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FINAL TRANSCRIPT

Conference Call TranscriptVZ - A Conversation with Ivan Seidenberg

Event Date/Time: Apr 06, 2010 / NTS GMT

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FINAL TRANSCRIPTApr 06, 2010 / NTS GMT, VZ - A Conversation with Ivan Seidenberg

C O R P O R A T E P A R T I C I P A N T S Ivan Seidenberg Verizon - Chairman, CEO

C O N F E R E N C E C A L L P A R T I C I P A N T S Alan Murray Wall Street Journal - Media

Glenn Greenberg Brave Warrior Advisors - Analyst

Bal Das Kailix Advisors - Analyst

Jose Mario Telefonica - Employee

Henry Schlosser Citigroup - Analyst

John Jefferson AT&T - Employee

P R E S E N T A T I O N

Alan Murray - Wall Street Journal - Media

Welcome to today's Council on Foreign Relations meeting, part of the CEO Speaker series. Everybody please turn off, well, two requests, one, Ivan requested your service provider be Verizon. And, second, I request that whatever it is, you turn it off.

Ivan Seidenberg - Verizon - Chairman, CEO

No. You can leave it on if it is Verizon.


And, second, remind everyone that this session is completely off the record, although I think you have been around long enough to know what with this many people in a room --


We'll just lock the door and you can't leave. That's all.


I think Ivan Seidenberg needs no introduction. He has been CEO of Verizon for as long as there has been a Verizon, and has also become increasingly involved in the Business Roundtable. You are now the head of the Business Roundtable, so a lot to talk about this morning.

But you have been in the telecommunications business for more than four decades. You started as a cable splicer. What's a cable splicer?


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What's a cable splicer? Well, it's a guy who splices cables, right? So, you know those wires you see? It's -- you connect them. So that's what I did. I would connect wires.


And those were in the days of Ma Bell, government-controlled monopoly business, could not have imagine, I would think, how much your business who have changed over those four decades.


Well, just to -- this is nostalgia minute.


A minute, yes.


So, yes. In 1966 the world was a lot different when I started. But the concept was different. We had to connect traffic from point A to point B. And the way we did it was copper wires. And we had this elaborate network of switches, and wires, and poles and things of that nature.

And we still have elaborate networks of switches. But now they are fiber optic so they are wireless. And now they are silicon and things of that nature.

So, we are a business that the disruption in technology is enormous. But what we do hasn't changed much in the last 50 years, but we --


Well, you are not -- you are, what, 30% of your business now is data instead of voice, right?


Yes. The services we offer are different. If you look at our business, just as an interesting tidbit, so, we are $110 billion company. And probably $80 billion of that $110 billion we have generated in the last 10 years.

So we are a business that almost everything we did before has been made obsolescent by technology. And so, we are constantly having to regenerate new products and services even though the core technology to most people appears to be the same. But the services we offer are constantly changing.


So this whole net neutrality debate that has been going on in Washington for the last few years, it seems like some of the people involved in that debate still think of you as what you were, sort of the dumb pipes and the technology happens on the people who are providing applications to go over your pipes.


Yes. I think I would come at that a little differently. I don't think that people are that naive. I think people who are -- who fashioned this net neutrality argument did it for competitive reasons, not because they were not aware of the nature.

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So, let's take the example -- and the net neutrality issue has sort of evolved in the last three or four years, but when the debate first started the leader of the pack was Google and, basically, Silicon Valley. So if you look at Silicon Valley, their view was anything that Verizon, or AT&T or any of the carriers did was an encroachment on the software business.

So, the best thing is to come up with a strategy that defines network and segments it away from software. And therefore, you create a whole argument around that neutrality.

What we know is that the technology is not that easy to separate, makes it more integrated. And so, where we are today with the debate is you see Verizon now has -- I have filed two or three joint editorial letters with Eric Schmidt, and we see now an evolution of this, what people recognize, that you can't regulate technology.

What you have to do is regulate an industry. And the industry requires players to participate in all parts of the value chain in different ways.


So you are not worried about the net neutrality argument?


Well, I always worry about unintended consequences of government reaching into our business. But I believe the players in the industry like Google, like Microsoft, like the Silicon Valley players, as well as AT&T and us and the rest of the industry, we are creating a better dialogue.

So, the FCC is looking at more reasonable positions than these polar positions. So let's set aside all the lobbyists on either side and assume they are on the polar conditions.

And so, when you are looking at today as industry, and let me get to the answer. Industry is focused more on more self-policing than strict rules to government every single behavior.

An example of that, advertising industry has self-policing. And they don't do a bad job. And once in awhile, if it doesn't work, somebody takes you to court.

But in the telecom business, we need industry to do a better job at policing behavior because in the final analysis, government can never possibly regulate every condition, every single circumstance that could ever happen and do it efficiently.


So you have got that big, fat FCC connecting America, the National Broadband Plan in front of you. You carry that everywhere you go?


I do. I wanted this audience to see this document. So the FCC just released their National Broadband Plan, okay? So, there is always a lot of good things in here. But when you think of the reach that this document has -- so, for example, I just took some of my favorite recommendations.

So, the FCC is now going to suggest that they decide how many hours a day local community centers should be open for people to get Internet access. They are even going as far as saying maybe we should talk about off hours, and how many hours community centers should be --


But they have no power to do anything about that.


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They can try. And they can impose costs on people. So here's the issue. The issue is we have to be careful that well-intentioned, high level policy issues don't turn into burdensome rules and regulations that will just stifle growth and innovation. This is a simple issue for me. And --


Is --


-- this document is, in one way, it is fine. And in another way, it is extremely -- it gets my attention.


Do you fear that that is going to stifle your ability to make the investments you need to make to build out the network?


