Edited Transcript of Address by

Michael Powell

Chairman

U.S. Federal Communications Commission

To British American Inc

Thursday, May 24, 2001

London

Thank you for that kind introduction. I must say that with each passing
word I felt the weight on my shoulders, making them droop even further.
I just recently had my confirmation hearing and submitted a number of
forms to the United States Senate and one of the questions really
stopped me in my tracks: "Why do you want this job?" And when I hear
remarks like that, I'm not sure. But I will give it my best.

I want to thank the group for having me here. This is my first
opportunity to visit Europe as Chairman of the FCC. It has provided a
really unique opportunity to exchange ideas with my regulatory
colleagues as well as the business community, which is such an important
part of what we do. It seems to me everywhere I go there's this theme of
the "regulators challenge." You find 5 or 10 different ways to spin the
same basic concept. But, I think it is important to reflect on what does
that mean, what are the forces or the activities that are going on in
the market place and in the world, that really create a challenge of a
singular and unique nature? I thought that I would try to share my
perspective of what I think they are and from whence they spring to give
you some sense what we're facing in the United States, and, I think, in
essence, what the world is facing.

The first and most dramatic theme I think that you will immediately pick
up on around the world, concerning government regulation policy and
certainly in the United States, is that we are moving from State-blessed
or State-sanctioned monopoly regimes to competitive markets. One day,
somebody woke up and said, "guess what, we thought for 100 years that
the telephone service is a natural monopoly, but we don't believe that
anymore." I'm not too sure where the study was that concluded this, but
we came to this epiphany in the United States and proceeded to move
legal and regulatory regimes out of one that blessed the notion of the
single monopoly provider, and put our faith in competitive markets and
business and then proceeded to try to create the legal and regulatory
framework for doing so.

In the United States, it took the form of the Telecommunications Act of
1996, and it is taking various forms all around the world. It is a
recognition that maybe consumers benefit from the possibilities of
competitive entrants, rather than the notion of the single monopoly.
Interestingly enough, I think the challenge in the rest of the world is
even more daunting. In the United States, we at least have the benefit
that we never owned \--the government never owned \-- the telephone
company. Our communications industries have always been private. Though
heavily monopolistic with the blessing of the state they nonetheless had
the infrastructure of a private operation and with the kind of capital
conditions of a private operation. So, in some ways, we don't have that
additional big burdensome step that the UK did for instance.

I think it was in 1984 when BT became private. And other countries were
also working through pulling government out of the regimes of incumbent
providers. We did that in essence when we broke up AT&T in the early
80's, but they were private to begin with, so many of the more difficult
structural issues for the government's return on its own investment were
not present in our ability to establish that regulatory regime.

So, we see the world really struggling with this change in paradigms,
which is pretty phenomenal. For a hundred years we had this notion that
telecom services were a national monopoly and suddenly we had a
realization \-- and to some it may be but a hope, but I think a real one
\-- that consumers can benefit from competition in all forms of the
communications market. I believe we'll probably have to continue to
exercise that principle as I'll explain further in a moment.

But that's not the most important thing that's going on in the world. I
think that's the part that was the end of a matured legacy with the
phone system, as we understood it.

And then something remarkable happened that I think gives the times its
revolutionary character. Two extraordinary technology revolutions were
creeping along separate and distinct for the most part, and then really
ran together in the last decade and created possibilities that we could
not imagine.

The first technology revolution is the communications revolution, which
is the more mature of the two. It was said that from the time that James
Maxwell created the laws of electromagnetic radiation and we began to
have a grasp of how to transmit information using electricity, we saw
the burgeoning of communications services that were built on those
principles. The new telegraph, the telephone, the move to the airways by
Marconi and radio or television, and then the more sophisticated version
that involved the satellite and wireless infrastructures. I would
maintain that this revolution has really reached a level of maturation.
There certainly are breakthroughs going on, there are certainly advances
in communications in the pure electromagnetic sense, but in many ways
that revolution has really moved along.

But the second half of the revolution is the one that's embodied in the
computer world, the micro-processing revolution. The day that they were
able to integrate transistors on a single silicon chip and ultimately
make the silicon chip a computer unto itself, we unleashed this thing
that we now are pretty familiar with that we call Moore's law to
describe this unbelievably relentless doubling and tripling of
processing power that can be more and more miniaturized, increasingly
invisible to our lives, though increasingly accessible by people,
consumers.

We suddenly had technologies that were really the property of academic
institutions and government and the people who predict weather, in the
hands of people who raise children, and people who buy products on a
mass market scale. It's a remarkable development. The world knew this
was remarkable, Bill Gates became a billionaire, Intel joined him and we
really understood the power of the computer.

But then what happened was that this communication revolution and this
computer revolution got married.

