Good afternoon. I am delighted to have the opportunity to remark on the interplay between communications technology and regulation. I enthusiastically accepted Scott Cleland's invitation because I believe very strongly that the cross-section of professions and industries assembled here -- whether from Wall Street, Main Street or M Street -- are all affected by the momentous transformation to a pro-competitive, deregulatory communications regime.
The term revolution is overused, but it aptly describes the sudden and dramatic change we are experiencing in the global economy. We are living in extraordinary times, for we stand at the forefront of a new and wondrous economic period, equal in its importance to that of the agricultural and industrial revolutions. This revolution, much as those that preceded it, is being fueled by dramatic advances in technology. Technology is evolving at a blinding rate and appears hell-bent to change every facet of our lives. It undoubtedly will, and the potential for that is exciting. Governments around the world are making strides to alter their regulatory frameworks in attempt to tailor them to rapidly evolving economic and technical realities in communications. But are we truly changing enough, quickly enough to accommodate these realities?
Albert Einstein once said: "The unleashed power of the atom has changed everything save our modes of thinking and we thus drift toward unparalleled catastrophe."
Professor Einstein was commenting on the tremendous power man unleashed by splitting the atom, which led to the creation of the atomic bomb. Einstein was suggesting that the atomic bomb had changed forever the rules of war and, with them, the relationships between nations and societies throughout the world. His statement was a warning that failure to change our mode of thinking to accommodate the unimaginable power of this new technology would surely lead to catastrophe.
I. The Unleashed Power of Communications Technology
When I reflect on where we are in the communications revolution, I often think of Einstein's warning. The communications revolution, like the atomic revolution, was also born of explosive changes in technology, the primary new force being the advent of digital technology. Digital technology has liberated information. Information of all types (voice, pictures, video and text) can be encoded, transmitted and decoded by tiny microprocessors with an efficiency never before imagined. Information is no longer constrained to any particular means of distribution and can be manipulated in an unlimited number of ways.
Because of the infinite flexibility of digital technology, traditional market barriers also have begun to crumble. Now it is possible for providers of traditionally distinct technologies and services to cross into new markets and attack each other with a panoply of applications and services. Cable service providers are eyeing data services, telephone markets, and are considering competing more directly with various broadcast services, such as radio. Telephone companies are investigating how they may use the existing telephone infrastructure to provide information services, multi-channel video services, and wireless services. On the horizon are entirely new players using innovative technologies to enter the communications market such as wireless cable, fixed wireless telephony, satellite services and wireless Internet access.
Unfortunately, however, full emancipation has not yet come to the information and communications industries, because we have not fully changed our mode of regulatory thinking. We continue to administer a regulatory regime crafted in a time long gone. As the shock waves of the digital explosion broaden and intensify, all of us will be forced to confront the relentless energy of these waves and decide whether to fight the current (ultimately, in my mind, to our destruction) or move with the waves, allowing them to propel us ever faster toward an efficient, technology-driven marketplace.
I believe that we must now confront and accept certain truths about the nature and impact of this technological change. First, it is futile to attempt to preserve the balkanized regulatory framework that presently exists. Unquestionably, the dramatic evolution of technology will erode and ultimately eliminate the legal, economic and conceptual boundaries that traditionally have separated the various communications media. Thus, we need to be bold and decisive and undertake strategic, persistent efforts to eliminate these boundaries.
Second, the changes ushered in by the digital revolution are inevitable. By making information infinitely malleable and distributable, digital technology gives those who design and use it the broadest possible palette with which to develop and showcase their creativity. Thus I believe that, even if policymakers were to do nothing, the changes made possible by digital technology would assuredly continue to multiply, though perhaps more slowly and less efficiently. This truth counsels for humility. We policymakers should not arrogantly maintain that we bring about change. We may shepherd change, but we must not make the error of thinking we can engineer it.
