William E. Kennard
Federal Communications Commission
"TELECOM INVESTMENT PRECURSORS" WORKSHOP
March 12, 1998
(as prepared for delivery)
Last week, as I was preparing for this speech it was an interesting coincidence to pick up USA Today. There was one article on the revival of Snapple. There was another about why women like to sit near their bosses on planes -- while men like to sit far away.
And there was the 1998 USA Today all-star mutual fund team.
With Legg Mason Value on top: 36.7% in one year.
No wonder you have money to spend on fancy conferences like this one.
It's refreshing to be talking to a group whose agenda is straightforward.
In the investment business, your job is to handicap the players out there -- to figure out who the winners and losers will be, so that you can invest in the winners and make money.
I was reading the other day about how the terms "bull" and "bear" market originated. Supposedly, a bear attacks by swiping down with his big paws. So a bear market goes down. But a bull attacks by slashing up with his horns.
Bull market goes up.
This reminds me of that story of two hunters in the woods, asleep in their tent. They are awakened by a bear growling. One reached for his Nikes. The other guy says, "Sneakers won't help you outrun a bear."
Guy says, "I don't have to outrun the bear. I just have to outrun you."
Brokers don't have to avoid the bear, either. After all, you can make money in a bear market, too.
But you do have to outrun the other brokers. Competition is your life.
My agenda is a little different but equally focused on competition. My
job is to set the stage for competition in all sectors of the telecommunications marketplace -- especially the local telephone market. And my job is to ensure that we continue to provide universal service in the emerging competitive marketplace.
I don't pick winners. I don't pick losers. Instead, I make sure that the playing field is level and the goalposts are the same height and that the rules of the game keep up with changing times.
With revenues in the communications services industry growing 43% between 1990-96...with the burgeoning consumer demand for e-mail, paging, cellular and radio services creating a step climb in new jobs...with over four in ten households now containing a PC...the telecom industry is not just about to enter a revolution. It's in one.
One of the megatrends of that revolution is technical: digitalization.
Digitalization means that all communications technology will be the delivery of digital bits. It may be voice. It may be video. It may be audio.
But it's all digital bits.
A second megatrend is bandwidth -- how that data gets to you, how you get to that data. In this technological revolution I want to see Moore's law applied to communications -- a market so vibrantly competitive that transmission speeds double every 18 months.
Maybe they'll call that Kennard's Law.
But there is a side to this revolution beyond technology -- though just as important.
It is the move away from monopoly and towards competition -- and toward deregulation.
In theory, no one objects to competition. Why should we? It fosters choice.
It lowers costs for consumers.
It stimulates innovation.
And you don't need to have price regulation in a competitive market.
Competition also creates risk. Some people who compete are going to fail.
Competition will happen. Eventually. The debate about competitive issues is really a debate about when it will happen, and for whom.
It will come faster, of course if we have rules that favor competition. Such rules would allow competition as fast as technology and financing allow.
But the reality is that moving a monopoly market to competition is hard work.
It's hard work for the incumbent.
It's hard work for the new competitors.
It's hard work for the policy makers.
Those within companies charged with creating and meeting competition need to resolve complex operational issues. They need to design system interfaces and write software. They need to negotiate contracts, arbitrate differences, sign agreements and implement them. For policy makers, we must insist that this hard work be done -- and that the parties create or have available swift, meaningful ways to enforce obligations under these agreements.
All that takes time. And while some call it "regulatory," it's actually deregulatory. Because competition and choice won't exist unless local telephone companies create this competitive infrastructure and unless they are forced to keep this infrastructure well-maintained and running smoothly.
To get a true picture of the development of local competition, we should not be looking for dramatic, sudden upsurges in local competition, but instead for the type of steadily increasing momentum that we saw with the introduction of competition into the long distance market.
And guess what? That's exactly what we see.
We see it in the hundreds of state-approved interconnection agreements between incumbents and competitive carriers entering the local market.
