NEWS April 4, 1995 CHAIRMAN HUNDT DISCUSSES NEW PARADIGM FOR THE DIGITAL AGE AT WERTHEIM-SCHRODER/VARIETY CONFERENCE In a speech delivered today to the Wertheim-Schroder/Variety Conference in New York, FCC Chairman Reed E. Hundt discussed the need for a "new paradigm" for communications in the digital age. In response to those who say there is no reason for any government involvement within the communications sector, Chairman Hundt said "we need some agency of the public interest to deal not only with the congressionally delegated issues that we know about today, but with tomorrow's issues as well." Such issues include ensuring that communications technology is available to all classrooms and the 40 million Americans with disabilities and ensuring that the workforce has the tools to cope with the massive restructuring, redeployment and retraining that is a necessary and inevitable counterpart to the information age. Chairman Hundt then discussed the tremendous possibilities of the digital age, including simultaneously sending traditional television broadcast signals, radio and data. He said that telecommunications markets of the future will be driven by competition. "Our key policy goal . . . should be to foster competition so that the price of communications as opposed to the thing communicated, is driven . . . as close to zero as economically possible." Chairman Hundt said the recent PCS auctions were examples of this a new paradigm for communications policy. "We guaranteed that . . . the products and services of this industry will be like any other consumer product: consumers will get choice; innovation will be driven by competition; some companies will succeed, others may not; buildout will be driven by demand, not regulators; and government won't pick winners, the market will." "As we enter the digital age, its time to make several clear key commitments on which the private and public sectors can rely." These are: (1) elimination of all barriers to entering anyone's business; (2) creation of incentives that encourage the private sector to build modern communication networks into every classroom and library in the country; (3) elimination of artificial spectrum shortages as quickly as possible; and (4) fostering competition in all communications markets by requiring interconnection of all competing systems, eliminating every bottleneck. - FCC - CHAIRMAN REED E. HUNDT WERTHEIM - SCHRODER/VARIETY CONFERENCE APRIL 4, 1995 INTRODUCTION Thank you for that kind introduction. This is the second time I've had the honor of speaking to this conference. This time last year I had only been at the Commission, cast in the role of what one rag called "top cop on the info highway," for about five months. The major action we had taken at the time was recalibrating cable rates. Maybe some of you remember that event. I know I do. When I arrived here at the conference, where Gerry Levin had just finished speaking, a friend stopped me at the door and said, "They're pretty hostile in there. You might want to open with a joke." Oh yeah, I thought, tell jokes to a lot of guys who went long on cable stocks just before I got confirmed. I'm sure they'll be rolling in the aisles. Actually this time last year once or twice my sense of humor almost deserted me. Those who know my sense of humor perhaps will regret that I didn't lose it entirely. But even as I listened to what might be called the constructive commentary from Wall Street and cable executives this time last year, I took comfort from history. After all, Newton Minow, one of the three other living Democratic chairmen of the FCC, also riled up his business audience in his first act as chairman. That act was to go to NAB in his first speech after confirmation and tell the most powerful media magnates in the country: "Sit down in front of your television when your station goes on the air . . . and keep your eyes glued to that set until the station signs off. I can assure you that you will observe a vast wasteland." He then went on to say that unless broadcasters improved the quality of their programming, his FCC would not renew their licenses. In other words, he would put them out of business. Broadcasting & Cable magazine later called it "Black Tuesday." Compared to that, I was just kidding around last year. After the speech a broadcaster came up to Minow and said, "That was the worst speech I ever heard in my whole life!" The NAB president turned to Minow and said,"Don't let that guy upset you, Newt. That man has no mind of his own. He just repeats everything he hears." Let me tell you some of the things repeated to me in the last year. First, I've been told by everyone all over the globe that the FCC's cable rate order broke up the Bell Atlantic-TCI merger. On this subject I feel like Jimmy Stewart in the movie `The Man Who Shot Liberty Valance'. If it helps the story line for the FCC to take the responsibility, I don't mind. But the fact is that no merger agreement was ever presented to any of the many local, state and federal, government agencies whose approval was required. My own view is that it would have been very, very difficult to persuade decisionmakers to bless a