There was an intersection. All of a sudden computer-processing power
could be brought together with communication power and our traditional
notion of what communication is has changed forever.

In an analog system, if I say "hello," you hear "hello." But when I add
computer processing, we really have information processing. I may say
"hello," and it may come out "hello" in French. Or we may be able to do
things with communications so that we can modify, alter and change its
delivery. And I think that those two things coming together revealed
themselves most charismatically in the Internet, which was the beginning
of a communications revolution of architecture and computer processing
to manage communications. Suddenly, you had this flowering thing come
out of the desert that people really saw as the next great economic
revolution \-- a technical revolution, similar to the agriculture and
industrial revolutions that preceded it. And we got really, really
excited. We probably got too excited. One of my favorite phrases is
"techno-ecstasy". It's rampant throughout Washington and the rest of the
world, I expect, and I'll say more about that too.

But the other thing is the mastery of computer technology
digitalization. Think how remarkable it is that you essentially reduce
the whole of communications to just two digits. Just a zero and a one
and in this order they are a picture, and in this combination they are a
song. Suddenly there is a sameness of communication and when those two
digits can be modified or processed to run on virtually any kind of
communication infrastructure, you have \-\-- what I am so tired of using
as a word \-\-- "convergence." You have the possibility of
infrastructures that have long been used for separate and distinct
purposes suddenly embodied with the ability to provide services never
before provided, as well as new ones never imagined. So you get sameness
in the way we distribute information.

And then markets started competing with each other. You wouldn't have
believed that a cable company is suddenly a telecom competitor to a
phone company or that a wireless company might have the ability to eat
into the revenues of the local phone company, and that the local phone
company might start to provide video services over an infrastructure
designed originally for voice. You start to see market segments that
have been traditionally separate - - and safe by the way - - and
companies are dramatically learning that the new economy ain't always
fun. It can hurt because of the cacophony associated with convergence,
and the markets can begin to collapse.

If you look at the telecom statutes in the United States you see they
are beautifully and neatly laid out. If you use coaxial cable and you
provide a video service, you're called a cable service provider and
Title VI controls what happens to you. If you use the airwaves to
provide video images you're a broadcaster and Title III provides the
rules for you. And if you're an information service provider or an
Internet company, we love you so much, because that's our
"techno-ecstacy" thing, and there are no rules for you, you're just
kissed and blessed and sent into the world.

But what happens when AT&T uses the same infrastructure to provide
telephone service, video service and Internet service? I'll tell you
what they want to be called \-- "information service providers." So, the
buckets \-- regulatory buckets that guide us or are supposed to \-- are
becoming increasingly irrational and arbitrary and difficult to apply.

The most difficult question in telecom policy right now is, "What is
it?" Well, if you do this and this, "you're a cable company," or you're
not, because you don't do that. We spend a lot of time wrestling with
what labels to stick on a company, or what to call an innovator, because
our simple world wants to push this thing in a particular way into a
regulatory bucket, because then we'll know what to do with you. It's
just not that simple anymore.

So you get back to convergence. And where does that lead us? We take
these two themes \-- this move from state-sanctioned monopoly to a
competitive market \-\-- an exercise that I think preceded the sort of
data-centric technology revolution aspects of this \-\-- and this is
where you are if you are a regulator. You are standing in the middle of
two different worlds. There is this legacy regime with that matured
network where we know what the technology was, we know what a twisted
copper wire looks like, know its cost characteristics, we know what
companies provide it, and we know its CEO. We regulate that, we
understand that \-\-- and now we're trying to untangle it so that it
will be competitive.

But at the same time cresting in front of me is a world of revolution
that seems now to be one that all communications will be part of, and
one where we don't know the technology. We struggle, and there are many
of them competing for the same distribution\--fiber optic, wireless,
satellite delivered services, telephone supercharged services\--all
standing out there. But we don't understand that as well.

We also don't understand the cost characteristics. That used to be the
key part of what regulators focused on. Well, a bit is a bit. What does
per-minute pricing mean in a packet-switched world?

But here's the part that I think gets left out: we don't know what
consumers want. I know what telephone service is, and my neighbors know
what telephone service is. They know what quality they want, they know
what it means to call the emergency number 911, and they know what they
expect to happen when they call that number. We promised them that, and
companies promised them that and they get it, for the most part. Yet I'm
not sure what consumers want in the broadband, digital world. And
neither do most companies, to be candid, and certainly the government
doesn't. We sort of tend to forget about the average man and woman whose
lives you are asking to revolutionize. But there's a lot not known about
what it is they really want and place value on, because I tell you, if,
at the end, they only want everything that comes over it which is free
\-\-- and that is what most Americans think when they look at internet
content \-\--, "it's free," \-\-- then we have a problem going forward
with a broadband market.

