# FORRESTER RESEARCH TELECOM FORUM

# Q & A with Chairman Powell

# May 21, 2001

CHRISTOPHER MINES (Group Director at Forrester Research): I trust you
all enjoyed the quick refreshment break.

Well, our next speaker is a real treat for all of us, an opportunity to
discuss the regulatory environment with the telecom industry and hear
about it directly from the horse\'s mouth. The Chairman of the FCC,
Michael Powell, is with us. He was designated chairman by President Bush
back in January of this year. He's served on the Commission since 1997.

We decided to go with a different format with Chairman Powell. We\'re
going to go directly to a Q&A, to increase the bandwidth in our
communications. We\'ll go directly to Q&A, to give us and all of you the
most time possible with Q&A, with our time \-- with the Chairman.

We\'re very pleased to have him with us this morning. Please help me
welcome Chairman of the FCC, Michael Powell.

CHRISTOPHER MINES: Well, good morning and welcome.

CHAIRMAN POWELL: Good morning.

CHRISTOPHER MINES: Thank you for joining us. My initial question, just
to get us started, I\'m curious about how you got started in the telecom
field. You have a resume that doesn\'t scream telecom to me. How did you
get into the telecom gig?

CHAIRMAN POWELL: Well, that\'s a good question. I had been an Army
officer. I got out of the Army, due to an accident many years ago and
went to law school, long and short of it, and ultimately ended up at a
firm, doing antitrust work and telecom work. And it was really in the
wake of the \'96 Act, in which we realized competition policy and
antitrust policy were going to be central focuses of telecom regulation,
as opposed to this sort of historical rate of return, quality of service
kind of regulation that attracted me to the field and private practice.
And then I ultimately went to the antitrust division, where, as the
chief of staff of the antitrust division under Joel Klein, I saw a
number of major telecommunication mergers and the effects of them. And
that really became a central focus of mine.

Plus, I\'m a technology fiend and I\'m very attracted by the amazing
technology-driven innovations that are in the marketplace. That\'s
always been a real love of mine and so I keep up with that pretty well,
as well.

CHRISTOPHER MINES: What do you use the Internet for, yourself? Do you
have broadband access at home and what do you \-- what do you use it
for?

CHAIRMAN POWELL: I do not. I\'m a have not. I\'m a have not desperately
awaiting its arrival.

CHRISTOPHER MINES: The broadband device?

CHAIRMAN POWELL: I am on the wrong side, regrettably. But, I am a heavy
Internet user. I use it for everything, from the simple and mundane,
including what\'s on the school menu at my kids' school tomorrow,
whether they\'re going to buy or take. I use it for a lot of research.
I\'m a real digital photography fan. I play around a lot with uploading
of family pictures, etc. Of course, e-mail, video editing applications
\-- all kinds of stuff.

CHRISTOPHER MINES: Really?

CHAIRMAN POWELL: Yeah.

CHRISTOPHER MINES: Well, let\'s dive into the state of competition in
regulation in the industry, especially in the local access business. The
key goal of the Telecom Act was to bust open the last bastion of
monopoly in the industry. We\'ve successfully deregulated in long
distance, in CPE, in wireless, and most of the other segments. Local
access remains that last bastion of monopoly and the key goal of the
Telecom Act in \'96 was to break that open and to allow new competitor
entrance in the marketplace.

It hasn\'t quite worked out the way the framers of that legislation, I
think, would have hoped. What\'s gone wrong and what do we do about it
going forward?

CHAIRMAN POWELL: Let me first say that I think we saved the hardest for
last. It\'s important to put things in perspective and really manage our
expectations before we start declaring things successes and failures.

We\'re talking about a local phone system that\'s been in existence
virtually for 100 years, in which monopoly was achieved, not because
these carriers were the efficient or best producers and ultimately set
up their markets, but because the government was a participant in a
state-sanctioned natural monopoly model, in which we wove into that
system an enormous amount of government policies. The monopoly provision
of services was indeed an affirmative government policy for a good part
of that time.

I think the \'96 Act was a tremendous change in thinking. But the notion
that 100 years of developed matured market infrastructure, both as a
matter of the architecture itself, and the policies associated with it,
were going to be eviscerated on a five year or six year time horizon, I
personally always struggle with as being a fantastically naive
expectation.

I mean, these are very tough markets to enter under any circumstance. I
think they\'re more like construction projects than they are like dot
coms. They take a long time to produce the kinds of networks that have
sufficient service differentiation and cost differentiation to be real
and meaningful viable competitors against an existing incumbent.

And so, I refuse to fall into the trap of "is the Act a success or
failure." I don\'t know that we really know yet. I still think that
there are fundamentals that are sound, that will attract competitive
entry. I think that if we confine our thinking to believing that it\'s a
BOC lookalike voice offering, that\'s not going to do it. I mean, I
think that what we do is we place our hopes on advanced and newly
differentiated services, probably differentiated by key technology
differences, and hope that provides the choice that consumers want.

