[ text version ]

Remarks of
FCC Commissioner Susan Ness
before the
Wall Street Journal Technology Summit
New York, NY
October 15, 1997

(as prepared for delivery)

"From Hype to Reality in the Emerging Digital Age"

It's amazing how digital technology has permeated our everyday lives:

Just a few years ago, none of these digital uses would have been commonplace.

Incidently, children growing up in this digital world will be far better positioned than we are to embrace new services. Whenever my husband or I have a problem with our computer -- can't get the printer or a program to work -- we solve it by waking my nine year-old son three minutes early before school, and in three minutes flat, it's fixed.

The Communications World is Changing

For the FCC, the communications world has been changing for a long time, but the pace has accelerated in the year and a half since the passage of the Telecommunications Act of 1996, and the nine months since the historic World Trade Organization agreement was reached on basic telecommunications services. We're working to open the entire communications industry to competition in the US and throughout the world.

Change is also taking place because of technology. When I joined the FCC a mere three- and-a-half years ago, the Internet was still a relatively limited phenomenon. People were talking about convergence in the communications world, but back then everyone thought convergence meant telephone companies would offer video over "video dialtone" networks, and cable companies would get into the telephone business by offering voice services over their existing facilities.

Digital television was still a gleam in the eyes of engineers, seven years after we started the Advanced TV proceeding at the FCC. And satellite-delivered digital programming was just being launched...literally. The landscape today has changed dramatically.

Change is occurring at the FCC as well. For the first time in the Commission's sixty-three year history, four of the five Commission seats will be turning over at one time, as soon as the Senate confirms the FCC nominees. As the only remaining commissioner, I'm looking forward to working with my new colleagues.

The FCC has accomplished a great deal under the leadership of Reed Hundt. Having worked closely with our new chairman-designate, Bill Kennard, I feel confident that our record of accomplishment will continue unabated under his fine stewardship.

Hype into Reality

One of the things that FCC commissioners have to do is be able to distinguish hype from reality. But, then again, that's not all that different from what you do in the investment community. Or at least that's what I had to do in my previous life as a banker.

Ever since I came to the FCC, I have been hearing about the impending digital revolution. Well, this year we are finally seeing long-promised broadband digital services becoming commercially available, and 1998 looks to be the year that many of these nascent offerings reach critical mass.

Of course, I seem to recall that 1993 was going to be the year of the great digital cable conversion. Actually, I remember hearing the same thing about 1994 ... 1995 ... and 1996

-- the future was just around the corner. Cable has cautiously embraced the digital world. Long-anticipated digital converter boxes are finally rolling off the assembly lines and into consumers' homes.

In addition, high-speed cable modems are providing rapid access to Internet in nearly 50,000 homes. While it is projected that ten times that amount will be in use by the end of 1998, a half million still represents only a small fraction of cable home penetration.

Cable is not the only newcomer to digital broadband. You can call Hughes today and order its DirectPC service, which gives almost any household in the lower 48 states satellite access to the Internet at 400 kilobits per second -- or almost eight times the speed of the fastest telephone-line modem on the market.

And planned satellite systems promise to deliver two way broadband Internet services to the most remote villages. Even in the remote areas of our country, subscribers will be able to check e-mail or access the Web with the same speed available to urban dwellers.

Wireless Internet connections are now available in several major U.S. markets. For about the same cost as a second phone line and an account with an Internet service provider, you can attach a transceiver to your laptop and access the Internet.

Some cellular and wireless providers are selling Internet and e-mail access using new hand- held phone/computer combinations.

And in a few years we will see whether LMDS lives up to its promise as a cost-effective delivery mechanism for interactive broadband services. The LMDS spectrum auction of over one gigahertz is scheduled to begin in December.

Progress has been slower in the world of wired telephony, as the courts have chipped away at the FCC's pro-competitive orders. Incumbents and competitive carriers are experimenting with xDSL technologies to transmit as much as six megabits per second over ordinary copper loops.

But new entrants have expressed frustration in their efforts to secure unbundled sub-loops to provide upgraded local service. And prices for ISDN lines have not declined sufficiently to engender rapid consumer adoption.

After a decade of gestation, digital television is becoming a reality. The FCC has adopted an allotment table, established a transition schedule, and issued the first two construction permits. Many of the major network affiliates in the top ten markets plan to inaugurate digital television service by Christmas 1998.

And a different kind of digital TV, Internet service to conventional TVs, is making Internet access available to TV viewers who never thought they could navigate Windows, let alone DOS, for the price of what a 28.8 kbps modem alone cost 2 years ago.

Two Digital Audio Radio Service licensees are about to make final payments on their new licenses, so we will soon see the DARS service rollout.

