[Senate Hearing 112-872]
[From the U.S. Government Publishing Office]
S. Hrg. 112-872
THE VERIZON/CABLE DEALS: HARMLESS COLLABORATION OR A THREAT TO
COMPETITION AND CONSUMER RIGHTS?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
MARCH 21, 2012
__________
Serial No. J-112-66
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PRINTING OFFICE
87-458 PDF WASHINGTON : 2012
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin CHUCK GRASSLEY, Iowa
DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah
CHUCK SCHUMER, New York JON KYL, Arizona
DICK DURBIN, Illinois JEFF SESSIONS, Alabama
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota JOHN CORNYN, Texas
AL FRANKEN, Minnesota MICHAEL S. LEE, Utah
CHRISTOPHER A. COONS, Delaware TOM COBURN, Oklahoma
RICHARD BLUMENTHAL, Connecticut
Bruce A. Cohen, Chief Counsel and Staff Director
Kolan Davis, Republican Chief Counsel and Staff Director
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
HERB KOHL, Wisconsin, Chairman
CHUCK SCHUMER, New York MICHAEL S. LEE, Utah
AMY KLOBUCHAR, Minnesota CHUCK GRASSLEY, Iowa
AL FRANKEN, Minnesota JOHN CORNYN, Texas
RICHARD BLUMENTHAL, Connecticut
Caroline Holland, Democratic Chief Counsel/Staff Director
Rob Porter, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
prepared statement........................................... 48
Lee, Hon. Mike, a U.S. Senator from the State of Utah............ 3
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 50
WITNESSES
Witness List..................................................... 47
Milch, Randal S., Executive Vice President and General Counsel,
Verizon Communications, Inc., New York, New York............... 5
prepared statement........................................... 51
Cohen, David L., Executive Vice President, Comcast Corporation,
Philadelphia, Pennsylvania..................................... 7
prepared statement........................................... 63
Rule, Charles F., Managing Partner, Washington, DC Office,
Cadwalader, Wickersham & Taft, LLP, Washington, DC............. 9
prepared statement........................................... 93
Berry, Steven K., President and CEO, Rural Cellular Association,
Washington, DC................................................. 11
prepared statement........................................... 106
Kelsey, Joel, Policy Advisor, Free Press, Washington, DC......... 12
prepared statement........................................... 125
Wu, Timothy, Isidor & Seville Sulzbacher Professor of Law,
Columbia University, New York, New York........................ 14
prepared statement........................................... 141
QUESTIONS FOR THE WITNESSES
Questions for David Cohen submitted by Senator Al Franken........ 146
Questions for Randal Milch submitted by Senator Al Franken....... 147
Questions for Steven Berry submitted by Senator Herb Kohl........ 149
Questions for David Cohen submitted by Senator Herb Kohl......... 150
Questions for Joel Kelsey submitted by Senator Herb Kohl......... 153
Questions for Randal Milch submitted by Senator Herb Kohl........ 154
Questions for Charles Rule submitted by Senator Herb Kohl........ 158
Questions for Timothy Wu submitted by Senator Herb Kohl.......... 159
Questions for Steven Berry submitted by Senator Michael S. Lee... 160
Questions for David Cohen submitted by Senator Michael S. Lee.... 161
Questions for Joel Kelsey submitted by Senator Michael S. Lee.... 163
Questions for Randal Milch submitted by Senator Michael S. Lee... 165
Questions for Charles Rule submitted by Senator Michael S. Lee... 167
Questions for Timothy Wu submitted by Senator Michael S. Lee..... 168
Questions for David Cohen submitted by Senator Charles E. Schumer 170
Questions for Randal Milch submitted by Senator Charles E.
Schumer........................................................ 171
WITNESS RESPONSES
Responses by Steven Berry to Questions for the Record............ 173
Responses by David Cohen to Questions for the Record............. 182
Responses by Joel Kelsey to Questions for the Record............. 197
Responses by Randal Milch to Questions for the Record............ 207
Responses by Timothy Wu to Questions for the Record.............. 228
NOTE: At the time of printing, after several attempts to obtain
responses to the written questions, the Committee had not
received any communication from Charles Rule................... 234
MISCELLANEOUS SUBMISSIONS FOR THE RECORD
ConsumersUnion, Parul Desai, Policy & Action from Consumer
Reports, Washington, DC, March 20, 2012, letter................ 235
IBEW Local 827 New Jersey & IBEW System Council T6 New England,
IBEW Local 824 West Central Florida, statement................. 238
T-Mobile USA, Inc., Thomas J. Sugrue, Senior Vice President,
Government Affairs, Washington, DC, March 20, 2012, letter..... 249
THE VERIZON/CABLE DEALS: HARMLESS COLLABORATION OR A THREAT TO
COMPETITION AND CONSUMER RIGHTS?
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WEDNESDAY, MARCH 21, 2012
U.S. Senate,
Subcommittee on Antitrust, Competition Policy and
Consumer Rights,
Committee on the Judiciary,
Washington, DC
The Subcommittee met, pursuant to notice, at 4:34 p.m.,
Room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Klobuchar, Franken, Blumenthal, and Lee.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Senator Kohl. Today we meet to consider the series of
transactions between Verizon Wireless and four of the Nation's
largest cable TV companies announced last December. These
deals, coming on the heels of the now-abandoned proposed merger
between AT&T and T-Mobile, are the latest transactions that
seek to reshape the wireless phone, Internet access, and cable
television markets.
Under these deals, Verizon Wireless, the Nation's largest
cell phone company, would acquire large chunks of Spectrum from
Comcast, Time Warner, Cable Cox, and Bright House. And at the
same time, these companies have all signed agreements in which
Verizon Wireless and the cable companies agree to cross-market
each other's services and form a joint technology venture.
The parties to these transactions argue that these deals
are highly beneficial both to their companies, as well as to
consumers. It will give Verizon Wireless additional spectrum
necessary to meet the exploding demand for Internet
applications used by consumers with smart phones, and it will
permit the four cable companies, which collectively account for
over 70 percent of the Nation's cable TV subscribers, to offer
a quad-play bundle to their customers: video, Internet,
landline phone, and now wireless services, as well.
Yet these transactions have come under serious criticism
from consumer advocates and competitors. The basic premise of
the landmark Telecommunications Act of 1996 was that cable
companies and phone companies would enter each other's markets
and compete. And this vision was well on the way to being
realized with cable companies offering landline phone service,
phone companies, like Verizon, offering cable TV through its
VIAS service, and both offering consumers an on-ramp to the
Internet, so crucial in today's economy.
In addition, recent years have seen a tremendous expansion
of cell phone service and wireless devices as a way both to
make phone calls and access the Internet.
Many now wonder if these agreements that we are examining
today will roll back these advances in competition and even
amount to a truce between one of the two largest phone
companies and over 70 percent of the cable TV industry.
Under these agreements, cable company represents will be
present in Verizon Wireless stores, and cable representative
will be selling products and services that directly compete
with Verizon's, including VIAS.
After these deals, will Verizon continue to develop and
aggressively market VIAS?
Furthermore, rather than attempt to develop competing
wireless services with the spectrum the cable companies bought
in 2006, the cable companies are selling that spectrum to
Verizon Wireless and will be offering Verizon Wireless services
to their customers.
In addition, Verizon Wireless will be acquiring what is
likely the last swath of crucial spectrum available for years
to come, keeping this vital input for wireless service out of
the hands of its competitors.
After this deal, Verizon Wireless and AT&T will have,
together, two-thirds of the Nation's cell phone customers, as
well as the lion's share of the most valuable spectrum.
Given the exploding consumer demand for smart phones and
the spectrum they require, will the other cell phone carriers
truly be able to compete?
Having won the battle for competition by blocking last
year's AT&T and T-Mobile merger, are we now in danger, indeed,
of losing the war?
So we enter today's hearing with more questions than
answers, while cognizant of the very high stakes for
competition in consumers in these transactions. We know that
both Verizon and Comcast, as well as the other cable companies,
believe that they are acting in the best interest of their own
businesses and shareholders. Yet we need to ensure that
consumers' best interests will be served in the long run.
We urge their regulators to ensure that nothing in these
deals reverse the historic gains in competition between phone
and cable companies ushered in by the Telecom Act of 1996.
The fundamental question we must answer is whether these
deals will bring beneficial new choices to consumers or amount
to previously fierce rivals standing down from competition.
We look forward to the testimony of our panel of witnesses
to shed light on these important issues.
[The prepared statement of Senator Kohl appears as a
submission for the record.]
Senator Kohl. At this time, we turn to Senator Lee for his
comments.
STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM UTAH
Senator Lee. Thank you very much, Chairman Kohl. Hundreds
of millions of Americans pay for cell phones, cable television,
home Internet connections, and for home landline connections to
the telephone network. In fact, there are over 320 million
wireless subscriber connections in the United States, meaning
that there are more cell phone contracts than there are people
in the United States.
Over 100 million households have cable-video service, and
nearly 50 million pay for high-speed cable Internet. So the
announcement late last year of commercial agreements between
four of the country's largest cable companies and the country's
largest wireless phone services company understandably
attracted some attention.
These agreements include the sale of wireless spectrum to
Verizon Wireless from a group of cable companies, most of which
had purchased the spectrum in 2006 and were not using it at the
time.
In separate agreements announced on the same day the cable
companies and Verizon Wireless agreed to potential marketing
arrangements for each other's products. For each Verizon
Wireless contract obtained through cable marketing, Verizon
will pay the cable company a commission of a few hundred
dollars, and vice versa.
The companies have also agreed to fund a joint research and
development project. And these agreements provide cable
companies a future option of renting from Verizon the necessary
inputs to create their own wireless cell phone offerings.
Since these deals were announced, competitors of Verizon
Wireless and the cable companies, as well as consumer advocate
and public interest groups, have voiced a number of concerns.
Some have argued that the wireless market is tending toward a
duopoly and that additional spectrum should be sold only to
smaller wireless service providers.
Others have argued that the Federal Communications
Commission current spectrum screens, which are not implicated
by Verizon's spectrum acquisitions, except in a few distinct
localities, do not sufficiently account for the value of
spectrum holdings and should be changed.
Critics of the joint marketing agreements fear that Verizon
Wireless' parent company, which owns Verizon VIAS, a fiber
optic offering providing cable, phone and Internet services on
a combined basis, will no longer compete as vigorously with the
cable companies. They also worry over the potential competitive
implications of the companies' joint venture and speculate that
its resulting products and technology may give the member
companies an undue advantage in the marketplace.
It needs hardly be said that competition is essential to
consumer welfare in the wireless and cable industries, just as
it is elsewhere. The competitive state of the wireless market
has recently received a lot of attention, including a hearing
in this Subcommittee on the proposed merger between AT&T and T-
Mobile, which the companies were forced to abandon late last
year.
The competitive state of the cable and video industries is
likewise worthy of consideration, both in the course of today's
hearing and as part of future Subcommittee discussions. The
concerns expressed by critics of the agreements between Verizon
Wireless and the cable companies highlight important issues
facing these industries, and I am hopeful that this hearing can
help shed some light on the proper role of government in this
context.
With respect to the wireless spectrum, consumer demand for
data has exploded and continues to increase at exponential
rates. Some estimates suggest that data traffic will surge to
as much as 18 times current levels in the next few years alone.
Particularly because government agencies have been slow to free
up unused spectrum and make it available in the marketplace,
many analysts fear an increasingly severe spectrum crunch.
Given this context, we must give significant weight to
efficiencies that will result from the Verizon acquisition,
including the substantial benefit of putting previously fallow
spectrum to use by a highly efficient wireless network.
Although this scarce and limited resource is overseen and
administered by government agencies, regulators must take care
to incentivize productive use of spectrum and must not punish
private enterprise for government mismanagement.
With respect to the joint marketing agreements, I believe
we ought to pay close attention to the relevant business
incentives at play. Perhaps the most important question in this
regard is whether the joint marketing agreement signed by
Verizon Wireless does, in fact, interfere with the motivation
and the ability of its parent company to propagate VIAS. If the
deal leaves Verizon's incentives with respect to VIAS
unchanged, the agreement may be seen as pro-competitive,
enhancing consumer choice in the form of new quadruple-play
service.
Absent evidence of anti-competitive conduct, the companies'
joint venture and agreement allowing cable companies to brand
their own wireless service offerings may likewise be seen as
primarily pro-competitive deals that encourage innovation
through collaborative research and development of new
technologies and new services.
Throughout our consideration of these agreements, we should
remember that the purpose of our antitrust laws is simply to
maximize consumer welfare. Although antitrust law, by its very
nature, is forward looking, unmoored speculation must not be
allowed to overtake rational economic analysis. Government may
sometimes have a proper role in ensuring that businesses fairly
compete and do not collude, but it is improper for government
agencies to pick winners and losers in the marketplace or to
run interference with private enterprise where robust market
forces are in operation.
I look forward to hearing from each of the witnesses and
thank them for their cooperation and joining us today.
Thank you, Mr. Chairman.
Senator Kohl. Thank you, Senator Lee.
I would call our first panel witnesses. First to testify
today will be Randal Milch. Mr. Milch is Executive Vice
President and General Counsel of Verizon, a position he has
held since 2008.
Our next witness to testify will be David Cohen, Executive
Vice President of Comcast Corporation. Mr. Cohen joined Comcast
in 2002.
Next, we will be hearing from Charles Rule. Mr. Rule is the
managing partner of the Washington office and head of the
antitrust group at Cadwalader, Wickersham & Taft. He served as
assistant attorney general in charge of the antitrust division
at the Department of Justice under President Reagan.
Next to testify will be Steven Berry, President and CEO of
the Rural Cellular Association. Mr. Berry has also served as
senior vice president of government relations for the National
Cable and Telecommunications Association.
Our fifth witness today will be Joel Kelsey. Mr. Kelsey is
a policy advisor at Free Press; he previously worked as a
policy advisor for Consumers Union.
Finally, we will be hearing from Timothy Wu, Professor of
Law at Columbia University. Before that, Mr. Wu served as
senior advisor at the Federal Trade Commission, and he is the
author of several publications, including books, ``The Master
Switch'' and ``Who Controls the Internet? ''
We thank you all for appearing here before the
Subcommittee. I ask you now to stand and raise your right hand
as I administer the oath.
