[Senate Hearing 113-679]
[From the U.S. Government Publishing Office]
S. Hrg. 113-679
AN EXAMINATION OF COMPETITION IN THE WIRELESS MARKET
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HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
WEDNESDAY, FEBRUARY 26, 2014
__________
Serial No. J-113-51
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
DIANNE FEINSTEIN, California CHUCK GRASSLEY, Iowa, Ranking
CHUCK SCHUMER, New York Member
DICK DURBIN, Illinois ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota LINDSEY GRAHAM, South Carolina
AL FRANKEN, Minnesota JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
MAZIE HIRONO, Hawaii JEFF FLAKE, Arizona
Caroline Holland, Chief Counsel and Staff Director
Bryson Bachman, Republican Chief of Staff
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
AMY KLOBUCHAR, Minnesota, Chairman
CHUCK SCHUMER, New York MICHAEL S. LEE, Utah, Ranking
AL FRANKEN, Minnesota Member
CHRISTOPHER A. COONS, Delaware LINDSEY GRAHAM, South Carolina
RICHARD BLUMENTHAL, Connecticut CHUCK GRASSLEY, Iowa
JEFF FLAKE, Arizona
Craig Kalkut, Democratic Chief Counsel
Boyd Matheson, Republican General Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota.. 1
Lee, Hon. Mike, a U.S. Senator from the State of Utah............ 3
Leahy, Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 40
WITNESSES
Witness List..................................................... 39
Milch, Randal S., Executive Vice President and General Counsel,
Verizon Communications Inc., New York, New York................ 6
prepared statement........................................... 42
Ham, Kathleen O'Brien, Vice President, Federal Regulatory
Affairs, T-Mobile USA, Inc., Washington, DC.................... 8
prepared statement........................................... 50
Spalter, Jonathan, Chair, Mobile Future, Berkeley, California.... 10
prepared statement........................................... 65
Graham, Eric B., Senior Vice President, Strategic Relations, C
Spire Wireless, Ridgeland, Mississippi......................... 11
prepared statement........................................... 83
Layton, Roslyn, Ph.D. Fellow, Internet Economics, Center for
Communication, Media, and Information Studies, Aalborg
University, Denmark............................................ 13
prepared statement........................................... 99
Wood, Matthew F., Policy Director, Free Press, Washington, DC.... 15
prepared statement........................................... 104
QUESTIONS
Questions submitted by Senator Klobuchar for Randal Milch........ 116
Questions submitted by Senator Klobuchar for Kathleen Ham........ 117
Questions submitted by Senator Klobuchar for Jonathan Spalter.... 118
Questions submitted by Senator Klobuchar for Eric Graham......... 119
Questions submitted by Senator Klobuchar for Roslyn Layton....... 120
Questions submitted by Senator Klobuchar for Matthew Wood........ 121
Questions submitted by Senator Franken for Randal Milch.......... 122
Questions submitted by Senator Franken for Kathleen Ham.......... 123
Questions submitted by Senator Franken for Eric Graham........... 124
Questions submitted by Senator Franken for Matthew Wood.......... 125
ANSWERS
Responses of Randal Milch to questions submitted by Senators
Klobuchar and Franken.......................................... 126
Responses of Kathleen Ham to questions submitted by Senators
Klobuchar and Franken.......................................... 130
Responses of Jonathan Spalter to questions submitted by Senator
Klobuchar...................................................... 135
Responses of Eric Graham to questions submitted by Senators
Klobuchar and Franken.......................................... 137
Responses of Roslyn Layton to questions submitted by Senator
Klobuchar...................................................... 139
Responses of Matthew Wood to questions submitted by Senators
Klobuchar and Franken.......................................... 142
AN EXAMINATION OF COMPETITION IN THE WIRELESS MARKET
WEDNESDAY, FEBRUARY 26, 2014
U.S. Senate, Subcommittee on Antitrust, Competition
Policy, and Consumer Rights,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:04 a.m., in
Room SD-226, Dirksen Senate Office Building, Hon. Amy
Klobuchar, Chairman of the Subcommittee, presiding.
Present: Senators Klobuchar, Lee, and Flake.
OPENING STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM
THE STATE OF MINNESOTA
Chairman Klobuchar. All right. We are calling this hearing
to order. Thank you, everyone, for coming today and for getting
through the weather. We consider this minor weather in our two
States. But it is good to see everyone here. And also someone
told me Ben Affleck is testifying in another hearing, so we
consider you guys our Ben Afflecks. Okay? Just remember that.
Right, Mike? Exactly.
Thank you for being witnesses. Thank you to everyone here.
This hearing highlights an industry that impacts consumers
across the country and will continue to change the way that we
communicate for years to come.
Mobile phones have revolutionized the way we talk to each
other. Today more than 90 percent of adults--and I remember
doing this a few years back, and it was not even that high.
More than 90 percent of adults own a wireless phone, and that
does not even count all the teenagers out there with cell
phones, or in the case of my family, multiple cell phones when
they lose their cell phone. And today, two in five U.S. homes
have a mobile phone but no landline.
Mobile devices are not just telephones anymore. In fact,
young people today probably do not even remember when cell
phones only made calls. People depend on their smartphones to
conduct their everyday lives. Smartphones are the primary way
for 34 percent of users to access the Internet, for everything
from telehealth to education to Words with Friends. And they
are consuming a voracious amount of data to the tune of 1.2
gigabytes per user per month last year. That is double the
amount from 2012, and that number will only grow.
That is why we need to make sure consumers are able to reap
all of the benefits that come from robust competition: lower
prices, high-quality service, innovative devices, and an
abundance of choice.
Antitrust has a role to play in this market. As Thurgood
Marshall wrote for the Supreme Court, our antitrust laws and
the competition that they promote are ``the Magna Carta of free
enterprise.''
The competitive landscape in the wireless industry has gone
through remarkable changes since the 1990s when I was in
private practice focusing on communications law. Just 10 years
ago, consumers had six national wireless carriers and a variety
of regional carriers to choose from. As a result, aggressive
competition led to declining prices and the rollout of new
services and new devices.
In 2005, the number of nationwide carriers went down to
four when Cingular merged with AT&T and Sprint acquired Nextel.
In 2007, the iPhone was unveiled and revolutionized the way
people interact with their mobile phones. In 2011, AT&T and T-
Mobile attempted to further consolidate the industry until the
Justice Department stepped in and blocked the merger and the
parties ultimately abandoned the merger.
Recently, T-Mobile has re-emerged as the maverick it had
been before the proposed AT&T merger with its ``Un-carrier''
emerging markets, which offers consumers free international
data roaming, reimburses them for early termination fees, and
eliminates long-term contracts. T-Mobile has also boosted its
spectrum holdings by acquiring MetroPCS.
Last year, Sprint was acquired by Japanese-based SoftBank,
a transaction that was promoted as providing Sprint with
capital and expertise needed to deploy its national LTE
network. Sprint also took full control of Clearwire.
AT&T is expected to close an acquisition later this year to
acquire Leap Wireless. Verizon bought a large swath of spectrum
from several cable companies and more recently sold a block of
unused spectrum worth $3 billion to T-Mobile. And regional
carriers like C Spire continue to expand and offer more and
more consumers their competitive 4G LTE service.