combination of monopoly providers of telephone and cable service to 40% of the country. By contrast, the prospect of cable vs. telco competition is very attractive for the economy and the country. And these are just two of the lanes of the information highway that ought to compete. The others that should be in the game are wireless, satellite and broadcast. In the digital age, which I'm here to talk about, all can compete with each other and at the FCC, that's what we want to see. It is also what I hope Congress will make possible in its long-awaited rewrite of the 1934 Communications Act. In connection with that rewrite, a second thing I have been hearing lately is that the Republican Revolution means we have to rethink the role of government. As Jefferson was for frequent revolution, I am for frequent rethinking about the role of government. Let's begin by the way we make policy. Policy people are a special kind of elite in Washington. Washington elites, in my limited experience, are like Washington restaurants: on balance, you'd be better off in New York. Perhaps this is because, as Boswell quotes Dr. Johnson saying, "There are few things a man can do that are so innocent as making money." By contrast, Washington, living as it does off other people's money, is a much less innocent and much more dangerous burg. How could it not be with 100,000 lawyers and lobbyists and affiliated employees located within the Beltway. I'd like to take special issue today with at least two subspecies of the Beltway's policy elites. The first is the naysaying laissez-faire absolutists who would deny the need for all public action other than full scale wars against clearly defeatable adversaries. This group has lately cast their gimlet gaze on a tiny, beleaguered agent of the public interest, the Federal Communications Commission. The weary band that I temporarily lead is now in the 61st year. Yet in its golden age, instead of expressions of respect and helpful suggestions for solutions to compelling issues of public policy, the agency hears the raucous cries of the laissez-faire crowd: retire the place. Now I'm not a career civil servant. To be honest, I've got too much zeal for the pursuit of private interest to make a full-time, lifelong career out of public policy. But I give great credit to those who make that commitment at the FCC or elsewhere. In fact, it does seem to me that Abraham Lincoln, perhaps the most noble of Americans long ago explained the reason we need government: "the legitimate object of government is to do for the people what needs to be done but which they cannot, by individual effort, do at all, or do so well, for themselves." Today, in the communications sector, we need some agency of the public interest to deal not only the congressionally delegated issues that we know about today, but with tomorrow's issues as well. For example: -- Communications technology has to be made available to every teacher and every student in every classroom in this country. Is there anyone here who thinks that teachers should NOT have the same communications technology at their fingertips as is available to every lawyer, every banker, and every shipping clerk at Wal-Marts? -- Our workforce needs the tools to cope with the massive restructuring, redeployment and retraining that is a necessary and inevitable counterpart to the information age. Is there anyone here who thinks our country and economy will be better off if nothing at all is done to foster adult retraining? Why shouldn't we couple tried-and-true techniques like tax credits and other incentives with new communications technology in order to change for ever and for better the ways adults thrown out of work can get back up and ride the Third Wave, rather than being left adrift in its wake? -- Forty million Americans suffer from physical and mental disabilities. Communications technology can truly work wonders in making life and work productive and fulfilling for these Americans. Is there anyone who thinks that we should do nothing at all to create access to communications technology to Americans with disabilities? On all these subjects, the FCC, in conjunction with the states, should be, in my judgment, given the congressional authority to develop solutions. The Communications Act of 1995 should give the FCC that authority. Parenthetically, and additionally, here's another recommendation for amending the Communications Act. The FCC should not be located in Washington, D.C., as the old law requires. Instead the Chairman should be able to move the Commission wherever he wants. And there should be a proviso that states that the Chairman doesn't have to tell the lobbyists and lawyers where he's gone. Perhaps we should move it into cyberspace. But wherever the FCC is located, the important point is that we need some entity to fulfill the public interest in bringing communications technology into the classroom, into the lives of those adults for whom the Third Wave means a threat of drowning, and into the real or virtual hands of the disabled. Now let me turn to the much-maligned media's role in our policy debates. The other day I heard a talk show critic -- someone whose very