United States Chamber of Commerce

Ivan Seidenberg
United States Chamber of Commerce
January 16, 2002

[Introduction by Chamber President and CEO, Tom Donohue.]

Thanks, Tom, for that introduction, and thanks to the Chamber for inviting me to be part of this CEO Series. I believe it’s urgent for business issues to be part of the dialogue here in Washington, and this venue is a way of making that happen. I’m grateful to be part of the conversation.

One look at the headlines these days and it’s clear why business leaders need to speak up, early and often, about national issues: an economy that shows only faint signs of life; investor concern over write-offs to return asset values to pre-bubble levels; employee worries about retirement nest eggs, even at some of America’s most storied companies.

I’m sure I join the Chamber in believing that American business is an important part of the solution to the problem of restoring a strong economy and improving financial security for our citizens. That’s why I find myself here in Washington a lot these days. Unfortunately, most of the time I’m talking about the ins and outs of communications policy -- debates that tend to be full of arcane terms and technical mumbo-jumbo, which can sometimes obscure the relevance of these issues to the public at large.

I think 2002 is the year we can -- and must -- change all that by connecting communications policy to the larger issues in the U.S. economy. This nation’s telecommunications companies are a great and vital resource that have a crucial role to play in addressing what’s on the minds of real Americans: economic growth, technical innovation, and national security.

Today, I want to talk -- hopefully in plain English -- about two critical subjects that we at Verizon believe must be elevated to the top of the policy agenda for 2002:

• The need for pro-investment policies that will put capital back to work in the economy,

• And the need for a new way of regulating communications that will unleash our potential to stimulate a new wave of high-tech innovation and productivity.

First, though, I want to give you a quick overview of some of the transforming events in communications over the last year, which will demonstrate that a realignment of public policy with the realities of technology and markets is long overdue.

Of course, the most significant event of 2001 -- for Verizon, as for the rest of the country -- occurred on September 11th. I’ve spoken in other forums about the impact of these attacks -- all of which took place in Verizon territory -- on our networks and about the heroism of our employees’ response.

For the purposes of our discussion today, I would simply emphasize these points: The security of our nation rests on a strong communications infrastructure -- and, as we learned on 9/11, that depends on diverse technologies -- landline, wireless, data, Internet -- that provide alternative ways for customers to communicate. The more we can encourage investment in new facilities and alternate technologies, the stronger and more secure our communications infrastructure will be. And as I will discuss, it’s also the surest route to competition in communications, the long-stated but elusive goal of many years’ worth of public policies.

But 2001 would have been a momentous year in communications even without the events of September 11th. The key dynamic in the marketplace was -- and is -- the drive to control the information-age customer by becoming the single most important source of content, commerce and communications. And as we saw over the past year, this objective was the focus of attention for some of America’s most powerful companies:

• The AOL Time Warner merger brought together a top ISP, a top media player, and a top cable company to provide a bundle of services that includes Internet telephony, Instant Messaging, Internet access and broadband connections.

• The country’s two major satellite providers -- Echo Star and Hughes -- are planning a $27 B merger aimed at digital video and high-speed Internet connections.

• Wireless companies are upgrading their networks for high-speed data and actively urging their 120 M-plus subscribers to substitute wireless for landline phones.

• Microsoft introduced its new "Windows XP" -- a souped-up version of the operating system used by 95 percent of computer users -- that, in effect, uses Internet telephony to turn every computer into a phone.

• And most recently, the $72 B merger of AT&T and Comcast puts together a company with a bigger footprint than any of the incumbent telephone companies -- one that has the $100 B local telephony marketplace squarely in its sights.

All of these companies are looking to expand their footprint in the markets that will drive growth in communications: data, high-speed Internet access, and, increasingly, content. They’re aimed directly at Verizon’s core business, telephony, which is rapidly migrating to wireless and voice over IP. And -- not coincidentally -- the action is taking place outside the sphere of traditional regulation, which squashes innovation and impedes the flow of capital.

Verizon wants to play in this growth space, as well. We’ve spent the last decade reinventing ourselves around these new opportunities. We’ve assembled the assets, the scale and scope, and the technology base required to go head to head with cable, media and software companies to deliver the broadband revolution. And -- with a capital budget of $17 B in 2001, one of the largest in the industry, if not the world -- we have the potential to have a tremendous ripple effect on the U.S. economy, especially in the area of high-tech growth.

