[Senate Hearing 109-48]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 109-48

   SBC/ATT AND VERIZON/MCI MERGERS: REMAKING THE TELECOMMUNICATIONS 
                    INDUSTRY, PART II--ANOTHER VIEW

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 19, 2005

                               __________

                          Serial No. J-109-8A

                               __________

         Printed for the use of the Committee on the Judiciary



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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
                       David Brog, Staff Director
                     Michael O'Neill, Chief Counsel
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                      MIKE DeWINE, Ohio, Chairman
ARLEN SPECTER, Pennsylvania          HERBERT KOHL, Wisconsin
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            JOSEPH R. BIDEN, Jr., Delaware
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
        Peter Levitas, Majority Chief Counsel and Staff Director
                Jeffrey Miller, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     1
    prepared statement...........................................    49
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     3
    prepared statement...........................................    64

                               WITNESSES

Citron, Jeffrey, Chief Executive Officer, Vonage Holdings 
  Corporation, Edison, New Jersey................................     7
Cleland, Scott, Founder and Chief Executive Officer, Precursor 
  Group, Washington, D.C.........................................     9
Grivner, Carl, Chief Executive Officer, XO Communications, 
  Reston, Virginia...............................................     5
Kimmelman, Gene, Senior Director for Public Policy and Advocacy, 
  Consumers Union, Washington, D.C...............................    11

                       SUBMISSIONS FOR THE RECORD

Citron, Jeffrey, Chief Executive Officer, Vonage Holdings 
  Corporation, Edison, New Jersey, prepared statement............    25
Cleland, Scott, Founder and Chief Executive Officer, Precursor 
  Group, Washington, D.C., prepared statement....................    38
Grivner, Carl, Chief Executive Officer, XO Communications, 
  Reston, Virginia, prepared statement...........................    52
Kimmelman, Gene, Senior Director for Public Policy and Advocacy, 
  Consumers Union, Washington, D.C., prepared statement..........    66

 
   SBC/ATT AND VERIZON/MCI MERGERS: REMAKING THE TELECOMMUNICATIONS 
                    INDUSTRY, PART II--ANOTHER VIEW

                              ----------                              


                        TUESDAY, APRIL 19, 2005

                              United States Senate,
Subcommittee on Antitrust, Competition Policy and Consumer 
                 Rights, of the Committee on the Judiciary,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 3:04 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine, 
Chairman of the Subcommittee, presiding.
    Present: Senators DeWine, Brownback and Kohl.

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE 
                         STATE OF OHIO

    Chairman DeWine. Good afternoon. We apologize for being 
late. We had two consecutive votes on the Senate floor, but we 
are here. The good news is the Senate is now in recess for a 
while, so we will not be interrupted.
    Let me welcome all of you to the Antitrust Subcommittee 
hearing examining the proposed mergers between SBC/ATT and 
Verizon/MCI. As promised, this is a continuation of the 
examination that we began last month with the full Judiciary 
Committee. The difference today is that rather than hear from 
the CEOs of the merging parties, we will hear from witnesses 
who take a somewhat different view.
    As you all know, at that time I expressed some reservations 
about these mergers. Not surprisingly, the CEOs of the four 
respective companies acquitted themselves quite well at the 
hearing and emphasized very clearly that ATT is already leaving 
the residential market and MCI is likely to follow. In other 
words, they made the important point that in some ways these 
mergers don't change the competitive landscape for consumer 
services.
    They also emphasized the impact of intermodal competition, 
meaning competition from other forms of service such as 
wireless cable and voice over Internet protocol. These are 
important arguments and the companies made them very 
effectively. But, frankly, I am still worried. I think there is 
still a lot more to it. In my mind at least, it is still an 
open question between the SBC/ATT merger and the Verizon/MCI 
merger are good for competition and for consumers. That, of 
course, is what we are here today to discuss and to look at.
    As we began to explore last month, there are a range of 
issues that raise concerns. Perhaps the one which has received 
the most traditional antitrust scrutiny so far is the so-called 
enterprise market, the sector of the market comprised of large 
businesses with sophisticated telecommunications needs. All 
four of the merging parties currently compete in this market 
sector. So large business customers will likely be affected by 
the deals. This area will require close scrutiny.
    There are also questions regarding the impact of these 
deals on the markets for long-haul capacity and in the market 
for Internet backbone that today's witnesses are particularly 
well-suited to answer. We are looking forward to these 
discussions.
    As we discussed in our last hearing, however, the critical 
issue here is intermodal competition. According to the 
testimony we heard from the company CEOs, they are facing 
competition on numerous different technological platforms, 
specifically, as mentioned, cable companies, wireless companies 
and companies that provide voice over IP services.
    Once again, we must keep in mind that intermodal 
competition, by definition, does not always provide the type of 
direct competition we are used to seeing. Wire line, wireless, 
cable--these services are inherently different and provide 
similar services in different ways with different pluses and 
different minuses. Not all will always provide sufficient and 
competitive benefits for all consumers. In fact, there are a 
number of concerns that have been raised about each which I 
know we will explore today.
    But most important in this context, we must discuss whether 
or not merger conditions are required to ensure that these 
multiple modes of competition are, in fact, available. For 
example, voice over IP is often held up as the poster child for 
intermodal competition. In fact, Vonage, one of our witnesses 
today, is a voice over IP provider.
    It is certainly a very promising product, but our witness 
himself will testify today that voice over IP is a type of 
service that is available to the consumer only if he or she has 
broadband access, and currently that access is widely available 
only from the phone company or the cable company. Think about 
it. Voice over IP providers must rely on their competitors to 
get access to their customers. Clearly, that is a somewhat 
tenuous situation and we will need to consider if the mergers 
change it at all.
    There are several other issues to explore. In most places, 
residential consumers currently face duopoly choice--buy an 
expensive bundle of local, long-distance, Internet and wireless 
service from the phone company or buy an expensive bundle of 
similar services from the cable company. What impact will the 
purchase of ATT and MCI have in this situation? Will it allow 
the phone companies to provide better products and services, or 
will it remove two of the few potential existing market 
entrants?
    Another important point is that high-speed and wireless 
broadband will clearly be required for the next generation of 
services and will certainly help competitors such as voice over 
IP and cable telephone service. ATT and MCI, as independent 
competitors, had a big stake in promoting the development of 
broadband. How will these mergers impact the development of 
those broadband capabilities? Similarly, how will the mergers 
impact the availability of new wireless spectrum?
    Finally, I hope that the panelists will share their 
thoughts about what we in Congress can do more broadly to help 
promote competition and innovation in the telecommunications 
industry. Many have noted the need for a rewrite of the 1996 
Telecommunications Act, and it is time to start thinking about 
what such a rewrite would entail.
    Certainly, it seems that there is a need to free up the 
spectrum necessary to enhance wireless broadband development. 
Another issue is the need for the FCC to expeditiously rule on 
their own proceedings on inter-carrier compensation, special 
access pricing and the regulation of IP-enabled services.
    These proceedings have been going on for an extended period 
of time and the industry is to some extent in limbo awaiting 
the rulings. Outdated legislation and incomplete regulations 
can only hinder the type of aggression competition that leads 
to innovation, better products and lower prices. So with that 
in mind, we look forward to hearing from our panelists today on 
a wide range of issues.
    Before I turn to Senator Kohl, I would just to acknowledge 
some news that we all heard this morning. Verizon has announced 
that it will be making stand-alone DSL service available to 
some of its customers in certain regions. This is an issue that 
we discussed at some length in our last hearing, and I think we 
all agree that to the extent that stand-alone DSL is available, 
it makes voice over IP a stronger and more valuable competitor 
and provides more choices for consumers. So I applaud Verizon's 
actions in this regard, and we will be watching to see if 
Verizon and others within the industry are able to continue 
down this path.
    Let me now turn to my colleague and my friend, Senator 
Kohl.

 STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF 
                           WISCONSIN

    Senator Kohl. Thank you, Senator DeWine.
    Today, we return to the topic we began considering a month 
ago at the full Committee's hearing on consolidation in the 
telecom industry. As we noted then, the mergers we are 
examining and the technological changes we are witnessing will 
fundamentally change how Americans communicate and what we pay 
for these services.
    At our Committee's hearing last month, we heard from the 
four CEOs of the merging companies explain why they believe 
these deals are in the consumer's best interests, and we agree 
that today's telecom market is very different from the market 
that existed when the ATT phone monopoly was broken up 21 years 
ago, and that there is the great potential for many consumers 
to benefit from new forms of competition and new choices.
    But the sheer magnitude of these mergers and a potential to 
concentrate market power in the hands of two large telecom 
companies requires us to carefully examine the competitive 
consequences of these deals. Today's hearing will be an 
important opportunity to hear the views of consumer 
representatives, competitors and independent experts as to 
whether the mergers will be good for competition and for 
consumers.
    The Bell companies and their merger partners have testified 
that new technologies and innovation should allay any concerns 
we have about the size and market power of the companies that 
will emerge once these mergers are completed, and we hope they 
are proved correct.
    Our first responsibility therefore must be to ensure that 
the development and deployment of these new technologies are 
not stifled in their infancy by today's consolidation. We must 
seek to avoid the creation of a world where consumers are left 
with only two choices for a bundle of telecom services--the 
Baby Bell phone company and the cable company.
    Our witness from the Internet telephone company Vonage is 
an example of one exciting new way consumers can make telephone 
calls without using traditional phone lines controlled by the 
companies involved in these mergers. However, in order to 
access Vonage's service, consumers still need to obtain high-
speed access to the Internet. And, today, the only provider of 
such high-speed Internet connection for most consumers is 
either the Bell phone company or the cable company.
    We need to ensure that these Internet connections come 
without strings attached and that consumers are free to buy 
Internet connections without also being required to buy 
conventional phone service. We need to make sure that the phone 
or the cable company providing the Internet connection does not 
attempt to block or degrade the consumer's access to these 
Internet-based telephone services.
    So our concerns remain the same as we stated them last 
month. First, how can we ensure that this consolidation will 
not decrease the choices and increase the cost to consumers and 
business customers, both large and small? Second, how can we 
ensure that new technologies and new services can get access to 
the Bell company networks?
    Our goal must be the nurturing of a truly competitive 
telecom marketplace with a maximum of choice for consumers, a 
market that will not be controlled by a few dominant players. 
We must insist that the Justice Department and the FCC 
scrutinize these mergers properly so that the tremendous gains 
in telecom competition over the last 20 years are not lost in 
the midst of this industry consolidation.
    We thank our witnesses for coming to testify today and we 
look forward to hearing their views.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Kohl appears as a 
submission for the record.]
    Chairman DeWine. Senator, thank you very much.
    Let me briefly introduce our panelists, and thank you all 
for being here.
    Carl Grivner is CEO of XO Communications, the largest 
independent competitive local exchange carrier. Prior to his 
tenure at XO, he served as CEO of Global Crossing. He has 
worked in the telecommunications industry for the past 25 
years. Thank you for joining us.
    Jeffrey Citron is the Chairman and CEO of Vonage. In 1999, 
he co-founded the company. In addition to his work in the 
telecommunications industry, he has worked extensively in the 
financial services industry and founded both Island ECN and 
Daytech Online Holdings.
    Mr. Scott Cleland is the founder and CEO of Precursor, and 
also serves as the chairman of the Investor Side Research 
Association. He has testified before the Subcommittee on prior 
occasions and we certainly welcome him back.
    Gene Kimmelman is the Director of the Washington, D.C. 
office of Consumers Union, certainly no stranger to this 
Subcommittee or to the full Committee.
    Gene, thank you for joining us again.
    Mr. Grivner, thank you. We will start with you. We will go 
from my left to right. Each one of you will have five minutes 
and we would ask you to kind of keep your eye on the clock and 
that will give us the opportunity to have plenty of questions 
for you. Thank you.

    STATEMENT OF CARL GRIVNER, CHIEF EXECUTIVE OFFICER, XO 
                COMMUNICATIONS, RESTON, VIRGINIA

    Mr. Grivner. Good afternoon. My name is Carl Grivner and I 
am CEO of XO Communications, one of the Nation's largest 
facilities-based providers of telecommunication and broadband 
services to business. XO is headquartered in Reston, Virginia. 
We have nearly 5,000 employees nationwide. We were formed in 
1996, and since then XO has expanded telecommunications 
offerings from its original four small markets to more than 70 
area markets in 26 States today. Our company provides a 
comprehensive array of voice and data telecommunications 
services to small, medium and large businesses serving nearly 
200,000 customers.
    I want to thank Senator DeWine and Senator Kohl for 
inviting me to testify before the Subcommittee on the 
competitive ramifications of the SBC acquisition of ATT and the 
Verizon acquisition of MCI.
    I believe a number of questions were left unanswered 
following the previous hearings held on these mergers, and I 
hope that our testimony today will provide you with additional 
information needed to properly analyze the effects of these 
mergers.
    These mergers are truly monumental in scope, as they seek 
to join the largest telephone monopolies with their largest 
competitors. There is no doubt that these mergers will reduce 
the amount of competitive choices for your individual 
constituents and businesses.
    With the loss of ATT and MCI, future competition between 
the incumbents and the remaining competitors will look much 
like a match between the Green Bay Packers and a Pop Warner 
team. And I didn't mean that as a partisan comment. I have been 
a Packer fan for 40-plus years.
    My written testimony addresses a number of our concerns in 
detail. However, I would like to highlight a number of specific 
points that we hope the members of the Committee will consider.
    First, the SBC/ATT merger and the proposed Verizon/MCI deal 
will fundamentally reshape this industry, marrying the two 
largest local telecommunications providers with their two 
largest competitors. Only the breakup of ATT in 1984 and the 
1996 Telecommunications Act can compare to the massive industry 
restructuring that will result from these mergers.
    Second, these mergers are particularly harmful to business 
customers, both retail and wholesale, in local markets. We have 
gathered for the Subcommittee preliminary high-level data that 
demonstrate the substantial injury that occurs. The charts here 
that we are showing, which use the same data employed by the 
RBOCs in the FCC's triennial review process, provide a sobering 
look at what these mergers can do to local competition.
    The first set of charts shows the current status of 
competition in Cleveland, Ohio, and Milwaukee--no coincidence.
    Chairman DeWine. We thought that looked familiar.
    Mr. Grivner. Yes, okay. I hope so.
    Chairman DeWine. The shoreline looked a little familiar to 
us, yes.
    Mr. Grivner. As measured by the presence of competitors in 
commercial buildings, ATT is in red, while all other CLECs are 
in green. Indeed, competitors have made some headway in these 
local markets as a result of the 1996 Act.
    The second chart shows what these markets will look like 
after the mergers with the removal of ATT. You will notice that 
these markets are significantly altered. The presence of 
competitive providers drops by a staggering 53.6 percent for 
Cleveland and 64 percent in Milwaukee. In other words, the 
competitive injury to customers from ATT exiting the market 
will be real and substantial.
    And don't expect alternative providers to make up this 
competitive gap. ATT is unique. It entered local markets with 
an enormous advantage. It had tens of millions of long-distance 
customers, including relationships with top business customers 
throughout the country. It had tremendous financial resources, 
$11 billion of which it spent to acquire the largest local 
provider, Teleport, and then it continued to expand its local 
network.
    The only other local competitor with similar resources is 
MCI. And as I am about to demonstrate, post-merger, it too will 
not fill this gap. The next set of charts depict the effect of 
MCI's departure from the market. You can see that the 
competitive presence declines even further, a total of 61 
percent for Cleveland and 69 percent for Milwaukee.
    The reason we took MCI out of the market leads me to my 
third point regarding these mergers. No one should expect that 
SBC and Verizon will compete head-on. Today, SBC and Verizon 
are the number one and number two local telephone providers. In 
the hand-outs that we provided you, you will see that in the 
Los Angeles market SBC and Verizon share a common geography. 
Yet, neither is competing in the other's territory. So why 
should we assume they will compete if these mergers are 
approved?
    SBC and Verizon operate under that old Cold War principle 
of mutually-assured destruction. Each company is a mirror of 
the other, and each knows the other has an overwhelming 
competitive advantage in its home territory. So why attack and 
face annihilation? Better to operate under a strategy of 
containment.
    Fourth, these mergers will reduce, not encourage the 
innovation that has flourished in the competitive environment. 
It was competitive companies that brought your constituents 
DSL, and now voice over IP. It was companies like XO that 
incurred the enormous expense of laying much of the fiber that 
is now used for advanced telecommunications services, and it is 
competitive companies that are continuing to innovate to find 
solutions to the so-called last-mile access.
    The basic fundamentals of antitrust law demand a thorough 
examination of these mergers. It is not consolidation, per se, 
that is the paramount concern. It is the massive concentration 
and the injury to customers that ensues.
    It is important that Congress understand that if these 
mergers are approved, SBC and Verizon will control nearly 80 
percent of the business wire line market, more than 63 percent 
of ILEC lines and more than half of all wireless subscribers 
nationwide. We hope that the members of the Subcommittee will 
resolve to fully examine the competitive impacts of these 
proposed mergers we are discussing today.
    I thank you for the opportunity to testify today.
    [The prepared statement of Mr. Grivner appears as a 
submission for the record.]
    Chairman DeWine. Thank you very much.
    Mr. Citron.

