NEW DIRECTIONS IN TELECOM
A CONVERSATION WITH ASSISTANT SECRETARY LARRY IRVING
Wednesday, February 4, 1998
National Press Club
Washington, D.C.
1 WELCOME AND INTRODUCTION
2 (9:10 a.m.)
3 MR. IRVING: I think we will get started. I
4 want to thank all of you for coming out today,
5 particularly our discussants for coming out today in
6 weather not even a duck could love. It's pretty bad
7 weather, but I'm happy -- I apologize for bringing
8 California weather here. El Nino strikes again. Thank
9 you for coming.
10 The purpose of today's conversation, as it's
11 been billed, is really to talk about things we haven't
12 been talking about here in Washington.
13 I think a lot of times here in Washington, or
14 all the time here in Washington I think all that matters
15 is what's happening inside the beltway, and I think
16 particularly in regard to telecommunications the focus has
17 been on things like regulations and legislation and
18 Congress and FCC, occasionally the Commerce Department,
19 and what we're doing in terms of examining
20 telecommunications, but really the exciting things are
21 happening outside of the beltway. Things that are
22 happening with entrepreneurs and investors in business,
23 women who are out there creating a new economy.
24 We heard a lot about the new economy, and today
25 we have around this table the men and women who are
3
1 creating that new economy.
2 I'm excited to talk about something other than
3 legislative gridlock or regulatory reform. Let's talk
4 about investment and talk about what we're bringing
5 consumers, and talk about how we're creating jobs, and
6 talk about where we're going and where we should be going
7 in the 21st Century, talking about opportunities
8 internationally. I think the men and women around this
9 table are as qualified as anyone in the world to talk
10 about those kinds of issues.
11 I could spend a lot of time yakking this
12 morning, but I'm not going to. I'm going to instead turn
13 to introducing people around the table, but one thing I'm
14 hopeful -- the folks who come let me have sense of what
15 this discussion is about and gave me some broad outlines
16 of what the questions would be, but I'm a New Yorker who's
17 spent most of my life in Washington. That means I like a
18 little conflict. I like a little give-and-take.
19 I hope that as Ed Markey, who was my boss for 6
20 years of my life always said, if two people agree on
21 absolutely everything one of them is not necessary. There
22 are 15 people around this table. I don't expect they will
23 have the same view on these issues, and I'm looking
24 forward to proving how necessary each of us is to this
25 discussions this morning by having some good robust debate
4
1 and discussion.
2 I don't want to embarrass anybody, but I do
3 think there are some interesting different perspectives,
4 and we would like to share them with the audience.
5 You should also take advantage of some of the
6 new technologies as we're meeting here today. People
7 everywhere in the world who have access to the Internet
8 and real audio software will have the opportunity to
9 follow us live.
10 I was talking to Garrett. Even those people who
11 aren't wired in, if they have their Ricochet or other
12 wireless device we'll have the ability to have this live.
13 Gary I have known for a while, and I hope
14 that -- his laptop's sitting right in front of him, and it
15 shows just how quickly this industry has changed. When I
16 started this job in 1993 we didn't have the capacity to
17 broadcast it, and nobody had the capacity to receive it
18 except for a few people, because this technology just
19 wasn't there.
20 I was going to talk about some of the statistics
21 that are going on, but I think most of you know how
22 important these industries are to our economy. 450,000
23 new jobs between 1990 and 1996 were created by the
24 software computer and allied industries, a 58-percent
25 jump, 1.1 million communications service industry jobs, 12
5
1 million Internet hosts as of July 1996 out of 20 million
2 worldwide.
3 The number of access lines in the United States,
4 intel telephony, has been growing at a rate twice that
5 over the last 5 years. Look at the historic trends over
6 the last 5 years. The rate of telephony access lines has
7 been doubling. CLEC's is now an industry with about 2.6
8 percent of all local telephone revenues. The top 10
9 CLEC's have switches in 132 cities and 33 States.
10 Publicly traded CLEC's have raised $14 billion
11 in capital since passage of the act. Total market cap is
12 $20 billion. Long distance rates are trending downward.
13 Local telephone rates are steady. Smaller long distance
14 companies have increased their share of the market sine
15 1995 from 17 percent to 24 percent, and 470
16 interconnection agreements in the 2 years since the act
17 was passed.
18 Cable rates, while they are increasing faster
19 than inflation, cable operators operating the facilities,
20 20 percent of all cable homes presently are passed by two-
21 way plant, allowing for the deployment of interactive on-
22 line services. Fiber optics increased by 27 percent in
23 the cable industry in the past year.
24 High speed cable modems are available or
25 accessible by 9.5 million cable households, although only
6
1 about 75,000 cable households presently take them.
2 The DBS industry has been growing, doubling --
3 doubled since the passage of the act, the number of
4 subscribers.
5 Cable phone service, the cable phone service has
6 reached interconnection agreements in 37 States. Cox,
7 TCI, Cablevision, Jones are all selling some form of cable
8 telephony. Open technical standards are making sure that
9 the new generation of set top boxes are interoperable.
10 When you look at those kinds of issues --
11 there's one other thing I want to know. The total value
12 of IPO's, initial public offerings in the 2 years after
13 the Telecom Act was $3.5 billion, and the total values of
14 the IPO's in the 2 years prior to the Telecom Act was $1.5
15 million, so we had a doubling in the number of IPO's in
16 the years after the act.
17 We're talking about incredible opportunity,
18 incredible investment. A lot of wealth is being created,
19 a lot of jobs are being created, but really I think the
20 American consumer is the one who is going to benefit from
21 these new choices and these new industries.
22 What I'm going to do now is briefly talk about
23 who we have here today. What I'm going to do is, I'm
24 going to talk about who they are as opposed to what
25 they've done, and I think everybody who's gotten a packet
7
1 can find out the outstanding academic achievement and the
2 employment history of the people around the table.
3 Instead, I want to talk about what they're doing now,
4 because that maybe fits more into what we're going to talk
5 about.
6 Let me start on my left and introduce Debra
7 Berlyn. Ms. Berlyn cofounded the Competition Policy
8 Institute in April 1996 and serves as executive director
9 of this nonprofit organization. CPI was established to
10 develop and advocate policies to bring development, the
11 benefits of competition to consumers of telecommunications
12 and NG services, and Ms. Berlyn was executive director of
13 NASUCA for 6 years.
14 NASUCA, as most of you know, is responsible
15 for -- NASUCA is the National Association of State Utility
16 Consumer Advocates, and she's had a long and distinguished
17 career advocating for the rights of consumers.
18 Next to Ms. Berlyn is Howard Taylor, the
19 president and chief operating officer of Winstar
20 broadband. Mr. Taylor is responsible for developing and
21 implementing Winstar's strategy for providing data, video,
22 and Internet services. Winstar offers a calling long
23 distance and Internet access, and is building a national
24 local switch telephone network and wireless fiber
25 technology that they are using as fixed broadband wireless
8
1 communication services provided through their licensees in
2 the 38 gH frequency.
3 Next to him, over in the corner, is Gary Green,
4 who is Metricom's executive vice president and its chief
5 operating officer since October 1991. Metricom is a
6 leader in the emerging market for wireless data
7 communications.
8 Metricom develops license-free high performance
9 products featuring advanced broad spectrum package radio
10 technology which sends data across a network of
11 intelligent radio nodes. They're most well-known,
12 possibly, for Ricochet, which offers affordable monthly
13 subscriptions to its wireless service at flat rates
14 between E-mail accounts. Ricochet is used in the San
15 Francisco Bay Area, Seattle, Washington, D.C. and on
16 corporate and university campuses across the Nation.
17 NTIA subscribes to Ricochet and I have had the
18 pleasure of using the product for more than a year now.
19 Next to Gary is Kathy Wallman. Many of you know
20 Kathy from her service as common carrier bureau chief and
21 also as the Deputy Assistant to the President for Economic
22 Policy Counselor and the Chief of Staff at the National
23 Economic Council. She was also a deputy counsel at the
24 White House.
25 Kathy now heads Wallman Strategic Consulting,
9
1 where she provides strategic advice in the areas of
2 telecommunications, information technology, and other
3 infrastructure issues such as retail competition
4 electricity. She's also presently a visiting scholar at
5 Georgetown University Law Center, and I think no one
6 probably in this city is more responsible for this
7 Nation's telecommunications policy than Kathy through her
8 tenure at the FCC and her tenure at the White House, and
9 she brings a unique perspective this morning.
10 Then we have Tom Koutsky, assistant general
11 counsel from Covad Communications. Covad is a start-up
12 telecommunications carrier that represents a new class of
13 telecommunications carrier dedicated to carrying high
14 speed access solutions connecting corporations to the home
15 and connecting small businesses to the Internet.
16 Covad provides a compelling high speed remote
17 access solution for corporations that want to realize the
18 benefit of connecting corporate lines to employees who
19 want to work at home, known as teleworkers.
20 Terry McGarty is the managing director of
21 Telmarc, a company he founded in 1984 to invest in and
22 manage several high tech start-up ventures. He is also
23 currently chairman and CEO of Zephyr Telecommunications,
24 an international record carrier, the chairman of COMAV, a
25 competitive local exchange company, and managing director
10
1 of Forceconnect, a venture capital company. In his spare
2 time he's training for the Olympic marathon.
3 Where do you find time to do all of these
4 things, much less hold down one job? I mean, I talk fast,
5 but I couldn't think that fast.
6 (Laughter.)
7 MR. IRVING: Mr. McGarty has been active in
8 telecom for over 30 years.
9 Next to him is David Conn, associate general
10 counsel of McLeod USA Inc. in Cedar Rapids, Iowa. McLeod
11 and a subsidiary provides local and long distance
12 telecommunications services to businesses and residential
13 customers in Iowa, Illinois, Indiana, Wisconsin,
14 Minnesota, South Dakota, North Dakota, Wyoming, and
15 Colorado. The company's objective is to become a leading
16 provider of telecommunications services across this
17 country.
18 Next to Mr. Conn is Kathy Brown. Kathy serves
19 as the Associate Administrator of NTIA's Office of Policy
20 Analysis and Development. Kathy has also served as a
21 senior staff of the New York State Public Service
22 Commission.
23 Most of you I hope know her, but again, in terms
24 of being an architect of this administration's policy,
25 telecommunications policy, and maybe being the best person
11
1 in the administration bridging the interests of States,
2 consumers, and what the Federal Government's trying to do,
3 Kathy has been a linchpin in our efforts. Nothing we've
4 done in the last 3 years could have been done without her.
5 And some of you should know, she left a great
6 job in New York to come down to Washington, D.C. to help
7 us out and was about 5 minutes from being abolished by the
8 Congress, but she came here and Congress saved us, and we
9 thank Kathy for her contributions over the last several
10 years.
11 Next to Kathy is Lior Haramaty, the cofounder
12 for Vocaltec Communications. Vocaltec is the Internet
13 phone company delivering Internet dial tone to businesses
14 and homes for multimedia communications worldwide.
15 Vocaltec Communications software enables audio, video,
16 data text, and collaborative communication between
17 personal computers and other devices over the Net. It
18 pioneered the market in telephony with introduction of
19 Internet phone in 1995.
20 We are waiting for Daniel Ernst. We hope he'll
21 get here, but as many of you know, if you are relying on
22 certain modes of transportation getting here wasn't easy
23 this morning.
24 Speaking of getting here not being easy this
25 morning, we have substituted Lisa Rosenblum for Cherie
12
1 Kiser. Thank you, Cherie, for pinch-hitting at a moment's
2 notice.
3 Cablevision is being represented very ably by
4 Ms. Kiser, and Cablevision owns and operates cable
5 television systems, has ownership interests in and manages
6 other cable television systems, and offers residential
7 telephone service to its light path through its subsidiary
8 and offers high speed Internet service through cable modem
9 facilities.
10 Then we have Gordon Hutchins, a member of the
11 board of directors of Star Telecommunications, an
12 international long distance carrier headquartered in Santa
13 Barbara. Star specializes in supplying wholesale long
14 distance services to switch-based services throughout the
15 world. Star's customers include all of the top U.S.
16 telecom carriers as well as many international facilities-
17 based providers.
18 Dan and I had the pleasure of sharing some time
19 in South Africa at the Information Development Conference
20 a few years ago, and he had a good chance to talk about
21 some of the developing countries and what some of the
22 developing economies are doing with opening up new
23 markets.
24 Next to him is Barry Schwartz, yet another
25 architect of this administration telecommunications
13
1 policy. From April '95 to June '96, Dr. Schwartz served
2 as senior economist on the President's Council of Economic
3 Advisers. We focused on the Telecommunications Act. He
4 is presently a professor of economics at Georgetown
5 University and has spent considerable time in the last
6 year analyzing the Bell Company entry into long distance
7 telecommunications services and consulting for
8 international organizations and private clients.
9 Thank you, Dr. Schwartz.
10 And finally, last but not least is Frank
11 Plumley, the director of Standard & Poor's corporate
12 finance department. As a member of the telecommunications
13 rating group, Mr. Plumley follows local and long distance
14 telecommunications companies, is involved in reading debt.
15 Standard & Poor's offers many consumer services.
16 I hope I didn't horribly mutilate somebody's
17 name in introducing you, and I do want to thank each of
18 you for your presence here today. We're going to try and
19 make this as interactive as possible and try to get you
20 guys engaged in a conversation. I could hold a
21 conversation with myself for 2-1/2 hours, but that is not
22 the purpose of this morning.
23 Let me turn to Debra. We have gone around the
24 table, and I think it is fair to say that 5 years ago or 6
25 years ago some of the companies we are talking about
14
1 weren't even conceivable. Nobody knew they were existing,
2 and the glimmer of new ideas that really started some of
3 these things. What services are available to business
4 consumers that weren't available 2 years ago. What are we
5 looking at? What are the new things people should know
6 about?
7 MS. BERLYN: Well, thanks, Larry. First of all,
8 let me than you and Kathy and NTIA for putting this forum
9 together. I'm looking forward to hearing from many of the
10 folks around this table as well.
11 This is a dynamic industry, and we have seen the
12 growth of technologies and new services over the course of
13 the past 2 years. A couple to highlight, actually you
14 mentioned the cable modems and digital subscriber line
15 high quality, high speed data services are just going to
16 start to reach consumers.
17 Other services that consumers have taken
18 advantage of already, dial around, for example, offers
19 consumers an easy way to reduce their long distance prices
20 and a convenient way to do that.
21 Also, prepaid calling cards, which have taken
22 the market by storm. We have seen every picture we can
23 imagine, every company we can imagine on prepaid calling
24 cards, and these have been a great service to consumers.
25 They're used by many families to give their kids when
15
1 they're on the road so the kids can call home with ease.
2 So that's another service that we have seen.
3 As you mentioned, there are lots of different
4 companies around this table that wouldn't be here several
5 years ago, which we can all assume means that choice is on
6 its way. For residential consumers, that choice is still
7 something we are looking forward to. For business
8 consumers, choice is starting to happen, albeit it at a
9 rather small pace, but it is arising.
10 So from a consumer's perspective we are looking
11 forward to choice opportunity and also to the new
12 technologies that we expect to continue to arise.
13 MR. IRVING: Gary, could you share the
14 entrepreneur's perspective? What are the benefits that
15 consumers have for entrepreneurial developments, looking
16 from your perspective? What's happened over the last
17 couple of years?
18 MR. GREEN: Well, we have thought outside the
19 box, Larry, I think is the best way to say it. We looked
20 at what we thought was missing. As we looked particularly
21 at wireless offerings, costs were too high, performance
22 was too low. Everything was too hard to use and take the
23 perspective of some of the folks who were looking at the
24 more conventional telephone network. We said, hey, we
25 think people want to carry that with them.
16
1 We're less and less tied to computers that don't
2 communicate. We want that freedom to communicate wherever
3 we are, and we set off to provide an entirely different
4 approach as a solution to that, and so we did. We went
5 off and we did a packet switch rather than connection-
6 oriented transmissions.
7 We went off and used license-free, rather than
8 licensed spectrum, so that costs were low and we tried to
9 provide to people that performance, that cost structure
10 that regular, ordinary people could afford, and that's --
11 some people are taking advantage of it. That's what's
12 happening.
13 MR. IRVING: Kathy, where do you expect us to go
14 in the next couple of years?
15 MS. WALLMAN: I think there are going to be some
16 interesting and exciting developments over the next couple
17 of years that are mostly to do with transparency of
18 distance, largely owing to the development of packet
19 switch networks.
20 I think you're going to see a dramatic
21 development in Internet telephony all over the lines.
22 You're already seeing it, but I think you're going to see
23 a new kind of network where voice begins to migrate to
24 packet switch networks, and this will drive down the cost
25 of networks and it will fundamentally challenge the
17
1 economics of both the LEC industry and the excess charges
2 and the long distance industry which now many of the
3 companies still charge based upon a time and distance.
4 And so I think with the migration of the packet
5 switch networks you're going to see greater transparency
6 of distance and it will challenge the fundamentals of a
7 lot of businesses. It will also mean exciting
8 developments in telemedicine and in distance learning as
9 the cost of providing those services go down.
10 I think there will also be some important
11 developments within the conventional future envisioned by
12 the act. I think somewhere in the -- 1 year from now to 2
13 years from now you will see RBOC entry into long distance,
14 which will be a good development to the extent we can do a
15 good job of making sure that the conventional existing
16 local networks are really open to competition, and I think
17 you will see the trading of hostages on the bridge to make
18 that happen somewhere in 12 to 18 months from now.
19 MR. IRVING: Lior, is Kathy right?
20 MR. HARAMATY: Well, as someone who is using
21 Internet telephony already -- and, of course, it's natural
22 for me. I'm using telephony every day talking to Israel
23 and to my family, and so on. I believe that not only she
24 is right, it will be much faster than what she just said.
25 We already have companies that are selling services on
18
1 Internet telephony worldwide, and I think we will find out
2 that people are adopting this and service providers are
3 adopting this technology much faster than what we think.
4 MR. IRVING: Now, there was a semi-famous quote
5 in the daily a couple of days ago. I guess it was Cox
6 basically pooh-poohing the idea that Internet telephony
7 was a near-term, viable alternative to traditional
8 telephony. What does he know that you don't know, or what
9 do you know that he doesn't know?
