JUNE 12, 2002

GOOD AFTERNOON. MY NAME IS ROYCE HOLLAND AND I AM CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF ALLEGIANCE TELECOM, INC. ALLEGIANCE IS A FACILITIES-BASED COMPETITIVE LOCAL EXCHANGE CARRIER HEADQUARTERED IN DALLAS, TEXAS. WE OPERATE IN 36 MARKETS ACROSS THE UNITED STATES TODAY. PRIOR TO STARTING ALLEGIANCE, I WAS PRESIDENT OF MFS COMMUNICATIONS, ONE OF THE FIRST COMPETITIVE ACCESS PROVIDERS AND A VERY EARLY ENTRANT INTO THE LOCAL MARKET.

BEFORE I BEGIN, I WANT TO THANK THE NATIONAL PRESS CLUB FOR THE OPPORTUNITY TO SPEAK TODAY AND TO SHARE MY PERSPECTIVES ON THE STATE OF THE TELECOM INDUSTRY AND THE ROAD THAT LIES AHEAD.

A COUPLE OF WEEKS AGO, THE D.C. CIRCUIT COURT OF APPEALS RELEASED ITS DECISION ON THE FCC'S UNBUNDLING RULES. NOT SURPRISINGLY, AN E-MAIL IMMEDIATELY SPREAD THROUGH THE CLEC COMMUNITY LIKE WILD FIRE. THE MESSAGE WAS A MOCK NEWS REPORT DESCRIBING HOW THE TELECOM ACT OF 1996 HAD BEEN FOUND DEAD IN AN ALLEY IN WASHINGTON, SHOT THROUGH THE BACK OF THE HEAD. THE REPORT SAID THAT AUTHORITIES WERE INVESTIGATING A POSSIBLE CONTRACT KILLING PAID FOR BY ONE OF FOUR REGIONAL "FAMILIES." (UNLIKE THE COSA NOSTRA, THESE REGIONAL "FAMILIES" RELIGIOUSLY RESPECT EACH OTHERS BORDERS).

NOW, I LIKE A JOKE AS WELL AS THE NEXT FELLOW, BUT I DON'T WANT ANYONE TO LEAVE HERE WITH THE WRONG IMPRESSION. THERE IS NO DOUBT THAT THESE ARE CHALLENGING TIMES IN THE COMPETITIVE TELECOM INDUSTRY. BUT THOSE OF US WHO REMEMBER THE HISTORY OF THIS INDUSTRY KNOW THAT WE HAVE SURVIVED OTHER CHALLENGES IN THE PAST. AND WE WILL SURVIVE THIS ONE. LOCAL COMPETITION WILL SURVIVE, EVEN IF SOME OF THE COMPETITORS DON'T. IT IS AN INEVITABLE EVOLUTION WITHIN ANY NEW SECTOR OF THE ECONOMY.

YOU MIGHT BE ASKING YOURSELF ALREADY HOW CAN THIS GUY BE SO OPTIMISTIC? HASN'T HE HEARD THE NEWS - TELECOM IS DEAD? WELL, DESPITE THE CONSIDERABLE NOISE EMANATING FROM THE MONOPOLY BELLS' PUBLIC RELATIONS MINIONS AND LOBBYISTS, THERE IS A CERTAIN INEVITABILITY IN THE PROSPECTS FOR LOCAL COMPETITION -- TO RECOGNIZE IT; ONE MUST DECIPHER THE "SIGNAL TRANSMISSION" FROM THE "NOISE."

A COUPLE OF REALITY POINTS TO START OFF WITH:

• CONTINUED LOCAL COMPETITION IS INEVITABLE - CLECS ALREADY SERVE OVER 17 MILLION LINES TODAY
• CONTINUED LOCAL COMPETITION IS INEVITABLE AS THE SUPREME COURT - FOR THE SECOND TIME - REAFFIRMED THAT COMPETITION IS "THE LAW OF THE LAND."

PART OF MY CONFIDENCE LIES IN THE FACT THAT I USED TO HAVE A HEAD FULL OF BROWN HAIR. I'VE EARNED EACH ONE OF THESE GRAYS ATOP MY HEAD FROM THE MFS SCHOOL OF HARD KNOCKS. THAT IS WHY I FEEL AS THOUGH I'VE TRODDEN THIS PATH BEFORE, OR AS YOGI BERRA SAID, "THIS FEELS LIKE DÉJÀ VU ALL OVER AGAIN." LOCAL COMPETITION IS INEVITABLE. MAKE NO MISTAKE. AND I DON'T THINK I'M BEING TOO POLLYANNISH, BUT I'VE SEEN THE ORIGINAL VERSION OF THIS PLAY BEFORE. I WILL CONCEDE THOUGH THAT THE SEQUEL HAS THE AUDIENCE A BIT MORE ON THE EDGE OF THEIR SEATS!

