"A Consumers' Guide to Telecommunications Reform Legislation" Remarks by Larry Irving Assistant Secretary for Communications and Information National Telecommunications and Information Administration Department of Commerce May 25, 1995 Washington, D.C. [as prepared] At the conclusion of the American revolution, the world watched eagerly as we fashioned a document that would provide a framework for us to govern our nation. Today, as we enter what Vice President Gore calls the digital revolution, the world is again watching to see how our nation designs a framework to meet the challenges of the Information Age. The Clinton Administration believes that we must adopt a framework for competition. We want to stimulate competition in the telecommunications marketplace to improve everyday life for millions of Americans. The Clinton Administration believes that competition will provide consumers with lower prices, higher quality, and greater choice for telecommunications goods and services. And it will provide businesses with new opportunities. We believe that competition is the best way to accelerate the buildout of an advanced telecommunications infrastructure. Telecommunications and information technologies and applications can create new high-paying jobs; improve our nation's competitiveness; enrich our children's educational experience; enhance medical services, especially for Americans living in isolated or rural communities; connect us to our government officials; and facilitate communications with our family and friends. We believe that the best way to achieve a competitive telecommunications marketplace is to reform our 60-year-old Communications Act. The Administration supports telecommunications reform legislation that will protect consumers from monopolistic practices and promote real competition. The difference between the approach to telecommunications reform being taken by Congress and the Administration's approach is clear: they want to deregulate companies, we want to ensure that companies compete. Deregulation is not synonymous with competition. We cannot move overnight from regulated monopolies to a truly competitive market. This takes time. We share common goals with the Members of Congress that are crafting the legislation, including Senator Pressler, Congressman Fields, Congressman Bliley, Senator Hollings, Congressman Markey, Congressman Dingell, and other Members of the House and Senate who have contributed to this legislative effort. Yet, in key areas we diverge. The Administration wants both consumers and industry to reap the benefits of competition. Both the House and Senate have introduced telecom reform legislation. We've been reading the fine print of the bills, and they fall short of our goal. Today, I want to present a consumers' guide to telecommunications reform legislation. This consumers' guide will cover five key issues: (1) cable rate regulation, (2) concentration of mass media, (3) cable-telco buyouts, (4) telephone rates, and (5) universal service. Then, I want to offer a "Consumers' Bill of Rights" that should guide our policymaking in this area [with apologies to our Founding Fathers.] Cable Rates Will Rise First, let us take a look a cable rate regulation. Mark Twain once said, "Whenever you find that you are on the side of the majority, it is time to reform." The authors of the House and Senate bills appear to be taking this advice literally when it comes to telecommunications policy, in particular cable regulation. The vast majority of Americans are paying less for cable and support the continued regulation of cable television rates. The truth is that the 1992 Cable Act has brought substantial savings to consumers. The FCC estimates that as a result of the '92 Act, consumers have saved $2.8 billion through rate reductions, as of December 1994. They have also saved because the rate of increase has been brought down from three times the rate of inflation to a more reasonable rate. Indeed, on April 3, 1995, this organization, the Consumer Federation of America (CFA), released a national survey showing that cable consumers believe their rates are too high. And when asked whether they support continued regulation of cable TV rates, two-thirds of consumers said yes. In addition, consumers are no longer overcharged for additional outlets or remote controls. Before the '92 Act, cable companies charged customers as much as $7 for an additional outlet; today most customers pay nothing beyond the initial cost of the second wire for the ability to get cable on a second or third television in their house. Before the '92 Act, cable companies charged their customers up to $5 for a remote control. Today, those customers pay less than a dollar for the ability to channel surf. And yet, the House and Senate committees, would deregulate cable rates before consumers have a choice of providers, opening the door for these abuses to return. The Administration is not arguing that we should regulate cable forever. We don't argue that rate controls could be less administratively burdensome, especially for small operators. We do believe, however, that it is critical that we not deregulate too soon, before competition exists. Now is too soon. We've been down this road before. In 1984, Congress received assurances that competition to cable was at Americans' doorstep. The then-president of the National Cable Television Association testified before Congress that "Comsat and the other operators are going to be providing [direct broadcasting] satellite service. It will have a multiplicity of channels that again will be movies, sporting events, news; same kind of things as on cable television. It will be offered this year. It is not a pipedream. Comsat will be offering the service this year. Rupert Murdoch just announced he will offer it this year. That will be directly competitive with cable and it is totally deregulated." The same cable spokesman went on to promise that "[t]here will be two cable wires running down the street." It was a pipedream. Competition did not emerge in 1984, or shortly thereafter. What did emerge were tremendous price increases for consumers as cable companies raised their rates with impunity. The General Accounting