[Senate Hearing 107-1148]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1148
GOVERNMENT ROLE IN PROMOTING THE FUTURE OF THE TELECOMMUNICATIONS
INDUSTRY AND BROADBAND DEPLOYMENT
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
OCTOBER 1, 2002
__________
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska
Virginia CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon SAM BROWNBACK, Kansas
MAX CLELAND, Georgia GORDON SMITH, Oregon
BARBARA BOXER, California PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
Jeanne Bumpus, Republican Staff Director and General Counsel
C O N T E N T S
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Page
Hearing held on October 1, 2002.................................. 1
Statement of Senator Allen....................................... 59
Statement of Senator Burns....................................... 7
Prepared statement........................................... 8
Statement of Senator Breaux...................................... 12
Statement of Senator Dorgan...................................... 9
Statement of Senator Hollings.................................... 1
Article from BusinessWeek/online, dated October 7, 2002,
entitled: When Will the Telecom Depression End?............ 3
Statement of Senator McCain...................................... 6
Statement of Senator Smith....................................... 10
Prepared statement........................................... 11
Witnesses
Huber, Peter W., Senior Fellow, Manhattan Institute for Policy
Research; Partner, Kellogg, Huber, Hansen, Todd and Evans, PLLC 41
Prepared statement........................................... 43
Hundt, Hon. Reed E., Former Chairman, Federal Communications
Commission..................................................... 12
Prepared statement........................................... 14
Lessig, Lawrence, Professor of Law, Stanford Law School.......... 31
Prepared statement........................................... 33
Article from the November/December 2001 Foreign Policy
magazine, entitled The Internet Under Siege................ 34
Mundie, Craig J., Senior Vice President and Chief Technical
Officer, Advanced Strategies and Policy, Microsoft Corporation. 24
Prepared statement........................................... 26
Price, Michael J., Vice Chairman, Evercore Partners, Inc......... 17
Prepared statement........................................... 20
GOVERNMENT ROLE IN PROMOTING THE
FUTURE OF THE TELECOMMUNICATIONS
INDUSTRY AND BROADBAND DEPLOYMENT
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TUESDAY, OCTOBER 1, 2002
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:35 a.m. in room
SR-253, Russell Senate Office Building, Hon. Ernest F.
Hollings, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. ERNEST F. HOLLINGS,
U.S. SENATOR FROM SOUTH CAROLINA
The Chairman. The Committee will come to order. Today we
examine the depression in the telecommunications industry and
again consider policy to help revive the sector. What perplexes
me was that this industry was destined to ensure America's
economic superiority in the 21st century. It was the motor of
growth, we were told. Instead, the telecom depression dragged
our economy into a recession and now threatens our global
competitiveness as critical equipment makers like Corning and
Lucent are staring bankruptcy in the face.
Our telecommunications industry has always been unmatched
in its preeminence. In 1996, we sought to extend that supremacy
with the Telecommunications Act. Six years later, most of the
dazzling promises that led us to pass that legislation remain
unfulfilled. Only now are some promises coming true.
The Bells are suddenly making progress opening their local
markets. Cable is finally offering voice competition in more
markets. There is real competition in the business market.
Millions of residential customers have a choice for local phone
service. Rates are lower than ever in the long distance and
wireless sectors. Broadband is available to 80 percent of
Americans. But just as customers are enjoying the fruits of the
competition, times have never been worse for the companies,
their shareholders, and their employees, over \1/2\ million of
whom have lost their jobs. Bankruptcies, accounting scandals,
overcapacity, and dozens of bad business plans have destroyed
confidence in the industry.
This is not how it was supposed to be. While there is a lot
of finger-pointing going on among the companies and here in
Congress, we need to move beyond that. We need to move beyond
the intramurals up here over Tauzin-Dingell and parity--that
crowd went from the constitutionality--I have never seen such a
group. They wrote the law, and then they immediately went to
court and said it was unconstitutional. Then, the next thing
they said, there was not data. It was not considered.
When we went through the record and found it mentioned 438
times, I think it was, they got off of that and they said, ooh,
we could go rural, we could go rural. We looked at the business
practices as they came to Washington, swearing they could go
rural--they were selling rural just as fast as they could. More
recently it has been broadband, broadband, and then parity.
They have tried every gimmick in the book. If the market
demonstrates anything, it is that competition, not
deregulation, drives the Bells to invest in their networks and
comply with section 271, open markets. That is the record in
the business market, where the Bells responded with cheaper,
newer offerings to combat the CLECs. It is true in the
residential market, where the UNIPI lines lost to competitors,
forcing the Bells to hurry up and comply with the Act, where
they have yet to do so.
Deregulation will not rescue this sector from depression.
What ails telecom goes far beyond the regulations governing the
Bell companies. Any policy solution must recognize that.
Lincoln said years ago, ``the dogmas of the quiet past are
inadequate to the stormy present. The occasion was filled with
difficulty, and he said, we must rise above the occasion. As
our case is new, so must we think anew and act anew.
And so, if we politically can get off of this standoff of
working against each other for the past few years and see what
we can work together on, we might help in saving this
telecommunications economy, and then the Nation's economy. This
is what we have in mind with today's telecommunications
hearing. The wireless companies may need to consolidate and
obtain more spectrum. What we call broadband may not actually
be fast enough. The government may need to subsidize demand
and/or infrastructure to promote the highest speeds needed to
jump-start the industry.
We can consider new technologies like Wi-Fi and unlicensed
spectrum as high speed alternatives, and while I tend to doubt
Bell claims that wholesale pricing regimes discourage
investment, perhaps we should examine that also. With everybody
going broke and declaring bankruptcy, we will take a look at
the revenue margin trends of the wire line operating margins of
Verizon, SBC, Bell South, Sprint, Alltel, Century Tel, Citizens
TDS over the last eight quarters, an average, I would say, of
24 percent for Verizon, 28 percent for Bell South, 31 percent
for Sprint, 36 percent--I used to be in these hearings at the
Public Service Commission back in Columbia, South Carolina,
when we fussed around to make sure they got 12 percent on the
rate of return. As the public interest monopoly guaranteed no
competition, they were guaranteed at least 12 percent on the
rate of return.
The Federal Government does have a history of assisting
industries to preserve America's global competitiveness in the
Seventies with the aerospace industry and Lockheed Martin, in
the Eighties with the auto industry and Chrysler, and with the
semiconductor industry and Sematech.
America also invested in the infrastructure to benefit the
economy as a whole, as with the canals and railroads in the
19th century, the REA, rural electrification, and federal
interstate highway programs in the 20th century, all of which
expanded interstate trade. Investments in higher speed
broadband infrastructure could pay similar dividends.
I welcome the panel that we have today, the most
outstanding panel that we have had in many a year up here. We
left off our Bell friends and our long distance friends to get
away from the yin and the yang of who was right and who was
wrong, and trying to see with some real minds here that maybe
something can be done.
They have the Telecom Depression, when will it end. Without
objection, I will include that article in the record here at
this time. After reading that, I am discouraged. I do not know
that you can get there from here, but we have got five folks
who can tell us if we can. I really am grateful for their
appearance today.
[The information referred to follows:]
BusinessWeek/online, October 7, 2002
Special Report--The Telecom Depression
By Steve Rosenbush, with: Roger O. Crockett, Charles Haddad, Jack
Ewing, and bureau reports
when will the telecom depression end?
The ongoing disaster in telecommunications girds the globe, growing
in one place just when it shows signs of abating elsewhere
The telecom crisis is reminiscent of a classic scene in The African
Queen. Humphrey Bogart and Katharine Hepburn, desperate and lost on the
Ulonga-Bora River, rip pieces of wood off the little steamer and use
them to fuel the vessel's engine. Today's telecom companies, struggling
to survive one of the greatest busts in business history, are slashing
prices below cost and selling precious assets. ``Neither one is a long-
term survival strategy,'' says Stephan Beckert, research director at
TeleGeography Inc., a Washington consultant. Hepburn and Bogart were
rescued by a last-moment stroke of good fortune, but today's telecom
titans won't escape catastrophe so easily. More than a cyclical
downturn, what they're experiencing is a full-blown industrial
depression, one that has wiped out half a million jobs and $2 trillion
in U.S. market value. That's about as much as the savings and loan
crisis of the early 1990s. And turmoil in the $2.3 trillion global
industry shows few signs of abating. In September, Lucent Technologies
Inc. (LU) and French equipment maker Alcatel (ALA) issued dire revenue
warnings and new layoffs. Throughout telecom, frenzied cost-cutters
come up short again and again. They can't catch up to collapsing
revenue or predict the timing of a recovery. ``This is an unprecedented
period,'' says Lucent Chief Executive Pat Russo.
How long will the bloodletting go on? BusinessWeek spent a month
examining the capacity for each type of telecom service, from long-
distance to wireless, and comparing it to worldwide demand. The results
show that capacity continues to dwarf demand. Prices in America and
Europe remain under pressure. Meanwhile, rollouts of new cables promise
to extend excess capacity to regions such as Asia that have been spared
much of the pain to date. ``We're not seeing any turnaround,'' says
BellSouth Corp. CEO Duane Ackerman.
The upshot is that the crisis could last until at least 2004. In
the U.S., traffic at the core of the networks is leaping ahead at 85
percent a year, with Europe and Asia at similar paces. Within two
years, that should soak up excess capacity of networks in operation,
which are running at 35 percent of capacity in the U.S. and Europe and
at higher rates in Asia. An economic upturn, expected by the end of
2003, could spell recovery for U.S. telecom carriers six months later.
Europe is expected to follow suit in late 2004.
But things could get worse. If the world economy continues to
struggle or if telecom companies fail to lop off capacity and come up
with lucrative new data services, this depression could continue
through 2006. Even when recovery arrives, most of the once-robust
telecom players are likely to perform, at best, like stolid, slow-
growing utilities through the end of this decade. Growth is likely to
be 2 percent or 3 percent a year, predicts Lawrence Kenny, head of the
telecom practice at PricewaterhouseCoopers.
The road to recovery for the beleaguered industry involves a three-
stage process. The first stage, happening now, is managing the glut.
This involves slashing costs and struggling to come to terms with
massive debt. This period, which should last another two years, will
continue to drive many companies to the brink of insolvency or beyond.
But relief won't arrive until stage two, consolidation. That's not
likely to come until mid-decade, when the surviving companies have
cleaned up their balance sheets and can afford to snap up rivals who
have been driven to rock-bottom prices--pennies on the dollar.
Far-sighted companies are already at work on the third stage,
transformation. The idea: Players that survive this turmoil will emerge
with new business models. Instead of selling old-fashioned access to a
network, they'll offer a host of value-added services, from encryption
and wireless teleconferencing to management of huge video, music, and
game programs.
They'll need loads of these products to fill up today's empty
pipelines. Much of the build-out was based on dreams for revenue and
traffic growth that fell far short. Internet traffic was supposed to
double every three months, but it's growing at just a quarter of that
pace. Today, only 1 percent to 2 percent of potential long-distance
capacity in North America and Europe is in use. The vast majority is
dormant cable in the ground. No wonder the price of a speedy business
connection between New York and London has fallen 95 percent during the
past three years, to $6,000 a month.
Much of the problem comes from technology itself. Dazzled by the
engineering prowess of optical systems that can download the entire
Library of Congress in a flash, few gave any serious thought to the
economic consequences of wiring the world with these marvels. Now,
super-high-speed technology is out of the lab, and capacity growth is
out of control. This winter, British carrier Cable & Wireless (CWP) and
Alcatel will begin operating a $443 million transatlantic cable called
Apollo. Loaded with the latest in optical and Internet Protocol
communications equipment, the cable's four pairs of hair-thin fibers
will be able to carry 3.2 terabits of data--30 percent more than all
current transatlantic capacity combined.
And just try trimming back that capacity. Gap Inc. can pull last
season's unsold sweaters off the shelves and sell them at discount
prices, and then stock the shelves with a new lineup of higher-priced
goods. But telecom companies can't pull fiber out of the ground. The
result: Capacity, the root of the telecom depression, doesn't go away.
In the midst of this depression, certain sectors, however, remain
healthy. Data from Internet services and network management are growing
10 percent to 20 percent a year for many companies. Trouble is, those
sectors represent only a fraction of telecom revenue. The biggest
sectors, local and long-distance voice, are in decline and are unlikely
ever to grow again. In fact, many companies can see the day when voice
calls will be offered as a complimentary service to accompany lucrative
data subscriptions. ``In our projections, voice will be free,'' says
Ilkka Raiskinen, Nokia Corp.'s vice-president of mobile applications &
services.
Even in wireless, the booming growth business of the past decade,
revenues are flattening out as the wave of new subscribers subsides.
The wireless Internet, the great hope from the bubble years, is
trudging along behind expectations. Says Lawrence T. Babbio Jr., vice-
chairman of Verizon Communications: ``We don't see any growth trends.''
And they don't need much convincing these days to slash capital
spending. SBC Communications Inc. (SBC) Chief Technology Officer Ross
Ireland says he used to buy gear to meet multiyear forecasts. Now SBC
saves money with a just-in-time approach. ``Before the downturn, it
didn't matter if you guessed wrong because you'd just grow into it,''
he says. But current penny-pinching is leaving equipment makers such as
Nortel Networks (NT) and Lucent Technologies struggling to survive. To
make it, they and the rest of the telecom industry face a three-step
recovery program:
WORK OUT THE GLUT. The first period of the recovery, the glut,
entails unremitting pain and apparent paralysis. Even bankrupt carriers
struggle to eke out sales, which means that capacity does not
disappear. Consolidation promises relief. But that's still a ways off.
Carriers are shouldering far too much debt for acquisitions. For this
nasty stage to end, the markets have to work their malicious miracles:
Survivors must clean up their balance sheets, usually at the expense of
investors and creditors. Meanwhile, losers must be ground down
mercilessly, until they are cheap enough to buy.
North America has been wrestling with overcapacity for two years
and is about halfway through the process. A survey of 20 major long-
distance and local trunks shows that networks are running at about half
of ideal capacity, according to telecom researchers RHK Inc. Local and
long-distance carriers generally expand capacity on a route when
capacity utilization reaches 70 percent to 75 percent. The telcos are
slashing their capital spending by up to two-thirds--which puts
recovery at two years away.
A few signs of stabilization are finally emerging in the depressed
market. The price of a high-speed circuit between Los Angeles and New
York, which fell 50 percent, to $13,000, between the summers of 2001
and 2002, has inched up in recent weeks. Sprint (FON) cancelled a high-
speed Internet service called ION, which would have added more
capacity. ``I won't predict when growth will resume, but the market is
cleaning itself up right now,'' says David Dorman, president of AT&T.
One wild card: Some creditors of bankrupt WorldCom Inc. tell
BusinessWeek they want to swap debt for equity in a new company. They
are pushing other creditors to allow WorldCom to emerge from bankruptcy
debt-free, which could spark a price war a year or two from now. Other
carriers might start sooner. ``I'm a low-cost share taker,'' says John
J. Legere, CEO of Global Crossing Ltd., which is expected to emerge
from bankruptcy this year with just $200 million in debt, down from
original liabilities of $12 billion.
In some markets, conditions may get worse before they get better.
Catapulting demand in Asia, for example, has buffered the region from
much of the nastiness to date. Wireline phone revenues in Asia have
fallen 10 percent over the past two years, vs. a 50 percent decline in
North America and a 33 percent fall in Europe. Yet despite a strong
economy, a rising population, and soaring demand for telecom, worrisome
signs are emerging. Later this year, Tyco's telecommunications unit
will begin operating a new undersea cable that will double transpacific
capacity.
The glut grows relentlessly in other markets as well. Last year,
the price of a high-speed circuit between Tokyo and Hong Kong fell 27
percent, to $62,000 a month. But four new cables have begun service in
the region during the past eight months, raising the risk of a price
war.
One big variable is the economy. In the U.S., consumers are both
yakking on the phone and surfing the Net more than ever. This makes up
for falling prices and keeps spending flat. But with corporations
slashing costs and laying off workers, businesses have cut phone bills
by about 6 percent, paring $9 billion from a $141 billion market.
And telecom isn't likely to see a surge in business demand soon. An
uptick in usage should lag economic recovery by six months. That means
relief could arrive in 2004. This could trickle down to the equipment
makers some six months later, producing modest growth in the second
half of 2004.
CONSOLIDATION. It's waiting to happen in Europe as well as North
America--but it will keep waiting for at least another year. If markets
permitted, wireless giants Verizon (VZ), Deutsche Telekom (DT),
Vodafone (VOD), and perhaps Japan's NTT DoCoMo (DCM), would be gobbling
up smaller competitors, driving down costs, and jacking up prices.
Local and long-distance carriers like AT&T (T) and BellSouth (BLS)
might have signed long ago. But debt-wary markets will not tolerate
such maneuvering today. Even the whisper of new equity or debt
offerings provokes warnings of downgrades from rating agencies and
investor stampedes.
For a consolidator on a holding pattern, look no further than
Verizon. The largest of the Bells, Verizon could take a large step
toward dominance by buying a national long-distance carrier, either
WorldCom or AT&T. And it could tighten its grip on the U.S. wireless
market by gobbling up Sprint PCS (PCS). The total outlay for AT&T and
Sprint PCS: perhaps $25 billion--peanuts back in the bubble.
But that bubble has popped, and Verizon, with $45 billion in long-
term debt, is busy cleaning its balance sheet. The company is slashing
investments and paying down debt with its $2.7 billion in net income.
Analysts say that Verizon won't be out shopping for more than a year.
This is where the passage between phases one and two--glut and
consolidation--gets tricky. When one carrier lines up the first big
acquisition, competitive pressure could push others into the hunt. That
would punish balance sheets while hastening a necessary consolidation.
In the next year, though, look for a slew of buyouts on the cheap.
Consolidators like IDT Corp., a Net voice company, are prowling the
littered landscape for bargains. Last year, it acquired bankrupt
carrier WinStar, for $42 million, a small fraction of its book value.
And if WorldCom fails to emerge from bankruptcy as an independent
company, look for IDT and the Bells to buy it in pieces.
Deutsche Telekom, which paid $26 billion to buy upstart wireless
carrier VoiceStream at the height of the market, is now ready to sell
the U.S. carrier for much less so it can pay down its massive debt. So
far, no buyers. When the German company finds one, perhaps within the
next year, the consolidation period will be under way.
TRANSFORMATION. Even while wrestling with capacity and cost issues,
phone companies must focus on the longer term. To survive, many must
undergo a fundamental transformation. In a competitive environment, the
century-old practice of charging customers for access to a network has
produced a punishing, low-margin business.
To make money in an age of plentiful networks, carriers must market
new content and value-added services that flow through their pipes. The
companies already have billing relationships with customers--a huge
advantage--but have to come up with services to sell. ``It's really
about transforming telecom from a transport industry into a services
industry,'' says Microsoft Corp.'s Pieter Knook, corporate vice-
president for network services providers and mobile devices.
This is already happening. Over the past decade, AT&T has grown its
service arm into a $4 billion enterprise that competes with consulting
and service companies. In time, services may become the heart of AT&T
and the carrier division may be spun off.
The signs of change are clearest in wireless. In Japan, wireless
data pioneer NTT DoCoMo has let thousands of other companies offer an
endless array of services, from games to music, on its network. DoCoMo
gets a small fee for every transaction. ``DoCoMo has created a new
model of the telecom as marketplace,'' says consultant Andrei Jezierski
of telecom researcher i2 Partners. AT&T Wireless, a DoCoMo partner,
plans to import the model to the U.S.
In the end, telecom companies may eventually even spin off their
networks and concentrate on services. The first signs of this
fragmentation are evident. Across Europe, so-called virtual phone
companies such as Virgin Mobile are selling wireless subscriptions and
simply renting network capacity from incumbents.
Even in the midst of this industrial depression, the elements of
telecom's recovery, from consolidation to new business models, are
coming into focus. The industry that emerges from this will be humbler
and, yes, poorer, than it was in the bubble. But even in these dark
days, which are every bit as treacherous as the Ulonga-Bora River, the
shape of a new industry is in sight.
Senator McCain.
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
Senator McCain. Thank you, Mr. Chairman. I also read that
article in Business Week, and it starts out by saying the
telecom crisis is reminiscent of a classic scene in the African
Queen. Humphrey Bogart and Katherine Hepburn, desperate and
lost on the Llonga Bora River ripped pieces of wood off the
little steamer and used them to fuel the vessel's engine.
Today's telecom companies, struggling to survive one of the
greatest busts in business history, are slicing prices below
cost and selling precious assets.
So when we discuss broadband, I do not see how we can
discuss it without the background and absolute criticality of
the depression that we are seeing now in the telecommunications
business. If we had had this hearing, Mr. Chairman, just a year
or so ago, we probably would be talking in very different terms
than we are today, and as much as I respect and admire the
experts before us, I would be curious when each of you
predicted that we would be in the situation that we are in
today. I have always believed the Telecom Act of 1996
contributed to this failure, but we will not continue that
debate again today.
I thank the witnesses. Broadband is a crucial issue.
Obviously, all of us want as many Americans as quickly as
possible to acquire broadband services. Starting some massive
multibillion central planning effort to do so is not what I
believe in or support. As you said, Mr. Chairman, we continue
to be gridlocked on this issue here in the Senate and in the
Congress, and clearly we will not act this year. I hope that
perhaps with less campaign contributions maybe it will free
some of us up to be more conducive to negotiations and
agreement. We are gridlocked by the special interests.
We just mentioned the yin and the yang. None of those
special interests will let us move when you give million-dollar
contributions either directly to the candidates or to
institutions that they would set up in their various states
named after them, so I hope, Mr. Chairman, in the coming year
we will be able to work on this issue from the broadest
perspective, the telecom depression, but also on the specific
issue of broadband access. Both of those issues are
indivisible.
I thank you, Mr. Chairman.
The Chairman. Thank you. Senator Burns.
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Welcome to production agriculture. We have
been going through this for a long time, folks. It is nothing
new.
Thank you, Mr. Chairman. I have a statement here, and I
will paraphrase some of it, but I want it to be put in the
record.
I quit reading those things because they are depressing,
and so we will go on with the business at hand of moving
America ahead.
Last year, we requested a comprehensive GAO report on
spectrum management along with my colleagues Senator Hollings
and Senator Inouye and Senator Kerry. This report, which was
unprecedented in its scope, was released yesterday. We have not
had all the time to go through it yet, but I will tell you that
there were some very glaring findings in that report. They are
nothing short of alarming, and I think they beg our immediate
attention.
The report indicates that the U.S. currently lacks a
national spectrum policy, in large part because it is a divided
structure on spectrum management. I should add that both the
FCC and the NTIA has done tremendous work recently in
coordinating their actions due in large part to the efforts of
Chairman Powell and Secretary Victory, since I am concerned
that the split in authority over spectrum authority has bred a
longstanding institutional turf battle between the two
agencies.
Another troubling finding in that report is the direct
state-of-affairs regarding the lack of preparation for the all-
important World Radiocommunication Conference that is upcoming.
The GAO report states that the U.S., and I will quote, ``the
U.S. position on some items has remained unresolved until the
eve of the conference, leaving the U.S. little time to build
preconference support.'' Furthermore, the head of the
delegation, who bears a huge responsibility of negotiating a
unified U.S. position at the conference, typically bears the
rank of Ambassador for only 6 months, and that's not very long.
We could cite numerous other examples found in the report
that faults the U.S. spectrum policy, including severe lack of
accountability and, concerning efficient spectrum use by
federal agencies, I have fundamental reservations about the
very auction method itself, which views spectrum as some sort
of a national resource to be exploited for maximum budgetary
impact. We have seen the results of this sort of thinking in
both Europe and here at home, which, instead of maximizing
revenue, has often resulted in bankruptcies and lawsuits.
Rather, spectrum should be viewed as a technology, which is a
key to the future of the new generation of services for
American consumers and American companies.
Given the stark nature of the GAO findings, I will begin
immediately working on draft spectrum reform legislation. I
look forward to working with my colleagues on the Commerce
Committee that share those concerns. We will also look forward
to the GAO's upcoming early 2003 report on spectrum allocation
practices of other countries, and will incorporate those
findings in the final bill.
I have become convinced of the need for comprehensive
reform after traveling. We made a trip to Asia over the
Memorial Day recess. During my trip to Korea and Japan I met
with top legislators and telecommunications CEOs, and was quite
impressed with the products and services they are making
available to their consumers. Making innovative wireless
services available to consumers is seen as a national priority
in each one of those countries, and I believe the key goal
should also be a national priority for this country, also.
And then there are some new things that are coming down. We
hope to talk to some witnesses today about Wi-Fi and other
unlicensed wireless technologies. It is amazing to see new
entrepreneurs coming up with new ideas, and just using a small
slice of spectrum, unlicensed spectrum I would say for
commercial innovation.
So Mr. Chairman, I appreciate this hearing today. It will
be interesting to hear what our witnesses have to say, but we
are wounded in this industry a little bit, but we are along way
from being dead, or counted among the dying. So we think there
is a great future, and I appreciate the witnesses coming, and I
appreciate your having this hearing today.
Thank you very much.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns,
U.S. Senator from Montana
Thank you, Mr. Chairman. Today's hearing concerns a topic of
crucial importance to the nation's future: how best to accelerate the
pace of broadband deployment. I would like to focus my remarks on the
need for wholesale reform in our nation's spectrum allocation policy.
Last year I requested a comprehensive GAO report on spectrum
management along with my colleagues Senator Hollings, Senator Inouye
and Senator Kerry. This report, which was unprecedented in its scope,
was released yesterday. The GAO's findings are nothing short of
alarming and call for immediate action. The report indicates that the
U.S. currently lacks a national spectrum policy, in large part because
of the divided structure of U.S. spectrum management. I should add that
both the FCC and the NTIA have done tremendous work recently in
coordinating their actions, due in large part to the efforts of
Chairman Powell and Secretary Victory. Still, I am concerned that the
split in authority over spectrum policy has bred longstanding
institutional turf battles between the two agencies.