[Witnesses sworn.]
Senator Kohl. Thank you. So we will start with you, Mr.
Milch. And, gentlemen, please keep your testimony to about five
minutes or less.
Thank you, Mr. Milch.
STATEMENT OF RANDAL S. MILCH, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, VERIZON COMMUNICATIONS, INC., NEW YORK, NEW
YORK
Mr. Milch. Thank you, Chairman Kohl. And good afternoon to
you and Ranking Member Lee and the other Members of the
Subcommittee.
I wish to make three points this afternoon, and then I'd be
happy to respond to your questions.
First, it's critical that this previously unused spectrum
be put to use to meet customers' growing needs in the mobile
broadband economy. Mobile broadband is a continuing bright spot
in our national economy, and it's built on investment in
facilities and networks, startling daily innovation in
applications, and widespread societal benefits.
But it's no secret that we're currently in a critical
situation. Customer demand for mobile bandwidth is growing
faster than currently available spectrum. Customers using data-
intensive devices, like iPads, iPhones, tablets, as well as
data-intensive applications, like streaming video and audio,
are driving the need for more spectrum. According to public
estimates, total smart phone traffic in 2015 will be 25 to 50
times greater than it is today, and the FCC predicts that if
additional spectrum is not made available in the near term,
mobile data demand will likely exceed capacity by 2014.
From Verizon's own perspective, on our networks, data usage
has been doubling each of the last three years and we expect
that trend to continue going forward. In some of our largest
markets, the spectrum crunch will come as soon as 2013 and
start hurting our customers and your constituents who expect
and demand high-quality service.
Finally, I would note that one thing has been true about
all data estimates--they have been underestimates. The spectrum
purchase will allow us, in the short term, to meet our
customers' growing needs.
Second, allowing Verizon Wireless to purchase this spectrum
and build it and invest in it is a good reallocation of an
important asset. Verizon is a good steward of spectrum. We put
it to use, and we do it more efficiently than anyone else in
the United States.
As this chart demonstrates, Verizon Wireless serves more
customers per megahertz of spectrum than any other carrier in
the United States, despite the huge growth of data traffic from
smart phone usage.
For example, Verizon Wireless, which is here on the right,
serves over 1.2 million customers per megahertz of spectrum;
and, for instance, T-Mobile, which is right here, serves
660,000 customers per megahertz of spectrum.
Verizon Wireless is almost twice as efficient as T-Mobile.
And I want to point out that we are not seeking to buy this
spectrum without already having taken other expensive steps to
best use the spectrum we already have. We have spent $22.3
billion over the past three years, $8.3 billion alone in 2011,
on our network, and that's more than any other wireless
provider in the United States.
Roughly half of that spend has been investments to increase
our capacity within our existing spectrum limits by numerous
engineering techniques, such as cell splitting and denser cell
site deployment.
Now, of course, these engineering techniques are available
to any carrier who chooses to invest in them, but I would also
point out that we do not believe that we can engineer our way
out of the spectrum crunch. More spectrum is necessary.
I would also push back on the notion that Verizon Wireless
is somehow taking more than its fair share of available
spectrum. After acquiring this additional spectrum, our
holdings in nearly all geographic areas will remain below the
level where the FCC has said that no further competitive
inquiry is necessary, because there is clearly no competitive
harm.
This is the so-called ``spectrum screen,'' which identifies
areas where there's competitive concern. Ninety-eight percent
of the counties involved here fall below the spectrum screen.
Third, let me talk for one second about the separate cross-
marketing agreements. I fully believe they will be good for
consumers in the competitive marketplace by providing them more
choice.
Let me explain why we did this. Verizon's award-winning
FiOS service has always been intended to reach a relatively
small portion of the country. As this chart indicates, Verizon
FiOS, here in the blue, hugs the east coast largely, a small
bit in Florida, Texas, and in southern California.
This represents our current build, which is about 80
percent of the total FiOS build that we had intended to begin
in 2005 and announced in 2009 was going to be our FiOS build.
Now, on the other hand, Verizon Wireless provides service
across the country, which is provided in this chart. This is
our 3G footprint, our current footprint, but our 4G footprint
will match this by the middle of the next year when we finish
building out our high-speed 4G bandwidth service.
So what we needed to do was figure out a way to ensure that
Verizon Wireless, which covers the entire country, would have
the ability to be part of bundles and of wireless and wire line
services in the parts of the country where FiOS didn't exist.
We also wanted to be able to compete in the innovation race
and tried to create new technical capabilities to allow
customers to more seamlessly use mobile and wired broadband
products. That's what these various agreements do. Verizon
Wireless and the cable companies will have the ability to act
as sales agents for one another. They will not control the
price of the input. So the cable companies don't control the
price of the Verizon Wireless service and Verizon Wireless
doesn't control the price of the cable service. They merely
sell it for a one-time agency commission.
There are thousands of such agency commissions in the
marketplace today. Verizon Wireless has over 1,000 itself.
They've never attracted any anti-competitive attention.
The companies also have created a joint venture in order to
try to produce this new product. We don't have it yet. If we do
have it, it will be successful only if the marketplace deems it
so.
Finally, let me dispel the notion that Verizon would
somehow disadvantage FiOS in this transaction. FiOS is one of
the largest investments by a private company in the last decade
in this country, $23 billion invested to do this. We have only
just recently begun to see positive cash-flow out of this
investment. It's important for us to continue it and there will
be no stopping it, because it's a superior product that
customers like and that we are going to push as hard as we can.
Thank you very much for your time. I'd be happy to answer
your questions.
[The prepared testimony of Mr. Milch appears as a
submission for the record.]
Senator Kohl. Thank you, Mr. Milch.
Mr. Cohen.
STATEMENT OF DAVID L. COHEN, EXECUTIVE VICE PRESIDENT, COMCAST
CORPORATION, PHILADELPHIA, PENNSYLVANIA
Mr. Cohen. Thank you, Mr. Chairman and Members of the
Subcommittee. It's a pleasure to be back in this room, and I
thank you for the opportunity to testify today on the
substantial benefits consumers will realize from SpectrumCo's
sale of spectrum to Verizon Wireless and the reseller,
technology joint venture, and joint marketing agreements the
companies entered into in this transaction.
Because Mr. Milch from Verizon has really fully covered the
spectrum aspects of the transaction, I'm going to focus on the
commercial agreements. So the commercial agreements at issue
here are ordinary and customary, market-standard agreements.
There is no merger here, like there was in AT&T/T-Mobile. There
is no acquisition of customers or of ongoing business
operations. Not one competitor will be removed from the
marketplace as a result of this transaction.
Let's break those commercial agreements down into the three
types. The reseller agreements will allow us to become a mobile
virtual network operator, an MVNO, and offer consumers our own
unique branded wireless services.
The FCC consistently has acknowledged the benefits that
resellers can provide to consumers. The government has never
insisted on preapproving such agreements. In fact, it has
encouraged and even compelled them in certain transactions.
They are a slam-dunk win for consumers.
The technology joint venture will lead to more innovation
as we develop amazing new technologies that will offer
consumers the ability to use all of their communications
devices and services seamlessly across multiple platforms. This
innovation will compete with other innovation already occurring
in the marketplace. Joint ventures such as these have also been
viewed favorably by the government.
The agency agreements allow us immediately to begin selling
Verizon Wireless services as part of multi-product bundles, and
they also allow Verizon Wireless to do the same. There are
many, many examples of our competitors entering into similar
agency agreements to offer multi-product bundles.
The latest example is the announcement by AT&T and DirecTV
of an agency agreement at the end of last year. Again, so far
as we are aware, the government has never questioned or
challenged any of these agreements.
Contrary to certain parties' claims, these agreements will
not affect Verizon's or the cable companies' incentives to
compete vigorously against each other. Such claims ignore basic
business realities.
Initially, please remember that Verizon Wireless and
Verizon are separate companies, with Verizon owning 55 percent
of Verizon Wireless. As a matter of simple business economics,
as Mr. Milch just testified, Verizon is hardly going to walk
away from its $23 billion investment in FiOS, which generates
61 percent of its consumer wireline revenues today.
Second, it is important to note that there is no FiOS
overlap with the cable company partners of SpectrumCo--it's an
analog to that chart--in over 85 percent of our collective
footprint nor is there any incentive for Verizon to lay down
its weapons in the fierce FiOS/cable battle in the remaining 15
percent of the country.
Put yourself in Verizon's position. Would you rather hold
on to an existing or attract a new FiOS subscriber worth
thousands of dollars in ongoing monthly subscription fees, or
would you rather get 55 percent of a one-time commission worth,
at most, only a few percentage points of the value of a FiOS
customer? This isn't even a close call.
Arguments that are predicated on the idea that this set of
agreements will encourage Verizon not to expand its FiOS
footprint or discourage the cable companies from entering the
wireless marketplace ignore clear market realities. Verizon
announced over two and a half years ago that it did not intend
to build FiOS out to additional areas of the country outside of
its existing franchise areas, and the cable companies have made
a considered business decision not to build a new wireless
network.
Speculative claims that ignore the reality of considered
business decisions are not what the antitrust laws were
intended to address.
Finally, and with all due respect, opposition by some of
our competitors should also be seen in its proper context. What
they are really concerned about is that our agreements will
increase competition and compel them to respond accordingly.
The antitrust laws, however, are designed to protect
competition, not to insulate competitors from having to respond
to competition. In our view, the proper focus here should be on
the consumer. And for the consumer, these agreements are
entirely additive--more choice, more competition, more
investment, and more innovation.
So thank you for the opportunity to testify, and I look
forward to answering your questions.
[The prepared testimony of Mr. Cohen appears as a
submission for the record.]
Senator Kohl. Thank you, Mr. Cohen.
Mr. Rule.
STATEMENT OF CHARLES F. RULE, MANAGING PARTNER, WASHINGTON, DC,
OFFICE, CADWALADER, WICKERSHAM & TAFT, LLP, WASHINGTON, DC
Mr. Rule. Thank you, Mr. Chairman, Senator Lee, and Members
of the Subcommittee. It's an honor to be invited to discuss
with you the antitrust aspects of the Verizon Wireless/cable
deals.
The views that I am expressing today are mine and mine
alone. I have no clients involved in this transaction or really
have any interest in it one way or the other. And until I was
invited to come here today to talk to you, I hadn't spent that
much time thinking about the transaction.
As a consequence, my analysis is based on a review that
I've been able to do over the last few days of the principal
filings made with the FCC and then consideration of those
arguments for and against the deal.
My analysis, such as it is, has been provided in written
form to the Committee and I won't dwell on it, but I will
summarize it.
The analysis is strictly through the lens of the antitrust
laws. There may be and seem to be other arguments made at the
FCC, but they are not necessarily antitrust issues.
The antitrust lens is shaped by three core principles.
First, the antitrust laws are, the Supreme Court has said, a
consumer welfare prescription. A merger, acquisition or
collaboration is ultimately judged by whether, on balance, it
is likely to increase quality-adjusted total output.
Second, private mergers and acquisitions are critical to a
dynamic economy and facilitate the movement of assets from
lower- to higher-valued uses. While due to factors such as
market structure, the position of the parties and so forth, a
very small fraction of such deals may threaten harm to consumer
welfare. Antitrust should not unduly interfere with or raise
obstacles to the market for the flow of assets.
Third, short of an M&A transaction, collaboration among
firms, even competitors, is critical to the economy and
generally holds the potential for increasing consumer welfare.
Sure, under certain circumstances, collaboration can threaten
consumer welfare and competition, but the antitrust laws are
sensitive to the welfare-enhancing promise of collaboration.
Ultimately, the antitrust analysis of any transaction,
including this one, is heavily dependent on the relevant facts
surrounding the particular transaction. Gathering those facts
and examining them under the antitrust lens is currently
underway at the Department of Justice, and I would imagine that
that will continue for several months more.
Given my limited time and access to the facts, I'm able to
reach only tentative views about the agreements. Based on those
constraints, let me briefly summarize my tentative views on
three aspects of the deal--Verizon Wireless acquisition of the
cable companies AWS spectrum licenses, the commercial
collaboration agreements between Verizon Wireless and the cable
companies, and the R&D collaboration between the parties.
First, with respect to the acquisition of spectrum, the
cable companies have never developed that spectrum. They've
never gotten into the business of competing for wireless
service on a facilities basis.
Moreover, in the absence of the transfer, the spectrum that
they hold will continue to generate zero wireless service for
the foreseeable future. As a consequence, Verizon Wireless
acquisition of that spectrum will not eliminate any existing
competition.
Moreover, Verizon Wireless claims to have a roadmap for the
use of the spectrum to generate 4G LTE service in the next
three years or so. So the transaction appears to increase
output.
The fact that opponents can conjure up that there may be
some conceivable alternative deal that will increase output
even more is not, under existing antitrust law, a basis to
challenge the transaction.
Second, the commercial agreements. Those I have an interest
in, I actually happen to be a happy, satisfied customer of
FiOS. So I am concerned, like everybody else should be, as to
whether or not these agreements are going to impact that
competition.
However, looking at the deals that are fairly standard
commercial agreements, the structure and economics of them do
not appear to materially impact either the cable companies'
incentives to go into facilities-based wireless communication
or Verizon's incentives and ability to continue to compete with
FiOS.
However, it's important for the department, as they look at
these transactions, to make sure that there are adequate
safeguards to prevent anti-competitive spillover.
Last, with respect to the cable/wireless collaboration on
innovation, it seems to me, on its face, this collaboration
raises little concern. Joint R&D is treated favorably by the
antitrust laws, and the consortium will face vigorous
competition from others.
The basis of my views is, as I said, provided in the
written submission. I hope it's of help.
Mr. Chairman, that concludes my remarks and I look forward
to any questions that the Committee may have.
[The prepared testimony of Mr. Rule appears as a submission
for the record.]
Senator Kohl. Thank you very much, Mr. Rule.
Now, we will hear from Mr. Berry.