One last thing I want to say about that. It\'s interesting to me what
people think local competition is. I\'ve been thinking a lot about this,
as people say that it\'s failed. And I think to myself, why do we assume
that? We talk about convergence in technology all the time, but we\'re
not seeing through the eyes of a consumer.

Communications, to me, is a way of calling my mother. Now, let me tell
you, today, I do things that I never was able to do just a few years
ago. I might e-mail her. I think that\'s a threat, that\'s a competitive
alternative to picking up the local telephone. I might instant message
my sister. That is a lost opportunity cost to the local telephone
system. I did that instead of call.

And I will tell you, we underestimate the value of wireless, as a
substitute for local services. I make many calls on my wireless phone,
sitting in the driveway of my house, the front yard while I\'m
gardening, and I haven\'t picked up the phone in a hotel in five years,
because I use my wireless phone. That\'s all coming out of what would
have been a traditional call by a local company or an incumbent.

And I think if we look at those services, the ones that really have tech
differentiation, like cable services and high speed Internet services,
DSL services, and wireless services, consumer growth has been
extraordinary. And I think the lesson there is you\'ve got to move to
networks that allow real value, real differentiation, and things that
consumers will really appreciate, be willing to pay for. I think if
you\'re going to call and bug me at dinner with nothing but the basic
BOC lookalike offering, I\'m probably not very interested in that, as a
local consumer.

CHRISTOPHER MINES: Let\'s talk about broadband in particular,
differentiated services being rolled out by a couple of different and
hopefully, in most cases, competitive service producers, cable companies
and telcos. Does that need a boost, somehow? Does it need a regulatory
boost, to get broadband availability and broadband penetration going
faster? I\'m thinking particularly as some of these providers are
raising prices, now. Here we are three or four years into the broadband
marketplace, DSL prices starting to creep up, cable modem service prices
starting to creep up, as well.

CHAIRMAN POWELL: Well, I think the central thing government has to do is
keep working through what it believes will be the government playing
field of the regulatory paradigm for advanced and new services, not so
much for what the consequences of those judgments are, but to help quell
the uncertainty associated with deployment investment decisions and
concern about whether that will ultimately, in your business model, get
the return that\'s expected or whether regulation will add a component
that isn\'t factored in the beginning.

I think we have to work really hard to continue to think about what the
rational regulatory environment is and give some time horizon
expectations, without being able to predict completely how services will
unfold, so that the risks associated with deployment are minimized.

I think it\'s important to keep in mind \-- this is an expectation point
\-- we have a rich environment of innovation and experimentation and one
of the shoes that has yet to drop is really what the consumers want.
What value are they going to place on these new services?

I mean, I am fascinated to watch repeatedly the country get
techno-euphoric. Because we can do something, means we will. And it\'s
just not true, if you look at the deployment of technology historically.
It often takes periods of experimentation and innovation before you find
a value point which consumers are going to pay for. I don\'t think you
can just, say, plug a fat broadband pipe into the side of my house and
the world will beat a path to my door without thinking hard about what
soccer moms do or won\'t do, or what families are prepared to do or not.

Do they really sit around the living room watching TV, in the ways they
used to? Are they really demanding video on demand over their computer
systems? Are they really demanding full motion video on mobile handsets?

I mean, just because these things are possible, doesn\'t mean the human
animal is prepared to embrace every one of them. And I think human
beings evolve toward technology much slower than the technology, itself,
evolves. And so when you say things like your question about price, I\'m
not so sure I know what the right price for broadband offering is yet.

I mean, we\'re talking about services that, in reality, really only
became a retail alternative in \'98. We have early adoption going on. I
don\'t think that it\'s a mass market yet.

CHRISTOPHER MINES: About seven percent penetration, by our numbers.

CHAIRMAN POWELL: Seven percent penetration, which I think is
interesting. A lot of people will say, well, that\'s, you know, just
terribly slow. You compare it to the roll out of other similar
innovations in our society that we herald, whether it be the roll out of
the telephone system, the adoption of color TV, the adoption of VCRs and
CD players, the adoption of electrification and plumbing, and these
services are rolling by an order of magnitude faster than any of those
that preceded it.

And I sometimes think, if we root our thinking and go back to history
and see what it takes, we wouldn\'t quickly sort of jump to the
anxieties that we\'re failing. Instead, we need to focus on where we are
hitting bumps and then try to alleviate them.

I think my own opinion is that the price rises \-- I don\'t know whether
they\'re justified or not, but I think that they\'re going to hurt
growth. I think they\'re going to consumers that are already frustrated.
I would submit, by the promises we\'ve pedaled, about what they can
expect and how quickly to expect it, who are not having good experiences
in the marketplace right now. Anyone who has gotten DSL or even a cable
modem a lot of times will tell you the same horror story, how it took
forever, how it didn\'t work, how they had to come back, and now they
want 10 bucks more a month for that unbelievable quality service. And I
think that what \-- at a time where we\'re seeing slowing growth a
little bit in deployment, I think the price rises are certainly going to
take a chunk out of that.

I\'m not so sure I\'m convinced yet that it's just a reaction to the
economic stress on the DSL competitors. I do think that\'s a part of it.
I do think the business cycle is a bigger part of it. The financial
models are a bigger part of it.

