NEWS October 11, 1996 FCC CHAIRMAN URGES ALL COUNTRIES OF THE WORLD - DEVELOPED AND DEVELOPING - TO SUPPORT COMPETITION IN TELECOMMUNICATIONS FCC Chairman Reed Hundt today said the World Trade Organization (WTO) telecommunications negotiations "offer tremendous promise as an avenue to speed worldwide liberalization in telecom and bring the benefits of competition to consumers and businesses worldwide." In a speech to the Asia Society in Hong Kong, Hundt said, "A principal purpose of my trip to Hong Kong is to urge Asian countries to improve their offers in the WTO telecom talks that are scheduled to end next February. If these talks are to succeed, Asian countries must make better offers," he said. Chairman Hundt said today that there is a "convergence of new thinking about communications in countries around the globe," and he urged developed and developing countries alike to adopt policies of telecommunications competition. He said, "It is often thought that open markets and competition are not right for developing countries. This view has been conventional wisdom in the past. But if it was ever right, it is now clearly wrong." Hundt said, "The notion that competition is the right telecom model is now generally accepted in developed countries. We see this, for example, in the European Union's commitment to liberalization. The challenge in European and other developed countries, including the United States, is to bring practice in line with principle." Hundt warned that the "telecommunications gap between developing and developed countries is growing larger," and said, "A developed country possibly can afford to bear the costs of a monopoly, although I am dubious. But does anyone think that a less developed country has the luxury of time and resources to forego the economic gain that will come from adopting a policy of open, competitive telecom markets?" Chairman Hundt said, "Everywhere, in every nation, there is talk about the implementation of the basic policy goals explained by Vice President Al Gore in his famous Buenos Aires speech of 1994: competition instead of monopoly; reliance on private investment from world capital markets to build the information highway through every country; and creation in each country of an independent government agency that will write fair rules of competition." (over) - 2 - Hundt rebutted "five distinct fears" as to why many countries resist competition: 1. He said the notion that competition is the enemy of universal service is "a pernicious myth," adding, "Monopolies are simply not necessary for universal service." 2. He said countries do not need to control telecommunications because of protecting national security. "I agree that telecommunications is a strategic industry. They's why countries cannot afford not to have competition building them reliable, modern and to some degree redundant networks. Monopoly infrastructures will be less reliable and technologically inferior compared to those built by competition." 3. Hundt said competition will not lead to job loss. "New entrants to the telecommunications industry means new jobs in the economy...and can open up new employment opportunities in and beyond the telecommunications sector." 4. He said competition will not reduce revenue obtained from privatizing state-owned monopolies. "A competitive market will generate far more in taxable revenues than a monopoly market," Hundt said. 5. He said modern technology and business practices will not threaten local culture. "In fact, competition and modern communications may well be necessary to sustain local culture." - FCC - SPEECH OF REED E. HUNDT CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION Asia Society Hong Kong October 11, 1996 "To build one world, only connect" July 1, 1997, marks the convergence, among other things, of the communications revolutions of China and Hong Kong. These beneficent and benign revolutions have driven economic development in both countries, and they can, I believe, help assure the success of this very important transition. In all countries, including the United States, the power of the communications revolution for many decades has been constrained and confounded by government polices favoring monopoly instead of competition, state-managed growth instead of market-driven development, simple engineering solutions instead of innovative new technologies. There is a convergence of new thinking about communications in countries around the globe. The policies of decades are being reversed, or at least preparations are being made for their reversal. And these policies of monopoly and state management of communications cannot easily be defended. They have delivered a world communications market that is perhaps half as big as it could be. They have left more than half of the people in the world without any access to a telephone or, more important, to telemedicine or to tele-education or to the economic development that is sparked by modern communications. So everywhere, in every nation, there is talk about the implementation of the basic policy goals explained by Vice President Al Gore in his famous Buenos Aires speech of 1994. These goals include: -- competition instead of monopoly, -- reliance on private investment from world capital markets to build the information highway through every country, and -- the creation in each country of an independent government agency that will write fair rules of competition. Over the last few days in Beijing and Shanghai we had very interesting and positive meetings with Chinese officials including Vice Premier Wu Bangguo and Minister of Posts and Telecommunications wu Jichuan. We talked about these precise topics. We talked also about the competition among all economies to attract investment in modern communications, and the tremendous magnetic power that fair and clear and explicit rules of competition exert to draw in investment. I think it can be fairly said that the whole world is impressed by the progress China has made in developing its telecommunications sector over the last five years. I was very pleased to hear that China intends to build on its achievements in telecom development