Yet, for all the opportunities in our industry, this nation’s incumbent telecom companies trade at a 30 to 40 percent discount to the market. One of the reasons is that a dollar of invested capital simply doesn’t buy us the same growth opportunities that it does for our competitors, at least if it remains invested in the old traditional regulated world. Unlike those of Microsoft or AOL Time Warner or AT&T Comcast, our regulated assets are subject to a long list of price regulations, sharing obligations, and separate subsidiary requirements that put us on an unequal footing in the marketplace and remove the incentives for investing in new technologies.

It’s a world -- in George Gilder’s memorable phrase -- of "privatized risk and socialized benefits." Or -- to steal someone else’s line -- you might call it a "tale of two networks": one (ours) that’s heavily taxed, heavily regulated, subject to all kinds of price controls and sharing obligations; and one (cable’s) that’s lightly taxed, virtually unregulated, and free of any requirement to open itself to competitors.

I’m sure I don’t need to remind this audience of the immutable law of physics that, when given a choice, capital simply does not flow to over-regulated businesses. Traditional policies have shifted value, growth and innovation away from the incumbent telephone companies to less-constrained segments of the industry. And, since they are based largely on resale and the forced sharing of telephone company assets, they do little to promote the robust competition among multiple technologies and service providers that would benefit American consumers and businesses.

The impact of this regulatory model goes well beyond our customers and shareowners. At a time when the American economy is in desperate need of a jolt of innovation and investment, some of this country’s most technologically strong, capital-rich companies are being kept on the sidelines.

I believe we no longer have the luxury of the status quo approach to communications policy, which has sent investment capital scurrying in the direction of safer, saner alternatives. We need to reframe these issues in terms of the larger goals of getting more technology in the hands of customers and more capital pumped into the economy where it can create jobs and growth and entrepreneurial activity.

It’s time to take down the "do not enter" signs at the entrance to the broadband future.

The challenge for America is to stimulate the most capital investment in the shortest amount of time. There are a variety of issues on this nation’s policy agenda that would help do exactly that.

The first, and most urgent, is for Congress to enact an economic stimulus package that contains meaningful incentives for investment.

While much of the focus has been on the decline in consumer spending, this more powerful trigger for this recession has been a slowdown in capital spending. The impact has been especially severe in the high-tech and communications sectors, where a disproportionate number of jobs have been lost. Even with signs that the economy is bottoming out, excess capacity will keep a lid on capital spending for much of the coming year.

Simply put, businesses need a reason to invest sooner rather than later.

Today, more than $2 Trillion in cash or cash equivalents is sitting on the sidelines while the economy languishes in an investment recession. Therefore, we believe any recovery package needs to contain changes in the tax law to encourage new investment. In particular, we support proposals that would give a sizable "bonus depreciation" for companies making new investments in the next two or three years.

This approach has garnered widespread support from the high-tech industry because it focuses on new investment -- you actually have to spend to get the benefit -- and on the kind of productive assets that create jobs and economic growth. And momentum is building on the Hill, as well. The House of Representatives included a 30 percent bonus depreciation provision in the stimulus package it passed last month. More recently, in a speech to the Center for National Policy on January 4, Senator Daschle expressed his support for a similar provision as part of a larger pro-growth agenda.

I join the U.S. Chamber of Commerce in applauding the emerging consensus in support of tax policies that will pump more investment capital into the nation’s economy, and urge the Congress to make this one of their top priorities when they return to Washington later this month.

Those of us on the front lines of American business are counting on it.

With a capital budget in the neighborhood of $17 B a year, pro-investment tax policies would have a significant impact on Verizon’s investment decisions. But tax relief alone will not enable that investment to flow to the biggest opportunities. For us to put that capital to its most productive use, we also need a national broadband policy that provides a rational economic basis for us to upgrade our networks, deploy new technologies, and reinvest in growth.

"Broadband," as you know, is really just shorthand for high-speed connections to the Internet. But it’s important to remember that broadband is not just about cable modems and DSL lines, as we think of it today. It’s about creating the new Internet infrastructure that will drive the next generation of IT innovation. If, as Alan Greenspan has said, the last wave of high-tech growth was stimulated by connectivity, the next will be driven by bandwidth.