 STATEMENT OF JEFFREY CITRON, CHIEF EXECUTIVE OFFICER, VONAGE 
               HOLDINGS CORP., EDISON, NEW JERSEY

    Mr. Citron. Good afternoon, Chairman DeWine, Senator Kohl 
and members of the Subcommittee. Thank you for the opportunity 
to appear today. I am Jeffrey Citron, the CEO of Vonage 
Holdings Corp. We are the largest provider of consumer and 
small business voice over IP service, as we refer to the 
industry, with over 600,000 subscriber lines.
    For once, the entire telecommunications industry can all 
agree that today's phone service market is highly competitive. 
Consumers have many choices, from plain old telephone service, 
to wireless service, to new and exciting offerings from voice 
over IP providers like Vonage. But no matter what kind of 
competitive phone service you choose, all providers need access 
to certain critical facilities. These facilities are network 
bottlenecks where there is little or no competition.
    Vonage would like to express our concern that the proposed 
mergers of SBC and ATT or Verizon and MCI would diminish 
existing competition by further consolidating the ownership and 
control over the critical building blocks upon which all 
communications service rely.
    A good example of this critical infrastructure is the 911 
emergency service network. There is only one 911 network for 
every market, which is typically owned and operated by the 
local phone company. There is no competitive marketplace for 
911 services. All calls to 911 must go through this unique 
system.
    Vonage has requested access to the Bell's 911 network and 
to date has been denied by all but one of the major phone 
companies. In an attempt to resolve this issue, Vonage has 
built a basic 911 solution, but it has limited functionality. 
Since there is no alternative to the Bell 911 network, Vonage 
cannot offer true 911 service if not guaranteed access to this 
public trust. At this critical juncture, we are crippled from 
meeting our collective social policy goals to deploy 911 for 
all. These mergers cannot be approved without conditions 
guaranteeing consumers with Internet phones direct access to 
911 service.
    Another good example of critical telephone network 
infrastructure are the Bells' network tandems. Tandems are 
where competing providers of phone service meet to link their 
networks together. The core of the public telephone network is 
made up of these tandems. These tandems are essential because 
they enable customers from one phone network to talk to 
customers of all other phone networks, and vice versa.
    To be clear, this is not about reselling the Bells' 
network, as it has been debated to death. I don't want to 
resell plain old telephone service. I just want my customers to 
be able to call grandma. In an effort to link Vonage's network 
to the public telephone network, we have requested direct 
access to the tandems that are controlled by the major phone 
companies and all these requests have been rebuffed.
    This has forced Vonage to seek other alternatives such as 
purchasing these services from third parties like MCI and ATT. 
Now, the combination of MCI with Verizon and ATT with SBC puts 
two of the largest competitive carriers and long-distance 
companies under the control of the two largest Bells, giving 
them additional ability and incentive to deny competitors 
access. Congress must ensure that voice over IP providers have 
the right to directly interconnect with the merged companies 
that comprise the public telephone network to prevent the 
collapse of the competitive phone market.
    Another essential piece of many new communications services 
is the Internet itself. In order for us to offer our service, 
Vonage must have access to both the Internet and the 
traditional telephone network. MCI and ATT are two major 
providers of access to the public Internet backbone. Post-
merger, the Internet would largely be controlled by the Bells, 
all of whom have the incentive, ability and history of denying 
Vonage access in order to gain a competitive advantage in the 
retail market. Congress must ensure that the merged entities 
provide their competitors nondiscriminatory access to the 
Internet backbone.
    Furthermore, wireless spectrum has slowly been consolidated 
into the hands of the powerful local phone companies. As the 
spectrum caps and resell requirements for these services have 
eroded, to accommodate our increasingly mobile customers Vonage 
must have access to this critical infrastructure in order to 
compete with local phone companies. Recent industry analysis 
indicates that when these mergers are complete, SBC and Verizon 
will control more than half of the wireless market. These 
mergers leave the interconnection rights of yet another 
essential facility at the discretion of the Bells.
    The final concern I would like to raise today is that the 
consolidation of retail services and broadband network 
providers will continue to put pressure on consumers' rights to 
switch their phone service to a provider like Vonage. Today's 
consumers are prevented from moving their phone service to 
Vonage if they have DSL. If a customer wants to transfer their 
number to Vonage or to another competitive service, SBC and 
Verizon will cancel their DSL service. This practice slows 
broadband adoption and reinforces anti-competitive practices.
    DSL tying also holds consumers hostage by controlling which 
services they can and can't use their phone number with. Less 
than 20 percent of our customers use Vonage over DSL. Stand-
alone broadband is a critical driver for this emerging 
competitive market. Therefore, Congress should ensure that the 
merged companies allow existing customers to switch their phone 
service and keep their stand-alone DSL.
    In light of all these concerns, we respectfully submit that 
these mergers cannot be approved by the FCC and the DOJ without 
appropriate conditions to remedy these problems. Policymakers 
must ensure that retail providers like Vonage have fair and 
equal access to the essential facilities, the 911 network, the 
tandems and the Internet backbone. These conditions are 
necessary in order to protect retail customers and to allow for 
the continued innovation of voice over IP and other Internet-
based applications.
    I look forward to answering any questions that you might 
have. Thank you.
    [The prepared statement of Mr. Citron appears as a 
submission for the record.]
    Chairman DeWine. Thank you very much.
    Mr. Cleland.

    STATEMENT OF SCOTT CLELAND, FOUNDER AND CHIEF EXECUTIVE 
           OFFICER, PRECURSOR GROUP, WASHINGTON, D.C.

