Precursor Group Conference

Ivan Seidenberg
Precursor Group Conference
February 4, 2003

Introduction by Scott Cleland.

Thanks, Scott, and good afternoon, everybody. I want to thank the Precursor Group for having me here and for helping point the way to more rational economics and real competition in communications. I know Scott has called the regulatory decisions that will be made early this year a "turning point" in telecom that could fundamentally change the investment climate for our industry.

I'll spend a few minutes today talking about what a solid outcome at the FCC would mean to Verizon and the technology sector as a whole. But first, I want to give you some context about Verizon -- where we are today and where we want to be tomorrow.

I know it goes against the grain to call 2002 a year of great progress in communications, but -- at least for Verizon -- it was:

• We showed that -- despite all the economic woes, competitive challenges, and technology shifts in the industry -- a strong business model, a real business strategy, and great management could weather the storm and perform strongly.

• Within two months, we expect to have erased entirely the obsolete distinction between local and long distance in Verizon territory - (something our customers did, by the way, a long time ago).
• We proved our belief that investing in and operating networks is the only way to control your destiny and deliver value and innovation to customers.

• And, in a year when our traditional telephone business shrank and other major wireless carriers lost customers, we showed we're no slouches ourselves when it comes to taking market share in wireless, broadband and long distance.

In one of the toughest years for communications in memory, Verizon's core businesses turned in a superb operating performance:

• Adding customers -- quarter after quarter after quarter -- in the hyper-competitive wireless business,

• Becoming the #3 consumer long distance company in the country, with 10.4 M customers,

• Ending the year with 1.8 M DSL customers,

• Deploying new technologies like digital wireless and broadband,

• And doing what great companies do -- growing through innovation, in areas like wireless data, Enterprise services, e-commerce, bundling and packaging and more.

The good news about all this is that we enter 2003 with great momentum.

More than that, we can legitimately claim to be one of the only companies in our sector to have created a sustainable business model and winning strategy - one based on scale, scope and a commitment to network investment.

Companies who create long-term value don't do it by being the middleman in the value chain or by reselling someone else's product. They do it by innovating around a core competency and investing in the future.

That's what cable companies do. It's what software companies do. It's what wireless companies do. And it's what we do -- and will continue to do -- wherever intelligent investment gives us the opportunity for positive growth.

At Verizon, we believe the next great growth opportunity for us will be the rapid transition of the wireline network to a high-speed data network. We're excited about the prospects for working with the broader technology industry -- including manufacturers, software, consumer electronics, computer, and content companies -- to deliver the full value of next-generation technologies to our customers.

And as we pursue our own prospects for growth, we're confident that we can play a leadership role in restoring the communications industry to its rightful, historical place in the U.S. economy, as an engine of growth, productivity, innovation, and job creation.

To do that, though, we need to change the way we talk -- and the way we think -- about the aims and assumptions of communications policy.

In particular, we need to break out of the insular, echo-chamber rhetoric of "telecom economics" and connect with the larger debate about how to stimulate the investment and innovation that will move our industry, and our economy, forward. Fortunately, with the end of the 271 tunnel in sight, the opening of the local network to competition a fait accompli, and the Triennial Review of the Telecom Act in its final stages, the time is ripe for a new conversation about communications policy.

We need to begin with what's going on at the FCC as we speak.

Now, as I look over your agenda, it's clear to me that there are lots of people here today who can tell you with far more certainty than I what the output of the FCC's Triennial Review will be.

But from where I sit, Chairman Powell's analysis of telecom policy has at least two things right:

• Number 1 -- it's about broadband.

• Number 2 -- it's about economics.

These may seem like the most obvious statements in the world. But if we actually based public policy on these two simple precepts, the impact on communications -- indeed on the whole technology industry -- would be huge.

You've all read the studies about broadband's potential to pump half a trillion dollars' worth of growth into the U.S. economy. And you also know as well as anybody about the capital investment that would be required for broadband to reach the mass-market penetration levels (25 million or more) that would transform the way entertainment, learning and commerce are transacted.

Policy-makers have long given lip service to the importance of mass deployment of broadband technologies. But the current regulatory framework ignores economic laws of nature and creates the wrong environment for investment. The truth is, "telecom economics" should operate on the same principles that apply to other technology-intensive and infrastructure businesses. Instead, we have a special set of "command-and-control" rules that require us to share broadband investments with competitors at prices that drain them of value and profits and -- ultimately -- constrain investment.

The fact is, telecom broadband investment has occurred in spite of, not because of, the current rules.

Verizon is a leader in deploying new technologies and investing in infrastructure. Our performance in deploying a digital wireless network, for example, is testimony to our willingness to invest aggressively when we have the prospects of earning a competitive return.

And because we need to deliver a competitive product set to our customers, Verizon has invested to the best of our ability in the current generation of broadband technology, DSL. As of the end of 2002, we have extended this infrastructure to 60 percent of our market and gained 1.8 million customers.