Another troubling finding by the GAO is the dire state of affairs
regarding the lack of preparation for the all-important World
Radiocommunication Conferences. The GAO report states that ``the U.S.
position on some items has remained unresolved until the eve of the
conference, leaving the U.S. little time to build preconference
support.'' Furthermore, the head of the U.S. delegation, who bears the
huge responsibility of negotiating a unified U.S. position at the
conference, typically bears the rank of ambassador for only six months.
I could cite numerous other examples found in the report about the
faults in current U.S. spectrum policy, including the severe lack of
accountability concerning efficient spectrum use by federal agencies. I
also have fundamental reservations about the very auction model itself,
which views spectrum as some sort of national resource to be exploited
for maximum budgetary impact. We have seen the results of this sort of
thinking in both Europe and here at home, which instead of maximizing
revenue has often resulted in bankruptcies and lawsuits. Rather,
spectrum should be viewed as a technology which is key to the future of
a new generation of services for American companies and consumers.
Given the stark nature of the GAO's findings, I will begin
immediately working on draft spectrum reform legislation. I look
forward to working with many of my colleagues on the Commerce Committee
who share these concerns. I will also look forward to the GAO's
upcoming early 2003 report on the spectrum allocation practices of
other countries and will incorporate these finding into the final bill.
I became more convinced than ever of the need for comprehensive
spectrum reform after traveling to Asia over Memorial Day recess.
During my trip to Korea and Japan, I met with top legislators and
telecommunications CEOs and was quite impressed at the products and
services available to consumers. Making innovative wireless services
available to consumers is seen as a national priority in each country.
I believe this key goal should also be a national priority in the U.S.
Finally, I want to touch on a topic that could yield tremendous
benefits for businesses and consumers--opening up additional spectrum
for unlicensed wireless broadband technologies. Wireless technologies,
with their ability to transfer data over vast distances instantly,
offer an immediate solution for areas of low population density such as
my home State of Montana. I hope that some of our witnesses today will
talk about Wi-Fi and other unlicensed wireless technologies. It is
amazing to see what entrepreneurs have been able to do when this small
slice of spectrum was opened up for commercial innovation. So-called
``hot spots'' of wireless Wi-Fi broadband access are springing up
across the nation. The Wi-Fi innovation and deployment happened in
spite of, not because of, government involvement. We need to see, Mr.
Chairman, what we can do to remove the interference of government and
let such innovations take place.
Right now, Wi-Fi is capable--like DSL and cable--of working only
over limited distances. But market innovators are already moving to
extend its reach. There have been stories in the press recently about
new Wi-Fi equipment that is capable of creating broadband zones of up
to 12 miles. During a recent briefing before the Internet Caucus, MIT
professor Andy Lippman talked about extending the reach of Wi-Fi even
further, up to a radius of 30 miles.
In short, comprehensive spectrum reform has the potential to create
numerous high-tech jobs and jump-start the currently ailing technology
sector of the U.S. economy. We need to create a spectrum plan that will
focus on managing spectrum in a rational way, balancing the needs of
industry and federal agencies. The emphasis of this plan must focus on
developing innovative new wireless technologies.
I look forward to the testimony of the witnesses. Thank you.
The Chairman. Thank you. Senator Dorgan.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much. Let me
start just by saying, I know there are people who are pushing
to have the FCC make decisions right now on some very important
issues. We have a nomination for an FCC Commissioner that is
pending here. It has been pending for a good long while. It is
someone who I care a great deal about, because that person is,
in my judgment, going to bring a rural voice to the Federal
Communications Commission. As has been the case with too many
nominations on key issues, this nomination languishes. I am not
quite sure when we can expect some action on it, but I guess I
would say, I would like the FCC to have a full complement of
commissioners and the input from all the commissioners before
they make some of these decisions.
So we can talk about these things a little later, but I do
not quite know what we do about this. I mean, how on earth can
anybody hold up Jonathan Adelstein's nomination at this point?
This ought to go to the floor for a vote. It ought to be there
today. It is just unforgivable that we have a commission that
has so many important decisions in front of it, we have a
nomination that has been here, as I said, a long while ago,
this Committee has acted on it, and so there it sits on the
floor of the Senate.
Well, I will say more about that on the floor in the next
couple of days, but let me thank the Chairman for holding this
hearing. The issue of broadband is very important. I carry a
Blackberry, which is probably both a blessing and a curse. My
Blackberry that I have with me works just fine in Washington,
D.C., but when you get off the airplane in the Dakotas, you
might as well turn it off, because there is no service at all.
Yet this company would advertise they serve, I think, 90, 94
percent of America.
I have seen ads about these kinds of devices where they
say, we cover 90-some percent of the country. That is true. It
is just the major cities. You gather up all the folks who live
in the major cities, and you have got 90 percent of the
country, but if you take a look at the geography of the
country, devices like this do not work over a large part of the
country.
The reason I mention this is that people tell us that by
2002, 90 percent of the people in this country will have access
to broadband. Well, that is probably true as well, but take a
look at the map and you will find a large portion of the rural
areas of this country that will not have access. In order to
exercise and maximize the full potential of the Internet, you
do need high speed connections. When we wrote the
telecommunications bill, we talked about advanced services,
providing advanced services with Universal Service Fund
support. We were explicit in that as we started in 1996.
So we have a lot to talk about, Mr. Chairman. I know there
is--once again, I say this often, as I was shaving this morning
and getting ready for work, I saw more ads on television by
both sides lobbying back and forth. It is like advertising foot
powder to hear these ads by both sides on the
telecommunications industry, but frankly, we need an FCC that
makes good decisions. We need a Congress that is proactive and
aggressive in setting goals on the buildout of broadband,
enhancing broadband capability for all Americans, and
comporting with the law.
We wrote the law in a very simple way. We said that
Universal Service Fund shall support advanced
telecommunications services. Some people seem to forget that,
Mr. Chairman.
I look forward to the witnesses' testimony.
The Chairman. Thank you. Senator Smith.
STATEMENT OF HON. GORDON SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Thank you, Mr. Chairman. If I may, I have a
longer statement that I would like to include in the record.
The Chairman. It will be included.
Senator Smith. In the interests of time and hearing from
our witnesses I will not read it, but just simply say that I
think broadband deployment can be a significant part of
economic development, particularly in rural places. There are
places in my state where they have in one case, Le Grande,
Oregon, a deployment. A tremendous amount of medical services
are given there through this technology that I think is very,
very promising. I think we need to structure policies and tax
policies in particular to incentivize the deployment of
broadband all over the place, but there are some other
questions I hope to ask when we get to the witnesses.
Thank you, Mr. Chairman.
[The prepared statement of Senator Smith follows:]
Prepared Statement of Hon. Gordon Smith, U.S Senator from Oregon
Thank you Mr. Chairman. Earlier this year, I offered an amendment
to the Energy Bill for a broadband deployment tax credit and said that
the Federal Government has an obligation to support broadband
deployment just as it has supported the construction of highways
throughout our nation. It is only with federal support for the
construction of broadband networks that all consumers will be given
access to the advantages of broadband.
Broadband networks have the power to bring economic development and
opportunity to rural areas, but unfortunately, the communities that
often have little or no broadband service are rural and low-income
areas. We have already seen how the information economy has transformed
major cities and other industrial areas. I believe it is critical that
we bring that information economy to all consumers.
Recent studies show that cost is the biggest impediment to consumer
broadband growth. More than 70 percent of potential broadband consumers
said they were not signing up for broadband because it is too
expensive. I am very concerned about reports that nearly every major
broadband provider increased prices in the past two years.
It is now time for the government to act. The legislation I had
offered would create a two-tiered tax credit designed to spur broadband
deployment around the country. The first tier would provide a 10
percent tax credit to broadband providers for new deployments in rural
and low-income areas. The second tier would provide a 20 percent tax
credit for next-generation broadband deployments. The rural and low-
income credit would be broadly available. For example, in Oregon, 45
percent of the households would be eligible for the first tier of tax
credit. The second tier credit would be available for broadband
deployments throughout the country.
We know that broadband deployment can benefit consumers. In La
Grande, Oregon, which was connected to a nearby fiber optic network in
1999, the community has developed a telemedicine program that makes it
possible for doctors to consult with patients remotely and receive
needed medical information instantly. Other Oregon towns have seen
broadband services help them attract and keep telecommuting residents
and improve local services.
The issue I want to explore with the witnesses today is whether the
current broadband environment is consumer friendly. Is the offering by
telcos and cable operators consumer friendly? Do consumers want more
broadband choices than just two carriers, which are cable and DSL? Is
wireless or satellite broadband technically feasible?
I firmly believe that even as we talk today about increasing
government's role, it is important that our actions are not heavy-
handed. Any government action must have--as its first priority--the
goal of encouraging private businesses to make a substantial investment
in public infrastructure. Making high bandwidth broadband widespread
and affordable is going to require tens of billions of dollars of risky
investment by any company in the telecommunications industry. The
companies who take the risk of deploying last mile broadband facilities
should get the benefit if it succeeds.
Our goal is simply to make sure that basic consumer safeguards are
in place. The widespread availability of broadband technology is
essential to ensuring the United States' technological leadership in
the world. We must make a commitment to a national broadband policy.
I look forward to hearing from our witnesses today about what they
are doing to develop broadband technologies, and what they think we
should do to encourage broadband in the United States. Thank you, Mr.
Chairman.
The Chairman. Thank you. Senator Breaux.
STATEMENT OF HON. JOHN B. BREAUX,
U.S. SENATOR FROM LOUISIANA
Senator Breaux. Thank you, Mr. Chairman. I thank you for
having the hearing and for our witnesses. I think by any
measure that we look at that the telecommunications industry in
this country is in a tailspin. Whether you are a manufacturer
of telecommunications equipment or whether you are a long
distance company, or whether you are a Bell local service
company, you have to look very hard to find someone who has
really been successful.
I think one of the companies let go another 12,000
employees on Friday. Nearly 500,000 jobs have been lost, $2
trillion in market value, just in the last 24 months, and it is
across the board. You could say that, well, long distance is
doing well, and local service is not, but that is not true. The
opposite is not true as well.
There is not a segment of the most important, or one of the
most important industries in this country, that is not in very
serious financial trouble. When this Committee was considering
the legislation a couple of years ago to bring the
telecommunications industry into the 21st century, legislation
which I strongly supported, none of us, I will bet, would have
thought that in a short period of time we would be here looking
at an industry in the shape that it is in today. The real
question is, what do we do to help?
Now, I think there are some things that need to be
considered and looked at, but we just cannot sit back and watch
one of the most important industries in this country go down
the tank. That is what is happening, and I thank you for having
the hearings.
The Chairman. Thank you.
The Committee welcomes our very distinguished panel, Hon.
Reed Hundt, Former Chairman of the Federal Communications
Commission, Mr. Michael J. Price, vice chairman of Evercore
Partners in New York, Mr. Craig Mundie, the senior vice
president and chief technical officer of Microsoft, Mr.
Lawrence Lessig, professor of law at Stanford University, Mr.
Peter Huber, senior fellow of the Manhattan Institute.
Mr. Hundt, Chairman Hundt, glad to see you back.
STATEMENT OF HON. REED E. HUNDT, FORMER CHAIRMAN, FEDERAL
COMMUNICATIONS COMMISSION
Mr. Hundt. Thank you very much, Senator. Thank you all for
inviting me back. It is a great privilege. It has been 5 years
since I have had the opportunity to appear in front of you, and
5 years since I have left public service, and there certainly
has been a lot of water that has gone under the bridge since
then, and some bridges have been washed away.
Senator Burns. Do not worry about the Potomac, though. It
comes and goes.
[Laughter.]
Mr. Hundt. I was trying to think about how to summarize
these last 5 years. Unfortunately, my high school senior son
showed me the book he has just been assigned, which is ``A Tale
of Two Cities,'' and you only have to read the first paragraph
to encapsulate the last 5 years. It has been the best of times
and it has been the worst of times, it has been the time of
hope and it has been the time of despair, and if you will
permit me, I would like in a very, very short period of time to
talk to you about the best of times part and the worst of times
part in my judgment, and then urge you to take the leadership
you have shown so often in the past and take the steps to build
America the finest next generation broadband network in the
world that will reach absolutely everybody, especially
including those of you in your state, Senator Burns, or your
state, Senator Dorgan, who are the most expensive and the most
in need of the government's help in being part of the network.
So the best of times, actually the telecommunications
sector measured by revenue is much bigger now than it was in
1996, when you signed the law. It is much bigger this month
than it was 6 months ago, measured by revenue. It is $277
billion for this year, and was only $164 billion when the
Telecommunications Act was signed. It has been a story of
continued growth measured by revenue. One of the main reasons
is the spectacular new services that have been introduced all
across the country in this time period, the Internet, cell
phones, even broadband itself, with 15 million subscribers in
homes and small businesses.
These are tremendous growth stories from the perspective of
consumers. What lies behind them is the competition has
produced better prices for new services than ever before in the
history of telecommunications. Since 1996, long distance prices
have dropped at a rate of 6 percent per year on a compound
basis. Wireless prices have dropped at 19 percent a year on a
compound basis since 1996, and long haul data dropped in just 1
year 99 percent in price.
As a result of all of these price drops, consumers have
purchased not the same amount for less money, but more for more
money, and every time you read a story about how we have a
consumer-led economy that is just barely keeping us out of
recession, it is in particular, the epitome of that, that the
consumers are buying more in the communications sector.
All of this is because of the magic elixir of competition
and innovation at the same time. We have never seen so much
innovation. We have never seen so much competition. All of this
has also produced net job growth in this time period.
Looking at the telecommunications companies alone, we now
have 1.6 million jobs. We had 1.2 million 10 years ago. Jobs
increased in the telecommunications sector every month from the
signing of the Telecommunications Act until May of the year
2001. Since then, they have begun to decline.
Now let us talk about the worst of times. The worst of
times is that in the last 2\1/2\ years there has been a flight
of capital and a retraction of investment in this particular
sector. It is true at the startup level, it is true at the big
company level, it is true in the public stock markets. We have
the longest bear market in 60 years, and it is most
dramatically the case that we have a bear market in the
telecommunications sector. As investment leaves--we all know
that there is a non-virtuous cycle that goes on. As investment
leaves, companies begin to lay off people, they reduce the
innovation, they do not produce new services, ultimately the
dynamic, innovative strength of the sector fades away and
dissipates because there is not new investment, and as the
services are not introduced, and as companies are not trying to
market them successfully, ultimately the consumers do not buy
more, and the whole economy tips into a recession.
That is where we are right now, I would suggest with great
respect, and with great humility in terms of predicting the
future. We are at the very knife's edge of decision, where it
is absolutely imperative that the government play its right
role in exercising the leadership to make sure that we build on
all these strengths of the real economy and create a new vigor
and a new confidence in the market economy and in the capital
markets in particular.
There are two choices that have to be made. Here is the
first choice, I would say with great respect. Do we adopt a
policy of monopoly and try to consolidate industries through a
pro-monopoly policy at the government level, thereby building
the confidence of investors in those particular industries, or
do we stick with the policy of competition?
Here is the choice that was faced in the crash of the
market in 1929, and the policy choice made over the 10 years
thereafter was to revert to monopoly and have big government
come in and regulate those monopolies and make sure that there
was not too much capital invested in any of the infrastructures
of America. That is why the Federal Communications Commission
was created in 1934.
That is the wrong policy, I would say. That is the policy
that reduces jobs, shrinks investment, reduces innovation,
reduces the number of services, and ultimately will reduce the
size of the economy. The right policy is competition, but the
essential key--and this is the bottom line that I hope will
join in the thoughts already expressed by the Senators and
build a momentum, to the degree my testimony can, for a new
policy of universal service.
The essential extra ingredient to a competition policy is
to have the government look at broadband, look at the new
technologies of fiber and upgrades of existing plants and
wireless, and decide that the government needs to make an
investment of public moneys in jump-starting our broadband
industry. There has never been a communications industry or a
transportation industry in the history of America that did not
benefit from an original government jump start or incentive
plan to get going, and this broadband industry needs that help
now.
[The prepared statement of Mr. Hundt follows:]
Prepared Statement of Hon. Reed E. Hundt, Former Chairman, Federal
Communications Commission
Mr. Chairman and Members of the Committee:
Thank you for inviting me to testify today on the government's role
in the future of telecommunications and broadband deployment. This is a
vital subject and a timely hearing, as the telecommunications sector,
which led the economy through extraordinary growth in the 1990s, is now
leading the capital markets in the wrong direction in this decade. I am
grateful for the opportunity to present my views.
My testimony today reflects only my personal views, and not the
views of any company with which I am associated.
My two key points are that (1) competition is the right policy to
build broadband networks, but (2) to ensure truly high speed and
universal broadband networks, government needs to help pay at least for
the early stages. By year-end, about 15 million homes will have
broadband at speeds approximately 1 megabit per second (``mgbps'').
This Committee should vow to get 100 million homes on broadband at
speeds never less than 10 mgbps by the end of the decade.
I am certain, Mr. Chairman, that you and the other Members of this
Committee know well the current state of the telecommunications sector.
It is in large part because of this Committee's leadership that the
telecommunications sector became an engine of our dynamic economy of
the late 1990s. The 1993 Budget Act opened the airwaves, or spectrum,
to competition by making new licenses available through auction. The
1996 Telecommunications Act opened telephone markets to competition,
and created the single most successful universal service program in
history--the so-called E-Rate, which has put Internet access in 90
percent of all classrooms in less than 5 years. Thanks to your
visionary legislation, competition policies and tremendous
technological innovation have together lowered prices for
communications services. As a result, consumers and businesses have
purchased more services than ever before, and aggregate revenues for
telecommunications have grown steadily from the beginning of the 1990s
to this date. Aggregate employment in the sector also grew steadily
from 1992 until the middle of 2001.
However, capital markets and profits in telecommunications have
been in decline since mid 2000. Inevitably, the decline for investors
has translated to reductions in employment. Net job loss has plagued
telecommunications for more than a year now. Ultimately, if firms do
not make profits and investment does not begin to grow, instead of
shrink, in telecommunications, we will not see the same rate of
innovation, new services, competition, and revenue growth that
characterized the 1990s.
The good news is that, as a whole, the telecom sector continues to
grow rapidly, and consumers are spending a growing percentage of their
income on an expanding array of telecommunications and information
services, while benefiting from sharply lowered prices. The pace of
growth in the U.S. telecommunications industry, including voice and
data, wireline and wireless, is enviable. Total U.S. telecommunications
revenues grew from $164 billion in 1996 to $242 billion in 2000, and
current estimates indicate they will reach $277 billion in 2002, and a
staggering $383 billion in 2006. Although revenues for long distance
voice are shrinking and local voice revenues are under pressure, local
data, long distance data, and wireless voice revenues are growing
rapidly, with the result that revenues for the sector as a whole
continue to grow.
Telecommunications, moreover, is posting healthy gains as measured
by its share of the gross domestic product (GDP). For example, U.S.
telecommunications revenue represents an increasing percentage of GDP--
just over 2 percent in 1996, projected to increase to over 3 percent in
2006, which represents a 4 percent compound annual growth rate.
Residential telecom spending, as a percent of disposable income, is
growing at an even faster rate--at a 5.7 percent compound annual growth
rate.
Customers benefit tremendously from the price reductions that have
occurred over the past few years as Congress' national competition
policy has begun to take hold in all sectors of this industry. Long
distance prices dropped an average of 6 percent per year from 1995 to
2000; wireless prices dropped 19 percent annually; frame relay prices
fell 12.6 percent per year; and OC-3 prices fell a staggering 99
percent annually. Prices for local voice and for Internet access have
been more or less stable over the past few years.
The effects of the competition policy introduced by this Committee,
combined with technological innovation, have been profound.
Specifically, that policy has lowered greatly the barriers to entry in
all segments of the telecommunications sector; fostered extensive
innovation and the deployment of a vast array of new services; and made
possible the explosive growth of the most revolutionary communications
medium in history--the Internet's network of networks. Moreover, the
growth of competition has been largely responsible for both the ongoing
reductions in the prices for most telecommunications services, as well
as the continuing increases in aggregate revenues for the sector since
the early 1990s. The number of jobs in the telecom sector, while down
from its peak in 2001, is still much higher in 2002 (1.6 million jobs)
than it was in 1992 (1.3 million jobs). Finally, net income for the
telecom sector is still positive, although it has shifted away from
some firms and some technologies and toward others.
My conclusion from these facts is that competition provides exactly
what the economists advertise--tremendous advantages for consumers,
opportunities for entrepreneurs and new capital to take risk and
introduce new technologies, and continued growth in the nation's
economy. It is also clear that a competitive sector means that
companies can fail, as they do in every competitive economy, and that
has happened to many firms in telecommunications. Some of the failures
in this sector are due, it seems, to excessive investing in redundant
business models; others to shoddy or even fraudulent practices. Good
sense among investors, better corporate governance, and stricter
regulation in financial markets are all right and proper remedies for
these serious problems. But it is always true that there is some risk
of misallocation of capital by the private sector, as we saw in the
second half of the 1990s. And it is always true that this risk is the
one policy makers should permit investors to take, in return for a
competitive, innovative telecom sector. The potential reward
significantly outweighs the risk.
Despite the recent downturn, I am confident that new capital
spending will return to this industry. I am also quite sure that there
is a right way and a wrong way for government to act during this
prolonged period of disinvestments.
The wrong way is to react by repudiating the benefits of
competition, and blessing monopoly instead. Down that path lies job
loss, price increases, reduced innovation, reduced capital investment
in the aggregate, fewer new services, a smaller GDP, and ultimately the
loss of the spirit of entrepreneurship and risk-taking that is part of
the American spirit.
The right way is to encourage new investment and to foster
competition and innovation. And a key part of the right way is to
recognize that certain essential elements of a modern
telecommunications network are not likely soon to be constructed purely
by the operation of competitive private markets. Therefore, to some
degree public monies should be spent to provide a base or floor for
private sector capital investment. And a final part of the right way is
to identify as well the extent to which public money must be spent to
make essential communications services available and affordable to all
Americans.
All private markets leave some services too expensive to be
affordable to all. For most services and goods, there is no good public
policy reason to address this issue. But part of maintaining democracy
and our uniquely inclusive society is to include everyone in our
country--those in distant rural areas and those in high cost
demographies and those in nonaffluent income classes and those in
classrooms and government buildings and health care facilities--as part
of a single fabric of communication. Just as roads link every small
town and farm to every big city and business location, so we have long
set as a national goal the linking of everyone in America to the most
modern conceivable communications networks.
And where private markets do not through the operation of
innovation and competition make such networks available and affordable
to everyone, the government should step in. At this perilous time for
capital markets it is doubly important to reaffirm this traditional
universal service goal because the right amount of public money, spent
in the right way, can help build essential facilities that are
necessary for the further evolution of America's communications
networks and industries.
Everyone in the information sector acknowledges that the next
technological leap in telecommunications is broadband. Policy and
competition has to date built a broadband market of about 15 million
households and small businesses now subscribing to high speed
connections that deliver data, also known as Internet content and
communication, over cable modem or DSL.
But 15 million is not enough, especially when we see that more than
40 percent of households in Korea, for example, have broadband. We need
a broader dissemination of broadband than private markets, under
today's economic constraints, are likely to provide, if we want to make
broadband universally available and affordable. Moreover, if we want a
communications network that would serve as a base for advanced data
services then we should not be content with the speeds of today's
broadband networks.
Our goal should be speeds to all business users that range from 100
megabits per second to 1 gigabit per second, or even 10 gigabits, and
to all residential users at speeds from at least 10 megabits per second
to 100 megabits. These speeds will require a combination of upgrades of
existing facilities, deployment of new wireless technologies, and
ultimately installation of fiber. Whether it is in connection with
education, business, health care, entertainment, or any other part of
our modern life, a robustly networked America will be a productive
America.
I would like to describe the best approach to broadband as ``Having
our cake and eating it too.'' We should take advantage of competitive
market structures to build this broadband network. That's the cake. And
every American should have broadband available to them; it should be
universal and it should be affordable. That's the eating.
The only way we will get a broadband market that meets these twin
goals is if the government provides the leadership and economic
stimulus to accomplish it. It took government leadership and some
public funding to build a truly national electric system and a truly
national highway system, and it will take it here. Unfortunately, as of
today private capital simply will not invest to build a universal
broadband system. There is capital available to build the current lower
speed version of broadband in parts of the country, where the
population density and the economics of the families or businesses
passed justify the investment, but it is not universal and it is not
high speed enough.
I am sure the Members of this Committee know that there are many
countries around the world that are ensuring that broadband is
universally available, with networks touching every citizen. If they
succeed and we falter, the applications and the hardware for these
networks will be developed in those countries, not here. For decades,
we have been the world leader in technology and telecom, but there is
no guarantee that we will remain the leader.
It would be great if we could sit back and watch private capital
build a universal high-speed network. But it won't happen soon enough,
nor will it be universal, nor will it provide efficient communications
services to all business and residential users and service providers,
unless government establishes a plan to make it happen.
Only if the Federal Government provides leadership, and financial
incentives, will we have the high-speed networks that ensure our
continued world leadership in telecommunications. We can afford it,
because these networks will pay for themselves over time, but they will
not pay for themselves soon enough to attract private capital today and
they will not pay for themselves in important but remote or underserved
parts of the country.
There are many ways that the Federal Government could provide the
leadership. I don't favor government ownership of a broadband network,
but I do favor government assistance to communities that need the help
to provide broadband to all their citizens.
