Assistant Secretary Nancy J. Victory
before the
16th Annual Global Communications Conference
Sponsored by Goldman, Sachs & Company
New York, NY
May 8, 2002
Telecommunications Challenges:
The Telecom Tsunami
Thank you for that very kind introduction. I appreciate the opportunity to participate in your timely event. There is no question that these are challenging times for the telecommunications industry and telecommunications investors. The headlines from last week alone underscore the inescapable reality that even the mainline and previously "blue chip" companies with real assets and real customers are having real problems.
Let me open my remarks by challenging you to answer a simple spot quiz. What do the following have in common with telecom? A McDonald's hamburger and fries? A Starbucks coffee? And a stick of Doublemint Gum? Anyone want to offer a guess? For the price of a Big Mac Value Meal you can buy one share of Qwest. For the price of a Starbuck's Expresso you can buy one share of WorldCom. For the price of a stick of Doublemint Gum, you can buy one share of Global Crossing.
The tidal wave of troubles that hit telecom came hard and fast. In the past year, we have seen dramatic declines in market valuations:
- WorldCom used to be the darling of Wall Street, trading as high as $64.50 in June 1999. It's now down to less than $3.00 a share. WorldCom's stock price has fallen 80% since January.
- Qwest is similarly facing problems. It traded for over $40.00 a year ago and now is down to under $5.00.
- A little over a week ago, AT&T posted a loss of $975 million, or 28 cents a share, on revenue of $12.02 billion, compared with a loss of $192 million, or 10 cents a share, on revenue of $13.55 billion during the same period a year earlier.
- Wireless stocks have also been hard hit. Since this time a year ago, AT&T Wireless' stock has dropped almost 60%. Similarly, Nextel's value has dropped almost two-thirds - from over $16.00 per share to less than $5.00.
- Layoffs in the telecommunications sector have also been surging, rising to 300,000 people in 2001 - that's almost double any other industry.
What's more we have seen an unprecedented number of telecom bankruptcies. There is a long laundry list of casualties that includes: Covad Communications, Rhythms NetConnections, Metricom, PSINet, Teligent, Inc., Viatel, Inc., WinStar Communications, Pathnet Telecommunications, e.spire Communications, Omniplex Communications Group, Northpoint Communications, Flashcom, Inc., ICG Communications, and the list goes on.
We can all debate the causes of the telecom tsunami. Bad business plans? Bad government policies? Bad accounting practices? Bad financial advice? Too much capital chasing too few customers? Dot Com boom becoming the dot bomb bust? Post-September 11th economic malaise?
My purpose today is not to rummage through the past in hopes of gleaning lessons for the future. My purpose today is to highlight for you what I see as the major challenges ahead. In so doing, I am hoping that you on Wall Street will join us on Pennsylvania Avenue in tackling these challenges.
WALL STREET AND PENNSYLVANIA AVENUE:
Let me start by stating one of the unfortunate tenets of government - silence is not rewarded. If Wall Street wants to have an impact on Pennsylvania Avenue, you better speak out and speak out loudly. Otherwise, you will have no one else to blame for being ignored as key policy decisions are being made.
Right now at my agency, NTIA, we are in "listening mode." We want to benefit from your expertise, your experience and your insights. We want to frame our decisions in terms that recognize financial and marketplace realities. We want to look before we leap in new directions on untried and untested paths. We are waiting to hear from you.
Now listening should not be confused with a lack of urgency or purpose. As we learn from listening, we will act with confidence when and where appropriate. In some cases, we have already moved from receiving input to shaping new policies. In other cases, we are seeking advice to build a consensus.
NTIA'S ROLE IN TELECOM:
Before turning to the key challenges ahead, I should give you a clearer picture about my role in telecommunications for the Administration. I have a somewhat unique position that involves wearing two hats. As Assistant Secretary of Commerce for Communications and Information, I directly report to Commerce Secretary Don Evans. As head of the National Telecommunications and Information Administration, I also directly report to the President of the United States.
My most visible duties fall into three basic areas. First, I serve as the manager of federal government spectrum. As you know, the FCC under Chairman Michael Powell manages the non-federal spectrum. Since spectrum is often shared, NTIA and the FCC regularly engage in coordination of spectrum uses and spectrum policies.