Office found that, on average, the price of basic cable services rose more than 40 percent from 1986-1989 -- three times the rate of inflation during that time. And many individual communities saw their cable rates skyrocket even more dramatically. For instance, residents of Newark, New Jersey had rate increases of more than 130 percent. Cablevision of Connecticut raised its rates 222 percent. Today, cable advocates are saying the same thing -- that satellite and telephone competition is just around the corner. This Administration is committed to the proposition that consumers deserve protection through either regulation or competition. And I should note that the '92 Act provides for immediate deregulation of cable rates as soon as real competition is established in a community. Unfortunately, just as in the '84 Act, both the House and Senate bills will permit cable companies to increase rates before the vast majority of cable operators face any actual competition. As George Santayana said, "We learn from history that we do not learn from history." The House bill, for example, deregulates rates for almost 30 percent of cable subscribers immediately, and rates for cable programming received by other subscribers fifteen months after the bill's enactment, whether or not consumers have any choice of an affordable alternative service. The legislation would ensure that consumers could buy their cable boxes in a retail store. We applaud this provision. But cable operators will be permitted to increase rates for such equipment long before the first consumer can actually buy a cable box in a store. This is anti-consumer. The Senate also deregulates cable, but in a different way. Under the Senate bill, cable rates for popular programming such as CNN, CSPAN, Discovery Channel, and ESPN would go up. Under the bill, rates for cable programming services (commonly known as "expanded basic services") will be regulated only when rates "substantially exceed the national average rate for comparable cable programming services." In most cases, rates would have to rise substantially before any regulation occurred. Even worse, two cable companies, TCI and Time Warner control about 40 percent of the market. When they raise their rates, it will raises the national average. The end result -- cable rates skyrocket for consumers. The Administration understands that some regulatory flexibility for the cable industry may be appropriate, particularly in pricing upper tier services and for smaller operators. But, again, we would retain essential protection for consumers until they can actually choose an alternative video provider. Let's put this all in perspective. Contrary to the cries of the cable industry, current regulations are not crippling them. Electronic Media reported that in 1993, "cable TV companies' operating income margins at 20.1 percent outperformed the rest of the communications industry." In 1993, 14 new cable channels were launched; 1994, 25 new channels were launched; and launch plans for 1995 include 63 new channels. This winter, a consortium that includes TCI, Comcast, and Cox spent more than $2 billion to acquire spectrum for the delivery of personal communications services (PCS) -- an amount that topped all other bids. As CFA notes, since last summer, major cable companies have invested over $15 billion in new competitive ventures. In 1994, the FCC reported that the number of subscribers to the top 100 MSOs grew by 5.4 percent -- almost 3 million customers in one year. In contrast to the over 60 million cable subscribers, DBS has fewer 1 million total customers, wireless cable has 600,000, and C band has about 4 million. DBS is unaffordable for many Americans -- dishes cost at least $700-$800 plus a monthly fee. And, as CFA has noted, under current law, when any combination of these competitors penetrates a market to the level of serving 15 percent of the homes, cable regulation immediately disappears under existing law. Consumers should also be aware of what I call the "predatory pricing provision." The House bill allows a company to drop its rates for a small, select group of customers simply to drive out competitors. For instance, a cable provider in New York City could drop its rates for two apartment buildings in order to drive out of business a competitor that is servicing those buildings. Diversity and Localism in Mass Media Will Decrease Consumers must also be made aware of the danger of concentration in mass media. Under an amendment to the current House bill expected to be offered today, the same individual or company can own two television stations, an unlimited number of radio stations, the local newspaper, and the cable system in an area. Now, it is fair to say that if one person controls all of these media sources, that person will have a strong influence on news reporting, editorializing and thus public opinion in that community. As Congressman Ed Markey has stated, "this provision will make Citizen Kane look like an underachiever." This should concern each of us. News and information is essential to our system of democracy which relies on an informed citizenry. As John Stuart Mill wrote in On Liberty, "only through diversity of opinion is there . . . a chance of fair play to all sides of the truth." Broadcasting and newspapers are still the major sources of news, information, and entertainment in this country. Two thirds of Americans get their news from television. Concentration of mass media will bring a loss of diversity and localism. What is on the front page will also be the lead story on radio and television. An advertiser or a political candidate seeking to reach an audience would face a bottleneck -- the local media mogul -- with a strangle hold over a community. And perhaps worst of all, fewer media outlets will be in the hands of people who live and work in the communities they serve. Cable-Telco Buyouts Will Reduce Competition Let us now take a look at the cable-telco crossownership issue. The Administration supports a repeal of the current cross-ownership ban for telephone and cable companies. If we want to encourage competition in today's market, we must eliminate outmoded rules that prevent telephone companies from