Wireless technologies are advancing rapidly, and we should be doing
everything we can to make sure that the spectrum is available and the
technology is encouraged so wireless can be part of our broadband
solution.
A next generation, universal broadband network will cost tens of
billions of dollars. But we know consumers will pay for the network
over time if the monthly user price is affordable and the applications
are attractive, and everyone is on the network. Therefore, to some
extent this network, like all transportation and communications
services since the telegraph and the first macadam roads, simply has to
be built in order to attract the traffic, as opposed to waiting for
unmet demand to build before the network is built. After all, did
America wait to build roads until after every garage had a car? Not at
all; even while Ford's cars were pouring out of factories in the 1920s,
Secretary of Commerce Herbert Hoover used government leadership to
build a network of roads linking every town and city in the country.
Similarly, even while computer processing speeds continue to double
every couple of years and Internet applications consist of more and
more bits all the time, we need to extend and expand the underlying
communications networks so that they have the reach and the capacity to
take advantage both of processing speeds and the complexity and volume
of Internet applications.
If the government will help finance the network, in time it will
recover the cost, directly from the fees paid by consumers, and
indirectly from the gains in technology and productivity that will be
part of our economy.
Mr. Chairman, as you and the Members of this Committee know from
your deliberations and actions over the last many years, it takes
vision and leadership to ensure that a sector of the economy like
telecommunications remains vigorous, competitive and dynamic.
Unfortunately, it is a job that requires constant attention. As markets
and technology change, new visions are necessary. We will fail if we
sit back, take a break, and hope that we can continue to lead the world
by doing nothing here in Washington. Technology advances and we can
either use the combined forces of the government and the marketplace to
make technological innovation available to all Americans, or others
will take the lead.
The Chairman. Very good. Mr. Price.
STATEMENT OF MICHAEL J. PRICE, VICE CHAIRMAN, EVERCORE
PARTNERS, INC.
Mr. Price. Thank you, Senator Hollings, thank you, Senator
McCain for holding these hearings today. I would like to
present you with my views of what has led to the telecom
meltdown and highlight three observations about industry
structure that need to be addressed, and leave you with one
legislative proposal for you to consider.
The Telecom Act of 1996 created unbridled enthusiasm about
the opportunities available to new competitors. It also created
a consumer-friendly frenzy that has destroyed the balance
sheets and income statements of many of America's largest and
most important companies. In essence, we have too many
competitors, particularly in wireless and in the backbone
transport. Further, our bankruptcy laws are a problem. They do
not eliminate the capacity.
Normally, our bankruptcy process would allow the companies
to reorganize and other companies would buy these assets. Using
today's bankruptcy laws, what many companies do is use these
laws to reorganize. When they reorganize, it is a path to
liquidity, not a path to capacity reduction, and unfortunately
this perpetuation of this capacity is going to make more
trouble for the stronger companies as time goes on. You can
imagine a WorldCom that is reorganized without its debt. How is
it going to compete with AT&T?
So this is a problem that is not at the forefront yet
today, but I think portends a looming problem that is going to
happen in 2 or 3 years from now. To make Senator McCain's point
of what did you predict in October 2000, when I was running my
CLEC in Europe, we saw this coming. In August of 2001 we saw it
coming again, so we have seen this coming for some time.
My concern about the bankruptcy laws in this country is,
with these companies reorganizing debt-free, they will create a
terrible situation for the companies that have been managed
prudently and stay in business.
My second point is that we have too many competitors,
particularly in the overcapitalized wireless industry. In my
testimony, there is a chart which highlights the industry
structure according to Michael Porter's five factors, and you
can see that the wireless industry closely resembles the
airline industry. Six, seven, or eight competitors are too many
for a capital-intensive industry where the switching costs are
near zero.
The wireless industry's capital structures are under
tremendous strain due to the next generation technologies,
upgrades, and marketing costs. In 2002, the wireless industry
is expected to have zero dollars in free cash flow, yet
suffering under $84 billion of debt.
The European market provides evidence that three or four
competitors can still maintain a high degree of competition,
and in fact competition remains fierce, and penetration has
reached 87 percent in Europe. My view is that if the same
competitive environment would exist in the U.S. if there were
three or four competitors. Remember, in the late 1990s, in the
highly concentrated long distance industry, where three
players, AT&T, Sprint, and MCI had an 80 percent market share,
competition was intense. This is fundamentally because the
switching cost was zero, just like it is in the wireless
industry.
To Senator Burns' point, beyond allowing consolidation, I
believe the government should also give additional spectrum to
carriers at no cost. This is not the government's piggy bank. I
do not think it should be seen as such. We can strengthen the
remaining carriers if we give them this additional spectrum and
allow them to have 60 or 70 megahertz per market. In an
engineering context, spectrum is a substitute for capital. It
is a direct economic tradeoff. This will allow the existing
wireless carriers to be a strong, effective competitor to the
land line communication network. In fact, it will also lead to
the RBOCs competing with each other, which I also believe
should be a broader public policy objective.
So let us get to the RBOCs. With huge cash flow EBITDA
margins of 40 percent, and relatively strong balance sheets,
the RBOCs appear to be the stalwart of this industry. However,
this is changing. With the improving coverage of wireless
services, home phones are becoming optional. Several providers,
like LEAP, estimate that 26 percent of their customers have
dropped their home phone. According to USA Today, one in five
Americans think of their cell phone as their primary phone.
The cost advantage of cable is an emerging reality. Coax
cable technically has more capacity for a given level of
technology spender than a copper loop. The average charge for
the high speed Internet service by DSL is $51, and the average
charge for cable is $45, and $10 less if you already have
video, so the cost advantage that they have is reflected in
their pricing. This has led to cable capturing two-thirds of
all broadband customers.
Cable's cost advantage is also due to lack of regulation,
which in my view was a good policy decision. Freed from price
caps 6 years ago, effectively, cable has now upgraded their
plant for high speed Internet and digital cable. In 2 to 3
years, cable telephony will be providing voice, another
effective competitor to the RBOC monopoly in residential voice.
When I recently surveyed a group of telco executives and
asked them what they would give up first, their home phone or
their cable TV, the answer was unanimous, the home phone, so in
this regard the Telecom Act is an apparent success. The
question for this Committee, I would pose, and the FCC, is, if
facilities-based competition to the RBOCs' residential voice
monopoly has become a reality, when should the regulatory
environment be changed?
So now, let us get to the need for broadband, which I think
is an important economic concern. We have all talked about the
technology and telecom depression and the job force and the
wealth loss. Furthermore, the trend of recycled bankrupt assets
becoming viable again will only serve to hurt the strong
players of today. Fundamentally, we need a Technology New Deal.
I would propose a broadband subsidy of $300 per month be paid
to the provider if the provider agrees to provide high speed
Internet service for under $30 a month for a 3-year period.
Just as we had a comment several years ago, ``it's the economy,
stupid,'' the problem with broadband is price. If we fix the
price, we will get the demand caught up.
If we did this for 20 million homes, this plan would cost
$6 billion probably over 2 to 3 years. Without a change in the
regulatory environment, there will be no catalyst to revise
investment in the wireless networks. The equipment
manufacturers will not survive the cutbacks that are currently
being made in the capital budgets.
Lucent and Nortel have reacted by partially reducing their
spending in next-gen technology. If this continues, the U.S.
will lose its competitiveness. Already, Nortel has cut back its
investment in its world-leading optical technology. How much
longer do we expect Lucent to lose $3.5 billion a year and
continue funding Bell Labs, and where would the country be
without Bell Labs?
I leave this Committee with three observations and an
aforementioned proposal.
1. Our bankruptcy laws, which allow stand-alone
restructurings, will perpetuate the overcapacity that plagued
this industry for years to come by maintaining excess capacity
and creating new low cost competitors.
2. The wireless industry resembles the airline industry and
needs to be consolidated and given more spectrum. If they
cannot earn a respectable rate of return on new equipment due
to overcapacity, they will not innovate and continue to invest.
3. The historical regulation of the telcos needs to be
examined in light of the changing regulatory environment, cable
superior technology plant and the increasing quality of
wireless offerings.
4. No constructive action this government could take with
the three previous industries will solve this industry's
problems for a meaningful time, and we need a Technology New
Deal to stimulate demand.
Thank you very much. I appreciate the opportunity to appear
before this Committee.
[The prepared statement of Mr. Price follows:]
Prepared Statement of Michael J. Price, Vice Chairman, Evercore
Partners, Inc.
The Telecom Mess: How did we get here and how are we going to get out
of it?
My name is Michael Price and I am Vice Chairman at Evercore
Partners a private equity and advisory firm based in NY and LA. We have
2 private equity funds that invest in growth capital and one venture
capital fund. Our advisory business focuses on strategic corporate
services and restructuring. I have spent 20 years in the investment
banking and telecom industries. In 1987, I joined Lazard Freres and ran
their global telecom and technology practice. While there I was
responsible for the sale of McCaw Cellular to ATT, SBC's acquisition of
PacTel, the breakup of US West into Media One and US West, and the sale
of MCI to WorldCom. In 1998, I left Lazard Freres to start FirstMark
Communications Europe and raised $600 mm to build a competitive carrier
in Europe.
As an active participant, I have firsthand experience in the
dramatic growth of this industry, as well as its contraction. I have
watched the power shift from the incumbents to the upstarts, and now
back to the traditional participants, the RBOCs and the cable
companies. However, the current state of affairs is more dire than it
has ever been. We are simultaneously fraught with excessive
competition, fragile balance sheets, regulation which is constraining
investment, declining profitability and bankruptcy laws, which recycle
assets and allow them back to be competitive with those companies that
have not restructured.
Furthermore, technology is finally creating alternatives for
consumers to feast on. Wireless is an effective substitute for the
landline telephone. Satellite is an effective substitute for cable TV,
broadband Internet may one day be a substitute for the cinema as video
on demand takes off. These dislocations change the power of the
participants.
Today I would like to present you with my views on what led to the
current telecom meltdown and highlight three observations about
industry structure that need to be addressed and one legislative
proposal for you to consider, which in my view, will lead to a more
rapid recovery of this sector.
First, how did we get here?
The Telecom Act of 1996 created unbridled enthusiasm about the
opportunities available to new telecom competitors. Unfortunately, it
also created a consumer friendly frenzy that is economically
unsustainable. It has destroyed the profitability, and balance sheets
of some of America's most important companies. In essence, we have too
much competition, particularly in wireless, and backbone transport.
Early successes like MFS and Teleport proved that investors could
make money supporting competitive telcos. Extrapolation of early
successes in the marketplace ignored the difficulty in gaining
significant numbers of customers and assumed little competitive
response from incumbents. In the late 1990s, we believed that
telecommunications was a rapid growth industry, as early Internet
growth was estimated at 100 percent per quarter for several quarters.
This forecast gave proof to the capital markets that demand was indeed
boundless. Following the closure of Napster and the rapid achievement
of high Internet penetration, Internet growth returned to a much more
normal pace. However, the future perceived ``demand'' curve of that
moment in time in 1999, dictated the capital budgeting commitments for
the next 18 to 24 months. At the same time, dense wave division
multiplexing (DWDM) and other next-generation technologies multiplied
available capacity, leading to the massive oversupply with which we are
now faced. These points we chronicled in last Thursday's Wall Street
Journal.
Wall Street responded enthusiastically to the ``Telecom Growth
Opportunity'' raising over a trillion in capital and spending in this
industry dramatically increased with North American telco equipment
capital expenditures rising from $28 billion to $123 billion from 1990
to 2000. While capital expenditures in this industry dropped to $110
billion in 2001 and is expected to drop to $78 billion in 2002, this is
still above inflation adjusted 1990 numbers of $39 billion. Thus, if we
return to pre-wireless, pre-hype spending levels, Nortel, Lucent,
Corning and Motorola will see their sales decline further.
Bankruptcy Laws Are A Problem
The good news about telecom deregulation is that it was
extraordinarily successful in bringing new entrants to the market and
creating new choices for consumers. The bad news is that it created too
many competitors who did not have customer bases and this has resulted
in stranded capacity, like the railroads of the 1880s, which will take
years to disappear.
Normally the free markets eliminate capacity, however, our
bankruptcy laws allow companies to be reorganized. In Europe, assets
are liquidated. In the United States, management teams that have
overextended themselves, get to wipe out their debt in Chapter 11, and
start with a cost advantaged capital structure relative to those that
have managed their businesses prudently. This means capacity does not
go away.
In an industry where we have fundamental oversupply, we have a
structural flaw, which in fact encourages the perpetuation of this
oversupply. This recycling of assets, with their debt free capital
structures will put pressure on the ``still'' strong balance sheets.
Thus, the complete ``capitulation'' is still some years away. Chapter
11 is a path to liquidity, not a path to capacity reduction.
My first point is that our bankruptcy laws will actually lengthen
the time period for this industry to recover, and this needs to be
appreciated when prescribing ``fixes'' for this industry.
It's all about Industry Structure
My second point is that we have too many competitors, particularly
in the overcapitalized wireless industry. Michael Porter provides a
framework for evaluating industries structure in terms of the power of
buyers and suppliers, the barriers to entry and exit and switching
costs. The below chart summarizes the competitive nature of the telecom
industry as compared to the airline industry.
------------------------------------------------------------------------
Local
Wireless Wireline Cable Airlines
------------------------------------------------------------------------
Power of:
Buyers High Medium Medium High
Suppliers Medium/Low Medium/Low Medium/Low High
Barriers to:
Enter High Medium High High
Exit High High High High
Switching costs Low Medium/High Medium Low
for consumers
Number of 6-8 Residential: 1-3 1-4 (per
competitors per 1-4 (UNE-P, (satellite) route)
market cable and
RBOC,
wireless)
Business:
many
(Multiple
CLEC's,
IXC's,
RBOC)
Key Industry Excess Competition Competition Labor
Issues competition from from unions, low
, low wireless satellite product
switching and cable, providers, differentia
costs, lack regulation leverage tion,
of product (what is with media supplier
differentia the true companies, concentrati
tion cost of UNE- balance on
P?) sheet
leverage
------------------------------------------------------------------------
Using this analysis, the attractiveness of the wireless industry is
only slightly better than the airline industry due to the airline's
labor and concentrated equipment supplier issues. However, the larger
number of (currently) well-financed wireless competitors may make its
prospects worse. It is important to remember when thinking about this
comparison that the cumulative net profitability in both the airline
and U.S. wireless industry is negative.
The wireline industry is entering a battle with cable. While the
intramural broadband wars have begun, and are painful for the ILEC
which lose money on each DSL line sold, the real fight, over
residential voice, has not yet begun. The outcome of this fight will
determine the fundamental shape of the industry for the next
generation.
So where do we go from here?
Wireless
Six, seven or eight competitors are too many for a maturing,
capital-intensive industry, where the switching costs for the consumer
are near zero. Recently, U.S. wireless penetration reached 50 percent.
While minutes of use have grown dramatically in the last three years
(447 per month for 2002 vs. 171 for 1999) and total revenues have grown
materially ($65 billion in 2001 vs. $33 billion in 1998), we are
entering the final stages of this industry's growth. We may be entering
a phase where the elasticity of demand for voice services approaches
one, i.e., increasing number of minutes leads to flat or negative
revenue. When this condition occurred in the long distance industry in
the late 1990s competition became cutthroat. Furthermore, the industry
is not yet suffering from the churn caused by number portability.
The wireless industry's capital structures are under tremendous
strain due to next generation upgrades and marketing costs. In 2002,
the wireless industry is expected to have $0 in free cash flow (EBITDA
less capital expenditures) while it struggles under $84 billion of net
debt.
A recent report indicated that for the wireless industry to earn 10
percent return on invested capital, given the existing invested capital
base, and the current profit per subscriber, the industry would have to
double the number of subscribers, without investing any additional
capital, and with no pricing degradation. Since this is unlikely, and
as capital needs a return, only two conclusions can be made--
consolidation must occur (to share the invested capital plant), or
competitors need to leave the industry.
The European wireless market provides evidence that the existence
of 3 or 4 competitors still maintains a high degree of competition. In
Europe, wireless competition remains fierce and penetration has reached
87 percent.
My view is that the same competitive environment would exist in the
U.S. if there were 3 or 4 competitors. Remember that in the late 1990s,
in the highly concentrated long distance industry where three players--
AT&T, MCI and Sprint, had 80 percent market share--competition was
intense. The long distance industry, like the wireless industry, has no
switching cost.
Beyond allowing consolidation, the government should give wireless
carriers additional spectrum at little or no cost. In an engineering
context--spectrum is a substitute for capital. We can strengthen the
remaining carriers if we allow them to have 60-70 mhz of spectrum each,
and make it available at low cost. This will allow the remaining strong
carriers to be a truly effective alternative to the landline
communication network and provide other broadband connectivity options.
It will also lead to the RBOCs competing with each other, which ought
to be a broader public policy objective.
Wire Line: They Are Not as Strong as They Seem!
With huge cash flow, EBITDA margins over 40 percent and relatively
strong balance sheets, the RBOCs appear to be the stalwart of this
industry. However, this trend is changing. Aggregate access lines at
SBC are down 4 percent from last year but retail access line growth was
down 6 percent, the difference being low/no profit wholesale access
lines. It is clear that the RBOCs are facing stiff competition from the
wireless and cable companies.
With the improvement in coverage in the wireless services, home
phones are becoming optional. Several providers, including Leap
Wireless and MetroPCS are pursuing a strategy of landline replacement.
Leap estimates that in some markets 26 percent of its customers have
dropped their home phone. According to USA Today, one of 5 Americans
think of their cell phone as their primary phone.
Further, the cost advantage of the cable plant is an emerging
reality. Coax cable technically has more capacity for a given level of
technology expenditures than a copper loop. The average charge for
high-speed Internet service by the telcos (DSL) is $51 per month and
the average cable Internet service is $45 per month, and $10 per month
less if you are already a video subscriber. This pricing advantage
allows cable to capture two-thirds of all broadband customers.
DSL is a transitional product, which has less capacity than coax
cable plant. Eventually, the RBOCs will have to spend billions to
upgrade their networks to fiber just to compete. Nationwide, the
estimate is $100 billion to bring fiber to every home. If they do not
have the profits from existing services they will be unable to afford
the fiber upgrade.
Cable's cost advantage is also due to its lack of regulation. It
was effectively freed from price caps 6 years ago and cable operators
now have upgraded their plant to provide high speed Internet and
digital cable. In 2 to 3 years cable telephony will be implemented
using voice over IP at very low incremental costs to the cable TV
provider. This points to the benefit of regulatory freedom.
The so-called cable triple play (voice, video and high-speed data)
will allow it to offer all of the services of the RBOC, plus video, for
a lower total cost.
When I recently surveyed a group of telco executives and asked
which they would give up first, their home phone or their cable TV, the
answer was unanimously the home phone.
The residential voice business traditionally had one strong
competitor--the RBOC, a monopoly. Today, facilities based alternatives
to residential voice, include six wireless competitors, with at least
one of these wireless competitors offering a landline quality product.
In the near term, the entry of the cable company into residential voice
will add additional facilities based competition. Furthermore, UNE-P's
are allowing AT&T and MCI to capture local customers.
In this regard, the Telecom Act is an apparent success. We have
both facilities and non-facilities based competition. While the RBOCs
still have 80-90 percent market share in residential voice, Verizon
Wireless the largest wireless company has only 25 percent market share
in wireless, and the telco industry has only has 33 percent market
share in high-speed Internet. So, in the ``next gen'' platforms, the
monopoly is waning, and either the rest of market, in the case of
wireless, or cable in high-speed Internet access has the dominant
share. But in the historical monopoly business--residential voice--
competition is here today, before cable launches VOIP.
The question for this Committee, and the FCC, is if facilities
based competition has become a reality, when should the regulatory
environment be changed.
The Need for Broadband
We are in a telecom and technology depression. With 500,000 telecom
jobs lost, hundreds of bankruptcies and two trillion dollars of wealth
lost, the effect of telecom bust have been wide spread. The trend of
recycled bankrupt assets becoming economically viable again, will only
serve to hurt the strong players of today in the years to come. Just as
the 1930's economy needed a ``New Deal'', today, we need a Technology
New Deal.
My proposal would be a subsidy paid to the provider to stimulate
broadband demand. The problem with broadband is that it simply costs
too much. At $20 per month, America has over 60 percent narrowband
Internet penetration. Bill Gates has suggested broadband should cost
$25 per month--it currently costs 60-100 percent more. Broadband
penetration in Korea is 60 percent as the cost of broadband ($22) is
almost the same as narrowband ($20). America will fall behind other
nations if we do not have pervasive residential broadband.
To foster broadband penetration, I would suggest a $300 per
subscriber subsidy be paid to the provider, if the provider agrees to
provide high-speed service (defined as 384 kbs or greater) for under
$30 per month for a 3-year period of time. The payment would be made on
the basis of net adds so the carrier would receive no benefit for
churn. If we created this incentive for the 20 million new broadband
homes the cost would be $6 billion, probably over 2-3 years.
The secondary consequences would be dramatic. Tele-medicine, e-
learning, tele-commuting, and e-commerce would be more pervasive.
Software, hardware, equipment companies and cable and telcos would all
benefit. With a large enough installed broadband base, Hollywood will
be forced to solve the digital rights issues that will eventually
enable entertainment content to be broadly available over the Internet.
This will be the killer-app that will massively stimulate further
broadband demand.
The Korean market benefits from greater density (more apartment
buildings, smaller cities), which has led to the lower cost to provide
broadband and thus spurred its adoption. An American company ON2 is
currently selling VOD using DSL in Korea. It cannot find a market here
in America. Once broadband penetration reaches 30 percent (up from 10
percent today) the cost structure of the entire industry will decline
and these prices will be able to be maintained, eliminating the need
for any possible extension of the subsidy.
Conclusion
Without a change in the regulatory environment, there will be no
catalyst to revive investment in wired and wireless networks. The
equipment manufacturers will not survive the cutbacks the carriers are
making in their capital budgets. Lucent and Nortel have reacted by
partially reducing their spending in next-gen technology. If this
continues, the U.S. will lose competitiveness. Already Nortel has cut
back its investment in its world leading optical technology. How much
longer do we expect Lucent, which is projected to lose $3.5 billion
this year to fund Bell Labs and where would this country be without
Bell Labs?
Without a rebound in carrier spending within 24 months, Corning,
Lucent, and Nortel will either be bankrupt or become subsets of their
current capabilities.
I leave this Committee with 3 observations and the aforementioned
proposal:
1. Our current bankruptcy laws, which allow stand-alone
restructurings, will perpetuate the over-capacity that will
plague this industry for years to come by maintaining excess
capacity and creating ``low cost competitors''. WCOM without
its $30 billion debt burden may now really have a lower cost
structure than AT&T.
2. The wireless industry resembles the airline industry and
needs to be consolidated and, GIVEN more spectrum. If they
cannot earn an acceptable rate of return on new equipment due
to overcapacity--they will not innovate new services and
continue to invest.
3. The historical regulation of telcos needs to be reexamined
in light of the changing competitive environment, cable's
superior technology plant and the increasingly quality of
wireless offerings. Their current regulatory regime may be
appropriate in a monopoly context, but the RBOC monopoly is
rapidly waning.
4. No matter what constructive action this government could
take to the previous three issues, it will not solve the
industry's problems for a meaningful time to come and thus this
industry needs a Technology New Deal to stimulate broadband
demand.
When considering the need for economic stimulus, I ask this
Committee to consider this proposal in the backdrop of our overall
economy, where the airline industry is deeply troubled, the consumer is
becoming weary even before a possible war, and the auto industry may be
``stuffing'' the channel, with unsustainable free financing. In fact,
the auto industry today, reminds me of what Nortel and Lucent did for
their customers in the late 1990s in financing purchases they cannot
afford.
Without some ``HELP'' the technology and telecom markets have
little prospect for recovery until 2005. My hope is that with a
broadband stimulus bill we can enliven the broader technology, media,
telecom and entertainment sectors by creating a new pervasive
communication medium called BROADBAND.
Thank you Chairman Hollings and Members of this Committee for
inviting me to share my views.
The Chairman. The full statement of both Chairman Hundt and
you, Mr. Price, and all the panelists will be included.
Mr. Mundie.
STATEMENT OF CRAIG J. MUNDIE, SENIOR VICE PRESIDENT AND CHIEF
TECHNICAL OFFICER, ADVANCED STRATEGIES AND POLICY, MICROSOFT
CORPORATION
Mr. Mundie. Thank you, Mr. Chairman, Members of the
Committee. My name is Craig Mundie. I am senior vice president
and chief technical officer of advanced strategy and policy at
Microsoft Corporation. I am very glad to be here today, because
I think we bring a different perspective than many witnesses
the Committee would have seen in the past on telecommunications
matters.
I think Microsoft has an almost unique perspective. We are
not in the telecommunications business, but, rather, like many
other high technology companies we are in the business of
developing software and services that will excite consumers
enough that they will actually pay for bigger pipes to run ever
more innovative services and applications and, like everyone in
our industry, we believe that reasonably priced ubiquitous
broadband deployment will advance economic opportunity for the
American public.
The issue today before this Committee is how to use public
policy to promote broadband deployment. We have two
straightforward suggestions. First, make more unlicensed
spectrum available and regulate it minimally but more smartly
than we have in the past.
Second, protect consumers' ability to use the Internet free
from any artificial interference by the underlying network
provider. We understand several Members of the Committee are
exploring proposals to address these goals, and we fully
support those efforts, but time is of the essence, because the
U.S. is falling behind in broadband deployment.
If analyzed closely, current statistics are not all that
encouraging. According to a recent Commerce Department study,
our country has the most households of any nation connected to
a broadband service, over 11 million. However, as a percentage,
our penetration rate is sixth in the world behind the likes of
Sweden, South Korea, and Taiwan, among others, and the recent
trend lines indicate that we are falling further behind rather
than catching up.