CHRISTOPHER MINES: For the providers?

CHAIRMAN POWELL: For the providers.

CHRISTOPHER MINES: So, they\'re actually slowing deployment, based on
their own capital needs or profit and revenue needs?

CHAIRMAN POWELL: Yeah. I don\'t have the numbers in front of me, but
even ILECs, the incumbents, are sort of down something in the order of
39 to 40 percent. And they may have the cash to weather these kinds of
cycles better than new entrants do, who are down closer to the 90th
percentile, but they\'re all still really hurting from the very high
up-front capital costs of infrastructure modification. And nobody is
making money on return for that investment yet.

CHRISTOPHER MINES: Right.

CHAIRMAN POWELL: And everybody is hoping that they find that value
proposition. But, a company\'s tolerance, their shareholders' tolerance,
investor tolerance, for how long it can bleed and at what level of
magnitude before there\'s a mandated pullback, I think is \-- you know,
the \'96 Act or the Internet or anything else, if there\'s one lesson
we\'ve learned, cannot eliminate the business cycle and cannot eliminate
the realities of business fundamentals. And I think if there\'s one very
good thing that will come out of the current conditions, I hope, is
greater sobriety in thinking about what could be expected.

CHRISTOPHER MINES: So, it sounds like \-- I just want to make sure I
understand, but it sounds like broadband is a long way from a utility,
in your mind; that is, something that everyone needs to have guaranteed
access to or has to have some sort of universal service provisions
written into law, anything like that to \--

CHAIRMAN POWELL: No, lest you get me in trouble, let me clarify that a
little. I think that the early signs that we see about broadband do
suggest that a robust data infrastructure is going to be a key service
and component of the average family and consumer\'s life over some time
horizon. And I think that the goal of the country continues to be and
is, we want it to be ubiquitous, which is we want it for all Americans,
and we want it affordable for all Americans.

How you achieve that is multifaceted. And the only caution I usually
interject in this debate is that I wouldn\'t assume that the right way
to achieve that is to carry over what we\'ve become accustomed to in the
common carrier telephone world, as a universal subsidy system, into the
broadband system too lightly. Because one of \-- for those thinking
economic types know that while universal service has been
extraordinarily successful, it\'s also part of what makes the business
equation in local markets very difficult to achieve. And so, we have
some cautionary tales, as we look at broadband deployment, as to whether
we can roll it out in a way that\'s more economically rational, so that
the competitive economics remain viable and consumers get all the
promises that we suggest.

I also think that people often don\'t recognize, to me, broadband, at
least as I\'ve seen it so far, is not the replication of the early 1900
deployment of the phone system or even the electrical system, because
what we\'re really doing is building on top of existing infrastructure.
We\'re not really laying from scratch, at least in the first iteration,
an entirely new wired infrastructure, except in aspects of the long
haul, which I think are already coming along nicely.

We\'re going to build this stuff on top of phone lines that already
reach 95 percent of Americans. We\'re going to build this stuff on top
of coaxial cable that reach 96 to 98 percent of homes in America
already. And we\'re talking about infrastructure upgrades and
modifications that allow that reach to be supercharged, if you will, for
broadband capability. And I\'ll sort of leave out whether fiber optic
will one day be the thing that we do have kind of a real electrification
project about. And then, we have wireless and satellite services, which
even have less problems, at least with the traditional teledensity,
demographic, geographic challenges. Even though it still has technical
challenges, I think those things will arrive.

CHRISTOPHER MINES: So, the goal is still in place? You just say \--

CHAIRMAN POWELL: The goal is absolutely in place.

CHRISTOPHER MINES: \-- ubiquitous, affordable, but time frame is open;
is that right? I mean, you\'re willing to wait and see how long it \--

CHAIRMAN POWELL: Not forever, but I think that it really is important to
keep hold of ourselves and our emotions about these things a little bit,
because I think that one of the things the telecom markets teach me is
that getting stuff out there for its own stake can be a big mistake.
There is such a thing as hasty. There is such a thing as embedding
technology too quickly before it\'s matured and then being stuck with
decisions that were made precipitously.

I\'ll give you an interesting example. I think one of the most
successful broadband projects that exists is the e-rate. Ninety-five
percent of public schools are wired, 63 percent of public classrooms are
wired. And so, that\'s a great success.

We, also, at the same time, are watching the introduction of wireless
LANs for connecting homes and schools. And I\'m not so sure a lot of
those schools, at a much more cost effective and flexible way, might
have achieved classroom connectivity by having a central server with
wireless distribution throughout the school environment, which a lot of
colleges are starting to play with. But, we will, in some ways, have
skipped that possibility in the context of this program, not that it\'s
a bad thing. I mean, I think schools will still have the access.

But, there are a lot of things coming into the marketplace that we want
a fair chance of being a participant there and I think that the
government sometimes can get premature in intervening and should remain
vigilant to see whether that\'s necessary.

CHRISTOPHER MINES: Right. Let\'s take our question from the audience,
please.

