no more than respond to the demands of the European Community. But given the strength of the insistent demands of German industry, which saw its international competitiveness being undermined, it seems clear that domestic considerations were at least equally important in shaping the recommendations of the 1987 commission.

The 1987 Witte Commission report became the basis for the Conservative/Liberal government's 1988 proposal for restructuring and liberalizing German telecommunications, and for the 1989 legislation that began to put that liberalization into effect. But at each stage, the degree of liberalization proposed by the Witte Commission was somewhat reduced due to the need for political compromise.

For most Germans, the most noticeable change recommended by the Witte Commission and instituted by the 1989 law was the breakup of the Deutsche Bundespost (a government agency) into three administratively separate "public enterprises," which would function under private rather than public law, and which would have separate boards of directors and separate balance sheets. The three entities that resulted were a unit for traditional mail and parcel service, a unit for postal banking (a long tradition in Europe), and DB Telekom (or as it calls itself in all its advertising, "T·e·l·e·k·o·m"). Of the three, Telekom is by far the largest (1988 revenues: 36.7 billion DM compared with 13.9 billion DM for the letter post and 2.0 billion DM for the postal bank); Telekom is also the only unit that produces profits: in 1988 2.26 billion DM of its earnings were used to cross-subsidize the losses of the other units. One of the goals of reorganization into separate entities was to make clear just what was happening with the money made or lost in the various units, providing at least some basis for steps toward more cost-based pricing. (Even under the new legislation cross-subsidization of the other units of the DBP is still accepted as long as it is made clear.) Critics of the restructuring, such as Duch, point out that the three units remain joined at the top level under the Minister of Posts, and--more importantly--remain under pressure from a single union, the Deutsche Postgewerkschaft (DPG), one of the largest and most powerful unions in Germany.

Another aspect of the commission's report implemented in the 1989 reform that was almost immediately noticeable for German customers was the complete elimination of the DBP's monopoly on customer premises equipment. Until the reform the DBP had strictly enforced its right to be the sole provider of the first telephone handset on all premises, and had sought to enforce its sales monopoly even on items most U.S. consumers would not immediately associate with the telephone company, such as modems.

Along similar lines, the procurement of big ticket central office and network equipment was also opened up to wider competition so as to no longer favor the small number of German "suppliers of the court" (mainly Siemens). For the first time, foreign suppliers have an opportunity to participate effectively in this large market. As one of the first consequences of the procurement reform, Telekom placed an order for digital switches with Northern Telecom instead of Siemens.

Besides liberalizing the market for equipment procurement and sales, the 1989 reform substantially opened the market for providing services, particularly value added services (VAS) involving data. In many ways the DBP's restrictive policies on data services were what most threatened the competitiveness of German industry and thus of the German economy altogether. When companies throughout the world were finding they could achieve competitive advantages by designing private data or voice/data networks, the DBP continued to view any attempt to circumvent its public network as a serious threat to its monopoly. Thus it was willing to lease private lines to firms, but only with punitive pricing designed to discourage private networks. In 1985 a leased circuit of 100 kilometers cost an average of $75.00 in Britain, between $244.00 and $275.00 in France, Switzerland, and Sweden--and $841.00 in Germany; a 10 kilometer circuit cost $25.00 in France and $129.00 in Germany. To make matters still worse, the DBP insists on adding usage-sensitive tariffs to the cost of the leased lines to "harmonize" their costs with those of the public network. Besides discouraging use of private lines altogether, this "harmonization" was designed to eliminate any thought of reselling "excess capacity" on a firm's private network. Since every transmission cost extra, there simply was no "excess" capacity to sell profitably. Even after liberalization, usage-sensitive pricing on leased lines remained, and remained one of the most hotly-debated issues in telecommunications discussions (and one of the first targets for further liberalization). It is easy to imagine that large German corporations used to setting up networks in the U.S. and other countries would find this arrangement intolerable, and that even smaller German companies would recognize that they were being put at an extreme disadvantage compared to their competitors abroad.

