FCC CHAIRMAN REED E. HUNDT ADDRESS TO THE HARVARD INTERNATIONAL BUSINESS CLUB [AS PREPARED FOR DELIVERY] May 11, 1994 It is a pleasure to speak tonight to such a distinguished audience; one that is so knowledgeable about business. I want to use this opportunity to discuss the role that everyone hopes business will play in the development of the information infrastructure of our nation. My view is easy to summarize. Our country has the finest information infrastructure in the world today. This infrastructure, the so-called "information highway," is going to keep growing and evolving -- offering an ever-increasing array of new services. This growth has been, and will continue to be, the result of innovations and investments made by the private sector. As you know as well or better than I, we are living through a communications revolution that is creating new opportunities for consumers and investors alike. This revolution is not being driven by the government, but I believe that policy makers have an important role to play in letting markets create as much value as possible. That sounds like a daunting and complex task, but I believe it is one we can accomplish as long as we remain true to one commitment: we must promote competition. Our rationale for competition must be to provide choice for consumers, to give opportunity for new entrants, and to assure fairness in the means of competition. But let's talk first about what the information highway is. Never have so many talked so much about something so hard to describe. So what is the information highway? The short answer to this question is clear: it is the mother of all metaphors. Every day we hear about on-ramps to the highway, cruising the highway, and lately, roadkill and pot holes on the highway. Unquestionably, like many metaphors, the phrase information highway both illuminates and distracts. This metaphor has so captured the public's imagination that most people approve of the information highway even though according to a Harris poll only one-third claim to know what it is. Yet the highway metaphor doesn't help us much to discuss, for example, the complexities of introducing competition in concentrated markets or guaranteeing privacy or security. Nor is the highway metaphor a useful substitute for explaining the strategic thinking behind a proposed merger or the risk- reward ratio associated with an investment opportunity. The highway metaphor has also created unrealistic expectations. Many people appear to believe that some day next year a golden thread of fiber will bring them 500 interactive channels of education, entertainment, healthcare and job opportunity. And some believe that, like the highway system, this connection will be built as a massive government project. As you know, the information highway will not arrive in its fullest sense tomorrow. Nor will it be a massive public works project, or a single centrally planned private works project. It is, and will continue to be, many different business activities -- driven by competition to provide value to household and business users. Already the information highway exists. It includes our country's great, familiar, parallel communications networks. These are the telephone, cable, broadcast, and cellular systems; soon to be joined by satellites that will offer video programming on dishes no larger than a big salad bowl. The information highway includes the thousands of individuals and organizations maintaining data bases and bulletin boards on the Internet. The information highway is what almost two-thirds of all Americans travel on as part of their daily work. Police and school teachers, homemakers and stockbrokers, sales clerks and millions of others depend on cheap information and easy communication to be productive and successful. But the information highway is also the future. A recent edition of U.S. News & World Report lists 25 "breakthroughs that are changing the way we live and work." Each -- from paperless manufacturing to voice recognition -- is part of the 'information highway'. Each is going to create a new job or make an old job more challenging, more productive and, ultimately, more highly paid. Many of these new services will be based on the extraordinary development of broadband interactivity; that is, two-way communication entailing full-motion video, data, and voice. These services will have new uses, new applications and create new business that will rival the development of cars or computers in terms of their economic and social impact. Everyone is looking for the interactive "killer app" -- the new application that will do for new communications technologies what PC's did for computers, what the Model T did for the car: the invention that will democratize a product for an entire industry and the country. While much attention has been paid to the hunt for killer apps, technology is also making possible another, equally exciting opportunity: the chance to have widespread, vigorous competition in communications markets. The technological underpinnings of this opportunity come from inventions like fiber optics, SONET rings, digitization, and compression. The power of these inventions is not their technical wizardry, although each is an impressive achievement. Their power comes from the fact that they facilitate "convergence." Convergence means that each of the parallel networks I just mentioned can deliver products and services that compete with the products and services delivered by the other networks. Competition has many benefits: Competition leads to lower prices, stimulating demand; Competition promotes innovation and creates more choices for consumers; And the presence of vigorous competition means that there can be no need for regulation. Competition brings these benefits to communications markets, not just in theory, but in fact. Customer premises equipment in the telephone industry provide a good example. If the old, pre-divestiture AT&T had had its way, you would still be renting the big black phone alternatively serviceable as hammer or a paper weight in a hurricane -- and costing more each year in rent than the full price of the most advanced hybrid computer-phone today. The reason for the explosion in choices and innovation for customer premises equipment is that public policy opened this market up to competition. Government employees were not the innovators, the investors, the entrepreneurs; but they are the ones who made it possible for those who brought their ideas and products to the public. Long distance telephone services provide another example of the impact of competition. Since AT&T lost its monopoly over such services ten years ago, MCI, Sprint and 400 other long distance companies have entered