REMARKS OF U.S. FEDERAL COMMUNICATIONS COMMISSION COMMISSIONER RACHELLE CHONG AT THE FINANCIAL TIMES SYMPOSIUM TOKYO, JAPAN SEPTEMBER 28, 1995 "THE ROLE OF COMPETITION IN PROMOTING THE NATIONAL AND GLOBAL INFORMATION INFRASTRUCTURE" INTRODUCTION Good afternoon. As the first speaker following lunch, it is a good idea to be entertaining -- or your audience may fall asleep. So, today, I will begin my remarks with one of the hottest and most fascinating topics on both sides of the Pacific -- no, not the Global Information Infrastructure. I am talking of course about Hideo Nomo, star baseball pitcher for the Los Angeles Dodgers. Now, I must be honest. I was born and bred in northern California where I was raised to despise the Dodgers, the arch rivals of my home team, the San Francisco Giants. However, like many fans in the National League, I have caught "Nomo Fever" and I am following his skyrocketing career with great interest. Nomo faces more obstacles than the average rookie. First, he is living and working in a foreign country. Second, Nomo is not fluent in English, so it is a challenge to communicate with his teammates and coaches. But these challenges have not stopped Nomo from becoming one of the Major League leaders in strikeouts. He's so good, he was the starting pitcher in the All-Star game last summer. For a rookie, that's a tremendous accomplishment. How is it that this 26-year-old "Tornado Boy" from Japan can take the U.S. baseball league by storm? In a word, competition. While some may question his rather unusual delivery, his record shows that he is, quite simply, one of the best pitchers around. Now, do you think Nomo would have had the chance to succeed had the baseball Commissioner overly managed competition? Suppose the Commissioner had severely limited the number of pitchers allowed to play? Suppose he had set an Americans-only rule for players? With unnecessary restrictions like those, I wonder if Nomo would have had the chance to become one of the premier pitchers of the year. THE IMPORTANCE OF COMPETITION Besides the race for the World Series, there is another important contest going on right now. This is the race to develop the national and global information infrastructures. Competition plays a critical role in this event too. Competition in telecommunications has produced great benefits in the United States, for both consumers and service providers. We Americans, particularly my colleagues at the FCC, are so committed to the notion that we are constantly scouting for new sources of competition. And, like the Dodger scouts, we in the U.S. Government would welcome all new talent to our telecommunications market, including companies from all around the world. I believe that our best hope for bringing new talent to our market -- and to markets around the world -- is the successful conclusion of the work being done by the World Trade Organization's Negotiating Group on Basic Telecommunications. The NGBT is working to negotiate commitments to liberalize trade in telecommunications services in the most important world markets. And it must meet its April 30, 1996 deadline. In the interest of promoting competition in the global telecommunications market, our goal should be sportsmanlike competition. Actually, I see this competition as being more like a triathlon than a baseball game. But instead of the running, swimming, and bicycling of a triathlon, I envision us competing in three events: first, granting market access to all segments of basic telecommunications; second, allowing 100% foreign direct investment in basic telecommunications suppliers; and third, adopting rules that guarantee fair competition among all market participants. It is up to Japan and the United States, as two key players in this negotiation, to take the lead in setting the rules in this race. If we set the finish line where it should be -- well down the path to full and fair competition in the global telecommunications market -- then our friends around the world will likely follow our lead. Fortunately, the global political climate has never been more favorable to the development of competition in telecommunications. In January, Vice President Al Gore announced the Global Information Infrastructure Agenda for Cooperation, and encouraged world leaders to come together to bring advanced communications infrastructure to all countries. The world is coming to understand the need for full and fair competition and is actively discussing implementation of competition on a global and a national basis. Of the five basic principles that form the foundation of the GII, competition is the cornerstone. The other principles include encouraging private investment, providing open access, creating a flexible regulatory environment, and ensuring universal service. I am aware that Japan, like many of our global partners, is caught up in an important debate about what strategy it ought to pursue. In the mid-1980s, Japan embarked on a program of liberalization in its telecommunications market. This program included the partial privatization of NTT and the introduction of competition in the domestic and international long distance markets. The Telecommunications Business Law of 1985 permitted the entry of new common carriers (NCCs), such as Teleway Japan, Japan Telecom, and DDI, to compete against NTT for domestic long distance. These NCCs, however, were not free to take advantage of market forces. For example, prices and network capacity were closely regulated. Some have argued that the industry was being micromanaged. Despite the introduction of competition ten years ago, the NCCs have garnered only 13% of the market in fiscal year 1993, according to MPT figures. So it is fair to say that NTT continues to dominate the domestic telecommunications market. Now, Japan faces the challenge of how to further increase competition. To divest or not to divest NTT is purely a decision for Japan's government. I did not come here to prescribe a solution to the challenge Japan now