Editor’s note: Anyone involved in the high-tech economy is well aware of the challenges facing the telecommunications industry. So when a prominent telecom exec speaks these days, many people are listening. Duane Ackerman, chairman and chief executive officer of BellSouth, delivered one of the keynote addresses at SuperComm in Atlanta this week, and he had a great deal to say. In our opinion, the best way to cover Ackerman’s remarks is to publish the speech as he delivered it. Local Tech Wire requested a copy and will publish it in two parts, today and Friday. His opening remarks were edited slightly for length.I — want to thank (emcee) Roger Plummer for not doing to me what another emcee did a while back. I was waiting to go on stage to deliver an after-lunch speech. The emcee leaned over and said to me: “Are you ready to speak now? Or should we let them enjoy themselves a little longer?”

I hope my speech and your enjoyment aren’t mutually exclusive. But I do want to ask you to think with me today about our industry. With the telecom sector still stuck in status quo–with the release of the FCC Triennial Review Order still pending –with the nation still on security alert–this is an important time to talk about telecom’s ability to invest and innovate for the future. At the core of all the uncertainties, there’s one fundamental question: How do we make our industry healthy again?

As I thought about that question and how we got here, I was reminded of an experiment that the media widely reported in the early 90s. You might remember it, too.

A decade ago, eight researchers sealed themselves in a glass and steel bubble built on the sands of the Arizona desert. Inside, an airtight world had been replicated, along with 4,000 carefully chosen plant and animal species. Called Biosphere 2, the project’s aim was to devise a self-sustaining ecosystem in a test tube. In theory, it should have worked.

But time would tell a cautionary tale.

News reports revealed that inside the closed biosphere, oxygen depleted. Noxious gases built up. Crops failed. Many species went extinct, while voracious insects, like the so-called crazy ant, multiplied. Even special intervention like pumping oxygen into the bubble wasn’t enough to make the biosphere livable. Two years later, the researchers emerged tired and thin. All the artificial controls and human manipulations could not make this ecosystem viable. The experiment had failed.

I think you see where I’m heading with this.

Telecom has been locked into a glass bubble of its own. Government regulators and their economists thought they had the model right. Theoretically, it should have worked. But we now find the industry is an ecosystem gasping for air…stifled for too long by artificial industry boundaries and stale rules. From a monopoly legacy to the economic regulation of today…public policy has controlled what we grow and breathe and the relationships we form…all aspects of our existence …from what we charge, to who we serve, and how we package these services.

Meanwhile, natural market and technological forces have transformed our industry. Digital convergence is rising. Everyday hundreds of millions of voice and data connections between people and information flow over our networks.

Consumers are connecting on more devices at greater speeds than ever before. Communications has become the foundation of much of our innovation and growth. And, the reliability of our networks has taken on new relevance in an age of digital viruses and terrorist threats.

Underlying it all is a complex telecom ecosystem of interdependent players and converging technologies. Everyone in this room–equipment manufacturers, carriers, service providers, investors, and policy makers–we’re all a part of it. We are each other’s suppliers and customers. And, we are competitors. Wireline, wireless –wholesale, retail– local and long distance are all interconnected. A thousand streams of commerce … all dependent on the right mix of demand, investment, business models and policies. In this high-fixed cost industry, none of us can operate in isolation. And none of us alone can deliver technology’s promise of new and better ways to live and prosper.

Public policy has been trying to keep the lid on the telecom glass bubble. Digital convergence is blowing the lid off. The tension between these forces has brought our ecosystem to the brink of an industry big bang. And the lack of oxygen–the lack of capital in the industry–has only intensified the pressure.

Somewhere between the stagnation of the old ways and the chaos of the new, it’s time for us to find a new equilibrium. As technological change marches on, how do we as an industry harness its power for the digital age? How do we get capital flowing into the industry so that we can deliver to our customers critical and innovative communications services?

The telecom ecosystem, as we have known it, is broken. I want to talk with you about where I see some of the opportunities for renewing it. But first, let’s take a deeper look at the dynamics of the system.

Telecom ecosystem, as we’ve known it, is broken

The fact is that the state of our stewardship has not kept pace with the state of technology. Why? Because our industry has been shaped according to regulatory assumptions rather than the logic of the marketplace and the dictates of technology.

Let’s look at the facts:

  • The regulators have assumed that the more competitors the better, without regard to the return on invested capital, and so the ecosystem is swarming with players. In the top 15 U.S. markets, there are at least 15 providers of wireline service. In the Southeast, we have more than 300 competitors. And wireless has at least six carriers in every major market.
  • Competition among different technologies has exploded. One in five Americans consider their cell phone their primary phone. Cable broadband subscribers outpace DSL subscribers by almost a 2-to-1 margin, and by 2008 one estimate says cable will have 14 million residential telephony subscribers. There are other forecasts that are even more aggressive. Meanwhile, much of our policy is still focused on a strictly wireline world with regulators staunchly refusing to recognize the existence, or at least, the impact of intermodal competition.
  • Technology is taking us into an “any distance” world, but the industry is still separated along local and long distance lines. Based on a 100-year tradition of social pricing in telecom, government controls retail wireline prices. And in its zeal to construct–to divine– a competitive ecosystem, regulation didn’t stop there. Rather than trusting natural market forces to determine the winners and losers in the marketplace, government also decided to control wholesale prices by formula–And in doing so, encouraged a boom of new species of communications companies regardless of whether they had sound business models.

The rest as they say is history. The boom turned into a bust and killed massive amounts of investment with it…and left an industry with too much capacity and too much regulatory uncertainty.

Between 1996 and 2000, annual capital spending by U.S. telecom carriers, cable operators and Internet service providers jumped from $42 billion to $113 billion. Since then, capital spending has collapsed back to $41 billion.

The same trend is going on in venture capital investing. A recent survey showed that venture capital investments in communications companies dropped from a high of $23 billion in 2000 to $4 billion last year… back to 1998 levels.

Telecom is a high fixed-cost industry. Capital investment is the oxygen we breathe, but layer upon layer of entangled regulation is strangling our capital air hose. Investors have not seen a clear path for getting a return. No return. No capital. And with government controlling both wholesale and retail prices, we can only react to the result and so far that has meant cutting costs.

The capital squeeze has huge implications for innovation:

  • Consumers are still waiting for the full promise of digital convergence…the seamless integration of devices, networks and services that bring new value to their everyday lives.
  • American jobs are moving overseas. Forrester predicts that 3.3. Million U.S. services jobs, especially in the IT sector, will move offshore over the next 15 years as companies cut costs. We are seeing engineering jobs beginning to move as well.
  • On the broadband front, the Asia-Pacific region now leads in total broadband subscribers with 48 percent of global DSL lines, followed by North America at 36 percent. Did you ever believe we would be here?
  • And now that the age of Bell Labs is over, how do we fund and drive innovation? In this age of convergence, no one company can fund R&D and generate ideas in a closed environment…and, I might add, nor should we.

I welcome the shift to more collaborative and open innovation, but we have to change how we manage and fund R&D across the industry.

The future of communications…as well as the future of the economy of this country…depends on our ability to innovate next generation networks and the products and services that ride on them. And, the stakes for investors, consumers, the industry and, for that matter, the United States have never been higher.

So how do we fix this broken telecom ecosystem?

LTW will publish the remainder of Ackerman’s remarks on Friday.