IN THE EARLY DAYS AT MFS, WE ALSO FACED TREMENDOUS LEGAL AND REGULATORY BATTLES. AT THAT TIME, PROVIDING COMPETITIVE LOCAL SERVICE WAS ILLEGAL IN THE MAJORITY OF STATES, AND VIRTUALLY IMPOSSIBLE IN THE REST. THE BELL COMPANIES HAD NO OBLIGATION TO INTERCONNECT WITH OUR LOCAL NETWORKS, ALTHOUGH THEY WOULD BE HAPPY TO SELL US SERVICES AT RETAIL PRICES. {SOUND FAMILIAR?} WE KNEW THE RULES WOULDN'T CHANGE OVERNIGHT, AND NOT WITHOUT A FIGHT. WE ALSO KNEW THAT REGULATORY CHANGE NEVER PROCEEDS IN A STRAIGHT LINE. IT'S USUALLY MORE LIKE "TWO STEPS FORWARD, ONE STEP BACK." {SOUNDS AWFULLY FAMILIAR?}}

THE KEY POINT, HOWEVER, IS THAT THE ULTIMATE SUCCESS OR FAILURE IN THIS INDUSTRY IS IN PART DEPENDENT ON THE COMMITMENT BY THE REGULATORS TO PROMOTE PRO-COMPETITIVE POLICIES. OUR INDUSTRY WAS CREATED BY CONGRESS. WHAT CONGRESS GIVETH, I'M CONFIDENT THE FCC WILL NOT TAKETH AWAY. BUT SUCCESS IS ALSO DETERMINED BY A COMPANY'S OWN ABILITY TO ADAPT TO INCREMENTAL CHANGES IN THE MARKETPLACE AND IN THE REGULATORY ENVIRONMENT.

AND I WANT TO STRESS THE IMPORTANCE OF THIS MESSAGE FOR BOTH THE REGULATORS AND POLICYMAKERS -- INCREMENTAL CHANGE CAN BE MANAGED - WHOLESALE REVERSAL OF DECADES OF PUBLIC POLICY SIMPLY CANNOT BE MANAGED BY ANY COMPANY. THE ONLY COMPANY THAT COULD MANAGE SUCH CHANGE IS THE COMPANY THAT HAS BEEN HAND-PICKED BY THE REGULATOR AS THE WINNER.

AT MFS, WE FOUGHT OUR OWN REGULATORY BATTLES. WE WON SOME, WE LOST SOME. IN 1989, FOR EXAMPLE, WE ASKED THE FCC TO REQUIRE THE BELL COMPANIES TO INTERCONNECT WITH US AS CO-CARRIERS, INSTEAD OF CHARGING US RETAIL RATES FOR USE OF THEIR NETWORKS. {{SOUND FAMILIAR?}} IT TOOK 3 YEARS FOR THE FCC TO RULE ON OUR PETITION, BUT IT FINALLY DID ACT AND ALLOWED US TO USE PHYSICAL COLLOCATION TO ACCESS BELL FACILITIES. TWO YEARS LATER, THOUGH, THOSE RULES WERE VACATED BY THE D.C. CIRCUIT. {{SOUND FAMILIAR? WHERE'S YOGI BERRA WHEN YOU NEED HIM?}}

MAYBE SOME OF YOU REMEMBER THAT DECISION - THE VALUES OF CLEC STOCKS FELL BY 40 PERCENT IN A SINGLE DAY. YOU MIGHT SAY THE MARKET PANICKED. BUT AT MFS WE DIDN'T PANIC. WE DIDN'T ALLOW THIS SETBACK TO DISTRACT US FROM FOCUSING ON OUR BUSINESS. WE ADAPTED TO THE CHANGE, MADE USE OF VIRTUAL COLLOCATION AND OTHER STRATEGIES, AND KEPT ON GROWING. OUR SUBSEQUENT SUCCESS WAS INEVITABLE.

I SEE MANY PARALLELS FROM MY MFS DAYS TO THE SITUATIONS WE FIND OURSELVES IN TODAY. THE LESSON TO BE LEARNED FROM HISTORY IS THAT COMPANIES DON'T BECOME SUCCESSFUL BY WINNING REGULATORY BATTLES, AND THEY DON'T FAIL BY LOSING THOSE BATTLES - THEIR SUCCESS LIES IN THEIR ABILITY TO MANAGE AND ADJUST TO THE INCREMENTAL CHANGES ADOPTED BY THE REGULATOR.

SO NOW I'D LIKE TO TAKE A FEW MINUTES TO DISCUSS HOW I SEE THE REGULATORY ENVIRONMENT IN THE WAKE OF TWO BIG COURT CASES THAT WE'VE SEEN OVER THE PAST MONTH.

