"Local Competition. . .CLECs In The Midst Of An Explosion" Convention
Las Vegas, Nevada
December 2, 1998
(As Prepared for Delivery
Good morning, and thank you for having me here. I find it rejuvenating to get out of Washington, D.C. In the capital, I am constantly questioned and queried with pleading anxiety "Isn't the 1996 Act a failure?" Or "Where is all the competition?" Well, I will tell you where it is, it is assembled right here in this auditorium for all the naysayers to see!
It is indeed appropriate that the theme of ALTS '98 is "Local Competition. . .CLECs In The Midst Of An Explosion." For in the aftermath of the enactment of the Telecommunications Act of 1996, the landmark legislation that exploded the old-world, closed-market telecommunications regulatory regime, we are indeed looking to exploit the new landscape wrought by the conflagration and to establish a real and lasting competitive market.
Local competition may not yet have taken the hill, but it has hit the shore and established a beachhead. And while we can always talk about driving it further inland toward the heart of monopoly, I, for one, believe it is here to stay. Without a doubt, though, it is a momentous undertaking that requires all of us to respond and react to the dynamic changes that are before us.
I have a passing interest in physics, and the great Albert Einstein knew something about explosions of another sort. He once said: "The unleashed power of the atom has changed everything save our modes of thinking and we thus drift toward unparalleled catastrophe."
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 adapt to the unleashed power of this new technology would surely lead to catastrophe.
Relatedly, in the telecommunications context, we have unleashed previously unimagined technological and market forces. Telecommunications service providers of all sizes and varieties are scrambling to benefit from the growth opportunities emerging as a result of the 1996 Act. And just as Einstein warned, in another context, industry participants and policymakers that do not adapt to technological change place themselves in imminent peril. CLECS have often foreseen the risks and possibilities in time to be the first to capitalize on them.
II. ENTREPRENEURS HAVE ALWAYS LED THE WAY IN THE TELECOMMUNICATIONS INDUSTRY
Throughout the history of the telecommunications industry there have been competitive alternatives to incumbent carriers. These insurgents, despite the long-standing existence of Government-sanctioned monopolies, always found a way to attack and introduce new services, often deploying new technologies. They have frequently faced Goliath and won, and more importantly they have often succeeded despite political and regulatory favoritism towards incumbents--demonstrating as much innovation in their way around regulation as they had in the exploitation of new technologies.
Indeed, it was not so long ago that Microwave Communications Inc. took advantage of a technological innovation that was developed and improved through military application throughout World War II--microwave transmission--to provide competitive exchange access service. Armed with a new and improved "slingshot," and tenacity to match, Bill McGowan, the Chairman of MCI, set off on his quest to compete against the mighty giant AT&T. It was no small feat for such a small upstart, but it is emblematic of the resolve of competitive telecommunications providers. Reflective of McGowan's spirt is the quote he actually insisted be placed on the program at his funeral. It read: "The meek may inherit the Earth, but they'll never increase market share."
CLECs have generally lived by that credo. Competitive access providers (CAPs), and their successor CLECs, have aggressively sought a way around the incumbent-Government alliance in order to compete. They initially provisioned dedicated services by installing advanced high-capacity fiber optic plant, and new competitors have exploited wireless technology as well to fight their way through or around incumbent providers.
The services and capabilities developed during the relatively short history I just described were innovative and cutting edge, yet today they are common-place. They were born out of market opportunities and in many cases supplanted by new, improved products and services deployed by new entrants seeking out new opportunities. On the whole, what impresses me about entrepreneurs generally and this community of competitors specifically is their inventiveness and tenacity. Many of you would rather attack the competition with technologists than lobbyists. Many of you would rather hire businessmen and women rather than lawyers. I urge you not to lose that spirit.
III. UNIQUE ADVANTAGES FOR CLECs
The industry's past, in many ways, is a prologue to the future. The 1996 Act aims to burst open the local service market and to open the flood-gates to facilities-based local competitors. I am confident that CLECs--never known for failing to take advantage of market-opening policies--will continue to advance on the core of monopoly incumbents, by taking advantage of the unique advantages that this community enjoys. Let me highlight a few of them.
