# **Remarks**

# **Of**

### Michael K. Powell

### Commissioner

#### **Federal Communications Commission**

##  {#section .unnumbered}

## **Before** {#before .unnumbered}

# **The Progress & Freedom Foundation**

**\"THE GREAT DIGITAL BROADBAND MIGRATION\"**

## **Washington, D.C.** {#washington-d.c. .unnumbered}

**December 8, 2000**

# INTRODUCTION

Good morning. It is a pleasure to be with you this holiday season. I
applaud the Progress & Freedom Foundation\'s ambitious effort to develop
and offer a prescription for FCC and communications policy reform.

In the wake of the 1996 Act, the FCC is often cast as the Grinch who
stole Christmas. Like the Whos, down in Who-ville, who feast on
Who-pudding and rare Who-roast beast, the communications industry was
preparing to feast on the deregulatory fruits it believed would
inevitably sprout from the Act\'s fertile soil. But this feast the FCC
Grinch did not like in the least, so it is thought.

It is undoubtedly appealing to see the government as the Grinch who
stole Christmas as telecommunications companies still scurry around the
marketplace looking for their colorfully-clad presents. I submit,
however, that something more profound is occurring that cannot be
simplistically cast as poor implementation of the 1996 Act. Instead,
there has been a dramatic change in the climate and conditions in which
communication \"life-forms\" exist. FCC and communication policy
\"reform\" is not the question. Instead, the real questions are revealed
by opening our eyes to the great exodus from legacy business models,
legacy technical infrastructures, and legacy regulations.

I.  MIGRATION

I would conceptualize our challenge as a great migration. A migration is
defined as a movement from one place, region, or country to another with
the intention of making permanent settlement in a new location. A
migration leads to more rapid diffusion of cultures, tools, habits,
ideas and forms of organization.

Ancient migrations shaped the world we live in today. The invasion of
Palestine by the Hebrew tribes (which developed the ideas on which the
Jewish, Christian and Islamic religions are founded) had a significant
impact on Western civilization.

More recent movements have advanced science, realigned our politics and
demographics, and altered our economy. European migration to the United
States during the World Wars, the Great Migration of African-Americans
from the South to the North, and migration from rural areas to
industrial areas during the great depression, all profoundly altered the
character of our nation.

Today, I want to speak to you about a great migration that is having a
similarly profound effect on the communications industry and on our
society as a whole. It is not a movement of people, though it will
change how people live. Rather, it is a fundamental shift of
technology---the arrival of \"disrupting technologies\" (in the words of
Clayton Christensen, the author of *Innovator\'s Dilemma*). And it is
the unleashing of the power of \"creative destruction,\" the phrase
coined by the late great economist Joseph A. Schumpeter, who is
celebrated more and more as the father-figure of the New Economy.
Schumpeter saw that technological change \"incessantly revolutionizes
the economic structure from within.\" Rather than talk of \"reform,\" a
relatively pedestrian, incremental notion, we need to consider the
Schumpeterian effect on policy and regulation. That is, what are the
implications of \"creative destruction\" economics on
economic-regulatory policy.

Before I move to the great technological migration that is occurring
today, let me say a word about the 1996 Act, which is a very important
catalyst of change, but should not be seen as the end of the journey
itself. In other words, our challenge is not simply the faithful
implementation of the statute, but one that requires us to use the
principles of the statute to adapt to a more dramatic shift taking place
in communications.

II. THE 1996 ACT: THE FIRST STEP

The Telecommunications Act of 1996 was a remarkable and important shift
in telecommunications policy. Its purpose was to move from a regulated
monopoly model of telecommunications to a deregulatory competitive
markets model. The Act\'s preamble declares that its purpose is to
\"promote competition and reduce regulation in order to secure lower
prices and higher quality services for American telecommunications
consumers.\"

The 1996 Act is focused principally on deregulation and the move to
markets. It is not a technology statute. It was not a direct response to
the tectonic shift in communications technology that was only beginning
to be felt in 1996.