So, as regulators and policy makers \-- and I would submit businesses
too \-- we're sort of in this trough between those worlds. If anyone
plays tennis, you know that middle part of the court, where you're never
supposed to get stuck, that "no man's land" in the middle. We're no
longer back at the base-line where you can see clearly and if the ball
bounces, you can get to it, and you sort of sit back there all day.
That's the phone world, you play safely back there. We're all now at
that middle line and \-- this is a bad joke \-- where we're trying to
get to the "net", right?

This is why I'm in government. We're at that place where we're picking
balls up off our shoelaces. It's a dangerous place to be. And when we
are talking about digital broadband migration, it's my attempt to say
that we need to realize where we are and begin to start boldly moving in
to the net and moving a policy, and regulatory environment, and business
environment there, because this is the point of no return. There is no
going back to what we had. It's just fruitless to do so, and to even
have debate on that in my opinion, because we're wasting energy and what
we really need to do is to drive forward.

So, what's a poor regulator to do? What is our response? I think these
are the challenges facing all regulators. The first principle I think
that we have to abide by is that you have to learn to be certain about
uncertainty. You might not realize how much a regulator counts on
knowing what the world looks like. Think about a rule. It's based on
assumptions that you expect to remain valid for some period of time, so
that the rule has merit for more than a day or two. But what if you sit
down to write a rule about the Internet? What if you want to write a
rule about broadband for example? What is it? How long will it be here
in this form? What are the characteristics? These assumptions are very
difficult to pin down, so we need to recognize that our crystal ball has
gotten really cloudy as a consequence of this revolution.

You know one of my favorite economists, Friedrich Von Hayek, says it's
high time we take our ignorance more seriously. I think that's true. I
think that we have to recognize we're ignorant about the future, and we
have to let policies breath in a way that takes that into account.

The other thing I think that we have to do in terms of shifting is to
focus on innovation more than we have ever done. That has not been the
hallmark of a regulatory policy. Indeed, government has largely been
focused on anti-competitive behavior and price control. It's all about
the price \-- some paying too much, some not paying enough, some
companies making enough, some are not making enough. Government has
spent the better part of the century focused on these issues.

In many ways, the phenomenal cost characteristics of new networks is
that a lot of times price is not the most critical component that will
harm consumer welfare, in my opinion. What you are trying to do is
recognize that in this uncertain world, you want to stimulate innovation
and experimentation. If you are a reader of Adam Smith, that means I
want the producers to talk to the consumers and I want them to talk a
lot. I want the producer to try some things, and I want the consumer to
reject them, and then I want the consumer to try something else. I want
the fall-out that comes from the dialogue in the marketplace as we try
to find that sweet spot of value between that producer and that
consumer.

I think that government policy that understands innovation is preeminent
and it will do very different things than a regulatory agency that has
the traditional analytic price discipline as its central focus. If you
care about innovation then you have to learn about investment. I have to
know why Wall Street will give one idea money and not another one. I
need to know how Wall Street thinks about what I do in making that
decision. I start to learn that, right or wrong, you must make a
decision because the uncertainty hurts more than the answer. This has
led me to pursue efforts to make the agency more efficient, more
effective and more decisive, because I have learned that the dithering
we do is much more harmful to the market than anything we actually do. I
learned in the Army, right or wrong, you must do something or otherwise
you can get killed just standing there. I think that regulators have to
have that attitude in an Internet-time market.

I talked about these regulatory buckets. These buckets aren't harmless.
If you have markets that actually compete across them and you have
different regulatory treatment associated with each of them, then you
have incented the business model known as regulatory arbitrage. This has
nothing to do with economic efficiency. It has nothing to do with
serving consumer's wealth and it has nothing to with trying to find the
highest value for them. But it has everything to do with being the first
one to get to the bucket of money that everyone knows won't last
forever. Get it first and sell it. I really believe that this is a lot
of what happened to the competitive market in the U.S. I think there was
a lot of chasing of things that everyone knew were not staying around
rather than doing the hard things like facilities-based competition and
having companies actually bring something to the table and be in that
market for the long term and make money by doing what companies should
do, which is bring value to the consumers.

But we have holes in the regulatory bucket, because these rules came
from the phone world, in which we never expected that in a data world,
traffic might go only one way. We have a reciprocal compensation
problem. This was always about " I'll eat my costs and you eat your
costs \-- it'll balance out." Telephone companies said we'll exchange
traffic. But you don't exchange any traffic with an ISP, so we gave it
all to them. Those companies knew it and set up ATM machines right in
the middle and took the money. I think that hurt the CLEC industry. We
have implicit subsidies for universal service purposes that made
business rates much higher than residential rates. Well, it didn't take
long for competitive companies to know that.