    Mr. Cleland. Yes, thank you, Mr. Chairman and Senator Kohl 
and Senator Brownback, for letting me share my views today. I 
will take a little different tack today. What I want to do is 
emphasize kind of a forward-looking view to the extent that I 
can.
    I think antitrust is very relevant to these transactions, 
but in a traditional way I am not one that believes that these 
mergers pose a potential antitrust threat that warrants 
disapproval. On the condition issue, I think these mergers are 
subject to a tremendous amount of existing regulation that can 
be adapted and modified to address many of the concerns that 
people have in this merger context.
    Now, that being said, that does not mean that I don't think 
that there are serious antitrust and enforcement issues here. I 
want to respectfully suggest how I think antitrust needs to 
adapt to what we call a techcom future. What is really going on 
here is we are seeing the convergence of tech and telecom. It 
is becoming a new industry which we call techcom. In my 
testimony, we have a piece that summarizes it and explains kind 
of where that is going.
    The one point on a going-forward basis that is absolutely 
critical to get right is there is, I think, in the United 
States a core constant, unshakable principle that is embedded 
in the 1934, the 1996 Act and in the Internet, and that is the 
national value of free and unfettered access of every American 
to every other American. That is critical for our social and 
political cohesion as a Nation, our economic growth and 
innovative society, and for national security and homeland 
security.
    Let's remember the 1934 Act basically required 
interconnection because ATT successfully monopolized the market 
by denying interconnection to small players. The 1996 Act in 
this respect got it dead right--a mandated duty to interconnect 
and be interoperable. Then the Internet is the ultimate example 
of this principle, where it is what connects everybody as 
simply, broadly and universally as possible.
    So I think the biggest anti-competitive threat that faces 
the techcom world is not pricing power that many may discuss 
here. Pricing in this market is plummeting because of Internet 
protocol substitution. Prices are plummeting. Now, that does 
not mean there aren't antitrust issues here. What it means is 
you all should be concerned about subtle and naked attempts to 
gain market power by impeding or denying interconnection or 
network access for the purpose of competitive gain. It is going 
to require, I think, some real vigilance among the Congress, 
the Department of Justice and the FCC. But I think with market 
forces and with that vigilance, I think it will turn out to the 
benefit of all.
    What I want to do is list four anti-competitive concerns on 
a going-forward basis that are very important to focus on. The 
first is bit interference. That is basically trying to impede, 
sabotage, block, slow down somebody else's traffic that is 
going over your network. And we know from the recent Madison 
River case that affected Mr. Citron's company that this exposed 
potentially the most lethal risk to emerging techcom 
competition. If companies are allowed to technologically sort, 
block, impede or sabotage bit transmissions, competition cannot 
develop or flourish.
    Another one that you should be looking at very closely is 
the rather innocuous term of ``quality of service.'' That can 
be used to discriminate where, say, a large network says I am 
going to allow my customers to get premium passage and fast 
traffic and anybody that doesn't use my service gets put in 
second-class or the slow lane. And the fastest way for an 
incumbent to win and shut everybody else out is to create two 
tiers of discriminatory quality of service. That has to be 
watched very, very closely. It could also be lethal to 
competition.
    The most insidious form of anti-competitive behavior that I 
have seen is the non-cooperation on 911. It is absolutely 
unacceptable that people are denying or impeding or not 
cooperating as incumbents with any competitor that is trying to 
promote what we all agree is a national goal of 911. Every 
American expects that that is there and it needs to be. That is 
very insidious.
    Another one that people don't think about as being 
insidious is muni broadbands, the opposition to municipal 
networks, and I want to characterize that in a little different 
way. These are technological and equipment companies that are 
trying to sell to the single largest market, which is municipal 
broadband buyers. If they are banned by the government, that is 
probably singularly the most anti-competitive thing that can go 
and prevent most Americans from enjoying the benefit of 
alternative competitive sources.
    So with, I believe my time is up, but thank you for the 
opportunity to talk about this in front of the Subcommittee.
    [The prepared statement of Mr. Cleland appears as a 
submission for the record.]
    Chairman DeWine. Mr. Kimmelman.

STATEMENT OF GENE KIMMELMAN, SENIOR DIRECTOR FOR PUBLIC POLICY 
        AND ADVOCACY, CONSUMERS UNION, WASHINGTON, D.C.

