Today, Craig McCaw, erstwhile ultimate controller of ICO and Teledesic, was out to lunch at the Federal Communications Bar Association in Washington DC. The talk he gave includes the namechecks you'd expect, such as terrestrial reuse of satellite frequencies for urban areas, Teledesic just not being crazy enough, and 9/11. The transcript is short, and below. L. Speaker's Notes of CRAIG O. MCCAW Chairman and Chief Executive Officer Eagle River, Inc. before the FEDERAL COMMUNICATIONS BAR ASSOCIATION March 14, 2002 I. Introduction Thank you for the opportunity to address the Federal Communications Bar Association. It's a great pleasure to be among so many colleagues from every sector of the telecom industry. Although with the way things are going in the industry, it feels as though I'm on an episode of "Survivor" and could be voted off the island at any minute. The good news is: the only communication on the island is via satellite. Unfortunately for all of us gathered here, the "survivor" metaphor hits a little too close to home. The turmoil in the industry today tempts regulators to depart from long-standing telecom policies and instead imitate - and thus reinforce - Wall Street's preference for the safest bets. To carry the metaphor one step further: Bad policy choices during these troubled times could force the wrong survivors on us, essentially disenfranchising a large part of our society. Total Capital Starvation It's not difficult to see where all the gloom is coming from. Many of the most highly touted telecom stocks of the late 90s are now more than 90% off their highs. Even giants like Intel and Cisco have seen their market caps plummet. The strongest CLECs are trying to restructure through bankruptcy; the weaker ones are already gone. The debt ratings of established equipment manufacturers and even some former "Baby Bells" are perilously close to "junk bond" levels. All of this has created not just red ink for investors, but pink slips for employees. All of these problems have led to a critical shortage of capital. Just as investors irrationally threw money at bad business plans two or three years ago, they now irrationally withhold capital from promising start-ups with solid business plans. The resulting environment is one of total capital starvation. The only business opportunities being saved are the safe bets - the ones where the biggest companies sell the lowest-risk, most me-too services in the largest, most lucrative markets. All the more innovative - and therefore riskier - opportunities are left to wither on the vine. Now, to some extent this is simply the operation of a free market, which is famously efficient in the long run but notoriously irrational in the short run. And to that extent, despite the pain many in the industry are feeling now, we are constrained to admit that the government ought not to tilt the playing field toward the riskier ventures, no matter how worthwhile they seem to us. Today, however, I believe the greater danger lies in the possibility that policy makers will actually skew their policies in the other direction - in favor of the safe bets and the conventional wisdom. This, too, would interfere with the free market - and it would interfere in a way much more likely to do long-term damage not just to our economy, but to who we are as a society. Specifically, the wrong policy choices now could (1) stifle innovation, (2) disenfranchise people in rural and remote areas, and (3) jeopardize our future security. Crackpots Lead the Way One of my first businesses was selling pagers in Centralia, WA, not exactly an urban center. Some said I was a 'crackpot' (many still do), because Centralia was not a market large enough to support a paging business. But the business succeeded because there really was a need there. The people of Centralia wanted pagers just as much as the people of Seattle did. Later, cellular succeeded in the same rural markets, for the same reason. Conventional wisdom throughout the 1960s and 70s, this time from Bell Labs, was that there was 'no market' for cellular. Today, cellular and PCS boast 130 million subscribers. The conventional wisdom right now is that only large, established infrastructure companies can survive in the telecom business. I do not doubt that the big boys will survive for years to come. That's what they do best. But a government policy premised on waiting for the largest players to innovate is a recipe for stagnation. It has never been the established players that have taken risks or bet on innovative products and services. Instead, it's the risk-takers, the 'crackpots,' if you will, who have been the architects of the largest, most cutting edge telecom infrastructure on the planet. It will be the Roberts family company and Comcast, rather than AT&T, that pushes broadband cable the last mile to millions of residential customers. It's Charlie Ergen, rather than GM-Hughes, who's gone from a C-band dish business to creating a multi-million subscriber, 6-satellite DBS operation - and perhaps beyond. It was Steve Case at AOL that bought Time Warner, rather than the other way around, to create the nation's largest Internet