Hearing of Telecommunications and the Internet Subcommittee: The Current State of Competition in the Communications Marketplace

HEADLINE: HEARING OF TELECOMMUNICATIONS AND THE INTERNET SUBCOMMITTEE OF THE HOUSE COMMITTEE ON ENERGY AND COMMERCE

SUBJECT: THE CURRENT STATE OF COMPETITION IN THE COMMUNICATIONS MARKETPLACE

CHAIRED BY: REPRESENTATIVE FRED UPTON (R-MI)

LOCATION: 2322 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES:

MICHAEL J. BALHOFF, MANAGING DIRECTOR, TELECOMMUNICATIONS GROUP, LEGG MASON INC.;

FRANK LOUTHAN, VICE PRESIDENT, EQUITY RESEARCH RAYMOND JAMES FINANCIAL, INC.,

ADAM QUINTON, MANAGING DIRECTOR & FIRST VICE PRESIDENT, CO-HEAD OF GLOBAL TELECOM SERVICES RESEARCH, MERRILL LYNCH & CO.;

NED P. ZACHAR, CFA, FOUNDING PARTNER, WEISEL PARTNERS, DIRECTOR OF TELECOM SERVICES RESEARCH, LEVER HOUSE

BODY:
REP. EDWARD J. MARKEY (D-MA): We thank you --

REP. UPTON: Especially by Mr. Brady.

REP. MARKEY: We thank you for Tom Brady from Michigan and Boston. We thank you for the Michigan primary, for Mr. Kerry from Boston.

REP. UPTON: Ty Law.

REP. MARKEY: Huh?

REP. UPTON: Ty Law.

REP. MARKEY: Could I just pass at this moment? Would that be all right? And if you could recognize one of the other members --

REP. UPTON: Sure.

REP. MARKEY: -- and I will come back, okay.

BREAK IN TRANSCRIPT
REP. MARKEY: Thank you, Mr. Chairman, very much. And I wanted to compliment you on this timely hearing.

The telecommunications marketplace remains in the doldrums, although there are hopeful signs that parts of the marketplace are beginning to rebound. The health of the marketplace sector can be measured by various ways, and one's assessment of marketplace well- being depends on what one considers optimal health. The workforce looks to job growth and reasonable wage increases over time. Consumers typically look to choice, service quality and price. Investors often look to the bottom line, that is profitability. Manufacturers like to have many outlets for their products so that they have a myriad of potential buyers.

As such, what investors may think constitutes a wise investment in a healthy economy or sector might put them at odds with what consumers and workers see as healthy. A telecommunications marketplace with multitudes of companies engaging in fierce competition with ever lower prices, higher quality and new services is the kind of market we seek to create and the kind of marketplace for which the vast majority of consumers yearn. Yet for investors, that type of competition may not be a good investment because it is a highly competitive marketplace, often with low profitability and higher risks.

In other words, if you have one company, with no competitors, that's the pluperfect risk-free investment. A duopoly is slightly more risk, but not much. Those are the kind of companies Warren Buffett invests in. Yet such a marketplace would be terrible for America because it is anti-consumer, anti-innovation and doesn't foster new jobs over the long run. Moreover, companies that successfully lower costs for operational support, customer support, telemarketing or billing services, by shifting such operations to entities offshore in places like India, the Philippines or elsewhere, might get kudos for investors for increasing profitability but receiving standing boos from high-tech workers.

According to Forrester Research, over the next 15 years, 3.3 million U.S. service jobs and $136 billion in wages will move offshore, and the information technology sector will lead the initial overseas exodus. When such firms post lower costs and trumpet their profits to Wall Street, does that really constitute a healthy marketplace? Can we really herald an economic recovery if it comes without new jobs? A jobless recovery, Mr. Chairman, is like jumbo shrimp or Chevy Chase nightlife. There is no such thing, you know.

(Laughter.)

So the challenge for our telecommunications policymakers for many years has been to reform telecommunications statutes and rules in a way that substitutes a sound competitive policy framework consistent with the public interest for hitherto monopoly-provided services. I believe a competition-based policy is preferable because it maximizes consumer choice, job creation, technological innovation, service quality and price reductions. In addition, I contend that the economic interests of the United States are most advanced in the global marketplace by fully establishing competition in our domestic telecommunications markets.

We still have progress to make on this front, but I remain hopeful that sooner, rather than later, the Federal Communications Commission will surely see that without fleet-footed up and coming competitors with a legal right to access their customers in the marketplace, we will have no marketplace insurance that the large corporate owners of the wires will not grow complacent, that they are not again permitted to sit on innovation, keeping it on the shelves, and that they are forced, by competitive paranoia, to invest and upgrades.

And this is an important lesson for those who don't have a long history in dealing with monopolies from a policy standpoint to appreciate. That's because when our telecommunications laws were written, our incumbent telecommunications companies were not exactly mobile. They were in a 100-year-old monopoly-induced technological stasis. When our telecommunications laws were updated, however, the incumbents were forced to become mobile, to move to deploy new equipment, to move into new markets and to move into new technology.

Policymakers were successful in the sense that when our new telecommunications laws were made, these companies were forced to become mobile and we saw broadband go from zero customers in 1996 to over 80 percent of all Americans having access to it past their front door today. That is an incredible public policy success story. And we must ensure that we don't see any further backsliding from our policy preference for the types of vigorous competition that will keep the companies and market sectors moving.

Mr. Chairman, I thank you for holding this hearing and I look forward to hearing from the witnesses.