We will push as hard as we can to extend the reach of DSL in 2003 through the further deployment of remote terminals. But this deployment started later and proceeds slower than it would if we operated in a more rational economic system. More broadly, DSL is not the final answer to creating a truly mass-market, 100 mb/s broadband infrastructure. That takes fiber, pushed as close to the home as we can get it. A fiber-to-the-premise infrastructure not only will make us truly competitive with cable and satellite, but also deliver the kind of true broadband experience that will stimulate innovation and economic activity across the entire technology sector.

It will also take a huge capital outlay -- as much as $128 B to upgrade the entire U.S. infrastructure, according to some estimates, well beyond today's levels.

Verizon is one of the few companies with the scale and capital capacity -- and, I might add, the will -- to move the needle on the broadband speedometer. We're actively studying if and when to make the "big bet" on this next step in our network evolution.

How much capital we can commit to fiber deployment obviously depends on a number of variables. But at minimum, we have to weigh investments in broadband against all the other ways we can use our cash, meaning fiber investment has to compete from an ROI point of view with everything else on the table -- from wireless data to new spectrum to stock buy-backs, debt reduction and dividend payouts.

In a capital-intensive business like ours, it's the discretionary, incremental investments -- those devoted to new technologies and emerging markets -- that are the most sensitive to changes in policy. And the fact is, across the industry, capital spending in the wireline telecom sector is down sharply -- well below the 20 percent of revenues and up being invested to upgrade wireless networks. Policies such as the current unbundling rules - a system which simply transfers wealth from those who invest in infrastructure to those who ride on it -- are a big wet blanket stifling progress and innovation.

By the way, the investment malaise afflicts not only the U.S. telecom industry, but also the pace of innovation and investment worldwide:

• British Telecom expects its capital-to-sales ratio to be less than 13 percent this quarter.

• France Telecom's investment in landline will be in that same range.

• Deutsche Telecom will invest even less -- about 11 percent.

• Overall, according to a study by Ernst & Young, telecom investments fell by more than 50 percent in the first half of 2002, compared with the year before.

We need to get investment levels in wireline headed in the right direction again, here and around the world.

I believe the FCC has a terrific opportunity to show the positive impact market-driven policies can have on investment -- which can begin to reverse the downward trend, get capital flowing again, and lead a revival of the global communications industry.

If broadband investments in this country were freed of the rules that now make them less competitive in terms of ROI than the other growth opportunities in our business, Verizon could transition to the new fiber platform faster -- with all the broader economic benefits that would ensue.

No matter how hard you push it, water doesn't run uphill. Nor does capital flow to highly regulated, uneconomic investments, regardless of how many years you try.

We need to restore the link between rational economics and investment in technology -- something the Commission now has a golden opportunity to do. At a minimum, that would mean clear national standards on the following:

• No unbundling for DS-1s and DS-3s,

• Removing switching from the list of required UNEs,

• Eliminating business UNE-P,

• Transitioning away from UNE-P in the residential market,

• No backsliding on UNE rules for special access,

• And no old telephony rules in the broadband space.

More broadly, we need to move as quickly as possible toward a national policy that would eliminate all economic regulation of telephony and let us make investment decisions like every other business in America. I'm hopeful that, in the days ahead, the FCC will take a big step in that direction by removing the burdens unique to telecom investment and applying the same economic principles to telecom regulation that work in other technology-driven industries.

It's important that we get this right so we can stop fighting the battles of the past and focus on what will make the U.S. a broadband leader in the future.

Hard as it is to believe sometimes, most of the answers to that question have nothing whatsoever to do with government.

They have to do with customers.

What will really change the growth trajectory of our industry is the creation of a new broadband experience that will stimulate demand and pull through the next generation of hardware, software, network components, and consumer equipment.

And that means moving beyond the question, "can they get it?" to the infinitely harder question, "is it worth it?"

Everyone involved in the delivery of new technology to the marketplace has a lot more work to do to answer that question in the affirmative.

At Verizon, we've worked hard to make our products and services more useful, more compelling, and ultimately, more valuable to customers with new bundles and packages that cut through the clutter and help customers manage their lives better. We're working with strategic partners like Microsoft to deliver the next generation of wireless data, portal and Internet services, and to marry them to services like Caller ID and universal messaging. And we're studying ways to incorporate new technologies like Wi-Fi to extend the features and functionality of DSL.

We need to put customers -- not government -- back at the center of the conversation about the future of communications. Because it's only by re-igniting the market's excitement about the possibilities of our industry to change people's lives for the better that we will restore investors' belief in our ability to grow and compete and innovate.

At Verizon, we love what we do. We believe in our business model, our technology, and our people. We think we have a great and vital role to play not only in revitalizing the technology sector, but also the economy as a whole. And we're prepared to step up to the plate and do what great companies do: invest, grow, innovate, and create value -- year after year after year.

I look forward to the next few weeks as being the beginning of a new dialogue, and maybe even a new era, in communications.

Thanks for listening, and I look forward to your questions.