STATEMENT OF STEVEN K. BERRY, PRESIDENT AND CEO, RURAL CELLULAR
ASSOCIATION, WASHINGTON, DC
Mr. Berry. Thank you, Mr. Chairman. Chairman Kohl, Ranking
Member Lee, and Members of the Subcommittee. Thank you for the
opportunity and inviting me to testify before this Committee
about the proposed spectrum transfer and integrated commercial
agreements between Verizon Wireless and the cable companies.
These transactions will further cement Verizon's dominant
control over every input and resource critical to provide
mobile broadband services to the detriment of every other
smaller competitor.
Mr. Chairman, the RCA, the competitive carriers'
association, represents over 100 wireless carriers. You might
recognize Celcom if you're from Wisconsin or Union Wireless
Telephone if you're from Utah, and Duet Wireless if you're from
St. Cloud, Minnesota. But I think you'll also recognize some of
the other names, T-Mobile, Sprint, Metro PCS, Cricket, US
Cellular, Alltel, Cincinnati Bell, C Spire, and I Wireless.
All have come together at RCA because of the dangerous
pattern of consolidation in the once-competitive wireless
industry. There used to be the big four. Now, we talk about the
big two, the twin bells, the duopoly of Verizon and AT&T.
It's difficult to explain the potential impact of this deal
without getting bogged down into the minutia of spectrum
policy. However, I must say that the Verizon/cable deal is
elegantly contrived, is superbly clever, and very difficult to
deconstruct. But it will deliver the same insidious and
disastrous impact on competition, and, unless conditioned,
would not be in the public interest.
Because of the massive consolidation and the dominant
control of all inputs into the mobile services, RCA filed a
petition to condition this deal to allow competitive carriers
an opportunity to access spectrum, back-haul, and ensure data
roaming and interoperability.
This deal is not about price, except maybe perhaps higher
prices for consumers. And these arrangements are integrated
transactions. This is about control of the market share, and
the deal is effectively a non-compete agreement. Verizon will
not compete with cable on the wire line service side and cable
will not compete against Verizon on the wireless side.
Over 60 million households will immediately be affected by
this deal on the wire line side and far greater on the wireless
side. If this were only about spectrum price, higher prices
could be commanded in the marketplace by multiple carriers
starved for green field spectrum. Verizon owns substantial
spectrum reserves, as much as 44 megahertz of unused spectrum
in most markets currently. And if this deal is approved, they
could warehouse as much as 72 megahertz of unused spectrum in
many of the top markets. And the Verizon heat map before you
over here shows their holdings and their superior position.
These companies, all products of decades of state-
sanctioned monopoly, have figured out a way to guarantee and
solidify market share in their respective areas. This is not in
the public interest, and it certainly impacts market conditions
contemplated by the Clayton Act.
Spectrum is a finite and unique taxpayer resource. And make
no mistake about it, manipulation of spectrum resources is,
unfortunately, a reliable and effective tool to eliminate
competition. Spectrum is the lifeblood of the wireless
industry. You cutoff the lifeblood and the heart does not pump
for long.
The Verizon/cable team wants you to believe that this is
merely about a spectrum transfer, a license transfer, albeit
the largest single spectrum license transfer the FCC has ever
considered, covering approximately 280 million consumer pops
and spanning almost the entire United States, as the map before
you shows.
This is the equivalent of eliminating a national carrier in
the marketplace or, in this case, it does eliminate four
potential wireless competitors.
RCA did not file a petition to deny. We filed a petition to
condition this transaction. The very considerations that forced
cable to exit the wireless industry must become transaction
conditions if we are going to promote a competitive industry
and avoid additional regulation.
In summary, Mr. Chairman, in their own words, Comcast, Cox,
and the SpectrumCo members provided us with an excellent
roadmap of the conditions needed for a competitive wireless
market.
Clearly, the deal must be conditioned by significant
spectrum divestitures under an updated spectrum screen;
commercially reasonable roaming requirements; affordable and
available back-haul; and interoperable standards. Denying
competitive carriers an opportunity to access these critical
inputs is denying their ability to survive.
Mr. Chairman, America's competitive telecom policy should
not be relegated to the mantra--if you can't beat them, join
them.
I'll be more than happy to answer your questions.
[The prepared testimony of Mr. Berry appears as a
submission for the record.]
Senator Kohl. Thanks, Mr. Berry.
Now, we will hear from Mr. Kelsey.
STATEMENT OF JOEL KELSEY, POLICY ADVISOR, FREE PRESS,
WASHINGTON, DC
Mr. Kelsey. Chairman Kohl, Ranking Member Lee, and esteemed
Members of the Committee, thank you for the opportunity to
testify before you today on behalf of Free Press.
In my testimony, I plan to cover three topics. First, I'd
like to provide a consumer perspective on the consolidating
telecom market in which these deals are being proposed; second,
I'd like to explain what it means to put this much control over
our Nation's spectrum market into the hands of one company;
and, last, I'd like to explain how the joint marketing
arrangements would leave many of our Nation's households facing
monopoly conditions in the market for residential Internet
access.
We've heard a lot about the spectrum crisis, but today I'd
like to point out we have an equally large competition crisis.
This is a crisis that consumers are already facing today as
they get locked into more expensive multi-year bundles, while
competitors are locked out of entering the marketplace to offer
better alternatives.
The market for wireless service is concentrated at the top,
with Verizon and AT&T together controlling nearly 65 percent of
the market share and capturing nearly 80 percent of the entire
wireless industry's profits. To put this in perspective, this
dwarfs the level of concentration that we see in the oil,
banking, or airline industry.
The market for at-home broadband service has long been a
duopoly, and FCC data predict that most American households
will have no other choice than their cable company for next-
generation Internet access. These trends have real consequences
for consumers. J.D. Power reports the average wireless bill in
2011 was $86. That's a 25 percent increase in just the last
four years.
The central theme that I'd like to get across here today is
that these market conditions will be made much worse if this
deal is approved. For example, this deal will result in AT&T
and Verizon controlling a combined 60 percent value share of
all mobile broadband spectrum in America.
The benefit here for Verizon is not just in using the
spectrum. It is also in foreclosing other companies from using
this critical resource to challenge Verizon's market dominance.
Not all spectrum is created equal. The more high-quality
spectrum a carrier controls, the more market power it has,
making it easier to mount a competitive challenge.
Put simply, with better spectrum, cell towers can carry
signals for longer distances, so fewer towers are needed. So
for a dominant firm like Verizon, with more spectrum depth than
any of its competitors, acquiring more spectrum is not the only
way to meet growing consumer data demand. Verizon could
continue to build more towers, conduct spectrum swaps in
congested areas, or use Wi-Fi offloading to carry traffic.
Acquiring more spectrum is, however, the best way to ensure
competitors cannot mount a serious challenge by using that
spectrum to offer high-quality services at lower prices.
If Federal regulators are serious about protecting the
public interest, they must act to preserve the limited amount
of competition in the wireless market that exists today, and
that starts with denying this license transfer.
The spectrum sale is enough to tilt this transaction
against the public interest in the wireless market. However,
the joint marketing arrangements will also exacerbate
consolidation in the residential broadband market.
These agreements simply represent a deal between these
companies to stay out of each other's way in perpetuity. They
put former rivals on the path to collaboration rather than
competition, and they send a clear signal to Wall Street that
the largest cable and wireless companies in America are aligned
together, and it will be nearly impossible for any competitor
to mount a viable threat in either market.
Congress recognized the danger in these sorts of
arrangements when it passed the 1996 Telecom Act. That Act
specifically bans local telephone companies and cable companies
joining forces. That's because Congress intended to encourage
competition between cable and telephone companies, competition
that would be eliminated through these agreements.
For example, these agreements eliminate the incentives for
Verizon to aggressively market its fiber to the home broadband
service in markets where it competes head-to-head with cable
companies. Competition benefits consumers when companies are
trying to win subscribers from their competitors, not when they
are offering to sign up their own customers for their rival's
services.
In conclusion, I'd like to point out that the consolidation
that we've been experiencing is no accident. It is not the hand
of the free market. Rather, it's the outcome of public policy
decisions that have unwound protections on competition and
placed a disproportionate amount of our Nation's most valuable
spectrum into the hands of just two companies.
There is no reason this pattern of poorly protecting the
public interest has to continue. The DOJ and the FCC showed
immense analytical skill and political courage in rejecting the
AT&T/T-Mobile merger. And if that was the down payment on
future competition, preventing this proposed transaction should
be the next installment.
Thank you very much. I look forward to your questions.
[The prepared testimony of Mr. Kelsey appears as a
submission for the record.]
Senator Kohl. Thank you, Mr. Kelsey.
Now, Professor Wu.
STATEMENT OF TIMOTHY WU, ISIDOR & SEVILLE SULZBACHER PROFESSOR
OF LAW, COLUMBIA UNIVERSITY, NEW YORK, NEW YORK
Mr. Wu. Thank you, Mr. Chairman, Senator Lee, and Members
of the Subcommittee.
Does support for robust competition remain the
communications policy for the United States?
It may sound like a rhetorical question, yet it is the
right question to ask as we witness increasing concentration in
every single communication market, including the prospect of a
de facto duopoly in wireless communications.
This was the same question that this Committee faced--the
Subcommittee faced--when it addressed the AT&T/T-Mobile merger
last year. And it's the same question raised by the sale of
spectrum and the marketing agreements that we examine today.
As compared to the spectacle of T-Mobile and AT&T,
Verizon's softer strategy may seem like a sideshow, but subtle
action is often the more powerful, particularly in the
distracted age.
Verizon holds more valuable spectrum than anyone else and
should it complete this transaction, it will actually be left
with spectrum holdings that are, by book value, even larger
than AT&T and T-Mobile would have been.
Yes, AT&T's challenge to competition was feckless and loud,
but Verizon's deal affects the very competitive structure of
the communications industry. This transaction, and others that
are like it, does not threaten to be the single grand coup that
ends competition in our time. The danger rather is the prospect
of a creeping duopoly in wireless and a quiet end to the
contest once thought to be the most important to the consumers
of all, namely, competition for last mile access.
That is why the Federal Communications Commission must
examine this transaction just as closely as it did the AT&T/T-
Mobile merger.
The usual dangers of excessive concentration are well
known--higher prices, poor customer service, and, over time, a
kind of depressing stagnancy. But I would like to highlight the
particular dangers to innovation that are the likely byproduct
of non-competition between Verizon and the main cable
companies.
I'm going to make two quick points. First of all, I want to
point out that communications policy, not antitrust law, is the
appropriate lens for addressing this transaction. The reason is
that spectrum belongs to the public and it is the government's
role to make sure that the asset of the public is used
properly.
The Commission cannot sit idly by, as it were, and say that
nature is taking its course when the government has such a
central intrinsic role of deciding what competition is in this
industry. On an ongoing basis, the Commission needs to decide
whether more competition or more concentration will be better
for the people of the United States.
If the Commission truly believes that greater
concentration, in this case, in the wireless industry serves
the interest of the American public, it is free to make that
choice. Congress, similarly, is free to pass a law that
supersedes the 1996 Telecom Act and remove competition as the
policy of the United States.
But if we take these actions, we owe it to the public to
explain that we are changing the communications policy of the
United States from a policy of competition and back toward
something along the lines of regulated monopoly or regulated
duopoly.
Second, I want to point out that over the last decade,
Verizon has been the clearest and strongest competitor to the
cable industry, and what we face here is the prospect of the
elimination of that competition. I don't want to simply focus
on the FiOS arrangement, which I think is important, but not
the only thing at issue here.
What is at issue is the future of disruptive innovation.
That is to say, the innovations we don't understand right now,
but the innovations that could potentially undermine the
stranglehold that cable has over the viewing habits of the
American public.
Consider, for example, something we haven't discussed much,
which is 4G broadband to the home. PC Magazine wrote, ``The
mobile broadband service that has the best chance of being a
true cable replacement is Verizon's new 4G LTE service. The
firm has an admirable home fusion product it just launched
which shows much promise.''
But the fact is that 4G is a cable replacement, not a
complement. It is not clear how selling a cable replacement can
be consistent with promoting cable's products at the same time.
Thank you very much, and I welcome any questions you have.
[The prepared testimony of Mr. Wu appears as a submission
for the record.]
Senator Kohl. Thank you, Professor Wu.
We will now start our questions in seven-minute rounds.
Mr. Milch, the vision of the landmark 1996
Telecommunications Act was that the phone companies and cable
companies would, for the first time, compete with each other in
each other's markets.
In the last few years, we have seen this vision on its way
to being realized, particularly with Verizon FiOS, which offers
consumers high-speed Internet connections and video in direct
competition to the cable companies. FiOS has grown to be a
strong competitive rival to cable, recently capturing market
shares of 29 percent for FiOS TV and 33 percent for FiOS
Internet in its service areas. Even outside the areas where
Verizon has deployed FiOS, Verizon competes with cable for
connections to the Internet and landline phone service.
Consumers reap the benefits of this competition each and every
day.
Now, many are concerned that the joint marketing agreements
represent a truce between these fierce rivals. Under the
marketing agreements, cable company representatives will be in
Verizon Wireless stores selling the very cable products that
Verizon competes against, and Verizon Wireless will realize a
commission for every cable product sold.
So, Mr. Milch, what does this deal mean for the future of
competition between Verizon and the cable companies? How can we
expect you to compete as vigorously against cable when your
subsidiary, Verizon Wireless, is partnering with these cable
companies?
We know you argue that you will not end your FiOS service
for merely a commission of a few hundred dollars. But the
question here is the level and vigor of competition.
How do we know that you will maintain your same level of
price competition and promotion or will not instead pull your
punches in competing with the cable companies?
Mr. Milch.
Mr. Milch. Thank you, Senator--I mean, Chairman Kohl. Thank
you for the question.
Just to reiterate, these various agreements are between the
cable companies and Verizon Wireless, not with the parts of
Verizon that provide our FiOS service, our landline service.
