Key Executives

Ivan Seidenberg
National Press Club
September 25, 2000

Thanks, John, and good afternoon, everyone. I thank you for that introduction; the first big speech I gave right after our merger closed back in July, I was introduced as the chairman of VEHR-eh-zon Communications. I guess we're making progress.

In any case, I'm particularly honored to have this forum to explain what's going on in the communications business.

On second thought, maybe it's easier to explain quantum physics, instead.

Frankly, when you think about it, the last 15 years have been an amazing ride - and, from a shareowner's perspective, it's been a great ride. A single share of AT&T stock in 1983 turned into eight separate companies by 1984. A decade later, that went down by two, as SBC bought Pac Tel and Bell Atlantic merged with NYNEX.

This year, it changed again: US West got taken over by Qwest, SBC took over Ameritech, and Bell Atlantic merged with GTE, forming our new company, Verizon.

And that's not the half of it.

Along the way, AT&T split itself in two, which means you may own a piece of Lucent Technologies, and acquired TCI, which means you're now in the cable business. Pac Tel split its telecom and wireless businesses, so you may also have owned AirTouch ... which, of course, was bought by Vodafone and then combined with our wireless business to form Verizon Wireless. And of course, if you looked at the last 15 years from the perspective of WorldCom or Sprint, you'd see a similar pattern.

To top it off, Patrick Ewing isn't a Knick any more. (I don't know how that fits, but if you like big, old, slow "legacy" guys, it seems like it should.)

In fact, the landscape has changed so much in just the last five years that the list of the biggest telecom companies in the U.S. has changed almost completely.

In 1995, AT&T was on top, followed by all the former Bell companies, GTE and MCI. But if you look at the same metric for the year 2000:

• The biggest company is one we wouldn't even have called a communications company five years ago - AOL / Time Warner.
• The next four slots are taken by companies created by mergers or acquisitions, including Verizon.
• And the rest of the top players are new entrants and cable companies.

So the Telecom Act has clearly had an impact and makes for good dinner party conversation, if you like that sort of thing.

All of this restructuring of the communications industry is, at the most basic level, a response to an unprecedented period of technological change that is reshaping industries, re-directing investments, and rewriting the rules that govern communications companies.

Specifically, we're seeing the emergence of two gigantic new communications platforms - neither of which we could have envisioned in their current forms a few years ago, but both of which have the potential to disrupt our traditional ideas about communications.

The first is wireless, which has rapidly evolved from a single-use, luxury product to a full-service platform, spurred by the Web-to-wireless revolution:

• Already, more people have wireless phones than have cable television. Worldwide, wireless subscribership has grown at more than 50 percent through the '90s and appears to be accelerating.
• There are now more wireless subscribers in countries like Italy and Finland than there are landline phones.
• In five years, it's estimated there will be one billion mobile devices, many of which will be portals to the Internet so you can buy a Coke in Finland, download karaoke songs in Japan, or get stock tips in Singapore. Actually, you can do all those things today.
• In fact, of the $1.5 Trillion in e-commerce revenues generated in 2005, a stupefying one-half will be handled over wireless platforms.
• And that doesn't even take into account the growing presence of "fixed" wireless systems as a viable alternative to the traditional local telephone connection to the home.

The second new platform is the Internet itself -- or, more precisely, the massive networks that run on the IP protocol that governs the 'Net. These global IP networks are capable not only of carrying vast amounts of traffic but also of embedding a whole range of functions we used to think of as separate businesses - from entertainment to commerce to publishing to communications.

• Internet telephony is a reality today, with rates as low as 4 cents a minute when it's bundled with other services.
• IP-technologies are turning one-way cable systems into two-way networks that can provide a whole range of communications services - just as our networks are evolving to provide all the services traditionally provided by cable companies.
• Content and transport are becoming inseparable as we see with combinations like AOL-Time Warner, AT&T and Excite @ Home, and Microsoft's wide-ranging investments in cable and satellite systems.
• And if you think about it, the biggest communications network in the world may be AOL's Instant Messaging platform. I mean this literally.
• Verizon has 43 M residential access lines and Verizon Wireless has 25 M subscribers. Pretty big.
• But AOL's two Instant Messaging services have a mind-boggling 138 M registered users - an Internet nation existing entirely in cyberspace.

These two markets - wireless and the Internet - are the focal points for virtually all the investment, innovation and growth in the communications industry.

