[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
HEALTH OF THE TELECOMMUNICATION SECTOR: A PERSPECTIVE FROM INVESTORS
AND ECONOMISTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
FEBRUARY 5, 2003
__________
Serial No. 108-3
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U. S. GOVERNMENT PRINTING OFFICE
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____________________________________________________________________________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas Ranking Member
FRED UPTON, Michigan HENRY A. WAXMAN, California
CLIFF STEARNS, Florida EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania RICK BOUCHER, Virginia
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina SHERROD BROWN, Ohio
Vice Chairman BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois BART STUPAK, Michigan
HEATHER WILSON, New Mexico ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Telecommunications and the Internet
FRED UPTON, Michigan, Chairman
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas Ranking Member
CLIFF STEARNS, Florida BOBBY L. RUSH, Illinois
Vice Chairman KAREN McCARTHY, Missouri
PAUL E. GILLMOR, Ohio MICHAEL F. DOYLE, Pennsylvania
CHRISTOPHER COX, California JIM DAVIS, Florida
NATHAN DEAL, Georgia RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming BART GORDON, Tennessee
JOHN SHIMKUS, Illinois PETER DEUTSCH, Florida
HEATHER WILSON, New Mexico ANNA G. ESHOO, California
CHARLES W. ``CHIP'' PICKERING, BART STUPAK, Michigan
Mississippi ELIOT L. ENGEL, New York
VITO FOSSELLA, New York ALBERT R. WYNN, Maryland
CHARLES F. BASS, New Hampshire GENE GREEN, Texas
MARY BONO, California JOHN D. DINGELL, Michigan,
GREG WALDEN, Oregon (Ex Officio)
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Atkinson, Robert C., Director of Policy Research, Columbia
Institute for Tele-Information............................. 17
Bath, Blake, Managing Director, Lehman Brothers, Equity
Research................................................... 24
Brodeur, Stephen B., President, Cambridge Strategic
Management Group........................................... 27
Crandall, Robert W., Senior Fellow, The Brookings Institute.. 30
Strumingher, Eric, Investment Analyst, Cobalt Capital........ 42
(iii)
HEALTH OF THE TELECOMMUNICATION SECTOR: A PERSPECTIVE FROM INVESTORS
AND ECONOMISTS
----------
WEDNESDAY, FEBRUARY 5, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Telecommunications
and the Internet,
Washington, DC.
The subcommittee met, pursuant to notice, at 1 p.m., in
room 2123 Rayburn House Office Building, Hon. Fred Upton
(chairman) presiding.
Members present: Representatives Upton, Stearns, Gillmor,
Cox, Whitfield, Shimkus, Wilson, Bass, Terry, Tauzin (ex
officio), Markey, Davis, Gordon, Engel, Wynn, Green, and
Dingell (ex officio).
Staff present: Howard Waltzman, majority counsel; Will
Nordwind, policy coordinator; Hollyn Kidd, legislative clerk;
Jon Tripp, press; Gregg Rothschild, minority counsel; and
Brendan Kelsey, minority professional staff.
Mr. Upton. Before the Chair recognizes himself for an
opening statement, I have a brief unanimous consent request
that has been shared with all members of the subcommittee
yesterday.
As members may recall, there was a lengthy discussion about
opening statements at our Energy and Commerce Committee
organization meeting last week. Chairman Tauzin and Ranking
Member Dingell discussed a possible committee rule change to
address what are often very lengthy periods for opening
statements.
The following request is modeled after that discussion. I
would ask unanimous consent that during the period for opening
statements, and prior to the recognition of our first witness
for testimony, any member may completely defer his or her 3-
minute opening statement, and instead of using the 3 minutes,
transfer them during an initial round of witness questioning.
By way of explanation, a couple of points. One, if a member
comes after all opening statements have been completed, he or
she will be just entitled to the normal 5 minutes of
questioning. And, two, members may only defer their statement
completely, all 3 minutes, or not at all. That is, they can
deliver a 1-minute opening statement and then reserve 2 minutes
for questioning--that doesn't happen. That won't happen. It is
all or nothing.
So is there discussion on the request? Hearing none,
without objection, that will be the order, and the Chair thanks
all members. And I will not waive my right to give an opening
statement.
I will only get 5 minutes.
So good afternoon. I want to welcome everyone to the first
hearing in the 108th Congress of the Telecommunications and
Internet Subcommittee. I especially want to welcome our new
members on both sides of the aisle. In addition, I want to
especially recognize our able ranking member, Mr. Markey, and
our vice chairman, Mr. Stearns, who is on his way. And I look
forward to another productive 2 years.
While I am glad that we are meeting today, I wish we
weren't meeting under these circumstances. It has been said
that the telecommunications sector used to be the propeller of
our nation's economy, but it is now the heavy anchor weighing
it down.
The telecommunications sector has issued an SOS. The
industry has lost more than half a million jobs and $2 trillion
in market value. In addition, the sector is burdened by
approximately $1 trillion in debt. And what I always considered
industry giants in the telecommunications equipment
manufacturing and infrastructure field--companies like Lucent,
Nortel, Alcatel, Ericsson, Corning--they have suffered
devastating layoffs and massive cuts in capital investment, and
the news is no better elsewhere in the sector.
For Verizon, capital expenditures declined from $17.3
billion in 2001 to $11.9 billion in 2002. For SBC, capital
expenditures dropped from $11.2 billion in 2001 to $6.8 billion
in 2002. For Bell South, capital expenditures fell from $6
billion in 2001 to $3.8 billion in 2002. For Qwest, capital
expenditures dropped from $8.5 billion in 2001 to approximately
$3 billion in 2002. Thus, the total decline in capital
expenditures from 2001 to 2002, just by the RBOCs, was $17.5
billion.
The long distance carriers have also experienced a decline
in capital expenditure. AT&T's capital expenditures declined
from $5.8 billion in 2001 to $3.8 billion in 2002. Sprint
declined from $5.3 to $2.2.
Wireless companies have also experienced a significant
decline in capital expenditures. In 2001, capital expenditures
declined by 16.1 percent. In 2002, capital expenditures fell by
more than 25 percent. For the whole sector, some estimate that
the capital expenditures could decline an additional 30 percent
in 2003.
Of course, the dramatic decline in capital expenditures
throughout the sector is bad news for the consumer, since it
means less investment is flowing in for infrastructure to
provide new services or upgrades of the services that they
already have. The question is: how can we lift up the anchor
and get the telecommunications sector propelled and under full
steam?
As I look at the evidence and speak with investment
analysts and economists, I believe that the FCC's rules
implementing the Telecommunications Act in 1996, particularly
UNE-P and unbundling of new broadband facilities, have been a
major contributor to the massive decline in investment in the
telecommunications sector, particularly in facilities.
Of course, all of the downstream telecommunications
equipment manufacturers have suffered greatly as a result of
this, too. So it is not just an ILEC versus a CLEC problem. As
I mentioned earlier, the consumer is losing out, too, and all
boats seem to be sinking with this receding tide.
Now is the time for the FCC to act boldly and decisively to
overhaul the regulations. Actions on the triennial review is
due, and simply reshuffling the deck chairs on this sinking
ship will not help.
February 26 the subcommittee hopefully will hear from
Chairman Powell and the commissioners about the state of the
telecommunications economy, and we anxiously await their
testimony, not to mention action on the triennial review in the
meantime.
Today we will hear from investment analysts and economists
about the state of the economy, which will help us understand
what we need to do to stem the tide of water rushing over the
gunnels and turn that anchor back into the propeller of the
nation's economy.
I yield to my friend Mr. Markey for an opening statement.
Mr. Markey. Thank you, Mr. Chairman.
The telecommunications marketplace is in the doldrums. No
one disputes that. It is not entirely surprising that this is
the case, because the overall economy is in the doldrums as
well. The promise, however, of our telecommunications sector is
that it might help lift us out of the current recession, and
analyzing what can be done to restock the telecommunications
revolution is a worthy inquiry.
Wireline competition for voice and data services, wireless
competition from advanced mobile services to unlicensed Y-FI
technologies, the development of increased competition and
innovation from internet service providers, and competition in
the video marketplace are all important areas where
competition-based telecommunications policy can help to promote
economic growth, create much needed jobs, drive innovation, and
offer consumers choices.
How to best start economic activity in this key sector of
our overall economy is a question that may have multiple
answers and suggestions. It would be helpful if the
subcommittee is afforded an opportunity to hear from all such
legitimate viewpoints. As brilliant as today's panelists are in
their own fields and areas of expertise, there are equally
brilliant men and women who may differ dramatically from the
conclusions reached or suggestions offered by today's panel.
For a variety of reasons, we were unable to get a broader
cross-section of witnesses for the subcommittee hearing this
afternoon, but my hope is that in the future the subcommittee
will make a special effort to provide members of the
subcommittee a balanced panel as is possible.
The health of a marketplace sector can be measured in
various ways, and one's assessment of marketplace well-being
depends on what one considers optimum health. The workforce
looks to job growth and reasonable wage increases over time.
Consumers typically look to choice, service quality, and price.
Investors often look to the bottom line--that is,
profitability. Manufacturers like to have many outlets for
their products unless, of course, they think they will win the
contractor's supply long term, one dominant provider.
Investor risk assessment of what is a healthy investment
might put them at odds with consumers and workers. Dozens of
companies engaging in fierce competition with other lower
prices is what the vast majority of consumers look for. But for
investors, that kind of competition may not be good for
investment, because it is a highly competitive marketplace,
often with low profitability.
I think that prior to proposing myriad solutions to a
problem it is useful to identify clearly and convincingly the
problems we propose to remedy. So what is the problem? Is there
insufficient competition? Are there too many regulations on the
incumbent Bell companies?
Are the subsidies in the system for supporting universal
service bloated and unnecessary? Or do we need more subsidies
to encourage deployment of certain broadband technologies? Do
current FCC regulations need to be modified, or should they
simply be eliminated? Is our nation's immediate
telecommunications policy goal deregulation or, rather,
demonopolization?
The challenge for telecommunications policymakers for many
years has been to reform telecommunications statutes and rules
in a way that substitutes a sound competitive policy framework
consistent with the public interest, for a hitherto monopoly
provided services and rules by which such monopolies were
regulated and safeguarded from competition.
I believe a competition-based policy is preferable, because
it maximizes consumer choice, job creation, technological
innovation, and service quality, and price reductions.
Last Congress the subcommittee heard testimony from Mr.
James Henry, managing partner of Greenfield Hill Capital, who I
think captured part of the problem very succinctly. He said,
``It is my observation, as an industry analyst, that the
investment community's willingness to fund telecom companies in
general, and CLECs in particular, is adversely impacted by
legislative and regulatory uncertainty.''
Since passage of the Telecommunications Act, we have
certainly seen ample uncertainty, through legal challenges to
implementing rules, constitutional challenges to the act
itself. My recommendation would be to abide by a sort of
telecommunications Hippocratic oath. First, do no harm.
Thank you, Mr. Chairman. I look forward to hearing from the
witnesses.
Mr. Upton. Thank you, Mr. Markey.
Mr. Tauzin?
Chairman Tauzin. Thank you, Mr. Chairman.
Let me first join with so many others who asked for prayers
and thoughts for the families of the shuttle Columbia who lost
their lives this weekend. We are actually going to reverse our
schedules tomorrow that we can all mourn together, and I think
it is important in every one of our hearings that we remember
them again and particularly in our prayers.
Mr. Chairman, this is an important hearing. The fact of the
matter is that whoever you use for service providers in this
area have been shrinking, and capital expenditures by the same
service providers have been plummeting. The numbers are
astounding. The capital expenditures for the four baby Bells,
for example, dropped $17.5 billion from 2001 to 2002. And the
reduction in those expenditures doesn't just mean less, you
know, new services to be offered consumers or better systems to
offer those new services on. It means that the equipment
manufacturers are literally in the dumps.
The U.S. high tech equipment manufacturing base, in fact,
is dying. Companies have laid off hundreds of thousands of
employees, and they have idled many plants that used to be the
economic backbone of their communities.
For example, Lucent, which employed 150,000 people in 1999,
now plans to cut its workforce by 35,000 by the end of this
year. And Corning has been forced to idle four of its five
fiber optic plants. And, frankly, I am tired of seeing the
distressed look of our colleague Amo Houghton when I meet him
on the floor.
They can't afford to starve much longer, or they are gone.
And it doesn't take an economic genius to figure out what is
wrong here. All you have to know is that when you have rules in
place that tell an incumbent telephone company, ``If you build
new facilities, your competitors can use them to steal your
customers,'' and tells the competitor, ``It is better for you
to park your facilities, not use your own switches, because it
is cheaper under the Federal rules to use the incumbent
telephone company's facilities.''
Now, common sense tells you that when you have rules like
that in place that disincentivize the investment into new
facilities by the incumbents, and actually create a condition
with those who compete against those incumbents, who have built
their own facilities, no longer use them because it is cheaper
to use at the subsidized rates the facilities of the incumbent
companies, but none of them have an incentive to invest in new
facilities. The incumbents won't invest, the challengers won't
invest, and the equipment manufacturers die on the vine.
Now it doesn't take an economic genius to figure that one
out. And the first step this FCC ought to take is to rip the
rules that were put in place by Al Gore and Reed Hunt out by
the roots and throw them away. At the very least, our
Republican members of the FCC should run a wholesale change in
the regulatory approach that was taken by Al Gore and Reed
Hunt.
The FCC needs today to show some real leadership and
vision. The so-called UNE-P rules ought to be abolished. New
facilities, especially fiber, should not be subject to
unbundling rules. We ought to create an incentive for the
incumbents to lay out that fiber and connect up America, and we
ought to create an incentive for those who want to compete
against them to build their own facilities, rather than to idle
their facilities to you at subsidized government rates the
facilities of their competitors.
We make that simple change, and investments will grow
again. Equipment manufacturers will come alive again, and the
sector of our high-tech economy might stop starving to death.
Mr. Chairman, thank you for holding this hearing today. I
look forward to hearing the testimony of witnesses.
[The prepared statement of Hon. W.J. ``Billy'' Tauzin
follows:]
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Mr. Chairman, thank you for holding this important hearing today.
The telecommunications sector has sunk into a state of economic
malaise. Revenues for service providers have been shrinking. Capital
expenditures by service providers have been plummeting. Capital
expenditures for just the four Baby Bells dropped $17.5 billion from
2001 to 2002.
This has obvious implications for consumers because it means that
service providers have less money to spend on making improvements to
their current infrastructure and on deploying new equipment in order to
offer advanced services.
But the reduction in capital expenditures has much worse
implications for equipment manufacturers. The U.S. high-tech equipment
manufacturing base is dying. These companies have laid off hundreds of
thousands of employees and idled many plants that were the economic
backbones of their communities.
Lucent, which employed 150,000 people in 1999, has announced plans
to cut its workforce to 35,000 by the end of this year. Corning has
been forced to idle four of its five fiber optics plants.
These companies cannot afford to starve for much longer. While
there are business and general economic reasons that affect capital
expenditures, government policy does play a part, and the FCC's current
unbundling regulations are killing these companies.
Rules that require a company to share parts of its network, even
new parts of its network, with competitors are perverse. These rules
stifle investment by giving ILECs a disincentive to deploy new
facilities. Why would you deploy new facilities when competitors can
use that equipment to steal your customers?
The FCC's current rules also provide a disincentive for CLECs to
deploy their own facilities. Under the FCC's twisted scheme, it is more
cost-efficient for a CLEC to use all of an incumbent's facilities than
to deploy its own equipment. And the fact that neither the ILECs nor
the CLECs have an incentive to deploy new facilities means one thing
for equipment manufacturers--they will continue to lay off people and
close plants important to many of our communities.
Mr. Chairman, Michael Powell's FCC needs to rip the rules put in
place by Al Gore and Reed Hundt out by the roots and throw them away.
At the very least, our Republican FCC Commissioners should want a
wholesale change to the overly-regulatory approach taken by Al Gore and
Reed Hundt. The FCC must show leadership and vision in this area. The
so-called UNE-P must be abolished and new facilities, especially fiber,
should not be subject to the unbundling rules.
Only through these changes will all companies have the proper
incentive to invest in new facilities. And only through these changes
will equipment manufacturers ever recover.
Mr. Chairman, thank you again for holding this hearing today, and I
look forward to hearing the testimony of our witnesses.
Mr. Upton. Thank you, Mr. Chairman.
Mr. Dingell?
Mr. Dingell. Mr. Chairman, I thank you. Mr. Chairman, I
commend you for holding this subcommittee's first hearing on
the dismal state of our nation's telecommunications industry.
This hearing is very badly needed and will serve a very useful
purpose. Corrective action is needed now to restore vigor to
this vital sector of our nation's economy.
In the past 3 years, we have lost about 600,000 jobs
amongst telecommunications carriers and equipment vendors.
These were good, rewarding, and productive jobs. Many of them
were union jobs. Capital investment is decreasing by tens of
billions of dollars annually. In 2002 alone, there was a
decline of roughly 47 percent in capital expenditures for the
telecommunications industry. Without this investment, our
ability to innovate and keep these high-paying manufacturing
jobs in America over the long term is put at risk.
Telecommunications companies and the equipment suppliers
lost better than $2 trillion in value since March of 2002.
Millions of retirees and pensioners have been left with fewer
assets to tend to their needs as they grow older. Bankruptcies
litter the telecommunications landscape. Although the economic
toll is great, the human toll may even be greater.
Last year we in the House did our part to revive the
telecommunications sector. By nearly a two to one margin, we
passed the Tauzin-Dingell bill to facilitate and to accelerate
the deployment of broadband services to all Americans. That
legislation, had it been enacted, would have reversed the cycle
of disinvestment and created proper regulatory frameworks for
new investment in broadband networks.
The high tech industry has made it clear that in filings
before the FCC, and in numerous public statements, that
liberating the last mile to the home from the outdated and
unsuited old telephone network is critical to unlocking
investment in broadband infrastructure and services. Our bill
did exactly that, while preserving access of internet service
providers to these networks.
Unfortunately, the bill died in the Senate, and opportunity
was lost. Precious time has been wasted, and the American
people have suffered. The state of the industry tends to show
that it was an unwise act by the Senate.
But another opportunity lies now in front of us. The FCC
has five major pending proceedings before it, the outcomes of
which have the potential to reshape the telecommunications
industry, and I believe in a desirable way. The most imminent
of these decisions involves reexamination of the obligation of
incumbent local exchange carriers to unbundle their network
elements and to provide them to competitive local exchange
carriers at wholesale rates.
Last week I joined Chairman Tauzin, subcommittee Chairman
Upton, and 19 other members of this committee in sending a
letter to Chairman Powell outlining our reviews regarding key
aspects of the Commission's triennial review. I would counsel
the FCC to read that letter with great care. I also would ask
unanimous consent that it be inserted in the record following
my statement.
Mr. Chairman, let me reiterate a few key points. First, it
is time to abolish the UNE platform or UNE-P method of resale.
It is a curious, and, indeed, bizarre invention of the
Commission that subverted both the language and the clear
intent of the 1996 Telecommunications Act. Perhaps more than
any other failing of the Commission in implementing the 1996
Act--and its failings have been very many--UNE-P has been
destructive of the capital and infrastructure investment in the
telecommunications sector.
Second, as a part of its statutory and court-mandated
analysis of the network elements that must be unbundled, the
Commission should conclude that there is no ILEC obligation to
provide unbundled access to fiber loops and sub-loops used for
the transmission of packet-based services. Such a rule would
open the door to new investment in broadband networks, enabling
consumers to reap the benefits of high-speed internet services.
Finally, the FCC must discharge its clear responsibilities
under the 1996 Act, which do not permit it to defer to the
States as it undertakes its review of which network elements
must be provided on an unbundled basis. This is a defining
moment for the Commission.
The committee can help the Commission to understand that
fact. It can put us back on the road to facilities-based
competition. It can reconfigure the regulatory environment to
provide incentives for investment in equipment and
infrastructure. Now is the time for decisive Commission action.
If the Commission fails, then the Congress must act.
Mr. Chairman, I commend you for the hearing, and I thank
you for this opportunity to present this statement.
[The letter follows:]
U.S. House of Representatives
Committee on Energy and Commerce
January 29, 2003
The Honorable Michael K. Powell
Chairman
Federal Communications Commission
445 12th Street, S.W.
Washington, DC 20554
Dear Chairman Powell: We ask that you take prompt action to change
misguided regulations that have badly distorted important
telecommunications policies. As we first made clear with our colleagues
in our letter of September 12, 2002, Congress intended the
Telecommunications Act of 1996 ('96 Act) to promote choice and
competition for local exchange and other services--ultimately through
facilities-based competition. In this respect, the implementation of
the '96 Act by the Federal Communications Commission (FCC) has been a
failure. Rather than fostering facilities-based competition, the FCC's
local-competition rules have encouraged competitive local exchange
carriers (CLECs) to rely exclusively on networks owned and operated by
incumbent local exchange carriers (ILECs) to provide services to
residential consumers. These policies subvert the intent of the '96 Act
and must be reversed.
The '96 Act prescribed three methods of competitive entry for
CLECs: reselling an ILEC's service, using a CLEC's facilities
exclusively, and using a CLEC's facilities in combination with an
ILEC's facilities through the purchase of unbundled network elements
from the ILEC. However, the FCC distorted the '96 Act's requirements to
manufacture a fourth method of entry by creating the unbundled network
element platform or UNE-P--in essence a back-door way of forcing the
ILECs to resell the entire local phone service. To further exacerbate
the problem, the FCC developed a pricing model for the UNE-P that is
based on a hypothetical cost model rather than on actual operating
costs. The hypothetical model permits CLECs to lease network elements
at a price that is lower than what it cost ILECs to purchase and
maintain the elements.
As a result, the FCC created a regulatory fiction that provided
CLECs with a disincentive to invest in their own facilities. No
competing carrier has an incentive to risk capital and invest in its
own facilities when it can simply lease an ILEC's network elements at
below-cost prices and resell the service. Recent FCC data has confirmed
the absurdity of this policy. According to the FCC's 2002 Local
Competition Report, the number of customers served by CLECs using UNE-P
increased from approximately 500,000 in 1999 to 7.5 million at the end
of June, 2002.1 Ironically, AT&T and Worldcom, which are
reported to have more than one million UNE-P customers in New York
state, operate at least 28 local circuit switches in New York, but do
not use the switches to provide local service to these
customers.2
---------------------------------------------------------------------------
\1\ In contrast, the number of customers served by CLECs using
their own switching increased from approximately 1 million in 1999 to 4
million at the end of June, 2002. In addition, the number of customers
served by CLECs reselling an ILEC's service declined from approximately
4.5 million in 1999 to 3.5 million at the end of June, 2002.