10 MR. HARAMATY: What do I know? Well, I don't
11 think that Internet telephony has a great window of
12 opportunity right now for cost savings and building lower
13 cost infrastructures. I believe that in the future the
14 Internet telephony will be not only audio but will be
15 video applications with screen-sharing. Sales people will
16 be able to show you what they want to sell you, not just
17 talk about it, and so on.
18 And so I believe that eventually what we will
19 see is one big wire connecting to the household or the
20 business that will carry the data and audio all together,
21 and you will be able to buy services by utilizing as much
22 as you want out of this, and this is what we see as the
23 future, so cost-saving and lower cost infrastructure is a
24 window of opportunity for a few years from now, but media-
25 rich applications is where we're heading to.
19
1 MR. IRVING: Mr. Ernst, thanks for joining us.
2 I know you had a hard time getting here. We appreciate
3 that you were able to get here at all.
4 You've heard some predictions of the future.
5 What do you think, from your perspective? Are those
6 predictions what consumers and businesses are demanding?
7 MR. ERNST: Well, absolutely. The consumers and
8 businesses are continuing to demand more and more types of
9 services and technologies. Today, 75 percent of
10 businesses have some access, but 57 percent of those are
11 dial-up access in the home in something like 17 to 20
12 percent of households, but to look at this in terms of
13 impact in the future and to say, well, this will happen
14 tomorrow and this new technology, all those things require
15 a capital investment and time to build the new network.
16 Something like Internet telephony doesn't
17 replace the existing infrastructure. It must employ the
18 existing infrastructure in the short to intermediate and
19 sometimes long term.
20 The incumbent local networks are still the way
21 to get to the customers, and it is the companies that have
22 been building replacements to those, the CLEC's, the
23 Winstars, MFS and Worldcom PCG, which may soon be AT&T,
24 that have actually designed new networks to reach the
25 customer, and the new long distance networks like Quest,
20
1 or Peter Hewitt's new group, but those things are based
2 upon current technology and take time to develop.
3 This thing will not happen overnight, but you
4 can't say that they're not going to change things
5 tomorrow.
6 MR. IRVING: Maybe you and Frank can talk about
7 that. Are the investors confident? Is this something
8 they feel should be done?
9 MR. PLUMLEY: The last seven business days
10 CLEC's raised about $1 billion in the capital markets, so
11 it's a fair bet to say the money is there.
12 MR. IRVING: I can go report to the President
13 and the Secretary of Commerce the economy is still strong?
14 MR. PLUMLEY: Oh, yes, at least based on Wall
15 Street.
16 MR. ERNST: I think an analogy is that people
17 say, well, are investors continuing to invest in what
18 amounts to a redundant network in an industry which
19 exhibits both economies of scale and scope, and it turns
20 out you do. Consumers and businesses are demanding it
21 left and right. Where there's an opportunity the CLEC's
22 penetration is very high.
23 Take a long distance network, where we might
24 have thought that over 12, 13 years since the modified
25 Bell judgment broke up AT&T but really 25 years since the
21
1 MCI put in its first call. Now, we thought long distance
2 competition was developed to the point to ensure
3 competitive market. We have three major networks.
4 It turns out that's not right. All of a sudden,
5 you have IXT Communications and new groups all planning
6 new Nation-wide LD networks. In other words, they're
7 putting in capital on t he ground. They're not reselling,
8 so it turns out the markets are responding favorably to
9 people who take the long-term strategy to invest in
10 capital that they know they can use.
11 MR. IRVING: We've heard a little bit about
12 this. Dan and Howard, maybe we can talk a little bit
13 about what you have to do in this new environment, the
14 post Telecom Act, huge investment, 400, 600 different long
15 distance companies, all kinds of competition in the local
16 markets. What do you have to do to win over consumers and
17 retain their loyalty?
18 I'll be honest, when I go to the supermarket I
19 buy whatever detergent I have a coupon for, or is on sale.
20 How do you avoid becoming Tide one week and -- I'm trying
21 to think of what else I might buy, but --
22 MR. HUTCHINS: I think from our perspective it's
23 really two-phased. The first option is price. Like you
24 say, the coupon, or whatever you get at discount. Star's
25 in the international business, and generally when
22
1 somebody's attracted to us either at a wholesale or on now
2 a retail level as well, it's because we offer access to a
3 given location at a price that is less than what they
4 maybe pay now.
5 Long-term, no. It's got to be service. And so
6 there's sort of a migration. Everybody gets into the
7 marketplace. They're competing with low rates to certain
8 countries, particularly with high rate locations that you
9 see right now, particularly in Asia and South America.
10 But as that sort of competitive battle continues
11 you need to develop brand loyalty, or you're in big
12 trouble, so you save with a coupon in Tide, whatever. We
13 have to find ways, and we're trying very hard to find ways
14 to get that brand loyalty to retain the customer maybe by
15 offering them other promotions on other international
16 destinations they are calling.
17 More and more we're starting to get down to
18 domestic service as well, because people may have chosen
19 the international and say, what else can you do for me.
20 MR. TAYLOR: I agree with Dan. I mean, speed to
21 market in terms of customer service, all those things are
22 very important.
23 One of the things that we're concentrating on in
24 Winstar is not being encumbered with many of the legacy
25 systems that are there today with your traditional
23
1 telephone and telecommunications companies. We have the
2 opportunity of developing an infrastructure based on where
3 we want things to be versus where they are.
4 We're looking to brand or services a little
5 differently. We're thinking out of the box. We talked
6 about voice-over telephony and that type of services from
7 an Internet standpoint. We're looking at building our
8 network with that in mind, that the needs of the consumers
9 for residential, small and medium businesses will not be
10 really voice communications, because a lot of what we
11 talked about is things that are there today.
12 And building a network, putting things on a
13 network that is being built today, we have the opportunity
14 at Winstar to develop our network where we think things
15 will be, and this is the convergence of content,
16 communications, and computer technology, and build our
17 network to -- with that in mind, if that's what businesses
18 and consumers will be demanding, and from that standpoint
19 voice will be a very small piece of that. We'll be able
20 to put content over that.
21 We'll be able to provide unique services to
22 customers that aren't there today, and businesses are
23 really asking for that. They're asking for choice,
24 they're asking for cost-effectiveness, but they're also
25 asking for unique solutions that help them be more
24
1 profitable in the market.
2 MR. IRVING: So Terry, is branding important?
3 MR. McGARTY: I think branding is important.
4 Our experience, however, is that we look at this as really
5 two ways, new products and higher prices, or the same
6 product at a more competitive price, and frequently, at
7 least as we target the business sector, pricing is a key
8 factor.
9 Quality of service can kill you after you make
10 the sale, so you've got to be able to deliver it with
11 quality of service, and that's a very broadly defined term
12 and what we try to do is develop brand loyalty through an
13 ongoing relationship with that customer. Our motto is, if
14 all else fails, listen to the customer.
15 (Laughter.)
16 MR. IRVING: I think about my own personal
17 experience. I was an early adopter of a cellular phone
18 and had one for years, and then I got a Government one,
19 and it was big and it was ugly and it was heavy, and the
20 new technology PCS came along. It was cheaper, and it gave
21 me more services, and I immediately, both for my personal
22 use, went out and bought a PCS services.
23 And of course, the Government requires that I
24 keep a cellular service, a big, heavy phone for about 2
25 years until they finally changed it, but it raises a
25
1 question. It wasn't just price that drove me to the new
2 technology. It was a nonprice factor.
3 What is driving consumers out there? Is it
4 price, is it nonprice, is it customer service, product
5 features? What are consumers out there looking for? What
6 are businesses looking for in terms of what they make
7 their decisions on?
8 DR. SCHWARTZ: Well, first of all, Larry, you've
9 got more than I did, because I didn't even get a cellular
10 phone, but there are people in this room that can speak
11 much better to the details of what consumers want and what
12 business can offer.
13 As an economist that's been involved in public
14 policy, the perspective I take is that they want both.
15 They want the same products at lower prices, or they want
16 new and better products or simply different products.
17 Our job as policymakers is to make sure that the
18 environment is there for businesses to try an figure out
19 what works and what doesn't, and to get rid of the
20 artificial impediments.
21 On the price side, you can't really expect
22 entrants to compete for cross-subsidized local service
23 when the incumbent is cross-subsidizing local service by
24 overpricing other things and the entrant doesn't have the
25 ability to do that.
26
1 One major goal of the Telecom Act was to replace
2 the system of implicit cross-subsidies through the
3 incumbent LEC's pricing structure with a system of
4 explicit, targeted, and competitively neutral subsidies
5 where entrants also could qualify for subsidies to serve
6 so-called high cost areas or other groups.
7 I suspect, and I would like to raise this as a
8 question, that part of the delay in residential
9 competition can be attributed to a rather slow pace of
10 reforming universal service/cross-subsidies.
11 The other point to make is that in
12 telecommunications you need to be able to communicate, and
13 I guess that's the point, but what that means is that
14 entrants are at a considerable disadvantage vis-a-vis an
15 incumbent who is sitting on a big customer base, if the
16 incumbent wants to make life difficult for them.
17 At a minimum an entrant needs to be able to have
18 its customers interconnect with communicate with the
19 incumbent, and secondly it has to be able to switch over
20 customers to the incumbent seamlessly.
21 Now, our Telecom Act imposes additional
22 obligations beyond that, such as resale and unbundling of
23 networks, but even just the first two having smooth
24 switchover of customers and allowing smoother traffic
25 could be weapons used by incumbents, and we should be on
27
1 the lookout for that.
2 MR. IRVING: With regard to cellular phones
3 versus PCS, about 2 days ago I got a mailing from a former
4 cellular provider at a price point that was equal to or
5 better than the price I am paying. I could get the
6 equivalent services and I could get a nice little snazzy
7 new phone.
8 The point I am trying to make is, when you get
9 competition, it drove me one way, but as soon as you get
10 competition and they realize that it drove me away,
11 they're trying to pull me back by upping the ante and
12 putting something better out there, and I guess that leads
13 us inevitably to the conversation about, one of the few
14 places where I think people really think that we need to
15 do a little bit more with regard to competition, the local
16 exchange market.
17 David, what kind of services are CLEC's
18 providing, and what do they anticipate offering over the
19 next year or several years that's going to really help
20 change the marketplace for local telephony?
21 MR. CONN: We've got two things going on in our
22 company. We have our standard product offering that we've
23 had really since the beginning of 1994, predating the
24 Telecom Act, which is an integrated package of local and
25 long distance service. The price point is typically, at
28
1 least for businesses, the same as the incumbent pricing
2 for local service, but you get some features.
3 Our typical package for resident service is
4 priced a little above the price point for standard flat
5 rate resident service, but again, the customer gets
6 features that aren't available -- three-way calling, call
7 waiting -- and our marketing people have been very
8 successful in making customers understand the value of
9 those services.
10 In addition to that, you can add on paging, you
11 can add on Internet access, you can add on voice mail to
12 any of those standard packages.
13 In conjunction with that, or really in addition
14 to it, starting this year we're going to be trialing in
15 Cedar Rapids, Iowa a service provided over our own
16 broadband network connected to our own switch in Cedar
17 Rapids that will include eventually both entertainment
18 video services and telephony over the same plan and, in
19 fact, we have a franchise election coming up in Cedar
20 Rapids in about a month to get a cable franchise to
21 provide those video services.
22 So in terms of the services we expect to
23 provide, really we're pursuing two tracks. One is more
24 the traditional telephony services, although integrated
25 together, and the second is a package that will integrate
29
1 both telephony and video services.
2 MR. IRVING: Well, let me start opening this up.
3 We've talked about the investment levels in long distance,
4 and the inner exchange areas. What's happening with
5 regard to investment in broadband network by CLEC's, and
6 what investors are looking at the CLEC's?
7 What is going to qualify as the success, and
8 what kind of investment are we looking at in CLEC's in the
9 next few years? Are they as ambitious as those in the
10 interexchange long distance industry? Frank.
11 MR. PLUMLEY: Just take Teleport as an example.
12 AT&T justified the purchase by saying, well, gee, CLEC's
13 is 13 to 15 time revenue. Teleport's got a revenue rate
14 of about $1/2 billion a year. It could have a revenue run
15 rate of about $1 billion a year in 1999, and AT&T has
16 promised investors it will squeeze $1-1/4 billion in
17 pretax earnings out of that billion-dollar revenue stream.
18 Investor expectations are a little overheated,
19 in my opinion. I could be wrong. But if you look at the
20 situation we have with CLEC's, the thing that I think it's
21 most analogous to is the situation where the PC market
22 opened up and you had lots and lots of hot companies doing
23 PC's. Folks invested in Kaypro and Commodore didn't do so
24 well. People who invested in Apple did fairly well.
25 So it's kind of a mixed bag. Right now there's
30
1 a lot of hype, a lot of interest, a lot of heat, a lot of
2 sizzle. A lot of these companies are going to make it. A
3 lot of companies nobody's ever heard of. I'd never heard
4 of Covad until a couple of days ago.
5 It's just that there's a lot out there I'm not
6 familiar with, and I follow the industry, but there are
7 new players every day in the market, and right now just
8 about anybody can attract some level of investment. Down
9 the road there will be some kind of shake-out and
10 bankruptcies, mergers, the usual.
11 MR. ERNST: Overall I think that Frank is right.
12 It has been overheated. But if you look at the investor
13 reports about a year ago when the expectations that they
14 had for the stock prices and the capitalization of the
15 companies were a little more realistic, the recent
16 acquisition strategies by Worldcom and now AT&T and the
17 CLEC's have upped the ante on the potential value from an
18 acquisition standpoint.
19 However, in the long run the capital that they
20 lay in the ground, even if the company were to go
21 bankrupt, is productive capital. Fiber optic systems and
22 digital switch will always produce something, so I'm not
23 sure.
24 I've been impressed with sort of the long-term
25 view that Wall Street has taken on the CLEC's, because
31
1 they're not expected to go positive for 5 or 6 years, and
2 they've already been operational for 5 or 6 years, so
3 that -- I think at a time in the country when people tend
4 to criticize Wall Street for looking very short-term, that
5 they've actually taken a very long-term view with regards
6 to investment in network-based competitors to both long
7 distance and local.
8 MR. TAYLOR: From Winstar's standpoint it's
9 getting kind of lonely out there, since we're the only
10 independent national facilities-based CLEC that's out
11 there in the market. We kind of look at that as an
12 opportunity for us to expand beyond where we are.
13 We have made investments in ISP in the
14 marketplace. We have acquired a Nation-wide packet and
15 frame relay company, PACNET, and I think from an
16 investor's standpoint not only have we been able to
17 acquire funds, but if you look from a market
18 capitalization standpoint we have now exceeded and go well
19 over $1 billion in terms of market capitalization.
20 We see ourselves being a bit positive by the end
21 of '99, and we see the prospects in terms of this market
22 and the companies that are really flooding to our
23 technology growing on a daily basis, so the market has
24 been very kind to us, especially when you look at what
25 happened yesterday with one of the companies.
32
1 As the market went down, Winstar went up over 3
2 points from a market standpoint, and it's really what has
3 happened in the last few months in terms of confidence
4 that has grown in this technology, but also in where we're
5 headed to the CLEC marketplace.
6 MR. IRVING: Tom, did you want to explain why
7 Covad should have been on the tips of a lot of tongues?
8 MR. KOUTSKY: Actually, it's interesting to hear
9 about the various different perspectives. Covad has a
10 very different orientation towards the telecom industry.
11 We're a very focused company.
12 A lot of the issues with regard to
13 infrastructure investment, what investors expect, are
14 still based in my mind upon the fiber CLEC model, where a
15 fiber carrier digs up a street, lays some fiber. Winstar
16 is different, but Winstar shares some of the
17 characteristics of that in the need to build up an
18 infrastructure for a kind of if-you-build-it-they-will-
19 come model.
20 Covad's market entry strategy is radically
21 different from that. We're a very focused company upon
22 deploying digital subscriber-line technology over existing
23 telephone company plant, and Covad wouldn't exist without
24 the unbundling provisions of the 1996 act, which permit us
25 to colocate in an incumbent's central office and obtain
33
1 access to the copper loop that terminates at that office
2 or serving wire center, and then we provide a range of
3 different bandwidths over any local loop to our customers.
4 That form of entry is in my opinion very
5 different than the fiber-based CLEC and the infrastructure
6 investment is more scaled to your actual coverage area and
7 also most of the equipment costs, in terms of the DSL
8 technology, comes after you've signed up a customer in
9 terms of the customer acquires a modem, we have to put
10 something in the central office on that side.
11 So our cost structure is very different, and
12 perhaps a little more similar to Metricom's, if I had to
13 pick an analogy.
14 So we face the same capital market that
15 everybody else does, but our entry strategy is very
16 different. We're a focused company, and computer
17 networking strategies look at this as a level 2 company.
18 We provide level 2 communications.
19 The Peter Hewitt entry is called level 3 for a
20 reason, because he's operating at a level above us.
21 Vocaltec should be very interested in the rapid deployment
22 of the Covad services because Vocaltec operates right on
23 top of that, right on top of our network, and we are
24 application-agnostic in terms of what applications are
25 actually run over our network. We just provide the big
34
1 pipe, as it were.
2 So our entry model is a little bit different
3 than the traditional CLEC entry model, and it's actually
4 been interesting to see how that plays through in terms
5 of, you know, explaining to investors and things like that
6 about how Covad is in business and what Covad's business
7 plan is.
8 MR. McGARTY: I think from our perspective on
9 our CLEC side, on investments, they're kind of built on
10 some of the things we've done in wireless, where we took a
11 look at what the act had done, and a key issue of the act
12 was the unbundling, and we posed the question of what's
13 the least amount we have to get from, in the original case
14 NYNEX, now Bell Atlantic, so our independence is de
15 minimis, and then what is the target market we want to go
16 after, that is, where can you make the biggest killing?
17 The answer to that seems at least in our case --
18 I'll take Boston as an example. We have the donut
19 strategy. Ironically, our first client was Dunkin Donuts,
20 so there's a symbolism there -- but just go after 128 to
21 495 and mainly because 20 percent of the switches there
22 are digital, 80 percent are electronic, they're all 1-A
23 switches, so you can't do ISDN. You can't do a bunch of
24 stuff. So there was some tough issues. You could modify
25 things at the top.
35
1 Secondly, go after the business customer where
2 the target revenues are about $100 a month. Why? Because
3 we pay $8 a month for a local loop, so you've got a gross
4 margin of 92 percent, not a bad place to start.