1. Technological Innovation
For one, CLECs are freer to innovate employing the latest technologies because they lack the legacy physical plant that their entrenched incumbent competitors possess. The current communications revolution is born of explosive changes in technology, the primary new forces being the advent of digital communications technology and the Internet. Digital technology has liberated information. Information of all types (voice, data or video) can now be encoded, transmitted and decoded by tiny microprocessors with an efficiency never before imagined, and thus new market entrants can take advantage of any number of distribution means, including fiber optics, coaxial cable, and wireless technologies. Digital convergence is creating new and innovative ways to transmit voice, data and video information, and consumers are eager to begin integrating these seemingly disparate forms in the manner that they define.
The Internet Protocol (IP) network paradigm is making all of that possible. Unlike the networks of old, the intelligence of the IP network does not reside in central office switches at the center of the network, in the full control of monopoly providers. Instead, it rests in the hands and imaginations of millions of users employing computing devices of all types who will have the power to define and implement communications services themselves.
The pressing of intelligence to the periphery of networks and to users turns existing networks on their heads and poses a real threat to incumbents. George Gilder aptly described this phenomenon in discussing what he called the new "microcosm":
"The law of the microcosm is a centrifuge, inexorably pushing intelligence to the edges of the networks. Telecom equipment suppliers can no more trap it in the central switch than IBM could monopolize it in mainframes."
CLECS are free to capitalize on these new network paradigms without the shackles of old-model legacy systems. Incumbents that currently enjoy the fruits of market dominance, on the other hand, are hindered by their sizeable investment in their existing systems. They are forced by their shareholders to protect those investments. They, necessarily, must move more cautiously and incrementally and are less able to respond to what Clayton Christensen calls "disrupting technology" in his book, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. The promise of technology is, in the long-run, infinite, and this correspondingly presents a tremendous opportunity for CLECs.
2. Capital Market Opportunities
Wall Street and the capital markets are willing to tolerate more risk with CLECs than with incumbents. The advent of digital convergence, new IP networks, and new distribution media has thrilled Wall Street. Though there certainly has been some volatility, the markets generally are more willing to reward risk taking by cutting-edge telecommunications companies employing new and innovative approaches than incumbent communications companies.
Incumbents surely enjoy rich rewards on Wall Street, but they are often valued more for their stability. To be flip, many are dividend companies, not rewarded for taking risks. As evidence, consider that AT&T's stock immediately fell 5 1/8 points after its TCI merger announcement, presumably because of the company's warning that the TCI takeover would hurt profits for approximately three years. The irony for these various dividend companies is that they, as much, if not more than CLECs, must take risk and change in response to new technological developments.
3. Culturally Suited To The New Competitive, De-regulated Paradigm
In the time that I have been at the Commission, I have observed how corporate and even regulatory culture can dramatically affect the objectives and performance of different firms. I wish I could film a day in the life of a regulator and show the striking difference between the presentations I receive from some long-established companies and many of the new upstarts.
It is common among the veteran players to be visited by at least six to ten people, with over half of them being lawyers. Their presentation often involves some complex or intricate rule that they want us to craft in order to protect their profits or to burden their competitors. The new competitors are often strikingly different. They at most will have two or three people, usually business and operational personnel, and more times than not their message is simply "leave us alone." When they do complain, it is usually pointed and involves some real show stopper for them, rather than something that would simply put icing on the cake.
I must wonder, as competition matures, whether the established monopoly culture with its golf tournaments and regulatory game plans can withstand the assault from entrepreneurs eating turkey sandwiches for lunch and sharing hotel rooms just to save a single dollar for the rapid-changing competition that will characterize the Digital Information Age. This nimble, dogged culture has won more times than it has lost in times of revolutionary change like we are presently experiencing.
IV. UNIQUE CHALLENGES FACED BY CLECs
CLECs are without a doubt uniquely positioned and equipped to make the transition to robust local and long-distance competition. However, I do not want to minimize the threat that large established companies with market power present. When you are still living in the Jurassic Period, a dinosaur can be a scary thing, and as you are being eaten by Tyrannosaurus Rex, there is no solace in the knowledge that one day he may be extinct. There are significant challenges that confront (and, in the near term, will continue to confront) CLECs. Let me take a moment to articulate a few of them.
