Thank you for inviting me to be with you this morning.
Today I'd like to touch on two topics: The first is local telephone competition. The second is FCC's policies affecting the Internet. These areas are important to businesses and, at present, the FCC is clearly playing an key role in both.
First, local competition. For most of the last century, local service was provided on a monopoly basis. In the early 1980s, the Justice Department succeeded in its antitrust suit against AT&T, and AT&T was divested of its local telephone operations.
The conventional wisdom following the breakup was that the Baby Bells were left with the sleepy backwater of local telephone service. However, almost from the time of the breakup, new entrants started competing for pieces of the local market. It gradually become clear that the local telephone market was not the natural monopoly some had thought. This showed Washington policymakers that local competition was really possible. But shifting the legal framework from monopoly to competition was easier said than done. Powerful interests were greatly affected by such a change. As Senator Hollings recently said, no single telecommunications company could push a bill through Congress, but any one of them could sure stop a bill.
So it took years of negotiation and maneuvering, but in 1996, Congress achieved its goal when it passed the Telecommunications Act of 1996. It reversed the 60 year old notion that the nation was best served if regulators managed local monopolies. The new law says competition will be the hallmark of local telecommunications.
In the two years since the Act passed, the FCC has worked very hard to make local competition a reality. Most of the FCC's pro-competition orders have ended up in court, thereby delaying a final regulatory framework. But apparently enough of the picture is now in place, because Wall Street is throwing money at new local telephone companies like there's no tomorrow. The reason, in part, is the lure of the business market in telephone service. Most new competitors in the local phone business focus on business markets. And while I am disappointed that most residential consumers are not yet able to choose among local carriers, I am very encouraged that businesses are seeing the benefits of competition.
Right here in Albuquerque, there are at least four new local carriers. Brooks Fiber, ACSI, GST, and AT&T. From what I understand, AT&T has limited itself to reselling local service. The other three carriers, none of whom are household names, are actually putting in their own facilities and offering customers choices they never had before. And I give these carriers all the credit in the world for simply diving in and starting to compete. Because even while key pieces of the regulatory framework were still being debated, those companies were going out, cutting deals with the incumbent telcos for interconnection, and getting down to business.
These new upstart competitors should make your businesses at least a little stronger. At a minimum, the arrival of competition should herald lower prices for telephone service. The more your business relies on telephone service, the more beneficial it is to have competition. Competition is much better than regulation at forcing monopolists to treat customers better, lower prices, and innovate. I am confident that businesses in Albuquerque will start to see some of the benefits of a competitive local telecommunications market that businesses in New York and Chicago have enjoyed for a while.
I am also optimistic that competition will result in real benefits for a small and medium-sized businesses. Up to now, telcos took the best care of their largest customers -- the Fortune 500 companies. Smaller businesses did not get the same level of attention. But now, new local competitors will be courting the nation's five million small and medium businesses. Those businesses will now get focused attention like never before.
Speaking of local competition in Albuquerque, I should mention that before I joined the FCC last fall, I was on the New Mexico Corporation Commission, which regulates telecommunications. In that post, I had the privilege of playing a role in the new competitive telecommunications market here in Albuquerque. My fellow commissioners and I arbitrated the agreements that allowed the new competitors to enter the market and compete against U S WEST. Of course, now that I've publicly associated myself with those actions, I'm a little reluctant to ask for a show of hands on whether your experience with local competition has been positive. So what I'll say is this: if things have improved on the telecom front, I'll take the credit. If they haven't improved, it's not my fault -- I just work at the FCC.
One area of communications where things constantly seem to be improving by leaps and bounds is the Internet. That's second topic I'd like to cover. The Internet is the most important cultural and business phenomenon of this decade, and its growth has been exponential. In 1991, the World Wide Web did not exist. In 1992, it consisted of 100 sites. Today, there are over 200,000 sites. Approximately 60 million people in the United States and Canada now use the Internet. Half of them were on-line in the last 24 hours.
Those statistics certainly prove that Internet use is exploding. But you people run businesses, and this conference is all about how the Internet affects businesses. It's about increasing your profits by advertising and selling your products on-line. It's about becoming more efficient by sharing information on-line with your suppliers and customers.
According to an article in Computer World, the number of companies conducting business-to-business transactions on-line is projected to increase from 135,000 companies this year to 435,000 companies next year. And the number of people who have actually made purchases via the World Wide Web has reached almost 10 million. Forrester Research estimates that Internet-based end user commerce will total eight billion dollars this year and will double each year for the next five years.
The extraordinary growth of the Internet was made possible by a confluence of events. One of those events was the decision by the FCC in the early 1980s regarding the payment of access charges. Access charges are fees paid by long distance companies to local telephone companies to originate and terminate long distance calls. Fifteen years ago, the FCC decided to exempt "enhanced service providers" from payment of access charges, even though it appeared that some ESPs were similar to long distance carriers.
In addition, the FCC said that anyone could have access to the underlying telephone network in order to deploy and market enhanced services. One of those enhanced services turned out to be Internet access. So the FCC's policy instincts were correct, and those decisions by the FCC clearly facilitated the development of the Internet. But I also think Woody Allen's line about our success being "somewhat inadvertent" may also apply here.
Once the Internet arrived, however, the FCC's continued "success" with Internet policy has been entirely intentional. For example, when the FCC reformed the access charge system last year, it resisted arguments by local telephone companies that ISPs should pay access charges because they cause major traffic congestion on local phone networks. That argument has since diminished as it became clear that second lines for Internet access are now a major revenue generator for telcos.