Second, I serve as the President's advisor on communications and information policies. This obviously involves a wide swath of potential issues. NTIA is not the direct decision-maker, but rather the Administration's source of input and recommendations to the FCC and Congress, where such input is deemed necessary and appropriate.
Third, I have broad responsibilities for Internet domain name management. This includes awarding and overseeing the contract for the .us top-level domain as well as dealing with ICANN's responsibilities and practices. There are a host of Internet-related questions that get subsumed within the scope of those NTIA duties.
Before turning to the challenges facing us today, you should understand that the prism through which I view policy issues is designed to focus on promoting growth, investment and employment. The preferred instrument for achieving those goals is competition and deregulation. These commitments, of course, are mindful that the economic fate of the nation is inextricably linked to the safety of the country and of our citizens.
SPECTRUM AS FUEL FOR GROWTH AND SOURCE OF SECURITY
One pressing challenge for NTIA is ensuring that spectrum is available to fuel future wireless growth and to provide the increasingly indispensable infrastructure for our military, law enforcement and public safety needs. Here, we are moving from listening mode to action mode in a number of respects.
As many of you probably know, NTIA recently hosted a two-day Spectrum Summit with joint participation by Chairman Powell and his FCC colleagues. The Spectrum Summit was geared to looking at long-term policy and process shifts to better accommodate the dynamic nature of wireless technologies and wireless needs. While I and my colleagues at NTIA attempted to ask pointed questions to stimulate discussion, the idea was to hear from the experts as to the successes and failures of current spectrum management policies, as well as how to further improve the process.
Clearly, our two-day summit gave us lots of food for thought. Tackling spectrum management will not be a short-term project for sure, but one we must tackle thoroughly and thoughtfully. And you should not expect that the end result of our efforts will be a report that will get dusty sitting on a shelf. Rather, we intend to turn what we learn into action items to effect the changes needed to better manage this essential resource. Let me identify a couple of themes or issue areas that should figure prominently in that agenda:
Government Working Together - Teamwork Not Turf Wars. First, a core message at the summit was the need for teamwork to replace turf wars. Our country's spectrum needs are too important to be undermined by internecine squabbling between and within branches of government. As head of NTIA, I am committed to building a foundation of trust, collegiality and cooperation in our dealings within the federal government and our interactions with the FCC, the State Department and Congress. In pursuit of that objective, I will be having discussions with Chairman Powell at the FCC and David Gross at the State Department to develop an action plan to facilitate the efficient functioning of the nation's spectrum management team at home and abroad.
Modernizing Spectrum Policies - Eliminating Out Dated Micro-Managing. Second, we need to make a concerted effort to eliminate unnecessary government micromanaging of spectrum uses. This means taking a fresh look at legacy rules and restrictions to assess their ability to accommodate emerging technologies or spectrum needs. As a starting point, NTIA has already supported the elimination of spectrum caps and the liberalization of spectrum leases. With the FCC's Biennial Review about to begin for regulations on wireless services, we will be looking for additional opportunities to advocate the removal or modification of vestigial and unnecessary obligations that could improve spectrum use.
Better Anticipating Future Technologies - Looking to the Spectrum Future Rather Than the Spectrum Past. Third, the rapid pace of technological innovation in wireless often creates a substantial risk that regulations will rapidly become outdated and counterproductive. At NTIA, we will be focusing on where things will be heading rather than where they have been. Our goal will be to fashion forward-looking policies that enable rather than retard advances. NTIA's Institute for Telecommunication Services in Boulder, Colorado will be playing an increasingly prominent role in that initiative.
Removing "Clouds" Over Spectrum Availability - Clear Skies Rather Than a Clouded Vision. In the short term, we are facing pressing spectrum allocation challenges on three fronts. First, there is the so-called allocation for Third Generation wireless services - the Internet on and off ramps for mobile communications - better know as 3G. Second, there is the huge cloud of uncertainty hanging over the spectrum that television broadcasters will be surrendering as they migrate to the digital world of High Definition Television - better known as HDTV or more recently ATV. Third, there is the spectrum currently shared between commercial SMR operators like Nextel, private radio users such as utilities, airlines and other companies, and public safety organizations.