5 You pay half of $50 to a long distance carrier,
6 because you've got a gross margin of 50 percent there, so
7 it costs you $25 to a long distance carrier. It costs you
8 about $6 to $8 a month for operations and support, oh,
9 another $15 for sales, and you're looking at roughly a 40-
10 percent pretax margin in certain markets, and all you have
11 to do is drop your price 5 percent because you can do all
12 of these things off of a digital switch that the
13 electronic switches can't do, so this is some cherry-
14 picking.
15 The tasks in a lot of these cases are posed
16 solely for business and not residential, and it addresses
17 the issue you have that we look at the residential market
18 as highly problematic, because there is no local measured
19 service, so as we start looking at it, we just can't
20 figure out how we can provide residential service when the
21 local tariff is, you know, $9 or $10 a month and we're
22 paying $8 a month.
23 And by the way, I'm not going to argue over
24 whether $8 is the right number or not. It's just that
25 there is a distortion on the residential side, for better
36
1 or for worse, that says we can't service the residential
2 but we can make a killing in the business market.
3 Now, whether that's the way it begins, that's
4 the way it ends, I don't know, but when you add the
5 numbers up it's a very simple back-of-the-envelope
6 calculation and it says, gee, there's the opportunity, and
7 I think Winstar probably looks at very similar type
8 numbers that we do, and that's the key issue, and we do
9 put some fiber in.
10 MR. IRVING: I was going to turn to Cherie. Do
11 you have the answer? Is the cable industry going to be
12 where the residential consumer can look for telephone
13 service?
14 MS. KISER: I think Cablevision definitely is
15 going to -- I'm listening to Terrence and Tom.
16 Interconnection is the most important thing, at least for
17 Cablevision rather than the unbundling, because we have
18 the facilities.
19 The residential market is definitely a market
20 we're vigorously perusing, and in fact Cablevision rolled
21 out a residential trial in the fourth quarter of '97 in
22 New York in Nassau County, Long Island. It is expanding
23 that to all of Long Island presently and plans to roll out
24 the tristate area of New Jersey, New York, and Connecticut
25 residential offering -- Connecticut in early '98.
37
1 So for us, because we are facilities based, the
2 issues are slightly different. That's a market we do have
3 access to. We believe there are margins that are rational
4 to pursue, and we are doing it.
5 MR. IRVING: You can make it in business and
6 residential?
7 MS. KISER: We definitely can. The one thing
8 that we're experiencing is the pricing, and pricing is
9 important, and I think both Gordon and Marius mentioned
10 this, that service quality is also very important.
11 So we are somewhat restricted by the local
12 exchange carrier because we are dependent upon operational
13 systems and such, but the pricing and pricing our product,
14 the consumer seems to be interested in innovative pricing.
15 It's not so much, is it exactly less than what the
16 incumbent is offering, but what's the packaging, or
17 community of interest, which is a focus of Cablevision
18 system, because we think that, well, the local exchange
19 carrier may have a local calling service for a designated
20 area.
21 We can go beyond that community of interest
22 that's maybe more applicable to all of the residents of
23 Long Island. You know, maybe they don't care about
24 Manhattan, and that's just an example, of course, but the
25 other piece of it is, in some of the packaging it's
38
1 amazing how many consumers are very interested in
2 discounts on their cable service.
3 You know, if you have pricing as part of a
4 telephony offering that says, if you utilize your
5 telephone service to X dollars a month you will get a
6 certain percentage on your cable service, consumers are
7 very, very interested in that.
8 MR. IRVING: Let me ask you to give a
9 prediction. What's going to happen in the next year or
10 two with regard to cable industry provided telephone
11 service? Where do you see that going, and maybe we can
12 get marius and Kathy to chime in on this.
13 MS. KISER: Well, I think a lot of it is
14 contingent on the interfaces that you're able to obtain
15 from the incumbents. If that continues at the slow roll
16 that it is, cable companies are going to be restricted in
17 their ability to deliver these services to consumers, and
18 some of that is tied to the regulatory climate in each
19 particular State as well.
20 But at least from Cablevision's perspective, we
21 expect to be in the residential market in a big way in the
22 next 2 years in the tristate area of New Jersey, New York,
23 and Connecticut.
24 MS. WALLMAN: I would like to answer your
25 question and then touch on another point. I think the
39
1 question of cable deployment in telephony is really just a
2 question of pace.
3 I think that the act set in motion forces and
4 trends that are not going to be rolled back, and I think a
5 number of cable companies, including Cablevision, have
6 seen an opportunity here to provide services in a
7 different configuration and at some savings to consumers,
8 and I think those are forces that aren't going to be
9 pushed back, so I think it is just a question of pace.
10 MR. IRVING: So those folks who are sitting
11 there saying the act hasn't done much for us, 2 years
12 later everybody's going to have telephones hooked up to
13 their cable?
14 MS. WALLMAN: You know, the thing that's really
15 strange, when I was in the administration I did
16 electricity competition, too, and it was striking, the
17 differences in expectation and pace there and here.
18 In electricity, people on the Hill and people in
19 the industry are talking about a horizon that goes from 5
20 to 10 years to effectuate real competition, and here
21 somehow we adopted -- and this maybe the telecom version
22 of irrational exuberance, but we all got into the idea
23 this is going to happen overnight as soon as the act was
24 signed.
25 So I think that people have put in motion here
40
1 things that are going to be awfully good for the consumer
2 and the industry and the economy, but it is going to take
3 some time, and I think we shouldn't buy into this idea
4 that because it's not all done now it is a problem or a
5 failure.
6 I had one question. I grew up on Route 495 in
7 Massachusetts, Route 110, and the switches are really old.
8 We used to have 5-digit local dialing, and I'm wondering
9 whether there's some opportunity to consider here whether
10 there could be some sort of optionality for residential
11 customers.
12 There may be people out there who would be
13 willing to accept local measured service if they could get
14 this kind of speed, and I wonder whether you've explored
15 it with regulators there, or whether that is a
16 possibility.
17 MR. McGARTY: It's an interesting question,
18 because we work very closely with the regulators, and also
19 I would say some very good things about Bell Atlantic,
20 that they've been very cooperative and supportive, so
21 we've not had problems.
22 As a matter of fact, we are here to tell the
23 commission things are working very nicely, thank you very
24 much. The act is doing some things for us.
25 The issue really from our perspective is, since
41
1 we've run fiber to a CO, a central office, we have to have
2 a fixed number of access lines to start with, and so part
3 of the residential market is by going after business,
4 like, I get 200 or 300 at a clip, which is my break-even
5 point if I do residential, and if I get three here, seven
6 there and nine somewhere else, suddenly my economics get
7 distorted even if I have a local measured service.
8 So it really is -- just as you said, in the
9 early stages of this business we're only getting into it
10 at best. We're making economic decisions that may not
11 necessarily be the best in terms of policy. That is,
12 we're not going after the residences no matter what price
13 we can charge, because the real money to be made and the
14 returns, from an investor's perspective, are on the
15 businesses.
16 I think Howard would probably agree, so Howard,
17 maybe you want to comment.
18 MR. TAYLOR: I agree, and it's interesting, the
19 three questions -- and prior to coming to Winstar I spent
20 the prior 3 years at SNET, looking at competition and
21 having responsibility for the business market in
22 Connecticut, and the three questions that I always ask
23 myself, and now on the other side I ask myself in terms of
24 1) can I make money, can I really get a return to the
25 shareholders, and you've got to look at that.
42
1 In many cases on the residential side the
2 economies aren't there based on current tariffs that are
3 out there today, and that I think is inhibiting some
4 growth and movement in this whole area.
5 The other is, can I interconnect? Can I really
6 get the connections and interfaces that I need to be
7 successful with others to supply services to customers,
8 and the other is, can I really service my customers, and
9 from that standpoint how can I get orders into the system
10 and be able to track them and interface with the long term
11 legacy systems that are there?
12 And that's not as easy as what we think, and
13 that's probably more -- it's not a technological benefit,
14 it is more people, and it's more systems that are there,
15 that I think it is holding things back and progress being
16 made.
17 MR. IRVING: Debbie, we're listening to folks
18 instead of being irrationally exuberant or being
19 rationally reflective in terms of what they can do for
20 their shareholders and what the long-term business
21 strategy should be for their companies, and as you listen
22 to folks, it sounds like for some people it is a rational
23 decision not to get involved in competition for the
24 residential consumer. For the cable industry it makes
25 some sense, because they've been deployed to do that.
43
1 After listening to the various men and women
2 around the table for a few minutes, what should consumers
3 be thinking from their perspective? Is there a long-term
4 or a short-term hope for a true competitive marketplace
5 for their dollar?
6 MS. BERLYN: The simple answer is yes, there is,
7 but picking up on a couple of things I've heard around the
8 table, Kathy is right. Kathy Wallman is right in saying
9 that our expectations for the immediate residential
10 competition are truly unrealistic, given this industry,
11 but we do see things starting out there that encourage us
12 to believe that competition can reach the residential
13 consumer.
14 And although I've heard a company say, hey, it's
15 easier for us to make money from business customers,
16 that's where we're going to have the highest opportunity
17 for revenue, if you ask any one of the Bell Companies
18 whether or not you can make a profit serving residential
19 consumers, the obvious answer is yes, and you can make
20 quite a nice profit, and there are small companies --
21 Cablevision, or cable companies, Cox Cable, there also
22 companies that are reselling services directly to
23 residential consumers, local service, so that is starting
24 to happen.
25 Again, we have to caution ourselves to not jump
44
1 up and down with exuberance over the level of competition
2 for residential consumers, but there is enough to let us
3 believe that in terms of the Telecommunications Act things
4 are working, things are starting, and that residential
5 consumers can expect to see competition at some point down
6 the road.
7 MR. IRVING: Tom.
8 MR. KOUTSKY: If I could interject a little bit,
9 I think one thing that I was both in the -- speaking both
10 in the Washington sphere and the Silicon Valley sphere
11 with the job that I have, one thing I run into is, when
12 people talk about what the Telecommunications Act was
13 supposed to bring for residential consumers, the focus is
14 generally on residence or voice service, and I think there
15 is an important distinction.
16 As long as the subsidy mechanisms continue to
17 make residential voice service a $15 to $20 a month
18 proposition, I think the economics that Terrence was
19 talking about really tells us what we can expect there.
20 I think, and history really plays out that
21 competition in the telecommunications industry, which is
22 really what the Telecom Act is about, not about local
23 exchange service, the history of that competition
24 demonstrates that the successful competitors have to do
25 innovative products, build something more than what was
45
1 there before.
2 The reason the Bell system got an advantage over
3 the other start-up companies right after the Bell patents
4 expired was because the Bell system offered long distance
5 service. Telephony itself surpassed telegraph service by
6 offering a superior type of product.
7 I would say that we are about to experience the
8 same thing in the telephone industry, that in 30 or 40
9 years we will look askance upon the days when telephone
10 network, whereby only 3 percent of the copper loop, of the
11 bandwidth available in the copper loop is actually
12 recognized by a traditional telecom switch. There is a
13 whole lot of other potential bandwidth available over
14 those copper loops which is obviously Covad's business
15 strategy that isn't being realized that can offer higher
16 bandwidth services.
17 So we start thinking about, what do consumers
18 want, and this is Covad's perspective, is what can we
19 sell? What are people demanding? What are they willing
20 to pay perhaps $50 to $100 to $125 for? It's not
21 necessarily for the ability to make a call on Mother's Day
22 as for the ability to do other things.
23 Our focus is upon teleworkers, which is a very
24 residential based entry. In order for us to go to a
25 corporation such as Cisco Systems or Intel and say, I want
46
1 to service your teleworkers who are now using ISDN, I want
2 to provide them DSL service, the question we need to
3 answer to them is, well, what consumers can you serve? I
4 mean, I have people that live all the way out towards
5 Sacramento. I have people that live all the way down
6 towards Monterey. These people would love nothing better
7 than not to have to drive 2 hours to come in to work.
8 So our entry is based upon serving an entire
9 metropolitan region. We need to colocate in every one of
10 those offices. In more than half of the offices we're the
11 first colocator in a residential market.
12 So we have a spin where we're selling a service
13 to business, but we're really selling a residential
14 service, and it is those types of dynamics and those types
15 of ideas and market interest strategy that the act
16 enabled, which bring in my opinion, residential service,
17 which is what Covad is doing, but put a different spin on
18 it in terms of residential voice grade $20 a month local
19 telephone service.
20 And I think that we -- at least Washington needs
21 to keep that in mind and other regulatory agencies need to
22 think about, it's not about getting the price of local
23 telephone service from $20 to $19 or $18. It's about
24 developing a process in which new and innovative services
25 can continually be brought to consumers at price points
47
1 that they demand it.
2 And only in an environment of competitive
3 rivalry, where there's several different companies
4 competing tooth and nail for that customer, and keeping
5 that customer, that we'll be able to actually provide that
6 higher level service, and I think that's the dynamic that
7 the act was aimed at, and I think that's happening.
8 MR. IRVING: I'm going to turn down here,
9 because I'm listening to different things, and one of the
10 things -- I spent 10 years on Capitol Hill, which is
11 either a very good thing or a very bad thing. Most people
12 think it shows that I have a high tolerance for pain, but
13 one of the things -- I mean, there are a few sacred cows
14 on Capitol Hill.
15 One of the sacred cows is that telephone service
16 wherever you are in America cannot be outside that $15 to
17 $20 range, and candidly at least one former Member of the
18 Senate would suggest that -- there's an article in the
19 national Newsweek describing the loss of Senator
20 Pressler's seat to fears that telephone rates in South
21 Dakota and other rates, consumer rates might go up because
22 of his shepherding of the Telecommunications Act of 1996.
23 Given that kind of political reality, Members of
24 the House and the Senate and the FCC State regulatory
25 commissions feel constrained to keep residential rates
48
1 within the kind of range that consumers will find
2 acceptable.
3 How does that play? I mean, I'm willing to pay
4 as a consumer $30 to get wireless Internet service. I'm
5 wiling as a consumer to pay $400 for a handset and
6 whatever the fee is, depending upon the various providers,
7 for a cellular telephone service. I'm willing to pay
8 something between $50 and $70 for multichannels of video,
9 and I switched back from satellite to cable, but I don't
10 know if I'm the average consumer, but I'm not willing to
11 pay -- I'm going to make somebody pay a political price if
12 my local telephone bill gets outside of that $15 to $20
13 range.
14 How do you rationalize that? How do investors
15 for the industry, how do you do things in that kind of
16 environment, and it's a very real environment. I mean,
17 whether it's true or not -- I don't know whether it's true
18 or not that consumers won't pay, but I know the Members
19 think that the voters will make you pay if rates go up
20 beyond a certain range in local telephony, and what you're
21 trying to tell me is that if there's not some kind of a
22 refocusing on whether or not that is sacrosanct, getting
23 residential competition may be more difficult in the near
24 term.
25 MR. KOUTSKY: I didn't mean to say it in that
49
1 way, that we need to refocus what we're thinking about in
2 terms of what the subsidy mechanisms would do.
3 I'm looking in a forward-looking manner about, I
4 understand that voice service is eventually going to
5 become an application over a higher bandwidth network, in
6 which case nobody would really expect to pay -- just like
7 nobody really, when they have Internet service, expects to
8 pay by the E-mail, or that E-mail is just another avenue
9 in addition to Web browsing, in my opinion I think voice
10 telephony will eventually be another application, so to
11 say that that will always be $20 is kind of hard to think
12 about in that future-looking orientation.
13 MR. IRVING: Let me go to Marius and Dan.
14 DR. SCHWARTZ: A couple of points from our last
15 discussion. One is that what you need to do is move
16 competition in bundles so the consumer doesn't look at,
17 this is what I'm paying for my local service. What he
18 should care about is, this is what I'm paying in total,
19 and that is the strategy we're describing.
20 It's certainly true that local phone service has
21 a physical component that everybody screams over a raise
22 of 1/2 cent and the FCC had a very unpleasant experience
23 with this phone in the breakup of AT&T when they tried to
24 do what everybody said was the sensible thing to do, which
25 is to increase some fixed monthly charges and introduce
50
1 fixed monthly charges for subscriber line charges and in
2 turn reduce the variable rates per minute.
3 The problem was, they raised fixed charges
4 before long distance rates came down, and guess what
5 happened?
6 MR. IRVING: I remember that well.
7 DR. SCHWARTZ: A couple of years later they let
8 long distance prices go down and then they quietly raised
9 fixed charges and nobody noticed, so the key is to make
10 sure that in total the consumers are seeing the benefits.
11 The other point I want to make is that -- and
12 it's really a question to Cherie, that there does seem to
13 be, or we thought at least there was some room for reduced
14 prices even for standard voice telephony by using the
15 cable facilities. Cable was going to erode the so-called
16 national monopoly in local loop because you can take an
17 existing facility and just tweak it to get a new service.
18 But when I was on the Council of Economic
19 Advisors in '95 I remember looking at Time-Warner and
20 saying how long will it be before you guys employ it, and
21 they were right there. They had color charts, and I
22 called my friend at AT&T and he said the rule is you take
23 the cable company's projection and add 2 years, and this
24 rule is good at any point in time.
25 So my question to you is, somewhat facetiously,
51
1 is it different this time? Are you really going to put it
2 in?
3 MS. KISER: I think from Cablevision's
4 perspective, absolutely. We definitely are in the
5 business already in New York, and we're having success,
6 and the question at some point during the trial is how are
7 we going to market it to the consumer?
8 And from State to State it will vary, because as
9 Tom mentioned, where there's just flat rate charging and
10 no measured service, although in many of the States there
11 are variations of that, so that maybe you still have to
12 have a basic package that is the same price as the
13 incumbent, you can have discounts when you compete for the
14 measured offerings that offer a little bit expanded
15 calling area or something like that.
16 So it is happening, and it's happening right
17 now, so I think the additional 2 years -- we are here.
18 MR. HUTCHINS: Just an echo on Mary's comment in
19 terms of bundling. I think part of what needs to be done
20 on bundling is really keep track of where the
21 opportunities are, which is a moving target.
22 You know, in the early days of telephony long
23 distance, really all was subsidized, the local side of
24 things. Today with long distance rates down at 10 cents a
25 minute or less for most people in businesses there's not
52
1 much opportunity to do that.