I fear that when industry, not just us, but any company makes capital allocations decisions, if we start out with $2 billion, $3 billion, $4 billion worth of government mandates that really don't have any reality in how the market works, I worry about that because that just adds costs that reduces our incentive to invest in this country. And it affects hiring. And you know all the other things that go with that.

So I am concerned that there is an overreach here. But it is early in the game. But the point is intelligent, engaged, opinion leaders just need to understand that this is not a slam dunk that net neutrality is right and, therefore, we need to cave into everything. You have to see things as what to do.


So I am going to come back to that in a little bit. I should tell you that I was handed a note. I misread my notes here. This meeting is actually an on the record meeting, not an off the record meeting. So is there anything you said in the last few minutes that you --


No. I was hoping it was on the record, actually.


It is. It is on the record and I will turn my tape recorder on and we will -- we can move on.


I didn't think everybody in this room was going to keep it a secret anyway. So, in fact --


You weren't? So, but I want to talk first, you have made the point that Verizon really is very much a technology Company. You have kind of cast your lot with Google in the great Google versus Apple war.

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You have the Android phone. AT&T has the iPhone. I realize this is just the early stages and a lot if going to happen from here on out. But are you on the right side of that battle?


Well, so far, if you look at the results I think you would say we are doing okay. But here's why I would look at that. I think we are on the right side of the network argument, as opposed to Google or -- right now, the hand we were dealt is to develop our business.

So let me just clarify this real quickly. So, Verizon runs its wireless business on a technology standard. It's called CDMA. So it is a different standard than the one that AT&T runs, GSM.

So, Apple decided to build its first device on a GSM standard because that is a more accepted global standard. Our view, over time, is that as the devices come to a common architecture we would be eligible for Apple to consider putting their devices on our network.

It is their shot, their call. We are open to doing that. So, to get to your question about who we sided with, our view is that the network should be neutral to anybody's device. And we want to carry anybody's device.

And so, what we are doing now is we have plans to carry the Google Android. We are carrying the Microsoft Windows. Nokia and Siemens are developing another standard. And, eventually, our view is we will get to carry Apple's standard when Apple is ready to make that decision.


Do you have any idea when that will be?


No, but the newspapers, the Journal reported that Apple is looking at that. All I can say about that is that we have expressed to Apple an interest in doing it. We have explained that our network is capable of handling it. But those of you who read about Apple, a great company, they operate on their own frequency. They do what they want when they do it.

And so, they -- part on balance, they are good for the industry. The equipment -- if you don't mind, just let me just extend to the iPad --


Yes, sure.


-- just to give so everybody is familiar with this. So, like everybody else, we are interested in it, so had some of our technology people go out and buy a couple devices.


You didn't stand in line on Saturday?


No. I had somebody else stand in line, so it's -- all right, but we had people standing in line and -- but here is the thing about the iPad that is very interesting. So, we look at is a fourth screen.

So you have got your TV, you have got your mobile device, right? You have got your PC and now you have got a fourth screen.

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So, it is not clear that those four could become three or those four could become five. But at this point, it is another screen in the marketplace.

Now, the interesting thing about the iPad from how Verizon looks at it from a network person, first of all, it has no hard drive, all right? It has got flash memory. So, that doesn't mean anything to you, but it means a lot. It means they can produce a lower cost device for the technology they put in. And the battery will last longer.

But it also means that all of the downloading will come from the cloud. You -- so all this business about edge devices, putting expensive hardware in an edge device is now it gets turned on its head a little bit.

So, what you have is -- so this device will be great for media. And it is at a -- it is a video intensive experience. The intention of the iPad is to push a lot of video onto that device. So it has no hard drive.

Now, the other thing is it is geared for unicasting. So what does that mean?

So, as Gus would know, when you broadcast cable we send one signal out to everybody in the room at the same time. When you do a unicast, each of us can watch the same program three seconds apart. That means you need 125 different video screens going out into the network at one time. So, that means for a network person like us, Internet capacity is going to just explode.


To --


Yes. It is like it is cool so --


What -- but --


Guys like me love this, more networks, more fiber, more capacity. And so --


But the massive investment on your part.


Well, yes. But there is also the advances in technology that will keep getting more mileage about the same fiber. Our view is that this fiber we put out there will carry unlimited capacity. All you have to do is get smarter electronics and you keep doing digital compression.

So, our view is the investments we made now will last forever. And all these smart people will continue to invest in digital compression technologies, Moore's law kind of a thing, and keep getting more bandwidth out of the fiber.


The big bandwidth hog is video.

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True. The way we see it, getting back to your first question, if you look at our old business which was making phone calls, if we look out into the future, we think that 90% of the demand we are going to face is all out in front of us. So you think of all the information you all transmit back and forth. That is only 10% of what we think will happen in the next 10 years. It is just absolutely awesome.


And what does that mean in terms of your investment, you way you have to plan? You have a level of investment unlike most -- any other company.


Yes. Well, the way we see it is we make some big investments up front which will then ride for 10 or 20 years because that fiber we put out there will end up increasing its capabilities two, three, four, 15 times. We are doing that with 4G and wireless. We are putting it in the generation of wireless.

So, we have investors in the group. They worry that we are spending a lot of money upfront. Our view is everybody is going to have to do what we are doing, guaranteed. But we are going to have done it sooner, earlier.

And I think it proves today, if you look at our Company, particularly our wireless business, our network service and our network quality is pretty good. And I think that it is only because we invested. And we invested and we have people that run it. So I think in the future everyone will sort of catch up.


You are investing in wireless. At the same time, you are putting fiber optic cables into people's homes. Do you have to do both? Or is one going to end up as the preferred method for --


Well, let's look at it. We have three businesses, now, so let's look at the three. So, one is the wireless business which we all understand.