Telecom spending on broadband will have huge multiplier effects on the economy. It’s the kind of technology innovation that -- like the PC and the Internet -- creates change at the core of the economy, not the margins. It will transform entertainment, create demand for new PCs run by more powerful chips, reinvent consumer electronics, and usher in new productivity-boosting business applications.

A recent study by Robert Crandall of the Brookings Institution estimates these benefits could add as much as $500 B of growth to the U.S. economy a year. All that’s required is an economic framework that is technology-neutral and rewards investment on the part of the industry’s strongest and most capable players.

If you saw yesterday’s Washington Post or Wall Street Journal, you saw that America’s high-tech industry also views broadband as the key to its future. A coalition of more than 300 high-tech companies called TechNet issued a report that calls on the administration to make broadband deployment a national priority and argues for fundamental change in the way local, state and federal authorities regulate this technology. In particular, they advocate freeing telephone company broadband investments from the “old rules” that govern the traditional telephone business as a way of stimulating faster growth.

I’m encouraged that Chairman Powell of the FCC has endorsed in principle a simple, market-driven approach to encouraging broadband investment. Now it’s time for the FCC, along with the Congress, to take action to open the gates to broadband investment and let us put our resources to work where they can do the most good for America.

Of course, the current recession is a global, not an American phenomenon, which makes the need for market-driven policies a global concern, as well. So at the risk of being accused of going for an easy applause line at the Chamber of Commerce, let me add a word about Verizon’s support for Trade Promotion Authority legislation.

(It says here "pause for applause.")

TPA legislation would restore U.S. authority to negotiate trade agreements, allowing the executive branch -- in the words of Commerce Secretary Donald Evans -- "to play an active, assertive role in shaping the rules that... govern trade."

With 12 million U.S. jobs supported by exports, and more than 20 percent of U.S. goods destined for overseas markets, it’s imperative that American companies have the ability to sell their goods freely around the world. The free movement of capital and goods would raise living standards here and around the world. We encourage the Senate, as the House has done already, to make extending the Trade Promotion Authority part of its platform in 2002.

Finally, not just as the head of a New York-based company but as a kid from New York City, let me say a word about New York.

Americans have been unbelievably generous in sending emergency aid to the victims of the September 11th tragedy, and Congress has been responsive in considering ways to help New York City recover, passing -- by unanimous consent -- a relief package for victims just before Christmas.

But emergency aid alone won’t do the trick. To rebuild lower Manhattan and retain its economic base, New York City needs investment. The House and Senate reached a tentative agreement in December on legislation that would provide a variety of incentives and tax breaks for businesses that reinvest in lower Manhattan. For the sake of the 125,000 jobs and $12 B in tax revenues lost to the city of New York -- not to mention the national interest in restoring the strength and vitality of the world’s greatest financial center -- we urge the Congress to enact these pro-growth policies as soon as possible in 2002.

We stand at what Intel founder Andy Grove might call an "inflection point" in U.S. economic history.

Behind us lies a decade of extraordinary growth, driven by investment in telecom and information technology and characterized by entrepreneurial energy, technical innovation, expanding markets and a rising standard of living. Ahead of us lies a new generation of productivity growth and wealth creation, stimulated by the spread of broadband connections and the explosion of new applications those connections will enable.

My company stands at a turning point, as well.

On the one hand, we’re tremendously excited by our opportunities. We have enormous capital resources to devote to innovation. We have a quarter-million employees with unparalleled technical skills and resourcefulness. We have a huge investment in the technology platforms that can bring a whole new generation of services to customers and create jobs, productivity and growth for America. And -- as we demonstrated on September 11th -- we have a huge role to play in providing the kind of advanced communications network on which this country’s security depends.

But we also have a business to run. And unless we can operate under rules that make economic sense and give us rational incentives, we will not be able to put these enormously valuable assets to work for our customers.

And that would be too bad for us -- but more important, for the country.

The answers are right in front of us. What’s required is a sense of urgency and national purpose. The test will be the choices we make about policies that affect technology and capital investment. If we make the right decisions, this nation’s communications industry can help catalyze economic growth and high-tech innovation. And the American economy can get back to doing what it does best: creating jobs, inventing cool new stuff, and leading the world in productivity and growth.

Thank you, and I look forward to your questions.