1. Brand/Name Recognition
CLECs are often relative newcomers to the telecommunications scene, and they are competing against well-known, entrenched competitors with tremendous capital reserves and most of the market's customers. Accordingly, CLECs consistently face a difficult battle to attract customers. It will take superior customer service to move revenue and customers into your "assets" column. It will take differentiated products that capture their imaginations and place them in the control seat. And, it will just take time. Time to establish brand recognition, customer loyalty, and acceptance of CLECs' technologically advanced services and facilities. This need not be decades, however, for the natives are restless.
2. Access To ILEC Infrastructure And Resale
Incumbent local exchange carriers, by virtue of their historical Government-sanctioned monopoly status, control many of the essential facilities that competitive providers may initially need to provision their services. Many CLECs would find the local access exchange infrastructure very complex, expensive and time-consuming to duplicate. The 1996 Act was intended, in large part, to help tackle this problem by requiring interconnection under reasonable terms and conditions or, alternatively, under a resale option.
Unfortunately, I know that the interconnection, unbundled network elements and resale issues have suffered some temporary set-backs and delays that only time and concerted effort can repair. But, as this segment of the industry has always done, do not confuse a regulatory game-plan for a business plan There is no upside, in the long run, being dependent on your primary competitor for your key assets, or in relying on the Government to protect or subsidize your service. Wherever and whenever possible build facilities. Only by controlling your own essential facilities do I believe you can differentiate your service. And, the more you possess your own assets, the less you need to look to the Government for salvation.
What I urge most is that you keep to the message that heavy regulation in the long run is a hindrance to opportunity. At times, as I have observed, it is tempting to play the regulatory "game" in the way the incumbents often do. Begging for regulatory protection. Seeking regulatory favoritism that raise the costs of your competitors. The "game," is fraught with uncertainty, vicissitudes and delay, subjecting your business to the whims of politicians and regulators. Relying too heavily on current regulatory distortions can provide short-term benefits, but it also perpetuates these and other distortions that will not necessarily benefit you over time.
This picture need not be grim. I firmly believe that there will be innovations that make it feasible to avoid incumbent facilities, including the venerable "last mile." Nearly every major evolution in the communications industry has come on the heels of a new development or application of technology. In this regard, cable, wireless, and satellite technologies all hold the promise for competitors and represent the threat to the incumbents' control over essential facilities. Chase these possibilities.
3. State and Local Regulatory Involvement
The CLEC industry also will face hurdles at the State and local levels. In many of our communities, local governments have been reluctant to let new local service entrants tear open their streets, or raise new poles or towers. In this area, we collectively have to become advocates to convince these governments of the virtues of competition and the manner in which it will empower their citizens in the Digital Information Age. The Commission is doing everything it can to take this message to State and local governments, in our respective discussions with regulators and through the FCC's Local-State Advisory Committee.
V. CRITICAL MASS TO CHAIN REACTION
Theodore Vail, President of the American Telephone and Telegraph Company, once remarked:
"Competition--effective, aggressive. Competition--means strife, industrial warfare; it means contention; it oftentimes means taking advantage of or resorting to any means that the conscience of the contestants or the degree of the enforcement of the laws will permit"
I believe that CLECs are born and shaped by this mind-set. This industry has constantly led the way to competition, by being aggressive competitors and advocates for the free market. You have plowed through the regulatory regime to sow the seeds of new competitive choice and services time and again.
Of course, no one can predict what the future may hold for the telecommunications industry generally and the CLEC community specifically. However, it is very interesting to note that Einstein, at one time, predicted that it would be impossible to unleash the power of the atom. He stated incredulously, that "[t]here is not the slightest indication that nuclear energy will ever be obtainable."
Well, on this very day, December 2nd, 56 years ago, scientists at the University of Chicago, achieved the first self-sustaining chain reaction, thereby causing the scientifically-controlled release of atomic energy.
Clearly, despite the most August naysayers, the future is open to all possibilities! I wish you happy hunting.
VI. YEAR 2000 PROBLEM
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.
With 394 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 ourYear 2000 Internet site that you can access from our homepage at www.fcc.gov.