2 In international where Starmax is focused, there
3 is some opportunity there with high cost countries, and a
4 lot of people use our service target, the $50 to $100
5 residential user, the cost to Asia or Latin America, but
6 those markets are eroding.
7 Internet, yes, there's some ability to bundle
8 there, but that's eroding quickly, and it's really going
9 to be an ongoing game to keep up with where are the
10 opportunities that there's still enough margin to do so in
11 this packaging to make it work, and maybe we can keep up
12 with it, but ultimately I think we're going to have to
13 look at the core area of cost and say, is there some
14 relief in that area as well.
15 MR. CONN: The point I wanted to make is, I
16 think people are being a little too quick to write off
17 residential competition right now. The point you make
18 about the political expectations on residential pricing is
19 a good one, but there are ways to live with that fact.
20 Our basic residential product now in Cedar
21 Rapids, for example, is priced at $16.95 a month. You get
22 local service. You can get call-waiting. You get three-
23 way calling.
24 MR. IRVING: For $16.95?
25 MR. CONN: Yes, and the incumbent pricing is I
53
1 think $12.05, and so we're above the incumbent pricing for
2 local service but you don't get the features.
3 But in addition to that, once you've got the
4 customer, once that is your local customer, you get the
5 opportunity to sell a whole bunch of additional services
6 that you can bundle and make some money on that customer
7 that is not available just from local rates.
8 You've got Internet. You've got paging, for us
9 you've got long distance, you have all sorts of new
10 services in the future, and once that customer is on your
11 system you really have the first advantage to offer those
12 new services as long as you can keep that customer happy
13 with good customer service, so I think there is an
14 opportunity to live with the price points as they exist
15 and still provide some level of competition to residential
16 customers.
17 MR. IRVING: Can I ask a question? How are you
18 doing in terms of competing against the incumbent with
19 your bundled services?
20 MR. CONN: We're doing okay. I don't actually
21 know what our market penetration for residential service
22 is. We've got in Iowa and Illinois primarily right now
23 about 64,000 residential customers. They're in a resale
24 mode now, but again, once our network is complete and once
25 we can migrate those customers onto the network then we've
54
1 got more opportunities for margins that don't exist.
2 MS. KISER: I just wanted to add in response to
3 your question, it's interesting, the Cablevision's
4 experience has been that the more personal we get with our
5 marketing, moving from just over-the-air radio to door-
6 to-door, our take rate goes up, so that seems to me the
7 difference with the residential consumer. If you're
8 willing to get up close and personal they're more
9 interested in your products.
10 MR. CONN: I just want to follow up on that,
11 because it ties in very nicely with exactly what we found.
12 When we first started marketing our residential service in
13 Cedar Rapids it was marketed under the name, Prime Line,
14 and the service was developed with the concept of why
15 can't getting local telephone service be as easy as
16 ordering a pizza on the phone.
17 As a result, when we first started offering that
18 service, if you would sign up for the service we would
19 send Prime Guy or Prime Gal out in a little van and
20 deliver your service package in a pizza box with
21 instructions on how to use it, an instructional videotape,
22 a pager if you ordered that.
23 But it's that sort of thing that exactly as
24 Cherie says, the personal contact with the customer has a
25 huge effect in this business.
55
1 MR. IRVING: Did you get a pizza with it?
2 (Laughter.)
3 MR. CONN: That's interesting, because we did
4 have some calls from disappointed people who were
5 expecting a pizza.
6 (Laughter.)
7 MR. IRVING: Gary, what's your experience with
8 regard to, you provide a service that is unique, but it's
9 also something that at least to some degree can be
10 identical -- not identical, but substitutable to the
11 service the telephone company provides. Who is ordering
12 Ricochet? Is it the college student, or the business
13 person? Is it residential? Can it be used in residences
14 in your marketing? Who do you see?
15 MR. GREEN: The answer is, everywhere. We
16 identify three markets that we pursue specifically. One
17 is just ordinary people, people who, if you hear ads or
18 read about us on the Internet and want what we offer.
19 Business customers certainly we pay attention
20 to, and we're seeing increasing interest in virtual
21 private data networks and we respond to that, certainly,
22 and we pay very close attention to K through 12. K
23 through 12, although it's not a really large part of our
24 business, is growing faster than our business because of
25 the cost structure.
56
1 It's interesting to listen to you people talk.
2 We're really driven in our pricing by the cost of a second
3 phone line Our primary competition is that second phone
4 line, and so we've got to look at our pricing with respect
5 to, what's a phone line and an ISP, which most people
6 want, what is the cost of that, and that is what we've got
7 to compete with.
8 It is also -- I will second what Tom said. What
9 we find is that people want to use the same solution at
10 work and at home. More work is going on at home these
11 days, and connectivity ever more important, and our
12 product is very much more attractive to people if they can
13 do the same thing at work and at home, wherever they may
14 be.
15 It is that sort of, everywhere you are, you can
16 do the same thing. Whenever you look at the bill you know
17 what it's going to cost, and it's a reasonable value
18 compared to what your alternatives are. Those are real
19 keys, and for us it's important. We're pioneering that.
20 We're doing something different. We're asking people to
21 change what they do and do it a different way, and we've
22 got to be there right in the middle of the fray in terms
23 of cost and performance.
24 MR. IRVING: Maybe this is a good time to turn
25 to you, because we're asking to do things new and
57
1 different. We're talking about being in the middle of the
2 fray. We're talking about expectations and predictions,
3 1998. I know we had -- I think the Chinese New Year that
4 just happened, or is about to happen, is the Year of the
5 Tiger. Is 1998 also the year of Internet telephony?
6 MR. HARAMATY: Internet telephony, as I
7 mentioned before, is already happening, and yes, I believe
8 that during 1998 we will see the sort of deployment we
9 didn't see beforehand, and this is more scalable solutions
10 in telephony, solutions that can be used within telcos and
11 not just new service providers, and I believe during 1998
12 we're definitely going to see that.
13 MR. IRVING: So businesses and consumers are
14 going to start -- we're going to start talking about, this
15 is it, we finally got there. We've arrived.
16 MR. HARAMATY: Well, talking about business and
17 consumers, there are many ways to use Internet telephony.
18 The first way we introduced back in 1995, which is using
19 your computer to do Internet telephony. There's a way to
20 do it with your telephone, and then you have two options
21 if you're a business, either deploy your own IP telephony
22 gateways in order to use it, or use a service from a
23 service provider, so corporates that are already using
24 Internet telephony, we have that today, and I believe
25 during 1998 we will see more deployment of that.
58
1 But the next step is buying such service from
2 the local, from the telco, and this is what we're really
3 going to see during '98, having more scalable solutions
4 that big telcos can use for that.
5 One comment regarding the previous issue. I
6 believe that what we heard is that actually the initial
7 phone bill is going to be subsidized by other services,
8 either the business is going to pay for it in order to get
9 people working from home and getting additional
10 information to the home data video, whatever is needed, or
11 on the other hand, other services such as buying from
12 home, and this is the big pipe that I was talking about
13 and Tom was talking about.
14 We're going to see customers that are going to
15 use, to buy even groceries from their home, and actually
16 we already see it on the Internet. Grocery.com is a
17 service that supplies services over the Internet, and we
18 will see the local phone bill is actually being subsidized
19 by such local services that actually add to their
20 convenience of the end user.
21 DR. SCHWARTZ: It's like 1-800 almost.
22 MR. IRVING: Let me throw a question out to the
23 rest of you. What is going to be the effect of IP-based
24 technologies on this industry? Is it in telephony or
25 Internet protocols? Is it something we should be thinking
59
1 about here in Washington? Is it something you're thinking
2 about trying to figure out how it's going to change your
3 businesses?
4 MR. McGARTY: Right now, we're moving onto
5 circuits in 24 countries in the next 6 months, using what
6 I would call the second generation, which has
7 international toll rate quality voice, which means if
8 you're placing a call to Poland it sounds as good as what
9 you're going to get today.
10 MR. IRVING: So Mr. Robinson is wrong?
11 MR. McGARTY: With all due respect to Mr.
12 Robinson, I do remind Cox they were the first one to
13 provide packet voice under the Cox-MCI versus Mountain
14 Bell decision at the FCC in 1984, for those lawyers around
15 the table that remember that decision, and they were the
16 ones first to provide packet voice in Omaha, so they
17 should go back to their own history and sort of review it
18 and say that at least, what, 14 years ago they did it.
19 I went up against them in a cable franchise bid,
20 so I remember that very well. The arrow holes are still
21 in my back.
22 (Laughter.)
23 MR. McGARTY: But on the domestic side we tried
24 out IP telephony domestically and our operations people at
25 this stage -- and this is our opinion, is that it is not
60
1 ready for prime time in local loop, so it's international
2 toll grad quality, marginal at best, inter-exchange toll
3 grade, and it's not ready for prime time this year in
4 domestic local loop.
5 Once it is, and we believe it will be in the
6 next couple of years, the economics of the business become
7 dramatically different, because now what we can do,
8 instead of putting remote access, which is in the CO in a
9 colocation chamber, what we now put in is what we call IP
10 voice nodes, and it drops the access cost from $115 per
11 line down to about $15 or $16 per access line.
12 So it is a factor of three change in the capital
13 structure, and to me that is a sea State change that you
14 should be paying attention to, and they actually get
15 better, because in volume production you will see they may
16 even go down by a factor of two.
17 MR. IRVING: Frank, Daniel, are you paying
18 attention to this? Is this something to be factored in as
19 you're making forecasts for your clients? Is this
20 something you're thinking of doing now?
21 MR. ERNST: The problem with forecasting
22 specific technology, technology is continuing to be
23 developed, and if you were to imagine the Internet being
24 as broadbased as it is today 6 years go, even 2 years
25 ago -- when did you get Internet access at your desk?
61
1 But the point is that looking forward, I'm not
2 going to make predictions about the capital structure of
3 the entire telephone industry changing, because I'm also
4 looking at other technologies, and I think coming back to
5 what I said earlier about Internet telephony is,
6 ultimately you still have to get the customer, and that's
7 using the lines, and those developments are happening. We
8 discussed what's happening in the business market.
9 I kind of want to say something about what was
10 going to happen in the residential market and whether or
11 not Cablevision uses IP protocol for the voice services or
12 not, the real issue is, are they going to provide voice
13 services, and I think there's a couple of trends that bode
14 really well for competition developing in the residential
15 market.
16 One is demand by residencies, and the other is
17 competition in the business markets on the demand side.
18 If you look -- and you mentioned in 1980 the average
19 household had one telephone subscription. In 1990, it's a
20 little less than two, and today the average household has
21 2.2 subscriptions per household. That's phone lines,
22 cellular, cable TV, and now Internet, and we predict that
23 the average household in the year 2000 will have 3.2
24 subscriptions, and if you look at the top half, it's five
25 or six.
62
1 MR. IRVING: So in 2 years you expect to go from
2 2.2 to 3.2?
3 MR. ERNST: That's right. That's the average
4 household. Whereas about 26 percent of households have
5 cellular phones or PCS phones, 60 percent will have it in
6 the year 2001. It is our estimate.
7 And so those bode very well for surveying the
8 residential market and providing the basic voice service
9 unbundled still at $20 a month, because not only are we
10 seeing more services, but we're using it more intensely.
11 If you look at the average household, it's not
12 going to be spending $20 on phone service. They have call
13 waiting, caller ID, and call forwarding, all at $5 or $6 a
14 month increments on their phone bills, so the average
15 local bill is -- again, it's not really $20, but it's
16 closer to $30, when you add on the services, and if you do
17 it over one network, then you're achieving incredible
18 economies and you can provide all of the scope and all of
19 the services over one network at a price largely
20 competitive to bundling those services separately with
21 different networks, and so that is the demand side.
22 On the other side is, on the companies and the
23 business markets, well, how do all of these competitors
24 keep building right now? There's about 108 trading areas
25 that have at least one CLEC, but 79 percent of those have
63
1 more than two CLEC's, and there are markets like New York
2 where there's 11 CLE's operating now, and San Francisco
3 has seven, and Washington has about three or four, and
4 that's growing.
5 So as the competition continues to develop from
6 an investor's standpoint the marginal return on the dollar
7 of capital invested in this market will decline at some
8 point, because you're not going to be able to achieve the
9 growth in market share.
10 At that stage in time there's no one serving the
11 residential market, so $1 of capital invested in the
12 residential market will yield a faster growth with respect
13 to the business market, and at that point in time people
14 will start investing more seriously.
15 Right now we have 100,000 out of 67 million
16 households that have cable TV, so it's very small, but it
17 will grow, and it is a matter of them being able to have
18 the money to invest in upgrading their networks and
19 whether it's $500 or $1,000 a line, it is still a bulk
20 investment and we have to build out the fiber optics. We
21 have to install the switching.
22 So that is a capital investment that we don't
23 think the cable operators are ready to meet right now in a
24 large way, but in a couple of years, as Marius has said,
25 they might. The structure of the market will change, and
64
1 it will be a profitable investment.
2 MR. PLUMLEY: I assume on a macro level
3 residential customers in the U.S. have benefited because
4 they're sort of at the end of the subsidy chain and have
5 been subsidized by long distance and subsidized by
6 business customers in the local market, and so investment
7 tends to go where the profits are, and profits are more
8 readily apparent serving business customers.
9 You have to pay $8 for a loop. Why not sell it
10 to somebody who's paying $20 or $30 a month instead of
11 somebody who's paying $8 a month?
12 However, probably no matter what regulators do
13 and no matter what Government policy is, technology of
14 this industry continues to move. There are endless
15 economies of scale which can be realized as a result of
16 technological change and smaller and smaller scale.
17 So I would agree with Dan, I think the
18 competition comes in and brings profits into the business
19 market and the common carriers simply have to eat the
20 pricing shifts that we will see as a result of competition
21 in the more profitable markets.
22 Fortunately, with the declining cost curve
23 reasonably well run ILEC's should be able to survive. Come
24 to my neighborhood. Please, please come see me. I don't
25 care what you charge. If I get dial tone and a picture, I
65
1 will take it.
2 But I would agree with Daniel's thesis that you
3 get a migration of investment from being targeted to sort
4 of cherry-picking type investment. We've already had
5 that. McLeod has expanded. TCG will expand from serving
6 Merrill Lynch to smaller customers. They already have.
7 But in the end, the consumer market will become
8 more and more attractive. It just isn't right now, and
9 the flip side of this, unfortunately, is that this assumes
10 that competition drives down prices in the business
11 market, and there is no immediate consumer benefit,
12 economically, over the next several years, except for very
13 high profile customers.
14 I mean, sure, everybody would love to have you
15 as their first subscriber. I'll sell you some wireless,
16 sell you some video, sell you some Internet, sell you some
17 local, sell you some LD.
18 MR. IRVING: How is that different from most of
19 the people in this room? Most of the people in this room
20 are going to be typical consumers in 2002.
21 MR. PLUMLEY: Most of the CLEC activity we see
22 in the market is basically using the provision of local
23 service, maybe not as a loss leader but as part of a
24 bundle. If you look at the way Rescom sells service or
25 RCN, one might think they're making money on the video,
66
1 and it's just that you get good customer retention, less
2 churn, less marketing cost over time, by providing a
3 bundle of services.
4 MR. IRVING: You don't think they're making
5 money on the residential by itself?
6 MR. PLUMLEY: No.
7 MR. IRVING: Except in Cedar Rapids you are
8 making money on residential, or you expect to make money
9 on it.
10 MR. CONN: I think we hope to.
11 (Laughter.)
12 DR. SCHWARTZ: You lose money, but you make it
13 up on the volume.
14 (Laughter.)
15 MR. CONN: It's a difficult question because of
16 the service vehicle we use right now, but we believe, I
17 think, that once we can migrate some of that service onto
18 our own fiber rings that we're going to have the
19 opportunity to make that money.
20 MR. IRVING: Let's talk a little bit about
21 wireless. Howard -- and you might want to answer this --
22 what should we be looking for in terms of innovation and
23 new services, new products innovations in the wireless
24 industry over the next year, 2 years, 3 years?
25 MR. TAYLOR: I think you're going to see
67
1 innovations and that 1998 will be the year for wireless
2 fiber.
3 MR. IRVING: So it's not the year of Internet
4 telephony, but it will be the year of wireless?
5 MR. TAYLOR: It will be the year of wireless
6 fiber.
7 MR. ERNST: It might be both.
8 MR. TAYLOR: I hope it is. But getting back to
9 the other question, I think wireless technology will help
10 expedite some of the things that we've talked about in the
11 industry.
12 There's a strange thing that's happening in the
13 marketplace today. The traditional ways and means that
14 we've looked at of telecommunications being driven, which
15 is really by the traditional RBOC's and AT&T and those
16 companies, is -- it's completely been reversed in terms of
17 the consumer.
18 IP technology will, I think, be validated in
19 1998 as a technology from a telephony standpoint and will
20 be the driving force in telephony for years to come, and
21 it's really changing the trend, changing the trend of how
22 we've traditionally thought about telecommunications
23 networks being put out there, and the end users are now
24 driving this technology and innovations that are taking
25 place, and technological innovation that is going to bring
68
1 a whole new price point to this industry.
2 We're breaking down new governmental barriers.
3 They're breaking down what traditionally we have looked at
4 in terms of information interchange, across lines, and
5 companies are getting into this now of saying, why should
6 we look at and pay the rate that we've had for
7 communicating with people and companies across the world,
8 so this has really changed.
9 I think it will also change how we look at
10 education, and that's one of the driving forces that we've
11 seen in terms of one of the benefits of the Telcom Act of
12 '96 is the E rate, and from that standpoint driving
13 technology into a whole new sector that does have profound
14 impact in terms of residential users, bridging the haves
15 and the have-nots in our society. That is one of the
16 things we look at and take very carefully.
17 MR. IRVING: Will you be applying in some areas
18 the E-rate?
19 MR. TAYLOR: Absolutely. We have a subsidiary
20 of Winstar for education, one of the unique products and
21 programs we have. We've talked a little bit about the
22 title Passages, where we have a school teacher, Rona
23 Metzger out of the Poughkeepsie school system who is
24 traveling the world in a tall ship, and she's connected to
25 thousands of children across the U.S. and around the
69
1 world.
2 We have a chat program in utilizing a laptop
3 computer, a satellite phone and some other services. She
4 is holding chat forums and teaching and educating in New
5 Zealand. She is in Africa. She's out on the plains, and
6 education is taking place with the kids across the world
7 as she travels across the world in the tall ship.
