Remarks by Larry Irving
Assistant Secretary for Communications and Information
National Telecommunications and Information Administration
U.S. Department of Commerce
Practising Law Institute (PLI)
Telecommunications Policy and Regulation Conference
December 10, 1998
Good morning. It's a pleasure to be here at the 16th Annual PLI Conference, and I want to thank Henry Rivera, Dick Wiley, and Clark Wadlow for inviting me to join you this morning.
As I prepared to speak to this roomful of lawyers on telecommunications issues, I was a reminded of a joke:
A surgeon, an architect an a lawyer are having a heated barroom
discussion concerning which of their professions is actually the oldest
The surgeon says: "Surgery is the oldest profession. God took a rib from
Adam to create Eve and you can't go back further than that."
The architect says: "Hold on! In fact, God was the first architect when he
created the world out of chaos in 7 days, and you can't go back any
further than THAT!"
The lawyer puffs his cigar and says: "Gentlemen, Gentlemen...who do you
think created the CHAOS??!!"
When you think about the telecommunications market today, some would say this market also appears chaotic. I believe it is a good chaos, a creative chaos: companies in the same sector are competing against each other, and those in different sectors are offering competing services. Many lawyers, maybe even some of you here in this room, helped create that chaos.
Sadly, one of the key lawyers - perhaps the key lawyer -- who helped create this chaos died two weeks ago -- William Baxter. Bill Baxter, the former Assistant Attorney General for antitrust, was my former law professor and also was the antitrust professor for Anne Bingaman, his successor as head of the Antitrust Division. It was Baxter who presided over the break-up of the AT&T monopoly fourteen years ago. He insisted, despite the protests of the Secretary of Commerce, Secretary of Defense, and even President Reagan, that long-distance competition would come about only by divesting the regional telephone monopolies from AT&T's long-distance monopoly. Thanks to his historic and landmark settlement with AT&T, we now have competition in the long-distance industry and independent regional Bells. Many of the issues we will be addressing at this conference today exist only because the framework he helped create.
It is therefore a great tragedy that, as one of the founding fathers of our current telecommunications framework, his death largely went unnoticed in this city. Nevertheless, he has left us a significant legacy through his passion for competition and open markets. It is even fair to say that the global revolution we have experienced would not have happened quite so quickly were it not for this legacy. Professor Baxter continually asked whether a combination or merger was anticompetitive, or whether it served the consumer. As the Administration develops telecommunications policy, and as my colleagues in the Administration consider mergers and combinations, our focus should continue to be on open markets and competition. These are the questions we should also be focusing on now, as we begin this two-day seminar.
Competition - Three Years Later
And how are we faring in creating an open market and competition nearly three years after the passage of the 1996 Telecommunications Act?
On the one hand, we have seen remarkable growth of the Internet and data-based services resulting from an open, unregulated approach. The vibrancy, the creativity, and the unparalleled energy that we have seen in this sector of the industry is testimony to the power of an unrestricted environment. Today, over 70 million Americans and nearly 150 million people worldwide are using the Internet. This will be the first "Internet Christmas" for many with a trebling or quadrupling of on-line sales expected from last year to this year. By some estimates, we will be purchasing $1 trillion of goods on-line in the next several years. We are listening to music through Real Audio, watching live footage on CNN.com or ABC.com, bidding against each other through on-line auction houses, and buying our stocks on-line. Three years ago, we would never have imagined that the Internet would have so profoundly changed our culture.
In the Clinton-Gore Administration, we believe that it is through an unfettered, open market that the greatest investment and innovation occurs. The Administration has forcefully advocated regulatory forbearance domestically and internationally as the Internet and new networks develop. For example, Internet (or IP) telephony now provides a cheaper option for making telephone calls. Had the U.S. government decided to regulate IP telephony, as some telephone representatives have requested, companies might not have been willing to make the millions of dollars of investments to improve voice service over the Net. By permitting companies to experiment in an unregulated environment, we are now beginning to see the fruits of their technological innovation in all areas of the Internet.
The Telecommunications Act was intended to create the same open, competitive environment in the telecommunications industry as well. In local telecommunications, however, competition has arrived more slowly. We don't have the level of competition that consumers deserve. In 1995, Bill Baxter wrote in a letter to Congress that "[w]e should not fall into the trap of thinking that just because local competition is imaginable, it is already here. It is not here. It is not even close." The same statement is still true today, even three years after the Act's passage.