the market. Rates for long distance calls have dropped by two-thirds. AT&T has continually lost market share, yet because of the higher demand coming from lower rates, it increased its revenue. Again public policy introduced competition -- and I remember how millions complained about the breakup of Ma Bell and how the market struggled to value the Regional Bell Operating Companies (RBOCs). Transitions to competition are difficult. The benefits of competition seem self-evident at least in retrospect to all of us who have worked and learned in the great American economic system. But let's focus on a key fact -- in developing the full potential of the communications revolution, no other country in the world trusts in private industry and competition to the degree we do. In almost all other countries, governments block competition in many ways, with many excuses. For example, the minister of telecommunications for one of the former Soviet Republics recently told me that his country's economy was too poor to permit competition, and therefore he was authorizing monopolies to develop the country's wire and wireless systems. I told him, with respect, that if his country was poor, it was too poor to tolerate monopoly. I noted that the Soviet Union tried to foster economic growth through state- authorized monopolies and I thought it was not an exaggeration to say that things really hadn't turned out so well. Unfortunately, former Soviet Republics are not the only countries that rely on monopoly, rather than competition, to build their telecommunications infrastructures. That's why I thought it was so laudable that the United States send its second highest ranking elected official to the first World Development Conference of the International Telecommunications Union this spring in Buenos Aires. That conference made history in the annals of telecommunications by adopting the principles advocated by the American delegation. Implementation of these principles -- privatization, liberalization, competition and open access -- can generate extraordinary business opportunities for those companies that know how best to compete -- and those companies are American companies. Even in the face of obstacles erected by some foreign governments, American companies are doing well in telecommunications markets abroad. American exports of telecommunications goods and services exceeded 20 billion dollars last year. Just yesterday, AT&T won a contract with Saudi Arabia that could be worth up to 4 billion dollars. If the rest of the world follows the path prescribed by the Buenos Aires conference, we can do even better. Over the next six years China alone will spend 90 billion dollars on telecommunications equipment. Under the Buenos Aires principles, American companies would have a fair shot at those sales. If, however, other countries choose not to follow our approach, American companies seeking to offer telecommunications goods and services may be forced to do so in a rigged system that will not give them assurances of a fair chance to compete. As a result, projects with huge economic potential -- such as planned worldwide satellite systems for mobile communications -- could be denied the economies of scale and scope that their inventive genius has earned, and from which consumers would benefit. I believe America should vigorously argue for open, competitive communications markets all over the world. The beneficiaries will be not only Americans but all of the world's people. But we should also acknowledge that we haven't always got it completely right here at home, that creating choice through competition isn't always the way we've handled communications here in America. At home, competition means permitting new companies to bring local telephone service to your community -- just as the State of Maryland did two weeks ago in authorizing a new competitor to Bell Atlantic in the suburbs of Washington, D.C. Competition means enabling new companies to provide video programming -- just as the Federal Communications Commission did when we decided not to let cable companies lock up programming with exclusive contracts. Competition means finding a way, over time, to let long distance companies into the local telephone markets and local telephone companies into the long distance markets, just as Congressional leaders such as Senator Hollings and Congressmen Dingell, Brooks, Markey and Fields are now doing through their proposed legislation, with the Administration's support. Let me discuss in greater detail one area in which the Commission is working to foster competition, and by doing so will ensure that market forces -- and not the Commission -- will ultimately guide prices and investments. That area is personal communications services, or PCS. PCS refers to the next generation of wireless services. Small hand held phones that you can use anywhere. Wireless LANS. Wireless faxes. Even services that are not yet a gleam in some young engineer's eye. PCS is a business made from thin air -- and hard infrastructure investment on the ground. We are currently preparing to issue licenses for that thin air -- a large block of spectrum allocated for PCS. As part of our deliberations, we must consider more than sixty petitions for reconsideration of our rules. I have been meeting with would-be builders, bankers, computer companies, unlicensed users, and designated entities to decide how to resolve these outstanding petitions. Let me share some of what we've been saying to each other. First, we are committed to choice in PCS. Second, we need real opportunity for business in the lower and upper band. Third, we need to create a fair opportunity for markets to reach equilibrium. These views mean we must tolerate risk and permit reward. This summer we will auction so called narrowband PCS, which includes advanced paging services. Toward the end of this year we will begin auctioning broadband PCS, which is enough spectrum to permit a company to offer mobile telephone services provided by light weight, low-cost pocket devices. We are almost four years ahead of the deadline Congress has set for us. Ultimately, sound decisions made today will speed up the introduction of new services and new competitors in the future. This is an unparalleled opportunity to start with competition and has never been done before. To fulfill this opportunity thanks in large part to the vision of Congress, we are auctioning spectrum, rather than relying on comparative hearings. That will put licenses in hands of those who will compete best -- not those who have the best lawyers or the most luck. Next, we should give licensees unprecedented flexibility to use the spectrum to provide those services that they believe will have the