\2\ Telecordia, Local Exchange Routing Guide (LERG), January 2002.
---------------------------------------------------------------------------
There is no question that the '96 Act contemplated that a CLEC
would be permitted to use elements of an ILEC's network in combination
with elements of the CLEC's network. But the UNE-P is a regulatory
fiction that must be eliminated.
In addition, in the context of the Triennial Review, the FCC must
produce a sensible national policy regarding which network elements
meet the '96 Act's stringent ``necessary and impair'' analysis and,
therefore, must be provided on an unbundled basis. Delegation of that
determination to the states would be a gross abdication of the FCC's
statutory responsibility and a clear violation of the law.
Section 251(d)(1) of the Communications Act, as amended by the'96
Act, requires the FCC, not the states, to ``complete all actions
necessary to establish regulations to implement the requirements of
this section,'' including the determination of which network elements
must be made available on an unbundled basis. Section 251(d)(2)
requires the FCC to determine, for network elements that are not
proprietary in nature, ``whether the failure to provide access to such
networks elements would impair the ability of the telecommunications
carrier seeking access to provide the services that it seeks to
offer.'' While Section 251(d)(3) permits the preservation of state
access regulations, such regulations cannot ``substantially prevent
implementation of the requirements of this section and the purposes of
this part.'' Thus, if the FCC determines that the lack of access on an
unbundled basis to a particular network element would not constitute an
``impairment'' under Section 251(d)(2), any state regulation that
required unbundled access to that element would violate Section
251(d)(3).
The FCC, therefore, must engage in a rigorous analysis to justify
why ILECs should be required to unbundle network elements, and a
conclusion by the FCC that an element does not have to be unbundled
cannot be contradicted, ignored, or overruled by state regulations. As
the FCC conducts this analysis, there are particular elements that
should not have to be provided on an unbundled basis in accordance with
Section 251(c)(3).
For example, circuit switching should not have to be provided by an
ILEC on an unbundled basis, with the possible exception of an extremely
limited number of remote and rural areas.3 More than 200
CLECs operate approximately 1,300 local circuit switches.4
According to the National Cable and Telecommunications Association, by
June 30, 2002, cable companies were providing telephone service to
approximately 2.1 million subscribers, primarily over their own
switches. How could the FCC determine that a CLEC would be impaired if
it did not have access on an unbundled basis to an ILEC's circuit
switch when thousands of such switches are being self-provisioned by
hundreds of CLECs serving millions of customers?
---------------------------------------------------------------------------
\3\ Packet switching should also not have to be provided on an
unbundled basis. The FCC in the UNE Remand Order already acknowledged
the pervasive deployment of packet switching by CLECs and declined to
require packet switching to be unbundled except in limited
circumstances. Given the even greater CLEC deployment of packet
switching today, the FCC should eliminate the unbundling requirement
for packet switching in all circumstances.
\4\ Telecordia, Local Exchange Routing Guide (LERG), January 2002.
---------------------------------------------------------------------------
Nor should the FCC require ILECs to provide unbundled access to
fiber loops and subloops used to transmit packet-based services. The
telecommunications manufacturing sector has been devastated by the
dramatic decline in capital spending by telecommunications carriers and
broadband service providers. While capital spending has declined for
several reasons, the FCC's requirement that ILECs provide access on an
unbundled basis to new facilities is one of the primary reasons why
ILECs have reduced their capital investment. We cannot expect ILECs to
invest in and deploy new facilities when they are required to share
such facilities with competitors at below-market prices. Moreover, the
pervasive deployment of fiber loops and subloops would dramatically
improve the types of services that consumers could access at home and
at work. While access to broadband services transmitted over copper
loops has increased over the past several years, such services pale in
comparison to the types of capabilities that consumers could enjoy if
fiber accounted for a greater portion of so-called last-mile
facilities. Our nation's consumers deserve no less. In addition,
telecommunications equipment manufacturers need the ``shot-in-the-arm''
that would accompany massive investment in fiber deployment by ILECs.
The FCC's impairment analysis regarding fiber loops and subloops
should support a conclusion that such facilities should not be subject
to the unbundling requirement. The FCC's impairment analysis must take
into consideration the fact that ILECs do not enjoy an advantage over
CLECs with respect to investment in new facilities. The tens of
billions of dollars that cable companies have invested to deploy fiber-
based facilities throughout their networks demonstrates that investment
made after the enactment of the '96 Act requires a different impairment
analysis than facilities that have been deployed by ILECs for decades.
Not surprisingly, the cable companies have made this investment in the
absence of the unbundling regulations currently imposed on ILECs.
Mr. Chairman, your agency faces a tremendous responsibility. The
future of the U.S. telecommunications equipment manufacturing base will
be greatly affected by the outcome of the Triennial Review. You have an
opportunity to remove regulatory impediments to investment in new
networks and to facilities-based competition. The current rules have
greatly undermined the achievement of these important goals. We
strongly urge you to reshape the FCC's existing framework and put the
telecommunications sector on a path to increased investment and greater
facilities-based competition.
We look forward to your response to our correspondence and to you
and your fellow commissioners testifying before the Committee on Energy
and Commerce's Subcommittee on Telecommunications and the Internet in
the coming weeks.
Sincerely,
W.J. ``Billy'' Tauzin, Fred Upton, Joe Barton, Nathan Deal, Richard
M. Burr, John M. Shimkus, Vito Fossella, Roy Blunt, Steve Buyer,
George Radanovich, Greg Walden, Charles Bass, Mary Bono, Lee Terry,
John D. Dingell, Rick Boucher, Edolphus Towns, Bobby L. Rush, Eliot
Engel, Albert Wynn, , Gene Green, and Chris John.
cc: Commissioner Kathleen Abernathy
Commissioner Jonathan Adelstein
Commissioner Michael Copps
Commissioner Kevin Martin
Mr. Upton. Thank you great gentlemen from the State of
Michigan.
Mr. Shimkus?
Mr. Shimkus. Well, Mr. Chairman, I would be the first one
to waive my opening statements and claim 3 minutes for
questions.
Mr. Upton. Done.
Mr. Whitfield?
Mr. Whitfield. I would like to waive my opening statement.
Mr. Upton. Mr. Stearns?
Mr. Stearns. Mr. Chairman, I want to exercise----
Mr. Upton. The gentleman is recognized for 3 minutes.
Mr. Stearns. Thank you, Mr. Chairman. And I commend you for
having this hearing.
I was part of the Telecom Conference Committee when we
passed the Communications Act and saw the possibilities, and I
think for a while there we thought that it was working. And, of
course, recently we have seen a lot of nosedive in businesses
and bankruptcies, and capital investment has come down.
But I submit that part of this is just the normal business
cycle, and also I submit that part of this is dealing with the
Financial Accounting Standards Board. As chairman of that
subcommittee with jurisdiction over that, I feel a lot of what
happened was an overextension of capital, and a lot of these
companies that went into bankruptcy were cooking the books. So
you can't stop people from cooking the books unless you have an
accounting standard which is transparent, which we don't have.
And I submit, Mr. Chairman, that we still need more
transparency with the financial accounting standard. But I
think you and the full committee chairman have touched on a
very important aspect about this whole problem, and that is the
regulatory uncertainty, and I am sure some of the witnesses
will bring that out.
Perhaps the Act, when it was implemented, created a
regulatory morass of rules and procedures that are overreaching
and bureaucratic and unnecessary, so that would be good to find
out if that is true today. There is a number of things that the
FCC could do, and I hope they will do.
Mr. Chairman, I have always submitted, and I think Chairman
Tauzin would agree, that if we could get more spectrum for
third generation wireless, that would be an impact, enormous
impact for the telecommunications industry by freeing up the
analog, the UHF on the video--the television, to give them that
third spectrum--that spectrum for the third generation.
And, second, if we could iron out the additional content
rules so that high definition television could start to
explode. And, third, if broadband could be more available to
all the public, so that, in fact, instead of an ISDN line or a
DSL line or a 56K modem, you had broadband, a million or 2
million kilobits per second.
Now, you would leave your computer on. You would be able to
download videos, pay for them, download CDs, and there would be
an enormous increase in productivity in America. So third
generation wireless, high definition television, and broadband
are three of the areas that I think would help. And regulatory
uncertain in this area would be helpful if the FCC would move
to alleviate that problem.
I will conclude by saying that in a capitalistic system
like we have we can expect up and downs, and I think the market
will come back. And, obviously, I think the government should
get out of the way and let industry have the opportunity to do
so.
And I thank you, Mr. Chairman.
Mr. Upton. Thank you, Mr. Stearns.
Mr. Wynn?
Mr. Wynn. Thank you, Mr. Chairman. I appreciate the trend
that seems to be evident of members waiving, and I also
appreciate the chairman's wisdom in giving us the option to
defer. And so I will take advantage of that at this point.
Thank you.
Mr. Upton. Thank you.
Mr. Gordon?
Mr. Gordon. I will also defer, so we can get on and listen
to our witnesses. thank you.
Mr. Upton. Mr. Gillmor?
Mr. Gillmor. Thank you, Mr. Chairman, and I will be brief.
You know, what a tremendous difference just a little bit of
time makes. A few years ago telecom stocks were going through
the ceiling. Profits were strong, and all departments were
talking about the endless growth in telecom. Employment was
high.
Then, everything hit the wall, and revenues actually
declined for a lot of companies, and they still are. There are
billions of dollars of investment lost, very little investment,
very little now in equipment, and for those affected worst of
all, there were tens of thousands of people laid off probably
permanently.
So I guess what I would hope we would have--I would like to
let them answer--the panelists answer the questions that have
been raised on the FCC rule as it affects the regional
telephones and what impact that has had on investment and will
have in the future. But also, I would like to know whether this
group thinks something has fundamentally changed in telecom. Is
it still a growth industry, or are we going to see kind of a
stable--more of the same for the next couple of years?
So those are the kind of things hopefully that will be
developed. I do have a statement that I would ask go into the
record in addition to what I have just said. And with that, I
will waive back, Mr. Chairman.
[The prepared statement of Hon. Paul E. Gillmor follows:]
Prepared Statement of Paul E. Gillmor, a Representative in Congress
from the State of Ohio
I thank the Chairman for the opportunity to address the health of
the telecommunications sector, as well as providing an environment in
which Members are offered the chance to learn more about and discuss
this important subject without any kind of commitment to supporting or
opposing specific legislation.
Over the years, this subcommittee has been active in keeping pace
with the high-speed developments in the private sector. However, we
must also give special attention when the telecommunications industry
is facing difficulty. There is no question that this sector is
experiencing a decline in business and investment. With the lack of new
infrastructure, equipment suppliers suffer, as do service providers and
their employees, further stunting research and development. Ultimately,
this slows consumer spending and demands for telecommunications
services.
Keeping this scenario in mind, I look forward to hearing from the
expert witness panel of investors and economists, and in particular,
any feedback regarding potential regulatory solutions, such as the
Federal Communication Commission's (FCC) upcoming unbundled network
element (UNE) Triennial Review.
In my home state of Ohio, incumbent local exchange carriers (ILECS)
employ thousands and serve many more. In my rural district in Northwest
Ohio, one incumbent local phone company employs 325 employees, serving
138,000 of my constituents. They, along with others, have consistently
conveyed their concerns regarding competitors' exclusive reliance on
their networks, preventing facilities-based competition. They are also
troubled by the potential regulation of voice services into an already
competitive broadband market. I also share their concerns, and feel
that this hearing is certainly a step in the right direction, as
Congress should continue to focus on spurring growth within the
telecommunications sector.
As we all are aware, there is a great deal of controversy with
respect to the deployment of broadband services. This complex issue has
divided Congress and the American people, as well as polarized segments
of the telecommunications industry. However, we also know that
broadband deployment is essential, especially in rural America.
Communities equipped with broadband technology provide an environment
conducive to encouraging economic growth by attracting new business,
residents, knowledge, and jobs.
Again, I thank the Chairman and yield back the remainder of my
time.
Mr. Upton. Thank you.
Mrs. Wilson?
Mrs. Wilson. Thank you, Mr. Chairman. I would ask unanimous
consent that at the appropriate point in the record to include
a piece of research by J.P. Morgan, U.S. Equity Research, and
it is entitled ``Communications Equipment: Potential FCC
Ruling,'' and it is dated January 16, 2003.
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In addition to that, I would have some questions that I
would like to have submitted for the record if--in the
eventuality that I am not here at the time that you come to me.
Mr. Upton. Without objection.
Mrs. Wilson. Thank you, Mr. Chairman. And with that, I look
forward to hearing the witnesses.
Mr. Upton. Thank you.
Mr. Terry? Mr. Terry defers.
Okay. The experiment worked. Congratulations.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
Thank you, Mr. Chairman.
I would like to thank you all for coming Today to share your views
on the health of the telecommunications sector.
As experts on economics and financial markets, I look forward to
hearing your testimony.
As you know, since the passage of the Telecommunications Act of
1996, we have seen a great deal of change in how these important
services affect our country; from home and work, to security and
defense, and as an engine helping drive our economy.
Hindsight has shown us that there is a close correlation between
the economic boom of the late 1990's, and the passage of this act.
Today, however, we are witnessing a steep decline in capital
expenditures by the telecom sector which appears to be having a
substantial effect on the health of the economy. Now that this act is
reaching a point of maturity, we need to ascertain what barriers exist
to maximizing the benefits customers receive while giving companies a
firm, clear and dependable regulatory environment to compete in.
In this hearing I would like to learn your opinions about these
barriers: are they regulatory in nature? Can congress address them? Or
are they simply manifestations of the business cycle? In short, we must
find the cause and fix it before it's too late. With equipment
manufacturers downsizing and investment in new technology stalled, we
need to exhaust our options as a Congress, if necessary, to right the
ship and achieve the true intent of the Telecommunications Act.
An important issue to me is the closing of the gap between rural
and urban service. Representing a rural state, I know firsthand how
important telecommunications are to Wyoming residents. They are a
lifeline. Often with hundreds of miles separating cities, our phone
lines allow us to connect to our neighbors, the Internet, and
participate in the global economy, and do so while living in our
rugged, frontier state. Unfortunately, rural America lags behind the
rest of the country in comprehensive choices and innovative
telecommunications solutions. I would like to see that changed.
I do understand that there are inherent costs in serving rural
markets that don't exist in other places. Nevertheless, it is important
to ensure that any legislative solution or regulatory approach that is
taken keep these real and serious concerns in mind.
I look forward to hearing your testimony and welcome you to the
Subcommittee.
Mr. Upton. We are delighted to have a panel of outstanding
witnesses today, and we will be led off by Mr. Robert Atkinson,
Director of Policy Research-CITI, from Columbia University; Mr.
Blake Bath, Managing Director of Lehman Brothers, Equity
Research; Mr. Steve Brodeur, President of Cambridge Strategic
Management Group; Mr. Robert Crandall, Senior Fellow of The
Brookings Institute; and Mr. Eric Strumingher, Investment
Analyst for Cobalt Capital.
And, gentlemen, we appreciated getting your testimony in
advance. It is all made part of the record in its entirety, and
I would like to limit your opening remarks to 5 minutes. And we
will start with Mr. Atkinson. The time is yours. Welcome.
STATEMENTS OF ROBERT C. ATKINSON, DIRECTOR OF POLICY RESEARCH,
CITI, COLUMBIA UNIVERSITY; BLAKE BATH, MANAGING DIRECTOR,
LEHMAN BROTHERS, EQUITY RESEARCH; STEPHEN B. BRODEUR,
PRESIDENT, CAMBRIDGE STRATEGIC MANAGEMENT GROUP; ROBERT W.
CRANDALL, SENIOR FELLOW, THE BROOKINGS INSTITUTE; AND ERIC
STRUMINGHER, INVESTMENT ANALYST, COBALT CAPITAL
Mr. Atkinson. Good afternoon, Mr. Chairman and members of
the subcommittee. My name is Robert Atkinson. I am currently
Director of Policy Research at the Columbia Institute for Tele-
Information, CITI, at the Columbia Business School in New York.
I am appearing here today in my personal capacity rather
than on behalf of CITI, and I am bearing all the expenses of
being here. And I am glad to do so.
From 1985 to mid-1998, I was responsible for the regulatory
and public policy matters of Teleport Communications Group,
TCG, which was the first, and certainly by current standards
the most successful CLEC. TCG, I should note, was very much a
facilities-based CLEC. I was personally and deeply involved in
all of the legal and regulatory policy battles that shaped the
first 13 years of local competition. It started well beyond
1996.
In addition, and after a decade as a private company, I
helped to take TCG public in mid-1996 and saw how much investor
sentiment shapes the evolution of a business. Shortly after TCG
was acquired by AT&T in mid-1998, I had the good fortune of
being recruited to be a deputy chief of the FCC's Common
Carrier Bureau.
I developed the greatest respect and sympathy for the FCC
during my 18 months at the agency. The Commission was, and
still is, attempting to implement an ambiguous statute, the
Telecom Act of 1996, while the view of the industry was, and
still is, changing more quickly than regulatory due process and
agency workload can possibly accommodate.
One obvious problem was that there was little or no
experimental evidence for the Commission to evaluate, just
endless speculation, hypothesis, and rhetoric. I should also
note that during the very good times of the telecom boom there
seemed to be very little concern among the parties petitioning
the FCC about the fundamental health of the telecom industry or
whether any of the decisions the FCC was taking might have a
fundamentally adverse impact on the industry's health in the
future.
So what about the health of the telecom sector, and what is
the impact of regulation on that health? Briefly, as we have
obviously heard this morning, the overall health industry is
poor, but it is slowly improving. Clearly, some companies are
in critical condition and may not recover, and it is too soon
to predict when or if there will be full recovery from any
others. It is also too soon to know precisely how much
regulation has contributed to the meltdown, although I am sure
it is probably--it was a contributing factor.
It is worthwhile to note that the telecom meltdown was a
simultaneous worldwide event, and that each country has
different laws and regulations and different degrees of
regulation. I suppose it is possible that the simultaneous
nature of the meltdown around the world was just coincidence
and that the U.S. meltdown, in fact, could be largely
attributable to the peculiarities of U.S. regulation.
However, it is more likely that regulation played a
relatively minor role, and that other common factors, such as
the laws of physics and the laws of human nature, which are the
same in all countries, are more responsible.
CITI is in the midst of getting to the bottom of your
questions that you have asked us to address. With a grant from
the Alfred P. Sloan Foundation and supporting grants from a
cross-section of the telecom industry, CITI has embarked on a
year-long project entitled ``Remedies for Telecom Recovery.''
While our research and recommendations are far from
complete, I believe that my CITI colleague, Professor Eli Noam,
has put his finger on the reason for the poor health of the
telecom sector. He summed it up simply in just two words:
fundamental volatility. If the telecom industry has entered a
period of chronic volatility, which is brand-new, we have never
had this volatility before, boom-bust cycles will become the
norm rather than just a one-time aberration.
As we have discovered over the past 2 or 3 years, telecom
managers, investors, and regulators have few tools and little
or no experience in dealing with the uncertainties of a
volatile boom and bust. Deer in the headlights is an apt
description of how industry, government, and investors reacted
to the meltdown. We need to do better than be a herd of deer
next time.
One thing we can do is minimize some of the volatility.
Professor Noam has suggested, for example, that price cap
formulas could include automatic price inflaters that kick in
during downturn, and wholesale prices and interconnection
charges could be changed to distribute these additional
revenues throughout the sector.
Some changes in policy might also minimize the severity of
the next downturn, since some policies are--probably have
contributed to the volatility that we are currently
experiencing. It is certainly conventional wisdom that the
Telecom Act contributed to the telecom boom, but it is
important to note that the euphoria affected totally
unregulated sectors. So the connection between the boom and the
Telecom Act may not be as direct as some thing.
More certainly, the Telecom Act contributed to the bust.
First, it inhibited the experimentation that can reduce risk in
the first place and make recovery faster and more effective.
Simultaneously, the Act created a legal and policy gridlock
that spooked investors and prevented regulators from responding
more effectively to the downturn.
The gridlock comes from the micromanagement inherent in the
Act, which took away the FCC's freedom to adjust policies in
the light of unexpected or changed circumstances such as the
rapid development of the internet or a monumental bust in
investor confidence.
My co-management also provides fertile ground for endless
due process, so that every FCC decision seems to lead not to
finality but to litigation, where fundamental decisions are
made not by an expert agency but by judges and their law
clerks.
Mr. Upton. Mr. Atkinson, I am sorry to say your 5 minutes
is up, so----
Mr. Atkinson. It goes so quickly.
Mr. Upton. We will come back to you.
Mr. Atkinson. Thank you very much.
Mr. Upton. Very well. Thank you.
[The prepared statement of Robert C. Atkinson follows:]
Prepared Statement of Robert C. Atkinson, Director of Policy Research,
Columbia Institute for Tele-Information
Good afternoon, Mr. Chairman and Members of the Subcommittee.
Thank you for inviting me to testify this afternoon on the health
of the telecommunications industry despite the fact that I am neither
an investor nor an economist. Rather, I am a telecom lawyer and the
Director of Policy Research at the Columbia Institute for Tele-
Information (CITI) at the Columbia Business School in New York.
I should note, however, that I am appearing today in my personal
capacity rather than as a representative of CITI and that I am
personally bearing all the expenses associated with this testimony.
My personal involvement in the development of local competition
since 1985 shapes my view of the health of the sector and the impact of
regulation on that health, so let me briefly review that experience to
provide you with a context for my comments.
Beginning in 1985, I was responsible for the regulatory and public
policy matters at the Teleport Communications Group (TCG), which was
the first and certainly, by current standards, the most successful
CLEC. That put me personally right in the middle of the development of
the state and federal local competition policies that laid the
foundation for the Telecom Act of 1996.