AS YOU ALL KNOW, TWO LONG-AWAITED DECISIONS WERE ISSUED BY THE SUPREME COURT AND DC CIRCUIT COURT OF APPEALS. AT FIRST BLUSH, THESE RULINGS APPEAR TO PRESENT US YET AGAIN WITH ANOTHER "2 STEPS FORWARD, I STEP BACK."

BUT UPON FURTHER REFLECTION, I BELIEVE THAT THE BELL MONOPOLIES DECLARATION OF VICTORY AT THE DC CIRCUIT WILL PROVE HOLLOW AT THE END OF THE DAY. I PREDICT THAT THEY WILL RUE THE DAY THAT THE DC CIRCUIT DIRECTED A MORE GRANULAR ANALYSIS IN LOOKING AT THE STATE OF LOCAL COMPETITION. UP TO THIS POINT, THEY HAVE BEEN SUCCESSFUL IN GAINING SUPPORT FOR ANTI-COMPETITIVE POLICIES SIMPLY BY DEVELOPING CATCHY P.R. SLOGANS - "NEW WIRES, NEW RULES"; "CABLE PARITY;" "SCALE IS ALL THAT MATTERS." I'M SURE YOU IN THE PRESS ARE FAMILIAR WITH THE SPIN. BUT I AM CONVINCED THAT IF REGULATORS AND POLICYMAKEERS LOOK AT THE FACTS - AND NOT THE SLOGANS - THEN PRO-COMPETITIVE RULINGS WILL RESULT MORE OFTEN THAN NOT.

NOW, WITH RESPECT TO THE RECENT COURT RULINGS, THE SIMPLE FACT IS THAT DESPITE THE RHETORIC FROM THE BELL MONOPOLY, I DO NOT BELIEVE THAT THE DECISION WILL HAVE A DRAMATIC IMPACT ON THE ALLEGIANCE BUSINESS MODEL. THE DC CIRCUIT SIMPLY TOLD THE FCC TO DO SOMETHING IT WAS GOING TO DO ANYWAY, WHICH IS TO TAKE ANOTHER LOOK AT THE LIST OF UNBUNDLED NETWORK ELEMENTS BUT TO DO SO IN A MORE GRANULAR WAY. THAT'S WHY I BELIEVE THE FCC SHOULD SEEK REVIEW OF THAT DECISION BY THE SUPREME COURT. I THOUGHT JUDGE BORK'S ARGUMENTS TO CHAIRMAN POWELL FOR WHY THE DC CIRCUIT DECISION MIGHT CURTAIL THE NORMAL DEFERENCE GIVEN THE AGENCY IS FASHIONING ITS RULES IS REASON ENOUGH TO SEEK AN APPEAL DIRECTLY TO THE SUPREME COURT. BECAUSE, AS I SAID, THE FCC HAS THE DISCRECTION TO UNDERTAKE A MORE GRANULAR ANALYSIS WITH OR WITHOUT THE DC CIRCUIT DECISION. I ALSO BELIEVE IT WOULD SEND A SIGNAL TO THE INVESTMENT COMMUNITY THAT THE COMMISSION IS COMMITTED TO THE BETTER PUBLIC POLICY OUTCOME.

DESPITE MY BRIEF FLIRTATION WITH THE FREE LEGAL ADVICE I JUST OFFERED TO THE FCC, I AM NOT A LAWYER BUT AN ENGINEER SO I TEND TO INTERPRET LEGAL ISSUES IN WAYS THAT MAKE SENSE FROM AN ENGINEERING STANDPOINT. IT IS EASIER FOR ME TO COMPREHEND THE MEANINGS OF THESE DECISIONS IF WE SEPARATE THE SIGNAL FROM THE NOISE.

LET'S DO SOME SIGNAL PROCESSING:

FIRST, IN THE RECENT TELRIC PRICING DECISION, THE US SUPREME COURT DID MORE THAN JUST AFFIRM THE FCC'S TELRIC PRICING METHODOLOGY - IN THE SCHEME OF THINGS, THAT WAS JUST NOISE -- MORE IMPORTANTLY, THE COURT ELEVATED THE FACT THAT COMPETITION IS "THE LAW OF THE LAND" BY AFFIRMING THE CONGRESS' INTENT TO "ACHIEVE THE ENTIRELY NEW OBJECTIVE OF UPROOTING THE MONOPOLIES THAT [PRIOR SCHEMES] HAD PERPETUATED". THIS IS THE REAL SIGNAL AND MESSAGE!

A SECOND BIT OF NOISE IS THE EVER-PRESENT BELL WHINING THAT THE FCC'S RULES REQUIRING THE BELLS TO LEASE NETWORK ELEMENTS AT RATES "BELOW HISTORIC COSTS" REDUCED THE INCUMBENTS' INCENTIVES TO INVEST IN FACILITIES, BECAUSE THE BELLS WOULD HAVE TO SHARE THE "REWARDS" WITH COMPETITIVE PROVIDERS.

