February 22, 1996
Much has happened since I visited last year. In Washington, we have had a once-in-a- lifetime viewing of Vermeer paintings, two government shutdowns, and three year's worth of snow. And for the first time in sixty years, Congress completely overhauled our nation's communications laws.
What makes enactment of the Telecommunications Act of 1996 so momentous? Why did Vice President Gore proclaim at the February 8th signing ceremony that "the Berlin Walls" of the telecommunications industry have crumbled?
Why are members of Congress, Wall Street gurus and CEOs of communications companies alike announcing that revolutionary changes in the industry are around the corner?
The new law isn't the end -- or the beginning -- of civilization as we know it. But, for the communications world, it's as if we just went from black and white TV to color -- overnight.
Just think about it. The core law that has governed the communications industry was enacted in 1934, more than six decades ago.
When that statute was passed, there were no televisions, no satellites, no cellphones. Sixty years ago, the latest in telephones was the rotary dial desk set that came in exactly one color -- black.
Today we are accustomed to wireless phones that fit in our pockets, allowing us to be reached anytime, anywhere. Now isn't that progress?
Fifty years ago, scientists here at the University of Pennsylvania were turning on ENIAC, the world's first large-scale, general purpose electronic computer. It weighed about 30 tons and filled a 30 by 50 foot room.
Today, it could be replaced by one fingernail-size silicon chip. We now carry powerful computers on our shoulders and in our briefcases. We use them in meetings, on airplanes, even at the beach.
The telephone network is now a web of thousands of powerful special purpose switching computers, which link literally millions of phones, faxes and personal computers at home and at business.
The Internet -- known only to a few a decade ago, is now a household word and a household window to the world.
Just pick up the newspaper -- or should I say, click on it -- and you are sure to see additional reminders of the rapid pace of change in computer and communications technology, the growing variety of services, and creative business strategies.
These changes show no signs of slowing down. Now, finally, the telecommunications laws are catching up.
Historical Perspective
The debate over rewriting telecommunications law has been underway, on and off, for twenty years. Significant issues have been considered regularly by Congress, and there have been amendments to the '34 Act over the years. But attempts at comprehensive legislation have -- until now -- been unsuccessful.
One so-called "reform measure" was attempted back in 1975. The "Consumer Communications Reform Act" as it was called, was designed to prevent "wasteful duplication" of investment in the telecommunications marketplace. It would have addressed two areas: long distance service and customer-premises equipment. For both, it would have outlawed competition -- you heard me correctly -- outlawed competition! Fortunately, it failed to gain the requisite number of votes.
It finally took a lawsuit brought by the Justice Department and the effort of a newly appointed federal judge, Harold Greene, to direct us down the right road -- away from monopoly and toward competition. Judge Greene ordered the breakup of AT&T from its local telephone monopolies, the Bell Companies. He also required the Bell Companies to offer all long distance companies and information providers equal access to the Bell local telephone networks. And in light of the Bells' continued market power, he prohibited their participation in the long distance, information services and equipment manufacturing markets.
Today, the thriving long distance, information service and telecom equipment markets are a testament to the wisdom of his decisions. The new law has taken an old page from Judge Greene's book and relies heavily on "equal access" to make local competition viable.
The New Consensus
Finally, after years of wrangling by a host of interested parties, legislation was crafted that won overwhelming bipartisan support in both Houses of Congress and in the Administration. The Telecommunications Act of 1996 became possible only because consensus finally was forged around the central principles that should apply in the new telecommunications environment. (It helped, too, that multiple sectors of the telecommunications industries, weary from battle, came to recognize that continuing uncertainty would complicate investment decisions, hinder access to capital, and ultimately delay their entry into each other's businesses.)
The overall thrust of the new law is straightforward: increase competition and reduce regulation. Everyone hopes -- and most people expect -- that this new law will lead to intense competition in every sector of the telecommunications industry. That's how you spur innovation, expand consumer choices, lower prices, and increase U.S. competitiveness.
As competition arrives -- and hopefully thrives -- the future can and should be driven much more by the industry -- the strategic planners, the marketing experts, the technology whizzes, perhaps even some of you in the audience today. The role of regulators will be significantly reduced.