Why do we care about these individual allocation issues? The simple answer is that spectrum is the energy source that fuels growth opportunities for manufacturers, service providers and consumers. In each of these cases, initiatives have been launched and actions will be needed.
3G. Much has been written about the proposed next generation of commercial wireless systems or 3G. The difficulty has been - where to come up with the spectrum needed to deploy it, particularly how to find spectrum that might match up with allocations elsewhere in the world to facilitate economies of scale and global roaming. NTIA and the FCC are currently conducting a viability assessment of the 1710-1770 and 2110-2170 MHz bands as a possible home for 3G services. This assessment is made particularly complex by the fact that the 1710-1770 MHz band is currently used by critical, and not easily relocated, defense systems, such as precision guided missiles and satellite communications. The purpose of the assessment is to see if and how sharing or relocation could occur without unduly disrupting these important government communications. We hope to conclude this study within the next few months. The study will then be a significant factor in a public interest determination as to whether to make that spectrum available for 3G.
If it is determined that these government uses can be relocated to other parts of the spectrum (and, trust me, finding comparable replacement spectrum is no easy feat), the issue becomes - how to effect that relocation with minimal disruption to the licensees being relocated and in a manner that is fair to the new occupants of the spectrum? To address this problem, the President's budget proposes legislation that would create a trust fund mechanism. The idea is that a portion of the auction revenues for the spectrum would be set aside to compensate and facilitate the relocation of the incumbent licensees. The trust fund mechanism would provide certainty by ensuring that relocating licensees have their costs covered. It would also provide predictability for entities bidding for the spectrum by eliminating the considerable time and dollar uncertainties associated with negotiating relocation costs directly.
700 MHz/HDTV. The Administration, the FCC and Congress currently are focused on the timing of auctioning a certain portion of the 700 MHz band (now occupied by analog broadcast television channels 52-69) to make way for proposed public safety and commercial wireless services. While the auction is scheduled for mid-June, numerous parties - including the Administration - have called for its postponement. It is the Administration's position that, at this time, there remains too much uncertainty over how and when this band will be cleared. While prompt clearing of the band is a priority to speed the broadcast digital transition and to promote spectrum efficiency, it simply makes no sense to auction spectrum until the winners' access to such spectrum is relatively close in time. Otherwise, bidders will not know how to value the spectrum and the auction might not include those most in need of the spectrum at the time it actually becomes available.
800 MHz. At 800 MHz, efforts are underway to try to create a capacity-rich and fully functional future for public safety wireless communications. An orderly plan for public safety and critical infrastructure licensees is a must. The FCC's recently announced examination of the current 800 MHz band plan is a good starting point and catalyst for rethinking how things should be done in the future, rather than simply tinkering with what has evolved over time. Public safety and critical infrastructure services need our attention and need an interference-free environment. Further, federal, state and local public safety systems need a plan for an effective and orderly transition to a fully interoperable web of systems. NTIA is still in listening mode about ideas and options for addressing public safety and critical infrastructure needs more effectively.
BROADBAND AS SOURCE OF GROWTH AND INVESTMENT:
Another issue that has captured the attention of those of us in government is broadband - a lightning fast means of data transmission that could revolutionize the way we all send and receive information. In addition to enhancing business efficiencies and broadening commercial opportunities, broadband holds the promise of expanding educational opportunities, improving health care, increasing governments' responsiveness to its citizens, and generally enhancing our global competitiveness. Thousands of new jobs could result from greater broadband deployment, both directly through network construction, and indirectly through industries related to advanced networks and services. Not surprisingly, then, broadband is an important potential source of growth and investment for our country.
Over the past several months, we in the Administration have been focused on how to help create the right environment for broadband to thrive. On the regulatory side - or the supply side, as many have called it - the issues are challenging. Broadband is the poster child for the buzzword, convergence. While convergence is exciting and ripe with opportunities, it presents serious challenges for the regulator - how to remove regulatory impediments and ensure full and fair competition among different platforms that currently operate under very different regulatory regimes. On the demand side, there is the equally challenging issue of figuring out why more people aren't seeing the possibilities and subscribing to this new technology. At the Department of Commerce, we are working on both these supply- and demand-side issues.