faces. Rather, I would like to share with you some of the lessons we learned when we introduced competition to our telecommunications market. I think you will find many similarities between our experience and the Japanese situation today. THE U.S. EXPERIENCE WITH COMPETITION Once upon a time, AT&T maintained a monopoly on telecommunications services and equipment in the United States. AT&T had proprietary ownership of critical patents, had control over access to most of the U.S. local telephone network, and had the only public long distance network. Competition was first introduced in U.S. telephone services in 1969 when the FCC granted MCI permission to provide point-to-point microwave services. Eventually more than 1,700 service providers such as MCI and Sprint filed applications to enter the U.S. telecommunications market. Despite the emergence of competitors to AT&T as early as 1969, the new carriers faced technical and regulatory obstacles that continued to protect AT&T's dominant position. Because the network was designed to accommodate only one long distance carrier -- namely AT&T -- MCI callers were required to dial extra digits and, in general, received technically inferior interconnection to the network. What happened next is that the U.S. Department of Justice filed an antitrust lawsuit against AT&T. The Department of Justice alleged that the company had engaged in anti- competitive practices to maintain and enhance its dominant position in the long distance and other markets. In 1982, AT&T and the Justice Department reached an agreement known as the Modification of Final Judgment -- or MFJ. The MFJ stipulated that AT&T would divest its local telephone companies, while maintaining long distance and manufacturing operations. The agreement also required that the local telephone companies provide consumers access to any long distance carrier of their choice on the same terms as AT&T's customers. We call this "equal access." Meanwhile, the FCC wrote rules to govern interconnection of long distance carriers to the local network, replacing the negotiated deals that had previously existed. The result was what we call "interstate access charges." These are the rates that long distance companies pay local carriers to originate and terminate interstate calls. Under these new rules, local exchange carriers must file annual tariffs that contain non-discriminatory, just and reasonable rates, and terms and conditions for interconnection to the local network. Traditionally, usage-sensitive long distance rates have subsidized the high fixed costs of the local network. In other words, businesses with high volume usage were paying an excessive share of local network costs. The "interstate access charges" were designed to rationalize the way costs were recovered. Indeed, as a result of the new rules, high-volume customers have stayed on the public switched network and increasing demand has reduced the unit costs of providing services. Interstate switched access minutes of use increased at an astonishing pace -- from 183 billion in 1986 to 401 billion in 1994. BENEFITS OF COMPETITION What has been the net result of competition in the U.S. telecommunications market? I would like to address four major areas. Increased Traffic And Penetration Rates First, competition has resulted in increased traffic and penetration rates -- in short, more talking! In the period between 1984 and 1993, we witnessed an explosion in traffic: for every hour of local usage in 1984, there was an hour and 15 minutes in 1993; for every hour of long distance usage in 1984, there were 2 hours and 18 minutes in 1993; and for every hour of international long distance in 1984, there were a whopping 3 hours and 45 minutes in 1993! The increases in local traffic came despite the fact that local rates increased. Meanwhile, long distance usage increased in response to rate reductions of nearly 30%. It is interesting to note that U.S. consumers responded to rate rebalancing not by disconnecting from the network, but by increasing local usage slightly and increasing long distance usage dramatically. Nor did competition discourage local exchange carriers from adding new subscribers. In the 10-year period following the breakup of AT&T, 14.6 million households were added to the U.S. telephone system, increasing the telephone penetration rate from an already high 91% of all households to an even higher 94%. Increased Employment and Revenues Second, competition in the communications marketplace has created more employment opportunities and increased the number of firms and overall revenues. There was an initial loss of about 70,000 jobs resulting from the restructuring of the telecommunications market between 1988 and 1992. However, during roughly the same period, we saw nearly half a million new jobs created in communications and emerging information markets such as computer software and broadcasting. In the international long distance market, AT&T has been joined by nearly 160 new carriers of international traffic. Again, these new firms mean new jobs. Revenues are up too. Between 1983 and 1993, overall revenues for long distance and local carriers increased by two-thirds, to reach over US$133 billion. Although AT&T's market share since divestiture declined from over 90% to under 60% and long distance telephone rates have fallen significantly, AT&T has been able to maintain healthy revenues. These revenues have increased steadily since 1990: from roughly $34 billion in 1990 to $37 billion last year. The reason for this revenue increase is the overall market growth stemming from increased call volumes and a plethora of new services. More Choices Created For Consumers Third, competition has produced a diversity of services and products based on consumer needs -- in short, more choices. Until the equal access rules were put into place, other carriers simply matched AT&T's new service offerings. Now, however, old and new carriers alike are engaged in fierce competition to offer innovative services based