MR. MCCARTHY: Chairman Powell, John McCarthy, group director of Net
Policy and Regulation, Forrester. A very topical question from the
audience: what is the FCC\'s position on the potential acquisition of
Lucent by Alcatel, given the foreign ownership and the fact that they
provide such a huge percentage of the technology behind the
infrastructure?

CHAIRMAN POWELL: Well, I\'m going to disappoint you, because on two
fronts, you won\'t get an answer. One, I generally will not comment on
mergers, unless they\'re actually filed and I see them, because I don\'t
think it\'s my place to interject into the marketplace without the
record to make a serious evaluation of.

Secondly, I\'m not so sure those mergers will even be subject to
Commission review, because we don\'t review mergers unless there is a
transfer of licenses that are issued by us. And if there are not, even
mergers that seemingly are communication related do not necessarily have
an FCC review. They will have an antitrust review, but they don\'t
necessarily have an FCC review.

You know, I think this is an area of confusion. If you look at AOL-Time
Warner, we don\'t have natural jurisdiction over that merger. The only
reason we did is because Time-Warner, the cable company, owned licenses
for transmitting video over microwaves that they had to transfer to the
new company. Absent those licenses, there would have been no FCC review
of that transaction.

And so, I don\'t know that two equipment manufacturers, who are
primarily in the business of producing equipment, whether they do or
don\'t, whether they are or they are not FCC licensees, and, if they\'re
not, we won\'t have anything to say about it, one way or the other.

CHRISTOPHER MINES: Okay. Let\'s take another question from the audience,
please.

MR. BURNOFF: I\'m Josh Burnoff, principal analyst from Forrester. This
is a question several people in the audience wanted to know. What do you
think of the Tauzin Bill and is there a point at which openness needs to
be mandated?

CHAIRMAN POWELL: I\'m a good enough politician not to insert myself
publicly into legislative debates. I will just say that I think there
are two views and you can pick yours, as to the competing visions that
are represented in the debate over that legislation.

One view is this: that real competition and choice are going to come to
consumers solely by virtue of major technology-differentiated offerings.
So that there will be a wire line alternative on the public switched
telephone network. There will be a cable modem alternative on the cable
infrastructure. And, hopefully \-- and if you\'re satisfied with two,
that\'s enough\--If not, you can hope for a wireless alternative and
maybe a satellite alternative and, in my own mind, the fifth kid in the
garage alternative that we don\'t even know about yet. And if you are
relatively comfortable that broadband data centrex services are the
future, bar none; that the residual place of analog infrastructure to
copper wire infrastructure, etc., are minimal or nonexistent, then you
are relatively comfortable with concentration within those stove pipes.

And from the perspective of the consumer, there may be choice and
differentiation, but that choice and differentiation may be among
monopolies or ologopolies. But, at least if you see them as a single
converged marketplace, you have competition and choice. I think that\'s
the vision that the proponents of the bill most subscribe to.

And then I think there are others, who think that, no,\--intra stove
pipe competition is very important. It provides a very important
competitive alternative. It puts the heat on the incumbent. And if you
believe in that strongly, then you are a much bigger proponent of open
access and open systems, because you can\'t achieve intra kind of
technology communications without having some degree of interconnection
with the monopolies or the existing incumbent architecture. And I think
that that\'s the best way to understand that Tauzin-Dingell, in some
ways, is the battle of these visions. And then you might ask yourself
questions on top of that\--well, I believe in one vision or I believe in
the other, but is it timely? Is it premature? Or is it ripe?

And I think that a lot of where you come down on that kind of gets back
to your question about your expectations of time. I mean, I think that
if I thought broadband needs to be in the hands of all Americans within
a year, I would have a very different view about what I think we will
have to do to achieve that. And I think that the case for larger
companies with the kinds of capital reserves and the infrastructures to
meet that kind of aggressive goal would be much more merited.

If you\'re a laggard about broadband\--it\'s going to come, but it\'s
going to come at a natural pace, and it doesn\'t bother me if it might
be 10 years\--you might have a very different view about whether the
government ought to drive this through large existing companies or not.

And I\'m sorry, but I\'ll just reserve my thoughts about that to myself.

CHRISTOPHER MINES: Is there a need to harmonize? Today, cable companies
and telephone companies are regulated under very different regimes,
different sections of the Communications Act, etc. Is there a need to
harmonize or converge those regulations, in some way, given that the
package of services, particularly on the consumer side, that a cable
company and a telephone company bring me, are looking more and more the
same?

CHAIRMAN POWELL: Typical weasel answer, yes and no, meaning there are
defensible cases for asymmetric regulation. I am not one who subscribes
to the idea that no matter what, if you\'re competing for the same
customer base, your regulation should be identical, because I think that
ignores all kinds of things that are rightly factored into the proper
regulatory regime.

I mean, I think that where you come from matters; how you achieved your
position; what kind of infrastructure you use. I think that, whether the
incentives for anti-competitive behavior exists can vary. I think \--
unfortunately, in Washington, we have \-- everybody wants \-- I guess
investors are the same \-- I just want the bottom line, I just want the
sound bite. It\'s a little too complicated to just sort of say,
openness, yes; closed, no.

