Wednesday, September 23, 1998
(As Prepared for Delivery)
Thank you, Jay, for that very kind introduction. And thank you for having me here today.
Here we are in the "Wonderful World of Disney." A land of enchantment, which is the product of the great visionary, Walt Disney. Walt Disney was a visionary like no other -- not only in his artistic creations, but in his ability to look into the future and show us a glimpse of how we would live and interact.
Before he died in 1966, Disney envisioned a "city of tomorrow" that he wished to share with the public. His vision was realized in the form of the EPCOT theme park, symbolized by that grand grey sphere, which reflects his view of the techno-future.
I wonder if Mr. Disney would have ever envisioned that, in his community, the residents would have the ability to pick among multiple companies competing with each other to sell little, pocket-sized digital devices with voice-mail, caller I.D., short messaging ability, and (soon) wireless access to something called the "Internet." I am guessing that even his forward-thinking techno-future may not have included things like PCS.
But, here we are in Florida, which has become a Mecca of wireless competition where consumers have more wireless choices, lower prices than ever before, and the rest of America is following right along.
In 1996, Congress set out to bring into being its own vision of the techno-future. Not unlike Walt, Congress saw a world in which fantastic developments in technology and telecommunications would be brought to consumers throughout the nation -- empowering them with new tools to go about their work and bringing them new ways to play. It was a world in which consumers themselves would choose what they wanted rather than have that choice dictated to them by government and monopoly service providers. The legislature recognized that to bring such a world into being, it had to change the rules and regulatory processes by which the world was governed. It wisely selected a competitive sphere as the most suited environment for realizing its vision.
President George Bush was correct when he observed that you have to have
that "vision thing," but, as he himself knew, it is exceedingly difficult to bring vision into reality. This is particularly true when you do not have the advantage of building a new structure from scratch, but instead have to renovate the existing one -- with its deteriorating foundation, musty halls and crumbling walls. Our task under the Telecommunications Act is the latter.
What tools do we have to bring to the task? For starters, Congress set out a blueprint and made a number of changes itself directly. In addition, it provided the FCC and States with new equipment and refurbished some of our tried and true instruments. Perhaps, none more important than regulatory forbearance, which commands us NOT to apply any regulation if we determine certain things. It is a powerful piece of hardware and it is important to know how to handle it properly. This is what I wish to focus my remarks on today.
For context, let me focus on some of the issues raised when PCIA asked the Commission to swing the forbearance hammer and crush the vast body of regulation it believes, like Jonathan Swift's Gulliver, is pinning the industry down. Putting aside the specifics of the Commission's order (I supported not forbearing yet in certain areas), it reflected some timidity in using the forbearance hammer. Instead of showing a willingness to wield the Big Iron with the purpose and power of John Henry, we demonstrated an uneasiness in even grabbing the handle. Two aspects of the order illustrate the point: (1) the conclusion that conditions are not sufficiently ripe to discipline competitive markets with regard to speculative harms; and (2) the tendency or willingness to shroud the promotion of desired market outcomes in the garb of "market failure" or "consumer protection" in order to justify continued regulation.
II. Understanding Markets and Competition
To begin, it seems to me that in order to use forbearance properly, one must first understand what we are trying to build. That is, what is a competitive market and what are its conditions? I would characterize competition this way: it is a dynamic in which consumers and private firms interact and communicate and thereby define the contours of the market and the nature of the services offered in it. This "dialogue" maximizes consumer welfare by bringing forth those services (and service providers) we value most and extinguishing those we do not. In short, a competitive market is a means for making decisions. Properly viewed as a decision-making mechanism, it is plain to see that the market is a replacement for regulators making decisions about what services will be offered, what technology will be deployed, by whom, to whom, and at what price. A competitive market, thus, is NOT simply an accumulation of outcomes, pre-selected by the government. We should not yield to its forces only when those outcomes are achieved. Instead, a competitive market is a model that produces different outcomes that reflect the value consumers assign to the variables of the model. Almost by definition, you cannot predict what outcomes a healthy market will produce, and attempting to do so too broadly will result in speculation about benefits and harms that can paralyze our ability to let go of regulation.
"Getting to competition," then, is not a construction project, as some in policy-making believe, and we are not its master-builders. Instead, I view the drill as handing off decision-making responsibilities to the market. Our work leading up to the change of command is to prepare our institutions for that change, and forbearance is one of the key levers we pull to execute the trade.