Rather, the 1996 Act is best understood as an important change in legal
and economic thinking that helped ignite what I call the Broadband
Digital Migration. As to the law, the Act, at its heart, is a political
compact between local phone companies and long distance carriers to end
the Modified Final Judgment, and the oversight of telecommunications
markets by Judge Harold Green, stemming from the historic divestiture of
AT&T. The most sweeping provisions of the statute deal with the terms
and conditions for Bell Operating Company entry into long distance
markets, and the terms for new entrants, principally long distance
companies, to enter the local markets.

On another dimension, the 1996 Act represented a changed economic
judgement. For nearly a century, we regulated the telecommunications
industry on the assumption that phone service was a natural monopoly and
that the public was best served by a single regulated carrier. This
promoted the objective of a universal, seamless, low-cost network.
Though there had long been some erosion in the natural monopoly thesis,
and increasing experimentation and interest in competition, the 1996 Act
was a seminal and resounding declaration of faith in competition.

There are parts of the statute that recognize growing technological
convergence, but they offer only modest guidance for regulation in the
converged digital era. For example, the statute opens up some previously
prohibited cross-market competition and Section 706 commands us to
\"encourage the deployment on a reasonable and timely basis of advanced
telecommunications capability to all Americans.\" But such provisions
are best understood as providing a commitment to remove regulatory
barriers to competition and promote pro-competitive measures, rather
than demonstrating a more fundamental understanding of the degree to
which technological change is revolutionizing communications markets and
policy.

Furthermore, the statute left unchanged the balkanized regulatory
treatment of different technologies and industries that existed in the
Communications Act of 1934. Our greatest challenges today at the FCC are
definitional. With increasingly converged services it is difficult to
rationally label and, thus, assign regulatory treatment to an innovative
provider, product or service. This graying diffusion of the legal
structure, smudged by technological change, is at the forefront of the
challenges facing policymakers. A clear example is the continuing
uncertainty over how to treat the multitude of services that can be
bundled over high-speed cable plant. Just as quantum theory challenges
the physicist to deal paradoxically with quanta that simultaneously
exhibit the characteristics of particles and waves, the policymaker is
faced with services that are, at once, different legal constructs.

At the time of drafting, there were proposals for a Title VII that would
recognize converged communications services more fundamentally and offer
specific guidance as to its regulatory treatment, but the Congress
rejected the proposal, not yet seeing how cracked and unstable the
current foundation would become.

Do not get me wrong, the 1996 Act is a critical force that in many ways
split the atom, unleashing much of the power and potential that is now
represented in the market. Law and policy, however, must now ride the
torrent and adapt to the new conditions. These new conditions are
unfolding and are just beginning to crystallize.

III. THE DIGITAL BROADBAND MIGRATION

As I have said, the 1996 Act is a critical piece of legislation. It set
the foundation for deregulated competitive markets, which are essential
for innovation and technological change. But, rather than looking back
and measuring policy progress by its literal terms, we need to focus
ahead toward the far-reaching transformation of the Digital Broadband
Migration.

This remarkable movement is not a direct response to a legislative, or
regulatory policy change, but is instead driven by technological
breakthroughs or as John Chambers would say \"inflexions.\" In contrast
to the market changes that flowed directly from the1996 Act, this time
it is policy and law that is going to have to respond to more
spontaneous changes in the market.

Let me say a word about the key cylinders that combine to create the
enormous horsepower that is driving change---change so disrupting and
fundamental that we rightly recognize that we are in the midst of a
revolution as profound as the agricultural and industrial revolutions.

In actuality, the quickening, almost frenetic pace of change results
from the confluence of two separate technological streams: The first is
the century-and-a-half old communications revolution. The second is the
computer/micro-processing revolution.

