Progress & Freedom Foundation

Aspen Summit 2004
August 24, 2004

As delivered

Thank you, Jay, and the members of the Progress and Freedom Foundation, for inviting me to speak with you. Throughout its history, the Foundation has maintained that the greatest benefits from the digital revolution will come through a market-oriented approach. Your support for a pro-investment national broadband policy has been critical in the debate between over-regulation that impedes investment versus a marketplace environment that stimulates innovation and investment. And the facts continue to confirm our shared philosophy that greater social and economic benefits result from a reduced government role in today’s competitive communications industry.

We too are optimistic about “The Future of the Internet” -- we’re excited about all the possibilities it holds for our industry and the U.S. economy. As consumers continue to move up the bandwidth chain, Americans will absorb more innovative applications and broadband will become an essential part of their daily lives.

Despite all the changes in communication, plus all the innovation and productivity that the Internet has already delivered, this revolution has barely begun. The Internet will continue to evolve and expand and will drive the creation of powerful new applications that will demand greater levels of capacity.

High-speed broadband technologies -- with speeds of 30 megabits and more -- are now hitting the consumer market, and will further accelerate the changes in how we communicate. But increased capacity and faster connection speeds are just part of the story. The real benefit of broadband is that the speed and capacity of fiber networks will open a world of new ideas and new applications that will bring consumers valuable services that seem unimaginable now.

As I’m sure you know, Verizon is the biggest network operator in the U.S. We are one of the largest infrastructure companies around -- we deploy more technology, invest more capital, and serve more customers than virtually anyone else in the industry. Large-scale deployment of advanced network technology is what we do best.

We have built our business on the belief that world-class networks and next-generation technology will create value for our shareowners and our customers. And we have a vision of the future that is based on the model that works in every other technology-driven industry in the world: that investment and innovation will drive customer demand, and that true market-based competition will benefit everybody.

Our record of commitment to deploying new technology is clear. We have shown how network investment works in our wireless business, which has grown to become the industry leader in technology, quality and customer satisfaction. And we are committed to do the same in our wireline business by making the huge investments required to transform our network around the requirements of the high-speed broadband and packet-switching era.

We continue to use the $12 billion we spend in capital each year to align our networks and our business model around new technologies and markets. These network investments include:

• The first-ever deployment of the wireless broadband service, EV-DO

• Expanded and improved DSL service

• Packet switches that work on IP protocols and are inter-connected via optical networks

• And now the large-scale deployment of fiber in our local network, direct to the customers’ premises

So, there should be no doubt about our commitment to manage our business for the future, or our willingness to take on the challenges associated with investing in new technologies.

But we have reached a critical stage in the development of broadband. DSL reached the market later than cable modems and had a few early issues. But we’ve worked through most of those and this year we’ve significantly narrowed the gap with cable modems. By accelerating our deployment of DSL, more and more Americans are choosing DSL for their broadband service.

But we believe the status quo is not good enough. We feel that consumers deserve more speed for voice, data and video, all on fiber. As you know, some people in our industry recommend a more conservative approach, using a little less fiber and a lot less speed.

We feel differently. We aren’t content to stand still while the technology for advanced high-speed service is available to us. Just as we took the lead in deploying EV-DO in wireless, we want to raise the bar and create a new wireline network standard.

Therefore, we have made the strategic decision to take the lead in our industry by transforming our network to deliver ultra high-speed, broadband services. We believe this will provide strong economic growth, improve network efficiencies and revolutionize the way customers think about communications and entertainment services.

A connection offering speeds of 30 megabits or higher is essential to the future of our business -- and our national economy. Broadband’s true potential won’t be realized until connection speeds become much faster than those typical of DSL or cable today. Today’s lower-speed broadband services -- or even a fiber to the node architecture -- won’t be able to manage the large-scale two-way data transfers needed for tomorrow’s advanced applications. Without a substantial increase in bandwidth, America’s so-called digital revolution will only result in faster e-mail and web surfing.

This year, Verizon will invest $1 billion to upgrade our local network to deploy fiber-to-the-premises in select markets. We firmly believe that FTTP will take the broadband experience to new heights, and we are willing to invest the billions of dollars necessary to bring this innovative service to homes and business across our service area over the next several years.

