[Senate Hearing 108-1007]
[From the U.S. Government Publishing Office]


                                                      S. Hrg. 108-1007

                TELECOMMUNICATIONS POLICY: A LOOK AHEAD

=======================================================================

                                 HEARING

                               BEFORE THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 28, 2004

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation
                             
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel
                            
                            
                           
                            
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 28, 2004...................................     1
Statement of Senator Burns.......................................     2
Statement of Senator Dorgan......................................    40
Statement of Senator Lautenberg..................................     1
Statement of Senator McCain......................................     1

                               Witnesses

Ferguson, Dr. Charles H., Senior Fellow, Economic Studies, The 
  Brookings Institute............................................     7
    Prepared statement...........................................    10
Gifford, Raymond L., President, The Progress & Freedom Foundation    31
    Prepared statement...........................................    33
Gilder, George, Senior Fellow, Technology and Democracy Project, 
  Discovery Institute............................................    13
    Prepared statement...........................................    14
Hundt, Reed E., Former Chairman, Federal Communications 
  Commission.....................................................    18
    Prepared statement...........................................    20
Thierer, Adam D., Director of Telecommunications Studies, Cato 
  Institute......................................................     2
    Prepared statement...........................................     4

 
                      TELECOMMUNICATIONS POLICY: 
                              A LOOK AHEAD

                              ----------                              


                       WEDNESDAY, APRIL 28, 2004

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:35 a.m. in 
room SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Today we will continue to look at the 
Telecommunications Act of 1996 to identify the successes and 
failures of that law. Today we look ahead to consider potential 
reforms to our telecommunications policy given advances in 
technology. This examination is important because numerous 
members have discussed reforming the Act. It's imperative that 
any new legislation will provide a more streamlined statutory 
framework for a telecommunications policy in the 21st century, 
one in which technological innovation could flourish, 
competition could thrive, and the need for regulation is either 
eliminated or greatly reduced.
    I thank the witnesses for being here today and I look 
forward to their testimony.
    Senator Lautenberg.

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Mr. Lautenberg. Thanks, Mr. Chairman. Today's hearing, like 
the one yesterday, has a similar focus, and that is on the 
deployment availability and adoption of broadband technology, 
which fits into the whole examination picture that we have 
regarding telecommunications. We need to examine which would be 
a better use of scarce Federal resources, to subsidize more 
broadband deployment or encourage Americans to use the 
broadband technology that already exists.
    My view is that broadband technology is deployed pretty 
widely already. According to a report from CBO, the United 
States has the largest absolute number of subscribers to both 
high-speed and dial-up services. That's not as surprising as it 
would be if we looked at the relative use. I think the CBO 
report also found that by most measures United States 
businesses and consumers make more and better use of the 
Internet than do their counterparts in other nations.
    But we do fall short in one important area, and that is 
broadband use. There are just 6.9 broadband subscribers for 
every 100 people, a rate that places us only the sixth highest 
in the world. Now the question is, how do we entice consumers 
to switch to broadband, to switch to this much more efficient 
use of our telecommunications line? One application which will 
help is Internet telephony, which is often referred to as Voice 
over the Internet Protocol, or VoIP.
    Three Baby Bells: Verizon, SBC, and Qwest; three of the 
largest telephone companies: AT&T, Sprint, & MCI; and three 
cable companies: Comcast, Time Warner, and Cablevision have all 
recently announced their entry into the VoIP market. I find 
this development encouraging, because consumers will have their 
choices for their telephone service more available, and that 
should lead to competitive pricing and more features.
    Now, using the Internet protocol facilities, providers like 
Time Warner Cable and non-facilities-based providers like 
Vonage are capable of providing comparable phone service to 
consumers at reasonable rates. Consumers are responding. 
Earlier this month, Edison, New Jersey-based Vonage as a 
provider of phone service over high-speed Internet lines, 
signed up its 150,000th customer. They're not in business very 
long and their pace of acquisition of subscribers is 
accelerating. It's twice the number of subscribers they had 
less than 5 months ago.
    So it's exciting to talk about new technologies like 
broadband and new applications like VoIP, and Mr. Chairman, I 
look forward to hearing from our experts today to hear more 
about broadband technology and how we can get more Americans to 
use it. I thank you.
    The Chairman. Thank you. Senator Burns.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you, Mr. Chairman, for having the 
hearing. I have no opening statement. I am interested in 
listening to the witnesses and asking them some questions. It 
is nice to see some familiar faces back. Thank you very much.
    The Chairman. Thank you. We have some very smart people 
here today and we thank you all for coming. We have Mr. Adam 
Thierer, who is the Director of Telecommunications Studies at 
the Cato Institute; Mr. Charles Ferguson, a Senior Fellow of 
Economic Studies at the Brookings Institute; Mr. George Gilder, 
the Senior Fellow Technology and Democracy Project at the 
Discovery Institute; Mr. Reed Hundt, well known to all of us 
here, Former Chairman of the Federal Communications Commission; 
and Mr. Raymond Gifford, the President of the Progress and 
Freedom Foundation.
    Mr. Thierer, we'll begin with you.

            STATEMENT OF ADAM D. THIERER, DIRECTOR, 
           TELECOMMUNICATIONS STUDIES, CATO INSTITUTE

    Mr. Thierer. Thank you, Mr. Senator. Good morning. My name 
is Adam Thierer and I serve as Director of Telecommunications 
Studies at the Cato Institute. Thank you for your invitation to 
testify here this morning as the Committee begins its important 
business of thinking about what the next Telecom Act should 
look like.
    As someone who worked closely with the Committee and 
Members of this Committee a decade ago when we started getting 
serious about telecom reform, I think it's safe to say that we 
all share a sense of frustration and disappointment that we 
were not able to advance the ball a little further the last 
time around. Perhaps it was wishful thinking to believe we 
could have undone a century's worth of regulation in just a few 
short years, but one would have at least hoped that we would 
not be stuck today still debating the same issues we were 10 
years ago.
    Indeed, if Rip Van Winkle fell asleep in 1994 and woke up 
in 2004, he wouldn't think he'd missed a beat if telecom 
regulation was any guide. But despite the ongoing regulatory 
quagmire, the good news is that we've witnessed amazing strides 
in terms of technological progress and we can confidently say 
that this marketplace has never witnessed such competitive 
forces at work.
    Still, much remains to be done to clear out the regulatory 
deadwood that continues to hold back further innovation and 
competition. In my limited time here today, I'll just outline 
what I think are the three most important overarching themes 
that should be addressed as part of any reopening or 
reassessment of the Telecom Act. It would include the 
rationalization of regulatory classifications, dealing with 
jurisdictional matters, and getting agency power and size under 
control.
    With respect to regulatory classifications, a general 
consensus exists today that Congress will need to formally 
close the book on the archaic regulatory classifications of the 
past, which pigeonhole technologies and providers into distinct 
vertical policy silos or titles. Although the communications 
and broadband marketplace is essentially becoming one giant 
fruit salad of services and providers, regulators are 
essentially still separating out apples and oranges and bananas 
and regulating them all differently. This must end.
    One way to do this is to replace vertical silos or titles 
in the Act with horizontal layers. But I would caution Congress 
against formally enshrining a network layers model as the new 
regulatory regime for telecommunications. While it provides a 
good analytical model to help us rethink and potentially 
eliminate the old vertical silos, we do not want the layers to 
become the equivalent of rigid regulatory quarantines or 
firewalls on industry innovation.
    A potentially better way to tear down the old paradigms and 
achieve regulatory parity is to borrow a page out of trade law 
and institute the equivalent of a most favored nation clause, 
or MFN principle, for communications. In a nutshell, the policy 
would state that any communications carrier seeking to offer a 
new service or entering a new line of business should be 
regulated no more stringently than its least regulated 
competition. This would allow us to achieve the simplicity and 
parity we're looking for not by regulating up, but by 
deregulating down.
    Second, on jurisdictional matters, which could very well 
end up, I believe, being the most controversial issue this 
committee will face as it reopens the Act, I think we need to 
think seriously about reforming these policies. Specifically, 
we know that decentralization of political power almost always 
has a positive effect in terms of expanding human liberty. But 
our founders also realized that there were times that there are 
some important exceptions to that rule.
    So let me be perfectly blunt on this point. 
Telecommunications regulation is one of those cases or areas 
where state and local experimentation just doesn't work so 
well. After all, the very heart of the notion of 
telecommunications lies the idea of transcending boundaries and 
making geography and distance irrelevant. If ever there was a 
good case to be made for an activity being considered 
interstate commerce, this is it. And yet, America's telecom 
market remains riddled with a patchwork of policies that 
actually thwart that goal and seek to divide the indivisible 
and place boundaries on the boundless. This too must end, and 
the only way it will is by Congress taking the same bold and 
difficult step it did when deregulating other issues and areas. 
We must get serious about a national policy framework mentioned 
in the Telecom Act and preempt state and local regulation of 
the sector.
    My third and final big picture reform involves what may be 
the biggest glaring omission from the Telecom Act in my 
opinion, the almost complete failure to contain or cut back the 
size and power of the FCC. Again, we would do well to remember 
the lessons of the past. When Congress deregulated other 
sectors, lawmakers wisely realized that comprehensive and 
lasting reform was only possible if the agencies that oversaw 
those sectors were also reformed or even eliminated.
    In the telecom world, by contrast, the FCC has grown larger 
and more powerful in the wake of reform with spending, 
staffing, and paperwork all up significantly. It's safe to say 
that you cannot deregulate an industry by granting regulators 
more power over that industry. So this too must end.
    The next cut at the Telecom Act must do more than just hand 
the FCC vague forbearance language with the suggestion that the 
agency take steps to voluntarily regulate less. We can't expect 
regulators to deregulate themselves. We need clear sunsets on 
existing FCC powers, especially the infrastructure-sharing 
provisions of the last Act, and then we need to impose sunsets 
on any new transitional powers we grant them in the next 
Telecom Act and we need funding cuts too. If we fail to do so, 
I fear we'll be sitting here again in 10 years having the same 
conversation all over again.
    In conclusion, we have a chance to do more than just make a 
clean break with the past. We have a chance to now close the 
book on a regulatory past that has done little to truly benefit 
consumers. Regulators have been given over 100 years to conduct 
a grand experiment with telecommunications markets. Why not 
give markets a chance for once? Thank you, Mr. Chairman. I'm 
happy to take questions.
    [The prepared statement of Mr. Thierer follows:]

  Prepared Statement of Adam D. Thierer, Director, Telecommunications 
                        Studies, Cato Institute
    Good morning, my name is Adam Thierer and I serve as Director of 
Telecommunications Studies at the Cato Institute. Thank you Mr. 
Chairman for your invitation to testify here this morning as the 
Committee begins the important business of thinking about what the next 
Telecom Act should look like.
    As someone who worked closely with members of this Committee a 
decade ago when we started getting serious about telecom reform, I 
think it's safe to say that we all share a sense of frustration and 
disappointment that we were not able to advance the ball a little 
further last time around.
    If I had to summarize what went wrong with the Telecom Act of 1996, 
I would use the following paradox: Congress wanted market competition 
but did not trust the free market enough to tell regulators to step 
aside and allow markets to function on their own.
    Consequently, the FCC, the Department of Justice, state and local 
regulatory commissions, and the courts, have spent the last ten years 
treating this industry as a regulatory plaything to be endlessly toyed 
with. Today there is virtually no element of telecommunications that is 
not subject to some sort of meddling by some or all of these regulatory 
officials.
    While it's fair to say that it was probably wishful thinking to 
believe we could have undone a century's worth of command and control 
regulatory policies in a few short years, one would have at least hoped 
that we would not be stuck still debating the same issues today that 
dominated the agenda over a decade ago. Indeed, if Rip Van Winkle fell 
asleep in 1994 and woke up in 2004, he wouldn't think he'd missed a 
beat if telecom regulation was any guide.
    But despite the ongoing regulatory quagmire, the good news is that 
we have witnessed amazing strides in terms of technological progress 
and we can confidently say that this marketplace has never witnessed 
such competitive forces at work. Whether it's the wireless revolution 
that is allowing millions to cut the cord entirely, or the Internet and 
broadband revolution that is opening up a whole new world of 
opportunities that did not exist prior to 1996, by almost any measure, 
consumers are better off and have more choices now than ever before.\1\
---------------------------------------------------------------------------
    \1\ Adam Thierer, ``Number Portability Decision Adds to Wireline 
Telecom Sector's Perfect Storm,'' Cato Institute TechKnowledge No. 66, 
November 20, 2003, http://www.cato.org/tech/tk/031120-tk.html,
---------------------------------------------------------------------------
    Still, much remains to be done to clear out the regulatory deadwood 
that continues to hold back further innovation and competition. While 
there are dozens of important regulatory reform objectives I could 
outline,\2\ in my limited time here today it makes more sense to 
briefly discuss the three most important over-arching themes or 
priorities that should frame our current thinking about how to reform 
telecommunications policy. These priorities include:
---------------------------------------------------------------------------
    \2\ Adam Thierer, ``A 10-Point Agenda for Comprehensive Telecom 
Reform,'' Cato Institute Briefing Paper No. 63, May 8, 2001, http://
www.cato.org/pubs/briefs/bp-063es.html.

---------------------------------------------------------------------------
  (1) Rationalizing Regulatory Classifications

  (2) Dealing with Jurisdictional Matters

  (3) Getting Agency Power and Size Under Control
Regulatory Classifications
    With respect to regulatory classifications, a general consensus 
exists today that Congress will need to formally close the book on the 
archaic regulatory classifications of the past, which pigeonhole 
technologies and providers into distinct vertical policy ``silos.'' 
That is, we still have Title II for common carriers, Title III for 
wireless, Title IV for cable, and so on, even though rapid 
technological change and convergence have largely wiped out such 
distinctions and pitted these formerly distinct sectors against one 
another in heated competition for consumer allegiance. Thus, although 
the communications/broadband marketplace is becoming one giant fruit 
salad of services and providers, regulators are still separating out 
the apples, oranges, and bananas and regulating them differently. This 
must end.
    One way to do this is to replace the vertical silos model with a 
``horizontal layers'' model that more closely resembles the way the new 
marketplace operates. We can divide the new industry into at least four 
distinct layers: (1) Content; (2) Applications; (3) Code; and, (4) 
Infrastructure, and regulate if we must, each accordingly.\3\ But I 
would caution Congress against formally enshrining a network layers 
model as a new regulatory regime. While this model provides a useful 
analytical tool to help us rethink and eliminate the outmoded policy 
paradigms of the past, we would not want these new layers to become the 
equivalent of rigid regulatory quarantines or firewalls on industry 
innovation or vertical integration.\4\
---------------------------------------------------------------------------
    \3\ See generally: Richard S. Whitt, ``A Horizontal Leap Forward: 
Formulating a New Public Policy Framework Based on the Network Layers 
Model,'' MCI Public Policy Paper, Version 1.0, 
December 2003, http://global.mci.com/about/publicpolicy/presentations/
horizontallayerswhite
paper.pdf
    \4\ See: Adam D. Thierer, ``Are `Dumb Pipe' Mandates Smart Public 
Policy?: Vertical Integration, `Net Neutrality,' and the Network Layers 
Model,'' Presentation at Columbia University Institute for Tele-
Information conference on Media Concentration and the Internet, 
(forthcoming), April 15, 2004; Adam D. Thierer, ``Net Neutrality: 
Digital Discrimination or Regulatory Gamesmanship in Cyberspace?,'' 
Cato Institute Policy Analysis No. 507, January 9, 2004, http://
www.cato.org/pubs/pas/pa-507es.html
---------------------------------------------------------------------------
    A second and better way to tear down the old regulatory paradigms 
and achieve regulatory parity would be to borrow a page from trade law 
and adopt the equivalent of a ``most favored nation'' (MFN) principle 
for communications. In a nutshell, this policy would state that: ``Any 
communications carrier seeking to offer a new service or entering a new 
line of business, should be regulated no more stringently than its 
least regulated competitor.'' This would allow us to achieve regulatory 
simplicity and parity not by ``regulating up'' to put everyone on equal 
difficult footing but rather by ``deregulating down.'' \5\ Given the 
confusion over the Brand X court case and the ongoing FCC investigation 
into a Title 1 ``information services'' classification for broadband, 
this ``Most Favored Nation'' approach might help us bring some 
resolution to this difficult issue.
---------------------------------------------------------------------------
    \5\ Adam D. Thierer, ``Telecom Newspeak: The Orwellian World of 
Broadband `Deregulation','' in Sonia Arrison, ed., Telecrisis: How 
Regulation Stifles High-Speed Internet Access, (San Francisco, CA: 
Pacific Research Institute, January 2003), pp. 9-31, http://
www.pacificresearch.org/pub/sab/techno/telecrisis.pdf
---------------------------------------------------------------------------
Jurisdictional Matters
    Next we come to jurisdictional matters, which could very well end 
up being the most controversial issue this Committee will take up if 
you choose to re-open the Telecom Act. Here I am speaking of the heated 
debate between federal, state and local regulators for control over the 
future of communications policy.\6\
---------------------------------------------------------------------------
    \6\ Adam D. Thierer. ``Federalism and Telecommunications,'' 
Federalist Society, 2001, http://www.fed-soc.org/Publications/
practicegroupnewsletters/telecommunications/federalism-telecomv3i1.htm; 
Robert W. Hahn, Anne Layne-Farrar, and Peter Passell, ``Federalism and 
Regulation,'' Regulation, Vol. 26, No. 4, Winter 2003-2004, pp. 46-50, 
http://www.cato.org/pubs/regulation/regv26n4/v26n4-7.pdf
---------------------------------------------------------------------------
    As I noted in my 1998 book The Delicate Balance: Federalism, 
Interstate Commerce and Economic Freedom in the Information Age, 
decentralization of political power almost always has a positive effect 
in terms of expanding human liberty.\7\ But as our Founders wisely 
realized when penning the Constitution, there are some important 
exceptions to that general rule.
---------------------------------------------------------------------------
    \7\ Adam D. Thierer, The Delicate Balance: Federalism, Interstate 
Commerce and Economic Freedom in the Information Age, (Washington, 
D.C.: The Heritage Foundation, 1999).
---------------------------------------------------------------------------
    Let me be perfectly blunt on this point: Telecommunications 
regulation is one of those cases where state and local experimentation 
doesn't work so well. After all, at the very heart of 
telecommunications lies the notion of transcending boundaries and 
making geography and distance irrelevant. If ever there was a good case 
to be made for an activity being considered interstate commerce, this 
is it. And yet, America's telecom market remains riddled with a 
patchwork of policies that actually thwart that goal and seek to divide 
the indivisible and place boundaries on the boundless.\8\
---------------------------------------------------------------------------
    \8\ See generally: Adam Thierer, ``Will `States' Rights' Derail 
Telecom Deregulation?'' Cato Institute TechKnowledge No. 49, March 14, 
2003, http://www.cato.org/tech/tk/030314-tk.html
---------------------------------------------------------------------------
    This must end. And the only way it will end is by Congress taking 
the same difficult step it had to take when deregulating airlines, 
trucking, railroads, and banking: pre-emption. We must get serious 
about the ``national policy framework'' mentioned in the preamble of 
the Telecom Act by comprehensively pre-empting state and local 
regulation in this sector. The rise of wireless and Internet-based 
forms of communications makes this an absolute necessity.
    If you feel compelled to leave some authority to state regulators, 
why not devolve to them any universal service responsibilities that 
continue to be deemed necessary? This is one area where experimentation 
can work if the states devised targeted assistance mechanisms. But they 
should not be allowed to impose regulatory restraints or levies on 
interstate communications to do so.
Agency Power
    My third and final ``big picture'' reform involves what may have 
been the most glaring omission from the Telecom Act of 1996: The almost 
complete failure to contain or cut back the size and power of the FCC. 
Again, we would do well to remember the lessons of the past. When 
Congress deregulated airlines, trucking and railroads, lawmakers wisely 
realized that comprehensive and lasting reform was possible only if the 
agencies that oversaw those sectors were also reformed or even 
eliminated.
    In the telecom world, by contrast, the FCC grew bigger and more 
powerful in the wake of reform and we witnessed spending go up by 37 
percent, a tripling of the number of pages in the FCC Record, and there 
were 73 percent more telecom lawyers after the Act than before. It is 
safe to say that you cannot deregulate an industry by granting 
regulators more power over that industry.\9\
---------------------------------------------------------------------------
    \9\ J. Gregory Sidak, ``The Failure of Good Intentions: The 
WorldCom Fraud and the Collapse of American Telecommunications After 
Deregulation,'' Yale Journal of Regulation, Vol. 20., 2003, pp. 207-
267.
---------------------------------------------------------------------------
    This too must end. The next cut at a Telecom Act must do more than 
just hand the FCC vague forbearance language with the suggestion that 
the agency take steps to voluntarily regulate less. We can't expect the 
regulators to deregulate themselves.\10\ We need clear sunsets on 
existing FCC powers, especially the infrastructure sharing provisions 
of the last Act.\11\ And then we need to impose sunsets on any new 
transitional powers we grant them in the next Telecom Act. And we need 
funding cuts too.
---------------------------------------------------------------------------
    \10\ Alfred E. Kahn, Whom the Gods Would Destroy or How Not to 
Deregulate, (Washington, D.C.: AEI-Brookings Joint Center for 
Regulatory Studies, 2001), http://www.aei-brookings.org/admin/
authorpdfs/page.php?id=112
    \11\ See generally: Adam D. Thierer and Clyde Wayne Crews, What's 
Yours is Mine: Open Access and the Rise of Infrastructure Socialism, 
(Washington, D.C.: Cato Institute, 2003), http://www.catostore.org/
index.asp?fa=ProductDetails&pid=1441099
---------------------------------------------------------------------------
    If we fail to do so, we'll likely be sitting here again in 10 years 
having this same conversation all over again.
Conclusion: Ending ``Chicken Little Complex''
    In conclusion, it is my hope that Congress rejects the many 
doomsdayers and naysayers in the telecom sector who claim the sky will 
fall without incessant regulatory oversight and intervention. ``Chicken 
Little complex'' seems to run rampant throughout this sector even 
though it is less warranted than ever before. We have a chance to make 
more than just a clean break with the past; we have the chance now to 
close the book on a regulatory past that has done little to truly 
benefit consumers.
    Regulators have been given over 100 years to conduct a grand 
experiment with the telecom sector. Why not give markets a chance for 
once?
    Thank you, and I'm happy to take any questions you may have.