    Mr. Kimmelman. Thank you, Mr. Chairman, Senator Kohl, 
Senator Brownback. On behalf of Consumers Union, the print and 
online publisher of Consumer Reports, it is a pleasure to be 
here again to discuss with you these mergers.
    I want to take all the points that Mr. Cleland makes and 
put them into a consumer context, because I believe he is right 
on the mark and I believe all the conditions that XO and Vonage 
have requested are on point.
    Enormous technological explosion leaves us at a juncture 
now where consumers ought to be in the near future receiving 
broadband service, local telephone and unlimited long distance 
for as little as $40 a month. If you put together the prices 
that the muni wireless broadband networks can offer with the 
$25 package like Vonage offers for unlimited local and long 
distance, that is the average phone bill today for local and 
long distance for more than 50 percent of consumers, but that 
would have broadband included in it. It would be a marvelous 
innovation.
    But the companies that are merging are charging $75, $80 
for it, as are the cable companies, and they have every 
incentive to prevent that from happening. That is what is the 
fundamental danger for consumers in these mergers. They may not 
see the day of these price declines that Mr. Cleland pointed 
out we have had in the past and that we ought to have in the 
future.
    Let's look at the world of intermodal competition that 
could have and should have brought us this with these mergers. 
Who are the biggest players out there to challenge the Bells? 
ATT, MCI, gone, part of the almost total dominance in the SBC 
territory for local and long distance, and in the Verizon 
territory as well.
    Wireless is out there, someday may be price-competitive, 
may improve its quality, but it is still twice to three times 
as expensive as wire line service for the average consumer use 
package. And who owns wireless? Verizon wireless is dominant in 
the Verizon region; Cingular, owned by SBC and Bell South, 
dominant in the SBC territory. It doesn't solve the problem.
    Voice over Internet offered by cable. Well, if you are 
going to pay the high price, you might be able to get it. Only 
30 percent or less of consumers right now have it. It is not 
clear how many can afford it at those price levels. And what 
you heard from these witnesses is the underlying Internet 
backbone that needs to be there with the adequate resources 
available to support competition may decline, may diminish, 
because ATT will pick up a lot of the traffic they were 
carrying, as will MCI. We may not have that service fully 
available to consumers.
    The final opportunity for meaningful intermodal competition 
is municipal wireless. You have companies like Verizon and SBC 
leading the charge to prevent communities from building out 
these networks. Whether it is not the community and a public 
entity, the critical point there is that, looking at the actual 
costs of providing wireless broadband, Philadelphia has found 
they could offer it at wholesale for $9 a month to Internet 
service providers, who claim at that price they could turn it 
around for as little as $15 a month for residential consumers. 
I don't care if it is municipality or if it is a start-up 
company. That is where the market ought to be moving. These 
companies are trying to block that innovation, block that 
competition.
    So we believe from a consumer perspective that these 
mergers need to be substantially revamped. The conditions that 
Mr. Cleland were not that big a deal--quality of service, bit 
interference--yes, there are regulatory tools for them. But, 
boy, are they hard to police. That has been the Achilles heel 
in getting competition in telecommunications for 35 years. They 
are very important. We need the right incentives. They are not 
just a regulatory police force. So conditions are very 
significant here.
    I am not even sure that is enough. Even if you have DSL 
stand-alone, naked DSL, what is the price? How much control of 
the customer information, the quality of service, the bits, is 
there still going to be in these dominant Bell companies?
    Mr. Chairman, members of the Committee, we think it is 
really time for Congress to step in beyond the merger and look 
at whether your goals of competition in the 1996 Act are really 
being delivered to consumers, whether we are going to be able 
to sustain it in this environment, mergers conditions or not, 
and reopen the Act and think about what really needs to be 
done. Do you really want competition? Do you really want a $40 
package for all these wonderful services? If you do, I suggest 
it is going to take some reworking by Congress.
    Thank you.
    [The prepared statement of Mr. Kimmelman appears as a 
submission for the record.]
    Chairman DeWine. Senator Kohl.
    Senator Kohl. Thank you, Mr. Chairman.
    Mr. Citron, Mr. Kimmelman, one important new way for 
consumers to make phone calls is through the technology, as we 
know, voice over Internet protocol. This allows consumers to 
make phone calls over the Internet rather than over 
conventional phone lines. Making phone calls using voice over 
Internet requires a high-speed Internet connection, a service 
many consumers obtain from their phone company.
    With the exception of Qwest, until now none of the regional 
Bell companies will sell consumers high-speed Internet service 
without also requiring that the consumer also buy local phone 
service. This clearly eliminates any incentive for the consumer 
to purchase voice over Internet phone service and is therefore 
a significant obstacle to the deployment of this technology.
    At our last hearing, we asked the Bell companies whether 
they would be willing to sell high-speed Internet DSL service 
without also requiring that the consumer buy phone service. The 
Bell companies answered that they would do so only if they 
could make a profit on stand-alone DSL service.
    Mr. Citron, what is your reaction to this statement? Can 
you market your voice over Internet service to consumers who 
use DSL Internet connections if these consumers are also 
required to buy phone service?
    Mr. Kimmelman, I am interested in your view, and what do 
you think of Verizon's plan announced today to offer limited 
stand-alone DSL to their existing customers in the Northeast?
    Mr. Citron. Senator Kohl, Vonage has found it incredibly 
difficult for our ability to sell voice over IP services to 
customers who have DSL. We find the problem in two forms. 
First, in order to go ahead and get the DSL, most customers are 
required to buy phone service. So buying voice over IP and then 
being required to keep a phone service you don't want makes it, 
of course, too cost-prohibitive to go out and get the service.
    Even in examples where people are able to go ahead and 
purchase stand-alone DSL, the ability does not exist yet for 
people to transfer their phone service, when tied with DSL, 
over to Vonage's service, the ability for them to keep their 
phone number and move the service seamlessly over. Both are 
enormous barriers to competition and for people to switch.
    Senator Kohl. Mr. Kimmelman.
    Mr. Kimmelman. From the consumer perspective, you pay $25 
for your local phone service and then you can get, for about 
$30, DSL. But they have told us up until now you have to buy 
both. Well, why go out and then pay extra money to get the same 
service you have already paid for? It undermines competition, 
as Mr. Citron says.
    Is what Verizon is offering a real stand-alone DSL? Boy, I 
hope it is. It doesn't look like it. At least from what I saw 
from press accounts, they are offering it to existing DSL 
customers. Well, that leaves out more than 90 percent of their 
current customers.
    Why can't somebody who is interested in getting a high-
speed connection tomorrow call Verizon and say all I want is 
high-speed? Why can't they get the same thing that they have 
just offered someone else? I don't understand it. I mean, 
limited is better than nothing. I don't want to criticize it in 
that respect.
    Once you get past technical barriers, which clearly Qwest 
has shown there are not--they offer this on a stand-alone 
basis--I don't understand why Verizon is offering so little. It 
is really very little for very few people. Hard to understand.
    Senator Kohl. Mr. Citron, on February 17 the Washington 
Post reported that the FCC was investigating complaints by your 
company that local phone companies were blocking or disrupting 
access to your voice over Internet service. Has your company's 
service been the victim of such actions by telephone companies, 
and are you concerned that this will occur in the future? Will 
these mergers make it easier for phone companies to have 
increased capabilities to block or to degrade access to your 
phone service in the future?
    Mr. Citron. Well, yes, it is true, Senator. A company known 
as Madison River, a small ILEC, went out and started blocking 
Vonage's service. Of course, we did go to the FCC and the FCC 
under its Title II authority was able to investigate the matter 
and ultimately a censure and a fine against this company.
    Vonage is highly concerned about this problem. We see the 
effects of what we call port blocking or disruption of the 
service occurring in a number of different sectors. We are 
seeing it occur right now with a wireless Internet service 
provider. We are seeing it with a very, very, small cable 
company that is also blocking Vonage's service. So we find this 
to be problematic and we find this to be a growing trend.
    But beyond the last mile, we are also concerned about being 
able to purchase that Internet backbone. As I have already 
mentioned in my testimony, we buy a lot of capacity from MCI 
and ATT and others, and with the majority of the Internet 
backbone controlled by the Bells post this merger, we are 
concerned that not only do we have to worry about tampering in 
the last mile, but potential tampering inside the core of the 
network with, quite frankly, the inability to purchase services 
at the core of the network level.
    Senator Kohl. Are there remedies that the regulators can 
enforce that will prevent this from happening?
    Mr. Citron. Well, in the case of a phone company DSL 
provider, yes, under the Title II authority the FCC did find 
that capability. But there are a lot of concerns about whether 
or not you can enforce this on other providers or players. So 
this is something that we take issue with.
    Senator Kohl. Mr. Kimmelman and Mr. Cleland, as you know, 