service provider. It is Sumner Redstone, rather than CBS or Paramount, who went from a few movie theaters to a media empire that includes MTV, Viacom, and most important, the roller coaster rides at Kings' Dominion. On the other hand, not all of the crackpots will survive, either. Consider the Chinese astronomer Wan-Hu. He wanted to be the first man in space, about 500 years ago. His vehicle was a wicker chair to which he attached two large kites and 47 rockets. On the day of the flight, he commanded his 47 assistants to come forward with torches to light the rockets. He was, of course, blown to smithereens. If we'd been on the scene, most people - correctly - would have said, "Chalk one up for conventional wisdom." I, on the other hand, would have been trying to figure out how to get a piece of the action. Actually, I think some of my investment advisors are descended from Wan-Hu. The point, though, is that Wan-Hu had the right idea, no matter how poorly executed it was. Eventually the Wright Brothers came along to get us off the ground. Eventually, we did put people not just in space, but on the moon. Today, we think of the Wright Brothers as the guys who got it right. But the day before Kitty Hawk, they were just another pair of crackpots. And today, the likes of United, American, Delta, and Southwest are just big, established companies following in the footsteps of crackpots. (Southwest seems to know this.) What has this got to do with the telecom industry? One lesson is that it is very dangerous to bet against the crackpots, because despite spectacular failures, history is on their side. But it is particularly important that policy makers avoid the temptation to dismiss the crackpots and label them as failures. DBS was a failure for many years, but now just seven years after DirecTV launched its first DBS satellite, industry pundits no longer call DBS a 'pipe dream. They now see DBS as a broadband pipe, with 17 million subscribers. An industry that did not exist in 1994 now presents the only real competition to cable television. What a shame it would be if, fifteen years ago, the FCC hadn't shown the flexibility that was required in order to give the DBS licensees a chance. Aren't we clearly better off as a society today than we would have been if we had pulled the plug on DBS and changed the spectrum allocation back to point-to-point microwave services? I hope the FCC thinks about DBS when it looks at today's satellite marketplace. On the mobile side, successive bankruptcies have created an aura of commercial futility. Similarly, on the fixed side, broadband satellite projects are dying on the vine. Mega-projects like Astrolink and Skybridge have been shelved. Hughes sold off its satellite manufacturing arm, and is set to merge with Echostar. Motorola exited the business altogether. Loral says it will stay in the business, but abandon the consumer market. Industry opinion regarding Teledesic seems divided between those who think we're dead and those who think we will be soon. As I stand here today, I can't guarantee you that any one of these projects is the Wright Brothers rather than Wan-Hu. But I can guarantee you that someday in the near future, millions of our fellow citizens will find life without broadband satellite service as unthinkable as they now find life without DBS. In the meantime, the FCC needs to stay the course and give satellite operators the flexibility they need in order to realize the incredible promise of this technology. Reach Out and Touch Everyone Telecom is important not only as infrastructure, not only as a sector of the economy, but as part of the social glue that holds our society together and connects us to others. For over 100 years, telecommunications has enriched lives and broken down barriers. Since at least the passage of the Communications Act of 1934, the United States has pursued a strong national policy of ensuring that virtually everyone is hooked up to the telephone network. However, as our communications infrastructure has moved beyond Plain Old Telephone Service, Americans in rural areas have increasingly been left behind. Access to dial tone may be universal in America, but access to DSL or high-speed cable modem service is not. The coverage maps of any major terrestrial mobile service show vast white areas where service is unavailable. And subscribers know only too well that the coverage in real life is rarely as solid as the colors on the maps would indicate. The story is the same in Europe and Japan. Despite population densities far greater than our own, "3G" wireless services will be available only in the cities. In the United States, even the cities will have to wait years, and rural America will simply never have access to 3G from terrestrial service providers. This may not seem catastrophic today, since none of us have 3G yet and we all manage to get along without it. But I think there is good reason to be concerned about the growing number of "urban-only" services toward which we are directing our resources. To see this, one need only look at the history of video programming in this country. Once upon a time, the same video services were