The new law deliberately blurs lines between formerly discrete sectors of the telecommunications industry. Bell Atlantic may become your long distance company, or your video service provider. MCI or AT&T may become your local telephone company, or your source for wireless services. Cox or Comcast may offer you broadband Internet access, or wireless local loop.
The New Telecommunications Landscape
In short, every part of the telecommunications landscape will be dramatically changed as a result of this law. Let me explain how.
Imagine the end of the local telephone monopoly. The law eliminates state barriers to competition and requires the FCC and the states to create a procompetitive environment for local telephony. Components of that environment include:
These ground rules will make it possible for consumers to choose their local telephone company the same way they choose their long distance company or cellular company today. As a result, we can expect to see lower rates and more "one stop shopping" for local, long distance, video and wireless services.
Once the local telephone monopoly has been broken, the line-of-business restrictions imposed on the Regional Bell Operating Companies (RBOCs) will vanish. For the first time since they were divested by AT&T 12 years ago, the RBOCs will be permitted to provide long distance service and to manufacture equipment.
Congress recognized that once local competition had arrived, these monopoly-based safeguards are no longer necessary. Local competition has already been introduced in isolated pockets in several states. However, time will be needed before competition firmly takes hold.
We are already seeing inroads to the local cable monopoly from direct broadcast satellite and other alternative technologies. This law will accelerate that activity.
The new law permits entry by telephone companies into the video programming distribution business in their own region and with their own facilities. The courts had chipped away at this restraint. And the Commission had attempted to make sense out of a hodge-podge of laws to enable local telephone companies to offer what was called video dialtone service. The new Act establishes once and for all a blueprint for telephone companies to offer video programming.
Many cable companies, faced with new telephone company rivals for their video business, are poised to enter the local phone business. Their wires, with their broadband transmission capacity, already pass more than 90 percent of the nation's homes. However, the cost of upgrading these wires for telephony, by adding a power source and switching capability, will require a heavy investment.
In recognition of growing video competition, the new law removes cable pricing restrictions upon telco entry into video services in the cable operator's market or, at the latest, in 1999. Rural communities will see the lifting of cable price caps immediately.
Cable and telephone companies are each entrenched incumbents in one business, insurgents in the other. In their role as new entrants, they will no doubt be adept at anticipating the likely efforts of their incumbent rivals to thwart new entry. The Commission will have very little patience with delaying tactics by either industry.
One can only hope that all parties, from every industry sector, will recognize they have more to gain from getting on with the competition, not playing for advantage by trying to forestall competitive entry.
Meanwhile, there will be other major changes. Electric companies may seek to enter communications businesses, capitalizing on their valuable rights-of-way. Wireless companies will be anxious to build out their systems, having spent billions of dollars at auction to enter the wireless telecom market. The prospects for successful competition by both of these industries will be enhanced by the interconnection rights mandated by the new legislation.
For the broadcast industry, the new law offers increased ownership freedom. TV broadcast groups will be allowed to own stations reaching 35 per cent of the national audience, up from 25 percent. Radio operators may now purchase an unlimited number of outlets nationally, and greater numbers of radio stations in a single market. Broadcast networks and cable systems may be owned by a single entity. Many in Congress would have permitted even greater media concentration, but a consensus was lacking.
At the Commission, we have already seen an increase in mergers and acquisitions in the broadcast industry, in anticipation of passage of the law, and we expect to see many more.
Consolidation will not be limited to the broadcast companies. Throughout the industry, companies that previously focused on a single market sector will expand their horizons. I foresee a growing number of vertically integrated companies that provide content, distribution, software, and equipment. Some may seek to provide one-stop-shopping by bundling local and long distance, video, and Internet access services. Some may even throw in local service for free!
Some mergers or joint ventures may work. Others may suffer from the inevitable clash of corporate cultures, as traditional regulated utilities adjust to the more entrepreneurial worlds of entertainment and information.
Foreign interests too, attracted by the lucrative -- and now open U.S. telecommunications markets -- will seek ways to enter new global alliances with U.S. companies, just as U.S. companies will continue to expand their holdings abroad.