HERE THE SUPREME COURT SENT A CLARION SIGNAL: THE FCC'S UNE PRICING RULES DO NOT IMPEDE INVESTMENTS BY THE BELL COMPANIES. TO THE CONTRARY, THE INCUMBENTS' INVESTMENTS OF OVER $100 BILLION SINCE 1996 "AFFIRMS THE COMMONSENSE CONCLUSION THAT SO LONG AS [THE RULES] BRING[] ABOUT SOME COMPETITION, THE INCUMBENTS WILL CONTINUE TO HAVE INCENTIVES TO INVEST AND IMPROVE THEIR SERVICES TO HOLD ON TO THEIR EXISTING CUSTOMER BASE."

THEN THERE IS THE NOISE FROM THE BELL COMPANIES THAT THE DC CIRCUIT SEEMS TO ACCEPT THAT ONLY INTERMODAL COMPETITION IS SUFFICIENT: "[C]OMPETITION PERFORMED WITH UBIQUITOUSLY PROVIDED ILEC FACILITIES" DOES NOT "COUNT" BECAUSE IT IS "COMPLETELY SYNTHETIC."

AGAIN, THE SIGNAL FROM THE US SUPREME COURT IS CLEAR AS A "BELL": CONGRESS "ADDRESSE[D] THE PRACTICAL DIFFICULTIES OF FOSTERING LOCAL COMPETITION BY RECOGNIZING THREE STRATEGIES THAT A POTENTIAL COMPETITOR MAY PURSUE." ONE OF WHICH WAS TO REQUIRE INCUMBENTS "TO LEASE ELEMENTS OF THEIR NETWORKS AT RATES THAT WOULD ATTRACT NEW ENTRANTS WHEN IT WOULD BE MORE EFFICIENT TO LEASE THAN TO BUILD OR RESELL." THE ELEMENTS FOR WHICH DEMAND WILL BE HIGHEST ARE THE "COSTLY BOTTLENECK ELEMENTS, DUPLICATION OF WHICH IS NEITHER LIKELY NOR DESIRED."

HERE, THERE CAN BE NO DOUBT THAT IN THE SMALL AND MEDIUM SIZED BUSINESS SPACE, ALL LOOPS AND TRANSPORT MEET THIS TEST. THERE IS SIMPLY NO INTERMODAL PLATFORM ALTERNATIVE TO SERVE THIS CRITICAL SEGMENT OF THE ECONOMY.

ANOTHER EXAMPLE OF THE DC CIRCUIT NOISE IS THAT THE FCC SHOULD NOT HAVE RELIED ON COST DISPARITIES THAT MIGHT OCCUR BETWEEN A NEW ENTRANT AND AN INCUMBENT IN ANY INDUSTRY (E.G., ECONOMIES OF SCALE), BECAUSE SUCH AN APPROACH WAS "TOO BROAD . . . TO BE REASONABLY LINKED TO THE PURPOSE OF THE ACT'S UNBUNDLING PROVISIONS."

THE SUPREME COURT THOUGH UNDERSTOOD THE SIGNAL FROM CONGRESS. CONGRESS DESIGNED THE 1996 ACT "TO GIVE ASPIRING COMPETITORS EVERY POSSIBLE INCENTIVE TO ENTER LOCAL RETAIL TELEPHONE MARKETS, SHORT OF CONFISCATING THE INCUMBENTS' PROPERTY," AND THEREFORE THE COMMISSION'S ROLE IS "TO PUT A COMPETING CARRIER ON AN EQUAL FOOTING WITH THE INCUMBENT.

COULD THERE BE A MORE CLEAR SIGNAL TO THE FCC?

THE FCC'S RULES ACHIEVED THE "PRACTICAL RESULT" CONGRESS SOUGHT -- I.E., PROMOTING LOCAL COMPETITION TO THE GREATEST EXTENT POSSIBLE. I AM A FIRM BELIEVER THAT IT IS INEVITABLE THE FCC WILL CONCLUDE ITS PENDING PROCEEDINGS CONSISTENT WITH THE SIGNAL EMANATING FROM THE SUPREME COURT AND IGNORE THE NOISE BEING PROPOGATED BY THE BELL MONOPOLIES IN LIGHT OF THE DC CIRCUIT DECISION.

FINALLY, DESPITE THE NOISE EMANATING FROM THE MONOPOLISTS' SPIN, THE DC CIRCUIT COURT RULING DOES NOT REPRESENT A SEA CHANGE REGARDING COMPETITION - RATHER, WHEN RATIONALIZED AGAINST THE STANDARD SET BY THE US SUPREME COURT, IT SIGNALS A GREATER ROLE FOR STATES IN IMPLEMENTING THE FCC'S ANALYSIS.

