The Long and Winding Road

(or: The Seventh Inning Stretch)

INTRODUCTION

On this one-year anniversary of the signing of the Telecommunications Act of 1996, many people are looking back and making judgments about events of the past year.

In my view, this is like writing about a baseball game by only describing the action after six and a half innings.

It's time to stretch aching brain muscles, but it's too early to declare whether our competition policy is going to be a success or not, and it is way too early to declare what firms will be winners or losers. If our competition policy is a success, then government will never be in a position to declare an industry or a firm to be a winner or loser: the market will do that.

Nevertheless, what I would like to do today is talk about the direction of the competition game, and how the first through sixth innings have gone.

OVERVIEW

Earlier this week, in the State of the Union address, President Clinton stated that, "[a]s the Internet becomes our new town square, a computer in every home -- a teacher of all subjects, a connection to all cultures -- this will no longer be a dream, but a necessity." Telecommunications is fundamentally about tying together communities, industries, markets. It is about improving everything that depends on communication: from industrial productivity to teacher training, from international competitiveness to medical care.

Technological change is unstoppable, but what is not certain is whether we will as a country take the actions necessary to guarantee that all Americans, and all peoples of the world, will realize all the benefits of modern technology.

The success of the worldwide communications revolution depends on assuring that the information highway is built at home and overseas through competition, while also guaranteeing public benefits from that private sector competition. These are the two goals of our American dream for the communications revolution:private competition in communications and public benefits from communications.

COMPETITION

1. Domestic

The biggest change over the last several years has been a massive acceleration in the movement from a monopoly based communications policy to a competition based policy.

This competition policy is already showing significant results.

In long-distance, average revenue per minute in the US for all long-distance calls (including international and operator services) dropped from 19.6 cents per minute in 1992 to 17.9 cents per minute in 1995. For interstate domestic direct dial traffic, the average rate dropped from 13.6 cents per minute to 12.3 cents per minute. Overall, since we opened the long-distance market to full competition in 1984, long-distance prices are down 70%.

In wireless, we are also already seeing dramatic results.

• The average monthly cellular bill today is under $50. That's down 61% from what it was in 1988, and over 25% lower than it was in 1993.

• Depending on the particular plan, cellular rates have dropped 35-55% in the Baltimore/Washington area since the launch of APC's Sprint Spectrum PCS service.
  
  

• Wireless investment has more than doubled since 1993, and will total more than $50 billion over the next ten years. In just the last year (June 95-96,) employment in the wireless industry grew by 21%.

Declining prices are not the only way that customers see the benefits of competition. Instead of rates going down, people may just get more for their money. An example is the fact that people still pay about the same for a PC as they did five years ago, but what they get for their money now is about ten times faster and a heck of lot smarter.

So people may end up spending more on new things, like second lines for modem usage or caller ID, that were rarely in the market before.

The key to our wireless successes has been Congressional and Commission spectrum and auction policies. We need to continue moving toward our goals of private competition and public benefits from competition. Specifically, that means the following: auctioning as many licenses as possible, and giving purchasers flexibility in ways to use those licenses. In this way, we will eliminate the artificial scarcity of spectrum that limits competition. And flexibility is essential to new investment and innovation. Our recent staff paper, "Using Market-Based Spectrum Policy to Promote the Public Interest," by Greg Rosston and Jeff Steinberg, provides a brilliant analysis of why these are the right policies, and I endorse every word of it. I would invite all my colleagues on the Commission to join in this endorsement. I can't imagine a better statement of the right policy for the country. That was what was just stated earlier this week by Peter Passell, distinguished economics analyst of the New York Times. If anyone has a better policy for spectrum use, I sure haven't seen it.

Over the past two years the FCC has auctioned thousands of new licenses. Companies are using the spectrum they have purchased to deploy new services such as PCS. PCS is already beginning to provide competition to incumbent cellular providers, resulting in lower prices and new services for consumers. The January 1997 Consumer Reports has a full-page story describing the range of special services and deals now available for wireless services, a far cry from the limited choices of the old two-firm duopoly.