Of course, that\'s a balancing act. Openness is important, in one sense,
in that it provides viable opportunities for alternate competitors and
innovation is potentially advanced. I think the Internet is the paradigm
for that thinking.

On the other hand, we know that exclusivity is a component of how a
producer makes money. Copyright is nothing but a legal right to
exclusivity. Patent is a legal right to exclusivity. Businesses work to
capture competitive advantages that their competitors don\'t have, as a
consequence of what the business model needs, to justify the investment.
So, there\'s a legitimate case for a certain amount of hesitancy about
the degree to which you will make the risk taker turn over the benefits
of that risk, unless you share the risks, also. And it is not uncommon
to watch competitors want to have the benefits of those risks, without
having assumed them themselves. And that\'s not always healthy either.
So, I just think those things are \-- kind of dependent.

The other thing I would say about the cable-telco tradeoff, we talk
about convergence, but I think that we still have some thinking to do
about how much these networks have completely converged. We say that
they\'re offering the same services; but, in many ways, their most
fundamental service, each of the other is still tepid about. I do not
see a lot of large phone companies offering video service. And I do not
see that many cable providers, though some of them are doing terrific
work with it, offering ubiquitous 911-quality phone service either.

So, the notion that they\'re perfectly matched, their infrastructures
are perfectly capable of being matched, to some degree. But, I think DSL
video is a complicated thing; I think, ultimately, can be achieved. But,
they are each led by their core services and they each are really not
yet competitors within their core services. And all that is a cautionary
note about how much they are or aren\'t the same, at least yet.

CHRISTOPHER MINES: Right.

CHAIRMAN POWELL: And I think that one of the things the \'96 Act, the
members, who voted for it, really believed, and I think you can see it
in the legislative history, was that that would come together and would
come together quickly; that cable really would be a ubiquitous telephone
offering and that telephone companies really would be competitive video
providers, because they said so. They promised so, quite aggressively.

I know a lot of members who are very angry, in some sense. Now, I think
a lot of it is economics and people promising more than they were ready
to deliver. But, the truth to it is, I think one of the reasons the
statute was so comfortable with local competition and other things, is
that it really believed that the phone world and the cable world would
be robust competitors on all the systems.

CHRISTOPHER MINES: Yeah, which is really the exception rather than the
rule. I mean, broadband \--

CHAIRMAN POWELL: One of the exceptions is it shows the danger of not
having an engineer sitting around while you\'re doing the rule making. I
know enough about cable infrastructure and architecture, that anyone,
who thought that the cable system was going to be a telephone system
quickly didn\'t know what they were talking about.

CHRISTOPHER MINES: That includes some folks at AT&T, I think.

CHAIRMAN POWELL: Well, I\'ll reserve judgment on who. But, it\'s hard
\-- it was much harder than I think imagined. I mean, cable system
was\-- this is a perfect example of sort of not necessarily
comprehending the technical challenges of something. I mean, cable was
optimized for one way delivery of video service. It was wrought with
repeaters and amplifiers and all kinds of things that made two-way
service very problematic. Cable system was not independently powered,
all right.

The phone system, if you\'ve noticed, when your power goes out and a
storm knocks out your electricity, your phone usually works. It works,
because the phone company independently powers the system, so that 911
maintains its reliability. The cable systems, the vast majority, do not
have such functionality, which means they are hazardous in their current
iteration for primary phone service.

And these are all things that were on the table and available for
understanding then, as they are now, and fixing that was going to be
tough.

CHRISTOPHER MINES: That\'s a very interesting perspective, that the
world that the policymakers thought they saw in 1995, 1996, based on, as
you say, what the industry was telling them was promising, has really
not come to pass nearly as much as they would have thought five or six
years ago.

CHAIRMAN POWELL: That\'s right, but I keep pushing the word "yet."

CHRISTOPHER MINES: Yeah.

CHAIRMAN POWELL: And you know what, policymakers aren\'t the only ones.
I think businesses thought they could do things a lot quicker than they
could. I mean, I refuse to let capital markets off the hook. I\'ve got
to tell you, I come to these conventions, oh, the regulators didn\'t do
this and the country isn\'t doing this. And money chased really bad
things for a long time in ways we all knew were wrong when we were doing
it.

And I just think that as we talk about competition and free markets, you
cannot take out of the equation the rational flow of capital. We don\'t
have rate of return companies anymore, in the large carrier class. If
we\'re talking serious about capital \-- I mean, competitive
markets,\--we\'ll learn the intricacies of financial flow. I think there
are a lot of telecom companies driven to extraordinarily bad business
models, in pursuit of high yield returns. I think they grew too fast and
I think they knew it and I think they were increasingly demanding higher
revenue out of half built infrastructure. And that\'s a bubble that was
blowing as fast as the dot coms were, in some ways.

CHRISTOPHER MINES: Right.

CHAIRMAN POWELL: And guess what? It popped.

CHRISTOPHER MINES: Yeah. Another question from the audience? John?