We see it in the new entrants and the money that financial markets are pouring into the CLEC industry. There are over one hundred competitive local exchange providers around the country, with a market value of 14 billion dollars. They've become attractive investments for the likes of WorldCom and AT&T. The top ten CLECs have switches in 132 cities spanning 33 states and the District of Columbia.
We see competition in New York City, where over 20% of the business market is being served by carriers other than the incumbent Bell Company.
We see it in the investment going into cable modems and the restructuring of the high speed data segment of the cable industry.
We see it in the increasing interest on the part of the wireline industry in Digital Subscriber Line technologies, which allow you to get expanded capacity similar to fiber from a copper loop.
We see it in the exploding number of competitors, and declining price levels in the cellular and PCS markets.
We see it in the fixed wireless service providers, like Winstar and Teligent. They've begun to offer service that competes with traditional wireline.
We see it in the hundreds of satellites being put up for narrowband access and also for nationwide even worldwide broadband wireless data access.
"In differentiation, not uniformity, lies the path of progress," Supreme Court Justice Louis Brandeis wrote over eighty years ago.
If that's true -- and I think it is -- we've made a lot of progress. The world of telecommunications is a lot more differentiated today than it was when President Clinton sat down in the Library of Congress and started using all those pens to sign the Telecommunications Act of 1996.
We're going to have a lot more progress, too.
Let me be clear, though. I am not satisfied with the pace of competition.
The pace of competition in local markets should accelerate.
What causes these speedbumps in the road to competition?
Several things, all traceable to the problem of incentives.
Sure, the 1996 Act mandates competition. What's more, I firmly believe that competition beats regulation in making sure that high quality telecommunications services are provided to consumers economically and efficiently.
Still, entrenched incumbents in all markets -- local and long distance -- have powerful incentives to attempt to use all means to retain control of their markets, and the undiverted revenue stream that flows from such control. We shouldn't be surprised when local companies aren't delivering the same level of service to competitors as to themselves, or are charging prices or insisting on terms and conditions for use of elements that significantly raise their rivals' costs of doing business and foreclose competition. And we won't be surprised if long distance companies claim that an open local market is closed.
That's why some incumbent local telephone companies challenged the Congressional design for local competition. And the result of the rulings they won? Litigation has slowed investment and planning, frustrated promising entry strategies and led to widespread uncertainty throughout the business community.
The fact is, that to fulfill Congress's competitive vision, we must make sure there are economically rational options for those wanting to enter the market. To do any less is to deter investors not attract them. Deterrence is a reason for building prisons, not opening the marketplace.
What has gotten mired in litigation is the roadmap to progressive deregulation.
Creating immediate alternatives to incumbent LEC services through purchases of unbundled facilities would have allowed prompt retail deregulation and interstate access deregulation.
And we may have lost the chance to step outside the archaic model of telecommunications services regulation where we classify all costs and separate them between jurisdictions.
The other key to competition is subsidy reform. Universal service is the law of the land. The question is not whether to support universal service, but how?
Now comes the hard truth. The vast bulk of universal service support today is generated and spent within the boundaries of each state. This means that the real key to subsidy reform is state, rather than federal action. The law directs the Commission to ensure that service is affordable and comparable, and the Commission clearly must provide a universal service "safety net." But the bulk of subsidies will continue to be raised and distributed within the boundaries of any single state. And unless states act promptly to reform intrastate implicit subsidies, both incumbents and new entrants will be hobbled competitively. States must step up to the plate now. Some states are making progress. I believe that the federal government can play a role in creating incentives for the States to reform their subsidy systems.
Reforming a century-old subsidy system is a tough challenge -- for the federal jurisdiction and the state jurisdiction. But it must be done.
The good news is that we still have Section 271 in place.
Does it place a burden on the FCC? Of course. And on state commissions and the Department of Justice as well.
Still, it is a pretty ingenious portion of the statute.
Section 271 conditions a BOC's entry into the in-region long distance market on its ability to demonstrate that its local exchange network is open to competition.
Section 271 -- properly implemented -- gives BOCs a powerful incentive to open local markets. The incumbent LECs want to be able to provide total service packages (both local and long distance) to their subscribers.
