[Senate Hearing 109-689]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-689
 
                      COMPETITION AND CONVERGENCE

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 30, 2006

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation




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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
             Kenneth R. Nahigian, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 30, 2006...................................     1
Statement of Senator DeMint......................................     3
Statement of Senator Inouye......................................     2
Statement of Senator Stevens.....................................     1

                               Witnesses

Comstock, Earl W., President/CEO, COMPTEL........................    23
    Prepared statement...........................................    24
Cooper, Dr. Mark, Director of Research, Consumer Federation of 
  America; on behalf of the Consumer Federation of America, Free 
  Press, and the Consumers Union.................................    44
    Prepared statement...........................................    46
Ellig, Jerry, Ph.D., Senior Research Fellow, Mercatus Center, 
  George Mason University........................................    37
    Prepared statement...........................................    39
Largent, Steve, President/Chief Executive Officer, CTIA--The 
  Wireless Association'...............................    31
    Prepared statement...........................................    33
McCormick, Walter B., Jr., President/Chief Executive Officer, 
  United States Telecom Association (USTelecom)..................    28
    Prepared statement...........................................    29
McSlarrow, Kyle, President/CEO, National Cable and 
  Telecommunications Association.................................     4
    Prepared statement...........................................     5

                                Appendix

Response to written questions submitted by Hon. Trent Lott to:
    Earl W. Comstock,............................................    64
    Dr. Mark Cooper..............................................    74
    Jerry Ellig, Ph.D............................................    72
    Walter B. McCormick, Jr......................................    66
    Steve Largent................................................    69
    Kyle McSlarrow...............................................    61
Response to written questions submitted by Hon. Ted Stevens to:
    Earl W. Comstock,............................................    62
    Dr. Mark Cooper..............................................    74
    Jerry Ellig, Ph.D............................................    70
    Walter B. McCormick, Jr......................................    65
    Steve Largent................................................    68
    Kyle McSlarrow...............................................    59


                      COMPETITION AND CONVERGENCE

                              ----------                              


                         TUESDAY MARCH 30, 2006


                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:32 p.m. in room 
SH-216, Hart Senate Office Building, Hon. Ted Stevens, Chairman 
of the Committee, presiding.

            OPENING STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    The Chairman. Over the course of our series of 14 hearings, 
our Committee has heard from the wireless, wireline, 
competitive, cable, Internet, satellite and content industries 
as well as consumer groups and academic groups on a wide range 
of communications issues.
    Today, we want to discuss the phenomenon of convergence and 
how it is changing the competitive landscape in today's market. 
Cell phone companies, Bells, CLECs, cable companies and 
satellite providers are capable of providing the same or 
similar services. Our Committee wants to look at what that 
means for each of these industry segments and their consumers.
    Already, consumers are clamoring for a quadruple play of 
local, long distance, video, and data service on a single 
platform.
    Soon, consumers will be able to reach their video recording 
devices from their cell phones to either watch or record TV 
programs while on the move.
    These technological changes will impact how regulations are 
applied. Certainly, we have all heard about the importance of 
setting a level playing field as phone providers move into the 
video marketplace. Currently, the same bundles are often 
regulated differently depending on the platform that delivers 
it.
    It is our hope that as we level the playing field, we will 
seek the most deregulatory approach possible consistent with 
the public interest.
    Going forward, it will be necessary to ensure that 
regulations are flexible to readily allow for the innovation 
that consumers demand.
    Convergence and other forces are also contributing to the 
mergers we have seen in the communications marketplace. 
Wireless, wireline, and cable have all seen significant 
transactions in the last couple of years with the combination 
of Sprint-Nextel, Verizon-MCI, SBC-AT&T, AT&T-BellSouth, and 
the Comcast-Time Warner-Adelphia deal.
    With respect to the wireline mergers, one concern that has 
been raised is not just the impact for residential users but 
the impact on the business market. The special access lines 
that provide high capacity access to businesses are largely 
controlled by the Bells, but are crucial to competing in the 
business market. This is one area where intermodal competition 
may not be enough. We plan to schedule a hearing on mergers in 
the future, so we can examine all of them in some detail.
    This is the last communications hearing scheduled prior to 
that mark-up of our ``Communications Package.'' I have 
appreciated the participation of all you here at the table and 
I look forward to your testimony here. I don't know when we'll 
be able to look at the intermodal competition subject, but we 
will do our best to do so before we ask the Committee to report 
the bill. Our Co-Chairman, sir?

              STATEMENT OF HON. DANIEL K. INOUYE, 
                    U.S. SENATOR FROM HAWAII

    Senator Inouye. I thank you very much. While transformation 
of the communications services in our country is encouraging 
and bringing new benefits to consumers, as the Chairman 
indicated I think it's important that this Committee keep a 
close watch on the state of competition in the communications 
marketplace.
    As the Chairman noted, the proposed AT&T-BellSouth merger 
would certainly alter the communications landscape in this 
country, and is likely to trigger additional transactions. 
Whether or not such transactions or consolidation would improve 
competition remains to be seen. Given the enormous impact of 
this merger, I would like to see the Committee examine it 
specifically.
    Nonetheless, convergence is creating a new generation of 
communication service providers and a new set of options for 
consumers. In many respects, this is what we had envisioned 
when we drafted the 1996 Telecommunications Act. The law was 
premised on convergence. Cable companies would offer phone 
services, phone companies would offer cable services and, both 
would offer data services. With the explosion of satellite 
video services and wireless technologies, the options have 
expanded even further.
    In addition to this competition between different types of 
network operators, the rapid evolution of the Internet and the 
steady growth of broadband technology has also resulted in new, 
non-network communications service providers like Vonage, 
Microsoft, and Google, who are beginning to offer consumers new 
ways of transmitting information and communicating with each 
other.
    But while convergence promises great benefits, we should 
similarly recognize that it is performance, not promise that 
matters. Despite the development of alternative broadband 
platforms, cable and phone platforms are clearly the dominant 
players in this market controlling 98.7 percent of today's 
broadband market.
    We need to be mindful that the most important type of 
competition is the competition that occurs in a consumer's 
backyard. In too many parts of the country, Americans still 
lack a real choice of competitive broadband alternatives. As 
the marketplace changes, we need to be sure that rural areas 
and tribal communities that currently lack services do not fall 
even further behind. We have heard promises in the past that 
competition would lead to service in these communities only to 
see those promises go unfulfilled.
    We also need to be sure that broadband network operators 
play fair and do not use their control over physical 
infrastructure to disadvantage their competitors.
    We often forget that it was not a ``hands-off'' government 
policy that gave birth to the Internet. Instead, it was 
nurtured by principles of openness and nondiscrimination that 
have been part of the Communications Act since 1934 and that 
have prevented network operators from seizing proprietary 
control of its operation. As a result, this hearing allows us 
to get beyond the sounds bites and dig a little deeper to 
determine what statutory changes will ensure that 
communications policy continues to promote vigorous competition 
in all communications markets.
    I look forward to today's discussion and hope that our 
witnesses can shed some light on these challenging questions. I 
thank you very much sir.
    The Chairman. I thank you, Senator. Senator DeMint.

                 STATEMENT OF HON. JIM DeMINT, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator DeMint. Thank you Mr. Chairman, and Co-Chairman 
Inouye, for holding this very important hearing on the impact 
of convergence on competition in the communication marketplace. 
We're looking at the telecommunications industry at a time in 
history when the industry is undergoing tremendous change due 
to the rapid introduction of new technologies. We must decide 
how to regulate not just one, but multiple new and highly 
interrelated communication technologies. We need to recognize 
that there's been a paradigm shift in technology which has 
created new problems and opportunities related to the 
regulation of our telecommunications industries and their 
products.
    The computer chip, advances in transmission technology and 
the digitization of content have fundamentally altered the 
marketplace. These innovations have attracted new entrants, and 
greatly increased competition. Although we are in a new world, 
the old paradigm that views telecommunications through a 
monopoly lens is preventing us from doing what needs to be done 
to reform communications policy. These old paradigm filters are 
preventing many people from seeing the technological changes 
leading to service substitution was revolutionized the 
industry.
    This communication paradigm shift is more dramatic, fast 
paced and technologically daunting than almost anything we've 
experienced in the past. Massive change is happening 
simultaneously on multiple fronts, making decisions involving 
communication regulations difficult, if not impossible when 
viewed through the existing monopoly lenses to which we are 
accustomed.
    Mr. Chairman, I believe, and I am firmly convinced that 
there is no practical way for Congress to anticipate future 
changes in this industry and to effectively regulate the 
industry. I hope that the distinguished panel today will help 
us here in Congress understand the new paradigm and how to 
develop a new regulatory structure that protects the consumer 
without presuming that we can manage your business. And I thank 
you, Mr. Chairman.
    The Chairman. Thank you very much. We're honored to have 
the series of witnesses, as I've said have been here before. We 
can just go down the table in the way you're lined up if that's 
agreeable. The first witness would be Kyle McSlarrow, President 
and Chief Executive Officer of the National Cable and 
Telecommunications Association, Washington, D.C. Glad to have 
you back, Kyle.

STATEMENT OF KYLE McSLARROW, PRESIDENT/CEO, NATIONAL CABLE AND 
                 TELECOMMUNICATIONS ASSOCIATION

    Mr. McSlarrow. Mr. Chairman, thank you very much. First let 
me congratulate all of you and your staff for what's been a 
pretty intense road here the last couple of months. I have only 
testified at a few of the hearings but you have been at all of 
them. And I think an enormous amount of work has gone on and 
it's to your credit. And it's necessary. I think we all agree 
this is the time to take a fresh look at the 1996 
Telecommunications Act.
    Because we've talked about video in the past, just for the 
purposes of my opening statement I'm just going to confine some 
observations to the voice competition market, and start with 
this point. Competitive voice services cannot survive without 
physical interconnection to the Bell-controlled public switch 
telephone network, the PSTN.
    There is Mr. Chairman, very simply nothing like the public 
switch telephone network in the video or data worlds.
    The PSTN was built by a regulated monopoly which had access 
to captive rate-payers and guaranteed rates of return on its 
investments. For many years, the PSTN was the only voice 
network in the country and had no competition from other local 
or long distance telephone service providers. Interconnection 
to other domestic phone networks was not an issue. That changed 
in 1984 when under the terms of an antitrust consent decree, 
the original AT&T divested its local telephone networks and 
kept control of long distance operations. The consent decree 
created seven separate different regional telephone networks, 
and suddenly issues like interconnection became important. The 
significance of interconnection only increased as local 
competitors joined long distance providers in the 
telecommunications marketplace.
    Unlike the PSTN, cable did not develop as a regulated 
monopoly, and alternative video distributors like satellite did 
not need interconnection in order to provide services to our 
customers. And the Internet is a ``network of networks'' that 
is distributed rather than centralized. So voice is different 
in that sense.
    The 1996 Telecommunications Act addressed the central 
challenge and it provided interconnection rights to competitive 
local exchange carriers (CLECs) so they could exchange traffic 
with the Bells on an economic basis, without glitches or 
delays, in order to promote local voice competition.
    Ten years after Congress enacted interconnection rules, the 
Bells still own the only ubiquitous phone network--serving more 
than 85 percent of the local residential and small business 
market.
    So today, with the beginnings of facility based and non-
facilities based IP-enabled voice services, we have a real 
opportunity for increased competition in voice competition. 
Congress, we would urge, should ensure that the rights to 
interconnection, collocation, and numbering guaranteed in the 
1996 Act are available to all competing voice providers 
regardless of the technology used. Facilities-based IP-enabled 
voice providers should have the right to interconnect with the 
PSTN directly--like a traditional CLEC--or indirectly through 
arrangements with a CLEC if they choose.
    And we would urge you to make clear that the right is not 
technology-dependent and that digital voice is not relegated to 
second-class status. We think right now the time to act is with 
the bill that you are moving forward. As you have all noted in 
your opening statements we're talking about convergence, we're 
talking about providers who are offering all these services 
together.
    So even as we look at video, we should be thinking very 
clearly about the voice competitive market place. Thank you Mr. 
Chairman.
    [The prepared statement of Mr. McSlarrow follows:]

Prepared Statement of Kyle McSlarrow, President/CEO, National Cable and 
                     Telecommunications Association
I. Introduction
    Good afternoon, Mr. Chairman, Senator Inouye, and Members of the 
Committee. My name is Kyle McSlarrow and I serve as the President and 
Chief Executive Officer of the National Cable & Telecommunications 
Association. NCTA is the principal trade association for the U.S. cable 
industry, representing cable operators serving more than 90 percent of 
the Nation's cable television households and more than 200 cable 
program networks. The cable industry is the Nation's largest broadband 
provider of high speed Internet access after investing $100 billion 
over ten years to build a two-way interactive network with fiber optic 
technology. Cable companies also provide state-of-the-art digital 
telephone service to millions of American consumers.
    Thank you for inviting me today to comment on the state of 
competition and convergence in the telecommunications industry. In 
response to a growing number of competitors and the deregulatory 
environment created by the 1996 Telecommunications Act, cable operators 
invested over $100 billion of private risk capital to embark on a 
nationwide upgrade of their facilities. They did so without any 
government subsidies, programs, or guarantees that they would get a 
return on their investment. As a result, cable companies now provide 
consumers with a wide variety of advanced services, including digital 
video, High Definition Television (HDTV), high-speed Internet access, 
and telephone service--both traditional circuit-switched voice service 
and digital telephony using Voice over Internet Protocol (VoIP). \1\ In 
each of these markets, cable faces vigorous competition from several 
different service providers.
    With regard to our core business, the video marketplace is more 
competitive than ever before. Fifteen years ago, cable commanded 95 
percent of the multichannel television market. Today, because of fierce 
competition from Direct Broadcast Satellite (DBS) and other broadband 
video providers, cable's market share has fallen to 68.3 percent of 
multichannel video households according to November 2005 statistics 
from Kagan. As the FCC noted just a few weeks ago, ``almost all 
consumers have the choice between over-the-air broadcast television, a 
cable service, and at least two DBS providers'' as well as ``emerging 
technologies, such as digital broadcast spectrum, fiber to the home, or 
video over the Internet.'' \2\ And now the Regional Bell Operating 
Companies (RBOCs) are entering the fray, bringing with them annual 
revenues of $153 billion--more than twice those of the entire cable 
operator industry.
    New service providers are deploying new video technologies every 
day, including Internet-based services, cell phone providers, wireless 
computer manufacturers, and consumer electronics suppliers. For 
example, companies like USDTV have created an over-the-air digital 
video service (featuring dozens of DVD quality broadcast and cable 
program networks) using spectrum leased from local broadcasters. 
Similarly, consumers now have access to video through their wireless 
phones, IPODs, and laptops and can customize their viewing experience 
at home and on the road. For example, on March 15, 2006, AOL and Warner 
Studios announced the launch of In2TV, an Internet-based broadband 
television service which allows consumers to select from among 30 
different television series and program their own on-demand TV channel. 
\3\ Similarly, Verizon Wireless's V-Cast video service, which is 
``available to more than 148 million people in 181 major metropolitan 
areas and is expanding coast to coast,'' allows customers to use their 
cell phones to ``watch broadband-quality movie trailers, sports 
highlights, news and video on demand,'' play games, and listen to 
music. \4\ Using Digital Video Recorders for cable and broadcast 
sources or Internet-based video technologies like Akimbo and Slingbox, 
Americans today can: (1) watch television at home ``real time'' or 
``time shift'' a variety of programs for later viewing; (2) ``space 
shift'' programming on a home network to view it on another device in 
another room; or (3) ``sling'' it to the Internet for viewing on a 
laptop in a hotel room or conference center anywhere in the world that 
has a connection to the Internet. Consumers are the beneficiaries of 
this highly competitive landscape, where they now have a growing number 
of choices of advanced services from several different providers.
    With regard to new services, cable pioneered residential high-speed 
Internet access. At a time when telephone companies left DSL technology 
sitting on the shelf so they could sell customers extra lines for faxes 
and dial-up access to the Internet, cable introduced broadband Internet 
access at speeds 50-100 times those of dial-up. After upgrading their 
one-way analog facilities to interactive digital platforms, cable 
operators now offer broadband access to 109 million households and 
serve 25.4 million of them--a penetration rate of more than 23 percent.
    Using its new broadband facilities, cable also entered the 
telephone market, providing consumers with their first-facilities based 
alternative to the local telephone companies which have dominated the 
voice market for almost a hundred years. Cable currently provides 
traditional circuit-switched analog telephone service and VoIP-based 
digital telephone service to more than 5.5 million customers, offering 
these and millions more consumers a ``triple play'' of video, data, and 
voice services and the benefits of ``one-stop shopping'' with their 
local cable company.
    The introduction of interactive broadband services by cable 
operators has prompted a competitive response from other industries. 
Telephone and DBS companies, for example, initially joined forces to 
offer their own packages of video, voice, and data services. DBS 
obtained exclusive sports programming such as NFL's Sunday Ticket and 
increased the number of channels they offered and the types of service 
available, including HDTV. The phone companies took their DSL 
technology off the shelf and deployed it to compete with cable modems; 
DSL now serves about 17 million customers. Today, Verizon and AT&T are 
investing billions of dollars to enter the video marketplace around the 
country.
    The bottom line is that these are all signs of a competitive 
marketplace: several different providers of a wide array of services 
vie with each other for customers, each trying to differentiate 
themselves with unique offerings while trying to match those of their 
competitors.
II. Convergence in the Competitive Marketplace
    The cable industry supports reviewing and updating the 
Telecommunications Act of 1996 and further reducing unnecessary 
economic regulation. We favor a level playing field where like services 
are treated alike and necessary social obligations (such as the 
Universal Service Fund, CALEA, E-911, Equal Employment Opportunity, 
nondiscrimination, privacy rules, and access for the disabled) apply 
equally to all providers. We are opposed to attempts by one industry to 
secure legislation that would have the government pick winners and 
losers or that favors one technology over another.
    Although there is already vigorous competition in the video 
marketplace, the prospect of major new competitors with the resources 
of the Bell Operating Companies should be beneficial to consumers--as 
long as competition is governed by marketplace forces and is not 
artificially skewed by rules and regulations that give some competitors 
an unfair advantage over others. The marketplace--not government 
regulation--will impel all competitors to innovate in the packaging and 
pricing of new services to maximize value to consumers.
    Moreover, in taking a fresh look at the Telecommunications Act of 
1996, the video marketplace is only one piece of a larger puzzle that 
should be addressed by this Committee in its entirety. Perhaps the 
bigger challenge is how best to increase voice competition at a time 
when incumbent telephone companies (ILECs, including the RBOCs) still 
control 85 percent of the residential and small business markets, and 
more importantly, the public switched telephone network. In an era of 
rising telephone rates, $1.50 directory assistance calls, and 
burgeoning ``regulatory cost recovery fees'' on our phone bills, 
legislation to promote competition should include all markets, 
especially the voice market. As this Committee moves forward with the 
drafting of a bill this spring, I would encourage it to also focus on 
the problem of interconnection so that incumbent telephone companies 
cannot lock out alternative voice service providers--including cable, 
broadband overbuilders, and wireless companies.
Interconnection
    Competitive voice services cannot survive without physical 
interconnection to the Bell-controlled public switched telephone 
network (PSTN) at reasonable rates. Interconnection is necessary to 
reach customers on the Bells' lines, and these customers constitute the 
vast majority of wireline users in the United States.
    There is, very simply, nothing quite like the public switched 
telephone network in the video or data worlds. The PSTN was built by a 
regulated monopoly which had access to captive rate-payers and 
guaranteed rates of return on its investments. For many years, the PSTN 
was the only voice network in the country and had no competition from 
other local or long distance telephone service providers. 
Interconnection to other domestic phone networks was not an issue, and 
the PSTN even provided all of the equipment that consumers were allowed 
to attach to the network. That changed in 1984 when under the terms of 
an antitrust consent decree, the original AT&T divested its local 
telephone networks and kept control of long distance operations. The 
consent decree created seven separate different regional telephone 
networks, and suddenly interconnection of separate networks and 
independently-owned telecommunications equipment became important. The 
significance of interconnection only increased as local competitors 
joined long distance providers in the telecommunications marketplace.
    Unlike the PSTN, cable did not develop as a regulated monopoly, and 
alternative video distributors used different technologies like 
microwave relays and direct broadcast satellite. DBS operators did not 
need to interconnect with cable systems in order to compete, and the 
``network of networks'' architecture of the Internet is distributed 
rather than centralized. However, as long as the PSTN maintains its 
unique position for voice services, the Bell companies who control it 
will have a correspondingly unique incentive and ability to frustrate 
competition by impeding interconnection with other voice providers, 
regardless of whether those providers use IP or some other technology.
    The 1996 Telecommunications Act addressed the central challenge 
posed by the PSTN by providing interconnection rights to competitive 
local exchange carriers (CLECs) so they could exchange traffic with the 
Bells on an economic basis, without glitches or delays, in order to 
promote local voice competition.
    Despite their claims that the phone market is ``competitive,'' ten 
years after Congress enacted interconnection rules, the Bells still own 
the only ubiquitous phone network--serving more than 85 percent of the 
local residential and small business market. And they still serve as 
the ``hub'' to which all other carriers must connect in order to reach 
each others' customers.
    With IP-enabled voice services providing a real opportunity for 
increased competition in the voice market, Congress must ensure that 
the rights to interconnection, collocation, and numbering guaranteed in 
the 1996 Act are available to all competing voice providers on a 
technology neutral basis. Facilities-based IP-enabled voice providers 
should have the right to interconnect with the PSTN directly--like a 
traditional CLEC--or indirectly through arrangements with a CLEC that 
already has an interconnection agreement with an incumbent local 
exchange carrier. Congress must make clear that the right to 
interconnection is not technology-dependent and that digital voice is 
not relegated to second-class status. Limiting interconnection and 
related rights to providers of voice services using traditional 
technology will, perversely, penalize the introduction of new 
technology and ensure the Bells retain their continuing dominance in 
the voice market.
    The time to act to ensure voice competition is now. Some states and 
incumbent telcos have already sought to limit interconnection rights to 
providers using traditional voice technology. Indeed, the files are 
replete with examples of the Bells stalling on any number of reasonable 
interconnection requests from even traditional competitors.
    The Bells' consolidation makes the need for interconnection 
protections even more urgent. When the two largest CLECs in the market 
(AT&T and MCI) merged with the two largest Bells (SBC and Verizon), the 
most experienced and well-funded negotiators of interconnection 
agreements were removed from the competitive voice market. The AT&T/
BellSouth merger would only solidify the Bells' monopoly market power 
and make it more difficult for competitors to get a fair shake in 
interconnection negotiations.
III. Cable Has Invested $100 Billion to Meet the Challenges of a 
        Fast-Changing and Fiercely Competitive Video Marketplace
    Cable is one of the great American success stories. Born in the 
foothills of Pennsylvania and Wyoming around 1950, cable started as a 
relay service for broadcast television in areas that had trouble 
receiving over-the-air signals. At that time, American television 
consisted of two networks: NBC and CBS (followed by ABC in 1954 and 
National Education Television--later PBS--in 1966). Over the past 50 
years, cable operators and programmers have revolutionized American 
television. There are now over 530 national cable programming networks 
which bring diversity, choice, and quality programming to American 
consumers. \5\ Similarly, cable operators transformed one-way analog 
distribution systems into high speed broadband platforms that currently 
provide interactive digital services, including video, high definition 
television, high speed Internet access, and digital telephony. Cable 
entrepreneurs did all of this with private risk capital, not government 
funds.
    With an investment of $100 billion since 1996, cable operators have 
replaced coaxial cable with fiber optic technology and installed new 
digital equipment in homes and system headends. The fruits of cable's 
investment in a two-way broadband network are evident in the number of 
advanced services offered on virtually every cable system today. \6\
Cable is Leading the Way to the Digital Transition
    The cable industry continues to aggressively roll out and market 
high definition television service to the majority of American 
households, with a growing array of programming choices. As of 
September 2005, 96 million U.S. television households were passed by at 
least one cable system offering HDTV service, which represents all of 
the top 100 designated market areas (DMAs). Of all 210 DMAs, a total of 
198 markets were served by at least one cable system that offers high 
definition programming. Local cable systems also were carrying the 
digital signal of 681 broadcast stations, a six-fold increase from 
January 2003, when cable began rolling out HDTV with carriage of 92 
such stations.
    Cable customers are already enjoying a full complement of digital 
programming and advanced information services independently of the 
broadcasters' conversion to digital. Today, over 40 percent of U.S. 
cable customers (approximately 28 million) subscribe to digital cable 
services, which include a diverse array of program networks and music 
channels. Digital cable also gives subscribers the ability to block 
access to programming they believe is inappropriate for their children. 
All of cable's digital services can be enjoyed by consumers with analog 
TV sets who use digital set-top boxes that convert digital signals to 
analog. Cable companies are also deploying innovative interactive video 
services, along with Internet and digital telephone services.
    Cable customers with HDTV sets have even more options and can 
receive 23 HD cable programming networks. \7\ Cable operators are also 
voluntarily carrying the digital channels of a substantial number of 
over-the-air broadcast stations in addition to those stations' analog 
signals--either through retransmission consent agreements with 
individual commercial stations \8\ or under a recent carriage agreement 
with public television stations. In particular:

   As of September 2005, cable operators were carrying 
        commercial broadcasters' multicast programming in over 100 
        markets, including all of the top 10 markets and numerous 
        small-to-midsized markets across the country. In Washington 
        D.C., Comcast is carrying WJLA's local Weather Now channel 
        (ABC) and WRC's Weather Plus channel (NBC), as well as WETA's 
        Prime, Kids, and Plus channels (PBS).

   In January 2005, NCTA and the Association of Public 
        Television Stations (APTS) entered into an agreement that 
        ensures that local public television stations' digital 
        programming--including multicast channels--is carried on cable 
        systems serving the vast majority of cable customers across the 
        Nation. In April 2005, public television stations serving 
        markets comprising over 80 percent of U.S. TV households and 
        MSOs representing over 80 percent of cable subscribers ratified 
        the agreement, and MSOs are adding digital PTV stations to 
        their channel lineups across the country.

    Significantly, cable's contractual carriage agreement with public 
television stations was reached through private negotiations--not 
Federal legislation or FCC regulations.
    The vast majority of cable customers have analog television sets, 
and most of those sets--as in over-the-air households--are not equipped 
with digital set-top boxes. Today, cable operators provide the analog 
signals of virtually all local television stations, which can be viewed 
by all customers--those with and without digital boxes, and those with 
and without digital television sets. Operators also provide the digital 
signals of some, but not all, broadcast stations--especially those that 
provide compelling digital programming that is likely to enhance the 
value of cable service for the growing number of customers with high 
definition sets.
Cable's Video-on-Demand and Digital Video Recorders Put Customers in 
        the Driver's Seat
    As cable operators upgrade their systems with digital and two-way 
capabilities, they are offering more sophisticated interactive 
services. Such services are increasingly putting the control of media 
directly into the hands of consumers--allowing them to watch what they 
want, when they want.
    With video-on-demand, consumers have virtually thousands of viewing 
options at their disposal. For instance, in March 2005, Comcast 
announced that digital cable customers viewed more than 100 million ON 
DEMAND programs, three times the number of ON DEMAND programs viewed in 
March 2004, and a 40 percent increase from the fourth quarter of 2004. 
\9\ Comcast has expanded its library of on-demand programming to 
approximately 2,000 hours and recently signed a deal with Sony to 
provide a total lineup of about 100 movies a month from the Sony 
pictures and MGM libraries. \10\ Comcast aims to boost its library to 
10,000 hours in 2006. \11\
    The cable industry has a distinct advantage in the video-on-demand 
marketplace. According to one analyst, ``VoD is another arrow in the 
quiver of cable companies to retain existing customers and keep them 
from defecting to satellite.'' \12\ Kagan Research estimates that at 
the end of 2005, 23.9 million U.S. households had access to VoD from 
their local cable provider and that number is likely to increase to 
45.6 million by 2009. \13\ Analysts expect VoD revenues to approach $1 
billion this year and nearly $6 billion by 2013. \14\
    Cable companies have accelerated deployment of digital video 
recorders (DVRs), which enable customers to capture video programming 
onto a hard drive in the set-top box and pause, fast forward, and 
manage other functions and applications. Cablevision, Comcast, Cox, and 
Time Warner Cable all widely deploy DVRs.
    At the end of 2005, 4.5 million digital cable customers used a DVR 
service, an increase of 150 percent from 1.8 million customers at the 
end of 2004. \15\ The direct-to-home satellite industry once commanded 
a sizable lead in DVR users, with 3.6 million customers at year-end 
2004, but analysts expect the cable industry to aggressively grow its 
share of the market. \16\ Kagan predicts 20 million cable DVR 
households by 2009, while DBS providers will have 14.5 million. \17\
Cable is Competing on Speed and Value in the High-Speed Data Services 
        Tug-of-War
    Cable's leadership in creating and developing the market for 
affordable residential high-speed Internet access has led to a 
profusion of competitive offerings. That leadership spurred the 
Regional Bell Operating Companies (RBOCs) in recent years to 
aggressively deploy digital subscriber line (DSL) service (which they 
had developed years earlier but kept on the shelf in order to sell 
customers second and third phone lines for fax machines and dial-up 
access to the Internet). The cable industry is now facing competition 
not only from DSL providers but also wireless, satellite, and broadband 
over power line providers.
    Overall, the market for broadband continues to expand. High-speed 
lines serving residential and small business subscribers increased by 
36 percent during 2004 to 35.3 million lines. \18\ Leichtman Research 
Group estimates that by the end of 2005, the number of broadband homes 
surpassed 40 million. \19\
    By the end of the fourth quarter of 2005, cable's high-speed 
Internet service had attracted 25.4 million customers (see Chart 1). 
More than one-quarter of all cable households today subscribe to 
cable's high-speed data service, and among those cable households with 
Internet access, nearly 30 percent are cable modem customers. Cable's 
broadband services will be available to more than 117 million homes, or 
96 percent of U.S. households passed by cable, by year-end 2006 (see 
Chart 2).


    The high-speed Internet access market is far from saturated. For 
2004, the FCC reported a 30 percent increase in cable modem 
connections, from 16.4 to 21.3 million lines, affirming similar 
estimates from the private sector. \20\ Data from Leichtman Research 
Group reveal that total cable modem customers of the top ten multiple 
system operators grew 28 percent in 2004, from 15.3 to 19.6 million. 
\21\ Morgan Stanley reported a 28 percent increase in cable modem 
customers last year, from 15.0 to 19.2 million; it is forecasting 
annual customer growth rates of 22 percent for 2005 and 18 percent for 
2006. \22\
    Phone companies remain formidable broadband competitors with their 
DSL offerings. Though cable continues to have the largest installed 
base--25.4 million lines--compared to the Bells' nearly 16.4 million 
DSL lines, the phone carriers have been adding new lines at a furious 
rate. According to the FCC, advanced higher-speed DSL lines--defined as 
200 Kbps for both upstream and downstream--increased 88 percent during 
2004, compared to 36 percent for advanced cable lines. \23\ An NCTA 
snapshot of second quarter data for 2004 and 2005 reveals Bell DSL net 
additions grew 40 percent, while cable modem subscriptions grew 25 
percent. \24\ The RBOCs together have been adding about one million DSL 
subscribers each quarter (see Chart 3).