Then we have an Internet backbone business which is global. We are in 128 cities. We -- if you read the materials we sent out to the members, you can see we are pretty big in that. So, we want to make sure we do that.

And then, we have a third business which is just local access business, which is files to the home. So, yes, we think that the first two are more national or global. The files to the home is -- think about it. We serve 18 million to 20 million households from Boston down to Washington. That is a pretty good market. So why wouldn't you sort of put fiber into that?

And our view is once we put that fiber out, we are kind of good for 20 years. And all we will have to do is upgrade electronics and the switches every once in awhile, or put a new set top box in your house or maybe eliminate four set top boxes and have one set top box in your house. But the fiber will last for a long time.


In wireless you are in business with Vodafone. Would you like to get out of that?


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In the long-term, minority interests, partners in your business, you would probably like to resolve that. So the answer is, yes, I would like to resolve that at some point.


Can you define the long-term for us?


Well, it has been 11 years so far, so --


Long enough?


Well, the Constitution has lasted 200 years, so -- but I think what is important about Vodafone on this discussion is they are a wireless company. They do a very good job. They have been a partner in our business. We have an excellent operating partnership. They have never, ever gotten in the way of us running a good business.

But the fact is, at some point, either they will get -- decide that they don't want to be a minority partner anymore or the circumstances will change. But the issue is there is always this intrigue written about this. There is really no pressure on either side to do anything much different.


Does it make sense, the merge?


Well, here's -- that's a fair question. I get this a lot, so the way I would sort of think about it is we think that this notion of a global wireless only carrier, which is what Vodafone is, is no longer the preferred model. So, I think what you are watching the world sort of migrate into in our business is integrated companies.

AT&T is an integrated business. It has got wire and wireless. Telefonica has got wire and wireless, Orange wire and wireless. So I think what you are finding is if you want to be just wireless you, in my opinion, at some point will lose economies of scale.

So, therefore, when you think of a merger, I am not saying it is not possible, but the economics are different when you think of economies of scale and growth. And the other issue is that you put companies like us together, it is almost a $200 billion business, you have to show investors that you have higher growth than you would standing alone. So, it is a harder issue the bigger you get.

So, theoretically, you can do anything. But there is no compelling at this point -- there is no compelling reason for investors to think this is an exciting thing to do. The press loves this subject. Investors call me less than the press does on this subject.


All right.


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Just for what it's worth.


I'll drop it.


I will try and help you there.


Thank you.


I will try.


Okay. We will move on. So, you circulated comments to this group in advance in which you talked about how this rapid build out of the Internet you are talking about can address the most pressing social problems that society faces, whether it is a problem -- I thought I was back in 1999. I said, wait -- you were talking about education, poverty, health care, energy. Can we talk about that a little bit, go through, maybe take them one by one, education as a starter?


Well, look, our company -- I appreciate the good question and I would also like to thank Richard Hodge for inviting us here. And let me just thank you for being here. It is quite an honor that you do the interviewing.

But the way we view our business, we love what we do. We think what we do matters. And so when you think about our technology -- so, the PC we thought would change the world. All right? So for whatever reason, the capabilities that one could get from the PC didn't quite crack the impediments to sort of social growth that occurred in the classroom or in terms of how people learn.

So no matter how hard we worked we didn't PCs to every classroom. We didn't get them to every student. But we have a chance to get mobile devices to a lot of people.

So, there are four million people in the world now with a cellular device, which is sort of unheard of when you think about it, from where we started. The next billion, or so, people to be connected to the Internet will all be connected by wireless.

So I think we have a chance to crack the institutional roadblocks, particularly in education and health care, to get information into people's hands where they will change the world. So I think -- so, therefore --


The -- but part of the --


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-- people can learn differently. You can have teaching 24 by 7. People can download stuff. There is so many different ways that the learning process changes by having a mobile --


But have you been -- in both those areas, the rate at which technology has infiltrated seems to be extraordinarily slow. Education, today, K through 12 in this country, isn't that different than it was 30 years ago? And --


Well, let me give you one example.


Yes.


So, just one example of one company, so we have a website that we work with. It is called Thinkfinity. So it is our philanthropic, central activity. Teachers can get on this website, teachers, and download lesson plans from anyplace that they can get that.

So we have watched tens of thousands of teachers bypass their local school districts and their local curriculum to provide additional training, additional information and to get learning done in a different way. We now have parents getting on to this website.

So, it is slow? And we are just one Company. So this will multiply. I am totally convinced that the technology -- we are not -- we don't claim to know how to use all the technology. But we are convinced that we can reduce the cost and get the distribution broader that there are people who have the capabilities to know how to use the technology better than we would ever know how to use it.


Yes. And how about -- well, let's talk about health care for a little. And health care is an interesting one, of course, because we just passed this big health care law. You have been in the -- your Company has been in the news for being one of the companies that made the big write-down as a result of that law. Does that get us closer to your vision of where health care needs to be?


So, is the question about the write-down or of the broader question?


I am trying to -- I was just trying to wrap it all under one question. You can take them one at a time.


You want me to hang myself on this question. You realize there are three people from the White House in the ceiling listening to what I going to say, right? Okay.

So, to the health care, look, I think you all know this. So, the size of the health care bill that attempted to broaden access was good. I can't argue with that. That is -- we all agree with that. Business Roundtable signed up for that immediately when the thing started.

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So as we got down the path and we got to the end of the process, for whatever reasons, we ran out of energy. And we didn't focus on the backend of things as much as I would have preferred.

So I am worried that there are some unintended consequences where the costs will exceed the benefits for quite a long time. And here we get into this big political debate. Democrats think business is being political and business doesn't think the Democrats are quite listening to the reality of what is going on.