greatest commercial value and to do so using the technologies of their choice. We will not be telling providers what services to offer and how, their customers will. Finally, a guiding principle of our spectrum allocation will be to let market forces, not regulation, determine the ultimate number of competitors. That means we will not artificially limit the number of licenses in order to guarantee greater profits for those who obtain licenses. Nor should we preclude licensees from forming the spectrum and geographical blocks that permit sustainable businesses. We do not know and will not choose the ultimate number of firms that survive in each geographic wireless marketplace. And it is not our job to do so. Our job is to create the conditions that allow business men and women to take their chances in the marketplace, without undue regulatory burdens. It is up to financial markets to decide which projects get funding and which do not. It is up to consumers to choose which firms offer services worth buying and which do not. Some firms will enjoy tremendous success. Others may fail. Our job is not to guarantee success. Our job is to make sure that the opportunities are there. It is one thing to create a new market with these principles. It is another to apply them to an existing market. As some of you may have heard, if you were listening very closely, the FCC has recently issued new regulations for cable television. Cable television is a market that is not yet competitive. Given the lack of competition, fairness and the '92 Act require some rate regulation, but I want to be clear that I strongly believe that we should hold steadfast to the principle that competition, not regulation, is our ultimate goal. I find it interesting that in all the recent commentary about the cable industry, almost no one has pointed out that when competition comes, rate regulation will disappear. Competition will come -- although it is not inevitable. In the interim, while we are regulating cable rates, we rely on market forces where we can. In choosing its primary means of setting regulated prices, the Commission rejected the use of traditional public utility style regulation under which accounting rules establish a rate base on which firms are allowed to earn a set rate of return. Instead, under the '92 Cable Act, rates were set primarily by reference to what they are where cable competition from overbuilds -- so-called duopoly pricing -- exists. We rejected references to a multi-firm model, and declined to set rates at the much lower prices that a model of incremental cost of delivery would set. But far important than sharing with you the econometric models we considered and rejected, I want to reiterate our fundamental commitment to introducing competition in cable markets so that we can dispense with rate regulation. We also are working to ensure that cable companies can respond to market demands for new services and can obtain the new investment capital needed to support them. The incentives to undertake new investments and the access to capital to fund them both depend on the returns these investments are expected to earn. Two important implications flow from this fundamental point: First, innovative new channels offered a la carte are not regulated. Many new interactive services may well not be regulated. Hence, market forces -- not regulation -- drive the incentives to invest in these services. Second, those new services that are subject to regulation under the law should be allowed to earn a competitive return. For example, operators that add new channels to regulated tiers are be allowed to recover their costs, including a mark up. We are working with the industry to fine-tune incentives to increase capacity, modernize facilities, and add new programming where consumers want it. This is an ongoing cooperative process. It works best when industry works with us, as many members now are. Over the past several weeks, we have already fine-tuned the 13 pages of our rules to enable the launching of several new networks, including the largest launch in the history of cable television. Meanwhile, on another front of emerging competition,local telephone companies are lining up to provide video transmission services known as Video Dial Tone. This entry is expected to benefit consumers, not only by fostering lower prices through competition (and ending cable rate regulation), but also by encouraging the development of new, innovative services. Video Dial Tone can promote beneficial investment in infrastructure. But the cable industry wants us to review carefully all video dial tone applications to ensure that video transmission costs will not be recovered from charges for basic telephone service. We are taking this cable industry advice and doing that review. We believe in fairness in competition. We do not want other video service providers -- including cable operators -- to be at an unfair disadvantage in competing with the telephone companies because of the telcos' monopolies in local telephone services. I can sum up what I have had to say tonight as follows. The Commission's job is to create opportunities for all industries to participate in communications markets, not by handicapping players, but by ensuring that no one blocks access to markets. Our job is not to guide investment; our job is to ensure that companies have a fair chance to invest and to compete. I have told you tonight that I believe in markets, and I do. A lot of people are saying that if this is so, then the FCC should simply get out of the way and let market forces alone determine the shape of the industry. I agree with this much -- I hope and believe competition can replace regulation. But, while the information highway will inevitably be built, the transition to competition isn't inevitable. It will take good policies and aggressive entrepreneurship Yet we know that it will be worth the effort. There is perhaps no greater example of the benefits of competition than our nation's economy. It is no coincidence that the American economy is both the most competitive in the world and the strongest. In competition there are winners and losers. Don't judge the wisdom of competition on the success or failure of individual businesses. Judge it by the opportunities created for businesses to succeed or fail based on whether they can meet the challenges of the marketplace. We can't predict which firms will succeed and which will fail. Nor can we predict where communications technology and markets will lead. But we can make sure our economy will be the winner -- as long as we maintain a commitment to let private sector competition lead us, and the rest of the world, through the information age. Thank you and good night.