8 MR. GREEN: Larry, I would agree with Howard, it
9 is really time for us to stop thinking about
10 telecommunications in a voice-centric mode. It is time
11 for us to stop thinking about the media in terms of copper
12 and circuits. It is time for us to understand that data
13 in all forums will become more and more predominant.
14 The packet switching will happen, that the
15 Internet has provided a real paradigm change. We've got a
16 totally different sort of network that people are piling
17 on at one person a second, or something like that. It
18 scares Washington to death, as near as I can tell, which
19 is not very positive. I mean, all the terrible things
20 that can happen on the Internet, all the revenue
21 opportunities.
22 And by the way, if you look at legislation the
23 way people think about it, it's with the telephone system
24 and the line and not all this new stuff.
25 Times are changing. These are explosive times,
70
1 and yes, wireless is a major part of it.
2 MR. IRVING: How do you get the story out? A
3 couple of things you said resonated. I don't know that
4 Washington is scared of it. I think what happens in
5 Washington reflects two things. Let me be an apologist
6 for Washington, not a role I feel entirely comfortable
7 with, but a couple of things.
8 Ira Magaziner did an analysis. 80 percent of
9 the front pages on the Internet over some period of time
10 were negative stories, pornography, gambling, fraud,
11 crime, things that happen on the Internet, which drives
12 the average person who's not on the Internet -- and the
13 average person isn't on the Internet, or wasn't on the
14 Internet when the story came out. This is something to be
15 scared of.
16 Add that to the technophobia of the average
17 American consumer, and add that to the technological
18 illiteracy of most people in Washington. It kind of
19 builds on itself, and the average Member of Congress and,
20 I would dare say, the average Cabinet and sub-Cabinet
21 member doesn't carry a laptop, doesn't use the Internet in
22 his or her daily routine.
23 I think that is changing, but I will tell you
24 when I left in 1993 I don't think there were three Members
25 of Congress who were on the Internet. Now, in 1998,
71
1 they've all probably seen the Internet but I'd be willing
2 to bet that 100 Members couldn't boot up a computer if
3 their lives depended on it, because they don't have to use
4 the technology and they're a different generation.
5 But the other part is the consumer, because at
6 the same time all these wonderful things that we're
7 talking about are happening, the consumer, to some degree
8 the voter still sees that $20 phone bill as being somewhat
9 sacrosanct, and they're not looking at the bundle, and
10 they're not looking at the fact that they're having six,
11 where you have competition and so yearly your prices are
12 going down 25 percent, but I can go out right now, as of 2
13 days ago, and get a prepaid calling card for 5 to 7
14 percent if I'm willing to use Internet telephony to make
15 my long distance calls in the United States.
16 Now, instead of 10 cents a minute, it's 5 or 7
17 cents a minute. How do you get that story out?
18 The folks around this room have an interest, or
19 folks have an interest in this, yet the full story is not
20 told.
21 Kathy.
22 MS. WALLMAN: I think everybody here would want
23 to go down on record as not being in favor of local rate
24 increases.
25 MR. IRVING: Including me, particularly me. I
72
1 like my job.
2 (Laughter.)
3 MS. WALLMAN: I think Marius' point is the right
4 one. You have to be able to show consumers the whole
5 picture so that they know what they're getting and what
6 the trade-offs are.
7 If you said to consumers, look, here's the deal.
8 It will never go above $18.75 but the bad news is we're
9 not going to be able to give you any of these high speed
10 services that the network is capable of offering, they
11 might make a decision on that basis.
12 I think that there is a lot of cynicism among
13 consumers, that they would never believe you if you
14 offered them that choice. The reaction they would have is
15 oh, yeah, yeah, yeah, you want me to buy into this so my
16 rates will go up, but all these other wonderful things
17 will happen, all these other wonderful choices will be
18 available to me if I buy into this idea that my rates are
19 going to go up.
20 I don't think that we can talk about these
21 choices. I think that we have to let the system unfold in
22 a way that shows people that they really can have
23 meaningful choices about the kinds of services and the
24 combinations of services they may wish to select.
25 I don't think you can tell people in the
73
1 abstract what it's going to be like. You need to show
2 them and let them make the choices.
3 MR. IRVING: You have this irrational
4 exuberance, on the one hand. I think there's a tremendous
5 amount of hype leading up to the act and after the act,
6 but at the same time, as we all talked about, the Internet
7 is real in a lot of lives in a way that it wasn't real to
8 any of us a few years ago, and it's been of tremendous
9 benefit.
10 Things like Ricochet are providing real service
11 to real people. We've got $16.95 providers who are giving
12 you call waiting and caller ID, and I know that, you know,
13 for $15 I carry around a little portable telephone that
14 gives me caller ID, voice messaging, call waiting, call
15 forwarding, and it's a wireless.
16 Unheard of. Who could have thought, 4 or 5
17 years ago, for $15 I could get that entire packet of
18 products, and yet still there's consumer cynicism. Why is
19 that?
20 MS. BERLYN: What I have been wanting to say all
21 along this morning is one of the most important concepts
22 here is choice. And when we think of choice we think of a
23 choice of the carrier. But what consumers really want is
24 choice of services. They want to be able to pay for the
25 basic telephone residential service and that be it or they
74
1 want a package of services that Cablevision or Cox may be
2 able to offer and, as a tradeoff, receive discounts for
3 some of those services. But consumers really want to have
4 those choices.
5 And I do not think there is any one type of
6 consumer out there. I think smart companies will market
7 to a wide array of consumer types. But the most important
8 thing is that consumers maintain that opportunity for
9 choice.
10 MR. IRVING: Do they have that opportunity? Are
11 they getting that? Where are we on the spectrum, 10 being
12 utopia and 0 being 1950, black phone, you know, one
13 provider?
14 MS. BERLYN: Well, we have come a long way in
15 terms of choice. There is no doubt about that. We have
16 far longer to go. But if you look at choice, how choice
17 has developed in the long distance industry, consumers now
18 have the choice of determining a long distance company
19 that can perhaps offer them a lower service on Sunday as
20 opposed to a lower service in the evening or the day time.
21 So there is a choice there that consumers have for prices.
22 They also have choice of picking a long distance
23 company that can offer them frequent flier miles or other
24 types of bonuses and gifts. So there is choice out there
25 that is certainly starting to come about and offer
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1 benefits.
2 MR. IRVING: Frank, you seem to have an interest
3 in reaction to something.
4 MR. PLUMLEY: I was talking with Mr. Sullivan
5 down at the Alabama Commission right after he became a
6 regulator. And the Commission was looking at a rate
7 stabilization plan for I guess Southern Company. And I
8 said, well, gee, you know, if you lower this for Southern
9 Company, how about South central Bell? And he said, well,
10 Frank, you got to understand, an electric company has got
11 22 tariffs and South Central Bell has over 600.
12 Well, the electric company does one thing; it
13 runs electricity downhill. The phone company arguably
14 does a couple of different things, but not enough to get,
15 you know, 30 times, or whatever multiple, on the tariff.
16 So the frequent flier miles kind of packages, or AT&T's
17 Rewards Program or something, are sort of nice ways of
18 confusing the issues and trying to provide a perceived
19 benefit. It is a kind of marketing I do not particularly
20 like. I will just leave it at that.
21 (Laughter.)
22 MR. IRVING: Okay. Well, I did not sign up for
23 it.
24 MR. GREEN: They would not do it if it did not
25 work, though.
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1 MR. PLUMLEY: Right. But you get the whole
2 question: Is it to AT&T's benefit or Chesapeake & Potomac
3 or Bell Atlantic hyphen whatever? Is it to their benefit
4 for you to have a very clear -- as the consumer -- to have
5 a very clear understanding of what the costs and benefits
6 are of any particular pricing package? Or do confused
7 customers tend to stay where they are?
8 So I think that is a big part of those marketing
9 plans.
10 MR. GREEN: I have a feeling that customers are
11 not that dumb, I do not think. And if they do not like
12 it -- for example, AT&T's thing makes my wife mad. She
13 will not have anything to do with it. And she is a
14 non-technical, plain old consumer kind of person.
15 Sometimes you might look at the wrong end of the
16 animal. If we did not have cable television, we would be
17 saying, please, please, please, give it to me. And we
18 would not worry about the cost. It is when we have got
19 it, now we do not like the price to go up, and we never
20 like that on anything.
21 If we did not have telephone service -- listen
22 to what you said -- you know, I will pay anything.
23 Please, come give me cable.
24 And consumers are looking at all kinds of new
25 things now. The things that they have, will they be
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1 concerned about the price going up? Sure. But I think
2 they can make the value judgment as they look at new
3 services.
4 MR. TAYLOR: Yes, I think consumers -- and one
5 of the things that Kathy says -- I mean they are looking
6 for choice. And I think competition will regulate the
7 market on its own. And so I am a strong advocate to let
8 the market kind of regulate itself. Let's have a lot of
9 competition. Let's give choice in markets. And I think
10 you are going to see, in 1998 and 1999, in terms of
11 telephony, you are going to see fee to free or free to
12 fee.
13 And what is going to be the differentiator, be
14 it free, perceived will be Internet telephony; be it fee,
15 will be the value-based services; and the level of service
16 and the different levels of service that will be offered
17 on a fee basis. And there are going to be packages and
18 there are going to be offerings. But that is what is
19 really going to differentiate, from a residential
20 standpoint to services, to end users.
21 MS. WALLMAN: And I think one of the things that
22 is going to have to be managed here and in other areas are
23 how do you help consumers with the search costs. How do
24 you help them figure out what the best choices are?
25 When the number of long distance choices
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1 proliferated, the FCC had to deal with problems like
2 slamming. And the general frustration of consumers who
3 would call the FCC and say, you know, I cannot figure out
4 what is the best deal; you tell me. And, of course, the
5 FCC, you know, we did not feel like we are in the best
6 position to be picking for them among long distance plans.
7 (Laughter.)
8 MS. WALLMAN: And we encouraged some of the
9 consumer groups to see if they could figure out how to do
10 selection sheets and so forth, so that people could manage
11 the cost of finding the right deal.
12 The same issue is going to surface in retail
13 competition for electricity. Already consumers in test
14 markets, like Peterborough, New Hampshire, are finding,
15 gee, there are so many choices, how do I figure it out?
16 And we have the same issue when competition
17 really explodes and people do have different choices and
18 combinations that they can pick on data, voice, local,
19 long distance, and paging, and other wireless services.
20 There is a niche in the market for somebody who can go out
21 there and figure out how to provide a service and managing
22 the search costs.
23 MR. IRVING: Aren't there Internet services now
24 where you can put in three of four months of your
25 telephone bill and they will then go through the various
79
1 long distance options and say this is the one for you?
2 MS. WALLMAN: There is actually an interface you
3 can put on your computer that will pulse the right kick
4 code, the right carrier code, to route your call,
5 depending on time and day.
6 MR. IRVING: I like that. Another device I do
7 not have at my house yet.
8 (Laughter.)
9 MR. IRVING: My wife is going to be very happy.
10 (Laughter.)
11 MS. BERLYN: I think it all points, though, to a
12 tremendous need for consumer education. I think consumers
13 are still confused about what their long distance service
14 actually costs. And we absolutely will see a tremendous
15 growth in confusion about what exactly am I paying for.
16 And if you cannot understand what you are paying for, and
17 you cannot understand how much it costs, then you cannot
18 be a smart shopper. Because you do not know what the best
19 deal is.
20 So I think consumers do need a great deal of
21 information and assistance. And we plead with the
22 companies also for clarity about costs.
23 MR. IRVING: Whose responsibility is that?
24 MR. SCHWARTZ: Yes, let me say something about
25 it. I think everybody is right; that is the good news.
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1 That is, companies sometimes have an incentive to make
2 their pricing structure a little bit different, a little
3 bit more complicated, so they can get by with some higher
4 prices. And choice is not the same as transparency.
5 On the other hand, if there is enough
6 competition, somebody will come along and say, let me cut
7 through all this junk, 6 cents a minute any time, any
8 place. So if you have enough competition, competing
9 through transparency is a dimension of competition. And
10 you see that.
11 Now, one question, though, I wanted to ask
12 Cherie as well as David, in terms of choice, one of the
13 benefits we keep touting to consumers, you are going to
14 get your choice of provider. And people say, oh, just
15 like long distance, more calls during the dinner hour.
16 This is really great.
17 MR. IRVING: It is just the dinner hour at your
18 house?
19 (Laughter.)
20 MR. IRVING: It does not stop.
21 MR. SCHWARTZ: What kind of reaction do you
22 encounter when you try to get people interested in another
23 telephone provider?
24 MR. CONN: You probably will not believe this,
25 and I have a hard time believing it myself, but we do our
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1 residential marketing, most of it now, through
2 telemarketing. And I have had more than a handful of
3 people come up to me and say, your telemarketers are so
4 nice and knowledgeable.
5 MR. IRVING: Could you have them call me instead
6 of the guys that call me?
7 (Laughter.)
8 MR. CONN: Well, I will tell you, that is not
9 consistent with what the general reaction to telemarketers
10 is. I have been very surprised at that. But the reaction
11 from customers, to answer your question, has generally
12 been pretty good.
13 Remember, too, though, that the markets that we
14 are in are markets where customers have traditionally not
15 expected to have a choice. You know they are markets
16 that -- you know, cities and towns in Iowa and Illinois
17 and Minnesota, with 8,000 people or 40,000 people or
18 60,000 people. They read about telecom competition, but
19 they are not sure it is ever going to get to them. So to
20 have a choice makes them happy.
21 MS. KISER: And I think, for Cablevision,
22 because of where we are starting in New York, the response
23 has been very positive. But the main reason is, and it
24 goes somewhat to what Frank said, you know, you are
25 looking for somebody new, and the people in our service
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1 area are looking for somebody new because of service
2 quality. The service quality by the incumbent local
3 exchange carrier in the area we are serving right now has
4 been poor. So when you come to them, either at their door
5 or on the telephone, they have been waiting for you for
6 some time. So it has been very positive.
7 But, now, when we move into other markets, we
8 may see the poor response.
9 MR. MCGARTY: If I could make a quick comment,
10 Larry, just to build on your comments, Cherie.
11 There used to be a Web site called Nynex
12 something or other, which I will not use here.
13 (Laughter.)
14 MR. MCGARTY: On which all the consumers would
15 relate their concerns. And when we did market research,
16 just to give you an example, up in Framingham, we got an
17 80 percent willingness to change at a 5 percent price
18 reduction. And we had people trying to sign up with our
19 market research people. And they said, time out, you are
20 asking questions, you are not taking orders. So we think
21 there is a tremendous pent-up demand.
22 I think, just to get back to Kathy's comment, it
23 really -- from somebody putting money into this stuff --
24 it is an economic decision that says, where do you put
25 your money early on to get the return, because you have
83
1 got to worry about investors and the market and whatever?
2 And then, there is a point in which you will move over to
3 the consumer market. And that is a year down the road or
4 18 months. It is not 10 years.
5 And there is going to be a natural give and
6 take. Because what we are going to do is we are going to
7 drive down the rates on the business, which is going to
8 get rid of the cross-subsidy, which is going to force the
9 ILEC to increase, or to take rates, off of the local
10 residential side, and parity is going to start to get
11 reached.
12 So we can see that now, that it is occurring.
13 So, from a normal economic process, we think it is going
14 to be there. And Cherie's comment is that most of the
15 peak demand is that people are dissatisfied -- at least in
16 the region that you and we work --
17 MS. KISER: Precisely.
18 MR. MCGARTY: -- with the incumbent carrier.
19 MR. IRVING: Let me raise one other question
20 really quickly, because Howard talked about it and I
21 wanted to get back to the Clinton administration is not
22 going to not talk about schools and libraries.
23 David, Cherie, are you thinking about going into
24 schools and libraries in any kind of a --
25 MS. KISER: Well, Cablevision Systems has been
84
1 in schools for some time -- from the video perspective --
2 that is something we have pursued heavily. And we
3 continue to move towards access to as many schools.
4 MR. IRVING: Is it a market opportunity?
5 Because it is kind of a good corporate citizen thing to
6 do.
7 MS. KISER: It is both. It is both. And the
8 fact that there may be Universal Service Funds available
9 in the future for the work that we have been doing in the
10 past, and we may have access to those, certainly we would
11 pursue them. But that is not going to change what has
12 been our business approach historically.
13 So, it is a good thing, but it is not a driving
14 force from our business perspective.
15 MR. IRVING: What about rural areas, what is
16 Cablevision's vision with respect to rural America?
17 MS. KISER: Well, much of what we do is based
18 upon where our facilities exist. So where we are now is
19 not rural area, in the New York area. And as you know,
20 there have been certain mergers recently, where we are
21 trying to cluster --
22 MR. IRVING: We have been watching very closely,
23 as a matter of fact.
24 MS. KISER: And so a lot -- you know, we are
25 dependent upon where our facilities exist. So it is
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1 driven by that. I mean, there are many areas where our
2 facilities exist, like the Bronx, for instance --
3 MR. IRVING: Not rural.
4 MS. KISER: -- would not be -- not rural, but
5 not an area that companies are vying to deploy facilities
6 either, because they do not see that as a large business
7 center.
8 MS. KISER: My mother was a welfare worker there
9 for many years. And I remember, the year she started
10 there, and then 15 years later, going to the same center,
11 and just looking at the decimation, I mean, with the
12 stores and buildings. Over a 15-year period, there was
13 like nothing.
14 MS. KISER: But that has proven to be an
15 excellent market for Cablevision. And so, to the extent
16 our facilities exist in an area that may not be an area
17 that other companies -- especially with the business
18 perspective -- are interested in, if we are there we are
19 going to pursue every customer.
20 MR. IRVING: Why is that a good market? Do you
21 have a sense of why --
22 MS. KISER: Cable is popular. People like cable
23 television. They are willing to pay for that before they
24 will maybe pay for something else.
25 MR. IRVING: I can see it, yes.
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1 MR. TAYLOR: And we have found also that it is a
2 great area for us to deploy wireless technology. The cost
3 of running, say, a land line, a terrestrial line, from a
4 fiber standpoint, is probably over $500,000. We can bring
5 that broadband capability to a school or to a university
6 campus for less than $40,000. And probably, by the end of
7 1999, for less than $5,000.