SO, HERE IS THE MESSAGE THAT WE HAVE EXTRACTED FROM ALL OF THE NOISE:

• THE PRO-COMPETITIVE PRINCIPLES EMBODIED IN THE TELECOM ACT REMAIN THE LAW OF THE LAND AND NOT LIKELY TO CHANGE ANY TIME SOON - THIS IS NOTHING NEW
• FOSTERING COMPETITION IS THE OVERWHELMING STATUTORY MANDATE TO THE FCC AND STATES - THIS ALSO, IS NOTHING NEW, HOWEVER THE RECENT SUPREME COURT RULING HAS REAFFIRMED THIS.
• STATES WILL PLAY A GREATER ROLE IN APPLYING FCC GUIDELINES FOR UNES AND OTHER PROVISIONS OF THE ACT - THIS IS NEW, BUT NOT UNEXPECTED

SO WHAT HAPPENS NOW?

WHAT HAPPENS NEXT LARGELY DEPENDS UPON THE ACTIONS OF THE KEY STAKEHOLDERS IN THIS PROCESS: THE WHITE HOUSE, THE CONGRESS, THE FCC, THE STATES, AND INDUSTRY PLAYERS.

LET'S START FIRST WITH THE WHITE HOUSE. I WOULD NOTE THAT THE WHITE HOUSE IS HOSTING 100 CEOS TOMORROW, INLCUDING ME, FOR A SESSION ON THE COMPETITIVENESS IN THE 21ST CENTURY. THIS IS VERY TIMELY. I BELIEVE IT IS VERY APPROPRIATE FOR THE PRESIDENT AND SECRETARY EVANS TO HIGHLIGHT AND PROMOTE A DEBATE ON THE ECONOMIC BENEFITS OF TECHNOLOGY. AS A DALLAS-BASED CEO, I AM VERY FAMILIAR WITH THE PRESIDENT'S LONG TRACK RECORD IN LEVERAGING THE POWER OF GOVERNMENT TO DRIVE INNOVATION AND COMPETITION.

I SAW FIRST-HAND HOW THEN-GOV. BUSH AND HIS PUC CHAIRMAN, PAT WOOD, FOUGHT TO IMPLEMENT THE LOCAL COMPETITION PROVISIONS OF THE 96 ACT. THE FRUITS OF THEIR LABOR ARE CLEAR. TEXAS HAS ONE OF THE MOST VIBRANT COMPETITIVE MARKETS IN THE COUNTRY. I ALSO HAD THE PRIVILEGE OF BEING APPOINTED TO THE TEXAS E-GOVERNMENT TASK FORCE BY THEN-GOV. BUSH.

UNDER THE LEADERSHIP OF THEN-GOVENOR BUSH, TEXAS SUCCEDED BRILLIANTLY IN DEMONSTRATING THE ROLE OF GOVERNMENT IN IMPLEMENTING THE FCC'S LOCAL COMPETITION ORDER. AS A RESULT,TEXANS CAN CHOOSE FROM MORE THAN 27 LOCAL TELEPHONE SERVICE PROVIDERS. THESE PROVIDERS, INCLUDING ALLEGIANCE TELECOM, COLLECTIVELY SERVE 14% OF THE STATE'S 13.4 MILLION LINES. AS A RESULT, TEXANS CONTINUE TO BENEFIT FROM REDUCED PRICES, IMPROVED SERVICE AND INNOVATIVE NEW PRODUCTS.

IN ADDITION TO CHAMPIONING AND ENABLING ONE OF THE MOST COMPETITIVE TELECOM MARKETS, GOVERNOR BUSH WAS ALSO THE CATALYST AND CHAMPION FOR THE STATE OF TEXAS E-GOVERNMENT TASK FORCE. THIS WORK WAS IMPORTANT AND INSTRUCTIVE FOR THE OTHER STATES AS IT DEMONSTRATED A CONSTRUCTIVE ROLE THAT THE STATES CAN PLAY IN ADDRESSING THE QUESTION OF HOW TO PROMOTE GREATER DEMAND FOR BROADBAND SERVICES. UNDER GOVERNOR BUSH'S LEADERSHIP SIGNIFICANT GOVERNMENT OPERATIONS WERE BROUGHT ON LINE. THE TEXAS E-GOV INITIATIVE DELIVERED TANGIBLE BENEFITS BY MAKING GOVERNMENT AND GOVERNMENT-PROVIDED SERVICES MORE ACCESSIBLE TO MANY TEXANS.

IN TOTAL, I BELIEVE THE BUSH LEGACY IN THE STATE OF TEXAS PROVIDES A CASE STUDY IN "HOW TO GET IT RIGHT." I WOULD ENCOURAGE BOTH STATE AND FEDERAL POLICYMAKERS TO STUDY THIS MODEL, AND TO APPLY THE LESSONS LEARNED TO THEIR RESPECTIVE EFFORTS.

