"Convergence or Collision: Telecommunications Regulation and the Internet"
March 7, 1997
(As prepared for delivery)
President Kennedy won the applause of millions when he went to Germany and said in front of that Wall which has now tumbled down: Ich bin ein Berliner.
What can I say to win the approval of the economists who organized the conference today? Ich bin ein economist won't work. The truth I am a lawyer; in fact it's worse than that, I'm a son of a lawyer. I am not, regrettably, an economist.
I can say that I hired two Berkeley economists as Chief Economist at the FCC, and that under our first and brilliant occupant of that seat in my tenure Mike Katz and under the leadership of his equally able and equally energetic successor Joe Farrell we have tripled the number of economists at the agency.
I can say that my motto on day one, memorialized on T-shirts at our first retreat, was "Read the law, study the economics, and do the right thing." I hope the economists forgive that part about the law.
I can say that I have a pitbull, I've named it Long Run Incremental Cost, and I've let little LRIC chew on all the other historic dogs in the neighborhood.
This would be true if I had a dog, but those of you who are economists can assume a dog.
I've had my current job for 3 and one half funfilled and exciting years. In my term the Internet has exploded into consciousness; the hardware and software business in the US has more or less tripled in market cap; the country has decided that every child should have public access to communications technology; millions of new information-sector jobs have been created in the U.S., and the entire world has agreed in the World Trade Organization to reject the old way of monopoly in the communications sector and adopt the American paradigm of competition to build the global information highway.
I could take credit for all that. In my memoirs I shall.
But for now let me say that economists deserve all the credit. Earlier this week I told the cellular telephone association, Wired Magazine, and the Association for Computing Machinery each that they deserved all the credit.
This is called speaker's license.
Speaking of license, I read in the Wall St. Journal yesterday (as Mort Sahl said, I get it every day, packed in ice) that economists have given the Administration a B minus grade.
Who knows what they would say if we hadn't had steady economic growth, huge wealth creation in the stock market, and historic progress toward a balanced budget. These successes are attributable in large part to sound economic advice in the halls of government. Brilliant economists like Joe Farrell, Joe Stiglitz, Janet Yellen, and Larry Summers play key policy roles. Others like Laura Tyson, Alan Blinder, Carl Shapiro and Rich Gilbert shaped the essential decisions of the first term of President Clinton's administration.
It was economists and their way of approaching issues that lay behind the highly difficult and politically courageous decisions like supporting NAFTA, twice defeating the Balanced Budget Amendment, striking the ITA and Basic Telcom agreements in the WTO, passing OBRA in 93, and, at the FCC, totally overhauling spectrum policy and opening up the local exchange market to bypass or sharing by rivals.
Economists chronically fail to answer such pressing questions as how best to improve economic growth or reduce wage disparity or predict the future. But these are very forgivable failings and are in no way fatal to the utility of the discipline.
In my job I find that economists help us more than any other experts to define policy goals in measurable ways, identify illogical reasoning, focus on the greater good and not on the greater political power, and routinely suggest new perspectives and fresh ideas.
To use my time wisely today, therefore, I have brought you some of the questions before us.
First, what ought to be the purpose of our FCC policies?
To make this exercise fit within the academy's protocols, I'm also going to give you a range of answers. If you'll just mark down the correct choices on a scrap of paper Mike Katz and Joe Farrell will collect them later, throw them away, and tell me what they know we should do.
What is our purpose?
Second, what steps should we take to assure that the existing telcom incumbents' networks are susceptible to being bypassed or shared by new entrants, yet at the same time are not underfunded or under-innovated as a result of procompetition rules at the federal or state level?
Third, what if anything should we say or do about the Internet?
Many of the local phone companies have been urging us to allow them to assess per-minute access charges on Internet service providers. They claim that Internet usage is clogging their networks.
The first task for the FCC should be fixing the access charge system. With respect to the access charge system, the current emerging view seems to be that we should take a big first step to reduce terminating charges and a somewhat smaller first step to reduce originating charges, commit to a predictable path over a few years to reduce each toward TSLRIC levels, flatrate some but not necessarily all the shortfall for the LECs by way of a charge to IXCs, tilt that charge somewhat toward the business lines and away from residential, and increase flat rate charges on end users as to multiple lines.
And we need to take steps to guarantee resulting decreases in the prices for long distance offered to those Americans who have not otherwise benefitted from the price drops contained in various volume-based discount plans. Even low-volume users, and users too preoccupied or poorly informed to seek out a discount plan, have demand elasticity, so even from a pure efficiency point of view it's bad that they pay such high per-minute prices.
If the Commission takes these steps, it will earn a very glorious place in telcom history, since it is something like what I've outlined that economists have been urging on us for many, many years. If we don't, based on what you've told me for several years now, we will deserve your criticism and contumely for some time to come.
But about Internet access charges I don't think we have the data or the good practical ideas that beckon us toward clear decisions on access reform generally.
For instance, we have surprisingly little information about some critical empirical questions. Exactly what are the costs of network upgrades to support the growth of Internet services? How would different pricing regimes -- for example, charging some usage-sensitive rate to ISPs -- affect Internet usage patterns? How much overall revenue do local exchange carriers derive from Internet usage, when you factor in things like second line growth?
As a former litigator, I find this perpetually frustrating. In litigation, if you need a piece of information, you subpoena it, or depose under oath the person best able to supply it, or find a consultant who's collected it and pay for the multithousand dollar report. At the FCC, it seems we're always being told "that's confidential information; we can't tell you", or different parties tell us completely contradictory things -- not under oath, I notice. It's so bad that in our recent wireless competition report, mandated by Congress, we had to admit that we have only anecdotal and second-hand evidence that prices fall when new entrants come into the market! This is pretty sad stuff; the academy could help us enormously if it chose to do so.