    Cable operators have responded to this competitive marketplace by 
offering consumers a bundled package of services, which has enabled 
them to attract new customers and retain existing subscribers. Cable 
has been promoting increased access speeds, superior content, and other 
online enhancements.
    When cable modem service was introduced in 1999, the majority of 
customers experienced downstream access speeds up to 1.5 Mbps. Since 
2001, multiple system operators have regularly boosted those speeds at 
no additional cost. Most operators are now offering 4 to 6 Mbps, with 
additional pricing plans for speeds in excess of 6 Mbps. The cable 
industry is also focusing on developing the commercial market for high-
speed Internet access. For example, Cablevision is marketing 50 Mbps 
service (expandable to 100 Mbps) for commercial customers in Oyster 
Bay, New York. \25\
    Boosting speeds has not posed any technical problems for operators 
and the process is neither cost nor labor-intensive. No additional 
consumer equipment is necessary to move from 1.5 Mbps to 3, 9, or 15 
Mbps. Usually, just a simple software download to existing modems can 
upgrade the speed capabilities. With other enhancements, high speed 
Internet access could increase to 160 Mbps downstream and 60 Mbps 
upstream.
    In addition to speed, cable operators are offering a variety of 
features (at no additional fee) that increase value. These features 
include integrated security suites, with anti-virus, anti-spyware and 
firewall protection; pop-up blocking and spam filtering; video e-mail; 
and specialized content from partners such as Major League Baseball, 
NASCAR, Disney, and Movielink.
    Though a smaller subset of the broadband access market, alternative 
technologies including Broadband over Power Line (BPL), fixed wireless 
and satellite will continue to make inroads as a viable alternative to 
DSL and cable modems. BPL service allows the delivery of IP-based 
broadband using the communications capabilities of the Nation's power 
grid. According to the United Telecom Council, there are a number of 
trials underway nationwide, and a small number of commercial 
deployments have been launched. Adding new momentum, three technology 
behemoths--Google, IBM, and Motorola--recently announced major 
investments or trials involving BPL. \26\
Cable's Digital Telephony is Primed for Explosive Growth Resulting in 
        Better Service Bundles and Additional Benefits for Consumers
    Nearly 4.5 million customers are taking telephone service from 
their local cable operator, both traditional circuit-switched telephone 
service and, increasingly, cable's new digital phone (VoIP) service. 
Some cable operators have offered traditional circuit-switched 
telephone service for years. More recently, many companies have 
launched IP-based services. Circuit-switched telephony subscribers may 
be transitioned to digital telephony in the years ahead. Meanwhile, the 
two largest providers of traditional phone service--Cox and Comcast--
will continue to support their roughly three million circuit-switched 
telephone customers.
    Kagan Research reported significant growth in cable's digital 
telephone subscribership for 2005. Between year-end 2004 and year-end 
2005, the industry grew from 587,000 to 2.6 million customers, a growth 
rate of over 300 percent. \27\ Kagan estimates the penetration rate for 
cable's VoIP services and, to a lesser extent circuit-switched 
telephony, will reach 18 percent of occupied U.S. households by the end 
of 2009, while 88 percent of homes passed by cable will be able to 
receive VoIP service the same year. \28\ Morgan Stanley reported that 
90 percent of telephone homes should be passed by digital telephone 
services by 2007.
    Both Cablevision and Time Warner have established a strong 
beachhead in the digital phone marketplace, and Comcast is now in full 
deployment mode. Those operators, along with Charter, Insight, Bright 
House, and Bresnan are effectively competing against a range of 
independent VoIP providers, including Vonage, Packet8, and Lingo, as 
well as the RBOCs. During the fourth quarter, Time Warner continued its 
strong growth in new customers, adding 246,000 VoIP users. Cablevision, 
Comcast, and Charter added 548,300 combined customers during the same 
quarter.
    VoIP is having a positive impact on the other two service offerings 
in cable's ``triple play''--video and high speed data. Operators 
offering VoIP are experiencing lower churn rates for basic cable and 
increased growth in high-speed Internet subscribers. Cablevision, Cox, 
and Time Warner all exhibited faster growth rates--almost 20 percent--
in their high-speed access businesses than those operators not offering 
voice service. \29\
IV. Cable Continues to Invest in Original, Compelling Programming to 
        Win and Sustain Customers in a Highly Competitive Video 
        Marketplace
    With regard to video programming networks--including children's 
programming and locally-originated programming--the cable industry 
continues to invest in general interest and niche programming to 
attract customers.
Programming Investment
    Cable's original, compelling, and high-quality content is the 
direct result of increased investments by both cable networks and 
operators. In 2005, cable networks invested more than $15.88 billion in 
producing new programming (see Chart 4), while cable operators invested 
$15.8 billion to purchase quality programming for customers (see Chart 
5). As noted above, with the deployment of services such as VoD and 
digital video recorders (DVRs), viewers can watch their favorite 
programming at their convenience.


Programming Quality
    Cable is increasingly recognized as the premier outlet for high-
quality, cutting-edge programming by television critics and viewers. 
For example, the 56th Annual Primetime Emmy Awards in September 2004 
marked the first time that cable networks surpassed the broadcast 
networks in honors received, with 11 cable networks collectively 
garnering 50 awards compared to the broadcast networks' 37 awards.

   In January 2005, FX, Showtime and HBO won Golden Globe 
        Awards.

   In April 2005, cable organizations won 12 George Foster 
        Peabody Awards out of 32 awards granted.

   HBO and ESPN each won five Sports Emmy Awards in April 2005, 
        followed by ESPN2, NFL Network and TNT tied with one award 
        each.

Programming Viewership
    More viewers are tuning into cable's diverse offerings than ever 
before, even compared to the collective viewership of the major 
national commercial broadcast networks. For example, more than half of 
all primetime television viewers watched ad-supported cable networks 
during the official 2004/2005 TV season (September-May), the second 
consecutive time that cable has topped all national broadcast networks 
combined during an official season. Cable-plus households tuned in on a 
weekly basis to more than 35 hours of ad-supported cable programming 
versus an average of 26 hours per week for all commercial broadcast 
programming combined.
    An analysis of Nielsen data by the Cabletelevision Advertising 
Bureau (CAB) shows that for the official 2004/2005 TV season, ad-
supported cable networks outpaced the ``Big 3'' (ABC, CBS, NBC) 
broadcast networks on a total day basis by 23.9 share points--with 
cable posting a 48.3 share to broadcast's 24.4 (see Chart 6). \30\


    Programming Choice. Cable's investments in new channel capacity 
have resulted in a growing number of cable networks. As the FCC 
reported on February 10, 2006, the number of national cable networks 
increased from 145 in 1996 to 531 by year-end 2005--growth of 266 
percent in less than a decade (see Chart 7. Note however that vertical 
integration has fallen by half over the past decade--see Section VI.)


Children's Programming
    Cable networks are continuing to provide many hours of quality 
programming suitable for children and the whole family. In addition to 
the positive viewing options that are provided, the industry has taken 
steps to help parents manage what their families watch. Free blocking 
technology is available, and programming networks have enhanced their 
on-screen ratings information.
    Basic cable networks such as ABC Family, Animal Planet, Boomerang, 
Cartoon Network, Discovery Kids, Disney Channel, The Hallmark Channel, 
Nickelodeon, Nickelodeon GAS, Noggin/The N, and Toon Disney, as well as 
premium networks such as HBO Family, Showtime Family Zone, Starz Kids & 
Family, and Encore Wam continue to attract a growing audience share of 
children and families. Total day viewing by kids (ages 2-11) of 
advertising-supported cable networks increased from a 28.3 share in 
1993/1994 to a 56.4 share during the 2004/2005 official TV season.
Family Tiers
    Beginning in December 2005, several leading cable operators 
(including Comcast, Time Warner Cable, Cox, and Insight) announced that 
they would voluntarily offer family programming tiers. The program 
networks included on these tiers vary by company, but all feature 
primarily G-rated content suitable for family viewing. The tiers, which 
can be purchased with the broadcast basic tier, became available in 
early 2006, and additional MSOs are deploying family tiers this spring.
V. Cable Faces Vigorous Competition in the Video Market
    In its 12th annual report to Congress on the state of competition 
in the video market, the Federal Communications Commission found that: 
\31\

        Competition in the delivery of video programming services has 
        provided consumers with increased choice, better picture 
        quality, and greater technological innovation . . . We find 
        that almost all consumers have the choice between over-the-air 
        broadcast television, a cable service, and at least two DBS 
        providers.

    Today, consumers can choose from a variety of multichannel video 
providers, including Direct Broadcast Satellite (DBS), alternative 
broadband providers like RCN/Starpower, local telephone companies, and 
utilities. As a result of this competition, 29.7 million consumers 
(more than one out of four video subscribers) now obtain multichannel 
video programming from some company other than their local cable 
operator (see Chart 8).

Chart 8--Subscribers to Multichannel Video Program Distributors (MVPDs),
                            November 30, 2005
------------------------------------------------------------------------
                                                        Percent of Total
                                   Subscribers (in     MVPD Subscribers
                                     Millions)
------------------------------------------------------------------------
DBS (high power satellite)                27.20                 28.97
C-Band (low power satellite)               0.20                  0.21
MMDS (microwave)                           0.10                  0.11
SMATV (private apt/condo)                  1.00                  1.06
Broadband Competitors                      1.20                  1.28
Non Cable MVPD                            29.70                 31.63
Cable                                     64.20                 68.30
------------------------------------------------------------------------
    Total MVPD                            93.90                100.00
------------------------------------------------------------------------
Sources: NCTA estimates based on data from Kagan Research LLC, Kagan
  Media Money, January 4, 2006 at 7; and Nielsen Media Research.

Direct Broadcast Satellite
    DBS companies currently have more than 27 million customers 
compared with none 12 years ago. The two nationwide DBS providers now 
serve 29 percent of all multichannel video households and their 
penetration is 25 percent or greater in at least 25 states. DIRECTV 
(15.13 million customers) and EchoStar (12.04 million subscribers) are 
now larger than all of the cable companies in the United States except 
Comcast. Cable made significant gains in digital telephone and high-
speed Internet customers in 2005, but its share of multichannel video 
customers has fallen well below 70 percent.
    DBS operators continue to experience strong subscriber growth in 
virtually every market where they offer local channel service. \32\ 
Indeed, DIRECTV and EchoStar report that their total number of 
subscribers increased from 24.85 million to 27.17 million between 
December 2004 and December 2005, an increase of 9 percent. \33\ 
According to Strategy Analytics, ``DBS has robbed cable of the slow-
but-steady growth it enjoyed up until the late 1990s, but its broader 
impact has been to expand the total base of multichannel TV homes.'' 
\34\
    The Government Accountability Office (GAO) stated in 2005 that 
``DBS penetration rates have been and remain highest in rural areas, 
but since 2001, DBS penetration has grown most rapidly in urban and 
suburban areas, where the penetration rates were originally low . . . 
In short, over the 2001 to 2004 time frame, the DBS penetration rate 
grew about 50 percent and 32 percent in urban and suburban areas, 
respectively, compared with a growth rate of 15 percent in rural 
areas.'' \35\ As Chart 9 shows, DTH penetration of television 
households, as of November 2005, exceeded 30 percent in 9 states, 20 
percent in 36 states, and 15 percent in 46 states.

 Chart 9--States with Direct-To-Home (DTH) Dish Penetration of More than
                     Fifteen Percent, November 2005
------------------------------------------------------------------------
                        Penetration                          Penetration
        State              Rate              State              Rate
                        Percentage                           Percentage
------------------------------------------------------------------------
Vermont                       42.73  South Carolina                25.38
Montana                       38.03  Oregon                        24.77
Utah                          37.73  Wisconsin                     24.61
Idaho                         36.80  Arizona                       24.42
Wyoming                       35.56  Illinois                      23.04
Mississippi                   34.01  North Dakota                  23.61
Missouri                      33.94  South Dakota                  23.51
Arkansas                      32.50  Maine                         23.07
Georgia                       30.69  Michigan                      23.00
Colorado                      29.57  Nebraska                      22.81
New Mexico                    29.55  Washington                    22.28
Oklahoma                      29.44  Kansas                        22.15
Alabama                       27.93  Florida                       22.05
Indiana                       27.84  Alaska                        19.29
Iowa                          27.31  Delaware                      19.26
California                    26.94  Louisiana                     18.61
Virginia                      26.71  Maryland                      18.58
Tennessee                     26.62  Ohio                          18.54
Kentucky                      26.45  Nevada                        17.86
West Virginia                 26.42  New Hampshire                 17.30
Texas                         26.33  New York                      16.69
North Carolina                26.05  Pennsylvania                  16.16
Minnesota                     25.62  New Jersey                    16.00
------------------------------------------------------------------------
Source: The Bridge, November 1, 2005 www.mbc-thebridge.com; TV Household
  data from A.C. Nielsen.

    Partly in response to the competition posed by DBS, cable invested 
more than $100 billion in new equipment and facilities between 1996 and 
2006. These capital expenditures allowed cable to offer new digital 
services and digital tiers--including HDTV, interactive program guides, 
video-on-demand, personal video recorders, and CD quality, commercial-
free music channels.
    Cable's upgrades have provoked a competitive response from DBS, 
which is good for consumers. For example, DIRECTV's CEO Chase Carey 
acknowledges that many cable operators have improved their video 
service in recent years, ``which is why we have to continue to 
improve.'' \36\ In an effort to keep pace with cable's video-on-demand 
movie offerings, DIRECTV and EchoStar have stepped up marketing and 
promotion of their pay-per-view movie services. \37\ In addition to 
EchoStar's stand-alone pay-per-view channels, the company's Dish on 
Demand service launched January 2005 with 30 titles downloaded to 
subscribers using the company's DISHPlayer Digital Video Recorder 
(DVR). DIRECTV has promoted its pay-per-view business with discounts on 
recent Hollywood releases. EchoStar is rolling out the first portable 
DVR device, called the Pocket-Dish, in an effort ``to get a leg up in 
its battle with cable and satellite TV rivals.'' \38\ It has also 
teamed up with Frontier, a telecommunications provider, to offer a 
bundled package of satellite television, Internet and telephone service 
in 24 states. \39\ This is in addition to the joint marketing 
arrangements DIRECTV and EchoStar have with Bell companies.
Broadband Service Providers and Municipal Overbuilders
    Although DIRECTV and EchoStar are cable's largest MVPD competitors 
at this time, cable operators continue to face competition from other 
facilities-based providers in major U.S. markets. Broadband service 
providers (BSPs)--which include independent, municipal, and CLEC 
overbuilders--are offering bundles of video, voice, and data services 
over a single network. \40\ RCN, the largest BSP, has 371,000 cable 
subscribers and ranks as the twelfth largest MSO. It operates in major 
metropolitan areas, including San Francisco, Chicago, Boston, New York, 
and Washington, D.C. RCN's video, telephone, and high speed data 
service passes nearly 1.5 million homes. \41\
    Wide Open West (WOW), the fourteenth largest MSO, serves an 
estimated 291,200 subscribers, and passes an estimated 1.4 million 
homes. Knology Holdings, the twenty-first largest MSO, reports 175,300 
cable subscribers, and passes 783,000 subscribers. Grande 
Communications, the thirtieth largest MSO, provides cable service to 
87,800 subscribers and passes more than 328,000 homes. \42\
    Municipally-owned cable systems, in selected areas, also continue 
to compete with cable systems and other MVPDs. According to a survey by 
the American Public Power Association (APPA) of its members, conducted 
at the end of 2004, 102 municipally-owned utilities offered cable TV 
service. \43\ The APPA survey also reported that 81 municipally-owned 
utilities were offering cable modem or DSL service, and 52 municipal 
utilities offered telephone service. \44\
Mobile Video
    Digital video recorders and video-on-demand services have fueled 
consumer demand for watching TV shows whenever people like. The next 
goal for video providers is to offer consumers the ability to watch TV 
wherever they like. The market for video over cell phones is growing 
quickly and is being developed by major players--including service 
providers like Verizon Wireless, Sprint, and Cingular as well as major 
technology companies like Qualcomm, Microsoft, and Nokia.
    For example, Verizon Wireless rolled out V Cast, a service that 
offers video programming to cellular telephone users, in February 2005. 
\45\ V Cast currently provides news updates, sports highlights, 
celebrity news, stock quotes and market information, weather, and games 
for $15 per month. Its television-like video, at high bit rates, allows 
customers to download music videos and other high quality content. It 
is also reportedly working on its own original, reality programming. 
Verizon asserts that its V Cast service is ``available in 118 major 
metropolitan areas covering more than 148 million people.'' \46\ 
Industry experts estimate that Verizon Wireless has signed up 500,000 
customers since the service was launched early this year. \47\
    Similarly, Sprint Corporation began broadcasting live video over 
its wireless phones in August 2004. \48\ Sprint PCS customers can now 
see news, video clips, and other content real time over their cell 
phone. Sprint/Nextel has also announced that it will ``offer 2-3 Mbps 
mobile broadband service to the top 100 U.S. markets at $20-$40 a month 
in 2008.'' \49\ Qualcomm recently introduced its TV-cell phone service, 
MediaFlo. \50\ In addition, MobiTV, a video service made available by 
Sprint and Cingular in the United States, now has 500,000 subscribers 
and an Emmy Award from the Academy of Television Arts and Sciences for 
its streaming TV broadcast service. \51\
    The drive to deliver TV content to portable devices is picking up 
steam, as some providers prepare to launch Hollywood films and short 
format cinema in the near term. \52\ HBO and Cingular Wireless recently 
entered a pact for wireless content distribution. \53\ In addition to 
making the network's existing programming available, HBO may create new 
entertainment channels for the service.
    Meanwhile, Sony's new portable PlayStation game device, known as 
PSP, is another mobile video play. It is capable of downloading TV 
shows and video information. It has been called ``a plasma screen in 
your pocket.'' \54\
    Although still a nascent business, some financial analysts on Wall 
Street are predicting the following about wireless video services: \55\

        The U.S. mobile video user base may balloon to more than 20 
        million by the end of 2007, up from less than 1 million today, 
        says Albert Lin, an analyst at American Technology Research 
        (ATR). Assuming each subscriber pays $5 a month for such 
        services, that would translate to a $1.2 billion market. 
        Worldwide, more than 250 million people are expected to be 
        watching mobile video by 2010, generating some $27 billion in 
        sales, vs. with $200 million today, according to market 
        consultant ABI Research.

Internet Video
    The video landscape is marked not only by intense rivalry among 
cable, satellite and telephone providers but also Internet-based video 
delivery systems. Consumers now have new ways to access video content--
from digital cell phones and other portable devices to interactive 
websites to enhanced in-home consumer electronics and computer 
equipment with high definition DVD or streaming video-capability. Not 
surprisingly, Internet companies such as Yahoo! and Google have 
declared themselves to be media companies offering multiple services to 
compete with cable.
    As one observer put it, the ethos of New TV can be captured in a 
single sweeping mantra: anything you want to see, any time, on any 
device.'' \56\ Another stated it this way:

        It's the key battleground in what promises to be one of the 
        most bruising--and important--global corporate fights in the 
        next couple of years. Telephone giants, cable titans, computer 
        companies and consumer electronics makers are all vying to 
        provide the next generation of high-tech entertainment--a 
        single network or gadget that lets you view photos, listen to 
        music, record DVDs and tune into whatever TV programs you want 
        to watch, whenever you feel like watching them. \57\

    There is no denying that this proliferation of new delivery modes--
the combination of digital communications and computers with 
entertainment and immediate access to worldwide information--is making 
all industry players compete more aggressively to stay in the game. As 
one media analyst recently said, ``from an investment standpoint, I 
don't think we've ever before seen such a competitive landscape.'' \58\
    The FCC has recognized that video provided over the Internet has 
grown and promises to become an increasingly strong participant in the 
video programming marketplace. \59\ As broadband Internet offers 
broadcast-quality video, consumers are increasingly turning to 
Internet-based means of accessing video content, including downloading 
movies and other high value video content traditionally available only 
through broadcast, cable, satellite or home video outlets. Libraries of 
video content, containing thousands of hours of video programming, are 
becoming available to consumers on a personalized, customized basis.
    Internet companies are providing their own unique content or 
partnering with other established content providers and video 
distributors. New entrants, like Akimbo Systems, offer a mix of 
established TV programming and unique content via the Web. Akimbo 
charges $10 a month and offers about 1,600 programs, some for an extra 
fee. The company's chief executive predicts that Akimbo ``will do what 
eBay has done for retailing.'' \60\ Google, Yahoo! and Microsoft are 
developing video search engines to harness video content via their 
portal service. \61\ Over the past year, Yahoo! predicted a one billion 
subscriber base for its multiple media services by decade's end. \62\ 
BitTorrent, an Internet file-sharing method enables video enthusiasts 
to trade video files online. iFilm and other websites offer video clips 
to millions of customers. Wi-FiTV, a broadband website that features 
more than 200 TV channels from around the world, recently began 
service.
    Program networks are enhancing their Internet presence to gain 
viewers and advertising dollars. These web ``channels'' contain 
specially made programming, short videos targeting niche interests, and 
repackaged TV content. \63\ MTV Overdrive, a mix of news, live 
performances and on-demand music videos launched in April 2005. 
Networks such as Home & Garden Television, Food Network, CNN, Fox News 
Channel, and MSNBC are offering more video content on their sites. 
According to one analyst, Internet advertising is headed toward a 25 
percent increase over the last year, to upwards of $8.8 billion in 
2005. \64\
    AOL saw a jump of 120 percent in its on-demand video streaming in 
2004 and drew in five million viewers for its exclusive live coverage 
of the July 2, 2005, Live 8 concert. \65\ ManiaTV.com, the interactive 
television website, had 1.6 million users in July alone.
    As Internet companies and website operators grow their on-line 
video businesses, consumer electronics manufacturers are developing 
ways to exploit the World Wide Web via equipment. Toshiba and 
Matsushita, for example, offer digital TVs that allow users to download 
and store online video, along with DVD recording capability. \66\ PC 
makers are developing new ``media center'' PCs that can play and record 
movies, television, and music accessed on-line. As described by PC 
magazine online, ``there is going to be a big battle for dominance in 
people's living rooms. What we've seen is a mini-explosion of set top 
boxes for Internet television.'' \67\ This flurry of announcements and 
deals in recent months shows that all players in the video marketplace 
are positioning themselves to compete in the IPTV arena.
Broadcasting
    Broadcasters are still strong competitors to cable and other 
multichannel providers. The competition for viewers is manifested in 
the battle for advertising dollars. After a 10-year decline in viewers 
aged 18 to 49, the broadcast networks posted an increase in this key 
demographic for the 2004-2005 television season. It all came down to 
the big four broadcast networks' crop of breakout hit shows. Some 
network shows turned in performances ``akin to the days before cable 
became a serious competitor.'' \68\ This has boosted advertising 
commitments for the coming year on all broadcast networks.
    While the broadcast share of television viewing has declined in 
recent years as television viewers have increasingly opted for the 
multitude of choices available on cable, broadcast television remains a 
potent force. Broadcasting's share of the viewing day continues to 
exceed 40 percent. \69\ Moreover, approximately 15 percent of 
television households do not subscribe to any multichannel service. 
These television households continue to find broadcast television alone 
or in combination with non-MVPD video sources (such as DVDs) to be 
their preferred means of receiving video programming--and a significant 
percentage of MVPD households include television sets that are not 
connected to multichannel service.
Home Video
    DVDs, video cassettes, and laser discs continue to provide 
competitive alternatives to MVPD viewing options. There are 
approximately 47,000 DVD titles available for purchase or rental today, 
compared to 30,000 a year ago. \70\ Consumers spent $24.5 billion 
renting or purchasing DVDs and VHS tapes last year, while generating 
$9.4 billion in domestic box office revenue. \71\ In addition to 
theatrical releases, many highly popular previously broadcast 
television series are now available in DVD format, frequently 
accompanied by major advertising campaigns. Popular cable network shows 
are also available on DVD.
    The growth in sales of DVD-formatted programming has been 
facilitated by gains in the sale of DVD hardware. U.S. consumers 
purchased 37 million DVD players in 2004, an eight percent increase 
over the previous year. During the first half of 2005, nearly 14 
million DVD players were sold to consumers, more than a six percent 
increase over the same period last year. Household penetration is 
expected to reach 80 percent by year-end 2005, with over 45 percent of 
DVD owners having more than one player. When accounting for computers 
with DVD-ROM drives and DVD-enabled video game consoles, an estimated 
79 million households currently have the capability to play DVD, 
approaching three-fourths of all U.S. TV households. \72\
    With regard to DVD software, on-line provider Netflix recently 
teamed with retail giant Wal-Mart to offer their customers access to 
more than 40,000 titles of video programming. \73\ Overall, consumers 
spent $15.5 billion in 2004 on DVD sales, an increase of 33 percent 
over 2003, while revenues from DVD rentals increased 26 percent over 
2003, as consumers spent more than $5.7 billion. \74\
VI. Vertical Integration
    Vertical integration in the cable industry has declined 
dramatically over the past decade. For example, in 1992, half of all 
cable program networks were vertically integrated with cable system 
operators. \75\ Since 1992 the percentage of programming networks in 
which cable operators collectively have any ownership interest has 
dropped to 21.8 percent. No single cable operator has a financial 
interest in more than seven percent of the more than 475 national 
program networks (counting each multiplexed pay-per-view network only 
once) identified in the FCC's Twelfth Annual report on competition in 
the video marketplace. \76\ Consequently, the vast majority of channels 
carried by any one cable operator--including Comcast, Time Warner, and 
every other member of NCTA--are not affiliated with that operator.
    Even with over 530 national program networks, including several 24-
hour all-news channels, the video marketplace is open to new 
independent networks. 90 cable channels have launched since January 
2000 which are not affiliated with a cable operator, according to the 
FCC. This belies the complaints made by some critics that cable 
operators are refusing to carry independent programmers.
VII. Telephone Company Entry Into Video
    Now that DBS has transformed the video marketplace so that 
virtually all television households have choice, it is easy to forget 
that only a decade ago, it was the large local telephone companies that 
were promising to provide a competitive alternative to cable--just as 
cable operators were promising to provide a new source of telephone 
service. Congress took those promises seriously and cleared a path for 
both the cable and telephone industries to enter each other's business. 
The 1996 Telecommunications Act immediately removed the statutory 
barrier for telco entry into video. \77\ It also allowed cable to 
provide local exchange service, \78\ assuming that cable operators met 
the regulations for providing competitive local exchange service.
    The cable industry delivered on its promise to provide facilities-
based competition to incumbent voice providers. By contrast, the 
telephone companies did not fulfill their promises to enter the video 
marketplace. Instead, they spent ten years focused on the long distance 
market and thwarting the efforts of their competitors--especially the 
CLECS--to provide local telephone service.
    The telephone companies are now reviving plans to provide 
multichannel video programming services. \79\ For example, AT&T/SBC is 
spending $4 billion over the next three years to install fiber optic 
cable to serve up to 18 million homes and plans to deliver television 
services using Internet protocol (IP) technology. \80\ Verizon is 
spending $6 billion over five years to lay fiber directly to 16 million 
households in its service areas. \81\
VIII. Conclusion
    As Congress drafts changes to the Telecommunications Act of 1996, 
we urge you to treat like services alike, preferably in a deregulatory 
environment. We will do the rest by raising private risk capital, 
investing in new technology, offering better customer service, creating 
innovative programming, and competing with other multichannel video 
providers in order to provide consumers with the best voice, video, and 
data services possible.
ENDNOTES
    \1\ Some cable operators are also beginning to add wireless 
telephone service to their bundle, as Time Warner did recently in its 
partnership with Sprint.
    \2\ Twelfth Annual Report on the Status of Competition in the 
Market for the Delivery of Video Programming, FCC 06-11 (released March 
3, 2006) at paragraph 5.
    \3\ PCMag.com Productwire: In2TV.
    \4\ Verizon Wireless Connect magazine, Spring 2006 issue, pp. 2 and 
10, and verizonwireless.com.
    \5\ Twelfth Annual Report on the Status of Competition in the 
Market for the Delivery of Video Programming, FCC 06-11 (released March 
3, 2006), paragraph 21.
    \6\ In return for deregulation, the cable industry promised 
Congress and American consumers that it would provide: (1) facilities-
based competition to the telephone companies, and (2) a new generation 
of advanced information and video services--both of which we have done.
    \7\ The networks include Cinemax HDTV, Comcast SportsNet HDTV, 
Discovery HD Theater, ESPN HD, ESPN2 HD, FSN HD, HBO HD, HDNet, HDNet 
Movies, INHD, INHD2, MSG Networks in HD, NBA TV, NFL Network HD, 
Outdoor Channel 2 HD, Showtime HD, Spice HD, STARZ! HDTV, The Movie 
Channel HD, TNT in HD, Universal HD, and YES-HD.
    \8\ As of September 30, 2005, cable operators voluntarily carried 
681 digital broadcast signals--a 124 percent increase over the 304 
stations carried in December 2003.
    \9\ ``Comcast's Got Game,'' The Street.com, August 1, 2005.
    \10\ ``Who's going to win the living room wars?'', The Wall Street 
Journal, April 25, 2005.
    \11\ ``Cable in full flower: On Demand Makes Content Easier to 
Access--and Ads Easier to Target,'' The Denver Post, April 11, 2005 at 
F-01.
    \12\ ``VoD Squad Takes on Satellite TV,'' Chicago Sun-Times.com, 
May 31, 2005, (available at http://www.suntimes.com/output/business/
cst-fin-vod31.html).
    \13\ ``2005 Broadband Cable Financial Databook,'' Kagan Research, 
at 12.
    \14\ ``Cable Talks, Wall Street Listens,'' Broadcasting & Cable, 
April 11, 2005, at 18.
    \15\ Kagan Research, LLC, ``MSOs Fast-Forward DVR Purchases,'' 
Broadband Technology, May 12, 2005, at 1-2.
    \16\ Ibid.
    \17\ Overall, the total number of MVPD customers with DVR 
functionality is likely to grow. The Yankee Group is forecasting 25 
million DVR households by 2007 and Forrester Research is estimating 
35.7 million DVR households by 2008 ``Satellite, Cable Give DVRs a 
Boost,'' Advertising Age, June 27, 2005; ``Cable Firms Embracing 
Digital Video Recorders,'' Investor's Business Daily.
    \18\ ``High-Speed Services for Internet Access: Status as of 
December 31, 2004,'' FCC Industry Analysis and Technology Division, 
Wireline Competition Bureau, July 2005 at 3.
    \19\ Leichtman Research Group, Research Notes, 4Q2005, at 7.
    \20\ ``High-Speed Services for Internet Access: Status as of 
December 31, 2004,'' FCC Industry Analysis and Technology Division, 
July 2005, at 6.
    \21\ Research Notes, 1Q2005 (http://www.leichtmanresearch.com) at 
7.
    \22\ ``Downgrading Cable & Satellite: Content Looks Cheaper on 
EPS,'' Morgan Stanley Equity Research, July 20, 2005, at 29.
    \23\ ``Federal Communications Commission Releases Data on High-
Speed Services for Internet Access,'' Press Release, FCC, July 7, 2005, 
at 2.
    \24\ NCTA estimate based on data from company reports, Leichtman 
Research Group, and Kagan Research. Cable modem data based on top 10 
cable MSOs. DSL data based on four Regional Bell Operating Companies.
    \25\ ``Cablevision Revs Up 20-Meg Trial,'' Communications 
Engineering & Design, September 1, 2005, at 6.
    \26\ ``Are Power Lines the Internet's Future? '' The Austin 
American Statesman, July 17, 2005, at J1.
    \27\ ``Cable Poised to Add Four Million IP Voice Subs in 2006,'' 
Kagan Broadband Technology, February 17, 2006, at 1.
    \28\ ``IP Voice Posed to Become Major Player,'' Kagan Broadband 
Technology, February 18, 2005, at 1.
    \29\ Ibid.
    \30\ Moreover, in cable-plus homes, ad-supported cable networks 
outpaced the Big 3 on a total day basis by 31 share points, with cable 
posting a 53.7 share to the broadcasters' 22.2.
    \31\ Twelfth Annual Report in the matter of ``Annual Assessment of 
the Status of Competition in the Market for the Delivery of Video 
Programming,'' released March 3, 2006: FCC 06-11 at paragraph 5.
    \32\ ``Cable's Unique Market Opportunity,'' Investment Dealers 
Digest, February 21, 2005.
    \33\ NCTA estimates based on data from Kagan Research LLC.
    \34\ ``US Multichannel TV Update: Satellite Gains, But Does Cable 
Lose? '' Strategy Analytics, Inc., April 1, 2005.
    \35\ Statement by Mark L. Goldstein, Director, Physical 
Infrastructure Issues, Government Accountability Office, Congressional 
Quarterly, GAO Report, April 2005 at 3.
    \36\ ``Further to Fly; DIRECTV Continues to Grab Market Share 
Despite Stepped Up Competition,'' Multichannel News, May 23, 2005.
    \37\ ``DBS Tries PPV Discounts, Downloads,'' Multichannel News, May 
23, 2005.
    \38\ ``EchoStar to Roll Out Portable DVR Device,'' Investor's 
Business Daily, May 26, 2005.
    \39\ ``Frontier, EchoStar Form Strategic Alliance,'' Satellite 
News, April 5, 2005.
    \40\ 11th Annual Report at 2801, n. 362.
    \41\ ``Cable TV Investor: Deals and Finance,'' Kagan Research, 
Inc., November 30, 2005, at 13.
    \42\ Ibid.
    \43\ ``Powering the 21st Century Through Community Broadband 
Services,'' American Public Power Association, Sept. 2005.
    \44\ Ibid.
    \45\ ``On-Demand In The Palm Of Your Hand: Verizon Wireless 
Launches `VCAST'--Nation's First And Only Consumer 3G Multimedia 
Service,'' Verizon press release, January 7, 2005.
    \46\ http://getitnow.VZshop.com/index.aspx?Id=Vcast_coverage.
    \47\ ``Narrowcasting Video: Can Mobile Mimic Cable's Model?'' 
Wireless Week, Oct. 25, 2005, http://www.wirelessweek.com/article-
mobilecontent/CA6277594.html.
    \48\ ``Sprint Will Start TV Service for Wireless,'' Kansas City 
Business Journal, August 13, 2004.
    \49\ ``Sprint Plans $20-$40, 2-3 Mbps Mobile Service in Top 100 
Markets Starting 2008,'' Communications Daily, Warren Communications, 
January 20, 2006, p. 4.
    \50\ ``Qualcomm Goes with the MediaFLO; Armed with New Chip, 
company to join the TV-cell phone scramble,'' Broadcasting & Cable, May 
16, 2005.
    \51\ ``MobiTV, Cingular to Put Radio on Cell,'' Inside Bay Area, 
Nov. 15, 2005, 
http://insidebayarea.com/search/ci_3217487.
    \52\ ``The Movie Theater in Your Pocket; Direct from Cellywood: 
Cell-phone cinema isn't exactly like the bit screen kind, but its 
potential sure is attracting attention,'' Business Week Online, June 
22, 2005.
    \53\ ``HBO Unplugged,'' MSNBC.com, August 9, 2005.
    \54\ ``The Handy Future of TV; With Internet Uploads to Portable 
Players, the Airwaves are Wide Open,'' Kansas City Star, April 20, 
2005.
    \55\ Olga Kharif, ``The Coming Video Deluge,'' BusinessWeek Online, 
October 11, 2005.
    \56\ ``Television Reloaded,'' Newsweek, May 30, 2005.
    \57\ ``Who's going to win the living room wars?'' The Wall Street 
Journal, April 25, 2005.
    \58\ ``Panelists See Communications Services Converging,'' 
Communications Daily, June 2, 2005, quoting Richard Greenfield of 
Fulcrum Global Partners.
    \59\ 12th Annual Report at paragraphs 135-139.
    \60\ ``Merger of TV and Web May Hit Cable Industry Before It's 
Prepared,'' The Wall Street Journal, April 18, 2005.
    \61\ ``Next Via the Internet: Tailored TV,'' Associated Press 
Online, May 16, 2005.
    \62\ ``Mermigas on Media,'' The Hollywood Reporter, April 5, 2005.
    \63\ See e.g., ``CNN.com plans Internet live news service,'' 
Financial Times, May 16, 2005.
    \64\ WSJ On-Line, May 16, 2005.
    \65\ ``Extreme TV; ManiaTV.com offers college kids a broadband 
barrage of chat, sport, music and film. Is this the perfect media for 
the digital generation?'' MSNBC.com, August 24, 2005.
    \66\ ``Format Wars,'' Financial Times, Comment & Analysis, March 3, 
2005.
    \67\ ``The Web: Internet TV Ready for Prime Time,'' Gene Koporwski, 
UPI, March 9, 2005.
    \68\ ``Desperate No More? Networks See a Rebound in Viewers,'' The 
Wall Street Journal, May 26, 2005.
    \69\ Cabletelevision Advertising Bureau, 2005 Cable TV Facts, 
www.onetvworld.org/?modula-displaystory+story_id=1257xformat=html.
    \70\ The Digital Entertainment Group, ``DVD Household Penetration 
reaches 75 Million,'' (press release), July 26, 2005.
    \71\ The Digital Entertainment Group, ``Industry Boosted by $21.2 
Billion in Annual DVD Sales and Rentals,'' (press release), January 6, 
2005; ``Movie Income Rises in 2004, but Ticket Numbers Sag Slightly,'' 
The Associated Press, January 5, 2005 at http://www.post-gazeette.com/
pg05005/437134.stm.
    \72\ Ibid.
    \73\ ``Walmart.com and Netflix Announce New Promotional 
Agreement,'' Press Release, May 19, 2005.
    \74\ Ibid.
    \75\ Even then, most of each of those networks' customers were 
cable operators that did not have an interest in that particular 
network and would have no reason to carry it instead of an independent 
programmer.
    \76\ Id. at paragraph 157.
    \77\ See generally Section 302 of the Telecommunications Act 
establishing new sections 651-653 of the Communications Act, 47 U.S.C. 
Sec. Sec. 571-573.
    \78\ See Section 303 of the Telecommunications Act, establishing 
Section 621(b)(3) of the Act, 48 U.S.C. Sec. 541(b)(3), to facilitate 
cable provisions of telecommunications services.
    \79\ ``SBC Communications to Detail Plans for New IP-Based Advanced 
Television, Data and Voice Network,'' SBC Press Release, Nov. 11, 2004; 
``Verizon's New High-Fiber `Diet' for New Jersey, Blazing Fast Data, 
Crystal Clear Voice, Video Capability,'' Verizon Press Release, Sept. 
15, 2005.
    \80\ ``SBC and Comcast Want it All,'' San Francisco Chronicle, July 
31, 2005.
    \81\ ``Verizon, DIRECTV Get Closer,'' Boston Globe, February 22, 
2005.