on consumer needs. Like the "personal handyphone system" pioneered here in Japan, wireless personal communications services in the United States are expected to create additional innovations in the marketplace. Mobile phones are a huge success in my country, and even pagers are now being carried by school children so their parents can easily remind them to do their homework or walk the dog. Improved Network Modernization and Service Quality Finally, competition has brought greatly improved network modernization and service quality to our communications systems. We no longer rely, as we did in the predivestiture era, on a single entity to be responsible for modernizing our telephone network. Instead, many new market entrants are upgrading our infrastructure and providing new services to U.S. consumers. To give you just one example, by 1993, competitive access providers that compete against local telephone companies had laid nearly a quarter of a million miles of fiber optic cable. In the decade since divestiture, total plant investment has increased nearly 60% to reach roughly $300 billion in 1993. So, consumers have seen a better quality and more advanced network evolving. COMPETITIVE SAFEGUARDS Based on the U.S. experience, the FCC thinks that the four most important measures to safeguard a competitive market are as follows: First, fair and economical interconnection: Without non-discriminatory and cost-based interconnection obligations, a dominant carrier can engage in such anti-competitive practices as: excluding competitors from access to bottleneck facilities; charging excessive interconnection rates; and, requiring overly burdensome technical specifications for interconnection. In June, the Ministry of Posts and Telecommunications (MPT) invited my government to submit comments on NTT's proposal for interconnection to its local network. We very much welcomed this opportunity to provide our views on this critical issue. In our comments, which I will make available, we express concerns about continuing the "negotiated" approach to interconnection that NTT has proposed. An effective interconnection regime is the foundation of a competitive market. If the aim is to increase competition, we believe that interconnection must go beyond case-by-case negotiations. Interconnection terms should be uniformly and widely available for similarly situated customers on a non-discriminatory basis. Likewise, interconnection charges must be reasonable and non-discriminatory for all competing carriers. The second measure to safeguard a competitive market are those designed to prevent cross-subsidization by the dominant carrier. With the emergence of competition, the dominant carrier can obtain an unfair price advantage by shifting to monopoly services the costs incurred to provide services in newly-competitive markets. There are three sets of losers in this cross-subsidy game. The customers of the dominant carrier's monopoly services lose because they end up paying excessive rates. Competitors who cannot engage in cross-subsidization lose because they can be driven out of business by predatory pricing of competitive services. Finally, consumers lose the benefits of competition if the dominant carrier's strategy is successful. In order to prevent the dominant carrier from cross-subsidizing competitive services, regulators can introduce competition in monopoly markets so the carrier lacks incentive and the ability to cross subsidize. Regulators also can introduce a pure price caps regime so cost allocation does not affect prices for monopoly services. Yet another alternative would be to impose cost accounting and cost allocation rules. Under these rules, the dominant carrier is required to separate the costs of competitive services from those of monopoly services. In the United States, dominant carriers are required to allocate the costs of property and equipment used for both monopoly and competitive services in accordance with FCC rules. Our review of these cost allocation manuals helps to ensure that consumers and competition are protected. Of course, we have found that competition in all telecommunications markets is the surest way to prevent cross subsidization. There is no question that cost accounting and cost allocation requirements can be burdensome on both the carriers and the regulator. However, during the preliminary stages of competition, we have found these safeguards to be extremely important. The third measure to safeguard a competitive market is transparency or procedural openness. To ensure fairness, published tariffs and procedures are a must. Without transparency, dominant carriers cannot be held accountable to the public. Without this safeguard against anti-competitive behavior, competitors will likely be discouraged from entering the market. Likewise, without transparency, it is difficult for the public to hold regulators accountable. Not only should existing regulations be published, the public should participate in setting such regulations. We applaud the MPT's historic decision to invite public comment on NTT's interconnection proposal. At the FCC, we have found public input essential to sound decisionmaking. For every rule we create at the FCC, there is ample opportunity for the public to provide input. In fact, the public can even ask the FCC to initiate a rulemaking process. Our open rulemaking process ensures that we have had the opportunity to weigh fully the implications of our proposed rules with all views aired. A fourth measure to safeguard competition is having a regulator that is independent from the operator. Otherwise, there is a potential for a conflict of interest when a government is an owner responsible for the financial performance of a dominant carrier. As an example, a common view of the 1990 decision to postpone action on the issue of NTT divestiture is that the decision was motivated by concerns about NTT's precarious stock price at the time. As a majority owner of NTT stock, your government was obligated to