WITH RESPECT TO CONGRESS, I'D LIKE TO TURN TO A BRIEF MENTION OF THE RECENT EVENTS TRANSPIRING WITHIN THOSE TWO RESPECTIVE BODIES. AS A STUDENT OF HISTORY, I OFTEN WONDER WHAT WOULD THE FOUNDING FATHERS THINK ABOUT HOW THINGS HAVE PLAYED OUT. I AM SURE THEY COULD NOT FATHOM SOME THINGS THAT HAPPEN IN THE CONGRESS TODAY BECAUSE SOME OF IT MAKES NO SENSE TO ME EITHER.

OTHER ASPECTS OF OUR LEGISLATIVE PROCESS THOUGH WOULD NOT BE MUCH OF A SURPRISE - AND IN FACT - I WOULD SUGGEST THAT SOME THINGS HAVE NOT CHANGED MUCH AT ALL. SPECIFICALLY, I AM TALKING ABOUT THE FORESIGHT OF THE FOUNDING FATHERS TO ESTABLISH A BI-CAMERAL LEGISLATURE. THEY REALIZED EVEN TWO HUNDRED YEARS AGO THAT THE GREATER GOOD WOULD BENEFIT IF THE PASSIONS OF THE HOUSE WERE TEMEPERED WITH THE MORE DELIBERATIVE AND THOUGHTFUL PROCESS OF THE SENATE.

MY, HOW RIGHT THEY WERE. AND I THINK THAT'S ALL THERE IS TO SAY ABOUT THE PROSPECTS FOR LEGISLATION THIS YEAR.

I WOULD LIKE TO COMMENT BRIEFLY THOUGH ON A CONCEPT THAT IS BEING PRESSED BOTH IN THE SENATE AND THE FCC - THAT IS, "REGULATORY PARITY AMONG PLATFORMS," AND MORE SPECIFICALLY HOW SUCH A PROPOSAL WOULD IMPACT COMPETITION IN THE VARIOUS MARKET SEGMENTS.

AT THE OUTSET, I WILL AGREE WITH MY FRIENDS FROM THE REGIONAL BELL MONOPOLIES THAT SUCH A PROPOSAL SHOULD REQUIRE A CHANGE IN LAW. I BELIEVE THAT ANY EFFORT TO TWIST AND CONTORT THE EXISTING STATUTE INTO SUCH AN END RESULT IS BEYOND THE INTENT AND DESIGN OF THE ACT. I BELIEVE SUCH A RESULT COULD HAVE FAR-REACHING IMPLICATIONS THAT HAVE BEEN THOROUGHLY EXPLORED.

THE REALITY OF "INTERMODAL" OR "PLATFORM" COMPETITION POLICY IS NOTHING MORE THAN A SHORT-SIGHTED POLICY OF A RESIDENTIAL DUOPOLY AND A DEREGULATED MONOPOLY IN THE SMALLA ND MEDIUM BUSINESS SPACE. IT IS DOWNRIGHT PERILOUS FOR THIS MOST CRITICAL SEGMENT OF THE AMERICAN BUSINESS COMMUNITY: THE SMALL AND MEDIUM SIZED BUSINESS SEGMENT THAT ALLEGIANCE SERVES. THESE BUSINESSES ACCOUNTED FOR MORE THAN HALF OF THE U.S. PRIVATE, NON-FARM GDP OVER THE PAST TWO DECADES, AND TWO-THIRDS TO THREE QUARTERS OF NET NEW JOBS.

I UNDERSTAND THERE IS FRUSTRATION AT THE PACE OF COMPETITION IN THE RESIDENTIAL MARKET. BUT POLICYMAKERS SHOULD NOT LET THAT FRUSTRATION DRIVE A ONE-SIZE-FITS-ALL RESPONSE THAT WOULD THROW THE BABY OUT WITH THE BATHWATER. WE NEED TO STICK TO THE BASICS AND AVOID THE TEMPTATION TO ABANDON THE COMPETITIVE MODEL IN FAVOR OF CATCHY SEDUCTIVE SOUNDBITES LIKE "NEW WIRE, NEW RULES" OR "PARITY OF REGULATION." THESE EFFORTS WILL YIELD NOTHING MORE THAN A RESIDENTIAL DUOPOLY AND A BUSINESS MONOPOLY IN THE SMALL AND MEDIUM-SIZED BUSINESS MARKET. SUCH A RESULT WOULD NOT BE CONSISTENT WITH THE SIGNAL SENT BY THE SUPREME COURT.

FROM OUTSIDE THE BELTWAY, THE COLLECTIVE IMPACT OF THE RECENT FCC NPRMS, COURT RULINGS AND PUBLIC STATEMENTS HAVE BEEN VIEWED AS ADDING GREATER UNCERTAINTY TO AN ALREADY CONFUSING SITUATION.