A lot has changed in the fast-moving industry, and yet some
things remained relatively constant. AT&T and Verizon are still
the dominant wireless providers, accounting for roughly 68
percent of all subscribers. But anyone that watched the Super
Bowl knows from the ad campaigns going on that there has still
been some vigorous competition, especially in recent months,
which is why this hearing is so timely.
So now is a good time to assess the future outlook for
competition and consumers. We need to ask important questions.
Are we seeing the kind of competition we would expect from a
competitive market? Are we seeing price wars, competing offers
to try to acquire each other's customers, and new and
innovative services and choices that differentiate competitors?
What barriers to competition remain, and what challenges do
competitive carriers face?
What should we be mindful of as we consider spectrum and
other policies impacting competition or further consolidation
in the wireless market, such as a potential Sprint/T-Mobile
merger?
Wireless carriers and their partners innovate and compete
on a variety of levels, so we expect to see them trying to win
over new customers on everything from Internet speeds to a
variety of service plans and the latest handset features to
cutting-edge applications, including safety and security
features that will help stem the tide of mobile phone theft. As
you know, I am particularly interested in this area, as we have
seen an exponential increase in cell phone thefts across the
country. One in three burglaries are now the result of cell
phone stealing, and I have legislation on this. But the focus
is to, of course, reduce these kinds of thefts by actually
reducing the value of the phone to the thieves by allowing
consumers with new technology to keep their own private
information on the cloud but turn it off for the thief that
steals their phone.
When we think about competition and antitrust enforcement
in this area, we need to acknowledge that the mobile world is
quickly evolving. For example, just last week, Facebook bought
the mobile phone instant messaging service WhatsApp for $19
billion. New ideas, products, and services are being unveiled
this week at the Mobile World Conference in Barcelona, Spain.
So you guys got the short end of the stick, huh?
[Laughter.]
But just because technology is moving at a swift pace, the
antitrust laws are no less applicable. The wireless industry is
a hotbed for new technology, and by ensuring a fully
competitive market, we will foster innovation and ensure that
consumers will be the ones to pick the winners and losers.
So today we will hear from witnesses who will paint the
current picture of competition in the wireless industry and
inform us about what Congress should take into account when
considering wireless policy and future mergers in the industry.
Again, I thank the witnesses, and I turn it over to my
Ranking Member here, Senator Lee.
OPENING STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM THE
STATE OF UTAH
Senator Lee. The Dirksen Building really is a nice
destination even when compared to Barcelona, but I will not say
more than that.
Mine is one of those homes where you can find both cell
phones and a landline. I am still not sure why we have the
landline. It is one of those things that we have been reluctant
to part with. It seems irresponsible, almost, as a citizen not
to have a landline, even though we never, ever use it. My wife
refers to it as ``the line that people use to call us that we
do not want to talk to.''
[Laughter.]
A few years ago, my son, James, commented, when he could
not find his phone, ``You know, someone really should invent a
phone that is connected to the wall with a wire that cannot be
removed so you cannot lose it.'' I told him, ``That has been
used in the past, but no one wants it.''
Today's hearing focuses on competition in the wireless
market, and our Subcommittee's hearings often address the
competitive state of a particular industry or market, but in
some ways today's hearing is unique because, as it is presently
constituted, the wireless market is, in fact, very competitive.
Indeed, looking back a decade or two, there are perhaps few
industries in which the benefits of competition are more
readily apparent and pronounced than in the present-day
wireless market.
Many of us attending or watching this hearing can remember
a time when mobile phones were still something of a novelty,
and perhaps all of us can remember the time when a cell phone
was little more than that. It was just a phone. Today
smartphones are ubiquitous, and they do so much more than allow
us just to make phone calls.
In fact, within a few years, a majority of Americans will
access the Internet, primarily not through a computer but
through a mobile device. These rapid developments are in large
part the result of forces of competition. Consumers in the
wireless market have benefited from competition not just in the
form of low prices, but also in the form of high-quality
service, which is the product of innovation and which leads to
more innovation.
Consumer demand has pushed carriers to offer better, faster
service on better, faster devices. In the last 20 years alone,
carriers have paid more than $50 billion for spectrum and have
invested well over $300 billion in infrastructure. As the
Department of Justice noted last year in its comments to the
FCC regarding spectrum, ``Competitive forces have been a
central driver of innovations that have enabled wireless
carriers to expand capacity and improve service quality.''
The wireless market is, thus, in many ways a success story
that illustrates what can happen when government stays its
regulatory hand and allows the free market to respond
productively to consumer demand. To again quote the Department
of Justice, ``Competition generally represents the best method
of ensuring that consumers receive low-price, high-quality
products and services, greater choice among providers, and
important innovation.''
Today we have got the opportunity to discuss the government
policies that may best ensure that consumers and the wireless
industry continue to enjoy the benefits of robust competition.
As spectrum is the lifeblood of the wireless industry and a
scarce resource administered by the government, some of our
discussion will understandably center on that topic. With data
use exploding each year within the United States, carriers are
aggressively seeking spectrum to fulfill demand.
Indeed, to the extent the wireless industry has
consolidated, the need for spectrum may go a long way toward
explaining that trend. Although the Federal Government has
taken some steps to free up available spectrum for commercial
use, I believe additional steps can and should be taken in this
regard. Particularly where the government is holding low-
frequency spectrum for non-military use, a careful evaluation
of measures that may allow for some of that spectrum to be made
available for commercial use may be extremely beneficial and
may forestall additional attempts at consolidation.
Some have expressed concern that a carrier may seek to
accumulate spectrum for anticompetitive purposes. Although the
foreclosure value of spectrum makes such an outcome
theoretically possible, we must be careful to ground any
antitrust analysis in the facts of specific transactions.
Absent evidence that a carrier is hoarding spectrum or
otherwise seeking spectrum for a purpose other than to serve
its customers, it is at best premature to assume that a
carrier's desire to purchase additional spectrum is itself
anticompetitive.
Particularly in light of the increasing demand for
spectrum, it seems likely that all carriers will, for
legitimate commercial purposes and very legitimate reasons that
have everything to do with the desire to compete in a
competitive marketplace, continue to seek additional spectrum.
In that scenario, competitive forces and market valuation will
best allocate spectrum to its most efficient and highest-value
use.
I have also heard concerns expressed regarding the
competitive state of other aspects of the mobile device
ecosystem, including the market for operating systems. For
example, I have heard concerns expressed regarding the
potential for a company with market power to leverage that
power to limit competition in mobile services. I have likewise
heard concerns expressed from small carriers regarding the
availability of the latest and best mobile devices. These are
important considerations as we take account of the competitive
state of the wireless industry as a whole.
Throughout our consideration of all these issues, we must
keep our focus on protecting competition and not protecting
competitors. By carefully evaluating the evidence and applying
rigorous economic analysis, we can continue to ensure the best
outcomes for consumers.
I look forward to hearing from our witnesses today, and I
thank them for coming.
Chairman Klobuchar. Well, thank you, Senator Lee.
I would now like to introduce our distinguished witnesses.
Our first witness is Mr. Randal Milch. Mr. Milch is
executive vice president and general counsel of Verizon.
Previously he was associate general counsel at Bell Atlantic,
which merged with GTE to form Verizon in 2000.
