Thank you Chris (DeMuth). And Thanks, all of you, for that warm welcome.
I want to extend my special thanks to AEI for inviting me to be part of this terrific series.
Anyone who knows anything about Washington knows that the American Enterprise Institute is one institution that stands--bravely--between the private sector and the policymakers. That’s a bit like pitching your tent in the middle of the Beltway during rush hour…. But nonetheless, that’s what positions AEI as a key forum for so much of today’s policy debate.
That’s true especially now--as we enter what many are calling the global Communications Revolution.
The Power of Communications
Look back to 1991 to the last days of the Soviet empire, and the flurry of faxes reaching the West from Boris Yeltsin’s followers holed up in the Russian Parliament building--or look today at the way Chinese dissidents have turned the world-wide web into their own version of a virtual Democracy Wall: The power of communications is enhancing human rights. And in a world where borders and barriers of all kinds are falling, and free market policies are taking root, communications has the potential to improve the quality of life for people the world over.
What I’d like to do this afternoon is share with you my views on the Communications Revolution: The technologies that are driving it--and the policy barriers that threaten it.
Everything I want to convey revolves around one fundamental message:
To reap the gains of the Communications Revolution, we can not apply 20th Century regulations to 21st Century technology.
The Flywheel Factor
And to deal with the forces behind this Revolution, we must understand them, not in isolation--but in the way they interact. Because technology and competition function with a kind of "flywheel effect:" Competition pushes technology … Just as technology sparks competition--disciplined, of course, by the market.
To see that flywheel factor in action--look at the way the Internet is redefining our economy.
In case there’s still a skeptic or two who doubts the speed at which the Internet is penetrating our lives and reshaping our world, let me offer a few objective measures.
- It took radio 30 years to reach its first 50 million people.
- It took TV just 13 years to do the same.
- It took the World Wide Web half as much time--to reach twice as many people: 100 million people today--rising to 250 million just four years from now.
What’s driving those numbers are the enormous advantages of the Internet: The ease of e-commerce… The openness of the system… The way it exponentially expands the power of the individual… We are really witnessing the export of the market system on a global basis, achieved electronically--with the click of a mouse.
For those who remember Economics 101 about pure markets requiring perfect information--the Internet comes closer than any other system in disseminating information, and serving as an incredibly efficient market-maker in the distribution of goods and services.
But the Internet is transforming a lot more than our economy--it’s transforming society as well.
The Internet is all about information. And if you have access to information--you have access to truth. And that, in perhaps the deepest sense, captures the Revolutionary potential of the Internet:
On-line, real-time truth--available at the touch of a keyboard, to people the world over, leaping over whatever boundaries and barriers governments might try to put in its way.
Unleash the truth--and the wall of propaganda every tyranny hides behind begins to chip and crumble and finally fall.
The Internet today leaps over uneven levels of infrastructure development as well. In this respect, the tools of the Communications Revolution are electronic equalizers--empowering people in the least developed places on the planet, the most remote corners of the Earth, with the advantage of information, direct access to efficient commerce and the ability to communicate.
That’s why I see the Communications Revolution transforming our world--not just commercially, but socially as well: Changing the way we see, think, and feel, the way we relate to the world around us--because it changes the way we connect to the world around us.
The Communications Convergence
You may not think of communications as a smokestack industry, but it has been--up ‘til now. Look at the smokestacks that have funneled information technology--that drove video over co-axial cable… Voice over twisted wire… Computer data through the modem… All of those old smokestacks will be gone--made unnecessary and obsolete by technology.
The convergence of TV, PC and telephone made possible by Internet technology is the reason AT&T invested $48 billion to buy TCI--and why we formed our $10 billion joint venture with British Telecom: To create a whole new generation of communications, information and entertainment services.
Let me bring the changes home--to your home and mine--with technologies and services that we’ll see over the next few years. Start with the capabilities this digital cable will provide your family. The cable box on your TV will not only deliver hundreds of channels and movies--it will be a virtual communications center.
When you come home, you’ll be able to turn on the TV, the PC or the telephone--which one is up to you--to retrieve all your messages: E-mail, voice, or fax. If you're away from home, you’ll be able to have your messages read to you over your wireless phone--as the network translates text to voice, automatically.
