Remarks of
FCC Commissioner Susan Ness
San Diego Telecom Council Breakfast
Del Mar, California
February 15, 2001

It is a pleasure to be with you in San Diego - one of the most innovative areas for telecommunications technology in the country.

Yesterday was Valentine's Day -- a time to reach out to those we love. Valentine's Day has always been a special day -- especially for the post office, the telephone company, and delivery services.

Back in 1994 when I joined the FCC, people generally sent their Valentine's Day greetings through the mail, or they picked up their telephone and made a call -- to talk to their loved ones or to order the delivery of flowers, candy or balloons.

How times have changed.

Yesterday, Americans also sent Valentine's Day e-mails and instant messages.

They sent them using hand-held, wireless pocket-sized computers. They ordered flowers, candy and other gifts over the World Wide Web. They used Personal Digital Assistants to transmit and download information on friends and family, as well as gift ideas. They used tiny portable phones to confirm dinner plans and to check on their children and parents. It didn't cost them much under their one-rate, bucket-of-minute plans. They used a GPS navigator to direct them to the restaurant. And their children received candy hearts at school, embossed with the message, "e-mail me."

Progress

What a difference seven years can make in the development and use of communications platforms. It represents a lifetime in the digital age.

Only six short years ago, the U.S. Government fully privatized the Internet, and the World Wide Web was created. Back then, computers were largely tethered to desks; today, lap or palm-sized computers send information wirelessly and effortlessly.

Many of you in this room were at the forefront, driving that change. I applaud you for your inspiration, your innovation...and your investment.

One investment in technology has paid enormous dividends. In 1994, during my first few months as a commissioner, I met with Ginger Hovenic, the principal of the Clear View Elementary School in Chula Vista. That school had a transient population, with low standardized test scores and even lower moral.

Cox Cable reached out and connected the school by coaxial link to San Diego State University. The fifth and six graders were given networked computers in the classroom to communicate with SDSU professors and student advisors on history projects. Together, they wrote and illustrated a book on Supreme Court Justice John Marshall.

I was impressed with the enthusiasm of the fifth- and six-grade students, the joint efforts of industry and the educational community, and the dramatically improved test scores that followed.

Earlier this week, we checked back with Clear View Elementary School, and its Library and Media Director, Jim Dieckman.

Today, all of the students at Clear View Elementary, kindergarten through sixth grade, have access to computers with Internet connections. And Chula Vista has replaced its slow dial-up links with T1 access that permits the school's local network to communicate with the Internet and a wide area network for the entire School District.

Cox Cable also has installed two fiber optic links that provide direct broadband connections between the school, SDSU and the University of California San Diego Medical Center. Using these technologies, elementary school students currently meet on line with professors and graduate students to work on projects that involve, among other things, the study of the cardiovascular and digestive systems. These elementary school students also have access to SDSU's electron microscope facility through the same fiber optic link.

Progress, such as that achieved at Clear View Elementary, inspires me, and has made these past seven years at the FCC so rewarding.

But times are changing so rapidly. H. E. Fosdick must have been talking about our industry when he said, "The world is moving so fast these days that the person who says it can't be done is generally interrupted by someone doing it."

It is vitally important for the FCC, which is at the heart of the communications revolution, regularly to assess the impact of our actions on the marketplace and determine whether conditions or technology warrant revision or elimination of our rules.

Of course, as W.E. Denning once opined, "It is not necessary to change; survival is not mandatory."

So, I'd like now to spend a few minutes to shine a verbal light on some of my past predictions, to assess our progress to date, and to indulge in new predictions about what may be in store for the future.

Past Predictions

Seven years ago, I predicted:

(1) There would be competition in the market for local telephone service.

(2) The United States would enjoy advanced generation wireless services.

(3) Unlicensed spectrum applications would proliferate in the consumer marketplace.

(4) Broadband service would achieve significant penetration levels; and

(5) School children will benefit greatly from access to telecommunications technology.

Let's examine them, one by one.

1. There would be competition in the market for local telephone service.

Ever since my arrival at the FCC in 1994 - almost two years before passage of the 1996 Telecom Act - to foster local telephone competition was one of the FCC's most challenging tasks. The stakes were - and are still - enormous: well in excess of $100 billion in annual revenues.

At the time of the 1996 Act, incumbent local telephone companies were pocketing over 99 percent of local phone revenues. We hoped that new platforms for local telephony - such as cable, wireless, and satellites - would provide a launch pad for insurgents into the local telephone market.