TCG was very much a ``facilities-based'' CLEC, deploying our own
fiber optic networks and local switches in over 30 markets across the
company. We wanted to control our own destiny for two reasons: first,
we didn't expect our incumbent competitors to help us; and, second, we
wanted to differentiate our services on non-price factors so that we
wouldn't have to compete solely on the basis of price. I learned that
it takes a long, long time to develop a viable CLEC business: there is
no quick solution, just lots of blocking and tackling.
TCG was a private company for its first ten years. Because private
investors tend to be stingy with their capital, TCG had to be prudent,
conservative and grow carefully. But private capital is also patient,
which allowed TCG to pursue a longer term strategic vision rather than
responding to the whims of public equity markets. Based on this
experience, I was quite surprised to see that start-up CLECs were
immediately ``going public'' in the late 90s to cash in on valuations
based on ``comparables'' with mature ``incumbent CLECs'' such as TCG
and MFS. It was the case of the irrational business plan meeting the
irrational investor.
But after ten years of conservative, steady development and sound
financial performance under the discipline of private capital, TCG was
ready to ``go public'' in mid-1996, shortly after the passage of the
Telecom Act of 1996. The IPO ``road show'' and subsequent dealings with
the investors and analysts gave me the opportunity to see ``up close''
how the Telecom Act affected institutional investors' willingness to
invest in the CLEC sector.
In the typical ``roadshow'' presentation, our Chairman and CFO gave
a presentation on the company's background, strategy and solid
financial performance. Then the prospective investor, instead of
focusing on the fundamentals, would often turn to me and say ``what's
up with this Telecom Act?'' A frequent investor concern was whether the
Act would make it ``too easy'' for new entrants to get into the space
being occupied by established CLECs such as TCG and MFS and whether
unbundling would undercut the value of our existing investments. I
couldn't answer those questions because the roadshow was conducted
before the FCC's Local Competition Order of August of 1996 although the
answer turned out to be ``yes.'' But after that Order was released,
TCG's stock struggled for a time.
The last chapter of the TCG story was its acquisition by AT&T in
mid-1998, for about $12 billion in AT&T stock. The acquisition of TCG
represented a quick way for AT&T to develop local networks capable of
serving its large business customers, but it could do little for AT&T's
``mass market'' consumer and small business customers.
Fortunately for me, I was recruited to the FCC in late 1998 to be a
Deputy Chief of the Common Carrier Bureau and, in order to comply with
conflict-of-interest laws, was required to sell all of my telecom-
related investments at what turned out to be near the peak of the
bubble. As they say, it is better to be lucky than smart.
I developed the greatest respect and sympathy for the FCC during my
18 months at the agency. The Commission was (and still is) attempting
to implement an ambiguous statute--the Telecom Act of 1996--while
dealing with an industry that was (and still is) changing more quickly
than regulatory due process and agency workload can possibly
accommodate. One problem I saw was that little or no experimental
evidence was available for the Commission to evaluate--just endless
speculation, hypothesis and rhetoric.
I should also note that, during the very good times of the telecom
``boom,'' there seemed to be little concern among parties petitioning
the FCC about the fundamental health of the telecom industry or whether
any FCC decisions might have a fundamentally adverse impact on the
industry's health in the future.
To complete my personal context, I commuted to the FCC from my home
in New Jersey for 18 months--until mid-2000--when Eli Noam, the founder
of CITI, offered me the much shorter commute to Columbia in New York.
And I should add that I am the current Chairman of the North American
Numbering Council (NANC), the FCC advisory committee concerned with
managing the telephone numbering system.
So, what about the health of the telecom sector? And what is the
impact of current telecommunications regulation on the financial health
of telecommunications companies?
Briefly, the overall health of the industry is poor, but slowly
improving. Clearly, some elements are in critical condition and may not
recover at all and it is too soon to predict when or if there will be a
full recovery for many.
It is also too soon to know precisely how much regulation has
contributed to the ill health, although I'm sure that it was a
contributing factor. It is worthwhile to note that the telecom
``meltdown'' was a simultaneous, world-wide event and that each country
has different laws and regulations and different degrees of regulation.
So, the simultaneous nature of the meltdown might be just a
coincidence, and it might be possible that the U.S. meltdown could be
largely attributable to the peculiarities of U.S. regulation. However,
it is more likely that regulation played a relatively minor role and
that other common factors--such as the laws of physics and the laws of
human nature, which are the same in all countries--are responsible.
CITI is in the midst of answering your questions. With a grant from
the Alfred P. Sloan Foundation and supporting grants from a cross-
section of the telecom industry, CITI has embarked on a year-long
project entitled ``Remedies for Telecom Recovery''.
With the aid of advisory committees composed of experienced experts
from academia, industry, government, unions and consumer organizations,
we will be identifying the root causes of the telecom ``meltdown'' and
developing practical and workable managerial, financial and public
policy remedies. We expect to release a final report on our findings
and recommendations in early October and we hope that our work will
help this Subcommittee and other policy makers as well as telecom
managers and investors.
While our research and recommendations are far from complete, I
believe that my CITI colleague, Prof. Eli Noam, has put his finger on
the reason for the poor health of the telecom sector. He has summed it
up simply in just two words: fundamental volatility.
As Prof. Noam has pointed out, while business cycles are not new to
many industries, in telecom they are a new phenomenon. Until recently,
the network industry progressed in only one direction: up. Telecom used
to be less volatile than the economy as a whole. It grew steadily, with
long planning horizons hardly ruffled by the normal business cycle. But
today, in sharp contrast, the fragmented telecom sector may well have
become much more volatile than the overall economy: more like the
office construction business, less like water utilities. And the reason
for this is the basic cost characteristics of telecom industry have
evolved to be more like office construction and less like water.
Fortunately, the present downturn appears to be ending: there are
signs that the industry has ``bottomed'' and that the survivors will
begin to grow, albeit slowly and cautiously.
So, the real challenge for the industry is what happens next? If
the sector is just working through the consequences of a one-time boom
and bust, then there really isn't much that anyone should do: we'll be
back to the ``good ``ol days'' of steady growth and good health soon
enough.
But if Prof. Noam is correct, the telecom industry has entered a
pattern of chronic volatility where boom-bust cycles will become the
norm rather than an aberration.
As we discovered over the past 2-3 years, telecom managers,
investors and regulators have few tools and little or no experience to
deal with the uncertainties of a volatile boom and bust. ``Deer in the
headlights'' is an apt description of how industry, government and
investors responded.
If telecom has become a chronically volatile business, we need to
do better than be a herd of deer: all the corporate strategies and
cultures, all the investor expectations and all the laws and
regulations that were premised on certainty and predictable growth will
have to be changed, perhaps radically . . . and soon. This may require
wrenching changes in processes, policies and people.
Of course, we don't have much experience with volatility and
uncertainty in telecom to make long-term predictions. And it is true
that we are learning from the recent past.
As a first step, we can and probably should try to minimize some of
the volatility. For example, Prof. Noam has suggested that price cap
formulas could be modified to provide for automatic price inflators
that are triggered during a downturn, as a counter-cyclical measure. At
the same time, wholesale prices would be lowered, also automatically,
to distribute the additional revenues throughout the sector and to
establish a safeguard against unfair retail prices.
But if we fail to identify and then tame all the drivers of telecom
volatility--which is not likely in such a complex business--we must
expect considerable uncertainty to be with us into the foreseeable
future and we must be prepared to quickly develop and adopt different
management strategies, investor expectations, and laws and policies.
There are many causes for the boom and bust. CITI's ``Remedies for
Telecom Recovery'' project will attempt to catalog them and I'm sure
that, in addition to volatility, the list will include the separate
dot.com bubble, technological advances that increased capacity too
quickly, flawed business plans, and fraud. I believe that the
Telecommunications Act of 1996 contributed to the new volatility of the
telecommunications sector and is therefore a contributing cause of the
sector's current poor health.
Specifically, the Telecom Act amplified both the boom and the bust.
It is likely that the new law contributed to the telecom ``boom'' by
encouraging investors to believe that there would be less risk and more
reward from investing in the sector. (But it is important to note that
euphoria affected totally unregulated sectors, so the connection
between the boom and the Telecom Act may not be as direct as some
think.)
The Act contributed to the ``bust'' in two ways. First, it
inhibited the experimentation that can reduce risk in the first place
and can makes cures faster and more effective. Simultaneously, the Act
created a legal and policy ``gridlock'' that spooked investors and
prevented regulators from responding more effectively to the downturn.
For all its well-meaning intentions about loosening the grip of
government, the Telecommunications Act ended up centralizing all
fundamental telecommunications policy in the Federal Communications
Commission (FCC), effectively federalizing the 50 states with respect
to local competition and preempting the judicially-supervised modified
final judgment (MFJ) with respect to Bell entry into long distance.
This centralization appeared to satisfy investors' desire for less risk
and more reward by providing what turned out to be the illusion of
greater ``certainty'' and ``predictability''. This change in investor
sentiment made more capital available at less cost and that helped to
fuel the boom.
However, to assuage the concerns of the habitually warring and
suspicious factions in the industry, the Telecom Act did not simply
establish broad policy goals ``such as competition in all markets and
less regulation--and then leave it to the FCC to achieve them. Rather,
the statute itself sought to micromanage the implementation.
Unfortunately, the result has been a legal gridlock that has, so far,
thwarted achievement of the Act's fundamental objectives.
As we know, the Act set numerous implementation deadlines,
specified three pricing methodologies for ILEC-CLEC interconnection,
established a detailed system for negotiating, mediating and
arbitrating interconnection agreements, and imposed a 14-point
checklist to be satisfied before a Bell could offer long distance
services. There is nothing substantively wrong with these policies
except that they took away much of the freedom of the implementing
agency--the FCC--to adjust policies later in light of unexpected or
changed circumstances . . . such as the rapid development of the
Internet or a monumental ``bust'' in investor confidence.
If the Act took flexibility from the FCC, it took even more from
the States. With respect to local competition, it is useful to
recognize that the Telecom Act was neither revolutionary nor
innovative. Rather, the Act largely codified into national law and
policy the results of many experiments conducted by State public
utility commissions (PUCs) over the prior decade to introduce local
competition.1
---------------------------------------------------------------------------
\1\ Local competition (at least in the modern era) did not start
with the Telecom Act. Rather, it started when the New York Public
Service Commission, in mid-1985, issued a Certificate of Public
Convenience and Necessity to Teleport Communications, proposing to
provide local high-capacity private lines in New York City. By the
early 1990's, many other PUCs had authorized ``Competitive Access
Providers'' (CAPs) to provide unswitched local services. In so doing,
the States had required ``central office collocation,'' later known as
``collocation'' after the FCC ratified the various PUC decisions, and
some forms of loop unbundling to facilitate this initial phase of local
competition.
The pattern repeated for switched local services: in 1994 the NYPSC
authorized the first competitive local exchange service in the country
and by the end of the following year--1995--fourteen ``Competitive
Local Exchange Carriers'' (CLECs) had installed 70 competitive central
office switches. Such issues as mutual compensation, now known as
``reciprocal compensation,'' number portability, and OSS
interconnection were being addressed and had been at least partially
resolved on a state-by-state basis.
---------------------------------------------------------------------------
This state-by-state experimentation--with its admittedly untidy
look of ``muddling through''--did not provide the ``certainty'' and
``predictability'' sought by investors.
Ironically and not appreciated by investors at the time and perhaps
even today, ``muddling through'' was and is much less risky than a
single federal policy, particularly one that gets ``gridlocked'' in
interminable due process. That is because ``muddling through'' in the
States allows for a continuous and low-risk iterative process of field
experimentation, testing, and fine tuning of business strategies and
public policies before irrevocable, major investment bets are placed.
Although the Act stopped the state-by-state experimentation, it did
not empower the FCC to undertake its own experiments. Instead,
everything became a single high-risk roll of the dice. Now, every FCC
decision--because it has such far-reaching application--literally
becomes a ``federal case'' and leads not to finality but to litigation,
with fundamental decisions being made not by an expert agency but by
judges and their law clerks. This sort of gridlock cannot engender
investor confidence.
It is also important to note that the Telecom Act also gridlocked
the entry of the Bell companies into long distance markets. The
flexible standard of sec. VIII(C) of the MFJ 2 became the
detailed, specific and rigid ``14 point checklist'' of the Telecom Act.
Each of the 14 points became a point of contention, friction, and
delay--more gridlock wearing away investor confidence.
---------------------------------------------------------------------------
\2\ ``The restrictions . . . shall be removed upon a showing by the
petitioning BOC that there is no substantial possibility that it could
use its monopoly power to impede competition in the market it seeks to
enter.''
---------------------------------------------------------------------------
Ironically, by the end of 1995, at least two Bell companies (New
York Tel and Illinois Bell) were ready to seek interLATA relief under
the MFJ standard on the basis of competition in their major markets
(i.e., New York and Chicago).
Whether Judge Greene would have granted their initial applications
is, of course, unknowable. But my involvement in negotiations with
Ameritech and the Department of Justice leads me to conclude that Judge
Greene would have allowed them to enter to establish the regulatory
carrot that would encourage other BOCs to open up and to begin to free
themselves from the MFJ stick. My guess is that most BOCs would have
been in most of the long distance market years earlier if the Telecom
Act had not passed.
In the guise of promoting competition, the Act and the FCC
regulations that followed have created an enormous regulatory apparatus
and set of requirements. The Act has created a set of companies and
industries whose very survival is by the good graces of federal
regulators. This dependency relationship is not one that makes for a
healthy policy environment or acceptable investment risk.
If the Telecom Act has increased investor risk by eliminating
experimentation and gridlocking decision-making, what should be done?
My answer, of course, is to increase experimentation and reduce
gridlock.
I expect that CITI's final report, due in October, will provide a
comprehensive set of recommendations on these and many other topics. At
the present, I can think of a few things that could be done to
simultaneously encourage experimentation and reduce the gridlock:
1. First, wherever possible under the law and Constitution, the FCC
should use the States as laboratories, particularly on local
telecom issues.
As they did in the past, a few States will make decisions that the
FCC will regard as ``good'' and a few others will make ``poor''
decisions. Then it is likely that other States will copy and improve
the ``good'' results and, when the evidence is clear and convincing,
the FCC can quickly and confidently make national policy based on
experimental evidence rather than speculation . . . no more risky rolls
of the dice.
I believe that investors would soon understand and appreciate the
certainty, predictability and risk containment inherent in State-
federal experimentation and, as a result, be more willing to invest on
more favorable terms.
2. Second, the FCC should reform the carrier-to-carrier ``negotiation
and arbitration'' process established by sec. 252 for
interconnection agreements to encourage experimentation and
minimize regulatory involvement.
It is important to remember that many of the issues that are
consuming the FCC and the industry and bothering investors--including
unbundling, collocation, reciprocal compensation, quality measures--can
and should be determined by the negotiation and arbitration process
established by sec. 252. That is the ``deregulatory'' approach to
carrier-to-carrier relations envisioned by the Act.
By ``fixing'' the interconnection agreement process 3,
there would be no need for endless speculation about whether UNE-P is
good, bad or indifferent or whether ``bill & keep'' is a better mutual
compensation system. The real-world results of a variety of
interconnection agreements--the results of experiments--would speak for
themselves. The proven answers can then be applied to subsequent
negotiations, arbitrations and the few regulatory decisions that still
might be needed.
---------------------------------------------------------------------------
\3\ My recommendation is that the FCC should specify the use by
State Commissions of ``baseball arbitration,'' where one side wins all
the disputed issues and the other loses every issue. The arbitrator
would be guided by the goals of the Communications Act. The mere
prospect of ``baseball arbitration'' should encourage early, non-
regulated settlement since it forces parties to be reasonable and start
at the middle rather than at the extremes in the expectation that an
arbitrator will ``split the baby.''
---------------------------------------------------------------------------
States should also be encouraged to use private, expert commercial
arbitrators to speed the process, lower the cost and reduce regulatory
gaming, with the State's role being limited to reviewing and adopting
the arbitrator's decision.
Any agreements, negotiated or arbitrated, should only be subject to
``opt in'' by other parties, not ``pick & choose'' to encourage real
bargaining and to ensure that there are a substantial variety of
experiments.
Finally, the geographic scope of arbitrated (but not negotiated)
agreements should be limited to relatively small areas--perhaps as
small as exchange areas--so that there will be many different
arbitrated arrangements within a State and even between the same two
carriers. Each of these different arrangements will be an experiment,
the results of which can be fed back into private carrier-to-carrier
negotiations (perhaps between the carriers to make all their agreements
uniform) and better informed, less speculative regulatory policies and
future arbitrations.
I appreciate the opportunity to appear before you this afternoon. I
look forward to sharing with you and other policy-makers the results of
CITI's ``Remedies for Telecom Recovery'' project. I'm confident that
our research and analysis will help you to get to the root causes of
the telecom industry's meltdown and provide you with a clear
understanding of the sort of policies that can prevent or at least
ameliorate the impact of subsequent downturns.
Mr. Upton. Mr. Bath?
STATEMENT OF BLAKE BATH
Mr. Bath. Good afternoon, Mr. Chairman and distinguished
members of the committee. I thank you for the privilege of
speaking with you about the state of the telecommunications
industry and the impact of regulation on the health of the
sector.
My perspective on the sector is derived from my 10 years as
an industry financial analyst at Lehman Brothers and Sanford C.
Bernstein, and my nearly 4 years as a financial analyst at MCI
Communications prior to that. My clients include mutual funds,
pension funds, investment advisors, banks, hedge funds, and
others who commit capital to the sector.
I would like to focus my comments today on four topics--the
evolution of the telecom industry since the 1996 Act, the
impact of telecom regulation on capital investment, the state
of competition in the consumer market for telecommunications,
and, finally, the impact of these issues on how investors view
the telecom sector.
The evolution of the telecom sector since the signing of
the Telecom Act of 1996 has been profound. At the time of the
Act, the revenue composition of the services sector was 90
percent wireline voice, 5 percent wireless, and 5 percent data.
Voice calling was distinctly separated from local--between
local and long distance for both wired and wireless calling,
and the industry structure in each geographic market largely
consisted of monopolies, duopolies, and very well-behaved
oligopolies.
Every sector of the services industry grew at or above the
rate of growth of the overall economy. Not surprisingly,
investors were very keen on the telecom industry for its
combination of growth and stable operating performance. In the
last 7 years, the industry has evolved dramatically. The
industry's revenue composition is now 40 percent wireline
voice, 30 percent wireless, and 30 percent data.
Voice services for wireless callers very rarely distinguish
between local and long distance, and this type of any distance
offering is taking hold in the wireline industry as well. The
telecom sector across wired and wireless, voice, and data is
now robustly competitive with virtually all customers in all
geographies enjoying a range of supplier choices and technology
choices to meet the rapidly evolving and growing needs.
Investors are considerably less enthusiastic about
committing capital to the sector, and industry valuations are
among the lowest they have been relative to the market since
the 1984 breakup of AT&T.
On the impact of telecom regulation on capital investment,
I believe there is compelling evidence that deregulation of
telecom subsectors has led to strong growth in spending. Since
the 1996 Act, the growth in telecom services revenues has come
predominantly from wireless and data services as I highlighted
earlier.
These are two areas that are substantially deregulated and
where the capital investment and technological evolution has
been most dramatic. Since the 1996 Act, capital spending on
wireless networks has grown at nearly three times the rate of
growth of spending on wireline. Capital spending in the cable
sector has also grown substantially since it was deregulated in
the mid-1990's, with cable spending growing twice as fast as
telecom spending and giving birth to a range of new services,
including high-speed internet access and video on demand.
In my view, the analysis of the state of competition in the
consumer market for voice and data communications is often
modeled, because of an unwillingness to look at the impact of
intermodal competition between wired and wireless and the
growing importance of data communications to residential
customers.
Current competition for consumer share of wallet is
intense. In each major metropolitan area, customers seeking
voice services have a choice of six wireless providers, the
local telephone company, one or two of the national long
distance companies, and, in many cases, the cable company.
Customers wanting high-speed internet services largely
choose between the RBOC and the cable company. Customers have
clearly embraced the opportunity for choices of providers and
technologies. In each of the last 3 years, 2 or 3 million
customers per year have discarded their wireline phones in
favor of wireless, which can offer any distance packages and
mobility.
Noteworthy is that wireless pricing is currently below that
of wireline, with a package of 1,000 anytime, any distance
minutes, at $40 to $50 per month, versus the packages from the
national long distance companies for wireline services at $50
to $60 per month, and the RBOCs at comparable levels. I see
nothing that is going to reverse the trend toward more and more
customers choosing wireless over wireline, particularly if
wireless carriers are given the incentive to continue
substantial investment to bring their network voice performance
in line with wireline networks.
One major opportunity for the wireless companies would
clearly be the 10 million customers over the last 3 years who
have chosen a UNE-P-based competitor for service. On the data
side, cable companies have taken two-thirds of the 16 million
residential lines for high-speed internet access. I believe
that will grow to 40 million by 2007, and that ultimately these
broadband networks will carry packetized voice.
In the interest of time, I just would defer you to the rest
of my statement.
[The prepared statement of Blake Bath follows:]
Prepared Statement of Blake Bath, Managing Director, Lehman Brothers
Good Afternoon.
I thank you for the privilege of speaking with you about the state
of the telecommunications industry, and the impact of regulation on the
health of the sector. My perspective on the sector is derived from my
10 years as an industry financial analyst at Lehman Brothers and
Sanford C. Bernstein, and my nearly four years as a financial analyst
at MCI Communications prior to that. My clients include mutual funds,
pension funds, investment advisors, banks, hedge funds, and others who
commit capital to the sector.
I would like to focus my comments today on four topics: the
evolution of the telecom industry since the 1996 Act; the impact of
telecom regulation on capital investment; the state of competition in
the consumer market for telecommunications; and, finally, the impact of
these issues on how investors view the telecom sector.
i.
The evolution of the telecom sector since the signing of the
Telecommunications Act of 1996 has been profound. At the time of the
Act, the revenue composition of the services sector was 90% wireline
voice, 5% wireless, and 5% data. Voice calling was distinctly separated
between local and long distance for both wired and wireless calling,
and the industry structure in each geographic market largely consisted
of monopolies, duopolies, and very well-behaved oligopolies. Every
sector of the services industry grew at or above the rate of growth of
the overall economy. Not surprisingly, investors were very keen on the
telecom industry for its combination of growth and stable operating
performance.