8 So the cost economies and the return we can
9 get --
10 MR. IRVING: By the end of when is it $5,000?
11 MR. TAYLOR: 1999.
12 MR. IRVING: So in a year and a half?
13 MR. TAYLOR: Absolutely.
14 MR. IRVING: Wow.
15 MR. KOUTSKY: And from the perspective of Covad,
16 when we collocate in an office, we can provide the service
17 to any line served by that office. So, by definition, we
18 pass every school in the South Bay area right now.
19 MR. IRVING: And are you doing things with
20 schools and libraries?
21 MR. KOUTSKY: Well, I mean, to a certain -- that
22 is part of our business plan -- is to offer those types of
23 services. I would almost say, right now, that the prices
24 for T-1's and partial T-1's that we can sell already, you
25 know, put the incumbent pricing to shame. I mean, we are
87
1 talking not in terms of 95/5 percent price discount, we
2 are talking 50, 60, 70 percent price discounts.
3 And that is not a function of us doing anything
4 more than just taking an examination of the technology,
5 what it costs for us to deploy this service, and putting
6 in a reasonable markup. That is just the way that our
7 low-cost technology, and the fact that we are already
8 collocated in an office, to actually serve perhaps a
9 different type of consumer, that we happened to pass the
10 school.
11 And so that is the type of competitive dynamic
12 that at least our company brings up by building out. For
13 one particular reason, that collocation space and those
14 lines can be used to provide DSL service to anybody served
15 by that -- residents, schools. Also, the way -- when we
16 decide where to collocate -- you had mentioned rural
17 markets -- our focus being on teleworkers, the issue may
18 be that if we are trying to sign up, let's say, America
19 Online, who is out in Loudon County, I am sure they have
20 people living in West Virginia, I am sure they have people
21 living in Front Royal, I am sure they have people living
22 in Prince William County that would, quote, telework over
23 to America Online.
24 In order to acquire America Online as a major
25 client of ours, we will collocate in those offices. We do
88
1 not view each collocation necessarily as can I make money
2 on it, you know, am I rate-return positive or am I
3 return-positive from that central office. We look at an
4 entire metro region in deciding our collocation, and what
5 does it cost me to collocate to provide coverage for that
6 region, and does that include 70 offices, 100 offices, 200
7 offices. That is the dynamic.
8 And then, once you are in that office, you have
9 the economics working in your favor. Because then you
10 pass a school in that, and it is served by that area. You
11 pass the library. You pass the other small businesses
12 that may happen to be in Front Royal.
13 So I think the economics of rural entry and of
14 school and library services are being changed
15 underneath -- basically out from underneath policymakers.
16 These economics may have changed in the last year or so
17 anyway. And I think they are going to continue to change.
18 MS. WALLMAN: Larry, I just wanted to ask. What
19 has been the competitive response on your T-1 pricing?
20 Because that is really bread and butter for the incumbents
21 today. What happens when you --
22 MR. KOUTSKY: Well, we have not really seen much
23 of a competitive response. We do not market them at
24 T-1's, per se. And a lot of that has to do with just the
25 way that we have chosen to -- because our initial focus is
89
1 upon the teleworker situation, as opposed to just being
2 basically going into a T-1 technology arbitrage game.
3 I mean, we are using the same technology that
4 the incumbent uses to supply T-1 lines. You know, we just
5 call it HDSL technology.
6 So I suspect there will be a price response.
7 Has there been one yet? We have not seen one.
8 MR. IRVING: Let me go to Kathy. And then I
9 will go to Gary.
10 MS. BROWN: I want to build on Kathy's question.
11 The incumbent, sooner or later, is going to say, well, if
12 you can provide that service for that price using a
13 cheaper technology, well, so can we. And what happens
14 there to you, to the small niche player? And I have that
15 question all around the table.
16 I think we have incumbents who are waking up
17 from a long slumber, as the innovators -- or, as Larry
18 calls them, the blue jean crowd -- have come in and said,
19 gee, there is other ways and better ways to do this. And
20 the big players are saying, oh, well, then we can do that,
21 too.
22 What happens to all of you? And are there any
23 policy concerns that you would want to bring to the table
24 on that?
25 MR. KOUTSKY: This is one of the reasons we have
90
1 focused our business not upon T-1 arbitrage -- which is
2 how I regard it -- because that is just basically moving
3 the technology, you know, using the technology to change
4 the price. That is why we focused on the teleworkers and
5 upon the residential access standpoint, and also on
6 partial T-1's, which, you know, are an effective and
7 efficient small business service that they can provide.
8 But our focus is really more upon the remote.
9 Basically, it is a land extension business. That is a
10 business that our research has indicated is not apt to
11 churn. We are effectively extending the corporate LAN out
12 to employees' homes. That is not an easy thing to do, nor
13 is the company willing to switch that on a given moment's
14 notice. They are reluctant to have to go through that
15 type of computer network upgrade.
16 But that is more of an innovative-type
17 telecommunications/computer service. And that is where we
18 have niched ourselves.
19 We also use Internet service providers as
20 re-sellers of our service, as well. Whether or not we
21 will be the only service that those ISP's will resell, I
22 mean, I think, from a customer service standpoint, we
23 still think that we will never lose a customer and we will
24 always be able to out-service and out-provide the
25 incumbent telephone company. And that is where we have
91
1 decided to focus our energies.
2 MR. GREEN: The thread began with rural and
3 schools. Just two short comments.
4 We have a ricochet network in Scott's Bluff,
5 Nebraska, about a 25,000-person community. We have the
6 highest penetration per population of subscribership in
7 the shortest period of time. The folks there use the
8 Internet more than people in Silicon Valley. It is a very
9 active area. Maybe there is not much else to do, but they
10 are very, very active and very, very interested.
11 Wireless is unique in terms of its advantages to
12 school, I think. We have one school, a high school, that
13 checks wireless modems out to students so that they can
14 take the Internet home at night if they do not have it.
15 MR. IRVING: In a minute, I want to open this up
16 to the folks who have been patiently sitting here.
17 Because we said this is going to be a conversation. It
18 should be not just a conversation among ourselves, but get
19 to our questions.
20 Let me just turn to a couple of questions about
21 investment. And maybe I should, again, go back to Frank
22 and Daniel and talk about if you are a new
23 telecommunications service entrant and you are trying to
24 raise money out there in the capital markets, what do you
25 have to demonstrate to those folks with the money? What
92
1 do venture capitalists look for? What is the street
2 looking for?
3 When I get tired of being -- or when my wife
4 tells me I am tired of being a technocrat -- and if I want
5 to start a business, what do I have to demonstrate?
6 MR. ERNST: I think you have to demonstrate what
7 the successful CLEC's have been able to prove. Which is
8 that there is demand, and that is clear. There is demand
9 for competition. And we have a team of people who can
10 actually serve that demand. So you take a group like
11 Covad and essentially come into the market and install the
12 network on top of the existing network and provide the
13 service. And they are not really worried about price.
14 They are focusing on servicing the customer.
15 A lot of people -- where the investment
16 community is looking, we had caps when there were still
17 caps. In other words, you did not have the switches
18 installed and they did not have access. And the
19 competitive response was the T-1 price went down, from
20 $2,000 a month to $400 a month.
21 And as Marius said before, once you have the
22 competition in the market, the price is necessary but not
23 sufficient to get to the next level. So the investment
24 community says, what is your next level that you have to
25 offer, outside of price? Because, at a certain point in
93
1 time, Bell Atlantic and the others are going to install
2 the same DSL technology and have the same cost structure
3 as you. So how are you going to get by that?
4 That, we think, is bundling of the service. And
5 that is something that is hard to pinpoint.
6 MR. IRVING: Before I turn -- I guess my last
7 question before I turn and see if there are some other
8 questions out in the audience, is I do not think we can be
9 found guilty -- this particular group of 14 people of
10 irrational exuberance. But I do think that there seems to
11 be a sense that there is a good market. There is a lot of
12 opportunity. There is capital out there. We are in a
13 growth mode. And if we do things smart, this Nation is
14 going to soon be able to benefit. Investment is going to
15 benefit. Work is going to benefit.
16 What are some of the bumps on that road? If you
17 are trying to give cautionary advice to people who can try
18 to help make sure that the roads stay clear -- you know,
19 kind of a salting of the road before the snowstorm -- what
20 are the storm clouds on the horizon do you see?
21 Frank?
22 MR. PLUMLEY: I would advise people who are
23 trying to do so much to help the market adjust to change
24 reality to get out of the way.
25 MR. IRVING: We are out of the way. Are there
94
1 people in the way? Who is in the way? Please, let us
2 know.
3 MR. TAYLOR: I would say one of the things that
4 we are concerned with, from a wireless standpoint, is that
5 we continue to see the nondiscriminatory access for
6 customers to rooftop and building rights and for inside
7 wire and from rights-of-way. We think that is really
8 essential. Right now, landlords hold a virtual monopoly
9 to that last 100 feet that is out there.
10 So one thing for all of us in the CLEC industry
11 is that we make sure that this is nondiscriminatory across
12 the base. Right now, the local LEC's hold the rights in
13 terms of many of the buildings, in terms of free access.
14 We think free access should be worldwide and industry-wide
15 for all of us.
16 MR. IRVING: Frank, I did not know if you wanted
17 to continue.
18 MR. PLUMLEY: I just personally find it
19 impossible to believe that every 800-page new ruling is
20 really deregulation. Any 800-page rule is regulation.
21 I think the marketplace has consistently been
22 ahead of the regulators for the last 25 years in this
23 industry. I think there are enough companies that are
24 doing innovative things around this table, I guess, thank
25 God, that regulators are not conscious of.
95
1 (Laughter.)
2 MR. PLUMLEY: And several people have expressed
3 this, is willing and able to sort out subsidy issues and
4 some of these other things. If there is a social issue,
5 about what do we really want to do for the schools, what
6 do we really want to do for residential customers, then
7 people should stop waffling and go ahead and adopt an
8 explicit subsidy plan. Which that also is not popular.
9 You know, mobile rates cannot go up and
10 subsidies have to be there.
11 MR. IRVING: Trust me, we have these debates --
12 Marius?
13 MR. SCHWARTZ: I am all in favor of it. It is
14 politically unpopular, but the job of at least economists
15 is to keep harping on transparency. Let people know what
16 they are really paying for as opposed to finding variance.
17 I mean, part of this culture of burying things and keeping
18 it away from people is what is contributing to the general
19 cynicism about politicians. And I think if he got up and
20 faced the music, you might be surprised at how much
21 receptivity you might get.
22 MR. CONN: I want to give at least the observe
23 side of what Frank said. From our standpoint, we are in a
24 position now where we have good Federal legislation, we
25 have good Federal regulations, but I can tell you that
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1 every day the incumbents are out there before State
2 regulatory commissions and State legislatures, when they
3 lose before the regulatory commissions, and doing
4 everything they can to prevent competition from
5 developing. And to me, that is the pitfall.
6 I cannot tell you how many times we are faced
7 with situations where we have fought a battle before a
8 regulatory commission and won, and we have a
9 pro-competitive decision, and 2 months later, we are
10 before the State legislature, trying to keep legislation
11 from being passed which overturns that same decision. And
12 I think that is a very substantial pitfall that CLEC's
13 need to watch out for.
14 MR. KOUTSKY: Yes, I would like to reiterate
15 what David just say. Covad, our business plan, you know,
16 we were founded in October of 1996, 2 months after the
17 unbundling rules came out. Because the idea was that --
18 we did not even know for sure whether or not a
19 DSL-compatible loop would be unbundled as a facility until
20 those August rules came out. So we are dependent upon
21 that.
22 We are running into both loop price and loop
23 availability issues. One example in Texas, Southwestern
24 Bell, the price of what is called a conditioned loop, or a
25 digitally compatible loop, is $46 a month. Which,
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1 essentially, is no different than the State of Texas
2 putting up a sign and saying, you know, no DSL entry
3 wanted, in my opinion.
4 Also, my understanding is -- we are not active
5 in Texas, but my understanding from other CLEC's is that,
6 right now, in that State, SPC will not permit a person to
7 put even DSL bandwidth capabilities on that loop; that
8 they are limited to ISDN 128 kilobits per second-type
9 bandwidth.
10 Those are not the types of policies that are
11 really conducive towards providing the big pipe, which I
12 think would permit the type of innovative services and the
13 development of those types of services over time. There
14 are other issues, when I talk with incumbent LEC's, where
15 the focus is that the Act was about bringing competition
16 to local exchange service and voice-quality service, but
17 not necessarily to high-speed data services. That is
18 legally incorrect, but I think that is a perception out
19 there and that is the type of undercurrent movement which
20 could really throw a lot of these things off kilter, at
21 least from my perspective.
22 MR. IRVING: It is interesting, listening to
23 this debate kind of reminds me of the old Certs
24 commercial. You know, Certs is a breath mint. Certs is a
25 candy mint. No, you're both right.
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1 (Laughter.)
2 MR. IRVING: It is like Frank is right and Tom
3 and David are right. In the ideal world, regulators would
4 get out of the business. We would just say, hey, you can
5 have at the marketplace. But I think the fear is that
6 because of the size and some of the activities of some of
7 the incumbents, some of the concerns in terms of access is
8 that -- manage is the wrong word, but insurance that a
9 committed marketplace can develop.
10 And I am going to turn in a second -- but I
11 think the hardest thing in the world is going from a
12 regulated monopoly, where somebody has a guaranteed rate
13 of return, you know, where millions of people are
14 shareholders in those companies, so you're not trying to
15 drive them out of business, into a world where it is a
16 competitive marketplace, where new ideas and new
17 innovation and new entrepreneurs and new investment can be
18 driven. And it is turned out to be harder than any of us
19 thought.
20 I mean, I think the work that Marius and Kathy
21 and Kathy have done have helped us get to a pretty good
22 place. But I think you are right, to get to where Frank
23 wants us to get to is going to require some very delicate
24 balancing of competing interests. Because we do have the
25 best telephone system in the world, and did even before
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1 the Telecom Act of 1996. But we can have a better Act if
2 we get more competition, more investment, more
3 entrepreneurs, new innovation, and give consumers more
4 choice.
5 Debra.
6 MS. BERLYN: The whole trick here for
7 competitive local exchange companies to offer services to
8 all consumers, business and residential, and to make this
9 whole thing work, to make competition work, is to keep the
10 pressure on the monopolies to open up their local
11 networks. And without that, as Dave is saying, you will
12 get frustrated on the State level.
13 We do have an Act that provides a delicate
14 balance to opening up those local networks. And key to
15 that is a strict adherence to Section 271, which provides
16 the incentive for the Bell companies to continue to pursue
17 opening up those local networks. And from a consumer's
18 perspective, it is important that we continue to consider
19 the three parts to Section 271. And it is not just
20 meeting a checklist of 14 very important elements, but
21 also a public interest test as part of that, to ensure
22 that the public is served by that.
23 MR. MCGARTY: An interesting comment, and I
24 know, Howard, you were at SNET and I was at Nynex, so I am
25 not going to encumber our pensions and our stock shares.
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1 (Laughter.)
2 MR. MCGARTY: But one of the things that we have
3 seen is that Bell Atlantic -- and I am not going to speak
4 for SBC or any others which I think are different -- but
5 in the Bell Atlantic context, what we have observed is
6 they are re-looking at their business. And they are
7 saying, long term, where do we want to make money and what
8 is the business that we want to be in? What business
9 don't we want to be in?
10 And there is an internal reorganization
11 occurring there -- you know, and I think for the positive
12 it is kind of strange for us to say this because we are
13 competing with them -- they are doing such things as
14 outsourcing or getting rid of their outside plant. So all
15 of those little trucks running around with Bell Atlantic
16 signs on it may now be out-sourced to some third-party
17 company. They are saying, where is the real engine that
18 we make money? Because, in the long run, we are going to
19 have to be competitive.
20 And I think we ask ourselves the same questions.
21 And I think, in the long run -- getting back to some of
22 the comments of Kathy, for example, looking at this as a
23 5- or 10-year view -- we look at it that way and say, who
24 are we competing with 5 or 10 years from now?
25 And I think it is not going to be the ILEC that
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1 is there today. I think they are going to go through a
2 transition. And Bell Atlantic, especially because of the
3 additional burden put on them because of the merger
4 specifications from the FCC, have those additional
5 burdens. And they seem to be responding better. I do not
6 want to be a polemic for them, but we see that change
7 occurring.
8 And don't not pay attention to the fact that
9 there are economic forces, where they are going to say,
10 gee, we may behave rationally in our own interest long
11 term.
12 MR. IRVING: Is rational behavior -- well, I
13 think some would argue that some of the things that we are
14 seeing in some of the States would be argued as rational
15 behavior in the long-term economic interests of their own
16 business.
17 MR. MCGARTY: Of their own business. Right.
18 MS. KISER: I really think it depends who they
19 are dealing with, too. Because Cablevision's experience
20 is clearly very different than what Telmarc has been
21 experiencing. I mean, the interconnection negotiation
22 wars, you get no movement until you take something to
23 litigation. So, on the whole issue of what are the
24 roadblocks, that is it. We have a terrific statute. Then
25 we have regulators working very hard to issue orders and
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1 decisions. But to see them implemented, you know, in the
2 marketplace, it is a battle and it costs a lot of money.
3 MR. MCGARTY: Cherie, from our perspective,
4 again, we are totally different. And of course, what we
5 do is we now have a whole bunch of Nynex retirees. We do
6 have an outsourcing program. No, there is none of that
7 there.
8 (Laughter.)
9 MR. MCGARTY: But the point is that we -- I was
10 surprised -- we have turned our markets, in 90 to 120
11 days, from initiation of interconnect agreement to
12 termination of first access line. Okay. Or activation of
13 first access line.
14 And I have been, with all due respect,
15 surprised. And what we did is I was going to go in the
16 way you all did, which is, let's fight. And somebody
17 whispered in my ear, be nice. Which is a change. Okay.
18 And we found out that, boy, they were nice in return. But
19 they do need a poster child. And we are much more -- we
20 are less risky a poster child than you are.
21 (Laughter.)
22 MR. IRVING: I do not think Chuck Dolan is Bell
23 Atlantic's choice of a poster child.
24 (Laughter.)