The stakes in this debate are not as many would have
portrayed it. The Internet is becoming a programmable medium,
creating a potentially different model of broadband usage, not
just one of carrying media. Therefore, reexamining our policies
is critical, because we are rapidly moving from today's world,
in which the vast majority of activities focuses on publishing
of content, like web pages, to a different world, a world in
which literally millions upon millions of computing devices
will be simultaneously and constantly connected to the
Internet, and on consumers' behalfs will be communicating with
each other continuously.
Again, we need to take two critical steps. First, we need
to have wireless broadband connections that will provide a
third way for consumers. In particular, these are not the
traditional forms of wireless communications that we all know
today as cellular telephony. In particular, policy makers
should more aggressively manage the Nation's unlicensed
spectrum.
These systems are currently referred to today, as they get
deployed, as 802.11b, radio LANs, or more popularly now, Wi-Fi.
More generically, you should think of them or refer to them as
emerging radio technologies. These technologies, and even more
futuristic ones, such as ultra-wide band and software-defined
radios, not only offer an additional means of delivering
packets at high speed, they also allow new business models for
delivering broadband connectivity to emerge. These are not your
same old radio services.
To do this, the industry needs more spectrum for unlicensed
use, and the FCC should adopt spectrum etiquette for the
benefits of all Americans. If policy makers here at the FCC
and, indeed, around the world make more spectrum available for
these devices and simultaneously adopt minimalist spectrum
rules or etiquettes that limit the devices' ability to
interfere with each other, the result will be more choice for
consumers and stimulated innovation in broadband services
overall.
That value proposition, higher speeds with relatively cheap
and fast deployments, is especially compelling in rural areas,
where distance is so frequently the enemy of network efficiency
and a major cost driver for broadband deployments, as well as
in the inner city areas, where the high cost of broadband is a
significant inhibitor to deployment.
The second critical step is to assure consumers' freedom
from network operator interference. We are troubled that in the
ongoing debate on what our Nation's broadband policy should be,
a fundamental lesson from the last century, and that has been
an integral part of the Internet's success up to this point,
may, in fact, be slipping away. Proposals pending before the
FCC would remove longstanding obligations of network operators
not to interfere and not to discriminate in their customers'
use of the network.
At the same time, we see ominous signs that network
operators will frustrate consumers' ability to go anywhere on
the net. Already, cable operators have adopted provisions that
impair the ability of consumers to use their broadband
connection as they see fit. These issues have been documented
to the FCC by a coalition of trade associations, the so-called
High Tech Broadband Coalition.
In response to these kinds of restrictions, the High Tech
Broadband Coalition has developed basic connectivity principles
that we believe should be respected as we enter the broadband
era. The first principle is that consumers should be free to
attach to a broadband network any device which they may choose
to purchase at retail, and second, that consumers should be
able to use these devices to access any application or service
for any lawful purpose, as long as it does not harm the
network. As a company, we have urged the FCC to apply these
principles to both DSL and cable modem providers.
In closing, let me be clear that we are not advocating
forced or open access to these networks, nor do we suggest that
DSL and cable modem providers should be limited in how they
offer their services and bundle it with other services. At
their core, the connectivity principles articulate nothing more
than a noninterference rule.
We commend Chairman Hollings and this Committee for
focusing attention on these issues, and I look forward to
taking your questions. Thank you.
[The prepared statement of Mr. Mundie follows:]
Prepared Statement of Craig J. Mundie, Senior Vice President and Chief
Technical Officer, Advanced Strategies and Policy, Microsoft
Corporation
Mr. Chairman and Members of the Committee, my name is Craig Mundie,
and I am Senior Vice President and Chief Technical Officer of Advanced
Strategies and Policy at Microsoft Corporation. I am glad to be here
today because we bring a different perspective than many witnesses the
Committee has seen on telecommunications matters.
Microsoft's Perspective on the Importance of Robust, Reasonably Priced
Broadband
My company approaches this issue as a worldwide leader in
developing software, services and Internet technologies, as well as a
user of bandwidth. We are not in the telecommunications business, but
rather, we, along with many other high-tech companies, are in the
business of developing software and services that excite consumers
enough so that they actually will pay for ``bigger pipes'' to run ever-
more innovative services and applications. Like others in the tech
community, we see robust, reasonably priced broadband services as
essential for enabling and encouraging the development of new
applications and services that improve worker productivity, enrich
personal lives and business operations, and deliver benefits to every
sector of society and the economy. From that perspective, we see the
topic before this Committee as important not just for the near term.
Getting broadband policy right, here at the onset of the broadband era,
will impact our national welfare and global competitiveness long into
the 21st century.
Two Straightforward Steps That Will Promote Broadband Deployment
There is no doubt that the government, consumers and businesses now
fully recognize the importance of broadband to our communications
capabilities and the economy. As the Federal Communications Commission
explained earlier this year, ``ubiquitous broadband deployment will
bring valuable new services to consumers, stimulate economic activity,
improve national productivity, and advance economic opportunity for the
American public.'' \1\ We agree with that view. Indeed, I expect that
everyone agrees with that view.
---------------------------------------------------------------------------
\1\ In re the Appropriate Framework for Broadband Access to the
Internet Over Wireline Facilities, Universal Service Obligations of
Broadband Providers, Notice of Proposed Rulemaking, CC Docket No. 02-
33, para. 3 (2002).
---------------------------------------------------------------------------
The issue before this Committee, however, is more challenging: How
do we get there? Of course, this is not a new question for this
Committee or our country, but we must approach this question with
renewed urgency, because the United States is losing the footrace for
broadband penetration to other countries. To address the current
inadequacies in U.S. broadband deployment, Microsoft believes this
Committee and other policymakers can take two straightforward steps:
Foster a third mode of broadband communications into the
home by making more spectrum available for exciting, new
unlicensed technologies and subject that spectrum to
minimalist, efficiency-enhancing rules of the road.
Preserve consumers' ability to communicate and interact via
the Internet with each other, and with new services and
applications, without the threat that the underlying network
provider will interfere with those relationships.
We understand that several Members of the Committee are exploring
proposals to address these goals, and we fully support those efforts.
There is Urgency to Act on These Two Fronts
Our industry generally has not engaged in the telecom battles of
the past because we develop software and applications that ride on the
pipes that other industries supply. But we are watching with great
concern because the current course is not aimed at achieving the
broadband future we want as rapidly as possible, and we commend
Chairman Hollings and other Members of this Committee for exploring new
paths to a broadband future. The need for action is great because not
only are we losing ground in the worldwide race to become leaders in
deployment of broadband, the consequences also are being felt from our
perspective in the invention of new broadband applications and
services. If analyzed closely, current statistics are not encouraging.
According to a recent Commerce Department study, our country has the
most households of any nation connected to a broadband service (over 11
million). However, as a percentage, our penetration rate is sixth in
the world, behind the likes of Sweden, South Korea and Taiwan among
others. And recent trends lines indicate that we are falling further
behind, not catching up.
The gravity of the situation is even starker when one realizes that
the rules or laws being contemplated today will shape a future version
of the Internet--a future which is much closer than many of us realize.
A debate that simply focuses on how to download information faster from
a Web site is somewhat akin to a debate at Western Union in 1902 as to
how to move Morse Code faster across the country. We are rapidly moving
from today's world in which the vast majority of activities focus on
publishing of content (be it Web pages or entertainment) and person to
person communications (such as e-mail and instant messaging), to a
different world, one which preoccupies the tech community and motivates
all of us to innovate: a world in which literally millions upon
millions of computing devices will be simultaneously and constantly
connected to the Internet, and on consumers' behalf, will communicate
with each other.
This is not futuristic in the least. Personal digital assistants,
smart appliances and computer-drive set-top boxes are just a few
examples of the types of devices that will need affordable access to
``always on'' high speed connections in order to automatically bring
new services and capabilities into the home. Wouldn't it be convenient
to monitor who is knocking at the front door of your home from the
computer at your office? Or while away for the weekend, license via
your PDA the right to view the latest episode of ``The Sopranos,'' then
have it delivered to your home entertainment system to be viewed when
you get home from your trip? The Internet is in transition. It is
becoming much more than publishing. It is becoming a programmable
environment in which computers, devices and services will need the
ability to constantly stay in touch, and the ability to do so in a
seamless, unfettered way.
To take full advantage of the programmable nature of the Internet,
consumers will need affordable, reliable and fast connections. Some
advocate that, with some rule changes, telephone companies will have
greater incentives to deploy advanced services over their copper and
fiber facilities. The argument is that without greater regulatory
parity between telephone companies and cable operators the former
cannot compete as effectively with the latter. We have a good degree of
sympathy with these arguments and have been working with others in the
tech community to promote greater parity here on the Hill and at the
FCC.
Others have argued that the key to stimulating broadband deployment
is to ensure that high-value content is available online. I know this
Committee has addressed that question in other hearings, and that it is
not the topic of this hearing. I want to assure the Committee that
Microsoft is doing all it can to develop its own compelling content,
services and applications for the broadband era, and we continue to
work with other content producers to give them the tools they need to
develop their own broadband offerings.
At the end, however, we submit that these ongoing efforts are not
enough. Policymakers can and should do more. They should more
aggressively manage the nation's radio spectrum--and in particular,
unlicensed spectrum--in order to give unlicensed wireless broadband
services an opportunity to meet the demand that is simmering for these
new technologies. And equally important, to assure the programmable
Internet that is rapidly approaching is not derailed, policymakers
should reaffirm that network providers should abide by certain, basic
``connectivity principles.''
Wireless Broadband Connections Provide a Third Way for Consumers
Although much of the current debate over broadband services has
focused on two platforms, cable and DSL, that perspective fails to
consider that other technologies are available--other technologies that
can jump-start consumer-driven investment in broadband services,
provided policymakers aggressively manage the regulatory environment to
foster that outcome. Specifically, I am referring to potential advances
in the wireless sector, and even more specifically, advances in the
development of unlicensed radio-based networks. These systems are
currently referred to as 802.11b, radio LANs, or Wi-Fi. More
generically, they might be referred to as ``emerging radio
technologies.'' These technologies--and even more futuristic ones such
as Ultra Wide Band and Software Defined Radios--not only offer an
additional means of delivering packets at high speed, they also allow
new business models for delivering broadband connectivity to emerge.
These are not your ``same old'' radio services. Because they can be
deployed in an unlicensed manner, the broadband connections can be
deployed by the consumers themselves--using their purchasing power and
interest to meet her personal demand for a broadband connection.
If this Committee and policymakers at the FCC and indeed around the
world make more spectrum available for these devices and,
simultaneously, adopt minimalist spectrum rules or ``etiquettes'' that
limit the devices' ability to engage in mutually destructive behavior
(i.e., by interfering with each other), the result will be more choice
for consumers and stimulated innovation in broadband services overall.
These emerging, unlicensed technologies can support the
transmission of data at high speeds for a low cost. That value
proposition--higher speeds with relatively cheap and fast deployment--
is especially compelling in rural areas where distance is so frequently
the enemy of network efficiencies and a major cost driver for broadband
deployment, as well as in inner-city areas where the high cost of
broadband is a significant inhibitor to deployment. With unlicensed
technology and the appropriate wireless rules, Internet access and
other types of community communications could be provided at
comparatively lower costs. This promise is more than theoretical. In
Iowa, one company, Prairie iNet, is using wireless technology attached
to the side of grain silos to operate as a wireless ISP in 150
communities in the Midwest, with 5000 sites. Three fourths of their
customers are residential. Today, Wi-Fi technology is deployed at lower
costs where there is demand to provide consumers with more convenient
wireless Internet access in places away from home and office, such as
coffee shops, airports, and hotels. These ``hot spots'' can provide
speeds of 11 mbps, which is more than 10 times what 3G providers have
promised, and 150 to 200 times faster than dial-up service. For those
who have even greater bandwidth needs, a second generation of Wi-Fi has
the capability to reach speeds of up to 54 mbps. Notably, these
connections can be ``always on,'' assuring a pathway for the type of
programmable services I described above.
What is even more compelling is that consumers who want this degree
of connectivity can buy unlicensed equipment at a consumer electronics
store, just as they buy a cordless telephone today, and then take it
home to install it. An astonishing array of advanced communications
equipment is now being developed, sold, and used to provide wireless
broadband access in the unlicensed bands. These bands provide
tremendous flexibility and are the opposite of the FCC's traditional
approach to spectrum regulation, which reflects centralization of
control and specification of use. The current challenge is to provide
adequate spectrum and the minimalist rules to allow this spectrum to be
used for truly dependable communications by consumers. Current
unlicensed approaches fail in both dimensions, creating a situation
where the more successful the development and deployment of systems the
more congested the environment becomes, frustrating attempts to make
this a sustainable alternative to traditional broadband services.
Congress and the FCC can do more to encourage alternative wireless
broadband connections using unlicensed spectrum. Today, there is
insufficient unlicensed spectrum and, where it is being used for
unlicensed networks, the nation's regulations foster a tragedy of the
commons. Use of the spectrum is so lightly regulated that, to assure
their own success, radio manufacturers may have an incentive to
maximize their use of spectrum to others' detriment and, over the long
haul, likely to their own. Within some groups of manufacturers, there
are incentives to cooperate (such is the case with manufacturers of
today's Wi-Fi systems). However, without a modest degree of greater
regulation, it is difficult to assure cooperation across different
manufacturing interests.
Unlicensed spectrum bands, if upgraded modestly and in a targeted
way, are uniquely well suited for the creation of broadband
infrastructure for a variety of reasons. They are easily accessed by
everyone, from the largest corporations to the smallest entrepreneurs
to individual consumers. Indeed, the 2.4 GHz band, which supports
everything from cordless telephones to radio-based LANs, reflects a
significant level of innovation from entrepreneurs attracted by the
band's easy availability and lack of individual licensing requirements.
It will not surprise the Committee when I say that the market moves a
bit faster than the FCC's licensing bureaus, however well-run.
Moreover, because unlicensed bands are open to anyone who buys a
compliant device at a retail store and attaches it to the network, a
significant proportion of the capital invested in the creation of
networks comes from individuals and businesses, not from network
operators. Wireless networks are truly built from the ground up,
tapping an entirely new source of capital to build networks--the
financial resources of the users themselves. This is remarkable for two
reasons. One, there is no ``build it and they will come'' mentality,
with its legacy of overinvestment and stranded capital. Instead, the
wireless networks will grow organically, fed by new demand and marginal
supply. Two, while this alternative source of capital would be
important at any time, it is critical now, when even the most
successful carriers have difficulty navigating capital markets.
Finally, unlicensed spectrum is open to and can support a
multiplicity of technical solutions and contributes to redundancy,
since future unlicensed wireless networks may be dramatically different
from existing networks.
Over the last few years, the FCC, recognizing the potential
benefits of new technologies and creative uses of spectrum, has been
increasingly willing (with some helpful prodding by this Committee) to
grant individual licensees greater flexibility in how they use their
spectrum. This trend toward relaxing use specifications on individually
licensed bands is an important and worthwhile innovation in spectrum
management. It is in the same spirit of innovation that Congress should
encourage the Commission to adopt more deliberate regulation of some
unlicensed bands. No single approach to spectrum regulation is perfect,
and unlicensed bands are no exception. While current rules for
unlicensed blocks of spectrum have been enormously successful and have
brought numerous benefits to the public, they have also permitted less
than optimal use of available frequencies. Inevitably, where there are
virtually no rules of the road and almost anything is possible, someone
will design a technology that causes harmful interference to other
technologies. Sometimes this is because there is no technologically
feasible alternative. And sometimes it is simply cheaper to shout
noisily than to speak in measured tones. Unfortunately, a spectrum
free-for-all is not only messy, it carries a cost: innovative companies
will steer away from developing competitive unlicensed broadband
networks unless rules of ``spectrum etiquette'' have been developed and
implemented.
For this reason, it would be helpful for Congress to prompt the
FCC, as we have, to foster the creation of more ``unlicensed broadband
spectrum'' specifically for use by emerging technologies, such as Wi-
Fi, UltraWide Band and Software Defined Radios, and new business
models, such as community wireless data networks, that could supplement
cable modem and DSL services. This is not a request for more spectrum
for cellular or PCS or some generation of 3G. Instead, it embraces a
flexible model that is driven by consumer demand and innovation and not
the deployment schedules of cash-strapped carriers. Immediate steps by
the FCC to allocate unlicensed broadband spectrum and adopt minimum
regulations could accelerate the creation of wireless broadband
services across the United States, making service available more
quickly in unserved and underserved areas and stimulating rivalry with
cable modem and DSL services. We strongly support proposals to address
this important spectrum policy.
Consumer Freedom From Network Operator Interference Is Equally
Important
Broadband connections accomplish little, however, if consumers are
deprived of the ability they enjoy now in the dial-up and corporate
network environments to roam freely over the Internet; to run the
applications they want using the equipment they choose; to gather,
create, and share information; and to connect to Web sites with no
interference. Long before the creation of the Internet, policymakers
around the globe recognized that freedom from interference by network
operators was critical to consumer trust, as well as fostering gains in
productivity and economic activity. The history of the Internet itself
has been fundamentally characterized by unfettered consumer ability to
use an unprecedented array of content, services, and applications via
an ever-increasing array of products.
We are troubled, however, that in the ongoing debate on what our
nation's broadband policy should be, this fundamental lesson may have
been lost. Proposals pending before the FCC would remove long-standing
obligations of network operators not to interfere and not to
discriminate, obligations which go back at least to the famous
Carterfone decision and some of which go back to 1934. Watching the
debate from afar, it appears that the freedom to connect to where one
wants--the ultimate hallmark of the Internet--may be left behind. That
would be a mistake, because the Internet and the economy have been well
served by the unfettered ability of consumers to communicate and
interact with each other.
This concept of promoting free interaction among people is embodied
in our policy of universal telephone service--one of the singular
successes of American communications policy. Universal telephone
service is good social policy and good economic policy. Economists
refer to the benefits of adding more people to a network as Metcalf's
Law. The principle is that by adding more users to the communications
network, the economic value of the network increases for every user
exponentially. But if network operators interfere with this
interaction, or erect tolls on broadband highways that drive consumers
in one direction or another, then they will be affirmatively
undermining Metcalf's Law. Those actions, if tolerated by policymakers,
will frustrate our collective goal of adding more users, device types,
and services to the network, benefiting not only new users, but the
users who are already there.
One cannot ignore the ominous signs that network operators will
frustrate consumers' ability to go anywhere on the Internet. As a major
user of broadband services, we think it would be a mistake for
policymakers not to address these concerns.
Already, cable operators have adopted provisions that impair the
ability of consumers to use their broadband connections. These issues
have been documented to the FCC by a coalition of trade associations,
the so-called High Tech Broadband Coalition. In one instance, a
subscriber agreement says:
``You agree to only connect [company] approved equipment to the
[company's] network. . . . You will not connect the [company's
equipment] to any outlet other than the outlet to which the equipment
was initially connected by the [company] installer. [Company] may
relocate the equipment for you within the premises at the your [sic]
request for an additional charge. . . . You understand that failure to
comply with this restriction may cause damage to the [company] network
and subject you to liability for damages and/or criminal prosecution.''
\2\
---------------------------------------------------------------------------
\2\ Full text of the agreement can be provided to the Committee. We
have made the citation generic in order to illustrate our point without
singling out a particular company.
---------------------------------------------------------------------------
In response to these kinds of restrictions, the HTBC has developed
four connectivity principles that should be respected in the broadband
era. And as a company, we have urged the FCC to apply them to both DSL
and cable modem providers. Specifically:
Consumers should have unrestricted access to their choice
of lawful Internet content using the bandwidth capacity of
their service plan.
Consumers should be allowed to run applications of their
choice and to attach any device they choose, as long as they do
not harm the provider's network, enable theft of service or
exceed bandwidth limitations of their service plan.
Consumers should be given meaningful information regarding
the technical limitations of their service.
Let me be clear that we are not advocating ``forced'' or ``open''
access. In our view, network operators need not be compelled to create
a wholesale offering of a ``bit transport service'' so that third-party
Internet service providers can compete with the facility owner on the
same wire. Nor do we suggest that DSL and cable modem providers should
be limited in how they offer their own service and bundle it with other
services. At their core, the connectivity principles articulate nothing
more than a noninterference rule.
These restrictions in existing contracts that interfere with
consumer interests are troubling, and the Committee should review the
complete record on these provisions that the high-tech industry
submitted to the FCC. Unfortunately, the response by some at the
Commission so far has been more of a yawn than of concern, as if those
issues are out of fashion. Speaking on behalf of one company which
thinks every day about how to use broadband capability to deliver
better software and services to consumers, we disagree. As users of the
Internet and builders of the Internet age, we believe that our success
and consumers' enjoyment of the Internet has grown out of one
fundamental feature--the ability of consumers to use their Internet
connections without interference from network providers. This freedom
has made the Internet the powerful communications and technology tool
that it is today, stimulating small business development and benefiting
the entire economy.
Freedom from interference from network operators has fostered
tremendous gains in productivity and economic activity over the past
decade. As this Committee and the FCC develop policies for next
generation networks, now is not the time to abandon this fundamental
feature. The lessons from the 20th century with respect to promoting
consumer access to networks are as valid as ever. They will become all
the more important as the Internet and the growth of Internet-based
data services continue to blur the distinction among facilities-based
broadband services, and as the high-tech community continues to develop
smart devices and smart applications that can be attached to and run
over those facilities. It is time to reaffirm that a basic
noninterference rule--an essential element of today's dial-up Internet
world--must be carried forward into the 21st century.
We commend Chairman Hollings and this Committee for focusing
attention on these issues. Clearly, as our nation develops a broadband
policy, we urge aggressive congressional attention on how to promote
rapid, efficient, Nation-wide, and consumer-friendly broadband
deployment.
The Chairman. Thank you very much. Professor Lessig.
STATEMENT OF LAWRENCE LESSIG, PROFESSOR OF LAW, STANFORD LAW
SCHOOL
Mr. Lessig. Thank you, Mr. Chairman. There is a fundamental
point that is being overlooked in this debate, and I borrowed--
I insist, borrowed--from my hotel this morning some props to
help make this point clear.
There are 65 million homes in America today that have two
networks that enter the home. One network looks like this. It
is the electrical network. The second network looks like this.
It is the cable network. These are fundamentally different
networks. This electrical network does not care whether I plug
a Sony TV into the plug or a Panasonic TV. It does not know
whether my computer runs Microsoft's operating system or
Apple's operating system. Innovators realize that if they
develop technology that plugs into this network, the network
will run it regardless of the preferences of the network owner.
This network, the electrical network, has produced
extraordinary innovation in the past 100 years in America.
The cable network is fundamentally different. A consumer
sits here with this device and selects among the choices that a
network owner has made for him or her. These choices, of
course, are expanding. There are hundreds now, and 20 years ago
there were only 12. But still, the fundamental architecture of
this network is that the network makes the choice about what
you see and what you get to do, and the consequence is, the
only innovators for this network are the network owners.
The Internet took off and was the engine of innovation and
growth when it looked like the electrical network, when anybody
could devise an application or content and plug it into the
network, and the network ran it whether or not the network
owner wanted it. This was the principle of end-to-end in the
network.
Senator McCain asked, who was pessimistic? I am the most
famous pessimist about the Internet. I will take that claim.
Since 1999, I have been predicting this decline. The decline in
the Internet has happened as the Internet has become more and
more like the cable network, as the network owners have
increasingly been in a position to pick and choose what kind of
content and what kind of applications will run on this network.
The key to innovation and growth in the broadband network
is regulation that gets us back to the electrical network a
neutral, end-to-end network. I think the model to get us there
is exactly what Mr. Mundie has just proposed. It is two steps,
but I am going to reverse the order.
The first step is to make sure that the wired providers of
network service respect basic principles of neutrality, that
they, like the electrical service, do not build in technologies
that say, if you are running Microsoft's X-Box you have got to
pay us 12 cents a month, but if you are running something else
you do not have to pay us anything. That principle of
neutrality is critical to assure that the next Microsoft can
come along and displace this Microsoft. Neutrality on this
network is crucial. But to get there it may well be that open
access is no longer the solution. If not, then at least we need
principles of neutrality enforced in a way that the competitive
connectivity principles that Craig has described would. That is
the first step, but the most critical step is what Mr. Mundie
presented first, wireless.
Wireless technologies have got to be opened up for
innovators to develop unimagined technologies for exploiting
this network. This requires not more regulation. This requires
a different kind of regulation. It requires opening up
unlicensed bands and protecting them from government
interference that protects particular uses of the technology.
Mr. Mundie says we need certain minimal protocols, and so long
as we insist on the word, minimal, as minimal as possible, I
agree with that, too.
But those two changes would produce in the wireless context
exactly what the Internet looked like 10 years ago today. It
would produce a platform where an extraordinary range of
competitors could develop new technologies that would drive
demand for broadband services and explode the Internet on
wireless technologies in the way 10 years ago wired
technologies did the same.
The critical focus here is not whether there is regulation
or not regulation. It is the mix of regulation and regulation
to a single end, a platform where the innovators are not the
network owners. The innovators are the people who build
products that plug into that network. There are millions of
those innovators, and it is that diversity of innovation that
produced the explosion that we think of as the great innovation
in the 1990s.
Thank you.
[The prepared statement of Mr. Lessig follows:]
Prepared Statement of Lawrence Lessig, Professor of Law,
Stanford Law School
Every free and competitive market depends upon effective
regulation. From rules that establish property rights, to courts that
enforce contracts, to laws that assure competition is sustained, the
government is always intimately involved in guaranteeing the conditions
under which innovation and growth occur.