    The Chairman. Thank you very much. I'll hold off questions. 
The next is Earl Comstock, President and Chief Executive 
Officer of COMPTEL, a stranger in our midst.

     STATEMENT OF EARL W. COMSTOCK, PRESIDENT/CEO, COMPTEL

    Mr. Comstock. Yes indeed. Nice to be here, Mr. Chairman, 
and thank you all for having me here. Let me just comment for a 
minute and in one part agree, and another part disagree with 
the statements that Kyle just gave to you. A couple of 
observations. We're looking at the 1996 Act, and the first 
thing I would point out is that a lot of the 1996 Act did work. 
There's a lot of talk about reforming it, there's a lot of talk 
about gutting it, but we need to keep in mind that it did 
succeed in many areas. And I think it's worth the Committee's 
time to go back and look at those areas where it did succeed.
    Cable is a good example of the success of the 1996 Act, 
because of provisions included in, the provisions that Mr. 
McSlarrow just referenced, having to do with interconnection 
and access to the telephone network. The 1996 Act succeeded and 
we now have broadband deployment to over 90 percent of the 
homes in this country. You often hear about the need for 
regulatory relief on the part of the Bells so that they can 
bring broadband to America. Well cable has already done that, 
and they did it through not regulatory relief, but through the 
threat of competition. Competition that this committee helped 
engender in the 1992 Cable Act, when they made program access 
provisions available. Program access provisions, that 
interestingly enough USTA is busy supporting over on the House 
side, and said are necessary for there to be video competition. 
You've got to have program access. Those rules came about from 
Congress in 1992, and in 1996, Congress followed up with 
interconnection. Where I would differ with Mr. McSlarrow's 
testimony is he talked about the telephone network being built 
as a regulated monopoly, which is absolutely true. But the 
cable network was also built as a regulated monopoly. And then 
eventually it was de-regulated when part of the 1996 Act 
removed rate regulation, which Congress had imposed in 1992, 
from the cable industry. Why? So that they could invest in 
their networks to bring digital cable to the country, which 
they've done, which is why cable modem service today according 
to NCTA's own statistics is available to 90 percent of the 
homes that they pass. So broadband is available today. The 
reason you don't see greater broadband penetration, which is 
the purchasing of broadband services, is because the price is 
still too high.
    America today pays more for broadband than any other 
developed country in the world. And the reason is because we 
don't have competition. There was a great article in the Wall 
Street Journal yesterday talking about how France has gone in 
and told their incumbent entity France Telecom that they must 
provide access to competitors on their network. As a result 
they're able to get 25 megabits at about $30 a month. That's 
far faster than anything we have today. And this is over the 
existing copper loops that France Telecom has. The cable 
industry in France isn't very well developed, so they don't 
have a cable alternative. But I think the idea that somehow 
cable built their network in a competitive environment and the 
telephone companies built theirs in a regulated environment is 
a complete myth.
    Cable also got a protected environment in which to build 
their networks. And I think that's the point everybody needs to 
look at. Convergence is here, Mr. Chairman, and people are 
looking for the quadruple play. Voice, video, data and 
wireless. There's only one entity in the country today that has 
that capability over their own facilities. And that's the 
incumbent telephone companies. Why? Because they also own 
wireless licenses, cable doesn't have that advantage. So if 
competitors are going to be there, you need to give access to 
the incumbent networks that are there. Cable and telephone. And 
I'd just like to point out that it was Section 251 which 
allowed that kind of access, and lead to a lot of innovative 
services. DSL is one of those services which two COMPTEL 
companies, Earthlink and Covad offer. These two companies are 
bringing line powered voice to Americans, right now in three 
cities and they'll be rolling out in eight more soon. You can 
use your traditional telephone, it stays operational even if 
the power goes down, just like the traditional telephone 
network, but it's a broadband system. It's eight megabytes per 
second. That's over DSL and that's possible because of the 1996 
Act.
    The problem we have today is that the FCC has abandoned the 
1996 Act. It's walked away from it on the false premise of 
facilities based competition. We're not going to build new 
ubiquitous networks in this country. And I think the Committee 
needs to take a hard look at the facts, and recognize that if 
you want the consumer competition, as I think Senator DeMint 
very rightly focused on, as did both of the Co-Chairman, you're 
going to have to give access to those facilities. That access 
is not going to come from market forces. It's going to come 
from a competitively neutral set of rules, and that's what we 
hope you'll take up as you draft your bill. Thank you very 
much.
    [The prepared statement of Mr. Comstock follows:]

     Prepared Statement of Earl W. Comstock, President/CEO, COMPTEL
    Mr. Chairman and Members of the Committee, my name is Earl 
Comstock. I am the President and CEO of COMPTEL, the communications 
association of choice, which represents all types of competitive 
communications providers. COMPTEL has more than 180 members and is 
celebrating its 25th year representing competitors in the 
communications marketplace.
    The topic of today's hearing is competition and convergence, and 
COMPTEL members are on the cutting edge of providing converged 
communications services to both business and residential users. Our 
members brought local Internet access numbers, Digital Subscriber Line 
(DSL) and Voice over Internet Protocol (VoIP) services to small 
businesses and residential users long before the incumbent carriers 
would offer them, just as COMPTEL members brought competitive long 
distance offerings to businesses and consumers years before AT&T ever 
did. Likewise, COMPTEL members are at the forefront of offering 
competitive cable services through overbuilding and through use of 
Internet Protocol Television (IPTV). It is thanks to the innovation of 
competitors, and not incumbents, that consumers enjoy new, lower 
priced, and ever expanding service offerings.
    When Congress enacted the Telecommunications Act of 1996 ten years 
ago, one of the primary goals of that Act was to bring about 
convergence--namely the offering of voice, video, and data services 
over a common transmission platform. While it has taken longer to reach 
that goal than many might have expected when the 1996 Act was adopted, 
this hearing today can attest to the fact that convergence has finally 
arrived. The Members of this Committee who helped craft the 1996 Act 
should be proud of this result, and should take credit where credit is 
due.
    Notwithstanding the many myths that the Bell companies and cable 
lobbyists spread daily--for example that Congress was not aware of the 
Internet when the 1996 Act was adopted--the Act has worked as many of 
those who drafted it intended. For example, the cable industry has 
successfully used the cost based interconnection rules established in 
sections 251 and 252 to interconnect their cable networks with the 
telephone networks of the incumbent telephone companies to provide 
broadband Internet access and, more recently, local voice services 
using VoIP. Interestingly, the cable industry's ability to provide 
broadband Internet access and local voice service was made possible by 
upgrades the cable industry undertook starting in the early 1990s in 
order to meet the threat of competition that Congress helped create in 
1992 through the enactment of program access rules that are still in 
effect today. Those rules allowed Direct Broadcast Satellite (DBS) 
operators to successfully offer a competitive alternative to cable, and 
Congress included specific provisions in the 1996 Act to further spur 
cable network upgrades by allowing the Bell companies into cable and by 
including interconnection requirements that cable needed to enable them 
to provide Internet access and voice services.
    It was in response to FCC actions, court decisions, and rules 
adopted by Congress that made competition likely, rather than in 
response to regulatory relief, that cable made its investment. The 
threat of competition, and not regulatory relief, is what led cable to 
upgrade their networks so that roughly 90 percent of the homes in this 
country are passed by cable networks capable of providing cable modem 
service--a broadband service that is several times faster than the DSL 
service offered by the Bell companies today. Taking into consideration 
cable modem service availability, America ranks near the top globally 
in broadband deployment. Congress should carefully consider this 
successful prior precedent as it evaluates the present requests by the 
Bell companies for regulatory relief as a means of spurring further 
broadband deployment.
    Where America lags behind many other countries is in broadband 
penetration, i.e., in the number of homes that subscribe to broadband 
service. Broadband penetration is largely a function of price. America 
today pays more per megabyte of transmission speed than most of our 
European or Asian trading partners. This high price will only be 
reduced by competition or government price regulation. COMPTEL believes 
that competition, rather than price regulation, is the preferable 
approach to reducing the price Americans pay for broadband services.
    Unfortunately, the proposals before Congress today are not designed 
to spur competition. Instead, each of the proposals introduced so far 
in this Committee--S. 1504 and S. 2231--are roadmaps to disaster. They 
each would take huge strides toward reinstating the old Bell monopoly 
based on the mistaken assumption that facilities based competition is 
well established and growing. While it is true that cable facilities 
pass roughly 95 percent of American homes, those facilities reach less 
than 1 percent of businesses in the United States. Likewise, while many 
COMPTEL members have some of their own facilities to businesses and a 
few residential customers, COMPTEL members rely extensively on access 
to incumbent telephone company networks to reach most business and 
almost all residential customers. The same is true for wireless 
companies, some of whom are also COMPTEL members. Wireless companies 
link their cell towers to their mobile switching centers using wireline 
facilities--in most cases lines leased from the incumbent telephone 
companies under special access tariffs.
    The truth is that there is only one entity in this country that has 
facilities reaching 100 percent of businesses and residences in any 
given area, and that entity is the incumbent local exchange carrier 
(ILEC).
    In many areas of the country the ILEC is also a Regional Bell 
Operating Company that was formerly part of the Bell System monopoly. 
Particularly now, in light of the recent mergers, and the further 
proposed merger, involving former Bell entities, as well as the FCC 
Chairman's unilateral action last week to further deregulate Verizon, 
it is essential that the common carrier rules Congress reaffirmed and 
strengthened in the 1996 Act be put back in place. It is those rules, 
and not unregulated market forces, that have produced the competition 
that the Bells and their supporters point to as a justification for 
eliminating those very regulations. Without the rules, the competition 
that America sees today--competition that is not yet robust enough to 
drive down residential broadband prices to levels that will allow 
America to enjoy the same broadband penetration rates that consumers in 
other developed nations enjoy--will dry up and disappear, placing 
Americans at a serious competitive disadvantage in the global 
information economy.
    The 1996 Act was forward-looking and competitively neutral. 
Unfortunately the FCC was not up to the task of following the roadmap 
that Congress provided it. Entrenched in its own precedent and captive 
to the industries it was supposed to regulate, the FCC has step by step 
demolished the pro-competitive, technology neutral framework that 
Congress constructed in 1996. Starting with Chairman Hundt's decision 
in 1996 not to tackle access charge reform so that the FCC could 
continue its policy of favoring Internet data services over voice 
services, followed by Chairman Kennard's decision to exempt the 
telecommunications component of Internet access services (and other 
information services) from contributing to Universal Service and 
Chairman Powell's decision not to treat the transmission component of 
cable modem service in the same common carrier fashion that the FCC had 
previously treated the transmission component of DSL based Internet 
access services, until finally Chairman Martin decided to reverse 25 
years of prior precedent and treat common carrier transmission services 
bundled with an information service as entirely an unregulated service 
(as opposed to a regulated transmission service and an unregulated 
information service). With these actions the FCC has unraveled the core 
premise of the 1996 Act--namely that transmission services provided to 
the public would remain subject to common carrier regulation, 
regardless of the facilities used.
    Despite Congress' clear instruction in the 1996 Act to regulate 
based on what service was being provided rather than the technology 
used or the historic box in which a company started, the FCC to this 
day insists on classifying services based on technology and history. If 
left unchecked, this misguided policy will result in the re-
monopolization of business communications services in this country, 
and, at best, a duopoly in the provision of residential communications 
services.
    In considering now how to approach communications law reform, it is 
imperative that the Congress act to undo the damage being done by the 
FCC's policies. Congress faces an historic choice as it moves forward 
with new legislation. Congress can choose to re-instate the historic 
legal framework that led to the incredible growth and success of the 
Internet--the choice most governments are following in the rest of the 
world--or it can chose to continue down the path the FCC has been 
following, a path that will lead to the creation of a cable duopoly or 
even a cable monopoly--depending on whether or not AT&T and Verizon are 
successful in eventually running the incumbent cable operators out of 
business.
    The stakes couldn't be higher. Re-instating the rules that led to 
the success of the Internet will mean continued innovation, growth, and 
competition, which will keep America as a leader in the Information 
Age. Continuing down the path toward a cable duopoly will mean 
stagnation, higher prices, and the loss of our leadership position as 
innovators and entrepreneurs move overseas in search of countries that 
have rules that enable them to get their products and services on the 
Internet without having to go through the cable or telephone company 
gatekeepers.
    The cable rules set forth in Title VI of the Communications Act are 
in fact the polar opposite of the Title II common carrier rules under 
which the Internet and competition evolved. The cable rules grant the 
operator of a cable network exclusive control over the content and 
services offered over that network, subject to only a few requirements 
to carry public, educational, and governmental channels and a limited 
amount of unaffiliated programming. Using those rules, over the past 
thirty years no major cable operator has voluntarily allowed any other 
company to purchase capacity on its network to offer content or 
services, even content or services that the cable operator itself is 
not yet offering. The former AT&T bought two cable networks, and still 
it could not get agreement from its fellow cable operators to allow 
AT&T to offer phone services, even though the other cable operators 
were not then offering those services. Likewise, AOL bought a cable 
network, yet AOL was also unsuccessful in getting agreements with the 
other cable operators to allow AOL to offer competing cable modem 
service over their networks. Now Verizon and the new AT&T are both 
filing papers with the FCC suggesting that they intend to protect much 
of the capacity of their broadband networks from competitors by 
claiming those networks are cable networks subject to the exclusive 
cable rules.
    The fundamental premise of the cable rules is that one person--the 
network operator--has the exclusive right to offer video programming to 
consumers over the cable network. The entire cable business model is 
predicated on rules that give network operators' control so that 
consumers are only able to access whatever package of video programming 
the network operator offers. Yet this business model is diametrically 
opposed to the Internet business model, which is predicated on common 
carrier rules that limit network operators' control so that consumers 
are able to access any content and services, including video content, 
which they choose. The two cannot co-exist, which is precisely why the 
cable companies, closely followed by the Bell companies, are working so 
hard at the FCC and in Congress to ensure that common carrier rules do 
not apply to their networks. In the aftermath of the FCC's recent 
decision to reverse its prior precedent and not apply common carrier 
rules to the transmission facilities underlying Internet access and 
other information services, Verizon and AT&T, like the cable operators 
before them, have both announced plans to limit the bandwidth available 
to consumers to speeds far less than what would be needed to access or 
provide independent packages of high quality video content.
    The Bells are making their plea for video franchise relief based on 
the argument that consumers deserve greater competition in the video 
marketplace. They rightly point to the fact that cable rates have been 
going up roughly eight percent per year--several times the rate of 
inflation--ever since Congress enacted the 1996 Act. Yet the Bells do 
not propose getting rid of the cable rules that have led to these 
abuses. Instead, what the Bells have proposed is simply allowing them 
faster entry so that they can share in the profit taking at consumer 
expense. If Congress really wants to give consumers competition in the 
video marketplace, the far more effective remedy would be to apply 
basic common carrier rules to all network operators. That would provide 
consumers with the greatest level of choice, and the greatest level of 
price competition.
    Eliminating the cable rules would also have other benefits. It 
would eliminate the messy debates that Congress, the FCC, and the 
courts all get dragged into over First Amendment rights, must-carry, 
and ala carte programming rules. While the only fair way to eliminate 
the cable rules is through a transition plan--after all, the cable 
industry legitimately relied on the existing rules--the time for such a 
plan is now. Particularly in light of the capacity that will eventually 
be freed up on cable networks with the analog to digital TV transition 
that Congress has slated for 2008, there is a short window of 
opportunity for Congress to enact a transition plan that could take 
advantage of that fact.
    Establishing a transition plan to eliminate the cable rules and 
apply basic common carrier principles to all network operators is an 
ambitious undertaking, but it is what is needed for America to remain 
as a world leader in the Information Age. COMPTEL stands ready to work 
with this Committee to fashion such legislation. This legislation 
should adopt technology neutral requirements that apply to all 
companies that construct their networks over public rights of way, 
using public spectrum, or other public resources (for example numbering 
resources). These requirements should include the duty to provide non-
discriminatory transmission service upon reasonable request, to 
interconnect their networks with other providers of transmission 
service on reasonable and non-discriminatory terms and conditions, and 
not to interfere with content and services transmitted over their 
networks. In addition, Universal Service obligations and benefits 
should apply to all such companies in a competitively neutral manner.
    The legislation should also recognize the considerable barriers to 
entry faced by new network operators. New network operators must 
construct their networks in a competitive environment, without the 
benefit of an existing infrastructure and customer base. In addition, 
every customer the new network operator hopes to serve is already being 
served by at least one incumbent. As a result, the new network operator 
must win that customer from an established provider, a task far more 
difficult than signing up customers who have never been served.
    In the alternative, if the Committee would prefer to leave in place 
the existing cable rules and build instead on the framework of the 1996 
Act, COMPTEL urges the Committee to: (1) apply the cost-based 
interconnection and unbundled network element requirements of sections 
251, 252, and 271 of the Act to both copper and fiber facilities; (2) 
require incumbent LECs to provide cost-based special access services 
under sections 201 and 202 of the Act; (3) require all facility based 
providers of Internet access services (including cable operators) to 
offer the transmission component of such services to others on the same 
terms and conditions as it provides such transmission to itself; (4) 
treat cable operators as common carriers to the extent they provide 
transmission services; (5) strengthen the program access rules in Title 
VI of the Act by closing the terrestrial loophole and improving access 
to video programming by small providers (6) improve the language in 
section 224 regarding access to rights of way to ensure competitive 
neutrality and eliminate discriminatory practices by franchising 
authorities; (7) establish reciprocal compensation arrangements for the 
transport and termination of traffic between carriers; (8) modify 
Universal Service mechanisms so that all facilities based providers 
contribute in a competitively neutral manner and are eligible to 
receive Universal Service support in a competitively neutral fashion; 
and (9) prohibit cable operators and common carriers from interfering 
with or degrading content or services transmitted over their network, 
or from favoring their own content and services (other than video 
programming offered as a cable service) over other content and 
services.
    Thank you for the opportunity to testify, and I would be happy to 
answer any questions.

    The Chairman. Thank you. The next witness is Walter 
McCormick, President and Chief Executive Officer of USTelecom 
in Washington; you too are a stranger, yes sir.

    STATEMENT OF WALTER B. McCORMICK, JR., PRESIDENT/CHIEF 
           EXECUTIVE OFFICER, UNITED STATES TELECOM 
                    ASSOCIATION (USTelecom)

    Mr. McCormick. Thank you, Mr. Chairman. Thank you, Senator 
Inouye. Thank you to the staff that's done so much work on 
these hearings. They're very timely. They've been very 
comprehensive. And as my two colleagues have stated, with 
regard to voice services, what a record of success since the 
1996 Act. When we were here in 1996, it was my industry that 
provided voice telephone service. If the telephone rang, you 
would stand up and you would go to the corner of the room to 
answer it. Today you can have one of Kyle's cable phones, or 
one of Earl's Internet phones, or one of my wireline phones, or 
one of Steve's wireless phones. My guess is, probably almost 
everybody in this room is carrying a voice telephone in their 
pocket. And so the consumer now has the ability to choose the 
voice services they want from the companies that they trust. 
It's a record of success. Similarly, consumers can choose 
Internet access from cable modem, from DSL, from wireless 
access, satellite access, or from broadband over power line. It 
is a marketplace characterized by competition. And I think 
about this industry, this committee having established a 
regulatory model for this industry that was modeled on the 
Interstate Commerce Act. The Federal Communications Commission 
was modeled on the Interstate Commerce Commission. And late in 
the 20th Century, you said with regard to railroads, that if a 
consumer can choose between a truck and train, it's time for 
government to get out of the way and let's let those industries 
compete. And today when consumers can choose between wireline 
phones and cable phones, and Internet phones, and wireless 
phones, or DSL, or cable modem or satellite, Internet 
satellite, it's time for government to step back and get out of 
the way and let consumers get the products they want from the 
companies they choose. Nowhere is this more important than with 
regard to video. Cable began as a monopoly that offered video. 
Technology has made it possible for cable to now offer voice 
service. Similarly, we began by offering voice service and 
technology has brought us to the place where we can now offer 
video. We believe that we should be free to offer video over 
our networks and to provide consumers with this choice. And we 
would suggest to you, Mr. Chairman, and to the Committee, that 
this is the one area where competition has not yet taken hold. 
The Chairman of the FCC has said that the price increases we're 
seeing in cable are contrary to the price decreases that we're 
seeing in every other area under his jurisdiction. So it's our 
hope, Mr. Chairman, that Congress will act this year to move 
forward with competition, video competition to cable, by 
letting us offer that service over our networks. And that 
Congress will do so in a comprehensive way, that as it 
addresses these issues, it will do so with an eye toward the 
appropriate role of government to guarantee the continuation of 
Universal Service, so that individuals--no matter where they 
live in this country--will have access to services--
telecommunications services of comparable quality and price. 
That it will do so with an eye toward societal obligations like 
911, access for individuals with disabilities, and the 
continuation of societal responsibilities related to customer 
privacy--consumer proprietary network information.
    Again Mr. Chairman, thank you so much for holding these 
hearings, and we're honored to be a part of them.
    [The prepared statement of Mr. McCormick follows:]

    Prepared Statement of Walter B. McCormick, Jr., President/Chief 
    Executive Officer, United States Telecom Association (USTelecom)
    Mr. Chairman, Co-Chairman Inouye and Members of the Committee, I am 
Walter McCormick, President and Chief Executive Officer of the United 
States Telecom Association (USTelecom).
    At the outset, let me thank you for conducting this comprehensive 
series of hearings. USTelecom and its members have been honored to 
testify on net neutrality, Universal Service, video franchising, 
municipal networks, and rural issues. As this impressive fact-gathering 
process draws to a close, it is only fitting that you bring it all 
together with convergence and competition--two words that capture 
perfectly the environment in which telecom firms now operate.
    For a century our organization was known as the United States 
Telephone Association. But the word ``telephone'' is becoming less and 
less descriptive of the business models and competitive strategies of 
our 1,200 member companies. Whether it's AT&T or the Epic Touch Company 
in rural Kansas, companies are rapidly transforming. They are 
diversifying into high-speed Internet, wireless services, VoIP, and 
broadband television.
    This is a significant change for these companies, some of which 
have been family-run telephone companies for a century or more. This 
diversification is the most far-reaching change in our industry today. 
It's sweeping the country, almost without regard to population density 
or geography.
    Our companies are racing to change the way they operate, and they 
need Congress to embrace change as well. We urge you to use two tools 
when you think about the future of our communications laws--a fresh 
perspective and a clean sheet of paper.
    When the 1934 Communications Act was written, providing phone 
service was an expensive undertaking. Congress acknowledged the 
existence of a monopoly and created the FCC and a body of laws to 
ensure quality service and reasonable rates.
    When the 1984 Cable Act was passed, Congress again accepted a 
monopoly arrangement and again established government as the one to 
protect consumers.
    Today, there are a variety of networks, and the barriers to entry 
in voice, video, and broadband are relatively low for all but your 
local telecom service provider. For Internet access, consumers are 
using: DSL, cable modem, satellite, wireless, and electric power lines. 
The range of video networks includes co-axial cable, satellites, 
wireless, and fiber-optic lines.
    In fact, these days, it's not even necessary to build a network to 
compete in voice and video. Companies like Vonage, Skype, and Sun 
Rocket have millions of phone customers. A variety of new websites 
allow anyone with an Internet connection to download movies, TV shows, 
or amateur video. Major sporting events are online now as well. In 
fact, you may recall the spate of media reports earlier this month 
regarding a possible drop in office productivity because employees 
could watch the NCAA basketball tournament on their computers.
    Against this backdrop, the USTelecom board of directors met in 
November 2004 and unanimously adopted principles that we believe should 
serve as the foundation for updating our Nation's telecom laws. These 
principles call for Universal Service reform and for a new regulatory 
approach, an approach geared to the creation of a competitive, 
consumer-driven market for communication services.
    As I alluded to a few moments ago, a serious concern of USTelecom 
is legacy regulation that either prevents competition or creates a 
competitive disadvantage for those who invest in networks. For 
instance, the marketing materials of Sun Rocket, the Internet phone 
company, say subscribers can avoid Universal Service charges. And, 
online video providers are winning customers and gaining market share 
every day--with no thought of having to apply for a local franchise 
agreement.
    Competition has already arrived in voice communication. But it is 
only emerging in video. The most significant communications policy 
challenge of the 109th Congress is how to hasten the development of 
full and fair competition in video.
    If you are fortunate enough to be a cable television provider, you 
have effectively operated as a monopoly for 20 years, albeit with some 
competition from satellite. In the 1996 Act, cable received authority 
to enter the telephone business--free from any legacy regulation, a 
position we did not oppose, since we believe consumers are better 
served--seeing more choice, innovation and lower prices--when companies 
are allowed to compete head-to-head in the marketplace. We hope that 
the cable industry will today urge the Committee to take this same free 
market approach of lowering barriers to entry for new video entrants as 
local telecom service providers try to enter the video business.
    Based upon its recent actions, we expect that cable will argue 
against our entry into video. Why compete in a free and fair 
marketplace when you have such a lucrative business arrangement as the 
cable companies currently do? Their pricing power has enabled them to 
raise rates 86 percent from 1995 to 2004. That's a figure generated by 
the FCC.
    When USTelecom called attention to these increases the cable 
industry responded by refusing to run our factual ads in the DC area 
and many other places around the country. In an awkward attempt to try 
and justify these soaring prices, the cable industry insisted that we 
take into account the rising number of channels. If you factor in 
additional channels, cable prices still have risen a whopping 57 
percent from 1995 to 2004.
    Whether you prefer to look at it as an 86 percent price increase or 
a 57 percent price increase, it's still a substantial number. And the 
cable companies fear new entry into video, because we are their most 
formidable competitor.
    Time is money for consumers. Postponing franchise reform until the 
next session of Congress, that one year of delay, will cost consumers 
$8 billion. A two-year delay would cost Americans nearly $16 billion. 
This comes to about $75 per household per year. This figure has also 
been broken down on a state-by-state basis, and the numbers are 
substantial. One year of delay in franchise reform would cost:

   Alaska consumers $12 million;
   Hawaii consumers $31 million; and
   Montana consumers $22 million.

