CHAIRMAN REED HUNDT
                     FEDERAL COMMUNICATIONS COMMISSION

                       WALL STREET JOURNAL BUSINESS 
                         AND TECHNOLOGY CONFERENCE
                             Washington, D.C.
                            September 18, 1996

                        (As Prepared for Delivery)


     Without offending our host The Wall Street Journal, I hope, I would like to offer you
my list of what's in and what's out, in true USA Today style.

     In:  packetswitching; big bandwidth; competition in communications; the FCC's
interconnection order; 50th birthdays; designer vacations; social security; Techno-
Communitarians; golf; Juwan Howard and the Washington Wizards (nee Bullets); and The
Wall Street Journal news reporters.

     Out:  circuitswitched networks designed for 3 minute calls, bandwidth that is narrow
squeezed trickly exiguous skimpy and miserably slow; communications monopolies; and The
Wall Street Journal editorial page. 

     Actually that's not fair.  The true truth is that I often agree with the economics on the
Journal's editorial page.  It's just that I'm hurt that they haven't run one of those awful
cartoons of me lately.  

     Let's talk about a different paper.

     Have you noticed that USA Today provides the best coverage of the Internet? Some
say that's because USA Today understands what it means to pioneer a cutting edge idea and
not make any money doing it.

     Although I love all newspapers and especially the Journal and USA Today, I am a
true believer in the Internet.  I think it will in the fullness of time change the way we watch
TV, alter the significance of radio, revolutionize education, expedite and improve health
care, bring down radically the prices of international telephony, and continue to bedevil
everyone in hardware and software business.

     My hope is that the power of the Internet will forcedrive our two-point FCC agenda -
- competition in communications and public benefits from communications.  That's why
we've resisted all efforts to bring Internet communication within the out of date regulatory
scheme we have inherited at the FCC.  This scheme involves dividing communications
between intra and interstate traffic, dividing policy between state and federal jurisdictions,
intruding on investment plans and fixing prices by regulation instead of competition.

     This scheme is as out of date and simplistic and useless for the modern age as, let's
say, Social Darwinism.  

     So instead of applying its artificial constructs to the Internet we want the Internet to
help us deconstruct and redesign the country's and the world's communications policies and
networks.
      
     The Internet can change everything, if we let it.  Its digital code turns a zero into a
window on infinity and a one into a unifier of economies and society.  It turns the world
upside down.  

     Bill Gates is a genius.  He truly is the Henry Ford of the information age.  But so far
he is a Ford who started not by building the Ford, a car for everyone, but the Lincoln, a car
for the upper tier.

     Now from what I read about the $200 PC, Ellison and Gates and Grove and all our
other leaders of the information economy are plainly going to give us a range of model lines,
PC's spread across price points for all consumers like Ford sells Fords, Plymouths,
Mustangs, Lincolns, and Jaguars.  This breakthrough will mean that everyone will have an
affordable car for the information highway, a usable PC for all purposes.

     Because of this breakthrough in product development for the key barrier to internet
use, the PC, we are now looking at a future where the penetration rate for Internet access in
the U.S. will in the fullness of time be as high as the penetration of VCR's (88%),
telephones (95%) and even TVs (103%).  That latter number is what they tell me but it's
hard to interpret.  I think it means some people watch more than one TV at a time.  Let's let
that go.

     Now if PCs are going to be at last truly ubiquitous that will put unimaginable
pressure on the networks to accommodate the huge new usage.

     This pressure won't develop in a week or a month, but over time I envision a PC-
driven, internet-driven need to build in this country, through and over and with and around
the existing network, a big bandwidth, wide access network.

     I don't know if that network of tomorrow will be fiber to the bedside table, or the
cable modem hung on the cable network, or the new LMDS technology (with a two-way dish
no bigger than a small pizza) that delivers the big bandwidth of the 21st century networks.  It
may be all of the above.

     But I know this:  Starbucks is successful because its coffee is lawful, socially
acceptable and completely addictive.  

     Bandwidth is just like that.  You can never get enough.

     The importance of our recent interconnection order at the FCC for the internet is that
it opens the way for the emergence of any number of new firms that will be in the business
of specialty bandwidth delivery.  The firms I imagine will provide networking solutions to
homes, schools, neighborhoods.  They will lay wire, put up dishes, provide software, link
the half dozen PC-like devices that each home will have.  They will be able to use the
existing telco network, by the terms of our order, to get in business.