But let's not get carried away. New technologies take years to reach critical mass. It took almost three decades for cable television to become the mass medium it is today, and a decade for cellular phone service. The microwave, the fax machine, the VCR, and even the Internet are essentially applications of technologies that were available for many years before their popularity took off. It takes the right factors for new technologies to reach critical mass -- customer demand, the right price, ease of use and availability.

Once that critical point is reached, however, innovative services can explode into the marketplace. That's exactly what has been happening with the Internet over the past four years.

And as new digital cable, satellite, terrestrial wireless, broadcasting, and wired network technologies each reach critical mass within their market segments, they are interacting and feeding off one another to create a digital infrastructure critical mass. That heralds a marketplace "big bang" in applications and demand.

Now is that hype or reality?

The Internet as Driver

Some say the biggest factor driving the transition from digital hype to reality is the Internet. When I joined the Commission just a few short years ago, Netscape, Yahoo, @Home, and Amazon.com did not exist. Today these companies have combined market capitalization of about $10 billion.

It's been estimated that as of this past June, 51 million Americans were online, up 46 percent from June 1996 (Intelliquest 9/97). And that's predicted to grow to 135 million people -- or half the nation's population -- by 2001 (Forrester).

At this rate of growth, there may be more Internet users than people on Earth by the year 2112. But now we're getting back into hype -- you have to resist those marketing consultants. Internet products and services (not including revenue from goods sold online) generated $35 billion in 1996, and are projected to exceed $100 billion by the turn of the century.

Electronic commerce is blossoming, too. Revenues from sales on the Internet are projected at about $5 billion today (Intelliquest 9/97) growing to a whopping $220 billion by 2001! (DG 7/97)

Dell Computer reports that its Internet generated sales for the third quarter of 1997 were pacing at $3 million a day, up from $2 million a day during the second quarter of this year (Dell Computer). That translates to a billion dollars a year in electronic commerce.

Even if the consultants generating these predictions are off by 50 percent, the growth of the Internet will dramatically change the communications and information landscape. The current and projected market for Internet services gives companies a powerful reason to take their networks digital. The growth of the Internet is creating an enormous demand for ever- increasing bandwidth, and entrepreneurs are rushing to find ways to offer bandwidth at affordable prices.

As I have just described, the Internet is unique in that it can be integrated into virtually any communications technology. At the core of the innovations is an open standard -- TCP/IP -- which enables technologists and entrepreneurs to know that their new ideas can be implemented without delay.

Here's a real look into the future: As the cost to produce Internet protocol-laden chips declines, some predict that these chips will be embedded into many household appliances, such as refrigerators and microwave ovens. Power companies then could selectively control the energy use of each appliance in the home. That power saving may be sufficient to reduce peak consumption, and fewer power plants will have to be built. That represents huge savings to the company -- and to consumers.

But I am getting ahead of myself. I'm HYPEr-ventilating.

Pressure on Traditional Models

All of this growth has stretched out of shape the traditional models that companies -- and the FCC -- have used to understand the telecommunications industries. Old assumptions about market segments no longer apply. Now, every communications company has the potential to offer combinations of voice, video, and data.

Markets may change far more quickly than we expect. Take a look at wired telephony -- that little business that generates close to $200 billion in annual service revenues in the United States, and $600 billion worldwide. With cable entry into telephony largely on hold, competition in the local loop is limping along. Internet telephony services are being deployed, but it is virtually impossible -- today -- to match the sound quality of the public voice telephone network through the Internet.

But take another look at just where the revenues of today's circuit switched carriers are coming from. Of the nearly $80 billion US long distance market, 30-40% of the revenues are not real-time person-to-person voice. Fax transmission alone is estimated to be a $6-7 billion business in the US, and $35 billion globally. Voice mail and other store and forward applications are another significant chunk.

How many of you here today have either retrieved or left a voicemail message during a break this morning? Or sent or received a fax? It's been estimated that nearly half of all long distance calls are not completed to a live person.

In addition, call center traffic -- like LandsEnd -- generates billions of dollars a year. All of these services may be more compatible with Internet telephony than with traditional person- to-person calling. For example, reportedly 40 percent of Cisco's customer service contacts are made via the Internet as opposed to phoning its 800 toll-free call center.

As a result, "Internet telephony" -- broadly defined -- could easily become a $20 billion a year business in the next five years by grabbing the "low-hanging fruit" of the non-real-time circuit switched network.

But wait! Is that hype or reality?

Before we proclaim the demise of the circuit-switched network, let's not lose sight of the fact that today, less than one percent of voice telephone calls are actually delivered by the Internet. It is still more efficient -- and more satisfying -- to route voice telephony over the traditional network.

And the newest digital switches are fully capable of distinguishing between true voice calls and data calls. They can bypass the circuit switch, and route data traffic directly to the packet switched network. Ironically, such bypass may actually save telcos money, by avoiding the need to build additional capacity where Internet traffic is causing congestion at the switch.

