I. Introduction: It's Time for Congress to Remove Sand in the Gears of Innovation

Thank you, Greg, and thanks to AEI for hosting us today.

I understand this is the first of a series of forums that the AEI/Brookings Joint Center is organizing to encourage debate on the future of U.S. telecommunications policy. I commend you for engaging on this important subject, and I’m pleased to participate.

Today’s Policy Disconnected from Market Realities

When I look at telecom policy today, I’m struck by how far removed it is from where the business is today and where it’s actually going. The disconnect between policy and reality has very real consequences for consumers, for investors and our nation’s economy.

Lots of people, businesses and governments rely on the strength of the communications networks at BellSouth and other carriers.

Think about the i-Pods, digital cameras, laptops, PDAs and TIVO boxes on every body’s shopping list this holiday season. Your home network. Your business’s VoIP system. Government getting vital information to more citizens faster.

It all depends on high-speed networks.

At a time when communications technology is critical to our economy and the defense of our nation, is it acceptable to any of us that the United States ranks only 13th among broadband users worldwide?

Can we accept that, according to a recent study by the U.S. Chamber of Commerce, out-of-touch policy has diverted tens of billions of dollars of capital from the industry, delaying innovation and destroying more than 380,000 jobs?

Today’s regulations translate to a burden on the economy. They’re “sand in the gears” of innovation.

It’s time to get the sand out.

I want to spend the next few minutes explaining why sweeping regulatory change is needed and what policymakers--particularly Congress--should do to ensure that innovation flows freely in America.

II. Competition Is Today's Reality

No Evidence of Market Power

Let me begin by reminding everyone that we’re talking about competitive markets. There’s no credible evidence of “market power” anywhere in U.S. communications markets today.

Two major disruptive trends are fundamentally shaping communications.

Customers are shifting from wireline to wireless and from narrowband voice to broadband services. Voice, video and data are becoming applications that will run on the broadband pipe and they are now being delivered over multiple devices and multiple network technologies--wireline DSL, wireless, cable, and satellite. The common language in the devices on the edge of these networks is Internet Protocol.

Think about these facts. Today:

• 8 million Americans have no landlines in their home at all.
   
• There are 4 to 6 wireless competitors in most markets, with the day rapidly approaching when there will be more wireless minutes than landline minutes.
   
• The cable companies either currently offer switched telephony and have announced VOIP offers to two-thirds of U.S. households by the end of 2005.
   
• 63 million Americans or 25 percent of households connect to the Internet via broadband, 60 percent using cable connections.
   
• Wi-fi is off and running.
   
• E-mail: 31 billion a day
   
• Instant messaging
   
• Skype, Vonage, AT&T Call Advantage
   
• Broadband on powerline.

And the list goes on.

Customers have more choice about their communication today than most any other competitive industry.

Inter-modal competition is today’s reality, and it will intensify as new network technologies are brought on-line.

There’s no need for Government regulation to control the market. Markets are generating strong competition.

Perhaps it’s time to substitute competition for regulation instead of substituting regulations for competition, which was yesterday’s policy objective.

Competition Builds Markets, It Doesn’t Destroy Them

Tim Horan, an analyst with CIBC World Markets, just issued a report on all this, and how telcos and cable will compete going forward.

Among other things, he discounts the claim that competition--including VOIP--will mean doomsday for the phone companies. Instead, he contends that new revenue opportunities will more than compensate for any loss of traditional voice revenues--at least for those agile enough to adjust their business plans.

His assessment is consistent with the standard marketing view that competition doesn’t destroy markets; it helps them grow, by spurring demand for both the familiar and new products. As evidence, he points to a rather remarkable set of statistics:

Worldwide: There are currently 17 billion connected devices--1 billion wired phones, 11 billion appliances and toys, 2.6 billion wireless handsets, 1.3 billion entertainment gadgets, 1.08 billion computers and 400 million components of cars and industrial machinery--with more than 1 trillion expected within a decade, almost all connected to the Internet.

And, you can imagine, the emergence of a new, global, real-time communications market with one trillion connected devices and all of that, in not much more time than it took the regional Bell companies to slog their way through the Long Distance approval process, known in the industry as Sec. 271!

Imagine the demands this new world will place on service providers everywhere--not only for ever-cheaper bandwidth but also for security, for reliability and what might be called transactional agility. This is a new world of communications that we live in.

What Mr. Horan could have noted, too, is that competition compels companies to change and innovate quickly enough to accommodate developments of this scale. Cable modernized because of satellite competition and one result was cable modem service. Competition from cable modems caused BellSouth and our peers to advance our networks and services.

Today, BellSouth’s fastest download speed is 3 mbps. Over the next two to three years, we plan to offer total bandwidth of 12 to 24 mbps to 80 percent of our customer base. That amount of bandwidth can provide a customer with Internet service at speeds between 4 to 6 mbps as well as video and VoIP.

Competition and technological innovation are the motivating drivers here, not the regulator. Regulation cannot create, it can only constrain.