     How many radios do you have in your house today?  You don't even know, right?
That's the way it will be with internet access devices in the reasonably near future.  PC-stuff
that will facilitate the access is all it takes.  So the mini-PC's of the near future will be in
your home's electrical equipment, your kid's bookbag, attached to your belt, stuck in your
briefcase.

     You will have Email to your neighbors in your suburb, or to the teachers in your
kids' classes.  You will be networked with doctors, lawyers, and, in my case, lobbyists, with
enough bandwidth to send Xrays, videos, graphics.

     You already know all this of course.  It was in Bill's book The Road Ahead.

     There is a downside.

     No one decked out in the PCware of the future will ever be able to get through a
metal detector in less than half an hour.

     When they ask you at the airport if a stranger gave you something, you'll ask, does
shareware count?  Then they'll send you in the other room for more extensive questioning.

     But in the networked world, why travel anyhow?

     There are two laws that give us the best foundation for understanding the Internet.   
I'm talking about Moore's Law and Metcalfe's law.  Moore's law tells us that computer
processing power doubles every 18 months.  Metcalfe's law says that the value of a network
increases exponentially with the number of nodes.  The people who invented these laws have
done well in life so in a blatant attempt to imitate I have invented a law of my own:  Hundt's
Law, which I formulated this summer for the Internet Society conference in Montreal:

              Access + Bandwidth = Communications Revolution.

     Here's what I mean by this.  Lehman Brothers just released a report stating that
"'demand elasticity for bandwidth' is a key communications theme, as the unending appetite
for bandwidth drives industry growth." The huge pent-up demand for more bandwidth means
that as competition pushes prices down and makes more services available, usage will
skyrocket.  Lehman Brothers is initiating coverage of five different equipment manufacturers
because they know that the bandwidth business isn't like the war between Betamax and VHS. 
Multiple technologies, like ISDN, ADSL, and ATM in the wireline world, PCS and LMDS
in the wireless world, and digital set tops and cable modems in the cable world, can all
emerge as winners.  

     To meet this bandwidth challenge, our government policies must be directed towards
competition and deregulation, which will in turn stimulate investment, technological
innovation, and expansion of the market.  This is old news for computer and Internet
companies; government is no more involved in setting the price for Microsoft's latest
browser and AOL's online service than it is in setting the price for shoes or soap or salsa.  

     We've already largely deregulated the long-distance industry.  With 500 competing
companies, an more importantly, at least four nationwide facilities-based networks, there is
enough competition so that we no longer need to regard AT&T as the dominant carrier.  

     We have also preempted state regulation of retail prices for cellular services, and used
spectrum auctions to quickly and efficiently distribute hundreds of new licenses.  We have
minimized the limitations on the use of these licenses, so that the licensees can use their
spectrum to both compete with existing service options and to create entirely new markets. 
That's what Metricom is doing today with its wireless Internet service Ricochet, and what
Teledesic hopes to do in bringing two-way broadband communications to every person on the
planet.  To unleash the potential for these new services, we should further eliminate
restrictions on how licensees use spectrum.

     It took a century for the American telephone industry to go from zero to about $160
billion in revenues today.  The competitive, unregulated personal computer industry, by
contrast, went from zero to nearly $100 billion in revenues in just 20 years.  John Doerr of
the venture capital firm Kleiner Perkins recently said in online interview that the Internet
market could easily triple that, and reach $300 billion dollars.  I imagine it will be around
that time that Slate starts making money.

     Competition is a major reason why the Internet has been so successful.  There are
now more than 3,000 Internet service providers in the U.S., and everywhere you look in the
Internet world, you see similar evidence of competition.

     We aspire to achieve this kind of competition in the local exchange market, and to do
so we have to give new entrants a chance.  It is natural that the companies with monopoly
market power will try to keep that power unless governments through rules constrain their
potential anticompetitive impulses.  So that's why Congress, in the Telecommunications Act
of 1996, asked the FCC to write new rules of competition.  But let's be clear:  our ultimate
goal is to reach the sunny uplands of deregulated markets in which the prices and output of
telecom services, like software and soap, are set by markets and not governments.