So, there is always truth on both sides of the argument. I was mentioning just to Alan a minute ago that if you -- this morning the Times had an editorial on our write-downs, which we made the Times editorial. And the Journal had a sidebar editorial letter. And what is amazing is they were both right and I usually don't say that.

So, the Times said, well, they did have to take the charge because it was required by law. But they also made the point that the subsidy we were getting was probably not warranted. Okay. We don't argue with that.

But the fact is the bill eliminated the subsidy to lower the deficit because when you transfer cost to business, the CBO doesn't count that against the deficit. So, the fact is they used us to collect more revenues. We didn't complain about that. All we did is we followed the law and we took the charge.

The Journal editorial took a little different view and said, well, the White House should have accepted the fact they did use business to collect additional revenues to offset some of the cost instead of trying to make believe it didn't exist. So, both aren't exactly wrong.

Now, if you look at the health care bill in general, look, I think we needed to do something. My personal opinion is I never bought into the deadlines that got set. So -- and I told this to both leaders of both parties. I just never understood why all of the sudden the clock had to stop. We could have been working on this. The bill has a lot of good things in it. But it is light on controlling the escalation of costs.

And so, we have a lot of theory in terms of how this will work over the course of the next five to 10 years. So, almost all the provisions in the bill that will drive that efficiencies don't kick in until 2014, 2015. Most of the fees, they go into effect, start right away. And so, I think as a businessperson I would be irresponsible if I didn't point that out. So --


Well, there -- so there's a --


So we just have to do that. Now it doesn't mean we are against the bill. It just means that we want to keep trying to make it work.


But let's talk about the broader environment a little bit because you do have an environment where public skepticism and attitudes towards business are at an unusually low point, as a result of what we have been through, through the last couple of years. And you have an Administration -- you can argue about what the Administration's posture towards business is, but I think what you can argue about is this is the first Administration in my lifetime where you haven't had a single businessperson in a prominent Cabinet, Administration role.

Is that a problem? Are you concerned about that as head of the Business Roundtable? Do you see that operating in Washington?


You singlehandedly can fix this perception of business, by the way, by you reporting --


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Me personally?


Yes. You can personally this. You can.


What would you like me to do?


Well, you could say nice things about business. So let's address this issue because I think this is -- to me, this is an unfair wrath on the White House.

So, to the President's credit, he has had more meetings with CEOs than the previous three Presidents combined. And he has only done it in the first year and a half. So, the fact that we can put a token businessperson into a Cabinet job doesn't change anything.

So, on this one, I don't subscribe to the theory that somehow they are tone deaf to business. I think they have been trying hard. And I think if there is an issue, their philosophy may be more in the way than whether or not they are talking to us. And that's okay. That is a legitimate public debate. But, look, for what it is worth, I --


You say if there is an issue. In your -- you know much more about that than any of us sitting in this room. Is there an issue or is this no different than it has always been?


No. You take the health care bill. I think the longer it stayed in the House, the more it changed toward -- I don't want like bad labels, but more to a more populous government-sponsored activity than the original Senate bill. But having said that, what I want to get at, I don't think this White House is particularly anti-business. He has had -- the President has had -- I have been there three times.

And he has had other CEOs, many CEOs in there all the time. So I give him credit for that. And he is engaging and he asks questions. So I would like to put to bed the idea that he is not listening today.

But, having said that, he has a view, and he wants certain things done and he believes, for example, that it was more important in health care to get access fixed before we got cost. Even though we talk about cost, we fixed access. Now we have to work on costs, okay? That's the way it works.


You don't buy the argument that the health care bill addresses the cost problem?


I needed -- I need to see the evidence a little bit further. I am not saying it won't. But there is a lot of things that have to go right for this to work, yes.


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So, let's go back to this FCC Broadband Plan because, as I understand, the reason the FCC took this on was because of this general sense that somehow the United States was lagging in competitiveness in broadband. Penetration rates in other countries were higher, are higher than they are in the United States. And so, there was a sense that we needed a government policy to assure that we could compete with the rest of the world. I gather you don't buy that view?


Well, it is not right. It is not true. The facts in here already don't support that. So, since you need a one liner, okay. So here's the one liner that just keep in the back of your mind when I talk about this.

Anytime government, whether it is the FCC or any agency, decides it knows what the market wants and makes that a static requirement, you always lose. So, this FCC decided that speed of the network was the most important issue, so that is all they measured.

So they will say if you go to Korea or if you go to France you can get a faster Internet connection, okay, that could be true in some countries. The facts are that in the US there is greater household penetration of access to the Internet than any country in Europe. In Japan, where everybody looks at Japan as being so far ahead, they may have faster speeds, but we have higher utilization of people using the Internet.

So our view is whenever you look at these issues, you have to be very careful to look at what the market wants, not what government says is the most important issue. Let's take wireless, for example. Everybody says the European system was kind of better. Well, that is very interesting.

If you look at minutes of use, the average American uses their cell phone four times as much, four times as much as the average European. You look at Europe. They publish penetration rates of 150%, 160%, 170%, meaning that people have more than one phone, two phones, three phones.

You know why? Roaming rates are so high, my guess is you probably two or three different phones to carry to use in different countries because your roaming rates are so high, and you say yes. So my point is it is a fallacy to allow a regulatory authority to sit there and decide what is right for the marketplace when it is not even close.


So on the measures that matter most to you where does the United States rank in terms of --


One. Not even close.


Number one?


Yes. Verizon has put more fiber in from Boston to Washington than all the Western European countries combined, all. We have -- if you look at smartphones, not us, Apple, Google, the rest, they have exploded this market in the US.

Ask any European if they are not somewhat envious of the advancements of smartphone technology in the US. So it just seems to me this is that it is not even close.