And properly implemented, the Section 271 mechanism promotes competition in the local market at the same time it enhances competition in the long distance market.
But the stakes are high. If you are a Bell company, you'd love to jump the gun if you could get away with it. And if you are a long distance company, you'd love to keep the Bells out as long as possible. What happens if the Bells are held out too long? Consumers lose the benefit of a powerful entrant in long distance and the new products and packages the Bell company might offer.
But what would happen if the Bells were able to enter the long distance market before their local markets were open to competition? Well, the Bells tell everybody -- especially you in the investment community -- that consumers want "one-stop-shopping."
If you believe that, then the result of jumping the gun would be more mega mergers and consolidation rather than competition.
Because if we permit Bell entry before the local market is open to competition, long distance companies will have no alternative but to merge with an ILEC. That's the only way for them to get to the promised land of one-stop-shopping.
And I haven't met too many people who think it is a good thing to stimulate more megamergers in telecommunications. That damages the prospects for competition in both local and long distance markets.
That's why the 271 process must work properly. But "working properly" does not mean that the FCC must "just say no" to Bell entry.
Because the American people do not benefit by delaying 271 approval even one day longer than necessary to ensure the local market is open.
Let me say a word on approaches we are not taking, because they are not the law. There will be no market share test. The law makes clear that the door to competition must be open, and 271 approval can be granted regardless of whether competitors have walked through the open door.
The law also makes clear that we can't identify a date certain, say three years after enactment of the Act, when the BOCs would be able to get into long distance. This, too, was proposed and debated by Congress.
But eventually they rejected that, too.
Why did they reject this approach?
Because they knew what would happen.
No incentives to open markets.
No incentives for local competition.
The Bells would just have to wait three years -- there would now be just 11 months left -- and then they could get into long distance.
Even to get an NCAA bid you have to beat somebody.
That's why Congress rejected both of these approaches in favor of section 271.
While it is certainly the prerogative of Congress to change the law, unless and until that happens, the FCC will adjudicate 271 applications exactly as the statute directs. We will evaluate BOC compliance with the competitive checklist, determine whether entry is in the public interest, and apply the other statutory requirements.
We will do this in a way that is open and transparent. Last December, I invited every BOC to meet to review checklist compliance. Since January, more than 30 FCC staff members have participated in these meetings on a regular basis. We have the best, hardest-working staff in all of government, and, for quite a few of them, these meetings are more than fulltime job. We've visited with state commissions in Michigan, South Carolina, Texas and New York. We've consulted with a number of other state commissions.
We've viewed Bell Company OSS operations on-site -- Ameritech in Milwaukee, SBC in Texas, and BellSouth in Atlanta. I took a look at BellSouth's OSS operations in New Orleans.
We want to de-mystify this process.
That's what these discussions are about.
Let me be clear, however, about what this 271 dialogue is not about.
It is not a process of negotiation. It is not about cutting deals -- with a BOC or anyone else.
We will not prejudge a BOC's compliance with section 271.
Each 271 application will be decided on the merits, within the 90-day statutory period, and based solely on the record that is developed during that period. And the FCC will order that decision -- not the state Commission or the Department of Justice. Again, that's the law Congress set out.
You know, one of the interesting things about this job is the way you get to cast an eye over the entire history of our industry -- and some of the people who changed it.
Samuel Morse, for example.
He was first known as a portrait painter. And in 1825, he was in Washington to paint a portrait of General Lafayette and Morse's wife became sick and died.
She only lived about 300 miles away. But in those days, the news took seven days to reach him.
It was the event that prompted Morse to invent the telegraph. It is hard to imagine what life was like back then when it took seven days to get news so important.
But we know that as we speak, there are hundreds of thousands of people dreaming up new and better ways for us to use technology to communicate, ways that we can't imagine today. We know that most of those ideas will not make it to the marketplace. And for those that do, some will be winners and some will be losers. But in the end, we'll all be better off. Because we will continue to use competition to find better ways to communicate and to build a stronger economy and stronger communities.
For that reason alone, we should be bullish about the future of telecommunications.