The growth of broadband technologies will be no different. It too
will depend upon effective--and the right kind of--regulation. In my
view, the sole and central purpose of that regulation must be to assure
that the network maintains its character as a neutral platform for
innovation. That neutrality produced the growth and innovation of the
Internet in the 1990s. Corrupting that neutrality will stifle growth
within the broadband market, and in markets that are affected by
broadband technologies.
This neutrality was originally a feature of the network's technical
design. Network architects call that design the ``end-to-end''
principle. But the ideals of end-to-end neutrality are familiar within
many ordinary and important networks. Our highway, or ``freeway,''
system was not built to favor one auto manufacturer over another.
Electrical outlets don't function differently if you use a Sony rather
than a Panasonic TV. The post office doesn't deliver mail favorable to
Republicans any more quickly than it delivers mail favorable to
Democrats. All of these networks are instead neutral among a wide range
of compatible uses. These networks are not in the business of picking
and choosing which applications or uses will be allowed. That
neutrality in turn invites an extraordinary range of innovation.
This neutrality in the original Internet is now under threat.
Changes in the ownership of the network, and in the legal rules under
which the network is owned, increasingly give network owners the power
to choose which applications will be allowed on the network, and which
content will be preferred. That power in turn will reduce the incentive
of others to innovate for this network. Corruption of the original
network design will thus stifle growth of the Internet.
Open access regulations were originally intended to resist this
corruption. By promising adequate competition at the physical layer of
the network, the aim of open access requirements was to guarantee that
no single network owner would have sufficient monopoly power to direct
the network's evolution. If one provider biased the access it offered,
then because of open access requirements, users would be able easily to
switch to a different network provider. The competitive market would
thus assure network neutrality without direct government intervention.
There is now a strong resistance to open access regulations. The
current administration seems keen to remove any requirements that
network providers make their facilities open to competition. The FCC is
moving quickly to implement these policies.
Whatever the wisdom of open access, however, it would be a mistake
to remove regulatory oversight from the broadband market. The
consequence of total regulatory retreat will be an extraordinary
concentration in network ownership, leading to less broadband
competition, and higher broadband prices. That concentration will also,
in turn, threaten the neutrality of the network, and hence growth and
innovation on the broadband network.
In my view, it is crucial for Congress to insist that if the FCC
intends to remove open access requirements, then it must substitute a
different form of regulatory oversight to assure network neutrality.
This oversight must guarantee that Internet service providers not
corrupt the principles of neutrality built into the original network,
by providing biased or non-neutral Internet service. Just as the
electricity grid does not discriminate against Japanese televisions, or
GE toasters, Internet service should not discriminate against games
from Microsoft, or streaming video from Disney. And thus if regulation
at the physical layer of the network (open access) is to be terminated,
then regulation at the ``logical'' layer of the network (to assure
neutrality) must take its place. These regulations must assure that
consumers using the network have the freedom to deploy legal content
and legal applications as they choose, not as the network owner
decides. Separating control over the use of the network from ownership
of the wires that make-up the network is a necessary step to restoring
the growth and innovation of the original Internet.
The ``connectivity principles'' described by the High-Tech
Broadband Coalition are an important step to this end. At a minimum,
Congress should require that no change in open access policies be
permitted until the FCC articulates a set of principles like the
``connectivity principles'' to assure that all Internet networks
provide neutral Internet service. The FCC should not unilaterally
withdraw from regulation without assuring that rules to guarantee
network neutrality continue to govern the Internet.
If the FCC implemented a strong set of rules designed to assure
neutrality in the network, then it may well be advisable to relax
requirements of open access. As a first step, in my view, this is the
extent of the change that Congress should allow the FCC to effect. If
this proves insufficient to spur growth in broadband adoption, then as
with highways, it may well make sense for the government to subsidize
further deployment. At this stage, however, I do not believe subsidy is
merited.
In addition to these principles of neutrality, Congress should
direct the FCC immediately to develop spectrum policies that will
enable wireless ``Wi-Fi'' networks to compete with telecom and cable
providers in last-mile service. The greatest innovation and growth in
spectrum usage has come within ``unlicensed'' spectrum bands. This is
consistent with the original history of the Internet, and it follows
from major technological advances in spectrum technologies. It will
soon be apparent that these changes in technology will fundamentally
alter the way in which spectrum is allocated. In the meantime, the
government could spur a great deal of competition in broadband access
by freeing a much greater range of spectrum for unlicensed, or
``commons'' use.
For the first time in the history of network technologies, the
United States is falling behind our allies. Korea, Canada, and even
Japan are increasingly outstripping the United States with fast, cheap
Internet service. In none of these countries has this deployment been
produced by a totally unregulated market. In each case the government
has played an important role in assuring that the infrastructure of the
digital age get deployed quickly and efficiently. So too should our
government.
I have described these principles more fully in the attached
article from Foreign Policy magazine, which I submit for the record.
______
Foreign Policy magazine, November/December 2001
The Internet Under Siege
By Lawrence Lessig
who owns the internet? until recently, nobody. that's because, although
the internet was ``made in the u.s.a.,'' its unique design transformed
it into a resource for innovation that anyone in the world could use.
today, however, courts and corporations are attempting to wall off
portions of cyberspace. in so doing, they are destroying the internet's
potential to foster democracy and economic growth worldwide.
The Internet revolution has ended just as surprisingly as it began.
None expected the explosion of creativity that the network produced;
few expected that explosion to collapse as quickly and profoundly as it
has. The phenomenon has the feel of a shooting star, flaring
unannounced across the night sky, then disappearing just as
unexpectedly. Under the guise of protecting private property, a series
of new laws and regulations are dismantling the very architecture that
made the Internet a framework for global innovation.
Neither the appearance nor disappearance of this revolution is
difficult to understand. The difficulty is in accepting the lessons of
the Internet's evolution. The Internet was born in the United States,
but its success grew out of notions that seem far from the modern
American ideals of property and the market. Americans are captivated by
the idea, as explained by Yale Law School professor Carol Rose, that
the world is best managed ``when divided among private owners'' and
when the market perfectly regulates those divided resources. But the
Internet took off precisely because core resources were not ``divided
among private owners.'' Instead, the core resources of the Internet
were left in a ``commons.'' It was this commons that engendered the
extraordinary innovation that the Internet has seen. It is the
enclosure of this commons that will bring about the Internet's demise.
This commons was built into the very architecture of the original
network. Its design secured a right of decentralized innovation. It was
this ``innovation commons'' that produced the diversity of creativity
that the network has seen within the United States and, even more
dramatically, abroad. Many of the Internet innovations we now take for
granted (not the least of which is the World Wide Web) were the
creations of ``outsiders''--foreign inventors who freely roamed the
commons. Policymakers need to understand the importance of this
architectural design to the innovation and creativity of the original
network. The potential of the Internet has just begun to be realized,
especially in the developing world, where many ``real space''
alternatives for commerce and innovation are neither free nor open.
Yet old ways of thinking are reasserting themselves within the
United States to modify this design. Changes to the Internet's original
core will in turn threaten the network's potential everywhere--
staunching the opportunity for innovation and creativity. Thus, at the
moment this transformation could have a meaningful effect, a
counterrevolution is succeeding in undermining the potential of this
network.
The motivation for this counterrevolution is as old as revolutions
themselves. As Niccolo Machiavelli described long before the Internet,
``Innovation makes enemies of all those who prospered under the old
regime, and only lukewarm support is forthcoming from those who would
prosper under the new.'' And so it is today with us. Those who
prospered under the old regime are threatened by the Internet. Those
who would prosper under the new regime have not risen to defend it
against the old; whether they will is still a question. So far, it
appears they will not.
The Neutral Zone
A ``commons'' is a resource to which everyone within a relevant
community has equal access. It is a resource that is not, in an
important sense, ``controlled.'' Private or state-owned property is a
controlled resource; only as the owner specifies may that property be
used. But a commons is not subject to this sort of control. Neutral or
equal restrictions may apply to it (an entrance fee to a park, for
example) but not the restrictions of an owner. A commons, in this
sense, leaves its resources ``free.''
Commons are features of all cultures. They have been especially
important to cultures outside the United States--from communal tenure
systems in Switzerland and Japan to irrigation communities within the
Philippines. But within American intellectual culture, commons are
treated as imperfect resources. They are the object of ``tragedy,'' as
ecologist Garrett Hardin famously described. Wherever a commons exists,
the aim is to enclose it. In the American psyche, commons are
unnecessary vestiges from times past and best removed, if possible.
For most resources, for most of the time, the bias against commons
makes good sense. When resources are left in common, individuals may be
driven to overconsume, and therefore deplete them. But for some
resources, the bias against commons is blinding. Some resources are not
subject to the ``tragedy of the commons'' because some resources cannot
be ``depleted.'' (No matter how much we use Einstein's theories of
relativity or copy Robert Frost's poem ``New Hampshire,'' those
resources will survive.) For these resources, the challenge is to
induce provision, not to avoid depletion. The problems of provision are
very different from the problems of depletion--confusing the two only
leads to misguided policies.
This confusion is particularly acute when considering the Internet.
At the core of the Internet is a design (chosen without a clear sense
of its consequences) that was new among large-scale computer and
communications networks. Named the ``end-to-end argument'' by network
theorists Jerome Saltzer, David Clark, and David Reed in 1984, this
design influences where ``intelligence'' in the network is placed.
Traditional computer-communications systems located intelligence, and
hence control, within the network itself. Networks were ``smart''; they
were designed by people who believed they knew exactly what the network
would be used for.
But the Internet was born at a time when a different philosophy was
taking shape within computer science. This philosophy ranked humility
above omniscience and anticipated that network designers would have no
clear idea about all the ways the network could be used. It therefore
counseled a design that built little into the network itself, leaving
the network free to develop as the ends (the applications) wanted.
The motivation for this new design was flexibility. The consequence
was innovation. Because innovators needed no permission from the
network owner before different applications or content got served
across the network, innovators were freer to develop new modes of
connection. Technically, the network achieved this design simply by
focusing on the delivery of packets of data, oblivious to either the
contents of the packets or their owners. Nor does the network concern
itself that all the packets make their way to the other side. The
network is ``best efforts''; anything more is provided by the
applications at both ends. Like an efficient post office (imagine!),
the system simply forwards the data along.
Since the network was not optimized for any single application or
service, the Internet remained open to new innovation. The World Wide
Web is perhaps the best example. The Web was the creation of computer
scientist Tim Berners-Lee at the European Organization for Nuclear
Research (CERN) laboratory in Geneva in late 1990. Berners-Lee wanted
to enable users on a network to have easy access to documents located
elsewhere on the network. He therefore developed a set of protocols to
enable hypertext links among documents located across the network.
Because of end-to-end, these protocols could be layered on top of the
initial protocols of the Internet. This meant the Internet could grow
to embrace the Web. Had the network compromised its commitment to end-
to-end--had its design been optimized to favor telephony, for example,
as many in the 1980s wanted--then the Web would not have been possible.
This end-to-end design is the ``core'' of the Internet. If we can
think of the network as built in layers, then the end-to-end design was
created by a set of protocols implemented at the middle layer--what we
might call the logical, or code layer, of the Internet. Below the code
layer is a physical layer (computers and the wires that link them).
Above the code layer is a content layer (material that gets served
across the network). Not all these layers were organized as commons.
The computers at the physical layer are private property, not ``free''
in the sense of a commons. Much of the content served across the
network is protected by copyright. It, too, is not ``free.''
At the code layer, however, the Internet is a commons. By design,
no one controls the resources for innovation that get served across
this layer. Individuals control the physical layer, deciding whether a
machine or network gets connected to the Internet. But once connected,
at least under the Internet's original design, the innovation resources
for the network remained free.
No other large scale network left the code layer free in this way.
For most of the history of telephone monopolies worldwide, permission
to innovate on the telephone platform was vigorously controlled. In the
United States in 1956, AT&T successfully persuaded the U.S. Federal
Communications Commission to block the use of a plastic cup on a
telephone receiver, designed to block noise from the telephone
microphone, on the theory that AT&T alone had the right to innovation
on the telephone network.
The Internet might have remained an obscure tool of government-
backed researchers if the telephone company had maintained this
control. The Internet would never have taken off if ordinary
individuals had been unable to connect to the network by way of
Internet service providers (ISPs) through already existing telephone
lines. Yet this right to connect was not preordained. It is here that
an accident in regulatory history played an important role. Just at the
moment the Internet was emerging, the telephone monopoly was being
moved to a different regulatory paradigm. Previously, the telephone
monopoly was essentially free to control its wires as it wished.
Beginning in the late 1960s, and then more vigorously throughout the
1980s, the government began to require that the telephone industry
behave neutrally--first by insisting that telephone companies permit
customer premises equipment (such as modems) to be connected to the
network, and then by requiring that telephone companies allow others to
have access to their wires.
This kind of regulation was rare among telecommunications
monopolies worldwide. In Europe and throughout the world,
telecommunications monopolies were permitted to control the uses of
their networks. No requirement of access operated to enable
competition. Thus no system of competition grew up around these other
monopolies. But when the United States broke up AT&T in 1984, the
resulting companies no longer had the freedom to discriminate against
other uses of their lines. And when ISPs sought access to the local
Bell lines to enable customers to connect to the Internet, the local
Bells were required to grant access equally. This enabled a vigorous
competition in Internet access, and this competition meant that the
network could not behave strategically against this new technology. In
effect, through a competitive market, an end-to-end design was created
at the physical layer of the telephone network, which meant that an
end-to-end design could be layered on top of that.
This innovation commons was thus layered onto a physical
infrastructure that, through regulation, had important commons-like
features. Common-carrier regulation of the telephone system assured
that the system could not discriminate against an emerging competitor,
the Internet. And the Internet itself was created, through its end-to-
end design, to assure that no particular application or use could
discriminate against any other innovations. Neutrality existed at the
physical and code layer of the Internet.
An important neutrality also existed at the content layer of the
Internet. This layer includes all the content streamed across the
network--Web pages, mp3s, e-mail, streaming video--as well as
application programs that run on, or feed, the network. These programs
are distinct from the protocols at the code layer, collectively
referred to as TCP/IP (including the protocols of the World Wide Web).
TCP/IP is dedicated to the public domain.
But the code above these protocols is not in the public domain. It
is, instead, of two sorts: proprietary and nonproprietary. The
proprietary includes the familiar Microsoft operating systems and Web
servers, as well as programs from other software companies. The
nonproprietary includes open source and free software, especially the
Linux (or GNU/Linux) operating system, the Apache server, as well as a
host of other plumbing-oriented code that makes the Net run.
Nonproprietary code creates a commons at the content layer. The
commons here is not just the resource that a particular program might
provide--for example, the functionality of an operating system or Web
server. The commons also includes the source code of software that can
be drawn upon and modified by others. Open source and free software
(``open code'' for short) must be distributed with the source code. The
source code must be free for others to take and modify. This commons at
the content layer means that others can take and build upon open source
and free software. It also means that open code can't be captured and
tilted against any particular competitor. Open code can always be
modified by subsequent adopters. It, therefore, is licensed to remain
neutral among subsequent uses. There is no ``owner'' of an open code
project.
In this way, and again, parallel to the end-to-end principle at the
code layer, open code decentralizes innovation. It keeps a platform
neutral. This neutrality in turn inspires innovators to build for that
platform because they need not fear the platform will turn against
them. Open code builds a commons for innovation at the content layer.
Like the commons at the code layer, open code preserves the opportunity
for innovation and protects innovation against the strategic behavior
of competitors. Free resources induce innovation.
An Engine of Innovation
The original Internet, as it was extended to society generally,
mixed controlled and free resources at each layer of the network. At
the core code layer, the network was free. The end-to-end design
assured that no network owner could exercise control over the network.
At the physical layer, the resources were essentially controlled, but
even here, important aspects were free. One had the right to connect a
machine to the network or not, but telephone companies didn't have the
right to discriminate against this particular use of their network. And
finally, at the content layer, many of the resources served across the
Internet were controlled. But a crucial range of software building
essential services on the Internet remained free. Whether through an
open source or free software license, these resources could not be
controlled.
This balance of control and freedom produced an unprecedented
explosion in innovation. The power, and hence the right, to innovate
was essentially decentralized. The Internet might have been an American
invention, but creators from around the world could build upon this
network platform. Significantly, some of the most important innovations
for the Internet came from these ``outsiders.''
As noted, the most important technology for accessing and browsing
the Internet (the World Wide Web) was not invented by companies
specializing in network access. It wasn't America Online (AOL) or
Compuserve. The Web was developed by a researcher in a Swiss laboratory
who first saw its potential and then fought to bring it to fruition.
Likewise, it wasn't existing e-mail providers who came up with the idea
of Web-based e-mail. That was cocreated by an immigrant to the United
States from India, Sabeer Bhatia, and it gave birth to one of the
fastest growing communities in history--Hotmail.
And it wasn't traditional network providers or telephone companies
that invented the applications that enabled online chatting to take
off. The original community-based chatting service (ICQ) was the
invention of an Israeli, far from the trenches of network design. His
service could explode (and then be purchased by AOL for $400 million)
only because the network was left open for this type of innovation.
Similarly, the revolution in bookselling initiated by Amazon.com
(through the use of technologies that ``match preferences'' of
customers) was invented far from the traditional organs of publishers.
By gathering a broad range of data about purchases by customers,
Amazon--drawing upon technology first developed at MIT and the
University of Minnesota to filter Usenet news--can predict what a
customer is likely to want. These recommendations drive sales, but
without the high cost of advertising or promotion. Consequently,
booksellers such as Amazon can outcompete traditional marketers of
books, which may account for the rapid expansion of Amazon into Asia
and Europe.
These innovations are at the level of Internet services. Far more
profound have been innovations at the level of content. The Internet
has not only inspired invention, it has also inspired publication in a
way that would never have been produced by the world of existing
publishers. The creation of online archives of lyrics and chord
sequences and of collaborative databases collecting information about
compact discs and movies demonstrates the kind of creativity that was
possible because the right to create was not controlled.
Again, the innovations have not been limited to the United States.
OpenDemocracy.org, for example, is a London-based, Web-centered forum
for debate and exchange about democracy and governance throughout the
world. Such a forum is possible only because no coordination among
international actors is needed. And it thrives because it can engender
debate at a low cost.
This history should be a lesson. Every significant innovation on
the Internet has emerged outside of traditional providers. The new
grows away from the old. This trend teaches the value of leaving the
platform open for innovation. Unfortunately, that platform is now under
siege. Every technological disruption creates winners and losers. The
losers have an interest in avoiding that disruption if they can. This
was the lesson Machiavelli taught, and it is the experience with every
important technological change over time. It is also what we are now
seeing with the Internet. The innovation commons of the Internet
threatens important and powerful pre-Internet interests. During the
past 5 years, those interests have mobilized to launch a
counterrevolution that is now having a global impact.
This movement is fueled by pressure at both the physical and
content layers of the network. These changes, in turn, put pressure on
the freedom of the code layer. These changes will have an effect on the
opportunity for growth and innovation that the Internet presents.
Policymakers keen to protect that growth should be skeptical of changes
that will threaten it. Broad-based innovation may threaten the profits
of some existing interests, but the social gains from this
unpredictable growth will far outstrip the private losses, especially
in nations just beginning to connect.
Fencing off the Commons
The Internet took off on telephone lines. Narrowband service across
acoustic modems enabled millions of computers to connect through
thousands of ISPs. Local telephone service providers had to provide
ISPs with access to local wires; they were not permitted to
discriminate against Internet service. Thus the physical platform on
which the Internet was born was regulated to remain neutral. This
regulation had an important effect. A nascent industry could be born on
the telephone wires, regardless of the desires of telephone companies.
But as the Internet moves from narrowband to broadband, the
regulatory environment is changing. The dominant broadband technology
in the United States is currently cable. Cable lives under a different
regulatory regime. Cable providers in general have no obligation to
grant access to their facilities. And cable has asserted the right to
discriminate in the Internet service it provides.
Consequently, cable has begun to push for a different set of
principles at the code layer of the network. Cable companies have
deployed technologies to enable them to engage in a form of
discrimination in the service they provide. Cisco, for example,
developed ``policy-based routers'' that enable cable companies to
choose which content flows quickly and which flows slowly. With these,
and other technologies, cable companies will be in a position to
exercise power over the content and applications that operate on their
networks.
This control has already begun in the United States. ISPs running
cable services have exercised their power to ban certain kinds of
applications (specifically, those that enable peer-to-peer service).
They have blocked particular content (advertising from competitors, for
example) when that content was not consistent with their business
model. The model for these providers is the model of cable television
generally--controlling access and content to the cable providers' end.
The environment of innovation on the original network will change
according to the extent that cable becomes the primary mode of access
to the Internet. Rather than a network that vests intelligence in the
ends, the cable-dominated network will vest an increasing degree of
intelligence within the network itself. And to the extent it does this,
the network will increase the opportunity for strategic behavior in
favor of some technologies and against others. An essential feature of
neutrality at the code layer will have been compromised, reducing the
opportunity for innovation worldwide.
Far more dramatic, however, has been the pressure from the content
layer on the code layer. This pressure has come in two forms. First,
and most directly related to the content described above, there has
been an explosion of patent regulation in the context of software.
Second, copyright holders have exercised increasing control over new
technologies for distribution.
The changes in patent regulation are more difficult to explain,
though the consequence is not hard to track. Two decades ago, the U.S.
Patent Office began granting patents for software-like inventions. In
the late 1990s, the court overseeing these patents finally approved the
practice and approved their extension to ``business methods.'' The
European Union (EU), meanwhile, initially adopted a more skeptical
attitude toward software patents. But pressure from the United States
will eventually bring the EU into alignment with American policy.
In principle, these patents are designed to spur innovation. But
with sequential and complementary innovation, little evidence exists
that suggests such patents will do any good, and there is increasing
evidence that they will do harm. Like any regulation, patents tax the
innovative process generally. As with any tax, some firms--large rather
than small, U.S. rather than foreign--are better able to bear that tax
than others. Open code projects, in particular, are threatened by this
trend, as they are least able to negotiate appropriate patent licenses.
The most dramatic restrictions on innovation, however, have come at
the hands of copyright holders. Copyright is designed to ensure that
artists control their ``writings'' for a limited time. The aim is to
secure to copyright holders a sufficient interest to produce new work.
But copyright laws were crafted in an era long before the Internet. And
their effect on the Internet has been to transfer control over
innovation in distribution from many innovators to a concentrated few.
The clearest example of this effect is online music. Before the
Internet, the production and distribution of music had become
extraordinarily concentrated. In 2000, for example, 5 companies
controlled 84 percent of music distribution in the world. The reasons
for this concentration are many--including the high costs of
promotion--but the effect of concentration on artist development is
profound. Very few artists make any money from their work, and the few
that do are able to do so because of mass marketing from record labels.
The Internet had the potential to change this reality. Both because the
costs of distribution were so low, and because the network also had the
potential to significantly lower the costs of promotion, the cost of
music could fall, and revenues to artists could rise.
Five years ago, this market took off. A large number of online
music providers began competing for new ways to distribute music. Some
distributed mp3s for money (eMusic.com). Some built technology for
giving owners of music easier access to their music (mp3.com). And some
made it much easier for ordinary users to ``share'' their music with
other users (Napster). But as quickly as these companies took off,
lawyers representing old media succeeded in shutting them down. These
lawyers argued that copyright law gave the holders (some say hoarders)
of these copyrights the exclusive right to control how they get used.
American courts agreed.
To keep this dispute in context, we should think about the last
example of a technological change that facilitated a much different
model for distributing content: cable tv, which has been accurately
hailed as the first great Napster. Owners of cable television systems
essentially set up antenna and ``stole'' over-the-air broadcasts and
then sold that ``stolen property'' to their customers. But when U.S.
courts were asked to stop this ``theft,'' they refused. Twice the U.S.
Supreme Court held that this use of someone else's copyrighted material
was not inconsistent with copyright law.
When the U.S. Congress finally got around to changing the law, it
struck an importantly illustrative balance. Congress granted copyright
owners the right to compensation from the use of their material on
cable broadcasts, but cable companies were given the right to broadcast
the copyrighted material. The reason for this balance is not hard to
see. Copyright owners certainly are entitled to compensation for their
work. But the right to compensation shouldn't translate into the power
to control innovation. Rather than giving copyright holders the right
to veto a particular new use of their work (in this case, because it
would compete with over-the-air broadcasting), Congress assured
copyright owners would get paid without having the power to control--
compensation without control.
The same deal could have been struck by Congress in the context of
online music. But this time, the courts did not hesitate to extend
control to the copyright holders. So the concentrated holders of these
copyrights were able to stop the deployment of competing distributors.
And Congress was not motivated to respond by granting an equivalent
compulsory right. The aim of the recording company's strategy was plain
enough: shut down these new and competing models of distribution and
replace them with a model for distributing music online more consistent
with the traditional model.
This trend has been supported by the actions of Congress. In 1998,
Congress passed the Digital Millennium Copyright Act (DMCA), which
(in)famously banned technologies designed to circumvent copyright
protection technologies and also created strong incentives for ISPs to
remove from their sites any material claimed to be a violation of
copyright.
On the surface both changes seem sensible enough. Copyright
protection technologies are analogous to locks. What right does anyone
have to pick a lock? And ISPs are in the best position to assure that
copyright violations don't occur on their Web sites. Why not create
incentives for them to remove infringing copyrighted material?
But intuitions here mislead. A copyright protection technology is
just code that controls access to copyrighted material. But that code
can restrict access more effectively (and certainly less subtly) than
copyright law does. Often the desire to crack protection systems is
nothing more than a desire to exercise what is sometimes called a fair-
use right over the copyrighted material. Yet the DMCA bans that
technology, regardless of its ultimate effect.
