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JANUARY 26, 1995

I am pleased to have the opportunity to return to the Annenberg School. As was noted in the introduction, I was a graduate student at Wharton, and while I was there I elected to take some classes at Annenberg.

You and I have much in common. Every day we are exposed to a dizzying array of issues for which there are no easy solutions. Every day we have the opportunity to ask questions of industry -- analyzing their objectives and their business strategies. And every day we must think about the material presented, digest what we have learned, and do so under enormous time pressures.

Each of us writes exams on these issues -- except that in my case these exams are votes on rulemaking and adjudicatory proceedings, and billions of dollars ride on my answers and those of my fellow Commissioners. Moreover, the grades I earn may not be realized for months or years to come, when the effects of these decisions on a rapidly changing marketplace have fully unfolded. It's challenging, and exhilarating, to participate in the work of the Federal Communications Commission at a time when so much is riding on our ability to promote fair competition in communications markets.

Today I'd like to better acquaint you with the FCC -- its structure, processes, and agenda -- at a time of intense construction of what is known as the Information Superhighway (or the Infobahn, for short).

Have you noticed? Every time you open a newspaper or turn on the TV, you see references to the Information Superhighway. Reporters, industry officials, policymakers, and others are all using the same metaphors. There's "gridlock on the information superhighway," "construction on the superhighway," "on-ramps," even "road kill." It's getting out of hand.

But I don't think the end is yet in sight.

I just received this from the home office in Sioux City, Iowa. It's a Top Ten List.

This one lists the Top Ten Cliches About the Information Superhighway that Have Not Yet Been Driven Into the Ground..

Number 10 -- Drunk driving. I'll bet it won't be long before some repeat offender is required to have a Breathalyzer hardwired to his computer so his sobriety can be determined before he boots up and logs on.

Number 9 -- Bicycle lanes. This will probably have something to do with environmentally responsible applications of the network -- or maybe the right to use incredibly slow modems.

Number 8 -- Rubbernecking. There are bound to be accidents.

Number 7 -- Falling Rocks. You heard it here first.

Number 6 -- Manhole covers. So your avatar can duck out of sight?

Number 5 -- Nestoring. John Nestor is famous in the DC area for setting his cruise control at exactly 55 miles per hour and then driving in the left-hand lane of a superhighway. Who knows what he'll do on the Infobahn!

Number 4 -- Handicapped parking. This one's serious. We do need to make sure there's room for everyone.

Number 3 -- Skidding out of control. I hope this phrase will not be applied to policymakers.

Number 2 -- Drive-by shootings. Can computers replace guns, as Congressman Ed Markey has suggested, or will some maniac find a way to bring phasers into cyberspace?

And the Number One Cliche About the Information Superhighway that Has Not Yet Been Driven Into the Ground -- "Modern comfort facilities." With the amount of hours we will increasingly be glued to our screens, we'll need them! 'Nuff said.

Hundt's Highway

My friend and colleague, FCC Chairman Reed Hundt, often describes the national information infrastructure as five lanes of a superhighway:

Wired: There are the local and long distance telephone networks, which have given us the best telephone service in the world.

Wireless: We have cellular telephone, paging, new Personal Communications Services, and unlicensed services.

Broadcasting: Free, over-the-air radio and television provide ubiquitous local service.

Cable TV: A multitude of channels of video programming delivered over a cable wire (or possibly a microwave antenna), on a subscription basis.

Satellite: Including direct broadcast satellite with digital transmission of video programming on a subscription basis.

The lanes of the superhighway are in some respects converging. The regulatory distinctions blur as it becomes more difficult to neatly separate the computer hardware and software industries, cable, telephony, and television.

Strategic alliances have formed across industries as players share risks and critical information. The joint venture of several cable companies with Sprint to bid on PCS licenses evidences a desire to provide a competitive alternative to the local telephone company by combining wireless technology with an advanced broadband cable plant.

Consider another interesting combination, the companies that have brought us Direct Broadcast Satellite: Hughes, Hubbard, and Thomson. Hughes is owned by General Motors. So, the largest manufacturer of equipment used on the original interstate highway is now betting heavily on the information superhighway as well. GM's investment in Electronic Data Systems was an earlier manifestation of the same phenomenon.

The Information Superhighway will enable consumers and businesses to have access to a vast amount of unfettered information. It will fundamentally change the way in which we work, learn, shop, communicate, and entertain ourselves.

The importance of communications and information to our quality of life can be seen in some statistics I have gathered. Communications and information services and products represent a substantial and growing portion of our entire economy.

The local telephone industry alone represents $96 billion in annual revenues. Long distance telephone revenues are approximately $67 billion. Broadcasting is roughly $28 billion. Cable is about $26 billion. Wireless is another $12 billion.

Together, the industries directly regulated by the FCC represent about $230 billion of annual revenues, or just under 5 percent of Gross Domestic Product.