It's worth taking a look at what they have in common.

First, they are "boundary-less" - that is, not confined by geography or defined by distance. This means you can communicate with anyone, anywhere, usually for a single, nationwide rate like you do today with wireless.

Second, they deliver a whole bundle of digital services, seamlessly, with no distinctions. Voice, data, Internet access, video, music, e-commerce - all over the same platform in the same endless stream of "bits."

This opens up a whole world of price and packaging innovations. Subscribe to Internet access service, get Net2Phone for free. Sign up for a cable modem, we'll throw in long distance. One conduit, anything you want, at the price that's right for you - the possibilities are endless.

Third, they're governed by market forces - for the most part, there are no entry barriers, no price regulation, no subsidies. Only competition and customer demand to set prices and direct investment.

So the key dynamic in communications today is competition among the different modes (wireless, satellite, landline) of delivering the information-age services customers want -- anytime, anywhere, in any form, through a multitude of consumer electronic devices (cell phones, Palm Pilots, laptops, beepers, and the rest).

That's obviously good news for the American consumer.

And it's also good for the economy, because it means more investment and more jobs.

Contrast this dynamic, future-oriented environment with the view of the world as seen through the lens of traditional communications regulation.

Rather than being boundary-less, the regulatory view of communications is based on geography - specifically, close to 200 artificially defined "local calling areas" not found in any atlas - and governed by 50 different state regulatory commissions, countless municipalities, and an alphabet soup of federal agencies.

Rather than being seamless, the industry as viewed by regulation is a collection of separate services. Local is separate from long distance -- not because they're really two different businesses, but because the Telecom Act says they are. Cable, telephony, satellite, wireless - each has its own bureau at the FCC. And the vast bulk of regulatory effort is focused on one ever-shrinking segment of the business: local voice communications.

Rather than being market-driven, competition in communications is managed by regulatory bodies who today dictate the terms of competitive entry, establish prices on retail and wholesale services, oversee our operations, and maintain an elaborate system of subsidies.

To put it more simply, they're trying to pick winners and losers.

The result of this approach is that the communications industry in this country has not been able to develop along natural lines. However unintended, regulation has stifled progress in the deployment of new technology.

This has dramatic consequences for consumers in the form of less choice, less competition, fewer services, and misallocated investment.

There are several things government can do to correct this uneven approach to regulating communications. But before I suggest what those would be, let me emphasize why we believe this is such an important issue for the country.

The first, ironically, is that it delays the benefits of competition in the local and long distance markets.

As you probably know, last December - four years after the Telecom Act was passed -- we became the first former Bell company to get long distance approval, in the state of New York.

Lo and behold, competition has done what it usually does: stimulate the marketplace.

Since our entry, prices have gone down, long distance output has increased, and the number of competitive lines increased more than 70 percent. Even more tellingly, New York was the first state in the country where the "big three" long distance companies actually invested their own capital to provide local residential telephone service.

They had to.

I'm hopeful that this door has been opened once and for all. As many of you know, we filed our application to provide long distance in Massachusetts on Friday and hope to expand the footprint across all our big states in the next several months.

The trouble is, we cracked the human genome in less time than it took to open the long distance market in a single state.

The funny thing about this is that, after years of regulatory inducements designed to entice competitors into the local market, the only thing that really worked to get competitors to invest in local networks was to let us into long distance.

Some of you may think this is just normal Verizon rhetoric. But these facts are all verifiable. Just look it up.

Imagine what we could do if we erased the local and long distance distinction entirely and offered consumers the kind of nationwide pricing and packaging innovations that have energized the wireless business.

A second issue has to do with Internet access.

Today, thousands of mid-sized and small American towns have no direct, affordable access to the Internet backbone. And most won't likely get it any time soon.

We're talking about places like Wichita, Bakersfield, Sioux Falls, Shreveport - hardly remote, out-of-the-way locales.

The fact is, 60 percent of the country's metropolitan areas have no access to an Internet hub - and the situation is even worse in rural America.

The reason is that telecom companies like Verizon - which arguably have some of the strongest resources and expertise when it comes to competing in the Internet market - are effectively prohibited from investing in these kinds of facilities because Internet traffic is considered to be "long distance" service.