Digital Television

Just as Internet telephony has introduced new ways of thinking about telephone service, so too has digital television triggered new ways of thinking about broadcast service. Digital TV has tremendous promise. The DTV standard the FCC adopted last December, coupled with flexible service rules, enables broadcasters to offer consumers a wide array of innovative new services, beginning with high definition television.

The major networks have made it clear that they intend to offer their affiliates a substantial dose of high definition programming. Frankly, to do otherwise could put their affiliates at a competitive disadvantage, given the economics of free television.

The DTV standard also permits multiple data streams to be carried on the broadcast signal simultaneously with one or more channels of video programming. High definition. Multiple program streams. Data. These are not mutually exclusive. Even high definition program channels still leave part of the 19 megabits per second broadcast transmission available for a variety of uses.

So Internet access may be delivered to the computer while the viewer is watching a football game in high definition. Advances in compression technology will only improve. As one broadcaster observes, "today's system is the worst we'll ever see."

So what does a nice regulatory agency like mine do with the Internet?

Observe, support, but do not interfere. The Internet is still evolving. Its economic model has not yet stabilized.

Regulatory Models

The Internet does not fit neatly within any of our traditional legal categories, just as radio and broadcasting did not fit neatly into the interstate transportation regulatory scheme of the early 1900's -- that's the model upon which the 1934 Communications Act was based. (No wonder it's called the Information Superhighway!)

The emerging digital world is heterogenous. Instead of easily distinguished media like telephone and broadcast services, we see a spectrum of hybrids. Virtually all of the new services involve some intermingling of voice, video, and data, all of which have traditionally been treated separately under our rules.

If driven to its illogical conclusion -- Internet services could be subject to multiple, overlapping regulatory classifications.

We would also have to grapple with imponderable jurisdictional questions. Our framework for communications regulation in this country is built upon a division between local and interstate services -- which the 8th Circuit eloquently likened to a fence that is "hog tight, horse high and bull strong."

The FCC, state public utility commissions, and local authorities all could lay claim.

However, the Internet is a global, packet switched network, accessed -- at times -- through the local telephone system. It defies geographic and political boundaries. That means it's much harder to carve up into neat jurisdictional packages. An email message sent across the street may travel around the world before reaching its destination. Is it a local call? An international call? And have you ever tried to count minutes of use when it is packet switching?

It would be easier to lasso Jello than to successfully apply traditional regulatory structures to the Internet.

Yet, as some of the services provided by the Internet become substitutable for traditional voice telephony or cable service, there will be incumbents who will call for regulation to establish "a level regulatory playing field."

And some have argued that, because Internet telephony may divert significant revenues away from traditional telecommunications carriers, we should require all Internet services to contribute to universal service funding lest universal service be imperiled.

Let's explore that issue for a moment. Universal service is critically important to this country -- especially in the rural areas. Our network is enriched by the ability of everyone to have affordable access to it.

Internet providers do contribute indirectly to universal service when they lease transport capacity on the switched network from telecom carriers and when subscribers dial up. ISP's are also stimulating demand for second lines to the home.

But at the heart of the matter is whether people in the far reaches of America will have access to the same advanced communications services at affordable prices that urban people do.

I believe that unfettered growth of the Internet and digital delivery mechanisms will result in more rapid delivery of better services, lower cost, and more choices than have ever been seen before.

Competition by service providers will put downward pressure on prices -- even to rural America. Competition -- not regulatory action -- is the preferred course of action.

Broadband Internet access will provide the far reaches of Alaska with the ability to apply telemedicine to reduce the cost of transporting patients to a medical center an hour's flight away. Children in the bush will have fingertip access to the Library of Congress -- just as their urban counterparts do.

But at this stage, I fear that application of traditional telecom regulation on a service that is still in its infancy will stifle creativity and curtail its growth -- to the detriment of all consumers.

The Commission has an obligation to advance universal access. We should continue to watch closely as the Internet matures to ensure that universal service funding is not threatened. If Internet applications become essential to everyday life, it may well be in a few years that universal service will be redefined to include affordable access to this technology. But in my view, we should not take those steps today.

The Role of Government

So....apart from staying out of the way, is there a positive role for government in the emerging digital marketplace? Absolutely.

Indeed, later this fall, a government-private sector partnership called the Trans- Atlantic Business Dialog will be meeting in Rome with its European colleagues to develop a set of policy guidelines in support of Internet commerce.


There has been plenty of hype about new technology and competition in communications over the past several years. I have no doubt that the hype will continue into the future. But the hype should not obscure the reality that we are entering an era of immense opportunity.

I intend to work with my new colleagues, once they are confirmed by the Senate, to nurture these opportunities for the benefit of consumers and our economy.

Oh, and by the way -- I profess to a bit of hype in my opening remarks -- it takes my sleepy son at least five minutes to solve our computer problems!

Thank you.