25 MR. SCHWARTZ: Can I just add one point, though?
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1 I think, generally, people view Nynex and
2 Ameritech as among the more progressive of the Bells, as
3 compared to, say, BellSouth and SBC. And in an
4 environment where it is very difficult to force companies
5 to do something they do not want to do, especially if it
6 involves new, complicated arrangements, where nobody knows
7 can it be done, how fast, et cetera, it is very important
8 to give them incentives to behave right as well as behave
9 wrong. And the 271 process has a very important role to
10 play in that.
11 In particular, you do not want to coddle the
12 entrants. You do not want to, say, have the incumbent do
13 everything for you, but you do want to tell them, do some
14 important things, like helping switch over customers,
15 help, et cetera. And that is basically the Justice
16 Department's open local market standard that I have helped
17 work on.
18 I find quite cynical some of the postures
19 recently taken by some of the Bell companies, when they
20 challenged the constitutionality of the Telecom Act. Two
21 years have gone by and they discovered it is
22 unconstitutional.
23 The CEO of USWest recently spoke about this.
24 And when he was asked, he said, we wanted to see how it
25 was implemented. I see. So if it is implemented well, it
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1 is constitutional. But if it is not implemented well, it
2 is unconstitutional.
3 Well, I do not think it works that way. The
4 point I want to make is that it is important to get to
5 know what to get out of regulation. It is also important
6 to set some basic -- get rid of some basic roadblocks that
7 incumbents can put up. But to do that, it would help a
8 lot to have a pretty clear commitment against the Bells,
9 saying if you do not behave, you do not get at the long
10 distance. And if they really believed that, they would
11 behave better.
12 The problem now is that they think they can get
13 by with Chinese torture. They can keep filing petition
14 after petition.
15 MR. IRVING: Once again, Marius has said more
16 eloquently that -- and maybe a little more directly --
17 that which I was trying to say before.
18 (Laughter.)
19 MR. IRVING: Let me turn. We have some other
20 things we can talk about up here. But you folks out there
21 have been very patient. There is a microphone right here
22 so that people out in the world can hear you. If you have
23 something you would like to ask, feel free, come on up.
24 Please identify who you are, who you are with,
25 and ask your question. If there is more than one person
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1 at once, please queue up.
2 MS. BURGITT: I am Anne Burgitt from the
3 Corporation for Public Broadcasting.
4 My question is I am spearheading the effort for
5 the transition to digital television at CPB. And one
6 thing I would like to ask this group is how do you see the
7 6 megahertz chunk that could be used fairly flexibly
8 coming on line soon? How is it going to affect the
9 provision of some of these services? And if you do think
10 it will have an effect, how so?
11 MR. ERNST: Well, 6 megahertz is probably not
12 enough spectrum to offer the types of two-way broadband
13 services that we are kind of talking about here. We are
14 talking about fractional T-1 lines to the home. But, on
15 the other hand, it does open up opportunities for new
16 video services and new types of programs that were not
17 available. So, to that extent, maybe it offers some
18 competition to cable operators or other satellite
19 operators, but I am not sure if it directly impacts the
20 access market.
21 MR. COWDA: I am David Cowda, BNA.
22 I have two questions, but they are related. The
23 first question is Internet telephony has been touted as
24 being superior to traditional telephony. I would like to
25 know if anybody can kind of break that down as to how much
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1 of that is a technological advantage and how much of that
2 is an artificial regulatory advantage, where you do not
3 pay access charges and other fees, possibly for Universal
4 Service. Which leads to my second question:
5 What do people here think about Senator Stevens'
6 push to bring Internet traffic in underneath the tent of
7 telecommunications service, subject to Universal Service
8 fees, though possibly you can forebear at this time if it
9 is de minimis, but you should, as a definitional
10 standpoint, have it underneath the big tent, so that if
11 traffic does go to Internet, you do not have the network
12 undermined, particularly in rural areas?
13 MR. IRVING: Anybody want to try that?
14 MR. MCGARTY: I will take three comments at it.
15 I will talk with a different hat, which is my MIT hat,
16 because we have a MIT Internet telephony consortium.
17 From a policy perspective, Internet telephony
18 quality right now is -- I think I said earlier -- it is
19 not ready for prime time. So the quality is not there.
20 For those people who have tried Internet telephony over
21 the Internet, the delays, the security, the reliability,
22 all of these issues are problematic at this stage.
23 With Internet II, which is the upgraded
24 Internet -- higher speed, more protocol capability in
25 TCP/IP, and various versions of this stuff -- one could
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1 view, in the next 3 to 5 years, that feature functionality
2 being there. And then it is a question of how you price
3 demand Internet access. So it gets into a policy issue of
4 if somebody is demanding Internet access because they are
5 using realtime streaming of data, how do you charge for
6 that? And we have not really begun to even address some
7 of those policy issues.
8 That gets into the third issue of the Universal
9 Service Fund. Arguably -- and I think the FCC at least in
10 the Common Carrier Bureau, would say this already today --
11 that if I am going across a State line in TCP/IP, on a
12 private network, just because I change from voice to
13 TCP/IP to voice, that does not make me immune from the
14 current FCC strictures of interexchange carrier traffic.
15 That is, it is interexechange carrier traffic, and I have
16 got to pay access fees if I terminate on a LEC on the
17 other side. Okay. At least that is what the Commission
18 has told us.
19 There is a more complicated issue which is, if
20 you make that transition over the Internet, which makes
21 you immune from those types of termination fees, and
22 ultimately Universal Service, the argument is, what is the
23 Internet? I mean, if I have a private network which has a
24 firewall connection to the Internet, is that the Internet?
25 And I think there is a whole set of mushy issues there on
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1 the policy side that really have to be sorted out over the
2 next few years.
3 So it is just a, with all due respect to the
4 good Senator, a blatant restriction without understanding
5 where this process is going. I think it is premature at
6 this time.
7 MR. IRVING: Lior, did you hear the questions?
8 Because I think you might have a perspective that might be
9 useful. Let me try them. I think the first question was
10 people talked about Internet telephony as being a superior
11 product or having some advantages. And are those
12 advantages technological advantages or are they regulatory
13 advantages? Because there are some things that Internet
14 telephony has been exempted out from.
15 And I think the second question is Senator
16 Stevens has raised some questions with regard to the
17 regulatory treatment of IP-based services, and
18 particularly with regard to whether or not Internet
19 telephony-like services should be brought under the
20 Universal Service umbrella.
21 And I do not know if I did a fair job with your
22 questions, but I had some notes here and I do not want to
23 butcher them too badly. But I have been butchering
24 questions all morning.
25 MR. HARAMATY: Well, Terry already touched very
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1 good points about this. But, on top of that, also, we are
2 not talking about voice alone. And this should be
3 definitely treated differently.
4 When we enter into an era where voice, as it was
5 mentioned before, is only a small part of the overall
6 communications that is being done over the same lines, we
7 should apply new rules. The old rules, as was said by
8 Reed Hundt a long time ago, cannot be applied to the new
9 technologies.
10 MR. IRVING: And I guess for the record, I guess
11 I should say that the administration has been looking at
12 these issues. And our position has generally been that
13 these are promising new opportunities. And we do not want
14 to fail to realize a promise by premature regulation.
15 I think you have got to keep watching and
16 looking and seeing when and if, if ever, there is a right
17 time. You do not want to make the assumption that you
18 have to, but you want to be prepared that if you are
19 beginning to change the dynamics and the economics of the
20 industry, that you have a way of looking at it and
21 responding. But there are times when you can
22 prematurely -- I got petitions in 1995 and 1996, saying
23 that the FCC should start regulating Internet telephony.
24 And I think we made the wise choice at that time
25 to forebear and request that the FCC forebear from
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1 beginning to regulate Internet telephony. Hundreds of
2 millions of dollars have been invested as a result of that
3 decision.
4 I do not know, had there been some kind of a
5 significant regulatory response, that the folks in the
6 capital markets would have been as willing to make some of
7 the investments. And I do not know that we would have
8 seen the progress we have seen to date with regard to
9 improving robustness and the viability of IP-based
10 services.
11 So there is a balance, but we want to make sure
12 that we err on the side of investment opportunity and
13 entrepreneurial activity as opposed to reflexive
14 regulatory responses.
15 Yes, sir.
16 MR. CATO: My name is Tom Cato. And I represent
17 a Tokyo-based think tank called the Institute for Future
18 Technology. I happened to find out about this meeting
19 actually yesterday, and I was very interested. That is
20 why I came here.
21 As you know, in Japan, we have the new kind of
22 competition. I think, unlike your country, we have not
23 had a type of competition. But that is going to happen,
24 based on a new law that was promulgated last year.
25 Basically, you know, this break of Nippon Telegraph and
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1 Telephone Company.
2 And my question here is about research and
3 development funds. I would assume that this country, as
4 far as I know, the spirit of the AT&T, that innovation has
5 continued on a lot of products. Not necessarily in this
6 country, but all over the world. That we much appreciate,
7 number one.
8 And the other thing that happened, I think,
9 probably 2 years ago, is Bellcore that I understand being
10 acquired. And anyway, I would like to ask a couple of
11 people, particularly the CLEC representatives, how do you
12 get new technology, which I would say, while I was
13 listening, many people are hoping to distinguish their own
14 service over the other service. So that necessarily will
15 require, I think, the research and development strategy,
16 first; and, two, accomplish strategy. I think, you know,
17 they need to invest some money for research and
18 development.
19 But I have noticed -- well, I am guessing that
20 no new entrants have been made any statement in
21 research -- I mean in a technology fund. I would like to
22 listen, you know.
23 MR. IRVING: Does anybody want to talk about how
24 you get research and development --
25 MR. MCGARTY: Let me take a cut at that.
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1 I spent 4 years as the head of R&D at Nynex.
2 And I was chairman of the council at Bellcore, so I know a
3 little bit of something of this process. In the United
4 States, we are fundamentally different, I think, than most
5 other countries, in the sense that, at least in the last
6 15 years, our research and development has been driven
7 very much so from the venture capital perspective.
8 I mean, if you took a look at Silicon Valley, 2
9 years ago, every town had its own ATM company. And it is
10 a very Adam Smith-like survival of the fittest process,
11 which works effectively. If you go take a look at Bell
12 Laboratories -- having spent the first part of my career
13 there -- the introduction of the digital switch was
14 despite Bell Laboratories. The chairman of AT&T had to go
15 to Bell Northern Research and have it developed there.
16 That was the creation of Northern Telecom. Despite AT&T
17 and Bell Laboratories.
18 So centralized research, from my perspective, is
19 the anathema of the creativity of innovation. Let the
20 venture market work. Put my own money and put others at
21 risk. And we are the most efficient country in producing
22 innovative technology. I think Howard would agree with
23 PCOM and the other stuff. Do not put money in a
24 centralized fund. Because the people that run it do not
25 have the faintest idea, generally, of what they are doing.
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1 So, other than that minor comment --
2 (Laughter.)
3 MR. IRVING: Any other comments? Anybody want
4 to respond?
5 MR. ERNST: Yes. In the marketplace, it is not
6 necessary to be the leader, but a fast follower. And so I
7 think the CLEC's are not innovating technology. I do not
8 think they claim to be. But they are implementing the
9 technology that these new venture technology firms are
10 putting together. So it is a very neat process -- people
11 coming up with technology and someone coming forward and
12 putting it in place and directing it.
13 MR. IRVING: So you do not have to be the
14 Packers or the Cowboys, you can be the Buffalo Bills or
15 Minnesota Vikings -- never win, but come in a close second
16 -- or even a bad second?
17 MR. ERNST: It can be quite profitable.
18 MR. IRVING: All right.
19 MR. HUTCHINS: Just to comment on that. I
20 think, particularly in your market, it is interesting when
21 you talk about encouraging entrepreneurialism, and Terry's
22 comment, that, you know, the entrepreneurial drive and the
23 venture capitalists, that type of thing, I think if you
24 are going to look at where you expend your effort, it is
25 probably not in trying to preserve a current focus of
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1 innovation in one large entity, but what you can do to
2 encourage entrepreneurialism.
3 I think it is interesting to note that, so far
4 in Japan, with deregulation, most of the long distance
5 carriers are either major industrial corporations or they
6 are large bank companies that issue credit cards that
7 provide long distance. You have not seen a lot of the
8 small entrepreneurs coming up. And if there are things
9 that can be done across industry segments, including the
10 innovative side, to encourage entrepreneurialism, funding
11 for that, rewards for innovation, and that type of thing,
12 that is probably going to bring a lot more to the surface
13 quickly than to continue to try to fund the spinoff of
14 NTT.
15 MR. IRVING: Yes.
16 MS. NEWBERGER: Hi. My name is Lisa Newberger,
17 and I am with Andersen Consulting in Manhattan.
18 And my question is more about the content end of
19 these telecommunications topics that we are discussing.
20 And specifically, from the -- I am curious about anybody's
21 point of view on the topic of what services is the public
22 demanding or desiring regarding content that could be
23 distributed over the Internet or over the Internet and
24 other broadcast channels, such as television, digital
25 television?
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1 MR. TAYLOR: One of the things that I kind of
2 talked about was our Winstar for Education subsidiary, and
3 driving content from there. The other thing that we have
4 is a subsidiary that we bought -- a company called
5 Telebase, which is offering to small and medium businesses
6 pay-as-you-go services that have not been readily
7 available except for large businesses. So that type of
8 content that is being driven through the Internet to small
9 and medium businesses is one example as to how we are
10 trying to supply some new services to a whole new section
11 that had not been before.
12 MR. IRVING: Any other takers?
13 MR. PLUMLEY: I do not know. I can tell you I
14 spend my life largely on the SEC page, the FCC page, 51
15 State and D.C. regulators' pages. For me the Net has
16 pretty much been a business tool. And then I go to
17 FoodTV.com and print off recipes for my wife.
18 So it is a mixed thing, but 99 percent of my
19 time is business time. And I think the Internet has been
20 very helpful to us. We have a work-at-home program. And
21 I think without the resources that the Net makes
22 available, it would be very difficult for our people. And
23 we are pretty paper intensive. We shuffle a lot of
24 documents around. We have thick files and we document.
25 So without the provision of electronic files of
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1 one kind or another that the Internet makes possible, it
2 would be very, very difficult for our people to be in a
3 work-at-home mode. Even if they had a T-1 from the office
4 or something, it just would not do it. It is just the
5 absolute mass is an attraction. It is not so much a
6 specific niche that you can sell advertising on or
7 something, it is the mass, the fact that it is all there.
8 MR. GREEN: But let's not forget something. I
9 mean, the resources that we are beginning to find there
10 are valuable. E-mail is valuable, the ability to
11 communicate and all of that. But I think, if you are
12 honest, you end up saying that the common denominator for
13 kicking off the Internet -- and I think it will be very
14 important in the future as well as the same thing that we
15 see in cable -- entertainment. People love to pay for
16 entertainment.
17 And I am not saying it will not be useful for
18 business and in ways that have been described. But I
19 think you will always seen entertainment. You see new
20 sites coming on all the time now aimed at particular
21 segments of the population. And that will continue.
22 MR. IRVING: One of the things I remember when
23 the Net -- when I came over to Commerce in 1993, almost
24 exactly 5 years ago, one of the first things that I
25 implemented at NTIA was that everyone should have Internet
117
1 access at their desk. And then, when the Web, we wanted
2 to make sure everybody had Web access at their desk. And
3 that was like the next year.
4 And I know that personally I would do things
5 that were work related until about -- always at least
6 until 6 o'clock --
7 (Laughter.)
8 MR. IRVING: -- but then I might find things
9 like the Seinfeld page, or I might find things that were
10 entertainment. But now, increasingly you are seeing,
11 because we have more bandwidth and because you have faster
12 modems -- well, we have a T-1 line directly to my desk, so
13 maybe I am a little better off than most people in
14 America -- but most people will have that in the
15 not-too-distant future, or that kind of equivalency.
16 And what you are beginning to notice is that you
17 can do things like real audio, you can do things like real
18 networks, you can do things where there is a lot of, you
19 know, where bandwidth is required. And I think that is
20 going to drive more and more usage. I mean people want --
21 my grandmother has WebTV, and it is interesting, she
22 doesn't think -- she looks at the Web as kind of a
23 subsurface of television, because she does it through her
24 television. And I think that is going to happen more and
25 more as cable and others --
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1 MS. NEWBERGER: With the digital spectrum
2 allocations.
3 MR. IRVING: I hope. I mean, no knows what DTV
4 is going to do. We will have a PIAC meeting -- we had
5 one -- a public interest advisory committee meeting where
6 we looked at some of the technologies. I do not know yet
7 what is going to happen with the cable industry or the
8 television industry or the Web industry. But I do know
9 that my suspicion is, 10 or 15 years from now, with regard
10 to entertainment, to the consumer they will be seamless.
11 That is my suspicion. That they will all be doing
12 interesting things that to the consumer will be seamless.
13 Because it is not going to work if it is not.
14 The average consumer does not want to have to
15 get off of their computer and go to their television to
16 buy a Ford that is somehow hooked into this new stream.
17 But I do not think this -- we will probably have to do
18 another one for you -- another one of these for you -- to
19 really have that debate. Except somebody down here wanted
20 to say something.
21 MR. KOUTSKY: Yes, I would like to point out one
22 interesting change in the Internet, say, in the last 3
23 years that I, just as a user, was the development of these
24 push media -- Pointcast in particular. The type of
25 service that -- or the type of functionality that Covad
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1 provides, which is an always-on, high bandwidth
2 connection, all of a sudden, if you take Pointcast and
3 basically, you know, take the band -- you know, give it a
4 T-1 rate to everybody in the home, I think that that is a
5 pretty interesting and compelling, both business service
6 for somebody who wants to work at home -- that basically
7 everybody at home has a Bloomberg box if they want it, and
8 also from an entertainment perspective.
9 That is where I personally think where we will
10 start to see the movement towards -- is really in favor of
11 that type of broadcast, you know, push-type medium, when
12 big pipes do get developed into the house. But that is
13 just my own --
14 MR. IRVING: And look at the hits. I mean, one
15 of the most interesting things was, last week, MSNBC went
16 from 300,000 hits a day 2 weeks ago to 830,000 hits last
17 week, because people were interested in some rumor.
18 (Laughter.)
19 MR. IRVING: But, I mean, it was interesting,
20 you know, it trebled in a 1-week period, in much the same
21 way that the Gulf War drove what happened at CNN, all of a
22 sudden a new rumor -- a rumor -- well, some new
23 allegations -- I am trying hard to stay off of that road.