If you want to get onto the ‘Net, the cable box will give you access at speeds a hundred times faster than today's fastest modems. And you’ll always be online: No need to dial up and wait for your computer to connect.
Turn to telephony, and the same cable line that brings TV and the Internet into your home will give you as many telephone lines as you'd like: one for Mom and Dad, one for the kids, one for the fax and one for the PC. Each line with its own distinctive ring, and for only a few dollars a month per line, compared to $17 a month per line from your local Bell company.
Now look ahead to the next-generation wireless technologies like what we call the "world phone:" As the name implies, one phone that will work globally, powered by a 1000-hour battery, equipped with a 56 Kilobit modem--activated with the touch of a thumb.
And the generation after that, we’ll be looking at wireless phones with a 384-Kilobit modem to enable your phone to receive full-motion video--and still be small enough to fit into a vest pocket.
I’m not talking about a "future world" exhibit at a World’s Fair. This will happen--and it will happen in the next five years.
Think about that. To put the future in perspective--let’s go back in time. When I was in grade school each student’s desk was equipped with an ink well, as the technology of writing hadn’t changed since the day of the quill pen. Then came a new idea--a pen with its own ink cartridge built right into the barrel--and you could carry your ink well with you, wherever you went: The cartridge pen--the first mobile communications system. It sounds simple now to talk about something that was so revolutionary at the time.
Not too many years from now, we’ll be amusing a younger generation with similar tales of a primitive time when the telephone was only for talking--when people drove back and forth to video stores--when a PC and a TV were two different pieces of hardware. It will all seem as quaint as an old school house desk, with a hole for an inkwell.
Government's Role
But I don’t mean to imply that all we have to do is stand back--and let the future unfold. I can’t think of a single revolution in history that worked that way.
Up to now, I’ve focused on the private sector as the engine of progress. But the fact is, this is one Revolution where government has a limited but important role to play. And if we want to see this communications revolution realize its potential, it’s vital that government recognize the proper and legitimate public policy role that it should play. As I see it, government has three important roles in communications: To ensure markets are open; to ensure a level playing field, and to ensure policy predictability.
We need to keep lines open--open, as in open markets: Enabling the free flow of investment across boundaries and borders, the unencumbered flow of funds, services and distribution--ruled principally not by the laws of nations, but governed by the laws of supply and demand. No cartels, no combines, no cliques, no keiretsus, no non-tariff barriers--none of the collections of economic power that have done so much to frustrate the mandate of the market.
We’ll need government to keep lines open--as in providing an equal opportunity to compete. We need government to maintain a level playing field for all players. It’s the role of government to ensure that markets aren’t open in name only--but open in fact.
And finally, we need government to exercise its powers only where and when necessary, and with wisdom and restraint. Government’s goal should be a level of certainty and stability that comes from predictable policy and consistent enforcement. Companies investing in telecommunications globally face enormous risks already. If government adds to those risks with frequent changes of rules or sudden changes of policy, investment will dry up.
From Principle to Policy
If open markets, equal opportunity, and predictable policy are the principles that define the role of government--let’s see how we can put these precepts into action.
Without question, the U.S. Government has done a good job negotiating away obstacles to market access across many sectors--including the international telecom industry.
Consider the issue of international telecom settlement rates--the fees charged to connect every long-distance call into or out of a country. These rates do not reflect the real cost of connecting calls--they simply measure the market power of foreign telecom companies to use their settlement rate to generate windfall revenue and profit.
While AT&T may be cutting the settlement rate checks to these foreign telecom companies, American consumers are footing the bill with every international call.
So how much are high international settlement rates costing U.S. consumers? About $5 billion!
In late 1997, in the absence of any country-to-country progress in ratcheting settlement rates down--the FCC took appropriate action. They set benchmarks to lower international settlement rates and protect U.S. customers. Since the FCC acted, we’ve seen settlement rates in many countries decline--in some cases, cutting the cost of international calls by as much as one-third.