existence is a function of the communications revolution -- say that she had not heard a new idea in a long, long time. I think Ross Perot had it right when he said new and old ideas are lying around on the street in Washington. The trick is to pick the right ones, open the hood, and just fix the engine. Let me tell you about something that is a new idea and a good one. So far, we have earned $9 billion for the sale of spectrum rights that previously were given away for nothing to applicants with the best lawyers and lobbyists. More important than the money raised is the money that will be invested rapidly because of market forces the auction technique generates. We expect more than $20 billion to be invested in the immediate pursuit of returns on the auctioned licenses. The result: more than 300,000 new jobs in the mobile communications business, and another 700,000 new jobs stimulated over the next 5-8 years as an indirect effect of this job creation. Our most recent auction was the largest sale of property ever. The investment boom that it will jumpstart is the single largest one-time investment in a new technology in history. This investment correlates to the single biggest job-creating industry in the country: mobile communications. Moreover, by using auctions, we have taken licensing processes that use to take three years, and compressed them into three months. In technology-driven industries such as communications, three years is an eternity. Just imagine if this country had such delays in the computer industry. Instead of advanced Pentium PoweredPC's, 486 workstations would just be achieving wide circulation. It was enormously gratifying to present from the latest auction the symbolic check for $7.7 billion to the President last week. However, I did think, My goodness, Reed, that's a lot of money to let slip through your fingers with nothing left behind. You can't imagine that happening to an investment banker. So far spectrum auctions have raised three times the FCC's total budget for the last 61 years. In reward the House Appropriations Subcommittee chairman told me our budget would be cut. Hey, as the soon-to-be-shot Gene Hackman said in the movie `The Unforgiven', "I don't deserve to die." And the soon-to-be-shooting Clint Eastwood responded, "It ain't about deserving." In any event, the lessons of the PCS auction create the new paradigm for communications in the digital age. The possibilities of the digital age changes everything in communications. It is crucial to understand this change to set the right relationship between the digital age and communications law. This is a two-part topic. The first part is to discuss the digital age. That should take me about two minutes. Then I'll close with discussing why I think regulation, or deregulation if you prefer, will and should change entirely as we enter the digital era of communications. If the movie `The Graduate' were filmed today, the advice Dustin Hoffman would get about the future would not be the one word "plastic". It would be "digital." Digital is the morse code of the 21st century. It is a way to send information, pictures, sound, and data, by converting it to 1's and 0's. It is more than that, but as far as the technology goes I don't know a thing about it. As a lawyer I'm prepared to talk about it anyway. With digital transmission, the sound, picture, data is broken down into a string of "bits". These bits are packaged for transmission into packets. When the experts attempt to educate me on this subject they say, think of a freight train. My wife is a psychologist. She tells me dreams of trains have nothing at all to do with technology. Nevertheless, just to go along with the experts, let's assume that a digital signal is like a train going over the air or down a pipe. (Bill Gates calls it a pipe; so I'm going to do the same thing. Anyone here who calls it a wire is an analog kind of a guy, also known by the technical terms "has been" or "history".) Now the digital freight train delivers lots of cars in a hurry. Sounds like a train wreck to me, but to the experts it means that to handle the input you need a computer, which they agree to continue to call a television or a cable converter box just to humor us. In any event, the computer unloads the digital cars in a split second. And what is delivered is anything that can be loaded in the cars: voice, video, data coded in 1's and 0's. Voice, video, and data is also known to pre-digital, analog, "Old fogeys" as Radio, TV, and The Wall Street Journal. The definition of data does not necessarily include the Journal's editorial page. Now let's talk about the digital world's versions of train tracks. Suppose the FCC gives you six megaherz of spectrum, which is the same thing as the sweep from 88.5 FM to 94.5 FM on your radio dial, as in the case of broadcasters' proposal that they get for free digital spectrum to convert to the digital world. That's a pathway for digital transmission. The digital over the air signal being proposed to the FCC by the Grand Alliance will deliver almost 20 megabits per second. Mega means million. That is a lot of one's and zeros, or freight cars. Or you could buy the spectrum at an auction like the PCS providers. Or you could build the spectrum by installing fiber-coax pipe as is being done by John Malone and his cable colleagues or the telcos. With this spectrum, once it is fixed up for digital transmission and once the audience has digital receiver, then you're open for business. And down six MHz of invisible aerial pipe known as spectrum, the Mbps freight train can deliver the following simultaneously: 1. A Live sports event; 2. A kids television show; 3. This conference; 4. 