Privatization and liberalization have dramatically reshaped the global telecommunications industry over the past two decades. Former monopolies have lost large chunks of market share in data services and in long-distance and international telephone calls. Prices in many segments have plummeted.¹ But in one key area, the results of liberalization have been less impressive: in most markets, the last-mile connections between customers and the rest of the network have remained under the incumbents’ control.

Now, though, the access bottleneck is being removed by new technologies and alternative platforms, such as cable and wireless, as well as VoIP (Voice over Internet Protocol), in which voice is just another kind of data transmitted via the Internet. These developments, combined with the continued application of existing regulatory models, are exerting pressure on the incumbents’ fixed-line revenues, which still tend to account for 60 to 80 percent of their total revenues and for most of their profits. Over the next five years, incumbents in Eastern Europe, for example, could lose up to 40 percent of the revenues they earn from the retail fixed-line business as customers switch to mobile telephones. (In Hong Kong, shifts of this magnitude have already occurred.) In the United States...