May 7, 1998
"Working Toward Independents' Day:
Mid-Size Carriers as the Special Forces of Deregulation"
(As Prepared For Delivery)
Good afternoon, and thank you for inviting me to be here today. My remarks will be brief, so you all can hurry back to your offices before the post-lunch "food coma" takes hold. I want to share with you some of my thoughts on a critically important, but often neglected segment of the telecommunications industry.
Many of you represent what I consider to be some of the unsung heros of the telecommunications revolution: mid-size independent carriers. Large enough to command substantial resources and expertise, yet small enough to escape at least some of the onerous regulatory burdens imposed on larger carriers, mid-size independents are on the front lines of competition and deregulation. Just as importantly, mid-size independents are storming the beaches of innovation, both in terms of how some of these carriers market new products and services and in terms of how they employ new technologies. In the war to tear down the arcane regulatory walls that prevent firms from competing with other firms and from bringing customers the full benefits of a free market, I sometimes think of mid-size independents as our "special forces." The Special Forces, for those of you who aren't military buffs, are elite, highly- skilled forces adept at operating undetected behind enemy lines. The infamous Green Berets, a Special Forces unit, are small and nimble, allowing them to slip through the cracks, untethered by the logistical constraints faced by larger military forces. Fans of the Rambo films know their capability.
Now, I'm an old soldier, so I'm comfortable with thinking of telecommunications competition in terms of war and revolution. For those of you who have gotten no closer to battle than the screen in your local movie theater, however, try thinking of the movie "Independence Day." In that sci-fi thriller, aliens from outer space attack Earth and, in the process, establish a constellation of menacing space craft that surround the planet. For much of the movie, the prospects for humankind are bleak; we are outgunned and seemingly outnumbered by the technologically-superior aliens. Then Will Smith and Jeff Goldblum discover a way to thwart the attack by commandeering a ship that the aliens had left behind on a previous visit to Earth and by flying that single ship into the heart of the alien constellation. The aliens are caught off-guard and Smith and Goldblum manage to destroy the constellation. They defeat a superior force using stealth and the element of surprise, much like the Special Forces might in a conventional battle against a human enemy.
So how are mid-size independents like the Special Forces -- or our movie heroes -- in the war to promote competition, deregulation and innovation? Well, for one thing, mid-size independents operate quietly (in contrast to their larger counterparts, which constantly deploy teams of lobbyists to stir the pot in Washington), yet they are very effective. The independents, like Special Forces, employ creative, innovative techniques to succeed.
Those of you who have heard me speak about mid-size and smaller carriers know that I think most policymakers within the Beltway suffer from what I have termed "Big Guy Myopia" -- that is, we often set policies and measure the success or failure of such policies based on the positions of the major local and long distance companies. Faced with the momentous task of setting and removing policies on a national scale, we too often rush to address the concerns of the major players and deal with the smaller players as an afterthought, if at all. We thereby overlook the many mid-size and smaller companies that are active in the marketplace.
But our unfortunate tendency to focus only on the largest telecom players has an upside. Just as in the movie "Independence Day," our "Big Guy Myopia" creates an opportunity for mid-size players to capitalize on stealth and the element of surprise and to help win the war to promote competition, deregulation and innovation. Specifically, I believe the experiences of mid-size independents comprise a growing factual record that will both demonstrate the benefits of competition, deregulation and innovation and will serve as compelling evidence that our existing regulatory scheme will impede, if not prevent, the delivery of such benefits to customers. This is why I said mid-size independents are our "Special Forces." Let me say a bit more on this point.
In an upcoming law review article, I lay out the principles that I believe should guide policymakers as they try to navigate the rough terrain of change in communications that was unleashed or at least intensified by the Telecommunications Act of 1996. In my view, communications policymakers must not be content to respond and react to the dynamic changes that are before us. We must lead -- boldly, decisively and creatively. In carrying out our leadership roles, I believe we must be well-schooled in the fields of economics and competitive analysis, and be truly committed to the belief that competition and markets will ultimately prove superior devices for managing change. Further, we must be "technology-wise," respecting at once the promise, practicalities and uncontrollable development of technology.
Based on these principles, I suggest in the article that communications leaders focus, among other things, on (1) promoting innovation, because innovation breeds new markets and shatters the entrenched advantages of incumbency, as the recent history of communications has shown; (2) addressing convergence, because technology will continue to erase the differences that historically have justified regulating different services differently and thereby force policymakers to reconcile these conflicting regulatory approaches; and (3) strengthening enforcement, rather than continuing to rely on prospective, prophylactic regulation.
I point out in the article, however, that one of the biggest obstacles to policymakers truly promoting competition, deregulation and innovation is not legal, economic or technological; rather, it is psychological. One reason I believe 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 1996 Act commands policymakers and industry to move away from the monopoly-oriented, over-regulatory origins of communications policy 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.
I do not dispute that risks await in free markets: risk that the consumers will be harmed by anti-competitive conduct on the part of firms with market power; risk that communications companies may be acquired, downsized or driven out of business; and risk that some individuals will not vie successfully for the many choice jobs that competition will create.
Although these fears are not inconsequential, however, they nearly always are overstated and tend to paralyze us from taking action that would allow markets to flourish and competition to grow. Instead, we speculate about possible anticompetitive effects and then adopt policies intended to protect new entrants and consumers from them. Rather than protect these interests, however, we more often, in practical effect, handicap the market and postpone the arrival of competition and consumer choice. Communications leaders must not give into these fears so lightly and instead must have the courage to trust the market.