    Consumers will pay a steep price for delay.
    The GAO has studied trends in cable pricing and the effects of 
competition. It found that cable faces wireline competition in only 2 
percent of its franchise areas. But wireline competition had an impact 
that satellite competition did not. The GAO found that prices were 15 
percent lower where cable faced a wireline competitor.
    Local franchising requirements impede our entry. They extend the 
period during which consumers will pay artificially high prices. Let me 
give you two examples:

   Ben Lomand Telephone Cooperative in McMinnville, Tennessee, 
        has upgraded its network, and has the capacity to offer video 
        service to approximately 60 percent of its 42,000 customers. 
        However, in order to offer video, it must apply for and receive 
        25 different franchise agreements, some of which are required 
        for areas in which it serves just 100-200 customers. After 18 
        months of trying, the company has received only 15 franchises.

   In the case of Verizon, one year after engaging in franchise 
        negotiations with 95 local franchising authorities, only 10 
        have granted franchises and 85 remain in negotiation. 
        Typically, the process takes 18 to 24 months.

    Technology has created vigorous competition in voice and broadband. 
Unleashing the forces of competition and convergence in the video 
sphere will require a little help from Congress.
    Consumers want a simpler life. They want one communications 
provider who can package their voice, video, and Internet into one 
bundle. And consumers want lower bills.
    USTelecom members all across the country are hustling to give 
consumers what they want. We realize we cannot rely on old business 
models and old practices. The digital age has changed everything for 
our industry. Unfortunately, the benefits of this change will be halted 
or delayed for millions of consumers unless Congress removes legacy 
regulations adopted in a different era and takes action to update our 
communication laws.

    The Chairman. Thank you. Our next witness is Steve Largent, 
President and Chief Executive Officer of CTIA, The Wireless 
Association of America, Washington, D.C. Another stranger in 
our midst. You guys have been here so often, I probably should 
be just able to use your names, but I can't because of that 
tube that's behind you.

STATEMENT OF STEVE LARGENT, PRESIDENT/CHIEF EXECUTIVE OFFICER, 
           CTIA--THE WIRELESS ASSOCIATION'

    Mr. Largent. Well thank you Mr. Chairman for the 
opportunity to be here, and Co-Chairman Inouye, and Senator 
DeMint, we appreciate the opportunity to testify. I have to 
tell you that I guess I'm somewhat biased, but I sincerely 
believe that our industry is the poster child for the topic of 
this hearing, competition and convergence.
    The wireless industry has had tremendous success in 
providing our customers and your constituents with the greatest 
array of choices they have ever received from any segment of 
the communications industry. American wireless subscribers have 
a myriad of opportunity when it comes to choosing a service 
provider, when it comes to choosing devices, service plans, and 
applications, be it video, data, music and much much more.
    American consumers,--rural and urban, rich and poor--have 
benefited enormously from Congress's farsighted decision in 
1993 to limit regulation of this industry.
    Last year the FCC's 10th Annual Competition report which 
highlighted the fact that, ``97 percent of the total U.S. 
population lives in counties with access to three or more 
different wireless operators.'' Today there are more 180 
wireless licenses, providing service to 200 million plus 
customers in this country.
    As a result of the numerous choice of providers, wireless 
subscribers are the beneficiaries of lower prices, more 
reliable service, and a variety of new features on their 
handsets.
    Just to give you a brief perspective on the economic impact 
of the wireless industry, in 2004, approximately 3.6 million 
jobs were directly or indirectly dependent on the wireless 
telecom sector. That same year the wireless industry 
contributed $92 billion to the gross domestic product, and as 
of mid-2005 the industry had spent more than a $187 billion to 
create and upgrade networks and facilities.
    Moreover the industry spent an additional $20 billion to 
acquire spectrum at auction. This tremendous investment in 
infrastructure, coupled with a continued commitment to bring 
the best and most cutting edge services to Americans has 
resulted in wireless consumers being able to obtain a 
converging array of mobile voice, data, and video. These 
services have profoundly changed the way we communicate as well 
as the way we live our lives. The wireless industry is on the 
verge of a renaissance as carriers obtain access to more 
spectrum and deploy faster technologies and even more 
innovative services. CTIA and our member companies believe the 
best is yet to come for American wireless subscribers. Wireless 
Internet and broadband capabilities are in their infancy, but 
such things as viewing real-time video over a handset is 
happening today. Unfortunately however, we see storm clouds on 
the horizon. Continued regulatory and legislative creep, at the 
state and local level is undermining the national framework 
that Congress established in 1993 for the wireless industry.
    Under the guise of consumer protection, states are 
beginning to enact inconsistent and conflicting regulation on 
the wireless industry. A patchwork quilt of state by state 
regulation threatens to chip away at the ability of wireless 
carriers, suppliers and developers to collectively bring new 
services to consumers and business users across the country in 
a time efficient and affordable manner. It would be 
understandable if these state laws and regulations were a 
result of growing consumer dissatisfaction and rising prices. 
But that is not the case. Last year based on FCC data, 
wireless-related complaints fell 46 percent the last 5 months 
of 2005 to 24 complaints per million customers or less than 3 
one-thousandths of 1 percent. Correspondingly, wireless rates 
have fallen 84 percent the last 13 years. I know of no other 
way to put it, than states are seeking solutions in search of a 
problem. Each instance of state regulation will add unneeded 
cost to the consumer and exponentially complicate the provision 
of mobile services that are inherently interstate in nature.
    Even regulation by a small handful of states threatens to 
undermine the nationwide and regional calling plans that are so 
common-place in the wireless market.
    What can this Committee and Congress do to stem the rising 
tide of inconsistent and conflicting state regulation? CTIA and 
the companies I represent strongly believe that because of the 
interstate nature of wireless services, Congress should preempt 
state laws that would conflict with its national framework for 
carrier practices and regulate only in instances necessary for 
public health and safety or demonstrated market failure. 
Finally Congress got it right in 1993 when it amended section 
332 of the Communications Act to create a Federal deregulatory 
framework for commercial mobile radio services. Wireless 
consumers have come to expect that they will receive more 
minutes, more reliability, and more features for less money. 
But in order for wireless to grow, flourish and experience its 
next renaissance, it needs a strengthened deregulatory national 
framework to foster innovative, efficient, and convenient 
wireless devices and services.
    Again I want to thank you, Mr. Chairman, for the 
opportunity to appear before you this afternoon and I look 
forward to your questions.
    [The prepared statement of Mr. Largent follows:]

Prepared Statement of Steve Largent, President/Chief Executive Officer, 
               CTIA--The Wireless Association'
    Chairman Stevens, Co-Chairman Inouye and Members of the Committee, 
thank you for the opportunity to appear before you to testify on two 
important issues, Competition and Convergence. My name is Steve Largent 
and as President and CEO of CTIA--The Wireless Association' 
(CTIA), I am pleased to be here today to discuss with this Committee 
the tremendous success the wireless industry has had in providing 
American consumers with the greatest array of choices they have ever 
received from any telecommunications segment--choice of providers, 
service plans, devices, and much, much more. American consumers--rural 
and urban, rich and poor--have benefited enormously from your decision 
in 1993 to limit regulation of the industry. I urge your continued 
leadership in helping the wireless sector to continue being able to 
provide American consumers with the kinds of wireless services they 
want at prices they can afford. As we enter our third decade, the 
industry is poised to bring the Internet to its more than 200 million 
mobile subscribers. We are at a critical juncture in our evolution and 
need your leadership to help us stay the course in providing maximum 
benefits to the consumer.
    The significant growth and expansion of the competitive mobile 
wireless industry has also had a profound impact on the U.S. economy. 
In 2004, approximately 3.6 million jobs were directly and indirectly 
dependent on the U.S. wireless telecommunications industry. In that 
same year, the wireless industry generated $118 billion in revenues and 
contributed $92 billion to the U.S. Gross Domestic Product. The 
wireless industry has continued its ongoing investments in the networks 
and other facilities needed to deliver increasingly sophisticated 
wireless services--with almost $174 billion in cumulative capital 
investment reported as of year-end 2004. Over the past five years, the 
wireless industry invested on average more than $20 billion annually in 
new facilities. In addition, carriers have bid in excess of $20 billion 
in winning spectrum licenses from the FCC. In the first six months of 
2005, wireless carriers invested another $13 billion in capital, 
further demonstrating their commitment to improving and expanding the 
reach of existing services and also increasing the delivery of advanced 
capabilities to consumers across the country.
    This tremendous investment in infrastructure, coupled with a 
continued commitment to bring the best and most cutting edge services 
to Americans, has resulted in wireless consumers being able to obtain a 
converging array of mobile voice, data and video, profoundly changing 
the way we communicate and the way we live our lives. Indeed, the 
wireless industry is on the verge of a Renaissance as carriers obtain 
access to more spectrum and deploy faster technologies and more 
innovative entertainment services like games, mobile television 
(including news and sports), movie clips and music.
The Wireless Competition Story
    In 1993, Congress amended Section 332 of the Communications Act and 
created a federal, national regulatory framework for ``commercial 
mobile radio services,'' recognizing that a nascent industry like 
wireless needed air to breathe and develop. Congress wisely and 
pointedly decided not to subject the wireless industry to the economic 
regulation typically applied in the landline context at the Federal and 
state levels. As a direct result of this historic Congressional high-
tech, and pro-consumer initiative, industry growth exploded and 
consumers began realizing benefits rapidly. Over the next ten years, 
more than 160 million wireless customers signed-up for service. Today, 
the wireless industry provides service to more than 200 million 
consumers nationwide through more than 180 facilities-based providers, 
Mobile Virtual Network Operators (MVNOs) and others.
    The FCC's 10th Annual Competition report to Congress last year 
noted that, ``97 percent of the total U.S. population lives in counties 
with access to three or more different operators offering mobile 
telephone service, the same level as in the previous year, and up from 
88 percent in 2000, the first year for which these statistics were 
kept. The percentage of the U.S. population living in counties with 
access to four or more and five or more different mobile telephone 
operators also remained roughly the same as in the previous year.'' 
Furthermore, the FCC also concluded that wireless companies are 
competing effectively in rural areas. In rural markets, the report 
notes, ``there is no evidence in the record to indicate that'' the 
existence of somewhat fewer competitors than in urban areas ``has 
enabled carriers in rural areas to raise prices above competitive 
levels or to alter other terms and conditions of service to the 
detriment of rural consumers.''
    Competition in the wireless marketplace has resulted in the cost of 
wireless service to consumers dropping 33 percent since 1997, and by 
more than 80 percent since 1994. Wireless service leads all U.S. 
telecommunications services in price declines since 1997. Consumers are 
getting more for less and doing more with it. In 1996, consumers used 
their mobile phones for an average of 125 minutes per month. In 2005, 
they used their mobile devices for more than 680 minutes per month. If 
the average wireless consumer in America spends $54 per month on 
wireless voice and data services, that same consumer would pay 
approximately $125 U.S. for the same services in the European Union.
    Hyper-competition among carriers has produced tailored service plan 
features and options, improved customer service, declining cost of 
service, ease of billing, and improvements in call performance. Dozens 
of rate plans are available in practically every market, from prepaid 
or pay-as-you-go plans, to family plans, and big bucket plans--almost 
all of which offer options like national, no-roaming, free or 
discounted nights and weekends, or in-network calling, as well as a 
wide variety of wireless phones and devices. In effect, there's a 
service plan and device tailor-made for you. In 2005, Harris 
Interactive found that 90 percent of wireless consumers are ``very to 
somewhat'' satisfied with their wireless service, and three-quarters of 
wireless consumers thought wireless a good value for the money. The 
highly competitive nature of the wireless industry is focusing 
carriers' attention on improving customer service, with increased 
numbers of customer service representatives and more training, as 
recently reported by the New York Times. The industry's focus on 
customer care is reflected in the small number of complaints filed with 
the FCC. In the FCC's latest report on Consumer Complaints released in 
February of 2006, the FCC noted that wireless complaints fell 28 
percent in the fourth quarter of 2005. (In fact, the monthly number of 
complaints fell 46 percent between August and December of 2005.) The 
total wireless complaints for the fourth quarter amounted to 24 
complaints per million subscribers, equal to 0.0024 percent. That's 24 
ten-thousandths of one-percent.
    Although a number of high-profile mergers have occurred in the 
wireless industry over the past few years, the total number of 
commercially operational wireless companies has remained relatively 
constant, with more than 180 facilities-based companies identifiable as 
directly offering wireless service to consumers in markets across the 
country. The facilities-based companies include national, regional, 
affiliate, and independent operators. Additionally, numerous MVNOs have 
launched or announced the launch of service, including Disney, ESPN, 
TracFone, and Virgin Mobile, among others. Last year, RCR Wireless News 
published a list of 19 active MVNOs and resellers, estimated to serve a 
minimum of 10.6 million customers, indicating they offered prepaid, 
postpaid, and hybrid service plans to consumers.
    Facilities-based licensees continue to announce the initiation of 
service, expansion of networks, and the construction of new cell sites 
in markets--including rural markets--across the country. They also 
continue to modify their market holdings in order to establish 
footprints they believe will allow them ``to more effectively provide 
value and services to customers,'' as well as more robust spectrum 
holdings in order to deliver more spectrum-intensive services to more 
people. The FCC's Memorandum Opinion and Order approving the merger of 
Sprint and Nextel noted the potential benefits to customers from the 
combination, including faster data rates and interoperability between 
push-to-talk capabilities. Likewise, Cingular Wireless has noted its 
on-going upgrading of the combined network resulting from the 
acquisition of AT&T Wireless' operations, and the greater capabilities 
offered by its increased spectrum holdings.
Convergence: The Wireless Perspective
    The proliferation of IP-based networks has clearly pushed industry 
segments away from silo models to a more integrated delivery system. 
Where does wireless fit in? Mobile voice has begotten digital mobile 
voice and data which has given rise to e-mails away from the office, 
mobile photography, mobile music and mobile media. The fully converged 
wireless network will permit consumers to access voice, video, and an 
extraordinary array of data services--at home, at work, in cafes, and 
on the move. The wireless platform offers a solution that overcomes 
some of the technological and economic challenges inherent in any wired 
environment, extending the reach of broadband technologies to 
traditionally underserved communities, including rural areas and less 
affluent urban markets. Mobility, however, is the factor that separates 
wireless from other broadband services, and mobility is the primary 
reason wireless broadband has the potential to grow at unprecedented 
rates.
    Mobile broadband services are already spreading across the country. 
In December of 2005, Cingular Wireless announced that subscribers could 
access its BroadbandConnect service through Cingular's new 3G network. 
Verizon Wireless has launched a broadband network based on evolution 
data only (EV-DO) technology available in 171 metropolitan markets 
covering more than 140 million people. Sprint Nextel began to roll out 
its EV-DO technology in mid-2005 and now offers wireless broadband 
services in 208 markets. Alltel offers both its Axcess Broadband 
service which feature bursts up to 2.4 Mbps and average speeds of 400 
to 700 Kbps, and its Axcess Mobilink service which lets customers use 
the Internet with bursts up to 144 Kbps and average speeds of 40 to 70 
Kbps. In addition to its extensive network of wireless hotspots, T-
Mobile offers mobile Internet access though its GPRS service. According 
to CTIA's own semi-annual wireless industry survey, as of mid-2005, 
half of all wireless customers had mobile devices that were capable of 
web-browsing.
    These and a host of other applications and advanced services are 
being offered in rural and urban areas across the country by these and 
other carriers, including: Alaska Communications Systems' ACS Mobile 
Broadband service, and the broadband and mobile Internet services of 
Cellular South, Cellular One of Amarillo, Dobson Cellular, First 
Cellular of Southern Illinois, and Midwest Wireless, and U.S. 
Cellular's array of easyedgeSM data services. Many other wireless 
applications (such as mobile television, multimedia messaging, text 
messaging, and wireless e-mail) are now being offered across the 
country.
    Mobile television is an application that has attracted the 
attention of both wireless carriers and network programmers, and is the 
basis for competitive offerings both inside the CMRS space and between 
CMRS and other providers. Informa Telecoms & Media, a British 
consultancy, predicts that in just five years, there will be more users 
of broadcast mobile television worldwide--124.8 million--than there are 
currently U.S. television homes (110 million). It has been reported 
that 2.4 million wireless customers in the U.S. viewed some form of 
mobile video in September 2005, and that 10 percent of wireless users 
expect to view some form of mobile video in 2006.
    MobiTV, Inc. (formerly known as Idetic, Inc.), a third party 
provider of video programming, offers a multitude of program networks, 
including The Discovery Channel, ESPN, MSNBC, and the Weather Channel. 
Sprint Nextel, Cingular Wireless, Midwest Wireless, Alltel, and 
Cellular South all currently offer MobiTV service in the U.S., while 
Centennial Wireless and Verizon Wireless offer MobiTV service in Puerto 
Rico. Subscribers to Verizon Wireless' V CAST service also have access 
to content from NBC, CNN, Fox Sports, and ESPN, among other content 
providers.
    These are just some of the offerings that demonstrate we are in the 
midst of a wireless Renaissance. In addition to video applications, 
other applications or features now available with wireless devices 
include a variety of competing music services, and the broad suite of 
functions included on Smartphones and other advanced handheld devices. 
The iTunes-equipped wireless phone, the satellite-radio equipped phone, 
and the potential for the m-commerce and proximity payments enabled by 
wireless handsets--all figure in the evolving wireless converged 
marketplace.
The Wireless Renaissance: Bringing the Internet to You
    Today, wireless carriers are the standard bearers for competition 
and are in the process of rolling out a wide variety of mobile 
broadband services. From a once local and high-priced voice service, 
wireless has become an unbounded array of affordable national and 
regional service offerings as the competitive landscape has driven 
ongoing innovation in services and technologies, and lowered prices for 
consumers. Although CTIA believes the best is yet to come, storm clouds 
are on the horizon. A patchwork quilt of state-by-state regulations 
threatens to undermine the ability of wireless carriers, suppliers, and 
developers to collectively bring new services to consumers and business 
users across the country.
    State legislation regulating carrier billing practices threatens to 
balkanize the regulatory environment for wireless services. The 
wireless industry has developed sufficient guidelines that ensure 
customer billing information is clear and non-misleading while enabling 
carriers the flexibility to differentiate themselves in the market. 
State laws would undermine these market-oriented, consumer-focused 
solutions and hinder the industry's ability to compete in the 
converging telecommunications marketplace. Each instance of state 
regulation will exponentially complicate the provision of mobile 
wireless services that are interstate in nature. Even regulation by a 
small handful of states threatens to undermine the nationwide and 
regional calling plans that now are so commonly purchased by consumers. 
Consumers in rural areas, where the cost of service tends to be higher, 
are particularly threatened by regulation that could put an end to 
uniform nationwide calling plans. In addition, both large national and 
small regional wireless carriers will be harmed by inconsistent state-
by-state regulations. Congress should preempt state laws that would 
conflict with its national framework for carrier practices and regulate 
only in instances necessary for public health and safety or 
demonstrated market failure.
    State regulation of CMRS must be preempted in order to facilitate a 
national regulatory framework. A deregulatory national framework, 
consistent across 50 State jurisdictions, is the best way to protect 
consumers' rights and promote access to innovative and convenient 
wireless devices and services. The adoption of even one of these bills 
could immediately impact nationwide service offerings and prices. The 
problems associated with state-by-state regulation would escalate 
exponentially as each new state implements its own laws. Even state 
laws that appear to be consistent on their face run the very real risk 
of being implemented or enforced in an inconsistent manner. Absent 
strong Federal action, activity in the states will create a patchwork 
of complex and conflicting regulatory and legal schemes that would 
negatively impact consumers throughout the country.
    Wireless carriers have reduced the number and complexity of pricing 
plans, reducing or eliminating additional charges for roaming, peak/
off-peak, and long distance calling. Wireless carriers have also made 
enormous improvements in how consumers are informed about, acquire, and 
manage their wireless services. Website and in-store literature provide 
details on price, plans and other options. Wireless carriers have also 
developed sophisticated on-line tools to provide more efficient and 
user-friendly self-care options--from checking minute usage to signing 
up for new services to paying bills via the Internet and via the mobile 
phone itself. Wireless companies now list on their bills contact 
information not only for their own customer service departments, but 
also for state and Federal regulatory agencies, including TTY contact 
information.
    As the wireless industry strives to become a broadband alternative 
for millions of Americans, the cost of service is critical for 
widespread acceptance. The significant decline in prices for wireless 
consumers, that resulted from competition rather than regulation, is 
increasingly threatened by excessive and discriminatory taxation at the 
state and local level. Nearly five years after the National Governors 
Association (NGA) and the National Conference of State Legislatures 
(NCSL) urged states to reform and modernize their telecommunications 
taxes, most states have failed to enact meaningful reforms. On average, 
the typical consumer faces a 16.85 percent total of taxes, fees and 
surcharges on wireless service each and every month: a 5.91 percent 
Federal rate and a 10.94 percent state/local rate. One only needs to 
compare the average wireless rate of 16.85 percent to the average tax 
rate of 6.94 percent for other goods and services to see the need for 
reform.
    State policymakers offer the defense that they need to ensure their 
citizens, especially those in rural and underserved areas, have access 
to advanced communication services through broadband networks; however, 
these same states ignore the effect sky-rocketing taxes have on 
consumers (19 states have double-digit transaction tax costs). 
Additionally, some state and local governments tax wireless 
communications at rates that approach those levied by ``sin taxes'' 
that were designed to discourage usage of a product. This seems an odd 
approach to facilitate expansion and use of wireless broadband across 
the country and especially in rural areas. The ability for the wireless 
industry to continue its tremendous growth and deliver advanced 
services to urban and rural consumers depends on reasonable taxation.
    Wireless broadband also can not fully occur without access to a 
core resource: spectrum. I applaud the leadership of this Committee for 
passing the Commercial Spectrum Enhancement Act that establishes a 
trust fund to relocate government users in specific bands. As a result, 
the auction of Advanced Wireless Service (AWS) licenses is scheduled to 
occur this June. The auction for AWS spectrum is, by any measure, 
critical to U.S. mobile wireless carriers and their customers. This 
auction represents the first significant expansion of allocated 
spectrum for third generation mobile wireless systems, and 
substantially increases the overall spectrum available for commercial 
mobile radio services. CTIA believes that the new services that can be 
introduced using this spectrum--including expansion of broadband data 
systems consistent with the Administration's priorities--will be of 
incalculable benefit to the American public and to the continued 
competitiveness of U.S. businesses and industries. This auction also 
holds the promise of strengthening intermodal competition for mass 
market broadband offerings. CTIA appreciates and supports the FCC 
efforts to hold this auction in June. CTIA also believes that in the 
auction context, in the absence of compelling reasons, the Commission 
should use standard procedures. CTIA believes the FCC should be 
cautious in implementing new auction procedures for the upcoming 
Advanced Wireless Services auction. CTIA is concerned about proposals 
that would result in increased complexity and potential market 
confusion for one of the most critical auctions in over a decade.
    I also commend the leadership of this Committee in establishing a 
hard date for the release of valuable analog spectrum. The inclusion of 
the February 17, 2009 deadline in the Deficit Reduction Act will allow 
for improved public safety communications as well as further expansion 
of wireless broadband opportunities.
    As stated earlier, the success of the wireless industry stems from 
the wisdom of Congress in 1993 when Section 332 of the Communications 
Act was amended to create a federal, deregulatory framework for 
``commercial mobile radio services,'' under which wireless services 
were exempted from many of the traditional, economic regulation 
typically applied in the landline context, as well as from state rate 
and entry regulation. The incredible and unprecedented growth of the 
mobile wireless industry over the last decade would not have been 
possible without the environment of regulatory constraint created by 
the Omnibus Budget Reconciliation Act of 1993. We ask Congress to 
reaffirm that wisdom and allow wireless to experience its next 
Renaissance. Our 13 year track record stands second to none in 
delivering enormous benefits to your constituents. Please let us take 
that to the next level.

    The Chairman. Thank you very much. Our next witness is Dr. 
Jerry Ellig, who's here to sort of coach us on what convergence 
is, from George Mason University. You have a habit now of 
having good coaches, Dr. Ellig.

   STATEMENT OF JERRY ELLIG, Ph.D., SENIOR RESEARCH FELLOW, 
            MERCATUS CENTER, GEORGE MASON UNIVERSITY

    Dr. Ellig. Well thanks, Mr. Chairman, I appreciate the 
opportunity to testify, I appreciate your time. I should issue 
the disclaimer that I'm certainly not here speaking on behalf 
of George Mason. My remarks represent only my own views, not 
the views of George Mason University, or of its basketball 
team. In fact I guess I'm the only person here not speaking on 
behalf of any kind of members. I've spent about 20 years trying 
to understand industries that were monopolized and are moving 
toward competition and trying to figure out what we can do in 
terms of public policy to facilitate that process.
    The Chairman. Well I have read part of your statement and I 
do hope you do ask the four questions and answer them, but I 
don't think you can do it in 5 minutes. But go right ahead.
    Dr. Ellig. No, don't worry. I'm programmed to speak 50 
minutes in a shot, but I'll stay within five. Just defining 
convergence, actually Mr. Chairman, I think in your opening 
statement you hit the nail on the head. To me, anyway, 
convergence means that you have a piece of infrastructure that 
can be used to deliver multiple services which previously could 
only be provided with separate pieces of infrastructure. And 
the great thing about that is that means we can now fulfill 
some of the promise of the 1996 Telecom Act, because it creates 
a situation where you can have multiple competitors, all 
getting into each other's markets. Whether it's telephone 
cable, wireless, or whatever platform they're using because of 
convergence, both competing firms can offer packages, various 
packages of products and services. And that suggests to me--
since all kinds of folks will be coming before you asking you 
to do all kinds of things because of convergence--that suggests 
to me kind of a simple rule of thumb, that won't always be 
right, but maybe it will be helpful in trying to sort out the 
priorities.
    And that is that if something enhances competition, then 
it's probably relevant to the convergence issue. And if you're 
being asked to do something that doesn't enhance competition, 
then it's probably not relevant to the convergence issue even 
if it's being presented as something that you all need to do 
because of convergence. And if I look at a lot of the various 
telecom, cable, and other issues that are out there today and 
kind of apply that rule of thumb, there are certain things that 
stick out, well, like sore thumbs; there are some things that 
stick out as obvious opportunities to enhance competition. And 
I'd like to share a few of those real quickly. One of them is 
spectrum. It's true that the wireless industry has a great 
success story to tell about the benefits of competition, but it 
could be a lot better because of the way the Federal Government 
has chosen to allocate spectrum.
    If you want a third, fourth, fifth, sixth broadband pipe 
into the house, if you want to get broadband pipes into places 
where it's maybe too expensive to run a lot of wire or cable, 
you want to have Federal policy make spectrum cheap, plentiful, 
widely available, easy to transfer, and flexible use. And 
that's what a market based spectrum policy essentially does. 
And I understand the Committee's held hearings on spectrum, and 
have talked about some of those kind of issues. But we did a 
little back of the envelope calculation, based on some work 
that one of my colleagues at George Mason, Tom Hazlett, has 
done suggesting that current U.S. spectrum policy costs 
consumers at least $77 billion a year. Part of that is higher 
prices for wireless service, prices higher than they would 
otherwise be. Part of it is services consumers forego because 
there isn't enough bandwidth; there isn't enough spectrum 
available out there to provide it to them. That's a big number. 
That's more than any other Federal telecommunications 
regulation.
    So, making a larger amount of spectrum available to provide 
services to consumers helps us a lot in terms of both 
convergence and competition. Another area that looks like a big 
priority--again, picking off the low hanging fruit, trying to 
deal with things that are over barriers to entry--is the cable 
franchising issue. When we have well capitalized competitors, 
whose main difficulty getting into a market is getting 
permission from a local government, there's probably an 
opportunity there to clear that barrier out of the way and 
enhance competition tremendously.
    We estimated that cable franchising costs consumers around 
$10 billion a year. About $7 billion of that is due to market 
power, because a lack of market entry by competitive wireline 
cable folks, or wireline video folks. The $10 billion also 
includes the cost of franchise fees and other things.
    The final thing I'd want to hit on is, trying to shift our 
focus in public policy from regulatory solutions to solutions 
that are pretty much based on antitrust and competition policy. 
If we want the communications industry to behave like a 
competitive industry, we ought to start treating them like a 
competitive industry. That suggests things like merger review 
and the net neutrality debate ought to be conducted under the 
consumer welfare standard of antitrust. Either you tell the FCC 
to do it that way, or you give the jurisdiction to the 
antitrust agencies, rather than the FCC. It can be done either 
way. But I think that would get us a long way toward a policy 
that makes the effects of policy on consumers the highest 
priority instead of leaving it as an open free for all, where 
people can bring in almost anything they want to try to 
influence policy.
    [The prepared statement of Dr. Ellig follows:]
   Prepared Statement of Jerry Ellig, Ph.D., Senior Research Fellow, 
                Mercatus Center, George Mason University
    Mr. Chairman and Members of the Committee:
    Thank you for your time and the invitation to testify. I am an 
economist and research fellow with the Regulatory Studies Program of 
the Mercatus Center, a 501(c)(3) research, educational, and outreach 
organization affiliated with George Mason University. \1\ I have been 
with the Mercatus Center for the past ten years, with the exception of 
a two-year leave of absence in 2001-2003 when I served as Deputy 
Director of the Office of Policy Planning at the Federal Trade 
Commission.
---------------------------------------------------------------------------
    \1\ This testimony reflects only the views of its author and does 
not represent an official position of George Mason University.
---------------------------------------------------------------------------
    The subject of this hearing is ``Competition and Convergence.'' 
It's useful to define ``convergence'' before discussing its effects on 
competition and public policy. I will address four questions in this 
testimony:

        1. What is ``convergence''?
        2. What caused convergence?
        3. What does convergence mean for competition and consumer 
        welfare?
        4. What does this imply for public policy?