Number one, I think it's just important to know what the
square corners of the agreements are so that we're clear on
that. Verizon FiOS, which is part of our telecom part of
Verizon, is going to vigorously compete, Senator, because its
primary goal is to continue to provide the best level of
service it can and extend its reach within its franchise areas,
which have already been set out, and provide a world-leading
service, a service that we believe beats cable because it's
superior.
And we want to continue to provide that service, Senator,
because of the economics that you pointed out. It doesn't make
us--there is no rationale for saying that you're going to go
halfway if you want that sale, and that sale of FiOS is the
clear winner, from a financial services--from a financial
perspective.
So a half-baked effort would leave you without that sale
and would have--redound negatively to our bottom line.
All the financial impetus is to compete vigorously. Verizon
Telecom spends hundreds of millions of dollars a year
advertising FiOS services where it's available. They're going
to continue to spend hundreds of millions of dollars a year
selling those services, and we will continue to compete
vigorously, because it's a superior product.
Senator Kohl. Mr. Milch, in an interview with Politico two
weeks ago, Mr. Cohen of Comcast stated that, quote, ``Within
the FiOS footprint, all we have agreed is that Verizon Wireless
stores will be Switzerland. They can sell Comcast products and
they can sell FiOS products. There is no favoritism,'' quote.
But until now, Verizon and Comcast have been fierce rivals
where you overlap. Now, Mr. Cohen says your wireless subsidiary
stores will be like, quote, ``neutral Switzerland.''
Is this not another way of saying the competitive battle,
if not entirely over, is, for the most part, over?
Mr. Milch. Senator, no, I disagree. Right now, our Verizon
Wireless stores don't sell FiOS. They don't sell anything on
the landline side. So they are already--the status quo is that
they don't sell any landline services.
If, in fact, we end up with a situation in which those in-
region stores, those FiOS in-region wireless stores provide--
sell landline services and do it neutrally, then there will be
both wire line services there.
Neutrality is also achieved, Senator, I might add, by
selling neither. So it's entirely possible that those wireless
stores within the FiOS perimeter will not sell either service
and the status quo will be absolutely the same.
Senator Kohl. All right.
Mr. Milch. We market FiOS through the--not through those
stores.
Senator Kohl. Mr. Cohen, what did you mean by saying
Verizon Wireless stores would be like Switzerland? Does that
not imply that Verizon will not be able to compete as
vigorously or will not compete as vigorously against you?
Mr. Cohen. No. Actually, I think Mr. Milch gave the right
answer. The full context of that question really was the
question of, well, if Verizon Wireless stores sell Comcast's
Xfinity product, does that give the Xfinity product a leg up on
the FiOS product, and the answer is no.
Those stores are like Switzerland and they're going to
become additional battlegrounds for Comcast to compete against
FiOS and for FiOS to compete against Comcast. And the critical
issue here, as Mr. Milch said, is right now there is nobody in
those stores.
So a consumer who walks into a Verizon Wireless store
doesn't have the option to buy a wireline service from anyone.
And once we are in the stores, if we are in the stores, Verizon
Wireless doesn't control the Xfinity offer that's in the stores
and they don't control the FiOS offer that's in the stores.
If we come in and say, ``You can buy a quad-play in the
store for a $300 Visa card,'' FiOS could come in and say,
``Well, we're going to sell the bundle at $69.95 instead of
$99.95,'' and then requiring us to respond, requiring them to
respond. And so that Switzerland, if you will, creates a hotbed
of potential competition between Xfinity and FiOS that does not
exist today.
Senator Kohl. Professor Wu, does the Verizon/cable joint
marketing agreement signal a, quote, ``standing down from
competition'' between Verizon and these four cable companies?
Mr. Wu. Mr. Chairman, I am very concerned that it does. You
can see very clearly it's in the companies' interests often not
to compete. It's something that the government always has to
remain vigilant about. And if I were in their shoes, why would
you compete after this?
The incentives are for them to cooperate as opposed to
compete, which is very good for both companies, but it's not
clear that it's good for consumers.
I want to add one thing. Verizon was saying that at
present, Verizon Wireless does not sell wireline services,
which is true, but they do sell a service that competes
directly or could compete directly with cable. You can use
wireless, 4G wireless, very fast wireless, to offer a
competitor to a cable service, to a cable broadband service in
the home, and they also sell that product and I think their
incentive to sell that product will be diminished.
Senator Kohl. Thank you very much.
Senator Lee.
Senator Lee. Thank you, Mr. Chairman. And thanks to all of
you for coming.
Mr. Rule, first of all, I appreciate you joining us. I
understand you do not represent any particular business
interest in this, and I appreciate your willingness to come and
testify even in the absence of having such an interest.
As you know, the primary focus of our antitrust laws is on
consumer welfare. So accordingly, in considering the effects of
a transaction and the effects that it might have on
competition, we have to give appropriate weight to any
efficiencies that might be produced as a result of that
transaction.
What, if any, efficiencies do you see that could come from
this transaction and how might those efficiencies translate
into some kind of benefit for consumers on the ground level?
Mr. Rule. Senator, as I indicate in the written comments, a
form of efficiency, if you will, or what efficiency ultimately
generates is increased output. And anytime you take an asset
that--and I view the AWS spectrum as an asset, and it's not
being used to generate any output, it's, in effect,
inefficient.
What--and there are certainly arguments, I think Professor
Wu has made them, that maybe in the hands of the cable
companies, you couldn't expect them to be fully developed. I
don't know. I don't think that's that important.
What is important is that there's a market transaction
where Verizon is willing to pay for it. Verizon has
represented, and I'm sure that government will find out whether
or not that's an accurate representation in their
investigation, that they're going to take that spectrum,
they're going to put it into their network, and it's going to
allow them to keep up with demand for advanced 4G service, it
may improve the quality of the service that they have. All
those things, that is, the increased output, the improved
quality, are very beneficial.
With respect to the commercial agreements, I'm going to
admit that I don't know that those efficiencies knock my socks
off. I do think that these are agreements that are not
unfamiliar to most of us out there in the marketplace.
The real question from the antitrust perspective, though,
is what sort of impact do those agreements have on the
incentives of the two parties to compete. And it strikes me,
again, as a FiOS consumer, customer, I'm concerned about that.
But I think if you look at those commercial agreements, it's
just hard to tell a story that they really significantly or
even materially impact the incentives of the companies.
So to me, that sort of need to get a communications service
that each doesn't have on its own to fill in a bundled package
makes sense. I think it reflects what consumers want, in some
cases. But what everybody needs to understand is you're still
going to be able to get FiOS service directly from Verizon.
You're still going to be able to get wireless service directly
from the wireless provider.
As I said, I'm a FiOS customer. I'm a Verizon Wireless
customer. I bought them in two separate places. And so to me, I
don't think the competitive threat of those commercial
agreements, when you actually look at them, is all that
significant. And while there may be some benefits, I don't
think it's incumbent on the parties under the antitrust laws to
come forward with a lot of efficiencies to justify those sort
of standard commercial agreements.
Senator Lee. And you say the efficiencies do not
necessarily knock your socks off. Does that mean that--you are
not necessarily suggesting it is producing inefficiencies.
Mr. Rule. No. No, not at all. And, again, under the
antitrust laws, the way they're structured, if the government
or a plaintiff wants to challenge a transaction, the burden is
on them to show that welfare is being harmed, that allocative
efficiency, if you will, is being reduced, total output is
threatened with being reduced as a result of the transaction.
It's only if you could sort of establish that first that
the courts will look at efficiencies. So the burden on a party
to an agreement is not to prove that their transaction will
increase efficiency or increase output, it's really to prove
that the transaction will not lower output, will not lower
efficiency. And so I think that's the issue.
But, again, they certainly have arguments for where the
efficiencies lie in all three of these transactions. As I said,
while it doesn't knock my socks off in the commercial
agreement, I think in the joint R&D, there, there are real
possible efficiencies that, again, I think Congress has
recognized in the National Cooperative Research Act of 1984 and
elsewhere and recognized that the antitrust laws needed to be
sensitive to the potential benefits that joint R&D develop, for
example.
Senator Lee. Thank you. Thank you.
Mr. Milch, one of the chief purposes of the
Telecommunications Act of 1996 was to encourage increased
competition between cable companies, on the one hand, and
telephone companies, on the other hand.
Some have suggested that FiOS, which competes directly with
cable in areas where it has been built out, is exactly the kind
of competition that the Act envisioned and was trying to
encourage.
Now, I understand that Verizon announced in 2010 that it
did not intend to expand FiOS to areas where it is not already
present, where it has not already been built out, but some have
now expressed concerns that Verizon Wireless' cross-selling
agreement will interfere with any remaining incentive that
Verizon Communications might have to build out FiOS at some
later date and that that deal symbolizes, it represents, it
signals some kind of an end to any competition between FiOS and
cable.
Can you comment on that and on Verizon's decision not to
expand FiOS beyond its current footprint?
Mr. Milch. Yes, Senator. Thank you. Verizon made it clear
in 2009, Senator, I believe, that it had reached--that it was
near to the point of beginning to lower its capital commitment
and had reached a point where it could see the end of its FiOS
commitment.
It announced then that it was not going to expand beyond
the 18 million homes that were its target. We were very
transparent with Wall Street and everyone else, because Wall
Street punished us quite a bit for the massive investment we
made in FiOS. That massive investment is the investment that we
are going to continue to seek to recoup by providing the best
service we can to our existing and to new customers to hold on
and increase that revenue stream.
But the confines of FiOS have been set since the very
beginning. When we began this in 2005, we had a target in mind.
We were clear on the target, and we were clear on the amount of
money we were going to--of our shareholders' money that we were
going to commit to this.
So we owe it to our shareholders, Senator, to give them
some return on this. We owe it to our customers to continue to
provide them a service, that they're going to want to stay with
us. And we owe it to our future customers in our franchise
areas to continue to provide a service that they want us over
our cable competitors.
Senator Lee. It sounds like Mr. Rule will be pretty upset
if you would go back on that. He will hold you accountable.
Thank you, Mr. Chairman.
Senator Kohl. Thank you very much, Senator Lee.
Senator Klobuchar.
Senator Klobuchar. Thank you, Mr. Chairman and Ranking
Member Lee, for holding this important hearing. Thank you to
our witnesses.
I wanted to just start out with one thing that happened
today, and, that is, Mr. Milch, I want to acknowledge Verizon's
announcement today on the measure that your company is taking
to stop cramming and the unauthorized phone charges, third-
party phone charges that appear on bills.
As you know, I have been long involved in this and have
been asking this, and the Commerce Committee has been
investigating this for quite some time. And so I am encouraged
that you have taken these steps. And I am also going to ask
other national phone companies, especially the top phone
companies that have been engaged in this, to follow Verizon's
lead and protect consumers from these fraudulent charges.
But now back to the topic at hand. I would start out with
just the issue of bundled services. Almost one-third of
American households have cut the cord and rely on the wireless
instead of a landline.
Part of the business incentive behind this transaction is
that the companies that are party to these deals want consumers
to subscribe to a bundle of communications services, what we
call the triple play of video, broadband, and traditional
telephone service, and now a quad-play that also includes a
wireless plan.
On one hand, many consumers like the convenience of one-
stop shopping, purchasing a bundle of communications services.
On the other hand, locking consumers into bundled services
plans could potentially result in less competition, higher
rates, and less innovation.
So I would, I guess, start with you, Mr. Milch and Mr.
Cohen, and then go over to Mr. Wu and ask--what are the
consumer impacts as companies increasingly look to offer
triple-play or quad-play bundles of service?
Mr. Milch. Senator, thank you very much, first, for the
kind words. We believe that we're going to be able to offer
consumers more choices. So if right now the consumer doesn't
have the choice of buying a bundle of services from Comcast
that includes Verizon Wireless or vice versa and they want that
convenience, they can get that convenience.
As I said, it's important to note that the prices are set
not by the agent selling it, but by the principal who provides
it.
Second, no one is constrained to buy it in these bundles.
These are not bundles that are exclusive in some fashion.
Verizon Wireless is going to continue to sell through all of
its channels. FiOS will sell through its channels in its FiOS
region, and I assume that Comcast is going to vigorously sell
across its region.
So there is nothing to get from this bundle other than
convenience or a discount of some sort, but the consumer can
choose or not choose.
Senator Klobuchar. Mr. Cohen.
Mr. Cohen. I will be short and give you plenty of time. I
think Mr. Milch covers it from the Comcast or cable company
perspective. The motivation for this transaction was to be able
to afford our customers who wanted a quad-play bundle the
opportunity to purchase one and to gain the convenience of the
single purchase, particularly because our major competitors are
going into that space and providing their customers with that
opportunity; that is, AT&T, Verizon, DirecTV through its agency
agreement with AT&T. And we did not have the opportunity to
give our customers that particular option.
So I think it's about optionality. About half of our
customers buy a bundle today. The other half do not. And we are
all about flexibility and providing our customers with the
option to purchase our services in the way in which they want
to purchase the services.
So that's one of the reasons why this transaction increases
customer choice, does not take away any optionality, and only
improves, I believe, the consumer welfare and benefit, which
maybe we can't quantify, but which we can certainly talk about
in terms of improving customer flexibility and customer
optionality.
Senator Klobuchar. Mr. Wu. Thank you.
Mr. Wu. Senator, thank you for raising the issue of triple
or quadruple play. The industry loves quadruple play for many
reasons, one of which that it means four streams of income.
But for the consumer, it's not always so clear that the
consumer is served by a quadruple play strategy, which can
start to migrate into something more like a market allocation
scheme.
What the consumer really wants is one play that's fighting
with the rest of them. It wants, that is to say, one service to
try to start to try to compete with and kind of destroy the
other three services and be the only bill that the consumer
needs to get.
The consumer is served by destructive innovation, not by
bundling. And I think the problem with these agreements is they
sort of foresee, I fear, a perpetual quadruple play, when, in
fact, particularly with the advancement of Internet services,
eventually one service could replace the rest.
Senator Klobuchar. Thank you. I am going to come back to
you, Mr. Kelsey, on something else.
But, Mr. Milch, I am a sponsor of the Next Generation
Wireless Disclosure Act, a bill that would require wireless
carriers to give consumers complete and accurate information
about their 4G service, including information about minimum
data speeds, coverage maps, and network reliability.