10 radio shows; 5. A movie; and 6. The Dow Jones tape into the handheld pager in the vest pocket of your 3-piece pinstriped suit. You will watch or read or listen to all this on a lightweight portable handheld read/watch/listening computer/television/radio thing. Or perhaps you'll just buy a black box from John Malone and attach it to all your other things. One way or the other you'll receive the digital stream. The sales of digital content and digital receivers are going to be tremendous. But I have no idea what will be sold or when, and neither does anyone else. That's why this is going to be a gold mine for many, but some will do better than others. And that's why you'll do better listening closely to Dr. Malone than to me on this subject. He really might know the future. He certainly knows the technology. All I know is the past, and a little about the political necessities that will interact with all these developments. However, Bob Wright, in a terrific speech on March 10 at the New Media Conference, gave us a peek of how NBC is considering exploiting the digital age. In that speech, Bob talked about reconceptualizing NBC's market as "video-in-the home" instead of "broadcasting." In clear, insightful language, he summarized the significance of the change from analog to digital. If the medium really was the message, then now it is a vast cornucopia of messages. And we can at last kill the metaphors that confuse conduit with context. "Metaphors such as "cable" and "broadcast" are going to be gone long before the "information highway". And with the conduit metaphors out of the way, we can focus on what the product really is, instead of how it's delivered. Because as Bob Wright clearly sees in the digital age many conduits can carry the freight train of digital content. Cable, wireless cable, VDT, DBS, PCS - all are going digital. Competition in conveyance is not here yet -- and will not be ubiquitous for years -- but it can come to be if we stick with a pro-competition policy. In an article in Fortune magazine earlier this year, Bill Gates said his original insight for Microsoft was this question: "What if computing was free?" His answer was that individuals could use computers a tool. Bill Gates' then gave his insight for the next ten years: "What if digital communications was free?" His answer, equally insightful, "is that the way we learn, buy socialize, do business, and entertain ourselves will be very different." Our key policy goal, I think, should be to foster competition so that the price of communications, as opposed to the thing communicated, is driven by that competition as close to zero as economically possible. So now I can return to our good and new idea. The PCS auctions give us the right policy paradigms for the digital future. We designed the PCS auctions based on several key principles. We did not tell the buyers what to communicate. The content, whether it is private conversation, or something else, is up to them. We let them pick the technology of transmission. They are all going to use digital technologies. We sold redundant, competitive licenses. We refused to create artificially spectrum scarcity. In short, we guaranteed that with respect to wireless communications the products and services of this industry will be like any other consumer product: consumers will get choice; innovation will be driven by competition; some companies will succeed, others may not; buildout will be driven by demand not by regulators; and government won't pick winners, the market will. Our auctions are the new paradigm for spectrum management. Instead of saying why auctions, we should always say why not auctions. For example, we are committed to introducing competition to the cable pipe (remember Gates) by letting MMDS services become commercially viable. To do this we have to let MMDS license holders go digital. And we have to create a market where efficient aggregations of spectrum are possible. To this end we hope to hold the first MMDS auction this fall. This can only occur after we clean up the Augean stable of filings at the FCC: a mess of more than 10,000 backlogged lawsuits and applications clogging the MMDS pipeline. Our activities have already greatly helped this industry go from a market cap of about 40 million dollars in 1991 to over a billion dollars today. It can leap up again, we believe, if we get that auction underway. Of course down in Washington everyone's muttering about the possibility of auctions for digital broadcast spectrum. That's in the hands of Congress, of course. The FCC doesn't have the legal power to auction spectrum that will be used primarily for nonsubscription