WPC/ 2?BJZECourier#|#Xw PE37WXP#HP LaserJet 4P LPT1 (Local)HPLAS4P.PRS4x  @\ [X@ Y-#Xw PE37WXP#2@qZw CourierCG Times<?xxx,QQx6X@`7X@'8wC;,WXw PE37XPD(7zC;,XXz_ pi7X&)@ND,tI4  pG;*@|ND,4|\  P6G;Pd?|ND,D2|9 xOG;=yND,`ry*f9 xr G;XddddddddXXXd~ddkd~ddxCddCCCWxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNdddCYQQddddddFddddFCChhd44ddxxdddvooChdF"dhd9dCCxCddoddCdYds]xUvdYYCCCCx~oxoY~NYdYC8YooYdYxsdxdd~YYxoxxx~CdxYxxxxCCdddddddxCsdYC\   pxtll\tll@\@\`LCourierCG TimesCG Times BoldTimes New Roman BoldTimes New RomanTimes New Roman Bold ItalicTimes New Roman Italic PE37XPB(\n @AU;7G; VJ Zier<?xxx,>fx6X@`7X@2Fr  Z`#|HP LaserJet 4P LPT1 (Local)HPLAS4P.PRS4x  @\ [X@CourierCG TimesCG Times BoldTimes New Roman BoldTimes New RomanTimes New Roman Bold Italic2*Kxf f )K("i~'^DOuuOOOu=O=AuuuuuuuuuuOOuۨYuۨ騨OAOuOuggOuAOAăugYOuuug]3]yO=yOOO=OOOOOOuOAuuuuu騨gggggVAVAVAVAuuuuuuuuuuuuuggyggggguuuyuYAYYOYyyAiO]Auu稨gggYYYywO騨ygggOYOu=uuN?NWxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNTT|uOuuuuuuFOuFOuFOOuuuPPuu錱T錌TOuuF"u錊~u匌u",tB^ f ^;C]ddCCCdCCCCddddddddddCCY~~vCN~sk~CCCddCYdYdYCdd88d8ddddJN8ddddYYdYd4dddddCddddddddd8YYYYYY~Y~Y~Y~YC8C8C8C8ddddddddddYdddddsdXdXXXddx|X~d~d|XdddddddC8ddddCdoddd|8|H~d|8|8dtddddHHdlLlLlLkd|H|8~ddddddddXXXd~ddkd~ddxCddCCCWxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNdddCYQQddddddFddddFCChhd44ddxxdddvooChdF"dhd9dCCxCddoddCdYds]xUvdYYCCCCx~oxoY~NYdYC8YooYdYxsdxdd~YYxoxxx~CdxYxxxxCCdddddddxCsdYC\   pxtll\tll@\@\`L",tB^ f ^;C]ddCCCdCCCCddddddddddCCdxN`xoCCCddCdoYoYFdo8Co8odooYNCodddYdddd4dddddCddddddddo8dddddYYYYYN8N8N8N8oddddooooddpddddxodddXXddXddXdddddooL8doddNopddo8PdN8ppoddXXdpLoNpLodPDdopoopodXYXodoodddCddCCCWxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNdddCdUUddddddFddddFCCssd44ddxxddd~ooCsdF"dsd9dCCxCddoddCdYds`xUvdddCCCCxoxoYNYYYN8YooYdYxxdxddYYxoxxxNdxYxxxxCCdddddddxCxdYC\   pxtll\tll@\@\`L"i~'^DO]uuĶOOOu=O=AuuuuuuuuuuAAgרOYͨۨOAOkuOgugugOuuAAuAuuuuOYAuuuugp/p~O=~kOOO=OOOOOOuOuAggggg͘gggggOAOAOAOAuuuuuuuuuuguruuuuggggg~ggggguuu~u~uOAOuOOOu~~uA]OOAuuuuuͨOOOYYY~bAkuuuuuuۨ~ggguOuYOu=uuN*NWxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNTTkuOguuuuuAKuFKuFOOgguPPuu匱T錌TOguF"u錇~u匌u2/K +Kf-5Z "i~'^DObuuĶOOOu=O=AuuuuuuuuuuOOuבOgĚuđYAYbuOuugugAuuAAgAuuuuYYAugggY]A]~O=~bOOO=OOOOOOuOuAuuuuu͚gggggOAOAOAOAuuuuuuuuuguuuuguuuuugg~ggggguuu~u~uOAOuOOOuu~~gATOKAuuuuuۚYYYuYuYuY~~TAbuuuuuuĚ~YYYuOuuYOu=uuN3NWddddddddddddddddddddddddddddddddddddddddNTTyuYuuuuuuAKuFKuFOOuPPuu匱T錌T}uuOuF"u錇~u匌u"i~'^DYuuĶOOOu=O=AuuuuuuuuuuOOuĚYu͚ͨOAOuOuugugOuAAuAuuuYYAgugYO3OO=OOO=OOOOOOuOuAuuuuuۨgggggYAYAYAYAuuuuguuuuguuuuuggggggguuuuYAYuYOYuuAyOYAuuۨYYYYYY~A͚YYYuOYOu=uuNANWddddddddddddddddddddddddddddddddddddddddNTTuuYuuuuuu=FuFOuFOOuuuPPuu鏱T錌TOuuF"u錚~u匌u2/ Y-  #XP7  PT6QWXP#T  X-8i Remarks Lby nWilliam E. Kennard 57Chairman  Federal Communications Commission Mto  LEGG MASON  "TELECOM INVESTMENT PRECURSORS" WORKSHOP  6Washington DC T T ;March 12, 1998 T (as prepared for delivery)  Y -TP  a <#4  pG;tI#x#|\  P6G;P##4  pG;tI##|\  P6G;P#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. xAnd there was the 1998 USA Today allstar mutual fund team. xWith Legg Mason Value on top: 36.7% in one year. xNo wonder you have money to spend on fancy conferences like this one. xIt's refreshing to be talking to a group whose agenda is straightforward.  a)< x 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. xI 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. xBull market goes up. xThis 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." "(0*0*0*+"ԌxGuy says, "I don't have to outrun the bear. I just have to outrun you." xBrokers don't have to avoid the bear, either. After all, you can make money in a bear market, too. xBut you do have to outrun the other brokers. Competition is your life.  aF< xMy 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. xI 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. m$g  xWith revenues in the communications services industry growing 43% between 199096...with the burgeoning consumer demand for email, paging, cellular and radio services creating a step climb in new jobs...with over four in ten households now containing a PC...the telecom industry is not just about to enter a revolution. It's in one. xOne of the megatrends of that revolution is technical: digitalization. xDigitalization means that all communications technology will be the delivery of digital bits. It may be voice. It may be video. It may be audio. xBut it's all digital bits. xA second megatrend is bandwidth how that data gets to you, how you get to that data. In this technological revolution I want to see Moore's law applied to communications a market so vibrantly competitive that transmission speeds double every 18 months. xMaybe they'll call that Kennard's Law. m$g   m$g  xBut there is a side to this revolution beyond technology though just as important."