Auctions have dramatically reduced the time it takes for the government to make spectrum available, and by giving spectrum to those who want it most, they have also made it more likely that spectrum will be put to optimal use.

And, by the way, a side benefit of the auctions is the $24 billion raised for the U.S. Treasury.

But the money isn't really the point. Just as, according to Winston Churchill, "democracy is the worst form of Government except for all those other forms that have been tried from time to time," one way you can decide in favor of auctions is simply to consider all other forms of awarding licenses to use the public's airwaves. Lotteries and comparative hearings have been repudiated by all reasonable and objective observers and should not be used by the Commission in any circumstances that I can imagine.

At the same time, we should condition every wireless license on a promise to serve the public interest. This reasonably could be manifested one way for point to point wireless services like paging and telephony (for example, through some sort of universal service obligation), and another way for point to multipoint services like video and radio (for example, through a meanwhile programming or PSA or live political advertising setaside).

On Wednesday the Vice President called for a clear and commensurate public interest standard for the new digital television licenses whose holders will usher in the next generation of broadcasting. Given that the grant of these licenses is the largest single grant of public property to a single industry in this century, it would be part of a fair deal for the license holders to pay back the public for this grant by promising to provide substantial, quantifiable, meaningful public interest programming, PSA's, or free time for political debate. In this connection I thought Barry Diller's recent suggestion that television broadcasters provide over a billion dollars of free time for political debate in even numbered years was big, brilliant, workable, and fair.

Another area where competition is taking hold is with satellites. We are witnessing a satellite bonanza, beginning with the direct broadcast satellite services that have become one of the most successful new consumer product launches in history.

• DBS receivers have already dropped in price from over $1000 in 1994 to as low as $99 in some markets today.
  
  

• DBS subscribership increased seven fold between 1994 and 1996.
  
  

DBS still serves less than five percent of the video market, but that represents more than four million homes. DBS may not represent a true competitor for basic cable services because of its inability to transmit local over-the-air channels, but even that is changing as new "spot beam" satellites come on line.

Digital Television may also provide another multi-channel video provider. According to a respected Wall St. analyst, DTV could take as many as 7 million cable subscribers in the next few years, almost twice the number of people who currently subscribe to DBS.

I think the cable industry knows it has to respond to the new competition in prices and service quality. Cable's investment needs may not look good to the short-term investor, but I am convinced that they ultimately will pay off. For example:

• In 1996, the cable industry spent over $2.6 billion to upgrade to two-way plant, and deployed 30% more fiber optics in 1996 than 1995.
  
  

• The average cable system channel capacity grew 12% between 1995 and 1996 -- from 47 to 53 channels.

• Numerous cable companies began commercial deployment of cable modems for high-speed Internet access.

These developments over the last year in wireless, long distance and satellite video are all direct results of Congressional and Commission pro-competition policies, like auctions and the 1992 Cable Act. Auctions fueled the wireless competition just as the breakup of AT&T kicked opened the door for long distance competition. And DBS would still just be an engineer's dream instead of a real business had it not been for Congress' wisdom in passing the Program Access Rules in the 1992 Cable Act and for the Commissions implementation of that Act.

The central insight of the Program Access Rules, brilliantly championed by Congressman Billy Tauzin, is that you cannot have competition without access to essential programming.

Congress reconfirmed the wisdom of Congressman Tauzin's pro-competition policy in the video market by applying it to the phone context. Just as access to programming is essential for competing with cable systems, Congress decided that access to the local telephone network was essential for competition in the telecommunications market.

In the Telecommunications Act of 1996, Congress described three avenues for new competitors to gain access to the essential facilities of incumbent local exchange carriers. They can build their own facilities and connect to the incumbent's network -- that's called interconnection. They can lease portions of the incumbent network -- that's called unbundled elements. Or they can buy the incumbent's existing services at wholesale and resell them -- that's called resale.