Government, however, does have a role to play in ensuring that the conditions that are necessary for the market engine to work properly are in place, yet it must be careful not to extend this concept too far. Before imposing too many regulatory conditions or adding incentives to fuel competition, we should first diagnose the market to see if it is functioning well without government intervention. Is there a monopolist in the market? Is there evidence that prices are being held to competitive levels? Can consumers find substitutes for services? Is there evidence of product and service innovation? Do we see new entrants coming into the market? Do we see growth in the market? If the answer to most of these questions is yes, government should resist the temptation to tinker by offering additional kindling to the fire or imposing additional discipline in the form of new rules or restrictions. That tends to distort the market dynamic.
If one evaluates the wireless market on this basis (as the Commission did in its "CMRS Competition" report to Congress), one finds a healthy, functioning market:
First, markets are not monopolized. Indeed, the cellular duopoly is long gone. Broadband PCS operators have achieved coverage of half of the U.S. population in a little more than a year after beginning their launch. According to the Wireless Telecommunications Bureau's analysis, to date, 285 BTAs (containing over 222 million people) have one or more NEW competitors offering service. In 81 of these markets (containing almost 150 million people), there are three, four, or even five new providers. Combining these new entrants with the incumbent cellular operators means that these markets have five, six, and seven companies providing mobile telephone services.
Second, consumers churn. A recent study by Strategy Analytics estimates that 38 percent of subscribers in the "mobile family" could change their service to another carrier. Other estimates by Andersen Consulting and Herschel Shosteck indicate that wireless industry churn is around 30 percent annually. Recent surveys indicate that price is the most important factor in deciding to churn for consumers.
Third, price trends are downward. During 1997, a series of quarterly surveys found that during the year the price per minute of mobile telephone service dropped between 15 and 34 percent depending on the number of minutes purchased. This year, it seems that a week does not go by without a wireless carrier announcing new, flat-rate pricing for "buckets" of minutes, which are getting down to around 10 to 11 cents per minute.
Fourth, innovation is strong. Cellular and PCS hand sets are getting smaller and smaller. They are building more and more intelligence and capabilities into the handsets and the wireless networks: pretty soon I will be able to use my mobile "communicator" to talk to my wife on my way home, check the traffic reports on the Internet, and even open my garage door. Another sign: the "third generation" of wireless technology is a hot topic, not only because of the international issues, but because of the promises of new technologies just over the horizon. The paging industry is responding to heavy competition with new two-way narrowband PCS technologies that, personally, I love.
Finally, growth is strong. The Commission's report to Congress demonstrated that each segment of the mobile telephony market has seen subscribership expand dramatically. While the broadband PCS and digital SMR operators have acquired approximately four million customers since they launched service, cellular subscribership has continued to grow.
Yet, despite this evidence, the Commission still concluded that "certain conditions" -- namely, different technologies, different frequency bands, the cost of new handsets and the lack of number portability -- may "undermine market discipline." And, it further speculated that carriers "have the opportunity and incentive to treat some of their existing customers in an unjust, unreasonable, and discriminatory manner" if we don't mandate resale. I dare say there are not many companies that will stay in business long by purposely treating their customers in an "unjust, unreasonable, and discriminatory manner," as some seem to believe they have the incentive to do.
III. Market Failure and Consumer Protection
Let's turn to my second area of concern. The Act commands the Commission to forbear from applying any regulation if it determines a number of things, one of which is that the regulation is no longer necessary to protect consumers. This is undoubtedly an important precondition to forbearance but there is a danger that the exception will swallow the rule. Both competitive markets and regulation seek to maximize consumer welfare and it simply is a false choice to suggest that regulation benefits consumers and protects them from harm, while competitive markets do not.
The ability for markets to benefit consumers is often underestimated, and harm to consumers from its functioning is often overstated. For example, it is widely assumed by many regulators that the free market fails to bring services to certain areas or socio-economic classes in the nation. We are told this is a failing of the market, thus regulation is necessary to address this problem. The free market, however, is not some exclusive instrument of business, nor does it serve only the well-to-do. In fact, markets often prove much more robust in finding solutions to suit different segments of our population than regulators do.
Consider this industry. In the PCIA forbearance order, the Commission expressed its concern that competition would not serve certain areas or segments of the population, because facilities-based carriers were concerned only with high-end users and business customers. Yet, we see pre-paid wireless offerings springing up that are marketed to less affluent segments of the population. These plans are marketed to mass audiences on television, radio and billboards. In fact, I was in a 7-11 the other day and noticed that right there in the store one could purchase a prepaid cellular plan and wireless phone! The market has found a new and creative approach to serving areas and populations that we suggested would not be served well by competition. Never sell the market short.
