Maintaining the Operations of Essential Communications

On July 30 Federal Communications Commission chair Michael Powell spoke to the U.S. Senate committee on commerce, science and transportation. An edited version of his remarks, which appear in full at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-224797A1.pdf, is presented here. Communications services remain vital to consumers around the globe. Communications traffic continues to increase at historically formidable rates. And, importantly, the closing of time and distance barriers to information will continue to fuel global productivity and change all institutions of society, albeit slower than once fantasized. It is in the interest of every citizen for this industry to recover and to ultimately succeed in bringing new and vital communications capabilities to people’s lives. Recovery, however, is not going to occur overnight and is likely to require difficult—even painful—choices. Successful recovery is dependent on the collective efforts of Congress, Federal and State regulators, the private sector and the financial markets. In order to facilitate a recovery, we must understand what led to the current turmoil in the market. The story at bottom is quite straightforward. It begins with the Internet Gold Rush. The Telecommunications Act of 1996 and the commercialization and mass-market adoption of the Internet led to a near hysterical belief that the opportunities for growth were limitless. Investors, too, bought into and fed the hype—literally—as they flooded the market with capital that was consumed by thousands of companies. Companies in all sectors of the telecommunications industry, from wireline to undersea to wireless, across the globe and with global ambitions, set out to build national and global networks—some, as we all undoubtedly recall, by digging up streets to lay fiber, some through acquisition, some by bidding billions of dollars for spectrum, some by investing in foreign markets—to win the race to stay ahead of expected demand. In so doing, telecommunications companies throughout the world amassed staggering amounts of debt in building nearly- identical networks. Anxious companies began to race to gain market share to boost revenues and pay down debt, in hopes of being a survivor. Hyper-competition ensued in various markets across the industry, as they contained more industry participants than the market could support and vicious price wars ensued, driving down overall industry and individual company revenues. At the same time, many telecommunications companies learned the painful lesson that traffic growth did not necessarily lead to concomitant growth in revenues, as their markets were largely saturated. There were not enough untapped customers from which to derive new revenue. To make matters worse, many of these companies had to write off revenues as many of their customers (namely, bankrupt ISPs and dot-coms) disappeared through bankruptcy. These companies quickly found out that there was simply not enough revenue to go around to pay down debt and generate a return on investment for all of the vast number of competitors that had previously flooded to the market.The results were devastating. As some telecom companies began to fail and enter bankruptcy, others resorted to fraud and deception to mask these core fundamental problems facing their companies. Some went so far in their deception to not only mask failure, but to inflate, artificially, revenue growth—to make it look like the dream was real. The bursting bubble leaves us today with several core problems in several market segments that must be rectified. Given the interconnected and inter-dependant nature of the telecom network, the industry fallout has caused collateral damage across the industry worldwide. As telecommunications companies have dramatically scaled back capital expenditures, equipment manufacturers and vendors have struggled as sales have fallen precipitously. The access to capital crunch has taken some of the fuel out of the CLEC industry leading to many bankruptcies over the past two years and increasing liquidity concerns. Long distance and wireless companies continue to face pricing pressures and along with cable companies and ILECs, significant debt loads. Though the problems are significant, recovery can be achieved if several critical steps are taken.

Maintaining the Operations of Essential Communications

News | 08/13/2002 4:00 am EDT

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