But this is far from a complete description of the communications and information industries. There's telecommunications equipment and broadcast equipment: $43 billion. Consumer electronics: $26 billion. Computer products and services: $198 billion. Information services and entertainment: $141 billion.

Depending on how you count, it's not hard to get to $600 or even $800 billion or more. That means this industry, broadly defined, constitutes as much as 10 to 15 percent of Gross Domestic Product. Compare that with health care, which is said to represent perhaps 14-15 percent of GDP.

Moreover, the communications and information sector of the economy is growing faster than health care.

I think it's significant that policymakers are terrified at the thought that health care may reach 20 percent of GDP -- yet the prospect that communications and information may do the same thing is cause for celebration!

The Gore Core

The design and execution of the "Infobahn" rests on five core principles, enunciated by Vice President Gore at a landmark speech in Los Angeles in January 1994. These principles are:

Let me say a few words about each of these principles.

It is now settled that the seamless web of communications networks, computers, databases, and consumer equipment will be built, owned, and operated chiefly by the private sector. Private sector investment will ensure efficient deployment of resources -- and preserve limited government funds for other purposes.

Competition will play an ever-increasing role in dictating the growth of the Infobahn. Competition is the proven method of spurring increased consumer choice, better quality service, and ever-lower prices. Some companies will thrive and others will fail -- but technology and innovation will press relentlessly forward.

Regulation must be flexible to support such a dynamic technological environment. The government should not pick winners and losers. Nor should it impose unnecessary burdens.

Fair rules of the road are needed to ensure that suppliers are not locked out. Interconnectivity -- the ability to add services or new devices to a system -- must be maintained.

Finally, we must be true to our fundamental values and bedrock policy objectives, most notably universal availability of service. How do we assure that all people and areas of the country, rural and urban, rich and poor, have access to new technologies? What services should be regarded as essential, and at what price must they be made available? How do we avoid becoming a land of information-haves and information-have nots?

These are not idle questions. There is evidence that poor children may be falling behind in the information revolution. One recent study, for example, showed a substantial disparity in ownership of

personal computers. Almost two-thirds of families with incomes over $100,000 have PCs. In homes with incomes under $20,000, only one in ten families has a PC. This is why there's now so much emphasis on connecting the schools and libraries to the information highway.

The FCC's Role

With that as background, let me address the question: What part does the FCC play in the construction of the information superhighway?

The short answer is that we play many roles. Sometimes we function as an architect, other times as a traffic cop. Sometimes we're the land use planning commission. Sometimes we're the department of motor vehicles.

The Commission was created sixty years ago as an independent regulatory agency. It is not part of the Executive Branch or of the Congress. It is independent. And it is bipartisan. No more than three of the five members may be from a single political party.

We have jurisdiction over wired and wireless communications, most notably telephony and broadcasting, but we're involved with a wide variety of other services as well. In telephony, our jurisdiction encompasses only interstate communications. State power has been preserved over intrastate wired communications.

Though independent, the Commission is a creature of Congress. We work within a statutory framework. Our authority is determined by Congress, and Congress provides us with both general and quite specific guidance.

As an example of the former, the statute establishes a goal of universal telephone service but says nothing about how to achieve it. As an example of the latter, Congress has determined precise circumstances in which carriers may charge consumers for calls to 800 numbers.

I should add that the FCC shares communications policymaking responsibilities with other governmental bodies in addition to Congress.

The National Telecommunications and Information Administration (NTIA) both manages the federal government's use of radio spectrum and serves as the President's advisor and spokesman on communications policy.

The State Department and Trade Representative naturally play major roles in the international environment, but the FCC and NTIA are important participants too.

State public utility commissions regulate intrastate telephony. And Federal-State Joint Boards address

matters of common interest (such as allocating the costs of the telephone plant that carries both interstate and intrastate calls). Local franchising authoritiesregulate basic cable rates if certified by the FCC.

Courts also play a significant role in communications policy. FCC decisions are reviewable by courts of appeal.

The Federal Trade Commission and the Justice Department's Antitrust Division review some of the same mergers, acquisitions, etc., as does the FCC.

The Case of VDT

Let me put some of what I said earlier in context by using a concrete example.

I could talk generally about our conscientious efforts to carry out legislative directives, our commitment to fair competition, our desire to promote infrastructure investment, and our responsibility to safeguard the interests of consumers. But I think these points can better be illustrated in a specific context.

Any one of several examples might be used, but I have chosen to talk briefly about video dialtone, or VDT.

What is it? Video dialtone is something like cable, but it's different. It's different from a regulatory perspective, from a customer perspective, and from a program or service provider's perspective.

VDT is our name for a service in which the transport and programming functions of cable service have been separated. In VDT, a telephone company constructs a facility capable of transporting video programming and then leases the capacity of that facility to third parties so that they may provide video programming directly to end-users.