    The Chairman. Thank you, Mr. Thierer.
    Mr. Ferguson, welcome.

 STATEMENT OF DR. CHARLES H. FERGUSON, SENIOR FELLOW, ECONOMIC 
                STUDIES, THE BROOKINGS INSTITUTE

    Mr. Ferguson. Thank you, Mr. Chairman, Members of the 
Committee. I suspect that we all share in the ultimate goal of 
having a deregulated and freely competitive advanced digital 
telecommunications industry, but I'm sure that we differ 
greatly about how to get there. There are two examples from the 
history of information technology competition that are quite 
striking in regard to the current telecommunications case. The 
first is what happened to IBM when it was a declining 
monopolist over a 20 year period ending in the mid-1990s, and 
the second is what happened with the privatization, 
deregulation, and competitive freedom of the Internet.
    While IBM controlled about 70 percent of the world computer 
market for roughly a 20 year period, it sold the world 
something like $500 billion worth of computers that were much, 
much, much too expensive, and that led to enormous economic 
inefficiencies, and we face something similar in the current 
situation.
    The United States, depending on exactly what numbers you 
believe, is now approximately 20th worldwide in broadband 
deployment and is rapidly falling further behind.
    The Chairman. It was alleged yesterday we're 11th. Whatever 
it is, it's bad.
    Mr. Ferguson. It's bad. And it's very clear that it's 
getting worse. The world growth rate is about 80 percent. U.S. 
growth rate is about 35, 40 percent, so there's no question 
that we're falling further behind. And by the way, there are 
now more DSL lines in absolute terms in China than there are in 
the United States.
    So let me begin with another statement of this problem. 
Every other digital information technology industry, and I'm 
going to give you a long boring list: semiconductors, personal 
computers, disk drives, servers, software, consumer 
electronics, local area and corporate networking, fiber optics, 
telecommunications equipment, long distance services. Every 
other digital information technology and every other industry 
is advancing technologically somewhere between 40 and 80 
percent per year. The price performance of its products and 
services improves at that rate.
    There is one exception in the world and that exception is 
local telecommunications, including not just broadband 
services, but also local telephone service and you could even 
include cable service if you wish, cable video service.
    The United States has something like one-third of the 
world's computers. It only has 14 percent of its DSL lines. 
There are a lot of statistics here in my written testimony. 
I'll skip them. I will give one more important statistic. On a 
price performance basis, broadband service in the United States 
is about twice as expensive as it is in China, eight times as 
expensive as it is in South Korea, and about 30 times more 
expensive than it is in Japan.
    The Chairman. Why is that?
    Mr. Ferguson. That's a very good question and I now will 
try to answer your question. This has a lot of consequences 
which I think are enormous and still quite substantially 
underappreciated for the American economy, and also, by the 
way, for national security. There are very serious and very 
real national security concerns associated with this industry 
related to emergency video conferencing and quarantine and 
energy supply shocks and so forth.
    So why? I would argue that the situation has developed and 
persisted in some cases because of over regulation, but 
primarily because the dominant providers of local 
telecommunication services have successfully, including through 
regulation and their influence over regulation, have 
successfully blocked technical progress in broadband services, 
which progress would undercut the monopoly positions and 
current revenue bases of local telephone companies, traditional 
voice and data businesses, and would also eventually threaten 
the video distribution monopolies of the cable industry. Once 
you get to about 40, 50 megabits per second, television over 
the Internet becomes more than acceptable, it becomes in fact 
superior to cable television.
    Yet I fear that Federal policy, particularly I must say, 
and I apologize if this seems a partisan comment, I don't mean 
it that way, but particularly under the Bush Administration has 
been quite ineffective and even counterproductive in dealing 
with this problem. The industry remains very insufficiently 
competitive, even in the residential broadband market, which is 
the market most people talk about when they talk about the 
broadband market. In fact, the business broadband market is 
five times as large in revenue terms and is very important. But 
even in the residential market, which is the most competitive, 
most American consumers face at most two options, an incumbent 
cable company and an incumbent cable company, and about one-
third of U.S. consumers face no options at all, or face at most 
one option, face at best a monopoly situation.
    Most other local telecommunications markets, including most 
of the business broadband market, are dominated by a single 
telecommunications incumbent, the local telephone company. 
Remarkably, despite many public statements by the incumbent 
telephone companies implying that it would be rational for them 
to enter each other's territories and markets, not a single one 
of these companies has ever done so. In fact, not a single one 
of the incumbent telephone companies has ever competed with 
another one in any market whatsoever worldwide, which is a 
remarkable situation.
    This industry literally spends more money on lobbying, 
litigation, and paying expert witnesses every year than they do 
on R&D. They spend something like one-quarter to one-half of 
one percent per year on R&D, which is vastly lower than any 
other information technology sector.
    There are many signs that this industry is vastly 
inefficient, and, or perhaps I should say conversely, the 
nations now leading the world in broadband deployment all share 
two characteristics, a strong national policy in favor of 
deployment and enforcement of truly competitive industry 
conditions based on unbundling and open access to local 
facilities and local interfaces. Some nations also have 
subsidies, which however are designed to reward deployment 
competition and technical progress rather than simply handing 
money to existing incumbents.
    Thus, Mr. Chairman, and Members of the Committee, I must 
conclude on a somewhat pessimistic note. I think that current 
Federal telecommunications policy is failing the American 
people with potentially very serious consequences. Bearing in 
mind the bad IBM example and the much better Internet example 
related to the privatization and deregulation of the Internet 
backbone beginning in 1994, I would recommend the following: 
the establishment of a national broadband policy with the 
primary goals of creating a competitive, open architecture 
industry; eventually providing universal broadband service not 
primarily through any regulatory mechanism; and providing and 
having a goal of providing continuous improvements in broadband 
service that keep pace with the information technology sector.
    As a well known man who's now the chief scientist of Intel 
said, Dave Tannenhouse, putting telecommunications on the 
technology curve, which it has never been on. Second, true 
mandatory unbundling of existing telephone and cable television 
local loops, including the expansion of access rights to all 
potential providers rather than their being restricted to 
common carriers as is the case under the 1996 Act.
    Subsidies, I think, may be helpful. However, if they are 
employed, they should be linked to actual broadband deployment 
and use, not to vague promises or overall financial investment, 
and they should probably be restricted to services provided by 
non-dominant carriers. Those could include the incumbents if 
they enter each other's markets as new competitors.
    And I think that it might also be appropriate to consider 
antitrust investigations directed at the incumbent telephone 
companies, whose behavior is really quite remarkable for 
supposedly competitive firms. And then finally, I do agree with 
some of the comments of the previous witness regarding the need 
for reform and consolidation of the administrative and 
regulatory structures of the FCC, the FTC, the DOJ Antitrust 
Division and so forth. These agencies, my primary complaint 
would be that they are insufficiently politically independent 
and that they are very sadly and almost pitifully lacking in 
high technology expertise. Thank you.
    [The prepared statement of Mr. Ferguson follows:]

Prepared Statement of Dr. Charles H. Ferguson, Senior Fellow, Economic 
                    Studies, The Brookings Institute
    Mr. Chairman, members of the Committee, thank you for the 
opportunity to discuss U.S. telecommunications policy.
    On September 11, 2001, because it was judged unsafe for President 
Bush to return to Washington, DC, he conferred with his advisors over a 
secure videoconferencing link, a technology that will be critical to 
managing future national crises ranging from terrorist attacks to 
energy supply interruptions. Broadband technology is also critical to 
economic performance and national welfare. Yet the United States now 
ranks approximately 20th worldwide in broadband deployment, and is 
falling further behind. Although this industry is phenomenally complex, 
the sources of this problem are ultimately quite simple: broadband 
services are hostage to the self-interest and inefficiency of powerful 
incumbent firms, and Federal policy has failed to create a modern, 
competitive, open architecture local broadband industry.
    Let me begin with the still under-appreciated importance of 
broadband services. First, most terrorist threats involve significant 
transportation disruptions and/or quarantines, with broadband 
telecommunications required to replace physical transportation during 
the crisis. Second, videoconferencing and other broadband services are 
now critical to managing problems such as the cost and quality of 
health care, maintaining economic growth while limiting pollution and 
global warming, and surviving any future energy shock related to 
Mideast politics. And third, broadband services are critical to 
restoring and maintaining U.S. economic performance in an Internet-
driven global economy.
    And yet the United States, which invented the Internet and 
pioneered the commercial Internet revolution ten years ago, is 
performing exceptionally poorly in broadband deployment, and more 
generally in local telecommunications services. Every other digital 
information technology industry--semiconductors, personal computers, 
disk drives, computer servers, software, consumer electronics, local 
area and corporate networking, fiberoptics, telecommunications 
equipment, long distance services--all of these industries deliver to 
their users exponential improvement in performance per dollar, ranging 
from 40 percent per year to 75 percent per year. There is, however, one 
exception: U.S. local telecommunications services, ranging from voice 
telephone service to broadband service, have displayed low or in some 
cases even zero or negative rates of improvement over the last decade.
    Furthermore, while the United States has one third of the world's 
computers, it has only 14 percent of the world's DSL lines. As of year-
end 2003, the United States had 4.8 DSL lines per 100 telephones, 
versus for example 5.1 for China, 9.6 for France, 10.9 for Canada, 12.3 
for Israel, 14.4 for Japan, and 21.4 for Taiwan. China and Japan both 
now have more DSL lines than the United States. World broadband 
deployment is growing 78 percent per year, while U.S. broadband 
deployment is growing only 35 percent per year. On a price-performance 
basis, U.S. broadband service is twice as expensive as China, eight 
times as expensive as South Korea, and thirty times more expensive than 
in Japan.
    This quite stunning situation generates many problems. First, as 
all information technology becomes more Internet-dependent, all IT 
products, services, industries, and applications are increasingly 
hostage to the local broadband bottleneck. This affects the health of 
the U.S. high technology sector and reduces productivity growth 
throughout the U.S. economy, perhaps by as much as 1 percent per year. 
Second, the high cost and low performance of U.S. broadband services is 
a driver of outsourcing, causing higher unemployment and downward 
pressure on U.S. wages, which have now stagnated in real terms for 
several decades. Third, local broadband costs are now the dominant 
source of the ``digital divide,'' the growing inequality of information 
access between wealthy and average Americans. Because computers 
continuously become more powerful and less expensive, over a five year 
period broadband costs are now greater than personal computer costs. 
And fourth, America suffers more than necessary with regard to health 
care costs, medical accidents, lack of preparedness for terrorist 
attacks, pollution, and vulnerability to energy price shocks.
    This situation has developed and persisted because the dominant 
providers of local telecommunications have blocked true competition and 
the development of a modern, open-architecture industry. This is 
rational on their part: competition and technical progress in broadband 
services would undercut local telephone companies' traditional voice 
and data businesses, and threatens the video distribution monopolies of 
the cable industry. Yet Federal policy, particularly under the Bush 
Administration, has been ineffective or even counterproductive. As a 
result, the industry remains insufficiently competitive. In the 
residential broadband market, only two thirds of users have any choice 
at all, and even then they face at best a duopoly of one telephone 
company and one cable provider. These residential broadband services 
are also designed to impede, rather than promote, Internet telephony, 
advanced video delivery, and videoconferencing. Most other local 
telecommunications markets, including much of the business broadband 
market, are dominated by a single incumbent. And despite many public 
statements by the incumbent telephone companies implying that it would 
be rational for them to invade each other's territories, not a single 
incumbent has ever competed against another, in any market. These 
companies literally spend more money every year on lobbying, 
litigation, and expert witnesses than they do on R&D.
    However, the nations now leading the world in broadband deployment 
all share two characteristics: a strong national policy, and 
enforcement of truly competitive industry conditions based on 
unbundling and open access to local facilities. Some nations also have 
subsidies, which however are designed to reward deployment, 
competition, and technical progress, rather than simply handing money 
to inefficient incumbents.
    Thus, Mr. Chairman, and members of the Committee, I must conclude 
on a pessimistic note. In regard to telecommunications policy, Federal 
policy is failing the American people, with serious consequences. To 
remedy this problem, I would recommend the following:

  1.  A national broadband policy with the primary goals of 
        establishing a competitive, open architecture industry; 
        providing universal broadband service; and providing continuous 
        improvements that keep pace with the information technology 
        sector.

  2.  True mandatory unbundling of existing telephone and cable 
        television local loops, including open-architecture access 
        points analogous to those used in the Internet. Access rights 
        should be expanded to all potential providers, rather than 
        being restricted to common carriers as is the case under the 
        1996 Act.

  3.  Subsidies may be helpful. However, they must be linked to actual 
        broadband use, and possibly restricted to services provided by 
        non-dominant carriers. For example, a subsidy for each 
        unbundled loop used for new broadband service, in exchange for 
        low loop resale rates, would potentially be helpful.

  4.  Antitrust investigations and actions directed at the incumbent 
        telephone firms should be seriously considered.

  5.  Reform of the FCC, DOJ antitrust division, and other Federal 
        regulatory systems to improve the political independence, 
        efficiency, and high technology expertise of Federal regulation 
        and policymaking.

    For those interested in much further detail, and possibly also 
something to put them to sleep, Brookings Press has just published my 
book, The Broadband Problem. Thank you.
                               Attachment

                                       Selected Broadband Deployment Data
                                            Source: www.dslforum.org
----------------------------------------------------------------------------------------------------------------
                                                                                                  DSL per  100
  Global  Ranking           Country            DSL Subscribers  31     Telephone lines  2001/   phone lines  31
 31 December 2003                                 December 2003               02 (ITU)           December 2003
----------------------------------------------------------------------------------------------------------------
                1   South Korea                            6,435,955               23,257,000               27.7
----------------------------------------------------------------------------------------------------------------
                2   Taiwan                                 2,800,000               13,099,416               21.4
----------------------------------------------------------------------------------------------------------------
                3   Hong Kong                                690,000                3,842,943               18.0
----------------------------------------------------------------------------------------------------------------
                4   Belgium                                  789,677                5,132,427               15.4
----------------------------------------------------------------------------------------------------------------
                5   Japan                                 10,272,052               71,149,000               14.4
----------------------------------------------------------------------------------------------------------------
                6   Denmark                                  473,481                3,739,247               12.7
----------------------------------------------------------------------------------------------------------------
                7   Singapore                                242,000                1,927,200               12.6
----------------------------------------------------------------------------------------------------------------
                8   Israel                                   380,000                3,100,000               12.3
----------------------------------------------------------------------------------------------------------------
                9   Finland                                  336,600                2,850,000               11.8
----------------------------------------------------------------------------------------------------------------
               10   Canada                                 2,170,243               19,962,072               10.9
----------------------------------------------------------------------------------------------------------------

    USA: 4.8 DSL lines per 100 phones, less than half of Canada, which 
is #10; even China is already ahead of the U.S., w/5.1 DSL lines per 
100 phones, & its DSL use is growing much faster (over 300 percent per 
year); As a result, by year-end 2003 China and Japan already had more 
DSL lines in absolute terms than the U.S., which is now #3.
    USA falling further behind: 35-40 percent U.S. annual DSL growth 
rate vs. 78 percent world growth rate; U.S. will soon be far behind 
several nations even in absolute terms (e.g., China, Japan, Korea); see 
national rankings by total DSL lines as of 12/31/03:

----------------------------------------------------------------------------------------------------------------
                                                                  DSL Subscribers  31       DSL per  100 phone
     Global Ranking                      Country                     December 2003       lines  31 December 2003
----------------------------------------------------------------------------------------------------------------
                      1   China                                              10,950,000                      5.1
----------------------------------------------------------------------------------------------------------------
                      2   Japan                                              10,272,052                     14.4
----------------------------------------------------------------------------------------------------------------
                      3   USA                                                 9,119,000                      4.8
----------------------------------------------------------------------------------------------------------------
                      4   South Korea                                         6,435,955                     27.7
----------------------------------------------------------------------------------------------------------------
                      5   Germany                                             4,500,000                      8.4
----------------------------------------------------------------------------------------------------------------
                      6   France                                              3,262,700                      9.6
----------------------------------------------------------------------------------------------------------------
                      7   Taiwan                                              2,800,000                     21.4
----------------------------------------------------------------------------------------------------------------
                      8   Italy                                               2,280,000                      8.3
----------------------------------------------------------------------------------------------------------------
                      9   Canada                                              2,170,243                     10.9
----------------------------------------------------------------------------------------------------------------
                     10   UK                                                  1,820,230                      5.2
----------------------------------------------------------------------------------------------------------------


    The Chairman. Thank you, Mr. Ferguson.
    Welcome, Mr. Gilder.

