SPEECH BY REED HUNDT CHAIRMAN FEDERAL COMMUNICATIONS COMMISSION VARIETY/SCHRODER WERTHEIM CONFERENCE NEW YORK, NEW YORK (AS PREPARED FOR DELIVERY) APRIL 2, 1996 WORDS THAT MATTER: WRITING DOWN A COMMITMENT TO COMPETITION AND KIDS In the words of Jimi Hendrix at Woodstock, I see we meet again. I know investment is a young person's game. So let me tell you that Jimi Hendrix was a musician. Woodstock was a farm. And I come to you straight from the entertainment capital of the world: Washington, D.C. This is my third year here. You have such a glittering roster of speakers. I'm pleased as punch to hold onto my spot on your roster. Even if it is only because Don Imus cancelled. I love Washington's weird ways. Washington is the only place in the country where Don Imus' words are subject to lawyerly exegesis as if they were sections of the Food and Drug Act. New Yorkers know. That's not what you are supposed to do with his stuff. Wake up! But words are what Washington does. You New Yorkers have to understand that words are currency in Washington. In New York you do numbers; in LA pictures; in San Jose and Seattle code. In Washington we do words. This is partly because we don't have money. Sure it's true that the FCC has made more money in airwaves auctions than Bill Gates has: $19 billion so far. But he gets to keep his. I just get to talk about ours. This is why Washington is a lawyer's town. Lawyers and poets are the only people left who think words matter. When Microsoft finishes the software called "Sue You Sue Me," only the poets will remain. We at the FCC like to think we occupy a middle ground between law and poetry which is called Policy. Here's how you do policy. Someone hums a few bars, and someone else does the lyrics. Of course for us, LYRIC is an acronym for Long Run Incremental Cost. This sort of joke is why I'm the only person in Washington never invited on the Imus Show. At any rate, whether or not we wax LYRICal, the words we put into our rules may still have some bearing on life as we know it. This is especially true with respect to implementation of the new telecommunications law of 1996. The new law turns the 1934 Communications Act upside down. Before, we encouraged monopolies. Now, we are for competition. The new law also extends the public benefits of communications. For the first time we have a national policy of making communications "affordable" to absolutely everyone -- including, especially, people with disabilities and children and teachers in every one of two million classrooms. A hundred and ten years ago Steve Brody became famous here in New York for saying he could jump off the newly built Brooklyn Bridge and survive. It was a huge media event. Steve Brody took a chance. He jumped off the Brooklyn Bridge. And lived. "Pulling a brody" became a common phrase for risk taking. So our country is pulling a brody off the comfortable monopoly bridge. But Congress is asking in the new law not only that we descend into the turbulent waters of competition. It is also asking that we fly into the blue skies of guaranteed social benefits from communications. Blue sky. You know about that. And you know that while competition maximizes consumer welfare and promotes efficiency, of course it doesn't necessarily benefit everyone. We can spend all the words in our vocabularies, but in the end the social goals of the new law have to be paid for with New York's currency: money. So where will the money to underwrite networked classrooms and high-cost telephony come from if competition is going to drive prices to cost? We have to figure that out in the next few months. Someone told me the other day that the purpose of the new law was to have the price of every consumer communications product go down and the profits of every company go up. You remember the joke about the Greek restaurant that loses a dollar on every meal that ends with a broken plate: They make it up on volume. Well, actually, this is what happened with long distance. AT&T made increasing operating profits every year that its market share and prices went down after the 1984 breakup. And even before meaningful competition, usage is way up for the local exchange companies; cable subscribership is showing big subscribership growth; and wireless subscriptions are up an astonishing 40% a year. We hope competition will accelerate the downward trend of price and the upward trend of profits and subscribership. But as Emily Dickinson said, "'Hope' is the thing with feathers -- [t]hat perches in the soul." That sort of hope is okay for a poet. We policy people need to put our hopes in more bankable words. And the Street wants to know who our words will anoint as winners and losers. I could tell you, but then I'd have to shoot you. I keep getting that backwards, don't I? The truth is that, in the long run, the FCC won't dictate the winners and losers. That will be decided by the capital markets, the entrepreneurship of individuals in big and small companies, and the power of invention. But in the short run I am concerned that the words in our rules and in states' rules will affect the capital markets. For entrepreneurs big and small to take a chance, like Steve Brody, they need the support of the financiers in this room. So for the competition experiment to work, we -- the FCC and the states -- have to make sure that clear rules encourage you to invest in all the good ideas that are brought to you. At the same time, we must figure out efficient, pro-competitive ways to meet the country's social goals. Perhaps the most critical economic goal of the new law is that the local exchange market should be opened to competition. This is nearly a hundred-billion-dollar business -- the biggest monopolized business in our country. There is more than $200 billion in sunk cost undergirding the local telephone company monopolies. And the service the LECs deliver to 95% of Americans at an obviously affordable rate is critical to our society and economy. Yet, Congress has taken the extraordinary act of opening this market to competition. Suppose the local phone company were the Dallas Cowboys. Congress has said that the wannabe competitors, the Washington Redskins, have a right to borrow Emmitt Smith for any number of plays. That's called purchasing an unbundled element of the incumbent network, like a switch. And, also, the Redskins can use the entire Cowboy team at a discount off what Jerry Jones pays them. That's the resale idea. And, finally, the Redskins can hand off the ball to Smith if their own runners can't carry the ball. That's called interconnection. If the run gets to the end zone, it's called termination, for which the wireless and cable industries propose to pay nothing to the Cowboys. On the other hand, wireless and cable would argue that it all balances out when the Cowboys use the Redskins' players. The new rules of this new game are going to be a challenge to write. I have four concerns about the FCC's ability to meet this challenge. First, the key decisions at the FCC and in most states should be made before Labor Day. This is an extraordinarily rushed schedule. And, meanwhile, we're operating at a reduced level because of the continuing budget standoff. It's ridiculous that I have to worry about whether I can pay for air conditioning for public servants who are putting