More troubling, however, is that the DMCA effectively bans this
technology on a worldwide basis. Russian programmer Dimitry Sklyarov,
for example, wrote code to crack Adobe's eBook technology in order to
enable users to move eBooks from one machine to another and to give
blind consumers the ability to ``read'' out loud the books they
purchased. The code Sklyarov wrote was legal where it was written, but
when it was sold by his company in the United States, it became
illegal. When he came to the United States in July 2001 to talk about
that code, the FBI arrested him. Today Sklyarov faces a sentence of 25
years for writing code that could be used for fair-use purposes, as
well as to violate copyright laws.
Similar trouble has arisen with the provision that gives ISPs the
incentive to take down infringing copyrighted material. When an ISP is
notified that material on its site violates copyright, it can avoid
liability if it removes the material. As it doesn't have any incentive
to expose itself to liability, the ordinary result of such notification
is for the ISP to remove the material. Increasingly, companies trying
to protect themselves from criticism have used this provision to
silence critics. In August 2001, for example, a British pharmaceutical
company invoked the DMCA in order to force an ISP to shut down an
animal rights site that criticized the British company. Said the ISP,
``It's very clear [the British company] just wants to shut them up,''
but ISPs have no incentive to resist the claims.
In all these cases, there is a common pattern. In the push to give
copyright owners control over their content, copyright holders also
receive the ability to protect themselves against innovations that
might threaten existing business models. The law becomes a tool to
assure that new innovations don't displace old ones--when instead, the
aim of copyright and patent law should be, as the U.S. Constitution
requires, to ``promote the progress of science and useful arts.''
These regulations will not only affect Americans. The expanding
jurisdiction that American courts claim, combined with the push by the
World Intellectual Property Organization to enact similar legislation
elsewhere, means that the impact of this sort of control will be felt
worldwide. There is no ``local'' when it comes to corruption of the
Internet's basic principles. As these changes weaken the open source
and free software movements, countries with the most to gain from a
free and open platform lose. Those affected will include nations in the
developing world and nations that do not want to cede control to a
single private corporation. And as content becomes more controlled,
nations that could otherwise benefit from vigorous competition in the
delivery and production of content will also lose. An explosion of
innovation to deliver mp3s would directly translate into innovation to
deliver telephone calls and video content. Lowering the cost of this
medium would dramatically benefit nations that still suffer from weak
technical infrastructures.
Policymakers around the world must recognize that the interests
most strongly protected by the Internet counterrevolution are not their
own. They should be skeptical of legal mechanisms that enable those
most threatened by the innovation commons to resist it. The Internet
promised the world--particularly the weakest in the world--the fastest
and most dramatic change to existing barriers to growth. That promise
depends on the network remaining open to innovation. That openness
depends upon policy that better understands the Internet's past.
[Want to Know More?]
This essay is based on arguments developed in Lawrence Lessig's The
Future of Ideas: The Fate of the Commons in a Connected World (New
York: Random House, 2001).
The literature on the commons is vast. The notion of the ``tragedy
of the commons'' was made famous in Garrett Hardin's ``The Tragedy of
the Commons'' (Science, Vol. 162, No. 3859, 1968). Hardin's view has
led many to assume that any commons presents a ``tragedy.'' For a
powerful empirical and theoretical view to the contrary, see Elinor
Ostrom's Governing the Commons: The Evolution of Institutions for
Collective Action (Cambridge: Cambridge University Press, 1990). The
importance of the commons within Anglo-American law is well described
in Carol Rose's ``The Comedy of the Commons: Custom, Commerce, and
Inherently Public Property'' (University of Chicago Law Review, Vol.
53, No. 3, 1986).
The enclosing of the commons is described in many contexts. Mark
Lemley and Lessig describe it in the context of cable in ``The End of
End-to-End: Preserving the Architecture of the Internet in the
Broadband Era'' (Stanford: John M. Olin Program in Law and Economics
Working Paper No. 207, 2000). Yochai Benkler discusses a related
enclosure of spectrum in ``Free as the Air to Common Use: First
Amendment Constraints on Enclosure of the Public Domain'' (New York
University Law Review, Vol. 74, No. 2, 1999). For a wonderful review of
copyright's enclosure, see Siva Vaidhyanathan's Copyrights and
Copywrongs: The Rise of Intellectual Property and How It Threatens
Creativity (New York: New York University Press, 2001).
The end-to-end argument was first described in J.H. Saltzer, D.P.
Reed, and D.D. Clark's paper, ``End-to-End Arguments in System Design''
(ACM Transactions on Computer Systems, November 1984) available on the
Massachusetts Institute of Technology's Web site. A later paper,
``Active Networking and End-to-End Arguments,'' by Reed, Saltzer, and
Clark (IEEE Network, May/June 1998) describes the importance of end-to-
end to the network's development. David Isenberg, who developed a
similar set of ideas when he was an engineer at AT&T, praises ``The
Rise of the Stupid Network'' (Computer Telephony, August 1997).
Finally, to track the progress of the range of cases affecting
these matters, see the Web site of the most active organization in
resistance, the Electronic Frontier Foundation. Further resources are
online at the Center for the Public Domain.
For links to relevant Web sites, as well as a comprehensive
index of related Foreign Policy articles, access
www.foreignpolicy.com.
The Chairman. Very good. Mr. Huber.
STATEMENT OF PETER W. HUBER, SENIOR FELLOW,
MANHATTAN INSTITUTE FOR POLICY RESEARCH; PARTNER,
KELLOGG, HUBER, HANSEN, TODD AND EVANS, PLLC
Mr. Huber. Mr. Hundt remarked a moment ago there are two
basic choices, monopoly or competition, but there is a third,
and it can be implemented quite effectively if you have enough
authority, which this city does, and the third is to impose
from above on an industry a suicide pact, and we have come
fairly close to doing that with broadband.
Three concrete facts about broadband which you do have to
come back to after the long bombs are not working: first,
demand for capacity keeps rising. You cannot subsidize your way
to broadband, because broadband is not an end point. It is
going to keep moving out ahead of us for as far forward as
anybody can foresee.
Second, you really have to get concrete about the
engineering here. Most of the traffic and the highest speed
traffic will always be on wires. There are important
innovations to be made in wireless, particularly for rural
service, and for very short haul at the LAN level, and the
short-haul level of things, but for the fastest systems--and
these are solidly rooted in the laws of physics--the wires are
crucial. You have to have a solid cornerstone of competition.
We are lucky to have two wires beginning to approach the
level where they can compete head to head. They can get fully
there if we give the right environment for this, but the
foundation, the essential cornerstone of broadband policy, is
going to be on wires. This is not to take away from wireless
policy, it is very important, but you have get real about where
the traffic really moves, and moves fast.
And finally, the simple, plain, unambiguous fact--deploying
wireline networks is enormously expensive. It takes very long
planning. You have to have long, stable horizons of regulation
and from that, horizons of investment to get these wires rolled
out and to get this capacity upgraded. Without that, it simply
does not happen.
Everybody can point the fingers of blame in this city and,
as you have said, Mr. Chairman, it is not very productive, but
the fact of the matter is, the broadband policies put in place
in the immediate aftermath of the 1996 Act and still in place
today remain an unmitigated disaster. Roughly speaking, the
FCC, with all the best intentions in the world, decided that
one wired medium would be left completely unregulated to do
what it wished in the broadband arena, and the other medium
would be intensely regulated, that it would be unbundled and
price-regulated.
One medium was cut loose to build, the other was told to
negotiate, for however long it might take, how to share this
network that had not even yet been built, and at what price to
share it. And that process has created tremendous delay and
uncertainty, not just for the regulated targets, but for the
entire industry, because the prices are ultimately set, and the
level of competition is ultimately set by the lowest common
denominator on price and on performance, the highest
performance, the lowest price, and so long as there is intense
uncertainty about how one half of this house is going to be
regulated, and very long delays in determining how it is going
to be regulated, you pull down the entire industry.
Time after time, the high tech industry has learned that
the most important thing to get things moving is growth.
Suppressing one rival helps one side in the short term. Cable
has been the short-term beneficiary of these policies that have
suppressed the telephone wire. It has gained approximately a
two-to-one ratio of market share because of these policies in
the short term, but that is not what creates growth in these
infant industries. What cable most needed, what all the
broadband sector needed, was the rapid innovation in digital
content from the software providers and the video and audio and
other providers, and that has not come because the market has
not grown up fast enough.
Cable would have developed faster and would have invested
faster, paradoxical though it may sound, if this entire
industry had been deregulated, and if cable itself had faced
much more competitive rivalry. The same is almost certainly
true on the wireless side. But we got instead from the policies
we put in place--and I know hindsight is easy, but in this case
some of us were even saying it with foresight--we got a bubble
of foolish investment in companies that neither had the
resources nor the technical capability to build broadband
networks.
We had more than 20 major data local exchange carriers,
DLECs, growing together quarter-baked business plans. Nine of
them went public when they had an average of under 300
employees each and they were serving fewer than 2,000 lines
each. That was the kind of euphoria we created between a rising
stock market and a regulatory system that could make profits
for everybody.
The Internet bubble burst, the DLECs burst, and now we have
to return to reality and see how we can get two wires competing
head to head robustly, innovatively. What we ought to be seeing
in this market today is the kind of leapfrog competition that
we have seen in other sectors, with microprocessors and memory
chips and software and so on, where no one player is
solidifying a dominant position, where whoever is fastest today
and has gained some edge in the market today seriously risks
being overtaken a year from now, or 2 years from now, by a
higher-speed, better-performing system.
Once again, wireless has a real role to play here. It will
offer mobility and will offer large footprint service,
particularly in rural areas, that wireline cannot match. But
the backbone, the core competitive battle that has to be the
central focus of people who really want to make a change here,
has got to be wireline service. That is point number one.
Point number two is, you simply cannot subsidize your way
to the end point here. It is almost meaningless, in my view--
forgive me, Mr. Chairman--to talk of jump-starting this
industry. Where did it start? I had a 300-bit-per-second modem
20 years ago; everywhere now, we are 20- to 50- to 100-fold
faster than that, but we are nowhere near fast enough, and to
think that we can ever subsidize our way to some ``fast
enough'' end point is mistaken.
The new digital television standards are talking 20
megabits per second. Microsoft's CEO, or Intel's CEO says we
will not even get excited about broadband until we are at 5
megabits per second, or possibly 100 megabits per second. This
Congress cannot subsidize us to that end point. That kind of
spending will have to come from the private sector; it has to
come from a stable, balanced, competitive environment in which
capital will return to this market and compete head to head.
Thank you very much.
[The prepared statement of Mr. Huber follows:]
Prepared statement of Peter W. Huber, Senior Fellow, Manhattan
Institute for Policy Research; Partner, Kellogg, Huber, Hansen, Todd
and Evans, PLLC
The uncertainty and delay that infect broadband regulation today
are sharply depressing both investment and innovation. What the
industry most needs from Washington isn't any new form of affirmative
regulation or subsidy; the industry needs even-handed and complete
deregulation.
``Broadband'' is a horizon that keeps receding. Microprocessors,
computer buses, local area networks, and Web connections all run much
faster today than they did 5 years ago. There is no reason to expect
that our pursuit of higher speed in the processing and delivery of bits
will ever end. Modem speeds on ordinary dial-up phone lines increased
more than a hundred-fold over the last two decades. Broadcasting
bandwidth progressed from radio to analog television to cable and
digital satellite; the new digital television standard provides
effective transmission speeds (with compression) of almost 20 megabits-
per-second (Mbps). Speeds of 10 Mbps used to be quite adequate for
office LANs, but 100 Mbps is now commonplace. Intel CEO Craig Barrett
has remarked that ``broadband'' only ``get[s] exciting when you get to
5 megabits per second or even 100 mbps.'' By the time those connection
speeds become widely available, however, they will no longer be
exciting. New applications will inevitably emerge to push the threshold
of excitement out further still.
Demand for broadband isn't uniform across users, either.
Businesses, universities, schools, and residences have different needs.
Some require full two-way capabilities, others require mobility, others
need far more bandwidth in one direction than in the other.
Sound policy must start with a clear understanding of how dynamic
and varied broadband markets really are. Demand for broadband
connectivity, and the technologies that supply it, evolve quickly and
continuously. Connection speeds and the aggregate bitmiles of deployed
capacity will continue to double and redouble every few years,
indefinitely into the future. New applications will spur new demand for
bandwidth, and new bandwidth will attract new applications. Most of the
applications that will generate data traffic 5 years hence aren't
running today, at least not in any way comparable to what they will
become. Most of today's users aren't yet using broadband for what
they'll be using it for in five years. Most of today's broadband
infrastructure, both wired and wireless, will have to be upgraded again
and again to meet the continuous rise in demand.
In such circumstances, policies must be shaped to promote dynamic
and adaptable competition, nothing more or less. Whether by design or
otherwise, regulations that favor some providers or technologies over
others will do far more harm than good. So will fixed ``universal
service'' targets, or sweeping plans to subsidize or ``jump start''
broadband service, because there is no start or finish to the broadband
enterprise. At their least harmful, such policies will simply be
overtaken by the market before bureaucracies can be set up to implement
them. At worst--as is in fact happening today--such policies will
impede investment, stifle innovation and penalize creative effort
industry-wide. The broadband market does not need more help from
Washington. It needs considerably less.
Competition
Cable modem service is currently available to between two-thirds
and three-quarters of U.S. households; DSL service is available to
between half and two-thirds. Approximately one-third of all U.S.
households have access to both cable modem and DSL service.
Approximately 20 percent of online households are broadband
subscribers. Cable and DSL providers are now adding five million new
broadband connections a year--an annual growth rate of nearly 50
percent.
One way to look at these numbers is complacently: the
infrastructure is basically there now; the demand hasn't yet caught up;
and the customers will come when the online games, music, and videos
arrive to drive demand for broadband connections. But this is quite the
wrong way to look at things. Sound policy must promote a dynamic
competitive process--one that will keep pushing the boundaries for
decades to come.
Most cable networks have been upgraded at great expense, but they
still rely on shared bandwidth at the end of the line; they will have
to be upgraded further, and then further still, as bandwidth
requirements continue to rise. Substantial parts of the legacy
telephone network are now capable of providing DSL, but phone companies
will have to make huge investments in remote terminals and fiber-optic
glass to keep pace with cable, or to forge ahead of it--DSL can't be
provided at all over certain older loops, nor over loops that run
further than 18,000 feet, nor can the bandwidth in ordinary copper
loops be pushed much higher than where it's at now. So telephone and
cable companies alike will have to extend fiber deeper and deeper into
the local exchange, until it finally reaches the home.
Comparable levels of new investment will be required to develop
broadband wireless networks. DBS companies have, in the last year,
deployed a two-way highspeed Internet service capable of competing on
equal footing with cable modems and DSL; other terrestrial and
satellite technologies (MMDS, 3G, Digital SMR, 2 GHz MSS satellite
systems, L-Band satellites, and Big LEO satellites) are also under
development. The television set is now morphing into a personal
computer, and the radio into a mobile digital receiver, both linked to
high-speed digital wireless networks. DVDs, digital games like
Microsoft's Xbox, and high-end digital video recorders like TiVo and
ReplayTV already feed their content into analog televisions; in due
course, the transition to digital TV sets and digital broadcasting will
propel a new constellation of high-speed digital terminals and
connections into the average American home.
When broadband wireless services do come of age, they are likely to
expand very fast, just as satellite and wireless telephony did after
their early years of incubation. Wireline services generally get rolled
out incrementally, but wireless services tend to get turned on
abruptly, to serve an entire geographic area. That wireless providers
currently lag behind wireline providers in serving broadband customers
reflects the none-to-all dynamic of wireless roll out, more than
anything else.
The broadband market, in short, ought to be experiencing the kind
of leap-frog competition that has characterized competition in many
other sectors of the high-tech industry. No one network provider should
be securing an overwhelming market share; the fastest and most
affordable option today should always face the risk being overtaken by
a faster, cheaper, or better alternative. Wireline networks should
compete on both raw speed and quality of service; wireless networks
will offer mobility as well. Broadband content should be adding yet
another important dimension to competition: the demand for the digital
bandwidth depends on the supply of digital content, which should
depend, in turn, on how successfully broadband suppliers package,
promote, and protect the content that their networks distribute.
All of this should be happening, but much of it isn't. A legacy of
botched regulation is largely to blame.
Regulation
The regulation of broadband has been split into two separate and
unequal parts. One regime promotes a get-it-built objective: it is
deregulatory, it leaves planning, investment, price, and profit with
the cable and wireless companies that deploy real facilities, and it is
working--the facilities are indeed getting built. The other regime
requires phone company competitors who do build networks to unbundle
and interconnect, at cut-rate prices prescribed by regulators, with
free-riders who don't. This share-it-cheap regulation is intensely
intrusive, it empowers the FCC and state commissions to control
planning, investment, price, and profit, and if it has forced sharing,
it has done so at the expense of investment and innovation.
To its credit, the FCC has recently begun to take the steps
necessary to classify both cable modem and DSL as ``information
services'' under Title I of the Communications Act. The logical
culmination of that process, if the Commission sees it through, will be
complete deregulation of both services, with no further unbundling,
interconnection, or wholesale price regulation imposed on either
service, by either federal or state regulators. To get to that point,
however, the Commission must completely eliminate all sharing
obligations in new, mixed-use facilities, that are deployed to provide
broadband service but that can be used, as well, to provide traditional
voice service. The continued regulation of legacy voice services cannot
be permitted to continue depressing investment in the new facilities
required for high-speed data.
Until the Commission finishes its job--if it finishes it--phone
companies must continue to ``unbundle'' the wireline spectrum they use
to provide broadband; cable companies don't. Phone companies must
permit their broadband competitors to ``collocate'' equipment in
telephone company premises to make it easier to use that ``unbundled''
broadband capacity; cable companies don't. Phone companies still remain
largely locked-out of the multi-billion dollar market for Internet
backbone service; cable companies aren't. Phone companies must offer
their retail broadband transmission services to competitors at a
federally mandated discount; cable companies have no such obligation.
Phone companies have to pay into Universal Service Funds when they
provide broadband access; cable companies don't.
The unbundling mandates of the 1996 Telecom Act should never have
been extended to broadband services at all; Congress created those
mandates to open up competition in the legacy voice markets, which
incumbent phone companies had long dominated, not in broadband markets,
which were traditionally dominated by analog cable. Almost four years
ago, the Supreme Court made clear that--as Congress itself specified in
the 1996 Act--unbundling is to be extended only to network elements
that can't be provided competitively. It is, of course, preposterous to
maintain--as the FCC has in fact maintained for almost 6 years--that
competition in broadband markets would be impaired absent access to the
unbundled elements the phone company's network, when the phone company
itself is scrambling to catch up with the dominant provider of
broadband service, the cable company.
Costs
A few years ago, one incumbent phone company concluded it would
have to deploy new ``remote terminals'' and optical concentration
devices (OCDs) to upgrade its broadband capabilities and extend them
out to rural and other users located far from end offices. After the
better part of a full year of painstaking discussion, regulators
decided that the phone company would have to undertake various
obligations for the ``right'' to complete this upgrade, including
deployment of more capacious facilities to make sure there would be
sufficient capacity to share with potential competitors. The phone
company reluctantly complied with regulators' demands, at a total cost
of approximately $250 million dollars. Two years have since passed, but
no competitor has arrived to lease any part of the new facilities.
This kind of experience is not the exception, it is the rule. The
current regulatory regime imposes massive uncertainty and delay on new
investment. Sharing regulation assumes that the network is already in
place, and focuses entirely on how to divvy up access. This form of
regulation does not promote innovation or investment; it assumes that
the innovation and investment have already happened, or are inevitable
regardless of what regulators do. Sharing regulation operates entirely
for the benefit of competitors that don't build facilities, and its
costs are shouldered by competitors that do. It is retrospective in
that it kicks in only after facilities get built--but everyone knows
that it will kick in, nobody knows on just what terms, and this
uncertainty alone slows and depresses investment. In the worst
circumstances, new investment doesn't happen at all because would-be
investors fear that the benefits of good investment are destined to be
shared with competitors, while the costs of bad ones are shouldered by
shareholders. That is exactly what has happened wherever the prices set
for shared elements have been set ruinously low, as they now have been
in many major markets.
In an environment as dynamic as the market for broadband services,
the forced sharing of innovation and new facilities has done little
good even for the intended beneficiaries and their investors. Between
1998 and early 2000, more than twenty ``data local exchange carriers''
(DLECs) threw together business plans, raised large sums of money on
the public market, and launched preposterously ambitious marketing
campaigns. With an average of fewer than 300 employees each, and at a
point when they were serving an average of fewer than 2,000 lines, nine
DLECs completed successful IPOs. But as they and their customers soon
learned, most of the new challenge and value in the broadband market
lay in getting the broadband loop up and running, and that was
especially difficult on copper wire that had been deployed, originally,
only to carry voice. Counting on regulation to solve all their
problems, the DLECs simply ignored the engineering and economic
realities. When the Internet bubble burst, many of the DLECs burst with
it.
Up to a point, and in the short term, cable and wireless operators
benefited from all this turmoil on the DSL side of the house; roughly
two out of three residential broadband subscribers are now with cable.
But the development of broadband as a whole was seriously delayed, and
that has harmed cable broadband as much as anyone. Some critical
threshold size of broadband connectivity has to be reached to attract
broadband content and software; the content and the software then
propel further growth in broadband connectivity. In the early stages of
the evolution of markets like these, competitors benefit much more from
fast growth of the market as a whole, than they do from regulations
that suppress competitive rivalry.
Finally, the competition-suppressing regulation has certainly
harmed consumers, equipment manufactures, and providers of broadband
content. Robust competition between cable and DSL would have pushed up
demand and pushed down prices; instead, however, unregulated cable has
opened up a wide lead while phone companies have sunk deeper and deeper
into the regulatory quagmire. In a true free-for-all, each major
advance in one network will spur a comparable advance, and then some,
in a rival's. The one sure way to kill innovation and new investment is
to regulate in ways that allow a single provider to become so dominant
that it no longer has to worry seriously about being overtaken by
anyone else.
The delays in the synergistic development of broadband content are
especially worrisome. As content providers have correctly recognized,
broadband networks represent a huge new opportunity for distributing
their products--and an equally huge threat if networks evolve in ways
that facilitate theft. The potential downside has spawned many
different proposals for mandatory new technology standards or legal
liabilities for network providers. Standards and copyright laws do have
important roles to play, but experience teaches that the best defense
of intellectual property will be found in collaborative agreements
hammered out privately between providers of content and conduit. The
best way to protect the economic interests of content providers is to
have different broadband service providers vie for the right to
distribute the content. Cable already distributes significant amounts
of digital content in ways that provide acceptable assurances against
theft. Providers of broadband service know that content is what
ultimately sells the broadband connection to the consumer. Robust
competition among broadband providers is what will deliver the
innovative technologies to protect--and thus attract--the valuable
content.
Policies
Congress should urge--or direct--the FCC to complete the
deregulation of broadband immediately. This means placing broadband
service--in its entirety, including all underlying broadband transport
components--under Title I of the Communications Act. Broadband Internet
access service is an ``information service,'' not a
``telecommunications service.''
Wireline broadband service should not be regulated at all; wireless
broadband service should be regulated only as needed for the normal
allocation and assignment of underlying spectrum. Sharing obligations
must be confined to legacy voice service, provided on legacy networks,
and even then, must extend only to network elements that are
competitively essential to new entrants.
State and local authorities cannot be permitted to regulate
broadband services in ways that undermine implementation of a uniform
national broadband policy; patchwork regulation creates a serious
impediment to the development of broadband services.
Effective protection of content is essential to the long-term
development of digital broadband networks, but it won't come through
technology prescriptions issued from Washington. The best long-term
protection for providers of content lies in robust competition among
providers of broadband connectivity.
The Chairman. Dr. Lessig, I agree, we have got to maintain
the neutrality of the network. I think that is something that
perhaps we can all agree on. We ought to get onto the FCC about
that. Mr. Huber says no jump start, and yet I am hearing jump
start from the first two witnesses.
Mr. Price, you say that $300 will be paid to the provider.
That is a price less than $30 a month, or a 3-year program.
Now, is that $6 billion a year?
Mr. Price. No, it is $6 billion in total.
The Chairman. $2 billion a year?
Mr. Price. It would be for the first 20 million homes,
however long that took, so 20 million, if it took 3 years, it
would be $2 billion a year.
Let me comment on Mr. Huber's point, because he makes a
good point about the speed at which broadband should be
available. He is right, it should be that fast, but in order to
do that it is $100 billion to upgrade the fiber network, or $30
billion to upgrade the cable plant, and that is not happening
tomorrow, so little steps are good.
The benefit of a broadband policy, the Commerce Department
has pointed out, is way beyond the telcos and the cable
companies. It is to society, so any bit of broadband is a good
thing, and that is what my proposal is about.
The Chairman. But Chairman Hundt, you differ. You think
what we ought to do is subsidize the actual broadband rather
than the demand side?
Mr. Hundt. I think that what we need to do, Senator, is
find a way for consumers and users to be able to award a
subsidy, a sum of money to the service provider in return for
that provider building the underlying network, the underlying
system.
Take the ancient and positive story of Ford Motors. What
does that have to do with telecom? Henry Ford started two
businesses, and they both failed, before he finally invented a
car that changed the world, but what he did not do was go to
the private markets to raise the money for the roads, nor did
the first people who bought those cars have the job of
themselves building roads. Instead, the Secretary of Commerce,
Herbert Hoover, all through the 1920s led the Nation, and led
all the municipalities, in using public money to build road
systems.
