The problem of free-riding is not new. Predivestiture, non-Bell telephone companies like MCI and Worldcom—but with the notable exception of GTE—invested little in research. Other areas of telecommunications such as cable television, which was able to exploit optical transmission technologies for its new hybrid fiber-coaxial cable deployments in the 1990s, similarly depended on and benefited from new technologies arising from Bell Labs and from government-sponsored research. Today this trend has been accentuated as the fragments of the divested Bell System have greatly curtailed or eliminated research investments, especially those targeted at advancing the general telecommunications technologies available through their suppliers.

Another increasingly used mechanism or trend involves larger companies acquiring smaller innovative start-ups (perhaps in lieu of funding or otherwise supporting in-house research and development work) to stimulate their own growth and innovation. While this trend does seem more oriented toward short-term goals, it underscores the importance of early support or funding for the often high-risk research and development that contribute to the creation of these smaller spin-off companies.

Moving responsibility for research to suppliers increases the volatility of funding. The capital expenditures of service providers are dependent on the rate of change of their revenues, which can fluctuate rapidly, often owing to cyclical technology changes. For example, recent years have seen a sharp downturn in traditional wireline telephony revenues and purchases of new equipment by carriers. Sustaining a high-quality research organization requires stable funding, and volatility and uncertainty can have significant consequences. For example, in recent years, a number of prominent researchers have moved from industry research laboratories to universities as they seek a more stable environment in which to conduct their research.

The Decreasing Time Horizon of Research

The decline in attention to long-term research is quite evident when looking at the history of Bell Labs, the institution that for decades was most closely associated with long-term telecommunications research. Long-term research supported advances in areas such as switching, transmission, and services, and shorter-term research was aimed at operating and improving existing technologies and systems. Although most of the system building and systems engineering and integration were done by developers and system architects, researchers were traditionally heavily involved in the process since they were the ones who had created the fundamental technology on which the new systems were based.

It has become clear that even as the number of researchers was growing in the late 1990s, the former Bell family research enterprise was undergoing significant changes. Because internal corporate management decisions about research and development are proprietary and detailed historical data were not maintained, quantifying this shift is very difficult. However, testimony to the committee and comments received from a number of researchers clearly indicate a qualitative shift in the time horizon for research. Long-term, fundamental research aimed at breakthroughs has declined in favor of shorter-term, incremental and evolutionary projects whose purpose is to enable improvements in existing products and services. This evolutionary work is aimed at generating returns within a couple of years to a couple of months and not at addressing the needs of the telecommunications industry as a whole in future decades. Insiders and outsiders have observed in comments to the committee that the

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