           STATEMENT OF GEORGE GILDER, SENIOR FELLOW,

               TECHNOLOGY AND DEMOCRACY PROJECT,

                      DISCOVERY INSTITUTE

    Mr. Gilder. Thank you for having me here, Mr. Chairman.
    The Chairman. Can you pull the microphone over in front of 
you so that the stenographer can--thank you.
    Mr. Gilder. The first rule of holes is that when you're in 
one you stop digging, and----
    The Chairman. That applies to a lot of places in the world 
today.
    Mr. Gilder. It does. And today Federal regulators, local, 
state regulators, courts, have all dug a huge pit, a canyon 
from which America's telecom can't even see what's going on in 
the rest of the world. And since 1996, fiber optics technology 
has improved about 11,000-fold, and the capacity of fiber optic 
technology has improved far faster than microchips or anything 
else. It has been the spearhead of world technological advance 
and across the optics range. Internet traffic has increased 
about 9,000fold since 1996.
    But in the midst of this tide of telecom progress, we've 
had a catastrophe, just a disaster inflicted by multiple 
sclerosis of regulation and hundreds of bodies across 50 states 
in more than 100 jurisdictions, just an incredible maze of 
litigation has been created, which has effectively privatized 
the risks of telecom investment and socialized the profits and 
returns to it. And the result has been a 1,000 bankruptcies, a 
million people jobless in telecom, $2 trillion of lost market 
cap, and the United States fallen desperately behind, a lot 
further behind than previous testimony has indicated. Korea now 
has 40 times more per capita bandwidth to homes and businesses, 
40 times. Japan has between 10 and 20 times. Italy has 4 times.
    By world standards, the U.S. has no broadband at all. Stop 
talking about the big success of broadband. You're talking 
about average transmission rates that are one-twentieth to one-
fiftieth of the rates that a real broadband in Japan and Korea 
and other countries. But the U.S. does reign supreme in one key 
telecom area, and that's the communications bar. We've got more 
lawyers than any other country in the world by far devoted to 
this maze of litigation----
    The Chairman. And wouldn't you include lobbyists in that 
group?
    Mr. Gilder. Lobbyists too. They're called forth by the 
mazes of regulation. You don't have the whole industry focused 
in Washington unless Washington's doing something very bad. 
That's why they come. Unless you stop this aggressive, 
pervasive regulation and litigation, you can't accommodate an 
industry that's improving its cost-effectiveness 11,000-fold in 
6 years, where every part of the industry is advancing at a 
tremendous pace and accept the law, which still doesn't even 
come to terms with the existence of the Internet.
    And so if there's anything in the world that's interstate 
commerce, it's telecom, and the states and localities should 
have no role in telecom litigation. Preempt the states and 
localities. They just cause confusion and paralysis and I don't 
know what kind of bennies you're got to give to them to do 
that, but they've got to be preempted in telecom law.
    And resist new frameworks of regulation. All sorts of 
sophisticated people are coming forth with ideas of layering 
and sort of, which Adam correctly described as enshrining the 
past in the name of progress. There are all sorts of valuable 
vertical integration going on across all those companies that 
Charles listed, and that must be permitted. You can't 
modularize, prematurely modularize all the connections across 
the country. That just recreates a new paralysis.
    And keep the laws clear, simple, bright lines. That's 
absolutely essential to long-term investment, massive long-term 
investment that is needed in this spearhead of global economic 
progress.
    In summary, I do not want an industrial policy. I want an 
end to the anti-industrial policy that prevails in the United 
States where we subsidize ethanol but punish U.S. telecom with 
higher taxes than any other industry except tobacco and 
alcohol.
    Thank you very much.
    [The prepared statement of Mr. Gilder follows:]

  Prepared Statement of George Gilder, Senior Fellow, Technology and 
                 Democracy Project, Discovery Institute
    Mr. Chairman and Senator Hollings, thank you for the opportunity to 
appear before your committee today. Your selected topic is crucial to 
the well-being of the U.S. and global economies, and I appreciate your 
deep interest in the subject.
    Overthrowing matter and media with the new worldwide web of glass 
and light and air should be a happy and defining event in the history 
of man. Global information networks offer unprecedented potential 
opportunities for economic growth, cultural revival, and individual 
freedom and empowerment. Yet the United States has in large part 
blocked the path of the technologies and companies needed to consummate 
this vast new infrastructure of chips, fiber optics, antennae, digital 
storage, and software.
    Although American companies invented almost all the technologies 
crucial to the Internet, we have fallen behind many other nations in 
the deployment of these technologies. The U.S. now ranks eleventh 
internationally in residential ``broadband'' access. Using the FCC's 
silly 200-kilobit-per-second definition, some now say that 25 percent 
of American homes have broadband. But by the standards of Asia--where 
most citizens enjoy access speeds 10 times faster than our fastest 
links--U.S. residences have no broadband at all. U.S. businesses have 
far less broadband than South Korean residences. South Korea, for 
instance, has 40 times the per capita bandwidth of the U.S. Japan is 
close behind Korea, and countries from China to Italy are removing 
obstacles to the deployment of VDSL, fiber-to-the-home, and broadband 
wireless networks.
    Asian broadband also proves there was no Internet ``bubble.'' 
Today, Korea runs over the net between a three and five times larger 
share of its economy than we do. Riding the bus to work, Koreans watch 
television news and exchange video mail over their mobile phones. They 
enjoy full-motion video education and entertainment in their homes. 
Many of the dot-coms that failed in America due to the lack of robust 
broadband links are thriving in Korea. Consider that by this time next 
year Verizon Wireless's 38 million customers will enjoy faster Internet 
access via their mobile phones than through their Verizon DSL 
connections to their homes. Only the most severe disincentives to 
invest could have yielded such a result, which defies the laws of 
physics. The American Internet ``bubble'' was actually a crisis of 
policy.
    The Telecom Act of 1996 was meant to ``deregulate'' America's 
telecom infrastructure and technologies, the most dynamic sectors in 
the entire world economy. But after the usual lobbying and horse-
trading, the Act turned into a million-word re-regulation of the 
industry. Regulatory actions by the FCC and the 51 state utility 
commissions greatly exacerbated the bad parts of the Act and distorted 
many of the good parts. As I predicted the day after it was enacted, 
the result was a carnival of lawyers, micro-mis-management by 
bureaucrats, price controls, the socialization of infrastructure, the 
screeching halt of innovation and investment in the ``last-mile'' local 
loop--and the Great Telecom and Technology Crash of 2000-2003.
    In the last year or so, the FCC has partially reversed some of its 
most egregious errors. Some are still being adjudicated in the courts. 
But U.S. telecom remains a highly regulated, highly taxed sector of our 
economy. The mistakes of the last 10 years have greatly harmed the U.S. 
economy, and continued gridlock and inaction threaten to shift American 
leadership in technology to Asia, which has embraced the Internet with 
open arms.
    Today, just as the telecom and technology sectors exit a three-year 
depression, we are in danger of repeating the very worst mistakes of 
the 1996 Telecom Act, but this time on an even grander scale. In 
today's testimony I will address and refute one particular proposal 
that is being offered as the basis for the new telecom legislation. In 
doing so I hope also to offer an alternative vision.
    The new ``big idea'' in telecom regulation comes from a host of 
learned and experienced telecom thinkers: the likes of former FCC 
authority Kevin Werbach, Stanford law professor and technology author 
Lawrence Lessig, industry analyst Roxanne Googin, and IPioneer Vint 
Cerf, to name just a few. The idea is mandated ``open access'' to the 
logical layers of the network, and it is embodied in a new legislative 
proposal by MCI, ``A Horizontal Leap Forward: Formulating a New Public 
Policy Framework Based on the Network Layers Model.'' \1\ A horizontal 
layers approach would supposedly be a radical shift from the ``vertical 
silos'' approach now used, where telephony, cable, and wireless, for 
example, are regulated based on historical industry definitions, not 
generic functional categories. The common denominator of Internet 
Protocol (IP)--supposedly the basis for all future communications 
networks--is said to necessitate the new layered regulatory approach.
---------------------------------------------------------------------------
    \1\ Whitt, Richard S. ``A Horizontal Leap Forward: Formulating A 
New Public Policy Framework Based On The Network Layers Model.'' An MCI 
Public Policy Paper. March 2004. http://global.mci.com/about/
publicpolicy/presentations/horizontallayerswhitepaper.pdf
---------------------------------------------------------------------------
    Barely recovering from the FCC's TELRIC and UNE-P ``open access'' 
mandates that chopped up and assigned ownership rights to the physical 
infrastructure--the hardware--of the Net, we now face the prospect of 
rigid reassignment of content, applications, services, and protocols, 
too. Whatever it is called, it represents more micromanagement of a 
dynamic industry in the midst of major technological transitions.
    The new proposal feeds on fear--fears that cable TV companies or 
the Bells might seek to leverage their broadband networks by wrapping 
content into their conduits, or that Microsoft might keep ``tying'' new 
applications into Windows, or that Google might monopolize information 
on the Net (yes, there is already an organized effort to turn Google 
into a public utility). MCI's layering proposal defines rigid 
boundaries between content (voice, text, video), applications (e-mail, 
browsers, VoIP), protocols (TCP/IP, HTTP, FTP), and infrastructure 
(wires, switches, spectrum, PCs, handsets). In a paper entitled 
``Codifying the Network Layers Model,'' \2\ MCI proposes to 
``quarantine'' major providers of one of the layers within that layer, 
and to prohibit them from vertically integrating into another layer 
unless they offer wholesale open access to all competitors. Lessig, 
MCI, and company worry that the ``end-to-end'' nature of the Internet--
where any terminal attached to the net can be reached from any other 
terminal--will be threatened if these new layering rules are not 
adopted.
---------------------------------------------------------------------------
    \2\ Whitt, Richard S. ``Codifying the Network Layers Model: MCI's 
Proposal for New Federal Legislation Reforming U.S. Communications 
Law.'' March 2004. http://global.mci.com/about/publicpolicy/
presentations/layersmodelfederallegislation.pdf
---------------------------------------------------------------------------
    Layering proponents, however, make a fundamental error. They ignore 
ever changing trade-offs between integration and modularization that 
are among the most profound and strategic decisions any company in any 
industry makes. They disavow Harvard Business professor Clayton 
Christensen's theorems that dictate when modularization, or 
``layering,'' is advisable, and when integration is far more likely to 
yield success. For example, the separation of content and conduit--the 
notion that bandwidth providers should focus on delivering robust, 
high-speed connections while allowing hundreds of millions of 
professionals and amateurs to supply the content--is often a sound 
strategy. We have supported it from the beginning. But leading edge 
undershoot products (ones that are not yet good enough for the demands 
of the marketplace) like video-conferencing often require integration.
    Metaphors from the Telecosm help explain the fluid nature of these 
layers that MCI wants to preserve in concrete. Consider Corvis, our 
favorite optical equipment company and national fiber optic bandwidth 
provider. It blows apart the MCI approach on several fronts. First is 
CEO David Huber's architecture of an all-optical network, devoid of 
electronic regenerators and protocol readers, which unites content and 
conduit by using colors of light both to bear the message and to 
determine the path of the circuit. It radically collapses the top 
layers of the OSI (Open Systems Interconnection) stack used in the 
Sonet voice and data networks of the past, not so much redefining the 
interfaces as transcending them. A ``switchless'' web of always-on 
fixed lambdas (wavelengths of light) can function as both the physical 
and logical layers of the Net because the intelligence is embedded in 
the path. There will be some controlling devices at the edge of the 
network, and IP will still be widely used, but the heyday of IP packet 
switched networks may well be over. Typically government enshrines the 
past in the name of progress. In uniting Corvis, a cutting edge 
equipment provider, with Broadwing, an infrastructure builder and 
service provider, Huber is also betting that IP networks are not 
inherently modular, where equipment from a thousand providers can 
easily be cobbled together to deliver high-bandwidth, low-latency 
services, but that networks are still in fact in an era of undershoot 
where an integrated provider can deliver a superior product at a much 
lower cost.
    Our favorite digital chip company, EZchip, also explodes the idea 
that the layers of the Net can always be defined and ``quarantined.'' 
Where until now data flowing through the seven layers and numerous sub-
layers were parsed and modified by a gaggle of hundreds of chips 
connected by thousands of wires and glue-logic galore, EZ puts all 
seven layers of the OSI stack onto one chip, performing all the 
essential functions of an Internet router on a single sliver of 
silicon. The ``layers'' are once again transcended when EZ's software 
tools allow programmers to tell the chip what to do without even 
referring to the rigid layers, channelizations, protocols, and 
interfaces used in the previous software environment. Is this fair? 
Should EZchip be allowed to invade someone else's turf, perhaps that of 
Cypress's high-end content addressable memories (CAMs) or Broadcom's 
Silicon Spice communications processors or the sacred code of the OSI 
idol? Or to blow apart someone's whole field, like EZ could one day do 
to the many providers of communications ASICs (applications specific 
integrated circuits), or to Internet router king Cisco itself?
    It might be said that the ``layering'' proposals now in circulation 
are yet another (if more clever) attempt by competitors to target the 
Bell telephone and cable TV companies. Indeed, MCI's own paper implies 
the cable companies (bundling network, ISP, and content) and the Bells 
(bundling network, ISP, and voice) are already stomping all over the 
layers, creating a muddy (and hopefully one day illegal!) mishmash of 
vertical integration. What a coincidence that the activities of its 
rivals violate MCI's framework and cry out for cleansing and re-
ordering (read structural separation, consent decrees, price controls, 
divestiture) by new teams of FCC horizontalawyers and IPolice.
    But if the proposals are meant as anything more than political 
lobbygagging of rivals, if the proponents really mean their model 
legislation as a principled, generic set of rules, then we must 
consider the logical consequences of such new laws. If applied 
dispassionately, how would such general rules affect the rest of the 
Internet, communications, and technology industries?
    Should Google be able to leverage search into Gmail, or to supply 
content using its proprietary algorithms and its physical network of 
100,000 servers? Shouldn't any rival search provider be able to feed 
off of Google's advanced infrastructure? After all, wouldn't it be 
impossible to recreate Google's massive web of global intelligence? 
Doesn't Google's superior infrastructure exhibit ``market power''? 
Might Google actually evolve into a general provider of web-based 
information management services, rivaling the PC-based Microsoft, or 
should Google be ``quarantined'' as a search provider? Or maybe we 
should structurally separate Google into three companies: an 
infrastructure provider (its 100,000 networked servers plus algorithmic 
IP), a content/advertising company, and an information services company 
(Gmail plus future knowledge management applications). Surely FCC 
bureaucrats can make these easy distinctions and explain the resulting 
penalties to weary entrepreneurs who have just spent 10 years of their 
life building a new service that people really like.
    Should Sony be able to demand that its PlayStation gamers get 
access to Microsoft's Xbox Live online video game network? Should 
Amazon be able to aggregate and make searchable the text of hundreds of 
thousands of books? Should Sprint PCS or Verizon Wireless be allowed to 
develop specialized content delivery platforms or applications that 
take advantage of their superior wireless data networks? Sprint was the 
first to build its own photo-sharing platform, and it is apparently the 
most user-friendly wireless photo-sharing system. Can we let such 
infrastructure-leveraging stand?
    What if Equinix (the data center company that almost defines of the 
integration of the physical, protocol, application, and content layers 
of the Net) succeeds in becoming the overwhelming meeting place 
(peering point) for the world's network, e-commerce, and content 
providers? Network economics suggest the concentration of all the 
largest Internet players in Equinix facilities is possible, or even 
likely. If Equinix achieves such ``market power,'' are we to assume 
that other ``virtual data centers,'' like the CLECs before them, could 
force Equinix to ``open up'' its hosting facilities so that the new 
virtual competitors can offer services over infrastructure they did not 
build? Why should anyone build risky and expensive new infrastructure 
if it can be readily used by competitors.
    What about Microsoft integrating easy-to-use voice-over-IP software 
into its next operating system? Should Microsoft rival Real Networks be 
barred from aggregating music and video for download with its 
RealPlayer multimedia suite? All of these are, to one degree or 
another, inter-layer integrated products and services.
    Proponents of ``layering, or ``Net neutrality,'' or a free Internet 
``commons,'' assume there is one network, that it is sufficient and 
timeless, that no new networks are possible or needed. They want 
innovation on the edge, in the form of software apps and Wi-Fi 
attachments. Innovation in the core is either assumed or ignored. The 
logical conclusion, however, is that since the ``best network''--the 
free commons--cannot make any money, there will be no network. And just 
how much innovation at the edge will there be if there is no 
innovation--no bandwidth--in the core?
    MCI's ``horizontal leap'' asks authorities to pursue vigilantly 
those who would exploit ``network choke points'' or take advantage of 
``network effects.'' In industries where ``entities seek to obtain 
market power'' (i.e., seek to make money in a business enterprise), 
policymakers need to ensure four things: ``open architecture, open 
access, universal access, and flexible access.'' When imposed by 
regulators or courts in a national capital, these four euphemisms boil 
down to one hard reality: socialization and micromanagement of the 
``architectures'' and ``access'' networks built by others.
    The ability to tie and merge and break apart and outsource 
products, services, and technologies are the very stuff of business. As 
is the ability to pursue an unguaranteed return on one's risky 
investment. As is the decision how to price these products and 
services. Some services will be bundled. Some will be free, loss 
leaders to leverage the purchase at another point of sale. But the 
entire system cannot be free. Everybody else's product or service, 
except one's own, cannot be a commodity, barred from bundling or 
profit.
    The companies that enable this broadband world will be able to 
charge for it during the years that they provide the optimal service. 
Their initial margins will be high. When communications becomes a 
commodity, as it eventually will, the margins will drop. This is not a 
catastrophe. No one has a right to high margins for a commodity 
service. But the Telecosm is still an arena of innovators, such as 
Corvis, EZChip, Qualcomm, Verizon Wireless, Essex, AFCI, Agilent, and 
hundreds of others, who will enjoy large monopoly rents until their 
inventions are standardized and commoditized and the leading edge moves 
elsewhere.
    The telecom industry is nowhere near some mythical paradox of 
perfection or cul de sac bargain basement of commoditization. It is 
still engaged in a thrilling adventure of putting together worldwide 
webs of glass and light that reach from your doorstep or teleputer to 
every other person and machine on the planet. It is long distance and 
it is local, it is packetted and circuited, it is multithreaded and 
aggregated, it is broadband and narrowcast, all at once. These crystal 
palaces of light and air will be hard to do and the world will reward 
the pioneers who manage to build them. The real threat to monopolize 
and paralyze the Internet is not the communications industry and its 
suppliers, but the premature modularizers and commoditizers, the 
proponents of the dream of some final government solution for the 
uncertainties of all life and commerce.

    The Chairman. Mr. Gilder is always not only informative but 
also entertaining, and I thank you for your straightforward 
remarks, and frankly, I wish many Americans could hear your 
comments today.
    Mr. Hundt, it's a pleasure to have you before the Committee 
again. We've enjoyed a long relationship with you as our former 
Chairman of the FCC. We appreciate all the great work you've 
done and it's nice to have you back before the Committee today.

     STATEMENT OF REED E. HUNDT, FORMER CHAIRMAN, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Mr. Hundt. It's very much of an honor to be back before 
you, Mr. Chairman, and your colleagues, and it's also a 
pleasure to see you all. I do feel a little guilty because not 
only am I lawyer but I'm a son of a lawyer, and how could I not 
feel bad about that after hearing the catastrophe that the rule 
of law has inflicted on this sector? But I'm particularly 
delighted not to be invited here as a ghost of FCC past, but 
rather to be able to talk about the future. And I would with 
great respect like to urge you in my opening brief remarks to 
take four steps, and to be perfectly honest, you could take 
them pretty much today, meaning they do not require that you 
begin what we all know, because we know the rule of law, we all 
know is like it or not the long slog to an overhaul of a law.
    Not only are the four steps I'm going to talk about today 
some things that could be done quite immediately, but 
astonishingly they are unbelievably important to the future of 
broadband. They are four steps that relate to the future of 
wireless broadband particularly. The great lexicographer, Dr. 
Johnson, said that men usually agree on ends but disagree on 
means, and there are many, many debates to be held about means 
that could be boiled down to, do you trust the market or do you 
think it needs a little subsidy, do you want to regulate or do 
you want to deregulate. And I'm here to say that those issues 
are not necessary to be decided or those battles are not 
necessary to be fought on those terms in order to do what is 
incredibly important to do with respect to wireless broadband.
    In a political season and an election year, particularly in 
a Presidential election year, everyone on this Committee knows 
better than anyone else that if you can find a blessed island 
of agreement where cool reason can have a place, you don't get 
to stay there for long, but it's nice to enjoy it. This is a 
blessed island of agreement. We all note that the President of 
the United States 2 days ago said that by 2007 we should have 
universal broadband. Senator Kerry has said the same thing. 
Universal in our country is a practical matter, it means 
somewhere around 95 or 90 percent because you can never get the 
last 5 percent to agree on anything and that's OK.
    And we all know this. The one sure, certain way to get to 
these extraordinarily high penetrations is to improve the 
quality and lower the price of whatever it is you're talking 
about, improve the quality and lower the price. So we have 
universal VCRs because the government didn't have to do 
anything, we let innovation lower the price and we let the 
industry work out ways for them to be compatible with the 
existing television industry.
    That's what can happen with wireless broadband. If this 
Committee takes these four steps, we can lower the cost and 
have that translated to lower cost and we can improve the 
quality of wireless broadband. I'm not talking about 3G 
cellular, the handheld devices with the new technologies that 
run off the bay stations. They're primarily about voice with a 
little bit of short messages. That's not what I'm talking 
about. I'm talking by wireless broadband about a chip set about 
as big as my thumbnail that you can grab today, you'll have to 
get some pretty good glasses on to see its workings, but you 
can see it today. That chip set will send out a radio signal to 
a box about as big as a cheeseburger, I'm doing the South Beach 
Diet, so everything seems to me about as big as a cheeseburger, 
but this box is about as big as a cheeseburger and it sits on a 
windowsill. Its price is going to be less than $100 within 
weeks. It may be less than $100 if I buy it on E-bay, and then 
the signal goes from there to an antenna in a bread box, only 
food analogies, that needs to hang on a lamp pole or a street 
lamp or a telephone pool, something like that.
    The prices for these boxes also are going way down. We're 
talking about a radio signal from a chip that can be in a 
laptop or a TV set top box or a refrigerator or anything, 
George can tell us all the possibilities, go from that signal 
to boxes that hop across the air, and ultimately miles away get 
to a fiber optic cable and become part of the Internet. No 
digging, no huge networks that have to be built before there 
are users, incredible ability to take advantage of all the cost 
efficiencies.
    What are the hurdles? Wireless broadband is being designed 
as we speak. There are trials in have a dozen cities. I 
mentioned the names in my testimony. You can go around, kick 
the tires. It's all being put in the wrong spectrum. It's all 
being designed for spectrum where the radio frequencies are 
very, very high, and as a result, the radio waves themselves do 
not penetrate buildings. We did not put broadcast TV in that 
spectrum because we wanted people to have TV sets inside 
houses, not to have to put them out on their lawns in Montana 
where it might be too cold. So we a long time ago put broadcast 
TV in the spectrum that you need to have a high quality of 
service, and this is the most important part, a very, very low 
cost, because if you have the right radio frequencies, you 
don't need as many boxes and you can design it better. And I've 
attached a chart to my testimony, we can lower overall the cost 
of wireless broadband in one fell swoop by 50 percent within 
months if this committee will say to the whole wireless 
broadband industry, we need to be designing in the spectrum 
that today is occupied by analog UHF channels.
    That's what we need to do, not just right away, but we need 
to do it for the future. We'll lower the cost, we'll add tens 
of millions of people, not because we threw money at the 
problem, but because we let innovation lower the cost of the 
problem.
    What are the four steps? These are the following four. 
Number one, you recall, Mr. Chairman, the debate years ago 
about 85 percent penetration being the threshold for when we 
could begin to allow new data and broadband uses for the UHF 
channels. If the FCC is encouraged by this Committee, it only 
needs encouragement, to cast three votes for a sensible 
interpretation of the 85 percent in which you count everyone 
that now receives a satellite signal that is digital and now 
receives a cable signal that is digital, if you allow them to 
count that as 85 percent, then we've already hit the threshold, 
and you can take the very high UHF channels that literally we 
are down to only a few 100,000 people in the country who are 
watching them over the air as opposed to on cable and 
satellite.
    You can tomorrow say that that spectrum is available for 
wireless broadband, take out 50 percent of the cost, greatly 
improve the quality of service, and allow new wireless 
broadband technologies to be marketed by the market, by cable, 
by telephone companies, by new startups, by long-distance 
companies, by Gilder Inc., anyone who wants to go in this 
business. That's step one. They just need to count it right.
    Step two, the FCC needs to be told that, for example, if I 
might, in Senator Burns' state, where there is spectrum 
allocated to broadcasters, but no one is using it, because when 
you go out with a measuring device, you'll see that there are 
no signals because of the tremendous open spaces, allow what's 
called a secondary use that by law must not be permitted to 
conflict or interfere with any TV. That would be true in any 
state other than in a high density metropolitan area. That 
would be possible today. That's just a stroke of a pen at the 
FCC. It's not a big rewrite of the law.
    Third, they need to immediately proceed with respect to all 
the spectrum that will ultimately be retrieved. They need at 
the FCC to issue an order immediately that says this will be 
used by wireless broadband, some will be licensed, some will be 
unlicensed, some will be auction. They need to decide today 
what the plan is and promulgate it so that the engineers know 
what they're designing for. And that can be done today.
    And last, and it's absolutely not least, the FCC needs to 
be urged by this Committee to do the following, to say to the 
localities, to municipalities, these poles, these telephone 
poles, these street lamps, these public buildings, you have to 
let people put these bread boxes about this big on top of them.
    That's all. We're not talking about saying that they have 
to provide electricity. We're not talking about saying that 
they don't get to charge what's called a make-ready cost. They 
can charge that. We're just saying they have to allow it. They 
can't get bogged down in their own bureaucracies and say 3 or 4 
years from now we'll let you know whether or not you can build 
those networks.
    These four steps, if this Committee could get everybody to 
sign the letter bipartisanally, because I don't think there's a 
Republican-Democrat, left-right division on these topics, if 
you all could just say, these are the four steps, and FCC, if 
you've had trouble getting three votes for things, we want you 
to have five votes for these four steps. You will totally 
transform the future of wireless broadband, completely 
transform all of the penetration rates. Everybody on this panel 
will be talking about how we're going to be growing at the 60, 
80 percent rate instead of the current rate.
    Thank you very, very much.
    [The prepared statement of Mr. Hundt follows:]