> And then I listen to politicians who wonder where the local
> competition is for

residents. I'll tell you where it is. It's over there in the
cream-skimming businesses. Economic actors are rational, but they don't
necessarily maximize it to the highest value without proper guidance.

Companies are very invested in rules. A lot of times, when I do
interviews, they'll say "With your free market approach, consumer groups
think you are very "Big Business" because you are pro-market." I say how
many big businesses do you know that are really pro market?" I want to
be candid here. The incumbent with one-hundred percent of the market is
not that keen to competition. I don't know where anybody got that idea.
That is not the characteristic of a monopoly or an oligopoly.

Unleashing real competition is a threat to the establishment, which I
think means wealth being generated to the consumers and is not pro-big
business per se. But the long and short of it is that I think we have a
duty to start to rationalize rules of cross-carriers so that whatever
evolves in this unpredictable marketplace is based on efficiency, rather
than the notion that they went this way because the rule distorted them
in that way.

My next point is what I call being "technology savvy." This revolution
is driven relentlessly, in a Darwinistic-way, by technology that is on a
blistering innovation curve. Blistering. You cannot make sound policy
anymore \-- if you ever could \-- unless you have a basic fluency in
technology. If I am going to regulate AOL/Time Warner and pass on the
merits of some product like instant messaging, and I let Bill Gates and
Steve Case debate technology with me, and I don't know what they are
talking about, I have submitted my agency to the power and the whims of
technology savvy industries. I can't do that.

I have to have an independent capability to critically assess claims of
technology issues. If I can't, I'm letting the very people I regulate be
my teacher at the same time. And, trust me, lawyers know how to do this
with law, and technologists are just as good at giving you the spin in
the name of science as to how this really works. I have decided that I
better figure out how it works myself and that I better ensure that my
agency can speak fluently about technology.

Two final things. First, unbending independence. I feel very strongly
about this. I think it's just sort of lucky that, by a quirk, in the
United States this is the way the government created independent
regulatory institutions. I cherish my independence.

I have to preserve it. My motto is: "fairness to all and allegiance to
none." I have to be perceived that way in order to make tough decisions.
Because if your tough decisions, even when people don't like them, get
the respect that an independent judgment is entitled to, then you will
be able to survive. If not, you are in water with billion dollar sharks.
This is a rough political environment and a difficult one. If you are
not guided by principle, independence and a fair amount of courage and
intuition, you will just be beaten around by various interests.

And there is an economic reason \-\-- I always have to find the economic
reason \-\--for independence. Because you know what? Capital will not
flow to competitors, to an incumbent, if the capital market believes
that the regulator belongs to somebody. Would you? Would you give an
entrant a lot of money if you believed that the incumbent or some part
of the industry owned the agency or could have its way in the regulatory
environment much more than you possibly could? That becomes a huge
factor in your business model, and in your capital model, and you know
what, it won't do. So everything you are dreaming of and hoping for
doesn't materialize.

Finally, because I always like to be a little philosophical about
policy, let's go back to the word "techno-ecstasy." I live by a simple
rule with two corollaries. We always underestimate technology, and we
always overestimate the degree it will change our lives. People do not
evolve like Moore's Law. Your eyes do not take in bandwidth faster just
because you can shoot it at them faster. People don't stop lying on
couches and watching TV passively just because you want them to do
something different. The way the family works, the way people live,
their lives is the important lowest common denominator.

I listen as people say in the U.S., "Wow, it's been five years and the
Telecom Act failed." Five years? After a hundred years in a monopoly,
we're ready to measure success or failure on only a five-year scale?
That's ridiculous. It underestimates the challenge, and I think leads
you to get anxious and hasty about intervening long before you should.
The reason that is a mistake is because you will surely fail if you
shove things on consumers faster than consumers are prepared for them
and are able to absorb them or determine that they value them enough to
pay for it. And they will stump you.

I remember being in the fifth grade and watching AT&T demonstrate the
video-phone. Do you have a video phone? I don't have a video-phone. I
didn't want to talk to my sister in her underwear in New York. People
just didn't and wouldn't embrace it. I think that that's always
important to keep in mind as we have these debates about "Oh, My God,
we're behind" or "Oh, My God, this hasn't happened yet."

Broadband bandwidth is not there in the mass market level in any real
world reality yet. But have you ever compared it to the deployment and
penetration rate of some of the most critical services brought into the
world: electricity, indoor plumbing, water, telephone, telegraph
service? This thing is moving by a geometric order of magnitude, at a
faster rate to the masses than anything that preceded it. We should be
hopeful and optimistic about it.

In the U.S. today, ninety percent of Americans have access to a narrow
bandwidth service by 10 ISPs or more, and that's in five years. That's
remarkable, and that's a reason to be excited, so we focus all we can on
that.

With that I will wrap up, and thank you for your attention.