To inform our policymaking, NTIA convened a Broadband Forum in the fall, requested public comments on the issues (and received almost 100 in response), and extensively engaged public interest groups, industry representatives, academics, and other interested parties in discussions on broadband issues. Our sister agency at Commerce, the Technology Administration, has focused more on demand-side issues, convening workshops on digital rights management and the benefits of broadband to small business.
One early action item on NTIA's broadband agenda is rethinking public rights-of-way governance. This is an interesting issue in that it is one of the few under the broadband umbrella where all sectors of the industry - Bell Operating Companies, CLECs, cable providers, cable companies, overbuilders, and wireless providers - actually share the same point-of-view. That view is that constraints imposed by certain municipalities and federal government landowners on accessing public rights-of-way and tower sites might be inhibiting or at least delaying broadband network construction. While the industry admits that the problems seem to lie with only a small number of jurisdictions, due to the nature of networks, a few bad actors can have a disproportionately adverse effect on the roll-out of uninterrupted statewide or regional advanced services networks, which ultimately can impair national broadband coverage.
To ensure that rights-of-way regulation is appropriate and not an impediment to broadband deployment, NTIA is working closely with the National Association of Regulatory Utility Commissioners (NARUC), and particularly its Rights-of-Way Study Committee, to help identify best practices and recommendations for state action to streamline the current process. NTIA is also meeting with representatives of the cities and their association, the National Association of Telecommunications Officers (NATOA), to identify means for improving and simplifying their current processes, while ensuring sufficient flexibility for municipalities to best serve their citizens. NTIA is also working on an initiative to streamline and improve the rights-of-way oversight practices of federal government agencies. We want to see the federal government be a leader on this issue.
Meanwhile, the FCC is moving on all fronts with proposals for broadband regulatory reform. The agency presently has open three key proceedings that could dramatically change the broadband landscape:
· Nondominance Proceeding. The first of these raises the question of whether telephone companies should be considered "dominant" in the provision of broadband services - right now most surveys indicate that cable companies have the lion's share of the broadband market. The answer to this dominance question is important, because if the telephone companies are found to be nondominant, their broadband services will be exempt from a number of strict regulations and reporting requirements, including the filing of tariffs. In essence, this FCC proceeding is looking at the appropriateness of deregulating the "retail" provision of Internet access.
· UNE Triennial Review Proceeding. The second FCC proceeding focuses upon the right mix of regulation and deregulation of the broadband wholesale market. To what extent should ILEC competitors have the right to demand and receive "pieces" of the ILEC's network at special discounted rates under TELRIC pricing? As you might anticipate, the ILECs are making their case for shortening the current list of network elements subject to unbundling, while the CLECs are arguing for expanding the list.
· Proceeding to Define ILEC Internet Access. The third FCC rulemaking is looking at the legal "definitional" status of ILEC broadband services. For example, is DSL a regulated telephone service under Title II of the Act? Or, is DSL an "information" services that falls within the less regulatory Title I of the Act? Just as importantly, the Commission is asking for industry views as to the practical consequences of classifying Internet access in one legal cubby hole as opposed to the other.
· The Shoe Waiting to Drop - the Supreme Court Decision in TELRIC. A very large judicial shadow falls over the entire landscape of broadband. Last fall, the Supreme Court heard oral arguments concerning the legality of FCC-mandated TELRIC pricing policies - requirements that ILECs maintain are set at 40-50% of costs and CLECs say are essential to the survival of local competition. The Supreme Court decision could come at any time. Its effects could range from nothing to a major reexamination of the core pricing policies that underlie the FCC's and state public utility commissions' current regimes.
The general betting line is that the FCC will be taking action in one or all of the broadband proceedings by the end of the year. As the agency moves ahead with its efforts, NTIA will be assessing when and where its views could contribute to a better outcome for competition, deregulation and the American consumer. We won't be shy, but neither will we act precipitously if the Commission appears to be on course.