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And does that translate into sort of a broader sense of US competitiveness against the rest of the world? We are going through one of these periods of collective angst about our standing versus other countries. Go ahead.


No. This document, if it was redirected and it talked about, and it does t little bit, talked about capital formation, cyber security, standards, we would be a homerun. We are there on that. There is no question. Those are the kind of --


What do you mean by that?


Well.


Do you mean that things need to be done in those areas?


Well, government has a role into, in the issue of whether it is tax laws, depreciation rate, whatever they do, to attract capital into an industry. They can do that if they want to instead of worrying about how many hours a community center might be open in Bismarck, North Dakota.


But is capital formation a big issue right now?


Hasn't been, but it could be. We increase costs. We turn around and delay.


What is -- are you talking about --


Well.


-- concern about what is going to happen with taxes? Are you talking about --


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No. I am talking about overreaching regulations. There are lots of decisions. For example, this document also talks about, and there may be some neutrality advocates in the room. But this document spends a whole section on opening up set top boxes that are in your house to cable.

So let's open them up to create more open access. It sounds like a great idea, right? What does the FCC know about opening up set top boxes? Why would they even think about that?

And I am not even in the cable business like Gus is. We are in our own business. But it just seems to me these are the kind of things --


But, and the fear is --


Right.


-- if you force cable companies to open up the set top box, they may lose the incentive to make the investment? Do they?


They might, but then Apple comes around and comes out with iPad that doesn't even care about a set top box. They just go around the whole thing.

So what we are going to do is have a regulatory authority trying to play catch up regulating cable companies and maybe companies like us when, in fact, other people are on to something completely different. So it is a real problem to have well-intentioned people in Washington regulating the business as they understood it be in 1995. Bad idea. Doesn't work.


Internet security, you mentioned.


Yes. Look, we surveil our network to the tune of -- we look at five billion touches to our network every day to catch breaches. And we are not the only ones that do that. Telefonica --


But what does that mean? You look at five billion breaches, security breaches every day?


Every day, just us. And we kind of one of the largest ones, so you look at scale. But you think of all the bad things coming out of Russia, China, Bangladesh.


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There are five billion of them a day? That is a lot of bad things.


Well, we are only one small piece of it, so there may -- probably 30 billion or 40 billion. So just think of -- it is a real issue, but the way. Cyber security is a real issue.

We spend -- our Company alone spends in the hundreds of millions of dollars protecting our customers' network. So the government --


Yes. What do you want the government to do?


Well, I don't think -- I don't know what they should do. I think they could think about it more often. And they do. There are other agencies that are working on it. But there are all sorts of issues with this. And I think it is an important issue.

Standards is another one. If people think we should move to a common architecture for equipment, okay, government could jawbone on that a little bit. So there are things that people could do.

I don't think there is no role for government. I just worry about -- when you allocate capital and you look at consumer behavior, that is not a strength of everyday transactional activity of government agencies, particularly federal government agencies.


Can we talk about China for a little bit because I know, on the one hand, you have a business arrangement with China Mobile. On the other hand, you have been openly, fairly critical about policies, government policies that disrupt the free flow of information.


Yes. Well, we are probably not the leading edge Company about China. Remember, we are in a service business, so for China, there are very -- there is really no openness with respect to service industries like ours.

So the only thing, basically, that occurs between us and China is whenever we want to do a joint venture with them and we are willing to give them our intellectual property, they are usually very receptive to that. So we have basically gotten out of all our joint ventures in China.

Now, this venture you talk about, we joined with SoftBank, with China Mobile, with Vodafone and us to look at developing applications to ride on wireless devices. So, in that case, this joint little group which is headed by our SoftBank partner, will develop applications that will have a global standard so we can connect the same applications to China Mobile's customers, to Vodafone's customers to our customers.

And so that is, when you add it up, it is about a billion or so customers. So we thought by creating scale economies around a consistent set of applications, we can drive some value there.


But putting on your business statesman, business or Roundtable hat again, is there a broader threat to our society in the fact that China restricts the flow of information in the way it does?


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Yes. So, okay, I am not the foreign policy expert, but I think our Company's position is that there should be no restrictions of that nature. But it is also not our business to tell China what to do or what not to do.

But here is what we will do, what we have always done. We will figure out ways of deploying the technology as widely and as broadly as we can. And I think in the long-term what they are doing is not sustainable in the long-term. It just won't be sustainable.

And so, our view is our contribution, unlike Google, is not to take them on. Our contribution is to build the things that change the world. And I think that is what we do. And I think in the long-term that is a better position for America to be.

Now, one of the things, is I may, on this Roundtable thing, so one of the things a group of us told the President is this whole idea of doubling exports, so -- and then that leads to all these trade agreements and everything else, that we have talked about America being more export-driven. But the business community doesn't feel we put teeth. And do people really believe us when we say that? And I think that we need to really put some muscle behind that, as opposed to just making that a platitude.


What sort of muscle are you talking about? Again, it gets back to the role of government. You want --


No. In this case, the only people can negotiate the Doha and all these other agreements is the government. So the issue is we have got to show some additional resolve and additional teeth in the --


We haven't done enough to get trade agreements.


That would be the general consensus of the Roundtable companies. So if we forced our way into the system and said we are really interested in this. We will make this a priority. It won't change things overnight, but it will start the ball rolling to people thinking, ah, something has changed with these people in the US about this question.


And how do you feel about the Administration's willingness to take that on?


I think they are sort of gearing themselves up. They haven't said no. They haven't said yes. I think the President has been extremely interested in this subject. I know a couple of the other CEOs of companies that have much broader manufacturing activities worldwide really worked him over on this issue.

And he was -- he sat up in his chair and listened. And he was firing comments back to his staff. So that was a good sign to us. So -- and so the learning process is there. I don't think, to be fair to him he came into the job with an instinct for this. But I think he is working on it. What we are trying to do is ask to move a little quicker on it.