But according to news reports, the FCC's strong record on promoting the Internet is about to end. Those reports say that the FCC is about to tax the Internet. What the FCC is actually considering is whether phone-to-phone long distance calls that use the Internet protocol should face fewer regulatory costs than traditional long distance calls. At first glance, the answer is, "Sure, why not?" -- lower costs means lower prices, and lower prices are always good, all things being equal. The problem the FCC is wrestling with is whether all other things really will remain equal.
Technology is a powerful force. Sometimes it supports carefully crafted public policies and other times it undermines them. So-called Internet telephony -- it's really telephony over IP -- is a good example. Lower cost IP telephony is forcing foreign monopolies to lower their rates for regular, circuit-switched calls from the U.S. This helps erode the subsidies some countries are extracting from U.S. callers. That's an example of technology as the regulator's friend.
But IP-based telephony is also being deployed for long distance calls within the U.S. The reason, in part, is because those calls avoid paying access and other charges. Both upstart and established long distance carriers are moving traffic off the circuit-switched network and onto IP-based networks. If this trend continues, some have said the federal government will be left with less and less money to keep local rates affordable. If that is true, it would be bad news for residents of New Mexico and other rural areas where it's very expensive to install and maintain local telephone networks.
One other important consideration is that the world is watching U.S. policy toward the Internet. If we send the wrong signal, their own pieces of the Internet will have a harder time surviving. And strong Internets in other countries are a benefit, not a threat, to the U.S. component of the Internet. That's the nature of networks: the value of a network increases as the number and quality of end user applications increases. As foreign Internet users come on-line, the greater the value to all users, including U.S. residents. So there is a true national interest in leading by example when it comes to "Internet" public policy.
One other issue that will probably be discussed in Friday's Report to Congress is what is being referred to as "self provisioning." There is some question about whether ISPs who "self-provide" their own facilities, rather than leasing facilities from telephone companies, should be required to contribute to universal service. The argument for requiring "self-providers" to contribute is that ISPs who lease lines end up paying an additional universal service charge, while ISPs that self-provision facilities would avoid that charge. This could create skew investment incentives and encourage vertical integration solely to avoid payment of a universal service contribution.
So the crux of the dilemma for me is this: On the one hand, I very much want to avoid policies that will maintain incentives to develop new communications technology. I also like the idea that IP telephony may subvert unreasonable international settlement rates that harm U.S. consumers.
On the other hand, I am a strong supporter of the concept of universal service, and it's possible that funding for universal service could be affected if large amounts of long distance traffic move to IP networks purely for regulatory reasons. In the end, I am hopeful that my colleagues and I can reach conclusions that fairly accommodate both compelling interests. We will be issuing a Report to Congress tomorrow that will address the issue of IP telephony in greater detail.
But lest I end the Internet portion of my remarks on such an uncertain note, I would also point out that the FCC is actively seeking policies that will promote higher-speed connections to the Internet. From the local switch going out into the network, computing power has pumped up switching and transmission capacity tremendously. And as we all know, PCs themselves become more powerful and cheaper every day.
The missing link to the future networked world is the local loop. The local loop is the copper line running between your premises and the phone companies switch. The bandwidth of the local loop has fallen far behind the capabilities of PCs and the rest of the local telephone network.
Today, computer software and hardware companies are working with phone companies to develop standards to permit much higher speed connections to the Internet. Overwhelming demand for high speed access is driving this cooperation. I am optimistic that whatever standard they settle on, that it will be a quantum leap in bandwidth from today's Internet access speeds.
One thing I hope we do is make sure the FCC's rules don't inhibit the deployment of high bandwidth technologies. For example, incumbent local carriers argue that they shouldn't have to lease their own high bandwidth technology to competitors, as they must do with other parts of their networks. Otherwise, they argue, the FCC creates a disincentive for them to deploy this technology. My thinking on this issue will be guided by the goal of giving carriers the incentive to provide consumers greater bandwidth options.
In addition to giving carriers the right regulatory incentives, there may be other steps the FCC can take to speed that rollout of high bandwidth technology. One example might be the quality of loop an incumbent telco is required to provide to a competitor. When a competitor requests a leased loop to provide high speed connection, the competitor should receive a conditioned loop that supports high bandwidth transmission. Otherwise, competitors would be unable to offer high-speed access to many customers through no fault of their own.
Giving all parties access to conditioned local loops will promote competition in the market for high-speed Internet access. And competition is essential. Does anyone remember when ISDN debuted? How about 1983. The reason the market has passed ISDN by is that without competitive pressure, monopoly carriers have much less incentive to move new products to market.
I want to see telcos roll out high bandwidth service not at their leisure, but out of competitive necessity. That's why local competition is such an important piece of the bandwidth puzzle. Competition will force incumbent telcos not just to lower prices and treat customers better. It will also force them to develop and market different high bandwidth connections. Bandwidth will become the new telecom battleground.
One other source of competition that may be spurring telco action is the gradual rollout of cable modems. I've heard cable modems are really something else -- a whole new way of experiencing the Internet. Some industry observers say that telcos have a two or three year window of opportunity in the high bandwidth market before cable networks can support Internet access nationwide.
In the end, I think history will record the 1990s as the time when local competition and the Internet really took off. Those two related events will, in my view, transform everyday life in ways we can barely imagine. For you, as business people, this presents challenges and opportunities. I will do my best to support policies at the FCC that make sure those opportunities are truly available to you. Thank you.