by drafting a comprehensive telecommunications statute that will establish rules of competition in this crucial sector of China's and the world's economy. This is, of course, just what the United States, first by act of Congress and now by rulemaking at the Federal Communications Commission, is trying to do for its own economy. It is important to emphasize that no nation is distantly far ahead of any other in the transition from monopoly to competition, from state-managed telecommunications to market- driven telecommunications, from restricted telecom development to wide-open fast-paced telecom growth. As the revolution in world thinking about communications policy sweeps the globe all nations confront very similar questions. It is necessary and appropriate for us to be sharing our answers. The FCC is not precisely like any other government agency in the world, for Congress has happily given us broad and independent rulemaking powers with respect to all five lanes of the information superhighway: cable, broadcast, satellite, wire telephony and wireless communications. But similar agencies exist in the U.K. and Hong Kong, and our frequent and detailed discussions with those counterparts have certainly guided my decisions in the three years I've served since President Clinton appointed me to my post -- the best job in Washington you don't have to get elected to. I was very pleased to meet many officials in Beijing who constitute, as a group, our counterparts. We need to continue talking. And we shouldn't wait for the next FCC trip to China or the next MPT trip to the U.S. We may in fact wish to use modern communications to communicate about our common challenges and concerns. Now here in Hong Kong I expect to learn a great deal more about the convergence of thinking on telecom policies. For many years I have been an admirer of your excellent telecom regulator, Alex Arena. The benefits of open markets and free competition can be seen clearly in Hong Kong's paging and cellular markets, which are among the world's most competitive. Hong Kong opened its cellular market to competition in the late 1980's, causing explosive growth. Cellular subscribers grew from 134,000 in 1990 to 986,000 today. Hong Kong has also become a world leader in new wireless technologies such as the use of CDMA. I understand that OFTA, under the leadership of Alex Arena has recently issued six new PCS licenses, which I am sure will do much to further stimulate competition, encourage the introduction of new technologies, and drive consumer prices down and consumer satisfaction up. Some have voiced worries that six new licenses might somehow be too many for Hong Kong. I hope and believe that markets should make the decision about how may licenses are enough. Even now we are completing the auction of six new broadband PCS licenses in every geographic area of the United States. We are working hard to keep up with Alex. Hong Kong also introduced competition in the local fixed-line serve market in l995, a year before our Congress passed our new Telecommunications Act, opening up the local telephone markets to competition. We are trying to copy you in this respect as well. A more problematic issue is the Hong Kong telecom monopoly on international service. I am scheduled to go on a boat ride with Hong Kong Telecom this weekend, and I hope they don't throw me overboard for what I am about to say, but the fact if that HKTI's monopoly in Hong Kong's international services market causes consumers in both the United States and Hong Kong to pay a very fishy price -- a price for international service between Hong Kong and the United States that is many times above the cost of such service. In part because the competitive market in the U.S. creates opportunities for callback and in part because Hong Kong Telecom is able to use its monopoly position to insist on an accounting rate with United States carriers far in excess of its underlying costs, the balance of U.S.-Hong Kong calls originating in the United States versus those originating in Hong Kong has become badly skewed. The United States now sends over seven minutes of calls to Hong Kong for every one minute that Hong Kong sends to the U.S. As a result, U.S. carriers -- meaning their shareholders and their customers -- must pay Hong Kong Telecom tens of millions of U.S. dollars annually in the form of settlement payments. The ability of HKTI to extract monopoly rents from consumers in the U.S. and Hong Kong is not consistent with the principles of competition and open markets for which Hong Kong is so justly famous. Singapore has announced that its market for international services will be liberalized in the year 2000; if Hong Kong's international services market is still a monopoly at that time, won't Singapore have a substantial competitive advantage over Hong Kong in the sector that is most critical for the development of these two great economies? It is not only lower prices that a competitive Singaporean market would offer but the service and technology innovations that one finds so common in competitive markets and so rare in monopoly markets. While I'm here I hope to talk with various officials about the possibility that Hong Kong, in part to increase its ability to play a leadership role in the World Trade Organization's talks on telecom, will agree to open its international services market to competition. A principal purpose of my trip to Hong Kong is to urge Asian countries to improve their offers in the WTO telecom talks that are scheduled to end next February. The WTO negotiations offer tremendous promise as an avenue to speed worldwide liberalization in telecom and bring the benefits of competition to consumers and businesses worldwide. Yet the Asian response in the WTO has been disappointing. Too many important countries in the region, such as Malaysia and Indonesia, made no offers at all in the last round of talks that ended in April of this year. And too many other countries, including Korea, the Philippines, Thailand and Hong Kong have made offers of liberalization that fall short of full competition. If these talks are to succeed, Asian countries must make better