#### **Commissioner Susan Ness**

# Federal Communications Commission

**Global Information Society Summit**

###### Chicago, Illinois

# May 17, 2001

### Competitive Opportunity in the Information Age Economy: 

### the U.S. Experience

I am delighted to be here in Chicago with all of you today.

I want to thank Mayor Daley for his warm hospitality, and recall with
pleasure another international gathering he hosted a few years ago \--
the Transatlantic Business Dialogue.

Next week marks my seventh and last anniversary as a member of the
Federal Communications Commission, as I will be leaving the FCC later
this month.

I have had the privilege these past seven years to serve at an
extraordinary juncture in the history of communications. We have been a
part of the transition to digital technology across communications
sectors. We have witnessed the mass acceptance of the Internet and the
advent of the World Wide Web. We have stimulated the deployment of
broadband communications by wired, wireless, broadcast and satellite
systems.

During these past seven years, technology, the marketplace, and
government policy have conspired to create a communications milieu that
is forever changing --much akin to a kaleidoscope. The fundamental
pieces remain the same, but with each advance in technology, each
eruption of the financial markets, each enactment of a new telecom law,
the pieces tumble and reassemble to display an astonishingly new
tableau.

As I look back on these past seven years, I have enjoyed immensely the
opportunity to gather with leaders of industry and government to explore
how the public and private sectors can best work together so that our
citizens can reap the many benefits of the communications revolution as
the kaleidoscope turns.

But for some, the response to these changes has been to retrench -- to
try to preserve the old, comfortable ways of doing business, and of
regulating business. They try to squeeze the new technologies and
services into legacy regulatory molds. They try to freeze-frame the
display.

I am reminded of W.E. Denning's caustic advice. "It is not necessary to
change," he opined. "Survival is not mandatory."

Denning was right. The ability to embrace change is mandatory for
survival -- not just for industry, but for government as well.

But I prefer to see this kaleidoscope of high-speed access to data,
voice and video as an opportunity -- an opportunity for much more than
survival.

If the regulatory roadbed is paved, these kaleidoscopic twists and turns
create new markets to reach more people, to develop new services, to
solve age-old problems, to improve the quality of life.

The agility with which government officials respond to such changes
directly correlates with the intensity of competition, innovation, and
service. Conversely, when government fails to adapt, the marketplace
responds harshly.

Seven years ago, when I began my tenure at the FCC, the communications
landscape was strikingly different. As I conclude my tenure, I would
like to share with you some of the lessons we have learned in our
efforts to promote competition and extend its benefits to all Americans.

## **Local Telephone Competition**

Fostering local telephone and video competition was perhaps the most
daunting challenge the FCC faced. Under the landmark Telecommunications
Act of 1996, Congress sought to remove barriers to entry and to pry open
the local market to competition.

At that time, the incumbent telephone companies controlled access to
more than 99 out of every 100 homes and businesses. We hoped that new
platforms for local telephony -- such as cable, wireless, and satellites
-- would propel insurgents into the local telephone market.

Of course, we knew that it would be almost impossible for new entrants
in the near term - if ever - to replicate incumbents' "last mile"
networks. After all, the incumbents had constructed these networks
during the course of a century \-- with guaranteed rates of return.

And so Congress provided alternative vehicles for competitive entry. In
addition to constructing their own "last mile" networks, competitors
could resell incumbent's lines at a discount. They could lease some or
all of the incumbent's network elements at forward looking wholesale
rates. And they could interconnect with the competitor's facilities.

With passage of the 1996 Act, we awaited robust competition by the CLEC
industry. And indeed, competitive local exchange companies \-- including
cable companies and fixed wireless providers \-- invested almost \$100
billion to deploy local telecommunications services to subscribers.

The results? Today, five years later, the landscape is littered with the
remains of many of the fledgling "CLEC"s. Incumbents still retain the
lion's share of the local telephone market. And most of the lines served
by competitors are business lines. Only a small percentage of
residential consumers have a real choice of local carriers.

Some observers are ready to throw in the towel. They now fear that local
telephone service is best provided by a regulated and subsidized
monopoly.

But wait. Are we not in Chicago, the home of the Chicago Cubs, who last
won the World Series in 1908? I doubt there were many Cub fans who
thought that the Cubs would have any chance this year. But today the
Cubs are battling for first place in their Division.

Like the Cubs' baseball season and the dream that they will win the
World Series, the struggle for a competitive local telephone market
should never be over.

We have signs of progress. By the end of last year, new entrants served
eight percent of the total access lines. In New York, competitors had
garnered sixteen percent of the local phone market. And nationally,
competitors' share of local market revenues doubled in two years to
approximately nine percent.

Whatever progress we have seen, we all know that we have a long way to
go. After all, the local telecom market was deemed -- and regulated as
\-- a natural monopoly since before the Cubs last won the World Series.