         Prepared Statement of Reed E. Hundt, former Chairman, 
                   Federal Communications Commission
    Mr. Chairman and Members of the Committee:

    Thank you for inviting me to testify today on the future of this 
country's telecommunications industry. I am grateful for the 
opportunity to present my views. My testimony today reflects only my 
personal views, and not the views of any company with which I am 
associated. (Such associations are in the summary resume attached 
hereto.)
    As you know, the only right economic policy for a nation is to seek 
to obtain a high and rising standard of living. Social policies may be 
aimed at other goals, but that is the purpose of an economic policy. To 
do that, productivity gains and full employment are both necessary. The 
conundrum of telecommunications is that it has contributed more than 
any other single sector to overall productivity gains, but in the 
process many of the telecommunications jobs of the past have become 
unnecessary. At the same time many new jobs, particularly in wireless 
and Internet companies, have been created.
    The challenge for this Committee is how to foster both continued 
productivity gains and job growth in our whole economy by means of 
establishing a particular legal regime for the communications sector. 
Would we have more or less overall productivity gains if we had an 
unregulated communications monopoly, a rate-regulated communications 
monopoly, a set of competing firms that shared certain essential 
facilities, a contribution of public funds to make up for market 
failures, or a way to capture such externalities as network effects? 
All these questions must be asked anew very often and we can expect 
that answers will evolve over time. I honor and thank this Committee 
for engaging in this process of continued reassessment of the right 
answers to these questions, and indeed continued efforts to determine 
the right questions.
    Technology creates potential; in a capitalist society economics is 
the science by which we describe how the potential of technology is 
translated into the actuality of the marketplace. But the culture of a 
country ultimately determines the shape and function of the 
marketplace's outcomes. That culture is composed of many things, but 
one key element is the rule of law.
    Today we look back at the era of regulated monopoly in 
telecommunications and conclude that its advantages in terms of 
efficiency were ultimately outweighed by the cost of regulation and the 
discouragement of productivity enhancing innovation that was an 
inevitable corollary of monopoly. For the better part of30 years the 
United States, acting often through this committee, has led the world 
in replacing the paradigm of regulated monopoly with a new framework of 
competition coupled with certain key elements of legal obligation 
placed on the owners of bottlenecks or essential facilities. This new 
framework is the grand outline of the 1996 Telecommunications Act and 
the 1997 World Trade Organization telecommunications treaty. It is the 
outline of the rules of law being put in place in more than 90 
countries around the world. It is the outline of the rule of law that 
is helping such huge new economies as China and India take the place 
that the size and work ethic of their populations should earn them on 
the global stage, barring such dreadful catastrophes as war or the 
reversion to communism.
    We should take a look at some of the outcomes of this new paradigm 
here in the United States. The telecommunications industry since 1996 
has experienced unprecedented growth and American consumers and 
businesses today enjoy the widest array of services at the lowest 
prices in American history. The industry itself-like its related 
computer hardware and software industries--consists both of firms that 
have done better and those that have done worse over the last 8 years. 
In our system, we do not regard an economic policy as a failure if one 
or more firms fail in fair marketplace competition. We do regard that 
policy as a failure if it does not contribute to productivity gains and 
therefore to a high and rising standard of living for all Americans.
    While industry gross revenues are not the only metric by which we 
should judge the success of a policy, they are relevant. Industry 
revenues, both overall and by segment (with one exception) have 
increased tremendously since passage of the 1996 Act. By my current 
calculations, based on data drawn from several different sources, total 
sector revenues grew at a compound annual rate of almost 7 percent 
between 1997 and 2002, increasing from $266 billion to $371 billion. 
That growth rate substantially exceeds the growth rate of the overall 
economy for those years. And that revenue growth has come in 
conjunction with falling prices.
    Moreover, these impressive gains are dwarfed by the performance of 
particularly innovative service segments. Demand for wireless services 
simply exploded-growing from $30 billion in 1997 to $78 billion in 
2002, an annual average compounded rate of more than 20 percent. Mobile 
services are so cheap on a price per minute basis, because of 
competition and innovation, that cellular customers here purchase 
nearly twice as many minutes per month as they do in Europe. The result 
of the growth of wireless voice is that revenues in this segment will 
exceed revenues from local wire-based voice in the next couple of 
years, even though local voice revenues have gone up about 5 percent on 
a compound annual basis since 1996.
    Another tremendous growth story is that Internet access revenues 
increased annually by more than 25 percent, from a modest $7 billion in 
1997 to $24 billion in 2002. E-commerce firms have greatly increased in 
market capitalization as a result of greater Internet access.
    You might also be interested in knowing that contrary to many media 
reports, returns on dot.com investment have been positive since 1997, 
averaging about 10 percent compounded annually, according to a study by 
Professor Tom Eisenmann of the Harvard Business School. More generally, 
telecommunications capital expenditure in 2005 will be higher than in 
1997, although the trend now is downward unless and until new 
technologies are deployed.
    It follows that if revenues are up, then consumer spending by both 
business and residential consumers on telecommunications services 
during this period similarly grew strongly. Retail spending by business 
customers increased from $101 billion in 1997 to $141 billion in 2002 
and consumer spending rose from $121 billion in 1997 to $172 billion in 
2002. Yet, for almost all communications services the prices have gone 
steadily down.
    In short, consumers have spent more because they have been offered 
lower prices for similar services and attractive prices for new 
services. Whole new markets have been created, especially in wireless 
and Internet markets.
    An exception to this amazing story of economic expansion is the 
wireline long distance business. Revenues in that industry segment 
declined, in absolute terms, from $76 billion in 1997 to $55 billion in 
2002.
    Congress in 1995 was rightfully concerned about the potential for 
such a downturn in the long distance business. Prices have gone down 
because of technology innovations that lowered fundamental costs, the 
actions of the FCC to lower steadily the contribution to cost of the 
interstate access charge, and the proliferation of competition from 
both Bells on the fixed line side and the wireless firms offering 
wireless long distance. Prices have gone down so much that they have 
outstripped the willingness of consumers to pay more for long distance-
elasticity effects did not make up for the price drop and so total 
revenues are down. The result is that firms depending on long distance 
revenue have found that it is increasingly difficult to compete in 
telecommunications. By contrast, those depending chiefly on local voice 
or cable revenues have had their own challenges, but faced them with a 
more reliable revenue stream at their disposal.
    The Members of this Committee in particular were keenly aware that 
the traditional long distance carriers like AT&T and MCI would be hard-
pressed to offset their losses in toll revenues with revenues from 
local voice markets. Those carriers, even armed with the market-opening 
tools Congress provided in the 1996 Act, faced formidable barriers to 
entering local Bell markets. Generally they have been unable to obtain 
new revenues in any new market fast enough to overcome the loss of 
revenues in long distance. This was one of the possible outcomes of the 
1996 Act.
    I want to step around debate about the troubling role of the 
extraordinarily prolonged judicial review of the 1996 Act in producing 
this outcome. Although the judiciary collectively has not acted with 
clarity or alacrity, competition's benefits have been obtained to a 
large, if imperfect, degree. Under a competition paradigm the key goals 
are and ought to be productivity gains, as well as lower prices. These 
goals necessarily can be achieved only by reducing regulated costs and 
by promoting innovation. By and large the communications sector has 
never seen so much in the way of innovation, productivity gains, lower 
prices and higher revenue as it has seen in the 8 years since the 1996 
Act was passed. That is somewhat a function of the wisdom of the law, 
somewhat a function of technological change and somewhat a function of 
the effective strategies of various firms.
    What then comes next?
    As matters now sit, the American telecommunications industry will 
continue to experience steady growth in wireless, Internet, and 
traditional voice services, both local and long distance. For the voice 
business, the pace of growth will not resemble what we have witnessed 
in the years since passage of the 1996 Act. But the one industry 
segment that has the potential to re-ignite the engine of economic 
growth that drove the Nation's economy in the late 1990s is broadband 
services.
    This has been and ought to continue to be a subject of Committee 
attention for three principal reasons. First, measured by the scale of 
broadband (meaning the percentage of households subscribing), the scope 
of broadband (meaning the range of bandwidth speeds and proffered 
services), and the price of broadband, the United States does worse 
than important rival nations. Second, broadband has the potential to 
generate very large new productivity gains, and to create many hundreds 
of thousands, and ultimately millions, of new jobs here in the United 
States. Third, we are on the verge of a new technological breakthrough 
that can be brought more quickly and efficiently into the marketplace 
if the government takes timely and effective and comparatively minimal 
action: I refer to wireless broadband and to the wisdom of letting it 
flourish at frequencies on the spectrum chart that will in any event be 
vacated soon.
    If this Committee now can lay out a path for virtually immediate 
use of a modest amount of spectrum on the frequency chart below one 
gigahertz, then wireless broadband will be a much cheaper and easier 
and more valuable service for accessing the Internet, making a voice 
call, sending and receiving video, providing health care, education, 
job training, and universal service. It can be not just a universal 
service, but a universal solvent that can dissolve many of the 
roadblocks to innovation and deregulation in communications markets. 
With an effective spectrum allocation for wireless broadband at the 
frequencies that permit signals to reach inside buildings, we will in 
just one or two years be able to commence a step by step process that 
will achieve fairly soon the complete deregulation of retail prices in 
communications, among many other long desired goals of the 96 Act.
    Let's start with how the United States lags woefully behind many 
other countries, especially South Korea, in broadband penetration. See 
pages 20-22 for charts. Our broadband is Little Broadband, about one 
megabit per second, whereas in Korea and Japan very large percentages 
of the population can buy Big Broadband, meaning up to 8 megabits per 
second. Their services are priced lower: their users get up to 10 times 
the bandwidth for the buck. Their household penetration is much higher: 
South Korea's penetration is about three times higher than America's, 
measured by percentages of households.
    The rapid penetration of broadband in South Korea and other Asian 
markets is not a coincidence. Particularly in Japan and South Korea, 
the national governments played key roles in promoting the build-out of 
a truly broadband network. In Korea, for example, the government 
provided $1.5 billion in subsidies to finance the build-out of a 
broadband network backbone and an additional $1 billion in low-interest 
loans to operators for the construction of last-mile links.
    In addition, both South Korea and Japan implemented policies that 
were designed to foster vibrant competition between providers of 
broadband services. Japan, for example, required incumbent carriers to 
make available access to their dark-fiber facilities as well as copper 
loops. Japan also adopted regulatory directives to prevent the dominant 
incumbent provider of local voice service from deterring the entry of 
new providers.
    South Korea's approximately 70 percent penetration is the product 
of a number of different factors, including favorable demographics and 
strong consumer interest. But, it would be mistaken to understate the 
importance of government policy in making Korea by far the largest user 
of broadband services in the world. The South Korean government, for 
instance, sponsored programs to encourage the purchase of personal 
computers, including low-interest loans, and to encourage the schools 
and government to obtain broadband communications links. It closely 
regulated Korea Telecom in various respects.
    The United States, by contrast, has fallen well behind these other 
countries. Indeed, today, the United States is not ranked among the top 
ten countries in the world in terms of broadband penetration. Moreover, 
our version of broadband is little, versus the Big Broadband that can 
be found in Korea and Japan and elsewhere in Asia, where speed can be 
ten to even 50 times faster.
    If Big Broadband in America reached 100 percent of all households 
at affordable prices, we would see the growth of many new markets. 
Other countries show us that video games, for instance, produce new 
revenues for communications carriers. This may not be of much appeal to 
fumble-fingered formerly youthful people like me, but it's a new market 
that creates new jobs and new revenue. And it isn't growing in this 
country as fast as in other countries because our infrastructure is not 
as well-developed. Moreover, in other countries, where the speed of 
access tends to be higher, video can be more readily sent over the 
Internet. Not just entertainment, but education and health care are 
best delivered in part through video. These social services can be 
supplied effectively by broadband. We have every reason to worry about 
burgeoning costs of health care and our shortfall in providing 
education: broadband is an essential part of obtaining the productivity 
gains in both health care and education that will help up address our 
concerns.
    However, the good news is that the United States has an opportunity 
to regain worldwide leadership in telecommunications by taking 
advantage of a new technology that is on the verge of deployment. 
Wireless broadband has the potential to energize our broadband services 
segment.
    When Congress in the early 1990s authorized the FCC to auction 
radio spectrum, it gave technologists and entrepreneurs the tools 
needed to use not just Bell, but also Marconi to build an information 
economy. In the decade since, wireless has emerged as the most 
important means of voice communications and the Internet has emerged as 
the most important new medium of pictures and text.
    We are now entering the decade of wireless broadband, the era in 
which airwaves can be used to carry Internet transmissions much more 
cheaply, with easier access, than mere fixed wire networks can do.
    One species of wireless broadband is called Wi-Fi. Many people are 
familiar with a radio technology called Wi-Fi. If you have a laptop 
that is Wi-Fi enabled, you know that it connects over the air to a 
router, which in turn connects to a cable modem or a DSL box. You can 
walk around the house with the laptop and stay always on the Internet.
    Wi-Fi can be found not only in homes but in airports, coffee shops 
and many other places. These hot spots are places where you can use the 
laptop today to log on to the Internet using Wi-Fi. Just as the 
Internet has gone in about a decade from 6 million to about 600 million 
users globally, in the next 10 years hotspots will proliferate from 
about 7 million to about 700 million locations. The reach of such hot 
spots is about 300-1000 feet from an existing wire line Internet 
connection.
    However, in order to do without DSL or cable connections, many 
cities are contracting with service integrators to deploy antennas that 
create a mesh of Wi-Fi connectivity over very large radii. These mesh 
networks are based on principles similar to those on which the Internet 
is based. Any laptop or other device with Wi-Fi capability can connect 
to the network of antennas and stay connected even while the owner 
carries the laptop from place to place. The networks consist of routers 
with antennas on street lamp poles and telephone poles. Cities with 
such networks today include HalfMoon Bay, San Mateo and Cerritos in 
California, Baton Rouge and Lafayette in Louisiana, and North Miami 
Beach, Florida. These are representative illustrations. A large scale 
example is a recent request for proposals issued by the City of New 
York. See http://www.nyc.gov/html/miscs/rfp_mobile_wireless
_download.shtml.
    Another technology on the near-term horizon is called Wi-Max. It 
also uses open standards negotiated by engineers and private sector 
firms in the well-recognized IEEE process. Wi-Max also promises to 
bring inexpensive, high-speed Internet connections to the American home 
and workplace. Wi-Max is a label used to describe the following: a 
communications chip in a laptop (or really any other appliance) that 
sends a signal to an antenna at least several miles away.
    Wi-Fi is a synonym for a suite of ``802.11'' protocols developed by 
the IEEE for use in unlicensed bands worldwide. Wi-Fi radio 
technologies are in use today on unlicensed spectrum in the 2.4 GHz and 
5.7 GHz bands. Wi-Max is a wireless broadband radio technology 
specified by the IEEE in its 802.16a protocol. As of now, it also uses 
unlicensed frequencies fairly high in the spectrum chart. Both are open 
technology standards that can be used by any wireless broadband 
provider. Both have been endorsed by a wide variety of companies. Most 
interestingly, both these, and other related technologies, can be 
designed for use on various frequencies, including the far more 
desirable lower frequencies where radio waves are much longer and more 
useful for communications.
    In addition there are still other flavors of wireless broadband 
that use related technologies and alternative standards. In general, 
the technology world assures us that wireless broadband can provide a 
data rate that will over a short period of time run up to the range of 
Big Broadband (10 Mbps or higher), and provide a cost-effective 
alternative to fixed line broadband such as DSL or cable modem, if the 
government takes the right steps to welcome wireless broadband into the 
competitive arena. Indeed, the cost for the wireless mesh network might 
be as low as one tenth--or even lower-than the cost of building new 
fiber to people's houses. With lower cost, we will at last have an 
effective efficient way to bring broadband to rural America.
    Wireless broadband can also help keep the United States at the 
forefront of the technology revolution, creating new jobs and giving a 
much-needed stimulus to our economy.
    To be clear, what I'm talking about is not the so-called third 
generation of cellular, also known as 3G. That term describes advances 
in cellular phones to carry data along with voice calls. The acronyms 
for 3G are: EVDO, UMTS, WCDMA, and EDGE. These technologies enable 
handheld devices to send and receive data to mobile users in amounts 
ranging up to several hundreds of kbps. This service is sufficient for 
applications such as short rnp3 downloads, limited Internet browsing, 
ring tones, e-mail, low-resolution pictures, and video clips.
    These 3G technologies are the evolution path for the technologies 
used today by the mobile carriers and can be installed as an add-on to 
their network infrastructure. They are important and are being deployed 
now in the United States and worldwide.
    But for higher speed, affordable broadband-and certainly Big 
Broadband at a rate of 10 megabits or more per second--a user must look 
to a wire-based connection or the new wireless broadband technologies.
    Wireless broadband is not a new technology, by any means. The 
industry has been around for 15 years. Indeed, the Nation's leading 
experts on high speed wireless have been working on wireless broadband, 
learning lessons from years of trials, and their relentless efforts are 
now corning to fruition with the deployment of techniques such as 
Orthogonal Frequency Division Modulation, beam forming for antenna 
reception, and, of course, IP as the way to deliver the bits. What is 
now possible is ubiquitous, metropolitan area wireless broadband 
coverage.
    Wireless broadband can eliminate the need for per node wiring. The 
technology enables a self-organizing system, just like today's 
Internet, allowing nodes to be added or subtracted as needed, a feature 
that remedies defaults in wireline backhaul that may arise or 
interference that may be encountered. Advances in software claim to 
provide the reliability, security, and redundancy/diversity that are 
the foundation of public safety and other government communications 
systems, which are even more critical in this era of heightened 
national and local security.
    Implementing this technology does not require digging up the 
streets. It does not require installing a vast infrastructure. There 
are no zoning ordinance encroachments. It requires no new towers. The 
entire infrastructure does not have to be completed before it can 
commence. Significantly, it can be modified to meet changes in 
requirements very cheaply.
    But there are potential barriers that could delay or frustrate the 
entry of wireless broadband providers. One potential barrier is 
spectrum access. Wireless broadband today uses ''unlicensed'' spectrum. 
As the name suggests, unlicensed spectrum users do not need a license 
from the FCC to transmit over the airwaves. This is in contrast to 
licensed users of the spectrum like Verizon Wireless, Cingular; or T-
Mobile; these companies hold FCC licenses that give them the exclusive 
right to use a particular set of electromagnetic frequencies in a 
particular geographic area. Unlicensed operators, on the other hand, do 
not have exclusive use of the spectrum they use. They must also use 
equipment that complies with various technical requirements that 
minimize the amount of signal interference they cause to other spectrum 
users.
    The FCC has set aside some spectrum for unlicensed devices. These 
devices include cordless telephones, garage door openers, and wireless 
broadband. But there two problems with relegating wireless broadband to 
the unlicensed spectrum at and above 2 GGHz.
    First, many of the current unlicensed spectrum bands are already 
too congested with other devices-there are a lot of cordless telephones 
and garage door openers out there.
    Second, the current unlicensed spectrum allocations are at 
regrettably high frequencies. Waves at lower frequencies are longer in 
length. Longer length waves hold their energy over longer distances and 
also bounce around physical objects such as buildings. As a result, 
longer wave lengths are ideal for broadcast television--they can travel 
miles from a tower and find their way inside living rooms. These are 
the ideal wave lengths for wireless broadband, just as they were ideal 
60 years ago for the original allocation to broadcast television. 
Another similarity is that broadcast television waves carry tremendous 
amounts of information (for example, digital TV waves will carry up 20 
megabits per second.) Correspondingly, wireless broadband can deliver 
very high bit rates at lower cost and greater equality if it also uses 
the lower frequencies of broadcast television.
    Of course, it is possible to relegate wireless broadband to higher 
frequencies. Those frequencies are useful for garage door openers--
after all we do not want garage door opener to send signals over long 
distances, since the user wants to be opening his or her own garage and 
not the neighbor's. But to treat wireless broadband the same way as 
garage door openers would be to lower the value and raise the cost of 
this new technology.
    Of course any frequency can be used for any kind of wireless 
business, if you ignore the cost. For example, the shortcoming of 
higher frequencies for PCS has led cellular firms to build more base 
stations to retransmit signals. But that has cost more money, hurt 
industry return on capital, and embedded additional costs for consumers 
for decades.
    Engineers today for the most part agree that the cost of wireless 
broadband Internet access in the 700 MHz or 800 MHz bands is likely to 
be about 50 percent lower than if the technology is consigned to the 
unlicensed spectrum bands at or above around 2 GHz. See chart on page 
24. The consequence of higher costs is higher prices for the consumer. 
If we want truly high speed Big Broadband Internet access for all 
Americans we need to help lower costs for the technologies being 
invented. This is a particularly important goal for rural America, 
where costs are inevitably going to be higher due to reduced density of 
customers, and for emerging markets, where higher costs take the prices 
of service beyond the reach of populations with much lower national 
incomes per capita than in the developed world.
    Quite literally, the lower the frequencies assigned for wireless 
broadband, the more millions of people in rural America will be able to 
afford Big Broadband Internet access, the more hundreds of millions of 
people in the world will be able to afford joining the Internet 
community.
    Fortunately, in the United States new spectrum will become 
available in the 700 MHz band. This is ideal spectrum for wireless 
broadband. It has excellent propagation characteristics that will allow 
the build out of an inexpensive and ubiquitous wireless broadband 
network.
    This spectrum is currently being used by TV stations operating on 
UHF Channels. The broadcast industry is converting from analog 
technology to digital technology, and during this conversion process 
every TV station in the country has been given two TV channels-one 
analog and one digital.
    However, under the law, these stations must tum in their analog 
channel. This will clear UHF TV Channels 52-69 for other uses, 
including wireless telecommunications services. That spectrum covers 
from 698 to 806 MHz in the spectrum band, a total of 108 MHz. That 
spectrum should be the fit and proper home of wireless broadband.
    So once again the tough job for Congress and the FCC is to push the 
recalcitrant and incentivize the willing participants in the private 
sector to promote innovation, productivity gains, and new job creation. 
The current chapter in this ongoing story of facilitating the creative 
innovation of capitalism will be written if Congress and the FCC can 
find ways to let businesses use the best spectrum physics can find for 
us not for analog UHF TV but rather for wireless broadband. This 
transformation of the use of that spectrum means for the economy 
literally hundreds of billions of dollars of extra growth and hundreds 
of thousands, if not ultimately millions, of new jobs-provided it were 
done quickly.
    The first step I suggest is for Congress to urge the FCC to read 
correctly the meaning of legislation passed by Congress in 1997. That 
legislation requires broadcasters to tum in their analog channels at 
the end of2006, or when 85 percent of the TV audience is capable of 
receiving a digital television signal-whichever occurs later. As 
mentioned recently by the FCC staff, all households that get their TV 
through cable or satellite services should be counted in order to 
determine whether we have reached 85 percent penetration of digital 
television.
    This certainly makes sense: anyone with cable or satellite is 
obviously no longer dependent on over the air broadcast for the 
television consumption, and so those are the households that should be 
counted to determine whether we have crossed the 85 percent threshold 
for the relinquishment of the UHF analog spectrum. Moreover, cable and 
satellite can either deliver a HDTV broadcast signal to a digital TV 
set in the consumer's home, or permit the consumer to convert such a 
signal through a set top box into an analog TV set. By simply telling 
the FCC to count wisely the 85 percent, Congress can make available the 
spectrum most useful for wireless broadband.
    Next, Congress should take steps to allocate part of the 700 MHz 
spectrum for unlicensed use by broadband wireless services. In 1997, 
Congress directed the FCC to allocate 24 MHz of the 700 MHz band for 
public safety communications, and to allocate 36 MHz of the band for 
commercial use to be assigned through spectrum auctions. In order to 
facilitate wireless broadband in this spectrum, Congress could amend 
this 1997 law to allocate 30 MHz of this commercial spectrum for 
unlicensed services that would not be subject to an auction. In this 
way, Congress would have provided for wireless broadband public safety, 
licensed spectrum for wireless broadband, and unlicensed spectrum for 
wireless broadband: this perfectly wise trio of actions can produce 
millions of new jobs and billions of dollars of economic growth.
    Congress should also instruct the FCC to resolve quickly a notice 
of inquiry it opened in December 2003. In that NOI the FCC asked about 
the feasibility of allowing unlicensed devices to operate in the TV 
broadcast spectrum at locations and at times when this spectrum is not 
being used. The FCC should quickly adopt a rule embodying that 
proposal. Then wireless broadband services could use UHF TV spectrum 
provided they do not cause interference to full-service television 
stations. This would be especially important in rural areas where there 
tend to be far fewer television stations, and thus vacant UHF TV 
spectrum. Furthermore the wireless broadband technologies that are 
deployed in rural America will prove to be ideal in developing markets 
where there also are relatively few broadcast television stations and 
much unused spectrum in the 700 MHz range.
    The Congress should ask the FCC to take still other steps to 
facilitate the growth of wireless broadband. Wireless broadband 
requires the deployment of antennas in small boxes, small enough that 
they can be attached to a streetlamp pole or a utility pole. Due to the 
fundamental physical characteristics of wireless signal propagation, 
delivering the higher speeds enabled by wireless broadband requires a 
higher density of smaller cells as compared with traditional cellular 
networks. Therefore, wireless broadband needs access to these platforms 
so that its service is available ubiquitously. The FCC can and should 
ensure that no one exercise control over these platforms so as to 
prevent the deployment of wireless broadband services.
    We are on the verge of being able to unleash a revolutionary 
broadband technology. This Congress and the FCC have a chance to take 
certain steps that will deliver tremendous cost savings to the emerging 
wireless broadband technology firms. We can save billions of dollars in 
cost, and thereby make wireless broadband available more efficiently to 
millions more people, without a significant expenditure of public funds 
on a subsidy program. We need only to allocate the optimal spectrum to 
the future of communication instead of to its past, and to remove other 
impediments to the rolling out over the airwaves of this new way to 
connect everyone to each other and to all the knowledge in the world.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                        Resume of Reed E. Hundt
    Reed E. Hundt is a senior advisor on information industries to 
McKinsey & Company, a worldwide management consulting firm. His work 
with McKinsey has focused on helping senior management and boards 
address a wide range of strategic and other leadership challenges.
    Mr. Hundt serves on the board of directors of Intel, Pronto 
Networks, Tropos Networks, Polyserve, Megisto, and Entrisphere. He is a 
special advisor to Blackstone Group, a New York-based private equity 
firm. He serves as a member of the advisory committee at the Yale 
School of Management.
    Mr. Hundt served four years as Chairman of the Federal 
Communications Commission (FCC), from 1993 to 1997.
    Mr. Hundt is the author of, ``You Say You Want A Revolution: A 
Story of Information Age Politics.'' (Yale University Press, 2000). He 
is Co-Chairman of The Forum on Communications and Society at The Aspen 
Institute.
    Mr. Hundt is a magna cum laude graduate of Yale College, earning a 
Bachelor of Arts with Exceptional Distinction in History (1969). He is 
also a graduate of Yale Law School (1974) where he was a member of the 
executive board of the Yale Law Journal. He clerked for the late Chief 
Judge Harrison L. Winter of the U.S. Court of Appeals for the Fourth 
Circuit, and is a member of the District of Columbia, Maryland, and 
California bars. Prior to his position as Chairman of the FCC, Mr. 
Hundt was a partner in the Washington, DC office of Latham & Watkins, a 
national and international law firm.