Beyond erecting barriers to private telecommunications services through punitive tariffs on leased lines, the DBP traditionally also restricted what kinds of services could be provided at all. Large corporations could get dispensations to set up their own data networks, and small firms could form associations to provide particular services to their members (for example, travel agents, banks, etc.), but DBP regulations made it extremely difficult for a company to sell telecommunication services; selling services was in general viewed as a monopoly prerogative of the DBP. Thus of the some 4,200 value added services supposedly in existence in 1986, 75% were in fact only services of the DBP's own videotext system BTX. By a more widely accepted definition of VAS, only 239 would qualify. Given such restrictions, the German market for value added services was understandably quite small: only one half that of France, one third that of the United Kingdom, and smaller than that in Italy. Given the world-wide projected growth of VAS--one study anticipates 30% per year as opposed to 8% per year for voice telephony, another anticipates VAS growth at 40-60% per year--as well as the importance of VAS to client firms, the DBP's insistence on restricting private providers of services clearly posed a threat to the whole German economy.

The 1989 reform sought to open up the market for telecommunications services to competition in two ways. It moved to reduce the punitive pricing for leased lines. And it explicitly opened the market for value added services to all comers--while nevertheless reserving Telekom's right compete in this market as well. For most domestic and foreign telecommunications companies, this opening of the German VAS market represents one of the most significant opportunities created so far by the liberalization of German telecommunications. Several U.S. firms have been able to use their experience and expertise in VAS to play a major role in the German market. Thus General Electric's GEIS has quickly come to dominate the German electronic data interchange (EDI) market, with a 50% market share, followed by IBM with 12%. Large German companies such as Daimler-Benz (which is attempting to diversify out of its heavy dependance on automobile and truck production) are attempting to establish themselves in this market. In order to stay competitive, Telekom itself has begun to establish joint ventures with foreign companies with greater experience in creating and marketing data services, for example with IBM.

Critics of the 1989 reform point out a defect in the liberalization of the telecommunications services market: the new law leaves Telekom both a competitor within the services market and simultaneously in sole control of the transmission network--not everyone's idea of a level playing field. Any competitor wanting to design a private network for a customer must come to Telekom to inquire about leasing the necessary lines. Telekom is required to provide the lines at a reasonable price, but it is hard to insure that it will not use the information it gains from its competitors for its own advantage. There already seem to have been instances in which Telekom has used information acquired through its network monopoly to give an unfair advantage to its data services offerings.

As this instance illustrates, the German reform of 1989 left several crucial areas of telecommunications as Telekom monopolies, unaffected by the general attempt to move toward competition. Telekom was allowed to maintain its monopoly on most of the transmission network and on most voice telephony. In both cases competition was allowed in what was defined as the "fringes" of the network--areas just beginning to develop, requiring particular innovation and marketing acumen (and small enough not to threaten Telekom's revenues from more traditional sources). In practice the "fringes" refer to cellular and other radio-based telephony and to certain kinds of satellite transmission.

In the most noticeable instance of competition (because affecting voice traffic) a private firm (Mannesmann Mobilfunk) was granted a license in December, 1989 to operate a nation-wide digital cellular network ("D2") in direct competition with Telekom's own digital cellular network ("D1"). Mannesmann Mobilfunk is a consortium including the U.S. RBOC Pacific Telesis and Britain's Cable and Wireless. New paging and other cordless technologies will also be open for competition.

Regulations governing competition in satellite transmission are more complex. The initial plan was to permit private companies to operate satellite networks as long as they were restricted to low-speed data transmission (15 kbps per channel--presumably too low to be used for voice telephony). Following the fall of the Berlin Wall, which took place less than four months after the 1989 telecommunications reform went into effect, creating a new situation completely unforseen by the planners of the reform, new exceptions to Telekom's voice and network monopolies were made. Given the dismal state of the telecommunications infrastructure connecting the two Germanies and within Eastern Germany itself, the government was at first forced to give waivers allowing private firms to set up and use their own satellite networks to send voice traffic between the two former parts of the country; later the waivers were extended to permit private companies to use satellite networks for voice traffic within the former East Germany itself.

What was initially imagined to be a relatively minor, "fringe" exception to Telekom's network monopoly has clearly already expanded. It remains to be seen whether these--presumably temporary--waivers will lead to more permanent arrangements for private network transmission. One of Germany's chief telecommunications analysts and theorists, C. C. von Weizsäcker, has proposed that private operators be given 25-year licenses to create and run local telephone networks based on cordless technology as a means of overcoming the extraordinary infrastructural deficits in the former East Germany.