Our second witness is Ms. Kathleen O'Brien Ham. Ms. Ham is
vice president for federal regulatory affairs at T-Mobile.
Before going to T-Mobile, Ms. Ham was at the FCC for 14 years
and served in a number of top policy positions, including
Deputy Chief of the Wireless Telecommunications Bureau.
Next we will hear from Mr. Jonathan Spalter. Mr. Spalter is
the chairman of Mobile Future. Prior to joining Mobile Future,
he founded the independent investment research company Public
Insight. Mr. Spalter also served as the Associate Director of
the U.S. Information Agency during the Clinton administration.
The next witness will be Mr. Eric Graham. Mr. Graham is
senior vice president for strategic relations for C Spire
Wireless. Prior to joining C Spire in 2007, he practiced law in
Jackson, Mississippi, with a focus on public policy,
consultation, and public utilities regulation.
Then we will be hearing from Ms. Roslyn Layton. Ms. Layton
studies Internet economics at the Center for Communication,
Media, and Information Technologies at Aalborg University in
Denmark. She has worked with many companies in the IT industry
on digital marketing software, Web analytics, platforms,
disruptive technologies, and Web development services.
Our final witness will be Mr. Matthew Wood. Mr. Wood is the
policy director of Free Press. Prior to joining Free Press, Mr.
Wood worked at the public interest law firm Media Access
Project and in the communications practice groups of two law
firms in Washington, DC.
Thank you all for appearing at our Subcommittee's hearing
to testify. I now ask our witnesses to rise and raise their
right hand as I administer the oath.
Do you affirm that the testimony you are about to give
before the Committee will be the truth, the whole truth, and
nothing but the truth, so help you God?
Mr. Milch. I do.
Ms. Ham. I do.
Mr. Spalter. I do.
Mr. Graham. I do.
Ms. Layton. I do.
Mr. Wood. I do.
Chairman Klobuchar. Thank you. We will start with Mr.
Randal Milch.
STATEMENT OF RANDAL S. MILCH, EXECUTIVE VICE PRESIDENT &
GENERAL COUNSEL, VERIZON COMMUNICATIONS INC., NEW YORK, NEW
YORK
Mr. Milch. Chairman Klobuchar, Ranking Member Lee, thank
you for the opportunity to testify, and I would request that my
written testimony be entered into the record.
Chairman Klobuchar. It will be entered in the record.
Mr. Milch. Thank you very much.
U.S. consumers are benefiting from a fiercely competitive
and deeply innovative wireless market. That is a key driver for
our national economy and for maintaining America's competitive
edge in the global economy.
Normally I would not burden you with numbers, but the
numbers here are impressive.
First, on the competitive standpoint, the market is
indisputably characterized by massive investment, falling
prices, and deep rivalry. This is a competitive market by all
of these measures.
Capital investment is truly staggering. As Senator Lee
noted, in 2013 America's wireless carriers invested more than
$34 billion in their networks, and since 2001, it is $300
billion in capital investment in the United States, and that is
not including the investment in spectrum that was made.
Lately, this investment has centered on our 4G LTE networks
across the board. This was a big bet that Verizon first made in
2008, announcing it was going to go to 4G LTE. And since that
investment, all major carriers and regional carriers as well
have started investing in 4G LTE, which has been a major
transformation in the industry.
Because of that kind of investment by all carriers, the
United States has almost 300 million wireless broadband
subscriptions, and that is more than double that of any other
country in the world. And these broadband subscriptions can
provide mobile broadband speeds that are comparable to wireline
alternatives. This has been a bright spot in the economy. The
wireless industry has gained almost 1.6 million new jobs from
2007 to 2011, and that is at the same time when, unfortunately,
total U.S. private sector jobs fell by 5.3 million.
Our industry generated almost $200 billion in economic
activity during the same period, and the projection for
continued investment is staggering as well. Over the next five
years, it is estimated that there will be more than $1 trillion
in additional investment in economic growth--I am sorry, in
economic growth and will create almost 1.2 million new jobs.
The results are a great deal of choice for consumers:
nearly 200 facilities-based carriers in the United States, more
than any nation in the world; more than 90 percent of U.S.
consumers have a choice of three or more wireless carriers;
there are over 300 different handsets available to U.S.
consumers from a variety of manufacturers; and by 2017, 87
percent of connected device sales will be tablets and
smartphones, and these are devices that did not exist even
exist more than a handful of years ago. And they would not
exist without mobile broadband networks.
At the same time, prices are falling. From 2008 to 2012, as
data usage skyrocketed, data prices plummeted 93 percent,
dropping from 46 cents a megabyte to only three cents a
megabyte. And from 2005 to January 2014, the wireless CPI,
Consumer Price Index, fell 10 percent while the overall CPI for
all items increased almost 19 percent.
All this investment and choice has led to U.S. consumers
using far more mobile services than their international
counterparts. This is a well-known fact that we have some real
experts on the panel who can probably be more evocative on this
than I am.
Let me turn, though, to the deep rivalry among the
carriers. As Chairman Klobuchar noted, you look at the Super
Bowl ads, you look at the ads in any newspaper, there is a huge
amount of effort to attract new customers and attract customers
away from other carriers. For instance, in nine months alone,
from January to September 2013, telecom companies spent almost
$7 billion in advertising. That is an 11-, almost 12-percent
increase over the same period in 2012. And as we know, this is
a period when other consumer segments' advertising spend was
decreasing. The wireless market was increasing.
There is a great deal of additional benefit beyond the
economic benefit to the Nation from this effort. We believe,
and we are trying to lead the way, in ensuring that mobile
broadband helps answer questions and our deepest problems in
the health care area by the use of distance medical usage and
allowing the transmission securely of MRIs and X-rays. In
education, in STEM, this is a great effort where Verizon and
others are launching programs to ensure that mobile technology
is embedded and utilized well in the classroom.
There are a few issues that we should address. Privacy and
security are very important as mobile devices become more and
more embedded in our everyday lives. This is an area that we
believe deserves the greatest attention from the carriers and
from policymakers. And we believe it is an area where carriers
will strive to differentiate from one another as part of the
competitive process.
Finally, spectrum, spectrum, spectrum--the lifeblood of our
industry. We need to ensure both that there is a supply,
continued supply of spectrum, as Senator Lee noted, from parts
of the government where it is underutilized at the current time
and coming up with an auction process and other processes of
having that spectrum being made for commercial use, processes
that are fair and neutral and encourage all carriers to invest.
And, finally, a robust secondary market for spectrum is very
important.
Let me close simply by saying Verizon is honored every day
to serve 100 million customers around the country, and we
attempt to do justice to the investment that our shareholders
have allowed us to make, the trust that our customers put into
us every day, and to keep alive the innovative spark that is
furthering the mobile industry.
Thank you.
[The prepared statement of Mr. Milch appears as a
submission for the record.]
Chairman Klobuchar. Thank you very much.
Ms. O'Brien Ham.
STATEMENT OF KATHLEEN O'BRIEN HAM, VICE PRESIDENT, FEDERAL
REGULATORY AFFAIRS, T-MOBILE USA, INC., WASHINGTON, DC
Ms. Ham. Thank you. Good morning, Chairwoman Klobuchar,
Ranking Member Lee, and Members of the Subcommittee, and thank
you for inviting me to testify on the subject of wireless
competition. My name is Kathleen Ham, and I have been the vice
president of federal regulatory affairs for T-Mobile since
2004.
