A crucial factor in the recent rise of offshore outsourcing has been the rapidly falling cost of international telecommunications transmission. Prices of international circuits are today less than one per cent of what they were just six years ago. Many white-collar jobs involving transactions in information have become potential candidates for migration to cheaper locations. Distance is said to be dead. I am not so sure.

Just as energy prices affect the industrial sector, there is a direct relationship between international telecoms prices and the information economy. A century and a half ago, factories were located near rivers, ports or natural resources, and company management was right there too, for control and supervision. With the advent of telegraph and telephone, it became possible to separate management from production activities geographically. Corporate white-collar jobs moved to city centres, near banks, shops and newspapers. The central business district was born.

Today, we are at a similar stage of economic re-organisation, and again telecoms are a major driver. Now, production and many middle management activities can be moved still further from upper management. Business processes generate a huge amount of data. The cheaper the transmission of transaction-related data, the more effective a decentralised production and control become.

How do developments in telecoms enter into this? In the past few years, international telecoms have gone through much stronger ups and downs than even domestic communications. These disruptions now affect the global economy as a whole.

In the good old days, just a dozen years ago, international telecoms were dominated by a global cartel of national monopolists. This system went back to the 1850s and was the creation of European international telegraph organisations. One of its functions was to prevent price competition on international routes.

For a century and a half, the twin bottlenecks of limited technology and cartel organisation kept prices high. Before the Second World War, a scratchy 3-minute radio-telephone call from New York to London cost $900 in today’s money. After the 1960s the technology constraint vanished as satellites and trans-oceanic cables increased the number of circuits tremendously. But these links were still all run by international consortia of the major national telecoms monopolists, which enabled them to control supply. Prices were kept hugely over cost, and international telecoms was the cash cow used to subsidise domestic communications, as well as to provide many developing countries with hard currency.

About ten years ago, rival operators began to emerge, first in satellite communications with PanAmSat, then in transatlantic communications with Atlantic Crossing and its progeny. These companies operated outside the traditional club and challenged its high prices. Meanwhile, the traditional state monopolists were privatised and energised, and began to take each other on as well. As the collaborative system broke down, capacity soared and prices dropped like a rock. Soon, profits vanished, new entrants collapsed in droves, incumbents, their managements discredited, were awash with debt and unused circuits, and investment came to a standstill.

Much of this is based on the fundamental economics of the industry. Fiber created enormous economies of scale, which encouraged investments way ahead of demand. And competition created incentives to invest ahead of rivals to gain these economies of scale.

Many competitors followed these incentives. They then discovered - after the long period required for the near billion-dollar construction projects of laying cables for thousands of miles - that they had collectively created an enormous overcapacity. Unused or “dark” fiber accounts today for almost 90 per cent of the overall capacity, whereas in 1996 it was only 35 per cent. And that despite the huge increase in actual demand. In the past six years, utilised or “lit” US-to-UK capacity has grown one hundredfold from 23 to 2338 gigabits per second.

This overinvestment led to price declines of 50 to 70 per cent a year. Low-cost communications to low-wage countries encouraged the offshoring of many economic activities.

Where are things heading now? The conventional wisdom is that capacity overhang is so large, especially given our ability to squeeze ever more transmission out of existing submarine cables, that we have all that we need. Prices, it is assumed, will keep dropping as the bankrupt carriers re-emerge with their debt wiped clean.

Yet important changes are taking place that may well drag the system in the opposite direction, towards a shortage of capacity. If this seems inconceivable, consider the following. Worldwide, the connectivity to broadband internet has been growing by leaps and bounds. In South Korea, over 40 per cent of households have it. In the US, Canada, Japan and some European countries that figure is around 20 per cent. Growth rates in many countries are well above 50 per cent.

The whole point of such connectivity is to move more bits around more conveniently, to enable users to listen to music, play interactive games and watch video. Broadband internet is a voracious user of capacity. The video it enables uses millions more bits per user than text. Furthermore, real-time applications such as video, games and telephony require an extra cushion of capacity in order not to become jerky during peak load periods.

All this is part of a historic transition of human communications, from the skinny bandwidth of a phone line carrying a few kilobits per second to one of individualised broadband connectivity in the range of dozens of megabits and soon gigabits.

Three related transitions are taking place. First, narrowband internet users are moving to broadband. In America, 27 per cent have made the switch. In South Korea, more than half of users have. It is reasonable to assume that half of all internet users will be on broadband within five years. Second, the use of broadband internet for entertainment is increasing as suppliers serve the larger user pool with more options, from video greetings cards to multimedia shopping to Hollywood movies to sex sites. And the third transition is to significant amounts of “peer-to-peer” file-sharing traffic, much of it no doubt exchanging pirated Hollywood movies, but some of it resulting from new types of community creativity.

A typical narrowband internet user generates about 36 megabytes of bit traffic per month. A broadband user who regularly downloads movies and music, plays interactive games, shares files with peers and uses internet telephony will generate 230 times as much traffic, over 8,000 MB.

Let us assume that these traffic flows will increase proportionately for international traffic. Since 85 per cent of all international traffic is for internet and data, the rapid growth of broadband internet will raise capacity requirements enormously. If a switch by a narrowband user to broadband adds to his capacity consumption by a factor of 230, and if half of internet users do so within five years, then by the end of the decade international communications traffic will then be one hundred times higher than it is today. In 2003, internet traffic doubled over international backbone routes. This is merely a preview, since broadband’s real impact is just beginning to show. And on top of that, the added requirements of business communications due to offshoring and the worldwide growth of mobile communications will increase the traffic load.

Even if one scales down these assumptions, for example by reducing the share of international internet traffic among overall internet activities, the results are still enough to swallow up the present excess capacity of 90 per cent.

At the same time, no new capacity is being created outside the Indian Ocean region. It takes 3-4 years to plan and construct a new cable. In the go-go years, it was possible to do this in closer to two years, but those days are gone. Today, investors and banks wouldn’t touch trans-oceanic ventures with a ten-foot pole. Any telecoms company contemplating major infrastructure investments outside of the oversupplied wireless sector would be punished by Wall Street and the City. And existing cable owners will resist through the regulatory process any new capacity that would lower prices.

Thus, a capacity shortage may well be looming ahead. Providers will deal with it in several ways, many of them with negative consequences. First, they will increase prices. Second, they will redesign their systems to keep traffic local rather than utilising international routes. This will make the broadband Web less worldwide than before. Third, they will put a lid on the use of video materials. This will create gatekeeping power and reduce the openness of the medium. Fourth, they will try to tweak the existing cables with more advanced electronics and photonics.

The most logical response would be to build new submarine cables. Will new investments take care of the problem? Yes, but with a twist. No sensible bank, junk-bond investor or board of directors will commit funds to yet another boom-bust cycle of over-investment and price-crash. Therefore, the most likely scenario is a recreation, in some form, of the traditional consortium system. Jointly, the leading telecoms providers will keep supply matched to demand trends, and keep prices at a modestly profitable level, just low enough to deter new entrants. Competitors may enter in theory, but first they must gain billion-dollar financing and run regulatory gauntlets. Thus we may witness again the emergence of a kind of Opec of international telecommunications. Less competitive? Yes. But also less volatile and risky. And slower-moving, as multi-partner ventures between complex companies with multiple goals and strategies always are.

This will mean a step backwards from the golden but brief period of free-wheeling international competition. And it also means that companies whose offshore outsourcing activities are predicated on continuously declining costs of communications may find themselves disappointed. Distance might be ill, but it is not quite dead yet.

The writer is professor of finance and economics atColumbia University and director of its Columbia Institute for Tele-Information