However, several anti-competitive outposts remain that make up the $5 billion cost to you and me. But our challenge is clear: Whether through company-to-company agreements--or government action--we’ve got to replace monopoly power with market-pricing.
Access Charges: Creating Competition Closer to Home
There’s a corollary to international telecom policy that is closer to home. If we’re serious about bringing competitive barriers down in other countries--we’ve got to finish the job of eliminating them right here in the U.S. After all, if our market system is based on competition, then it must also enable competitive enterprises not just beyond our borders--but within them as well.
We still face the on-going challenge of opening up America's last bastion of monopoly power--the local exchange telephone market.
To put this challenge in perspective, go back to 1983--when AT&T had about 90 percent of the local and long-distance market. To spur competition in long-distance, AT&T agreed to resell its service at wholesale rates that today are 50 to 60 percent lower than retail rates. As a result, today there are over 500 long-distance companies in America--and the average cost of a long-distance call has come down more than 55 percent.
But long-distance is just half the telecom story. Contrast it with what happened--or, to be precise, what didn’t happen--in local phone service.
To no one's surprise, the Bell operating companies, who continue to enjoy 97 percent of the local service business in their regions, have wanted to get into long-distance from the day they were spun off from AT&T. The judge overseeing the Consent Decree kept slapping down their applications--so they went to Congress. And eventually, with the support of the entire industry, a grand compromise--the Telecommunications Act of 1996--was signed into law.
It's a good law. It says the Bell companies can get into long-distance--but only after they open their local markets to competition. But for local competition to move from theory to reality, certain steps are needed from the Bells.
First, since owning the only wire into people's homes gives the Bells an unfair advantage, the Act requires them to resell that wire at economically viable, cost-based rates. That’s the theory. But the reality has been that the Bells continue to use every tool at their disposal, including a lot of frustrating delay, to block competitors or deny them a fair price.
Second, policy-makers have long recognized that the fees long-distance companies pay local carriers to connect their calls--what the industry calls "access charges"--would need to be brought down to cost for a truly level playing field. Otherwise, the Bell companies would be able to enter already competitive markets, like long distance, while still pocketing subsidies paid to them by AT&T, MCI and others with whom they seek to compete.
That's not a small issue. Right now, the local phone companies charge about 4.6 cents a minute to complete both ends of a long-distance call. Their actual cost is about half a cent a minute--do the math, and you’ll see the Bells are making a mark-up of about 600 percent over real cost.
How do we know that their actual costs are so low? Because that's about what the local exchange companies charge each other when they complete calls over the very same facilities.
And all those pennies add up--to over $10 billion dollars per year in excess access fees: $10 billion dollars consumers must pay in their long distance prices--and that long distance carriers, acting as bill collectors for the Bell Companies, have to turn over to them. All because we have neither competition nor regulation taking this huge hidden tax out of long distance prices.
Of course, the Bells like to claim they need those inflated access fees to finance investments in local phone service. But the fact is, the Bells have been using access fees to finance their ambitious overseas investment from the EU to Brazil to East Asia--not to upgrade local lines right here at home.
If the principles we laid out earlier mean anything at all, we ought to be ending excessive local access charges--not extending a monopoly practice that costs American consumers over $10 billion every year. If we’re truly serious about ending unfair subsidies abroad, and leveling the playing field for all competitors, we ought to get our own house in order. And there’s no better place to start than by getting rid of the antiquated access charge system, and bringing those charges down to true cost.
Ladies and Gentlemen, my message today is that the Communications Revolution is real--and it will change our lives--not just commercially, but socially--in ways we can only begin to imagine.
But I also want to underline a second point: The fact that the Revolution is real… doesn’t mean the war is over.
If we want to reap the great gains the Communications Revolution promises us--we can’t apply 20th Century regulation to 21st Century technology. That’s why, to move this Revolution forward, government must keep our lines open:
- Open--as in open markets.
- Open--as in an opportunity to compete.
- And, open--as in predictable policy.
I would submit, there’s no better way to celebrate the rewards of the Communications Revolution than by giving American consumers a $10 billion tax reduction that would free them from subsidizing the Bell monopolies.
Thank you--and now I’d be happy to take your questions.