T-Mobile is headquartered in Bellevue, Washington, employs
more than 38,000 Americans, and offers nationwide wireless
voice and data services to individual, business, and government
customers. We are the fourth largest wireless carrier in the
U.S., serving approximately 47 million subscribers.
Since the spring of 2013, T-Mobile has been transforming
itself into a more competitive force in the wireless market--
the ``Un-carrier.'' We have implemented a series of initiatives
to address perennial customer pain points, including
eliminating the annual service contract, allowing more frequent
handset upgrades, providing free unlimited international data
and text roaming, and paying the early termination fees for
consumers who switch from another national carrier to us.
T-Mobile has been growing fast in comparison to the other
wireless companies. A year ago, we had virtually no 4G LTE
network. Today our LTE network covers over 200 million people
and is still growing.
We added more than 4.4 million new subscribers in 2013,
including 1.6 million in the fourth quarter. That was our third
consecutive quarter with more than a million net customer
additions, representing a significant turnaround from a year
earlier.
Despite its popularity with consumers, T-Mobile faces a
number of fundamental challenges that put at risk its ability
to maintain its disruptive presence in the marketplace. Our
subscriber base is still nowhere near that of AT&T or Verizon,
and their great numbers give these carriers significant access
to capital and economy-of-scale advantages. Our smaller scale
yields lower profit margins, smaller cash flows, and greater
challenges in funding capital expenditures and bold, disruptive
innovations.
By contrast, our larger competitors have substantial
economy-of-scale advantages in such critical areas as equipment
purchasing, handset rollout, business financing, the
acquisition of backhaul and roaming services, and national
brand advertising. The funding requirements needed for this
business, exacerbated by the lack of scale relative to the big
two, remain a major competitive challenge to T-Mobile going
forward.
As discussed in our written testimony, T-Mobile faces other
challenges the U.S. policymakers can impact, including securing
access to roaming at commercially reasonable rates to
interconnection with the other major carriers as we move to an
all-Internet protocol world and to backhaul from our cell
sites, especially outside of major metropolitan areas.
One extremely important issue for wireless carriers is low-
band spectrum. The broadcast incentive auction represents a
critical moment for the wireless industry that will influence
the structure of the market for years to come. Like our
wireless industry competitors, we believe that Congress and
regulators should do all they can to encourage widespread
broadcaster participation so that as much spectrum as possible
can be released for wireless broadband services.
In addition, there is a general consensus among mobile
carriers that the FCC should adopt a band plan for the
incentive auction that maximizes the amount of paired spectrum
available for licensed wireless broadband services, and we have
worked closely with our industry colleagues, including Verizon,
in pursuing that goal.
Finally, T-Mobile strongly believes that the FCC should
adopt reasonable spectrum aggregation limits to ensure that the
two dominant wireless carriers do not foreclose smaller
competitors from acquiring low-band spectrum in the auction, as
the Department of Justice has warned could happen.
Spectrum below one gigahertz is especially critical. It
offers superior building penetration and broader coverage than
the higher spectrum T-Mobile currently uses. Reasonable
spectrum aggregation limits have been applied in the United
States and around the world. In fact, it was the FCC's decision
to put reasonable limits on PCS spectrum concentration that led
to the development of real competition and mobile services in
the late 1990s. The mobile industry would look vastly different
today if the FCC had not ensured a procompetitive distribution
of spectrum in the PCS auctions.
As the ``Un-carrier'' in the wireless market, T-Mobile is
providing new options for consumers tired of high prices and
low levels of innovation. Heightened competition means better
service and more options and leads to a virtual cycle of
innovation and adoption, with consumers as the ultimate
beneficiaries. We all want this industry to be competitively
vibrant, aggressively innovative, and economically healthy for
years to come, and decisions we make now will determine whether
that shared vision becomes a reality.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Ham appears as a submission
for the record.]
Chairman Klobuchar. Thank you very much.
Mr. Spalter.
STATEMENT OF JONATHAN SPALTER, CHAIR, MOBILE FUTURE, BERKELEY,
CALIFORNIA
Mr. Spalter. Chairman Klobuchar and Ranking Member Lee, it
is a pleasure to be here before the Senate Committee. I am
Jonathan Spalter, chair of Mobile Future, and I am pleased to
join you today from the solar vortex of the San Francisco Bay
area.
Chairman Klobuchar. Very funny. From the polar vortex to
the solar vortex. That is pretty good.
Mr. Spalter. My organization proudly represents innovators
across the mobile ecosystem, those who build apps, networks,
devices, and those who also leverage wireless technologies to
improve their communities.
This morning, we have heard and we will hear some
compelling national data about the choices available to
millions of U.S. wireless consumers, but I would like to tell
the exciting story of American mobile competition through the
eyes of actually just one of these customers--my brother-in-
law, Jason Gu.
Jason has lived in the town of Plymouth, Minnesota, for the
past eight years. Plymouth, of course, is the lovely home town
of our esteemed Chairwoman. Jason lives there with his wife,
Jill, and they share their home with two mobile experts--their
teenage daughters.
Now, Jason and his family regularly drive past the AT&T and
the T-Mobile stores, just located three blocks apart on
Vicksburg Lane. Six miles away, at the Ridgedale Mall, they can
shop at Best Buy Mobile, at AT&T, Century Link, T-Mobile again,
and Shock City Cellular. Across the street is Verizon. Down a
few blocks on Wayzata Boulevard is Sprint, and the nearby
Target offers prepaid phones from no less than seven competing
brands. And the local Walmart offers the chain's Family Mobile
Plan alongside service from six additional providers.
Now, that is a lot of choices, not just of providers but
also of devices, operating systems, apps, and service plans,
and it really is creating tremendous value. We know that the
price per megabit for mobile broadband has been declining by
more than 93 percent in just five years. And with this
abundance of choice and competition, Plymouth has a lot in
common with communities across our Nation, including, Senator
Lee, those in your home State of Utah and those that your
family and your son, James, enjoy in Alpine. And every company
in this space competes and innovates in an ecosystem where
truly the only certainty is disruption. Just ask Facebook CEO
Mark Zuckerberg in Barcelona, who, as you mentioned, Senator
Klobuchar, found nearly 19 billion good reasons to like the
free text service WhatsApp. And this is just the latest and
most powerful reminder that formidable new rivals can emerge in
the blink of the eye or the snap of a chat.
Or ask Cisco CEO John Chambers. He sees just around the
corner 50 billion devices connecting to the Internet of things,
creating a $2 trillion global industry. This is the competition
we must win.
The so-called Internet of things encompasses everything
from the fitness monitors on our wrist to the thermostat we
adjust from our phone, right up to the very edge of science
fiction, for example, Google's pursuit of essentially wireless
contact lens that can register blood levels, and the wireless
sensors my 10-year-old daughter has to implant in her body
twice a week to manage her Type 1 diabetes.
Who knows what exciting new business opportunities or new
entrants or new life-saving wireless technologies will emerge
next? But what we do know is that the appetite of consumers and
the vision of innovators should guide the mobile future, and it
would be pure folly for anyone, especially for government, to
try to predict or to prescribe future market architecture.