In any event, we are being told just now that the Internet and other new interactive services are sorely constrained by the capillary telephone network we have today. This could be true-ish, but already Nortel, Lucent, DSC, and other equipment manufacturers have announced products to redirect Internet service provider traffic away from circuit switches and onto packet-based data networks.
At our bandwidth forum in late January, Hughes demonstrated their DirectPC service that provides 400 kilobits per second Internet access to the home, and we also saw a wireless MMDS service that provided 1.5 megabits per second.
Meanwhile, AT&T just announced their own digital wireless local loop technology, which they say will provide up to 128 kilobit per second connections. Microsoft rocked the CTIA convention this week by suggesting that wireless companies are not doing enough to promote internet access; our policies can at least open the door for a response. Specifically, we can do more to facilitate cell siting, guarantee flexible spectrum use, reduce interconnection charges, and attract investment.
And MFS is buying unbundled loops from local phone companies, connecting those loops to their own equipment, and providing data rates as high as 764 kilobits per second. Future xDSL implementations promise as much as six megabits per second over ordinary copper phone lines, over 200 times as fast as the current generation of analog modems. xDSL may be the gateway to the construction of a ubiquitous, nationwide, unswitched, packet-based service. If not that technology, some other may be the solution to congestion in the circuit-switched network. I just don't think the FCC knows enough at this time to alter the current ESP exemption.
But I do think we know one important thing: our best bet for promoting Internet solutions will be our overall competition policy.
The Telecommunications Act of 1996 should really be called the Big Bandwidth Act, because that's what it will mean if we do our job right.
To have big bandwidth networks, we will need to see the kind of competition that characterizes, for example, the pizza delivery business. Like pizza, bandwidth will be delivered piping hot to your door, in small, medium, or large size. You'll be able to get any anything you want on it -- voice, video, or data, in any combination.
No one thinks that pizzas are best delivered by a single monopoly, subject to the control of the Federal Pizza Commission. No one should think that personalized home or business bandwidth needs are best served by the old regime of regulated monopoly.
So let's have the FCC and the states aggressively enforce the three rights of competition: resale, interconnection, and unbundling.
Meanwhile, let's have the FCC and the states aggressively deregulate certain service. For instance, ISDN has been available for more than a decade, and it provides eight times the bandwidth of current analog modems. Yet there are still less than a million ISDN lines installed in the entire country. Meanwhile, state commissions are regulating the price of ISDN; could this situation resemble state regulation of cellular, which appears to have reduced competition in cellular pricing? This could be studied; test cases abound. According to the Consumer Project on Technology, 200 hours of ISDN usage costs $45 per month in Wisconsin and $505 per month in Indiana. Here in California, the same level of usage costs about $95 per month.
Perhaps there is a right regulated price; or perhaps states should simply get out of the business of regulating rates for ISDN, let companies in the marketplace set the prices, and let competitors come in and undercut it if they think the price is too high.
Our national competition and deregulation policy depends on giving new entrants the right to lease capacity and unbundled network elements at a fair price. And here's a point where I think the economists have it right -- the fair price is forward-looking economic cost, which starts from something called Total Element Long-Run Incremental Cost. ("TELRIC" doesn't include forward-looking common costs, which has been a wholly unnecessary source of controversy.) Economists have sold us; not yet persuaded our reviewing court, the Eighth Circuit; but have made a sale with the states: 33 of 35 states have used this methodology in setting rates for unbundled network elements on their own, with no mandate from the FCC.
If prices for sharing the existing network are set based on these efficient pricing principles, the marketplace will quickly select the technologies that relieve internet congestion, won't it?
All the bandwidth in the world doesn't matter to you if you don't have an affordable way to access it. That's why the Federal-State joint board on universal service has recommended that we spend $2.25 billion a year to connect every classroom and library in the country to advanced telecommunications and information services. By bringing the Internet to schools we will not only revolutionize education, we will stimulate the continued expansion of advanced networks to every corner of America. The money we spend in connecting the schools, like the G.I. Bill and the Marshall Plan, will be repaid many times over in the benefits this effort brings to our economy and our society.
According to the Wall St. Journal poll, almost half of the surveyed economists believe that more public spending on education will promote growth. However, it will take more than government alone to reach our educational networking goals. I spent most of the day today at a meeting sponsored by the Packard Foundation to develop public-private partnerships to bring computers into schools. Net Day programs, which started here in California, are a good example of what a few companies and individuals can do if they commit a small amount of time and effort to connecting schools in their area.
Right here at the University of California at Berkeley, there is a program that uses the Internet to connect Berkeley undergraduates with high schools seniors in a low-income minority high school in San Francisco for "electronic mentoring." If the connectivity is there, creative people will devise innovative ways to take advantage of it.
I recently got a very complimentary email message from an "ardent net-surfer" in Japan named Shoji Akao, who said that he wished that the FCC was a Japanese government organization. He noted that, while NTT in Japan was promising high-speed Internet connectivity for every household by the year 2010, the FCC is actually putting into place today the competition policies that are making affordable, high-bandwidth Internet access a reality.
As the recent WTO agreement demonstrated, Mr. Akao doesn't need to look to the U.S. alone, although I appreciate the compliment. All the countries of the world are embracing the policies of competition and deregulation are the right ones. They are the right policies for telecommunications, and they are the right policies for the Internet.