It is precisely the challenge of bringing the telecommunications infrastructure in Eastern Germany to the same level as that in Western Germany rapidly enough to permit the economy in the East to begin to become competitive that has been responsible for the most recent and radical proposal for restructuring telecommunications in Germany: that Telekom be at least partially privatized. Throughout the debate in 1980s on the future of German telecommunications hardly anyone went so far as to imagine that privatization was even an option; even dividing the PTT into three state enterprises seemed controversial. But within the last year, and particularly within the last several months (since about July, 1992) talk of privatization has become more frequent and more serious: the Conservative/Liberal government has come out squarely in favor of some degree of privatization; some reports say a 25% share may be sold, others as much as 49%. Now there is even some sign that significant portions of the Social Democratic Party (SPD) may be willing to go along with partial privatization, under some conditions, although a commentary in Der Spiegel from November, 1992 makes it clear that many in the SPD still have trouble accepting the idea. The support of the SPD is essential, since the state nature of all the branches of the DBP, including Telekom, is anchored in the German constitution, which can only be changed by a two thirds majority in parliament.

Such a radical shift of opinion is not so much a matter of ideology (except perhaps for the Liberals, who have always favored free enterprise throughout the economy) as of practicality and the simple need for money: since unification in October, 1990 Germany has been confronted with an extraordinary challenge to rebuild the entire economy and infrastructure of the Eastern states after forty years of neglect under the Communists. In the two years since unification the magnitude of the task has seemed to become larger rather than smaller; Chancellor Kohl and his Conservative/Liberal government have had to admit that they seriously underestimated the size of the problem when they promised the citizens of the Eastern states that they could reach the same standard of living as citizens in the Western states within five to ten years.

Kohl's predicament is made worse by the fact that in his successful 1990 election campaign he promised that Eastern Germany could be rebuilt without raising taxes, and without forcing Western Germans to make any sacrifices--the kind of "no new taxes" pledge that can turn from an asset into a liability. The only ordinary alternative to taxes, raising money through state borrowing, has contributed to raising German interests rates to a level that has infuriated Germany's economic partners; debt and deficit spending also violate a deep-seated German ethic.

Germany is now investing 140 billion dollars a year to rebuild the Eastern states and believes it needs to invest some 32 billion dollars over six years in the Eastern German telecommunications infrastructure alone. With such a desperate need for cash and so few options to find it, the idea of selling a large portion of Telekom takes on an irresistible logic. In the decade since the Kohl government began to privatize some state properties, privatization has brought in only some 10.5 billion marks. A sale of a 49% share of Telekom might be expected to bring in between 28 and 40 billion marks. Germany would of course not be alone in such a move to privatize its state telecommunications entity. One study predicts that between 1991 and 1993 some 26 countries (representing 995 million lines) will privatize the telecommunications branch of their PTTs. Some 100 countries are expected to privatize their telecommunications by the year 2000.

Privatization of Telekom, especially the partial kind that is currently being considered, would not automatically mean liberalization of the telecommunications market in terms of creating more openings for competing companies. Even a partially privatized Telekom could in theory continue to exercise its monopoly over the terrestrial network and over most forms of voice telephony. But it might become increasingly difficult to justify Telekom's monopoly status once the nimbus of state ownership was dissipated and Telekom had become just one more stock company among others. Thus privatization at least potentially could in the long term lead to significantly greater liberalization of the market.

Most observers view the future of telecommunications liberalization in Germany as uncertain. Powerful interests remain balanced on both sides of the issue, and carefully articulated arguments are being advanced by both. Among the factors inhibiting a further opening of the German market to competition one of the most important is the continuing potency of the coalition of interests that has resisted liberalization from the beginning, or at least two of its three parts: government and labor. (The third, equipment manufacturers, have perhaps become more willing to accept competition in the domestic market if that is a necessary price for competing in the world market.)