We have always needed to find a way to get the
transportation system to the farmer at the end of the road, to
the small business in the building. It has always been the
case, and there is no reason to think that a tremendously
expensive broadband network relying on fiber and wireless
technologies can be built entirely by the private market, and
it certainly cannot be built by the private market at a time
that capital is fleeing this industry, so the government, just
as Secretary Hoover stepped in and created a national program
for roads, the government needs to step in and find a way to
get that underlying network out there so the old users, the
companies that attach the electronics, the companies that want
to sell the PCs, the companies that want to distribute the
software, the companies that want to distribute entertainment,
all the users can find a way to benefit from that
infrastructure.
The Chairman. And the money is to come, I take it, from
spectrum auctions?
Mr. Hundt. Senator, this is one of those cases where the
witnesses get to say, this is where your leadership steps in.
[Laughter.]
The Chairman. Mr. Mundie, elaborate on Wi-Fi, because that
fiber is too expensive to go all the way into that last mile.
How do we subsidize and get it going, or what are the
roadblocks or problems right now?
Mr. Mundie. I think there are two problems relative to
wireless, and Wi-Fi, as you mentioned, is sort of the currently
popular one. The first is that Wi-Fi has emerged, but along
with it has emerged many other innovative uses of this current
2.4 gigahertz unlicensed band. Because, in fact, there are no
rules of the road for operating within this band, each of these
devices brought forward by different manufacturers around the
world can actually conflict with each other, in fact to the
point where they may not work at all, so this has the potential
to create a tragedy where the more successful we are in getting
people to adopt the technology the less well it might actually
work, thereby undermining the ability for people to use it as a
dependable alternative to other types of connectivity, and that
is why we recommended that you need, and Larry endorsed the
idea that you have to have some minimalist regulatory
environment.
The second is that there is not really enough spectrum
available for people to make business plans broadly that depend
on that as the primary form of communication. You see
innovation--I mean, I could have brought another socket from
the Four Seasons today which actually has two little Internet
jacks on it, all right, and in fact those things are Wi-Fi
connected.
This morning in the Four Seasons there was a laptop sitting
in the restaurant that said, this is connected by Wi-Fi for use
of the patrons of the restaurant, so in these limited
environments people are, in fact, using it, but you cannot
really depend on it yet, both technologically and in terms of
adequate capacity, and that is why we think we have to have
more spectrum allocated.
The Chairman. Well, we get more spectrum allocated, and
then what happens after that?
Mr. Mundie. I think what happens after that is, you will
continue to see the kind of innovation, both in technological
senses and also in business model senses.
One of the things that is--the reason I emphasize
unlicensed spectrum as opposed to the traditional notion of
licensed allocations that have been used for television or for
cellular telephony in the past is that it allows communities to
basically step forward. So, for example, if a rural community
wanted to get together and put a transmitter on their silo and
broadcast Internet services throughout the county, that could
happen. In fact, that is happening today, but it is hard to
encourage that thing to happen because of the spectrum limits
today.
The Chairman. Senator McCain.
Senator McCain. Well, I want to thank the witnesses. This
has been a very helpful panel to this Member, and I think I
have been informed, and I know the rest of the Committee has
been.
I do note that cable rates are up 45 percent since the
passage of the 1996 Act. That cannot be right, and maybe it has
something to do with Mr. Huber talking about two wires
competing on a level basis. How do you do that, Mr. Huber?
Mr. Huber. Well, there are several different ways to get
there, and this at least does sharply divide the panel. The FCC
has on the table now two proposals, one more or less
implemented, the other still pending, to move broadband under
Title I. That is where broadband should have been put in 1996.
That is where it belongs today, a broad, complete definition of
broadband, not just part of it, not just some of the
facilities.
This movement of broadband into Title I, which is
essentially the unregulated sphere, has got to extend to all
mixed use facilities. It has got to extend to--anybody who
wants to take glass, to take optical concentrated devices, to
take the terminals, actually put them in the ground, which is
an enormously expensive thing to do, and market them to end
users ought to be able to do that secure in the knowledge that
if they have done something stupid they will eat every last
dollar of the loss, and if they have done something really
smart, they will get the benefit from it.
That is not the law today. It ought to be the law today.
You do not have to share those facilities. They are not yet
built, and a law that is obsessed with how we are going to
divide up that pie after it gets built is counterproductive.
Senator McCain. Thank you. I have a question for all the
witnesses, beginning with you, Mr. Hundt. You are either the
czar of the FCC, which you once were, or have a majority in
both Houses of Congress and are President of the United States.
What would the law and/or regulations look like in order to
address this problem, beginning with you, Mr. Hundt?
Mr. Hundt. I would recommend to this Committee, to Congress
that we face the economic reality that under any system of
competition, or under any monopoly approach, it is simply not
the case that the private sector is going to invest at the
present time, in the present economic climate, is going to
invest enough money to build a truly broadband 10 to 100
megabit second system----
Senator McCain. What does your regulations or law look
like, Mr. Hundt?
Mr. Hundt.--so consequently you need to throw money at it.
You need to have the consumers be able to have a subsidy in
their pocket they can award the service provider to build that
kind of network. The exact amount of money would be, I might
add, a fraction of what we spent to build roads in this
country, the kind of numbers that Mr. Price is talking about
represent a fraction of even federal spending on roads on an
annual basis. So----
Senator McCain. So your answer is to set up a process and
program of subsidization of broadband for all Americans?
Mr. Hundt. That is right.
Senator McCain. Thank you. Mr. Price.
Mr. Price. First, I think broadband should be unregulated.
There are two competitors for it right now. I think a wireless,
maybe a third competitor, and I think there is no reason for
broadband to be regulated.
Second, I think we need more spectrum, and it needs to be
available at low cost.
Third, I think we do need some short-term subsidy just to
kick-start the market, to show a little bit of confidence to
the whole industry participants.
And fourth, I think longer term, when cable is an effective
competitor on the wire for voice in the home, we need to look
at the regulation for the RBOC's and the residential voice
monopoly.
Senator McCain. Mr. Mundie.
Mr. Mundie. I would address it in two tranches. The first
would be to create regulatory parity between the telephone wire
and the cable wire. I agree with Mr. Huber that facilities-
based competition is, in fact, the only way that we are going
to get sustained investment in this area, and I would move
aggressively to do that.
However, I think that regulation would essentially have to
have a meet-in-the-middle property so that some of these
attributes that Larry and I talked about in terms of the
connectivity principles are applied uniformly to those, which
would mean a diminishment of the regulations on television, but
the addition of these connectivity principles to cable.
The second tranche would be essentially direction to the
FCC and the NTIA to aggressively manage the country's spectrum
to the benefit of creating many, many unlicensed uses of these
novel radio technologies. Wi-Fi is just the tip of the iceberg.
The FCC this year approved ultrawide band, but due to
concerns with the Department of Defense it was so narrowly
constrained as to really limit its usefulness in many
applications. I think there are many other techniques that
could be applied to dramatically increase this.
The reason the two are necessary is that the historical
regulatory environment in which the cable environment was
invested in and the telephone environment was invested in has
created a situation in this country where it has been
demonstrated to be pretty much impossible to build a third
wired network. It is noneconomic, and therefore if you really
want to create competition it should be head-to-head facilities
based within the existing wired plants with the encouragement
through applications to grow their investment in that plant,
and then essentially the wild card of wireless communication,
but not in the traditional cellular telephony 3-G sense, but in
the use of these novel radio techniques, but that can only
happen if, in fact, people are confident.
I agree with the confidence question, and that is why the
connectivity principle gives people confidence to develop apps
for the wireline network, but it would be the regulatory change
in spectrum that would actually give people confidence to
develop the new products and the new services that would
complement that and potentially create new types of networks
that would compete with the wire line ones at much lower
capital cost.
Senator McCain. What about subsidy, as Mr. Hundt and Mr.
Price recommend?
Mr. Mundie. I personally favor creating a lot more
competition than direct subsidy. I think that as we have seen
in other countries--I mean, last week, ironically the United
States was now passed by Brazil in terms of the penetration of
broadband usage in households.
If you look at Korea, where game usage is essentially one
of the single biggest drivers of broadband adoption, Korea is
now at 70 percent of all households penetrated, and our belief
is that if you have these new kind of driving applications
which will be brought forward if people have confidence that
they have a sustainable business model, then in fact I think
the cash flows will return to these networks, and therefore
would not require the kind of subsidy that has been proposed.
Senator McCain. Mr. Chairman, can I ask your indulgence for
the final two panelists? Mr. Lessig.
Mr. Lessig. I would agree with the same structure. I think
if there are only two competitors, if it is the only two wired
competitors that could provide broadband, then subsidy makes
sense. But I think right now we can open a third line of
competition to provide broadband if we had a much more
aggressive wireless policy along the lines that Mr. Mundie was
just describing. Wireless Last Mile is a technology which 4
years ago seemed impossible to imagine, but right now is being
built by people who have technological capability to set up
broadband connections. These do not require extraordinarily
expensive investment to put wires out there. If the FCC's
policy as to wireless were much more embracing of this wireless
technology, that would produce extraordinary new competition
here.
Senator McCain. Such as Wi-Fi?
Mr. Lessig. Wi-Fi and other technologies around Wi-Fi,
meshed networks that would enable actually potentially
increasing capacity as the number of uses increased. This is a
potential that we have just not seen before in this context,
but it is extremely important that one feature of it be
emphasized.
Right now, the FCC has a string of companies coming to them
saying, we like unlicensed. Unlicensed is great, but you have
got to pass rules to protect us to make sure that our use of
unlicensed does not get destroyed by some other person's use of
unlicensed. But what that would do is lock in today's
technology against future technological innovation. If there is
an agreement between Mr. Mundie and myself about this, the
critical feature about minimal regulatory protocols is that
they truly are as minimal as technologically possible, the most
minimal position, so that it enables lots of new technologies
to come along and use this wireless capacity to compete with
wired capacity.
I think my tendency is, on this side of the table, to
believe that that will get us where we need to go without the
subsidy, but if it is not, the subsidy point is an important
one. When we built the highways we did not call up GM and say,
if you build the highways, you can then build them so that only
GM trucks run on the highways, or Ford trucks run a little bit
slower. But my concern is that we are building the Internet
such that the people who give us must-see TV are giving us
must-see Internet: where they get to say, ``here is the
Internet you are going to get, here are the applications you
are allowed to use,''--defeating the basic neutrality of this
network.
So subsidies may be an important part of this, but the
critical feature of what made the original Internet run was not
subsidy, it was not the fact that wires were there, it was that
the rules enabled broad range competition among innovators
outside of the network, not the network itself.
Mr. Huber. I really hate this highway metaphor, and you
should hate it, too. If you have $1,000 per home to put 5
megabits in, or $100 billion for the Nation as a whole, go
ahead and spend it, and spend it fast, but if you are going to
go a quarter way there, do not waste your money, because you
will not even begin to catch up with what is needed and what
ought to be happening in the market, and what the market--the
market will spend $100 billion. Give the market--if you want a
one-line law, say that any provider or broadband service, any
provider above 200 kilobits, say, can opt into the regulatory
structure that is applicable to any other provider above 200
kilobits and see what happens.
Senator McCain. Thank you. Thank you very much, Mr.
Chairman.
The Chairman. Senator Burns.
Senator Burns. Well, we have pretty well gone over that.
Everybody gets a version of it.
I want to ask Mr. Lessig. You said, OK, interference in
these unlicensed spectrum, tell me how you would award that
spectrum? In other words, if we are going to be plagued with
interference, then we are going to have to have some sort of a
protection or licensing situation. How would you do that?
Mr. Lessig. Well, the premise of the unlicensed spectrum is
that the FCC is not in the business of awarding who gets to use
it and who does not, and what has to happen in that context is
that protocols have to be developed to facilitate exactly the
kind of cooperation of the space that Mr. Mundie was
describing. The only issue is at what stage the FCC plays a
role in establishing or enforcing those protocols, and in my
view, historically the FCC's role in establishing and enforcing
protocols has stifled competition for many reasons.
Mr. Huber's work is excellent in showing this to be true,
so I would resist the FCC's role, except at the most minimal
layer, and I think to cite Mr. Mundie's proposal, it is
actually at the 5 gigahertz band, not the place that we
typically see Wi-Fi going on right now, the 2.4 gigahertz band.
Senator Burns. In other words, the FCC would be in the
business of developing protocols, rather than licensing the
spectrum, is that correct?
Mr. Lessig. I would not say the FCC is in the business of
developing protocols. I would also say they are not in the
business of regulating access. I would see protocols to be
developed by the private sector, including protocol
organizations, and then those protocols at some stage might
need to be adopted as this minimal protocol to make sure that
there could be cooperation among the uses at the different
spectrum layers.
Senator Burns. Would you like to comment on that, Mr.
Mundie? I am really unclear on it.
Mr. Mundie. I think there are two things that are very
important. The first is the idea that these are not allocated
bands in the sense that there is no single entity who is given
a right or permission to do anything with the band. In fact, to
the contrary. The public is authorized to do anything they want
with the band.
The key problem we have right now--and that is essentially
what is driving Wi-Fi into existence. It drove Citizens Band
Radio to some extent, and now the family radio services. These
are all the things that were a bit more specific in their
application, but it is an example where the public was given
something they could take up and use.
The unlicensed bands, however, in the digital era, are not
set up in a way that reflects how digital systems work. They
are still designed and essentially controlled per the FCC's
specifications, or rules, according to the way people have
always used analog radios, and so there is an opportunity now
to take the techniques that are used within that cable that
hooks up your PC to the network, to take a similar kind of
protocol and apply it in the air.
And if that is done, and there are a number of companies,
and in fact the DOD are in dialogue now about how you would
specify such a minimalist hand-shaking mechanism and, given
that, we do believe it is possible to have really unlimited
innovation within any one unlicensed band.
I think in addition we will need--and we propose, for
example, how that might happen in the 5 gigahertz band, which
would be Wi-Fi version, too, but we think other bands will also
be required below 1 gigahertz to deal with both the distance
propagation problem in the rural area and also to deal with the
penetration of walls and concrete structures, like in the inner
city. The current 5 gigahertz and 2.4 bands do not have the
propagation properties we would want there, and that is why I
recommend that there ultimately will have to be other
unlicensed bands allocated, but they should all have the same
uniform property of hand-shaking before use.
Senator Burns. Mr. Price, walk me through what changes you
would make in the bankruptcy law to facilitate the situation we
are going through now.
Mr. Price. I really do not have any specific proposals. I
merely brought it up to point out to the Committee how this is
working. I will tell you, though, that I have witnessed first
hand in our work in advising creditor committees and companies
how companies can get bankruptcy judges to give them an
enormous amount of leniency in terms of spending creditors'
money and keeping the companies alive, so I just think that is
a subject for another day.
Senator Burns. I am really interested in this unlicensed
thing, because I guess I am the only one in this room that ever
said that spectrum was never the property of the United States
Government. I always said it was the technology that was
developed, and the reason we put the FCC in business in 1934
was to make sure that everybody stayed in their lane, so to
speak. But it is interesting, on the unlicensed part of the
spectrum, I am having a hard time converting over. It says, OK,
you are going to be given so much. Are they going to get it on
a lottery, or is it just going to be a free-for-all out there?
Mr. Mundie. It is a free-for-all. That is how it works.
Everybody can come forward, and the way the radios actually
work allow people to all come forward and participate, and the
radios sort out from each other who gets to talk, and that is
how it actually works today.
Mr. Lessig. Can I just add, Senator, that one way to think
about this in on the model of the Internet. Right now, the
capacity of the Internet is such that everybody talks in some
sense at the same time, and the Internet protocol figures out
how to make it all function without an FCC coming in and
saying, you get to talk now, or you get to talk in this
particular way. It is the same insight. It is just being
applied in a different context.
Senator Burns. If there is anything I love to watch, it is
a good old-fashioned free-for-all. That is a great spectator
sport.
Mr. Mundie. I think the one other thing that I might just
go on record as predicting, I believe certainly 20 years from
now, maybe even 10 years from now, we will look back and
realize that the historical notion of band-oriented management
of spectrum was, in fact, a quaint idea and that, in fact, we
will find that eventually there are completely different ways
to use the spectrum to control these things, and the challenge
for this country and others will be to try to figure out how we
carefully take ourselves from the band-oriented approach that
we have as our legacy now, as does the rest of the world, into
the management of the entire spectrum capacity that will allow
the emergence of these new technologies, and that should
actually be the long term mission of the FCC with respect to
husbanding the spectrum.
Senator Burns. Very interesting approach, and I think it
merits more thought. Thank you, Mr. Chairman.
The Chairman. Thank you. Senator Dorgan.
Senator Dorgan. Mr. Chairman, we are really having a couple
of conversations here, and let me try to ask about both of
them.
First of all, Mr. Mundie, will there be enough unlicensed
spectrum for all the applications that want to use it? I am
trying to think through with you ahead here. How will it affect
the wireless carriers who paid a substantial amount to use the
spectrum that they do control?
Mr. Mundie. As the unlicensed bands are allocated today, I
will tell you that there is not sufficient spectrum either in
absolute bandwidth, and specifically not in the right places in
the spectrum to allow a comprehensive and reliable, let us say,
community network to form in your community or any other one,
but both of those could be addressed by the FCC quite directly,
and without forsaking any huge traditional notions of the
amount of money that might have been garnered from the auction
of those particular bands, in my opinion.
I think the more difficult question is, how do the
applications emerge in this environment, and without assurances
that these bands are going to be available you will not know.
Relative to the second part of your question, which is, how
does this relate to the telecom companies who bought their
spectrum, in essence, this is, as he has indicated, and Mr.
Huber indicated, a situation where you pay your money, you take
your choice. At the point where you bet on what we know today
as cellular telephony as the core of wireless technologies,
which are big antennas with multimile radius transmission and
receive capability, and what we know today as cellular phones,
they have met and made a good business out of that, but in
fact, the history of the technology industry is one that says
you are always going to be surprised by the next thing that
comes along, and essentially what I am advocating, and in fact
what I think you see some of the cellular carriers today
recognizing, is that they did not anticipate Wi-Fi and its
popularity.
This little hunk of unlicensed band usage in this
particular computer application is now getting some of those
cellular companies to come forward and say, I want to buy a
controlling interest in these little Wi-Fi hot spot companies,
because, in fact, they recognize that that is likely to be
true.
I have--I mean, this thing I use every day now is a
combination of--you have a Blackberry. I used to have one. It
has been replaced by this. It is a cell phone, World GSM cell
phone with a pocket computer in it.
Senator Dorgan. Have you tried to use that in Fargo?
Mr. Mundie. No, I have not, but I expect it probably will
not work, but it turns out that the next version of these
things will actually support simultaneously not only the
traditional telephone network, but the Wi-Fi network, and so,
in fact, if somebody in Fargo decided to put up a Wi-Fi hot
spot, I could come into town, and while I find that I might not
get my telephone connection, I would get a local area
connection, and I would have an alternative, and that is why I
speak, you know, so enthusiastically about the potential for
competition between the unlicensed band--which does not depend
on capital flowing from Wall Street. It does not depend on any
company owning or controlling spectrum. Its rate of diffusion
at that point is limited only by the choice of the consumer to
go down to the good guys, or Circuit City, and buy a little
box, and take it home and plug it in, and therefore you get to
do this third option on the back of the bank accounts of the
American public at their discretion, as opposed to some large a
priori allocation.
Senator Dorgan. Let me ask--well, I do not want to use my
whole 5 minutes on one question.
Mr. Price. Senator, if I could just explain, we at Evercore
have an investment in a company called Boingo. Its purpose is
to negotiate with the guy in Fargo, the guy in South Carolina
who has the hot spot and provide a universal access mechanism
to that, so it cobbles together all of the entrepreneurs to a
uniform system, and you sign up for a service called Boingo.
Wherever you are, it works.
Senator Dorgan. I will not ask the question, but I am
curious, because all of you have talked about competition, how
many of you have the same local telephone provider you had in
1996? I will not ask you, but the reason I would ask the
question if I had time, it would be about how much competition
really does exist in the local exchanges around the country.
The answer is, not much, and I believe in competition. I
believe we ought to do what we can to foster more and more
competition.
I am going to ask two things quickly in my remaining time.
One is the issue of the Universal Service Fund, which has kind
of become a forgotten stepchild in these days of
telecommunications policy. We specifically wrote in law in 1996
that the Universal Service Fund shall support advanced
telecommunications services, so that seems to me to be a
platform for policies that make sense in terms of what some of
you are suggesting as we try to provide the impetus for a
better and more robust buildup.
Mr. Reed, you might want to comment on that, but second,
some of you mentioned Korea. I do not know much about Korea,
but I am curious. You said 70 percent of the Korean households
have access to broadband?
Mr. Mundie. Subscribe.
Senator Dorgan. Subscribe to broadband. Presumably, then,
it is affordable in Korea, is that correct, or is it
subsidized?
Mr. Mundie. It is partially subsidized by the government, I
think, but there is really aggressive competition between two
DSL providers.
Senator Dorgan. But if it is partially subsidized by the
government, if you come here and tell us how great things are
in Korea, and someone says, it is because they are playing
video games, and the government subsidizes the subscription to
broadband, I think it suggests at least that whether it is
through the Universal Service Fund or some other device, that
governments are deciding that in order to have universal
access, like the old REA program, you have to do something to
stimulate that. Would you disagree?
I raise it only because you all have raised the question of
Korea, and someone Brazil. I do not know much about those
countries, but I assume that if it is affordable there, the
ingenuity of the American marketplace could make it affordable
here if we had public policies that supported that through some
kind of cross-subsidy, if we need to, through the Universal
Service Fund.
Mr. Mundie. Maybe I could comment that many, many countries
have contemplated this question over the last few years,
because they recognize that having an accelerated deployment of
broadband is an opportunity to steal a march on the major,
established countries, including and especially the United
States in terms of participating in this sort of information
economy, so many of them have actually been more aggressive
than we have in this country either in subsidies or regulatory
environment.
Canada, for example, I do not think has done anything in
subsidy, but they actually forced cable to provide open access.
Senator Dorgan. Is there also more aggressive competition
in those areas?
Mr. Mundie. In many cases there are. For example, there is
both real competition between different, mostly telephone
suppliers in those countries, because cable is not as uniformly
deployed. The reason I say the United States is slightly
different is because we have such a huge penetration of cable
already in place, and largely upgraded for these services, and
we also have the telephone network, which could be fairly
directly used to provide these services.
Senator Dorgan. I should just confess that I still have the
same local exchange service I had when we wrote the law, and I
assume you do.
Mr. Mundie. Has the company changed names?
Senator Dorgan. I have not had one telephone call during
dinner time suggesting I change it, because there is no
competition.
Mr. Hundt. Senator Dorgan, I recall you when I first came
into office at the FCC explaining to me the cost of telephone
service, the economic cost of telephone service in your home
town, which was $300 a month, I think was the number. That is
the problem with broadband, whether it is your home town, not a
large place, not even Fargo in North Dakota, or whether it is
even some of the suburbs around our major cities, the
underlying economic cost of building a truly high speed fiber-
based wireless LAN, all the different technologies, even the
most efficient, the underlying economic cost is greater than
any private market is going to invest.
That is why Korea, that is why China and Shanghai, that is
why the European countries all are going to have policies--some
will be wise, some will be less wise, but they will all have
policies in which the government steps in, as it did with the
road system, as it did with broadcast TV, as it did with radio,
as it did with rural electrification, and figures out how the
network is going to reach everyone, and it is an imperative
that we do that in this country, but it would be a godsend to
our capital markets to know that there was such a plan, so that
all the other technologies that the learned gentlemen are
speaking about would be able to enjoy the benefits of it.
Senator Dorgan. I should--just to clear it up, in my home
town they drove down the price of that, or the cost of that
telephone service by the Universal Service Fund support in
order to make it affordable, which was the case all across the
country.
Mr. Chairman, as is always the case, I am supposed to be in
two places at once, and I have to leave. I really appreciate
your holding this hearing. I know we have got tough decisions
ahead of us, but we need to start making those decisions.
The Chairman. We have got the best of advice.
Senator Breaux.
Senator Breaux. Thank you very much, Mr. Chairman, members
of the panel. Mr. Hundt, I am not sure I agree with your
suggestion that we apply the Herbert Hoover economic model to
the telecommunications industry, and apparently the rest of
your panel do not think too highly of it either, from what I
take from their testimony.
Mr. Huber, comment on Mr. Hundt's last statement about the
fact that the government came in and built the roads, built the
television, and there was a whole bunch of other things that
Mr. Hundt said that we did through subsidies. Why isn't that a
good example of why we should do it in this area?
Mr. Huber. Well, to begin with, certainly with the major
network industries there was a long period of private sector
incubation before the government even touched them. Edison
built the Pearl Street Station in New York to sell light bulbs;
the first radio broadcasters were built to sell radios. It was
completely closed in the private sector.
Number two, the key problem with this highway metaphor is,
go ahead, subsidize the highways, but keep in mind that it is 4
lanes this year, within 3 years it is going to be 8, and then
it is going to be 16, and then it is going to be 32, and there
is no sign whatsoever that that progress will stop. It ought
not to stop. We are not going to pave over the whole country
and then have to stop building digital highways. You cannot
subsidize your way to a horizon that is always receding on you,
and receding that fast.
Senator Breaux. Your testimony on page 3 I think answers
what I was going to ask, but can you elaborate on it? Are there
things that are short of what Congress can do to help move this
process forward? I think Congress is hopelessly log-jammed on
these issues, and someone pointed out all the television ads
are back on, do this, do that. I mean, most people quite
frankly do not understand what the ads are advocating. It is
very, very difficult. I just do not get a lot out of that.
You talked about the FCC having various issues before them
now that if they acted on it, what do you think the results
could be?