     We started down this road with our interconnection order, which was released on
August 8.  Interconnection is the first volume of a competition trilogy that in the next several
months with include access reform and universal service.  The interconnection order sets
forth clear national rules for opening up the monopoly local networks to new competitors. 
Its four dozen pages of rules are, in terms of word count, only 61% as long as the rules of
Little League Baseball, although admittedly not as important.  And those 48 pages, once put
into effect by state commissions that must approve or arbitrate interconnection agreements
between incumbents and new entrants, will eventually lead to the elimination of thousands of
pages of federal and state rules that control monopolies instead of promote competition. 

     What we want for our economy is what we want for the world economy.  We're not
looking for exclusivity on our packetswitched, big bandwidth, future, deregulated network. 

     The message of competition is one that we are stressing to other governments, both
directly and in negotiations in the World Trade Organization.  But the WTO can only
succeed if there is a real commitment to competition abroad.  We need more market opening
commitments from more countries.  We also need to see that the countries which have made
offers are truly committed to competition -- and not just going through the motions. 
Specifically, we'll be looking at progress by Germany, France and Japan on interconnection
rules that are truly cost-based.  With competition we can easily grow the $550 billion global
communications market to more than a trillion dollars a year, and easily double the $50
billion market for international long-distance calls.  This policy would catalyze the continued
explosive growth of the Internet worldwide.  According to an OECD report, in competitive
markets like the U.S., the market penetration of Internet hosts is five times greater, and dial-
up Internet access is nearly three times cheaper, than in countries with a monopoly phone
company.  

     The second part of our competition trilogy is access reform.  Back in the early 1980s,
the FCC developed a set of rules to govern the way the incumbent local phone companies
could charge for the use of their networks by long-distance companies.  These "access
charges" were part of a monopoly system that was designed to keep residential local phone
rates low.  We did manage to keep residential rates low, which we know because 95% of
homes subscribe.  Everyone agrees, however, that the access charges are much higher than
they should be, and that these extra charges mean higher long-distance rates.

     When we set up access charges, we wisely decided that providers of enhanced
services, like data networks, should not be subject to these charges.  As a result, companies
including Internet service providers pay end user business line rates with no usage charges
for receiving calls from their subscribers.  Of course, back then, there was no mass market
and commercial Internet.  

     Now, with Internet usage skyrocketing, some people are saying that we should subject
Internet service providers to the access charges paid by long-distance carriers.  

     I disagree.  You don't pour new wine in old bottles and if we applied these old access
rules to new technologies you'd have every reason to whine.  Instead let's just break the old
bottle -- in fact, the bottleneck of exchange access.  

     For the same reason, we shouldn't try to subject Internet telephony to all the rules
that apply to conventional circuit-switched voice carriers.  Imposing traditional divisions, like
voice vs. data or interstate vs. intrastate traffic, on Internet-based services wrongheaded and
futile.  Internet telephony may well become, in time, a competitive alternative to traditional
circuit-switched voice telephony, especially in areas like international calls and calls over
private corporate networks.  We want to encourage that kind of competition, not limit it.  I
hope the FCC bars any state from limiting the growth of Internet telephony.  We want states
to regulate less, not more.

     But let's agree that as competition builds the big bandwidth networks of the future,
we are going to have to confront more candidly the limitations of today's networks.

     Carriers engineered and deployed their switches based on the characteristics of voice
traffic.  Internet users, however, typically engage in far longer calls than voice users. 
Several local phone companies and Bellcore found in traffic studies that the average voice
call lasted between 2 and 5 minutes, while the average Internet call lasted between 17 and 21
minutes.  The average end user circuit in a central office was in use 5 to 7 minutes in the
busiest hour, but the average circuit connected to an Internet service provider was in use
between 31 and 47 minutes in the busiest hour, and some are in use virtually nonstop. 

     The existing networks weren't built for this sort of use.  And the same switches that
are being overwhelmed by Internet usage also provide voice connections to other users. 
According to Bellcore's models, if only 4% of the lines into a central office are in constant
use by Internet service providers, users, including non-Internet users, will face a sixty-fold
increase in the number of calls that don't go through.  

     The phone companies argue that the absence of usage charges means that Internet
users do not provide the revenue to cover the additional costs they impose on the network.  