one important possible alternative to traditional phone service 
for consumers will be wireless connections to the Internet. 
Using these connections, consumers can access alternative phone 
providers such as voice over Internet and provide the Bell 
companies connections to their homes.
    Cities and municipalities such as Philadelphia have begun 
to build such wireless networks and plan to offer it to their 
residents as a municipal service. At our hearing last month, 
the Bell companies admitted that they were actively lobbying 
State legislatures around the country to pass laws forbidding 
cities from building these new networks to deploy these 
technologies. Pennsylvania recently adopted such a law and 
other States considering such laws include Illinois, Texas and 
Florida.
    What are we to make of such lobbying efforts? Do these 
municipal networks offer competitive alternatives? What do you 
make of the Bell companies' claim that it is unfair to ask them 
to compete with a municipal system?
    Mr. Cleland?
    Mr. Cleland. I think it is patently anti-competitive, and 
what they have done is they have framed the debate that it is a 
municipality that is trying to compete directly with them and 
it is a fundamental misunderstanding of the technology and how 
they service is provided.
    Essentially, the WiFi phenomenon emerged because Intel 
decided without telling anybody that people wanted wireless 
access and they put it in a chip. And then people bought for 
less than $50 a WiFi stick and they put it in their home or in 
Starbucks or wherever it was. It is a form of a gorilla 
network. It doesn't require an operator or a service provider 
like we know that a Bell is. Somebody can put up a WiFi stick 
for virtually no cost and you can replicate not everything that 
a DSL can have, but you can replicate a lot of it.
    Why it is anti-competitive is incumbents don't fear the 
municipalities as competitors. What they fear is the massive 
price deflation of people realizing that there is an extremely 
cheap technology that replicates what they do that can be put 
up very, very simply.
    You can put up WiFi sticks on light poles, on mailboxes, or 
whatever. You put them around extremely cheaply and it can be a 
tech company supplier who is in this instance is a competitor 
to the incumbent. By getting it banned, what they are doing is 
they are basically shutting down the greatest competitor 
potentially to an incumbent, which is technology companies 
selling new technology that really doesn't require a 
traditional operator.
    So the last analogy that I will leave you with here that I 
think is a powerful one is would you have thought it was good 
public policy in the past when railroad companies came and said 
I don't think municipalities should be in the road-building 
business, they shouldn't build highways and they shouldn't 
build an airport because that would be an unfair subsidy to the 
automobile companies and the plane companies? Of course not. It 
is patently absurd in the sense that municipal broadband 
networks are much like what it was to build roads and to build 
airports in the past.
    Mr. Kimmelman. I couldn't agree more with Mr. Cleland. This 
is patently anti-competitive, it is unfair. It is embarrassing 
to come in and talk about innovation and competition and then 
to be out there actively blocking competition. It takes a lot 
of gall.
    This ought to be one of the first conditions I would urge 
the Committee to look at both for the antitrust officials and 
communications policy in general, the notion of barring entry 
in a world in which we have seen SBC swallow up two other Bell 
companies--former Bell Atlantic, now Verizon, swallow up two of 
its equi-sized colleagues. They all swallow them up.
    How many times did they tell you that was going to be the 
merger that was going to get you the competition? And, oops, it 
never is; it is always the next one. And here they are blocking 
competitors. It ought to be stopped.
    Senator Kohl. Thank you, Mr. Chairman.
    Chairman DeWine. Senator Brownback.
    Senator Brownback. Thanks, Mr. Chairman. Thank you for 
holding the hearing. I have a written opening statement I would 
like to submit for the record, if I could, too.
    Chairman DeWine. That will be fine.
    [The prepared statement of Senator Brownback appears as a 
submission for the record.]
    Senator Brownback. Gentlemen, I was on the Commerce 
Committee before and so I have been around this issue for the 
years I have been in the U.S. Senate. It does strike that, for 
whatever reason--and it was partially, I think, the 1996 Act, 
but it also is just a lot of technology--competition is very 
robust now.
    We sought to create that in 1996. We sought to be able to 
take advantage of some of the competition in the marketplace 
that we thought could be there with that Act. We got it 
partially right, probably got a lot of it wrong. But at the end 
of the day, we are at a point now where there is robust 
competition, there is a declining price structure, there is 
good quality of service on a lot of different platforms, to the 
point that I can't keep up with my latest device. They change 
it on me about every six months and it is something new and it 
is better.
    So I commend you as a group and as a field for that taking 
place. I think that has just really been a great innovation and 
I think it has been a great competitive advantage for the 
United States and I think it has been a great efficiency factor 
for us, increasing productivity across the United States, plus 
I can keep track of kids a lot better now than my parents could 
keep track of me, which is good for both of us.
    I am curious, though. Mr. Cleland--and I want some of the 
others to comment on this--you seem to look at this merger and 
say, okay, this is going to really stifle this continuation, 
and I guess I just don't have the degree of fear of this taking 
place, given all of the competition that is coming into this 
field right now, whether it is in Internet protocols or whether 
it is happening in cable or other places. I think you are going 
to have robust competition, it seems like, because of the 
technological factors and the number of ports that people can 
get into the phone service.
    Mr. Cleland, let me put the question, though, in reverse to 
you. What happens to these large companies that are merging if 
the merger does not go through? What would be the likely impact 
on them and on competition if it doesn't go through?
    Mr. Cleland. Well, to answer that specific question, I am 
an analyst for the investment community and so while I have one 
position--when I analyze these under antitrust law, I don't 
think that they warrant disapproval or necessarily heavy 
conditions. However, if you are asking my opinion on what would 
these companies do if they didn't merge, I think they would be 
a lot better off.
    I think in SBC buying ATT and Verizon buying MCI, they are 
changing their risk profile and their growth profile and they 
will become negative growth companies. So I am scratching my 
head about why they are wanting to do it. This is a free 
country. They have chosen to do it.
    I think that whether they are merged or not, that is not 
the competitive dynamic that is the real concern. I am a 
believer in intermodal competition and deregulation and in 
market forces, and I believe it is increasingly competitive. 
Right now, you have DSL, you have cable modems, you have three 
3G networks coming on board nationally this year from Sprint, 
from Verizon, from Cingular. You have companies like Clear Wire 
doing WiMax. You have broadband over power lines that is very 
promising; it is not right now, but it is coming down the pike. 
You have WiMax that is very promising.
    And so I personally believe that these companies, whether 
they merge or whether they don't, are dinosaurs and they are 
going to be affected very negatively by competition. Their 
prices are going down. They offer services that are on the 
wrong side of technology, the wrong side of history. And you 
can provide techcom services, services like Mr. Citron is, for 
anywhere between 20 and 90 percent less than what the 
incumbents offer. So competition is coming more furiously, but 
it is coming from technology.
    Senator Brownback. I understand. So regardless of the 
merger, the competition is going to be furious for the consumer 
out there.
    Mr. Cleland. Increasingly, if--and there is a big ``if''--
as a strong proponent of deregulation and of market forces, I 
also believe that deregulation does not mean a state of 
lawlessness or obligationlessness. Just like there is 911, 
CALEA, consumer protection, disability access, universal 
service, antitrust--all of those are social and national 
obligations we all agree should be on there--in addition to 
that, the critical one is protecting the duty to interconnect 
and making sure that people don't mess with the freedom to 
access any content, to access any application or attach any 
device. That is critical. Competition without those protections 
is really going to collapse.
    Senator Brownback. I appreciate you mentioning that because 
coming from a rural State, a number of these services and needs 
are things that are built into the law that we need to be able 
to maintain a set of infrastructure support that can be cost-
competitive. I actually think that is a far bigger issue than 
these mergers as to what we need to do to be able to maintain 
those services and the funding streams to be able to do that, 
because I think those funding streams are going to have to be 
altered, it looks like to me, to collect the new people that 
are coming into the field and make sure everybody is sharing in 
this.
    Mr. Citron, I am not sure maybe if you would be the right 
one to ask this or not, so I will apologize ahead of time if 
you are the wrong to ask. But when you hear Mr. Cleland say 
that there is going to be robust competition, regardless, and 
we shouldn't have a state of lawlessness, but there is going to 
be robust competition, don't you agree with that as you look at 
the overall factors? Regardless of the merger, this is going to 
be a robust field?
    Mr. Citron. Well, I think I would agree in a sense. I 
believe already that there is robust competition for consumers' 
business. I think that has led to obviously pricing declines. 
We think that is a very positive trend. I think one thing that 
people sometimes miss is that all providers of communications 
services still rely on critical infrastructure and if access to 