In the Bay Area where I reside, technology companies have
adopted an approach we call ``minimal viable product,'' or MVP
for short. The idea is keep products simple, ship them quickly,
and listen very, very carefully to your customers. And in many
ways, this same MVP approach has successfully guided our
Nation's wireless policy for two decades now, making our mobile
ecosystem, I believe, the envy of the world.
So for the sake of Jason's family, and American mobile
families everywhere, I truly do hope that past will be
prologue, for if so, with a dash of humility and restraint in
how we design our products and our policies, I am confident
that an even greater phase of our Nation's mobile future lies
yet ahead.
Thank you very much.
[The prepared statement of Mr. Spalter appears as a
submission for the record.]
Chairman Klobuchar. Thank you.
Mr. Graham.
STATEMENT OF ERIC B. GRAHAM, SENIOR VICE PRESIDENT, STRATEGIC
RELATIONS, C SPIRE WIRELESS, RIDGELAND, MISSISSIPPI
Mr. Graham. Good morning, Chairwoman Klobuchar and Ranking
Member Lee, and thank you for the opportunity to be here today
on behalf of Cellular South, who now provides C Spire Wireless
service. Our company has been in the wireless business for over
25 years, beginning in the late 1980s in the era of the
duopoly, when there were only two providers in each market
nationwide. We continued through the era of competition, which
was marked by the introduction of PCS spectrum licenses, where
new operators seemingly sprang up overnight, giving customers a
dizzying array of choices for their carriers, driving
innovation, and spurring competition in a way that has not been
seen since.
Following that era of competition, we entered the decade of
the 2000s and began the era of consolidation, where we saw the
remnants of Ma Bell begin to reconstitute themselves into the
wireless Twin Bells--Verizon Wireless and AT&T Mobility. It has
carried through today into this era of stratification, where we
have two nationwide operators with roughly 100 million
subscribers. We have a couple of metropolitan operators in that
40- to 60-million subscriber range. Below that we have a super-
regional operator, and then 100 or so regional and rural,
primarily rural, operators throughout the rest of the country.
If you think back over the last four or five years, there
have not been that many innovations purely in wireless for the
customer. There have been apps that have come on. There have
been maybe different devices that the customer does not
necessarily touch every day. But think of the form factor of
the phone that you use today. It is relatively unchanged from
what it was four or five years ago.
If our industry metrics were viewed through the lens of
another industry, I do not think we would be quite as
comfortable as we are saying that wireless is competitive. So
let us take a moment and think about the aviation industry in
the United States.
Consider if in airline travel in the United States the two
largest airlines controlled 70 percent of the domestic
passenger traffic. Consider that these airlines also had the
market power not only to demand but to receive exclusive access
to the latest and greatest jets, keeping them out of the hands
of their competitors.
Further consider that these airlines have the ability to
dictate the terms on which connecting passengers could access
their routes, charging exorbitant rates that bear virtually no
relation to the cost of transporting that passenger or
operating that jet.
Let us layer on top of that the government's desire to
introduce more capacity into that market through opening up new
gates at airports across the country, and position these two
airlines with the power to absorb 100 percent of that capacity
under the rationale that eventually they will need it, whether
they need it today, but certainly with the motivation there
that they could foreclose competitors from having that
capacity.
I do not think that we would be willing to sit by and let
the airline industry operate like that, unfettered and with a
purely hands-off approach. I certainly do not believe we would
call that a ``competitive industry'' nor a ``healthy
industry.''
Yet when we transfer that to wireless, my fear is that we
have become too complacent and too comfortable in a world where
the largest two operators have 70 percent of the wireless
subscribers and in 2013 combined to account for 86 percent of
the industry's earnings. The largest two have routinely
demanded and received exclusivity agreements to be the only
provider of particular devices in the market, keeping them out
of the hands of their competitors. They dictate the terms on
which roaming customers can access their networks, typically at
exorbitant rates that have little to no relationship to the
cost of providing service for those customers.
We have heard this morning already the statistic that data
costs three cents a megabyte. I can assure you rural and
regional operators seldom get a rate that approaches three
cents a megabyte for data roaming.
Let us layer on top of that now the government's interest
in introducing more spectrum that our industry desperately
needs, and consider that the largest two operators have not
only the ability but certainly the motivation to absorb nearly
all of that capacity, not only in the most attractive markets
but markets across the country, under the rationale that if we
do not need it now, we will certainly need it later. Well,
later means that competitors are foreclosed from having access
to that spectrum today when we need it now.
So I would submit to you that as we sit here today, we are
in a world where the wireless industry is stratified between
the largest two national operators, two metropolitan operators,
and a collection of smaller operators who need procompetitive
policies to assure us that, as we move forward, we will have
access to those inputs to the business that let us serve your
constituents and customers who have come to depend on us.
Thank you again for the invitation to be here this morning
and be a part of this panel, and I look forward to exploring
these and other issues with you.
[The prepared statement of Mr. Graham appears as a
submission for the record.]
Senator Lee [presiding]. Thank you.
Ms. Layton.
STATEMENT OF ROSLYN LAYTON, PH.D. FELLOW, INTERNET ECONOMICS,
CENTER FOR COMMUNICATION, MEDIA, AND INFORMATION STUDIES,
AALBORG UNIVERSITY, DENMARK
Ms. Layton. Good morning. Thank you for the opportunity to
share my testimony on competition in America's wireless market,
and a special thank you to Caroline Holland and Kayla Johnson
of Senator Klobuchar's office who did a lot of work to pull
together today's session.
My name is Roslyn Layton, and I am a Ph.D. fellow at the
Center for Communication, Media, and Information Studies in
Copenhagen, Denmark. I am also a visiting fellow at the
American Enterprise Institute, and I am a vice president of
Strand Consult, an independent consultancy to the mobile
industry.
As an American who lives in Europe and studies the
international wireless market, I hope to provide an
international perspective. Senator Lee and Senator Klobuchar, I
believe that we share the same goals. We want all Americans to
enjoy the benefits created by the wireless markets, the
networks, the devices, the services, and the applications. And,
in addition, we want Americans companies, especially those that
create American jobs in the mobile ecosystem, to win in the
global economy. So I have three points today in relation to
these goals.
First of all, competition comes from the level of
technology, not from the number of competitors.
Second, Americans get value for money when it comes to
mobile products and services.
And, finally, that America's mobile ecosystem and its
digital export economy is highly dependent on mobile operators'
investments in infrastructure.
So my first point: Competition comes from the level of
technology, not from the number of competitors.
We can examine wireless competition by looking at
technology development in mobile standards, in infrastructure
facilities, in services, handsets, operating systems, and
platforms. But, unfortunately, I can only talk about one
example today.
As Senator Klobuchar so pointed out already, consumers are
increasingly using their mobile subscriptions to access
competing communication services. They are also called over-
the-top or OTT services. And the example that we have seen of
late is the text messaging service WhatsApp, which Facebook
purchased for $19 billion.
With over one billion users, Facebook is actually the
world's largest communications provider. It is a wireless
platform where people communicate by voice, text, and data, and
at $175 billion, Facebook has a larger market cap and a larger
market share than any mobile provider in America. I think Mr.