1. What Is ``Convergence'' ?
    ``Convergence'' has become a buzzword in the communications 
industry that means a lot of different things to different people. To 
me, convergence means use of the same infrastructure to deliver 
multiple services to consumers. A big part of the infrastructure is, of 
course, the physical communications network: coaxial cable, copper 
wire, fiber optics, satellites, cell towers, switches, and various 
other physical facilities. But the infrastructure also includes other 
assets necessary to provide service to consumers: call centers, the 
servers that hold account information, etc.
    Convergence is more than bundling. Bundling occurs when the same 
firm sells multiple services as a package. The services might be 
provided using the same infrastructure, or they might be provided 
separately but sold together. A good example of the difference is the 
marketing partnerships that some of the phone companies have with 
satellite TV firms. Phone service, DSL, and video are sold as a 
package, but the phone service and DSL are provided over the phone 
company's wires, whereas the video comes via satellite.
    Convergence represents a change from past practice, in which the 
communications industry was carved up into pieces that usually provided 
a single service or closely related set of services, such as landline 
telephone or cable television.
2. What Caused Convergence?
    Several factors have combined to promote convergence in electronic 
communications. Moving an electronic communication over long distance 
no longer involves the huge additional cost that it once involved. 
Cheap fiber and computer chips have replaced expensive copper cable and 
mechanical switches. As a result, the additional cost associated with a 
long-distance phone call can be measured in tenths of a cent, if that 
much. The ultimate cost-reducing technological advancement, of course, 
occurred when digital transmission replaced analog transmission. 
Digital transmission using Internet Protocol allows information to be 
sent around the globe as cheaply as it can be sent across the street. 
As a result, we now have Voice over Internet Protocol offering long-
distance service within the United States at no additional charge. One 
can even make free long-distance calls internationally, as long as they 
are computer-to-computer calls that do not require termination on the 
destination company's telephone system. This ``death of distance'' 
phenomenon is responsible for the convergence--or perhaps ``re-
convergence''--of local and long-distance calling.
    Digital transmission has also fostered other forms of convergence. 
When a phone network moves and stores calls digitally, the phone 
company can now offer a wide array of services that previously required 
costly, specialized equipment on the customer's premises--such as voice 
mail, three-way calling, caller ID, and other features that many 
consumers now take for granted.
    The convergence phenomenon extends well beyond telephone. When a 
phone call, television program, spreadsheet, or set of video game 
keystrokes is converted into bits, it can be transported on a network 
capable of transporting bits. Conversely, a network capable of 
transporting bits can support many different services that previously 
required different types of networks. So cable companies can offer 
digital cable and cable modem Internet access. They can also offer 
telephone service using VoIP rather than cable telephony. Broadband 
Service Providers offer high-speed Internet service and video over the 
same plant, and consumers can also use that Internet connection for 
VoIP. Wired telephone companies can offer voice, data, and now even 
video service using DSL or fiber optic cable. The major wireless 
companies mostly offer voice and Internet service now--but what might 
they do with video if more spectrum were available?
3. What Does Convergence Mean for Competition and Consumer Welfare?
    Convergence has the potential to increase competition and consumer 
welfare. After all, convergence means that multiple firms which 
previously offered different services can now offer multiple services 
in competition with each other. Convergence means that we are finally 
achieving the broad vision of the Telecommunications Act of 1996: firms 
that own competing networks are invading each others' markets.
    The converging firms are often well-established and well-
capitalized. Examples include cable, wireline telephone, wireless, and 
satellite. They thus have the potential to be robust and credible 
competitors, with fewer of the problems that plague small startups. 
They wouldn't spend so much time asking you to do something about the 
other guy's ``unfair'' advantage if they weren't afraid of each other!
    For consumers, convergence could mean better value for the money. 
In some cases that may mean lower prices for the same services 
consumers purchased prior to convergence. We saw this phenomenon in 
long-distance phone service, for example. In other cases, better value 
means consumers might pay more, but the amount or quality that they get 
improves by more than enough to make the higher price worthwhile. 
Realistically, I suspect we're often likely to see both: lower prices 
for many services, plus improved quality.
    The same underlying trends that drive convergence can also 
facilitate the introduction of new products and services that consumers 
previously did not even know they wanted. One example might be 
interactive video games. Another might be dating, where I'm told that 
text messaging and Internet chat are partly substituting for actual 
dates.
    Industry observers today speak of the ``triple play'' of voice, 
video, and data--essentially relegating anything that's not voice or 
video to the ``data'' category. But perhaps in the future we'll hear of 
a rush to offer the ``quadruple play'' of voice, data, video, and 
interactive entertainment, where the design of networks includes 
special elements that enhance the interactive gaming experience. Or a 
``quintuple play'' that adds personal relationship management. 
Competing on this last attribute might require all networks to find a 
way of adding a high-bandwidth mobility feature. In short, it is 
difficult to predict how ongoing technological change could affect the 
variety of services available to consumers, and the ways they are 
delivered.
    You'll notice that I said convergence ``has the potential'' to 
increase competition and consumer welfare.
    Realistically, the efficiencies associated with convergence are so 
large that consumers would likely receive some benefit even if 
electronic communications were monopolized. The history of cable 
television regulation provides a case in point. Cable rates rose 
significantly when they were deregulated in 1984, but quality 
(primarily the number of channels) improved significantly as well. 
After taking the value to consumers of quality into account, consumers 
were better off with unregulated cable rates after deregulation than 
they were with regulated rates prior to deregulation. \2\
---------------------------------------------------------------------------
    \2\ Robert W. Crandall and Harold Furchtgott-Roth, Cable TV: 
Regulation or Competition? (Brookings, 1996).
---------------------------------------------------------------------------
    Two decades of economic research, however, also demonstrates that 
cable consumers would have been still better off with competition. 
Competition will be most vigorous, and consumer welfare will be 
greatest, when consumers are served by multiple competitors who have 
the capability to offer multiple services.
4. What Does This Imply for Public Policy?
    Two general principles should guide public policy. First, focus on 
the most important task at hand by removing barriers to market entry. 
Second, ensure that government intervention in communications meets a 
consumer welfare test.
Barriers to Entry
    A variety of factors either prevents firms from ``converging'' or 
prevent ``converged'' firms from serving consumers as expeditiously as 
possible.
    A firm that wants to sell consumers a conduit capable of handling 
multiple services must have sufficient bandwidth to do so. Now that the 
legal uncertainty regarding the regulatory status of cable modem and 
DSL has been settled, the cable and wireline phone companies are in 
pretty good shape in this regard. \3\ These firms have essentially 
built their own bandwidth in their cables and wires.
---------------------------------------------------------------------------
    \3\ Last year's Brand X decision settled the issue that the FCC can 
ultimately determine the regulatory status of various services, and the 
FCC decided that cable modem service is an information service rather 
than telecommunications. A subsequent FCC decision determined the DSL 
is also an information service. For a discussion of the implications of 
Brand X, see Jerry Ellig and Alastair Walling, ``Regulatory Status of 
VoIP in the Post-Brand X World,'' Mercatus Center Working Paper (Feb. 
17, 2006), available at http://www.mercatus.org/regulatorystudies/
article.php/1542.html. The FCC's DSL decision is available at http://
hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-150A1.pdf.
---------------------------------------------------------------------------
Wireless
    Other potential competitors aren't so fortunate. The digital 
wireless networks could play a bigger role as the third, fourth, fifth, 
and/or sixth broadband pipe into the home--but that likely requires 
more spectrum.
    As part of the Mercatus Center's ongoing program to assess the 
costs and outcomes associated with regulation, I recently examined the 
costs of major Federal telecommunications regulations. \4\ Out of all 
Federal telecommunications regulations, spectrum policy has by far the 
biggest effect on consumer welfare. The costs of the current spectrum 
policy are large in an absolute sense--in the neighborhood of $77 
billion or more annually. Spectrum allocation is by far the costliest 
aspect of U.S. Federal telecommunications regulation, and it represents 
a very large share of the total. Even if the actual costs of U.S. 
spectrum allocation policy were only one-tenth the size that scholars 
estimate, they would still account for more than 20 percent of the 
total consumer cost of telecommunications regulation. \5\
---------------------------------------------------------------------------
    \4\ The results have recently been published in Jerry Ellig, 
``Costs and Consequences of Federal Telecommunications Regulation,'' 
Federal Communications Law Journal 58:1 (2006): 37-102, available at 
http://www.law.indiana.edu/fclj/pubs/v58no1.html.
    \5\ Jerry Ellig, ``The Economic Costs of Spectrum Misallocation: 
Evidence from the United States,'' presented to the conference on 
Spectrum Policy in Guatemala and Latin America, Universidad Francisco 
Marroquin, Guatemala City, Guatemala, June 9-10, 2005, available at 
http://cadep.ufm.edu.gt/telecom/lecturas/JerryEllig.pdf.
---------------------------------------------------------------------------
    During the past two decades, U.S. spectrum policy has gradually 
become more market-oriented. In 1993, Congress directed the FCC to 
auction an additional 120 MHz of spectrum for wireless communications. 
Consumers have reaped significant benefits as a result. \6\ 
Nevertheless, current policy still generates large inefficiencies by 
preventing reallocation of additional spectrum to its most highly-
valued uses--most likely wireless voice and data communications.
---------------------------------------------------------------------------
    \6\ The results are documented succinctly in Robert W. Crandall and 
Jerry A. Hausman, ``Competition in U.S. Telecommunications: Effects of 
the 1996 Legislation,'' in Sam Peltzman and Clifford Winston (eds.), 
Deregulation of Network Industries: What's Next? (AEI-Brookings Joint 
Center for Regulatory Studies, 2000): 102-07.
---------------------------------------------------------------------------
    The costs of current spectrum allocation policy can be expected to 
fall sometime after 2006, if the FCC carries through on its plan to 
auction an additional 90 MHz of spectrum. \7\ However, the multi-
billion dollar cost estimate should only be taken as a rough 
approximation of the negative effects of spectrum allocation policy on 
consumer welfare.
---------------------------------------------------------------------------
    \7\ ``FCC to Commence Spectrum Auction that will Provide American 
Consumers New Wireless Broadband Services,'' FCC press release (Dec. 
29, 2004), available at http://hraunfoss.fcc.gov/edocs_public/
attachmatch/DOC-255802A1.pdf. The auction cannot occur until June 2006 
because the Commercial Spectrum Enhancement Act of 2004 requires the 
FCC to notify the National Telecommunications and Information 
Administration at least 18 months prior to the auction of any 
frequencies mentioned in the legislation, so that any public sector 
users can be relocated to other spectrum.
---------------------------------------------------------------------------
    The Commercial Spectrum Enhancement Act of 2004 and last year's 
digital TV legislation were positive steps that will eventually make 
more spectrum available for wireless communications. But doling out a 
few more slices of spectrum for a specific use is not the same thing as 
a comprehensive, market-based policy. A truly market-based approach 
would allow market transactions to allocate spectrum rather than 
licenses. Potential users could buy or lease spectrum, then choose how 
to use it. The amount of spectrum allocated to wireless telephone, 
broadcasting, broadband, and other services would be determined by 
market transactions and decisions of users, rather than regulatory 
proceedings. As Ronald Coase noted in 1959;

        Certainly, it is not clear why we should have to rely on the 
        Federal Communications Commission rather than the ordinary 
        pricing mechanism to determine whether a particular frequency 
        should be used by the police, or for a radiotelephone, or for a 
        taxi service, or for an oil company for geophysical 
        exploration, or by a motion-picture company to keep in touch 
        with its film stars or for a broadcasting station. Indeed, the 
        multiplicity of these varied uses would suggest that the 
        advantages to be derived from relying on the pricing mechanism 
        would be especially great in this case. \8\
---------------------------------------------------------------------------
    \8\ Ronald Coase, ``The Federal Communications Commission,'' 
Journal of Law & Economics 2 (1959): 16.

    I cannot claim expertise on the recent wireless company mergers, 
but I can't help asking whether those mergers occurred in part because 
buying a competitor was the most feasible way to acquire a big chunk of 
bandwidth.
Satellite
    Another, lesser-discussed broadband conduit is satellite. 
Currently, high-speed Internet via satellite is often more expensive 
than DSL or cable modem, which makes it a good option primarily in 
rural areas that lack these competitors. Could more satellite slots and 
associated spectrum be made available to increase bandwidth from this 
source? Could more satellite slots and associated spectrum be made 
available through competitive bidding, so that existing competitors or 
new entrants could acquire more? I don't know the answers to these 
questions, but they are well worth asking.
Cable Franchising
    A final set of entry barrier issues involves cable franchising, 
which tends to prevent additional providers of video service from 
entering local markets. This Committee has already held a hearing on 
the issue. A colleague and I submitted written testimony for the 
record, so I will not rehash our analysis in great detail here. Suffice 
it to say that we estimated that cable franchising costs consumers 
approximately $10 billion annually in higher prices and the value of 
services forgone due to the price increases. The costs attributable to 
anticompetitive exclusion amount to more than $6 billion annually. \9\ 
Various new video entrants, including Broadband Service Providers and 
telephone companies, have identified local video franchising as a 
significant barrier to entry. Clearly, the potential gains to consumers 
from removing the franchising barrier to entry are large.
---------------------------------------------------------------------------
    \9\ Our testimony is available at http://www.mercatus.org/
regulatorystudies/article.php/1540.html.
---------------------------------------------------------------------------
Consumer Welfare Test
    Historically, many policy decisions about communications have been 
made according to a ``public interest'' standard. Unfortunately, a 
public interest standard is virtually no standard at all. A number of 
FCC chairmen, general counsels, and legal experts have noted that the 
``public interest'' standard means precisely what its author, Sen. C.C. 
Dill, said it meant: ``It covers just about everything.'' \10\
---------------------------------------------------------------------------
    \10\ Thomas W. Hazlett, ``The Wireless Craze, the Unlimited 
Bandwidth Myth, the Spectrum Auction Faux Pas, and the Punchline to 
Ronald Coase's `Big Joke,': An Essay on Airwave Allocation Policy,'' 
AEI-Brookings Joint Center on Regulatory Studies Working Paper No. 01-
01 (Jan. 2001): 43; Coase (1959): 8.
---------------------------------------------------------------------------
    ``Whatever'' is not a satisfactory principle to guide merger 
decisions or other communications regulation. The public interest 
standard is a relic of the old, regulated monopoly mindset. Under 
regulated monopoly, government tells the firm, ``We are giving you a 
special privilege, and in return we expect you to use some of the 
monopoly profits to do things that consumers would not normally be 
willing to pay for.'' Any regulatory decision then becomes an 
opportunity to extract ``concessions'' that may or may not benefit 
consumers. Historically, this has occurred at all levels of 
government--at the Federal level at the FCC, at state public utility 
commissions, and on the local level (as with cable franchising).
    This ``taxation by regulation'' violates fundamental principles of 
transparency in government. Indeed, regulatory scholars have shown 
persuasively that opaque public interest requirements effectively allow 
public decisionmakers to confer benefits on specific interest groups 
while spreading the costs among consumers, who may not even be aware of 
the costs. \11\
---------------------------------------------------------------------------
    \11\ Michael Crew and Charles Rowley, ``Toward a Public Choice 
Theory of Monopoly Regulation,'' Public Choice 57 (1988): 49-67; 
Richard A. Posner, ``Taxation by Regulation,'' Bell J. of Econ. & Mgt. 
Science 2 (1971).
---------------------------------------------------------------------------
    Policy and regulatory decisions should be guided by a more concrete 
principle, and departures from the principle should be transparent and 
explicitly justified. A more specific, meaningful, and consumer-
oriented principle is the ``consumer welfare'' standard that guides 
antitrust enforcement. Antitrust analysis requires public 
decisionmakers to define the relevant market, determine whether market 
power exists in the relevant market, assess whether the challenged 
business practice harms consumers, and identify any offsetting consumer 
benefits. Two examples--merger enforcement and net neutrality--
illustrate how the consumer welfare standard might imply a different 
approach to key government decisions that affect communications.
Merger Enforcement
    It is well-known that FCC merger proceedings have, in the past, 
been used as a vehicle to induce ``concessions'' from merging parties 
that may or may not promote overall consumer welfare. One former FCC 
commissioner characterized the process as ``naked regulatory 
extraction.'' \12\
---------------------------------------------------------------------------
    \12\ Separate Statement of Commissioner Harold Furchtgott-Roth, In 
re Applications of Ameritech Corp. and SBC Communications, Inc., 
Memorandum Opinion and Order, CC Docket 98-141 (Oct. 10).
---------------------------------------------------------------------------
    In a statement on the proposed AT&T/Bellsouth merger, FCC Chairman 
Kevin Martin declared, ``The FCC's primary responsibility is to 
determine whether the proposed transaction is in the best interest of 
consumers.'' \13\ This is a laudable sentiment, but it is unfortunate 
that the definition of the goal depends on the views of the FCC 
commissioners, rather than a much more permanent commitment enshrined 
in legal precedent--as occurs under antitrust law.
---------------------------------------------------------------------------
    \13\ Martin Statement (March 6, 2006), at http://hraunfoss.fcc.gov/
edocs_public/attachmatch/DOC-264179A1.pdf.
---------------------------------------------------------------------------
    Another disadvantage of current merger review practice is that the 
FCC is not bound by the same predictable timetables that accompany the 
Hart-Scott-Rodino merger review process. As Congress recognized when it 
created the HSR process, the potential for delay can discourage mergers 
that promote consumer welfare. While the FCC has improved the 
timeliness of merger review in recent years, it remains true that 
timeliness, like the consumer welfare goal, depends on the priorities 
and goodwill of the commissioners.
    If we expect the communications industry to behave like a 
competitive industry, then the principles and processes guiding merger 
review should likewise be the same as those that apply in other 
competitive industries. This could be accomplished in one of two ways. 
One option would be for Congress to direct the FCC to review mergers 
under antitrust rules: employ consumer welfare as the sole standard, 
assess mergers under antitrust law subject to antitrust precedent, and 
observe the same deadlines as the antitrust agencies. The other option 
would be to simply take merger review away from the FCC and give it 
solely to the Department of Justice's Antitrust Division and/or Federal 
Trade Commission.
    Some communications firms are common carriers. The FTC currently 
lacks jurisdiction over them. By default, the Antitrust Division would 
end up reviewing mergers involving common carriers. If Congress 
believes this result is unsatisfactory, it should give the FTC 
jurisdiction over common carriers.
    Some might argue that antitrust rules would make merger review in 
the communications industry less thorough, raising the likelihood that 
mergers harming consumers might slip through. There is no reason that 
this would necessarily occur. Longtime members of this Committee can no 
doubt recall past instances in which regulators at the Interstate 
Commerce Commission, Surface Transportation Board, or Department of 
Transportation approved railroad and airline mergers over the 
objections of the Antitrust Division--either because the regulators 
differed with the Antitrust Division's analysis of competition, or 
because they believed other factors were more important.
Net Neutrality
    ``Net neutrality'' seems to mean different things to different 
people. I cannot claim to know all the various meanings that different 
parties attach to that term. But the consumer welfare issues in the net 
neutrality debate are not at all new. Rather, this debate is a replay 
of general antitrust discussions about restrictive business practices.
    If the policy goal is overall consumer welfare (as opposed to 
benefits for some particular segment of the communications industry, or 
satisfying some type of ideological objective), then competition could 
normally be expected to protect consumers. In a competitive market, 
owners of the ``conduit'' might engage in business practices that 
violate some parties' concept of net neutrality--but only if the 
practice offers consumers a corresponding benefit. Conduit providers 
who violate net neutrality without offering consumers some other 
benefit in return will have a harder time gaining and keeping 
customers. Net neutrality should not be a problem requiring a public 
policy solution if there is sufficient competition among providers of 
broadband Internet service. If broadband providers have market power, 
then a more specific and fact-intensive analysis is required to 
determine whether the benefits to consumers justify any harms.
    Viewed in this light, the net neutrality ``problem'' is little 
different from any other antitrust analysis of restrictive business 
practices under the rule of reason. First, define the relevant market. 
Second, determine whether there is significant market power. If there 
is market power, determine whether the business practice harms 
consumers. If the business practice harms consumers, determine whether 
there are any offsetting benefits.
    Antitrust enforcement agencies have extensive expertise in this 
type of analysis. For example, the net neutrality issue is quite 
similar to the Internet Service Provider issues that the Federal Trade 
Commission dealt with in the AOL-Time Warner merger. I see no reason 
the antitrust agencies are not competent to analyze net neutrality as a 
restrictive business practice. And thus I see no reason that net 
neutrality deserves special regulatory attention.
    Of course, this approach will not satisfy the purists on either 
side of the issue. There are pro-regulation interests who view any 
violation of their concept of net neutrality as abhorrent--even if it 
produces an offsetting benefit for consumers. There are free-market 
advocates who similarly view the antitrust approach as abhorrent, 
because it may sometimes justify government intervention.
    Nevertheless, I see two key benefits to the antitrust approach. 
First, it avoids reinventing the wheel in terms of analysis. Second, 
and most important, it is probably the most effective way to promote 
consumer welfare. Treating net neutrality as an antitrust issue rather 
than a regulatory issue would help ensure that overall consumer welfare 
remains the paramount consideration, since consumer welfare is the 
touchstone of antitrust analysis.
Conclusion
    Convergence promises consumers enormous benefits. Robust 
competition is the key to ensuring that consumers receive the largest 
possible benefits. Congress can take three steps to help ensure this 
result:

        1. Allow markets to allocate much larger swaths of spectrum, so 
        that multiple wireless conduits have the bandwidth to offer 
        consumers a full range of services.

        2. Remove local cable franchising as a barrier to entry.

        3. Ensure that competition policy decisions, such as merger 
        review and net neutrality, employ consumer welfare as the sole 
        standard, are consistent with antitrust precedent, and follow 
        the same deadlines that antitrust agencies must follow.

    The Chairman. Thank you very much. Our last witness is Dr. 
Mark Cooper, who's the Director of Research at the Consumer 
Federation of America, we welcome you, Dr. Cooper.

 STATEMENT OF DR. MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER 
FEDERATION OF AMERICA; ON BEHALF OF THE CONSUMER FEDERATION OF 
          AMERICA, FREE PRESS, AND THE CONSUMERS UNION

    Dr. Cooper. Thank you, Mr. Chairman, as the last witness, 
on the last panel, I greatly appreciate the opportunity to bat 
cleanup. I have a rather different view of what has gone on and 
what needs to be done.
    But let me make it clear, I don't think we need to give up 
our pro-competitive vision of the future. What we must do is 
build it on a realistic assessment of what competition can 
work, what policies are necessary to promote competition, where 
it can, and above all we have to stick to some very traditional 
values that are important in telecommunications and in 
communications, beyond pure competition theory.
    So while convergence was certainly contemplated in the Act, 
competition was the crown jewel. And I suggest that to anyone 
who thinks the 1996 Act contemplated the emerging situation in 
which the average consumer has essentially two choices for full 
scale broadband 21st Century communications. One of them being 
the incumbent local exchange company which is reconstituting 
the Bell local monopoly with a 95 percent share of voice, 75 
percent share of long distance, 75 percent share of local 
transmission and middle mile facilities, 50 plus percent in 
region share of wireless, that's the one company. The other 
company is the incumbent cable company, which still has a 75 
percent share of video, has (doubled) my rates in the last 10 
years. If you contemplated and suggested that that was going to 
be the competitive outcome of the 1996 Act, I think you didn't 
read the record. The record promised me an awful lot more 
competition than that. That's not the way it was supposed to 
work.
    Given that background, the idea that the telephone and 
cable companies are giving you, that their duopoly is 
sufficient competition to allow you to eliminate fundamental 
principles like that of nondiscrimination and access to 
telecommunications, and to abandon the vigorous and historic 
commitment to Universal Service, to slash the role of local 
governments in meeting the needs of citizens--those claims that 
two is enough competition are simply outrageous, unsupported by 
economic theory, empirical evidence, or practical experience. 
Two is not enough, three is not enough, in economics there is 
an expression, four is few, and six is many. And the prospect 
that we'll get beyond two or three, is very very bleak, 
particularly because we have allowed the incumbent wireline 
companies through merger, or joint venture to capture the bulk 
of the wireless companies. The three leading wireless companies 
are now either owned by or in a joint venture with the dominant 
wireline companies. We've allowed the competition to slip away.
    The fundamental point here is that in reality, 
communications is still substantially a local service; you 
cannot initiate or terminate a communication, voice or data in 
Anchorage, Alaska, without a local transmission medium, a local 
switch or a router, and local transpoint, in Anchorage, Alaska. 
You cannot initiate or terminate a communication in Honolulu 
without those local facilities, so at the core there's a local 
component to this industry that has not changed. Technology has 
not changed there. That local network is absolutely critical. 
And what we're contemplating here is allowing the very small 
numbers of local competition, the very small numbers in those 
facilities to destroy the vigorous competition we have on the 
Internet, or undermine the competition we might like to see in 
other and related markets.
    Now it was earlier suggested that the critical factor here 
is when the FCC abandoned its traditional values. And I think 
in communications some traditional values are very important. 
When it failed to stick to nondiscrimination in broadband. When 
it failed to open the local markets. When it allowed mergers to 
create regional giants, fortress hubs of both cable and 
telephone companies. It really did undermine our hopes for 
competition.
    Ironically, earlier this month the number two telephone 
company petitioned the FCC, filed a complaint about denial of 
access, about discrimination in access to program, and this 
very month the number two cable company filed a complaint with 
the FCC complaining about discrimination in interconnection. 
Yet these companies will tell you that they don't want to be 
obligated to provide nondiscrimination for Internet services 
applications or content. We simply cannot allow ourselves to 
abandon that principle.
    The computer inquiries in 1968 were in fact the modern 
equivalent of nondiscrimination. They required the network to 
be neutral, thereby opening the door to support the growth of 
the Internet. Second of all the clear commitment to vigorous 
expansive Universal Service, the availability to all Americans 
of an evolving level of communications is a commitment that was 
in the 1934 Act, repeated in the 1996 Act and must not be 
abandoned.
    And finally Congress can certainly promote the goals of 
competition and Universal Service simultaneously by making 
available more spectrum. I agree with Jerry, you ought to 
liberate the spectrum; I would liberate it for unlicensed uses, 
the WiFi networks that have been so successful over the past 
decade. But we ought to liberate more spectrum, and we ought to 
reserve the right of cities to provide the streets and roads, 
the onramps, for the information edge. To provide that local 
link to the global networks that are in fact much more 
competitive than the local market. Thus there's clearly room 
for a pro-competitive policy based upon the principles of 
nondiscrimination and interconnection and carriage and 
commitments to Universal Service. Thank you.
    [The prepared statement of Dr. Cooper follows:]

 Prepared Statement of Dr. Mark Cooper, Director of Research, Consumer 
Federation of America; on behalf of the Consumer Federation of America, 
                  Free Press, and the Consumers Union
    Mr. Chairman and Members of the Committee
    The Consumer Federation of America, \1\ Free Press, \2\ and 
Consumers Union \3\ appreciate the opportunity to testify on the issue 
of competition and convergence in the telecommunications market. My 
name is Dr. Mark Cooper. I am Director of Research at the Consumer 
Federation of America.
---------------------------------------------------------------------------
    \1\ The Consumer Federation of America is the Nation's largest 
consumer advocacy group, composed of over 280 state and local 
affiliates representing consumer, senior, citizen, low-income, labor, 
farm, public power and cooperative organizations, with more than 50 
million individual members.
    \2\ Free Press is a national, nonpartisan organization with over 
225,000 members working to increase informed public participation in 
crucial media and communications policy debates.
    \3\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the State of New York to provide 
consumers with information, education and counsel about good, services, 
health and personal finance, and to initiate and cooperate with 
individual and group efforts to maintain and enhance the quality of 
life for consumers. Consumers Union's income is solely derived from the 
sale of Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees. In addition to reports on Consumers 
Union's own product testing, Consumer Reports with more than 5 million 
paid circulation, regularly, carries articles on health, product 
safety, marketplace economics and legislative, judicial and regulatory 
actions which affect consumer welfare. Consumers Union's publications 
carry no advertising and receive no commercial support.
---------------------------------------------------------------------------
    This year, the Committee has now heard from dozens of witnesses in 
a score of hearings about the current state of telecommunications 
policy and the need for reform. It is not a pretty picture for 
consumers. Previous hearings have dealt with specific details of the 
failure of the competition policy under the Telecommunications Act of 
1996 (the 1996 Act). The 1996 Act promised an explosion of competition 
voice, video, and data communications, and yet today we are witnessing 
the reconstitution of Ma Bell and the crystallization of a cozy duopoly 
of cable and telco. The Committee has been told of skyrocketing cable 
rates and the plummeting position of the United States in the global 
race to the broadband future. It has been presented with examples of 
anticompetitive and anti-consumer behaviors of the giant communications 
companies that now dominate the market. Despite the perverse 
anticompetitive results of the ``pro-competition'' policies in 1996 
Act, these companies come before you to demand that you legalize 
discrimination in the provision of access to the communications network 
of the future, an approach that Congress has rejected for a century.
    If future prospects are determined by our success in the broadband 
market (which few analysts deny), our current position is untenable. We 
are now 16th in the world in broadband penetration. Virtually none of 
our broadband lines can sustain even 1 megabit per second of speed in 
both directions--up and down the network. We pay $15-$20 a megabit for 
download speed--20 times more than the global leaders. We have a 
pervasive rural/urban digital divide that is increasing as time passes. 
Our Universal Service policies have not been updated and reformed to 
efficiently address our broadband woes. Insufficient spectrum has been 
opened to facilitate a legitimate, independent wireless broadband 
competitor. All we are left with is the false promise of competition 
from 1996 and the farcical declarations from cable and telephone giants 
that a duopoly market is vigorously competitive.
    The parade of horribles with which you have been presented goes on 
and on and I will not regurgitate them in detail today. I have attached 
a half dozen Appendices to this testimony which contain detailed 
analyses prepared by our organizations of the failure of competition 
under the 1996 Act. I believe that we have been brought to this sorry 
condition because:

        (1) the 1996 Act tried to do the impossible in some markets, 
        aiming to build competition where conditions could not sustain 
        sufficient competition to protect the public from abuse (e.g., 
        local, last mile access);

        (2) the Federal Communications Commission (FCC) and the 
        antitrust authorities mishandled the introduction of 
        competition in markets where it was sustainable, allowing the 
        incumbents to drag their feet, engage in all manner of anti-
        competitive behaviors, and mergers (e.g., network opening, 
        program access and mergers); and

        (3) the FCC misread the 1996 Act in other markets, undermining 
        and threatening competition that actually existed (e.g., 
        Internet access and services).