Furthermore, we must accept that market capitalism seeks to maximize consumer welfare, but it does not endeavor to distribute equally all services to all consumers at the same time, as other economic systems do. There will always be consumers willing to pay more for higher-end services than others. There will always be economic incentives to serve certain areas and not others. This is true of every other good and service in the American economy and it is not surprising it is true of communications services. If we are withholding deregulation in America waiting for these things to occur, we will be waiting forever. I would note that this market reality is not wholly incompatible with universal service. It may be possible (and wise) to secure basic transportation for all Americans, without guaranteeing every American a Cadillac. I believe that the same is true of communications services.
Don't get me wrong. I believe government has a role to play in protecting consumers from harm. But, such harms should be specific and identifiable, not merely consequences regulators can imagine producers have an incentive to inflict. No one should quibble about government intervention that protects the health and safety of consumers. Nor would I dispute the need for some government intervention to protect against the anticompetitive harms of real "market failure" and monopoly prices, as well as to prevent fraud, misrepresentation and the like.
But, consumer protection often is being raised not merely to guard against harm, but as a moniker for a broader social objective to create for every consumer a right to a certain number of competitive alternatives, to certain prices, and to certain level of service. Consumer protection and the all-encompassing "public interest" are also being waved to ensure a certain level of service to "underserved" markets, like government fiat is the only way they will get served.
I believe it is a complete fallacy that the risks of free market competition are greater than the benefits it brings. There is no doubt in my mind that competitive markets are the most consumer benefitting economic model ever devised by mankind. However, instead of turning to this model and putting faith in it, we tend to take counsel of our fears and overstate our ability to manage competition to avoid those things we fear.
The consequences of this, I believe, will be further reluctance to deregulate. And this will lead to slower development of competition, especially competition to local wired incumbents, for it is deregulation which yields competition. And such deregulation must occur on both the Federal and State level, with the FCC (as it does successfully in the international arena) leading by example.
Let me offer one final caution about regulatory intervention. We must also hesitate to invoke regulation merely to protect certain types of firms from competition. It should carry no weight that a given business model will suffer or disappear if the government no longer guarantees its viability, provided that the ability and opportunity to provide the same value to consumers is transferred from firms of the defunct model to other firms. Competitive market forces, technological developments, marketing innovations and other factors -- not regulatory mandates -- will better serve to pick the winning and losing business models.
IV. Year 2000
Before I close and open up the floor for your questions, let me venture into another area that has been occupying a great deal of my time and attention recently: the Year 2000 Problem.
The fundamental problem is easy enough to state: Many unprepared computers, automated and intelligent systems, and embedded microprocessors are not designed to take into account the millennial rollover that will occur on January 1, 2000. Since many computers and software applications record calendar year dates using only two digits, in the Year 2000 they may interpret "00" to mean the calendar year 1900, not the calendar year 2000, which may result in malfunctions and often unpredictable consequences. In some cases, the software will continue to function, but it may generate spurious data causing problems that may not be detected for months or even years.
This problem has already been cropping up -- luckily not in the industries that the FCC regulates -- resulting in malfunctions and disruptions. And while computer and technology experts cannot predict how the Year 2000 Problem will affect the various telecommunications industries, without a doubt the subsectors of the wireless services -- public safety, private wireless and commercial wireless -- could be affected by the Year 2000 Problem.
The problem is indeed serious. Terrestrial wireless systems and networks are vital elements of our national telecommunications infrastructure, and critical to military preparedness, public safety, government services, emergency services, and personal communications.
The Year 2000 Problem thus poses the question, "What may happen to wireless systems on January 1, 2000, if nothing is done by the year 2000?" Wireless service providers and users may potentially experience service disruptions: Commercial wireless operators and their subscribers may experience improper billings and delayed, disrupted, or denied communications services, including access and roaming.
Private wireless services, used by companies, local governments, and other organizations, similarly may be disrupted or denied, affecting a wide variety of businesses that depend on private radios, such as taxis, plumbers, road services, package delivery companies, airlines, and also manufacturers that use radio communications in their production processes.
Most important, the prompt and continuous provision of public safety services, including, but not limited to, those of police, fire, ambulance, and other emergency service organizations, may be threatened by the type of computer glitch that the Year 2000 Problem poses to systems that use or depend on computers.
With fewer than 470 days to January 1, 2000, it is apparent that no company can afford to put off attending to this issue. Often we hear that Year 2000 remediation efforts are hindered by the notions that an eleventh-hour magic pill will be developed to fix the problem or that "it's someone else's problem." Well, there are unfortunately no magic or universal solutions. Moreover, the challenge of implementing Year 2000 compliance efforts squarely rests with the individual private firms.
Find out if your software and hardware are Year 2000-ready and, if not, seek out an answer as to why not. You can find more information on this issue at our Year 2000 Internet site that you can access from our homepage at www.fcc.gov.
Thank you for listening.