A few months ago, Verizon began laying fiber past homes and businesses in Keller, Texas; Tampa, Florida; Huntington Beach, California; and in several other states. As we get closer to offering service, we’ll announce six additional states, and by the end of this year, we’ll pass 1 million homes. In 2005, we plan to pass an additional 2 million homes. We’d like to move even faster, and I’m looking at the business case right now.

This summer we will reach a milestone -- our first FTTP customers in Keller, Texas will go live. Among our test audience, the response has been overwhelmingly positive. Our fiber-optic service -- which we have named Fios -- provides customers with their choice of Internet access speeds ranging from 5 to 30 megabits downstream and as much as 5 megabits upstream. Compare that to the average 1.5 to 3 megabits downstream typically found in today’s broadband offerings.

But more exciting is the increased upstream speed that Fios offers. Communication is supposed to be a two-way interaction, and fiber substantially reduces the delays that many of today’s broadband users suffer whenever they send data. Our faster upstream speed lets Fios customers benefit from a more interactive environment that enhances applications such as:

• Faster transfers of photos and other large files

• Better VoIP conversations

• Enhanced conferencing

• Improved video chat

• And faster gaming

We believe that FTTP’s two-way capability will unlock many of the applications that have been restrained under today’s slower broadband speeds, and its high bandwidth will drive the creation of tomorrow’s advanced interactive services.

By rolling out Fios, we hope to transform our business, increase broadband penetration and help raise the United States up from “Number 11” on the global broadband list.

In addition, there are numerous business advantages to Fios:

• Fiber opens up new revenue growth opportunities for Verizon

• Fios will “leapfrog” existing DSL and cable broadband technology

• Fios helps us compete on a level field with cable, and sets the stage for advanced video applications

• Also, improved customer service and network maintenance will provide a more compelling value proposition and business case

• FTTP restores “growth through innovation” to our wireline business

• And of course, fiber offers the promise of a much less intrusive regulatory environment

We’ll look back on this summer -- when our customers first received fiber services in Keller -- as the “turning point” for our company and our industry.

So the question is: how fast can we invest in our vision of the future?

We are especially aggressive in those markets that are not burdened by regulatory disincentives.

For us to make this investment, we must have a policy assuring that our new fiber network will not have to be unbundled. In the Triennial Review decision last year, the FCC gave assurances that the unbundling regime would not apply to fiber networks. That was an important element in our decision to invest in FTTP.

But because of a legal technicality, the threat of unbundling these new fiber networks still hangs over us in the former Bell Atlantic states, where we’re subject to the long distance entry rules in the 1996 Telecom Act. Anticipating that the FCC would address this issue, we have begun to deploy fiber in some of those states. But one year later, we are still waiting for this problem to be cleared away.

If we were in any other industry, we’d be moving at full speed across our entire footprint. In a normal business environment, our Fios deployment schedule would be based solely on economic and market-oriented factors. But unlike other companies, our investment decisions -- along with customers’ choices -- continue to be distorted by the current regulatory disincentives that require new data networks to fit into the old regulatory voice models.

Many of the policies in place today were designed around circuit-switched voice technology and an era of limited customer choice. I agree with what Michael Powell said. We need to stop making policy by looking in the rear-view mirror, and create a forward-looking framework that rewards the investment, innovation and risk-taking at the heart of technology-driven industries.

As I see it, there’s an imbalance between the rules for investing in the wireline network, as opposed to other technologies like cable or wireless. The current system exposes our investments to the conflicting agendas and interpretations of regulatory agencies at every level of government, from municipalities to states to the federal government. They only serve to impose costs, inject ambiguity, and introduce bureaucratic red tape into every investment decision involving the wireline network.

It’s great that President Bush, Senator Kerry, Chairman Powell, and a long bi-partisan list of congressional leaders have embraced high-speed broadband as a critical building block for a robust economy. They’re right.

More importantly, they’ve also asserted that the Internet -- along with fiber networks -- will flourish in the free market, and that high-speed facilities and services should be in a “regulatory free” zone. Again, they’re right. Companies operating in a free market will respond aggressively to meet the needs and demands of customers in creative and exciting ways that we cannot yet envision.

Yet, the FCC has not yet put in place the clear policies that fulfill the vision and intentions of our political leadership. We still have a policy that deters us from rebuilding our wireline network and offering new services. That’s wrong for customers, wrong for our company, and wrong for our country.