We knew that it would be tough - if not impossible -- for new entrants to replicate completely the networks that the incumbents had constructed over the past century under guaranteed rates of return.

And so the Act provided three vehicles for competitive entry: (1) reselling the incumbent's lines at discounted prices; (2) leasing at forward looking, cost-based rates (plus a risk adjusted rate of return) some or all of the network elements necessary to provide local service; and (3) interconnecting with the competitors own facilities.

And what have the results been?

There can be no doubt that the Act has unleashed a torrent of investment:

• Competitive local exchange companies, including cable companies, fixed wireless providers and competitive wireline carriers, have invested almost $100 billion to deploy local telecommunications services to subscribers.

• In the fourth quarter of 2000, new entrant's lines grew to approximately 8 percent of the total access lines. The numbers are even better in states where the incumbent has qualified under Section 271 of the Act that its market is open to competition. In New York, for example, competitors had garnered 16 percent of the local phone market as of last June.

• And competitors' nationwide share of local market revenues doubled between the fourth quarter of 1998 and the fourth quarter of 2000, to approximately 9%.

While these figures show progress, we all recognize that we have a long way to go. Incumbents still retain the lion's share of the local telephone market. And most of the lines served by competitors are business lines. Only a small -- but growing -- percentage of residential consumers have a real choice of local carriers.

But after all, for more than 100 years, the local telecom market was deemed - and regulated as -- a natural monopoly. And understandably, like any monopoly player, the incumbent will use its muscle to forestall competitive entry.

It simply takes lots of time and lots of capital to make inroads. We cannot expect, and should not have expected, full-scale erosion of the monopoly position over the relatively short period of five years since passage of the Act.

Despite the financial setbacks of some competitive carriers in an unforgiving capital market, I believe that we will continue to see slow, but steady washing away of the monopoly position of the incumbents. This will occur primarily from facilities-based players using competing technologies, both wired and wireless.

As cable companies complete their extensive upgrades, the promise of cable telephony is at long last becoming a reality. The cable industry claims to have one million telephone subscribers today.

Fixed wireless providers will serve more businesses, and I predict some will even extend service to residential users in multiple dwelling units. The legal battle over competitive access to apartment and office buildings has not yet fully played out.

Mobile wireless providers will continue to replace the second line into the home. As prices continue to plummet, mobile wireless is appearing more and more like a substitutable service for wireline.

And most significantly, as the technology to provide voice over IP technology improves, the dynamics and economics of providing voice service will shift, and we will see a reordering of the market for local telecom service. In the meantime, the FCC and our state colleagues will need to think through some very difficult regulatory issues, which could either foster -- or hamper -- the deployment of voice over IP.

So, let's give the Telecom Act a chance to work. After a setback of several years where parties were litigating rather than competing, there is now an equilibrium - a level of regulatory certainty necessary for carriers to invest and compete. To reopen the Act would reintroduce uncertainty and could forestall competition.

My second prediction:

2. The United States would enjoy advanced generation wireless services.

While mobile wireless service has not developed as a major competitor for the first residential "line," there has been an explosion of wireless services. At my very first Commission meeting in 1994, we approved a bandplan and rules for personal communications services, or PCS. The numbers are impressive:

• From year-end 1994 until mid-year 2000, the number of mobile phone subscribers has increased by more than 300 percent, to over 100 million subscribers - more than any other country (although China may soon surpass us).

• Jobs in the mobile wireless industry are up 200 percent, from 54,000 to 160,000.

• And at the same time, the average price per minute for a mobile telephone call has plummeted, with some consumers paying as little as 7 cents a minute under buckets-of-minutes plans.

And here's why:

• In 1994, there essentially were only two mobile telephone service providers in each market. Today, markets covering 90% of the United States population have at least three service providers and markets representing 41% of the population have six or more competing providers.

• In 1994, there were few mobile data service offerings beyond traditional one-way paging. Today, consumers crave mobile data service:

• With the introduction of the Palm, RIM, HP Jordana, and Handspring devices, there are now at least four different types of hand-held PDAs on the market with built-in or attachable wireless modems for mobile Internet and data access.

• More than 2.4 million people currently use mobile telephone "wireless web" services and more than 2% of mobile traffic is now data.

And we know that the explosion in demand continues unabated.

