[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
__________
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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
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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
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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\
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\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,
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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:
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\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.
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(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\
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\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
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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.
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\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
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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\
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\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
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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.
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\7\ Adam D. Thierer, The Delicate Balance: Federalism, Interstate
Commerce and Economic Freedom in the Information Age, (Washington,
D.C.: The Heritage Foundation, 1999).
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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
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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\
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\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
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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.
---------------------------------------------------------------------------
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.]
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