Third, we must acknowledge that we cannot accurately predict what technologies and services will ultimately prevail in the marketplace. Regulatory history is filled with examples of failed predications about technological progress. Only a few short years ago many expressed with certainty that cellular telephones would remain a small niche market with only 900,000 users by the year 2000. Today more than 54 million Americans subscribe to wireless services. Similarly, in very large measure, the anxiety we see expressed today about the lack of local telephone competition is due to the exaggerated expectation that cable companies needed only to flip a switch to become local telephone companies. The truth of unpredictability counsels restraint. We should not dare to pick technology winners or losers, whether consciously or unconsciously. Assuredly, we will be wrong more often than right.
II. Changing Our Mode of Thinking
So, we have seen the immense power and potential of communications technology unleashed, but how should we change our mode of thinking? I believe the facts of the situation point to several answers to this question. My advice to the investment community is to look for evidence that policymakers are hearing these answers and responding accordingly, in thought, word and deed. Let me outline the tenets of this new regulatory thinking.
A. Faith in Competition and Free Markets
The first tenet is competition. I believe devoutly that this great communications revolution demands a much more committed and sincere faith in consumers and free markets. Several factors compel this conclusion. For one, world economic history tells us quite clearly that economic greatness flows from free and competitive markets. This is the most poignant lesson of the Cold War. Markets are far superior devices for controlling prices, spurring innovation, enhancing quality and producing consumer choice than are central planning models. Moreover, competitive markets are the only proven devices for maintaining efficiency in the face of blistering technological change. It is futile for bureaucratic regulatory agencies to attempt to keep pace with the demands of high technology markets. Yet, too many communications bureaucrats mouth the words of the pro-competition catechism, while still attempting to "manage" competition and technological evolution.
To stay faithful to the promise that competitive markets will nurture technological evolution, we must accept certain hard facts about competition. Perhaps the most important is that in competition someone must win and others must lose. In a competitive environment, the market ultimately punishes those firms that fail to provide value or manage their costs, even if these firms are the richest and most established firms in the industry. We must accept this fact and avoid the traditional tendency of regulators to protect firms or industry segments in exchange for promised results for consumers.
One reason that policymakers find it difficult, even after setting appropriate ground rules, to allow the market to run its course is, ironically, their fear of ceding control to the marketplace. The Act commands us all to move away from regulation and toward a world in which the market, rather than bureaucracy, determines how communications resources should be utilized. Yet, so often, we cannot actually bring ourselves to let go, to jump off our regulatory perch.
Instead, we speculate about possible anti-competitive effects and then adopt policies intended to protect new entrants and consumers from them. Rather than protect these interests, however, we more often actually handicap the market and postpone the arrival of competition and consumer choice.
We should not, as often as we do, give in to incumbent firms' demands that we save them from competition. By shielding mature industry participants from the pressures of having to adapt to the presence of new entrants, we merely prevent these new entrants from offering customers greater value at lower price, while simultaneously rewarding incumbents for providing no new value to the economy. Conversely, when we go too far in shielding new entrants, we condemn incumbents to their existing lines of business and services, thereby stifling innovation by sophisticated firms that may be uniquely positioned to provide significant benefits to consumers.
The second change in our thinking should be to shift our focus to innovation. So often when people speak about competition they focus on lower prices and market share. These things are quite important. However, it is probably more important to focus on innovation when dealing with network industries that are driven by technology. It is the competition to provide new products and services that usually serves as the key driver of consumer benefits in information industries.
Innovation has consistently been responsible for the most significant advances in the communications marketplace. For example, MCI's creative use of microwave transmission (and the law) led to the demise of Ma Bell and ushered in long distance competition. Shortly thereafter, Sprint's use of a nationwide fiber optic digital network advanced competition even further. Cable providers' deployment of coaxial cable to distribute signals brought competition to the television market and expanded the possibilities of multi-channel video, and their efforts in digital may help launch even more dramatic growth in data services. Direct Broadcast Satellite promises to do much of the same. And, the race to develop high-definition television produced what many engineers thought -- just a few years ago -- impossible; a digitally-transmitted television signal. The first HDTV sets will ship this fall.