In the last seven years the industry has evolved dramatically. The
industry's revenue composition is now 40% wireline voice, 30% wireless,
and 30% data. Voice services for wireless callers very rarely
distinguish between local and long distance, and this type of ``any
distance'' offering is taking hold in the wireline industry as well.
The telecommunications sector--across wired and wireless, voice, and
data--is now robustly competitive, with customers in virtually all
geographies enjoying a range of supplier choices and technology choices
to meet their rapidly evolving and growing needs. Investors are
considerably less enthusiastic about committing capital to the sector,
and industry valuations are among the lowest they have been relative to
the market since the 1984 breakup of AT&T.
ii.
On the impact of telecom regulation on capital investment, I
believe there is compelling evidence that deregulation of telecom sub-
sectors has led to strong growth in spending. Since the 1996 Act, the
growth in telecom services revenues has come predominantly from
wireless and data services, as I highlighted earlier. These are two
areas that are substantially deregulated, and where the capital
investment and technological evolution has been most dramatic. Since
the ``96 Act, capital spending on wireless networks has grown at nearly
three times the rate of growth of spending on wireline. Capital
spending in the cable sector has also grown substantially since it was
deregulated in the mid-1990s, with cable spending growing twice as fast
as telecom spending and giving birth to a range of new services
including high speed internet access and video on demand.
iii.
In my view, the analysis of the state-of-competition in the
consumer market for voice and data communications is often muddled
because of an unwillingness to look at the impact of inter-modal
competition between wired and wireless and the growing importance of
data communications to residential customers. Current competition for
consumers' share of wallet is intense.
In each major metropolitan area, customers seeking voice services
have a choice of six wireless providers, the local telephone company,
one or two of the national long distance providers, and, in many cases,
the cable company. Customers wanting high speed internet services
largely need choose among the RBOC and the cable company. Customers
have embraced the opportunity for choices of providers and
technologies. In each of the last 3 years, 2-3 million customers per
year have discarded their wireline phones in favor of wireless, which
can offer ``any distance'' packages and mobility. Noteworthy is that
wireless pricing is currently below that of wireline, with a package of
1000 anytime/any distance minutes at $40-50 per month, versus the
packages from the national long distance companies at $50-60 per month
and the RBOCs at comparable levels. I see nothing that would reverse
the trend towards more and more customers choosing wireless over
wireline, particularly if wireless carriers are given the incentives to
continue substantial investment to bring their network voice
performance in line with wireline networks. One major opportunity for
the wireless companies would be the 10 million customers over the last
3 years who have chosen a UNE-P based competitor for service.
On the data side, cable companies have taken two-thirds of the 16
million residential lines for high speed internet access. I believe the
number of consumers choosing broadband access will grow to 40 million
by 2007, and that ultimately these broadband networks will carry
packetized voice. Notably, the cable industry has taken fewer than 2
million telephony customers, due to the uncertainty about technological
evolution and the type of regulatory environment that will exist for
telephony in the coming years. Without question, the cable companies
would look more favorably on investing in telecom voice service if
regulation favored facilities-based competitors.
iv.
Finally, the impact of the current environment on how investors
view the telecom sector--investors despise uncertainty and excessive
competition, two things they believe exist in abundance right now in
telecom. Investors are encouraging companies to enter a ``bunker''
mentality: conserve cash until the regulatory, competitive, and demand
landscapes show greater clarity and investors can be more confident in
return on invested capital. I believe the FCC and the state commissions
will play a critical role in the weeks and months ahead in clearing
away some of the regulatory uncertainty, creating an environment which
favors facilities-based investment, and embracing a market of fewer--
but perhaps stronger--competitors.
I would be happy to answer any questions you have.
Mr. Upton. I like the word ``defer.'' Thank you.
Mr. Brodeur?
STATEMENT OF STEPHEN B. BRODEUR
Mr. Brodeur. Thank you. Mr. Chairman, distinguished members
of this committee, thank you for the opportunity to appear
before you today.
My name is Steve Brodeur. I am the President of the
Cambridge Strategic Management Group. We are a leading provider
of management consulting services to the emerging and
established telecommunications operators, equipment
manufacturers, and financial services companies.
The firm's practice areas encompass a wide variety of
disciplines within the sector, including market opportunity and
competitive analysis, financial analysis, and economic
evaluation. Throughout the firm's 13-year history, we have
helped clients, incumbents, and new entrants alike evaluate
business opportunities and identify and assess critical risk
factors, whether entering new markets or deploying new
technologies. We have also provided in-depth economic analysis
and advice to financial services companies and large operators
seeking to invest in the telecom sector.
As directed by your staff, today I am not here to provide a
policy statement on any matters appearing before the Congress
or the FCC. Furthermore, I would not even characterize myself
as a regulatory expert, having only loosely followed the day-
to-day discourse between the various parties in these
regulatory matters.
What I am is an observer of the economics of the
telecommunications industry, with over 15 years of consulting
experience in the sector. What I can say to you today is that
in those 15 years I have never seen a greater period of
uncertainty. As you know, and as has been mentioned here, there
are a record number of bankruptcies in the sector today, and
there are even more companies in financial distress.
These companies include large and small operators and
manufacturers alike. As you have mentioned, there are some
500,000 jobs that have been shed in this sector since 2001.
Liquidity is virtually absent in the sector right now, with
external financing extremely tight, and internal financing
constrained by ongoing economic uncertainty.
Many companies operate also with unprecedented levels of
debt. Capital investment has been spoken about already today--
has fallen dramatically among both large carriers and small
carriers alike, which has had tremendous downstream impact on
wholesale infrastructure providers like Level 3 and Willtel,
and equipment manufacturers like Lucent and Nortel.
Perhaps most importantly, there have been significant
shifts in purchasing and usage behavior among residential and
business customers; for example, substitution of wireless
services for wireline, local, and long distance usage, and the
substitution of wireless access for second lines in the home.
The results of these purchasing changes is that many
operators have seen absolute revenues decline and lines and
service decline. Given the highly fixed cost nature of most
telecom operators, new and old alike, this produces severe
impact on their profitability.
Competition with the industry has also been fierce with
different competitors, CLECs, cable companies, satellite
providers, large carriers, using different network service
delivery platforms to offer select services across a variety of
customer segments within the industry.
Regulation has been a factor but not the only one in
contributing to the state of the industry today. Regulation,
though, clearly will be a factor in the continued emergence of
competition in the sector and continued investment by existing
operators in cutting edge technology and capabilities.
About a year ago, we complete a study for Corning in which
we examined the impact of extending today's unbundling
regulatory paradigm to fiber loop facilities, fiber loop
facilities being a new broadband infrastructure designed to
replace copper facilities to the home. In that analysis, we
concluded that incumbent providers like SBC and Bell South
could rationally build fiber loop facilities for roughly 30
percent of households without regulation, but only 5 percent of
households if today's unbundling paradigm were extended to
these fiber loop facilities.
The heart of this economic analysis is an extremely
complicated investment decision that each incumbent operator
must undertake--a decision that is complicated enough even
before considering the impact of regulation. To make this
decision in an economically rational manner, each incumbent
will need to estimate its present and future market takeup
rates across voice, long distance, broadband, data, and video,
estimate the average revenue per customer for those services,
and estimate operating costs and capital expenditures.
Making these estimates is extremely difficult, given that
most ILECs have only recently entered the long distance
business and don't have any presence in the video sector
whatsoever. Add to this that there is no unassailable market
research to guide these estimates of market takeup and revenue,
and the absolute investment in fiber loop facilities may reach
$40 to $50 billion, you can see why this is a very, very
difficult decision to make.
Now overlay the impact of regulation. Today's unbundling
paradigm extended to fiber loop facility only makes it more
complicated and risky, and ultimately reduces the likelihood of
broad fiber facilities deployment.
I will submit the rest of this for the record.
[The prepared statement of Stephen B. Brodeur follows:]
Prepared Statement of Stephen B. Brodeur, President Cambridge Stratgeic
Management Group
Mr. Chairman, thank you for the opportunity to appear before you
today. My name is Stephen Brodeur. I am the President of the Cambridge
Strategic Management Group (or CSMG). CSMG is a leading provider of
management consulting services to emerging and established
telecommunications operators, equipment manufacturers, and financial
services companies. The firm's practice areas encompass a wide variety
of disciplines within the sector, including market opportunity and
competitive analysis, financial analysis, and economic valuation.
Throughout the firm's 13-year history, we have helped clients
(incumbents and new entrants alike) evaluate business opportunities and
identify and assess the critical risk factors, whether in entering new
markets or deploying new technologies. We have also provided in-depth
economic analysis and advice to financial services firms and large
operators seeking to invest in the telecom sector.
As directed by your staff, I'm not here to provide a policy
statement on any matters appearing before the Congress or the FCC.
Furthermore, I would not even characterize myself as a regulatory
expert, having only ``loosely''' followed the day-to-day discourse
between the various parties in these regulatory matters. What I am is
an observer of the economics of the telecom industry, with over 15
years of consulting experience in the sector. What I can say to you
today that in those 15 years I have never seen a period with greater
uncertainty.
As you know, there have been a record number of bankruptcies
in the sector and there are still many more companies in
``financial distress.'' These companies include large and small
operators and manufacturers alike.
The sector has shed roughly 500,000 jobs since the beginning
of 2001.
Liquidity is virtually absent, with external financing
extremely tight and internal financing constrained by ongoing
economic uncertainty.
Many companies--big and small--operate with unprecedented
levels of debt.
Capital investment has fallen dramatically among both large
carriers and small carriers alike, which has had tremendous
``downstream'' impact on wholesale infrastructure providers and
equipment manufacturers.
Perhaps most importantly, there have been important shifts in
purchasing behavior among residential and business users (for
example, the substitution of wireless services for wireline
local and long distance usage and the substitution of wireless
access for second lines in homes). The result of these
purchasing changes is that many operators have seen absolute
revenue and lines in service decline. Given the fixed cost
nature of most telecom operators, this has severely impacted
profitability.
Competition within the industry has also been fierce, with
different competitors (CLECs, cable companies, satellite
providers, large carriers, etc.) using different network
service delivery platforms to offer select services across a
variety of segments within the sector.
Regulation has been a factor--but not the only one--in contributing
to the state of the industry today. Regulation, though, will clearly be
a factor in the continued emergence of competition in the sector and
the continued investment by existing operators in cutting-edge
technology and capabilities.
About a year ago we completed a study for Corning in which we
examined the impact of extending the unbundling regulatory paradigm to
fiber loop facilities. In that analysis, we concluded that ILECs could
rationally build fiber loop facilities--a completely new broadband
infrastructure--to roughly 30% of US households without regulation--but
to only 5% of US households if the unbundling regulatory paradigm were
extended to these fiber loop facilities.
The heart of this economic analysis is an extremely complicated
investment decision that each ILEC must undertake--a decision that is
complicated even without considering the impact of regulation. To make
this decision in an economically rational manner, each ILEC will need
to (1) estimate its present and future market take-up rates across
local voice, long distance voice, broadband internet access, data
services, and video; (2) estimate its average revenue per customer for
those customers it serves across the same set of services; and (3)
estimate its operating costs and capital to support the fiber loop
facilities business.
Given existing levels of competition and the fact that most ILECs
have only recently entered the long distance and broadband markets and
have no significant presence in the video sector, this fiber loop
facilities investment is inherently risky. Add to this that there is no
unassailable market research to guide these market take-up and revenue
per customer estimates and that the absolute investment in fiber loop
facilities may total as much as $40-50 billion and you can begin to
understand the magnitude of this decision.
Today's regulatory paradigm extended to fiber loop facilities only
makes it more complicated and risky and ultimately reduces the
likelihood of broad fiber loop facilities deployment.
Robust investment, of course, is crucial to the continued vitality
of the sector. I applaud the Committee for tackling the difficult
challenges facing the telecom industry today. It is a critical sector
for our economy and its health should be of paramount importance. I
would be happy to lend my knowledge of the sector to the Committee in
whatever way is most appropriate.
Mr. Upton. Thank you.
Mr. Crandall?
STATEMENT OF ROBERT W. CRANDALL
Mr. Crandall. Thank you, Mr. Chairman, members of the
subcommittee. My name is Robert Crandall. I am a Senior Fellow
in economic studies at The Brookings Institution. I come here
today to testify for myself. My views do not represent those of
The Brookings Institution.
But I think to put what is happening today in context, it
might be useful to hear from someone with an experience of 30,
35 years in looking at regulated and deregulated industries,
and I have had about 25 years of experience in looking at the
telecom sector.
We have been through this before. By the way, I am just
going to summarize the statement which I submitted for the
record. We have been through deregulation liberalization of
airline, of trucking, of railroad, of air cargo, of natural
gas, natural gas distribution, and we know what happens. We
know that, first of all, we can't predict what is going to
happen. We know that a period of turmoil will ensue.
In the case of airlines and trucking, we could have been
sitting 20 years ago talking about many of the same problems
afflicting the airline industry, as they are parking planes in
Arizona, as their stocks had had a run-up and suddenly had
collapsed in the 1982 recession. It takes a long time to work
through a period of economic liberalization of any industry,
and particularly one with deregulation.
Now, fast forward 1996 to 2003. Here we have an industry
which has been heavily regulated for decades, whose rate
structure is thoroughly distorted by regulation, which is
subject to very rapid technical change, and is now subject to
the intervention of a new phenomenon--namely, the internet.
Shortly after the 1996 Act was passed, we were involved in
the stock market bubble. Just before the Act was passed, the
FCC deregulates AT&T's long distance services. Three years
before the Act was passed, we began to open up the spectrum for
competitive wireless, expanding the number of wireless carriers
from two to six nationally.
We regulated in 1992, and then deregulate cable programming
services. And then we impose upon the industry in the 1996 Act
a completely untried, new set of wholesale regulatory
approaches, none of which we could predict how they would work
out.
Well, in this environment, and particularly from the stock
market bubble investment surge, but a large part of that
investment was in capacity, which was driven by an anticipation
of incredibly rapid growth in demand, some of it fed by
rhetoric from WorldCom. And also, it was fed by very ambitious,
but untried, business plans by the new competitive local
carriers.
Now, 7 years later we sit here and we see that those plans
of the competitive local carriers have mostly collapsed. They
spent $45-, $50 billion over this period. At one time, their
market capitalization was estimated at $80 to $100 billion.
Today it is about $1 billion.
We have tremendous excess capacity in the long haul market,
because wireline telecommunications revenues have not grown at
all since the 1996 Act was passed. They have growth about 1
percent or slightly less per year, since the 1996 Act was
passed, in nominal dollars but not at all in real dollars when
you just take account of the limited amount of inflation we
have had over that period.
All of the growth in revenues has come from the wireless
sector. Now, when you invest this amount of money and have this
tremendous surge with investment spending rising from $40
billion to $100 billion in the sector, a large part of it going
into the wireline sector and no revenue growth, you are bound
to have disappointment.
So the thrust of my testimony is that if we are to see
recovery, and don't think that recovery in the telecom sector
is going to be all that important for the overall economy--
telecom is still only 2 percent of GDP, and it has fallen since
the 1984 AT&T breakup. But if we are to have recovery in the
telecom sector, it must come through revenue growth.
We are not going to get that revenue growth in traditional
telephone services, because deregulation is working, or at
least liberalization is working. Prices are falling
dramatically. Price elasticities in demand are less than one.
As a result, revenues are falling for traditional services. You
have got to get growth in new services.
Those new services aren't going to be introduced by the
competitive local exchange carriers. They are on their backs
and have no new service stuff in the first place. That is why
they are on their backs, in part.
They are not going to come from the long distance sector.
The wireless sector is waiting out what to do about 3G and
Spectrum and all of that. That is a long ways away. It is going
to have to come from the last mile investment, and that is why
I would agree with several of you today that one of the things
one can do is to clarify and reduce the regulations on the
incumbent local exchange carriers for advance services the UNE-
P. Advance services are much more important than the UNE-P,
because those people using the UNE-P are not going to succeed
with it.
Thank you very much.
[The prepared statement of Robert W. Crandall follows:]
Prepared Statement of Robert W. Crandall, Senior Fellow, The Brookings
Institution 1
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\1\ The views expressed in this testimony are those of the author.
They do not represent the views of the Brookings Institution, its
Trustees, or its other staff members.
---------------------------------------------------------------------------
the health of the telecommunications sector
Mr. Chairman and Members of the Subcommittee, I am pleased to be
here this afternoon to express my views on the current state of the
U.S. telecommunications sector. This is an important topic, given the
severe downturn that has occurred in equity values and capital
expenditures in the sector. Indeed, telecommunications is suffering the
greatest financial distress and general turmoil that I have seen in the
roughly 25 years that I have been studying this industry.
As we focus on the current dire condition of the telecommunications
sector in this proceeding, we should recall that we have been through
similar problems in other sectors after they were first opened to entry
and subjected to deregulation. For example, similar, but less severe
problems gripped the airline and trucking industries shortly after they
were deregulated in 1978 and 1980, respectively. A surge in investment
by the airlines led to excess capacity that was exacerbated by the
rather deep 1982 recession. As a result, airline stocks tumbled in
1982. Similarly, the natural gas pipeline industry suffered through
much more severe adjustments to natural-gas and oil price deregulation
in the 1980s. Finally, no one needs to be reminded of the recent
difficulties that California utilities faced when ``deregulation'' was
instituted in that state in the 1990s. In each case, policymakers,
industry participants, and economists could not predict how these
industries would adjust to entry and deregulation or who the winners
and losers would be. We simply knew that prices would eventually be
lower under deregulation, and that output would be greater.
These observations are important, because, as my colleague Clifford
Winston has found, deregulation has created much larger benefits in
virtually every instance than many economists and other observers would
have expected.2 Given the turbulence that often follows from
opening markets to competition and from deregulation, we should have
expected the 1996 Telecommunications Act to create similar turmoil. The
1996 Act was not as deregulatory as many of the earlier statutes, but
it opened a regulated market to competition and thereby threatened to
place considerable pressure on an incredibly distorted regulatory rate
structure. For this reason, in October 1996, I opined in a speech in
Maine that ``all hell would soon break loose'' in the telecom sector.
As it turned out, my prediction was premature, and it may have been
right for at least some of the wrong reasons. Neither I nor anyone else
could have predicted the 1998-2001 stock market bubble that swept the
sector, the nature of the competition that would develop, the
regulatory policies that would be adopted under the new Act, nor the
telecommunications market's response to all of these events.
---------------------------------------------------------------------------
\2\ Clifford Winston, ``Economic Deregulation: Days of Reckoning
for Microeconomists,'' Journal of Economic Literature, Vol. 31,
September 1993, pp. 1263-89.
---------------------------------------------------------------------------
the telecom surge--rhetoric meets reality
The years leading up to the 1996 Act were a period of excited
discussion about the potential of the ``Information Superhighway''
3 and the promise of network convergence. The declining cost
of fiber-optics transmission and the technological progress driving
microprocessor technology (at a rate described by Moore's Law) led some
to predict that communications bandwidth would soon be virtually
free.4 Households, physicians, teachers, and businesses
would be able to send and receive high-speed video images that would
substitute for personal diagnoses, provide remote monitoring, allow
remote tutoring, and supply much more personalized access to
entertainment. Once the telecommunications sector was opened to
competition and deregulated, innovation could flourish, thereby
allowing subscribers access to new services and providing existing
services at dramatically lower prices.
---------------------------------------------------------------------------
\3\ Vice President Gore was credited with this description of
modern communications technology. See, for example, http://www-
tech.mit.edu/V113/N65/gore.65w.html.
\4\ George Gilder, Telecosm: The World after Bandwidth Aiundance.
Simon & Schuster, 2000.
---------------------------------------------------------------------------
Capital Spending and Market Valuations
The 1996 Act was not deregulatory. It created a vast new system of
wholesale-price regulation of local services that was only vaguely
spelled out in the statute. Indeed, local telecommunications would
continue to be intensely regulated by the states and the FCC. On the
other hand, long distance and wireless services were essentially
deregulated before the Act was passed. Both sectors had begun to invest
heavily in infrastructure in the early 1990s, and the lure of the
Internet would entice them to accelerate this investment after 1996.
Moreover, new local carriers sprouted from everywhere and were able to
attract enormous amounts of capital. The result was an investment boom
that continued for more than five years.
Figure 1 shows the acceleration in capital spending in the
telecommunications sector that occurred after 1995 in both nominal
dollars and constant dollars.5 Between 1987 and 1996,
nominal and real (inflation-adjusted) capital spending increased at
average rates of 4.8 and 4.5 percent per year, respectively. In the
next four years, however, the growth rate soared to more than 20
percent per year. By 2000, real capital spending had risen 148 percent
from its 1996 level. This surge in capital spending was accompanied by
an even greater rise in the prices of telecommunications industries
equities--a stock market ``bubble'' that burst with a vengeance in
2000-01. (Figure 2) 6
---------------------------------------------------------------------------
\5\ These data are from the Bureau of Economic Analysis, U.S.
Department of Commerce, downloaded on August 25, 2002 from http://
www.bea.doc.gov/bea/dn/faweb/AllFATables.asp#S3 They are investment
expenditures in current dollars and constant dollars for the
``telephone and telegraph'' industry.
\6\ The indexes in Figure 2 are calculated from monthly closing
prices of individual equities. The RBOC index is a weighted average of
the common equities of SBC, Bell South and Verizon. The CLEC index is a
weighted average of the equities of Allegiance, Covad, McLeod, Time
Warner Telecom, and XO Communications. The wireless index is a weighted
average of the equities of Leap, Nextel, RCCC, and Sprint PCS. The
long-distance index is a weighted average of the equities of Sprint and
WorldCom.
---------------------------------------------------------------------------
The bubble gripped three of the four major groups of carriers: the
new CLECs, the wireless carriers, and the long-distance
companies.7 The largest rise was in the CLEC index in Figure
2, which also shows the greatest collapse. The wireless stocks were
next in the upsurge, and the long-distance stocks were third. The Bell
companies enjoyed much less of a surge in 1998-2000 and suffered less
in the downturn as they essentially tracked the S&P 500, which had a
much more modest bubble.
---------------------------------------------------------------------------
\7\ My ``long-distance'' sample includes only Sprint and WorldCom.