Apri1 2004

    The Chairman. Well, thank you very much, Mr. Hundt.
    Mr. Gifford, welcome.

          STATEMENT OF RAYMOND L. GIFFORD, PRESIDENT, 
               THE PROGRESS & FREEDOM FOUNDATION

    Mr. Gifford. Thank you, Mr. Chairman. I find myself in the 
unanticipated position of having George Gilder call for the 
elimination of my former job and agreeing completely with Reed 
Hundt's comments. Thank you for the opportunity to speak with 
you----
    The Chairman. In America, anything is possible.
    Mr. Gifford. It's a new broadband world, Mr. Chairman. My 
name is Ray Gifford. I'm President of the Progress & Freedom 
Foundation, a think tank that explores the legal and policy 
issues of the digital age. Also relevant to my testimony here 
today, from 1999 to 2003, I served as Chairman of the Colorado 
Public Utilities Commission, which means I had to try and 
implement what Congress thought it meant and what the FCC told 
me Congress meant in the Telecommunications Act of 1996.
    To think about a new communications act, we first need to 
think about the current Act and what we have learned. The 
Telecommunications Act of 1996 should be judged a qualified 
failure. It may have been a failure of concept or of 
implementation, but it certainly did not live up to the hopes 
of its framers. The current Act is a failure because it does 
not provide a framework that anticipates the broadband, 
packetized Internet age. It is a failure because it presumes 
that two mutually incompatible goals, market competition and 
universal service, can be seamlessly reconciled. It is a 
failure because it added a pervasive layer of wholesale 
regulation to an already encompassing retail regulatory layer. 
It is a failure because of statutory ambiguity and self-
contradiction. Finally, it is a failure because the competitive 
successes of the past 8 years happened despite the 
Telecommunications Act of 1996, not because of it.
    That failure is qualified, however, because the sectors the 
Act left relatively unregulated, wireless and cable, provide a 
road map of how to allow markets to emerge, regulation to 
receive, and consumers to benefit.
    I have two points of counsel for the next 
Telecommunications Act. First, law and regulation should not, 
and indeed cannot, contain the dynamic, multi-platform 
competition of the broadband Internet age. This promise 
counsels a recognition that regulatory burdens need to be 
minimized, and more importantly, that the incentives for 
special interests to manipulate regulation to preordain a given 
market outcome need to be written out of the next Act.
    My second point is that the institutions charged with 
implementing the legislative vision you enact are in need of 
fundamental reform and redesign. These progressive era 
institutions, the FCC and state commissions, which served us 
well, must have a different charge in the age of spectra and 
photons. Communications is no longer local or confined to a 
single platform. It is no longer just voice, but 
undifferentiated packets of voice and data that know no 
geographic bounds. The traditional jurisdictional distinctions 
cannot hold.
    Next, the self-contained regulatory world and the legal 
distinctions that sustained it no longer signify. Legal 
definitions of information service and telecommunications 
service have no relation to today's underlying technological 
reality. Thus, while legal fights remain, to quote my 
colleague, Randy May, mired in metaphysics, the underlying 
technological reality remains that a bit is a bit is a bit, and 
should therefore be regulated as such in the next Act.
    The regulatory regime needs to adapt to the architecture of 
today's networks. Thus, the physical layer should be regulated 
the same across all platforms, and the remaining logical 
applications and content layers may or may not be integrated 
depending on the preferences of producers and consumers. That 
said, a premature common carriage requirement on all physical 
layer connections could destroy integration that serves 
consumers best, and there is reason to believe that an 
unregulated market will drive to the optimal result.
    This equally regulated, multi-platform world means 
regulators must loosen their control over pricing decisions. 
The old regulatory system allowed rates to be set to effectuate 
a vast cross-subsidy mechanism. In the new world, technologies 
like VoIP will evade regulators' attempts at special regulatory 
treatment.
    Related to this, the intercarrier compensation system must 
be radically reformed so that access arrangements between 
carriers are rationally related to cost or better yet, left to 
the market, as is done currently in the Internet backbone 
market.
    And last but not least, the flourishing of networks means 
universal service policy needs to be rethought and refocused. 
What is universal service for? Well, it subsidized basic local 
voice line or a broadband connection. If you're going to 
subsidize connections, who is eligible to receive compensation 
and how much?
    Rural American need not be left behind, but recognize that 
the traditional means of service values, rate averaging and 
cross subsidies are not sustainable. Rural America then needs a 
universal service policy that encourages innovation, scale, and 
competition. Subsidy mechanisms that spur competitive 
innovation rather than protect legacy industry structure need 
to be encouraged.
    The Committee also needs to think about what sort of 
institutions need to implement the next Communications Act. The 
current FCC is slow, technology is fast. The current FCC is 
riven by muddied political compromises and legal uncertainty, 
capital markets that will finance the next generation of 
networks need certainty and legal clarity. Administrative 
regulation such as currently practiced by the FCC and state 
commissions is Mother-may-I regulation. Mother-may-I regulation 
relies on advanced permission for engaging in this practice or 
that. Thus, companies have to get permission from the regulator 
to do business, get permission from the regulator to define the 
terms of a contract, and get permission from a regulator to 
charge a given price for a given set of services. This 
regulation was devised for an era of regulated monopoly and can 
no longer be sustained.
    By contrast, ``wait until your father gets home'' 
regulation occurs after the fact. This for the most part is 
what we empower agencies like the Federal Trade Commission and 
the Antitrust Division with doing. In this sort of world, the 
market and market players are free to do what they want and use 
what technologies they want, subject only to ``after the fact'' 
antitrust and consumer fraud supervision.
    This, I submit, is the sort of regulatory model that is 
suited for the next Communications Act. It is law applying 
rather than law making. It minimizes regulatory errors. State 
regulation, meanwhile, in its traditional role of regulating 
prices and terms and conditions, has no place in the next 
Communications Act. State agencies have proven politically 
attentive and possess skills and resources to regulate 
franchise monopolies, but they are ill-suited to make 
competition policy. This is not to say that all state 
regulation need be wholly tossed aside. States, for instance, 
have adjudicative capabilities that the FCC does not.
    Finally, I urge you to reconsider the size and structure of 
the FCC. I think it's not beyond the pale to consider things 
like a single administrator agency such as Britain's OFTEL and 
also making the FCC part of the administration so there's 
accountability for the decisions it makes.
    In conclusion, the next Communications Act is of enormous 
import. Congress cannot write a statute that means all things 
to all people. It will have to make choices about what sort of 
laws it wants to govern for the broadband Internet age. Those 
choices will dictate the nature and speed of the current and 
next generation broadband networks. Thus, this is not merely a 
matter of which company wins with this provision or that 
provision of the next Act. It is a matter of international 
competitiveness and America's role as the preeminent digital 
age economy.
    On Monday, President Bush noted that clearing out the 
underbrush of regulation will get the spread of broadband 
technology and America will be better for it. President 
Clinton's Administration championed the unregulation of the 
Internet. Unregulation and clearing out the underbrush should 
be the charge that you accept.
    Thank you for your time.
    [The prepared statement of Mr. Gifford follows:]