|'0*((N*"Ԍ xIt is the move away from monopoly and towards competition and toward deregulation. m$g   m$g  xIn theory, no one objects to competition. Why should we? It fosters choice. m$g  xIt lowers costs for consumers. xIt stimulates innovation. xAnd you don't need to have price regulation in a competitive market. xCompetition also creates risk. Some people who compete are going to fail.  m$g#   m$g#  xCompetition will happen. Eventually. The debate about competitive issues is really a debate about when it will happen, and for whom. m$g$   m$g$  xIt will come faster, of course if we have rules that favor competition. Such rules would allow competition as fast as technology and financing allow.  m$g%   m$g%  xBut the reality is that moving a monopoly market to competition is hard work. xIt's hard work for the incumbent.  m$g'   m$g'  xIt's hard work for the new competitors. m$g(   m$g(  xIt's hard work for the policy makers. m$g)   m$g)  xThose 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. m$g*   m$g*  xAll that takes time. And while some call it "regulatory," it's actually"|'0*((N*"  a<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 wellmaintained and running smoothly. m$g+   m$g+  xTo 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. m$g,   m$g,  xAnd guess what? That's exactly what we see. xWe see it in the hundreds of state-approved interconnection agreements between incumbents and competitive carriers entering the local market. m$g.   m$g.  xWe 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. xWe see competition in New York City, where over 20% of the business market is being served by carriers other than the incumbent Bell Company. xWe see it in the investment going into cable modems and the restructuring of the high speed data segment of the cable industry. xWe 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. xWe see it in the exploding number of competitors, and declining price levels in the cellular and PCS markets. xWe see it in the fixed wireless service providers, like Winstar and Teligent. They've begun to offer service that competes with traditional wireline. m$g3  xWe see it in the hundreds of satellites being put up for narrowband access and also for nationwide even worldwide broadband wireless data access. m$g4   m$g4 "|'0*((N*"Ԍx"In differentiation, not uniformity, lies the path of progress," Supreme Court Justice Louis Brandeis wrote over eighty years ago. xIf that's true and I think it is we've made a lot of progress. The world of telecommunications is a lot more differentiated today than it was when President Clinton sat down in the Library of Congress and started using all those pens to sign the Telecommunications Act of 1996. xWe're going to have a lot more progress, too. xLet me be clear, though. I am not satisfied with the pace of competition. The pace of competition in local markets should accelerate. xWhat causes these speedbumps in the road to competition? xSeveral things, all traceable to the problem of incentives. xSure, the 1996 Act mandates competition. What's more, I firmly believe that competition beats regulation in making sure that high quality telecommunications services are provided to consumers economically and efficiently.  m$g>   m$g>  xStill, entrenched incumbents in all markets local and long distance have powerful incentives to attempt to use all means to retain control of their markets, and the undiverted revenue stream that flows from such control. We shouldn't be surprised when local companies aren't delivering the same level of service to competitors as to themselves, or are charging prices or insisting on terms and conditions for use of elements that significantly raise their rivals' costs of doing business and foreclose competition. And we won't be surprised if long distance companies claim that an open local market is closed. m$g?  xThat'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. xThe 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"|'0*((N*" reason for building prisons, not opening the marketplace.  a<xWhat has gotten mired in litigation is the roadmap to progressive deregulation. xCreating immediate alternatives to incumbent LEC services through purchases of unbundled facilities would have allowed prompt retail deregulation and interstate access deregulation.  