Communications technology has its roots in the basic laws of
electromagnetism that were brilliantly codified by James Maxwell in
1878. His basic mathematical principles gave birth to a host of
communications developments. The invention of the telephone by Bell in
1875 and deployment of the first public telephone network in Connecticut
in 1878. The move to the airwaves over radio made possible by the
efforts of Marconi in 1898. And the invention of the television by Baird
in 1926. These technologies shaped telecommunications policy and gave
birth to the Federal Radio Commission in 1927, and the FCC in 1934. As
remarkable as these analog technologies are, the missing ingredient in
these communications systems is processing. Digital systems, as compared
to analog, allow one to work with and manipulate content. Information
processing, and its promise of an information revolution, needed another
ingredient.

That ingredient arrived in 1958 when Robert Noyce and Gordon Moore
created the integrated silicon chip, following on the work of William
Shockley who had invented the transistor in 1948. The company they
founded was Intel. Intel really broke the computing barrier in 1974 with
the 8080 chip that was virtually an entire computer on a single chip. In
1977, Apple gave us the Apple II, and the desktop computer was born.
This all unleashed a chain reaction of faster and cheaper chips embodied
in the now famous principle of Moore\'s Law. Add memory (which evolves
even faster than the micro-chip) and software and you have the final
ingredients of the Information Age. Computer systems working in parity
with communications have spawned the Internet and the advanced networks
we see today that fully integrate satellites, telephones, wireless
devices, broadcasting and cable over fiber-optic, broadband, and
wireless networks. The result is what we now call convergence.

Convergence is not just a technological phenomenon. Given the technical
underpinnings, we see the collapsing of previously distinct markets and
competitors. Convergence is radically altering economic assumptions and
underlying cost structures. It is changing the game of capital formation
and altering business models. The culmination of these changes is what I
am referring to by the Broadband Digital Migration. The challenge for us
is to make a similar leap from analog-rooted regulations to ones that
are applicable and relevant to the digital environment.

We are clearly and dramatically seeing the dust rising from a multitude
on the move. Species migrate both to seek more favorable environments
and to escape hostile ones. Such can be observed in the Broadband
Digital Migration.

Much of the rush to the broadband digital world is prompted by the
promise of greener pastures. Companies are seeking the benefits of
cheaper and more efficient infrastructures, though deployment comes at
great cost. The markets are in search of greater material gain from that
infrastructure by offering more services over it and by bundling those
services for consumers. Moreover, The Promised Land holds out hope for
entirely new markets and new innovative services.

But, people also migrate to escape hostile conditions and we see such
movements in the Digital Broadband Migration as well. Consider the
adverse conditions that often trigger flight from one\'s homeland:

-   **Climate**: Today, we see many communications companies attempting
    to flee traditional businesses and models because of the frigid
    temperatures. AT&T and MCI/Worldcom\'s recent announcement to
    restructure their consumer businesses are examples. The chilly stock
    market has continued to punish these companies and drive them to
    warmer climes.

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-   **Dwindling Food Supply**: Migrations are also prompted by dwindling
    food supplies. An example is the drop in long distance revenues we
    see. Moreover, customers are fracturing as they find new ways to
    communicate using Internet telephony, email, instant messaging and
    wireless devices.

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-   **Defeat in War**: Again, many carriers who wear only the armor of
    an analog solider are increasingly in danger of defeat in battle.
    Legacy carriers are rapidly working to acquire the assets of modern
    war: digital networks, Internet services, packet routing, broadband,
    optics and content. Examples include SBC\'s Project Pronto, an
    accelerated effort to offer DSL, or AT&T\'s purchase of cable assets
    to offer video, voice and data. Similarly, companies are working to
    forge new alliances that position them well in the new land:
    American Online/Time Warner, Qwest/US West, Bell Atlantic/GTE (now
    Verizon), AT&T/MediaOne are all examples. We also see content
    providers mobilizing to service the capabilities of these new
    platforms.