AT&T was very much a cable company for a good part of this period.
Global Crossing and Qwest were much more than long-distance companies.
---------------------------------------------------------------------------
Of the facilities-based long distance companies, only AT&T remains
with any market capitalization attributable to long distance, and even
AT&T has lost roughly one-third of its market cap in the two months
since it spun off its broadband division. It now appears that the long
distance companies must offer a wider bundle of services to survive.
At this point, it appears that very few of the new competitive
local carriers ('``CLECs'') are likely to survive and prosper. Once the
repository of more than $80 billion in market capitalization, the
publicly traded CLECs now have a scant $1 billion in total market cap
after reporting more than $40 billion of spending on capital facilities
between 1996 and 2001. As was the case in the airlines and trucking
industries two decades ago, a large number of new entrants have
foundered on bad business plans and a disappointing market.
Even the stocks of the Bell companies are only slightly above their
1996 levels, hardly a stunning result in the wake of the 1999-2001
surge in their capital expenditures. The wireless sector's equity
prices are about two-thirds of their 1996 values. The cable television
companies, who are not included in my analysis, also appear to be
relatively stable. Thus, the problems in telecom are heavily
concentrated in the companies with large national fiber networks who
offer long distance services, the new local entrants, who offer little
new after investing more than $40 billion, and to a lesser extent, the
wireless carriers. This is not to say that the incumbent local carriers
operators are prospering in this environment, but the equity markets
are suggesting that they are not in long-term difficulty.
As a result of the collapse in market valuations, capital spending
declined substantially in 2001-02, a decline that was exacerbated by an
incredible series of bankruptcies of telecommunications carriers. Total
capital spending has fallen from more than $100 billion in 2000 to less
than $40 billion last year, according to most estimates, and it is
forecast to remain low for at least the next year. This decline in
capital spending is clearly the most alarming aspect of the current
telecom malaise for it portends a slowdown in the deployment of new
technology and even the possibility of a degradation of traditional
services if it continues. Capital spending is now less than it was when
the act was passed seven years ago.
The capital spending boom is now widely acknowledged to have
created excess capacity in data and voice transmission,8 but
the rise in investment spread far beyond fiber-optic transmission
facilities. Capital spending by the new local carriers increased from
virtually nothing to nearly $20 billion in 2000.9 The
wireless sector increased its capital outlays from $8.5 billion in 1996
to $18.4 billion in 2000.10 And the regional Bell Companies
(including GTE) increased their wireline capital spending from $20.8
billion in 1996 to $35.7 billion in 2000 even though they were largely
banned from interstate communications.11 All of these
companies have pulled back substantially since 2000.
---------------------------------------------------------------------------
\8\ Yochi J. Dreazen, ``Wildly Optimistic Drove Telecoms to Build
Fiber Glut,'' Wall Street Journal Online, September 26, 2002.
\9\ It is unclear how much of this reported capital spending was
devoted to productive capacity. Much of it may have been spent on
office facilities, collocation cages, marketing-related equipment, etc.
For a discussion of this issue, see Larry F. Darby, Jeffrey A. Eisenach
and Joseph S. Kraemer, The CLEC Experiment: Anatomy of a Meltdown,
Progress and Freedom Foundation, September 2002, p. 10 et seq.
\10\ CTIA, Semiannual Wireless Survey.
\11\ Total investment spending by wireless carriers is published by
the Cellular Telecommunications Industry Association. All other data
are calculated by the author from reports by publicly-traded companies
to the Securities and Exchange Commission.
---------------------------------------------------------------------------
Telecom Revenues
Perhaps the most surprising feature of the telecom industry since
1996 has been the absence of growth in carrier revenues despite the
explosion of the Internet and the strong growth of the economy. Between
1987 and 1995, the growth in telecom output (its contribution to the
``gross domestic product'' of the entire economy) and capital spending
growth were virtually identical.12 But after 1995, the
industry's output did not accelerate very much in nominal dollars,
rising from a 4.6 percent growth rate during 1987-95 to just a 6
percent growth rate after 1995. Figure 3 provides annual data from the
Commerce Department on investment and output, as measured by gross
product, for the telephone and telegraph industry. Given that current-
dollar GDP grew at a 5.8 percent average annual rate during this
period, the growth in telecom spending was surprisingly low and far
below the growth in nominal capital spending. Indeed, the value of
telecommunications output in nominal dollars has grown more slowly than
has durable-goods manufacturing in recent years.13
---------------------------------------------------------------------------
\12\ These data are obtained from BEA at http://www.bea.doc.gov/
bea/dn/faweb/AllFATables.asp#S3 and www.bea.doc.gov/bea/dn2/gpo.htm.
\13\ The Federal Reserve Board's Industrial Production Index for
durable goods manufacturing rose at an average annual rate of more than
8 percent per year between 1995 and 2000.
---------------------------------------------------------------------------
Most of the growth in telecommunications services output and
revenues in recent years has come from the wireless sector. The local
exchange companies, long distance carriers, and wholesale fiber-optic
transmission companies, have seen little or no growth in their total
revenues. (See Figure 4.) Between 1996 and 2001 (2002 data are not
available yet), end-user wireline revenues increased by less than $8
billion, from $159.4 billion to $167 billion, or only 0.9 percent per
year. In real, inflation-adjusted terms, wireline revenues actually
decreased by about 1 percent per year.14 This was surely not
the explosive growth that had been anticipated from the IT revolution
and ``deregulation.''
---------------------------------------------------------------------------
\14\ This does not imply that telecom output declined. Given the
sharp declines in the price of telecom services, real output was
increasing substantially throughout this period.
---------------------------------------------------------------------------
The lack of revenue growth does not mean that there was no real
output growth in telecommunications, but that the output growth was not
great enough to more than offset the substantial decline in prices that
was occurring. Prices of transmitting the trillions of bits of
information generated by the Internet fell dramatically, but the demand
response to these price declines was not sufficient to boost revenues.
Real output growth was substantial, but not as spectacular as many have
suggested. Figure 5 shows the recent trend in the telecom industry's
contribution to gross domestic product in real terms along with its
contribution to gross domestic product in nominal dollars that was
shown previously in Figure 3.
Regulatory Changes
Though the 1996 Act was not deregulatory, telecom regulation was
changing during the period preceding that Act and in the first few
years of implementing it. Between 1993 and 2000, the following
regulatory changes combined to make the telecom sector a treacherous
environment for investment when combined with the technological changes
also buffeting the industry:
1. Wireless communications were opened to competition for the first
time in 1993, and wireless rates were largely deregulated;
2. Government auctions were initiated in 1995 to provide the requisite
spectrum for new wireless competitors;
3. AT&T's interstate long distance rates were deregulated by the FCC in
1995;
4. Local telecommunications services for residential and small business
customers were opened to competition by the Telecommunications
Act of 1996;
5. Local incumbents were required by the 1996 Act to lease network
facilities to new entrants at regulated prices; but the extent
of the required unbundling and ``line sharing'' remained
uncertain due to court reversals of FCC decisions;
6. In 1997, the FCC launched a sweeping new program to reduce
international ``accounting rates'' and to increase competition
in international services.
7. In 1999-2000, the ``UNE Platform'' began to replace other forms of
competitive local entry as AT&T, WorldCom, and others responded
to the deep discounts that states offered for leasing
(essentially reselling) the incumbent' networks.
All of these changes occurred as equity and debt capital poured
into a large number of telecom companies, funding hastily constructed
investment plans. In this environment, one had to expect a large number
of failures, and this expectation was surely fulfilled. A tabulation of
recent telecom bankruptcies found that 59 firms have filed for
bankruptcy protection in the last few years.15
---------------------------------------------------------------------------
\15\ Converge! Network Digest accessed at http://
www.convergedigest.com/Mergers/finan
cialarticle.asp68ID=4160 (1/20/03)
---------------------------------------------------------------------------
why was growth so slow?
The lack of revenue growth for wire-based telecom carriers after
1996 can be attributed to perhaps three factors. First, competition in
wireless and long distance services began to drive prices down
substantially. Because the demand for traditional telecommunications
services is price inelastic, these price declines translate into lower
subscriber expenditures unless there are important new uses of these
services. Second, the revolution in wireless communications has
siphoned enormous amounts of traffic from the wireline network,
particularly the over-priced long distance traffic. Third, new
services, such as broadband, were slow to develop, in part because of
regulatory uncertainty.
Household Spending.
Approximately 60 percent of all end-user telephone expenditures are
made by households. Census data show that the share of household
expenditures devoted to telephone service remained remarkably constant
throughout the1980s at about 2 percent of their overall
expenditures.16 Beginning in 1993, however, this share rose
gradually to 2.3 percent. In nominal dollars, the average household
spent $877 in 2000 compared to $658 in 1993.17 However,
household data collected by TNS and reported by the FCC, reproduced in
Table 1, show that all of this increase reflected a growth in wireless
spending, not expenditures on traditional wireline services. Rising
expenditures on local service, reflecting principally the increase in
FCC mandated subscriber line charges, could not offset the decline in
long distance spending.
---------------------------------------------------------------------------
\16\ U.S. Bureau of the Census, Current Population Survey, as
reported in FCC (2002b), p. 46.
\17\ Id.
---------------------------------------------------------------------------
Why have these revenues fallen in an era of explosive growth of the
Internet/ The reason must be that revenues from the new uses of the
telephone network have not offset the decline in revenues from falling
long-distance rates. Given that the residential demand for local access
has an estimated price elasticity of less than -0.05, any increase in
local rates would lead to higher expenditures on local services. The
modest increases in local rates that occurred after 1995, reflecting
principally the increase in FCC mandated subscriber line charges as a
substitute for per-minute carrier charges, could not offset the decline
in long distance spending as Table 1 shows. This decline in spending is
much greater than can be accounted for by lower rates; it obviously
reflects a substantial shift to wireless services. Competition is truly
working.
Table 1
Average Annual Household Expenditures on Telephone Service ($/Year)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Non-
Year Local Carriers Long Distance Wireless Total Spending Wireless
Carriers Carriers Spending
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................................... 358 250 82 690 608
1996............................................................... 359 250 108 717 609
1997............................................................... 379 305 129 813 684
1998............................................................... 398 270 164 832 668
1999............................................................... 402 257 205 864 659
2000............................................................... 416 211 279 906 627
2001............................................................... 426 176 351 953 602
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: FCC.
The Growth of Wireless.
The 1996 Act provided major policy changes towards the wireline
telecommunications sector, but it largely ignored the wireless sector.
Competition in the delivery of mobile wireless services had been
limited to two carriers per local market by FCC policy since the 1970s,
but liberalization was thrust on this sector by Congress three years
before the 1996 Act was passed. The 1993 Omnibus Budget Reconciliation
Act instructed the FCC to begin auctioning spectrum for commercial
wireless uses. These auctions began in 1995, and construction of the
new digital ``PCS'' networks was just beginning when the 1996 Act was
passed.
The 1993 legislation that established the spectrum auctions
essentially eliminated price regulation of wireless services. States
may now regulate these rates only if the carriers have ``market
dominance,'' an unlikely condition in today's wireless sector, even in
rural areas. The auctions of 120 MHz of spectrum essentially allowed
four new entrants into wireless services in each local market to
compete with the two carriers that were already operating there. Since
1996, the wireless industry has been transformed by mergers and
consolidations into an industry with six, large national carriers
Although the U.S. launched its ``second-generation'' digital
wireless service somewhat after Europe and Japan, wireless is now
growing very rapidly. (See Figure 6) By mid-2002, the number of
wireless subscribers had risen to almost 135 million; by 2004 or 2005
the number of wireless subscribers is likely to exceed the number of
fixed access lines.18 The substitution of wireless for
traditional wire-based telephony is developing very rapidly. Many
households, particularly those with young adults, do not even have a
traditional copper-wire telephone service. Others are using their
wireless service rather than their home telephone for long distance
calls. The effect on traditional wire-based telephone carriers is
obvious. Long distance revenues for wire-based carriers are now
declining rapidly, and the number of fixed access lines is now also
falling after decades of steady growth.
---------------------------------------------------------------------------
\18\ The Cellular Telecommunications Industry Association's Semi-
Annual Wireless Survey found that there were 134.6 million wireless
subscribers in June 2002. At this time, the FCC's Local Telephone
Competition: Status as of June 30, 2002 reported that there were 189.1
million wire-based switched access lines in the country.
---------------------------------------------------------------------------
The potential stumbling block for wireless operators is the
technology required to provide higher-speed Internet access. In Europe
and other parts of the world, carriers have paid billions of dollars in
auctions for spectrum designated for ``Third Generation'' wireless
services (3G). But these services are likely to be much slower and less
easy to use than fixed-wire broadband services, such as cable modems
and DSL, or even ``WiFi'' services.
Regulatory Uncertainty.
In most other sectors, the liberalization of entry has been
accompanied by, or at least followed by, rate deregulation. This is
clearly not the case in telecommunications. The profound changes that
have gripped, if not overwhelmed the telecommunications sector have not
changed the traditional regulatory policy towards retail rates very
much. State regulatory commissions continue to regulate local retail
rates very much as they did in 1996 despite the growth in wireless, the
steady expansion of competitive local carriers, and the lurking threat
of cable telephony.
The 1996 Act also ushered in a major new form of regulation:
network unbundling at cost-based rates. After seven years of intense
intra-industry battles, the FCC has maintained a rather steady course
of intense wholesale regulation and has not placed any pressure on the
states to deregulate retail rates. In fact, unbundling and line-sharing
requirements have actually increased with the passage of time. And new
services, such as broadband services, have been subject to asymmetric
regulation since 1996.
Fortunately, there are numerous proceedings open at the FCC that
could alter the regulatory landscape substantially.
a. Network Unbundling--The FCC's approach to wholesale unbundling
has been controversial from the outset, in part because of the vague
language in the 1996 Act. Facilities are to be unbundled and made
available to entrants if without them the entrants would be
``impaired'' in competing with the incumbents.19 But what is
the measure of ``impairment?'' Moreover, should a facility be unbundled
everywhere if it is determined that the entrants would be ``impaired''
somewhere without it? The FCC on two separate occasions essentially
decided that virtually everything in the incumbents' networks must be
unbundled and that there should be no differences between rural and
urban areas or across states. This broad approach to unbundling is
unique to the United States and has been the source of controversy for
more than six years.
---------------------------------------------------------------------------
\19\ Section 251(d)(2)(B).
---------------------------------------------------------------------------
The most recent challenge to this broad-based approach to
unbundling was mounted by the incumbent telephone carriers in 2001 in
the form of a petition to the U.S. Court of Appeals for the District of
Columbia. The court's opinion in May 2002 requires the FCC to
reconsider its unbundling requirements and, in particular, its
requirement for line sharing with entrants seeking to offer DSL
services, but not basic telephone service.20 The court
criticized the Commission for failing to account for the effect of
competition in determining whether the absence of an unbundled element
would ``impair'' the ability of entrants to compete. As of this
writing, the FCC has not responded to this court order.
---------------------------------------------------------------------------
\20\ U.S. Telecom Association, et. al. v. FCC, 290 F.3d 415 (D.C.
Cir.), May 24, 2002.
---------------------------------------------------------------------------
The Commission now has the opportunity to back off from its broad
attempt to require everything to be unbundled and to bring U.S. policy
to a less interventionist level that is consistent with that employed
elsewhere in the world. First, if it decides that certain switching and
transport functions need not be unbundled, it would bring an end to the
use of the ``UNE Platform'' that now accounts for one third of all
entrants' lines. This would force entrants to build facilities or to
scale back their local services where they are essentially reselling
the incumbents' services. Second, the Commission can end its
unsuccessful attempt to force intra-platform competition in broadband
through line-sharing requirements. Both decisions would lead the
Commission in a deregulatory direction and reverse six years of
increasing regulation of inter-carrier relationships.
b. Broadband--Economic regulation is generally premised on the
existence of market failure due to monopoly. In telecommunications,
competition is increasing rapidly in most markets. However, one cannot
claim that the delivery of the new broadband Internet services are or
are even likely to be plagued by problems of monopoly. Cable television
systems compete actively with telephone-company DSL services, and a
variety of wireless and satellite services are under development.
Because these services have developed over facilities that were
originally designed to carry other communications services, they have
been subject to the threat or actuality of regulation under different
provisions of the Communications Act. Recently, however, the FCC has
decided that cable modem service is an ``interstate information
service,'' and therefore subject to the FCC's jurisdiction. It is also
contemplating the appropriate regulatory approach to all wireline
broadband services, including DSL.21
---------------------------------------------------------------------------
\21\ FCC, Notice of Inquiry, In the Matter of Inquiry Concerning
High-Speed Access to the Internet over Cable and Other Facilities, GN
Docket 00-185, September 28, 2000; Declaratory Ruling and Notice of
Proposed Rulemaking, GN Docket 00-185, March 15, 2002.
---------------------------------------------------------------------------
Through a welter of different proceedings, the Commission has the
opportunity to exercise ``forbearance'' from regulating any of these
services under Section 706 of the Act. Unfortunately, it has been
examining these options for a very long time without reaching any
decision on whether to regulate cable modem service or to forbear from
regulating any of these ``advanced'' services, allowing the market to
drive technology, facilities deployment, and pricing of the services.
Once again, the Commission has the opportunity to move in a
deregulatory direction in a market that is evolving rapidly and has no
clear tendency towards monopoly.
policy options for recovery
In a sense, the telecommunications industry is suffering from the
effects of successful competition. The cost of accessing and using
traditional telecommunications services is declining rapidly, led by
the aggressive competition among six national wireless companies.
Further competition will place more downward pressure on the
traditional local and long distance rates, particularly as the fiber-
based local carriers drive down business rates in central business
districts. Wireless rates will continue to fall. All of this is
beneficial to consumers and the economy, but it does not provide the
resources for growth and expansion of the network. These forces will
further reduce telecom revenues. As wireless continues to replace
wireline services, the incentives to invest in the traditional
telephone network will be further reduced.
If we are to see a revival of capital spending, it must be
stimulated by the development and deployment of new services that
expand telecom revenues. But the incentive to develop these new
services is clearly impeded by the continuing uncertainty over attempts
to regulate the wholesale and retail access to these services. Wireless
companies, local incumbent carriers, and cable companies cannot and
will not underwrite large capital expenditures to develop new services
if they must share the gains with rivals or be subjected to rate
regulation in selling these services to customers. For this reason, the
FCC should make it clear that traditional telephone companies and cable
television companies will not face regulation of their new high-speed,
broadband Internet services.
Decisions regarding unbundling of network facilities for the
delivery of traditional telephone service are also important, but not
as important as the removal of regulation from the newer services. The
spread of the UNE platform will increase the appearance of competition,
but not the reality of it. Simply allowing other carriers to deliver
the same service over the same facilities to the same customers at a
greater social cost will not promote competition. The UNE platform is
not stimulating the development of new local services. Nor are the
companies offering local service over the UNE platform using this
network strategy to gain a toe-hold before moving ahead to build their
own networks. Indeed, I believe that the securities markets are already
telling us that those using the UNE platform are not likely to thrive
from such a strategy. For a while, the increase in transactions costs,
the bickering over wholesale rates, and the uncertainty over the UNE-
P's effect on the incumbents' cash flows will simply displace more
productive uses of these resources. But eventually, I believe, the UNE
platform will die because it is not an economically viable method of
organizing a network industry in which there is so much technical
change.
The United States was not alone in experiencing a
telecommunications ``bubble.'' Virtually every other developed country
suffered a similar boom-bust cycle. The exaggerated expectations for
telecom created by the Internet and general IT revolution were met with
stark reality in Europe, Asia, and Oceania at about the same time.
Stock market valuations in many of these countries also soared in 1998-
2000 only to collapse in 2000-02. Capital spending in
telecommunications collapsed everywhere, placing most telecom equipment
suppliers in severe difficulty. The only way out of these problems is
to allow investors to find and fund productive new uses of
telecommunications. Otherwise, declining prices will translate into
declining revenues and little appetite for capital spending.
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Mr. Upton. Thank you very much.
Mr. Strumingher?
STATEMENT OF ERIC STRUMINGHER
Mr. Strumingher. Thank you, Mr. Chairman.
Mr. Upton. Is that button on?
Mr. Strumingher. That would help. I, too, am pleased to
give some observations about the health of this industry, this
time from the perspective of an investor in the industry. Since
1994, I have worked as an investment analyst, specializing in
the telecommunications industry and related industries, and I
am currently an analyst for Cobalt Capital, which is an
investment partnership that at times will take positions and
whose returns will be influenced by policy decisions made by
the Federal Government.
I just want to state up front that my intent in providing
this testimony is to provide an empirical analysis based on my
observations of the impact that government policies have on
industry investment returns and not to recommend or to
influence specific policies that could benefit or disadvantage
individual industry participants.
I hope that your committee will be able to use this
information in order to better understand how the actions in
Washington impact outcomes on Wall Street, and consequently on
investment in the telecom industry. I will also focus my
comments on important industry growth area, about which
uncertainty over important aspects of regulation appear to this
observer to be detrimental to the health of the industry
overall and, indeed, asymmetric in their application across
industry participants.
In my opinion, clarity, consistency, and predictability in
regulation, coupled with an overarching bias toward restraint,
will minimize the cost of capital for industry participants,
thereby encouraging increased investment and strengthening the
industry.
The consequences of the Telecom Act of 1996, some intended
and others likely not, have been such that there are critical
areas of potential investment for the industry in which Federal
regulation lacks all of the necessary conditions listed that I
just mentioned to minimize the cost of capital, with the
possible exception of what appears to be an evolving bias
toward regulatory restraint by some at the FCC.
The most glaring example to me of an area in which the
above conditions that I just mentioned are absent is in the
regulation of broadband access to the telecom network, and the
uncertainty surrounding the future duties of the incumbent
local telephone companies to lease elements of this network to
competitors.
To frame the discussion, I must point out that the very
notion that a shareholder-owned corporation is subject to
mandates requiring it to lease out its primary asset to
competitors at a rate dictated by the government is, to say the
least, atypical when looked at against the backdrop of the U.S.
economy overall.
Now I am not here to judge whether this is good public
policy or not, but merely to point out this idiosyncracy that
local telephone companies face here, and it is a foundation for
investor analysis of this sector--clearly, the one that raises
the cost of capital for these companies, and, thus, discourages
investments.