It simply takes lots of time and lots of capital to make inroads. We
cannot expect, and should not have expected, full-scale erosion of the
monopoly position over the relatively short period of five years since
passage of the Act.

Transitions are messy. The capital markets over-stimulated fledgling
players to construct networks, and then over-reacted by shutting off
their capital when losses mounted as expected. They failed to
distinguish between those carriers with viable business plans and those
that did not.

Indeed, it has been observed that the pattern is consistent with market
behavior following deregulation of the airline and trucking industries.
New investment poured in, incumbents used their market dominance to ward
off challengers, followed by bankruptcies and consolidation.

Despite some temporary setbacks, I believe competition in local
telephony will slowly be realized. Cable telephony is becoming a reality
in a few markets, as cable companies complete their extensive upgrades.
Remaining fixed wireless providers will reach more businesses. Mobile
wireless service will continue to replace the second line into the home.
As prices decline, mobile wireless service increasingly will compete
with the landline telephone.

And most significantly, as broadband voice over IP technology improves,
the economics of providing voice service will shift, and we will see a
redefined market for local telecom service.

## **Broadband Competition**

At the same time Congress resolved to pry open the local telecom market,
it removed the legal barriers to telcos providing multi-channel video
service over the local loop. But the economic barriers were harder to
overcome.

Despite our best regulatory intentions, today only a handful of
telephone companies are providing video service. Sadly, the Bell
companies pioneering cable service were bought out by larger Bells,
which abandoned the effort. They claimed that the up-front capital
investment was too great, programming was too expensive, and the
take-rates were too low.

But video competition of another sort is blossoming.

In 1994, the direct broadcast satellite industry was launched. Today,
more than 15 million Americans access digital video programming through
DBS.

And consumers are clamoring for high-speed access to the Internet. The
Bells already had a highly profitable commercial product \--T-1 lines.
They were reluctant to cannibalize that product by introducing low cost,
high-speed access.

That is, until competition from cable modem service forced them to do
so.

Today, both cable and telephone companies are racing to provide
broadband access. The cable industry has expended over \$40 billion to
maintain and upgrade their facilities for broadband, including more than
\$12 billion in 2000 alone. At year-end, more than three-quarters of
cable facilities had two-way capability, compared to only eleven percent
four years earlier.

Telephone companies have been deploying high-speed DSL lines at an ever
increasing rate. Some project that DSL could overtake cable modem
subscriptions in the next few years.

Broadband Internet access is now becoming available from wireless
terrestrial and satellite carriers as well. Such services may succeed in
rural areas, where DSL and cable modems are uneconomical. Sprint and
WorldCom have begun to roll out fixed two-way wireless services
operating on the MMDS channels. A joint venture of Gilat and Echostar
has begun broadband satellite service, while two-way DirectPC is not far
behind.

The advent of competition -- from wire, terrestrial wireless, and
satellites \-- will spur rapid deployment of high-speed broadband
service. Such competition may not only cause divergent service providers
to enter each other's markets, but it may even cause operators to open
their networks to multiple service providers.

So diehard Cubs fans will be able to follow their team's march to the
pennant on satellite, on cable, digital broadcast, over the Internet,
and maybe even over wireless devices.

## **The Vision of A Wireless World**

While wireless service is not yet a major competitor for the first
residential "line," there has been an explosion of mobile services.

When I joined the Commission in 1994, there were only two real mobile
telephone service providers in each town -- and one was owned by the
local telco. At my very first Commission meeting, we approved the first
PCS band-plan.

Today, three quarters of the U.S. population can choose between five or
more competing mobile service providers.

Between 1994 and 2000, mobile phone subscriptions in the United States
have tripled to over 113 million subscribers -- more than any other
country. And the average price per minute for a mobile telephone call
has plummeted, with some consumers paying as little as 7 cents a minute
under buckets-of-minutes plans. U.S. cell phone users spend more time on
their wireless phones each month than do subscribers in any other
country.

What about wireless data? Back in 1994, there was traditional one-way
paging. Today, with the introduction of the Palm, RIM, HP Jordana, and
Handspring devices, there are now at least four different types of
hand-held PDAs on the market with built-in or attachable wireless modems
for mobile Internet and data access. But while more than 2.4 million
Americans currently use mobile "wireless web" services, only 2% of
mobile traffic is now data.

So we have a new vision -- the "Wireless Web" or "3G" always on Internet
access. Some argue that the United States is behind in the pursuit of
this dream. They believe that government should have moved to establish
a standard for next generation services, and that we have too little
spectrum allocated for mobile wireless services.

I disagree with the assertion that the United States lags behind the
rest of the globe in achieving a "wireless Internet world." Cubs fans
know that a fast start does not always lead to a pennant. While
government-mandated standards may jump-start an industry, just as
easily, a head start can become a false start. Despite predictions of
early deployment in Europe and Japan, recent reports have acknowledged
that the technology and its applications are not completely ready for
prime time.