offering video services to consumers, as well as restrictions on cable companies offering local telephone services. However, competition will be thwarted and consumers will be hurt if we simply allow the two most likely competitors to buy each other out in region. We want to encourage two wires to the home, not one, as well as additional wireless options. And we want to encourage more choices for consumers, not less competition among companies in any local market. The Administration believes that an anti-buyout provision is crucial for competition. Right now, cable companies are the dominant providers of subscription-based video programming in communities across the United States. The whole purpose of allowing telephone companies into the video programming market is to provide a competitor to the cable monopoly. The effect of two companies competing to provide video programming services in a particular community will be lower costs, greater choice, and higher quality for consumers. If, however, telephone companies are allowed to enter the video programming market by buying out the local cable company, the result is the same as if the telephone company had never entered in the first place -- one dominant provider of video programming services. The American people do not want one monopoly to be replaced with another -- they want and deserve competition. In addition, cable companies are particularly well situated to compete head on with telephone companies in the local exchange market as they are the only other industry that has a wire into most peoples' homes. Local cable companies' networks pass 96 percent of U.S. homes. Mergers will eliminate local phone competition from cable. Thus, we are opposed to the bills' buyout provisions. The Senate bill allows telephone and cable companies to merge in every community in the United States. Potential competitors will be swept away. For example, NYNEX and Time Warner could merge in the New York City area . . . who would possibly have a chance of competing with that combination? In an era when we are trying to move away from regulation towards competition, this is a major step backwards. The Administration commends the House Telecommunications Subcommittee for recognizing that limits must be imposed on the ability of a telephone company to buy out a cable company in the telco's local service area. They have included a ban on buyouts in areas greater than 35,000 people, and have limited the buyouts to 10 percent of the telephone company's region. The Administration is, however, concerned by a provision of the House anti-buyout rule as currently drafted. The Administration is troubled that the House bill assumes that two-wire based competition is impossible in communities with fewer than 35,000 people. In fact, the opposite may be true. Competition might be possible in many of these smaller towns. NYNEX is building an advanced video network in southeastern Massachusetts and Rhode Island. This network would provide service to Marblehead (population 20,000) and Winthrop (population 21,000) among other towns. The fact that NYNEX is planning to provide service to these two towns shows that competition is not only possible but may soon be a reality -- if we permit it. The Administration has consistently recommended that Congress adopt a strong in-region anti-buyout restriction on acquisitions and joint ventures between telephone companies and cable systems, with a limited exception for rural areas of, for example, 10,000 inhabitants or less, because such areas truly may not be able to support two-wire based competitors (out of region is ok). In addition, the FCC should be granted authority to review the ban after a certain number of years. Broad exceptions to the anti-buyout rule, however, invite consolidation of power by multimedia monopolies and discourage critical competition in the video services and local telephone markets. Rural areas will receive a double whammy, as cable rates for small systems are deregulated immediately and buyout provisions reduce the likelihood of competition. To paraphrase Glen Campbell, "Thank God I'm a City Boy." Telephone Rates Could Rise Fourth, consumers must understand that the current bills could result in higher telephone bills if the Bell Operating Companies are allowed to use their monopoly power to weaken their competitors. The bills under consideration in the House and Senate Commerce Committees lift restrictions on Bell Operating Company entry into long distance and other markets without first allowing the Department of Justice to determine whether real competition is developing in local telephone markets. The checklist included in the bills covers many of the steps for interconnection and unbundling that most analysts believe are necessary for opening local markets to competition. Unfortunately, however, we do not know whether these steps alone will be sufficient to allow local competition to evolve. A simple checklist may not ensure that competition will occur . . . and it most certainly cannot replace the need for the expert analysis of the market that the DOJ would bring to the process. William Baxter, the former Assistant Attorney General -- and my former law professor -- who presided over the break-up of the Bell System, strongly supports a role for DOJ to ensure that local telephone companies who hold a monopoly over essential local facilities do not use their entry into the long distance market to diminish competition and hurt consumers. As Mr. Baxter states in a letter to Congress: "We should not fall into the trap of thinking that just because local competition is imaginable, it is already here. It is not here. It is not even close." The Clinton Administration agrees. The bills in both Houses weaken the ability of state PUCs to protect consumers by preempting state regulation of rate of return regulation. The bills assume that we in Washington can best determine how telephone rates should be regulated in the various states. Universal Service Is Under Siege Fifth, consumers need to be alerted to the fact that universal service is under siege. President Clinton, Vice President Gore, and Secretary Brown are all committed to ensuring that all Americans have