We are indeed seeing an increasing number of competitive local exchange carriers (CLECs), many of whom are contributing to the buildout of advanced networks. That development is encouraging, and important. Nevertheless, CLECs still have not captured a significant share of the local, residential market. Incumbent LECs still control more than 95% of the local market today, as measured by total local service revenues. And, by some estimates, incumbents still control more than 97% of the local access lines.
As a result, while the Telecommunications Act was intended to create choice and lower prices for the consumer, it appears that the only person benefitting today is the high-end phone user and business customer. The average customer still doesn't have a choice in local provider or lower local telephone bills. And that simply is not acceptable.
The Stall Ball Approach
There are a number of reasons why we still have not felt the full benefits of the 1996 Telecommunications Act. First, for too long, many companies have been caught up in a game of stall ball. In the basketball world, the NCAA outlawed the stall ball strategy, where the team with the late lead in the game keeps the ball away from the opponent. In the local telecommunications market, on the other hand, that strategy still reigns. The BOC or ILEC that has monopolized the local telephone service market can still do so by refusing to engage with the opposing team. By making it difficult for a competing provider to interconnect, or to obtain the elements, services or the information it needs, the incumbents are maintaining the control of the game.
Local competition is critical if we want to reduce the costs of telecommunications for the average consumer. If a CLEC is beginning to offer advanced data services, you can bet that it's going to undercut the current price of those services offered by the incumbent. Competition is also critical if we want to spur providers to build out their networks to meet our country's growing data needs. These services, to date, have been largely provided by information technology (IT) companies. A recent report on Marketing Telecoms to Small and Medium-Sized Businesses found, for example, that IT companies, not the telephone providers, are successfully providing network services for this fast-growing sector. But, as long as the incumbents remain a monopoly, we will not see the level of innovation and investment in our networks that is so urgently needed.
Another factor that has stalled the successful implementation of the Telecommunications Act is litigation. Now, I love lawyers . . . . Some of my best friends are lawyers. But we've seen enough litigation. Companies have spent billions of dollars in legal fees challenging the interconnection agreements they have signed, FCC orders implementing provisions of the Act, or provisions of the Act itself. Over 150 interconnection agreements have been challenged in district court, by either the incumbent LEC or the competing carrier. At least twenty rulemakings or orders implementing the Act have been appealed. And various carriers have raised facial challenges against provisions of the Act, including a challenge to the constitutionality of the Act itself - by those who lobbied Congress to pass it to begin with! As a result, we are still waiting - nearly three years later -- for significant provisions of the Act to be interpreted by the courts. Meantime, companies faced with such uncertainty are often reluctant to move forward. And, investment capital is not deployed to the benefit of competitors or consumers.
These strategies of delay have made it difficult for competitors to even enter the game. As a Wizards fan, I've been upset by the NBA's lockout this season. But at least I can still watch the ABL or college basketball. In the telecommunications market, if there's a lockout, the consumer has no other options. Those companies that use their size and their political and legal muscle to block competition might be inhibiting those that are the fastest and most innovative, or those with the best strategy for developing networks or services of the future. Until the game is joined, we will never know who the stronger competitor is. And we are tired about watching folks argue over the rulebook.
Towards A New Approach
Fortunately, there are indications that the tide is turning. Some companies are recognizing that pro-active, creative steps and conciliatory action are necessary to foster the pro-competitive goals of the 1996 Act. We continue to believe that the 1996 Act got it right. We just need companies to comply with its terms. Less stalling, and more collaborative thinking, will help us reach these ends.
I am pleased to see that some companies are now thinking long and hard about whether the resources devoted to litigation could be better spent elsewhere. It is gratifying to note that companies realize that litigation may not be the most efficient or most productive way to achieve results. Let me take this opportunity to commend BellSouth on its decision two weeks ago to withdraw from the Fifth Circuit case on universal service. BellSouth recognized that regulatory developments had reduced the need to challenge the 1997 universal service order. The company also noted that it didn't want to be involved in a lawsuit that might damage a program providing discounted services to schools and libraries. Its withdrawal was a bold action, and one I hope other companies might consider.
We are also beginning to see more negotiation and collaboration in devising creative solutions. In the context of the 706 proceeding, for example, we have seen several companies negotiate agreements. In this proceeding, the FCC is considering how to promote the deployment of advanced network services by ILECs, and what type of access ILECs must provide competitors to these services. Promoting investment in broadband networks is critical if we want incumbents to invest in new technologies, and if we hope to connect more American homes and strengthen our economy.
