A Dynamic Macroeconomic Model for the Us Telecommunications

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A Dynamic Macroeconomic Model for the US Telecommunications Industry1 Elias Aravantinos, Stevens Institute of Technology, Wesley J. Howe School of Management, Hoboken, NJ, USA2 Dr. Fotios Harmantzis, Stevens Institute of Technology, Wesley J. Howe School of Management, Hoboken, NJ, USA ABSTRACT Dynamic models have been used in most businesses serving different purposes. The increased changes of the Telecommunications environment have created a dynamic industry emerging new dynamic economic models. We investigated the Telecom industry by conducting macroeconomic and infrastructure analysis. However, this paper uses recent data from the Telecommunications industry to reveal the infrastructure trends and predict the US wireless growth. The analysis is focused on several factors such as the infrastructure described by the Teledensity, the employment and the Telecom revenues in comparison with the Gross Domestic Product (GDP). The purpose of this analysis is to understand the industry’s behavior during a specific period of time, 1984-2003, propose an appropriate economic dynamic model, wireless oriented that identifies the current driving forces and detects the impact of some critical events and trends. Keywords: Dynamic Economic Model, Macroeconomic Analysis, Telecom Act, Teledensity INTRODUCTION The US Telecommunications sector is going through several changes (Fransman 2002). The first and fundamental reason is the rapid technological change in the Telecommunications and computer-based services. The Telecommunication Act which follows is the most important event in Telecom that established a new era with changes and surprises for the Telecom incumbents. The 1996 Act, took about six years to pass without including the numerous follow-up rule-makings (Noam 2002). The intent of the 1996 Act was to promote competition and the public interest, on the fundamental assumption that competitive markets would emerge. Economides (Economides 2004) is pointing out the major driving forces in US Telecommunications today, such as dramatic and continuing reductions in the costs of transmission and switching, digitization, move of value from underlying services (transmission and switching) to interfaces and content and the existence of network effects. These effects are seen to be associated with a connection to a large network, which is more valuable for each customer considering the fact that small networks if unable to reach critical mass are unlikely to survive. The ‘bubble’ that the industry experienced in 2001 was a shock, driving the companies to over-invest, expecting a potential high growth according to the markets analysts predictions. The result was less demand than predicted and high debt for the companies, hard to handle. The following overview of the Telecom industry as follows is showing a snapshot of the ‘bubble’s’ bursting impact. Since the beginning of the year 2000 (Atkinson 2001; and Noam 2003), the US industry alone has shed in excess of 130,000 jobs, lost over $1 trillion in stock market capitalization, and endured a continuous stream of bankruptcies. Losses have been much greater than for the savings and loan debacle of the late 1980s. And parts of the industry are mired in scandal. Worldwide, the Telecom industry has accumulated over $1 trillion in debt; investments have virtually come to a standstill; and stock values have declined by $4 trillion (Atkinson 2001). The total Industry’s spending rose during the period 1999-2001 of a rate of 24,85% due to the large investments. The Telecom Services Companies did not generate the revenues needed to pay for the equipment they had bought and were trapped in high debt and bankruptcy issues. Some company officers resorted to misleading and illegal practices to hide these disappointing results (Harmantzis, 2004). Total spending in the U.S. telecommunications industry rose 7.9 percent in 2004 to an estimated $784.5 billion – a 1 2

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