affordable access to telecommunications and information services. The House bill may include a provision to weaken universal service by essentially freezing the definition of universal service at basic telephone service. If we are to move our country forward, into the 21st Century -- the Information Age, then we cannot afford to freeze the technology that we make accessible and affordable at yesterday's level. We will stunt our growth as individuals and as a nation with a static definition of universal service. Imagine if thirty years ago we had frozen the definition of universal service nationally -- we would be limited to party-line service outside our major cities! The Administration supports language in the Senate bill that promotes affordable access for schools, libraries, and hospitals. Yet, this language is being attacked as well. The Administration supports the Snowe-Rockefeller Amendment that would advance this issue. The President and Vice President have repeatedly emphasized the need to ensure that every child in this nation be able to hook up to the information superhighway. A Consumer's Nightmare If a telecommunications reform bill passes without changes to these provisions, it will be a consumer's nightmare. Consumers will dig deep into their pockets to pay cable bills that will likely rise faster than the rockets carrying direct broadcast satellites and telephone bills that will increase faster than George Foreman's weight after a Memorial Day picnic . . . . Many consumers will have only one provider to turn to for their telephone and cable services. Deregulated monopolies will be in the position to keep start-ups and entrepreneurs out of the business. For equipment, consumers will have the choice of the deregulated monopoly provider or . . . the deregulated monopoly provider. There will be no choice. Higher rates, no choice, no pressure for high quality or innovation. Isn't the whole idea of reform to improve our lives? A Consumers' Bill of Rights What consumers need is a bill of rights that is reflected in the telecom reform legislation. Let me suggest some possibilities: o The right to reasonable cable and telephone rates. o The right to a choice of providers of cable and telephone services. o The right to buy converter boxes, telephones, remote controls, and other telecom equipment at competitive prices. o The right to diversity and localism in ownership of community media. o The right to privacy. o The right to be protected from fraud over telephone, cellular, and computer networks. o The right to fair compensation for use of spectrum. o The right to affordable access to basic telecom and information services. These rights will not just appear. You need to fight for them on behalf of consumers. You need to educate consumers as to their importance. Consumers need to voice their concerns. And you also need to look beyond the current telecom environment to the information superhighway of the future and the emerging consumer issues that are arising. For example, a 1993 Harris Poll found that 83 percent of Americans are concerned about threats to personal privacy. How will consumers' privacy rights be protected in an era of increased electronic dissemination of information? NTIA released its Notice of Inquiry on privacy in February 1994 and plans to issue a Privacy White Paper next month. We hope that you work with us to develop solutions to this issue. From Sound Bites to Sound Policy Let us our recognize that what makes for good sound bites, does not make for good policy. Eliminating NTIA and the Department of Commerce may sound good in a press release, but what does it mean? It means that as we enter the 21st Century -- the Information Age -- and encounter critical issues such as privacy rights and copyright protections in cyberspace or universal service or electronic commerce, the President will not have the benefit of a telecommunications policy shop to advise him on how to resolve these issues. Without protections or rules of the road, no one will want to travel the information superhighway. Moreover, without the NII grants program, the public broadcasting grants, and the children's television grants dispersed by NTIA, new technologies will not reach traditionally underserved communities. Each of us will suffer, and our country as a whole will suffer, for the opportunities lost. The Clinton Administration is fighting to avoid this result. We will all pay a costly price if we lose. Let me take a moment to emphasis that industry has valid concerns. The telephone and cable companies are unnecessarily shackled from entering into each others' businesses. Broadcasters have valid concerns about being able to compete in an increasingly multichanneled and digital environment. The Regional Bell Operating Companies should be permitted into long distance, manufacturing, and other areas once they face competition in their local markets. The Administration has long advocated reform to the 60-year-old Communications Act to enable our telecommunications and information industries to retain their leadership in the global economy. And the Administration will continue to fight on behalf of the consumer. We recognize the problems for consumers in the current telecom reform legislation. But as American industrialist Henry Kaiser said, "Problems are only opportunities in work clothes." Conclusion We're not the only country working to meet the challenges of the digital revolution. Around the world, other countries are facing similar issues and are looking to us for a model of reform. The G-7 Ministerial Conference on the Information Society held in Brussels in February underscored the importance of what we are doing in our country for the rest of the world as well. And my participation in the Latin American Telecommunications Summit in March reinforced this point. The rest of the world is watching us. Countries that are in the midst of reform right now -- such as Germany -- are calling us daily for weekly reports on our legislative efforts. We need to get telecom reform right. The bottom line is that we need competition as fast as possible, reaching as broadly as possible. Please join us in working towards reform that will benefit everyone.