The Administration’s Ear to Telecom
As 100,000 workers at SBC Communications Inc. conclude a four-day walkout after midnight tonight, California’s dominant local phone company is still trying to look for ways to lower its labor costs to better compete against rivals that are luring away customers and squeezing prices.
That competition stems from the Telecommunications Act of 1996, a landmark law that opened the Baby Bells’ monopoly markets. And now the Federal Communications Commission and the Bush administration are pressuring the Bells and their rivals to negotiate leases of Bell networks and other gear.
Watching the negotiations is Michael D. Gallagher, the Bush administration’s principal advisor on telecommunications policy. Gallagher heads the Commerce Department’s National Telecommunications and Information Administration, an agency charged with creating jobs in the telecommunications industry, encouraging competition, spurring innovation and helping improve the economy.
Gallagher, a graduate of UC Berkeley and UCLA’s law school, entered government from the wireless industry, where he worked for AirTouch before it was acquired by Vodafone and eventually merged into Verizon Wireless. He sees wireless technology as a way to get around the chokehold the Bells have on local access lines, called loops.
He talked about phone competition, the lease talks and affordable high-speed Internet access during a recent interview at the third annual Wireless Telecommunications Symposium at Cal Poly Pomona.
Question: What’s your role in the current round of talks?
Answer: The FCC is in charge of it. We have a strong interest in making sure the outcome comes out well. So our role is one of support for the outcome and working together with folks as we can constructively.
Q: So if these talks succeed, does the commission take the credit?
A: Well, I think the American people take the credit. They’re the direct beneficiaries of it. When you have a competitive environment, there’s an equilibrium that’s achieved and you have new enhancements and lower prices, then there is a distinct benefit to our economy and to our citizens.
Q: The Bells control about 85% of the local business nationwide and a growing piece of the long-distance market. Does that share give them unequal bargaining power?
A: We’re engaged in a transition. If you go back in legislative history of the Telecom Act and look at the speeches in Congress at the time, you have people who were saying, “We live in a monopoly world right now. We’re going to open all that up and have all this competition.” And everybody agreed. We wanted to be in the position where we have multiple competitors offering multiple exciting services.
But this road on how we get there is extraordinarily difficult. And that’s what we’re managing.
Q: So in managing deregulation, does this unequal market share demand that the government have more oversight or stronger oversight of the process here?
A: I think it depends on the nature of the marketplace. What market share did Internet Explorer have in browsers when it first was started? Zero. None. Netscape was it. Netscape was the dominant browser, and today it’s still a fabulous browser. But if you look at the shares, very different.
So you have to ask yourself what your expectations are for competition to calibrate what degree of government involvement there should be in a particular industry.
Q: But isn’t there a big difference between Internet Explorer and telecom? There’s a bottleneck -- the lines to homes -- that is controlled by the network owners and can’t be replicated. Is that a monopoly that needs to be opened up?
A: Plenty of people say that Windows is a bottleneck and we need to open that up and make the source code available. But the telephone industry is certainly a very different animal.
Q: It’s an essential service.
A: You have to look at barriers to entry and you have to look at substitution of other products. For the local loop today, we’re just beginning to see those types of intermodal competitive offerings, which still are not quite fully substitutable.
We have 163 million wireless customers. Massive numbers of minutes are moving to the wireless networks. But even with today’s spectrum allocations, they don’t have enough spectrum to replace the wire-line phone system.
Also, if you talk to people, they really rely on their wireless, but it’s a supplement, a fast-growing supplement. It’s not a replacement except for a very small number of people, mainly college students.
Q: Will voice over Internet protocol technology become a replacement?
A: Voice over Internet protocol is a very powerful offering. I’ve had the privilege to see most companies’ platforms and what their intentions are with their customer bases. But you look at what this is. This is the inexorable march of IP in countering voice telephony. It’s already cut through text data -- it’s called e-mail, it’s called word processing -- and it’s cut through photographs. It’s cut right through music, and we’ve seen what it has done to that industry.
Well, now it’s encountering voice telephony. And why do we care? Because we have a hundred years of regulation and taxation that we’ve built up around voice telephony, and here comes IP right through it. What are we going to do about it? That’s the question that goes to policymakers.
The fact is you have to have broadband to do it.
Q: So today, in broadband, people have a choice mainly between the telephone company and the cable company. Is that duopoly enough competition?
A: You also have satellite TV, and that skews the models a little bit. But competitive theory would say two is not a robust competitive market. To really deliver the benefits of competition to consumers, it’s better to have more. If you ask most customers how many choices they want, they’d want as many as they could get. But I think more than two is certainly optimal.
Q: In calling for ubiquitous broadband, President Bush said the more providers there are, the better the pricing will be. How does the administration reach that goal under current broadband rules?
A: We get more [competition] from making more spectrum available for [companies like] Verizon Wireless to do [high-speed data connections]. At Vivato, a California company, they have a Wi-Fi solution for broadband that goes over a mile and a half or so with strong penetration inside buildings, and the antenna is a big as this door. What you have in that technology is another choice. Vivato has it up at SBC Park in San Francisco. I’ve gone out, I’ve walked it, I’ve seen it myself. It’s very impressive.
Q: Cities would lose a lot of tax revenue if residents turn to VOIP. Should there be a way to replace those taxes, or should local government be able to offer the services?
A: You have to approach the notion of government competition very carefully. It’s not the traditional American way. Where we already have a competitive market and it’s serving the needs of consumers, the government doesn’t need to get in there as yet another provider, yet another competitor. It doesn’t make a lot of sense.
Now about taxation, there’s an absolute potential impact. And the arbitrage can be pretty significant. If you go to the Council on State Taxation website, it gives you, state by state, the breakdown of what the taxes are on consumers’ telephone bills. And it turns out that telecommunications is, I believe, the third-most-taxed industry behind alcohol and tobacco.
So there is a burden on policymakers at all levels -- federal, state and local -- to make sure we don’t make VOIP a gray market, that we make it a foundational piece of our economy. We need to rationalize those tax burdens in a way. That’s what legislatures are for.
Q: Why is broadband important? Why do we want everybody to have it?
A: Broadband is our path toward future international competitiveness. Broadband is how we are going to increase the productivity of the American worker. It’s how we’re going to release the demands on our transportation system. It’s how we’re going to entertain our children and educate them.
For tele-health, the notion that you can have a doctor, a Mayo Clinic doctor, provide a clinical diagnosis of a child in rural South Dakota because all the data, including X-rays and other types of complex medical data, can be transmitted to the doctor for evaluation and directed right back to the on-site physician. That type of medical treatment, that type of care for all Americans in all places, is very important.
For education, you can take education content from Duluth or can take education content from UC Berkeley and make that available anywhere in the country to students for purposes of education analysis and further input.
All of those things can only be done over high-speed broadband networks.
Q: All that sounds good, but many people may say it still costs too much. What’s the price point? How low do we have to go?
A: What we have to keep in mind is not so much price but value. It’s the value of what are you getting over the connection. How robust, how fast is it, to you, the consumer. And what that combination of those individual decisions being made in the marketplace that lead to an aggregate impact on the economy -- that’s the issue. The value equation.