MR. MCCARTHY: Yeah. Another question here is how will the FCC ensure
that the momentum of voice over IP isn\'t undermined by the ILECs?

CHAIRMAN POWELL: Well, it\'s interesting. I don\'t know to what degree,
what method you will expect it to be undermined by the ILECs. The ILECs,
in likelihood, because any large incumbent with huge investment and
legacy always has difficulty grappling with a disruptive technology.
Whether you read the book by William Christiansen that talks about the
challenges, sometimes, these large companies, with incredible success in
a given set of technologence and legacy infrastructure, had the most
difficult time figuring out how to make the paradigm shift and will
often resist it and fight against it. And I suspect there will be
elements of that, as IP telephony becomes more serious, as well.

I think, though, that in some measure, it\'s a killer app, which is that
I just think that it is an extraordinary efficient use of data
protocols, to provide a relatively modest burst of data information. And
quality and reliability are the key issues and I think that they can be
solved to the satisfaction of consumers. And I think that the ubiquity
of networks that can take advantage of that are compelling.

I also would note that the minute you talk about IP telephony, in the
pure sense of the word, you\'re talking about the much more efficient
ability for anyone with data networks to be providing telephone systems.
I mean, I think the real competitive advantage of the incumbents, in the
telephone system, is the degree to which those networks have already,
based on a different era, been engineered for the kind of quality and
reliability and what I call sort of the 911 quotient that\'s very, very
difficult to build anew. But, when you really have a disrupting arrival,
like IP, suddenly, there are other infrastructures that, as a value
added component, can introduce telephony services.

I personally think one of the reasons for slowness in the cable world is
that they\'re waiting it out for IP. That is, they\'re building IP \--
yes. I think cable companies are building high speed infrastructures
first for video, no matter what the high buzz about high speed Internet
service. I think that\'s important to them, but I think the projects
were initially initiated. I think much of the drive is for
digital-tiered cable. I think that\'s in part a response to DBS. I think
more capacity, more program opportunities. Secondly, high speed
Internet; and, third, telephony.

And I think a lot of them, given that they\'re building a data network,
see that they\'d rather pursue telephony in its IP form, as opposed to
its circuit switched form. And I think you\'ll see them pursuing second
lines and the kinds of things that don\'t need the kind of 911
reliability, because that\'s a high responsibility to assume onto
yourself.

You\'ve seen these stories. Wireless industry got hit with this. Your
car rolls over in a ditch and you call 911 and it just doesn\'t work,
all right. If you\'re a carrier, that\'s a bad day for your press
department, explaining why the little child, who had the phone and was
within reach of the tower, couldn\'t get the fire department that was
only two miles way and was eaten by a bear.

CHAIRMAN POWELL: This is, essentially, I think, a true example. That\'s
a very tough proposition. You\'re talking about near unfailing
reliability.

All right, now, you tell me, you look at capital markets that are ready
to be patient for the engineering of those kinds of architectures or
whether government policy will await that level of sophistication. And I
think that\'s a perfect example of \-- we\'ve got to decide what we\'re
trying to achieve. If it\'s this killer app to consumers, as we say, the
tolerance quotient for quality of service and reliability is higher,
because politicians react when customers get angry about these things.
And so, it\'s a tough nut to crack.

CHRISTOPHER MINES: Yeah. Other audience questions? Josh?

MR. BURNOFF: This audience member feels that you\'re much more pro-cable
versus pro-telephone, in your remarks. We\'re interested in what sort of
cable regulation you think is appropriate. In particular, should all
sorts of content have access to the consumer through cable, in sort of a
common carrier model?

CHAIRMAN POWELL: Well, the questioner is wrong. I\'ve got to say to the
audience that I always bristle that you\'re pro anything. I mean, all of
them are self-interested money changing actors, as far as I\'m
concerned. I treat them all that way.

CHAIRMAN POWELL: And I don\'t even mean that disparagingly. I just come
from an antitrust background, economic background, that says if you
expect companies to do anything other than pursue their self-interest, I
don\'t know what planet you come from. They all do, they all will, and
I\'d rather build that into how we regulate, than to act as if people
can be pushed out of their self-interest, and in the name of the greater
good, do something that they usually won\'t do.

Let me tell you this: the statute is more pro-cable than the statute for
telephone, which is why you probably rightly pick up on the differences.
As I sit here right now, the telephone companies have an enormous
statutory regime that says they have to do all this stuff. This is not
something that the regulatory agencies are doing at their own
discretion. This is something that the congressional statute mandates.

CHRISTOPHER MINES: They have to offer access to their facilities.

CHAIRMAN POWELL: Interconnection, access, technically feasible points,
cost-based pricing, call location, on and on and on. That is required,
because most of the phone regulatory statutory world came out of the
divestiture of AT&T. And the \'96 Act took Judge Green out of the
equation, but adopted much of the notion about openness and
interconnection in the phone context.