Let's open it open for questions. Raise your hand. Wait for the microphone. Please give your name and affiliation.

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Q U E S T I O N A N D A N S W E R

Glenn Greenberg - Brave Warrior Advisors - Analyst

Hi, Glenn Greenberg, Brave Warrior Advisors. The question I have for you is how much will it cost you to hand over your health care insurance to the government? And how does that compare with what you are spending now per employee?


Yes. So we spend about between, cash out the door every year, we spend about $3.7 billion as we reported last year. So includes actives and retirees. We insure about 900,000 lives including retirees.

We have about -- so break the 900,000 down. We have 225,000 retirees and 600,000 in change, okay, in terms of active families.

So what we have done on health care, just so it is pretty clear -- and this subject is one of the most painful to me going because it is -- because you are stuck with a problem that you hate because you are always in this business of shifting costs to your employees. What we have done, over the course of the last 15 years, is basically say to our employees we will do the best we can at using our scale.

And we used to subsidize 90% of every dollar. Now it is about $0.72 of every dollar. So if you work for us, you pay 28%. We pay 72%, okay?

What we have also stopped doing is guaranteeing that when you retire, we will give you any subsidies going forward. So if you had that deal before, you still have some subsidy. But for all new employees, so you take our entire wireless Company, people leave and they retire, the only thing the Company will offer them is post retirement access to our plans. And they pay the full fee.

So, those estimates today for a single person could be $7,000 to $8,000 a year. Families are $13,000, $14,000. Estimates are it will go to $22,000, $24,000 over the next four or five years.

The health bill was passed. It remains to be seen how much that cost curve will bend. And we will work harder at it.

So now let's get to the answer to your question. I think there is no doubt that what companies will do is shift more of that burden to customers and employees. And here is the reason that, A, it is obviously a cost issue to every profit line, but our belief is whether people like this argument or not, if you have to pay 28% or 38% you will shop better. One of the arguments we have made on this issue for the broad --


So this is a good thing, the fact that you will shift more to your employees you think is a good thing for the system?


Well, no, well, I don't want to get quoted on that point. Here is what I would say. What, unfortunately, right, the market in the long-term will fix this problem. That is what will happen.

If our debt gets too high, the rating agencies will downgrade the country. That is what is going to happen, right? And so, the same thing on health care, if we don't bend the cost curve, people will have to set the --


And the way to bend the cost curve is to put more of the burden in the hands of the people who are making the decisions.

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Give more choices to people so they can shop. Look, let me use two examples. They are not perfect, but -- so take LASIK surgery. My guess is if statistics are right, 15% of the people in the room had lasik surgery. Is that a fair thing? I had it. How many people had it? You don't want to admit it.


They are not -- oh, there are a couple. There are a few hands going up.


So when I had LASIK surgery it was not covered by insurance. I interviewed three doctors. I shopped around. I figured out who did it. Same thing. And so there are plenty of ways in the health care world where the market will do a better job.

Now, one of the things in the bill that is good, they will finally start publishing all of the Medicare data. You will start to see and people will start to ask questions. So I think that, in deference to my Democratic friends, some market dynamic here is not a bad thing.

So I think in the long-term we need more market dynamics, so the short answer to your question is I am not going to get up every day and allow our costs to go up 10% every year. I can't let that happen, so we are going to have to shift more and use our scaled economies to try to drive down pricing.

Unidentified Participant

(inaudible question - microphone inaccessible)


All right, last question. We could push some of our employees, for example in the prescription program into -- if we chose to. We have nowhere made that decision, but over time we will have to see what options exist for our Company.


Question in the back.

Bal Das - Kailix Advisors - Analyst

Thank you. Bal Das from Kailix Advisors. Now, over the last many decades in some form or the other, you have been part of and presided fundamentally a technology and technology service Company. I would be interested in your views on, as you see matters evolving, where do you see some of the most important challenges that we as a nation face in technology and innovation, and some of the opportunities in technology and innovation? Thank you.


Okay, so that is a -- let me see if I could, as a businessperson, just focus on that question this way. I think the gap between the capability of the technology and the innovation that needs to occur to deliver new products, new services, new capability is too long.

And what we are finding is either great countries or great companies close that gap. Apple has been good enough to say I know what all this stuff could do. It's magic. But they get the markets faster than everybody else.

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So I think, as a country, we have to stop thinking about, well, all these things will happen naturally. And we have to get ourselves strong willed enough to make them happen sooner. And I think this is the difference between government and business.

I look in my own industry and companies that thought they could ride out the wave didn't ride out the wave. Companies that made the investments and talked about what they needed to do the implementation gap have done a lot better.

So I think, as a country, we don't spend enough on R&D. We don't spend enough on education. And I can down the list. We don't have enough execution skills to go with all of the things that make a difference in terms of all the capable technologies.

Now, one industry you brought up here, the pharmaceutical the medical, the energy, I will bet you they can razzle-dazzle you with wonderful sounding capabilities for the long-term. But I think America is facing a problem where the short-term is going to overtake us if we are not careful. And I really worry about this.

So I am on the last leg of my career here. I am 63. I have never been more worried about the next 10 years than I have been in my entire career.


Because of the --


Because of this question of are we -- is our pace of advancement too slow? And I really worry about that. And I really try to --


And that is a private sector and public sector worry.


I think it is a joint issue for all of us, absolutely. And I think there is an academic and a government flavor here which generally gets the right directional answers here. But there is a clear execution gap. And we lost it the last 16 years. We lost it.

Whether -- no matter what is your preferred Party, and I was here for both -- I have been a CEO 15 years so I was, Clinton and Bush. And I watched it, and we got distracted with all these issues that had nothing to do with making every household stronger, and every job better and every business working better. And so, I am worried about that.