offers. When the U.S. asks Asia to open is markets to competition, we do so in order to boost world trade and the world economy for all companies. It is also true that we want to guarantee that American flag companies do not face unfair competition in the growing global market for telecommunications and satellite services. The notion that competition is the right telecom model is now generally accepted in developed countries. We see this, for example, in the European Union's commitment to liberalization. The challenge in European and most other developed countries, including the U.S., is to bring practice in line with principle. It is often thought, however, that open markets and competition are not right for developing countries. This view has been conventional wisdom in the past. But if it was ever right, it is now clearly wrong. The resort to monopoly in order to build communications infrastructures in developing countries is not only wrong; it is importantly wrong. Most of the world has not shared in the benefits of the telecommunications revolution. Two-thirds of the people on the planet have never made a phone call. Half the world's population lives more than two days' walk from the nearest phone. In some countries, the nearest phone for many is five days' walk away. People in may countries are not even close to being able to afford basic telephone service. In India, for example, the annual fee for use of a telephone line is l.5 times per- capita income, 29 times more costly than in the U.S. The gap between the developing and developed worlds is, unsurprisingly, even more dramatic in advanced telecommunications. Ninety-eight percent of all Internet users are in high income countries. There are 21,150 times as many Internet users in Sweden as in India. Meanwhile, only 9% of telecom investment goes to low-income countries. Yet telecom infrastructure is among the top three "critical factors" for successful global expansion, according to a recent MCI/British Telecom survey, well above traditional criteria such as cost of capital, cost of raw materials, or transportation costs. And as nearly all of the respondents in that survey said, telecommunications will become even more important over the next five years. But as telecom becomes more important, the situation in developing countries is going from bad to worse, and the telecommunications gap between developing and developed countries is growing larger. In the past 10 years 12 countries have lost more phone lines than they have added. In developing countries, people stay on waiting lists for telephone service on average for over 8 years. And while it is up to 18 times cheaper to send information over digital ISDN lines than over conventional phone lines, 99% of all ISDN networks are in the developed world. This is happening not because low-income countries lack demand for telecommunications services. Indeed, there is a tragically underserved market that's willing to pay for phone service. One telling fact: international telephone traffic grew more in low- income countries than anywhere else in the world -- 26% per year over the last 10 years. And waiting lists have been increasing by 10% per year in low income countries (while decreasing by 21% per year in high income countries). There are now six times as many people on waiting lists in poor countries as there are in rich countries. International organizations are increasingly recognizing the vital need to promote telecommunications in developing countries. Under the brilliant leadership of the able and eloquent Dr. Pekka Tarjanne, the ITU has undertaken several initiatives to promote the development of a telecommunications infrastructure in developing countries. Dr. Tarjanne has done a superb job preparing the ITU for the challenges of the 21st century and his initiatives for that challenging organization deserve our support. Another leader in telecom reform is President James Wolfensohn of the World Bank. He recently announced that telecommunications development was one of the top goals of his institution. Under his leadership, the World Bank has launched an initiative to explore ways to include developing countries in the global information highway. This initiative deserves our support as well. But while international organizations like the ITU and the World Bank can certainly help address the telecommunications problems of developing countries, their efforts would be frustrated by monopoly policies. To a very large degree the explanation for the gap between demand for and availability of telecommunications services in developing countries is the absence of open, competitive, fairly regulated markets for telecom services in those countries. Developing countries can derive the same benefits from open markets as developed countries. The laws of economics do not vary from country to country any more than the laws of physics. The conditions necessary to attract investment are similar in all countries. for developing countries to shroud their telecom sectors in opaque, ad hoc, pro-monopoly decisionmaking is, to paraphrase Talleyrand, "worse than a crime, it's a blunder." What are the attributes of an open, fair, competitive market? They include clear, real and enforceable rules for a new entrant to obtain interconnection and other uses of the incumbent's network. A fairly competitive market is not biased toward facilities-based or non-facilities-based service. Competitively neutral universal service policies are essential. Spectrum flexibility and spectrum auctions are also highly desirable. The U.S. is only now moving toward this model of competition. For decades we relied on a monopoly model, insisting on above-cost prices as the best way to build out our telecom infrastructure. Developing countries should resist the temptation to make the same mistake. A developed country possibly can afford to bear the costs of a monopoly, although I am dubious. But does anyone think that a less developed country has the luxury of time and resources to forego the economic gain that will come from adopting a policy of open, competitive telecom markets? Some developing countries have experimented with