NOW YOU'RE PROBABLY GOING TO NEED AN "INSIDE-THE-BELTWAY" LAWYER TO MAKE SENSE OF THIS BUT HERE'S MY UNDERSTANDING OF THE SITUATION. THE BELL ATLANTIC - GTE MERGER WAS APPROVED BY THE FCC WITH A REQUIREMENT THAT THE COMBINED ENTITY COMPETE OUT OF REGION. THE COMBINED ENTITY, VERIZON, INVESTS IN NORTHPOINT, THE DLEC. ACCORDING TO PRESS REPORTS, VERIZON RENEGES ON THE TERMS OF THE AGREEMENT AT THE 11TH HOUR. NORTHPOINT IS SUBSEQUENTLY DRIVEN INTO BANKRUPTCY. AND NOW VERIZON CLAIMS THAT THEIR COMMITMENT TO COMPETE OUT OF REGION IS SATISFIED. I GUESS WHAT THE VERIZON LAWYERS MEANT TO SAY WAS THAT THEY WOULD COMMIT TO COMPETE OUTSIDE THE 8TH CIRCUIT COURT OF APPEALS AND IN THE BANKRUPTCY COURTS!

HISTORY HAS SHOWN THAT DUOPOLIES ARE DISFAVORED - LOOK AT THE EXAMPLE OF CELLULAR. DUOPOLIES WILL NOT WORK - THE PLAYERS MERELY STAY COMFORTABLY WITHIN THEIR CORE MARKETS. JUST LOOK AT THE INNOVATION AND COMPETITIVE PRICING THAT OCCURRED IN THE CELLULAR INDUSTRY AFTER COMPETITION WAS INTRODUCED. YOU KNOW, IF THOSE CELLULAR COMPANIES BECOME ANY MORE INNOVATIVE AND MAKE THESE PHONES ANY SMALLER, I WON'T BE ABLE TO USE THE KEYPADS!

AN EXAMPLE ON THE OTHER EXTREME IS THE AMOUNT OF COMPETITION BETWEEN THE REGIONAL "FAMILIES" TODAY. I DON'T BLAME THEM THOUGH IF WHAT I HEARD THE OTHER DAY IS EVEN REMOTELY TRUE. I FOUND THIS VERY SURPRISING BUT LET'S SEE IF YOU AGREE WITH ME ON THIS ONE. APPARENTLY, THERE IS A SUGGESTION THAT VERIZON MAY HAVE SATISFIED ITS COMMITMENT TO COMPETE OUT OF REGION BY DRIVING NORTHPOINT INTO BANKRUPTCY.

NOW YOU'RE PROBABLY GOING TO NEED AN "INSIDE-THE-BELTWAY" LAWYER TO MAKE SENSE OF THIS BUT HERE'S MY UNDERSTANDING OF THE SITUATION. THE BELL ATLANTIC - GTE MERGER WAS APPROVED BY THE FCC WITH A REQUIREMENT THAT THE COMBINED ENTITY COMPETE OUT OF REGION. THE COMBINED ENTITY, VERIZON, INVESTS IN NORTHPOINT, THE DLEC. ACCORDING TO PRESS REPORTS, VERIZON RENEGES ON THE TERMS OF THE AGREEMENT AT THE 11TH HOUR. NORTHPOINT IS SUBSEQUENTLY DRIVEN INTO BANKRUPTCY. AND NOW VERIZON CLAIMS THAT THEIR COMMITMENT TO COMPETE OUT OF REGION IS SATISFIED. I GUESS WHAT THE VERIZON LAWYERS MEANT TO SAY WAS THAT THEY WOULD COMMIT TO COMPETE OUTSIDE THE 8TH CIRCUIT COURT OF APPEALS AND IN THE BANKRUPTCY COURTS!

IF THE FCC DOES IN FACT OPERATE ITS ENFORCEMENT POLICIES THIS WAY, THEN MAYBE THOSE CYNICS WERE RIGHT THAT THOSE 10 DAYS IN MAY WILL BE REMEMBERED AS THE "GOLDEN AGE OF LOCAL COMPETITION."

BUT THIS SURREAL DRAMA DOES NOT STOP THERE -- JUST LAST WEEK, VERIZON'S VICE CHAIRMAN SUGGESTED THAT A 40% PRICE HIKE FOR DSL SERVICE WAS WARRANTED. THIS WAS ATTRIBUTED TO THE FACT THAT COMPETITION IN THE LATE 1990S, DROVE PRICES DOWNWARD. WELL, SINCE THE BELL MONOPOLIES HAVE ALL BUT KILLED OFF THE DLECS BY DRIVING THEM INTO BANKRUPTCY AND THE COMPETITIVE PRESSURE ON DSL IS WANING, IT MUST BE TIME TO RAISE PRICES.