And I think that one of the reasons I agreed to take a leader, a more leadership role in the Business Roundtable is to get a chance to answer a question like this and bang on this question of we have got to be more practical in getting our country to compete a little bit better. We have got to compete.


Question? Right here, please.

Jose Mario - Telefonica - Employee

Hi. It is Jose Mario from Telefonica just to say that in many -- in a big part, I agree with what you said about the broadband market in the United States. It is true that many of the statistics of the areas are not correct. And I agree. You are doing very well.

And, luckily, Europeans are now also looking to the States to see how the revelation here is going of what we are doing. And, luckily enough, we are coping, in many cases the good things of the United States. So that is --

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And one clarification, I just have two cell phones. One is the American one and the other one is the Spanish one because it is true that the roaming charges are high. And they are very high also within Europe because of the fragmented market and, definitely, something that the operators would like to have is a single market in Europe.

And then, my question would be for you. I think that we will agree here in the sector and out of the sector that we are going to have this explosion of data, people, media. But the real challenge for operators like you or like us is how are we going to monetize that explosion because people are used to flat rates.

I am not sure people are -- well, I am sure they are not willing to pay more. So, I would like to see or to hear from you the strategy or putting in place to monetize that explosion of data?


Do you mind if I answer that?


No. I think it is a good question.


Thank you for the question. Thank you for the comments. This goes to the investors so they don't think we are crazy.

So when you look at this question -- so let's look at that dichotomy between a carrier and the Silicon Valley types. So, most people think a carrier wants to charge for every minute on a linear basis in perpetuity, infinity. That's what you guys think, right, because you are right when we do that.

Okay, we don't really want to do that. What we want to do is give you chance to buy a bundle, a session of 10 megabits or a session or a session of 30.

The problem we have is 5% or 10% of the people are the abusers that are chewing up all the bandwidth. That is what happened with music and all that kind of thing.

So what we will do is put in reasonable data plans. And we have done this. We have just introduced a $30 data plan that goes with every one of our Blackberrys or smartphones, or a $10 or a $30 data plan that covers the majority of people who feel that is a fair price. I get to use it for 30, 40 hours and I pay a certain rate.

But when we now go after the very, very high users, the ones who camp on the network all day long, everyday, doing things that who knows what they are doing, --


It's video, right? It's video.


No. But those are the people we will throttle. And we will find them and they will -- we will charge them something else. Now, the dilemma we have is that government will come in and say, well, I am not sure we want you to do that.


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Net neutrality we want.


Net neutrality could be used against that. So the issue is, to answer the question, is we don't want to have a linear pricing scale. We do want to find a way to give the majority of people value to bundles. But we have to make sure we find a pricing plan that takes care of that 10% that is abusing the system. And that is just it.

And therefore, you have to have rules that give us discretion to run our business. Net neutrality could negate the discretion to run your business, and if you take it to its ultimate extreme. So that is just an example. Hope that helps.


He was a plant. That was a plant.


No. He has got the same issue. He has got the same problem.


Other questions?


But we don't want to throttle demand. We don't want to do that, all right? Yes, sir.

Henry Schlosser - Citigroup - Analyst

[Henry Schlosser], Citigroup.


Hang on just a second for the microphone. It is right behind you.

Henry Schlosser - Citigroup - Analyst

Thank you. The FCC says the broadcasters have more spectrum than they need. And they want to take a hunk of it back. Now the broadcasters would argue that that spectrum has a real value and it will permit in the future that you describe, it will permit them to get into businesses and use it in a way apart from broadcasting.

How do you think that issue will wind up, given the strength that broadcasters typically have in Washington? Do you think the FCC will succeed?


Yes. And this is a really good question. Now, of course, if I took the self-serving approach it would be, okay, screw the broadcasters. Let's get their spectrum, and we can put it use in our wireless and cellular business or broadband business.

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My reaction is going to surprise you. I don't think the FCC should tinker with this. I think the market is going to settle this. So, in the long-term, if we can't show that we have applications and services to utilize that spectrum better than the broadcasters, then the broadcasters will keep the spectrum. But let me just give another point. So, the FCC is also --


There is some history there in terms of the agreement that was made with the broadcasters at the time they got their digital spectrum.


That is true, but in all fairness, I have never seen any FCC ever honor any agreement to any prior. That's reason we have -- and that is the reason we have courts because, generally, we end up resolving these things in the courts. And so, look, -- by the way, having been in the business so long, healthy tension is probably not a bad thing, as well, so the people have to test it.

But just let me answer this thing. And not that -- Gus is here so it just reminds me of this. Cable companies have bought spectrum over the last 10 or 15 years that has been lying foul. They have not been using it.

So here the FCC is out running around looking for new sources of spectrum. And we have got probably 150 megahertz of spectrum sitting out there that people own that are not being built up. I don't get that. It just annoys me.

So the issue is there are -- by the way, there are -- not to leave the broadcasters out of the debate, there are lots of issues that we have with retransmission and things of that nature we need to solve, but basically, confiscating the spectrum for -- and repurposing for other things, I am not sure I buy into the idea that that is a good thing to do.


Do you foresee a spectrum problem?


I that yes and no. Now, so here is the way to look at it. To an engineer, we could put a tower every 12 feet, okay? Very expensive and we won't have a spectrum problem. So, if you all want to carry a tower in your back pocket, then I think we are going to have some form of a spectrum issue.

So I think what you need is you need to allow natural forces to drive capital to where they are naturally going to work. So Sprint and Clearwire are building a 4G network. We are building a 4G network. AT&T is going to build one. I think that is good, okay?