Mobile telephone subscribers in the United States already spend more time on their wireless phones per month than do subscribers in any other country. But our ability to auction more spectrum is constrained by the plethora of fixed terrestrial, broadcast, satellite, and government and public safety services that use spectrum that is ideal for mobility.

How will we provide for the growth of this industry as it enters the market for the next generation of services and beyond, when our spectrum availability is already so constrained?

First, I would encourage licensees that currently deploy analog mobile technology to migrate their customers to digital service as expeditiously as possible. Second, government agencies using spectrum and private industries that are capable of using spectrum more efficiently will have to see the benefit of rapidly adapting their services and sharing or clearing some of their spectrum at reasonable cost.

We will see just how responsive government and industry can be as we look to the transition in the 700 MHz band currently used for television Channels 60 to 69.

We also will see what progress can be made in the joint assessment by the FCC and NTIA of possibilities for 3G services in the 1700-1800 MHz band currently occupied by the government and the spectrum at 2.5 GHz shared by MMDS and ITFS services.

(3) Unlicensed spectrum applications will proliferate in the consumer marketplace.

Ever since I joined the FCC, I have believed that the judicious use of unlicensed bands would promote spectrum efficiency. Parties using unlicensed bands share spectrum with a wide assortment of other unlicensed services, and must adapt their technologies to avoid causing interference.

For years, under Part 15 of our rules, companies have manufactured low cost, high volume devices that use very low levels of power to transmit over short distances. In the 1980s, the FCC first adopted rules to allow "spread spectrum" transmitters to operate in this manner once they were approved under the equipment review process.

And for years, such devices were largely unnoticed. In fact, in 1990 the FCC only received requests to approve 13 such devices, and in 1993 the FCC still received less than 5 requests for approval in an average month.

But after I arrived at the Commission, manufacturers exhibited a resurgence of interest in serving consumers through devices that operate in unlicensed bands. The market for cordless telephones, wireless LANs, and other short-range communications devices mushroomed. The IEEE 802.11 standard was developed for certain spread spectrum devices; and Bluetooth was born. Requests for FCC approval of unlicensed RF emitters increased by a factor of more than ten. The FCC now receives the same number of requests for approval in an average month that it received in an average year ten years ago.

Over the past five years, the FCC has undertaken several initiatives to expand the opportunity for the use of such products on an unlicensed basis. For example:

• We made spectrum available in the 5 GHz band - the Unlicensed National Information Insfrastructure Band - to be used for various applications, including high-speed data communications and local area networks.

• We have wrestled with difficult issues involving "frequency hopping" technologies in the 2.4 GHz band.

• And we started a rulemaking proceeding on the "ultra-wideband" spread spectrum technology as well as one on software defined radios.

All of these efforts were initiated with the belief that innovation in the unlicensed bands will offer consumers better services at lower prices.

But as the volume of unlicensed consumer products increases, the trade-off between the cost and the efficiency of these products becomes more problematic. What do you do about interference that these devices are prohibited from creating and interference that must be accepted by these devices?

As new "frequency hopping" and "direct sequence" technologies permeate the 2.4 and 5 GHz bands, the FCC must find a way to permit innovation without picking winners and losers in the marketplace. How do new technologies, such as ultra-wideband, fit into an outdated regulatory regime?

Perhaps a few guiding principles would be helpful. There always will be a need to balance the benefits of the new technologies with the impact of any new technology or innovation on existing users of the spectrum. As stewards of the spectrum, we at the FCC want to provide certainty for authorized uses.

But in the unlicensed spectrum bands in particular, we want to create a test-bed for the development of more desirable and efficient services. I would venture a guess that the Commission in the future will - carefully and with a sensitive hand - authorize additional innovative technologies.

Under these circumstances, products should be designed with the expectation that they will operate in a field where other innovative products also play.

Prediction #4:

4. Broadband Will Achieve Significant Penetration Levels.

We have always believed that the telephone companies and the cable operators would want to enter each others' businesses. In the United Kingdom, U.S. cable operators and Bell operating companies in the late 1980's had joined forces to provide both video and voice telephony to residential subscribers. While penetration rates for cable were well below those of the U.S., the take rates for telephony were significant by U.S. standards.

Prior to passage of the 1996 Act, we struggled mightily in this country to design a video service for the Bells that would not run afoul of the statutory and judicial shackles that restricted their entry into cable. Video Dialtone merited an "A" for good intentions and an "F" for practicality.