Graham certainly points out a number of things about mobile
market concentration, but if we look at Internet companies,
their industry is more concentrated in terms of the number of
competitors.
So while $19 billion is a staggering sum, four times this
amount is lost by the mobile industry worldwide as users are
switching from the services they can get from their mobile
provider to the over-the-top services. This is a classic
example of the innovator's dilemma and demonstrates that the
bigger a mobile provider grows, so do the incentives for the
upstart to disrupt its revenues. This suggests to me that the
market can better discipline than any regulator.
And it is because of this competition in the wireless
market that Americans get value for their money with mobile
products and services. Americans use five times more voice and
twice as much data than Europeans. The current next-generation
mobile standard 4G LTE is available to 97 percent of Americans
but only 26 percent of Europeans.
The mandated low prices that you have heard about in Europe
come at a high long-term cost. Europeans are being shortchanged
on the future because operators there cannot afford to invest
in investments in next-generation networks. So in practice in
Europe, you may have one mobile network being shared by 20 or
more resellers. They are frequently owned by the incumbent. So
this is not meaningful competition as we have here in the
United States where different facilities are actually
competing, and we can certainly see this now with new efforts
in nomadic WiFi also competing for mobile subscriptions.
If we measure the value that consumers have gotten over
time and the improvement in the capability of the mobile
ecosystem, it has been a dramatic improvement. To get the
equivalent of an iPhone 20 years ago, you would have had to
spend $3.5 million. Today your mobile provider subsidizes your
handset as part of your subscription.
I want to make a special point for the Chairwoman because I
know she cares very much about mobile services being affordable
and available, especially for the citizens of her State. In my
own home State of Florida, we have many Minnesotans who come to
Florida for the winter and seniors from across America. And I
think as Mr. Spalter so eloquently described, in Plymouth,
Minnesota, the marketplace has a mobile product that suits
every budget and every person.
There is one thing we can do to improve the affordability
and availability of mobile, and that is to remove the barriers
at the local level for deploying mobile infrastructure. In my
studies, I have found that mobile operators often pay four
times the market rate to secure the rents to deploy their
mobile mass and toward. If we want to have mobile in rural
areas, we need to reduce these barriers.
I come to my last point. America's mobile ecosystem and its
digital export economy is highly dependent on operators'
investments in infrastructure. Facebook's business model is
predicated on mobile operators making fundamental investments
in infrastructure so they can reach their users. As Mr. Milch
so much described about the many tens of billions of dollars
that the wireless providers are making, altogether Americans
got an investment of $75 billion in networks last year, this
means that Americans who are just four percent of the world's
population enjoy one-quarter of the worldwide broadband
investment. This is twice the rate per capita as Europeans.
Of the world's 25 Internet companies in terms of market
cap, 15 come from the U.S. and just one from the EU. This means
that Europeans and others around the world are using American-
made mobile operating systems, handsets, search engines, social
networks, and mobile apps. In fact, America's digital goods and
services sent abroad, over $350 billion annually, are now our
third largest category of exports. If our wireless networks
were not up to speed, there is no way we would realize these
numbers today.
America's wireless market is highly competitive, consumers
get value for money, and investment in infrastructure by
America's mobile providers supports a vibrant mobile ecosystem
and a digital export economy second to none.
[The prepared statement of Ms. Layton appears as a
submission for the record.]
Chairman Klobuchar [presiding]. Thank you.
Mr. Wood.
STATEMENT OF MATTHEW F. WOOD, POLICY DIRECTOR, FREE PRESS,
WASHINGTON, DC
Mr. Wood. Chairman Klobuchar and Ranking Member Lee, thank
you for the chance to testify today on the topic of wireless
competition. My name is Matt Wood, and I am the policy director
at Free Press, a nationwide, nonpartisan nonprofit with 700,000
members. Free Press works for media and technology policies in
the public interest, like promoting affordable wireless access
for everyone, because these communications tools are so vital
for our free expression, our democracy, and our economy.
The wireless market today does show some signs of improved
competition, especially when compared to some other telecom
sectors. Positive steps taken by DOJ and the FCC, like blocking
the T-Mobile/AT&T merger and encouraging divestiture in the
Verizon/SpectrumCo deal, were grounded in the law and common
sense, and we have seen good outcomes from those decisions.
Still, the FCC has not done quite enough to follow
Congress' command to promote economic opportunity and
competition. So the FCC must do more about concentration in the
wireless market, which qualifies as highly concentrated still
today under DOJ guidelines.
Verizon and AT&T exercise significant market power. That
leads to the loss of untold billions of dollars in consumer
surplus per year. A few facts and figures show the impact of
this type of concentration on a wireless market that is still
top-heavy.
For instance, AT&T and Verizon have more than 68 percent of
wireless subscribers, as you noted, Chairman Klobuchar, but
they rake in more than 82 percent of the entire industry's
profits. Verizon alone enjoys nearly 50 percent of the
industry's earnings. With Sprint and T-Mobile, those four
companies control 98 percent of the country's wireless
customers. This type of concentration is bad for consumers.
For example, many customers today pay more for plans worse
than they had when smartphones first came on to the scene. In
2008, for example, an AT&T iPhone customer could buy 450 voice
minutes, 200 text message, and unlimited data for $60 per
month. Today she would pay $95 for a plan with unlimited voice
and texts but just two gigabytes of data. That is a 58-percent
rate hike for a comparable plan, and Verizon's similar plan is
little better at $90 per month rather than $95.
Wireless customers also shell out an absurd amount for the
devices that they buy once you know what they pay back for
these so-called subsidies that some carriers still offer.
Compared to budget carrier plans with the same allowances on
voice, text, and data, that $95 per month AT&T customer might
pay an extra $1,200 during the course of a two-year contract,
swamping the $450 phone subsidy. In reality, that is not a
subsidy. That is a loan, at rates that would make a payday
lender blush, with an annual interest rate of 120 percent.
The FCC and Congress also must act to give people more
control over these tools we use to stay connected, because when
people can do more with the devices they buy, their service
choices go up and their prices go down. Unlocked phones that
actually work with and roam on to other carriers' networks
increase competition by letting customers move around. The bill
sponsored by so many Members of the Senate was a welcome spur
to the FCC's unlocking measures last year, and your Smartphone
Theft Prevention Act is welcome news for consumers who pay so
much to replace these stolen devices to the tune of $30 billion
per year.
Devices should not take away customers' freedom to take
their business elsewhere, and that is why we need these steps.
Neither should spectrum imbalances that stem from AT&T and
Verizon's status as early spectrum recipients. Rather than
focusing solely on the upcoming incentive auction, though, Free
Press has asked the FCC to restore sensible spectrum limits for
all spectrum holdings. The FCC should not and cannot keep
anyone out of this upcoming incentive auction, but the agency
should recognize the superior value and coverage afforded by
the low-band spectrum that will be on the auction block.
There are other imbalances, too, in addition to spectrum,
based on AT&T and Verizon's legacy as wireline monopolies. On
one of those, the FCC needs to move ahead at last on special
access and correct assumptions made nearly 15 years ago,
because these mistakes still harm wireless customers and
competition today. AT&T and Verizon can and do raise the cost
of wireless alternatives by overcharging their rivals to carry
traffic from the tower back to the network.