Our rules that set the prices new entrants pay incumbents for the use of network elements are based on fair, forward looking costs that you would expect to see in a competitive market. So far it appears that most states have adopted this same methodology, and Wall Street continues to forecast economic health for the RBOCs.

Over the past year, our insistence on competition has meant the following:

• We have reviewed several hundred thousand pages of comments and other filings by parties in proceedings to implement the Act, 65,000 in the Universal Service proceeding alone.
  
  

• We completed 31 rulemakings to implement the Act, and adopted 128 individual items in all.
  
  

• We spent almost $450,000 in overtime electric bills during the past year, or more than triple what we spent the year before, just to keep our buildings open to support the longer staff hours.

The real secret to our work was the addition of several caffeinated beverage slots to our soda machine.

No one should expect broad-based competition for all of the nation's 150 million access lines to occur overnight. Although we kept our promise to meet or beat every single statutory deadline under the Act, in many cases arbitration proceedings are still taking place in the states to define the basic terms for competitors to connect to incumbent networks. However, over 240 interconnection agreements have been reached, potentially setting the stage for competitors eventually to serve as many as 75% of the nation's phone lines. Of course, the agreements are only the first step toward consumers seeing real choice.

Ameritech's 5,000 page filing for authority to offer long-distance will no doubt be the first of many we will soon receive. This process will be extremely fact intensive, and we are already seeing disputes over such basic questions as whether there is an interconnection agreement in a particular situation. It is incumbent upon the Bell Companies to put before us good, clean factual records.

2. International

The pro-competition agenda has also been advancing in the international arena.

Communications has been the primary driver of global development, and will continue to be for the foreseeable future. The same principles of competition and deregulation that guided our own telecommunications reform legislation a year ago should guide the rest of the world in opening their telecommunications markets as we have. Over the past three years, we have worked to create the framework for a Global Information Infrastructure that will foster economic development for all countries of the world, but we have also insisted on a level playing field internationally. Under the leadership of the brilliant and indefatigable Charlene Barshefsky, the United States is insisting on a good deal in the current WTO telecommunications negotiations. We are pleased to support Ambassador Barshefsky's efforts.

The FCC is now moving to address the five billion dollar annual subsidy that flows from American consumers to monopoly telephone companies in the rest of the world because of the antiquated "accounting rates" system. We have proposed benchmarks to lower those rates so that they more closely correspond to costs. Our goal is to cut the average international phone rate from around a dollar a minute to one fifth of that, or less.

PROMOTING THE PUBLIC INTEREST

In addition to competition, we must keep the public interest and public benefits in mind in everything we do. Not all challenges will be met by competition. Some take a commitment from policymakers and industry.

I. Education/Health Care

A critical goal in our communications policy is to ensure that, as the President stated in his Inaugural address, "[t]he knowledge and power of the Information Age will be within reach not just of the few, but of every classroom, every library, every child." Leveraging communications technology for education is essential if we are to train the knowledge workers that will be needed to fill the high-paying jobs of the 21st century, but although we've gone from 3 percent of classrooms with Internet access to 9 percent, that still leaves us 90 percent away from our goal. The Federal-State Joint Board on Universal Service, in a historic decision , has recommended that we set aside 2.25 billion dollars per year to connect classrooms and libraries to the information highway. Like the G.I. Bill, the National Highway Act or the Marshall Plan, it's worth every penny. We must also make the most of benefits of telehealth to enable more affordable and more effective health care. Communication about medical treatments can mean the difference between life and death, especially in emergency situations and rural areas, and we should use our communications technologies to give all patients access to the best medical care available.