The 1996 Act eliminated the video restriction and created a streamlined, quasi common carrier service, called Open Video Service, or OVS. Congress had the idea that if you opened your network to other video service providers, you did not have to secure a local franchise.

Well, municipalities control the roadways, and they would have none of it. No way should competitors to their franchise fee-paying cable systems bypass local government control. We issued rules for that service in a record six months. Once again, we merited an "A" for good intentions and a "C" for practicality.

Today, there are only a handful of OVS systems in operation. And those Bell companies that ventured into providing regular cable service have, for the most part, disbanded that effort. The up-front capital investment was too great, programming was too expensive, and the take-rates were too low.

And the Bells were uncomfortable in the role of an insurgent, trying to provide a competing telephone service in the territory of another Bell. For starters, their market-opening filings would be used against them back home.

We did not realize in 1994 that broadband competition would take another route -consumers would clamor for high speed access to the Internet. The Bells already had a highly profitable commercial product - T-1 lines, and were reluctant to cannibalize that product by introducing low cost, high speed access…that is, until competition from cable modem service forced them to do so.

Today, both cable and telephone companies are racing to provide broadband access:

• The cable industry has expended over $40 billion to maintain, build, rebuild, convert and upgrade their facilities for broadband, including more than $12 billion in 2000 alone.

• At year-end 2000, more than three-quarters of cable facilities had two-way capability, compared to only 11 percent of such facilities as late as year-end 1986. [or is this 96?]

• By year-end 2000, 81 percent of cable homes were passed by cable systems with 750 MHz facilities, compared to only 28 percent as late as 1986.

• The NCTA claims that 10 million customers subscribe to digital cable service and an additional 4 million customers purchase cable modem service.

• High speed DSL lines increased at an even faster pace - over 150% in the first half of 2000 alone - with some projecting that DSL could overtake cable modem subscriptions in the next few years.

Despite these increased expenditures, broadband is rolling out more slowly in rural and high cost areas for both technical as well as financial reasons.

But we are on the verge of seeing competition in broadband Internet access from satellite carriers, which will be particularly attractive in rural areas. A joint venture of Gilat and Echostar has begun to roll out its service, and two way DirectPC is not far behind.

I believe that competition will spur continuing rapid deployment of broadband service. I also believe that such competition - and a watchful regulatory eye -- will cause operators to open their networks to multiple service providers.

While over time we should move toward a more rational regulatory regime for like services, we should not be tempted to impose legacy regulation on new services nor should we in the name of equality deregulate a monopoly before its market is open to competition.

The FCC can, and should, exercise its authority not to regulate these platforms, but to ensure that these platforms can compete against one another.

And my last prediction:

(5) School children will benefit greatly from access to telecommunications technology.

Finally, I cannot reflect on the past and look to the future without celebrating the arrival of broadband facilities in schools and libraries. Shortly after I arrived at the FCC, I wrote that the best way to spend the 60^th anniversary of the Communications Act was to celebrate the signing of communications reform legislation that addressed the proper role of government in supplying a broadband pipe to everyone in the United States.

When that legislation was passed eighteen months later in 1996, it called upon the FCC specifically to include schools and libraries in this plan.

Congress put a process in place, and we have implemented that plan:

• In 1999, 63 percent of public school instructional rooms were connected to the Internet, whereas in 1996, only 14 percent were connected. Overall, 95 percent of public schools were connected in 1999.

• Over 83,000 schools - public and private - have received E-rate funding, with public schools receiving about 84 percent of the E-rate dollars.

• 60 percent of E-rate funds go to districts in which more than half the children are eligible for free or reduced price lunch.

Earlier, I mentioned the Clear View Elementary School. It has received more than $1.5 million dollars in E-rate discounts to fund the construction of local networks and T1 lines and receive service. That funding gives students and teachers access to local and wide area networks, as well as the Internet.

Our children are our future. It is vital that we continue to ensure that our classrooms and our libraries have access to broadband telecommunications at funding levels consistent with today's $2.25 billion annual commitment. Our global competitors are following our lead.

Our success is measured, not by the statistics we compile and study, but by the individual advancement of children like those at Clear View Elementary.

Success is the schoolchild who has access to a wealth of information and inspiring mentors, like the professionals at the UCSD Medical Center and SDSU.

Conclusion

And as we reflect on how new technology has changed Valentine's Day, I might add one additional one - the love that we give our children every day by providing them with access to broadband communications.

Thank you for inviting me join you this morning, and I am happy to answer your questions.