Last month, we saw an ILEC -- Ameritech -- come together with a CLEC -- Northpoint -- and begin to find agreement on key issues. And this week, we all learned of a new proposal put forth by a coalition of other BOCs and several computer companies. The coalition negotiated a set of ten principles to accelerate the deployment and access to data services, such as DSL loops. In a letter to Chairman Kennard on Monday, the companies presented these principles as a potential resolution in the FCC's 706 proceeding.
We must look critically at this proposal to ensure that it complies with the key provisions of the 1996 Act. Without addressing the merits, I'd like to commend these parties on their strategy of coalition-building and negotiation. I only wish that the coalition had included all interested parties. The absence of the CLECs as parties was striking, and we are now beginning to hear the reasons why they did not sign on.
I should also note that, yesterday, a coalition of Silicon Valley companies wrote the Commission urging regulatory forbearance in regulating emerging broadband networks, particularly for companies competing against incumbent telcos. Their concern about the effects of overregulation on capital markets is fair and appropriate, but must be balanced against the need to ensure that no player is capable of distorting competition.
The approach of building a broad-based coalition is nevertheless a sound one. Often, the parties affected by an agreement are far better than those of us in Washington in determining what works, what doesn't work, and which incentives will encourage compliance with the law. If we can encourage more creative thinking and negotiation, within the current legal parameters, I believe that we can more readily fulfill the goals of the 1996 Act.
Review of Mergers
Having talked about industry's constructive actions in implementing the goals of the 1996 Act, I'd now like to turn to the role of government in this regard. Open markets and competition will be accomplished only if government plays an aggressive role in reviewing pending mergers. Bill Baxter certainly did not believe that mergers per se impeded competition, but he cautioned that government must look closely to ensure that a merger does not foreclose competition.
These words of advice serve us well as we examine the ever-increasing number of telecommunications mergers. When the Telecom Act was passed, there were seven BOCs and GTE. In a little over a year, we have already seen mergers between Bell Atlantic and NYNEX, AT&T and TCG, MCI and Worldcom, and SBC and Southern New England Telephone. This spate of merger activity has continued unabated. We are now faced with mergers between AT&T and TCI, SBC and Ameritech, and GTE and Bell Atlantic. If the pending SBC-Ameritech and GTE-Bell Atlantic mergers are approved, there will only be four major providers of local telephony, and the two newly merged entities would control approximately two-thirds of the nation's access lines.
We must be particularly vigilant as the number of major providers diminishes. Several of the merging companies have claimed that the combination is necessary so that they can compete globally. While I see the merits of this argument, I have to ask: At what point does such an argument no longer apply? When there are three BOCs, or two? Remember that, when the FCC issued its order on the Bell Atlantic-NYNEX merger, it cautioned that "further reductions in the number of Bell Companies or comparable incumbent LECs would present serious public interest concerns." We must carefully evaluate whether we have reached that point.
Our vigilance is necessary whether we are dealing with telecommunications mergers or mergers involving new technologies, such as the Internet. The Internet's chief virtue is its openness, its decentralized operations, and its democratic structure. The Net is open to anyone with access to PC and proper software. Anyone can be a publisher and put his or her own story on the Web, or sell a product to the world market. We therefore must guard against any merger consolidating ownership over part of Net in a way that could affect its openness or control the content.
I am pleased that the Department of Justice, the FCC, and key members of Congress are taking a serious look into these issues. The FCC is continuing its series of en banc panels next week, which will raise diverse perspectives on the mergers. Senators DeWine and Kohl have also been holding a series of hearings on the telecommunications mergers and have commissioned a GAO study to determine the level of competition in the industry. This the type of critical analysis that we need.
The upcoming panels today and tomorrow will continue to shed light on the issue of mergers and local competition. As we think about these issues, I encourage you to think about these issues as Bill Baxter would have done. Some of us look at a problem, and decide what principles we should draw from it. He always operated from principle and applied those principles to the practical problem. In his speech announcing the Modified Final Judgment, Professor Baxter spoke of the need to eliminate structural barriers to the emergence of effective competition.
As we explore various issues over the next two days, let's remember that the principles of open markets and competition should always be among our goals. These are the principles that have promoted new services, better technologies, and the buildout of our infrastructure. These are the principles that have built America into a great nation. Let's make sure, as we review any action or inaction, that these principles endure.