m$gC   m$gC  xAnd 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. xThe 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? m$gD   m$gD  xNow comes the hard truth. The vast bulk of universal service support today is generated and spent within the boundaries of each state. This means  a<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  a<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. xReforming a centuryold subsidy system is a tough challenge for the federal jurisdiction and the state jurisdiction. But it must be done. xThe good news is that we still have Section 271 in place. xDoes it place a burden on the FCC? Of course. And on state commissions and the Department of Justice as well. xStill, it is a pretty ingenious portion of the statute.  m$gI   m$gI "|'0*((N*"ԌxSection 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. xSection 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. xAnd properly implemented, the Section 271 mechanism promotes competition in the local market at the same time it enhances competition in the long distance market.  m$gL   m$gL  xBut 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. m$gM   m$gM  xBut 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 "onestopshopping." xIf you believe that, then the result of jumping the gun would be more mega mergers and consolidation rather than competition. m$gO   m$gO  xBecause 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 onestopshopping. m$gP   m$gP  xAnd 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. xThat's why the 271 process must work properly. But "working properly" does not mean that the FCC must "just say no" to Bell entry. m$gR   m$gR  xBecause the American people do not benefit by delaying 271 approval"|'0*((N*" even one day longer than necessary to ensure the local market is open. xLet 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. xThe 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. xBut eventually they rejected that, too. xWhy did they reject this approach? xBecause they knew what would happen.  m$gW   m$gW  xNo incentives to open markets. m$gX  xNo incentives for local competition. xThe Bells would just have to wait three years -- there would now be just 11 months left -- and then they could get into long distance. xNo competition. xJust entry. xEven to get an NCAA bid you have to beat somebody. xThat's why Congress rejected both of these approaches in favor of section 271. xWhile it is certainly the prerogative of Congress to change the law, unless and until that happens, the FCC will adjudicate 271 applications exactly as the statute directs. We will evaluate BOC compliance with the competitive checklist, determine whether entry is in the public interest, and apply the other statutory requirements. xWe will do this in a way that is open and transparent. Last December, I"|'0*((N*" invited every BOC to meet to review checklist compliance. Since January, more than 30 FCC staff members have participated in these meetings on a regular basis. We have the best, hardestworking staff in all of government, and, for quite a few of them, these meetings are more than fulltime job. We've visited with state commissions in Michigan, South Carolina, Texas and New York. We've consulted with a number of other state commissions. m$g`   m$g`  xWe've viewed Bell Company OSS operations on-site -- Ameritech in Milwaukee, SBC in Texas, and BellSouth in Atlanta. I took a look at BellSouth's OSS operations in New Orleans. xWe want to demystify this process. xThat's what these discussions are about. xLet me be clear, however, about what this 271 dialogue is not about. m$gd  xIt is not a process of negotiation. It is not about cutting deals with a BOC or anyone else. xWe will not prejudge a BOC's compliance with section 271. xEach 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. m$gg   m$gg  xYou 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. m$gh   m$gh  xSamuel Morse, for example.  m$gi  xHe was first known as a portrait painter. And in 1825, he was in Washington to paint a portrait of General Lafayette and Morse's wife became sick and died. xShe only lived about 300 miles away. But in those days, the news took seven days to reach him. "|' 0*((N*"Ԍ m$gn ԙ xIt 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. xBut 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. m$go  For that reason alone, we should be bullish about the future of m$gr   m$gr  telecommunications. t: FCC  m$gs ԃ