that critical infrastructure is not provided, then all of a 
sudden you will not have competition.
    Vonage is already facing problems in getting access to many 
systems that are critical, like the 911 infrastructure, and 
that is problematic. In addition, I notice that Mr. Cleland did 
mention wireless broadband opportunities. One of the new 
wireless broadband providers in this country actually is 
disrupting and blocking Vonage's access to its customers. They 
literally stop our packets from flowing over the wireless links 
to the consumers to provide them voice over IP service. So what 
good is voice over IP competition if the broadband provider 
that is delivering those packets interferes with them for their 
own benefit? That is the problem that we see.
    Senator Brownback. Now, Vonage, as I understand it, is the 
largest VoIP provider. Is that correct?
    Mr. Citron. That is correct.
    Senator Brownback. Much larger than ATT on that type of 
service?
    Mr. Citron. That is correct as well.
    Senator Brownback. And it doesn't seem to be that you have 
had problems providing that sort of service to date, or 
competing with the large telephone incumbents to date. I mean, 
you are identifying other fields where there are blockages and 
not particularly this one?
    Mr. Citron. No. Actually, if you look at our problem, say, 
with interconnecting to 911, we have asked all four Bell 
companies for direct access to the E911 system so that we can 
provide an E911 solution that is on parity with the regular 
wire lines--something that everyone in this room should be very 
concerned about. Only one of those four Bell companies has 
granted us access to date. The other three Bell companies still 
refuse to give us access. Some are talking to us about it.
    Senator Brownback. On what basis? What do they articulate 
to you?
    Mr. Citron. They don't have to.
    Senator Brownback. And they have not?
    Mr. Citron. They have not. Now, I will add one more point 
to that just related to these mergers. Today, Vonage wants to 
go ahead and access the PSTN network, the core tandems, to be 
able to take our customer calls and have them communicate with 
other networks, basically for my mom to call her friend who is 
not on the Vonage service.
    To make that happen, we need to interconnect at the 
tandems. These are critical core network elements. Vonage has 
asked for access to these tandems. The incumbent Bell operating 
companies have told us no. Why? They can.
    Senator Brownback. Let me ask Mr. Cleland kind of a tight 
question, if I can, on this. Mr. Grivner's testimony states 
that the DOJ, upon close scrutiny of the geographic markets, 
will find that the SBC/ATT merger will fail to meet legal 
standards.
    Would you agree with that assertion? Do you feel in a 
position to be able to make any statement regarding that 
assertion today?
    Mr. Cleland. Well, if they drill down and look at 
individual markets like that, there may be some difficulties. I 
think what I expect DOJ to do is to draw back a little bit 
bigger in the markets. Remember, each one of these markets has 
been declared in a congressional act and through all the 
painful, ad nauseam regulation to be irreversibly open to 
competition.
    So the regulators have deemed that local and long distance 
integration is now allowable. There is a lot of competition and 
potential competition. I think it would be very difficult for 
the Department of Justice to go to court and say that these 
mergers were anti-competitive.
    Mr. Kimmelman. Senator Brownback, can I just say here is 
the interesting conundrum: the irreversibility was based upon a 
set of regulations that enabled ATT and MCI to come in 
aggressively and offer local phone service that have now been 
obliterated, where those companies will now be part of the 
companies they were competing against. So I think there is an 
open question as to how irreversibly open any of these markets 
are, given these changed circumstances.
    Senator Brownback. Thank you, Mr. Chairman.
    Chairman DeWine. Mr. Grivner, let's get back to that map 
you put up there. I found that kind of interesting. Isn't it 
true that ATT actually had announced its withdrawal from 
providing these services before the decision to merge, and 
isn't the lack of competition in the local market really the 
result of a court decision that made it difficult for ATT to 
compete rather than a product of these mergers? In other words, 
would blocking the mergers change anything?
    Mr. Grivner. I think, Senator, it is part of, to give kudos 
to where they are, a very comprehensive overall strategy. ATT 
specifically withdrew from the consumer business when the 
writing was on the wall that they were going to have to charge 
more to their consumers and not be able to compete with the 
local Bell operating companies when UNEP went away. They were 
two of the largest users of UNEP.
    So if you look at it from a regulatory perspective, the 
regional Bells have been very successful in lobbying the FCC. 
When you go to the courts, you have got the Trinko decision. 
You have the issue now that they are fighting through relative 
to the municipalities.
    So they have put their two biggest competitors on their 
backs in the consumer market and then decided to buy them. I 
think it is a very remarkable overall cohesive strategy on 
their part, so failing perhaps in those particular markets, but 
still very, very strong in the business market, where they will 
still control 80 percent of the wire line business market 
between Verizon and SBC.
    Chairman DeWine. So your answer to my question is what? You 
are telling me that blocking the mergers will change this 
reality. Is that what you are telling me?
    Mr. Grivner. I am saying that what the FCC and the 
Department of Justice need to do is they need to exhaustively 
examine both of these mergers to understand the impact to 
consumers, which will be substantial, as well as to business 
customers. These companies are not failing. They are Fortune 
100 companies with $30 billion and $20 billion, respectively, 
in revenue, and producing significant cash flow as businesses 
as well.
    Chairman DeWine. But the specific question I asked you had 
to do with this market, though. ATT had announced it was 
withdrawing from providing their services. That is correct. I 
am not wrong on my facts, am I?
    Mr. Grivner. You are not wrong on your facts. It is how 
they got to that point. They got to that point because they 
were pressured out of the market.
    Mr. Kimmelman. Mr. Chairman, could I add one thing there?
    Chairman DeWine. Mr. Kimmelman.
    Mr. Kimmelman. Even as they announced they were 
withdrawing, ATT still has more than 25 million consumer 
accounts. That is a big chunk of the consumer population there.
    Chairman DeWine. Consumer accounts?
    Mr. Kimmelman. Yes, consumer accounts. They were 
withdrawing from marketing to new customers to offer this 
package of services as the regulations were wiped out. On the 
business side, what this reminds me of is the 1970s. Do you 
remember the old MCI? MCI started out not offering the kind of 
services consumers now know. They offered services to 
businesses, and the way competition developed was from a new 
upstart coming in serving businesses and expanding out to the 
residential market.
    That is where we are again here with the new technologies 
and a new set of players. We need companies that can serve the 
business market independent of the Bells and then expand out to 
consumers.
    Chairman DeWine. Mr. Cleland, let me turn to you, but also 
Mr. Grivner. Both of you have staked out somewhat divergent 
views on how we should react to these mergers. Mr. Cleland, you 
said these mergers will not really pose a serious risk unless 
the Government fails to be vigilant in deterring anti-
competitive behavior and urges Congress, the DOJ and FCC to 
apply vigorous antitrust oversight after the fact.
    Mr. Grivner, on the other hand, has stated his concern that 
the current Government oversight scheme cannot be counted upon 
to correct abuses post-merger. is Mr. Grivner correct to be 
concerned that our current oversight scheme is inadequate to 
the task of policing this industry post-merger?
    Mr. Cleland. Well, where I come from is I believe that in 
the totality when you look at this thing that it won't be 
blocked and that it is best for competition going forward not 
to block it. Does that mean that I don't think there is going 
to be any anti-competitive effect in certain markets? Of course 
not, but I think competition is rough and tumble.
    The old CLEC model is one that was built upon the Telecom 
Act of essentially interconnecting in a certain way with an 
overbuilding of the Bell network. And now what we have is a 
whole new set of technologies that are able to break the 
bottleneck and don't have to lean on it and I think those will 
cure many of the ills that Mr. Grivner is talking about.
    Will it be a totally pretty transition? No. I think we 
should expect that there will be probably some market power 
exerted in some localities in some places for a certain period 
of time. However, if we had that fear, we would never get from 
here to there. So I think a competitive transition and 
intermodal transition takes time and will be a bumpy road.
    Chairman DeWine. Mr. Grivner, do you want to comment?
    Mr. Grivner. Senator, there were conditions placed on the 
SBC/Ameritech merger back in 1998, and post that merger SBC has 
paid $1.2 billion in fines in non-compliance for those 
conditions. Now, in most States that is a lot of money. That 
would be a lot of additional revenue, $1.2 billion. But 
apparently to SBC it is not; it was cost of doing business. So 
I think those conditions need to be very, very carefully 
analyzed and I don't think we are at that point yet.
    Chairman DeWine. Let me ask all of you this question. The 
testimony we have heard and seen had a great deal of emphasis 
on the idea that access to the local network may be the most 
important factor in allowing other market entrants to compete. 
However, this certainly may be easier said than done.
    When we tried to implement the unbundled network elements 
method as a way to assure that the long-distance companies had 
access to Bell company networks after the 1996 
Telecommunications Act, we saw years of fighting and 
litigation. How exactly do all of you suggest ensuring access 
to the local network?
    Mr. Kimmelman, do you want to start?
    Mr. Kimmelman. Well, I think there are some straightforward 