    In amending the Communications Act (the Act) we do not have to 
abandon a pro-competitive vision for the future, but we must fully 
understand the failures of the anticompetitive past. A competition-
friendly, consumer-friendly future requires that we return to certain 
key traditional values and fundamental principles that made the 
American communications network the envy of the world throughout most 
of the last century.
Social, Technological and Economic Principles for Communications Policy
    In order to evaluate competition and convergence in the 
communications sector in the context of a legislative hearing on 
amendments to the Communications Act of 1934, there are four basic 
principles that must be kept in mind.
    First, the Act has a specific purpose laid out clearly in the first 
sentence of Title I, Section I: ``to make available, so far as 
possible, to all people of the United States, without discrimination on 
the basis of race, color, religion, national origin or sex, a rapid, 
efficient, nationwide and world-wide wire and radio communications 
service with adequate facilities at reasonable charges.'' This 
commitment is more important than ever because access to communications 
is increasingly vital in the digital information age.
    Second, today's analysis must be forward-looking, in the spirit of 
the Act, focusing on the broadband communications network that will be 
the dominant means of communications in the 21st century. Looking to 
the future does not mean we should ignore the problems or the progress 
of the past. On the contrary, the right combination of correcting past 
mistakes and evolving successful policies for the digital era is the 
only means of satisfying the public interest. Certainly, the track 
record of competition and the past behavior of market participants are 
relevant, especially if the same actors play similar roles. These 
market patterns can give a good indication of what is likely to happen 
under the various policy regimes under consideration. However, policies 
that attempt to segregate the ``legacy'' network from the future 
network and ``ghettoize'' Universal Service are unacceptable. The 
commitment to Universal Service needs to include a commitment to an 
evolving level of service to ensure all Americans participate in the 
future, as the Telecommunication Act of 1996 (the 1996 Act) explicitly 
recognized in Section 254.
    Third, at its heart, communications is local. Communications starts 
and ends with a local transmission medium and a local network. In order 
to make a call from Los Angeles to anywhere in the world, you need a 
wire or spectrum in Los Angeles. In order to terminate a call in New 
York from anywhere in the world you need a wire or spectrum in New 
York. The network in between may be national or global, but the last 
mile is local. Global networks are useless without last mile 
facilities--the local switches/routers and transport facilities that 
connect the consumer to the world. The Act recognizes this as well, in 
the first two sections of Title II, which establish the obligation to 
provide interconnection and carriage of communications on 
nondiscriminatory rates, terms and conditions. Technology has not 
changed this basic fact.
    Fourth, competition is an operational means to serve public 
interest ends; it is not the end in itself. Further, the state of 
competition is an empirical question, not a theoretical statement of 
belief or desire. There is an expression in economics used to describe 
competition in markets--``four is few, six is many.'' When there are 
fewer than the equivalent of roughly six, equal competitors, a market 
is considered highly concentrated because economic theory, empirical 
evidence and a century of practical experience shows that markets that 
are this concentrated do not perform well. In highly concentrated 
markets, prices are set above costs and innovation declines. With so 
few competitors, it is easy to avoid vigorous, head-to-head 
competition, especially when each uses a different technology, 
specializes in a different service, or concentrates on a different 
geographic area or user sector. Where competition is lacking, there is 
little chance that markets will accomplish the goals of the Act. Even 
where there is vigorous competition, there are circumstances in which 
the market will not accomplish the broader goals of the Act. It is the 
responsibility of legislators to conduct a fair assessment of 
competition thresholds in order to maximize the effectiveness of public 
interest communications policy. We must not place our trust in the 
rhetoric of special interests without facts on the ground.
The Current State of Competition and Convergence
    In the emerging, converging world of 21st century communications, 
prospects for vigorous competition in the local segment of the industry 
are not good. At present, there are only two local, last mile 
communications networks that can provide a fully functional broadband 
network to the residential consumer--the incumbent local telephone 
companies and the incumbent cable operators. Two is not a sufficient 
number to ensure vigorous competition, and both sets of incumbents have 
a miserable record of anticompetitive, anti-consumer behavior.
    The best hopes for a third, last mile alternative were undercut 
when regulators allowed the most likely candidate--wireless--to be 
captured by dominant wireline firms through ownership or joint 
ventures. It stretches credible expectation to assume that a wireless 
provider owned by an ILEC, or in partnership with a cable giant, will 
market a wireless broadband product that directly competes with its 
wired product. They will offer premium, supplementary services to be 
sure--but it will not be a true third broadband competitor. Hope and 
hype surrounding other technologies cannot discipline anticompetitive 
and anti-consumer behavior. Mergers such as that proposed by AT&T and 
BellSouth will only make matters worse. No company with sufficient 
market power to set monopoly rents will fail to do so absent proper 
public policy protections.
    On the current trajectory, consumers are falling into the grip of a 
``cozy duopoly'' of cable and telephone giants, which will abuse its 
market power, abandon it social responsibility and retard the 
development of our 21st century information economy. We can debate 
whether a regulated monopoly is better or worse than an unregulated 
duopoly, but we believe the evidence shows beyond any doubt that the 
feeble duopoly we have will not accomplish the broad Communications Act 
goal of a ubiquitous, nondiscriminatory networks available to all 
Americans at reasonable rates.
    The danger of relying on a ``cozy duopoly'' is already apparent. 
The harm has already been done, and its impact is severe. America has 
been falling behind in the global race to the broadband future, not 
because there is inadequate incentive to invest, not because we are 
less densely populated than other nations, but because there is 
inadequate competition to push the ``cozy duopoly'' to deploy 
attractively priced services and unleash the Internet economy to 
develop consumer-friendly services. The current jostling for upscale 
consumers with big bundles of services leaves the majority or Americans 
behind. On a per megabit basis Americans pay five to twenty times as 
much for high-speed services as consumers in many other nations. Is 
there any doubt that the primary cause of the broadband digital divide 
is price? Now, after leaving the American consumer in a serious 
predicament, the network giants are insisting on the right to 
discriminate against content, applications, and services on the 
Internet, as blackmail for building broadband networks. (See Appendix 
A)
    The failure of penetration resulting from high prices and the 
threat of discrimination in network access drives innovation out of the 
American Internet space and overseas. We should take note that the 
world's most advanced broadband nations have instituted policies that 
are based on last-mile competition, strategic direct investment in 
infrastructure, and free market principles of nondiscrimination on the 
network to drive innovation. Not only has the FCC failed to institute 
pro-competitive policies, the Commission has done precisely the 
opposite, masking it in rhetorically glowing but substanceless reports 
on the state of the broadband market.
The Past as Prologue: Successes and Failures on the Road to Convergence
Telecommunications
    The idea behind the break up of AT&T in 1984 was to separate those 
parts of the industry that could be competitive from those parts of the 
industry that could not and use public policy to advance competition in 
the competitive sector. It worked in the long distance industry for 
most consumers. Requiring the local companies to provide ``equal 
access'' to their networks and shifting fixed cost recovery onto 
consumers, Federal regulators created an environment in which long 
distance companies eventually commoditized long distance--as long as 
consumers took large bundles--and competed the price down.
    The Telecommunications Act of 1996 sought to introduce more 
competition into last mile markets in telecommunications and cable. In 
telecommunications, it sought to promote competition by identifying the 
various elements of the local exchange network and making them 
available to competitors on terms that would allow competition. The 
idea was that new entrants would invest in competing facilities where 
they could, while the monopoly elements were rented from the 
incumbents. Billions of dollars were invested, but this experiment 
failed. In the decade since the Telecommunications Act of 1996 was 
passed, the Federal Communications Commission (FCC) and the antirust 
authorities failed to enforce the communications and competition laws 
of this Nation to promote a consumer-friendly competitive environment. 
The FCC allowed the incumbent local telephone and cable companies to 
avoid their obligations under the law to promote entry into the 
communications field, while the Department of Justice (DOJ) and the 
Federal Trade Commission (FTC) allowed them to buy up their actual and 
potential competitors. (See Appendix B)
    The Competitive Local Exchange Carriers (CLECs) were strangled by 
the failure of the FCC to force the incumbent local exchange carriers 
(ILECs) to open their local markets. And when the possibility of voice 
over Internet protocol (VoIP) arose, the ILECs slammed the door by 
tying high speed Internet to VoIP service. In essence, forcing 
consumers to pay twice, if they wanted an unaffiliated VoIP provider. 
The two largest CLECs were recently absorbed by the two largest ILECs. 
The same two dominant local companies also absorbed the two players in 
the largest long distance service and enterprise market, reconstituting 
the old Bell system as two huge regional entities that dominate their 
home territories with about a 90 percent share of local service, an 80 
percent share of long distance, and over a 50 percent share of wireless 
service. (See Appendix C)
Cable
    The 1984 Cable Act ended local regulation under the promise of 
competition. Overbuilders were supposed to enter to compete head-to-
head, and satellite providers were supposed to provide intermodal 
competition. It never happened. The last mile market for cable proved 
too difficult to crack. Cable rates skyrocketed and the industry was 
subject to conditions of nondiscrimination in access to programming in 
1992. Rates stabilized because of regulation, not competition.
    As in telecommunications, the 1996 Act sought to stimulate head-to-
head competition in multichannel video programming distribution (MVPD), 
but failed. Overbuilders could not crack the market--taking a scant 2 
or 3 percent of subscribers. Satellite grew, but could not discipline 
cable's market power nor effectively discipline prices. The local 
telephone companies were invited into the cable business in a variety 
of ways, but chose not to enter.
    Cable operators still account for about 85 percent of all MVPD 
subscribers. Regional concentration has reinforced market power at the 
point of sale. Monthly cable rates have doubled since the 1996 Act and 
consumers are offered massive, monthly packages which afford them 
little choice in what to buy (see Appendix D). Geographic consolidation 
has created a huge obstacle to entry into the programming sector. Cable 
operators control the programming that reaches the public and 
discriminate against unaffiliated programmers. The results of these 
market trends have left consumers and independent programmers at the 
mercy of the cable giants. (See Appendix E)
Internet
    When cable rolled out a telecommunications service--cable modem 
service--the FCC moved the goal posts, redefining cable modem service 
into a different regulatory category. It abandoned one of the vital 
underpinnings of the success of the Internet, the ``Computer 
Inquiries.'' This was the digital age expression of the principle of 
nondiscrimination that the FCC applied to computer and data services 
starting in 1968. As telecommunications in this country have evolved, 
the FCC established the policy of keeping the network neutral--allowing 
the intelligence in the network to stay at the edge. This dovetailed 
with the end-to-end principle of the Internet and provided an arena for 
free market innovation, competition and consumer choice, that was 
unparalleled in recent experience.
    When the FCC abandoned this policy for cable modem service, 
America's slide from Internet leadership began. This allowed the cable 
operators to discriminate against Internet service providers--forcing 
consumers to pay twice if they preferred an Internet service provider 
other than the cable affiliate (See Appendix F). They have imposed all 
manner of anti-consumer, anti-innovation restrictions in their customer 
agreements, which have driven applications developers away from this 
space. More importantly, the decision to remove common carrier 
regulations from cable modem service paved the way for a total 
cashiering of a century of communications policy. The immediate result 
will be nothing short of the destruction of the Internet if the 
Congress does not move to hold the line on the last remaining 
safeguard--network neutrality. The fundamental mistake in 
communications policy, which we have made over and over in the last two 
decades, is to allow a very small number of network owners to control 
the physical communication system. If we duplicate that mistake again, 
the result will be the destruction of the vibrant, vigorous competition 
and burgeoning innovation of the Internet economy.
The Future
    The telephone companies now say they are ready to compete with 
cable in video, and the cable companies now claim to be ready to 
compete with telephone companies for voice. But they have demanded the 
elimination of the fundamental social obligations of the Act--Universal 
Service and nondiscrimination. The notion that Congress anticipated or 
would ever have enacted the 1996 Act under belief that we would end up 
with a duopoly is not believable. The hope was for vigorous competition 
among many providers.
    Two competitors are simply not enough to discipline pricing, as the 
new entrants just match the high priced bundles of the incumbents. Two 
are not enough to ensure nondiscriminatory access to the communications 
network, as the new entrants demand to be allowed to discriminate and 
exclude Internet service providers and rival services. By traditional 
economic standards, three or four market players are not enough to 
assure competition, certainly not when access to the means of 
communications are at stake. If both network giants in a market adopt 
the same anti-competitive practices, where will consumers go? They are 
trapped.
    The fundamental importance of nondiscriminatory access to networks 
and services embodied in the Communications Act was reaffirmed just 
this month by key members of the ``cozy duopoly.'' Time Warner, the 
second largest cable company, has petitioned the Federal Communications 
Commission to impose an obligation of nondiscriminatory interconnection 
on the incumbent local telephone companies, under Section 251 of the 
Act. Verizon, the second largest telephone company, has petitioned the 
Commission to impose an obligation of nondiscriminatory access to video 
programming under Section 628 of the Act. Yet, both of these entities 
directly and indirectly through their trade associations, are lobbying 
the Congress, and have pushed the FCC, to eliminate all such obligation 
with respect to Internet access and services.
    The fact that the anti-competitive and anti-consumer policies come 
and go, as political pressure or public attention ebbs and flows, is 
not a justification to abandon the principles of nondiscrimination. On 
the contrary, when innovation depends on the whims of network 
gatekeepers it is stunted and chilled. As Vint Cerf has said: the 
Internet is about ``innovation without permission.'' When the choices 
are few and the switching costs for consumers are large, innovative 
activity will go elsewhere.
    Current arguments against obligations to provide nondiscriminatory 
access are based on the claim that competition exists between two 
networks and that is all the American economy needs. That claim is 
wrong as a matter of historical fact and practical experience. The 
obligation of nondiscrimination came to this country under English 
common law. From the founding of the Republic, public roads competed 
against privately owned canals, but they were both subject to 
obligations of nondiscrimination. Private railroads were added to 
compete with canals and roads, and when they began to brutally 
discriminate, refusing to be bound by their common law obligations, 
they brought common carrier down upon themselves with the Interstate 
Commerce Act of 1886. Telegraph and wireline telephone were also 
expected to behave in a nondiscriminatory manner, but when AT&T refused 
to interconnect with independent companies, common carrier obligations 
were extended to that industry in the Mann-Elkins Act of 1910, thus 
ensuring nondiscrimination in communications.
    In other words, one of the enduring principles of communications in 
America has been nondiscrimination. We have layered alternative modes 
of communications one atop another, each using a different technology, 
each optimized for a somewhat different form of communications and 
still we imposed the obligation of nondiscrimination. We have 
accomplished this through both a liability approach and a regulatory 
approach. The layering of networks subject to the obligation of 
nondiscrimination makes even more sense when the importance of the free 
flow of information is magnified as it is in our digital economy.
Conclusion
    As this Committee moves forward to construct a new regime of 
communications policy, we urge the Congress to begin from the 
successful principles of past policies and to learn from the problems 
and failures of past mistakes.

   Nondiscrimination in interconnection and carriage should be 
        the explicit legal obligation of communications networks that 
        provide last mile connectivity and local network access, as it 
        has been for the last century.

   The commitment to Universal Service should be strengthened, 
        not weakened, and we should apply the program beyond the dial-
        tone to broadband capabilities. We support legislation 
        introduced by Members of this Committee to meet this need.

   Congress can promote the goals of competition and Universal 
        Service simultaneously by making available more spectrum for 
        unlicensed uses and protecting the right of local governments 
        to build last mile networks. We applaud Members of this 
        Committee who have introduced legislation to accomplish both of 
        these goals.

   Congress should recognize the economic reality of the 
        communications market and direct public policy to correct for 
        the abuses of a duopoly market structure. Without explicit, 
        pro-competitive policy, we cannot expect it to grow of its own 
        accord.

                  Appendices Submitted for the Record
Appendix A: Broadband Penetration
    Expanding the Digital Divide and Falling Behind on Broadband: Why a 
Telecommunications Policy of Neglect is Not Benign--October 2004.
    Broadband Reality Check: The FCC Ignores America's Digital Divide--
August 2005.
Appendix B: Local Competition
    Competition at the Crossroads: Can Public Utility Commissions Save 
Local Competition--October 2003.
    Broken Promises and Strangled Competition: The Record of Baby Bell 
Merger and Market Opening Behavior--June 2005.
Appendix C: Wireless
    Petition to Deny of the Consumer Federation of America and 
Consumers Union, In the Matter if Application for the Transfer of 
Control of Licenses and Authorizations from AT&T Wireless Services, 
Inc. and its Subsidiaries to Cingular Wireless Corporation, Federal 
Communications Commission, WT Docket No. 04-70, May 3, 2004.
    Reply--Federation of America and Consumers Union, In the Matter if 
Application for the Transfer of Control of Licenses and Authorizations 
from AT&T Wireless Services, Inc. and its Subsidiaries to Cingular 
Wireless Corporation, WT Docket No. 04-70, May 3, 2004.
Appendix D: Cable
    Time to Give Consumer Real Cable Choices: After Two Decades of 
Anti-Consumer Bundling and Anti-Competitive Gatekeeping--June 2004.
    Reply Comments of the Consumer Union and the Consumer Federation of 
America, In the Matter of Comment Requested on a la Carte and Themed 
Tier Programming and Pricing Options for Programming Distribution on 
Cable Television and Direct Broadcast Satellite Systems, Federal 
Communications Commission, MB Docket No. 04-207, August 13, 2004.
Appendix E: Cable
    Comments of Consumer Federation of America, Consumers Union and 
Free Press, In the Matter of the Commission's Cable Horizontal and 
Vertical Ownership Limits and Attribution Rules, Federal Communications 
Commission, MM Docket No. 92-264, August 8, 2005.
Appendix F: Internet
    The Public Interest in Open Communications Networks, July 2004.

    The Chairman. Well, I'm only sorry the rest of our 
colleagues aren't here, because I think the six of you really 
have hit on the basic issues connected with this overall 
subject of convergence that we have to address, and we thank 
you for taking the time to do that. I do think, implied in a 
couple of your comments, there is a criticism of my friend and 
I who started the concept of spectrum being available and being 
auctioned. And I've got to tell you that I agree with a lot of 
what you said Dr. Cooper, I still feel that the public is 
right, that those airways are owned by the public and somehow 
or other the public ought to have some return for the use of 
them when it's done for profit.
    Now your last comment really about opening up more to 
unrestricted use, is a question I was going to ask you anyway, 
and that is: So we open up a lot more for use, it's going to 
primarily be used on the local level, but how do we know its 
really used for anything other than profit making? How do we 
know it's really used for public use rather than competing with 
the people who are paying rates to have the balance of the 
spectrum?
    Dr. Cooper. Frankly, I think when you provide unlicensed 
spectrum to be available to a vigorously competitive 
marketplace to exploit it; I think the public gets its value 
back directly. That is they get it back directly in the form of 
using that spectrum. Rather than taking the spectrum and giving 
a license to a single person whether you allocated the license 
in the past by essentially roulette at the FCC or by 
auctioning, you're essentially establishing an exclusive right 
to that spectrum. I think people use the spectrum.
    The Chairman. I only have so much time. And we are going to 
separate here, and we're going to have to go back and vote 
soon. But OK, so we give out a bunch of unlicensed spectrum, 
what's the sanction if they misuse it. And how do we control 
that, it will be pornography, it will be all the stuff we're 
trying to prevent in terms of misuse of the airways. If you can 
use it without any permission, what's the sanction to the 
people who misuse it?
    Dr. Cooper. Unlicensed doesn't mean anarchy in fact----
    The Chairman. How do you regulate it?
    Dr. Cooper. The FCC will establish rules of non-
interference, they will protect the primary users and the white 
spaces, and the devices will in fact not interfere, the issue--
--
    The Chairman. Not interference, it's use. It's content. How 
do you control the misuse of that spectrum by unlicensed 
people?
    Dr. Cooper. Well frankly the same way we control the misuse 
of streets by bank robbers who drive away in automobiles, we 
don't ban automobiles----
    The Chairman. Well, they've got cops.
    Dr. Cooper.--and we don't eliminate streets.
    The Chairman. They've got cops in every town for that. 
You're not going to have cops for this unlicensed spectrum. I 
don't mind you talking to us about unlicensed spectrum for 
public use. Or community use, but when you say just turn anyone 
loose to use it, unrestrained, unrestricted, and say that the 
FCC is going to somehow have some control over it, from the 
point of view of what we want our children to be listening to, 
or what we want our spectrum to be used for, believe me, I'm 
sorry. We ought to talk about that later.
    You know, Kyle, you mentioned digital, two or three times. 
What's going to happen to all the people that still have analog 
if we give all this freedom to digital? Don't we have some 
layover here for a few years that we've got too much analog in 
the whole system, and you're talking about freeing up digital 
people. What about the people who still have analog, and still 
want analog, am I off base, technically?
    Mr. McSlarrow. No. I mean that's true. I mean interestingly 
the digital age actually helps analog customers. I mean what's 
actually happening now, the upgrade to the plant that we did to 
digitize data, even the data, the bytes that are bringing video 
is reconverted to analog for somebody who has an analog TV. So 
they benefit, they actually get a better picture, even if it's 
not a ``digital picture.''
    The Chairman. Isn't that so, if you don't adjust it at the 
beginning, in terms of cable you can serve just your customers, 
but the other people who are picking up are going to pick it up 
still analog isn't that right?
    Mr. McSlarrow. Yes, I mean you can convert it back and 
forth. I mean from analog to digital, but ultimately you're 
right. There is a transitional period. There are right now, 
probably 40 million Americans who are cable customers who have 
analog TVs. Now we're trying to--from our digital transition.
    The Chairman. You're looking at one of them.
    Mr. McSlarrow. And you probably have five of those right. 
And so----
    The Chairman. No, I'm talking about up home.
    Mr. McSlarrow. So you're going to have a transition and our 
hope is that in the next few years, we're going to get all 
those customers into the digital age. But in the meantime we 
have to deal with both digital and analog customers.
    The Chairman. Steve, what do you think about this program 
of spectrum, that Dr. Cooper and I have been talking about? You 
mentioned spectrum too, I think you criticized the auctioning 
of spectrum, is that right?
    Mr. Largent. No, sir, we didn't. We're not critical of the 
auctioning of spectrum. In fact Congress has gone a long way 
over the course of the next several years to make more spectrum 
available to the wireless industry and we're greatly 
appreciative of that. And we pay dearly for it. I did mention 
spectrum, and we paid over $20 billion for the spectrum that we 
utilize today.
    The Chairman. Senator Inouye.
    Senator Inouye. I believe all of us have read the Wall 
Street Journal of Tuesday. What is France doing right, or what 
are we doing wrong?
    Mr. Comstock. Mr. Chairman, if I might take a shot at that. 
I think that the important part about that article from the 
Wall Street Journal regarding France Telecom is that they are 
applying essentially the same provisions that Congress adopted 
in 1996. They're saying we have an incumbent infrastructure 
here and that that incumbent has to make that service 
available. That infrastructure, the transmission 
infrastructure, must be available on reasonable terms and 
conditions. And that is what has lead to much of the 
competition that you hear mentioned today. And again I don't 
think it should be lost. There's a lot of discussion about all 
the available voice competition services you have and that is 
where wireless comes into the fray. But when you're talking 
about data, it's down to two in the residential areas, and it's 
down to one in the business. And so the idea that we're going 
to is that the consumer is going to get the benefit of the 
infrastructure that they've already paid for by having these 
reasonable rules. And the rules under the existing 1996 Act 
include a reasonable profit, that's written right into the 
statute.
    And it's through the use of these unbundled network 
elements and special access that much of the competition that 
consumers enjoy today, including wireless competition, is made 
available. Because at the end of the day all of these networks 
come back onto the wireline infrastructure. And if cable can't 
interconnect to the incumbent infrastructure, if the wireless 
companies can't interconnect, if the CLECs can't get there then 
we can't compete. And we can't offer service, and that's the 
important thing. What France is doing right, is they are 
applying much the same rules that Congress adopted in 1996 in 
Sections 251 and 252 of the statute.
    Mr. McCormick. Mr. Chairman, if I might respond to that. 
They have an entirely different philosophy. It's a philosophy 
that's been reflected in that part of Western Europe for a long 
time. France Telecom is a government-owned telephone company. 
And what they have done is that the government has funded the 
deployment of a new network. They don't have to make money 
operating it; they don't have to worry about investors 
investing in it. And what they have done, is they have then 
made that government network available to folks for a price.
    What they have done is they have gone to a government-owned 
and operated model. They do the same thing with regard to their 
airlines. In our country for over 100 years we've had a 
different model; it's been the private-sector model. But what 
we need to do, Mr. Chairman, is not be betwixt and between. We 
need to at this point free up our private sector model from 
government-managed competition and really embrace the free 
market. We have investors who are willing to invest their 
capital to upgrade the networks, if they're allowed to offer 
over those networks everything technology will allow them to 
offer. So, for example, in McMinnville, Tennessee, I've got a 
small telephone cooperative that the community, the people own 
their telephone company, and they have upgraded their telephone 
company plan to offer not just voice service, but voice and 
video and Internet access. But to serve that little community 
of 40,000 people in middle Tennessee, the co-op crosses 25 
franchise areas. And so, for over a year now, they've been 
trying to obtain franchises to offer video. What we need to do 
Mr. Chairman, is if we're not going to have a government-owned 
model, then let's really have a free-market model and allow 
those who invest in new infrastructure to use that 
infrastructure for whatever services they think consumers might 
want to buy.
    Dr. Cooper. Senator, in fact if you look at British 
Telecom, they're pursuing the same model. It's not a 
government-owned monopoly. In fact the key, in almost every one 
of the nations that have moved past us, in the past half decade 
in terms of broadband penetration is when the regulator said 
open your local markets, the telephone companies did. They 
started a little bit later than we did, their CLECs are 
competing for the triple player, or the quadruple play, 
actually the triple play, and so they're competing against the 
bigger pot of money and that made it more doable. The 
regulators also set rates so that it was attracted to 
competition, they didn't have a half a decade of litigation 
until death. And so it is a model that can work and that has 
been made to work, essentially by providing nondiscriminatory 
access to the infrastructure.
    And in almost every one of the cases, only a few of them 
involve substantial government subsidies. Most of them do not 
involve that kind of government subsidies. It's simply a 
question of opening the network, allowing the incumbent to make 
the investments recover the cost of those investments, and the 
FCC might have made some mistakes on how they allocated the 
revenues and that model is in fact beating the heck out of our 
approach.
    Dr. Ellig. I think when we look at these kinds of issues we 
have to be careful to distinguish between some type of mandated 
interconnection so that the traffic is exchanged between 
networks, versus use--mandated use of other facilities in ways 
other than interconnection. The half decade of litigation unto 
death, I assume, Mark, you were talking about the whole 
unbundled network element platform controversy, which was a 
fight over a competitor being allowed to use someone else's 
network to reach the customer instead of building their own 
stuff. I think that's a little bit different from the much more 
limited type of argument and discussion you can have over the 
fair and nondiscriminatory terms on which various carriers are 
going to exchange traffic back and forth so that everybody with 
a phone or an Internet connection can reach anybody else who 
has a phone or Internet connection.
    The Chairman. Senator DeMint.
    Senator DeMint. I'm with you Mr. Chairman, this has been 
very helpful to see the different perspectives all across the 
industry. It's interesting though to listen, back up a little 
bit and see cable wants access to phone switches, but doesn't 
want to give other companies access to cable, and the CLECs 
want access to cable and phones. The phone company wants to 
compete for video but wants to continue to get the universal 
subsidies, even though you just gave a great example in 
Tennessee, people will invest in a rural area, but to continue 
to pad the bottom lines with taxpayer dollars is questionable. 
Wireless seems to want to just be left alone, which sounds 
good. I think the decision gets back the philosophy between Dr. 
Ellig and Dr. Cooper, if the government weighs in, we decide 
we're going to continue to regulate the technologies; clearly 
we're going to end up with another hodgepodge of regulation 
that restricts competition. But in order to move toward the 
approach where we have real good consumer protection, that new 
license spectrums and let this go, I mean it just seems obvious 
to me that it's changing, it's so complex we've got to let it 
go, we could sit back and watch for a few years if consumers 
were not getting a good deal, we could come back in and do what 
Dr. Cooper wants and try to regulate the industry. But I just 
want to challenge you and the different industries, if we 
really want competition we've got to figure out how not to get 
this little regulation for this industry so you can have access 
to that industry, by the time we get through we're not going to 
be better off than we are today.
    Why don't we just let it go, protect the consumer and just 
see if in a few years we need to come back and create a 
regulatory structure. We couldn't do any more harm than we're 
doing now. So if anybody wants to comment--yes sir.
    Mr. Comstock. Senator, I'd like to point out that New 
Zealand gave that a try and they recently reestablished their 
regulatory authority, because they found it was a complete 
disaster, and in fact one of Walter's companies, Bell South was 
an active participant down there. So I mean the idea--the 
problem you've got is it's not like we're all lined up at this 
table and you shoot the gun and we're all racing for that wall, 
and may the best man win. You've got two people sitting on my 
left and my right here, who already got to build ubiquitous 
infrastructures in a protected environment. And so they start 
out with, in the case of the telephone company, connections 
that reach 100 percent of the consumers and businesses in this 
country and they've already got the customers for at least one 
service, at least voice and probably data in the case of phone 
companies. In the case of the cable companies, they got to 
build their network in a protected environment, the phone 
companies were told to keep out, and they got to build it and 
they got 100 percent of the customers for video.
    Now, then as I said, the Congress let satellite in through 
the program access rules. But the reality is the wireless guys 
couldn't even exist today without mandated interconnection; 
section 332(c) which Steve Largent referred to, includes a 
provision that Congress had to put in in 1993. Why? Because the 
local phone companies wouldn't give competing wireless 
companies interconnection.
    So, the idea that you can have a level playing field, in 
which there's no ref and there's no rules, and two guys get to 
start out with basically 100 percent of the stack of peanuts, 
it's just not going to work, and so you really do need some 
rules. And I think what Dr. Cooper and I are saying is look, if 
you want the continued innovation that brought us the Internet, 
that's brought all these technological changes that you talk 
about that are applications, you need to have some rules. There 
doesn't have to be a lot of them, but there have to be some 
basic ones that give people access to that infrastructure or 
you're not going to have the continued innovation in this 
country, which is what all the consumers like.
    Senator DeMint. You want access to all the new technology 
that is--Mr. McCormick's folks are building in Tennessee, they 
do all that investment, you want access----
    Mr. Comstock. It's not new technology Senator, it's fiber 
optics, which has been around for----
    Senator DeMint. Well not new technology, but new 
investment.
    Mr. Comstock. That's right, if I get to start out with a 
100 percent of the customers, then it would be fair for 
somebody else to use my network. They're using public rights of 
way which are limited--there isn't enough money in this country 
for each one of us to build our own network to the consumer. So 
if you want competition you've got to share the network.
    Senator DeMint. But somehow it's true in every other 
industry but yours, how just--a quick comment and I know I need 
to run.
    Mr. McSlarrow. You didn't say this, but the implication was 
that you know we're all sort of hypocritical here.
    Senator DeMint. No. No. I'm just saying----
    Mr. McSlarrow. I know it's not a high bar, I actually try 
to avoid hypocrisy, but let me--let me just say----
    Senator DeMint. I think we live in a glass house on this 
side of the desk too.
    Mr. McSlarrow. Let me just say this. The question you 
really asked about whether or not we shouldn't just walk away 
from all of this, I think is a fair one. We are all sort of 
stuck in a system that has quid quo pros, and so you hear that 
from each of us. And there is something attractive about 
walking away if you will and sort of starting over. I mean, I 
know, I read your bill obviously and I think there's a lot of 
attraction to a different kind of model that's a pure free 
market, competitive model. If we're not in that universe, then 
we have to deal with the world as it is, and for us what we 
would urge across the board is as little or no economic 
regulation as possible. And narrowly targeted if there are 
social obligations that are important, like E-911, and USF, and 
that kind of stuff, then everybody should play by the same 
rules. And as Earl said, when it comes to interconnection, 
reality is we have a public switch telephone network, you 
cannot exchange traffic unless you can interconnect. It's 
different from every other part of the telecommunications.
    Senator DeMint. I'll probably have to leave as you're 
talking.
    Dr. Cooper. I'll get it on the record anyway. I mean the 
simple fact of the matter is telecommunications is different; 
it has always been treated different. The principle of 
nondiscrimination is centuries old. Established under English 
Common law, brought over to this country in that law. It 
applied to every means of transportation and communication we 
have ever deployed in this country, roads, canals, railroads, 
telephone, telegraph, and steamship lines. Everything has been 
subject to this principle. It used to be a legal obligation 
actionable liability, and then it became regulation when the 
railroads refused to accept their obligation. When Ma Bell 
refused to interconnect with independent companies, it got 
slapped with common carrier regulation as well.
    But the simple fact of the matter is that we have always 
had this obligation on every means of communication and 
transportation in this country, and there's no reason to 
believe that the problem will be solved by individuals who have 
market power if we just let them go.
    The Chairman. Thank you very much. As you know we have a 
very active young staff sitting behind us, young compared to me 
anyway, and they have questions prepared for both Senator 
Inouye and I to ask you. And we both have to be at a 
Commission, the Eisenhower Commission. So what I'd like to ask 
you to do is if you would reply to these questions. I'm going 
to limit the staff to two questions, from each one of us to 
each one of you, if you would send them back. And I tell you 
what if you make them no longer than one page and get them back 
to us before next Thursday, I promise you I'll read every one 
of them personally, OK. But I also want to ask you another 
question. And I would like to have each one of you give me 
about one page, maybe a little bit longer, I see Earl reaching 
for his pen already. It's a simple question Earl.
    [Laughter.]
    The Chairman. If you were drafting this bill, what would 
you include in it, that would help promote competition, and 
what would you include that would force consumer prices down? 
We say promoting competition is designed to bring it down, so 
it may be that there's one answer for that double question, but 
I don't think so. What would you include to promote 
competition, and what you include to really bring consumer 
prices down? And I think we've all read the Wall Street Journal 
article, and I understand your answers to the questions that 
you've had, but it still rings a bell with us, that one of the 
major expenses of the American family now is communications. 
And we're using it not just in one of the old--as you said not 
the phone on the wall, I can remember when you had to go over 
and you could listen into three or four other people on the 
same line, and you had to ring it, turn it over to make it 
ring, and we had to do three longs, and one short to get on the 
line ourselves, OK. Now we've come a long way since that, and 
you have so many variations now of communications available. 
And hopefully, as I said this morning, we can talk about 
communications, not telecommunications, it's total 
communications again now, we want a communications act, not a 
telecommunications act. We don't want an act that deals one way 
with information and another way with telecommunications and 
another way with communications and another way with satellite. 
We want a communications act, if we can possibly do it. Your 
suggestions I think are very helpful to us, and again I thank 
you all for coming back I don't think we'll ask you to come 
back again to mark up this bill, but once we get your 
suggestions we might, I don't know. But we'd very much like to 
have your help. You six really have helped address the broad 
spectrum of the problems we face and we appreciate your 
suggestions.
    Thank you very much, gentlemen, we appreciate it.
    [Whereupon at 4:34 p.m., the hearing was adjourned].
                            A P P E N D I X

    Response to Written Questions Submitted by Hon. Ted Stevens to 
                             Kyle McSlarrow
    Question 1. If you were drafting this bill what would you include 
in it that would help promote competition and what would you include 
that would force consumer prices down?
    Answer. Voice: Any bill that seeks to promote competition in the 
telecommunications marketplace would be incomplete without addressing 
voice competition where the Bell companies still control 85 percent of 
the voice market and still serve as the ``hub'' to which all other 
carriers must connect in order to reach each others' customers.
    The fundamental problem is that the telephone companies have no 
incentive to give their competitors access to their network, which was 
funded by rate payers, and competitive voice services simply cannot 
survive without such access. To address this, the 1996 Telecom Act 
provided interconnection rights to the Bells' competitors (CLECs) so 
they could exchange traffic with the Bells on an economic basis, 
without glitches or delays, in order to promote local voice 
competition.
    Today, there are a host of new technologies--such as Internet 
Protocol--that are capable of providing voice service. And just as they 
sought to block competition from CLECs through litigation, the 
telephone companies are seeking to block competition from VoIP 
providers arguing that they don't qualify for interconnection rights 
based on the technology they use. Unless Congress acts to explicitly 
extend these interconnection rights to ALL voice competitors, on a 
technology neutral basis, the best hope for true competition in the 
voice market will never take hold.
    Video: Today there exists vigorous competition in the video service 
marketplace with most consumers having a choice among at least three 
video providers--a cable operator and two national direct broadcast 
satellite providers. Cable now has 68.3 percent of the multichannel 
video market as compared to 95 percent twelve years ago, further 
evidence that video competition is thriving.
    To the extent that Congress believes that the franchise process 
needs to be modernized, we support reforms that:

        (1) ensure that a new entrant can get a franchise in as little 
        as 30 days;

        (2) ensure a level playing field so that all providers of video 
        services are treated equally and play by the same rules; and

        (3) ensure local governments have the ability to negotiate and 
        enforce the policies of Congress.