Mr. Huber. Well, on broadband we simply have to get back to
where we ought to have started in 1996. We have to move the
main wireline infrastructure broadband regulation to a system
that applies one set of rules for all, a system that says, we
mean it, it is going to stay this way, and you can invest your
next $100 billion in joint-use facilities, and if it turns out
to be a stupid investment, you'll lose your money, or else you
are going to get as rich as Croesus if it is a really good one.
You have got to get that message out emphatically. It is not
hard, but you have got to do it.
As for subsidies that everybody was discussing, before you
cook up the next one, try enforcing the 1996 Act, which said
subsidies had to be made explicit. People are not competing for
residential service in Dakota because it is ridiculous to
compete for residential service in Dakota. It is subsidized
like crazy internally, the subsidies are not explicit, nobody
can beat the rural rates when they are so heavily subsidized.
Make the subsidies explicit. In other words, implement what
was in the 1996 Act, and then talk about your next round of
subsidies, but do not do it the other way around.
Senator Breaux. Mr. Price, you mentioned on page 12 of your
testimony--can you elaborate on number 3, when you talked about
the historical regulation of telcos need to be examined in
light of the changing competitive environment in cable's
superior technology plant and the increasing quality of
wireless offerings? The current regulatory regime may be
appropriate in a monopoly context, but the RBOC monopoly is
rapidly waning. There are some who would argue that they still
have a lock, mortal cinch from a monopolistic standpoint. Can
you elaborate more about what you meant on that point number 3?
Mr. Price. RBOCs generally----
Senator Breaux. Use your mike.
Mr. Price. The RBOC generally provides three services
today, residential voice, data, and wireless. In the
residential voice business they have 80 to 90 percent market
share, in data it is one-third market share, and in wireless
the strongest person nation-wide, Verizon, has a 25 percent
market share, so the only monopoly that still exists is in
residential voice.
In residential voice, we have wireless carriers
increasingly impinging on this monopoly. If any of you has
college kids, just ask them which phone they use. I mean, there
is a sea change coming like this, that is going to take maybe a
half a generation to be implemented, but it is coming with
respect to the wireless phone.
With respect to cable, it is going to impinge upon the
residential voice business, and what I am saying is, in a very
short period of time, relatively, 3 years, 4 years, you are
going to see the RBOC residential voice monopoly gone, and at
that point in time, you need to examine the entire regulatory
regime for the RBOC.
Senator Breaux. Mr. Huber, you outlined this in your
testimony. Maybe you would be the best. Suppose the RBOCs had
the same regulatory requirements that they had to meet in
providing a broadband that the cable companies currently have
to operate under. What would be the result of that?
Mr. Huber. They would be rolling out glass very
aggressively. The copper network, they are squeezing it out to
the very last limits of what it can do today, and they have had
concrete proposals like this on the table, and they spend 3 to
4 years negotiating with the FCC and with State regulators to
see how they can share this glass network once they have
deployed it. They would be pushing remote terminals out to
rural areas.
Senator Breaux. Well, how different is it from what the
cable operators have to do versus what the telco companies have
to do in providing a broadband?
Mr. Huber. Cable, of course, has--they do not like to talk
about it, but they are still a shared medium. In the last \1/2\
mile or mile they are bandwidth limited. They claim that they
have got more than they have got. They cannot actually deliver
real broadband during peak usage. They have a lot of work to
do. So do the wireless people, and they will all do it in an
environment that leaves them free to upgrade and build, or else
be beaten by the competition.
Senator Breaux. You are talking about the regulatory
requirements and comparing that to what the telcos have to
compete with?
Mr. Huber. Cable is under Title I for broadband. They can
do what they like and charge what they like. Telcos today, if
they build it, they will find out sometime, next year or two
years from now, whether Illinois or the FCC or somebody else
will tell them, look, you have just put in $5 billion here now,
take it apart and sell it at the price we prescribe. That is
the situation, that is the law today.
Senator Breaux. Thank you, Mr. Chairman.
The Chairman. Senator Allen.
STATEMENT OF HON. GEORGE ALLEN,
U.S. SENATOR FROM VIRGINIA
Senator Allen. Thank you, Mr. Chairman, and thank you for
holding this hearing. I have thoroughly enjoyed it. Whether I
agree with each one of the witnesses, your perspective has been
outstanding for us. I think it might be helpful, and we have
gotten into it, looking at this in a third way, or a different
way, and alternatives, rather than worrying about the ILECs and
CLECs and the old way of looking at things, whether they are
highways, rural electrification and so forth, and I think we
ought to focus on spectrum-efficient technologies, satellite
services, wireless technologies, and possibly even power line
broadband capabilities.
All of these incentives, there are not enough incentives or
tax credits available to make sure that folks will dig up into
mountain hollows or across wide expanses of our country and to
that extent I have been working, along with Senator Boxer, for
several months now, and our staffs have been working very
diligently on coming up with the proper approach, and I have
heard our witnesses talk about it as far as Wi-Fi, wireless
fidelity.
I think that that is a third way that is not bogged down by
all of the legacy litigation, regulations, precedent,
animosity, and everything else that is engendered in the other
way of thinking, and I feel that we are making progress, and I
do want to commend Senator Boxer and her staff and mine for
working together on this, and we are working also with the FCC
and the Department of Defense, which has not really been
mentioned much in here, but is very, very important as we move
forward, and this is just a working draft of where we are, and
I am going to ask some of the gentlemen, especially those who
focused on this, their views on it as we are trying to go
forward.
And Senator Hollings, I know you care a great deal about
Wi-Fi as well. In listening to some of the comments of others,
we might be able to get a convergence of views. The goal of our
legislation, at least at this stage--and this is not the
legislation. This is a working proposal to provide an
alternative to broadband wireless service by using advances in
wireless technology and spectrum efficiency. It is to
accelerate the development of wireless broadband networks in
both residential and business markets, and allow schools and
libraries the ability to purchase wireless devices that deliver
broadband services under the Universal Service Fund.
Now, the specifics are as follows, and again, this is a
draft at this point, but we would require the Federal
Communications Commission to make additional unlicensed
spectrum available for wireless broadband services. The draft
approach would also require the FCC to establish quality of
service and technical rules of operation that facilitate
spectrum efficiency for unlicensed wireless broadband
technologies, require the FCC to establish baseline Internet
connectivity principles that ensure consumers have access to
Internet content services, applications and devices, as was
mentioned, and obviously allows the schools and libraries to
pay for it with the Universal Service Fund.
What is your horseback reaction to such a draft proposal,
and again, we have been working for several months and have
gotten to this, and we are obviously getting comments, but I
certainly would like your comments and insights on such a
framework or structure of principles.
Mr. Lessig. Senator, let me start by saying I would agree
with the framework and, in particular, in response to some of
the discussions about subsidy, as Mr. Mundie suggested, the
critical feature about wireless technologies is that, like
computer infrastructure, the subsidy for this technology is in
large part coming from consumers purchasing the devices
necessary to make it work. It is not Wall Street that needs to
do it. It is actually the consumers that are developing the
technology to make this work, so you are getting consumers to
help make this project go forward.
The one thing that I would again emphasize, though, is that
quality of service protocols should not interfere with
experimentation for the next generation of technologies.
The history of damage that the FCC has done--and again, Mr.
Huber's book is, I think, excellent in describing this--has
been the FCC putting out the equivalent of ``quality of
service'' protocols, that have had the effect of stifling the
next generation technologies. It has got to be minimal in the
way that Mr. Mundie has described, leaving open an
extraordinary range of experimentation. Technologists are
humble.
This is a rare quality among lawyers, and I do not know
about Congress, but technologists will tell you that they do
not know what the future could hold for wireless technology.
There is a great potential that it could provide more capacity
as the users increase, something we have not seen before. But
technology needs the space to experiment with that, and the FCC
regulations that set up certain protocols have the potential to
interfere with that opportunity in a way which I do not think
has yet been appreciated.
Senator Allen. Thank you. Mr. Mundie, what is your view,
seeing how you obviously focused on this, and we seem to share
similar philosophies and ideas?
Mr. Mundie. Well, clearly your bill, as you have outlined
it with respect to wireless, seems to be completely compatible
with the recommendations that we made. Again, I think the thing
that is important to realize is that if this is really going to
be what I would say is a dependable medium today, I mean, if
you think back to Citizens Band Radio and other things, people
used it, but it was hard to really depend on it, and I think
the problem we have got today is, two problems. If we do not
get the etiquette right to allow this innovation to occur,
then, in fact, even within the bands we have, we will end up
with just congestion, or cacophony.
I think the other problem with dependability is the fact
that we ultimately want to see this used in many different
environments, inner city, rural, et cetera, and to do that,
physics plays a real role here, and the different bands have
different propagation properties, so for example, the good old
television band was chosen because it goes through bricks and
mortar and everything else, and you can watch TV with your
rabbit ears.
None of the spectrum in that band, for example, has been
allocated for these kinds of applications and, as a result, it
is very hard to get those kind of propagation characteristics,
and so I think as I mentioned earlier, the other key idea that
you should consider is directing that we need a bouquet, if you
will, of bands that are all unlicensed and managed in a
compatible way so that people could, in fact, have assurances
that it would be both dependable under heavy use, and that it
would be dependable relative to the different propagation
environments.
Senator Allen. I thank you. My time is up. I was going to
ask that question.
The Chairman. Go ahead.
Senator Allen. You generally have--well, in response to a
question from Senator Burns as to which of the gigahertz,
bandwidths and so forth, the part of that spectrum is most
important, and you answered that previously on the record, and
obviously I am not sure if in our legislation, or any
legislation, you would want to micromanage to that level. I do
not mean to be legislating on a draft proposal here. I think
that if you establish the proper principles, that is the way to
go with it.
If necessary, I suppose you do have to come in and tell
them what to do, but nevertheless, if you have knowledgeable
people such as yourself and others working on that and adapting
the bottom line principles, hopefully it would be done.
Mr. Mundie. The industry is fully engaged, both with the
FCC and the DOD, around these questions to try to find a
compromise that works for everybody, and I agree with your
statement about principle. It is less important to pick which
bands than it is to realize that there are two fundamental
principles. One is that it has to be reliable under heavy use,
and the second is, it has to work no matter whether you are in
Kansas or Manhattan, in a building or on a farm.
Senator Allen. There is a Manhattan, Kansas.
[Laughter.]
Senator Allen. Or in Washington, D.C.
Well, I do think the application, Mr. Chairman, is--you and
I, I know, care about rural areas, and rural areas look at
access to broadband as they did rural electrification. I hate
to get back to those, and interstates and railroads and so
forth, and it is important in rural areas. It is also important
in inner city areas, or metropolitan areas, where it gives the
consumer another choice, and you are not having to dig up all
the roads constantly for another wire to be laid, so it is
applicable anywhere, and I look forward to working with you,
Mr. Chairman, and I know Senator Boxer will and also these
gentlemen.
I thank you all for your insight and perspective, and
really I think Wi-Fi, out of this whole hearing, which was
generally gloom and doom, that this is one area where I think
innovation is exciting and has tremendous potential, and I
thank you again for your great leadership on this issue, Mr.
Chairman.
The Chairman. We are just trying to find something we can
get done along that line, and you mentioned rural. Chairman
Hundt, you heard Mr. Huber say, let us take broadband out from
Title II, put it under Title I, remove the common carrier
obligation on the one hand. What happens to the CLECs? On the
other hand, remove the support of universal service. What
happens to the rural areas? What happens if we do that? You
heard that suggested.
Mr. Hundt. Well, the CLECs, the competitive local exchange
carriers have, in fact, broad competition in voice and data to
small businesses in the United States since 1996. There are now
22 million lines supplied principally to small businesses by
CLECs.
The Chairman. But they are not facilities-based. They
depend on that connection.
I am an RBOC, and now on broadband I do not have to really
make that connection under 251.
Mr. Hundt. Well, those CLECs----
The Chairman. What happens to me?
Mr. Hundt. As you know, Senator, those CLECs have only been
able to come into existence and provide that competition
because they have been able to lease the last mile, or the
local loop. Now, if that is going to be upgraded to fiber,
which is what we are all talking about as a core technology
because the wireless solution is not going to be a complete
solution, although I agree with Senator Allen, it is going to
be a tremendous advance, that local loop, if it is going to be
subsidized, needs to be available to be leased by competing
companies.
The Chairman. But Mr. Huber is against all of that
subsidization. We are not going to have the subsidy. I am
talking about the situation today, and I am just trying to find
where I am with respect to broadband. If I take it and put it
under title I, remove any kind of common carrier obligation,
specifically I do not have as an RBOC, then, to connect to any
CLEC, and other than Covad or something like that, they all
depend on that business customer you are talking about for
connection, so I have eliminated--I am an RBOC. I can eliminate
that competition by getting that done, is that not correct?
Mr. Hundt. I think that is right. I think that the move to
title I, if that is what we are going to do, is pretty much
tantamount to the attempt to recreate the old AT&T monopoly, at
least in this particular space.
The Chairman. And what happens to the rural areas that
Senator Allen and I are both interested in? What happens to the
universal service contribution? No contribution at all.
Mr. Hundt. No contribution at all.
The Chairman. You know, it is very interesting, I have been
trying to get--you see, what we had is, you and I seven years
ago, prior to 1996, we all owned, let us say at that time, Bell
Atlantic up here. I have been paying the rates for the last 36
years, or back home, not 80 years, but almost that. I am still
20 years younger than Strom.
[Laughter.]
The Chairman. But that was Bell South, but what we had was
not a subsidy. We set up the monopoly and said, you do not have
any competition, and you have got the right of way and
everything else of that kind and no competition, and the
guaranteed return, and it worked, and so here we were sitting
around, everybody agreed, wait a minute, when we deregulate,
deregulate, deregulate--particularly me, it did not work with
the airlines, and it did not work with natural gas, and it did
not work with trucking. It did not work with the Securities and
Exchange Commission, all of this deregulate, deregulate,
deregulate.
I said, wait a minute, I am a born again regulator now.
Before I go along with this deregulation, I want to make sure
we do not mess up the RBOCs, the Bell Companies. You used the
word dependable seven times, I counted them, Mr. Mundie, and
they are dependable. I can pick up my telephone and I can get
Verizon right now, and so the system is working.
One of the biggest reasons they have all gone broke is, my
early morning TV, the district attorney in New York is carrying
five of those super duper, wonderful executives to the
hoosegow. I can tell you that right now. I mean, they were
swapping each other and everything else. That is why they lost
all the money, and now they lost all the employees you know
what I mean, so nobody says something is wrong with the law. If
somebody had said it, we would have amended the law right away.
You could get a majority vote around here.
I am back to Mr. Price's observation that the RBOCs'
monopoly is gone. What we had was the task of letting the RBOCs
continue to perform and give that good universal service,
common carrier responsibility and public interest. It was
working fine. And yet--let the competition ensue. Let it be
deregulated. How do you deregulate a monopoly? And I am hearing
you, Mr. Price, saying the monopoly is gone in 3 or 4 years.
How does that happen? Tell us about it. That is wonderful.
If we can get that and get all of the competition going,
that is what we all around here keep telling each other, is
that what we are trying to get is the competition, so how do
you get it? They have still got 91 percent, right this minute.
That is why Senator Dorgan says, you pick up your line--I have
got the same one that I have had for years, and still have the
same one here. There have been some mergers, but how has the
monopoly gone, as you see it?
Mr. Price. We acknowledge that cable has two-thirds market
share in broadband.
The Chairman. You have got two-thirds market share in
broadband in the business area?
Mr. Price. No, in the residential.
The Chairman. I mean in the residential area.
Mr. Price. That is right, in the residential. We
acknowledge that in wireless no one RBOC has more than a 25
percent market share, so now it is down to residential voice,
is the market that we are talking about. Ninety-one percent is
your figure. Let us take that as a good figure.
We see increasing substitution today from wireless. We are
going to see increasing substitution from cable. Now, is cable
ever going to have power down the line? I do not think so, not
near term, so we are talking about second lines. We are not
necessarily talking about lifeline voice service, so there may
be some period of time when it is still the primary line. Reed
tells me that two-thirds of lines are lifeline lines, the first
line.
I would tell you that 20 percent of the people today have a
proclivity to give up that lifeline service for mobile service,
and have the freedom of flexibility, so in time the residential
voice monopoly gets withered away. Does it go down to 40
percent, 50 percent, 60 percent? Probably towards the higher
end of that is what I would see in some period of time.
Now, with respect to broadband, broadband is already a
competitive market with respect to interconnecting a CLEC so
that he can have access to that business customer. Somehow I
think that needs to be preserved. I do not quite know how, but
in that part I am in agreement that we should allow the
competitor to get there, but there is a fundamental technology
difference and a choice that this country is going to have to
make, because if we want the RBOCs to upgrade to fiber, they
cannot do that easily any more, so there is a policy decision
that is going to have to be made here of, do you want pervasive
broadband, or do you want to preserve those CLECs in providing
that service to anybody.
The Chairman. Well, I am back, then, to the universal
service. I am thinking out loud, if I go all to wireless and
there is no universal service, and the rural areas and the
sparsely populated areas are underserved or unserved, they
could come undone. I mean, if you have got my monopoly gone
there is no reason for me to continue the wireline. Yes, the
RBOCs have taken on now the wireless, too. They will take on
that wireless, but why should they carry it into North Dakota?
That is a big problem.
Mr. Price. The whole telecommunications system is fraught
with subsidies.
The Chairman. All the time we get these smart witnesses. Is
there any comment, something you all want to correct, or
elaborate on? Chairman Hundt.
Mr. Hundt. Senator, I just would say that the whole economy
is looking in particular at the information sector for
leadership in the right direction, not in the wrong direction,
and this is a time when the government could play a crucial
role. The kind of bill Senator Allen was talking about would be
a big contribution, expanding universal service and having the
plan over the next 5 or 10 years to really have a truly high
speed network everywhere in this country, would be a tremendous
contribution.
We are right at that brink where we could--we all hope it
is not so. We could slip into our second recession in 2 years.
We should go the other way. We could have another resurgence of
growth in our economy. The congressional leadership is
absolutely critical.
The Chairman. Very good. Mr. Price, have you got any
elaboration?
Mr. Price. I think we need to do two things. One is the new
technologies. I am a big fan of Wi-Fi. I have it on my PC. I
love it. It is great service, but recognize the technology
issues that Craig points out. At 2\1/2\ or 5 gigahertz it goes
2 miles.
Mr. Mundie. 300 yards.
Mr. Price. So if you want to get a 50-mile radius in rural
areas you are down at 300 megahertz, or some pretty low----
Mr. Mundie. Well, it is different power, different antenna.
There are many ways to solve the problem without necessarily
changing the frequency, but the way that the band is regulated
today makes it very hard for people to do that.
Mr. Price. So it is not a little leap. It is not a little
snap to get there.
The second thing I would say is, I am very pessimistic
about this economy. When I look at the auto companies today
financing the customer purchases, it just brings to mind Lucent
and Nortel stuffing their equipment down the throats of all
their CLEC customers and financing consumer purchases that
would become unsustainable next year. So I worry about this
economy, and I am more free market than you would ever think,
but I am so scared for this economy that I say, let us do
something--let us do something that stimulates demand, because
if we do not, I feel bad about this sector in particular.
The Chairman. Very good. Mr. Mundie.
Mr. Mundie. First of all, I thought I would share with you
at the end that this really is an issue for ultimately the
country's national security. We learned on 9/11 among the
NSTAG, the National Security Telephone Advisory at the White
House, when the buildings fell down in New York and took out
the wireline network, we had congestion in the cell phone
network, and it turned out the only thing that people could
work with was their Blackberries, and they worked because they
were wireless, and they were not one of the centralized
environments as much, and the economic security today is
critical to national security, and the IT sector is, in fact,
one of the biggest contributors to overall productivity.
The reason other countries are so focused on this is, they
understand that, and we have kind of taken it for granted
because it was all invented in America, but I think for both
economic well-being, and then ultimately to have flexibility in
our critical communications infrastructure, finding a balance
between these wire line and wireless technologies and getting
them deployed I do not think can be emphasized enough these
days.
The Chairman. Technically you said, with the wireless and
everything else, but a lot of the firemen and policemen did not
get the wireless message in the building, that it was about to
come down. Technically, have you corrected that? Can we correct
that?
Mr. Mundie. Yes, I believe that can be corrected. And to
some extent those firemen are using radios that were designed
conceptually about in the 1940s and 1950s.
The Chairman. So the new designed radios is the logic
that----
Mr. Mundie. It is my opinion some of these novel radio
techniques could, in fact, be made to work in that environment.
I mean, for example, just having--Larry mentioned the idea of
having these mesh radios, where every radio guy gets to talk to
the next radio, and they become a lifeline, if you will, so if
you had that as the architecture that was on the belt of every
fireman in the World Trade Center, it might have been a
different result, because you did not have to worry about
propagating from a central tower, or down all the way to the
truck, and these are the kind of innovations that I think we
need to enable, and that is not happening now with the way we
manage spectrum in these highly regulated bands.
The Chairman. Mr. Lessig.
Mr. Lessig. First of all I want to go to something Senator
Allen said about finding a third way. I think it is important
to note what has been said on this panel about the different
ways to deal with this regulatory problem.
We had in the broadband wire context with the telcos a
requirement of open access, and Mr. Huber is describing moving
all of the broadband into a place where there would not be that
requirement anymore for open access at the physical layer of
the network--no common carrier requirements at all.
But I think what I have described, and in a minimal way I
think what Mr. Mundie has described is, even if you do that,
and you eliminate open access requirements at the physical
layer, it is critically important that you have a different
kind of regulation to assure that at least neutrality on the
network is sustained. So it might be that you give up a failed
method of regulating--(I am still a believer in many contexts
in open access, but let us just assume it fails.) But that does
not mean you go to no regulation. That means you change the
kind of regulation that you embrace.
The second important point, is that these new wireless
technologies, as Senator Allen and Mr. Mundie were suggesting,
are fundamentally different from the wireless technologies that
existed for the last 70 years. We do not understand them yet,
and they need lots of encouragement and space to grow, and the
FCC so far has been pretty good about protecting the unlicensed
band from lots of regulation. But it has got to be encouraged
by this Congress to open up a much wider range of spectrum for
this type of unpredictable innovation, not controlled by the
traditional carriers, because it is not the traditional
carriers that produce the great innovation that produced the
Internet.
It is shifting the ability to innovate and build outside of
those carriers to the millions of innovators at the edge of the
network that will be the key to turning this wireless
opportunity into something special.
My parents live in South Carolina, Senator, and I promised
them broadband as a Christmas present 5 years ago. But today, I
still cannot deliver on that promise, because there still is
not broadband in their community, even though they come from
the Hilton Head area. This is a failure of national policy.
Right now, I am living in Japan for this semester. In
Japan, they are offering 12 megabits per second DSL service for
$20 a month. That is 12 times what you can get in the United
States for \1/2\ the price that you pay for DSL service in the
United States right now. For $50 a month you can get 100
megabits per second. Now, that is a fundamentally different
opportunity for growth in Japan and many other countries that
we are missing because we failed to find a way to push this
innovation into the broadband space.
The Chairman. You see what Senator Allen and I have. We
have to contend with the Department of Defense. We have got to
contend with the FBI, Mr. Huber, because if we transfer it over
from Title II to Title I, then the FBI says, wait a minute, we
cannot wiretap and enforce the law.
But excuse me, Mr. Huber, your comments.
Mr. Huber. If the FBI has, in fact, told you they cannot
wiretap Title I services, I can give them some help, believe
me, Senator. It can be done.
The Chairman. We will have to work it out. We are working
it out.
Mr. Huber. Mr. Chairman, however much we may disagree about
what the law ought to be, we should be able to agree about what
the law is, and the law today is that the dominant provider of
broadband service to residents is--the provider that actually
serves two out of three residential customers that subscribe to
broadband today is deregulated, not ``should be,'' not ``might
be some day'': it is deregulated today, has been deregulated
since well before 1996. So all we are debating is, ought we
deregulate or regulate the nondominant providers, and that
makes no sense.
There is no serious disagreement among anybody, including
the Bell Companies, about the legacy copper network and legacy
voice services. That sharing decision has been made, and it is
going to stick. There is a lot of debate about pricing, but
there is no debate about the principle. The debate is about the
glass network that ought to be built by phone companies that
has not been built yet.
The Chairman. Well, one last question, George, unless you
have got any.
Senator Allen. No, I do not.
The Chairman. I am, Mr. Price, concerned not just about
communications, but the economy. I agree with you. I know
yesterday was a $386 billion deficit for fiscal 2002. Now, it
got up, in the early part of September. Last month, it got up
to 412, something like that, but they have been moving things
over into October to try to get it down below the 400 mark, but
you watch it, in the next 2 weeks it will zoom right over the
400 mark. So we ended up, instead of a $5.6 trillion surplus
this time last year, now we ended up this one fiscal year $400
billion, and the deficit and the balance of trade $400 billion,
and the manufacturing sector is just about gone.
Jack Welch led the way several years ago. He said I am not
contracting with any subcontractor for General Electric unless
you move to Mexico. People just do not factor that in. They are
talking about jobs, jobs, jobs, and fast track. Free trade, I
believe in free trade and everything else, so the economy is on
its heels, and we have got to do something, but--and I am
intrigued by the point, and I do not want to be quoted as
having asked a question, would you deregulate the RBOCs?
Mr. Price. Not yet.
The Chairman. When, at what stage?
Mr. Price. I would have a market share test. When market
share gets below X, then they are deregulated, and then you
would have to put some subsidy back in for rural. You would
have to do that.
The Chairman. Well, this has been outstanding. The
Committee is indebted to each of you. The Committee record will
stay open for further questions. Thank you very much. The
Committee will be in recess.
[Whereupon, at 11:45 a.m., the hearing was adjourned.]