When consumers purchase a 4G wireless plan, I believe they
have a right to know exactly what they are getting.
What do the joint marketing arrangements mean in terms of
the transparency and information that consumers can expect to
receive about their wireless speeds and coverage?
And then I would ask Mr. Kelsey the same and anything he
would want to respond to.
Mr. Milch.
Mr. Milch. Senator, first, I applaud the introduction of
this. We believe it's a real problem with people passing off
faux-G for 4G. So we want to try to prevent that.
As for the effect on these marketing agreements, we don't
believe there is any effect in this sense. Whatever the rules
are about disclosure, they will follow through to our agents.
Our agents are very carefully--have to follow all the rules
that we have to follow as Verizon Wireless.
So if there are rules about disclosure, they will be
followed through. So there is no aspect in which these
agreements affect the utility of your efforts here.
Senator Klobuchar. Mr. Kelsey. Thank you. Mr. Kelsey.
Mr. Kelsey. I would say that for the most part, in the
telecom marketplace, we see that when these companies are
making deals with one another, there is not the types of
incentives that are there to try to differentiate their
products in ways that are valuable to consumers.
So I would fear a lack of transparency as a result. And I
would go back to some of the comments that Professor Wu made
and that were made earlier in the panel, that, specifically,
what's interesting with these deals is that the cable companies
that jointly own SpectrumCo have shown that they really want to
get involved with the wireless market and offer a 4G service.
And that's well and good, but there's lots of ways for them
to do that that it isn't harmful to the competitive
environment. They could make deals with other wireless carriers
that offer a competitive alternative to the dominant AT&T and
Verizon.
With this deal, that threat is removed from the table. And
so I think the real question here is, do these deals make the
prospect for competition in the wireless marketplace in
particular better or worse? We would say no, and, as a result,
the FCC should reject the license transfer.
Senator Klobuchar. Thank you very much.
Senator Kohl. Thank you, Senator Klobuchar.
Senator Franken.
Senator Franken. Thank you, Mr. Chairman, for holding this
very important hearing.
Mr. Milch, when you received that phone call a little
earlier, was that on your Verizon Wireless?
Mr. Milch. Yes, sir.
Senator Franken. Because the ring seemed very, very clear
and a very good, clear connection.
Mr. Milch. It was over a blazing fast 4G phone.
[Laughter.]
Senator Franken. And was the call from Brian Roberts? Is
there any collusion here?
[Laughter.]
Senator Franken. No. All right. That was a joke.
[Laughter.]
Senator Franken. Mr. Milch and Mr. Cohen, the FCC found in
its 2011 report on cable industry prices that over a 14-year
period, cable prices have increased by 134 percent. That means
an average family used to be paying $22 per month for cable,
but as of 2009, they were paying $53 per month.
This is a pretty large increase. That is more than three
times the rate of inflation, and this was three years ago I am
talking about.
But even more tellingly, the FCC found that cable rates
were lower in communities where there was effective competition
and higher in places where there was no real rival operator.
This is really at the heart of why I am skeptical about
this deal. It is almost as if your company has gotten a room
with the other big cable companies and you agreed to throw in
the towel and stop competing with each other. And I fear that
will mean consumers will just keep seeing their cable rates
rise.
How can we be assured that will not happen? And, again,
this is for the two of you.
Mr. Cohen. I will go first this time. Thank you, Senator
Franken. And let me respond in two ways, if I can, which is,
first of all, as in looking at any government report, you can
sort of find what you want in the report.
So I don't want to quibble with the premise of your
question except to point out that in the same report, the FCC
also concluded that the price per channel for cable subscribers
had actually declined almost seven percent over the preceding
12-month period.
And I think in the cable business, we're looking at
providing more channels, more high definition----
Senator Franken. I am sorry. Excuse me for----
Mr. Cohen [continuing]. More choice.
Senator Franken [continuing]. Being amused. Go ahead.
Mr. Cohen. So I think--so I actually think that market is
robustly competitive. I think it has improved quality. I think
it has lowered price for the consumers.
In terms of the concern that you have expressed, which I
think is the legitimate concern and each of the questions have
gone to this, I'm a believer, at the end of the day, that
businesses are going to perform primarily in their best
economic interest, and there's just nothing in these
transactions that is going to stop us from trying to beat the
brains out of FiOS, continuing to compete against FiOS on
quality and on price, and there's nothing in this transaction
that's going to prevent them from trying to do the same thing
to us.
So just look what's happened since the transaction has been
announced. FiOS has come out with a $69.95 a month bundle in a
chunk of its footprint, reducing the price of its bundle by a
third in that particular area.
They have announced a deal with Redbox to provide a new
over-the-top service to FiOS customers that is exclusive to
FiOS, and we have responded by launching Streampix, which is
our new----
Senator Franken. All right. I got it. I only have a certain
amount of time, but thank you for your very complete answer.
Mr. Milch, thanks for being here.
Mr. Cohen, one of my many hearings or of the many hearings
that was held prior to the passage of the 1996
Telecommunications Act, the Comcast CEO at the time testified
that the company planned to, quote, ``combine wireless and wire
technologies in a bold new way to give American consumers
unprecedented choice, convenience, and competitive prices,''
unquote.
He went on to say, quote, ``When we are done, America will
be the first nation on earth to have full-fledged facilities-
based telephone competition everywhere. We will achieve the
vision of the two-wired world,'' unquote.
This deal seems to completely abandon the goals of the
Telecom Act and seems to signify that the promises that Comcast
made in 1996 will no longer come to fruition.
Do you disagree with me on that? And do you think that this
means that we, Congress, need to reevaluate the deregulation
that took place in the Telecom Act?
Mr. Cohen. I never like disagreeing with you, Senator. So I
think I'd rather just put the comments in a slightly different
perspective that's reflective----
Senator Franken. I appreciate that.
Mr. Cohen. I think the comments at the time were reflective
of a marketplace that existed in the mid-1990s. At that time,
Comcast actually owned a small wireless business, Metrophone in
Philadelphia, and I think we have seen a dramatic change in the
marketplace over time.
So we got out of that business. Then starting in the mid-
2000s, we decided we needed to be in that business. We tried a
joint venture with Sprint around Pivot. We formed SpectrumCo.
We bought spectrum. We spent tens of millions of dollars
evaluating the opportunities, clearing that spectrum, concluded
we couldn't enter the wireless space on our own, and now we
have ended up in the sale of the spectrum and these commercial
agreements, I believe, to----
Senator Franken. I am sorry, but could you----
Mr. Cohen. I am sorry--I believe, to accomplish exactly
what it is that Mr. Roberts said in 1996. So I don't think we
have changed the goal. I think we have changed the tactics to
be able to get to the goal.
Senator Franken. Just very quickly. Did you consider--
because you made the sale right before the AT&T/T-Mobile deal
was scuttled. Did you consider maybe holding out and using
competition on who could buy the spectrum? Would not that have
been a smart thing to do from a business perspective?
Mr. Cohen. We engaged--I'll answer with one sentence and if
you want to probe beyond that, we engaged in discussions with
virtually every wireless carrier in the country with respect to
this spectrum and the types of commercial agreements that ended
up being the product, and ended up believing that the
transaction that is in front of you is the best transaction for
our customers.
Senator Franken. Thank you.
One last question for Mr. Wu and Mr. Kelsey. I am worried
about what this deal might mean for consumers not just two
years from now or five years from now, but 10 or 20 years from
now.
The fact that this is a joint venture can live on and the
fact that it can live on indefinitely has me worried about the
long-range impact of the deal.
Can you tell me what you expect to be the downside for
consumers if the deal goes through?
Mr. Kelsey. I'll just jump in first. As I mentioned in the
oral remarks, there is such a trend toward duopoly in the
wireless market that would be exacerbated by putting close to a
third of the Nation's broadband spectrum, measured by value,
into the hands of Verizon, and that's something that the FCC
really ought to take into consideration.
I'm from Upstate New York, and if the State of New York was
in charge of handing out all of the valuable farmland in
Upstate New York and they decided to give 80 percent of that
land only to two farmers, no one would be surprised when the
price of corn all of a sudden skyrocketed.
But we would expect the State then to come in and start to
figure out how to protect consumers in that regard. That, to
us, sounds like a whole lot of government. We would rather the
FCC reject these deals in favor of more competition in the
wireless marketplace, and we think that there are a number of
items before the Commission that they could do to make sure
that there are stronger competitors there.
Senator Franken. Mr. Wu.
Mr. Wu. I think the prospect is a slow drift back to the
conditions of the 1960s and 1950s, which I think were good in
some ways, great music, things like that, but in terms of
innovation in communications, they were fairly dead. And the
reason is we'd drift slowly back to a duopoly/monopoly
structure, the only difference being no regulation against
customer abuse.
So I think those are serious problems. To be more concrete,
I think we would gradually move toward the natural monopoly in
the wireline side focused on cable. At least for now, we'd go
toward the duopoly in wireless.
And I want to add, finally, there's a lot of technologies
that everyone was thinking were just around the corner that may
just remain around the corner maybe forever. The idea that
maybe America will have a fiber optic network to the home at
some point in our Nation's history would be put on hold,
perhaps perpetually. And the idea that wireless services might
end up being a significant way of moving information to the
home on a fixed basis, I mean, 4G, and people cutting their
cable connections and just using their 4G modems, to be more
technical, to get Internet access, that that as a major
competitor to cable might disappear.
So we drift back to sort of the stagnant, depressing
communications markets of the 1960s and 1970s, and I think that
wouldn't be so good.
Senator Franken. Thank you all. Thank all of you,
gentlemen.
Mr. Chairman.
Senator Kohl. Thank you, Senator Franken.
Senator Blumenthal.
Senator Blumenthal. Thank you, Mr. Chairman. And thank you
for holding this hearing.
Let me begin by thanking Mr. Milch for your endorsement of
the bill that I have introduced that Senator Klobuchar
mentioned, the next generation wireless bill, and hope to be
working with you in light of your endorsement on it, because I
think it is very important.
I would begin by asking you about these agreements,
referring to, in the plural, the spectrum agreement and the
marketing agreement. I take it your view is that they should be
and can be reviewed separately.
Mr. Milch. Yes, Senator. The agreements are not contingent
upon one another. The spectrum agreement will move forward
regardless of what happens to the marketing agreements. The
marketing agreements will move forward regardless of what
happens to the spectrum agreement.
There are differences in the process, as you are very well
aware, Senator. The spectrum agreement needs affirmative
approval. The marketing agreements can move forward, and then
there will be investigations that are already ongoing about
them at Department of Justice and at the FTC.
Senator Blumenthal. And in those reviews, they are separate
reviews done by the Department of Justice and the FTC. Is that
correct?
Mr. Milch. Yes, sir.
Senator Blumenthal. And with different standards and
different laws that apply.
Mr. Milch. Yes, sir.
Senator Blumenthal. But it seems to me, in light of the
market concentration that exists here, that the antitrust
review is an important one. Would you agree?
Mr. Milch. Yes, sir. And the Department of Justice is doing
a thorough job.
Senator Blumenthal. And should be.
Mr. Milch. Yes, sir.
Senator Blumenthal. In fact, my feeling has been over the
years that the Department of Justice really has failed to be as
rigorous or vigorous as it should be in enforcing antitrust
laws going back for some years, perhaps not to Mr. Rule's time,
without any criticism of that era.
But with all due respect to the ladies and gentlemen who
sit on this panel, the Department of Justice really has the
primary enforcement role in this area. Would you agree?
Mr. Milch. Yes, sir, I would.
Senator Blumenthal. Really, the Department of Justice has
that responsibility, and now the ball is in the Department of
Justice's court. Is that correct?
Mr. Milch. Yes, sir.
Senator Blumenthal. Is there anyone who disagrees with that
basic premise?
Professor Wu.
Mr. Wu. I disagree with that with respect to the spectrum
sales. Those are the Federal Communications Commission's duty.
And I think they should apply different standards to those than
they would for a normal antitrust transaction.
Senator Blumenthal. And I thank you for that clarification,
because we were really talking about the antitrust issue, I
think, primarily.
Mr. Wu. The marketing agreements, correct? That's what I
understood your question to be.
Senator Blumenthal. Exactly. But you are absolutely right,
Professor, and, luckily, we have a professor in the house to
keep us on the straight and narrow.
Let me ask the panel as a whole where you think, in effect,
the burden of proof should be, because in this kind of
antitrust review, I think there is a very strong argument that
when you come to the Department of Justice, the companies bear
a burden of proof because of the market concentration that
exists in these respective areas of enterprise. And that is an
open question.
Mr. Cohen.
Mr. Cohen. I'll take a shot, but I'm going to quote Mr.
Rule, who is the only active practicing antitrust lawyer on the
panel. Actually--and if I can, again, I hate to always be picky
about this.
Yes, we're the largest cable company. Yes, Verizon Wireless
is the largest wireless provider. But we both function in
intensely competitive markets. And notwithstanding our size,
there are large numbers of competitors with robust competition
and a pretty clear demonstration across the board as to the
benefits of that competition to consumers.
So I don't think our size alone would dictate a change in
what the normal course of conduct would be, which is, on a
strict antitrust analysis, as Mr. Rule stated in response to a
prior question, the Justice Department analysis is to look, in
the first instance, as to whether there is anti-competitive
harm, whether there is harm to consumers. And in the absence of
such harm to consumers, the proponents of a transaction
actually do not have an obligation to come forward to
demonstrate consumer benefit in order to outweigh that consumer
harm.
So I will tell you that in our--in this review, as in
probably all reviews, we are aggressively making the case to
the Department of Justice both that there is no consumer harm
and that there is consumer benefit.
So we're certainly at least assuming a burden of making an
affirmative case that this is not a problem under the antitrust
laws.
But I think strictly speaking, in this case, we actually
don't have a burden, because I don't think there is anti-
competitive harm that we need to overcome. But if we did, there
is plenty of consumer benefit that we can put on the table to
offset any anti-competitive harm that the Justice Department
would articulate.
Senator Blumenthal. Mr. Rule.