Last, but certainly not least, the FCC must open more
spectrum for unlicensed uses like WiFi and other innovations. A
study this month estimates that unlicensed contributed almost
$230 billion to the U.S. economy in 2013 alone. New entrants
and licensed carriers alike use WiFi to benefit consumers.
Wireless competition today does show some signs of life,
and that is due in part to smart intervention by antitrust
authorities and the FCC. Competition has improved because of,
not in spite of, well-timed oversight. That is why the FCC must
prevent spectrum concentration, promote unlicensed use of
spectrum, and put people in control of their wireless devices.
Thank you very much, and I look forward to your questions.
[The prepared statement of Mr. Wood appears as a submission
for the record.]
Chairman Klobuchar. Thank you. Thank you to all of you.
I think one of the themes of this hearing has been some
competition that we have been seeing in just the last few
months, and I think that followed the breakdown of the proposed
AT&T and T-Mobile merger. We could see from the ads we have
referenced that T-Mobile has emerged as an aggressive
competitor. Last quarter, it acquired 896,000 consumers from
its competitors, no doubt a result of the promotions and the
offerings.
We have seen Verizon and AT&T respond with price cuts. In
fact, just yesterday, AT&T announced it would drop the cost of
calls to North America and give customers to its mobile share
plans unlimited international text messages for free.
Mr. Wood, do you think that the level of competition we are
seeing today is sufficiently benefiting consumers?
Mr. Wood. Well, I think some of those facts and figures
show that it is not good enough yet, it is not effective enough
yet to really discipline the prices that consumers pay,
especially for the biggest two carriers, and that by making
sure all carriers have access to these critical inputs like
affordable roaming rates, special access that is not under the
control exclusively of AT&T and Verizon, and, of course,
spectrum, that we will see more benefits for consumers from
this competition rather than the top-heavy market we still have
today.
Chairman Klobuchar. Ms. Ham, yesterday T-Mobile announced
fourth quarter losses. Is T-Mobile's aggressive discounting and
efforts to win over new consumers sustainable? And is T-Mobile
in this competitive mode for the long term?
Ms. Ham. Well, T-Mobile is the little engine that could. We
come from the position of number four in the marketplace, and
in the last year we have been very aggressive. But that comes
at a cost, and as I noted in my testimony, we have scale
disadvantages to the larger two. And over time, whether that is
sustainable, I think, is something that we will have to see in
time. But I think, you know, right now we are doing our
darnedest to compete, but the scale disadvantages, the costs,
the investment that is needed in this industry are very real
and something that we have to contend with.
Chairman Klobuchar. Mr. Graham, is C Spire able to provide
the same kind of vigorous competition where you operate? What
unique challenges do you face?
Mr. Graham. Well, we are able to provide competition in a
number of areas in our specific markets, but our struggles stem
from the fact that even though we have just a little bit less
than a million subscribers these days, when the Leap
transaction closes, we will be the sixth largest operator in
the country. As I said, there are two nationwide operators with
approximately 100 million subscribers each and the scale that
that brings. There are two metropolitan operators with 40 to 60
million subscribers and the scale that that brings. Just ahead
of us sits United States Cellular at about 5 million
subscribers, and then it is us and 100 others smaller than us,
sixth, seventh, eighth on down.
And so what we struggle with is ensuring that we have a
clear pathway to the latest devices, that we have certainty of
access to roaming on nationwide networks or networks in other
parts of the country, and access to spectrum. Given those three
things, we will compete with anybody, as we have for 25 years.
In our market, we compete with the largest four operators every
day, and quite honestly, in most of those markets we win. The
way that we lose is when we lose access to those critical
inputs to our business.
Chairman Klobuchar. Thank you very much.
In a speech a few weeks ago, the Assistant Attorney General
for the Antitrust Division, Bill Baer, said that competition in
the wireless industry is ``driving enormous benefits in the
direction of consumers.'' He went on to indicate that at this
time it would be hard to make the case that reducing the number
of nationwide wireless competitors from four to three would be
good for consumers.
Mr. Wood, again, there have been reports citing talks
between Sprint and T-Mobile about a potential combination. Do
you have concerns about further consolidation in the wireless
market? I think I know the answer. And why is having at least
four national wireless networks important for consumers not
only in the prices but also for things like service billing
practices and cell phone unblocking?
Mr. Wood. Thank you, Senator. My reputation precedes me.
[Laughter.]
Mr. Wood. We do have some concerns, although I do think I
have to say that not only is the jury still out on this
potential deal, it has not even been called yet because it is
still speculation at this point in time. Obviously antitrust,
as we all know, protects competition and not competitors, but
the claim that reducing the number of competitors will increase
competition is one that deserves a lot of scrutiny, in our
opinion. So we think going from four to three and that Justice
found that that was not appropriate in the AT&T/T-Mobile deal,
the deal can be considered, but we think that it likely would
lead to a reduction in competition because you would have three
national carriers with basically the same number of subscribers
and not the same kind of disruption and maverick potential we
see today from someone like T-Mobile.
Chairman Klobuchar. Ms. Layton, in your testimony you state
that competition comes from the level of technology, not the
number of competitors. Would two wireless carriers be
sufficient to sustain a competitive ecosystem under your
analysis? What do you think works?
Ms. Layton. Definitely. You can certainly see competitive
markets with only two players, and I would say a great example
is look at the Internet companies today. Look at our market for
search engines. Essentially everyone uses Google. We have heard
of Bing and Yahoo, and they are there trying to offer their
services.
But, for example, what Google competes on is to constantly
outdo itself. How can it continue to make a more innovative
experience?
So I, in principle, do not have any problem with seeing
fewer carriers, and it is certainly the--you talk about the
Mobile World Congress. My colleagues from my company are there
today, and what they are talking about is consolidation across
all the countries of the world where the third and fourth
carrier want to merge. It is very difficult to be the third and
fourth carrier, and let alone down the line, certainly as Mr.
Graham has explained. So no problems with having more
consolidation.
Chairman Klobuchar. Mr. Milch, any views on what the
optimal number of carriers is? Do not say one.
[Laughter.]
Mr. Milch. No, Senator Klobuchar, I do not have any views.
[Laughter.]
Chairman Klobuchar. Okay. I just want to turn to this
spectrum issue. One essential element for competition in the
wireless industry is, of course, spectrum. Some of you have
brought that up. And in a filing with the FCC last year, the
Justice Department Antitrust Division pointed out that spectrum
is a scarce resource and key input from mobile wireless.
Especially important is access to what is known as low-band
spectrum that can travel greater distances and penetrate walls
and reach consumers inside buildings and homes much better than
high band.
Ms. Ham, Mr. Graham, could you explain the importance of
access to low-band spectrum for your companies to be able to
compete in the wireless market?
Ms. Ham. Yes, thank you. Low-band spectrum, as you note,
has unique propagation benefits. You think about your
television set and your ability to watch it indoors. As more
and more consumers want to watch things indoors and use data
indoors, having that type of spectrum as part of your
portfolio, I think, is very important to compete.
This is why T-Mobile has been very aggressive in the
proceedings at the FCC on this upcoming auction. This auction,
as I indicated, is really important to the future structure of
the market. Right now AT&T and Verizon overwhelmingly have the
majority of that spectrum, about 80 percent of it, as noted by
the Department of Justice. T-Mobile recently entered into an
agreement, which is pending before the FCC, to acquire some
low-band spectrum. That gets us about half a footprint, and it
gets us about an additional six megahertz averaged nationwide--
I mean not nationwide, but over only half the country.