II. Kids

We have worked hard to ensure that the tools of the digital age accrue to the benefit of our children. The broadcasting industry has agreed to provide three hours of educational programming per week. We've also shifted the debate to focus on how to give parents tools to protect their children from inappropriate material on television and online. The Telecommunications Act included the V-Chip requirement, to ensure that parents have an opportunity to control the programs their children are exposed to. Technology should be beneficial to our children, not harmful, but we must make the commitment to always strive for that result.

INTERNET

In some ways, the Internet has been the biggest communications story of the last three years.

• In January 1994, there were just over 2 million Internet host computers; today there are nearly 20 million.
  
  

• There are now more than 3,000 Internet service providers in the United States.
  
  

• The Internet is projected to serve over 40 million households and two million businesses in the year 2000, up from 15 million and about 300,000 today.

This dynamic growth, coupled with the market success of companies such as Netscape and Cisco, has created enormous wealth for the American economy. We should know -- the FCC Internet sites get 90,000 hits per day, and we've received over 200,000 inquires and comments to our main email address.

Our policy of promoting bandwidth and access depends directly on our larger pro-competition efforts. Only a pro-competition regime will create the conditions for the Internet to continue to grow. Some in business believe that we cannot afford to have competition build big bandwidth networks, that we need to ask monopoly providers to build them. I totally disagree. To have big bandwidth networks, we will need to see the kind of competition that characterizes, for example, the pizza delivery business. Like pizza, bandwidth will be delivered piping hot to your door, in small, medium, or large size. You'll be able to get any anything you want on it -- voice, video, or data, in any combination. No one thinks that pizzas are best delivered by a single monopoly, subject to the control of the Federal Pizza Commission, and no one should think that personalized home or business bandwidth needs are best served by the old regime of regulated monopoly.

There is huge pent-up demand for bandwidth. Competition will satisfy that demand, because it will open the doors for new companies and new technologies to provide bandwidth to end users.

FCC REINVENTION

While busy implementing the Act, we at the FCC must simultaneously continue to streamline and improve our processes and to eliminate unnecessary regulatory artifacts. One question we need constantly to ask ourselves is whether we are doing things we should not be doing.

It was asking this question that led to our first Reinventing Government effort in 1994. That effort produced savings in the millions of dollars for the Commission and savings in the hundreds of millions for industry.

• Working closely with the Federal Communications Bar Association, we issued a Notice of Inquiry immediately after the 1996 Act became law asking how we could improve our processes. The NOI generated nearly 60 formal submissions with numerous suggestions, many of which have been adopted.
  
  

• We eliminated our Review Board.
  
  

• We cut the number of field offices from 34 to 16 and reduced the Bureau's employees from 384 to 262.
  
  

• We made 37 recommendations to Congress concerning functions we no longer believed it was necessary for us to perform, and 21 of those were adopted by the last Congress.
  
  

• We eliminated dozens of requirements. Just one such change, removing and individual licensing requirement for domestically-operated recreational ships and aircraft, eliminated the need to track about 710,000 radio licenses.
  
  

• With electronic filing, we reduced processing times for amateur radio service from 75 days to overnight.
  
  

• We created a national call center at 1-888-CALL-FCC.

PREDICTIONS

If the Commission, the courts, and Congress stay the course on the country's pro-competition policy, I think we can safely predict that we'll make some tremendous strides in the competitive market place by next year. Here are five specific predictions for January 1,1998:

• Business customers in a major urban area will have a choice for all their telecommunications services,
  
  

• At least high volume residential users will be afforded a market place choice for all telephony services.
  
  

• Many residential subscribers in major cities will have at least one high-bandwidth option for accessing the Internet -- cable modems, wireline xDSL, or wireless, and more will be on the way.
  
  

• Investment in all telcom industries will go up significantly and job growth in the information sector will continue up by a sizeable amount.
  
  

• An education revolution will have started as new technology reaches 25% of the nation's classrooms per year.

It has been quite a year, and we have much to be proud of. But there is much left to be done. We must remain steadfast in our public and private purposes. If we do so, all Americans will reap the benefits.