And, what can one say to describe the Internet. It alone promises to match the advances brought about by all the other developments I described combined. This is so, not so much because of what it presently offers consumers, but what it teaches about the innovation potential of networks that are engineered as it is. The true genius of the Internet is that it uses an open architecture that allows users at different computers to share and manipulate information in a way that is virtually unhindered by the transmission media over which this information is carried, thus placing in the hands of millions of innovators a low cost option for creating, and distributing, their creations. The potential is boundless and holds the promise that, in the future, it will be near impossible to maintain a monopoly of communications goods and services.
The only constant in the communications revolution is change itself. Innovation breeds new markets, and shatters the entrenched advantages of incumbency, as the recent history of telecommunications has shown. As such, policymakers must work to avoid (1) slowing the pace of innovation in technology and service offerings and (2) inadvertently picking or conferring advantage to a particular technology or service.
If regulation is necessary at all, it should be consistent with competitive markets and sufficiently flexible to accommodate unknowable future technological advances. The rules on our books should take into account the kid who, as sure as I am standing here, is in a garage right now somewhere working on some technology that will spin our heads in the next few years. We must make sure that we are not taking actions that themselves bias the market to reject that breakthrough in favor of some less efficient technology.
Additionally, we must remember that there must be incentives for firms to invest money in R&D, which often does not pay off for some time. Generally, it is true that firms will not invest in their networks unless they are permitted to reap the benefits of that investment. That being understood, there are two fundamental ways in which to incent innovation: (1) Granting greater proprietary rewards to the innovator, allowing him to exclude others from his creation or expression for some period of time, as in the intellectual property context. Policymakers must be careful not to allow anti-discrimination or other policies to foreclose the ability of firms to benefit from their own innovations. And, (2) competition. The hot breath of a competitor on one's neck can spur you to run faster in the race to offer new products and services to your customers. We must remain cognizant of these fundamental principles as we develop policy.
C. Preparing for the Regulatory Implosion
In addition to focusing on innovation, techno-wise regulators (and I dare say investors) must sharpen their focus on the imminent collapse of the categorical regulatory scheme. Communications historically has been regulated (or not regulated) according to the method of transmission used: telephone companies are placed in one regulatory bucket, broadcast companies another, cable companies another, and so on. Such regulatory balkanization was sustainable in the era before digitalization, when services offered via one method of transmission could not, as a general matter, be offered via a second method of transmission in a manner that would lead customers to view the two services as substitutes for each other. But that was then. This is now.
As competition and innovation hit high speed, we are facing more and more "Alice in Wonderland" questions that derive from the distinct regulatory buckets in which we put services. When a cable company offers telephony over the same pipe it uses to offer video, is it subject to Title II, Title VI or both? Should the regulatory burdens and advantages that a firm is subject to depend upon what order zeros and ones travel in along a broadband pipe or how those zeros and ones are ultimately decoded? Yet, for the moment it does. Even the degree of First Amendment protection changes as one changes channels from the broadcast stations to cable channels, though seamless to the viewer. This world cannot possibly be sustained.
As technology erases the differences between communications services, policymakers will need to reconcile conflicting regulatory approaches in a way that reinforces forward-thinking, pro-competitive approaches. And providers, too, will have to decide if they want to remain cozy in the confines of regulatory protectionism or take the field as competitors and innovators.
As one who hears the concerns and complaints of communications companies daily, I can tell you that convergence and the strain on the regulatory framework is producing some interesting results. Companies that have always risen or fallen on regulatory favor are discovering the import of the warning "be careful what you wish for -- you just might get it." That is, as companies begin to compete in new markets and add new lines of business, they find themselves changing their perspectives on particular regulations, so as not to get hoisted on their own petard. The more companies become full service communications companies, the more similar they are and, as a result, the more congruent their interests. Maybe this will result in less rancor and less regulatory and judicial warfare. Maybe.