Mr. Rule. Let me just say, put in a word for the U.S.
antitrust system, the system isn't a law enforcement system
and, essentially, the Department, when it investigates a
merger, is trying to decide whether or not, under the
precedents that are in place at that time, they can go in and
block the transaction.
So technically, the way the law is set up, the burden is on
the Department, at least that's the way the Department views
it, as to whether or not they can go into court and prove that
merger may tend substantially to lessen competition.
And so in that sense, the burden is on the government. The
sort of notion----
Senator Blumenthal. Well, the burden is on the government
when it gets to court.
Mr. Rule. When it gets to court.
Senator Blumenthal. When it reviews the transaction, the
burden is on the government, as well, to uncover the facts and
do a thorough investigation. And my point earlier was simply
that in many instances, States have filled a gap left by the
lack of Federal antitrust enforcement.
Mr. Rule. And I think that's fair, but I will--I mean, it's
a fair comment. I don't know that I agree with it, but I
understand where the comment comes from.
I will say that, look, the Department of Justice and,
particularly, the career folks, you take me and my successors
out of it, they are very committed, they work very hard.
They're going to put these guys through quite a bit of expense
and effort in looking at all these issues.
But I think the one thing that's important about this
transaction in the spectrum part of it is they have to answer,
I think, at the outset, the fundamental question whether or not
the cable companies, simply because they own spectrum, are
actual or potential competitors to Verizon Wireless.
And the problem is that they are going to have if they go
in and bring a lawsuit is it looks like the facts that at least
I can see, it's going to be very difficult to argue that the
cable companies are even a viable potential competitor under
the existing case law, much less an actual competitor.
So that's the dilemma that the Department faces.
Senator Blumenthal. My time has expired, but I want to
thank really all the witnesses for addressing these questions
so well. And I understand and think that your points on the
standard of proof issue are certainly fair points, and I will
be very interested in seeing what the Department of Justice and
the FCC determine.
Thank you.
Senator Kohl. Thank you, Senator Blumenthal.
Mr. Cohen, when Comcast and the other cable companies that
are part of SpectrumCo partnership bought spectrum at FCC
auction in 2006, there was hope that the cable companies would
develop a competing wireless service.
Instead, these cable companies decided that it would be not
economical to spend the resources to deploy this spectrum and
enter the wireless market. Instead, you are now selling all of
the spectrum to the largest wireless company, Verizon.
We are not suggesting that you and your cable partners
should be compelled to operate a cell phone service if you
determine it is not economical and not in the interest of your
shareholders. However, spectrum is government-granted public
airwaves to be used in the public interest.
Indeed, there are FCC rules against speculation in and
warehousing of spectrum. And that is why we were disappointed
when your CFO told an investors conference in January that,
quote, ``We never really intended to build that spectrum.''
So is it in the public interest, Mr. Cohen, for you to sell
this valuable spectrum to Verizon, the Nation's biggest
wireless company, which will keep it out of the hands of any of
the competitors?
Would it not have been better to at least have a public
auction for the spectrum? The competitors would have a fair
chance to bid on it, Mr. Cohen.
Mr. Cohen. I think there are two questions embedded there.
One is the warehousing argument, if I could address briefly,
and I already gave a lot of this answer in response to Senator
Franken's question.
At the time we bought this spectrum, we had every intention
of at least exploring whether we had a viable wireless
business. We cleared the spectrum. We engaged in technology
tests on the spectrum. We invited companies to come in and test
their devices on the spectrum. We expended tens of millions of
dollars in those efforts.
We engaged in a detailed analysis of the viability of
launching a wireless business. Over that period of time, things
happened, like the launch of the iPhone and the iPad that
dramatically increased the amount of data that was going over
wireless networks, and we concluded that 20 megahertz of
spectrum was wholly inadequate to be able to build a business.
We would have to buy more spectrum. We'd have to invest
more dollars in the build-out of that spectrum, and we could
not figure out a viable business model to be able to launch the
fifth national wireless competitor. And that's the reason we
made the judgment not to go into the wireless business.
Mr. Angelakis' comments were in a Q-and-A at an investor
conference, I think. I think they were--I think in the overall
context of the five years of work that they did, they reflected
our current view. The word ``never,'' I think, was unfortunate.
We did explain that subsequently publicly, but I know and
our documents will reflect that we did anything but engage in
spectrum warehousing. We seriously studied this alternative and
just determined there was not a viable business for it.
In terms of whether we should have auctioned it off or made
it available, as I, again, said in response to a question from
Senator Franken, we marketed this spectrum. We talked to
virtually every wireless player in the marketplace.
And at the end of the day, we made the conclusion that the
transaction we entered into with Verizon Wireless was the best
transaction for our company and for our customers. And under
Section 310(b) of the Communications Act, Congress has directed
the FCC that its appropriate standard of review is of this
transaction, not of some other hypothetical transaction that we
might have entered into, and the antitrust laws through case
law have established exactly the same principle in the
antitrust context.
Senator Kohl. All right. Mr. Milch, just a few minutes ago,
you said these agreements are separate. However, Mr. Cohen, in
his interview with Politico on March 8, said, ``The transaction
is an integrated transaction. There was never any discussion
about selling the spectrum without having the commercial
agreements.''
So I suppose, Mr. Milch, you would be challenging that
view. And if you do not, does that not mean that the regulators
should consider these together?
Mr. Milch. Senator, I don't challenge his view. I interpret
it a certain way. I don't think that he meant by integrated
that they are contingent upon one another, which they are not
contingent upon one another.
And there is no doubt that they were negotiated at the same
time. That's obvious. They were signed at the same time. That's
also obvious, as they are part of a larger set of deals. That's
also obvious.
But the law is you look at deals on their square corners.
These deals are not contingent upon one another. And, finally,
I would say, Senator, that the responsible agencies, both the
Department of Justice and the FCC, are undertaking
investigations.
So if the concern is will the appropriate authorities look
at them, the appropriate authorities are looking at them.
Senator Kohl. Mr. Cohen, just to understand your statement,
you are saying that you would have not done the spectrum sale
unless you obtained the commercial agreements. Is that not what
you said?
Mr. Cohen. That is basically correct. From a Comcast or a
cable company perspective, our interest was in having an
integrated solution and a comprehensive strategic wireless
solution for our company and for our customers. And sale of the
spectrum, as well as entering into the commercial agreements,
provides us with that integrated comprehensive solution.
And to be clear, I do not disagree with Mr. Milch that the
agreements are not contingent upon each other. There is no
legal connection between them. The Justice Department could
challenge the commercial agreements and nobody could do
anything with respect to the spectrum agreements. That is
absolutely something that could occur.
So legally, it's not the agreements that are integrated.
It's the fact that the sale of the spectrum, plus our entry
into the commercial agreements, provided us with an integrated
wireless solution.
Senator Kohl. Professor Wu, is it your view that in keeping
with the goals of competition and communications policy to
permit cable companies to sell this spectrum to Verizon
Wireless?
Mr. Wu. I certainly don't think it's in the spirit of a
policy which maximizes competition in these industries,
spectrum-based industries. And I want to repeat again that the
appropriate lens for analysis here of the spectrum sale is not
antitrust law, with respect to Senator Blumenthal.
This is a matter of communications policy and this Nation
decided almost three decades ago that we are embarking on a
course of competition, not regulated monopoly. And these
transactions threaten to take us back in the direction of
duopoly/monopoly, this time unregulated.
Senator Kohl. Thank you very much.
Senator Lee.
Senator Lee. Thank you.
Mr. Berry, some have made the estimate that the U.S.
Government may own as much as 61 percent of the best airwaves,
and, meanwhile, the mobile broadband providers may own only
about 10 percent.
Some commentators have argued that the impending spectrum
crunch that everyone is anticipating and, in many respect,
fearing, has been made worse by government mismanagement and
failure to free up spectrum in a more timely manner.
Could you comment for us just kind of the role of
government, the role that it has played in the spectrum market,
what could be done separate and apart from efforts to
scrutinize this deal, to help ensure that more spectrum is
available for all wireless companies that might need it?
Mr. Berry. Thank you, Senator. Thank you for the question.
I was starting to feel like a potted plant here.
Senator Lee. I did not want you to feel left out.
Mr. Berry. Appreciate it. Thank you for the question. Yes,
you're right. The government, most notoriously in the
President's broadband plan, identified a hope of having 300 to
500 megahertz of additional spectrum made available for
broadband, and I understand that that is a very difficult role.
Over the past 15-20 years, I have been involved in numerous
legislative efforts to free up more spectrum for wireless uses
and, particularly, broadband. That is a government function.
We also have a government function directly related to this
particular transaction, and it is incumbent upon the FCC to
look at not only the efficiencies, as Verizon had indicated,
but the spectrum that they currently have warehoused and
currently not utilizing as we move forward, because many of our
carriers didn't have an opportunity to purchase the spectrum.
T-Mobile, who was otherwise engaged in an AT&T event, was
unable to acquire this spectrum. I don't think that any----
Senator Lee. Unable from a financial----
Mr. Berry. No. They were involved with the AT&T/T-Mobile
acquisition.
Senator Lee. So in that respect.
Mr. Berry. So that sort of took them off the market during
that period of time, for sure. But the overall issue is how do
you get spectrum in the hands of competitors, competitive
carriers that can utilize it efficiently, effectively,
immediately.
And what I'm saying is in this particular case, the FCC is
going to review that and I think they're going to find that
there is additional spectrum that Verizon has that will only be
enhanced by this particular deal, and it may be best in the
U.S. public interest that spectrum divestiture and spectrum
screen be applied to this particular deal so you can get that
spectrum out there.
It's a real shame that private companies throughout the
wireless world may, in fact, be continually harmed by spectrum
policies that have not brought spectrum to the marketplace in
time to meet customer and consumer demand.
And since we are in a very, very limited market, with
tight, very finite resources, I think we have to be very
prudent about how those spectrum resources get assigned. And
I'm not so sure that it is in the public interest for the
largest company that is not only one of the best and most
efficient, but still has spectrum warehoused.
They may pay $3.9 billion for this slice of spectrum.
They're warehousing over $5 billion worth of spectrum that is
currently not in use. We think we would like to see more
competitive carriers get access to that.
Senator Lee. Mr. Cohen, did you talk to T-Mobile? Was T-
Mobile somebody you consulted in this offering?
Mr. Cohen. Senator, I have generically said that we talked
to virtually everyone in this space. Most of those discussions,
as I know you appreciate, take place pursuant to non-disclosure
agreements. So I'm a little limited in what I can say.
The good news for your question, however, is that I don't
think anything would prevent me from disclosing something that
is already in the public domain. And the fact of the matter is
that Robert Dotson, in 2010, who was the president of T-Mobile
at the time, stated publicly that T-Mobile was engaged in
discussions with cable companies about spectrum. And I think
it's probably a pretty natural extension--it doesn't take is
very far to know who else could he have been engaged in
discussions with other than us.
And so I'm happy to confirm Mr. Dotson's public
representation that he was in discussions with us about this
spectrum.
Senator Lee. Mr. Berry seems eager to respond.
Mr. Berry. And I think it's important to note. Mr. Cohen
has said this is an integrated transaction, and I think it's
very important that they made the decision, the corporate
business decision that this particular transaction could only
be given by Verizon. No one else could, in fact, sign a non-
compete agreement nationwide that would impact wireless and
give cable companies, SpectrumCo, the ability to have
nationwide wireless access to a network.
Senator Lee. Understood. Understood.
Mr. Milch, I would like to raise with you the same question
that I originally presented to Mr. Berry regarding the fact
that apparently 61 percent of the best airwaves are held by the
government, 10 percent only are available to broadband,
wireless broadband providers.
What can the government do to help free up some of that
spectrum?
Mr. Milch. Senator, thank you. Surprisingly, I agree with
Mr. Berry that there is a great deal of spectrum that is
available that's in the government's hands, but it is a very
difficult job for the Federal Communications Commission, given
the intergovernmental issues and the priority that seems to be
claimed by certain government agencies over their spectrum, to
free up that spectrum.
Nevertheless, there is considerable spectrum that's
potentially coming on board, and I do want to stress that this
notion that some spectrum is so much better than another
spectrum is reasonably well concocted for the purposes of this
hearing, particularly when you weight certain spectrum based on
book values and an arbitrary analysis that was done for the
purposes of trying to take spectrum out of play in order to
artificially inflate Verizon's alleged proportion of valuable
spectrum.
Senator Lee. That is not to say that all spectrum is
created equal.
Mr. Milch. It is not created equal. But, for instance, the
Sprint head of technology recently--in 2010, I believe it was,
opined how certain higher frequency spectrum is much better for
mobile broadband in congested areas because it has more
carrying capacity.
All spectrum is created differently. But you have the
spectrum you have, you do the best you can with it, and if you
invest in your technology, you can have a world-leading
service, like Verizon Wireless does.
Senator Lee. With the higher frequency, it has got more
carrying capacity, but one of the disadvantages is it cannot go
through----
Mr. Milch. Different propagation characteristics through
walls and the like. Yes, Senator.
Mr. Berry. For example, a high-frequency spectrum of 2.3,
2.5 would cost more than four times as much to build out to
have the same capacity and use as a 700 megahertz spectrum,
especially the propagation values and characteristics are great
for Utah and Wisconsin and other large States.
So it's not created equal, and I think this particular
spectrum is one of the four slices of spectrum that LTE, 4G LTE
is going to be rolled out on nationwide, which makes it
extremely attractive and very valuable.
Senator Lee. Thank you. I see my time has expired, Mr.
Chairman.
Mr. Kelsey. Excuse me. Since he seemed to indicate the
value stream that we had tried to place on it, I would just
jump in and say we agree that spectrum is absolutely not
created equal, but the way that the FCC currently measures it
is by just looking at square foot.
So if you are in the property market where location drives
the value of property, you wouldn't just look at the square
feet of a house. You'd look at is it beachfront, is it beach-
adjacent, does it have a beach view. The FCC does not do that
in its spectrum screen.