in 15-hour days in our airless, cramped, tumbledown building trying to do the right thing for the country. But I do want to thank Senators Hollings and Stevens for their efforts to get us up to an appropriate level of funding. They know that penny-wise appropriations for the FCC is a pound-foolish decision when we're swamped with new duties. But they haven't succeeded yet. Second, we would love to endorse or copy anything successful that states have done to implement a competition policy in the local exchange markets. But the fact is that only a few states are ahead of Congress and the FCC in such critical areas as interconnection, unbundling the LEC network, and number portability. Competition policy is so new that no state has a significant body of evidence on how its own competition policies work. Nor is anyone sure of the cost- benefit calculation if the different states enforced radically different competition rules instead of applying a consistent national policy in communications. The truth is, the FCC and the states are exploring uncharted territory together. That's why it has been so great for us to have staff from State Commissions working at the FCC, helping us understand the issues. Third, in our justice system new laws are new fields of play for lawyers. The new telcom law is no exception. Unless and until the FCC and the states cooperate to write fair, clear, and easily enforceable rules of competition, the fundamental policy issues for the IXCs, the LECs, the cable companies, and the wireless companies will be decided only after years of litigation. Lawsuits are great fun for people who like words by the million. But from 20 years of personal experience I'm telling you, that's not the preferred choice for writing a sensible national communications policy. It would be better to have clear structural rules for competition that reduce the significance of litigation in setting connection policy. Our fourth problem at the FCC is that we have to write our fair rules of competition during the worst of seasons for bipartisan policy: a Presidential election year. Typically, in every fourth year spring brings out at the same time the cherry blossoms around the Tidal Basin and the partisan bickering at the FCC. The Commission's oversight hearing in the House last week was just as distressingly partisan as you could fear. And to compound the problem, we are now four Commissioners in number disagreeing on issues ranging from auctions to children's TV. What if we divide 2 to 2 over the key issues of competition? How can that help the country? And suppose some people on the Hill sought to encourage partisan division at the FCC. It could happen. I've heard that it has happened. For example, the lead topic at last week's oversight hearing was this: Which Commissioner thinks pagers should be given to homeless people? Turns out no one actually proposed this idea. But this was politics. So we talked about the idea anyhow. A huge amount of time was spent discussing whether anyone at the FCC might ever dare to try a communications experiment that might get unemployed people out of soup kitchens and back to work. But the real point is: Should we spend our time in playing the gotcha game, or should we focus on solving the complex problems of interconnection? It's a great honor to be at the FCC at this point in history. We have a chance to get some things right for businesses and consumers and children. I am sharing my concerns about the FCC with you because I would like you to send us in Washington a strong message. Tell us to forget talk. It's cheap. But tell us our written words would be beyond value if they were the right words. Insist, for the good of the country, that we be very tough-minded in writing the rules that promote competition in communications. Demand that we be absolutely committed to write into rules the guarantee of advanced communications to every child in every classroom. These twin goals will work for Wall Street and Main Street. And tell us -- all four of us -- to ignore politics. There isn't a parent in the country who wants to hear that their child has to wait to receive modern technology in the classroom because the FCC is suffering 2-to-2 partisan gridlock on some issue or other. There isn't a businessperson in this room who wants the country's commitment to competition to be undercut because the FCC can't come to cool-headed consensus on the hard economic issues before us. When we and the states are done with our work, if the chance for competition is as real as the cold water of the East River in which Steve Brody jumped and swam, then the winners are going to be doing the convergence crawl. We are going to see the elimination of the distinction between local and long distance, as IXCs and LEC's, and their product offerings, converge. And at some point technology and financing will permit the cable industry to join the telcom fray on a big-time basis. And our auctions will drive PCS and cellular companies to think about how to take minutes from the stationary phone industry. Meanwhile, the telcos were the big winners in our wireless cable auctions. Ultimately, they may be logical allies of digital TV broadcasters. In a convergence world, a communications company that wants to bond with a customer has to offer a bundle of voice, video, and data services under a brand that is trusted. To let all competitors acquire the pieces to assemble that bundle, we have to make sure that the fair rules of competition really work. Businesses will go after customers on a regional basis, not solely within state lines. They will want to know on a regional and national basis what the rules of competition are. Will they tolerate major differences between the FCC and the states, or between one state and another? But pro-competitive experiments in different states might promote entry. What is the right balance here? This is where words still matter. Even Washington words. And when we strike that balance by writing pro-competitive rules at the federal and state level, those rules have to make sense. They have to be translated by Wall Street into commitments for funding. That's what clear, pro- competitive rules can deliver -- huge investment boom, big job growth, and better deals for consumers. If the Street believes our competition rules can really work, then the funding for new entrants will be there. If the rules are weak, wishy-washy, and ineffective, then we will be threatening financing and endangering the dream of competition. I'm absolutely sure that just on the other side of the mountain of work that faces us is a shining land of opportunity: opportunity to make new money, opportunity to make new inventions come to market, opportunity to teach the next generation in new and newly successful ways. And I'm convinced we can figure out, at the FCC and at the state level, how to write real words in real rules that create these real opportunities. To get over the mountain we can't slip to the right or the left into the gully of partisanship. We have to stay on the practical path of pragmatic policymaking. Then the business world can deliver on its promise to the country. Our children will have finer educations and finer jobs as a result. That ought to be enough to persuade us to pass on the politics of the season. Many thanks. -FCC-