In this model, the transport capacity is offered on a common carrier basis, meaning that rates are tariffed and that unjust and unreasonable discrimination is prohibited. The transport platform must be designed so that multiple independent video information providers can lease transport capacity for programming they provide to consumers. The end-user can choose to subscribe to the programming offered by one or more of the video information providers.

Why did the FCC create VDT? It did so to interject competition into the local video market -- to provide much-needed competition for local cable service. But there's more to the story.

In a statute passed in 1984, which has not subsequently been amended, Congress forbade telephone companies to provide video programming directly to subscribers in the areas where they already provide telephone service. But creative thinking suggested a way in which video competition could be achieved without running afoul of the statutory prohibition. VDT was the result.

We regard VDT as having the potential to introduce competition at two levels, both in facilities and in services. First, in facilities, VDT holds the prospect of encouraging the availability of two wires to the home -- two wires capable of supporting facilities-based competition in telephone and video services. There is widespread support for measures which promote private sector investments in the national information infrastructure. This is especially true where the investment brings another supplier to a market in which competition and its attendant benefits have been lacking.

Second, at the programming level, VDT also allows for multiple programmers to share a single transport facility. This promotes diversity and choice, more so perhaps than would the entry of a second traditional cable operator.

That's the basic concept. Now let me touch on some of the intriguing issues with which we are grappling as VDT deployment proceeds.

One major issue involves effects on telephone ratepayers. We know that video consumers will benefit from the presence of additional competition, but it is essential that the telcos' investment not be structured in a way that causes captive telephone subscribers to foot the bill. That would be unfair to telephone ratepayers. It would also skew the competitive balance between VDT and traditional cable service.

How can we provide the necessary safeguards against cross-subsidy? This issue has consumed considerable energy on the part of FCC Commissioners and staff -- and we're not done yet. We have been beset by intense lobbying by industry and consumer groups and legislators. Some argue vehemently that we are moving at a glacial pace, while others assert, with equal intensity and conviction, that we are speeding ahead at a reckless pace. We believe we are moving forward as swiftly as we responsibly can, given the complexity and importance of the issues presented.

At both the federal and state levels, measures like price caps can help prevent telephone ratepayers from being adversely affected by telco investments in VDT systems. Cost allocation rules can provide additional protections. We will need to be careful as we press forward to ensure that VDT serves our goal of fair competition.

Another set of issues falls under the rubric of regulatory parity. As telephone companies enter a business that looks increasingly like cable, it becomes harder to justify applying different statutory and regulatory requirements to the two industries. Will the consumer care, ultimately, whether entertainment or information is delivered by the phone company, the cable company, or perhaps the gas or electric company? Can the FCC play a role in minimizing regulatory disparities without any change in the underlying statute? It also may be appropriate to streamline regulation as competition develops. Does the Commission have the flexibility it needs to do so?

Here's a related issue: reciprocal entry. Unfortunately, the Commission has much more power to promote entry by telephone companies into video markets than to enable cable companies to provide telephone services. The barriers to telephone competition are mostly at the state level. To what extent should the Commission concern itself with the objective of contemporaneous entry by telcos? Should we more readily approve VDT applications in geographic regions where states have stopped sheltering telcos against competition?

What about demographic equities? The Communications Act calls for a rapid, efficient communications system to be made available, so far as possible, to all the people of the United States. Some groups have alleged that telephone companies' VDT deployment plans reflect economic "redlining" in that wealthy areas were disproportionately favored. The telcos deny this charge. How can we prevent invidious discrimination, while recognizing that a service like this necessarily must be deployed over time, not everywhere at once?

Preferential access. We have rejected proposals to permit a single VDT video information provider to control all or substantially all of the channels on a VDT platform, which would make VDT look more cable service. But we have not yet ascertained how all conflicts over channel capacity are to be resolved. For example, should there be favored access for certain signals such as those of local broadcasters? Or maybe nonprofit programmers? This topic takes on added significance in light of recent developments affecting public broadcasting.

Finally, telcos as video information providers. The original VDT construct presupposed that telcos could not themselves be video information providers in their own service areas. But now, several district and appellate courts have overturned the statutory cable-telco ban on First Amendment grounds. This makes it necessary for the FCC to revisit the notion that the telcos' role must be limited to that of providing a transparent conduit. Can we maintain the distinct advantages of VDT (a common carrier platform serving multiple video information providers on a nondiscriminatory basis) in an environment in which the telcos may themselves wish to control much of the capacity on the platform? How do we deal with the dilemma caused by the interplay between the First Amendment cases and other statutory provisions that remain in effect?


As you can see, our efforts in the area of video dialtone present us with abundant challenges. The questions are fascinating, and the opportunities are enticing.

It's an incredibly exciting time to be part of the communications and information industries, as all of you surely are learning. I hope I have managed to add something to your understanding of the role the FCC plays in this market -- and especially of our overarching commitment to promote fair competition in all market sectors.

And I wish you all the best as you move out into the workplace and become a part of this wondrous and dynamic industry.

Thank you.