     How can we make sure that the economics of the telephone network do not constrain 
the bandwidth demands of the Internet?  The challenge now is the for the governmentally
challenged Internet community to figure out how to talk to the FCC on this subject and what
to say?  After all, FCC stands for Friendly to Computer Communications.  After all I'm the
first FCC Chairman ever to be on the Net -- so let me know -- RHUNDT@FCC.GOV. 
What should our policies for bandwidth growth look like?

     Of course, the short history of the Internet has been a story of people often saying the
technical challenges were insurmountable and the network was about to collapse.  And every
time ingenious new solutions have developed.  Already, Nortel and other equipment
manufacturers have announced products to reduce the demand Internet access places on the
public switched network.  

     The telephone industry and the Internet industry need to work together to identify the
solutions to these problems.  We've already seen some evidence of that kind of cooperation. 
Our competition policy will drive this process.

     Now I'd like to move on to the second element of Hundt's Law, which is that
everyone needs access to the Internet, either at home, at school, or in a library.  Metcalfe's
Law only applies when people can access the network, and if they know how to take
advantage of the network access that is available to them.  So even if we are successful in
meeting the bandwidth challenge, we still must ensure that there is access.

     Communications Daily reported last week that advertising on the Internet will explode
50-fold from $100 million to $5 billion over the next several years.  Many of you are here
today because you embrace, fear, need to harness, or are amazed by that prediction.

     I don't know if it's true, but, just as Pascal said he chose to believe in God because it
was safer than the opposite bet, I think we should assume this prediction might well be right.

     That sort of advertising will come about primarily if the Internet reaches everyone.
As broadcast TV has discovered, if you can deliver the whole country as an audience,
advertisers will make you very, very comfortable.  It's good for the Internet if everyone has
access.

     So again, what are the policies that are likely to build big bandwidth networks
accessible to all Americans?  I am inclined to believe that the top three answers are
competition policy from Congress, procompetitive rules from the FCC, and enforcement of
those rules at the federal and state level.  But it still will be true that competition won't build
networks everywhere. You can't just assume all Americans have money to buy the bandwidth
that the internet requires. 

     In particular there are 50 million Americans whose only money is lunch money.  I am
talking of course about kids in classrooms.

     All these kids every day need to have internet access in every classroom if we want
them to participate fully in the 21st century classroom.

     American business repeatedly has heard appeals from public officials to invest in
education.  Many businesses have responded in big and dramatic ways.  The appeal generally
is premised on the notion that it is the right thing to do -- it is good for the country.

     Of course that is true.  But it also is in the self-interest of American business leaders
to commit to bringing technology to our schools and libraries.  Today, only 9% of
classrooms are connected to the Internet.  Expanding connectivity to schools and libraries
will create more technologically literate users to purchase the new Internet services
businesses are offering, and will create more skilled workers to fill the thousands of new jobs
the industry is creating.  Growth in the Internet market depends upon an increase in the
number of consumers who are technologically literate, and connected to the network.  

     The investment to network our schools and libraries is so small and the payoff so
large.  Look at the math.  The information industry alone generates $700 billion a year in
revenues.  It will cost at the most $10 billion over five years to network every classroom. 
This is 10 billion out of about 5 trillion dollars of revenue the information sector of our
economy is projected to generate over five years, which is 0.2 percent.  

     Can it be that we have a 700-billion-dollar-a-year information technology industry and
yet we can't afford to give every teacher the tools we give every shipping clerk at Wal-Mart?
Or that we could afford to network every classroom by the beginning of the next century, but
somehow we just neglected to do it?

     At the FCC we will vote next year on a new universal service funding mechanism. 
Should we vote to network all the classrooms in the country?  Would you support that? 
Would you persuade others to support that?

     If we can't get this done, what can we expect to do together?

     One of the great aspects of modern times is that our challenges are new and different
everyday.  The challenge I'm talking about is to provide bandwidth and access to all
Americans, but especially to kids in classrooms.  Right now we don't see this done in any
but the most exclusive, private schools and a handful of model projects.  The way you care
for the next generation is the proof of a person's character and a country's values.  Let's
prove we are as good a country as we'd like to be by delivering the future -- the Internet
future -- to our kids.


                                   -FCC-