And I also think it's important to remember that the
spectrum screen is not a bright line test, you fall inside or
outside of it. It's more of a guideline to indicate to the FCC
when there is enough consolidation in a spectrum sale for them
to be interested in it and to take a deeper look at the
competitive impacts that that spectrum sale will have on the
larger wireless market.
And in this particular sale, we're saying that Verizon
already has quite a bit of the beachfront, sub-1 gigahertz
spectrum. This is the last piece of nationwide spectrum that
will come on the market for some time and giving it to Verizon
for the foreseeable future would have an adverse impact on
competition and consumers going forward.
Senator Lee. I see my time has expired. Thank you, Mr.
Kelsey.
Thank you, Chairman.
Senator Kohl. Thank you.
Senator Franken.
Senator Franken. Thank you. Mr. Milch and Mr. Cohen, one of
my big concerns with this deal is the joint venture that your
companies have agreed to create. I am imagining that you could
produce some very valuable technology that you could also keep
locked up between yourselves, similar to what we now see with
cable set-top boxes.
Will you commit to opening up the technology and the
intellectual property that your companies create to your
competitors so that they can obtain the technology at fair,
reasonable, and nondiscriminatory rates?
Mr. Milch. Senator, I hope you are right that we are going
to create something valuable. Right now, we have nothing. We
are starting from scratch in, as Mr. Cohen said, a very
competitive market with Apple, Google, everyone else. And if we
do, Senator, then the question is why would it be that this
particular set of intellectual property is commanded to be
opened up when other people's intellectual property isn't.
For me, Senator, the question is going to come down to this
joint venture to decide what the best way to monetize that
intellectual property is and whether it is in its interest to
open it up or not.
One thing we have seen is that closed technologies do not
survive as well in the marketplace as open technologies do.
Senator Franken. I guess one of the reasons--the answer to
your question is that we worry about this agreement, this joint
venture agreement. That is why I am asking you this question.
Mr. Milch. Yes, Senator. But as I said, we have nothing in
comparison to some very, very successful and well-heeled
competitors who have a lot.
Senator Franken. You guys are very successful and very well
heeled, and, presumably, your joint venture will yield some
really exciting stuff and that, I think, is the point of it.
Let me move on. Mr. Rule, if you had known in 1996 what you
know now, that cable would never enter the wireless market and
Verizon would abandon its copper infrastructure and stop
marketing it, its DSL technology, do you not think you would
have been--we would have been foolhardy or Congress would have
been to completely deregulate the market?
Mr. Rule. Well, let me start the answer by indicating that
one of the things I did when I was at the Department of Justice
back in the 1980s was administer the AT&T decree, which, de
facto, at least, was the way in which the industry was
regulated.
And notwithstanding, again, a lot of good faith efforts by
people at the Department of Justice, I think we created some
issues. And one of the reasons I always viewed the 1996 Act as
being important was because it took this sort of regulation out
of the antitrust division and tried to open an area up to
competition. But it didn't--after all, it did not completely
deregulate.
I guess I would not say that I would have been an advocate
of the status quo in 1996, even if I knew what I know now. You
might have done things a little differently. I don't know
exactly, because I haven't thought about it.
Senator Franken. Well, let us ask Professor Wu. Have you
thought about it?
Mr. Wu. I have thought about the 1996 Act, and I think the
1996 Act, as you suggested, Senator Franken, was a deal. The
idea was that the government would proactively take a policy of
promoting competition, not just sort of sitting around seeing
whether competition happened, but trying to promote competition
in exchange for deregulation. And it did so in an effort to
move away from a regulated monopoly and still attempt to keep
alive the policy of the 1984 AT&T breakup.
And what we're doing here is we're going back to the
conditions before, slowly, but gradually and without stopping,
going back to the conditions before the 1984 breakup, just
without any deregulation to protect consumers, and I think that
is not a good thing.
Senator Franken. Thank you. Mr. Cohen, you confirmed that
Comcast talked with T-Mobile in or before 2010 about spectrum.
Presumably, those meetings are subject to the same non-
disclosure agreements that any 2011 talks were subject to.
So can you confirm that you talked to them before you made
this deal in 2011?
Mr. Cohen. I mean, talk to them in 2011, I honestly don't
know when the discussions with T-Mobile that Mr. Dotson
referenced publicly ended.
Senator Franken. Well, he made them in 2010, he made those
remarks. He said in 2010.
Mr. Cohen. Correct. But I don't know when those discussions
ended. That's what I'm saying.
Senator Franken. But you don't know when your spectrum
discussions with T-Mobile ended.
Mr. Cohen. I don't know that, off the top of my head,
correct. I can get that information to you.
Senator Franken. I would really like to have that, because
you said you talked to everyone you could talk to before making
this agreement. T-Mobile seems to be kind of, ``Who'd you talk
to,'' and this is like a big----
Mr. Cohen. I'm in a difficult position. It's not like all
of our discussions were in 2011. We talked over a long period
of time to multiple players in the market before we ended up
making this deal Verizon Wireless.
Senator Franken. I know. But I am asking you specifically
about T-Mobile and I feel that you are getting--I just want to
know if, before you made this deal with Verizon, you talked to
Sprint and to T-Mobile about this, and you were willing to
confirm that you had talked to T-Mobile at least in 2010 or
before then.
Mr. Cohen. Only because I was limiting my confirmation to
Mr. Dotson's public comments, which relieves me of any
obligation under the NDA, and that's why I made the 2010
reference.
But the bottom line is before we entered into this
transaction with Verizon Wireless, we talked to virtually
everyone in this space.
Senator Franken. Virtually everyone. All right. Well, the
point is that T-Mobile did not say they had talked to you. They
said they had talked to cable. And so you felt that it was fine
for you to disclose that you had talked to T-Mobile, but now
you cannot tell me, with this very, very important deal,
whether you were trying to make a deal with T-Mobile, who would
be one of two likely suspects for this.
You cannot tell me whether they were one of the players
that you were trying to sell this spectrum to, spectrum that is
worth an awful lot of money, and you cannot even remember
whether in 2011 you talked to them.
Mr. Cohen. I can't remember when the discussions with them
stopped. I can remember that--I can remember that we engaged in
discussions with them before we made the deal with Verizon
Wireless.
Let me say this. I know the discussions stopped by the--at
the time AT&T and T-Mobile announced their deal. I don't
remember when that was either. That was sometime in 2011, I
believe.
Senator Franken. Fair enough. Good. Thanks. I really
appreciate your testimony. And my time has run out. Thank you.
Senator Kohl. Senator Blumenthal.
Senator Blumenthal. Thank you, Mr. Chairman.
I want to thank all the witnesses for being so cooperative
and forthright and straightforward in your responses today.
Mr. Rule, you have qualified your answers by saying that
you had--I think I am quoting you--restricted access to
information. I wonder if you could tell us what facts or other
information you would need to know to further evaluate the
legal and factual issues here.
Mr. Rule. I think that there are a lot and there are a lot
of issues that I think the Department is exploring and should
explore. But there are two things that one would like to know
if you're trying to judge this.
The first is you'd actually like to see the agreements. I
understand why they're not available and I'm certainly not
criticizing the parties, because that's typical in these sorts
of arrangements. And I will also say that these guys are very
well represented by people who are well known in the antitrust
bar. So I'm sure they did a good job.
Senator Blumenthal. ``These guys'' meaning, just for the
record?
Mr. Rule. Everybody on both sides with me----
Senator Blumenthal. Swayed your arm in one direction and
not the other.
Mr. Rule. Right. But I don't want to leave the folks to my
left out either. But I'm sure that the people to the right of
me, Verizon and the cable companies, their agreement was well
vetted and well considered in terms of the way it was
structured.
But, frankly, you would want to look at that to sort of
confirm what my view is based on what I've seen publicly, that
this really doesn't materially change their incentives.
Senator Blumenthal. And those agreements will be reviewed
by the Department of Justice.
Mr. Rule. They'll definitely be--yes. I'm sure the
Department has seen them in complete unredacted form. They've
probably seen drafts of them and so forth.
The second thing that I'd like to see and I think would
answer a lot of questions are planning documents, quite
frankly, of both companies, but particularly of Verizon
Wireless, because--and of the cable companies, because part of
what the opponents are charging in terms of hoarding and other
things is at odds with what Verizon has said, that this is
going to be molded or folded into their network and they're
going to make the investment so that they can deploy this
spectrum in a sort of rational plan moving forward.
If they are right about that, it strikes me that that
suggests that sort of some of these hoarding concerns and
everything else are off to one side. I believe, based on my
experience representing companies, but also being at the
Department of Justice, that the Department will get to the
bottom of that. They'll understand what was motivating Verizon
Wireless, whether Verizon Wireless really wanted to use this
spectrum to enhance their ability to produce wireless services,
or whether they're just buying it to warehouse it and keep it
out of the hands of others.
Senator Blumenthal. And all that information in the form of
documents and testimony, interviews and so forth, would be
freely available to whatever government agency was reviewing
these issues.
Mr. Rule. Correct. But it won't be available to me.
Senator Blumenthal. We are talking about the government
agencies.
Mr. Rule. That's true. And I'm sure and I have a great deal
of faith that they will chase down all the appropriate alleys.
It's just that if you're a third party who were trying to look
at this on the outside in a few days, I don't have access to
that.
I can speculate about what they'll find, but since I'm not
involved, not representing the parties, I don't know.
Senator Blumenthal. But a full evaluation of this deal
would really depend on an examination of those kinds of
material, that kind of information, testimony, interviews,
documents, all of the stuff that you review as an antitrust
enforcer, that the FCC could review in evaluating motive,
purpose, effect, and so forth, even though many of these
documents and those materials are not available to this
subcommittee.
Mr. Rule. That is correct. And, again, my experience both
being somebody who has represented companies that had to spend
a lot of money to sort of respond to that, but, also, being at
the government, is that they are very thorough and I trust that
they will be very thorough here.
And I think it's pretty clear the kinds of things they'll
want to look at. I think they'll also get their economists
involved, because as I mentioned in my testimony, two of the
more interesting filings are the competing declarations of the
economists, Judith Chevalier, I guess, for the opponents and
Michael Katz for the companies. And the government will engage
in that and probably look at a lot of data.
But, again, I have a lot of confidence that they'll do a
thorough job.
Senator Blumenthal. And the reasons that those documents
are not available to the Committee would be the proprietary
information that they include or--as now a private antitrust
lawyer, maybe you could explain that.
Mr. Rule. Sure. A lot of the documents that the government
gets are highly confidential. The Hart-Scott-Rodino Act, in the
wisdom of Congress, limits significantly the use to which the
government can put the information and to whom they can
disclose it.
Senator Blumenthal. And part of the reasons--excuse me for
interrupting--is, very simple, Hart-Scott-Rodino review occurs
before the transaction actually goes forward so that it can be
stopped before the eggs have to be unscrambled, so to speak.
Mr. Rule. Correct. And the thought was in the 1970s when
the Act was passed, because it has turned out to be very common
to all of us, at the time, it was kind of a radical idea, but
the notion was that if businesses were going to be subjected to
those kinds of investigations, that really has to go to the
most sensitive, competitively sensitive confidential
information in order to answer the questions that you've
raised, that the government had to guarantee the
confidentiality of that material.
And that's why it's so limited in terms of who the
government can disclose it to. I'm sure they'd love to disclose
it to this Committee and others. That sometimes would make
their lives easier. But the fact is the law prevents them from
doing that.
Senator Blumenthal. Thank you very much.
Thank you, Mr. Chairman.
Senator Kohl. Thank you very much, Senator Blumenthal.
Mr. Berry, critics of this deal are concerned that, as they
see it, Verizon Wireless and AT&T own the large majority of the
spectrum best suited for wireless, especially given the
exploding demand for spectrum created by smart phones and other
mobile devices.
They believe Verizon Wireless' acquisition of this large
amount of spectrum will only make the situation worse and that
we are in danger of creating a duopoly in the wireless market.
What is your opinion?
Mr. Berry. Thank you, Mr. Chairman. I think we're very
dangerously close to a duopoly already. You have 73, 75 percent
of all the spectrum under one gigahertz, which has really
unique propagation values and allows for deployment of services
at lower cost owned by two companies. They own well over 80
percent of the EBITDA in the wireless world.
So it truly is, as the cable companies found out, a very
difficult place to enter in as a new entrant. And that's what
concerns me greatly now, is because if someone like Comcast and
the cable companies cannot find a way into the wireless
ecosystem with their substantial resources and literally green
field spectrum that could be used immediately, then you should
expect very few new entrants into the wireless world will be
available.
Senator Kohl. All right. Professor Wu, Mr. Kelsey, Mr.
Berry, and Mr. Rule, in the event that this deal would go down,
do you believe that there are any conditions either the Justice
Department or the FCC should place on this deal, should they
decide to approve it?
Who goes first? Mr. Kelsey.
Mr. Kelsey. I'll go first. Thank you for the question,
Senator.
We haven't seen any conditions, any proposed conditions
that would mitigate the long-term harms that this transaction
would cause. In a consolidated market--in a market as
consolidated as the telecom market, I think the behavioral
conditions have a short shelf life. They sunset. In the long
term, harms to competition remain.
So if there are any conditions that are considered, I think
you'd look at structural conditions, spectrum divestitures from
Verizon, foreclosing the ability of these companies to enter
into the joint marketing arrangements in areas where they
compete head to head and where their wireline infrastructures
overlap.
But that really seems like a band-aid. This market has a
competition problem and consumers need a long-term solution.
And so I think it would be much cleaner for the FCC to outright
deny the transaction in favor of more competition and promote a
more equitable distribution of the very finite spectrum we
have.
Senator Kohl. Thank you very much.
Mr. Wu.
Mr. Wu. All my answers, Mr. Chairman, stem from the
fundamental fact that spectrum is the public's property. It's
the property of the citizens of the United States, and we have
special duties to oversee that this asset is used properly.
I agree with Mr. Kelsey that probably the best thing to do
would be to stop the sale of the spectrum, in particular. But
if it is to be used, I'd put just two types of conditions if
the sale is to go forward, two types of conditions to be
imposed by the Federal Communications Commission.