  Prepared Statement of Raymond L. Gifford, President, The Progress & 
 Freedom Foundation (Former Chairman of the Colorado Public Utilities 
                              Commission)
    Mr. Chairman, members of the Committee, thank you for the 
opportunity to speak with you this morning. My name is Ray Gifford. I 
am President of The Progress & Freedom Foundation, a think tank that 
explores legal and policy issues of the digital age. Also relevant to 
my testimony here today, from 1999-2003, I served as Chairman of the 
Colorado Public Utilities Commission, which means I had to try and 
implement what Congress thought the 1996 Telecommunications Act meant, 
and what the FCC told me Congress meant in the Act.
    The topic here today is what a reworked Communications Act should 
look like. I have some thoughts about that. First, however, before 
thinking about a new Communications Act, we need to think about the 
current Act and what we have learned.
    I believe that the Telecommunications Act of 1996 should be judged 
a qualified failure. It may have been a failure of concept or of 
implementation, but it certainly did not live up to the hope of its 
framers. The current Act is a failure because it does not provide a 
framework that anticipates the packetized, broadband Internet age; it 
is a failure because it presumes that two mutually incompatible goals--
market competition and universal service--can be seamlessly reconciled; 
it is a failure because it added a pervasive layer of wholesale 
regulation to an already encompassing retail regulatory layer; it is a 
failure because of statutory ambiguity and self-contradiction. Finally, 
it is a failure because the competitive successes of the past eight 
years--in wireless, in broadband and now-emerging Voice over Internet 
Protocol (VoIP) services--happened despite the Telecommunications Act 
of 1996, not because of it. That failure is qualified, though, because 
the sectors the Act left relatively unregulated, wireless and cable, 
provide a roadmap of how to allow markets to emerge, regulation to 
recede and consumers to benefit.
    I understand that you are always supposed to have three overarching 
points to make, but I'll consider my testimony a success if I convince 
you of two. My first point is that law and regulation should not--
indeed, cannot--contain the dynamic, multi-platform competition of the 
broadband Internet Age. This premise counsels a recognition that 
regulatory burdens need to be minimized, and, more importantly, that 
the incentives for special interests to manipulate regulation to 
preordain a given market outcome need to be written out of the next 
Act.
    My second point is that the institutions charged with implementing 
the legislative vision you enact are in need of fundamental reform and 
redesign. These progressive-era institutions--the FCC and state 
commissions, which have in many ways served us reasonably well in the 
age of the circuit switched, copper network--must have a different 
charge in the age of spectrum and the photons.
The System Is No Longer Closed
    The Communications Act of 1934 was written when the country had a 
unified, closed platform, the twisted-copper-pair-based Public Switched 
Telephone Network (PSTN). Every consumer needed access to that 
platform. People who wanted to communicate were locked-in to that 
platform. Because it was distance-sensitive, the regulatory apparatus 
could encompass the entire communications universe. There was a single 
product. It was voice communications. State commissions could set 
retail and intra-state rates; while the FCC could handle inter-state 
long distance. Rates could be manipulated to serve the social goals of 
keeping rural and residential rates low by making business and long 
distance rates high.
    Of course, technology started to erode this hermetic world. First, 
competitive entry came in the long distance market, where artificially 
high long distance rates attracted entry. Next, gradually, competition 
came to the business market in the late 1980s and early 1990s, where 
artificially high business rates induced new competitors to enter under 
the incumbents' price umbrella. This world, interrupted only slightly 
by the Modification of Final Judgment (MFJ), led us to the 
Telecommunications Act of 1996, which aimed to bring competition into 
the local voice communications market.
    That single-platform voice world had some defining characteristics 
that made it necessary and relatively easy to regulate. First, it was 
localized, meaning that it was divisible into distinct local and long 
distance parts, and the infrastructure on which the communications 
traveled followed a knowable geographic path. Second, it was self-
contained, meaning that the regulator could accomplish social goals by 
manipulating rates to accomplish desired ends. Third, this world had a 
single product--voice--integrated onto a single platform, the PSTN, and 
therefore could be regulated distinctly as a ``telecommunications 
service.'' \1\ Finally, that world could be regulated according to the 
broadest of broad standards, the ``public interest.''
---------------------------------------------------------------------------
    \1\ See 47 U.S.C. Sec. 153(46). The legal counterpart to a 
``telecommunications service'' is an ``information service,'' defined 
at 47 U.S.C. Sec. 153(20).
---------------------------------------------------------------------------
    This age is at an end. Today multiple existing and emergent 
platforms compete for consumers' communications dollars. Along with 
traditional PSTN-based service, consumers can choose between wireless 
PCS, e-mail and instant messaging, circuit-switched cable telephony and 
emerging VoIP technologies. VoIP in particular promises to bring a 
torrent of choice and progress that will rush over, through and past 
the old legacy regulatory rules. Moreover, these emerging platforms 
will only thrive so long as they avoid the old legacy regulatory 
quagmires and classifications.
    If we have moved from a closed to an open system of competing 
platforms, what does this mean for law and regulation?
    As an initial matter, communications is no longer local, but 
instead national and even international in scope.\2\ A packetized 
communication, be it voice or data, does not followed a prescribed 
geographic path. The traditional jurisdictional distinctions cannot 
hold.
---------------------------------------------------------------------------
    \2\ See Douglas C. Sicker, ``Delocalization of Communications 
Networks,'' Progress on Point 11.2 (The Progress & Freedom Foundation, 
Jan. 2004).
---------------------------------------------------------------------------
    Second, the self-contained regulatory world and the legal 
distinctions that sustained it no longer signify. Further, maintaining 
these distinctions into the future will do serious harm to consumers 
and producers. Legal definitions of ``information service'' and 
``telecommunications service''--such as are fought about endlessly in 
the Brand X Internet case, the FCC's VoIP proceedings, and the FCC's 
title I Broadband proceeding--have no relation to today's underlying 
technological reality. Thus, while the legal fights remain, to quote my 
colleague Randy May, mired in ``metaphysics,'' the underlying 
technological reality remains that a ``bit is a bit is a bit,'' and 
should therefore be regulated as such in the next Act.
    Third, it is no longer necessary for carriers to integrate 
facilities and services at the physical layer of the communications 
platform. The regulatory regime needs to adapt to the architecture of 
today's networks. Thus, the physical layer should be regulated the same 
across all platforms, and the remaining logical, applications and 
content layers may or may not be integrated depending on the 
preferences of consumers. The layered conception of regulation means 
voice is merely another application running over a physical network, 
and thus cannot be distinguished for special regulatory purposes.
    Just because a layered conception of an Internet communications 
world is helpful, that does not mean it dictates given regulatory 
outcomes. We simply do not know the optimal degree of bundling and 
integration that will best serve consumers. In a competitive broadband, 
packetized world, there is reason to believe the market will drive to 
an optimal result of integration and bundling that is beneficial to 
consumers. A premature ``common carriage'' requirement on all physical 
layer connections could destroy the integration that serves consumers 
best, and there is reason to believe that an unregulated market will 
drive to this result.
    Further, this equally-regulated, multi-platform world means that 
regulators loosen their control over pricing decisions. The old 
regulatory system allowed rates to be set to effectuate a vast cross-
subsidy mechanism. In the new world, technologies like VoIP will evade 
the regulators' attempts at special regulatory treatment. In the end, 
just as now, the costs of networks must be borne by consumers. A freer, 
more explicit pricing system will serve them best. Related to this, the 
intercarrier compensation system must be radically reformed so that 
access arrangements between carriers are rationally related to cost, or 
better yet, left to the market, as is done currently with the Internet 
backbone market.
    Last but not least, the flourishing of networks means that 
universal service policy needs to be rethought and refocused. What is 
universal service for? Will it subsidize a basic, local voice line or a 
broadband connection? If you are going to subsidize connections, who is 
eligible to receive compensation and at what rate?
    Rural America need not be left behind, but recognize that the 
traditional means of universal service values--rate averaging, cross-
subsidies--are not sustainable. Rural America then needs a universal 
service policy that encourages innovation, scale and competition. The 
viability of programs such as reverse auctions, which would create 
competition for universal service support and encourage low cost 
innovators, need to be studied. Likewise subsidy mechanisms that spur 
competitive innovation rather than protect legacy industry structure 
need to be encouraged.
The Institutions Must Reform
    The Committee also needs to think about what sort of institutions 
need to implement the next Communications Act. The FCC is slow; 
technology is fast. The FCC is riven by muddled political compromises 
and legal uncertainty; capital markets that will finance the next 
generation networks need certainty and legal clarity. Because of its 
tendency toward political, as opposed to legal, determinations, the FCC 
has a dismal record in the courts on appeal.
    Put broadly, there are two sorts of regulation--``mother may I'' 
and ``wait `til your father gets home.'' Administrative regulation, 
such as is currently practiced by the FCC and state commissions, is 
``mother may I'' regulation. ``Mother may I'' regulation relies on 
advance permission for engaging in this practice or that. Thus, 
companies have to get permission from the regulator to do business, get 
permission from the regulator to define the terms of a contract, and 
get permission from a regulator to charge a given price for a given set 
of services. This regulation was devised for an era of regulated 
monopoly, when there was a single provider and a limited set of 
services.
    This regulation is prone to high error costs because it presumes to 
set rules in advance. By its nature, mother may I regulation assumes 
the regulator knows best. But if the regulator does not, or even makes 
an honest mistake, then the whole industry can suffer.\3\
---------------------------------------------------------------------------
    \3\ A shining example of how the law of unintended consequences 
applied to the Telecommunications Act came with the reciprocal 
compensation debacle. There, the prospect of garnering huge windfalls 
from Internet-bound reciprocal compensation distorted innumerable 
telecommunications business plans, all to no competitive benefit.
---------------------------------------------------------------------------
    By contrast, ``wait `til your father gets home'' regulation occurs 
after the fact. This, for the most part, is what we empower agencies 
like the Federal Trade Commission and Antitrust Division with doing.\4\ 
In this sort of world, the market and market players are free to do 
what they want, use what technologies they want, do business with whom 
they want and charge what they want, subject only to after the fact 
oversight for antitrust violations, consumer fraud or other breaches of 
legal or contractual obligations.
---------------------------------------------------------------------------
    \4\ This is not strictly true with functions such as merger reviews 
conducted by the Department of Justice or the Federal Trade Commission. 
The other salient difference between the FTC, DOJ and the FCC is that 
the former agencies are held accountable--by having to bring and prove 
their cases in court--to a rigorous standard of proof. By contrast, the 
FCC is subject only to after the fact review of their rulings under a 
deferential--but in recent years rarely met--administrative review 
standard.
---------------------------------------------------------------------------
    This, I submit, is the sort of regulatory model that is better 
suited for the next Communications Act. It is law-applying rather than 
law-making. It minimizes regulatory errors. ``Wait till your father 
gets home'' regulation has the added advantage of allowing 
technological ingenuity and entrepreneurial dynamism to take the market 
in places the regulators cannot have ever imagined.
    State regulation, in its traditional role of regulating prices, 
dictating contractual terms and conditions, has no place in the next 
Communications Act. State agencies have proven politically attentive 
and possess skills and resources necessary to regulate franchised 
monopolies. But they are ill-suited to make competition policy. This is 
not to say that state regulation need by wholly tossed aside. States 
have adjudicative capabilities that the current FCC does not. So long 
as private carriers do not resort to private arbitration models for 
contracting and dispute resolution, there could be a state role here. 
Likewise, state regulators might be better prepared to assume a greater 
role in consumer protection.\5\
---------------------------------------------------------------------------
    \5\ But, finally, states themselves need to think about their 
willingness to allow their state resources to be conscripted into a 
Federal statutory and regulatory scheme. The current clamor for more 
state involvement in Federal communications law decisions belies that 
this is a Federal mandate on the states, and an unfunded one at that.
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    Finally, the size and structure of the FCC should be reconsidered. 
Congress needs to consider whether a single agency administrator, like 
Great Britain's communications regulator, would better serve the 
policymaking needs of the broadband Internet age. Congress should also 
consider making that administrator part of the executive branch, thus 
making communications policy--like antitrust policy--accountable to the 
President.
    My experience with the FCC is of an agency of singularly dedicated 
and qualified individuals working tirelessly to follow the law and make 
sound policy. Yet, the FCC's record in the courts is dismal. The 
fluidity of the FCC's processes and the political nature of its 
compromises are designed for an agency charged with close-regulation. 
To become an agency geared toward implementing sound competition 
policy, the FCC must be reformed to speak more singularly, adjudicate 
disputes lawfully and regularly, and become less of a forum for 
lobbying campaigns, than one of neutral legal disputations.
Conclusion
    The next Communications Act is of enormous import.
    Congress cannot write a statute that means all things to all 
people. Congress will have to make unambiguous choices about what sort 
of laws it wants to govern the broadband Internet age. Those choices 
will dictate the nature and speed of the current and next-generation 
broadband networks. The choices will further determine the competitive 
station of the U.S. compared to the rest of the world. Thus, this is 
not merely a matter of which company ``wins'' with this provision or 
that provision of a rewritten Communications Act. It is a matter of 
international competitiveness and America's role as the preeminent 
digital age economy.
    On Monday, President Bush noted that ``clearing out the underbrush 
of regulation, . . . we'll get the spread of broadband technology, and 
America will be better for it.'' President Clinton's administration 
championed ``the unregulation of the Internet.''
    Unregulation and clearing out the underbrush should be the charge 
you accept. I do not deny that in lawmaking there is an element of 
predictive judgment in my testimony today. With the proper regulatory 
conditions in place, new technologies will eclipse what remaining 
pockets of market imperfection persist in the communications space. But 
your choice is not between correcting market imperfections with perfect 
regulation. Your choice is between slightly immature, but largely self-
correcting markets and demonstrably imperfect regulation, regulation 
that does not self-correct and, to the contrary, often impedes progress 
and economic growth.
    As you sit down to fashion our next Communications Act, remember 
what we have learned since the '96 Act. Competition and innovations 
flourishes where regulation retreats. I urge you to bring that to the 
whole communications sector.
    Thank you again for the opportunity to speak with you this morning.