Contrast with Regulation

Now contrast the promise of today’s communications marketplace--and what it will look like in 2010--with the “stovepipe” manner in which we continue to regulate communications service providers in this country.

Consider if you will:

• The chronic inability of the regulatory process to adjust to the rapid technological and competitive change that communications markets are undergoing.
   
• The proclivity of Federal, state, and local public officials to regulate and tax so called “legacy” communications services--as if they were a public health.
   
• The inevitable “competition” for regulatory favor, as companies invest resources in lawyers and lobbyists rather than infrastructure and business.

III. It's Time to Update Our Communications Laws

It’s time to update our communications laws and to reflect the reality of how people really are communicating today. I think the FCC under the leadership of Chairman Michael Powell has made headway. History teaches us a lesson that regulators are paid to regulate, not deregulate--just as the regulatory process is geared to be gamed.

Regulatory gamesmanship may help Washington lawyers. It certainly generates lots of work for the appeals courts. But communications regulation has deterred investment and slowed innovation. It hasn't produced new jobs or created new services. It hasn't furthered homeland security or the national defense. It hasn't promoted research, nor has it strengthened our national competitiveness.

What regulation has created are millions of dollars of non-revenue producing operating expenses--costs that are ultimately borne by consumers and individual investors.

We must update our communications laws, and we must do it now. It’s time to put customers in charge of the communications market.

IV. Telecom Act of 2005: What Congress Should Do

The next telecom act should focus on two communications policy goals:

First, we should foster a far more consumer-controlled, investment-friendly, and less regulated marketplace than we have today and second, we should correct flaws in the current universal service mechanism, preferably before that mechanism totally unravels.

Let me discuss each goal briefly.

Goal 1: Fostering A More "Consumer-Controlled" Marketplace

Since 1996 regulators have tried to substitute costly, time-consuming and uncertain rulemaking processes for decisions that could be better left to markets. The FCC's interconnection and unbundling rules are some of the most complicated in FCC history--and, that's saying a lot. They've proven a litigator's dream.

But here we are, eight years after the 1996 Act was signed into law, and we still don't have a set of legally sound, accepted unbundling rules.

How are we going to break through this inertia? One obvious step would be to start asking the question: in this environment what really needs to be regulated?--and to eliminate regulation where customers have choices and where the costs outweigh the benefits.

In my view, regulation should be limited to three small areas and three areas only: one in retail, one in wholesale, and one related to public safety.

1. Retail Regulation

Retail regulation should be confined to what I think of as a consumer “no frills zone.” Under this approach, very basic service rates would remain regulated. But if a customer opted to add another service or feature, the resulting bundle would not be regulated. Simple as that.

2. Wholesale Regulation

Wholesale regulation should be limited to requiring non-rural phone companies to unbundle local copper loops at negotiated rates. This obligation also should sunset after a few short years in order to facilitate commercially negotiated network access arrangements.

During that period, incumbent carriers would be required to give competitors access to copper plant where other competitive alternatives are not available. There'd be a uniform Federal intercarrier compensation rate to reduce arbitrage.

But at the end of a date certain, the FCC and state regulators would be out of the business of fixing interconnection terms and rates.

3. Public Safety: Equitably Apportioning Responsibilities

Let me turn now to a third area where some regulation might indeed be warranted: and, that’s the equitable apportionment of important social responsibilities.

Right now, established companies like BellSouth provide enhanced 911 emergency service and, that's the way it should be.

In most people's homes, after all, they have two emergency systems: the smoke detector and the telephone. People must be able to summon help, and that must happen in the fastest, best way possible. Preserving universal service is part of that.

Established companies like BellSouth--and, our cell phone affiliate, Cingular--are also subject to all the requirements of the "Communications Assistance for Law Enforcement Act," or CALEA.

In addition, we're obliged to ensure the disabled have access to communications. There are elaborate consumer protection rules, to make sure no one is "crammed" or "slammed."

These are things the American public has come to expect from this industry.

Base-Line Obligations

But we shouldn't have a situation where only one group of competitors has to meet these obligations. We have to put an end to any "free rider" effects, where one group of competitors can palm-off responsibilities and costs on another group. That’s not how you build and sustain competitive markets.

Congress must ensure that all the base-line social obligations placed on the communications business are equitably apportioned and supported by all competitors, regardless of the technology they choose to serve the public.

Goal #2: Preserving Universal Service

Let me turn, now, to the second policy goal: Universal Service

This country--and its regulators--can be proud of the fact that everyone in the U.S. who wants a phone has a phone, regardless of location or income.

In an emergency, American households need an affordable means to communicate.They have that today, as they should.

We can also take pride in the fact that the Internet is now available in virtually every school and library in the land. If a student, or adult, wants access to an educational, health, or government service on the Internet, he has a means of getting it.

But the universal service mechanism that has helped accomplish these goals is close to unraveling. Demands on that pool of available funds are far outstripping the ability of contributors to grow it. It is in need of a major overhaul that only Congress can provide.