broadcast into nearly every home. The penetration rate was higher even than for basic telephony. Ed Sullivan, Walter Cronkite, All in the Family, and M*A*S*H were homogenizing influences on our culture and on our communities. It is a commonplace to observe that cable TV changed this forever. What is not so commonly noted is that the change started with densely populated urban areas. And rural cable systems have continued to lag badly in terms of programming diversity. What this means is that for the better part of thirty years, television - which we all agree wields enormous influence on our society - has been a fundamentally different experience for urban viewers than it has for rural viewers. Nonetheless, I am happy to say that the gap is narrowing. And it is narrowing not because of any grant program or universal service subsidy, but because of the natural strength of satellite technology - coverage. Thanks to DBS, rural Americans can today enjoy very much the same viewing experience as their urban counterparts. In precisely the same way, we need to ensure that satellites are used to bring advanced broadband services to Americans in those areas where terrestrial wireless or even wireline services just cannot be economically provided. In precisely the same way, we need to ensure that satellites are used to bring the benefits of 3G to rural as well as urban users. Satellite technology is by far the most economical way to get the job done. The largest rural coverage holes comprise about 20 million homes. I started out in the cable business, where you are acutely aware of the "homes-passed" cost of extending your network. You are also very aware of what your lender is charging you for capital, and you have certain assumptions about what the speed of customer adoption will be. To reach those 20 million rural homes with cable would cost well in excess of $100 billion, and one would have to double that number to account for schools, government offices, and businesses. Given the state of the capital markets in 2002, that is simply not going to happen. Satellites, however, can provide the needed capacity to every home for a price between $500 million and $3 billion (depending upon the architecture). But if coverage is the strong suit of a satellite network, it is important for the coverage to extend to both urban and rural areas. And it is an established fact that first-generation mobile-satellite networks have had great difficulty serving urban areas because the signal cuts out in buildings and in urban canyons. This is not an insurmountable obstacle. In fact, the solution is very simple: allow the ancillary use of terrestrial towers in major cities. In one stroke, that would make MSS networks much more useful to traditional MSS subscribers, boosting take-up rates and fundamentally altering the economics of the user equipment market. It would also create a brand new type of integrated wireless platform. A network that allows the handset to roam as freely as the subscriber does, without losing a single feature. An "always-on" network that is available not just in urban areas, and not just in rural areas, but everywhere - coverage that is more ubiquitous, in fact, than Dick Wiley. A network that makes the same suite of advanced features available in both environments. That simply does not happen today when subscribers roam from one network onto another. Once such a platform exists, Americans will finally have truly continental mobility. Public safety officers will be able to access real-time data far away from terrestrial towers. Satellite-based networks can provide mobile IP-based platforms that don't lose any features when users across jurisdictional lines. Geographically dispersed state and federal agencies would have 50-state coverage on a single platform for homeland security, or seamless global coverage for national defense efforts. Telematics services for drivers -- like On-Star, Neverlost, and other GPS-based navigational aids -- will be available not just on the open interstate, but in the urban canyons where one is actually much more likely to need navigational help. The telematics market is a personal favorite of mine, since I tend to have more trouble with directions than most people. Maybe it's the dyslexia, or maybe it's the Y chromosome that stops me from asking. Both are disabilities in their own way. Terrestrial facilities will never support a network like this. Only satellites can do the job. And they can only do the job if the Commission grants them the kind of regulatory flexibility it has granted to other satellite and terrestrial services in the past. Satellites need to be given this flexibility, not because urban residents need a seventh choice for handheld voice service, but because the rural users with no other choice will not be well served by a swiss cheese network whose signal disappears unpredictably whenever one ventures into a major city. The policy question is very simple: Do we tolerate the lack of advanced services in rural areas, on the unspoken premise that people who can't be economically reached by cellular towers just don't count? Or do we decide that rural