competition. The results are spectacular. Several years ago the Philippines decided to allow numerous competitors into its telecommunications market. The result was a 15-fold increase in the number of lines added in one year. In 1992, before competition, only 13,000 new lines were added. In 1993, 199,000 new lines were added and in 1994 the number was 250,000. Chile similarly has rejected the old, flawed "smart monopoly" model with great success. In 1994 Chile introduced competition in both the domestic and the long distance markets. Chile had been paving the way for this bold move for some time. In the late 70's it created an independent regulatory agency. In 1982 Chile formally eliminated monopoly protection of telecom companies. In 1988 Chile privatized its telecom companies. The results in Chile tell the great tale of social and economic benefits:  After the introduction of competition domestic long distance rates fell from $2 per minute to 20 cents per minute. Volume went way up.  Waiting time for line installation, which used to be measured in years, is now under two months.  The telecommunications sector grew by 250%.  Teledensity, which had been improving at only 3% per year before liberalization, began increasing by 9% afterward.  Digitization went from 36% in '87 to 100% in '95. And while consumers were benefitting, so was the dominant telephone company. After privatization, operating income for CTC improved dramatically -- from $201 million in 1992 to $309 million in l995. Here in Asia, we've seen early evidence of similar results. Singapore has accepted the philosophy of competition. In May, the government decided to buy-out its monopoly as of the year 2000, seven years earlier than scheduled. The Telecommunications Authority gave its reason: "In this dynamic environment, every year counts. Every year that we do nothing is a year lost as competition worldwide intensifies and technological change speeds up." The results in Singapore of simply preparing for competition are impressive. In 1995 SingTel rebalanced its tariffs to prepare for competition, slashing its rates to $1.3 half of the 1994 level of $3. Demand soared 22%, and revenue rose by 9%. Meanwhile, where a policy of open, competitive, fairly regulated markets has not been introduced, the results have been distressing. Bangladesh is an example. The government has not introduced competition to either local or long distance markets, except in very limited instances of selected wireless and value added services. In 1983, Bangladesh had only 0.12 telephone lines per 100 people; ten years later, it had only 0.21. And it takes over 10 years to get telephone service. Myanmar is another country without telecommunications competition. Although Myanmar is a natural communications center, situated at the crossroads to China, India and Thailand, it has been unable to take advantage of its good fortune because its communications infrastructure isn't good enough. Less than one-fifth of its telephone lines are digital. And although it expected to double teledensity in the five years ending in 1992, telednsity rose by only 7% -- to just .18 lines per 100 people. In the past decade or so, many Asian countries embraced competition in many segments of their economies, and those segments thrived. But they have resisted competition in their telecommunications sectors. The result: Asia's telecom infrastructure does not match its other economic accomplishments, according to the Asian Development Bank. Why do so many countries resist competition? I've heard five distinct fears: First, some countries fear that competition is the enemy of universal service. This is a pernicious myth. Competition lowers prices and increases deployment -- making it the best friend of universal service, not its enemy. Yes, even with competition, subsidies are needed for certain target populations. But competitively neutral subsidies are entirely consistent with universal service goals and competition, and can even promote both. Monopolies are simply not necessary for universal service. Professor Milton Muller's study of the early history of the U.S. telephone industry found that before the agreement to create the Bell monopoly, when the U.S. had competing local companies, build out and penetration were increasing faster than after the creation of the monopoly. The same would be true in small markets, which are not exempt from the laws of supply and demand. Mr. Shigeo Katsu, Chief of the World Bank's West Africa Regional Mission has demonstrated that competition is now commercially viable even in small, low income markets. For example, in 1995 Millicom's cellular company in Ghana, with only about 4,000 customers and challenged by a second operator, was reported to be one of Millicom's three most profitable operations world wide. Developing countries thinking about universal service would profit from studying the accomplishments of Chile and Mexico. The Chilean government's universal service policy involves seeking bids on build-out contracts for key regions with the contract going to the lowest bidder. This approach has worked extremely well. In Mexico, the government pursued universal service bids not only from wireline companies but from all technologies. The result was a creative proposal to install a wireless system that will put a phone in every village in Mexico for just $64 million. Second, some countries fear that telecommunications is a strategic industry whose control must remain in the hands of the government to protect national security. I agree that telecommunications is a strategic industry. That's why countries cannot afford not to have competition build them reliable, modern, and to some degree redundant networks. Monopoly infrastructures will be less reliable and technologically inferior compared to those built by competition. Prices will be higher and availability lower. They will contain little or no redundancy in networks. This is not a model consistent with national security. It is not the model, for example, most likely to save lives in times of flood, earthquake or other natural disasters. Nor is it the model least vulnerable to external sabotage. A