Today’s new broadband technologies need an entirely new approach to communications policy -- one that builds on the strength of the Internet, relies heavily on competition, encourages investment and innovation and provides for an effective but non-intrusive role for government.

Let me suggest the principles on which this policy should be built.

Principle 1: Allow the market to work. We endorse the “Four Freedoms” outlined by FCC Chairman Powell.

We’ve embraced the principles laid out by the High Tech Broadband Coalition. We strongly believe that consumers in a free market will make sure that these principles rule the broadband world.

We do not need extensive regulation that will stifle innovation and investment. The FCC should retain the authority to regulate if problems arise, but we need to avoid unnecessary and harmful anticipatory regulation.

So our first principle is: let the market work.

Principle 2: High-speed services should be free from economic regulation. This means no price regulation. No tariffs. No cost allocation rules. No economic regulation of any kind. Beyond that, these services should get the “light” regulatory touch under Title I of the Communications Act.

For Verizon, these high speed services will soon include video provided over a state-of-the-art fiber network. Under current law, we are required to obtain cable franchises in every local jurisdiction – potentially thousands – so that we can offer consumers a competitive choice. And we are doing just this: we already have entered into franchise negotiations in multiple communities.

But when a wireline company enters the video market, it should not be forced to get a franchise. In theory, the reason for a franchise is to obtain the right-of-way to deploy the network. But we already have that. So requiring a franchise because we are upgrading our network and offerings only serves to delay the benefits of real competition and increased customer choice in the wireline video business.

We understand the legitimate revenue needs of local governments and are prepared to do our part. But we can accomplish that without enduring the needless delay and red tape of the franchising process. So principle two is: exempt high-speed services from stifling regulation.

Principle 3: No unbundling of new broadband networks. We’ve never seen a justification for the unbundling and pricing policies that have applied to our legacy network for nearly a decade. But since competition in the voice telephony market was behind that policy, then there’s absolutely no reason to apply this irrational practice to our new investments in the highly competitive broadband data world. Deploying fiber is a high-risk proposition, and any unbundling requirement destroys the economic case for this network investment. So principle three is: no unbundling of fiber.

Principle 4: We need a national policy. Today’s communications operate in a world without boundaries. In the realm of the Internet, our state, county, and municipal borders are artificial and meaningless. Yet, current policy subjects our investments to the conflicting agendas and interpretations of regulatory agencies at every level of government. That means more costs, more ambiguity, more bureaucratic red tape -- and long delays in bringing the benefits of this new technology to businesses and consumers. Therefore, principle four is: we need a national policy that effectively pre-empts other levels of government.

So what would happen if we were guided only by the market, and the government got out of the way, so that we no longer had to make decisions based on today’s disincentives?

Real investment opportunities would increase, in abundance. We would accelerate our FTTP deployment. Broadband infrastructure improvements would be extended across America and would help fill unused capacity in the Internet backbone. We would create an audience for a new generation of broadband services in areas such as education, entertainment, conferencing, and gaming.

A faster migration to the next-generation Internet would create a market for the hardware, software, applications and infrastructure improvements that have been waiting in the wings.

Widespread deployment of high-speed broadband technologies would also be an accelerator of economic and social development for states and cities across the country.

• Enriched educational programs

• Improved medical services for rural areas

• Enable faster and more efficient government services

• Create innovative business opportunities

But perhaps best of all, enhanced broadband services may help ensure that families, businesses and young people in rural areas do not feel forced to leave their community to find economic, educational and social benefits elsewhere.

Putting our industry on a healthy, rational economic footing will help stimulate a new wave of productivity, create the entrepreneurial activity that is key to America’s economic leadership, and deliver the long-promised social benefits of broadband.

Verizon is optimistic about the future of the Internet, and we believe our company has a positive, constructive role to play in delivering a new generation of technology to our customers. We are one of the few companies with the will and the resources to deliver the broadband future to the mass market. And we are confident that, with the right policy framework in place, communications can once again be an engine of economic growth and catalyst for innovation.

But if America’s broadband expansion stalls, it will not be the result of narrow thinking or outdated technology. It will be because we were unable to let go of the regulatory disincentives of the past. But we’re betting and anticipating it will not come to that.

It is my genuine hope that regulatory reform can and will happen. Then we can look back to this summer’s launch of Fios in Keller, Texas as the tipping point that established a new era in communications, and helped reestablish the United States as the technology leader of the world.