Here's where mid-size, independent companies come in as our "Special Forces." It is my view -- which I concede is at once optimistic and subversive -- that mid-size companies provide a valuable testing ground for policymakers seeking to promote competition, deregulation and innovation. Specifically, policymakers can look to the experiences of mid-size companies both to appreciate the benefits of deregulation and innovation and, hopefully, to quell regulators' fear that the sky will fall if we do not anticipate, and prospectively control, every potential anticompetitive effect or other negative consequence.
I believe that even overly fearful regulators may feel comfortable letting mid-size, independent carriers explore new markets and technologies with lesser regulatory burdens than larger carriers face and thereby hasten the great day when all carriers -- large and small -- are liberated from such burdens. Regulators may feel comfortable going easier on mid-size carriers simply because they are not large, such that regulators will not feel compelled to restrict the activities of such carriers to protect the vast majority of consumers.
Let me be clear: I do not favor setting up or perpetuating a scheme whereby regulators automatically impose greater regulatory burdens on larger carriers. But to the extent mid-size, independent carriers can be freed from some of the restrictions faced by the larger carriers, I hope regulators can begin to comfort themselves that ceding control to the marketplace is not such a scary proposition after all. Thus, just as Will Smith and Jeff Goldblum disrupted the alien constellation in the movie, mid-size independent carriers may be able to perform a "sneak attack" on regulatory fears of anticompetitive or other negative potentialities by providing evidence that such fears are, at times, overstated. This sneak attack by independents will, I believe, bring regulators that much closer to allowing the market to take hold and to focusing on innovation, convergence and enforcement.
And how imminent is such a sneak attack by mid-size independent carriers? I would say that, at least with respect to showing regulators the benefits of innovative marketing and applications of technology, the preparations are well under way. Take Citizens Communications, for example. Citizens operates in small and medium-sized markets in over a dozen states, offering a wide variety of services ranging from competitive wireline local and long distance service, to cellular, Internet access frame relay, DBS and cable. Roseville Telephone Company in Roseville, California, likewise has taken pride in being an innovator in the deployment of new technology. Roseville serves over 100,000 access lines and provides long distance service, directory assistance, equipment, alarm monitoring, cellular and PCS, as well. Anchorage-based ATU Telecommunications also prides itself on providing a variety of leading-edge technologies and services. For example, ATU provides digital cellular, LAN service, data and Internet services, wireless cable television and pre-paid calling cards. ALLTEL of Little Rock, Arkansas, serves over a million access lines with local service, long distance, wireless Internet access and paging.
The examples provided by these and other mid-size independents serve multiple purposes. First, as I have said, I believe that the experiences of mid-size independents may alleviate some of regulators' fears that incumbent LECs, in particular, will seize upon every potential anticompetitive opportunity that might arise if regulators fail to craft a prospective rule to foreclose that opportunity before the fact. I note that some independents are providing great value and choice to consumers despite the fact that they are the most established LECs in their service areas.
Second, and relatedly, I believe that the experiences of mid-size independents can help persuade regulators to take seriously the notion that in some cases the benefits of allowing the incumbent to provide new services outweigh the potential (and often largely unproven) risks of anticompetitive conduct and the like. Many independents are at the forefront of demonstrating the value to customers of allowing carriers to bundle traditionally-distinct services in new ways and to deploy new technology. My hope is that, by focusing on some of these companies, regulators can begin to see that the risk of anticompetitive effects they perceive may be unfounded or may be outweighed by the benefits that will accrue to customers if carriers are not unduly restrained.
Third, I hope that the relatively small size of mid-size independents will allow regulators to become more comfortable with the notion that there may be benefits to replacing prospective regulation with careful monitoring for improper activity, coupled with vigorous enforcement. In addition to eliminating unnecessary regulation, this should provide a way around adopting one-size-fits-all rules that sweep too broadly in terms of the carriers to which such rules apply.
Fourth, because many mid-size independents do offer a variety of services that traditionally have been offered by different types of providers (e.g., voice, data, video), I believe that the experiences of these independents will highlight the need to rationalize the existing regulatory scheme, according to which similar services are accorded different regulatory treatments depending on the transmission medium used. In particular, I hope that independents that manage diversified portfolios of services will have experiences while navigating this highly balkanized regulatory structure that will show increasingly that the inconsistencies of such regulation must be streamlined and ultimately eliminated.
In closing, then, I ask those of you who represent mid-size independent carriers to do a few things. First, keep innovating. I trust that this won't be difficult, as one of the beauties of the market is that firms will innovate because it is in their self-interest to do so.
Second, keep us regulators informed of your marketing successes, and your failures. Your practical, real world experience is invaluable, and by sharing it with us, you will help eliminate faulty assumptions and policies and thereby eliminate unnecessary and harmful regulation.
Finally, when our rules inappropriately lump mid-size independents together with larger carriers, help us build detailed, factual records that will allow us to carve out exceptions to these rules for mid-size and smaller carriers if necessary. In this regard, I applaud the efforts of some independents to conduct a study to examine whether mid-size carriers under price cap regulation experience the same productivity gains as the larger carriers do. This kind of factual contribution will be critical in helping us evaluate our rules and may help mid-size independents obtain a level of freedom from regulation that is more tailored to their circumstances.
The Army Special Forces' mission, like their motto, is "to free the oppressed" ("De Oppresso Liber"). I firmly believe that, by working with regulators and by otherwise serving as our "Special Forces" in the fight to promote competition, deregulation and innovation, mid-size independent carriers will help free all carriers from the bonds of outmoded regulatory thinking and liberate consumers with more vigorous competition, lower prices and better services. When that happens, it will not only be a great day for independents, it will also be a great "independence day" for us all.