The U.S. has chosen flexibility over mandating a standard for third
generation services. We have seen that innovation comes with
manufacturers battling it out in the marketplace. And we have not
limited the use of specific spectrum to specific technologies. Thus,
existing wireless providers may migrate to advanced services whenever
the marketplace warrants the move without first getting FCC permission.

We are working hard to find additional spectrum for advanced mobile
services. I hope that Commerce Secretary Don Evans will encourage
Federal users of spectrum to free up additional spectrum for such use,
as we at the FCC are continuing to examine every feasible band to expand
the allocation. Government and industry licensees that are capable of
using spectrum more efficiently will benefit from rapidly adapting their
services and sharing or clearing some of their spectrum.

But at the end of the day, it will be the consumer who will determine
whether the proffered services are valuable at a given price, enabling
the provider to earn a reasonable return on investment. And that is as
it should be.

## **Unlicensed Wireless Communications**

The vision of a wireless future does not rely solely on licensed
spectrum. Rather, opportunities are exploding for communication between
devices that operate with low power on unlicensed bands. Parties using
unlicensed bands share spectrum with a wide assortment of other
unlicensed services, and must adapt their technologies to avoid causing
interference.

Ever since I joined the FCC, I have believed that judicious use of
unlicensed bands would promote the competitive delivery of new services
in a spectrally efficient manner.

Almost thirty years ago, the FCC first adopted rules to allow "spread
spectrum" transmitters to operate on an unlicensed basis once they were
approved under the equipment review process. For years, this technology
was largely unnoticed, with requests to approve only 20 to 30 devices a
year.

But in the last five years, manufacturers have introduced a flood of
spread spectrum products. Cordless telephones, wireless LANs, and other
short-range communications devices are everywhere. Requests for FCC
approval of unlicensed RF emitters have increased more than tenfold.

Over the past five years, the FCC has expanded opportunities to use such
products on an unlicensed basis by making more spectrum available in the
5 GHz band. And we have further relaxed the criteria for operating in
unlicensed spectrum to enable other technologies to enter the
marketplace.

Bluetooth and WiFi -- competing methods to link consumer devises at
short range \-- are vying for consumer acceptance. Soon people will have
broadband access to the Internet in a variety of public places, such as
airports, coffee shops, and college campuses. Some folks are exploring
ways to daisychain broadband access across whole neighborhoods with
rooftop antennas connected to each other by wireless lan. Such
applications could impact demand for third generation mobile services.

The Commission is also examining whether novel technologies such as
"ultra-wideband" and software defined radios can be deployed without
harming existing spectrum users. These approaches raise spectrum policy
to a whole new level of thinking.

## **The Role of the Regulator**

Launching all of these new products and services -- from competitive
local telephone and video service, to mobile service, to unlicensed
broadband applications -- raises the question of the role of the
government regulator in this dizzying marketplace.

For many years at the Commission I have sat between those who argued
that we should get completely out of the way and those who argued that
it was the Commission's duty to establish rules that rigorously guarded
the public interest. And in the end I found that it was never as easy as
either contender would have it. Unfortunately, life is too full of gray
for us to simply choose black or white.

So I offer four general principles for the moderate regulator to
consider. In so doing, I cannot stress enough the importance of the
independence of the regulator in liberalized telecommunications
economies. It is critical that these officials be completely free of
conflict between the role of regulator and the role of protector of
government owned investments.

First, we should strive to eliminate any barriers that might exist to
the deployment of new technologies or competing services.

Second, we should rely to a greater extent on market forces, and less on
legacy regulation, as markets become more competitive.

But third, while we might like to rely on market forces, we should not
be tempted to deregulate a monopoly or a dominant provider with market
power before the market is truly open to competition.

Incumbent local carriers need incentives to open their networks to their
competitive carriers. As a veteran of interconnection and collocation
wars, I know that regulators must be clear and resolute. And penalties
for failure to obey the law must be severe and swift. Delay kills
competition.

Some have argued that deregulation is not the dessert that should be
served only after a meal full of competition. Perhaps, but a monopoly
player in a market will eat everyone's lunch if it is unregulated before
the table is set for enduring competition.

And once there are a variety of platforms that can compete to provide
substitutable services to the consumer? Regulators should not apply
legacy regulations to these platforms "to level the playing field," but
rather, should ensure that barriers are removed so that these platforms
can compete against each other.

Finally, governments should strive to eliminate regulatory uncertainty
in the marketplace. Financial markets need to know that the regulations
will not constantly change, that they will be enforced, and that
decisions will be made promptly \-- before investors will deploy capital
in this sector.

##### CONCLUSION

The Information Age economy presents unique challenges and opportunities
for the public and private sectors to work together to advance
competition and innovation in communications for the benefit of the
public.

I have been deeply honored to serve as a member of the Federal
Communications Commission for the past seven years. I hope that my
experience will enable others to avoid our pitfalls and to rejoice in
the magnificent displays at each turn of the kaleidescope.