conditions that have been mentioned. Unbundling DSL and making 
sure it is offered at a reasonable price in its terms and 
conditions would be helpful. Let's push Verizon to go much 
further than they have here and get SBC to the table on that. 
That would certainly be helpful. The variety of non-
discrimination requirements that have been mentioned could be 
helpful.
    I believe, given that history, I believe you are absolutely 
right, Mr. Chairman. It was a tough row to hoe and it didn't 
really work. Really, the best thing we could do is back these 
companies off of blocking new entrants, whether they be power 
companies, whether they be municipalities, find a way to make 
this a merger condition or enact it into law, if Congress has 
to, because the best way to ensure there is new availability of 
competition for consumers is to have a wireless broadband 
network offered by somebody else.
    Chairman DeWine. Mr. Cleland.
    Mr. Cleland. Yes. I really want to hammer home the point 
that in a deregulatory environment I think the incumbents have 
basically gone to the extreme of saying in a marketplace there 
are no obligations, there are no requirements. I think that is 
way over-reaching and very anti-competitive and a problem.
    Price deregulation didn't work. I think it is a failed 
policy and a lot of the reason we had the legal fights that we 
had was I think the FCC was overly aggressive in price 
regulation and less concerned about making sure that there was 
good interconnection and good access.
    So I think that the emphasis should be very, very strong 
toward enforcing and policing interconnection, and whenever 
there are people that are impeding or denying access to 911 or 
other networks, tandem networks, that is the thing that should 
raise the ire of regulators and antitrust enforcers, and they 
should back off of trying to micromanage the prices and the 
economics of the market.
    Mr. Citron. Clearly, we already have a framework for 
allowing for interconnection, and clearly that framework 
doesn't work because that framework does not currently extend 
beyond the current providers. It doesn't encompass voice over 
IP, it doesn't encompass our company. That is why we are having 
such difficulty in gaining access.
    I think there are a couple of prescribed approaches to this 
problem. One, of course, is as a condition of these mergers you 
can force the emerging entities to make sure they provide that 
their network is open and available to us on a competitive 
basis and to similarly situated companies.
    Another way is to actually look at the current laws and the 
constructs and to expand those laws on interconnection to allow 
players like ourselves to go ahead and compete and gain access 
to services.
    Mr. Grivner. While competition exists in the market today, 
it is extremely fragile. We all depend on that last-mile 
access. We have talked about some very innovative 
technologies--broadband, wireless and some new things. But 
those things are years away, and in the meantime the current 
FCC rules need to be enforced and they need to be innovative 
enough to allow new entrants into the market as well.
    Chairman DeWine. Mr. Kimmelman, in his written testimony 
Mr. Cleland has mentioned a number of technologies--wireless, 
cable modem, WiFi, WiMax, broadband over power lines--all as 
likely competitors against traditional wire line service.
    First of all, do you agree with this, and are these 
technologies ready for prime time do you think?
    Mr. Kimmelman. I agree with all them being potentially out 
there. Some of them have been potentially out there for 5, 10, 
15, maybe 20 years.
    Chairman DeWine. Emphasis on the potential.
    Mr. Kimmelman. Yes, a lot of potential. He mentioned 3G 
networks and he mentioned Cingular, Verizon and Sprint. Well, 
two of those are the merging parties here with their most 
likely competitors. The problem is not just the technology. You 
have to look at the market power they have in using the new 
technologies bundled with the old technologies.
    I do believe there is potential here. I really do urge you 
to look at this like the 1970s when old Ma Bell was being 
broken up, when MCI was challenging it. It took some hefty 
intervention to open up that market to more competition, and I 
think all the technologies Mr. Cleland is talking about are 
there. They are ripe for consideration in the marketplace. It 
is rough and tumble, but there needs to be some non-
interference from public officials in order to make that 
happen. Otherwise, it won't happen.
    Chairman DeWine. Mr. Cleland?
    Mr. Cleland. Yes, thank you, Mr. Chairman. There is a lot 
going on right now. We call this dynamic techcom, and why these 
technologies, broadband over power lines? I followed it for 
nine years and was yawning and saying when is it going to come? 
Well, it finally has come.
    The reason why many of these technologies that we are 
talking about--they are not pie-in-the-sky; they are real and 
they are coming on now for several reasons. We have a critical 
mass of wireless access. We have a critical mass of processing 
power. Essentially, Moore's law. Silicon chips have gotten so 
fast and so cheap that they are solving problems that before 
were barriers to competition.
    Storage is getting dramatically cheaper and dramatically 
smaller. We now have 185 million people with cell phones, so 
there is mass penetration there. We have broadband access all 
through the enterprise market, 90 percent. Thirty percent of 
the consumer market has broadband access. That is 60 percent of 
the buying power, so broadband access has been critical. 
Deregulation--we have displays, foreign factors.
    There is a confluence of things that are coming together, 
and we call it the techcom dynamic, where the things that we 
have all been talking about in pieces are finally starting to 
come together. What we call the techcom dynamic is mobility 
times convergence times the any-to-any connectivity of IP.
    What you have is a very, very dynamic, innovative 
marketplace that really was kind of started in the last year. 
VoIP is just one dimension of the exciting changes that are 
going on. People have been talking about convergence for a long 
time. What they are going to see is in the next two to three to 
four years it is going to happen much faster than people 
anticipate.
    Chairman DeWine. Mr. Cleland and Mr. Kimmelman, some have 
raised concerns that after the merger SBC and Verizon are not 
likely to compete in one another's territory even for 
enterprise customers, since they have not very aggressively 
competed in the past. However, a large part of the motivation 
for this merger on the part of SBC and Verizon is to gain 
access to the large enterprise clients currently served by ATT 
and MCI.
    Why would SBC and Verizon spend all this money to acquire 
ATT and MCI if they did not intend to compete head-to-head to 
get these big business clients?
    Mr. Kimmelman. I will start. Well, they clearly are 
spending money because they think they can make money here, and 
Mr. Cleland has made some good points about why it may not make 
total sense.
    The enterprise market is not where I focus, but there are 
very few competitors today in the enterprise market. They may 
be willing to challenge each other somewhat, but the real 
problem there is there are deregulatory pricing rules for a 
two-player market involving what is called special access that 
are leaving very high prices for business customers. This will 
not solve any of that problem and it will create the political 
environment that makes it impossible to solve that problem. 
There will be nobody else out there who is well-positioned to 
serve the enterprise market.
    I will just go back to my earlier point. While we don't 
focus on business customers, the history of telecommunications 
has been that many players coming in servicing business markets 
first end up in residential markets. So the danger here is that 
this just locks in a very tight oligopoly even further.
    Chairman DeWine. Mr. Cleland.
    Mr. Cleland. Well, the problem with the enterprise market--
and SBC and Verizon are going to learn it quickly--is you tend 
to covet and want what you don't have, and the Bells don't have 
those large enterprise customers. When SBC and Verizon buy 
them, they will realize that that customer segment is rapidly 
moving away from them and ATT and MCI.
    What is happening in that marketplace is essentially 
enterprises are in-sourcing. They used to have to out-source 
and they needed ATT and MCI. They are now moving most of their 
voice traffic and their data traffic onto their own networks. 
They just don't need telecommunications providers anywhere near 
as much as they did in the past.
    So that market, we believe, is going to be a steadily 
declining market for several years. I don't think in that 
marketplace that SBC/ATT and Verizon/MCI are going to be able 
to exert market power. They are going to have to do their best 
just to hold their own.
    Mr. Kimmelman. Mr. Chairman, what I hear Mr. Cleland saying 
is there really is no competition and big businesses ultimately 
will spend on their own if the prices are too high from the 
commercial market. That is not a very good set of policies, I 
believe.
    Mr. Cleland. Well, once again it is very important. You 
have to understand techcom competition is different than 
telecom competition. In the techcom world, large enterprises 
already have networks. They are Microsoft, they are IBM. They 
have their own networks. They don't need ATT, MCI, Verizon and 
these companies like they did in the past. So that is what 
technology is allowing them to do. Technology is allowing these 
enterprises to totally bypass or do without what they used to 
absolutely have to have.
    Chairman DeWine. I want to thank all of you very much. I 
think it has been a very helpful hearing. I think we can safely 
say we have heard just about all sides of the many issues 
raised now by these mergers. This panel has done a great job of 
balancing out the testimony that we heard last month from the 
merging parties themselves and really, I think, given our 
Subcommittee a lot to think about, which we will. As we have 
said, there are a wide range of issues raised by these deals.
    So we again thank our witnesses. I want to thank Senator 
Kohl for his great work, and we thank all of you. Thank you.
    [Whereupon, at 4:15 p.m., the Subcommittee was adjourned.]
    [Submissions for the record follow.]

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