Even elements of government ideologically in favor of competition may find it difficult to kill, or even weaken, what has been--and continues to be--an extraordinary cash cow. Not only has Telekom, or the telecommunications arm of the DBP before the 1989 reform, been able to contribute huge amounts to cross-subsidize the money-losing services of the Post Office (mail, parcel, and banking), thus saving the treasury from having to make up the losses (and avoiding the embarrassment of making the losses obvious), but it has contributed still larger amounts directly to the state treasury, as a kind of hidden taxation. In 1988, for example, the telecommunications sector of the DBP cross-subsidized the other DBP services with 2.26 billion marks. But that same year it also contributed another 5.25 billion marks directly to the federal treasury as part of the requirement that it must turn over 10% of all its revenues (i.e. gross receipts) to the government no matter what its expenses. Any assault on Telekom's profitability is thus an assault on the government's ability to pay its bills--a particularly sensitive point at a time when the government is strapped for money and yet reluctant to raise taxes. As part of the 1989 telecommunications reform Telekom was promised it would be freed from the requirement to pay 10% of revenues to the treasury, and would pay ordinary taxes instead. But with the unexpected financial burden of German unification, the government reneged on that promise, and instead insisted that Telekom make an additional contribution to the federal treasury of two billion marks per year for four years--not a good sign of the government's commitment to a liberalized marketplace, in which Telekom would have to take its chances along with other competitors.

The other interest group resisting liberalization is labor and its allies in the Social Democratic Party (SPD) and the Green Party. The union representing all postal workers, including those now part of Telekom, (DPG) has opposed liberalization from the beginning. In 1986, even before the Witte Commission had released its report, the DPG launched a major campaign against the liberalization it expected the commission would seek. Within the structure of the traditional monopoly the DPG has been extremely successful in bargaining for job security, benefits, and work rules. The "performance-related" element of salary, for example, is limited to at most 2%.

The SPD, the main opposition party since the current Conservative/Liberal government came to power in 1982, has generally opposed liberalization and, under pressure from the unions, voted against the 1989 reform. Some segments of the SPD and Greens announced during the 1990 election campaign that they would repeal the 1989 telecommunications legislation if they came to power. The Kohl government won the 1990 election, which took place just two months after German reunification in an atmosphere of general euphoria, in a landslide; but the economic situation in the East and the mood of the whole country have become so grim in the two years since then that polls show that if a nationwide election were held today the SPD and Greens would win and would form the new government. It is possible that the SPD might not want to go so far as to return to the pre-1989 structures, but it seems nearly certain that an SPD/Green government would not push especially vigorously for further telecommunications liberalization.

The arguments advanced by the SPD, beyond the threat to the jobs of the workers in the DPG, are much like those of U.S. regulators concerning telecommunications deregulation: that liberalization and cost-based pricing would favor the interests of large corporate customers, particularly users of long-distance, at the expense of small residential customers, who mainly use local service. As an example of exactly what the SPD fears, in the two years following the 1989 reform long-distance rates were dropped by 50% and local rates raised by 25%. In fact all German governments, not just those led by the SPD, have used the argument of the need to maintain universal service at uniform tariffs throughout the country as one of the chief justifications for keeping telecommunications a monopoly service; competition, they have argued, would permit companies to skim off profitable business and urban customers while leaving the PTT insufficient resources to provide equally good service to unprofitable sectors. Today that argument is made within the context of the huge infrastructural demands of the Eastern states (where many investments in providing service to small towns may scarcely ever be profitable) and of the desire to install a new digital and fiber optic infrastructure throughout the country.

The issue facing a potential SPD government in 1994, when the next national election will probably be held, is whether there are not other ways of assuring good service to less profitable sectors than by stifling competition: Pfeiffer argues that direct subsidies would be a more efficient way of achieving the goal of uniform service; another study suggests setting up a "universal service fund" to subsidize small, residential, and rural customers. Even though the SPD's political base is among small, residential users and though it perceives the large corporate interests favoring liberalization to be the base of its political opponents, it is at least possible that many Social Democrats will recognize the potential damage that could be done to the German economy as a whole--and thus in the long run to all citizens--through the loss of international competitiveness that would result if they should try to return to pre-1989 conditions.

Among the factors favoring further liberalization of the telecommunications market in Germany, the most important have to do with the rapid increase of the importance of new services and technologies that are not part of the traditional state telecommunications monopoly and that are thus particularly open to competition. Even the 1989 reform attempted to insure that Telekom would retain its monopoly over the services that mattered most (and that generated the most revenue): voice telephony (except for cellular and other radio-based technologies), and the terrestrial transmission network. Competition was permitted and encouraged at the "fringes": cellular and satellite networks, and data (especially VAS) services. At the time, voice telephony (POTS = Plain Old Telephone Service) accounted for 90% of revenues, data transmission for only 10%.