    The Chairman. Thank you very much. Just to have on the 
record, beginning with you, Mr. Thierer, do you all support the 
extension of the Internet tax moratorium?
    Mr. Thierer. Yes, I think that's a very important proposal 
that's moving right now on the Senate floor.
    The Chairman. Or not moving, depending on----
    Mr. Thierer. Not moving, and I'm glad to see that you're 
attempting to broker a compromise on it.
    The Chairman. It'll have ethanol and perhaps minimum wage 
to consider along with the Internet and others.
    Mr. Thierer. This is quite a discouraging development to 
say the least, but I'm glad to see that you're trying to broker 
a compromise on this front. One hopes that we can get this 
finalized, because this is just the beginning of a potential 
flood of problems on the state and local front in terms of 
taxation, and VoIP is certainly the next target there, and then 
there's Wi-Fi.
    The Chairman. Well, as you know, the opposition, and I'll 
go to Mr. Ferguson next, but the opposition, all they have to 
do is obfuscate and delay. You have enough ethanol amendments, 
you have enough minimum wage amendments, and then it dies and 
they succeed, so it's a situation where we have to act 
proactive rather than let existing law, which has already 
lapsed.
    Mr. Ferguson?
    Mr. Ferguson. Senator McCain, I would support the extension 
of the Internet tax moratorium, but I would like to add and 
question everyone involved that taxes or the absence thereof 
with regard to these questions in this industry are extremely 
unimportant relative to accelerating the rate of technological 
change. If you get 50 percent per year improvement in price 
performance, in 5 years that will totally drown out even a very 
large tax.
    The Chairman. Thank you. Mr. Gilder?
    Mr. Gilder. I'm for the moratorium and on taxation of the 
Internet.
    The Chairman. Mr. Hundt?
    Mr. Hundt. I have a more conditional view. I believe that 
e-commerce is so certain to be huge, it already is very large, 
it's so certain to be huge that sooner rather than later it's 
important to figure out the answer to the sales tax problem.
    The Chairman. You know, I agree with you, Mr. Hundt, but I 
look at the spectacular failure of a simplified tax system with 
regard to catalog sales, and so to wait until it happens I 
think would be a long wait.
    Mr. Hundt. I have no disagreement with your observation, 
but this problem is growing by hundreds of percent per year. 
Point number two, local municipalities, as you well know, have 
one issue that I'm sympathetic with and I suspect everyone is 
sympathetic with. They are almost always constitutionally in 
their states obliged to have equal treatment across all the 
different communications media, and it's not clear to me that 
any of them know how to do that with the new paradigm of 
broadband access and convergence and there's no need, I agree, 
there's no need to be approaching this brand new world of 
broadband with a sense of what taxes do we want to impose. But 
in terms of parity, I don't think there's guidance to be found 
for these municipalities in Federal law or in their own state 
law, and it's an unsolved problem.
    Why does it matter? Because they do have to pay for 
swimming pools and public schools and libraries and local 
roads, and I'm sure the Committee knows, in the last 3 years of 
economic downturn and flatness, localities all across the 
country have lost somewhere between 10 and 40 percent of their 
revenue base.
    The Chairman. In reality, that's not true. In the last 
couple of years, they've all had increases in state and local 
budgets. I'll be glad to provide you with that information we 
presented on the floor. They've experienced an economic 
recovery over the last couple of years and a significant 
increase in revenues, including my own state of Arizona. 
Spending has gone up faster than their revenue increase, but 
their revenue has increased. I'll be glad to provide you with 
that information, because this is the refrain we hear from the 
opponents of the extension on the moratorium.
    Mr. Hundt. I had 100 of them tell me this at a conference 3 
days ago so I wish I had had your information.
    The Chairman. Like to have been there and shown them their 
spending charts, yes. Drunken sailor, I believe, is the 
operative.
    Mr. Hundt. I wouldn't have said that to them.
    The Chairman. Thank you, Mr. Hundt. Mr. Gifford? Because I 
have one more quick question, if you'd respond and pull the 
microphone please.
    Mr. Gifford. I absolutely support extension of the Internet 
tax moratorium. I think it's crucial.
    The Chairman. Thank you. Mr. Hundt, I want to get into this 
proposal of yours. As you know, Chairman Powell has made pretty 
much the same proposal. What's the hang up? Broadcasters 
obviously, and also, perhaps more important to me anyway, are, 
as you mentioned, a few hundred thousand people who are still 
dependent on over-the-air television broadcasting for their 
television viewing.
    It seems to me, and I'm not trying to put words in your 
mouth, if we could experience the literally hundreds of 
billions of dollars of benefits from the use and auction and 
allocation of, as you mentioned, of analog spectrum given back, 
that we could easily afford to provide every one of those homes 
with a set top box or some other device. I'm not one who 
generally favors government give-aways, but when you look at 
the incredible benefit associated with the acquisition of that 
analog spectrum, that that would be at least some way of taking 
care of the ever-shrinking number of American households, and 
they are low-income households, so I am more and more inclined 
to taking some of those proceeds and providing those households 
with the ability to get their television viewing in return for 
this enormous benefit.
    And that's my question to you, but also, how do we overcome 
the National Association of Broadcasters? They sat right here 
and guaranteed us that those analogs would be returned, and I 
said at the time, I said, it's not true, you're not telling us 
the truth. And they weren't.
    Mr. Hundt. By way of violent agreement, this Congress, and 
you were very much a part of this, Senator, after the 1996 
Telecom Act, followed up with the Satellite Home Viewer Act a 
couple of years later, that was a tremendously wise statute 
because that produced a new capability for satellite to deliver 
digital video, and as everyone here from a rural state knows, 
it has completely transformed the viewing habits of Americans 
primarily outside metropolitan areas. When you take the cable 
penetration and add it to the satellite penetration that has 
been obtained, we are now pushing against 90 percent.
    The problem that you and I, Senator, were on the same side 
of with respect to digital broadcasting 8 years ago, it was 
sublimely difficult then, it is ridiculously easy now, because 
we are down to such a tiny percentage of homes that depend on 
over the air for their TV. Yes, everybody would like to have it 
if it's free, everybody says I'd like to have it, but they 
don't depend on it. They have cable or they have satellite, we 
have roughly 90 percent that have reached that number.
    If indeed it is absolutely necessary to buy a dish or a 
cable subscription for the remaining 5 or 6 percent or whatever 
number it is, first of all, I would find that passing strange, 
but if it were necessary, the cost that we would be talking 
about for doing that would be in the neighborhood of just a 
couple of percent of the economic benefits to be obtained, not 
just from auctioning the spectrum, but from opening all that 
spectrum up to wireless broadband so that we would actually 
have broadband be affordable for 95 percent of Americans.
    So it's a question of whatever it takes, but right now all 
the FCC has to do is look at that 85 percent that I remember 
you were crucial in making sure wasn't 95 percent, look at that 
85 percent and that number and count it right, and say when you 
add up everybody who has a cable subscription that gives you a 
digital feed, and when you add up everybody who has a satellite 
subscription that gives you a digital feed, and you realize 
that with a digital feed if it pleases you to buy a digital 
receiver you'll watch HDTV, if it pleases you to buy a box you 
can translate it to that. That's up to you. If you add them up 
right, you're going to be at 85 percent, the threshold will 
have been met.
    The Chairman. Could I have brief comments since my time's 
expired, from the other panelists about this issue? Mr. 
Thierer?
    Mr. Thierer. I find myself as well in violent agreement 
with this and I like the Reed Hundt plan. I haven't had a 
chance to say that much in the last 10 years, but I really like 
what Mr. Hundt outlined, and I love what you said, Mr. 
Chairman, I think it's the right path. We should probably 
consider a transitional subsidy mechanism, and I usually don't 
endorse that either, but here it makes sense to return the very 
valuable analog spectrum or whatever we can get back from the 
broadcasters. We need to structure that as a limited, means-
tested targeted approach, but it's very much doable. There are 
boxes on the market today that can be utilized for this, that 
can be handed out for that purpose. I personally right now have 
three HDTVs in my house and three set top boxes that are about 
to be obsolete, but they'll still receive a digital signal. 
They could be handed out to a lot of other people for a very 
low cost, and that could assist us in getting up to the 
threshold, whatever it is, 95 percent to have universal 
television service, and then we can get that analog spectrum 
back.
    The Chairman. Mr. Ferguson?
    Mr. Ferguson. Senator McCain, I'm going to in some way 
repeat myself. I'm all in favor of spectrum reform, I'm all in 
favor liberating that spectrum from the National Association of 
Broadcasters, I feel your pain. But I once again must caution 
everyone concerned that this is not going to solve the 
broadband problem for extremely fundamental technological 
reasons. It has long been the case and continues to be the case 
that wireless technologies are behind wire line technologies by 
about two orders or magnitudes, well, two generations, one 
order of magnitude in their price performance characteristics, 
and all of the nations that are now well ahead of us in 
broadband deployment are using wire line deployment and they 
are doing so using competition in the wire line sector.
    The Chairman. Mr. Ferguson, I don't disagree with anything 
you say, but I'm trying to free up the spectrum. I'm trying to 
free it up as quickly as possible, and if you've got a better 
way of doing that, I'd love to hear it.
    Mr. Ferguson. No, no, I don't mean to disagree with the 
proposition that it should be done. I'm sorry.
    The Chairman. Thank you. Mr. Gilder?
    Mr. Gilder. I agree with the proposition with no buts.
    The Chairman. Mr. Gifford?
    Mr. Gifford. Absolutely.
    The Chairman. Thank you. Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you. First of all, this 
is I think an interesting discussion and one that is really 
important and necessary. Let me ask a couple of questions about 
some of the testimony about the pace of broadband deployment 
in, for example, South Korea and Japan. Can one of you tell me 
what kind of involvement by government incentive or regulation 
or policy has resulted in that kind of development or build-out 
or is it just serendipitous that they decided somehow as a 
group of people living on this Earth we all want to create a 
new demand for broadband? Was there something that represented 
government policy that has resulted in this extraordinary rate 
of build-out? Mr. Ferguson?
    Mr. Ferguson. The answer is yes. There are common 
characteristics to most of the nations that are now well ahead 
of who are not, by the way, just the nations you mentioned, but 
they include Israel, they include Canada, they include France. 
The most dramatic are South Korea and Taiwan and Japan, but the 
others are important too.
    And they all share one characteristic and most of them, not 
all share a second. The first that they all share is that there 
has been a strong government recognition that this technology 
is imperative for their societies and that they must overcome 
the opposition of their incumbents and create a truly 
competitive industry, and in fact, if you look at the Japanese 
market, it is fiercely competitive based up on resale at very 
low prices of loops to competitors.
    Senator Dorgan. Is it a type of UNE-P process almost?
    Mr. Ferguson. Yes. The details are very different because 
these countries are different, their regulatory systems and 
industries are different, but in effect yes, it's the 
government saying you must sell to anybody at roughly this 
price and you have to let them into your central offices and 
you have to let them connect, and if you don't do it in a 
prompt and timely way, we are going to make damn sure that you 
do.
    Senator Dorgan. And that has created robust wire line 
competition for broadband?
    Mr. Ferguson. Yes.
    Senator Dorgan. Mr. Gilder, I only heard the last part of 
your testimony, I read it, and as Senator McCain indicated, it 
is interesting. If you had been advising the Japanese, would 
you have advised against what Mr. Ferguson just described they 
did?
    Mr. Gilder. Yes, I would have advised against that, but the 
key thing about Japan is it's simple, there's one body that 
sets the rules and they observe the rules. It's not litigated 
through 50 states and the FTC and FCC, it's not this maze of 
rules and opportunities for litigation.
    Senator Dorgan. Mr. Gilder, would you believe that we 
should continue some kind of universal service fund?
    Mr. Gilder. No.
    Senator Dorgan. Do you believe a universal service approach 
should be abandoned?
    Mr. Gilder. I think so.
    Senator Dorgan. And therefore price and open competition 
should determine what people pay for a service?
    Mr. Gilder. Yes.
    Senator Dorgan. Universality is not any longer a national 
goal or of national interest?
    Mr. Gilder. Well, I think you can retain universal wire 
line phone service if it's a deep commitment. I think it will 
reduce the universality of a service, that a free market will 
deliver more telephony, more broadband, more services of all 
kinds than a regulated, universal regime.
    Senator Dorgan. But if a free market would decide that the 
cost of a communications service is $180 in a small county in a 
rural part of North Dakota versus $22 in an urban county in New 
York, that's just the way it is and if the folks who can't 
afford it in that small rural county can't afford it, tough 
luck?
    Mr. Gilder. I think it's regulation that's resulted in 
costs in the United States that far exceed the costs that are 
being delivered demonstrably in other countries at far lower 
prices, the services that are delivered at far lower prices.
    Senator Dorgan. The reason I asked the question is I wanted 
to see how far this entertaining philosophy goes, and I 
obviously have some very significant disagreements with you 
about universal service. I think that in this area, whether 
they build out a broadband or a basic telecommunications 
service, I think the principle of universality has been a 
critically important principle, and we have by public policy 
driven that principle in a constructive way to benefit all 
citizens in this country.
    So having said that, let me just also ask a question about 
something we have done. Senator Burns and I have authored 
legislation that is on the books that provides a substantial 
number of dollars in loan guarantees, well over $1 billion in 
loan guarantees at RUS for the build-out of broadband services. 
Both of us are a little chagrined that there has been very 
little happening with respect to that. I think in terms of 
public policy, I think our country ought to decide and describe 
a public policy that is aggressive, that uses the market 
system, but also uses the capability of effective regulatory 
judgments here and tries to accelerate the build-out of 
broadband.
    Mr. Hundt, are you aware of the provision that is now law 
that has this money resting at RUS down at the Department of 
Agriculture, but effectively not being used in any significant 
way?
    Mr. Hundt. Yes, and by contrast, in Korea, the government 
spent about $1-1/2 billion on direct cash grants for network 
backbone build-out and also set aside more than $1 billion, I 
think it's roughly the same number, although it's a much, much 
smaller country, for low-interest loans to operators for 
actually building high-speed, physical mediums, typically 
fiber. That didn't pay for all of it, but it was a catalytic 
effect on the development.
    Senator Dorgan. And that's what we have done here, and 
we've obviously talked to the Secretary of Agriculture and 
said, let's get moving here, the Congress has appropriated this 
money, it's available, and we want to accelerate the 
deployment.
    But let me also make another point that I think is 
important. It relates a little bit to the universal service 
issue. I saw an ad a while back, I think it was about 
Blackberry, and most of you perhaps walk around with some form 
of electronic communication. Do some of you have a Blackberry? 
Yes. And so if you read an ad about it, it says covers 95 
percent of the country. What they mean is population, because 
you get on an airplane here and fly to a substantial portion of 
America and deplane at an airplane someplace, your Blackberry's 
not going to work. But it's true that it covers 95 percent of 
the population centers, but go to North Dakota, for example, 
and try to pick up your signal, it doesn't exist.
    My point is that the build-out of some of these services, 
as we talk about them in these hearings, we sort of describe 
them as, well, everybody has access to all of this right now. 
They don't. It is very uneven. Obviously the market system will 
move to those areas where the income stream most robustly 
provides support for the build-out immediately, and so you do 
have then digital divides in a number of areas, and it causes 
those of us from rural areas no amount of angst, as you might 
imagine.
    And that's what I feel very strongly that our country ought 
to embark on a national policy of aggressive, robust build-out. 
I don't necessarily share a couple of the comments about 
regulation, quote, unquote. I think in some areas regulation 
has been wholly constructive and very important in the 
development of policies of how we move.
    And if I might just make one comment, when AT&T was broken 
up and we developed by regulation in this country the 
opportunity for a very competitive long-distance service. It 
was so God-awful competitive that you couldn't eat meals 
without having your phone ring having somebody ask you whether 
you wanted to change your long-distance service, and it drove 
down price dramatically. That was good competition, aggressive 
competition that benefited the consumer, but it only happened 
because of constructive government interference requiring AT&T 
to make their system available to others at wholesale price, 
because all these competitors didn't build facilities base 
competition models.
    So as we proceed down this road, I think it's very 
important for us to understand we need thoughtful regulation, 
regulation that works, and then we need to use the market 
system, absolutely use the market system and all the juices 
that it contains to benefit consumers and help this build-out.
    Your testimony, I've read all the five pieces of testimony, 
I think it is a really interesting contribution to what we 
face, because we have to think through about the 1996 Act what 
did we do, what has been the result of it, and there are some 
that want to go in immediately and just change it because they 
think it was just a complete failure. I don't believe that at 
all. I believe competition is coming slower in local exchanges 
than I would have liked, but I think that the basic philosophy 
behind this to try to create more competition in local 
exchanges to benefit the American consumer is basically still 
pretty good philosophy, and I hope that if there are changes to 
be considered here that they will be changes that will improve 
the Act, not represent a notion that the Act was somehow 
unworthy, because I don't share that vision.
    I had some questions and I'm out of time. I'm sorry I 
didn't ask the questions, but I did want to say I think the 
statements that all of you have written are a really 
interesting contribution following on yesterday's hearing as we 
begin thinking through what we do now in the next 6 months or a 
year.
    The one thing all of you have said, which is important for 
us, is our country needs a national policy with some urgency to 
catch up as it were, not necessarily to catch up in technology 
but to catch up in the will of our country to express itself 
with respect to an aggressive build-out of these new 
opportunities, because it will be job-creating and will produce 
greater productivity and economic growth in this country.
    Mr. Chairman, thank you very much.
    Senator Burns. [presiding]. Thank you, Senator. Mr. McCain 
had to go to the floor and I've got a couple of questions and I 
think you've answered most of the questions just in your 
testimony. I can remember back in 1990, and Mr. Hundt, you were 
around about that time but you weren't chairman yet but you 
were going to rise to that position. I was sitting way down 
there where you had to have field glasses to see if I was 
there, brand new Senator, and the discussion on this Committee 
on that time was the re-regulation of the cable industry.
    And I had it in my mind that rather than to re-regulate 
them, let's provide some competition, and I came up with a 
little idea called video dial tone. Remember that? You bet. And 
I offered my amendment, and the Chairman was Mr. Hollings, and 
he was caught off-guard. I remember Mr. Inouye, Wendell Ford, I 
mean, the whole gamut of the Commerce Committee, and all at 
once this idea that the competition into that where we had 
franchises at that time and the state utility commissions were 
very much involved, Mr. Gifford.
    And so I didn't know if I had enough votes to pass it and 
Mr. Hollings didn't know if he had enough votes to defeat it. 
When you get into a situation like that, you immediately 
adjourn the Committee and move to the back room and discuss 
things. And so we decided we'd have a hearing and we'd look at 
the law as it pertains to this and we would go on to another 
subject.
    When I first came to the Senate, I was the only one in this 
town who did not think that spectrum was a national resource. I 
said it was a technology. The very reason for the FCC was to 
engineer it, and to make sure everybody who had some spectrum 
stay in their lane, just stay in their lane, and to use it any 
way that they so choose, and I still basically in my heart 
still believe that.
    But I'm the only one that does. Maybe Mr. Gilder may agree 
with me on certain points. I know Mr. Ferguson would not. So we 
went into the auction idea. What happened? People come in and 
bought this spectrum and just spent money like you can't 
believe, especially in light of the 1996 Act. Now, there's a 
lot of you says it's been a failure, it hasn't worked, but up 
until the 1996 Act, this is the first time that this town acted 
since 1935, 1934.
    We're dealing with technologies with a 1930s kind of tool. 
That wasn't going to work. And nobody had made a move to do 
anything. Whatever we did we had to get off a high center. So 
in that respect, I think the Act has contributed to a new 
dialogue and will probably lead to a new paradigm because 
there's no way we could have written that thing correctly. 
There is no way we could have done it.
    So my question is, if spectrum is going to be treated as a 
national resource, let's approach the spectrum use and the fees 
as we do, like on any other piece of government ground, that we 
charge grazing fees, access fees, park fees. Let's go, we might 
sell it, but there's also going to be a little royalty paid 
every year and that you must put the spectrum into use, because 
we had a lot of spectators just bought spectrum out here and 
set it aside because it's going to be worth a lot more money 
later on and we don't have to do nothing, and that didn't work 
either.
    So we've been looking at this spectrum policy a lot and 
we'll probably come up with one. We won't do it this year 
because we're going to talk about ethanol and minimum wage on 
an Internet tax bill, but next year I think you're going to see 
a lot of movement toward spectrum reform and new spectrum will 
be added and a new way of doing things, and I know several 
countries have looked at the royalty idea, and besides that, 
that brings more income to the Federal Government in perpetuity 
down the years than just one sale and then we spend the money, 
and the budgeteers always spend that money. I know they spent 
the same, out of the same pot for the last 5 years, and 
everybody spends out of it.
    So I'm going to ask just a simple question. Since we got 
the dialogue started, since there wasn't anybody else around 
here that decided basically that little idea of video dial 
tone, led to a dialogue that finally got us to the 1996 Act, 
because that dialogue picked up and it just kept gaining, maybe 
we should look at this thing. Digital, everybody says the 
Internet was never mentioned, or emerging technologies. What in 
the world do you think ones and zeros; we knew that everything 
was going to come down one pike and you weren't going to be 
able to identify a message as this is a radio band, this is a 
TV band. You're going to lose that identification because 
everything is going to be ones and zeros.
    So it had to happen. We knew that then, and that's why we 
had several sections in there that applied to the build-out of 
broadband, and we knew that was coming, although there are a 
lot of people that overlooked those different sections.
    What's the single greatest mistake that we made in the Act? 
The single greatest mistake when we passed the Act? And then 
I'm going to ask you, what is the single greatest mistake that 
the FCC made in applying the Act? Mr. Thierer?
    Mr. Thierer. Well, thank you, Senator. Very simply stated, 
I think the biggest mistake was that the Congress delegated 
broad, ambiguous, vaguely worded authority to the FCC and 
trusted them to enforce something as complicated as the Telecom 
Act in a simple, efficient fashion, and that failed because the 
single biggest mistake the FCC made is it overzealously 
attempted to micromanage a lot of results into existence that 
might not have been tenable at the time, and we are now living 
with the repercussions of that. We have a much larger FCC that 
regulates now more than ever before and they're able to do that 
because the Telecom Act broadly delegated so much authority but 
didn't really have any way of reining them in, and there has 
been unfortunately, not enough done to pull back on some of 
those broadly worded authorities and powers.
    Senator Burns. Mr. Ferguson?
    Mr. Ferguson. Somewhat uncharacteristically, I will agree 
substantially though not completely with my colleague from 
Cato. I think that much of the law is correct and what has gone 
wrong is that the law has not been effectively enforced. I 
think that the FCC tried, but the combination of lobbying from 
the incumbents, the court system, arbitration, state 
jurisdictions, resistance from the incumbents which was not 
prosecuted effectively by the Department of Justice, even under 
the Clinton Administration, permitting the mergers, all those 
things subverted and eventually destroyed the intent, subverted 
the Act and eventually destroyed the ability of the FCC to do 
its job and of the law to be enforced.
    Senator Burns. Mr. Gilder, your writings and teachings are 
very refreshing. What do you think the biggest mistake that we 
made?
    Mr. Gilder. I think you tried to privatize the risks and 
socialize the returns and prevented the emergence of a single 
industry by balkanizing it into scores of different categories.
    Senator Burns. Would you agree with the statement though, 
the initial step of this Act didn't benefit consumers?
    Mr. Gilder. No.
    Senator Burns. Mr. Hundt?
    Mr. Hundt. Well, this is a bit of a when did you stop 
beating your wife question, Senator. I think it's important to 
recognize that we finally found an area of very radical 
disagreement even between Mr. Gilder and me. Benefit consumers, 
the prices for virtually every single communications service 
have dropped precipitously. The only exception is local 
telephone and that's gone up at approximately the same price as 
the correlation with the GDP growth, and that's also because 
that's capped and set by the states, and that's a 
constitutional power that they have.
    Now, overall the GDP in this sector is much, much higher, 
grew at more than double the GDP growth rate for the whole 
economy. Productivity gains are fantastic. Whenever Dr. 
Greenspan is up here telling you all about productivity gains 
and how that justifies super low interest rates, he's actually 
giving credit to the communications and computer sectors of 
this country, but not just the computer sector, because there 
were no productivity gains until the computer became a 
communications device.
    Now, if you wish, my colleagues here all could say that 
happened in spite of the law, but I would like to say that it 
certainly wasn't stopped by the law, and as you said, it was 
stopped by the 1934 Act. It was important to kick that thing 
out and bring in something else, and I think you should feel 
very, very good about the changes.
    Is there anything that was imperfect? There's one single 
thing. Whether you like the regulations or don't like the 
regulations, whether you think that the courts got it right and 
the courts got it wrong, everyone in the world ought to agree 
that there's no possible excuse for a judicial review process 
that 8 years after this law was signed is not even close to 
being finished. That is not a function of the FCC. That is a 
function of the absolutely intolerable inattention by the 
judiciary to the importance that they do their job crisply, 
clearly, and promptly.
    We have had so much litigation that has lasted so long, and 
even now the FCC is in the middle of some kind of public 
opinion poll about whether to take the most important case back 
to the Supreme Court for what in effect is the fourth round on 
the same set of issues.
    How can that be fixed in other statutes and other areas? 
Congress picks special courts and they expedite the judicial 
review process. If we had known in 1995 and 1996, how 
unbelievably protracted would be the judicial review process, 
I'm sure that all of us involved in that statute would have 
said we'll think of an expedited way to handle that. Even if 
you didn't like the court results, if I didn't like them, Adam 
liked them or vice versa, we all wished that they had actually 
happened instead of going on ad infinitum.
    But I just want to say one thing. The four things I've 
asked you all to do here today, Senator, they are all within 
the ambit of the law. They do not require that you rewrite the 
law or that you have spectrum reform or philosophical changes 
of mind. They can all happen right away, and if they don't 