• To begin with, the contribution base should be broadened to include all service providers, and the FCC should be directed to collect fees in a competitively neutral manner.
    
• General tax revenues could also be used to fund at least part of the USF. At the same time that money is “re-purposed,” the industry needs to roll back the “nuisance charges” that customers complain of these days.That could be a win-win for everyone.The industry would get a predictable base of universal service support, and consumers would see changes in their bills.

I should also mention here that the combined burden of local, state and Federal taxes on telecom services typically exceeds taxes on other products or services by a factor of three or four, and that telecom users could certainly use a tax break. But let me say that our aim in legislative reform is not to address excessive and discriminatory tax rates, but we will press hard for the regulatory reform since the industry can no longer swim carrying both loads.

Preserving USF Includes Addressing Intercarrier Compensation

Some universal service support should be earmarked to offset any losses in access revenues that might result from the FCC adopting intercarrier compensation reforms. Most local phone companies, including many of the small ones that cover our rural areas, still recoup much of their costs through intercarrier compensation. They can’t afford to see these revenues curtailed on some “flash-cut” basis.

The last thing the industry needs right now is another financial shock to the overall system. But this isn't a challenge that is going to get easier by procrastinating.

We need to deal with it now.

In my view, here’s what Congress should do:

• First, direct the FCC to adopt a uniform federally administered intercarrier compensation mechanism within 6 months of enactment.
  
  The new mechanism should fairly compensate providers for use of their networks, while minimizing arbitrage opportunities.
  
  It also should require facilities-based carriers to interconnect directly and to provide transiting service to other facilities-based carriers at rates terms and conditions set through commercial contracts or, failing that, FCC-developed principles.
   
• After a few years, the FCC’s authority over interconnection and transiting should sunset. An industry group should then be responsible for updating default interconnection guidelines as necessary. Dispute resolution would be accomplished through mediation and/or some type of arbitration utilizing these guidelines.

What Will Be the Public Policy Dividends of Reform?

As we achieve communications reform, what public policy dividends can we reasonably expect?

The U.S. telecommunications industry was caught in the updraft of the "Internet bubble" during the late 1990s. It was hammered when that bubble burst and the world economy slipped into recession. Investors lost billions and market capitalization fell dramatically. Since then the health of the industry has improved, but certainly not as quickly as it needs to if the industry is to avoid becoming a bottleneck on innovation.

One immediate dividend of updating our communication laws should be more capital investment. More capital would accelerate the rollout of next generation technology and larger equipment R&D budgets.

The U.S. Chamber of Commerce estimates that reform could generate $58 billion dollars in new investment and result in GDP increases of $167 billion dollars over five years.

In the twentieth century, America lived up to its promise as a prosperous and peaceful nation, in part, because of our advanced communications infrastructure. Now, at the beginning of the twenty-first century, we’re ranked anywhere from tenth to thirteenth in the world in broadband penetration.

How effectively can Americans compete in the global marketplace if the rest of the world is surpassing us in the deployment of advanced communications infrastructure?

The Telecom Act of 2005 must address these issues.

The real story here is about Americans improving their lives through communications, more freedom and flexibility to get our work done, to learn, to create, and to raise our standard of living.

In any time in our history, prosperity has depended on innovation in technology. Innovation depends on capital. And capital flows where it finds a return. America’s promise is still there, if we work toward policy that is pro-technology, pro-investment and pro-innovation.

V. Conclusion: Telecom Reform Should Happen within Months, Not Years, and AEI and Brookings Can Play an Important Role

The last time Congress revisited our communications laws, they began the process in earnest around 1991 and finished five years later. But in my view, the industry, and the people we serve, can’t afford another five years of delay before reform would even take effect.

The basic issue before the Congress is simple and straightforward:

Can competition between multiple facilities-based networks do a better job than traditional utility regulation when it comes to satisfying customer needs at reasonable, affordable rates?

If Congress answers that question in the affirmative, as I believe it will, every other issue I have touched on could be dealt with in a very short bill in a matter of months, not years.

This is not complicated.

It only seems to get complicated when competitive markets are precluded from working their logic in maximizing efficiency and consumer welfare by well-meaning regulators trying to emulate market processes.

We must get out of the pattern of thinking more and better regulation will somehow produce more diverse and competitive markets. That's certainly not consistent with experience in this or any other sector of the economy.

Professor Alfred Kahn, who was Chairman of the Civil Aeronautics Board when the airline industry was deregulated in the late 70s, once remarked:

The competitive marketplace doesn't have to be perfect to be preferable to regulation. All it has to do is be 'as efficient' as regulation. And, it's not hard to be 'as efficient' as regulation.

As we work for fundamental regulatory reform in telecommunications, I think Congress could certainly use a Professor Kahn to help it sweep out the sand in the gears of innovation. To sort out, in this environment we’re living in now and tomorrow, what should be regulated and what shouldn’t.

I would urge AEI and Brookings to play that role. I truly believe it’s important to the future of our country. Thank you.

F. Duane Ackerman is chairman and chief executive officer of BellSouth Corporation.