It's ironic that the boundaries drawn up to break up AT&T in the early '80s - years before the Internet was commercially viable - are serving today to determine who can participate. The result is to keep some of America's strongest companies from investing in the very infrastructure on which our economic future depends.

The third issue is that current regulations favor certain technology platforms over others - even though the Internet is making these kinds of distinctions obsolete.

Consider the cable and telephone industries.

Driven by the logic of the Internet world, both platforms are evolving toward the same vision of the future. Cable is upgrading its one-way broadband pipes to handle two-way communications so it can provide voice, data, Internet access and video. Telephone companies are upgrading our two-way phone lines with broadband capacity so we can do the same thing.

The result should be flat-out competition between two robust platforms, racing to deliver new-age services to America.

So what's the problem?

The problem is, we're playing this game by two sets of rules. We're trying to upgrade our networks with broadband capabilities while operating under line-of-business rules that restrict our revenues and wholesale pricing rules that devalue our infrastructure. Cable, on the other hand, is permitted to leverage its monopoly into the broadband arena - which means it can lock up programming, Internet access, Instant Messaging, and huge libraries worth of intellectual property on closed, proprietary systems.

Anything that delays innovation and investment in open-platform broadband technologies cannot be good for customers.

Finally, there's the overriding public policy issue of American leadership in a globalizing industry.

In recent weeks, there has been intense speculation about the possibility of cross-border acquisitions - takeovers of American communications companies by telecom providers in France, Germany, and England, fueled by valuations of these foreign telecommunications that are much higher than those of American companies.

The reason for this imbalance is simple: investors rightly view the communications marketplace in America as both more competitive and more regulatory than that of our foreign counterparts.

For example, European countries don't make any distinction between "local" and "long distance" service - as a matter of fact, they look at us funny when we try to explain what a "LATA" is.

We're more Balkanized than the Balkans.

The result, from the capital market's point of view, is a lower long-term growth outlook and a much riskier climate for investment - meaning that the market is driving up the values of foreign telecom providers, to the disadvantage of American companies.

Just to make the point: at least one European telecom could afford to buy any one of the top five U.S. players, pay a substantial premium, and suffer no dilution in its stock price.

Now, public policy may not concern itself with stock prices. But it should concern itself with attracting the investment that will fuel economic development and job creation. And therefore, it's worth considering what policies will have a positive impact on the flow of capital.

On that, the evidence is crystal clear: more competition, accompanied by less regulation.

Anything less puts the American telecom industry in jeopardy of being a runner-up in the most vibrant sector of the global economy, for reasons that have nothing to do with our ability to compete in global markets. That's an unacceptable outcome for us all.

The bottom line of all this is that the current form of managed competition and economic regulation has run its course and is now harmful to consumer welfare, investment and market-based competition. It's time for a new approach to regulating the technologies that are at the heart of America's economic prosperity - one that allows the market to develop around what consumers really want.

The basic elements of such a system would be these:

• Create a clear path for eliminating economic regulation at both the state and federal level on the entire communications industry, modeling it after the success in the wireless industry.
• Focus public policies and regulation on those areas that are really meaningful to consumers: ensuring the availability of basic service, upholding service quality, and protecting consumer interests in the Internet Age through open access policies, privacy protections and meaningful enforcement.
• Deregulate broadband investments and services immediately to promote sensible investment and ensure maximum competition among all the technologies technologies.
• Deregulate the business market immediately, where - by any reasonable measure - competition is alive and well.

We're encouraged that a growing number of federal and state lawmakers have recognized that changes are required. Congress is considering a number of bills that would remove some of the restrictions on data investments, and the FCC has proposed a restructuring plan.

The challenge is to make these changes and do them fast.

Last week, the FCC's head technologist, David Farber, acknowledged the difficulty of regulating the new economy. "Regulation takes around three years," he said. "How many Internet generations does that amount to?"

It's time to stop playing tomorrow's game with yesterday's equipment.

We've seen the competition - and they're swimming in shark-skin body suits while we're still in Speedos.

There's a revolution going in your kid's bedroom today - a cell phone in the pocket, a beeper on the belt loop, a hundred instant messages flying across the Internet, and a million more new services just waiting to be invented.

Connecting our customers to this hugely creative global market is the reason Verizon was created - and it's what we want to deliver to America.

To do that, we have to have faith in the discipline of competition and market forces to unleash innovation and create growth - and the courage to be bold enough to try new approaches to governing these dynamic new markets.