national security analysis of telecommunications competition must take that into account. Third, some fear that competition will lead to job loss. It is true that competition will generally lead in its first phase to some loss of jobs at the incumbent monopoly. This is a serious matter and it's high time for policy makers to talk about it directly. But a full analysis of the effect of competition on jobs must include competition's contribution to job gains. New entrants to the telecommunications industry means new jobs in the economy. As the OECD's Jobs Study found, "where infrastructure competition had been introduced, it had encouraged greater efficiency in public telecommunication operators and opened up new employment opportunities in and beyond the telecommunications sector." The OECD's study is profoundly important in that it found not only an increase in jobs in telephone companies, but an increase in jobs in other industries where communications are robust and modern. The rise of the software industry in Bangalore, India is probably among the best examples of the positive impacts of low-cost, reliable international communications on jobs. The industry had export revenue of $300 million in 1994 and expects to employ 100,000 people in 1996. More than 150 of the 600 firms in Bangalore operate on global contracts only. None of this would be possible without telecom networks that allow firms in Bangalore to work with parent companies thousands of miles away. Fourth, some countries fear that competition will reduce the onetime revenue obtained from privatizing state owned monopolies. I doubt that this is so, principally because capital markets will reward firms for toughening up to face competitors. But raising revenue in a one sell off of state owned interest is far less valuable than reaping the benefits of a booming investment in a rapidly growing, welfare enhancing, competitive communications sector. A competitive market will generate far more in taxable revenues than a monopoly market. In any event, countries in need of revenue should give serious consideration to assigning licenses to used scarce spectrum by means of auction. Revenue generation should not be a goal of auctions any more than it should be a goal of privatization. But it is undeniably a valuable byproduct of a fine way to introduce competition: just auction the licenses to use the airwaves. Fifth, some countries fear that competition will lead to the introduction of modern technology and business practices that threaten local culture. In Chinua Achebe's novel Things Fall Apart, a gun -- representing technology and the outside world -- arrives in a primitive African village and destroys the way of live. Some fear that a cellular telephone can have the same effect. But modern communications need not destroy local culture. In fact, competition and modern communications may well be necessary to sustain it. Aren't the biggest threats to local culture migration, population growth, and poverty? In many countries people now flood from villages to overcrowded cities looking for jobs, abandoning cultural roots for overcrowded shanty towns in poverty-stricken megacities. According to the U.N. Population Fund (UNFPA), 5 of the world's 14 biggest cities in 2015 will be in South-East Asia with the highest urban growth rates (6.5 and 6.3 respectively). In Nepal and Bhutan where less than a fifth of the people live in towns. In these cities, 180 out of 1,000 children born die before their first birthday as compared against the national child mortality average of 110 per 1,000. And women bear the brunt of poverty in big cities where traditional joint family structures are rapidly giving way to nuclear households and marital ties are breaking down more often. The economic growth that modern telecommunications will produce is an antidote to these trends. Indeed, more speciffically, modern telecommunications networks can be used to bring jobs to villages, permitting people to participate in the world economy from their ancestral homes. Telecommunications networks can also help fight disease, another factor killing local culture. Modern telecommunications are already providing medical information all over the world. Two-way portable satellite earth stations provide medical information in Rwanda. The U. S. military uses satellite links to deliver health services to starving people in Somalia. Canada, Kenya and Uganda use advanced telecommunications techniques to share medical information and advice. And modern communications technology can expand the reach of regional cultures, making them more valuable to the world, by sharing them with everyone on the globe. The Irish Times, Katmandu Times, Korean Radio are all available on the World Wide Web; the distinctive contributions of these varied cultures to the world are made more manifest and easier to preserve because of modern communications. As to modern national cultures, let's listen to Kuni Miyake of Japan Ministry of Foreign Affairs who said: "Personally I believe you cannot protect your culture with trade restrictions. A culture will be strengthened when it is exposed to other cultures, and that kind of competition refines the culture." Many countries subscribe to the five fears I've discussed. A number of those countries are in Asia. Nevertheless, I believe that Asia can and should reject these unfound fears and take its rightful leadership role when it comes to competition. Competition will work for Asia. It will improve Asia's domestic infrastructure. And positive participation in the WTO, ITU, World Bank/IMF, and satellite negotiations is a key to ensuring that Asia remains engaged in the global economy on which it depends for its own well-being. I congratulate the Asia-Pacific Economic Group (APEC) for recognizing the importance of liberalizing domestic telecom markets. I agree with APEC that each country must adopt its own path to totally free trade. But, I have two questions: why wait until distant years in the next century? And why should developing countries wait longer -- when they have waited long enough already to participate in the modern world on a full basis. - FCC -