D. Regulatory Efficiency
A final tenet of changed regulatory thinking must be to strive for regulatory efficiency. In this regard, regulatory agencies must: (1) make timely decisions; (2) be sensitive to business realities and capital markets; and (3) shift their efforts to enforcement.
Technology is an impatient master and cannot wait long for regulators to reach decisions. Policymakers have come under increasing criticism because of the glacial pace that often characterizes the regulatory process. Technical innovation and the capital markets abhor uncertainty and demand timely responses. A decision by the Commission that is right, but too late, might as well not have been made at all. In the Army, we used to implore combat leaders, "Damn it, right or wrong do something! You can be killed just standing there." Companies would rather cope with an adverse result than watch their business strategies deteriorate in the face of regulatory uncertainty. On one of my recent trips, a senior management executive stated that "shareholders are more afraid of regulation than competition." This simply is disturbing and must change.
This is not a time for the timid or casual regulator. The advance of innovation continues in leaps and bounds. In the computer markets, Moore's law holds that the maximum processing power of a microchip, at a given price, doubles roughly every eighteen months. We would be well advised to adopt the urgency that Moore's law suggests in all our endeavors.
2. Business and Market Sensitivity
In this fast-paced competitive environment, regulators are going to have to be sensitive to the variables that go into business decisions and the factors that affect the flow of capital. We must take account of the variables that inform decisions by company executives, such as the returns on investment, the cost of capital, and the efficiencies and synergies of choices. Only by understanding these variables can we make thoughtful choices about how to satisfy national goals in a manner that is consistent with competitive and economic principles.
Of growing significance is the degree to which our decisions affect the flow of capital. Innovation is extremely dependent on this spigot staying on. If we are slow in our deliberations or ambiguous in our pronouncements, we will introduce uncertainty into the marketplace and, consequently, expose those who invest the capital that drives the economic engine to additional, unnecessary risk. Moreover, if we change the rules of the game in midstream, the capital markets will deem investment in that area too risky, subject to the whims of government and its susceptibility to the latest squeaky wheel. As a CEO once said to me, quoting Walter Wriston, former Citicorp Chairman: "Capital goes where it is welcome, but stays where it is treated fairly."
3. Shift to Enforcement
Another way that we can make regulation more efficient is to shift our resources from prospective regulation to enforcement. Communications regulatory agencies like the FCC have historically allowed companies to operate in certain market segments and to take action, only by the grace of prior approval. This process has often been resource-intensive and time-consuming. A prospective regulatory approach had more viability when dealing with monopolists and oligopolist, but quickly loses its currency in a dynamic market that cannot afford the costs of this process in money or time. Antitrust law, however, illustrates an alternative approach -- one that emphasizes vigorous enforcement, rather than prospective regulation.
Communications policymakers should look to enforcement as a means to protect the public against certain harms without hindering companies from entering new markets that lie outside their traditional regulatory boundaries. Also by doing so, we will cut down on the speculative predictions that characterize many of our deliberations presently. Rather than imagining all the dangers that might result if we let a company do what it has asked and then take equally speculative action to meet those speculative dangers, let's instead police conduct and make decisions based on real facts. If there are "teeth" in our enforcement efforts, companies will take heed or pay the price.
III. . . . Or else we drift toward catastrophe
And so in closing, as you keep a watchful eye on communications developments in an effort to predict whether proposed reforms will be implemented and whether they will be successful, remember that the inevitable, unpredictable changes in the communications industry that I have discussed today present us daily with a choice. The digital explosion will ultimately demolish the byzantine regulatory edifice that communications regulators have constructed over the past several decades. The choice is whether to implode the existing regulatory structure in a controlled manner, by strategically undermining its foundations, as you would in tearing down an old office building, or whether to resist foolishly the force of change and allow the regulatory structure to become pocked and shabby, dangerous and teetering, before it crumbles under the weight of its own inconsistencies.