    Broadband: Today, competition in the broadband market is strong and 
continues to grow. Cable broadband service is available to 93 percent 
of households passed by cable. DSL service is available to more than 76 
percent of households where the phone companies offer local telephone 
service. Based on June 2005 data from the FCC, 74 percent of U.S. zip 
codes have three or more broadband providers.
    The imposition of network neutrality regulations would threaten 
this robust competition and stifle investment and innovation. With 
bandwidth usage growing at a rapid pace, continued investment will be 
needed to meet the demands of consumers. Broadband providers and 
content providers need the flexibility to develop business models to 
share the costs of the network investments in order to maintain an 
affordable retail price for Internet access and promote further 
broadband penetration.
    Where the marketplace is highly competitive, where no real world 
problems needing a solution have been identified, and where the pace of 
technological development is breathtaking--as is the case in 
broadband--government intervention is unnecessary.

    Question 2. Cable is very concerned about the terms of video 
franchising for new entrants. What other instances are there where 
cable is either advantaged or disadvantaged against competitors using 
other platforms?
    Answer. When cable operators offer voice services they have no 
advantage over other voice competitors. (1) In fact, without the right 
to interconnect with incumbent local exchange carriers, they operate at 
a disadvantage. (2) Claims that cable operators are subject to lighter 
regulation than incumbent local telephone companies when entering the 
telephone business are false.
    (1) As referenced in the one page response attached, in order to 
ensure true voice competition language must be included to clarify that 
the interconnection rights Congress established in 1996 to promote 
voice competition apply to all providers of voice services on a 
technology neutral basis.
    The phone companies argue that private negotiations between 
themselves and their competitors will yield voluntary interconnection 
arrangements. The reality is that the phone companies have no incentive 
to enter reasonable commercial interconnection agreements with their 
potential competitors. And over the last few years the Bells, as well 
as rural and independent phone companies, have been seeking to limit 
interconnection rights based only on the technology used by a voice 
provider. Limiting interconnection and related rights to providers of 
voice services using traditional technology will ensure the Bells 
retain their dominance by hampering the introduction of IP-enabled 
voice services--the best hope for competition in the voice market.
    The Bells' continuing consolidation increases the need for 
interconnection protections. When the two largest CLECs in the market 
(AT&T and MCI) merged with the two largest Bells (SBC and Verizon), the 
most experienced and well-funded negotiators of interconnection 
agreements were removed from the competitive voice market. The AT&T/ 
BellSouth merger would only solidify the Bells' monopoly market power 
and make it more difficult for competitors to get a fair shake in 
interconnection negotiations. And even as they buy their largest 
competitors and consolidate their market power, the Bells are asking 
Congress and the FCC to abandon the basic interconnection rules 
established in 1996.
    Basic interconnection rights necessary for all voice competitors 
include:

        a. the right to interconnect to the incumbent phone company's 
        network anywhere it is technically feasible, including at the 
        incumbent's switch, at rates that are based on the incumbent's 
        costs;

        b. the right to collocate equipment on the premises of the 
        incumbent local exchange carriers, to ensure efficient 
        interconnection;

        c. the right to obtain telephone numbers directly from the 
        administrator of the North American Numbering Plan;

        d. the ability to have access to poles, rights of way and 
        conduits at reasonable cost-based rates;

        e. the right of customers to move their existing telephone 
        number from one carrier to another (number portability) in a 
        quick and efficient manner and not to dial extra digits to 
        reach customers of other carriers (dialing parity);

        f. guaranteed access to incumbent phone company databases for 
        E-911, customer service record information, directory listing 
        information and other local service requests through 
        established interfaces and systems; and

        g. access to incumbent carriers' circuits at cost-based rates 
        to carry traffic from one network to another (transiting).

    (2) The phone companies claim that cable operators are subject to 
lighter regulation when entering the phone business in order to justify 
their position--that they should not be required to comply with social 
obligations associated with the provision of video service. The fact 
is, cable operators offering voice services, including VoIP, abide by 
the kind of ``social'' obligations (i.e., Universal Service, E-911, and 
CALEA) the telephone companies want to avoid in the video business 
(i.e., providing video service to all consumers--not just ``high 
value'' consumers). Cable never sought, or received, exemptions from 
the type of fundamental provider obligations the phone companies seek 
to avoid.

   When cable companies rolled out circuit-switched phone 
        service, they complied with substantially the same framework as 
        Verizon. Cable and other competitors were exempt only from 
        regulations tailored to the monopoly provider.

   When cable companies roll out VoIP service, they compete 
        within the exact same regulatory framework as incumbent phone 
        companies or to new entrants. Verizon and AT&T, who complain 
        most about ``unregulated'' competition from cable VoIP, are 
        themselves among the largest vendors of VoIP service.

   Cable operators are deploying telephone service across their 
        entire franchise areas. Cable operators provide their new 
        digital telephone service over the same upgraded broadband 
        facilities that they use to provide video and high speed 
        Internet access. Because cable operators are already required 
        by their video franchise to deploy those upgraded facilities 
        essentially throughout their franchise areas, their new digital 
        phone services will be similarly deployed throughout all 
        neighborhoods in their franchise area.

    Question 3. At what rate are you gaining phone customers where your 
members have rolled out VoIP service?
    Answer. Cable operators began the deployment of voice services in 
2000 using circuit-switched technology. In 2003, VoIP service was 
launched. Below are yearly industry-wide statistics for circuit-
switched, VoIP and total telephony subscribers.

------------------------------------------------------------------------
                                   Total         Circuit
            Year              Telephony Subs    Switched        VoIP
------------------------------------------------------------------------
2000                                 850,000       850,000  ............
2001                               1,500,000     1,500,000  ............
2002                               2,500,000     2,500,000  ............
2003                               2,746,000     2,702,000        42,000
2004                               3,500,000     3,000,000       587,000
2005                               5,600,000     3,100,000     2,550,000
------------------------------------------------------------------------

                                 ______
                                 
     Response to Written Questions Submitted by Hon. Trent Lott to 
                             Kyle McSlarrow
    Question 1. I know this Committee has spent a lot of time talking 
about video competition, but what can we do to ensure there is healthy 
competition in the voice marketplace?
    Answer. Any bill that seeks to promote competition in the 
telecommunications marketplace would be incomplete without addressing 
voice competition where the Bell companies still control 85 percent of 
the voice market and still serve as the ``hub'' to which all other 
carriers must connect in order to reach each others' customers.
    The fundamental problem is that the telephone companies have no 
incentive to give their competitors access to their network, which was 
funded by rate payers, and competitive voice services simply cannot 
survive without such access. To address this, the 1996 Telecom Act 
provided interconnection rights to the Bells' competitors (CLECs) so 
they could exchange traffic with the Bells on an economic basis, 
without glitches or delays, in order to promote local voice 
competition.
    Today, there are a host of new technologies--such as Internet 
Protocol--that are capable of providing voice service. And just as they 
sought to block competition from CLECs through litigation, the 
telephone companies are seeking to block competition from VoIP 
providers arguing that they don't qualify for interconnection rights 
based on the technology they use. Unless Congress acts to explicitly 
extend these interconnection rights to ALL voice competitors, on a 
technology neutral basis, the best hope for true competition in the 
voice market will never take hold.

    Question 2. I have some real concerns about any provider cherry 
picking the wealthiest neighborhoods in my state while leaving the rest 
behind. There has been a lot of discussion about this in the context of 
franchise reform. Is there anything Congress can do to protect all 
consumers?
    Answer. Yes. The rollout of the fledgling Bell video services have 
already demonstrated that the telcos will only provide service to high-
income areas and their current business plans do not suggest that 
lower-income Americans will receive these services anytime soon. The 
Congress can and must ensure that service providers do not create 
telecom and video have and have nots by including simple protections 
for all consumers.
    To ensure effective enforcement of this anti-discrimination 
principle, we would suggest making clear that cable operators may not 
exclude localities from their service area or deny service to consumers 
within a franchise area based on income. Additionally, franchise area 
needs to be carefully defined to ensure that a cable operator cannot 
cherry-pick among the neighborhoods within a locality that is served by 
its telephone or cable network.
    Given that states and localities are in a better position than the 
FCC to identify violations of this principle, it seems most appropriate 
to give them the enforcement authority to require cable operators to 
extend service, file a complaint with the FCC or otherwise have the 
ability to correct such violations.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                            Earl W. Comstock
    Question 1. If you were drafting this bill what would you include 
in it that would help promote competition and what would you include 
that would force consumer prices down?
    Answer. Promoting competition is the least regulatory, and most 
effective, way to force consumer prices down. The alternative is retail 
price regulation, something that has been tried before in both the 
telephone and cable markets with unsatisfactory results.
    Four facts dictate the options Congress has to promote competition 
and bring down consumer prices for all communications services. The 
first is that the incumbent telephone companies are the only entities 
in any given area with a wireline network that reaches all business and 
residential customers in that area. The second is that the incumbent 
cable operators have the only wireline alternative network that reaches 
nearly all of the residential consumers, though that same network 
reaches very few business customers. The third, and perhaps most 
important, is that both the incumbent telephone companies and the 
incumbent cable operators were each allowed to build their network over 
the course of a decade or more while protected from competition, with 
the assurance that they would get all of the customers that chose to 
purchase their service in that area. Finally, it is clear that both 
here and abroad that wireless services are a higher priced complement 
to, and not a substitute for, wireline network services. As a result, 
incumbent telephone companies and incumbent cable operators retain at 
least 70 percent market share in their core service more than 10 years 
after passage of the 1996 Act.
    The reality is that, in both the residential and business markets, 
the construction of additional ubiquitous wireline networks will not 
occur. No competitor can get the financing for such an undertaking, and 
consumers do not want to pay for yet another network. Even in the 
wireless marketplace, where incumbent cellular operators had less of a 
head start, what you see is consolidation and dominance by the two 
incumbents.
    In light of these facts, which preclude the FCC's preferred model 
of ``inter-modal'' competition (i.e., each competitor can reach the end 
user by building its own wired or wireless network), Congress needs to 
adopt rules which require network operators, and in particular the two 
wireline network operators that were allowed to build their networks 
and establish a customer base while protected from competition, to 
provide reasonable and nondiscriminatory access to those networks. The 
scarce resource in communications markets is the transmission network. 
By requiring network operators to allow everyone to use these essential 
facilities to reach consumers, consumers will receive the benefits of 
competition--lower prices, better service, and greater innovation.
    The key measures needed to ensure reasonable and non-discriminatory 
access by competitors include (1) access to elements of the network so 
that competitors can create their own services; (2) interconnection at 
any technically feasible point; (3) the ability to collocate equipment; 
(4) the ability to attach devices to the network; (5) the right to 
resell transmission between or among points on the network as part of 
their own voice, video, and data offerings to consumers; (6) the right 
to use any technology and offer any service that does not harm the 
network; (7) nondiscriminatory allocation of all transmission capacity 
on the network (i.e., elimination of cable rules that allow network 
operators to reserve capacity for their exclusive use); (8) reasonable 
terms and conditions for each of these measures; (9) a neutral 
arbitrator to resolve disputes, and (10) efficient enforcement 
mechanisms to execute these rights. Congress must also require the FCC 
to establish Universal Service contribution and distribution 
requirements, and inter-carrier compensation rates (including access 
charges), which treat all transmissions and service providers equally.
    Adoption of these measures would not mean that the network operator 
could not charge consumers and other network operators more money for 
using more bandwidth. Nor would these measures prohibit a network 
operator from offering whatever additional services (for example 
information services or video programming) they chose. However, these 
measures would prevent network operators from using their ownership of 
the network to discriminate in favor of their own content and services. 
They would also prevent the network operator from unfairly cross-
subsidizing their own transmission services by charging competitors 
higher rates for transmission or requiring consumers to buy unwanted 
video or information services in order to obtain transmission capacity.
    Adoption of these measures will not discourage broadband 
deployment.  In fact, they will do just the opposite. By readjusting 
inter-carrier compensation and access charges so that all traffic is 
treated equally you eliminate the arbitrage opportunities, and by 
prohibiting the network operators from reserving capacity and 
discriminating against other providers you re-align the network owner's 
financial interests. Adopting these rules will mean that to make more 
money from the network, the network operator will want to maximize the 
use of the network. By adding more capacity to the network, the network 
operator makes more money. As long as Congress and the FCC do not 
regulate the price that network operators charge for transmission, then 
network operators will be able to recover whatever Wall Street demands 
to support the investment in more capacity. The only price regulation 
that is required is a nondiscrimination requirement. Whatever the 
network operator charges others for transmission capacity, the operator 
has to charge himself and his affiliates for the same transmission 
capacity. To allow the operator to do otherwise will result in price 
distortions that will reduce or eliminate competition.
    Adopting pro-competitive measures that require network operators to 
share transmission networks that use public rights of way or public 
spectrum will drive down the price paid by the consumer. This model has 
worked here in the United States in long distance and was starting to 
work in local until the FCC abandoned network sharing in favor of its 
flawed inter-modal competition model. Network sharing is working in 
Europe, not only for broadband Internet and voice services, but for 
cable services as well. By phasing out the cable rules that allow 
network operators to reserve capacity for their exclusive use, Congress 
can bring vigorous price competition to consumers in all communications 
markets. Competition through network sharing will result in more 
competitors offering a wider range of services to consumers at lower 
prices, while also providing incentives to network operators to expand 
their capacity in order to increase their own revenue.

    Question 2. The FCC recently allowed a forbearance petition from 
Verizon to go into effect that would impact high capacity special 
access lines. What impact would that have on your customers?
    Answer. Special access services are high-capacity connections that 
link businesses via facilities owned by the incumbent local exchange 
carriers to the facilities of competing carriers. Special access 
services are at retail to businesses directly by the incumbent LEC, and 
on a wholesale basis by the incumbent LEC to competing carriers who 
seek to serve business customers. Because the incumbent LECs own the 
only wireline facilities that reach the vast majority of businesses in 
the country (cable companies do not serve most business customers), 
competitive carriers have no choice but to purchase special access 
service from the incumbents. Prior to their acquisition by the Bell 
companies, AT&T and MCI offered the only viable alternative to 
incumbent LEC special access services, but those alternatives 
disappeared as soon as SBC and Verizon bought these two competitive 
giants. Because they own and control the connections to almost all 
business customers in their respective business territories, the Bell 
companies in particular are now able to raise wholesale rates for 
special access services sold to competing carriers, as well as retail 
special access rates sold directly to business customers, resulting in 
price increases for those customers.
    The FCC Chairman's decision to grant Verizon's forbearance petition 
by operation of law has the additional effect of eliminating common 
carrier regulation of numerous high-capacity broadband services, 
including ATM and frame relay services, offered by Verizon on a 
wholesale basis. COMPTEL member companies, including providers of both 
voice and data services, rely on these Verizon special access services 
as vital inputs into competitive service offerings. In the absence of 
common carrier regulation of its special access services, Verizon can 
refuse to provide such broadband services on a wholesale basis, can 
choose to provide them only to itself or its own affiliates, or can 
raise the price for such wholesale services to any rate it chooses 
(prior to the forbearance action, Verizon was at least theoretically 
constrained by the requirements in Title II of the Communications Act 
that rates not be unjust or unreasonable).
    The forbearance petition impacts not only competitive LECs, but 
also wireless carriers and cable companies as well. In the absence of 
access to these special access services, for example, wireless 
companies cannot interconnect their services with the wireline network. 
Competitive providers of broadband services, including cable companies 
and competitive data providers, that depend on special access lines to 
connect their facilities to the Internet backbone will also be 
adversely affected.
    As part of its justification for a recent decision scaling back 
unbundling obligations imposed on the incumbent LECs, the FCC found 
that where high capacity facilities were no longer available on an 
unbundled basis, special access services would provide an acceptable 
substitute for competitive providers. Now, the FCC has eliminated its 
regulation of numerous Verizon special access services, effectively 
eliminating the very competitive alternative to unbundled network 
elements that it promised would be available.
    Ironically, COMPTEL member companies are still subject to the core 
obligations of common carriage, including the obligation to provide 
services on a just, reasonable, and nondiscriminatory basis. Verizon is 
the only telecommunications company in the Nation that is not subject 
to those core principles of nondiscrimination. COMPTEL has filed an 
appeal of the FCC's decision to free Verizon from common carrier 
obligations. As part of that appeal, COMPTEL will argue to the court 
that the FCC's failure to issue an order precisely defining the 
parameters of the relief granted to Verizon has left the competitive 
community without any definitive pronouncement on the exact nature of 
the relief granted to Verizon.

    Question 3. How important are special access lines to your members 
in terms of revenue?
    Answer. Very important, particularly now that the FCC has severely 
limited the availability of unbundled network elements that section 252 
of the Communications Act made available at cost-based rates. Special 
access services are vital inputs to many of the services that COMPTEL 
members offer to consumers and small and medium sized businesses. In 
the absence of access to special access services, COMPTEL members may 
be unable to continue offering such services.
    For example, wireless services are really only ``wireless'' for a 
short distance: they must be connected to the wireline network for the 
transport and termination of wireless calls. In the absence of access 
to the special access services that provide access to the wireline 
network, or if such access is priced at such a high rate as to be 
effectively unavailable, wireless carriers cannot access their 
customers. The same is true for wireline services.
    Where unbundled network elements are not available because of 
recent FCC deregulation, special access services are the only means for 
competitive carriers to obtain interconnection with the incumbent 
network. If such access to the incumbent network is no longer 
available, or is priced too high to allow effective competition, 
COMPTEL members will be unable to provide service to their customers. 
Although the exact revenue impact is difficult to quantify, it is clear 
that the majority of COMPTEL member companies rely on incumbent LEC 
special access services as inputs into end user service offerings, and 
thus would be disproportionately impacted by any increase in cost or 
loss of access to special access lines.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Trent Lott to 
                            Earl W. Comstock
    Question. What can be done to ensure there is healthy competition 
in the voice marketplace?
    Answer. Competition in the voice marketplace will continue to 
diminish if Congress does not take steps to reverse the FCC's decision 
to rely on inter-modal competition alone. The FCC's inter-modal 
approach increasingly requires each competitor to own or control its 
own connection to the customer, potentially limiting residential voice 
competition to the incumbent local exchange carrier (ILEC) and, where 
cable is present and still has interconnection rights to the ILEC, to 
cable operators.
    The FCC cites wireless as a competitor in the provision of voice 
service, but in fact wireless voice service is a complement to, and not 
a direct replacement of, wireline voice service. In most cases 
consumers sign up for both wireline voice service and wireless voice 
service. If wireless were in fact a replacement, then you would see 
more people choosing one or the other, but not both. The reason people 
typically sign up for both is simple--wireline phone service is 
generally cheaper (on a per-minute basis) and more reliable (you never 
get dropped wireline calls or have dead zones) and wireless phone 
service, though more expensive, offers convenience.
    Voice over Internet Protocol (VoIP) services, whether offered by a 
cable operator, a competitive local exchange carrier (CLEC), or a 
provider (for example Skype or Vonage) that uses a CLEC to interconnect 
calls to the ILEC network, offer the best opportunity for increased 
price and service competition in the voice marketplace. In addition, 
many CLECs, and even a few cable operators, also offer circuit-switched 
voice services in competition with the ILEC. While most providers will 
eventually provide voice services using VoIP, maintaining the option to 
offer circuit-switched voice is important if the goal is to provide 
residential and business consumers with competitive alternatives.
    In order for VoIP to be a viable competitor, Congress needs to 
adopt Net neutrality requirements in order to ensure that network 
operators, and in particular the ILEC and cable network operators, do 
not discriminate against unaffiliated VoIP providers. Without Net 
neutrality safeguards, the number of VoIP providers for residential 
customers could be quickly reduced to two, and for business customers 
to one (because cable networks generally were not built to businesses).
    VoIP, like other Internet services and the provision of circuit-
switched services, requires interconnection with other network 
operators, and in particular the ILEC network, on reasonable terms and 
conditions in order to work. However, unlike circuit-switched services, 
which dedicate a particular pathway to each call (whether data or 
voice), IP services make more efficient use of the available capacity 
by sharing the network. As a result, IP based services like IPTV and 
VoIP, even more than traditional services, need nondiscrimination rules 
in order to be provided on a competitive basis. Thus, Net neutrality 
rules need to include not only interconnection, but also 
nondiscriminatory allocation of the transmission capacity and a 
prohibition on network operators' discriminating in favor of their own 
content or services (for example, by prioritizing their own content and 
services or degrading or block other providers content and services). 
Net neutrality rules also need to permit providers and end users to 
attach any device that does not harm the network, and to resell the 
transmission capacity obtained from the network operator as part of 
their own service.
    Competition in voice services can best be accomplished by adopting 
rules that ensure competitors, whether they have their own facilities 
or not, are able to purchase access to existing networks on reasonable 
terms and conditions. The key measures needed to ensure reasonable and 
nondiscriminatory access by competitors to provide voice services 
include (1) access to elements of the network so that competitors can 
create their own services; (2) interconnection at any technically 
feasible point; (3) the ability to collocate equipment; (4) the ability 
to attach devices to the network; (5) the right to resell transmission 
between or among points on the network as part of their own voice, 
video, and data offerings to consumers; (6) the right to use any 
technology and offer any service that does not harm the network; (7) 
nondiscriminatory allocation of all transmission capacity on the 
network (i.e., elimination of cable rules that allow network operators 
to reserve capacity for their exclusive use); (8) reasonable terms and 
conditions for each of these measures; (9) a neutral arbitrator to 
resolve disputes, and (10) efficient enforcement mechanisms to execute 
these rights. These rules, taken together, would achieve Net neutrality 
and promote the provision of VoIP and other voice, video, and data 
offerings.
    Adoption of these measures would not mean that the network operator 
could not charge consumers and other network operators more money for 
using more bandwidth. Nor would these measures prohibit a network 
operator from offering whatever additional services (for example 
information services or video programming) they chose. However, these 
measures would prevent network operators from using their ownership of 
the network to discriminate in favor of their own content and services. 
They would also prevent the network operator from unfairly cross-
subsidizing their own transmission services by charging competitors 
higher rates for transmission or requiring consumers to buy unwanted 
video or information services in order to obtain transmission capacity.
    Adoption of these measures will not discourage broadband 
deployment. In fact, they will do just the opposite. By readjusting 
inter-carrier compensation and access charges so that all traffic is 
treated equally you eliminate the arbitrage opportunities, and by 
prohibiting the network operators from reserving capacity and 
discriminating against other providers you re-align the network owner's 
financial interests. Adopting these rules will mean that to make more 
money from the network, the network operator will want to maximize the 
use of the network. By adding more capacity to the network, the network 
operator makes more money. As long as Congress and the FCC do not 
regulate the price that network operators charge for transmission, then 
network operators will be able to recover whatever Wall Street demands 
to support the investment in more capacity. Nondiscrimination avoids 
the need for price regulation, because whatever the network operator 
charges others for transmission capacity, the operator has to charge 
himself and his affiliates for the same transmission capacity. To allow 
the operator to do otherwise will result in price distortions that will 
reduce or eliminate competition.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                        Walter B. McCormick, Jr.
    Question 1. If you were drafting this bill, what would you include 
in it that would help promote competition and what would you include 
that would force consumer prices down? We say that promoting 
competition is designed to bring it down. So, it may be there's one 
answer for that double question, but I don't think so. What would you 
include to promote competition and what would you include to force the 
prices down, really, bring them down?
    Answer. USTelecom believes the committee draft should include 
provisions to stabilize Universal Service; to address intercarrier 
compensation; to unleash the power of the free market for traditional 
voice services now that they face vigorous competition; and to 
facilitate video competition.
    Much has been made of the need to accelerate broadband deployment. 
In fact, the ability to deliver video via broadband is a major driver 
of deploying the next-generation networks necessary for providing 
consumers with advanced services, including broadband. Unfortunately, 
the franchising process--developed in an era of competitive bidding for 
single providers--creates needless delay and drives up costs, as local 
governments seek to add extraneous requirements such as municipal 
holiday decorations, street-side flower pots, and community facilities 
unrelated to the provision of video services. Due to the lack of any 
real competition in the video market, cable bills have soared--rising 
86 percent in the past decade.
    The GAO has studied the video market and drawn two conclusions:

        1. Cable television faces no effective competition. Satellite 
        television is not an acceptable alternative for most consumers, 
        and fewer than 2 percent of the Nation's households have a 
        choice of wireline video provider.

        2. Wireline competition causes prices to drop. The GAO report 
        found that in markets with competition from a wireline video 
        provider, prices are 15 percent lower.

    USTelecom members plan to provide video in thousands of 
communities, but the local franchising process, requiring individual 
negotiations in over 30,000 local franchise areas, creates needless 
delay. Negotiating locality by locality creates the very thing we are 
moving away from in other sectors, a patchwork of different regulations 
and requirements--the cost of which inevitably burdens consumers.
    If Congress fails to reform this outdated process, consumers will 
foot the bill, to the tune of billions of dollars annually. In one 
recent study, economists found that a one year delay in enacting 
franchise reform will cost consumers nationwide $8 billion.

    Question 2. If Congress enacts franchise reform, how quickly will 
your companies deploy video services? Will the time frame be the same 
for small and mid-size carriers and what does this mean for rural 
areas?
    Answer. Should Congress approve franchise reform this year, it will 
accelerate the deployment schedule nationwide, because local 
franchising creates a bottleneck taking 1\1/2\ to 2 years to complete. 
Some of our members, both large and small, would begin delivering video 
to customers almost immediately. For example, Verizon has installed 
fiber optic cable in dozens of communities and could begin service as 
soon as the franchise is received. Likewise, in the Middle Tennessee 
area, thousands of citizens could begin receiving video service 
immediately; video service is already available on their network but 
must be confined to those communities that have granted a franchise to 
the local co-op telephone company.
    A number of our members have seen uncertainty in broadband 
investment due to the uncertainty of the franchising process, but they 
would begin investing promptly in preparation for going to market with 
video services.
    More importantly, franchise reform will particularly aid small and 
mid-size carriers in deploying broadband in their communities. We know 
from experience that video drives broadband deployment. Thus franchise 
reform will enable operators in rural areas to be more assured of a 
video revenue stream as they provide broadband, accelerating deployment 
significantly.
    For those rural operators who are acutely dependent upon revenue 
streams from Universal Service and intercarrier compensation, 
stabilization of Universal Service, reform of intercarrier 
compensation, and improved access to a reliable source of capital such 
as the RUS loan program are essential to accelerated broadband 
deployment. As a side benefit, video revenue streams may temper demands 
on the Universal Service Fund, enabling some of these funds to be used 
for even more sparsely populated areas that under no circumstance could 
ever support services from end user and intercarrier revenues.
    For all our member companies, national franchising would 
dramatically improve their ability to invest in broadband network 
architecture.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Trent Lott to 
                        Walter B. McCormick, Jr.
    Question 1. I know this Committee has spent a lot of time talking 
about video competition, but what can we do to ensure there is healthy 
competition in the voice marketplace?
    Answer. In 1996, some important first steps were taken to end 
government-managed competition. However, since then, the competitive 
landscape has changed dramatically and much more must be done to create 
a marketplace controlled by supply and demand, rather than government 
bureaucrats.
    Today we have vigorous cross-platform competition involving cable 
TV companies, on-line providers like Vonage and Sun Rocket, wireless 
companies, as well as ILEC and CLEC wireline providers. Due to this 
competition, Bell Operating Companies lost 4 million residential phone 
lines in 2005 alone.
    Alone among these competitors, ILECs must comply with a wide 
variety of Federal and state regulations. For instance, in most states, 
we must file with state regulators BEFORE we can lower our prices to 
compete with a VoIP service provider. Typically, we have to provide 45-
day notice to most competitors before our price changes take effect. We 
have to interconnect with all other providers and offer service for 
resale to competitors. These and a myriad of other regulations are 
legacies from the age of monopoly phone service. They apply to ILECs, 
but not to cable television companies or wireless providers.
    Consumers pay a price for these legacy regulations--including 
higher prices.
    We commend you for co-sponsoring S. 1504, the Broadband Consumer 
Choice Act, which is the best comprehensive legislation in the 109th 
Congress to create an open, consumer-controlled, free market for voice 
service. We believe enactment of S. 1504 would lead to a new era in 
which creativity and investment in the voice market would flourish.

    Question 2. I have some real concerns about any provider cherry 
picking the wealthiest neighborhoods in my state while leaving the rest 
behind. There has been a lot of discussion about this in the context of 
franchise reform. Is there anything Congress can do to protect all 
consumers?
    Answer. As USTelecom members seek to compete with a de facto 
monopoly, we urge the Committee to embrace a market-based approach 
which encourages more competition by granting relief from legacy 
regulation. As we have seen in the voice market, this strategy created 
an explosion in competition and significant price reductions.
    The most important benefit Congress could provide to consumers is a 
lower bill for video services. Cable prices have risen 86 percent from 
1995 to 2004--faster than almost any other consumer product except 
gasoline. The GAO found that wireline competition is virtually non-
existent for cable companies, but where it exists, cable rates are at 
least 15 percent lower. A new Bank of America study found even larger 
declines. If you consider the amount a household spends annually on 
cable television, these are significant savings.
    USTelecom members have every incentive to serve as many markets as 
possible. They are not developing a boutique product. Rather, they seek 
to enter tens of thousands of franchise areas to win a significant 
share of an $80 billion market. A high value customer is not 
necessarily a higher income customer. In fact, lower income residences 
have a higher propensity to purchase video services and are often 
located in more densely populated, less costly to serve areas.
    Our companies have never engaged in red-lining, and they will not 
start when they enter the video market. The first broadband network our 
companies deployed was DSL. In seven years, more than 80 percent of 
telephone lines nationwide are DSL-capable. That was accomplished 
without a build-out requirement or a government mandate.
    There are powerful market incentives to invest in network upgrades 
to accommodate broadband video. A larger percentage of Americans want 
advanced video more than Internet alone. Just look at cable rates 
compared to Internet-only rates. Research shows strong demand for 
video, without regard to household income. In fact, nearly 86 percent 
of households with a television are cable subscribers.
    To the extent there is a role for government, we support the anti-
redlining provisions in current law at 47 U.S.C. Sec. (a)(3):

        In awarding a franchise or franchises, a franchising authority 
        shall ensure that access to cable service is not denied to any 
        group of potential residential cable subscribers because of the 
        income of the residents of the local area in which such group 
        resides.