be concerned. However, at the same time, MPT is also motivated by its desire to increase competition in the Japanese telecommunications marketplace. One can see how conflicts of interest might arise. In our view, it is crucial that the regulator be independent of service operators. We think this balances competing interests and promotes public trust in the fairness of the regulatory process. Having said that, however, there exists the danger of over-regulation. Our experience in the United States teaches us that managed competition does not work. Limiting the number of entrants to the market, for example, produces a tremendous regulatory burden. How do you decide who gets to play and who doesn't? How do you stop someone intent on playing from doing so? Increased competition, in and of itself, reduces the need for regulation. This is the fundamental philosophy underlying the U.S. offer in the NGBT. Essentially, the United States is willing to eliminate all foreign ownership restrictions on basic telecommunications providers if others will agree to do the same. The resulting competition promises all of the benefits I have already mentioned and many more, including a reduction in burdensome regulations. CONTINUING U.S. EVOLUTION Having said that, I recognize that the United States is not yet fully competitive in all market segments. We, too, continue to evolve but we are swiftly moving in the direction of increased competition and less regulation. As we speak, the U.S. Congress is working on passage of a new law whose primary goal is to enhance competition in all telecommunications sectors. Recognizing the trend towards convergence, the new law would permit telephone companies to operate cable systems and cable operators to run telephone systems. Other provisions would allow the entry of local telephone carriers into the long distance telephone market and vice versa, given the appropriate competitive circumstances. Perhaps of greatest interest to our friends abroad, the proposed legislation would allow us to eliminate ownership restrictions on the provision of radio-based basic telecom services by non-U.S. companies. While the timing of the legislation remains unclear, there is widespread agreement among Congress, the Administration, the FCC and the affected industries, that competition should be the basis of a new telecom law for the next century. MEETING THE CHALLENGE Over the next seven months, our governments have a historic opportunity to sweep away barriers to competitive entry into telecommunications markets in all of the leading countries in the world. To do this, however, the NGBT must conclude by April, 1996, an agreement that would allow carriers, regardless of their nationalities, to serve their customers virtually anywhere they might be. Japan and the United States are two of the leaders of this negotiation, and it requires a full commitment on both our parts. If we are to seize this unique opportunity to sweep away barriers to global trade in basic telecommunications services, our two countries must be prepared to move well beyond the status quo. Indeed, we must meet the challenge now to eliminate remaining barriers to market entry or this historic opportunity will be lost. I have travelled halfway around the world to make a plea. I call on the Government of Japan to respond in kind to the U.S. offer to allow 100 percent foreign ownership of basic telecommunications providers and to commit to a procompetitive regulatory regime. As Vice President Gore emphasized at the G-7 Ministerial in Brussels this past February, "We must drop our barriers to foreign investment together." CONCLUSION In closing, let me wish my Japanese friends well as you prepare to decide whether NTT should be divested. You are fortunate to have models to study unlike when my country undertook its first historic divestiture of AT&T. In fact, the competition in the U.S. market is now so fierce, AT&T has taken to breaking itself up to ensure its ability to compete in the marketplace! We are pleased with the results of our divestiture because it has brought us a vibrant and exciting marketplace, but divestiture alone is not enough to ensure competition. With or without divestiture, competitive safeguards of the kind I have described are necessary to promote full and fair competition. In our June interconnection comments to the MPT, the United States said that government regulation which manages rather than promotes competition can be just as harmful as the anti-competitive behavior of the dominant carrier. Both distort the normal functioning of the market with unintended consequences. We think the style of regulation chosen is like a fork in the road: one path brings you to a less competitive and less vibrant market with fewer players, higher prices and reduced service choices, while the other path brings you to a competitive, expanded market -- with many diverse players, lower prices and innovative service packages. I wanted to return to the hot topic that I began my talk with, Nomo the Tornado Boy. Although he doesn't speak English, I think he would understand my message to you today. After all, the published rules of baseball apply to Nomo as well as all U.S. pitchers: three strikes -- not four-- will always be a strikeout for Nomo. As in baseball, we need to ensure full and fair competition in telecommunications. There is a saying in baseball that "the game ain't over until it's over." I see the game as being in the critical seventh inning, as the race for the development of the national and global information infrastructures continues. At what speed the race will proceed will depend largely on the outcome of the GATS negotiations. We all need to be aware that failure to come to agreement by April 1996 will set us back for years to come. It is time for global leaders to demonstrate their courage and leadership. We look to all of our global partners, but especially our Japanese friends, to join in our efforts. Thank you for your attention. Domo arigato gozaimasu.