TURNING BACK TO THE QUESTIONABLE BENEFITS OF INTERMODAL COMPETITION, I THINK WE HAVE TO RECOGNIZE WHAT THE INTERMODAL MODEL CAN ACCOMPLISH AND WHAT IT CAN'T. TO HAVE REAL COMPETITION THERE MUST BE FIVE OR MORE COMPETITORS WHO CAN OFFER SUBSTITUTABLE SERVICES IN THE SAME GEOGRAPHIC AREA.

EVEN TAKING CABLE AND SUGGESTING THAT IT REPRESENTS DUOPOLY COMPETITION DOES NOT TELL THE WHOLE STORY -- CABLE IS NOT A SUBSTITUTE FOR ILEC NETWORKS ACROSS THE WHOLE SPECTRUM OF TELECOMMUNICATIONS OR EVEN BROADBAND SERVICES OFFERED TODAY OR IN THE FUTURE.

CABLE DOES NOT SERVE, OR HAVE THE PLANT TO SERVE, LARGE SEGMENTS OF GEOGRAPHIC MARKETS - IT SERVES PRIMARILY RESIDENTIAL AREAS. CABLE HAS INHERENT TECHNICAL LIMITATIONS THAT PREVENT IT FROM RELIABLY DELIVERING BUSINESS-CLASS SERVICES THAT SMALL AND MEDIUM-SIZED BUSINESSES DEMAND. THESE INCLUDE T1-BASED INTEGRATED VOICE AND HIGH-SPEED INTERNET ACCESS SERVICES THAT ALLEGIANCE SME CUSTOMERS HAVE BEEN DEMANDING IN DROVES. FURTHER, CABLE NETWORKS HAVE HISTORICALLY STRUGGLED WITH QUALITY, AND THEIR ABILITY TO DELIVER BUSINESS-GRADE RELIABILITY IS AT BEST QUESTIONABLE. ACCORDINGLY, I THINK THERE NEEDS TO BE A BIT MORE FOCUS ON WHAT THIS CRITICAL SEGMENT OF THE ECONOMY NEEDS VS. WHAT CABLE CAN DELIVER.

NINETY-NINE PERCENT OF THE ECONOMY IS DRIVEN BY SMALL AND MEDIUM-SIZED BUSINESSES. FOR THE SAKE OF THE ECONOMY, THIS SEGMENT SHOULD NOT BE DENIED THE INNOVATION AND COMPETITIVE PRICING THAT RESULTS FROM CLECS COMPETING WITH THE BELL MONOPOLIES. THE INTERMODAL MODEL WILL SIMPLY RELEGATE SMALL AND MEDIUM SIZED BUSINESS TO THE BACKWATER DAYS OF MONOPOLY INNOVATION AND PRICING.

CONTRARY TO THE BELL MONOPOLIES' CLAIMS, THE DC CIRCUIT DID NOT SANCTION DUOPOLIES. IT MERELY FOUND THAT THE FCC HAD TO CONSIDER THESE COMPETITIVE ALTERNATIVES AS PART OF THEIR ANALYSIS. THE EFFECT OF FORSWEARING COMPETITION WOULD BE DISASTROUS - HISTORY REVEALS THAT COMPETITION IS THE ENGINE OF INNOVATION - NOT MONOPOLIES.

COMPETITORS ARE WHAT HAS DRIVEN BOTH THE BELLS TO DEPLOY DSL, BUT ALSO DRIVEN THE CABLE COMPANIES TO OFFER HIGH SPEED INTERNET SERVICES. IF COMPETITION IS LIMITED TO FORMER MONOPOLISTS, YOU WILL HAVE NO MORE INNOVATION. DON'T FORGET IT WAS THE NEW ENTRANTS THAT HAVE DRIVEN MANY OF THE INNOVATIONS IN THE NETWORK, SUCH AS SOFT SWITCHES, VOIP, OPTICAL SWITCHING -- WITHOUT THE NEW ENTRANTS, THERE WILL BE NO INNOVATION IN THE NETWORK.

IN CONCLUSION, YOU COULD SAY THAT THESE ARE CHALLENGING TIMES FOR THE COMPETITIVE TELECOM INDUSTRY, BUT THAT WOULD BE MISSING THE POINT. THE POINT IS THAT THE TIMES ARE ALWAYS CHALLENGING FOR OUR INDUSTRY, AND THE SURVIVORS ARE THE ONES WHO CONFRONT AND ADAPT TO THE CHANGES AROUND THEM. YOU CANNOT LEAD A SUCCESSFUL COMPANY IN THIS BUSINESS BASED ON ARBITRAGE OF SHORT-TERM REGULATORY OPPORTUNITIES; YOU NEED TO BASE YOUR BUSINESS ON LONG-TERM INVESTMENTS THAT CREATE VALUE FOR YOUR CUSTOMERS. AND WE CAN DO THAT BEST WHEN THE REGULATORS AND POLICYMAKERS SUPPORT PRO-COMPETITIVE POLICIES.

Royce Holland Speech to The National Press Club
June 12, 2002