Now, compounding this, the lack of clarity, consistency,
and predictability of regulation with respect to future
investments in broadband infrastructure just really complicates
the issue even further. And what I am really specifically
referring to here is the investment requirements to deploy
fiber optic-based technologies deeper into the access network
in order to deliver bandwidth to homes, educational
institutions, and health care facilities, places that are
generally outside of the main commercial districts of our
cities, and to bring the same to also more sparsely populated
parts of the country.
Now, I am not here to hold myself out as an expert on the
intricacies of FCC regulation in this area. But I can tell you
that there is sufficient uncertainty surrounding the potential
obligations to lease out ``elements'' of this network to
competitors that is raising the cost of funding the investment
for the incumbent phone companies. Simply put, investors are
far less likely to embrace aggressive plans to invest in this
kind of network upgrade when there is uncertainty over what in
the vernacular of telecom regulation is called unbundling.
In the absence of clear regulation, investors will be far
less tolerant of additional investment and more likely to
demand their money back through increased share buybacks and
dividends. Managements, on the other hand, will be far more
likely to explore investing outside of the United States in
geographies where they can more easily evaluate risk associated
with their investment.
What makes this situation somewhat perplexing to me is that
policymakers are addressing the very same issue for the cable
industry with far less ambiguity. While there has been no
affirmative claim by the FCC stating that cable broadband
access will remain deregulated in perpetuity, the mere absence
of such existing regulations compared with the requirements
currently placed on the local telephone companies gives an
investor more confidence that the future resale requirements
will be less onerous.
The only legitimate reason that I can see for this current
asymmetry between the two industry segments is that the Federal
Government feels like public policy is advanced by choosing
winners here, and that is truly perplexing when you think about
it.
My comments, while focusing primarily on the local
telephone companies, can be equally applied to other companies
in the telecom food chain. AT&T is currently spending
significant resources to market bundled local and long distance
voice telephone service. If they are not going to be able to do
this over time, they shouldn't be investing the money right now
to go after these customers, and they should be returning money
to shareholders--basically, harvesting their consumer
investment.
I do have a lot more to say on this, but, unfortunately, it
looks like I am about to get the gavel. So I will just submit
the rest of my testimony for the record, and I am happy to
answer any questions that you might have.
[The prepared statement of Eric Strumingher follows:]
Prepared Statement of Eric Strumingher, Investment Analyst, Cobalt
Capital
I am pleased to give some observations about the health of the
telecommunications industry from the perspective of an investor in the
industry. Since 1994, I have worked as an investment analyst
specializing in the telecommunications industry and related industries.
I am now an analyst for Cobalt Capital, an investment partnership that
at times takes positions in companies who's returns will be influenced
by policy decisions made by the federal government. However, my intent
in providing this testimony is to provide an empirical analysis, based
on my observations, of the impact that government policies have on
industry investment returns and not to recommend or influence specific
policies that could benefit or disadvantage individual industry
participants. I hope that your committee will be able to use this
information in order to better understand how actions in Washington
impact outcomes on Wall Street and, consequently, on investment in the
telecommunications industry. I will focus my comments on an important
industry growth area in which uncertainty about important aspects of
regulation appear to this observer to be detrimental to the health of
the industry and indeed asymmetric in their application across industry
participants.
In my opinion, clarity, consistency, and predictability in
regulation coupled with an overarching bias toward restraint will
minimize the cost of capital for the telecommunications industry,
thereby encouraging increased investment and strengthening the
industry. The consequences of the Telecommunications Act of 1996, some
intended and others likely not, have been such that there are critical
areas of potential investment for the industry in which federal
regulation lacks all of the necessary conditions listed above to
minimize the cost of capital, with the possible exception of what
appears to be an evolving bias toward regulatory restraint by some at
the FCC.
The most glaring example of an area in which the above conditions
are absent is in the regulation of broadband access to
telecommunications networks and the uncertainty surrounding the future
duties of the incumbent local telephone companies to lease elements of
their networks to competitors. To frame the discussion, I must point
out that the very notion that a shareholder-owned corporation is
subject to mandates requiring it to lease its primary asset to its
competitors at a rate dictated by the government is to say the least
atypical when looked at against the backdrop of the U.S. economy. I'm
not here to judge whether this is right or wrong from the standpoint of
public policy but merely to point out that this idiosyncrasy serves as
a foundation for investor analysis of the local telephone companies and
is clearly one that raises the cost of capital for these companies and
thus discourages investment. Moreover, the lack of clarity,
consistency, and predictability of regulation with respect to future
investments in broadband infrastructure.
Here I am specifically referring to the investment requirements to
deploy fiber optic-based technologies deeper into the access network in
order to deliver increased bandwidth to homes, educational
institutions, and healthcare facilities that are generally outside of
the main commercial districts of our cities and to bring the same to
the more sparsely populated parts of the country. While I do not hold
myself out as an expert on the intricacies of FCC regulation in this
area, I can tell you that there is sufficient uncertainty surrounding
the potential obligations to lease out ``elements'' of this new
investment to their competitors that it is raising the cost of funding
these investments. Simply put, investors are far less likely to embrace
aggressive plans to invest in this kind of network upgrade when there
is uncertainty over what is in the vernacular of telecom regulation
``unbundling'' obligations. In the absence of clear regulatory policy,
investors will be far less tolerant of additional investment and more
likely to demand their money back through increased share buy backs and
dividends. Managements will be far more likely to explore investing
outside of the United States, in geographies where they can more easily
evaluate the risk associated with their investment.
What makes this situation somewhat perplexing to me is that policy
makers are addressing the very same issue for the cable industry with
far less ambiguity. While there has been no affirmative claim by the
FCC stating that cable broadband access will remain deregulated in
perpetuity, the mere absence of such existing regulation compared with
the requirements currently placed on the local telephone companies
gives an investor more confidence that future resale requirements will
be less onerous. The only legitimate reason that I can see for the
current asymmetry that exists in broadband regulation among the cable
and local telephone industries is that the federal government feels
that public policy is advanced by choosing winners here.
My comments, while focused primarily on the local telephone
companies, can be equally applied to other companies in the
telecommunications food chain. Clarity on regulation is equally
important for shareowners of AT&T as it is for Verizon. AT&T is
currently spending significant resources to market a ``bundled'' local
and long distance voice telephone service through leasing the local
access network of the incumbent local telephone companies. To me, this
investment only makes sense in the context of a long-term plan in which
AT&T will be able to provide broadband access to these subscribers as
it is likely that voice and data services will migrate onto one
converged network over time and that carriers will need the ability to
offer both services with a competitive cost structure in order to
survive. The current lack of clarity is raising AT&T's cost of capital
as is evidenced by a declining stock price. Current and prospective
investors in the company would benefit from more certainty over the
course of future regulation. Should the company be spending
aggressively to defend its consumer long distance business through
bundling it with local telephone service, or should it be harvesting
this business and returning cash to investors? The answer to these
questions hinges on regulatory clarity. Much the same can be said about
another participant in the telecommunications food chain, namely the
manufacturers of equipment used in the telecommunications network.
Investors in companies such as Lucent, Nortel, Corning, and others face
difficult decisions on funding the large investment in research and
development required to develop market-leading technology. The
difficulty in making this decision is compounded by the lack of clarity
in regulation, causing investors to just walk away from the sector.
By way of conclusion, I believe that in regulating this industry
policy makers must not lose sight of the fact that strong companies,
both service providers and equipment vendors, are essential to a strong
telecommunications industry. These companies, however, are owned by and
run for the economic benefit of private shareholders who seek an
economic return in excess of their investment cost. The lack of
clarity, consistency, and predictability of industry regulation is
raising the cost of capital for the industry, thereby weakening its
participants. Importantly, the only legitimate explanation that I see
for the current state of ambiguity in the rules is that the federal
government is generally conflicted as to whether the local telephone
companies should be run for the benefit of their shareholders or for
the benefit of U.S. citizens generally. This is an inherently unstable
equilibrium. I believe that there is ample evidence to suggest that
inertia in clarifying regulation in this industry is destroying value
not only for shareholders but also for citizens generally. To put it
bluntly, I see only two ways for government to skin the cat on this
issue: either spell out the rules of the game clearly and allow private
investors to evaluate the risks associated with an investment based on
these rules, or nationalize the telephone system and lease it out as a
platform to resellers at tax-payer subsidized rates that are deemed to
achieve the redistribution of wealth or other policy goals that are
deemed to be in the public interest. I can't see how the current
straddling of the fence benefits anyone.
I look forward to responding to any questions that you may have on
my testimony.
Mr. Upton. Well, thank you very much. Thank all of you. And
as I read your testimony last night, and as I listened to many
of you, to all of you talk this afternoon, it seems--and as I
look at a whole series of analysts' reports done over the last
number of months with regard to the health of the teleco
industry, it seems as though almost virtually every one cites
the example of what is going to happen with UNE-P--what is the
FCC going to do with UNE-P, and will things continue about at
the same level, or are they going to make massive changes and
try to remove that, in my view as an obstacle to capital
growth.
And as I listen to you talk about the unbundling of
broadband, coupled with UNE-P, I would like each of you to
maybe expand a little bit in terms of your analysis, knowing
that you only have about 40 seconds each before my time
expires, to expand specifically just on that angle. What will
happen to the teleco industry if, in fact, the FCC makes some
rather dramatic changes and removes the UNE-P requirement, and,
thus, allow things to go freely? Mr. Atkinson? Would it be
better or worse?
Mr. Atkinson. It could be better, and it could be worse.
The problem is that there is really no way to predict. We don't
have any evidence. You know, it is speculation on a lot of
sides, and everyone is claiming the sky is going to fall.
Probably in some markets it will be much better. In large
cities, large urban markets, we know, you know, UNE-P probably
isn't necessary. In rural markets, smaller markets, it might
be. So if you took a meat axe approach to the--you know, said
``all in/all out,'' you are going to get kind of a meat axe
result, and you need a scalpel result.
Mr. Upton. Now, one of you in your testimony talked about
allowing the States to experiment. Some States--it was you?
Okay. I don't know how workable that is, but you, as a former
FCC employee, do you think that that is possible?
Mr. Atkinson. Well, my observation coming----
Mr. Upton. In Massachusetts versus Michigan? Holy Cross
versus the Wolverines?
Mr. Atkinson. My experience comes from my pre-FCC life,
where before the Telecom Act States made all of the decisions,
State by State. It looked pretty ugly and inconsistent, but
they made the decisions to open up a collocation, to allow
local competition in the first place. And, actually, you got to
fine-tune these policies. Each State made a little step
forward. Some got it right; some got it wrong. If it was right,
other States adopted it, and then eventually the FCC and
Congress adopted the right results.
And my concern is that the lack of the ability to fine-
tune, to experiment, really says we are going to place a big
bet on one outcome. Now that may be right, and the FCC is a
pretty smart group of people. But if they get the UNE-P
decision or the UNE decision wrong again, where does that leave
us? I mean, you know, we need to experiment, I think.
Mr. Upton. Mr. Bath?
Mr. Bath. I guess, in my view, the elimination of UNE-P
would be favorable for the industry. Really, I think as Eric
Strumingher mentioned, the elimination of that unbundling
requirement would lower the cost of capital; therefore,
improving hurdle rates for the telephone companies.
As I said in my written testimony as well, there is 10
million plus UNE-P customers out there that would be prime
candidates for the wireless companies seeking to offer local
voice services to those companies as well as the cable
companies who to date have taken less than 2 million local
telephony customers. Certainly, if you eliminate UNE-P, the
opportunity--industrial opportunity to compete in telephony for
cable becomes much greater.
Mr. Upton. Mr. Brodeur?
Mr. Brodeur. I think it would be both good and bad. In the
short term, it would be bad, as the UNE-P allows a competitor
to access and provide sets of services that would be hard to
do. But in the long term, it would be good, because you would
force an investment on the part of other carriers to provide
local services. Otherwise, it is just a price gain that is
somewhere between what the UNE-P rates are and the retail
price.
Mr. Upton. Do you think that it would begin to reverse the
long-term--the last couple of years trend in terms of capital
investment, then, from the sharp decline to coming back up to
where they were?
Mr. Brodeur. It could contribute to improving that. It is
not--it will not solely do that.
Mr. Upton. Mr. Crandall?
Mr. Crandall. It is a minor event, I think, in terms of the
future of the industry, because those people using UNE-Ps are
not going to succeed. MCI and AT&T are the two major users.
AT&T stock has fallen by 30 percent since it spun off its
broadband assets. MCI is not going to succeed with this.
I think it will help raise capital for the Bell companies,
but in a marginal way. I think the broadband piece is much more
important.
Mr. Upton. Well, you just have to agree or disagree, Mr.
Strumingher. I am out of time.
Mr. Strumingher. You are putting me on the spot. I think we
need clear rules on both UNE-P and all unbundling, because
either a competitor will have access to everything, or they
should have access to nothing. This state of straddling the
fence where we are now, and we have been for it seems like an
eternity, has got to stop.
Mr. Upton. Thank you.
Mr. Markey?
Mr. Markey. Thank you, Mr. Chairman.
In 1994, this committee and the Congress passed a bill, the
Markey-Fields bill, which had 400 votes on the House floor, and
then Senator Dole killed it over in the Senate. Here is what it
says in terms of its goals. It says, ``To make available, as
far as possible to all people of the United States, regardless
of location, a switch broadband telecommunications network
capable of enabling users to obtain affordable, high-quality
voice, data, graphics, and video telecommunications services,''
making reference to its digital quality.
Now, that legislation was killed. However, obviously what
we were interested in is dislodging from the Bells this DSL
technology which they had but were not deploying, because much
like the black rotary dial phone that we all had in our living
rooms in 1980, they were refusing to deploy anything because
they had no competition.
Or, as in 1993 when we created the third, fourth, fifth,
and sixth cell phone companies, they were refusing to move from
analog because they had no competition. And so the interesting
development since 1996 when the Telecom Act passed is that now,
just a brief 6 years later, more than 75 percent of all
American homes have broadband passing their front door. That
didn't happen before the 1996 Act, even though the Bells had
the technology and had no impediments in terms of the
deployment of it.
So this inducement of paranoia is something that actually
played a big role, as it did in every other area, right back to
black rotary dial phones, that they said if you allowed any
other competitor to sell one and they plugged it in in their
home, it would ruin the whole phone system for greater Boston
or any other system in America. We have heard it over and over.
This is just a continuation of that complaint.
So the interesting thing, though, is even though Americans
have, through the duopoly, access--75 percent of them--to
broadband, they are not subscribing. A very small percentage
are subscribing to something that is now available to them
because the price is too high.
So the question is: how do you solve that problem? Do you
guarantee that there are no new competitors able to use this--
these wires in order to get into homes, to provide new
services, to provide interesting price structures? Or do you
say once again to the Bells, ``Don't worry. No paranoia.
Continue to just do your research, but you don't have to
deploy''? Which is going to work better for America? What is
going to work better for the consumer, not just for--all of you
represent basically that investor perspective.
I am talking here about consumers. They have been the
beneficiary of the 1996 Act. It has been a huge, roaring
success. The Bells weren't deploying anything. So my question
is, to anyone who wants to take it, isn't it better that we get
more competition that will lower prices and increase the
quality of services, so we get the price down from $55 or $60
down to $35, and then they will get 75 percent of Americans
subscribing rather than having this--that is, the future that I
have heard this panel express has a name for it.
It is called the past. You are advocates for the past, over
and over again. So I want to hear from at least somebody here,
somebody that does support more competition, not less.
Yes, Mr. Atkinson?
Mr. Atkinson. There is a potential new development which is
coming along I hope called powerline communications. Now, if
you got--that would make--it is the idea of using the powerline
to every home, to every plug in your home, upgraded to some of
these trials have gone to five megabits. Could be a very, very
inexpensive broadband connection, which would break the duopoly
and at least----
Mr. Markey. Can I call and get the----
Mr. Atkinson. There are some very--there are some trials
going on around the country.
Mr. Markey. No. I mean, I need--I said I want to dump my
company today, so----
Mr. Atkinson. You have got to keep your eye on it.
Obviously----
Mr. Markey. While I am waiting for that to arrive, can I
keep the competition in place waiting for that? Or would I be a
fool to wait for a new technology that might never actually
fulfill its promise?
Mr. Atkinson. It is a risk that the technology certainly
won't evolve.
Mr. Markey. But that is that boom-bust that is--prefer not
to go that route, and just take the bird in the hand until
something new comes along.
Mr. Atkinson. Well, a third or more competition certainly
would, you know, provide the competition for--and lower prices,
etcetera, for consumers. That is a good thing. Investors will
go, hmmm, that is not a good thing. Maybe I don't want to
invest in it. Yes, that is the typical--the tradeoff and a
concern.
The question, of course, would be, should we have--in the
sense from a government policy point of view, carrots or sticks
to----
Mr. Markey. Should we change policy in anticipation of
technology----
Mr. Atkinson. No, it should----
Mr. Markey. [continuing] that may not arrive, or should we
wait for the technology to arrive and then change the policy
because the technology is here?
Mr. Atkinson. I would go with my--do an experiment to see
what happens in----
Mr. Markey. Thank you, Mr. Atkinson.
Yes, sir?
Mr. Strumingher. Yes. I would just offer one or two
observations in response to your statement. First of all, I
think you can't just consider the price. You have to consider
the economic return to not just the incumbent but all
competitors in providing the service. Right now there are many
different providers of DSL service--for example, COVAD,
Earthlink, just to name two, or AT&T and other--who are
currently leasing out the copper loop to deliver service over
DSL.
They are pricing at the same level roughly as the
incumbents. The reason--well, in my opinion--they don't consult
me about their pricing decisions. But in my opinion, the reason
is because it is an expensive service to provide. None of these
is actually making money at DSL yet. There are large
provisioning costs involved. There are lots of costs in ramping
the business up. So I say you have got to consider both the
price, but also the cost of providing the service when you take
a look at it.
The second----
Mr. Markey. If they eliminate that competition, do you
think the Bells are going to lower prices and increase
deployment if there is no pressure on them at all? That just
seems like it is anti--that is counterintuitive. That is not
how they have acted for the first 100 years of their existence.
Mr. Strumingher. Yes. Actually, that is not what I was
saying. I wasn't suggesting that we should do that. I was just
pointing out that we need to take a look both at the price and
the cost of delivering the service.
The second point that I would make in this that I think is
important is a comparison of price and value that the customer
is receiving. Right now, if you want to get dial-up access to
the internet, a lot of people buy a phone line or lease a phone
line from the Bell company, and then lease another phone line
that they use for their internet service.
It varies depending on geography, but the rough cost is
approximately equal to what you would pay for a DSL line, where
with DSL you can get both a voice service and an always-on
high-speed connection. So the value received by the consumer is
actually, in my opinion, better than in the contrary case where
they are buying two lines.
Mr. Markey. Mr. Chairman, you have been overly indulgent to
me. Thank you.
Mr. Upton. Mr. Tauzin?
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Crandall, you make the point that the spread of a UNE
platform into these new advance services will increase the
appearance of competition but not the reality of it. You say in
your statement, ``Simply allowing other carriers to deliver the
same service over the same facilities to the same customers at
greater social cost will not promote competition.''
If I can draw an analogy maybe--if we need some more
taxicab competition in this town, does it help us to say that
we are going to allow competitors to use the incumbent's
taxicab to drive people around at a discounted rate set by
government? Does that really increase competition in taxicabs?
Mr. Crandall. Well, as you well know, I mean, we have been
in this debate for a long time. The idea of using unbundled
network elements was one of providing entrance either of the
ability to access essential facilities that they couldn't build
themselves economically or to get a toehold prior to building
their own facilities.
Chairman Tauzin. The idea was to get things started.
Mr. Crandall. Yes.
Chairman Tauzin. I mean, the idea was that they were going
to have their own taxicabs eventually, their own facilities at
some point, right?
Mr. Crandall. Right. How the UNE-P is being used is not for
getting a toehold and building their own facilities, but,
rather, for bundling voice services.
Chairman Tauzin. Yes, but let us not talk about that.
Mr. Crandall. In places like New York, in order to compete
with the Bell companies. The only thing they are doing is they
are getting huge discounts, huge resell discounts.
Chairman Tauzin. They are getting a resell discount is all
they are getting. They are serving the same customers over the
same facilities.
Mr. Crandall. Let me point out----
Chairman Tauzin. But I have got to move quickly.
Mr. Strumingher, you point out the--I think in awfully good
language the absurdity of this kind of thing. You point out
that the very notion that a shareholder-owned corporation,
which is what we are talking about here--the ILECs--that a
shareholder-owned corporation is subject to mandates requiring
it to lease its primary assets to its competitors at a rate
dictated by government is a pretty atypical situation in a
capital market.
But you also point out that that isn't true for cable. It
is true for telephones but not for cable. And no one has yet
said that government ought to tell the cable company that it
has to lease out its facilities to competitors at a rate set by
government.
What do you think would happen to cable investment in these
new broadband services if we decided in fairness to subject the
cable companies to the same rules the FCC has subjected the
telephone companies to?
Mr. Strumingher. I think that it would be pretty
destructive.
Chairman Tauzin. Pretty destructive?
Mr. Strumingher. Yes, very destructive.
Chairman Tauzin. In what way?
Mr. Strumingher. Well, this is perhaps for the cable
industry its best growth opportunity. And if you all of a
sudden cast doubt upon the industry's ability to earn a return
on this investment because there are unclear rules or onerous
rules on reselling this asset to their competitors, you
increase dramatically their cost of capital.
Chairman Tauzin. But, you see, what we have done--you
really put it to us pretty good here in this statement. What we
have done is we have decided to tell the cable companies, ``We
are not going to do that to you. We want you to go out and make
these investments and earn capital--earn, you know, profits on
your capital investments. But we are going to do it to the
telephone company, your competitor in this broadband area.''
So, therefore, we decided to make cable the winner and
telephones the loser. That is essentially what you said. The
only--this is your quote. ``The only legitimate reason I can
see for the current asymmetry that exists in broadband
regulations among the cable and the local telephone industry is
that the Federal Government feels that public policy has
advanced by choosing winners here.''
Now, simply read, that is telling us that we decided to
make cable companies winners over telephone companies. Is that
right?