Americans do count, and that we need to enable satellite networks to get the job done? The question answers itself. Wall Street can perhaps be forgiven for channeling all the money toward me-too services in urban areas. For the Commission to ape Wall Street by channeling all the spectrum and regulatory flexibility toward urban services would be unforgivable. There are some who are trying to prevent ICO from using its assigned spectrum in urban areas. I'm not going to debate the fine points of that issue today. But it is important to note that when the terrestrial partisans talk about devoting spectrum to its highest use, they are talking exclusively about money. Their "highest use" is the same as Wall Street's, and it makes urban residents the measure of all things. But if we start instead with a shared commitment to keeping rural American plugged into our telecom network, a very different picture emerges. It's $100 billion to do that terrestrially, while satellites can do it for a tiny fraction of the cost. That's a social benefit that no auction can measure. And so today I will lay down a challenge: If there is any terrestrial wireless provider that is willing to provide digital broadband service to every square inch of this country within 3 years, using a single network and providing a single suite of feature-rich services, let that provider stand up and be counted. If, on the other hand, there is no terrestrial provider willing to make that commitment, let that provider sit down and be quiet. Redundancy and Security Deregulation over the past decade has fostered great progress in building a decentralized distributed network infrastructure. The Internet, created to survive a nuclear attack, is the prime example. There is no doubt in my mind that we are moving inexorably from a centralized, hierarchical infrastructure built with monopoly profits, to a distributed "network of networks," both wireless and wireline, satellite and terrestrial. This phenomenon is by no means limited to the U.S. The new communications networks are global in reach, with satellites providing global, seamless coverage more readily than any other mode. The evolution has not come a moment too soon. Multiple wireline and wireless competitive distributed networks that were deployed and operational in New York prior to September 11 were critical to public safety and the recovery efforts. On that day, we saw first hand the value provided by the facilities-based networks of competitive local exchange and wireless carriers. These networks helped to fill the void created by the loss of some of the essential facilities of the incumbent provider. It is instructive to reflect on the fact that telephone service in lower Manhattan simply could not have been restored as quickly as it was if it weren't for fixed wireless technologies. Fixed wireless providers like Winstar were there when Wall Street needed them - even though Wall Street had already abandoned Winstar to a bankruptcy court. Apart from being exquisitely ironic, I think this shows the dangers of having regulatory policy too heavily influenced by what Wall Street chooses to fund. Like rural service, redundancy and security are worth a strong policy commitment from the government, whether or not they get strong financial commitments from Wall Street. In the wake of September 11, there is also a growing recognition that satellites are less vulnerable to terrorist attack than their earth bound competitors, and are invaluable in times of emergencies. Satellite phones remain in demand by the military, media and others post-September 11, particularly in remote areas of the planet where no other modes of communication exist. Policy makers are probably quite aware of all this right now. But they may need to be reminded as the memory of September 11 fades. I promise to do my part. The policy makers most enamored of auctions may need to be reminded more often than others. What it boils down to, I think, is that managing the spectrum means more than giving it to the highest bidder. Auctions don't measure vulnerability to terrorist attack, just as they don't measure the importance of rural service. Conclusion I think the FCC understands how important these policies are. Chairman Powell and this Commission have been committed to facilitating the deployment of broadband services for all Americans, regardless of geography. The cornerstone of this broadband initiative has been technology neutral deregulatory policies that promote investment and competition across technologies. Greater spectrum flexibility and a more robust secondary spectrum market are critical if satellites are to play the role the Commission envisions for them in this technology mix. With these policies in place, three things can be predicted with confidence. First, a reinvigorated telecommunications sector will reassume its role in ensuring that the U.S. economy is the strongest in the world. Second, satellites will not only survive, they will flourish as the primary mode of connectivity for millions of Americans. Third, even the Wall Street analysts will realize all of this - about six months after it has happened. --end.