24 But you get the point. And so there is -- people are
25 discovering it. And I think that some of those people
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1 will be repeat -- will return and will be repeat buyers.
2 MR. HARAMATY: I believe that what all of you
3 are saying is -- and these are very nice things about the
4 Internet -- that anyone can put anything over the
5 Internet. And the variety of things that we can do with
6 it is really the major point. And what's even nicer with
7 it is that we do not know what applications we will be
8 using in 2 years, because they were not invented yet.
9 And this is the main issue with the Internet.
10 It is a platform that can do things that we do not know
11 what it is capable of. And this is, I believe, where we
12 are going.
13 MR. IRVING: Yes.
14 MR. ERNST: One thing I would say is a lot of
15 times -- and we have seen this over the last 5 years on
16 the concept of convergence, with these pie-in-the-sky
17 ideas about interactive television and data interacting
18 with new medium. And ultimately, if it is not easy to
19 use, it is not going to be. All the convergence tests
20 that they have done with full-service networks in Orlando
21 and other ones in California, have not been successful,
22 because it is far too interactive.
23 The reason why push technologies such as
24 Pointcast are successful is because it is packaged well
25 and it easy to use. I do not have to spend a lot of time
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1 searching. My primary mode of researching on the Internet
2 is Pointcast. Because I just do not have time, even with
3 a T-1 access, to do all the searches. And this gives me a
4 first level.
5 And in the household, if you have to sit there
6 and wait for that horrible noise to get through, and that
7 ding-ding on the Compuserve, and then, you know, that will
8 ultimately drive more applications of the technology. If
9 it is easy to use, if you can turn on, it is
10 instantaneous, it is quick, there is not a wait, and the
11 information is packaged in a way that is useful, then that
12 will be an application.
13 But people talk about all of these applications.
14 We have to keep in mind -- narrow it down to like how do
15 people actually interact with it.
16 MR. IRVING: Thank you.
17 MS. TUCK: Good morning, everyone. I am Shanda
18 Tuck, and I am with the Office of Congressman Edolphus
19 Towns, who is on Capitol Hill, and yes, he has used the
20 Internet.
21 (Laughter.)
22 MR. IRVING: He's on the Net?
23 MS. TUCK: Yes.
24 MR. IRVING: All right.
25 MS. TUCK: He has clicked around.
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1 MR. IRVING: I was born in his district. I'm
2 happy to see it.
3 MS. TUCK: But I want to commend you for having
4 this roundtable here today. Because it is not often that,
5 as a Capitol Hill staff person, we get to hear and listen
6 and actually think proactively in terms of what the
7 business community is doing towards the future. And
8 actually there were some issues here that were raised
9 today that I personally had not been aware of.
10 As Mr. Taylor mentioned, he mentioned the
11 building issue in New York, in terms of building
12 nondiscrimination over leases. And that point, that is an
13 issue that I now know about that I can take back to my
14 member and let him know. So I really appreciate you all
15 for raising the issue.
16 But I am really here also because we are really
17 interested in the urban areas and the infrastructure
18 issues, and particularly, as was mentioned earlier,
19 narrowing the gap between the information haves and the
20 information have-nots. Because, as most of you know,
21 there is a large consumer market in urban areas such as
22 New York, specifically Brooklyn, and people spend millions
23 of dollars on various products every year. However, there
24 are other products that I am sure that they would be
25 interested in if they only, one, had the information and,
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1 two, perhaps if the infrastructure were a little bit
2 better.
3 Because I was really interested in the Bronx,
4 and how Cablevision, Ms. Kiser mentioned, is actively
5 going out into the Bronx, and you are showing that you are
6 making lots of money. So what I want to ask you all today
7 is, are there any infrastructure problems in urban areas
8 or any other issues that you see in urban areas that are
9 preventing the consumers, the so-called technology
10 have-nots or information have-nots, from getting the
11 information?
12 Because when I am out therein the community in
13 various community meetings, people are interested in this,
14 once you tell them this information. For instance, the
15 Congressman just had a seminar on the Universal Service
16 Fund there. And there was a myriad of people there from
17 business people to the New York State community. And it
18 was a good combination and diversity of people. And they
19 were very interested. It was just that they did not have
20 a lot of the information before that time.
21 So I want to put the question to you, again:
22 Are there any barriers in urban areas that you are seeing?
23 What is keeping companies out of urban areas in
24 particular?
25 MR. IRVING: Could you define what you mean by
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1 urban areas? Because a lot of these guys do a lot of
2 business in -- okay.
3 MS. TUCK: Yes. Yes. Well, actually, I look at
4 Brooklyn, even though the average person may say that it
5 is a urban area in terms of large populations of people,
6 et cetera, there are issues -- there are barriers in terms
7 of people being, say, on the outer parts of the borough,
8 where it is similar, in a sense, to a rural area. And
9 then there are parts of the area where, you know, it has
10 an older infrastructure, the train system has been there
11 since the early 1800's, most of the fiber that we took a
12 look at a few months ago has been there for a very long
13 time. And so there are also issues for other companies
14 coming in.
15 So I guess I am defining an urban area as where
16 there is a small geographical area, there is a large
17 population of people and a large infrastructure in terms
18 of buildings and transportation networks.
19 MR. IRVING: Anybody want to take a look at
20 that?
21 MR. TAYLOR: I think there is an issue. And I
22 think it is a big issue. And I think it is an issue that
23 part of the Telecom Act of 1996 -- and this is probably
24 not a Winstar opinion, I will say, but it is a Howard
25 Taylor opinion -- that we have disadvantaged parts of
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1 society.
2 Now, at the same point in time, I will
3 contradict myself in saying that I think competition
4 itself will help to bridge this gap. One of the things
5 that I will tell you all of us around this table are doing
6 is sitting down and seeing, per subscriber, who are the
7 ones that will pay us the most dollars.
8 We are looking at consumers from the standpoint
9 of not just the Larry Irvings that are there, with the
10 quality and the number of services that they can offer us,
11 and we want the Larry Irvings. We want those consumers
12 that are going to pay $50, $60, $75, $100 a month for a
13 combined package of services -- not saying that we are
14 going to let off, but those are the first ones that we are
15 target-marketing and going after to offer services to.
16 So those consumers that can only pay $20 or less
17 a month are at the bottom of the calling pattern that are
18 there. Will they be served? Yes, at some point in time.
19 However, at the same point in time I will say they are not
20 the highest priority that you are going to find from a
21 business standpoint, mainly because of the return that you
22 have that are going to be on the top of the list.
23 MS. BROWN: I feel a need to jump in. From my
24 days at the New York State Public Service Commission, when
25 I spent a lot of time thinking about Brooklyn and the
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1 Bronx and Manhattan. And what we found was consumers in
2 those areas pay the same, at the same rate, took the same
3 services that people in suburban areas did. And that the
4 hurdles to entering those markets seemed to be other than
5 that they were not acting like consumers in other areas.
6 The experience of Cablevision in the Bronx, for
7 instance, suggests that these customers will pay $30 for
8 cable. And so the question becomes whether, in the way we
9 think about marketing, whether we are thinking about
10 different customer segments differently.
11 And I think we need to challenge ourselves
12 around that.
13 MR. TAYLOR: Well, I was speaking more from a
14 business standpoint, not from a public utility commission,
15 and giving you a perspective from a business standpoint
16 what's happening in the marketing departments in viewing
17 different segments.
18 Now, at the same point in time, I think
19 competition and looking at the Cablevision thing, in terms
20 of packaged services, is that will be the thing that will
21 bridge the gap between the profitable end users that you
22 may see and we look at today versus those that we will
23 have from a future standpoint.
24 And that is where I think partnerships and that
25 is where I think having other services beyond traditional
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1 telephony services will help bridge that gap.
2 MR. MCGARTY: I think, Howard and Kathy, we are
3 putting -- our second switch is in now in Brooklyn. We
4 chose to go in Brooklyn rather than Manhattan mainly
5 because of what exactly you have said. We took a look at
6 the statistics. Also the guy that is putting it in used
7 to run Brooklyn, Queens and the Bronx --
8 (Laughter.)
9 MR. MCGARTY: And we had the conversation with
10 the switch guy, right, okay. And his reward is he gets
11 the switch in the basement if he makes Brooklyn work well.
12 His wife does not like that.
13 But Brooklyn, from our perspective, we did the
14 demographics, and it fits exactly the profile we are
15 looking at, both, ironically, on the business side, which
16 is the average business access line of $100, and on the
17 residential side in certain markets, because of our
18 international company, it has a large community that make
19 international calls.
20 So what we did is we combined my international
21 company with the domestic company, and said, gee, I can
22 break even on local exchange, but in the Dominican
23 community or the Hasidic community or whatever it happens
24 to be, boy, we can get an uptick on the international
25 side. So that is part of the reason why we specifically
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1 chose Brooklyn.
2 I think the second part of your question, which
3 was how do you facilitate people access to this -- we can
4 put a fiber to somebody's home, but unless they have PC's,
5 unless they have the training, unless they have the
6 things -- the "ilities," I call them, that make the thing
7 work, we can give them gigabits, but it is going to be
8 gigabits going into nothing. So they really have to have
9 access to these facilities.
10 If you go into even the New York City Public
11 Library system -- and we were talking about this at
12 breakfast this morning -- in some of the better
13 neighborhoods, at best, there are two PC's that give you
14 Internet access. And all the kids run across the street
15 from the school and they line up on 20-minute sessions on
16 the PC over a 12-hour period. And it is a lock-up
17 problem.
18 So the issue, I think, at least from my own
19 experience in New York, is having access to the computers
20 and the tools to use that bandwidth. How do you solve
21 that problem? I do not think we as carriers know how to
22 do it.
23 MS. BROWN: Well, good news there, too.
24 (Laughter.)
25 MR. TAYLOR: One way is facilitating with
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1 libraries and schools and being able to bring the
2 technology into these neighborhoods.
3 MR. IRVING: Yes, if you really want to see how
4 people in New York use the library services -- if any of
5 you are in New York, and you are in downtown New York, go
6 over to SBL, the Science and Business Library, and there
7 are 400 PC's down there. And I am proud of it, because we
8 were one of the partners, with Paul LeClerk, to put them
9 down there. But you literally can use the computer for an
10 hour, and it is a slice of New York. It is everybody you
11 talked about, plus. You watch, you know, an Irish cop
12 sitting next to a Puerto Rican mother, sitting next to a
13 Hasidic Jew, and they are all, you know, accessing the Net
14 or a database in a library for free, 1 hour, you know, and
15 using the Web.
16 Jim, you are the last question, because we are
17 now at the end of the --
18 MR. GREEN: Can I ask one real quick perspective
19 that I think is relevant?
20 MR. IRVING: Sure.
21 MR. GREEN: I look at it a little differently.
22 Setting aside, you know, some of the things that were said
23 here related to capital availability -- and for us, we
24 think that will require a partner. We have characterized
25 our network very carefully, in fact, in Brooklyn, along
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1 with some Brook & Union Gas people.
2 It requires four things for us to come in:
3 Permission from the City. We have permission from the
4 City, but not enough to do New York City in total. So we
5 are going to have to choose where to go first. And that
6 will go back to marketing questions. And Brooklyn looks
7 like a good place, but most people say, gee, business is
8 Manhattan. So, you know, there is an issue with how much
9 permission the City provides.
10 We need access to electricity. And that means
11 going to the utility. Because the utility provides the
12 electricity to the City-owned poles.
13 We have to have access to building tops for
14 transition points to wire.
15 All of this has to fall together, and none of it
16 is easy. And it goes back to access, that Howard was
17 talking about before. And it is so critical. In addition
18 to capital, access is just dead critical.
19 MR. MCCONNAUGHEY: I am Jim McConnaughey, NTIA.
20 I will try to talk quickly.
21 Well, first off, I would like to echo what the
22 previous questioner said. It has been a tremendous
23 session, a real clinic. It has either had me stroking my
24 beard or scratching my head, which is usually a good sign.
25 A follow-up comment on the gentleman from Japan.
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1 I would like to throw out the idea of basic research, how
2 that will tend to fare in the -- wherever you want to take
3 the demarcation -- post-Bell system, post-divestiture --
4 whether private sources will be adequate sources of basic
5 research, as opposed to specific design and development.
6 Now, the question I really wanted to get to. A
7 number of folks think electric utilities are slumbering
8 giants in terms of possible participation in the local
9 markets. And the Telecom Act of 1996, I think, permits
10 exempt carriers to participate. I think there is
11 possibilities for that happening that did not exist in the
12 past.
13 I just would like to quickly throw out to folks
14 at the table whether they think that electric utilities
15 will be a serious participant in the local exchange market
16 within -- well, pick your time frame -- 2 years --
17 MR. GREEN: You know who my partner is here,
18 don't you, Pepco? So there is one answer.
19 MS. BERLYN: Yes, those partnerships have
20 already started.
21 MR. MCCONNAUGHEY: I understand they have
22 started, but in terms of a serious participant. Is there
23 going to be a critical mass or a groundswell in this area?
24 Or will they be niche players?
25 MR. IRVING: Anybody want to take a shot?
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1 MR. GREEN: I will.
2 From what we see, I think they are dead serious.
3 You see more and more of the electric utilities saying I
4 want to offer a full package of services to my customer
5 base. And that what is happening here. That is what is
6 happening in Scott's Bluff. I think they are serious.
7 They are all finding a new business.
8 MR. KOUTSKY: I think a lot of utilities are
9 looking at electric deregulation. And they are thinking,
10 when you get down to it, an electron is a commodity. And
11 they are looking for ways of getting total-bill customers,
12 too. And I speak at a lot of these conferences, and I
13 think that what is driving them is an ability to continue
14 to sell that person power; what can I put on top of that?
15 And I think that's what's driving them.
16 MS. KISER: I think what is key, though, from
17 what I am seeing in the industry, is that most of the
18 electric power companies are not going out and trying to
19 do this independently. They are looking for
20 relationships. And I think that, you know, that is
21 probably wise in initiating the service. And you are
22 probably going to see more of that, rather than them
23 acting independently -- especially in the New England
24 market, where this is in full force.
25 MR. PLUMLEY: I think electric companies serve a
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1 market that is growing much less rapidly than the phone
2 companies. I think, for some of them, deregulation of the
3 electric industry is going to be a bit of a problem. And
4 for seemingly decades, they have been casting around,
5 looking for ways to invest in other businesses that are
6 not in electricity, and they have lost huge piles of money
7 doing this, and that includes investments in telephony.
8 So they might be a source of capital, but an
9 electric utility has all the wonderful attributes of, say,
10 a BOC, in terms of its wonderful marketing skills, its
11 super-defined, real quick decisionmaking process.
12 (Laughter.)
13 MR. PLUMLEY: I might have come on a little hard
14 before.
15 (Laughter.)
16 MR. PLUMLEY: One of my comments on sort of the
17 regulators getting out of the way is I am sick to death of
18 the fact that the Bell guys, AT&T and MCI are so big and
19 have so much money and so many lawyers that it really
20 behooves them to compete in the regulatory process in the
21 courts and legislatures, which was mentioned, rather than
22 in the marketplace. Electric utilities have been weaned
23 the same way. They have had one customer, the regulator,
24 for the last half century.
25 So in terms of electric companies having the
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1 skills to do anything, I mean, Duke Power has been very
2 successful in partnerships, but -- and FPL has done some
3 stuff, not all of it bad -- but overall, what you have
4 seen is you have seen electric utilities try to do
5 something with fiber and then sort of slam the brakes on
6 and go find partners who might actually be able to do a
7 business as opposed to, oh, gee, you know, like we're
8 going to hang something else on a pole.
9 So I am not real optimistic on that. I think a
10 good source of capital maybe for some of the smaller
11 companies in the industry, but not, as utility companies,
12 players in any way.
13 MR. IRVING: Well, that is a good note on which
14 to close. There were some questions here that I had that
15 I would like to have gotten to with regard to M&A's. I
16 think we could have spent hours probably on the
17 international opportunities for companies like yours and
18 for this Nation, in the post-WTO, both with regard to
19 telecom and the IT agreement. And unfortunately we did
20 not have time to do that. But I think this has been an
21 incredibly rich discussion.
22 I mentioned to my wife this morning that I was
23 going to be moderating a panel. She said, oh, just what
24 the world needs, another black, bald-headed moderator,
25 without the charisma of Montel or the humor of Keenan
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1 Ivory Wayans.
2 (Laughter.)
3 MR. IRVING: So I get a lot of respect in my
4 house.
5 But I do want to thank you all. So if I do get
6 thrown out of business, maybe I can go in there as a
7 Montel imitator.
8 (Laughter.)
9 MR. IRVING: We got one thing today that I
10 wanted to share with you. Because we have been talking a
11 lot about competition. And all of you know that the
12 second birthday of the Telecom Act of 1996 is Saturday. I
13 hope you all send flowers or a card.
14 (Laughter.)
15 MR. IRVING: But there has been a lot of
16 discussion about the Act. And I have a statement from the
17 Vice President on the second anniversary of the
18 Telecommunications Act that I think is an appropriate coda
19 for the discussion that we have had here this morning, and
20 so let me read it as we conclude the session.
21 From the Vice President of the United States:
22 Today, as we approach the second anniversary of
23 the landmark Telecommunications Act, there is no question
24 that it is the right approach for America's economy and
25 for America's future. The information and communications
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1 industry is now the single largest and fastest-growing
2 industry in the United States. If we want this industry
3 to grow and to thrive, if we want to create more
4 high-paying jobs in this new economy, we need the greater
5 competition, greater investment, greater innovation, and
6 consumer choice that the Telecommunications Act promises
7 to create.
8 When we fought for and won this first overhaul
9 of America's telecommunications law in two generations,
10 updating communications law that were virtually unchanged
11 since the golden days of radio, we knew that the change
12 and growth we sought would not happen overnight. So, it
13 is not surprising that some are clinging to the status quo
14 that they have come to know so well.
15 But we cannot build the information age economy
16 with industrial age policies. We need to stay on the road
17 to competition. And that is why the President and I urge
18 all involved in implementing this Act to redouble their
19 efforts to open all communications markets. That is the
20 only way to build the 21st century economy we all deserve.
21 Thank all of you for helping build that 21st
22 century economy. And thank you for your contributions
23 today.
24 (Applause.)
(Whereupon, at 12:05 p.m., the conference concluded.)