First of all, Verizon has promised--the centerpiece of all
its filings is that it's actually going to use this spectrum,
put it to use, it's not going to warehouse it. Well, if that's
true, then the Commission should put some teeth into that
promise--sorry, that's not the right metaphor. But it should
somehow make sure that promise is carried out and put in some
safeguards against warehousing, including, I think, maybe one
of the best ones would be allowing unlicensed use of that
spectrum if it's not put to use by a certain amount of time.
Second, this is something that the competitive carriers
have been talking about, there needs to be oversight or
conditions on roaming and handset exclusivity. We cannot allow
the prospect of parallel exclusion by AT&T and Verizon, the two
biggest carriers, putting roaming rates up at such a level that
competitive carriers don't have a chance.
With more spectrum, the possibilities of the abuse increase
and the Commission should pay attention to that.
Thank you.
Senator Kohl. Mr. Berry.
Mr. Berry. Yes, sir. Mr. Chairman, thank you.
As I had mentioned in my opening statement, we believe
there should be spectrum divestiture, especially after a
thorough review at the FCC, with a new spectrum screen, and
identify those areas where we can more efficiently and
effectively utilize that spectrum for competitors in the
marketplace.
Commercially reasonable roaming agreements, requirements
that are permanent. This spectrum is being taken now to the
market. There will be four competitors that will not now come
into the marketplace, which we viewed as potential roaming
partners.
Now, Verizon is going to lease their spectrum, i.e., allow
Comcast to sell their devices as an agent. So Comcast is coming
into the wireless market as a competitor, but only as an MVNO,
and no one will be able to roam on the MVNO arrangement of
Comcast. Verizon will control that wholeheartedly.
The last thing is affordable back-haul, because, yes, you
can have a very effective, efficient network if you have access
to back-haul, and we haven't even mentioned the fact that
Comcast owns over 20,000 Wi-Fi hot spots, i.e., offload
opportunities between here and New York, very important for the
wireless industry to stay competitive.
And, of course, interoperable standards. Every customer
wants to know, wherever they are, whenever they make a call, it
ought to be able to go through, and we agree with that.
Senator Kohl. Thank you.
Mr. Rule.
Mr. Rule. Thank you, Mr. Chairman.
I, first off, want to clarify that I'll defer to others on
what the FCC should do, and let me just focus on what DOJ might
do.
From the perspective of DOJ and the antitrust laws, there
first ought to be a determination that there is a violation of
law, and then any fix, if you will, should flow from that.
With respect to spectrum, again, as I've said, I question
whether or not they're going to be able to prove that that's a
violation. But if they did, then one would think that either
they would prevent that deal from going through or they might
require that Verizon Wireless not acquire all of it.
But, again, that depends on what they conclude in
concluding that the deal would lessen competition.
With respect to the collaboration agreements, again, that
really depends on the agreements themselves. Those, though, are
pretty easy to fix and to the extent that the government sees
that there are problems that create bad incentives in terms of
keeping these two companies independent and competitive in
their relative spheres, then the government can ask the parties
to change the agreements in that way.
So, again, it depends on what the agreements say and how
the government--if the government concludes any particular
feature of those agreements violates the antitrust laws.
Senator Kohl. Finally, Mr. Milch, do you accept all of
these conditions?
[Laughter.]
Mr. Milch. Surprisingly, no, Mr. Chairman, I don't. Let me
explain. I won't go to the suggestion that it should simply be
denied outright. I don't think that there is any basis for
that.
However lugubrious people feel at the moment, the Telecom
Act of 1996 was a spectacular success and has produced
unbelievable public good and will continue to do so.
As for the notion of teeth in the build-out requirement,
the spectrum at issue is already subject to the AWS substantial
service requirements that were put on it when it was auctioned.
No party has shown that those have not been complied with. And
to the extent that they want to provide new or novel things,
that's inconsistent with the Commission build-out rules, which
Verizon is not seeking to change.
It will be subject to whatever the build-out requirements
were. We're getting it, obviously, many years later than we
would have originally, but we will stick to the timeline that
the FCC has already put on for the build-out.
As for interoperability of handsets, back-haul and roaming,
it's a very complete regulatory agenda that Mr. Berry has put
forward. He puts it forward very ably on every transaction that
comes around, and it's--in fact, he's very successful.
The FCC has dealt with every one of these or is dealing
with them. It has issued roaming rule. It is looking at back-
haul. Just today, it issued a notice of proposed rulemaking on
interoperability at Mr. Berry's request.
So all of these issues are squarely teed up at the FCC, and
that is the appropriate place to deal with them, not in the
middle of a license transaction.
Mr. Berry. With his help, we might be able to move some of
those even a little faster in the future.
Senator Kohl. Do you want to make one follow-up?
Mr. Wu. Just one comment. With respect, I think the current
build-out requirements can't be considered effective given the
fact that in the--first of all, they are 15 years long. And
second of all, given the fact that they didn't prevent cable
from sitting on this spectrum for multiple years, which
everyone was complaining about.
So it's clear that the current requirements are not good
enough and, at the minimum, that's what the Commission should
do is speed up this build-out.
Senator Kohl. Very good.
Senator Lee.
Senator Lee. At the conclusion of and in response to my
last round of questioning, Mr. Kelsey made a pretty articulate
plea, a pretty articulate statement regarding the value of your
spectrum holdings, Mr. Milch. I just wanted to know if you
wanted a chance to respond to that.
Mr. Milch. Thank you, Senator. Spectrum does have different
propagation and other qualities. There is no doubt about it.
However, the FCC has a very well-established approach to
dealing with this issue.
It has a spectrum screen, which, as ably said, below which
there is a presumption that there is no competitive harm and
above which it deserves further look.
If there is a--the whole reason that the value proposition
has been put forward with this weighting, which is a very
arcane and mysterious formula that's been proposed, is because
the existing rules, which have been set out and upon which
businesses rely to do their business, defeat the effort to stop
this transaction, because there are no competitive effects
under the rules that are in place right now.
If there is to be some new set of rules, if the Commission
were to want to look at the spectrum screen again, that
certainly is something that's within its power to do in a
separate proceeding. I would note, however, that in such a
proceeding, the denominator of the spectrum screen, that is,
the amount that's available to be used, would likely increase,
not decrease, because we are finding that there is much more
available broadband spectrum than is currently being counted.
Indeed, just today, the Commission decided that it was
going to start a proceeding to see if one of the satellite
companies could reuse its 40 megahertz of spectrum that is now
used for satellite for broadband. And there are other pockets
of such spectrum which are available for broadband use.
Senator Lee. So you do not necessarily disagree with those
who are suggesting that the spectrum screen ought to be
revised.
Mr. Milch. No. I do not believe the spectrum screen is
deserving of revision, certainly not in the middle of a license
proceeding, Senator. But I also would point out that we would--
that if such a spectrum screen were to be revised, an
appropriate spectrum screen would include more spectrum and not
less. So it would actually decrease Verizon Wireless' share of
the spectrum.
Senator Lee. Such that the ratio between the numerator and
the denominator under the new spectrum screen analysis would,
in fact, be lower.
Mr. Milch. Yes, sir. That's what we believe.
Senator Lee. Is the precedent, by the way, for the FCC
coming up with a spectrum screen, a new spectrum screen or
something analogous to that in the middle of a transaction
without going through the notice and comment process first?
Mr. Milch. I can't give you a complete answer, but I would
note that the same argument was made very recently in a deal
between AT&T and Qualcomm. The FCC declined to change its
spectrum screen. The exact same sort of requests were made, and
it declined to do so in the middle of a license transaction.
Mr. Berry. Senator, if I can respond to that, because they
did address the issue on the spectrum screen, saying that it
should reflect four National competitors in the AT&T/Qualcomm.
But specifically, the spectrum screen is not a product of an
NPRN, a notice of public rulemaking or inquiry.
Verizon itself argued for a change in the spectrum screen
when they bought Alltel, and that was during the middle of a
negotiation, and there's dozens of examples on record where the
spectrum screen, after the spectrum cap was removed, was
modified and changed during the ongoing proceeding, and it's
happened from AT&T and Verizon, and many of our carriers, also.
When it is to your advantage, you want it changed to your
advantage. When it's not, you want it held the way it is.
Senator Lee. And it was imposed initially without a notice
of proposed rulemaking.
Mr. Berry. My understanding is that that is a tool that the
FCC used and developed over a period of years after the
spectrum caps were eliminated.
Mr. Milch. That is true, Senator. It is a tool. And I would
point out that the spectrum screen changes because more
spectrum becomes available or goes off the market. So that's
one of the reasons it changes.
It's a flexible tool that allows the denominator to grow
and shrink depending on what's available or not available.
So we believe that it should remain a flexible tool. That
doesn't mean, however, that you would have a clear rule about
the spectrum screen and then change it in the middle of a
license proceeding.
People may go to the FCC and argue about whether they ought
to have a different view on what the spectrum screen is. But as
party to the Alltel transaction, I can tell you, Senator, the
result of that was the imposition of the spectrum screen and
significant divestitures as a part of that because they went
above the spectrum screen.
Senator Lee. Before I run out of time, Mr. Milch, I want to
ask you. Can you comment about Verizon's need for additional
spectrum and tell us whether you agree with Mr. Berry's claims
about unused spectrum and what Verizon might be doing to ensure
that excess spectrum is being put to good use?
Before you do that, I want to commend you on a very
effective use of the word ``lugubrious.''
[Laughter.]
Senator Lee. I didn't expect to use that word today or to
hear it in the context of the 1996 Telecommunications Act. So
good job.
Mr. Milch. Thank you, Senator. I'm going to get a lot of
ribbing for that, Senator. Thank you very much.
[Laughter.]
Mr. Milch. Yes. Thank you for the opportunity. As I pointed
out with my chart earlier, Verizon Wireless is the most
efficient user of spectrum in the Nation. So we very much
disagree with the notion that there is any warehousing going
on.
In the mobile world, them's fighting words, and it's not
true about Verizon Wireless. We invest more than anyone else,
we utilize--we have the most efficient network, and we take all
sorts of steps, from an engineering perspective, to further
increase the use of our spectrum that we do hold as quickly as
we can.
The notion that we have somehow warehoused this goes
directly against all the facts that are on the record.
Senator Lee. Thank you very much.
Senator Kohl. Thank you very much, Senator Lee.
And, Senator Blumenthal, you have the last crack at it.
Senator Blumenthal. Thank you. While we are on the subject
of linguistics, I want to compliment Mr. Cohen on the use of
the word ``optionality,'' which probably has not been uttered
with great frequency in these halls. I had not expected to hear
``lugubrious'' in the context of antitrust law, but some might
say that it could be applied to enforcement from time to time.
I want to just briefly explore an area which I think is
important to the future of this agreement, assuming it goes
forward, and it relates to the value of the marketing
agreements to the respective parties, and so it is relevant to
the antitrust issues here. And that is the potential sharing of
information, consumer information, and the security measures
that will be applied to that information.
And I know that you are aware of the importance of this
area. It may not be one that you are prepared to address today.
And so if you wish to comment on it in more detail in a written
submission, I would be perfectly happy to accept it in that
way.
But, essentially, the focus of my interest is in protecting
consumer information that is obtained by virtue of the
agreements and the shared marketing and so forth and the
keeping of that information confidential or notifying consumers
in the event that it is shared or sold or exchanged with other
companies as part of agreements that may not be encompassed by
this direct agreement.
So if you wish to comment on that area, I would welcome it.
Mr. Cohen. I will comment quickly, and we can provide a
much more detailed response. I think you have to break the
agreements down. Let's do the easy one, which is the reseller/
MVNO agreements. Once they go into effect, those customers that
we will market to and that we will sell the service to over the
Verizon Wireless network are our customers, and, in fact, no
customer information would be shared with Verizon Wireless.
They are integrated into our system and they would be just like
our regular customers.
In the marketing agreements, and this is--Mr. Milch can
help me or correct me, but the structure of these agreements is
that if we sell--if we, Comcast, sell a quad-play, for example,
and we sell a Verizon Wireless product with an Xfinity triple
play, the wireless customer is a Verizon Wireless customer.
They are not a Comcast customer.
It's an artificial quad-play. They get a Verizon Wireless
bill. They're a Verizon Wireless customer. We don't get access
to their customer information once we've sold them the service
and vice versa. If Verizon Wireless, in a Verizon Wireless
store, sells a quad-play with a triple-play Xfinity plus a
Verizon Wireless phone, the Xfinity triple play customer is a
Comcast customer. And it's no different than when Best Buy
sells a Comcast--an Xfinity triple play in the Best Buy store.
Verizon Wireless and Best Buy do not have access to that
customer information. So it's structured in the traditional way
that agency agreements are structured to protect the very
privacy concerns that the Senator is concerned about.
Mr. Milch. And I would only add, Senator, that there is a
very comprehensive set of rules in the FCC governing both cable
information, customer proprietary network information on the
telco side. All those rules are going to be respected
throughout this effort.
On Verizon's part, we have a very well-documented privacy
policy that's available to all of our customers, who will be
our customers, and all of our activities under these agreements
will be governed by our privacy policies, which, by the way, we
extend to our agents if they are acting on our behalf.
Senator Lee. Thank you. Thank you, Mr. Chairman.
Senator Kohl. Thank you very much, Senator Lee and Senator
Blumenthal.
In closing, I would just like to say that this hearing
today, which has been very interesting--and I would note that
no one has left in the audience and we have been at this for
two and a half hours, which I think is testimony to the
expertise and the vigor that you have brought to this
discussion, and we appreciate your being here.
The hearing demonstrates that these agreements between
Verizon Wireless and the four cable companies have potentially
far-reaching consequences for competition in the wireless phone
and cable industry. We will continue to examine these issues
carefully.
While this Subcommittee does not have the power to block or
alter these deals, we very much hope and we expect that the
regulators at Justice and the FCC will carefully examine the
record from today's hearing and our witnesses' testimony as
they decide whether or not to approve these deals and in what
form.
We thank you all for being here. This hearing is closed.
[Whereupon, at 4:34 p.m., the Subcommittee was adjourned.]
[Questions and answers and submission for the record
follow.]
A P P E N D I X
Additional Material Submitted for the Record
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