GLOBAL AS SOURCE OF GROWTH THROUGH U.S. LEADERSHIP:
NTIA will be reaching out internationally over the coming months to strengthen our communications policy relationships with key countries. We will particularly be focused on improving relations and harmonizing policies with countries in our own hemisphere, consistent with the President's "One Hemisphere" initiative. For example, NTIA recently conducted a seminar for Caribbean telecommunications regulators faced with the challenges of starting to open their telecommunications markets to competition. The seminar provided the opportunity to share the U.S.'s experience and to engage in spirited dialogue about both substantive and process challenges. In addition, we will be reaching out to other key players globally on telecommunications issues. This includes China - a huge telecom policy player with whom we have bilateral discussions scheduled at the end of May - and certain European regulators.
One global issue of particular interest to NTIA is the selection of a standard for digital television. Particularly when it comes to the Western Hemisphere, the U.S. believes that a common standard for digital television will benefit regional consumers and manufacturers by creating larger economies of scale for production of sets as well as content. As more countries choose a single standard, economies-of-scale will result in lower consumer equipment prices, lower content production and distribution costs, and lower broadcast equipment and component costs. Further, in keeping with the goals of the Summit of the Americas Action Plan and the Connectivity Agenda, a region-wide digital television standard offers the countries of the Western Hemisphere the opportunity to expand access to the Internet and information services to consumers who otherwise would not have access to a personal computer. It is our hope and expectation that policy makers throughout the region will use the experience of the U.S. as a guide in their selection of this important standard.
NATIONAL SECURITY AND PUBLIC SAFETY AS ESSENTIAL TO ECONOMIC WELL BEING AND GROWTH:
I don't need to tell anyone in this room that the events of September 11th have had a profound effect on each of us, our families and our country. We are bound in our grief for those we lost here in New York City, at the Pentagon and in Pennsylvania. My hometown of Garden City on Long Island lost a huge number of its sons and daughters. My old law firm lost one of its fine young partners, who was one of my friends. We all were touched.
In the wake of September 11th is the harsh reality that we are engaged in a domestic and global war against terrorism. NTIA has several key missions as part of its top priorities - ensuring the availability of communications capabilities and services for public safety and critical information infrastructure providers. The former are our police, fire and rescue organizations. The latter are the networks of companies that fuel our economy and provide indispensable services to the public.
· Public Safety Interoperability - Knitting the Public Safety Team Together Through Communications. Our local, state and federal public safety organizations have historically found the right communications solutions for their particularized needs. This is entirely understandable and appropriate. However, in times of emergency, there is an obvious need to be able to link all the pieces of the public safety community together through a common communications capability. Simply stated, "interoperability" is needed to ensure that every key organization can communicate with every other key organization - no matter what equipment, network architecture, or system they individually selected. This is obviously a challenging area, but one NTIA has placed among its highest priorities.
· Critical Information Infrastructure - Ensuring that the Nation's Key Transportation, Energy and Public Service Organizations Keep Running in Times of Crisis. While public safety is an obvious area of concern. So too is keeping our key public "service" companies and networks operating. We cannot allow our transportation systems, energy sources, financial networks and other keys to the well being of Americans to go "dark" when terrorists strike. NTIA will be working with the critical infrastructure industry representatives to see how, where and in what way safeguards can be strengthened and improved.
CONCLUSION
Well, that's what I see as the major challenges ahead in telecom and how we in Washington are beginning to address them. Our goal is a bright future for the telecom industry and for all Americans who rely on the services of this important sector. Our process is to gather as much relevant input as we can and then to make decisions based upon sound, careful weighing of this information.
You in this room are attentive observers of the telecom industry. You watch what happens out there and probably have a pretty good idea of why certain businesses and technologies are succeeding and others are not. You probably also have a view as to the impact of particular government policies on a business. I urge you not to sit on the sidelines. You have valuable information to help us successfully address the challenges ahead. Be active - rather than passive - in Washington decisionmaking. Now is your chance to be part of the solution and to help ensure a future for the telecom industry we can all be proud of.