Mr. Strumingher. Yes. I can't really see the policy
objective in so doing, but that is the way it appears to me.
And it is kind of perplexing.
Chairman Tauzin. Well, it certainly is to me. It is
perplexing to me that we would want to have competition in
broadband services and only make cable the winner. If we really
want competition, we should have a really level playing field.
Now, if you had to choose--if you were advising me and the
FCC today on whether we ought to subject cable companies and
telephone companies to all of these rules similarly, so we are
not picking a winner, or to take these rules off of both of
them--and everybody else by the way, wireless and satellite,
anybody else who wants to compete--which direction would you
recommend we go?
Mr. Strumingher. Well, I don't want to hold myself out as
an expert on public policy. I hope that I can hold myself out
as an expert on investing. And I will tell you this----
Chairman Tauzin. Well, which direction would take us into
more investments and more services and real competition, Mr.
Crandall, instead of fake or phony competition? Can you help us
here?
Mr. Crandall. Well, surely taking the same view of both
sectors, not regulating new services that are delivered over
new facilities is the right approach.
Chairman Tauzin. Absolutely it is the right approach.
I yield back, Mr. Chairman.
Mr. Upton. Thank you.
Mr. Wynn?
Mr. Wynn. Thank you, Mr. Chairman.
Mr. Upton. You are recognized for 8 minutes.
Mr. Wynn. Thank you.
Is there anyone on the panel that believes that the primary
unbundling rules to newly deployed infrastructure by ILECs or
CLECs makes sense? Guess not.
Mr. Crandall. Could I answer that in one way, Mr. Wynn?
Mr. Wynn. Yes.
Mr. Crandall. We had a conference at The Brookings
Institution a little over a year ago, and the book is out on
broadband regulations. It just came out a couple of weeks ago.
Everyone there, regardless of their views on unbundling, seemed
to take the same view. That is, for new facilities, there is no
basis or no justification for requiring unbundling.
Mr. Wynn. Thank you.
With regard to State rate-setting, is the primary issue the
uncertainty or the unfairness? I have heard both allegations.
What is your sense? If someone on the panel would respond to
that.
Mr. Atkinson. I think the allegation is that the TELRIC
rates set by the States are--have been too low. At least that
is certainly the allegation of the Bell companies. Of course,
the consumers of those services think the rates are good or not
low enough. The difficulty is the States are--to get it right,
you have to keep trying to get it right. I mean, it is
Goldilocks pricing, not too high, not too low, you have got to
get it just right.
And so the States I think are going to go back and take a
second look and a third----
Mr. Wynn. If I could just jump in, is that a result of some
sort of regional differences, or is it just the quirks of the
individuals States?
Mr. Atkinson. You know, the price or the cost of providing
the service varies typically by density more than just by
States. Rural areas are more expensive to serve than urban,
typically, and some companies do better or worse than other
companies, even for the same kind of geographic area. So it
varies sometimes by Bell company versus non-Bell company, or
you can just--it just differs. But the formula is a formula,
and they apply it differently, and they are going to change it.
Mr. Wynn. I see Mr. Bath kind of itching to get in on that.
Mr. Bath. Well, yes, I think the issue from the investors
that I talked to is that, certainly, as you think about the
States' incentives--as Mr. Markey noted, the incentive for the
States is to continue to lower prices to consumers, lower
prices for the traditional voice services. And so as long as
the TELRIC/UNE-P requirements are out there, there is certainly
an investor concern that the States will continue to have a
motivation to ratchet the rates lower and lower.
Mr. Wynn. Unfairly low, not just lower but----
Mr. Bath. Well, I mean, as----
Mr. Wynn. In relation to the value of the investment.
Mr. Bath. As low as they can to continue to promote
competition. Again, from their perspective, they are doing what
their constituents would ask them to do, which is drive lower
prices through more competition.
Mr. Wynn. Okay. I am curious. Everyone talks about clarity,
consistency, and predictability, most definitely what the
industry wants. I would submit that that is probably the same
thing that the consumer wants, and that one of the biggest
consumer concerns is dropped calls and the lack of consistency
in terms of their research.
Has anyone seen a market survey of really what the consumer
demand is? Is it for the next generation, or is it for this
generation to work better? What is it that consumers want? What
drives this market?
Mr. Atkinson. I think it is all of the above. I mean, it
is--consumers are very glandular. There are some who want just
low cost, some who want all of the latest bells and whistles.
And, you know, they will go to the carrier which gives them the
best value proposition for what they want. But there is clearly
a market for cheap and cheerful, and there is clearly a market
for the most, you know----
Mr. Wynn. Is there any segment that is larger than the
others, or is it fairly equally disbursed?
Mr. Atkinson. I don't know.
Mr. Crandall. Can I answer that?
Mr. Wynn. Yes, sir.
Mr. Crandall. Well, still to this day, the traditional
services constitute the overwhelming share of consumer
expenditures. But wireless is growing, as is broadband. But to
ask a household, what does he want when his choice is among
services that are--have not yet been perfected?
My DSL service here in the city of Washington, D.C.
delivers me 600 kilobits per second. In Japan, if I had the
choice, it would be between eight and 12 megabits per second.
So consumers don't even know what the choices could be once
technology gets rolled out.
Mr. Wynn. Yes?
Mr. Brodeur. And then I think the--I would agree that the--
clearly, quality is an issue. The consumer will want good
quality services, no dropped calls and the like, and they
clearly want decent pricing or low pricing. But there is also a
big desire on the part of consumers to see the bundling of
services, local and long distance together, to see local, long
distance, and wireless, and broadband all being provided as a
package to the home or to the business.
Mr. Wynn. Thank you.
It seems to me that there is a pretty good consensus that
this unbundling rule is not working or is inhibiting
investment. Is it your sense that it is also costing us jobs
that may be going overseas or other places?
Mr. Bath. I mean, the unbundling rules are largely being
used by AT&T and MCI to hold on to the current customers that
they now have. And as you think about the kind of jobs that
they are creating, there are certainly creating jobs in the
advertising community, telemarketing, and customer service,
etcetera.
Mr. Wynn. What would happen to those jobs if you didn't
have the unbundling rules?
Mr. Brodeur. I would just say that, clearly, unbundling
does create a disincentive for new investment, particularly
fiber loop facilities. When you consider the number of jobs
lost primarily in the manufacturing industry as well as the
service industry, but primarily the manufacturing industry, but
if you think about investment in fiber facilities it is not
just switches and fiber, it is also construction workers that
build the ditches that the fiber is put into. That is a huge
component of it. So there is a lot of jobs to be gained there.
Mr. Wynn. Okay. I think you used the Corning example in
your testimony?
Mr. Brodeur. Yes.
Mr. Wynn. As an example of where you, absent these
unbundling rules, you could get more investment?
Mr. Brodeur. There is a much greater incentive for
incumbent operators to invest in broadband--new broadband
infrastructure without unbundling today, and that will help
both Corning and many other equipment manufacturers.
Mr. Wynn. I think--Mr. Crandall, did you want to say----
Mr. Crandall. Yes. I wanted to say that UNE-P and
unbundling new facilities for broadband--the UNE-P probably has
some unfavorable effects on investment, in terms of maintenance
of existing plant. But requiring the unbundling of new
facilities in uncertain ways implemented by the States does
certainly chill investment in new facilities.
And to address Mr. Markey's question earlier, there is no
one who thinks that this unbundling for broadband is going to
generate much in the way of competitive supply of DSL. And the
forecasts are that the competitive DSL supplies are going to be
very small. Today there may be half a million out of, what, 15,
17 million total broadband subscribes.
Mr. Wynn. Is it true that there is no real impediment to
the ILECs or CLECs investing in the new infrastructure?
Mr. Crandall. Well, I mean, the impediment is demand and
cost. If you want that, I mean, it is the regulatory
impediments we are talking about.
Mr. Wynn. Okay.
Mr. Atkinson. Really, there is a very good role for UNEs to
consolidate demand to lower the risk for new investment,
particularly for startup companies, for competitive companies.
So, you know, in the right circumstances, UNEs are going to
create jobs, create new----
Mr. Wynn. My time is almost up. What do you mean when you
say consolidate demand? Why does it have to be consolidated?
Mr. Atkinson. No, to concentrate demand and to test it--to
build demand to now justify the investment in your own
facilities. The proper role for----
Mr. Wynn. And that argument is that you can only do that if
you have the current unbundling rules. Is that----
Mr. Atkinson. Not necessarily the precise current
unbundling rules, but the statute requires unbundling, and I
think it was intended to provide the ability to aggregate
demand so investment would be lower risk by the newcomers. The
newcomers would then, after aggregating the demand, move it to
their own facility.
Mr. Wynn. But no incentive for investment for the
incumbents.
Mr. Atkinson. There is a--not for the incumbent. Clearly
not.
Mr. Wynn. All right. Thank you, Mr. Chairman.
Mr. Upton. Thank you.
Mr. Shimkus?
Mr. Shimkus. Thank you, Mr. Chairman. It is great to have
the panel here, and I apologize for stepping out. That is part
of our challenge as a Congressman.
All of us have been concerned about the economy as a whole,
and a lot of us lived through the good days of the expansive
telecommunication age and all of the great things that
occurred, and then we have also, with the economic slowdowns,
are putting up and surviving with the way the economy is today
at the time.
I wasn't a member during the 1996 Telecom Act. I was back
home in Illinois, and I have been trying to follow this as we
move forward. But I have been a consumer and have tried
different types of technologies to do my job. You know, many
people do it now at home. And I have gone from dial-up to
recently switching to cable broadband at home and cable
broadband in my townhouse here, because of the bundling aspects
and what they have been able to provide me. And they are
marketing a good price.
And so the question is: if I, as just a consumer, have made
a decision, based upon looking at what is out there in the
market right now, and I have said for me it is worth my money
to switch--an ISP, I switched really, in essence, from the
dial-up, changed my ISP, went to cable.
What has to be done to the other modes of delivery of high-
speed internet connectivity to encourage anyone else to jump
into the competitive market, whether it be high-speed cellular,
whether it be direct satellite, whether it be, you know,
through the telephone lines, because that is really our--if we
want the economy to recover, how are we going to--what barriers
do we lift--and that has been part of the discussion--that may
have been in place either through the 1996 Telecom Act or
through FCC ruling, or what do we lift or do we have to put in
place?
And, of course, there is a difference in the investment
community based upon--even here on the panel--of more
government regulation or less. I would like just to start
from--to my left and go down and see if you can just address
that question for me in the generic arena.
Mr. Atkinson. There is nothing that a big dose of new
revenue wouldn't cure for the telecommunications industry and
the suppliers and everybody. I think it was pointed out earlier
by one of the other witnesses that, you know, new applications
are the only thing that is going to bring in new revenue in any
great quantities.
I don't know that regulation is going to--of telecom by the
FCC, for example, is going to make a great deal of difference
to the kind of applications. Clearly, if there are applications
that are being held back by FCC regulation, those should be
definitely eliminated. But it is the content, it is what is
that, you know, proverbial killer app?
I think it is somewhat generational, too. You know, people
with gray hairs may not be the great consumers of some of these
new applications, but the younger generations are avid, huge
users of these new services. And as they sort of move into the
telecommunications buying worlds, they get into their twenties
and thirties, form households, things like that, there may be
just a huge, very natural, new demand coming into the system.
And hopefully we could accelerate that, but it is--new
applications are going to be new revenue, and that is what we
need.
Mr. Shimkus. Mr. Bath?
Mr. Bath. Yes. I think, if I get at your question properly,
you know, what you are interested in is how can you get from
other providers the kinds of high-speed data and internet
services you get from the cable company. I think the clearest
path is to lower the cost of capital and create the incentives
for the telephone companies to deploy those networks more
aggressively.
Clearly, eliminating the network unbundling requirements on
those networks would help. I think, in addition, more spectrum,
which I know the FCC has worked hard, and, as Mr. Markey
pointed out, I think the FCC has done a superb job in getting
as much spectrum out as they can. And then, finally, on the
satellite side, you know, talk about a sector that has had
tremendous technological evolution here over the last decade in
terms of what it can deliver. And recently the FCC has taken
some action to improve the satellite companies' abilities to do
that.
So I do think it is coming. Less regulation, you know,
certainly, again, lowers the cost of capital and creates the
proper incentives.
Mr. Shimkus. And part of that answer is certainty.
Mr. Bath. Certainty helps. I mean, uncertainty is killing
the telecom investors', you know, view of the world right now,
as I said in my written remarks.
Mr. Shimkus. Yes, great. Thank you.
Mr. Brodeur. I would add the industry is evolving. I think
the Telecom Act of 1996 and previous regulatory initiatives
certainly are all part of the process of this industry and
improvement of the services that are provided to customers. I
think the objective should be facilities-based competition all
the way to the home or to the business. That should be the
objective.
Time and time again we have seen, you know, in the--if I
were in front of you 7 or 8 years ago, there is no way I could
have ever told you that there would be sets of services now in
the wireless zone where, you know, effectively you have free
minutes of long distance usage at the marginal rates on the
weekends and even in the peak periods. That is because we have
facilities-based competition.
I would also note that there have been roughly 150
competitors that were started in the 1999 through 2001 period.
Almost three-quarters of them were UNE-based competitors.
Because the risk for financial investors to make investments in
those companies was less, there is an incentive not to invest
in facilities all the way to the home or to the business, and
that is because of the UNE.
And that is why I think, as our study indicated for
Corning, how there is a disincentive especially when it comes
to incumbents providing fiber facilities. But the overriding
objective of public policy, I would believe, would be for
facilities-based competition.
Mr. Shimkus. Great.
Mr. Crandall?
Mr. Crandall. I will echo that and leave Mr. Strumingher
some time. But let me, in addition, add the fact that
regulatory uncertainty is probably keeping the cable companies
from allocating more of their spectrum to broadband services
for fear that they might be subject to some of the sharing
requirements that the telephone companies are subject to.
Mr. Shimkus. Very good.
Mr. Strumingher?
Mr. Strumingher. I guess I would just answer by saying we
should focus not on putting a little tweak here or a little
tweak here to regulations which might, you know, all of a
sudden create some huge boom in revenue. I mean, the nature of
this industry is it is technology-driven, and we don't really
know what the next great source of revenue is going to be.
But these opportunities are going to come up. And if there
is a clear deregulatory bias, if there are clear rules, then
capital is going to flow toward funding those ideas, which
they, you know, are at this stage. And, you know, who knows
what the next great thing is going to be? But when it comes, it
can get funded.
Mr. Shimkus. I appreciate the answers.
Mr. Chairman, I yield back.
Mr. Upton. Thank you.
Mr. Dingell?
Mr. Dingell. Mr. Atkinson, I want to thank you for your
very helpful testimony. I was reading at page 3, you have a
very interesting statement in which you said as follows, ``That
it might make it too easy for new entrants to get into the
space being occupied by established CLECs, such as TCG and MFS,
and whether unbundling would undercut the value of our existing
investments.''
``I couldn't answer those questions, because the roadshow
was being conducted before the FCC's local competition order of
August 1996, although the answer turned out to be yes. After
the order was released, TCG's stock struggled for a time.''
Wouldn't this appearance tend to lend credibility to the
fact that we need to eliminate some of these rules that
preclude this--that preclude people from getting relief from
this kind of situation?
Mr. Atkinson. Possibly. I think the bigger issue is
probably the pricing of--you know, if we--our concern--this is
back in 1996 when I was at Teleport, was that we were very
concerned with what has happened, that you UNE prices would be
too low and undercut the value of the investments that we had
made in the prior 10 years to compete.
So we were concerned not so much with the requirement of
the Bell companies to make UNEs available to our--the startups
that were coming behind us, but the pricing level. And I think
it may well be that the prices are in some cases too low, and,
therefore, undercuts.
Mr. Dingell. And changing back would help this situation.
Mr. Atkinson. Getting the pricing right is ultimately what
has to happen. It is a question--access to the elements is
important, and then you need to get the price right. If it is
too high, you are not going to get the market aggregation
function, which will trigger new investment.
Mr. Dingell. But the best mechanism for fixing that price
is the market. So you do regulate it, let the market fix these
prices, get everybody in the business to compete fairly, and
you have got the problem solved.
Mr. Atkinson. That would be the--you know, the Telecom Act
set up the prospect of negotiated interconnection agreements
precisely where those prices for UNEs would be negotiated. The
one that the Act has not fulfilled is the ability for CLECs and
ILECs to negotiate those deals and get that whole process
completely out of the regulatory process.
Mr. Dingell. Well, as I read the FCC's order, that is a
real possibility and would be a desirable consequence. Right?
Mr. Atkinson. If you can fix the negotiating process to
make that work, and then get rid of--then the FCC can get out
of it completely.
Mr. Dingell. But also address the unbundling problem to
which you complained in your statement.
Mr. Atkinson. It would--if you can get the prices right,
then I would have been happy back in 1996. And if I could have
negotiated my own interconnection arrangements with the
incumbent, I would have even been happier, because I would have
negotiated exactly what I wanted, and my competitors hopefully
wouldn't have been able to take advantage of my deal. But right
now, today, you can't negotiate a deal.
Mr. Dingell. All right.
Mr. Atkinson. So we have to go back to this regulatory
morass.
Mr. Dingell. Now, I note that at page 9 you have some other
very interesting comments, which I found to be very helpful.
``In the guise of promoting competition, the Act and the FCC
regulations that followed have created an enormous regulatory
apparatus and set of requirements. The Act has created a set of
companies and industries whose very survival is dependent on
the good grace of the regulators. The dependency relationship
is not one that makes for a healthy policy environment or
acceptable investment risk.''
Essentially, you are again saying the same thing, and this
brings us down here again to the fact that we have to address
this question in which you complain that the Act has created a
set of companies and industries whose very survival is
dependent on the decision of Federal regulators.
So if we, again, absolve ourselves of these Federal
regulations, the Federal regulators, industry is going to make
their own judgments, as you have said, on an acceptable
investment risk. And it would seem, therefore, to me at least
that the policy would promote, and should promote, facilities-
based competition which by its very nature would eliminate this
dependency relationship of which you have complained. Am I
correct?
Mr. Atkinson. You certainly don't, as a competitor of the
last--as a real competitor, the last thing you want to be is
dependent on your big powerful competitor. So that is a big
reason to become----
Mr. Dingell. I mean, we want to get that competition, don't
we?
Mr. Atkinson. You absolutely do. You want to be free and
independent.
Mr. Dingell. Thank you.
Thank you, Mr. Chairman.
Mr. Upton. Thank you, Mr. Dingell.
We will go to Mr. Terry. Mr. Terry is recognized.
Mr. Terry. Thank you, Mr. Chairman.
Mr. Strumingher, you and the chairman had a nice colloquy,
and I want to refer you to the last part of your statement
where you put it bluntly. You see two ways for government to
skin the cat on this issue, either spell out the rules of the
game clearly and allow private investors to evaluate the risk
associated with an investment based on these rules, or
nationalize the phone system.
What I would appreciate is some clarity from you on how to
make the rules clear. I agree with your statement that
investors, shareholder-owned companies, are looking for
certainty and clarity before they are willing to risk their
money. But what rule--specifically, the rules, what is the
seminal holdup in the rules, and how would we clarify those?
What would you suggest needs to be clarified in those rules to,
you know, release the pent-up dollars out there and reinvest in
the telecommunications industry?
Mr. Strumingher. Sure, I will give it a shot. I think from
point of departure, I would recommend that we have national
rules with local implementation of the rules. But the rules
have to be very clearly stated with an affirmative statement
and a definition of impairment.
That seems to me to be a critical stumbling block right now
for regulation. So the FCC should come up with a prescription,
with a detailed statement on what would define impairment, not
just for the network as it exists today, but to try to have a
forward-looking view, so that if a competitor wanted to make
investments today that might change based on technological
changes in the future, they might see a path toward being able
to do that instead of being just--in a real--I would call it a
vicious cycle of guessing.
Mr. Terry. All right. Well, in a similar question, I will
ask Mr. Atkinson--and I think probably in Ranking Member
Dingell's question you started to go into this area. But in
your statement you had mentioned that the 1996 Act contributed
to the bust, and regarding the rules and the gridlock that was
created by that.
I am just curious to what could have been removed, what
specifically could have been removed by way of the rules or
further better defined that--that we wouldn't have had that
micromanagement that you mentioned, and we could have prevented
or either softened that ``bust.''
Mr. Atkinson. I am not sure I have a specific view of what
was wrong the last time. My concern is when we get--if we have
an upturn, as we are having, that when the next downturn
happens we don't have the continuation of the gridlock, we
don't have the continuation of the risk.
And so my recommendation at the end of my testimony is we
do two things. One is we, first of all, try to get as much of
the controversy simply out of the regulatory process
completely, and get it away from the possibility of gridlock,
and you could do a lot of that if you could get this
interconnection agreement process to work. That is going to be
a very difficult thing to do, because there is all kinds of
problems with bargaining power, respective bargaining power,
etcetera.
But if you could pull a ton of the controversy out of the
regulatory process altogether, you would eliminate a lot of
gridlock. At the same time, if you had the opportunity to do a
lot of experiments, you also kind of could make--the can make
the regulator, to the extent the regulator has to make a
decision, instead of relying on informed speculation, which is,
frankly, what a lot of regulators have to do today, they could
look at real-world results and say, ``What happened over here
was a good thing. We will do more of that. What happened over
here was a bad thing. We won't let that happen again,'' and
have a dynamic process instead of sitting here today, for
example, or the FCC next week saying, okay, here is the new
plan, and that is a rigid plan that might work very, very well
for the next few years because it is based on the current
situation.
But as time evolved, as time goes on, as new technologies
comes in, as the economy either booms again or busts again, the
optimal regulatory decision made by the FCC next week may not
be at all appropriate. And so you need flexibility and the
ability for regulators to kind of get ahead of the problem, or
at least keep up with the problem, or they become increasingly
irrelevant.
Mr. Terry. I would assume, as all of you have mentioned in
your statements that you need clarity and certainty, if there
is a particular bill to ``deregulate'' similar to the bill that
we passed last year, or a similar type of bill, that we must,
in order to have clarity and certainty, mandate those--that
deregulation or clarity in the rules upon the States.