If video takes off, could we have a spectrum shortage in five or seven years? Could be, but I think that technology will tend to solve these issues. And I think, as I said, I happen to think that we will advance fast enough that some of the broadcasters will probably think let me cash out and let me go do something different.

So I think the market will settle this. So I don't think we will have a spectrum shortage this document suggests we will.


Question way in the back.


Uh oh. No, no, he can't ask a question.

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Unidentified Audience Member

Hey, critical related, Ivan, picking up on what you just said would you explain your concerns about retransmission, and perhaps explain what it is?


I am not going to do that. I was just having fun with Herb. Look, I think that we pay -- we have agreed to pay a retransmission fee because I think that is kind of the way it is. But, look, I think what we filed in our documents, and you all probably know something about retransmission, but the idea here is that we think the rules around the original deals that broadcasters had need to be modernized a little bit.

And so, the government should sort of level the rules so that there could be good negotiations so we don't end up with the situation we just had in which things go down to the end, and one side can't call the other on the issue. So, look, the bottom line is for cable companies to say there is no value, and therefore, I won't pay something for it, probably not right.

And for broadcasters to ask for the moon is probably not right. So there needs to be some leveling of the rules today so that when negotiations occur, without putting the customer in the middle of a deadline issue. That is how far I will go with that one.


Thank you.

John Jefferson - AT&T - Employee

John Jefferson, the other US telecommunications company. What if --


Good one, good one. All right.


What, if anything, bothers you about the concept of broadband as a basic human right?


And AT&T let you in the room? Okay.


It's a rhetorical question.


Yes. It's a rhetorical question. Well, look, I don't know. I will give you my own opinion on it. I think -- I don't think of those things are human rights. I think people who argue that are way overstepping their bounds.

25




It is like health care is a human right? I don't think so. So, I think we have an obligation as a society to do a better job at distribution and getting it out there, but I don't buy into the idea that basic services turn into human rights. That is -- because I think it destroys all semblance of a capital market, allocation of capital, choices for people.

And so, it is interesting, it comes from -- and we are like brothers in this, right? So the issue is when we look at our industry, it would be unacceptable to leaders in our business to have 50 million people, like they have in the health care industry, opt out of buying our services.

So it just seems to me that is just not an acceptable answer. So how the health care got to where to it got to, with so many people just choosing to think having no insurance was better than having insurance, is a failure of both government and industry.

So, to your question, if we allowed ourselves to provide such a poor product at prices that did not attract people, then we deserve government coming in and doing that. But I don't think that is our history. And I don't think that is the history of most businesses.

So I don't think we should be talking about any of these services as a human right. I think it just leads to a very different society and a very different structure of how things get done in the country. Please remember the statement now. Don't -- right here.


[Herbert Levin]. When you said health care is not a human right, I was reminded that Vice President Cheney also began life as a cable splicer, seems to affect people's judgment.

But my question is very simple. In Washington, DC, I have a home. And Verizon won't provide broadband. And when you ask them -- we have got 30 houses on the block, they say, well, it doesn't pay to put a step up switch for that block. Have a nice day. So we can't get broadband within sight of the Capital dome on a clear day.

I have a home in Vermont, and Verizon decided Vermont was very boring and turned it over to some company that went bankrupt. And the only way I get broadband there is that I had to put up a huge tower of my own. So I am not very impressed that the market provides broadband service. And I visit France, and stay with my French friends and I think it's great.


Do you expect me to answer you now? My guess is --


You moved into the wrong neighborhood.


No, no. Let's get the facts. My guess is in Washington you have a choice. You have a cable company that operates there and you have a satellite that operates there. And the answer is I know you do.

So the issue is -- if your issue is I have to provide you with service because you think that is an obligation I have, I don't agree with that. And so, the issue is if you moved to Vermont, I don't know, when you bought your house did you ask if there was broadband?


Hadn't been invented.


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Hadn't been invented, okay. So the issue is there is choices for this. So my only comment is, as a business, we deploy as widely as we can. But if is it not efficient, I don't think we have an obligation to do it. And you might disagree with that. But -- and you do. But I think we have choices.

Now, the only thing I really find offensive is you comparing me to Cheney, okay?


We are going to move on quickly. Right here.


Mr. Price.


I have a quick question, but I would like to answer one for what Judge Creedal answered. The Chairman answered it very properly. There is plenty of spectrum available, unused spectrum and spectrum they can always buy for competitive value. So if the broadcasters want to be in the spectrum business, they can go out and buy it.

Secondly, I have -- I am really unemployed, but an investor. And I have studied about 60 cellular companies as the Chairman may know and the staff certainly knows. And I came to the conclusion that there was only one cellular that would survive. That was Verizon.

My Board of Directors came to the conclusion pursuant to Sarbanes-Oxley. And after I advised them, they accepted my judgment.

In terms of service to employees, service to customers, build outs, capital, certainly cash flow, there is no company in America and in the world. I went to Italy. I went to Brazil and other places -- that has the cash flow per for its shareholder, and nor has the stock done as well as Verizon.

So in answer to the early -- this is the end. In answer to your earlier question about Vodafone and Verizon, the combination of the two which was discussed prior to your asking the question publicly, I think it would be a great mistake to even consider Vodafone buying Verizon because your stock would tumble.

Vodafone is a great company. It is all over the world. I don't think they know what the hell they own. And to buy Verizon where I believe you and, certainly, Denny Striegel and others in your Company know everything you own, where every tower is, where every cell is, and I have firsthand knowledge as an investor that you know where it is, that is when Verizon should buy Vodafone, regardless of what the capital markets and Moody's says about it. And my congratulations to what you have done.


Thank you.


My grandchildren thank you for their investment in Verizon.


I think we should let you quit while you are ahead.


I am buying him lunch. I am going to buy him lunch.

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Thank you very much. Thank all of you.

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