When you go to Title VI, which is where a cable service provider lives,
the tougher questions are actually legal. Because, for example, the
statute says quite specifically that a cable service provider cannot be
regulated like a common carrier. That\'s what the statute says. And so,
depending on how these services are characterized or labeled, there will
be either the opportunity to create some of this more interconnected
openness, or it will be clearly foreclosed, as a legal consequence of
the statute.

This is a perfect example of rules that are written before the advent of
new technologies and services that sort of changed the market
characteristics. And so, we have proceedings underway, to look at all of
these things, and I think we\'re wholesomely going to, fully going to
pursue them, to see what we think about the regime.

But, I do think that if you think there\'s a pro-cable component, it\'s
because you\'re picking up on the inequity, if you will, in the
statutory environment, which is just real. And that\'s why cases like
open access in the 9th Circuit decision are all about fighting over
people\'s dictionaries: is it a telecom service; is it a cable service;
is it an information service? What they\'re arguing over is the answer
to that question and it will determine which regulatory consequence
flows.

But the other thing is \-- and I won\'t ramble on about this \-- but
people kind of take snapshots of a given industry and say, well, they
got a better deal than these guys. I assure you, that\'s not a fair
comparison, unless you do a complete cost benefit evaluation of what
rules they apply to.

There are a whole lot of cable rules too, that nobody talks about. In
the context of a cable environment, program access; other kinds of rules
that are limitations on cable power, as well; horizontal concentration
limits that don\'t apply to phone companies. I mean, AT&T is screaming
mightily about its limitations and its ability to reach the country to
grow, claiming that that\'s an inequity that the phone system has a
benefit of.

So, I assure you, from my seat, it\'s kind of fun to watch people say,
well, these guys have a huge advantage, and it\'s all very convenient,
depending on the issue of the day.

CHRISTOPHER MINES: John, go ahead.

MR. MCCARTHY: Yeah. Here\'s another question. What are the prime
challenges in changing the FCC\'s primary event, from legislating
outcomes towards rigorous enforcement with you, as chairman?

CHAIRMAN POWELL: This is really a high priority of mine. When I do a
thorough survey of the kind of rules out there in the marketplace, to
deal with some of the failings we see, I do not generally, after
completing that review, find myself thinking, gosh, there are just not
enough rules out there. Usually, what I find is, where there are
shortcomings, is that there are rules all over the place and a lot of
times, it\'s just cost effective to ignore them. Self-interested,
profit-maximizing actors, remember.

If I tell a phone company, you have to have this kind of operation
support system that allows a competitor to interconnect at an efficient
level, and guess what, the infrastructure will cost that CEO a billion
dollars, if he doesn\'t do it and he gets a fine for a million and
that\'s it, what will you do, right. I think that\'s an absolutely
rational judgment that often occurs in the marketplace. And it\'s not
just phones, by the way. You will see this in a lot of the areas that we
regulate.

The world is papered in rules, I assure you; but, a lot of times, it\'s
whether you have any kind of effective ability between the state
authority and the federal authority, to ensure compliance; and when
there isn\'t compliance, whether there is swift and meaningful
enforcement that creates a deterrent for such future behavior.

The antitrust statutes don\'t go after every merger in the economy
either. They couldn\'t possibly. But, I don\'t think there\'s another
statute in the federal code that has treble damages. And there\'s a
reason. The theory is simple. It knows that by being permissive in the
marketplace, it has to be aggressive in the punitive phase, so that the
deterrent value resonates across the economy. And I would assert that it
does, for the most part.

I don\'t know any merger that will not hire extensive antitrust counsel,
work carefully through what they think the consequences are, because
your fiduciary duty can\'t expose the company to treble damages and have
missed, in due diligence, things that ultimately would lead to that
action. I\'m not sure in telecom, we won\'t need similar.

CHRISTOPHER MINES: So that\'s why you went to Congress for authority for
higher fines on the RBOCs, that are dragging their feet, impeding local
competition, in some way. Do you think you\'ll get that authority?

CHAIRMAN POWELL: I\'m pretty optimistic we will get it. I think that the
case resonates with people. Most of these fines have been at the levels
they\'ve been for a very long time. They were not modified, I don\'t
think, in 1996, so many of them have been around for decades.

CHRISTOPHER MINES: They\'re noise level, basically, for the companies
involved.

CHAIRMAN POWELL: I think a lot of times, they\'re noise level. I mean,
I\'m sure if the company were here, it would complain that it has a
million metrics and it has to comply and they can\'t get everything and
we don\'t need more penalties. But, I expect self-interested actors to
tell me that.

But, I also think that it is a ripe area for improvement. Nothing is a
magic bullet, but it is a deficiency that I think we\'ve identified.
It\'s one that we can quite easily modify and increase. And it sure is
worth pursuing and aggressively following up on, because I think that
more and more, as the market becomes further and further divided and
there are more and more opportunities to provide service, it gets very
difficult for the government to make one size fits all rules.

I\'m a fan of the theory of regulation. I don\'t think people appreciate
how complicated the move from regulated monopoly to competitive
environment is. When you have a monopoly, you know who to fine. You can
call a couple of CEOs and have the whole telephone industry taken care
of in an afternoon. I can get all four of them there\--I used to get
seven of them---to come on in. You sit them down. We\'re not going to do
this, we\'re not going to do this, dit, dit, dit, and you\'ve covered
the country.