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-   **Political Freedom:** People also often leave in search of
    political freedom. The oppressor here is regulation. Providers are
    desperately looking for ways to escape regulatory burden, or use it
    to their advantage. We have a balkanized regulatory model that
    promotes regulatory arbitrage by bending efficient market
    development to adapt to the relative blessings and curses of
    regulation.

# THE POLICY CHALLENGE OF BROADBAND MIGRATION

We need an agenda that is reflective of the Broadband Digital Migration.
I offer just a few starting points.

-   **A pointed focus on innovation incentives.** Conventional economics
    holds that price competition makes markets efficient. Antitrust
    policy is largely designed to promote such competition. Schumpeter
    recognized, however, that competition through innovation is perhaps
    more important than price competition. Government regulation, he
    insisted, should promote innovation.

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-   **Greater reliance on deregulation and competitive markets.** The
    collapse of centrally-planned economies around the world (most
    notably the Soviet Union) can be attributed to many things, but
    perhaps most central is the lack of oxygen they provided for
    innovation and entrepreneurs. In a Schumpeterian New Economy where
    such forces are the engines of prosperity, we must foster
    competitive markets, unencumbered by intrusions and distortions from
    inapt regulations. And, most importantly, we have to be careful to
    see speculative fear and uncertainty in this innovation-driven space
    for what it is, and not prematurely conclude we are seeing a market
    failure that justifies regulatory intervention. Moreover, consumer
    protection is important, but it should be just that and not a straw
    man for engaging in industrial policy.

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-   **Rationalizing the regulatory structure (\"A bit is a bit\").** We
    must make aggressive use of forbearance and public interest
    flexibility to work to harmonize regulatory treatment in a manner
    consistent with converged technology and markets. Critical efforts
    include such things as rationalizing inter-carrier compensation to
    avoid arbitrage. Additionally, we must recognize that the Digital
    Migration involves every segment of the communications industry
    (*i.e.*, telephone, cable, broadcast, wireless, and satellite) and
    none should be examined in isolation. We must drive our learning and
    experience across all the sectors of our regulatory authority and
    try to maintain a consistent and principled approach.

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-   **Doctrine Development.** We need to go to school to learn the
    technological underpinnings that affect policy. Moreover, we need a
    greater understanding of innovation theory and economic incentives.
    This includes a deeper understanding of capital markets and capital
    formation. It includes greater depth in antitrust doctrine and
    market economics, particularly the literature on network effects and
    the unique attributes of information industries.

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-   **Accelerated and efficient regulatory procedures.** Our
    bureaucratic process is too slow to respond to the challenges of
    Internet time. One way to do so is to clear away the regulatory
    underbrush to bring greater certainty and regulatory simplicity to
    the market. We need a greater emphasis on enforcement, rather than
    \"by the grace of us\" regulation. We must avoid the temptation to
    \"shape\" the development of markets and instead let the market
    mechanism make those decisions. Moreover, we must strive to complete
    regulatory reviews expeditiously, particularly license transfer
    applications in the context of mergers.

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-   **Unbending Independence.** Finally, in this period of incessant
    change, and even carnage, many will seek the shelter of regulation
    to protect themselves in the fierce storm of the market. Others
    (often the same people) will seek to affirmatively use regulation to
    harm or burden a competitor. The FCC will have to be judicious in
    its judgments, untainted by favoritism and staunchly above the
    political fray, if it has any hope of being an honest, respected and
    meaningful actor in this new era.

IV. CONCLUSION

Since I started this way, let me conclude as Dr. Seuss might this
holiday season:

So it\'s time to awaken from our dreams with a pinch,

though I might quibble with Whos down in Who-ville that think we\'re the
Grinch.

But to those who do, I would sing with full range

that we CAN, WILL and MUST adapt to this change!

Leaving the past will cause pain we all feel,

but it\'s change that even the FCC cannot STEM, STALL or STEAL!

We need to rapidly join in this technology migration,

then we can all bask in the glow of a very thankful nation.

So packing our bags and catching up with the times

is a perfect jumping off point for ending this rhyme.

Thank You.