But more quickly than government planners anticipated, the "fringes" may grow and begin to supplant the "middle." If value added data services do indeed grow at 30% or more per year as opposed to 8% for POTS, it would not take long to reduce the relevance of Telekom's (general) monopoly on voice. In the same way, if cellular services grow rapidly and particularly if radio-based services are encouraged in the East as a quick means of increasing transmission capacity, the terrestrial network may cease to be so central as it was in 1989. The immediate need for vastly more circuits to and within the East has already caused the government to permit certain private firms to carry voice traffic on their satellite links. It is of course possible that in time, when the crisis in Eastern Germany's economy subsides and its infrastructure is improved, all of these "waivers" will be withdrawn, and Telekom's monopolies will be restored to full force. But it may be politically difficult to take away freedoms to which people have become accustomed; after a company has invested large sums in designing and setting up its own voice/data network within Eastern Germany it would likely be reluctant to return to placing all voice calls through the public network--and it might be inclined to lobby for extending its network to branches in Western Germany as well.

New telecommunications technology itself seems to favor the likelihood of further liberalization. For example, the 1989 reform limited private satellite transmission to 15 kbps per channel in order to preclude voice transmission, which was assumed to require higher speeds. But technology changes quickly: a California company has demonstrated that it can provide high quality voice and Group III fax at 8 kbps per channel. German authorities will need to decide whether they want to respond by restricting data speeds still further, when even the current restrictions on speed surely lead many customers to object considering what is technically possible and widely available elsewhere, or whether they should relax the restrictions on speed and on voice transmission altogether.

New digital technologies such as SONET (Synchronous Optical Network, called SDH--Synchronous Digital Hierarchy--in its European implementation) and Asynchronous Transfer Mode (ATM) switching will presumably pose an even more significant challenge to current regulations. Digital technologies of course make no distinctions between voice, data, video, or other traffic, and some of the newest technologies do not even establish separate channels for them. Given the potential economies and productivity enhancements made possible by such new technologies when designed into private networks (all of which will unquestionably be exploited fully in the U.S. and other countries), it would seem counterproductive for Germany to limit its users to just a fraction of a system's functionality, for example by insisting that voice be split off and carried on a separate (public) network. Such limitations would once again threaten the competitiveness of German industry--precisely what the telecommunications reform of 1989 was intended to avoid.

In all these cases the German government could respond to new technologies by restricting their use, thus protecting Telekom's monopolies. But given the international nature of nearly all industries and the dependence upon technology for competitiveness, most decision makers within the government will probably recognize the long-term negative effect of such a policy on the economy as a whole.

Since July, 1989 the German telecommunications market, a nearly complete monopoly of the state PTT for over 100 years, has begun a process of liberalization that opens it to some degree of free market competition, creating significant opportunities for both domestic and foreign companies. The opening to competition is well advanced in some areas, such as in sales of customer premises equipment and in provision of value added services for data, but still very tentative in other areas: voice telephony and network transmission services so far remain monopolies of Telekom, the state owned telecommunications enterprise, except for the "fringe" areas of cellular and certain kinds of satellite transmission. Under the current circumstances most companies, like MCI International, see their best opportunities in the data communications market, value-added services and consulting. AT&T is also concentrating on data networks, but is already anticipating the day when all of continental Europe will liberalize its telecommunications market still further, making it possible to add voice.

How soon that day will come in Germany is a matter of heated debate. Entrenched social and political forces continue to resist further liberalization of the telecommunications market and might even attempt to roll back some of the changes made thus far. But strong economic interests speak in favor of further liberalization in order to keep Germany's economy competitive in the world marketplace. Technological developments may also spur the move toward more liberalization, as they make the "fringe" areas of telecommunications that are already open to competition more and more important and make it less sensible or feasible to separate voice and data transmission. Within the last year, parallel to the debate on liberalization, there has also been a debate on the possible partial privatization of Telekom--a move that would ultimately almost certainly lead to still further opening of all segments of the market, including terrestrial network transmission and ordinary voice telephony.

Forces inhibiting and forces encouraging liberalization are still too evenly balanced to predict the course of developments in the German telecommunications market with precision, but all in all it seems likely that the interests favoring greater competition will prevail. In the image of The Economist, "now that Germany's deregulation ball has started rolling, it is unlikely to stop."