happen now, you will be saying to the entire world of 
engineers, don't design the cheapest wireless broadband, put 
all your R&D in designing much more expensive broadband will be 
slowing radically the whole development of wireless broadband. 
There's no reason for it.
    We just need to nudge right over our friends at the FCC and 
say to them, this is important to the American people for 
competitiveness, for the social reasons Senator Dorgan talked 
about, for a standard of living going up, and the things I've 
suggested don't undercut the broadcasting medium. They're 
absolutely on the margin. I haven't said anything that should 
bother any broadcasting network governing 85 percent of the 
people.
    And you know in your state, if you took that measuring 
stick, although people still happily hear your voice wafting in 
their memory over the radio waves, most of the spectrum isn't 
used. You know that.
    Senator Burns. Mr. Gifford?
    Mr. Gifford. I think the Act did do some good things, 
Senator, but it was both too broad, as Adam said, in that it 
gave a very vast grant of amorphous power to the FCC to define 
what in a regular market we would call contract and property 
rights that various carriers have with one another. But it was 
also too narrow in certain circumstances if you take for 
example the reciprocal compensation piece of the Act, which was 
a very benign part, it appeared to be a very benign part of the 
Act. It turned out to be a multi-billion dollar arbitrage 
opportunity that distorted many companies' business plans----
    Senator Burns. That is true.
    Mr. Gifford.--and led to no wealth creation or competition. 
And I think the second thing that the Act didn't anticipate, 
and in some ways it couldn't have, which is why we need to go 
through another iterative process to decide what the next Act 
should look like, is it was aimed at bringing competition to 
the voice market, and the voice market is not really what we 
should be focused and fixated on. As George Gilder said, it 
maintained the old distinctions between cable and wireless and 
common carriage and it prevented them from becoming one big, 
undifferentiated broadband market.
    And where you look where we've had successes since the 1996 
Act, it's those areas where there hasn't been as much 
regulation, which is the wireless sector and the cable sector.
    Senator Burns. But we knew those signals were going to 
merge, just like I said a while ago. We're not going to be able 
to tell if we intercepted any communication, whether it's 
coming from a television station, AM, FM radio, there was 
always differences, everything that we did. There was high 
band, low band, all these things were different.
    But when that digital technology come in, it's just ones 
and zeros and it can travel high band, low band, whatever band.
    Mr. Gilder. However, it travels better and farther in rural 
areas in low band, and that's why Reed's proposal is so 
important for those rural concerns which Senator Dorgan was 
raising.
    Senator Burns. I think you're exactly right. I appreciate 
your opinion on that, because we get hung up on little things.
    Mr. Nelson, it's up to you.
    Senator Nelson. Thank you, Mr. Chairman. I just want to ask 
Mr. Hundt, the goal that you've laid out I think is an 
important goal, that what's in the interest of the consumer is 
to deliver this product at the most efficient way, the cheapest 
price without interruption.
    Now, what you have laid out you said we could do overnight 
by coming out with legislation in this Committee. As a 
practical matter, when you're talking about only 10 percent of 
the consuming public would have to be dealt with as you were 
talking, is it at the moment, since there's the resistance to 
go from analog to digital and therefore people haven't bought 
digital TV sets, isn't that resistance going to be a lot 
greater?
    So would you walk me through that, the fact that the 
American consuming public aren't on digital TV sets now except 
that 10 percent. So walk through the practicalities of that.
    Mr. Hundt. Yes, sir. That's a very good question. This 
Committee, I think, for many, many years and virtually 
unanimously has felt that one of the things that ought to be 
universal is the receipt by everybody in the home of a 
television medium with lots of different channels so that you 
can choose your different entertainment and news and different 
points of view and so forth and so on.
    But what has happened is that Americans have not wanted to 
settle for just the on average two or three channels that come 
out of metro markets in many of the states represented by the 
Members of this Committee for two reasons. First of all, there 
are not enough channels, not enough choice. They don't get to 
watch any of the cable news, they don't get to go to ESPN, 
don't get to watch the NFL draft for 46 hours. They wanted more 
choice.
    Point number two, in rural America, those signals weren't 
reaching anyhow, so Americans said en masse, now nearly 90 
percent, we're willing to pay as long as we get a competitive 
price, as long as it's a fair deal in terms of value, we'll pay 
for cable, we'll pay for satellite. That's what's happened.
    There's no evidence that cable and satellite, now that they 
do compete since the Satellite Home Viewer Act allowed 
satellite to deliver broadcast signals, there's no evidence 
that affordability is the problem here for people. There are 
people who say, I don't really like TV, but we're down to such 
a tiny number of people for whom it is sincerely an 
affordability issue and they just can't afford it that it is 
perfectly possible to say with respect to that, we'll let 
states, we'll let localities, we'll let cable and broadcast 
have some money out of the spectrum, anything at all in order 
to close that gap if there's a real need, if there's something 
the equivalent of food stamps for being together in a national 
medium.
    But what's absolutely clear are two things. You don't need 
legislation. You just need to sign, with all due respect, a 
letter that is by everybody here to the FCC saying to all five 
members, and hopefully you all could get all five to agree in 
telling them the following things, read the law. When it says 
that 85 percent is enough to call the conversion over, then 
call it over, and 85 percent means 85 percent of the people in 
the households in the United States are receiving a digital 
signal, which they are, they are right now, either on cable or 
satellite. And if they don't want to buy a digital receiver to 
show it digitally, that's their choice. If they want to wait 
till the price goes down next Christmas, which it will, and 
it'll be lower the Christmas after that and lower still the 
Christmas after that, if they want to wait, let them wait.
    Senator Burns. I just switched to color.
    Mr. Hundt. I've got a black-and-white in the basement I'd 
be happy to offer here as an exhibit. They do never break, and 
that's one reason why people are taking their time about 
switching.
    But your job has been accomplished. You wanted the digital 
signal out there, and through cable and through satellite, it 
is out there. So all we have to do is count the 85 percent 
right. This Committee negotiated that to a fare thee well in, I 
think, 1997, and it was a fair answer and just count it right.
    Point number two. When you look at the spectrum that Mr. 
Gilder here pointed out quite accurately is the way to get 
these wireless broadband signals to go a long way in rural 
areas, it's just so costly to dig up trenches 3 and 4 and 5 
miles long, too costly. In the rural areas, just say to people, 
at the FCC they just have to sign a little order, they just 
have to get the votes to sign a little order. Just say to 
people, where the spectrum in the 700 MHZ range is not being 
used, and as long as you promise that your technology won't 
interfere if it ever is used, as long as you make that promise, 
you can use this spectrum for wireless broadband. It's called a 
secondary use.
    The engineers in the United States will go, I never knew 
there was a U.S. Government that was going to do something 
right. They don't even know that there is a U.S. Government, 
but to the degree that they could find out that good news, you 
would lower the cost of wireless broadband in one fell swoop by 
50 percent. You'd go so far toward making it affordable for 
everyone. You'd accomplish so much toward the goal of 
universality that within a short period of time, we would be 
back her talking about what do we do about the last million 
people that wireless broadband doesn't' work for. That's the 
problem we want to have.
    Senator Nelson. I had said thank you, but I just thought of 
something else. Technology is changing so fast, to get that 
person out there in a rural area with a telephone, you're not 
going to have to run a line out to them in the future. So can't 
we approach universality in a whole new way because of the 
changes in technology and do it a lot cheaper? Because you 
don't have the costs of running poles and lines for hundreds of 
miles.
    Mr. Hundt. Absolutely, yes.
    Mr. Gifford. And I think, Senator, you're exactly right. 
But right now that's not the universal service system that we 
have and that's why I think when you look at the next act that 
you can think and reconceive universal service, look at things 
like reverse auctions to where you're getting that innovation 
out to the rural areas to where low-cost and low-priced 
innovators have the incentive if they need a subsidy to go out 
there and do it, which means you both reduce the universal 
service subsidy as a whole and bring rural America the advanced 
technology that you want to get out there.
    Senator Nelson. Then a Senator like Senator Dorgan from a 
rural state ought to embrace the changes that you're talking 
about instead of being locked in the old definitions of 
universality.
    Mr. Gifford. I would never want to tell Senator Dorgan what 
to think, but I do think there are dynamic ways to do universal 
service that recognize that there are some reliance interests 
of the incumbent rural phone providers, particularly the rural 
ILECs, which are highly dependent on the old legacy regulatory 
system of access charges, universal service subsidies. They 
have to be weaned from that and they have to realize that 
technologies like VoIP mean they're going to be weaned gently 
and seamlessly through a transition phase or very abruptly when 
there's no money in the till to subsidize them with.
    Senator Burns. But to follow up on that, and if the Senator 
would yield, my cooperative telephones and rural telephones 
have done really a better job of getting more fiber in the 
ground and doing more about distance learning and two-way 
interact in rural areas than the RBOCs have done in areas where 
they had a more densely populated areas. And so they've done a 
commendable job and should be recognized for that.
    But there's also a time, I am like Mr. Gilder, there is in 
universal service, there is a point of diminishing returns, and 
in fact, it may in some areas be boiled down to the fact to 
where it really limits and bars innovation and the deployment 
of new services. So there is a point there.
    Senator Nelson. That's what it seems to me, Mr. Chairman, 
that we got to break out, not the fact that your telephone 
companies have put fiber optic cables in the ground, but what's 
the most cost-efficient, good service for the future for your 
rural constituents.
    Senator Burns. Well, the thing about it is, the reason they 
did that is because of the spectrum thing and the spectrum that 
they were allowed would not allow them to put the technology on 
there that would push that signal out a long way. So you also 
had to weigh that, and so we've been down that road.
    Yes, sir?
    Mr. Thierer. The way we might be able to solve this in the 
next Act is to once again reiterate the importance of making 
sure universal service is technologically neutral in character, 
and maybe the best way to do that is something that actually 
Senator McCain suggested many years ago, which is make the 
subsidy or assistance direct and targeted toward the end user, 
but let them decide how they're going to go and use that 
subsidy or assistance to maybe buy a line from their coop or 
from their RBOC or from a cable company or a cell phone.
    Just yesterday in the Investors Business Daily, the latest 
stats came out on cell phone users who have cut their cord 
entirely. It's up to just 5 percent, but that's still 
impressive, but it's estimated to go up to 30 percent by 2008.
    Senator Nelson. I couldn't hear you. Cut their what?
    Mr. Thierer. Cut their cord, their wire entirely, who are 
completely wire free now, and this includes a lot of people in 
rural communities.
    Senator Nelson. I have a son and daughter that's done the 
same thing.
    Mr. Thierer. And when I go back to my old farm home in 
rural Illinois, I see that people have cell phones everywhere. 
That may be the better way for the truly needy is to deliver 
that assistance. It might even be something that the states 
could administer better than the Federal Government and allow 
that sort of targeting to take place and that solves our 
problem in a technologically neutral fashion.
    Senator Burns. Senator Cantwell. Sorry I didn't get to you 
there.
    Senator Cantwell. Thank you, Mr. Chairman. I appreciate it. 
Gentlemen, I don't think anybody's asked about CALEA. One thing 
that I would like to ask, I guess starting with you, Mr. Hundt. 
There obviously is now a petition before the FCC by DOJ and the 
FBI on what I equate to basically putting a network 
architecture into the infrastructure of the Internet and 
voiceover IP to get access. Are you concerned about that?
    Mr. Hundt. Yes. And I know you know, Senator, that this 
discussion has about 10 years of life in it already and----
    Senator Cantwell. It certainly does remind me of the 
Clipper chip, but yes.
    Mr. Hundt. Exactly. Let me mention something here that I 
think speaks to this, and that is a request for proposal that 
the City of New York has put out for how to create across New 
York a wireless broadband mesh network that will be absolutely 
secure, absolutely reliable, and will permit them at last to 
solve communications problems across their firemen and 
policemen and all their different public safety organizations.
    Now, they have as much concern about security as anybody 
else does for tragic reasons that we all know. That proposal is 
a proposal in which they're saying to the hardware and software 
community of the world that you're so familiar with, tell us 
your solutions and we'll pick the one that meets our bid 
requirements and is the lowest price, and so systems 
integrators have gotten together and they've contracted out the 
security problem to different firms, I don't know who they all 
are because it's a sealed process but it will be revealed, and 
I believe that we will see in that process a very instructive 
experiment in a very important city with tremendous technology 
issues and security issues. And I think that will teach us a 
great deal about how to address all the security issues that 
the FBI and other agencies are constantly addressing here.
    But here's the main thing about it, because I'm kind of 
riding this horse. That whole proposal is pitched for the 
unfortunately high frequencies in the spectrum chart because 
the FCC did not say you could put this in 700 MHZ, and so it's 
way up in the high frequencies and everything is more costly 
and more problematic.
    Senator Cantwell. Mr. Gilder, is there something unique 
about bits over voiceover IP that they shouldn't go before a 
judge to get access to? Is there something so unique about them 
that there's only one way to capture them and that is to have 
the FBI have a systems architect into the Internet?
    Mr. Gilder. I think that the problem is that this 
technology is changing so rapidly, as you know, that any fixed 
solution enacted at this point and deployed over the next 5 
years will be hopelessly obsolete by the time it's actually 
adopted.
    So I think that there should be more freedom for the FBI 
and the police to conduct their own arms race with possible 
abusers of the system rather than trying to provide some 
specific technological change now that will be easily 
circumvented as time passes by miscreants. And so I think 
what's really critical is to understand we are in an arms race 
with terrorists and that we don't disarm our people and prevent 
them from using information technology, data mining, all the 
various techniques that are commonly used already by insurance 
companies and credit card companies and use some of this 
technology rather than try to have technical fixes that are 
going to be obsolete by the time that they're adopted.
    Senator Cantwell. I don't want to misinterpret your 
comments. So then you would be more in favor of the petition 
that's currently in front of the FCC?
    Mr. Gilder. Yes. I'm not familiar exactly with what the 
petition is, so I can't discuss it in specific terms, but in 
general terms.
    Senator Cantwell. Maybe we could followup, because I think 
you're right, the task is difficult and the technology will 
continue to change and how do you keep them on top of it 
without giving them the--the three-legged stool of now going to 
a judge to get access is a pretty nice protection I think we'd 
like to keep. Thank you for your testimony in general, Mr. 
Gilder. I love your term lobby-gagging, political lobby-
gagging. I didn't realize that was a term but I don't know if 
you used it in your oral testimony but it's in your written 
testimony.
    You discuss a lot the layer concept, which we had a little 
bit of opportunity to talk about yesterday, and I think I'm 
understanding what you were trying to articulate, you're 
saying, don't make the same mistakes of trying to over 
regulate, don't try to come up with a framework, because it is 
moving so fast.
    But what then would you establish as you call it, the 
bright line? What would be your structure or bright line that 
you think we would have to have, or are you just saying, just 
get rid of the 1996 Act and just let the market roll?
    Mr. Gilder. I'm for letting the market roll. There are 
plenty of laws out there. If serious abuses or monopolies or 
fraud or all of the vast array of laws that we have are ample 
to prevent any significant danger from the abolition of this 
huge regulatory maze that has paralyzed our progress and left 
us 11th in the world, I think actually massively behind the 
Asians in per capita bandwidth to homes and business.
    Senator Cantwell. Do you think everybody's going to end up 
in the same business, the various players, the telcos, the 
cable industries? Everybody's going to end up basically 
providing the same services, the same bits, per se?
    Mr. Gilder. Right. And there are going to be lots of 
advances. Some of it's going to be vertically integrated, 
they're going to be all optical networks with wireless access. 
I think that'll probably be the optimal solution, but I don't 
want to prescribe it myself, because I think there will be 
other technologies now that they're proposing power line 
delivery. I mean, there are just so many different ways to 
render this particular arena the single most competitive arena 
in the entire global economy, that the idea that you need a 
special set of rules to protect consumers is obsolete.
    Senator Cantwell. And as the competition--and I think in 
your testimony you basically say that people will then 
integrate, we won't have to worry about open access, we won't 
have to worry about competition, it'll just take care of 
itself.
    Mr. Gilder. Yes. I believe that. I don't think you make 
money by depriving people of goods and services.
    Senator Cantwell. And so do you worry about one or two big 
players?
    Mr. Gilder. No. I think there are ample players. This is a 
global economy. You have to compete with companies all around 
the world, and I think, I'm not at all worried about one or two 
players.
    Senator Cantwell. So we don't get all our bits from one 
person, one entity in the future?
    Mr. Gilder. Not unless the government mandates some 
continued balkanization and creates a whole area of monopolies 
and prevents the vertical integration which is absolutely 
always the first step in the introduction of new technologies. 
It's always going to be vertically integrated and a monopoly 
within its own defined sphere, but the competition comes and 
competing among the spheres. Google will be competing with 
Verizon with Deutsche Telekom with Time Warner. It's just going 
to be a general competitive industry which happens to be the 
central industry of the world economy, and thus, it's 
appropriate that it be free.
    Senator Cantwell. Well, I think it's a very interesting 
point. I don't think that when Vocal Tech brought its first 
petition or when the first petition was brought before the FCC 
on IP telephony, I think that was probably like 1995, I don't 
think everybody thought we'd be sitting here today with 
everybody going to be in the voiceover IP business. And yet the 
FCC could have ruled at that point in time on Internet 
telephony and made some decisions, so I think your point is 
right.
    And I just want to clarify, I think you're saying then 
about these issues that we sometimes get obsessed with back 
here on things like universal service, your exchange with one 
of my colleagues, you think that will take care of itself.
    Mr. Gilder. I really do. I mean, think of TV. You didn't 
have a universal mandate for TV and universality was achieved a 
lot faster with TVs than with telephones despite the universal 
service mandate.
    Senator Cantwell. OK. Any other panelists like to comment 
on that vision of the future by Mr. Gilder?
    Mr. Ferguson. I guess I would in principle agree with 
George, if antitrust law and enforcement were absolutely 
perfect, frictionless and instantaneous, but as we all know, 
they're not. It was an antitrust action that led to the breakup 
of the original AT&T and that gave us competition in long-
distance service and in telecommunications equipment. The last 
mile is basically the last piece of unfinished business in the 
American high technology economy, and it's a gigantic critical 
bottleneck.
    If we were simply to deregulate the current incumbents 
without any effort to promote competition, to enforce 
competition, then what we would almost certainly get would be a 
duopoly in residential broadband service and in most cases, a 
single dominant telephone company in business broadband 
services. And both of those companies, both members of the 
duopoly in the case of residential service would have extremely 
strong incentives not to improve their broadband services, 
because the logical result of doing so would be the 
obliteration of their current entrenched monopoly businesses.
    In the case of the telephone companies, voice telephone 
service, including enhanced services, cost far more than it 
should and proper Internet-based technology riding a 50 percent 
per year improvement in broadband services delivered to homes 
would result in extremely drastic reductions in the price of 
voice telephone service over the next 5 years and the same 
would happen with regard to broadband services, real broadband 
services, which are currently extortionally expensive in the 
United States, and are showing no improvement or very little 
improvement in cost performance and haven't shown any 
improvement over the past decade.
    In the case of the cable industry, the broadcast HDTV 
standard requires 19.2 megabits per second. Once you get to 30 
or 40 megabits per second over a wire, you can deliver HDTV 
over the Internet and the utility of having a cable television 
monopoly declines rather precipitously.
    Both of these industries have shown absolutely no 
propensity to cooperate with--excuse me, to compete with, slip 
of the tongue there--to compete with either each other, except 
in the very limited case of residential broadband service, or 
to compete with other members of the same industry. Not a 
single incumbent telephone company has invaded the territory of 
any of the others or competed with any of the others in market 
whatsoever.
    Mr. Gilder. Except wireless, right?
    Mr. Ferguson. No. In wireless they do not compete with each 
other.
    Mr. Gilder. Cingular and Verizon?
    Mr. Ferguson. Cingular and Verizon have begun to compete 
with each other in a very limited way. They still do not offer 
primary service in the others' operating areas, and if you look 
at their ownership structures, you can see why. They are being 
forced gradually to increase their competition with each other 
by competition from others in the wireless market, which made 
their duopoly status unsustainable, and that is what we should 
and must do in the broadband case.
    If we had the same kind of system that every other nation 
that leads us in broadband deployment has, namely obligatory 
resale and serious competition among multiple competitors using 
the lines, the least lines of the incumbents, that's what works 
in Japan, it's what works in South Korea, it's what works in 
Canada, which has unbundled both its telephone and its cable 
infrastructures, if we had that, then, yes, the incumbents 
would begin to really compete with each other.
    Senator Cantwell. Mr. Gilder, is Mr. Ferguson looking at a 
shorter-term view of the future and you a longer-term view?
    Mr. Gilder. Yes, and I also, I don't agree that, in Korea, 
most of the fiber runs directly to the apartments or the 
basements of these big apartment buildings and then they have a 
variety of connections up through the apartment buildings, and 
there are only a couple of carriers in Korea and they don't 
exploit each other's lines very much. It's not a major factor 
in Korea. It was a bigger factor in Japan because they only had 
one carrier essentially, NTT.
    Senator Cantwell. Mr. Thierer, did you want to comment?
    Mr. Thierer. Yes, please. Senator, I think it's very 
important we recognize the fact that in a network industry like 
communications and broadband, we're not going to have the same 
economics as a corner lemonade stand. There are not going to be 
hundreds or thousands of small Mom and Pop providers in this 
industry ever.
    But it doesn't mean with three or four very large 
integrated providers we can't have true, facilities-based 
competition. And when we talk about the threats of monopoly and 
last miles, I always pull out my cell phone and say there's my 
last mile right there. My last home had two satellite dishes 
and two cell phones. I didn't have any wires and I got rid of 
that and I went to a new house and now I have wires again. 
Those are choices we'll have between maybe two or three or 
hopefully four major competitors. That is a realistically 
competitive marketplace. I do not believe that a marketplace 
based on mandatory unbundling and infrastructure sharing across 
the board can get us to that future, and it just pretends that 
we'll have sort of hypothetical competition among a lot of 
smaller players trying to squeeze a lot of juice out of the 
same old lemon. Let's go with entirely new wires for maybe 
three or four highly integrated providers.
    Mr. Hundt. If I might, Senator, the reason that telephone 
exists and works and does the things that Adam is saying is 
because this Congress in 1993 passed a law ordering that the 
FCC make the spectrum available for the company to buy it on 
auction, to then use that spectrum to build the network, and 
now he's locked into the technologies on his telephone. Yes, 
they will evolve, but they're not going to change on the 
frequencies, and the reason they're not going to change on the 
frequencies, and the reason he doesn't get good reception 
inside buildings is because there was lock-in for decades 
because the only spectrum that was given for that was roughly 
2.1 GHZ.
    Industries have lock-in. When you write a million lines of 
software code, I know you know this better than I, when you 
write a million lines of software code, you don't then say for 
the next patch, I'm going to write the whole thing all over 
again. You're locked in to the architecture that you start 
with.
    The reason we don't have fiber networks in the United 
States but have copper instead was not because everybody was 
just dumb, but because when we built our networks, copper was 
the medium of choice because people hadn't invented the optical 
technologies that George and others here have written about.
    So what I'm saying about wireless broadband is, let us not 
lock in this new technology to what is not the right frequency, 
what is the high cost solution, and what is the way to make 
sure that it goes as slow as possible and expensive as possible 
and reaches the smallest number of people.
    Let's instead say to wireless broadband, we're going to let 
you use the spectrum that long ago, 60 years ago, we said was 
the primary spectrum for tying everybody to the common medium 
of that age, which was broadcast TV. Broadcast TV didn't just 
happen universally without the government. It happened because 
the government stepped in, made some mistakes, but by and large 
got it right in the sense that it said in every single city and 
town in the United States, more than 400 separate allocations 
of spectrum, it said to individuals in those towns, you have 
the legal right to use this spectrum and put up a tower and 
it's the right spectrum for getting the signal out over a 
certain distance, and so the framework of universality was 
created, even as the technology of the TV transmission and 
receiver was being invented and the standards were set, and we 
had the same standards for years and years and the costs went 
farther and farther down. That's how we got universality.
    There were lots of mistakes, but by and large, it was a 
relatively perfect marriage between a plan for spectrum use 
that the government presided over and technology innovation. 
The reason that era's over is that, as you know, we've gone 
digital, and now we need that spectrum at the higher ends to be 
used for these new technologies. And if we don't do that now, 
it is not going to get easier later. It will be impossible 
later because we'll be locked into the wrong spectrum choices.
    Senator Cantwell. Thank you, and thank you, Mr. Chairman. I 
know I've been long over my time and I'm sure this debate could 
go on, and perhaps it should in a different forum, because I 
think really this is at the crux of how we--it's not 
necessarily about just getting rid of the 1996 Act, it's what's 
the framework by which we look at the new world emerging before 
us, and is that more of a hands-off approach, and if that's so, 
is it totally hands-off?
    So anyway, it's been an interesting answers. Thank you very 
much and thank you, Mr. Chairman.
    Senator Burns. Well, do you have another question? I think 
we've squeezed all out of this onion that we could get in one 
day. I want to thank the witnesses today and their testimony 
and their views. I'm sure you'll be asked again as we debate 
this, because I think I can see a very exciting next 2 years 
coming up as far as this issue is concerned, and being that 
we've got everything out of this onion that we can get, this 
hearing is closed.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]

                                  [all]

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