services. However, we are extremely interested to see broadcasting move to new spectrum for delivering the digital freight train, provided that the new technology works. I understand the final tests for digital over the air transmission will be finished by August. All expectations are that the Grand Alliance has invented wonderfully flexible, efficient transmissions technology. Digital over the air transmission is going to work to deliver the cornucopia of services, including eye-popping HDTV. My view is that on the consumer side the conversion will be driven in large part by competition among cable, DBS, MMDS, and VDT. Provided that everyone's digital standards are compatible and interconnectable, the digital conversion, I believe, will occur much, much faster than broadcasters now realize. At the FCC we are also especially focussed on retrieving the old vacated spectrum now used for analog transmission. After a reasonable time for the bulk of the country's households to convert to digital reception, we should be able to retrieve the spectrum now used for analog broadcast spectrum. Some consider it to be the most valuable spectrum in the air. When people talk about auctioning broadcast spectrum, I imagine an auction of the vacated analog spectrum for advances we can barely imagine, such as mobile computer uses that I hope Silicon Valley will design as soon as possible. The auction I'm talking about -- perhaps to be called the mobile video auction -- may be to the PCS auction what the Louisiana Purchase was to the Gadsden Purchase. I actually don't remember what was bought in the Gadsden Purchase, but the point is the Louisiana Purchase was a lot bigger. What can go wrong in this digital future? A lot. A technology can fail, but some other technology will succeed. It's conceivable that Congress will again fail to rewrite the Communication Act. But even if that happens we will find other ways to introduce competition in the digital era. So as we enter the digital age, it's time to make several clear key commitments on which the private and public sectors can rely. First, we need to eliminate all barriers to entering anyone's business. I hope the Senate and House bills will lay out a clear blueprint to open markets. Second, at the FCC we'd like the mandate and authority to create incentives that encourage the private sector to build modern communication networks into every classroom and library in the country. Third, as the PCS auctions have taught us, we need to eliminate artificial spectrum shortages as quickly as possible. Fourth, the FCC should be able to foster competition in all communications markets by requiring interconnection of all competing system. Our goal should be to bypass and eliminate every bottleneck -- whether at the IXC - LEC POP or the TV interface. For example, many believe the entrance of the cable system into telephony is on the verge of happening in a big way. The Cable and Sprint consortium is already the largest wireless company in the world in terms of potential subscribers with more than 200 million pops. Merrill Lynch and others report that the cable industry has tremendous cost advantages and may be the key raider of the local loop. But for the emerging new communications entrants, interconnection to existing networks will be critical. Congress should give the FCC the power to force interconnection at fair but low rates. Finally, the FCC should have the power to assure that well-intentioned but misguided local and state regulation do not create barriers to entry and impediments to competition. Does anyone in retrospect think that the best way to develop the national cable system or the national cellular system was to begin by dividing the country into hundreds and even thousands of separate markets? That frustrated necessary regional consolidation for decades. Dealmakers benefitted but the economy was worse off. We can't let local and state regulation of new voice and video deliverers like MMDS or PCS deter the deployment of those competitors. This is why the FCC needs reasonable preemption powers. When I was here a year ago, people were saying the information highway is crippled, killed, disabled, etc. None of that appears to be so. Instead we are on the verge of digitizing all our communications needs and that is the key to the whole communication revolution. But nevertheless for the last year I've constantly been asked, when is the information highway arriving? The question reminds me of the story of the man who bragged that he had a talking horse. The king called him to court and said, where's this talking horse? Show me or you die. The man said, give me a year, king, and I'll bring him to you. I don't see why I should wait, but alright, said the King. The man returned home. His best friend said, why did you ask for a year? You know you don't have a talking horse. Well, said the man, in a year a lot of things could happen. After all, the King could die. I could die. Or the horse could talk. Let me tell you that in the year since I last spoke to you I'm able to report that the horse is about to talk and it's in digital code. And by next year maybe I'll think of some jokes. Thank you.