    While mandating build-out to an entire area may have made sense 
when cable entered as the de facto monopoly provider, it does not make 
sense with regard to new entrants. In fact, creating an all-or-nothing 
mandate would have the perverse effect of slowing deployment. Build-out 
arrangements have led companies to carefully select which markets to 
enter and avoid other areas entirely.
    Imposing build out requirements on our deployments when we've 
barely begun adds to the tremendous risks and costs we face in a market 
where cable is already dominant. Capital investors prefer the path of 
least regulatory resistance. And there is no reason to send the wrong 
message to Wall Street when the evidence shows that build-out mandates 
are unnecessary and counterproductive.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                             Steve Largent
    Question 1.  If you were drafting this bill, what would you include 
in it that would help promote competition and what would you include 
that would force consumer prices down?
    Answer. In 1993 Congress made the wise decision to create a 
competitive environment for wireless services and to regulate only in 
limited instances. That decision has proven to be enormously 
successful. Since that time competition has dramatically intensified 
and the natural byproduct of competition, lower prices, is today 
enjoyed by more than 200 million wireless subscribers. CTIA therefore 
believes it is essential that any telecom legislation remain true to 
this established framework and take any steps necessary to prevent 
encroachment by state legislatures that threatens the success of the 
past 13 years.
    Accordingly, the most effective guarantor of true competition and 
lower prices, and thus CTIA's chief legislative recommendation to this 
Committee, is the inclusion of clear language that creates a national 
framework for wireless and preempts state action. A patchwork of 
disparate state regulations will hinder the deployment of advanced 
networks that bring innovative services to consumers.
    A national framework for the wireless industry is both logical and 
necessary. Because wireless services are not confined by geographical 
boundaries, and because wireless services are with growing frequency 
global in nature, it should logically be examined at the national level 
rather than state by state. And if the wireless industry is to continue 
to invest in network expansion and raise the needed capital, it is 
necessary to avoid the uncertainty created by inconsistent regulations 
at the state level.
    Additionally, CTIA would recommend a few other measures as well 
that would ensure continued competition. Spectrum is a valuable and 
finite resource. It should therefore be allocated in a predictable and 
timely manner and underutilized spectrum should be reclaimed and 
reallocated for optimal use. Further, timely and efficient tower siting 
process should be implemented so that networks can be appropriately 
expanded to meet the demands of the public. Finally, fair 
interconnection rules should be established so that wireless carriers 
are not subjected to unreasonably high rates by those who have 
exclusive control of the networks to which wireless carriers must have 
access.
    CTIA believes that implementation of these recommendations will 
assure continued competition, innovation, and consumer benefits in the 
wireless space. Even more, it will allow the industry to flourish as a 
competitive force in the broadband market. This can only be achieved, 
however, if its unique characteristics of mobility and accessibility 
are acknowledged and given separate legislative consideration in the 
manner we have described. A blanket application of legacy regulations 
on the wireless industry which were previously tailored to other parts 
of the communications industry will stifle innovation and inhibit true 
competition in telecommunications.

    Question 2. Small rural carriers have complained about their 
ability to negotiate roaming agreements with the national wireless 
companies. In fact, when former FCC Chairman Powell visited Alaska his 
plane went off the runway in an Eskimo village. He whipped out his cell 
phone but it didn't work. No roaming. How should Congress address this 
issue?
    Answer. Based upon a proven record of success in a limited 
regulatory environment, CTIA, as the voice of the wireless industry, 
strongly believes that Congress should regulate only in instances where 
public health and safety are at issue or when there is clear evidence 
of market failure. We believe that in the case of roaming agreements 
neither of these elements exist.
    CTIA continues to work with member companies on this issue to 
identify and resolve problems that may arise. Based on what we have 
learned, we do not believe congressional action is necessary. Rather, 
CTIA believes that commercial negotiations in the marketplace will lead 
to far better solutions than having Congress step into a myriad of 
circumstances that are constantly changing.
    This may take longer in some locations because of geographic 
considerations or unique business plans, but as networks are 
continually expanded, and technology is constantly changing, carriers 
will have to continually re-balance the needs of their own particular 
business situations. Additionally, we should be wary of significant 
unintended consequences that could reduce incentives to build-out 
robust competitive networks, and recognize there may be technical 
considerations of network air interface differences that may make 
roaming more difficult or even impossible to achieve in some 
situations.

    Question 3. Wireless service has gained rapid adoption from 
consumers. As broadband services gain popularity, are wireless services 
going to be able to compete effectively against wireline providers in 
that space?
    Answer. As this question correctly notes, wireless services have 
enjoyed unprecedented consumer acceptance in daily life. This is a 
direct result of the sprint toward innovation necessitated by the 
hypercompetition that has been the hallmark of the industry since 1993. 
This innovation will also carry the industry into the broadband market 
and allow it to compete effectively against wireline providers.
    This desired result, however, is based on a legislative and 
regulatory environment that does not automatically saddle the wireless 
industry with rules that may be appropriate for other parts of the 
communications industry. Rather, it is paramount that the 
characteristics of mobility and ubiquity that are unique to wireless 
are given special consideration. The wireless broadband market is a 
nascent but growing segment of the broadband market and the leadership 
of this Committee in freeing up the valuable spectrum in the 700 MHZ 
band will be instrumental in allowing for continued growth of advanced 
wireless networks. When this spectrum becomes available the wireless 
industry will distinguish itself through mobile broadband services and 
become a true competitor to the traditional wireline companies by 
offering customers the types of information and service they demand 
``on the go.'' With the assistance of national preemption deregulatory 
legislation that allows market forces to work, the wireless industry 
looks forward to providing all of the voice, video, and date services 
that its subscribers demand.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Trent Lott to 
                             Steve Largent
    Question 1. I know this Committee has spent a lot of time talking 
about video competition, but what can we do to ensure there is healthy 
competition in the voice marketplace?
    Answer. As CTIA noted in its response to a similar question from 
Chairman Stevens, in 1993 Congress made the wise decision to create a 
competitive environment for wireless services and to regulate only in 
limited instances. That decision has proven to be enormously 
successful. Since that time competition has dramatically intensified 
and the natural byproduct of competition, lower prices, is today 
enjoyed by more than 200 million wireless subscribers. CTIA therefore 
believes it is essential that any telecom legislation remain true to 
this established framework and take any steps necessary to prevent 
encroachment by state legislatures that threatens the success of the 
past 13 years.
    Accordingly, the most effective guarantor of true competition and 
lower prices, and thus CTIA's chief legislative recommendation to this 
Committee, is the inclusion of clear language that creates a national 
legislative framework for wireless and preempts state action. A 
patchwork of disparate state regulations will hinder the deployment of 
advanced networks that bring innovative services to consumers.
    A national framework for the wireless industry is both logical and 
necessary. Because wireless services are not confined by geographical 
boundaries, and because wireless services are with growing frequency 
global in nature, it should logically be examined at the national level 
rather than state by state. And if the wireless industry is to continue 
to invest in network expansion and raise the needed capital, it is 
necessary to avoid the uncertainty created by inconsistent regulations 
at the state level.
    Additionally, CTIA would recommend the implementation of a timely 
and efficient tower siting process so that networks can be 
appropriately expanded to meet the demands of the public. Finally, fair 
interconnection rules should be established so that wireless carriers 
are not subjected to unreasonably high rates by those who have 
exclusive control of the networks to which wireless carriers must have 
access.
    CTIA believes that implementation of these recommendations will 
assure continued competition, innovation, and consumer benefits in the 
wireless space. Even more, it will allow the industry to flourish as a 
competitive force in the broadband market. This can only be achieved, 
however, if its unique characteristics of mobility and accessibility 
are acknowledged and given separate legislative consideration in the 
manner we have described. A blanket application on wireless of legacy 
regulations previously tailored to traditional wireline industries will 
stifle innovation and inhibit true competition in telecommunications.

    Question 2. I have real concerns about any provider cherry picking 
the wealthiest neighborhoods in my state while leaving the rest behind. 
There has been a lot of discussion about this in the context of 
franchise reform. Is there anything Congress can do to protect all 
consumers?
    Answer. In CTIA's view the issue of franchise reform is not 
applicable to the wireless industry. By contrast with other segments of 
the telecommunications industry, wireless companies acquire their 
``franchises'' through the auction process conducted by the FCC. 
Obtaining licenses so that carriers can operate in a given area 
requires enormous financial commitments and thus provides ample 
incentives to maximize the use of scarce spectrum resources. The 
wireless industry has always met those obligations and indeed would do 
so even without these mandates, as evidenced by the more than 183,000 
cell sites that have been deployed throughout the country. The inherent 
mobility of wireless services and their broad demographic appeal have 
driven wireless carriers to create ever broader coverage areas, as 
demonstrated by the record of the wireless industry over the past 13 
years of meeting and exceeding the needs and demands of its customers.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                           Jerry Ellig, Ph.D.
    Question 1. If you were drafting this bill what would you include 
in it that would help promote competition and what would you include 
that would force consumer prices down? We say that promoting 
competition is designed to bring it down. So, it may be there's one 
answer for that double question, but I don't think so. What would you 
include to promote competition and what would you include to force the 
prices down, really, bring them down?
    Answer. The most important thing Congress can do to promote 
sustainable competition is to adopt policies that facilitate the 
creation of multiple conduits through which customers can obtain a 
variety of voice, data, video, and other services. As I mentioned in my 
testimony, two of the most significant opportunities are (1) removal of 
video franchising as a barrier to competitive entry, and (2) continued 
movement toward a market-based spectrum policy that will make more 
spectrum available for wireless services. These measures will help 
ensure that multiple conduits are available to as many consumers as 
quickly as possible.
    Experience suggests that we can usually expect competition to 
generate substantial price reductions and quality improvements. In 
cable TV, for example, 20 years of economic research consistently 
demonstrates that prices are 15-20 percent lower, and the number of 
channels is larger, in markets with two wireline video providers. \1\ 
Competition in long-distance telephone service substantially reduced 
long-distance rates, even after accounting for long-distance access 
charge reductions mandated by the Federal Communications Commission. 
\2\ The explosion of competition in wireless communications, triggered 
when Congress made an additional 120 MHz of spectrum available in 1993, 
led to several years of double-digit reductions in the per-minute price 
of wireless service. \3\ More recent years have seen significant new 
wireless services and features, such as camera phones, Internet access 
via PDAs, and wireless broadband cards. In all of these examples, the 
principal and most effective form of competition consists of entrants 
who made substantial investments in building their own networks.
---------------------------------------------------------------------------
    \1\ Jerry Brito and Jerry Ellig, Public Interest Comment on Video 
Franchising, submitted to the Federal Communications Commission (Feb. 
13, 2006), pp. 7-11, available at http://www.mercatus.org/pdf/
materials/1539.pdf.
    \2\ Jerry Ellig, ``Intercarrier Compensation and Consumer 
Welfare,'' University of Illinois Journal of Law, Technology & Policy 
2005:1 (Spring ), pp. 98-99.
    \3\ Robert W. Crandall and Jerry A. Hausman, ``Competition in U.S. 
Telecommunciations Services: Effects of the 1996 Legislation,'' in Sam 
Peltzman and Clifford Winston (eds.), Deregulation of Network 
Industries: What's Next? (AEI-Brookings Joint Center for Regulatory 
Studies, 2000), pp. 102-105.
---------------------------------------------------------------------------
    Competition can benefit consumers even when it does not generate 
price reductions.
    If a monopoly is providing only a low-priced, low-quality service, 
and many consumers would prefer a higher-priced, higher quality 
service, then competition might increase prices while simultaneously 
increasing quality. Consumers, however, would be better off as a 
result. Competition ensures that consumers receive the combination of 
price, quality, and innovative new services that they would most 
prefer.
    Alternatively, if a regulated monopoly is selling one service at a 
price that is below cost and selling other services at prices that 
exceed costs, then competition may lead to a price increase for the 
service sold below cost, coupled with reduced prices for the services 
sold at prices that exceed costs. Consumers who used only the below-
cost service might be worse off as a result of competition, but the 
consumers who had been over-charged for other services would be better 
off. Overall consumer welfare would increase, because prices would more 
accurately reflect the actual cost of service. This is essentially what 
has happened in long-distance telephone service, where substitution of 
the Federal subscriber line charge for excessive per-minute access 
rates increased overall economic welfare by between $8 billion and $15 
billion annually between 1985 and 1992. \4\
---------------------------------------------------------------------------
    \4\ Jerry Ellig, ``Costs and Consequences of Federal 
Telecommunications Regulations,'' Federal Communicaitons Law Journal 
58:1 (Jan. 2006), pp. 53-54, available at http://www.law.indiana.edu/
fclj/pubs/v58/no1/ElligPDF.pdf.
---------------------------------------------------------------------------
    In short, we should be cautious about an exclusive focus on price 
when quality is important to consumers or when regulation has held some 
prices below cost. Even in those cases, however, competition can lead 
to price reductions for some services.

    Question 2. You have stressed the importance of encouraging 
competition unfettered by regulation, but is it sometimes necessary to 
treat similar services differently? For instance, satellite providers 
don't pay a franchise fee but they don't use the rights-of-way either. 
Is there a problem with those types of distinctions?''
    Answer. Firms that use the public rights-of-way to provide 
communications services should pay fees that promote efficient use and 
management of the public rights-of-way. The appropriate fee depends on 
what kinds of costs the firm's use of the rights-of-way imposes on the 
public, in terms of congestion on poles, excavation of streets, and 
similar factors.
    Since satellite does not impose these costs, it would be 
inappropriate to charge satellite a franchise fee. For similar reasons, 
it would not be appropriate to charge wireless firms a franchise fee if 
they used some of their spectrum to provide video services. This does 
not amount to treating a competitor differently. Rather, the competitor 
is simply not charged for using something that it does not use.
    Having said that, I would also like to point out that the wireline 
video providers probably have a legitimate complaint about franchise 
fees. It is likely that the current maximum 5 percent franchise fee is 
quite excessive, compared to the costs that cable companies, broadband 
service providers, and telephone companies impose on the public when 
they use the rights-of-way. Out of approximately 175 local governments 
that filed comments in the FCC's video franchising proceeding, only 
three reported franchise fees substantially different from 5 percent. 
\5\ Data on the actual costs imposed by cable firms' use of public 
rights-of-way are sketchy, but a study of Berkeley, CA, found that 
these costs amounted to only $30,000 annually. \6\ Other potential 
video entrants, such as incumbent phone companies and electric 
utilities that could use broadband over powerlines to transmit video, 
already have arrangements to use the public rights-of-way for other 
purposes. The additional costs they might impose on the public by 
adding video services are likely small.
---------------------------------------------------------------------------
    \5\ Montrose, CO, White, SD, and Esopus, NY each charge 3 percent. 
See Jerry Brito and Jerry Ellig, ``Video Killed the Franchise Star: The 
Consumer Cost of Cable Franchising and Proposed Policy Alternatives,'' 
SSRN Working Paper (March 2006), p. 18, available at http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=893606.
    \6\ Thomas W. Hazlett, ``Cable TV Franchises as Barriers to Video 
Competition,'' George Mason University Law and Economics Research Paper 
Series 06-06, p. 17, available at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=889406.
---------------------------------------------------------------------------
    Firms that do not use the public rights-of-way should not have to 
pay local governments for something they do not use. However, the 
excessive franchise fees paid by cable, telephone, and electric 
utilities most likely distort competition, and they surely increase 
consumer costs. Since franchise fees represent an increase in marginal 
costs, it is likely that they are passed right through to consumers. 
\7\ The pro-consumer solution is to find a way to reduce franchise fees 
so that they reflect the actual costs that the franchisees create for 
the public when they use the public rights-of-way.
---------------------------------------------------------------------------
    \7\ For a more detailed explanation, see Brito and Ellig (2006), 
pp. 17-18.
---------------------------------------------------------------------------
    On a more general level, these two questions ask whether 
policymakers should seek to ``level the playing field'' by removing 
artificial distinctions between competitors created by public policy. 
The ``level playing field'' is an attractive metaphor that appeals to 
our sense of fairness. But not all ``level playing fields'' affect 
consumers equally.
    One can level the playing field either by imposing all of the 
regulations and requirements faced by each competitor on all, or by 
removing most of them and then making the remaining ones competitively 
neutral. For example, Congress might change existing law so that all 
voice, data, and video services pay a 5 percent franchise fee to local 
governments, make contributions to the Federal Universal Service Fund, 
and pay the Federal Government some upfront fee before they can enter 
the market (as the wireless firms must do when they purchase spectrum). 
The playing field might be level, but consumers would pay substantially 
more for these services than they do now. Alternatively, policymakers 
could level the playing field by:
    (1) requiring that local governments charge voice, data, or video 
service providers a franchise or other fee no greater than the costs 
that their use of the public rights-of-way actually imposes on the 
public,
    (2) funding Universal Service through a phone-number-based charge, 
and
    (3) making a large quantity of spectrum available for flexible use, 
which might result in less revenue from spectrum auctions but would 
substantially increase competition and consumer welfare.
    From a consumer perspective, this second ``level playing field'' is 
much preferable to one in which all companies bear every burden 
currently borne only by some.
    Finally, I strongly suggest that a fully ``level playing field'' 
should not be a prerequisite before policymakers allow new competitors 
to enter a market. One of the benefits of competition is that it helps 
reveal artificial advantages or disadvantages that public policy 
confers on some competitors, and it creates incentives to eliminate 
them. Competition, therefore, is an important tool that helps 
policymakers identify when the playing field is not level and find a 
pro-consumer remedy.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Trent Lott to 
                           Jerry Ellig, Ph.D.
    Question 1. I know this Committee has spent a lot of time talking 
about video competition, but what can we do to ensure there is healthy 
competition in the voice marketplace?
    Answer. In the most general terms, the best way Congress can ensure 
healthy competition in voice service is to ensure that multiple 
conduits capable of delivering multiple services (including voice) are 
available to consumers. (I elaborated on this point in answering 
Chairman Stevens' first question.)
    One additional, significant barrier to competition solely in voice 
service is the fact that many states still require incumbent phone 
companies to sell basic local service at a regulated price that is 
below the incremental cost of service in many markets. In Texas, for 
example, Robert Crandall and I found that only about 5 percent of the 
four largest incumbents' residential lines are sold at prices that 
cover long-run incremental costs. \1\ As a result, new competitors have 
had to find a way to compete against incumbents who are forced by 
regulation to sell local service below cost in many places. Some 
temporarily succeeded by convincing regulators to force the price of 
the unbundled network element platform even further below cost than the 
regulated retail price of local telephone service. Sustainable 
competition, however, came only from competitors who could introduce a 
lower-cost technology (such as Voice over Internet Protocol), offer a 
quality attribute that wireline phone service could not match (such as 
the portability offered by wireless), or sell a package of services at 
a price that covered the cost of the whole package (as cable, wireless, 
``broadband service providers,'' and facilities-based competitors using 
only some of the incumbent's network elements have done). \2\
---------------------------------------------------------------------------
    \1\ Robert W. Crandall and Jerry Ellig, ``Texas Telecommunications: 
Everything's Dynamic Except the Prices,'' Texas Public Policy 
Foundation Research Report (Jan. 2005), available at
http://www.texaspolicy.com/pdf/2005-01-telecom.pdf.
    \2\ Id. , pp. 117-118.
---------------------------------------------------------------------------
    Congress could arguably prohibit states from setting rates for 
local telephone service below cost, because such price regulation 
interferes with the Federal goal of promoting competition in 
telecommunications. However, Congress may be understandably reluctant 
to interfere with state regulation of local telephone rates. The next 
best option would be for Congress to support, or at least avoid 
undermining, any FCC initiative to increase or deregulate the Federal 
subscriber line charge, which helps bring the price of local telephone 
service closer to cost. \3\
---------------------------------------------------------------------------
    \3\ The FCC has discussed increasing or deregulating the Federal 
subscriber line charge in its proceeding on intercarrier compensation, 
discussed in Ellig, supra note 2, pp. 116-118.
---------------------------------------------------------------------------
    There are, of course, some very rural markets in which cost-based 
pricing might make voice service more expensive than policymakers feel 
is desirable. Federal Universal Service policy is intended to promote 
affordability in these markets. The most important thing Congress can 
do to promote competition in high-cost markets receiving Universal 
Service support is to make the support competitively neutral, and 
structure the support so that it creates incentives for continuous 
improvement and cost reduction. Universal service programs should have 
goals that are defined explicitly enough to guide the design of the 
programs. They should also have performance measures that identify how 
well the programs are accomplishing the goals that Congress 
established. \4\
---------------------------------------------------------------------------
    \4\ Additional ideas on improving the effectiveness of Universal 
Service programs can be found in a series of comments that Mercatus 
Distinguished Visiting Scholar Maurice McTigue and I have filed in the 
FCC's proceeding on management of Universal Service programs. These are 
available at http://www.mercatus.org/regulatorystudies/article.php/
1509.html.

    Question 2. I have some real concerns about any provider cherry 
picking the wealthiest neighborhoods in my state while leaving the rest 
behind. There has been a lot of discussion about this in the context of 
franchise reform. Is there anything Congress can do to protect all 
consumers?
    Incumbent monopolists frequently allege that competitors will 
``cherry pick'' as a justification for preventing entry or imposing 
costly requirements that will raise competitors' costs. A common 
justification for requiring new entrants to serve all markets served by 
an incumbent firm is that ``cream-skimming'' in the most lucrative 
markets would erode the profits that subsidize prices in less lucrative 
markets. The less lucrative markets may be higher cost, or they may 
consist of consumers who buy only a basic service package. According to 
this theory, if the new entrant takes the ``cream,'' the incumbent will 
have to raise prices to its remaining customers, or perhaps even 
discontinue service to the unprofitable customers.
    Whatever the merits of the cream-skimming argument in theory, there 
are two practical reasons that it is not applicable to contemporary 
cable markets.
    First, the cream-skimming theory requires that some customers pay 
prices that are below the incremental cost of serving them. These are 
the customers in danger of paying higher prices or losing service if 
the incumbent loses some of its profits from the more lucrative 
customers. I know of no economic studies showing that cable companies 
currently sell video, broadband, or telephone service to any 
subscribers at prices that fail to cover the incremental costs of 
serving those subscribers. As long as prices cover the incremental 
costs of serving a subscriber or a group of subscribers, they make a 
contribution to covering the fixed costs of the cable system. These 
customers may be less profitable than other customers, but they are not 
unprofitable. As a result, there is no reason for the cable company to 
stop serving them just because it loses some of its more profitable 
customers. Indeed, if the less profitable customers are willing to pay 
a price that covers the incremental cost of serving them, then new 
entrants would also eventually extend service to them, and competition 
would likely lower their cable rates too.
    Second, the theory that the incumbent deprived of the ``cream'' 
will raise prices to other customers makes sense only if regulation 
effectively constrains the prices these customers pay. But cable rates 
are effectively deregulated, because 90 percent of subscribers purchase 
``expanded basic'' service, whose price is not regulated. \5\
---------------------------------------------------------------------------
    \5\ Federal Communications Commission, Report on Cable Industry 
Prices (2005), p. 3.
---------------------------------------------------------------------------
    An incumbent unconstrained by regulation will charge whatever price 
it believes the market will bear (taking into account concerns such as 
its reputation for fair dealing and the possibility that a higher price 
might attract competition). Such an incumbent is already charging its 
customers the most profitable price. A cable incumbent that lost 
customers to competition and then tried to increase prices on remaining 
customers would see its profits fall even further. Since cable rates 
are effectively unregulated, it is unlikely that cable companies are 
using profits from lucrative markets to subsidize the prices paid by 
customers in less profitable markets. Therefore, no consumers are 
harmed if new competitors are permitted to serve only part of the 
incumbent cable company's customers. Because noncompetitive portions of 
the jurisdiction will not see higher rates as a result of competition 
elsewhere, there is no reasonable justification for forcing new 
competitors to serve the incumbent's entire territory.
    On the whole, I believe that concerns about ``cherry picking,'' 
``redlining,'' and ``cream-skimming'' in cable stem from an 
inappropriate analogy with telephone service. Historically, regulation 
has forced phone companies to sell basic local service to many 
consumers at a price that is below the incremental cost of providing 
the service. Urban consumers, business customers, and long-distance 
users were over-charged to provide this subsidy. Cable companies, on 
the other hand, do not face effective rate regulation that would force 
them to sell to some consumers at prices below incremental cost. 
Therefore, the conditions that lead to cherry-picking are simply not 
present in cable.
    The principal effect of requirements intended to prevent ``cherry-
picking'' would be to prevent or delay entry by new wireline cable 
competitors.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                            Dr. Mark Cooper
    Question 1. If you were drafting this bill what would you include 
in it that would help promote competition and what would you include 
that would force consumer prices down? We say that promoting 
competition is designed to bring it down. So, it may be there's one 
answer for that double question, but I don't think so. What would you 
include to promote competition and what would you include to force the 
prices down, really, bring them down?
    Answer. The key to promoting competition is to recognize where 
vigorous competition is possible and where it is not. Competition at 
the level of the underlying local network facilities (last mile 
transmission, local switching and middle mile transport) is likely to 
be very feeble because of economies of scale and scope. This is 
especially true for less urban and rural areas. Competition for 
content, applications and services that flow over the communications 
infrastructure can be much more robust because they are less capital 
intensive and can cover a larger market area (i.e., they are national 
and global in scope). This analysis argues for strong network 
neutrality and interconnection provisions in the bill. Without these 
guarantees, the primary arena for vigorous competition and price 
reduction will be constrained if not fully undermined.
    We can maximize competition and discipline prices in consumer 
access charges by ensuring that the local network bottleneck is open 
and nondiscriminatory. The key point is to break the wireline duopoly 
of cable and telephone giants by restoring competition in the market 
for residential and business connectivity. This is precisely how the 
Internet grew under the Communication Act of 1934, and the digital age 
policy established for data transmission by the Federal Communications 
Commission in the Computer Inquiries. In the event that particular 
types of services--such as cable services--will be dominated by a 
duopoly in each market, the law should require reasonable build-out of 
the networks to ensure that every American household (not just the 
urban and the affluent) reaps the benefits of video competition.
    In addition, as I noted in my testimony, Congress can promote the 
goals of competition and Universal Service simultaneously by making 
available more spectrum for unlicensed uses and protecting the right of 
local governments to build last mile networks. This is especially true 
in less urban and rural areas, as discussed in my answer to the next 
question. To truly address our alarming broadband digital divide and 
lack of global competitiveness, we must facilitate low-cost wireless 
technologies to offer universal, affordable broadband service.

    Question 2. Should spectrum sales be broken down into smaller 
geographic areas so small carriers can afford to bid on the spectrum 
and to increase competition in the less urban and rural areas?
    Answer. The issue is not geographic area, but population served. 
Creating smaller areas does not solve the business problem, especially 
in rural areas, since the population served is too small to create a 
base for viable business. While smaller entities might be able to buy 
spectrum licenses, they would not have the subscriber base to build a 
sustainable business.
    In less urban and rural areas, the best solution is to allow 
unlicensed access to the spectrum that is set aside for television, 
since it is vastly underutilized. I strongly support the Stevens and 
Allen bills that would facilitate this goal. Unlicensed Wifi and WiMax 
in these bands with more robust propagation characteristics can meet 
the needs of rural residents for the full range of communications 
service. Allowing unlicensed spectrum lowers the initial capital outlay 
dramatically and decentralizes the investment. Not only does the 
unlicensed approach save on the initial outlay for spectrum, but a much 
larger share of the investment necessary is decentralized in the 
communications equipment owned by the households (i.e., the smart 
radios that form the wireless network).
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Trent Lott to 
                            Dr. Mark Cooper
    Question 1. I know this Committee has spent a lot of time talking 
about video competition, but what can we do to ensure there is healthy 
competition in the voice marketplace?
    Answer. The key to promoting competition is to recognize where 
vigorous competition is possible and where it is not. Competition at 
the level of the underlying local network facilities (last mile 
transmission, local switching and middle mile transport) is likely to 
be very feeble because of economies of scale and scope. This is 
especially true for less urban and rural areas. Competition for 
applications and services that flow over the communications 
infrastructure can be much more robust because they are less capital 
intensive and can cover a larger market area (i.e., they are national 
and global in scope).
    We can maximize competition and discipline prices in consumer 
access charges by ensuring that the local network bottleneck is open 
and nondiscriminatory. The key point is to break the wireline duopoly 
of cable and telephone giants by restoring competition in the market 
for residential and business connectivity. This is precisely how the 
Internet grew under the Communication Act of 1934, and the digital age 
policy established for data transmission by the Federal Communications 
Commission in the Computer Inquiries. In the event that particular 
types of services--such as cable services--will be dominated by a 
duopoly in each market, the law should require reasonable build-out of 
the networks to ensure that every American household (not just the 
urban and the affluent) reaps the benefits of video competition.
    Thus, vigorous competition in voice can only be ensured through 
voice over Internet protocol (VoIP) if the underlying facilities are 
made available on a nondiscriminatory basis. The facility owners 
prevent vigorous competition in voice by creating discriminatory 
quality of service differentials between affiliated and unaffiliated 
VoIP providers.

    Question 2. I have some real concerns about any provider cherry 
picking the wealthiest neighborhoods in my state while leaving the rest 
behind. There has been a lot of discussion about this in the context of 
franchise reform. Is there anything Congress can do to protect all 
consumers?
    Answer. Cherry picking (choosing to serve some customers or areas ) 
or redlining (refusing to serve some customers or areas) should not be 
allowed in the deployment of infrastructure facilities. Broadband 
communications networks are clearly the communications infrastructure 
of the 21st century. The Congress should impose reasonable build out 
requirements. Absent these requirements, a franchise reform bill will 
effectively codify the digital divide into statute--guaranteeing a 
future with digital have's and have not's. A duopoly of cable and 
telephone companies does not constitute competition, nor is it a free 
market. Good public policy aimed at bringing broadband to all Americans 
is the proper remedy to close the digital divide and rebuild our 
strength in global competition.
    Additionally, Congress should reform the Universal Service Program. 
The 1996 Act envisioned an evolving level of service and it is time to 
include broadband in that definition. Broadband certainly meets the 
criteria specified in Section 254 of the 1996 Act, but it will be a 
lengthy process under current conditions. Congress would do well to 
recalibrate the national commitment to Universal Service, using the 
transition to broadband to reform contribution and distribution systems 
to increase efficiency and rationalize costs.
    Congress can promote the goals of competition and Universal Service 
simultaneously by making available more spectrum for unlicensed uses 
and protecting the right of local governments to build last mile 
networks. This is especially true in less urban and rural areas.
    In less urban and rural areas, the best solution is to allow 
unlicensed access to the spectrum that is set aside for television, 
since it is vastly underutilized. Unlicensed Wifi and WiMax in these 
bands with more robust propagation characteristics can meet the needs 
of rural residents for the full range of communications service. 
Allowing unlicensed spectrum lowers the initial capital outlay 
dramatically and decentralizes the investment. Not only does the 
unlicensed approach save on the initial outlay for spectrum, but a much 
larger share of the investment necessary is decentralized in the 
communications equipment owned by the households (i.e., the smart 
radios that form the wireless network).

                                  
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