As you can see, the new law allows for enormous change and opportunities for diversification in the industry. The walls have crumbled. But, will it actually happen? Will competition flourish, or will deregulation result in bigger companies and less competition? Will it ultimately be good for the American consumer?
The Role of the FCC
Whether this law achieves its laudable goals will be determined to a great extent by the work of the FCC. We have a tremendous amount of new work to do -- dozens of new rulemakings, some with very tight deadlines.
It may seem paradoxical that a law intended to reduce regulation will require some 80 rulemakings to implement. But remember that the goal of these rules is to bring about competition that does not exist today. After all, 95 percent of telephone subscribers today are served by a monopoly provider. Cable companies still account for more than 90 percent of multichannel video programming subscribership.
Our goal will be to craft rules that will facilitate the transition to competition in a way that best serves the public interest. It takes hard work to bring about fair competition. Wishing does not make it so.
One of the more important provisions of this law gives the Commission increased freedom to deregulate as markets become competitive. The 1934 Act significantly hampered our ability to take deregulatory measures which were plainly warranted by the evolution of competition in certain markets. The new law gives the Commission the authority to forbear from regulating telecommunications carriers where regulation is not necessary to ensure reasonable rates and to protect consumers.
Five years from now, I would like to be able to report to you that there is increased competition for local voice and video services, resulting in increased choice for consumers, lower prices, and even faster innovation. I would like to report that markets are not dominated by one or two very large providers.
Universal Service
I would also like to be able to report that we have restructured our traditional approach to universal service. This is a part of the law that I have not mentioned. The Commission and the states are instructed to work together to maintain the availability of universal telephone service at affordable rates for all Americans.
The new law also directs us to promote access to advanced telecommunications services for schools, libraries and health care providers. This directive provides us with a golden opportunity to ensure that every school and library is connected to the information superhighway.
Private industry has already played a key role in meeting this objective. We now have the tools to reduce disparities between information haves and information have-nots by ensuring access to quality telecom services at affordable prices in all areas of the United States.
Competition alone cannot achieve this goal. The FCC and the states must work hand-in-hand to make access to communications services a fact of life for everyone.
Once we have successfully implemented the law, the Commission's role will be to ensure, on an ongoing basis, that its goals are fulfilled -- that a healthy competitive market with many players develops and thrives, that consumers are protected, and that the public interest is served.
Potential Downside
Despite all the euphoria about the new law, there are potential negative effects as well. In the near term, consumers may see their cable rates go up, particularly in small towns and rural areas. Competition in the video programming and local telephony markets is likely to create some of the same consumer confusion that accompanied the introduction of competition in long distance service. Increased media concentration is likely, giving rise to concerns that distribution of information will become dominated by a small group of very large players. Small entrepreneurs may find themselves unable to compete with these media giants.
Many have rightly hailed this legislation as a job creator. There will be new jobs in many areas, such as strategic planning, marketing, finance and management, as telecommunications companies enter new lines of business. There will also be opportunities worldwide as U.S. companies enter global alliances and foreign companies enter our markets.
But we must be realistic. It is undeniable that, with the many mergers and acquisitions that have already occurred and will continue, there will be job losses. We have already seen phone companies lay off more than 140,000 workers since 1993, and AT&T recently announced it will cut 40,000 jobs over the next three years. The job losses in these traditional industry areas will likely continue but could be offset by job growth in new areas.
Conclusion
Over the next five years, I believe we will see an increased velocity of change in the telecommunications and information industries. The transition from ENIAC to the silicon chip may pale in comparison. Technology will fuel the change and technology does not stand still. At the FCC, we will seek to encourage, not delay, the deployment of new technologies.
It will be an exciting time to be involved in those industries, as they face intensified global competition and accelerated innovation. I believe the role of policymakers will be to ensure that American consumers are the beneficiaries of all of this change, and that they are not forgotten as industries race to grow bigger and stronger.
I expect that many in this audience will play a role in the new telecommunications marketplace. Some of you will help to build it or to shape it. All of you will be affected by it.
Opportunities abound. I wish you success in making the most of them.