Would you agree that if we left it up to 50 States that
there would be a lack of clarity and certainty, and that
perhaps we could exacerbate the problem?
Mr. Atkinson. I think Mr. Strumingher was correct. What the
FCC--the right role for the FCC is to be very clear what the
goals are and what the restrictions are. You wouldn't want to
just, say, have the 50 States just do whatever they want on a
whimsical basis. But the Telecommunications Act or the
Communications Act lays out a goal, a vision.
As long as the States are constrained to only act toward
that, and the FCC can always step in and say, ``No, you got it
wrong,'' and in a sense perhaps act more as an appellate court
than as a court of original jurisdiction. So that way you can
get the benefit of good ideas of adapting to the changing
technology, changing markets, etcetera, and use the FCC to
backstop against a disaster.
I think that I would expect from an investor's point of
view investors would be able to see what is happening in each
of these experiments, start placing their relatively small bets
on good things that are looking like they are going to have a
favorable outcome. And then, as the experiment matures, you
start placing bigger and bigger bets. That reduces risk.
Mr. Terry. Does anybody else want to comment on the role of
the States?
Mr. Crandall. Yes. I think people underestimate what the
cost of regulation is at the State level. The debates that have
taken place over having to unbundle fiber, copper, digital
loop, carrier types of systems often take a year or 2 in States
like Illinois, Minnesota, which is ongoing right now, and
freeze investment on the part of the ILEC, providing some
certainty, saying, ``You may only have the copper from the
subscriber back to the remote terminal,'' and that all of the
rest of the electronics need not be unbundled, would I think
move things forward substantially.
Mr. Terry. Thank you. I asked that latter question because
the--we had, obviously, several opponents of deregulation, but
one of the opponents that we have had are State PUCs and
Governors who want to keep--retain some level of power and
control over telephone utility companies, long distance and
local.
So, thank you, Mr. Chairman.
Mr. Upton. Thank you.
Mr. Engel?
Mr. Engel. Thank you, Mr. Chairman. A lot of people here
today have said a lot of what I want to say, but I wanted to,
first of all, make it clear that I am certainly not opposed to
Federal Government regulating the telecommunications industry.
I think that it is necessary in certain instances, but it is
clear to me that sometimes there can be unintended
consequences.
And I think in this case, in the case of unbundling network
elements, we have seen where many competitive local exchange
carriers chose not to build their own facilities, but instead,
you know, they rented a whole system from a local incumbent. I
think the 1996 Act and Congress were clear that we wanted and
need facilities-based competition.
So I am especially, as others are, concerned about the
industry's ability to access the capital markets, and I want to
identify with the chairman, Mr. Tauzin, and his remarks. I am
not interested in stifling investment, and I think that that is
what this does.
I want to ask Mr. Brodeur, in your testimony you state that
we could rationally build fiber loop facilities and completely
new broadband infrastructure to roughly 30 percent of U.S.
households without regulation, but to only 5 percent of U.S.
households if the unbundling regulatory paradigm were extended
to these fiber loop facilities. And I would like you to expand
on that, please.
Mr. Brodeur. Sure. I will do my best. Essentially, the
decision that all of the ILECs have to make with regard to
fiber--and fiber is probably the most--fiber to the home and to
the business is probably the most important advancement in the
telecommunications industry from the perspective of services
for the consumer and the business--is to weigh an incredible
set of issues.
As I mentioned in my testimony, you have to make
projections of your takeup rates of local voice services, long
distance services, broadband internet services, video services,
and three of those five are basically things that the ILEC has
just recently gotten into.
If the unbundling paradigm is extended to the fiber loop
facilities, and there are many CLECs that use those facilities
rather than to invest on their own, it is reasonable to expect
that the ILEC will have less retail market takeup. That gets
tradeoff against what the price point is for the wholesale
loop, whatever it negotiated, whether it is FCC or at the State
level, whatever it is.
There is a relationship between the price, the wholesale
price of that facility that is sold to the CLEC, and the
incentive for the ILEC to invest. And right now, if you extend
the current paradigm, unbundling paradigm at TELRIC rates, that
incentive wouldn't be sufficient for the ILECs to invest fiber
broadly. It would only be in those very large and very
lucrative central offices.
Mr. Engel. Well, thank you. Obviously, it has a negative
effect on broadband. What is its effect to traditional voice
services now?
Mr. Brodeur. To traditional voice services today, there
would probably be--the implementation of broadband facilities
wouldn't necessarily change, you know, long distance as we know
it today or local voice services. But it certainly would change
how the ILEC or cable company would package those services
together with other services, which has the potential for
reducing price.
Mr. Engel. Thank you. I want to also note that the
communication workers have sent a memo, and essentially it is
entitled ``Unbundling Policies Discourage Investment and
Facilitate Job Loss in the Telecommunications Industry.'' And
their fact sheet notes that the current unbundling policies
discourage network investment and facilities-based competition,
and they call upon the FCC to revise its unbundling policies.
It seems to me that the FCC should adopt clear national
standards, because, again, I think this is stifling investment,
and I think the FCC has a good opportunity here to reverse
that.
I know my time is up, and I thank you for your indulgence,
Mr. Chairman.
Mr. Upton. Thank you very much.
Mr. Cox?
Mr. Cox. Thank you, Mr. Chairman.
I wonder if all of the members of our panel would agree
that voice and data will eventually converge into one
integrated network. Does anybody disagree with that? Anybody
want to embellish on that, or is that just an obvious fact of--
--
Mr. Crandall. The question is when, I think, and, I mean, I
am not an engineer, but I would judge there will be convergence
at some point. It is a matter of time.
Mr. Bath. Maybe I could expand on it a little bit. You
know, we--our firm in New York, it is happening. I mean, we
have CISCO phones on people's desks, on our trading floors,
etcetera. And I think it really is going to encourage--you
know, the larger customers will get it first, and over time you
will see a clear convergence of voice and data down to the
smallest of customers. I think it will happen over the next,
you know, 7 to 10 years, even for very small customers.
Mr. Atkinson. You are already seeing it in the residential
space with voiceover IP, if you have a broadband connection in
your home today. So if you have got a cable modem or DSL, you
can get your basic telephone service using the existing phones
that are in your home today and run them over that DSL or cable
broadband. So right now it is not big, but it is working and it
seems--consumers seem to like it. They get a good deal on it.
Mr. Brodeur. And I would add to that that--I would agree
with the point that was made by Mr. Markey that paranoia drives
a lot of what goes on in the telecom sector and all others for
that matter. The paranoia that I think most of the ILECs feel
today is about true VOIP voiceover--the IP technology and the
likelihood that the cable companies are going to be able to
launch that broadly in the next few years.
Mr. Cox. I want to tighten the screws on this question a
little bit, because it is abundantly clear that there is such a
thing as convergence of voice and data already. It is not
universal, but it is out there in the marketplace.
And the question is whether this progression toward
convergence of an integrated network is inevitable, and whether
we can infer from what we are seeing and the destination toward
which competition is tending that in the future, at whatever
time we might stipulate this convergence is accomplished, in
the future competitors, in order to survive, are going to have
to offer both voice and data services, essentially over the
same platforms. Is that an inference that anybody is willing to
make?
Mr. Strumingher. I would answer the question by saying it
would be extremely high risk, in my opinion, for someone to
fund a business plan that was based on having an uncompetitive
cost position in one of those two services. So that may be a
somewhat complicated way of saying that it is going to be very
difficult.
Mr. Cox. Is that the same as saying that you cannot compete
if you don't offer both?
Mr. Strumingher. No. It is saying that you have to have a
competitive cost structure in both. Otherwise, you expose
yourselves to very high risks.
Mr. Cox. Yes?
Mr. Atkinson. My only observation would be the big
convergence will happen in--for many consumers in many markets,
there will always be probably many thousands, hundreds of
thousands, millions of people with single-line telephones. You
know, that is what some people want. But I think certainly as,
you know, the generation X and Y start moving along, those--
they will certainly be big consumers. But you never have one
network, one package. It will become, in fact, more and more
diverse.
The key will be accessing. This voiceover IP has nothing to
do, for example, with the provider of the broadband service. It
is--you plug it in, you get your voiceover IP service from
someone who isn't affiliated at all with the broadband service
provider. So a lot of the things like voice, like
entertainment, are simply applications on an underlying
broadband network.
Now, and the question really will be whether the broadband
network owner is going to restrict access to that network in
order to be the sole provider of the package of voice and data
and video, etcetera, or will it be more of an open platform.
And it will be interesting to see how--and I think we should
let it work out and see what happens, whether the network
owners, for their own self-interest, have an open or closed
approach to these, you know, boxes that people will want to
plug into that network.
And history has said, and I think consumers get a better
deal when you have an open access, it is probably going to be
how it will evolve. But I think we--you know, regulators don't
need to step in yet to, you know, kind of tip the scales. I
think we should see what happens.
Mr. Cox. There were some other initial expressions of
interest in response on this point. I don't want to cut anybody
off.
Mr. Brodeur. Well, I would say--I would add that in those
cases where competitors have effectively converged voice and
data services, their cost positions have been significantly
better than the incumbents in some cases. There were many
instances where the cable companies have deployed a voiceover
IP and an offer of residential households, combined video and
data, internet access, and voice.
And in those markets where they do, they have hit--they
have reached takeup rates of 40 and 50 percent, and that is
because the cost structure of being facilities-based is so
good, and it allows them to be very effective competitors.
Mr. Cox. When we wrote the--I am sorry?
Mr. Upton. The gentleman's time has expired.
Mr. Cox. We could go on indefinitely. Thank you, Mr.
Chairman.
Mr. Upton. Thank you.
Mr. Bass?
Mr. Bass. Thank you, Mr. Chairman.
Thank you all for being here today. I really am amazed at
the way that--the ride, if you will, that the
telecommunications sector has been on for the last 5 years. And
we have--I believe that the issue of slowing economy and
overregulation have been discussed with some thoroughness.
I am interested to know what your perspective is on the
possibility that part of this whole issue is associated with
overinvestment and overspeculation, the development of totally
unrealistic expectations for growth, no profits, and so forth
and so on, and where we would be--let me make the contention
that we might be where we are today had these unreasonable
expectations not been circulated and unreasonable investments
undertaken, would we not be more or less where we are today
without that? Anybody want to address that issue? Go ahead.
Mr. Crandall. There has been investment that has been
fueled by exaggerated expectations of growth. But a lot of it
has just been very bad business plans, such as the CLEC
business plans. Nobody would suggest that the investment that
has gone into wireless networks has been excessive, though the
current consumer reports will detail for you how bad the
coverage of some of the major national wireless carriers is
still today. They still need more investment.
Normally, I would suggest that my 600 kilobits per second
on my DSL in Washington is as good as the telephone company can
do without more investment. I mean, they need more investment
to get that up. So the excess investment has been directed
mostly to fiber optics capacity across the country and into the
oceans, and there is no doubt that the owners of that have
suffered rather dramatically. We still need substantial amounts
of investment in new technologies, both in wireless and in the
last mile in the wireline network.
Mr. Brodeur. I would add that the temptation here with such
a meltdown in the telecom sector is to paint everything black.
There are many instances of companies that have been created
during the Telecom Act--since the Telecom Act in 1996 that are
viable companies, many more that aren't viable companies.
The issue going forward is how, you know, as the industry
has evolved--because I guarantee what we were talking about in
1996, the lexicon, did not include much about the internet back
then. The issue is how to evolve the regulation to meet the
market, and I think that is the most important thing that needs
to happen now.
Mr. Bass. Okay. Anybody else?
Mr. Atkinson. My comment would be that, you know, we have
to certainly be careful about overstimulating--you know, if it
was overstimulated in the 1990's and we created an artificial
boom that led to a terrible bust, we certainly have to worry
about doing that again. And so artificial stimulation of
anything is probably a bad idea, whether it is done by
government or just by normal fear.
But, you know, the issue that I brought up in my testimony
was, you know, is this a one-time issue, or is it going to
happen again and again and again? Boom-bust, boom-bust, boom-
bust. If it is going to go away all by itself back to the nice,
steady, normal growth, we can all go home.
The prospect of boom-bust, boom-bust, boom-bust, that is a
problem, because eventually investors will give up, and they
will never come back if they get burned time after time after
time. And that is where we have to be--with a reasonably long-
time view of this have to be very concerned about a cycle of
booms and busts in the telecom business, which we have never
had before.
Mr. Bass. Is it anybody's contention that the major problem
behind these--this boom-bust cycle is the regulatory structure?
Mr. Atkinson. My testimony certainly said it is maybe a
minor--it kind of can amplify a boom and a bust, but it is not
a root cause.
Mr. Bass. Okay. Mr. Atkinson, one quick follow-up to
Congressman Terry's question. You talked about the issue of
experimental evidence not being available for FCC ruling, and I
think you alluded to the idea that States might be the proper
environment or laboratory in which these experiments might
occur.
Obviously, one of the problems with that is that you have
50 different experiments going on. To what extent should the
FCC provide guidance or help out or do something in order to
make this process a little bit more reliable and a little
better for--you know, more productive?
Mr. Atkinson. I think that would be a very good role for
the FCC to take, to make sure that the experiments were heading
toward the goals set out by Federal policy, by the Telecom Act,
etcetera, and to make sure that some State--I would assume a
State would correct itself if it was heading for disaster. But
by looking at the variety of results or ways to get to those
results, the FCC could then periodically decide this is the
best way to go.
And that is how we got to local competition the first time
around, and a lot of other things, is letting the States do
things first, and then the FCC and Congress saying, ``Hey, this
was a good idea. Let us make this national policy.''
And it is a low-risk way to let a dynamic industry thrive
instead of, you know, central command and control with some,
you know, expectation of perfect foresight, which is, in this
kind of a business, I think a very risky kind of position to
assume, that anybody has anything close to perfect foresight.
There is no evidence of that whatsoever.
Mr. Bass. Thank you, Mr. Chairman.
Mr. Upton. Thank you, Mr. Bass.
I know a number of us have perhaps just a couple of
questions left before we adjourn. Mr. Brodeur, what would be
the impact on fiber development if the FCC requires that the
ILECs give the CLECs a 1.5 megabit data channel on a fiber sub-
loop?
Mr. Brodeur. I haven't specifically studied a 1.5 megabit
channel, but I will tell you it ultimately revolves around the
price that the ILEC would receive for that channel from
whatever CLEC would want to buy it.
If the price point is high enough, there will be an
incentive for the ILEC to invest that fiber and provide that
service at wholesale. If it is too low, there is no incentive,
and, therefore, no development of--deployment of fiber.
Mr. Upton. So it is a similar argument to the UNE-P, then.
Mr. Brodeur. Yes.
Mr. Upton. In essence.
Mr. Atkinson, I know a little bit about TCG, and I am just
curious that if it was still independent, not swallowed up by
AT&T, do you think that it would still be--if UNE-P was
dislodged or no longer in effect, do you think that it would be
survivable--that is, be doing fine?
Mr. Atkinson. I think so. I think so, if we remained in the
same--if we had also been owned largely--even though we are a
public company, large investors are the cable TV companies, I
look at the success that Cox has had in providing residential
telephone service over cable plant as an innovative service,
and plugged into a Class 5 switch.
Well, the original plan was all of those cable companies
would be plugging into teleport switches. We would have filled
those switches during the day with business traffic, cable
companies would have filled them nights and weekends with
residential traffic, and, collectively, been a pretty powerful
competitor. You know, so I--if that model had continued, yes, I
think we would have done very well.
Mr. Upton. And it is pretty close to what is known as
facility based.
Mr. Atkinson. At that point, like Cox, Cox is totally
facility based. They only use their own cable plant for the
loop. They don't even use loops. It would have been a totally
facility-based network. However, we would have probably used
unbundled loops in markets where the cable plant wasn't
upgraded, in markets where we didn't have a cable company
affiliate.
So in our long-range plan, we simply said we would prefer
to use affiliates, i.e. cable companies' facilities, for the
last mile to residential consumers. If that is not available,
having a UNE loop of some sort would be a good fill-in.
Mr. Upton. Thank you.
Mr. Bath. Maybe just to add on to that, Time-Warner Telecom
Company I am familiar with has had a very similar business
model, reported earnings, strong performance, yesterday
actually said demand is accelerating, and, in fact, they are
going to be picking up their capital spending plans.
Mr. Upton. So, in fact, if the UNE-P was again removed,
your estimate would be that they would be doing just fine in
the future?
Mr. Bath. I think they are doing fine. They do have a
facilities-based model. And, clearly, the removal of UNE-P in
the backdrop would improve their outlook.
Mr. Upton. Okay. Thank you.
Mr. Markey?
Mr. Markey. Thank you, Mr. Chairman, very much.
I wanted to begin by demonstrating the bipartisanship that
has always characterized this subcommittee by wishing your
staffer, Will Nordwind, all the best as this is the last
telecommunications hearing before his marriage on February 15.
Oay? I just wanted to congratulate Will.
And while I am in the business of congratulating people, I
read your testimony, Mr. Atkinson, and I just wanted to
congratulate you on the foresight of getting hired at the
Federal Communications Commission. That forced you to divest
all of your telecommunications stock.
I thought that, you know----
Mr. Atkinson. It proves that it is better to be lucky than
smart.
Mr. Markey. And I would also like to note how fortunate all
government employees who were hired between 1998 and 2001 were.
The last point that I would like to make is that in this
area, as in just about every other area of telecommunications
policy, we are forced to deal with issues in a way that creates
a goal and then various paths that we can take in order to
accomplish those goals.
So back in 1987 on this committee, it was argued that it
was totally unfair to allow companies called CompuServe and
AOL, information services, to have this extra boost in the
regulatory system. And it went on and on for year after year,
because we were trying to encourage it.
Now, there are a lot of incumbents that didn't like the
idea, but we had a goal to create an information service
sector. And the Reagan FCC wanted to shut it down, but this
committee forced them not to. It was just a decision we made.
I think when AOL purchased Time-Warner, 10 years later it
kind of seems maybe it was a good idea, maybe not now for Time-
Warner, but in terms of the change in our environment. But it
was just a policy decision we made.
MCI and Sprint during the 1970's and early 1980's--again,
we forced carriage, because we knew they couldn't go down the
street building a three-foot telephone pole immediately. It was
going to take some time, although there were many that said,
``Why don't they just go build their own telephone poles across
America?'' But it has taken a long time to get the long
distance competition which we had.
In the video business, our committee passed a law in 1992--
Mr. Tauzin and I are the co-sponsors of it--that mandate that
the cable companies have to sell at reasonable prices their
programming to the satellite industry.
Now, the cable industry didn't like having to sell CNN and
all of the rest of their cable programming to a competitor. But
we wanted to encourage a nascent industry, and, by doing so, to
revolutionize the video marketplace.
Now, even as late as last--as this year, the Federal
Communications Commission is now extending those rules
mandating the sale of that programming, and I think everyone on
this committee agrees with it, even though it is 11 years later
and the satellite industry has 20 million customers now. And I
guess some people would argue it is plenty of time for them to
come up with their own CNN or their own sports programming or
their own movies. But we do it to encourage a policy long term.
So here there, without question, has been unquestioned
methods in the deployment of DSL, Verizon and others, are now
well over 60 percent of deployment of DSL in their regions when
they were at zero in 1996. And that is a good thing. That is a
revolution, and it created, to a very large extent, something
that we call the NASDAQ.
Now, it turned into a bubble, without question, but the
bubble was related to this massive deployment, paranoia-
induced, that was out there. And our country still derives a
lot of benefits from it. We sprinted out to the lead. We have
to now absorb what happened.
But the question that we have on an ongoing basis, whether
it be reasonable access to programming for satellite companies,
reasonable access compensating the incumbent, compensating the
cable companies here, compensating the Bells for access to the
lines, for MCI back in the 1970's and early 1980's, for AOL and
CompuServe--you know, how long does it go on?
And I would continue that we are nowhere near enjoying the
full benefits from the paranoia that was induced, be it, Mr.
Atkinson, that much of the problems that they now suffer from
are completely unrelated to whether or not they are forced to
be compensated for leasing any of these component parts. I read
most of the analysts, and they just don't agree with any
conclusion that relates the problems of the Bells with that, if
the Bells do have problems.
Or that it is going to lead to any massive deployment,
since they have already hit the sweet spot for the most part in
the first 50, 60, 65 percent deployment, whether or not they go
to the most rural parts of the areas. Or in the unlikely
prospect that they ever start to try to create programming,
create ideas, that is just not what the Bells do. They don't
come up with new programming.
You have to find ways where the ISPs, where the library
reincarnations of the dot-coms create the ideas that because of
the paranoia and lowering the prices, and creating the new
product, that millions of people want to subscribe.
But it is highly unlikely that they are going to go any
deeper into their territories than they already have, except on
an incremental basis, in the absence of some dramatic
turnaround in the economy at large, because they have already
done what makes the most sense, the first 50, 60 percent, urban
and suburban America. But going further than that is unlikely
anyway.
So we might be debating here a program of subsidies, and we
might want to talk about that. But in terms of removing the
pressure that has transformed the lives of all Americans with
all of these new technologies that are now available to them in
the last 5 or 6 years, you know, and companies--Yahoo and
Google that no one ever heard of, those are all products of the
1996 Act.
And I just think that it would be a big mistake for us to
remove that pressure in order to satisfy a recovering
monopolist's desire to go back to the way the world used to be.
I think our job is to ensure that we don't have that recidivism
that they so ardently desire replace the new competitive
marketplace that has served our country in a way that has
revolutionized the economy.
And by the way, most people attribute about 30 percent of
all of the growth in the GDP from 1995 to 2000 to the
information sector. And if the Bush administration wants to see
that extra percentage added on to their plans for improvement
in the GDP, I hope they are not deluding themselves into
believing that broad-based tax cuts for the upper 2 or 5
percent is going to do it.
You have to have a telecommunications policy as well that
is incenting hundreds and thousands of companies to go out into
the marketplace. And this policy that is being proposed heads
in just the opposite direction.
Thank you, Mr. Chairman.
Mr. Upton. Thank you, Mr. Markey.
Gentlemen, I want to again thank you for your testimony
today. It was particularly enlightening, and we look forward to
using it as a base as we go to the next train on February 26
with Chairman Powell.
The hearing is adjourned.
[Whereupon, at 3:18 p.m., the subcommittee was adjourned.]