You can\'t do that anymore and it will only get worse. And now, you\'ll
have a cable CEO, sitting next to a telephone CEO, sitting next to a
wireless company, with a foreign investment, and satellite company.
They\'re completely different. And if you try to make one rule for all
of them, you will find yourself kind of in a perpetual loop, trying to
figure this out. I think the answer is, where you have acted, you need
to put more emphasis on enforcement.

CHRISTOPHER MINES: We\'re almost out of time. Josh, let\'s do one more
from the audience, please.

MR. BURNOFF: Okay. How do you suggest fostering innovation, when new
services and their successful deployment are still relying on last mile
access?

CHAIRMAN POWELL: Well, these are all people who want open access,
that\'s for sure. You can tell from the questions.

CHRISTOPHER MINES: So, there must be some self-interesting \--

CHAIRMAN POWELL: I think one of the most important things the government
has to do is learn about what are the catalysts of innovation, what
really sparks experimentation, what sparks risk taking, what sparks
investment in risk taking, because I think, historically, the government
is worried a lot about price discipline and things like that. And I
think that price discipline is still important, but innovation is really
the central focus of \"the new economy,\" the new economics, the
competitive alternatives. And I think we have to learn what that is,
which is why I think learning about capital flow is really important.

I don\'t think it\'s easy enough to say, well, open will be innovation
and closed is not, because I think the answer is not innovation by
itself. It\'s innovation that finds sufficient value to continue to be
produced.

This may sound kind of odd to say, but we have a world, in which
consumers increasingly are getting acclimated to everything that comes
over that computer ought to be free. And I\'ll assure you, unless you
repeal the laws of economics, at some point, somebody better figure out
how they will take something over that environment and pay for it, or I
assure you, it will stop being produced, and I don\'t care how gee whiz
the technology is. And I think that the Internet is an extraordinary and
perhaps the most remarkable \-- invention in my time, but I still think
I watched producers and consumers struggling for the value point. And I
think we think about openness and things \-- ways that will foster
innovation, the positive side, but also what are the limits of it, so
that you don\'t sap out all the interest in the investment and risk that
produced it in the first place.

And that is not an easy line to draw. And as I sit here, I can\'t tell
you how we\'ll draw it, when those questions are presented to us. But, I
do think it\'s complicated and that you can make strong cases on either
side of that. And that\'s what we get paid the very little bucks to
figure out.

CHRISTOPHER MINES: Final question, Michael. What\'s the biggest priority
for you and the FCC this year? What will you spend \-- the number one on
the to do list for you and the Commission?

CHAIRMAN POWELL: Well, I think it\'s going to be a big learning year for
the Commission. We\'re going to, in essence, swap the Commission out. We
have three new members on the way, one who suggested she might leave at
the end of the year. There\'s going to be a big learning curve for new
members and new direction. So, we\'ll see the Commission changing
character. We\'ll see the Commission have a fresh look at issues that
have been going on for some time. So, I think, in some ways, it\'s a
wild card sort of year, as the Commission develops its direction and its
focus with new members.

And I think a lot of what we\'ll do is be reactive, which is, we will
have a lot of things that are brought to us, as opposed to us bringing
to them. I think we will see a lot of 271 applications, not because
we\'ve gone out and solicited them, but because it\'s been six years and
increasingly companies are pushing hard. They have \-- many of them have
slowly been working their ways through the state process, which is often
two and three years long. Many of those state processes are coming to an
end and they\'re going to likely show up on our doorstep this year. That
will be a big component of it.

You never know about mergers. We don\'t plan for them. Those are all
wildcards. You know, people bring major transactions that can become the
dominant activity of the year and it\'s hard for us to plan for or
predict.

And I also think that the Commission is spending a whole lot of time in
the harmonization exercise, which you alluded to, which is we are really
working to systematically go through our rules and figure out where
there are regulatory arbitrage opportunities, by virtue of rules coming
from different regimes, and can we clean those up.

I would argue that our intercarrier compensation item, which is an
attempt to look at the ways carriers compensate each other, to ensure
that it's fair and harmonized, is a big stroke in that direction. I
think that like people like to treat reciprocal compensation, as that\'s
a pro-BOC thing or a pro-CLEC thing, I disagree strongly. I actually
think that it was much more pro-CLEC than people realized. I think it
provided them the transition period. I also think it was a way of
saying, we have to rationalize compensation, to incept efficient entry
and not just any kind of entry that\'s short lived, because the drinking
off the sort of super economic profits available only by virtue of a
regulatory quirk are not something that long-term businesses can pursue.
And I think we\'ll be doing lots of stuff like that.

CHRISTOPHER MINES: Well, we\'ll look forward to watching events as they
unfold. Thank you, Michael, again, very much for joining us.

CHAIRMAN POWELL: Thank you, very much, for being here.

CHRISTOPHER MINES: Michael Powell.

(Whereupon, the forum concluded.)