So we are going to be interested in more of that coming up.
That auction is going to be, I think, very important to
ensuring that, you know, there is a leveling of the playing
field out there, that everybody has an opportunity to get
access to low-band spectrum.
Chairman Klobuchar. Mr. Spalter, what do you think the
consequences for competition of having so much low-band
spectrum controlled by two companies' low band?
Mr. Spalter. Let me say, Senator, that I think that as the
market evolves and as consumer needs are increasingly defined,
all carriers need to be able to conform their networks and
their spectrum needs to address consumers where they live and
to address their needs.
I do not believe that there should be any special weight
given to spectrum below one gigahertz. We know, as Ms. Ham has
just said, that T-Mobile is acquiring spectrum assets in the
secondary market below one gigahertz. We know that there are
other competitors that are seeking spectrum above one
gigahertz.
Fundamentally what we need to figure--what we need to put
into our calculations are consumers' needs regarding the
spectrum that they require in communities and the geographies
that they live. And carriers for technical and operational
reasons need to be able to have the flexibility to be able to
acquire spectrum assets and use those spectrum assets, both
above and below one gigahertz, to best meet those needs.
Chairman Klobuchar. So then you agree with the DOJ's
assessment when the head of the Antitrust Division talked about
how regional carriers lack that spectrum they need, the low
band, to keep their services competitive and called on the FCC
to, in fact, institute auction rules that guard against
excessive aggregation of spectrum?
Mr. Spalter. You know, I believe that the Spectrum Act was
very clear in making sure that the auctions that are going to
be conducted by the FCC catalyze systemic competition and not
privilege one competitor or advantage one competitor's business
plan over another. I believe that the fundamental principle of
open auctions available to all competitors, both for
commonsense reasons but also for the benefit of American
consumers, is the appropriate policy architecture for
developing and designing spectrum auctions as they have proven
to be in virtually every other kind of economic model for
auctions that we understand.
Chairman Klobuchar. Okay. Well, I have--Mr. Graham, do you
want to respond? Then I am going to----
Mr. Graham. I would, if I might address the low-band
spectrum question. You can argue spectrum a number of ways, but
you cannot change the physics of spectrum, and it is clear low-
band spectrum propagates better and travels further than high-
band spectrum. And it is a fallacy to believe otherwise. It
propagates better in buildings, and it penetrates vegetation
better than high-band spectrum. It is indisputable. And so low-
band spectrum will always have a higher value than high-band
spectrum will for that very reason.
I mentioned that our business has been--our company has
been in the wireless business for over 25 years, so we have
some of the original cellular licenses at 850 megahertz, which
is low-band spectrum. We also have PCS licenses, higher-band
spectrum, in a number of our markets. And if I were to show you
a map of our licenses and overlay--or, excuse me, if I were to
show you a map with pinpoints where we have customers, I would
not have to tell you where we have cellular spectrum and where
we have PCS spectrum. You would see the greatest concentration
of customers is in the areas where we have low-band spectrum.
The signal is better, and the coverage is better. And as
Verizon spends millions of dollars showing everyone on TV, the
map matters. The coverage matters.
Chairman Klobuchar. All right. Well, when I am in the next
round, I am going to ask you guys about the cell phone theft
issue and the technology there, but I will now turn it over to
Senator Lee.
Senator Lee. Thank you, Chairman Klobuchar.
I want to pick up on the spectrum issue. I will start with
Mr. Milch. You know, as you know, a lot of people have
expressed concern about the fact that we have got the two
largest carriers who have acquired a lot of spectrum, and some
have expressed concerns about this, suggesting that by buying
it up, in buying it up, they could be motivated by a desire to
box out others, that this acquisition of spectrum could serve
as a kind of natural restriction on entry helping to keep the
two largest carriers in place as the incumbent big carriers.
In your view, what is the likelihood that a carrier could
or would acquire spectrum for this purpose, for the purpose of
excluding others rather than for the purpose of using it?
Mr. Milch. Senator Lee, thank you. To directly answer your
question, I find the prospect, while theoretically interesting
and certainly an alarmist talking point, to be vanishingly
small. Capital dollars are very dear to everyone in a capital-
intensive industry, and the notion that you are going to
stockpile something that is so capital-intensive and not get a
return on it is ridiculous. I think that it is very unlikely as
a matter of fact.
You know, I think that there is an example that is worth
nothing, so we have noted--there has been noted a number of
times--that Verizon has a substantial position in low-band
spectrum, the 700 megahertz spectrum. We bought that at an
auction, and I would point out in that auction we did not out-
muscle T-Mobile for that spectrum, for instance. They did not
participate.
So the decisions that companies make about what they need
for spectrum at a particular time influenced their future
abilities, and they may pay more later, they may pay less
later, there may be new things that are available later, like
the 600 megahertz--600 band that is coming up for the incentive
auction.
I think that the notion that while there is the physics, as
Mr. Graham points out, about the propagation characteristics of
low-band spectrum, that does not necessarily equate to value.
The value that a carrier sees in any particular band of
spectrum depends on what they need at the time, whether they
need to have--do they need to have a widespread footprint? Do
they need to fill in? I mean, just last--just yesterday, the T-
Mobile CTO made it very clear that their strength is extremely
strong in urban areas, which I believe have a lot of buildings
in them, based on the density of their network and our spectrum
position in the mid-band. So that was what their CTO said
yesterday. They added that when they get the MetroPCS spectrum,
which is in the AWS band, which is higher-band spectrum, they
are going to be able to bring that across and will continue to
add spectrum in the AWS band and were in a good position and a
great position.
So I think that a lot of this depends on what you need at
the time. That is what is valuable to you as a carrier in
buying spectrum.
Senator Lee. Okay. Thank you.
Let us turn to Ms. Layton. I understand you have done a lot
of work studying the wireless markets, both within the U.S. and
in Europe. I was wondering what you could tell us about your
study, what you can glean from your understanding of the
European wireless market, what that can tell us here,
particularly what you can tell U.S. policymakers and regulators
in the United States that might be helpful from your
understanding of Europe.
Ms. Layton. Sure. Well, thank you for that question. I
think that we have had a 10-year natural experiment with what
we might call a European approach and an American approach--the
American approach, which is a technology-neutral, market-led
approach to the wireless market, and that has been shown to
win. Now, I think if you ask around the United States, people
will not say that, but if you ask Europeans, they will
definitely say that. And if you go--right now Europeans have
been involved in a three-year effort to create a digital signal
market led by Neelie Kroes, who is the vice president for
digital life. And I think probably she, more than anyone, has
talked about the successes of the United States. This is
largely motivated by Europeans who know they are missing out.
They are not winning in the Internet economy. There are only
pockets of next-generation access networks in Europe. They do
not have the wide footprints that we have here. You know, she
is pointing out how carriers can cover the entire United
States. There is no carrier in Europe who can do that. There
are 28 layers of telecom regulation. Operators cannot
consolidate across different states in Europe, so this makes it
very difficult.
I think there is one more example that I might want to
share, which is that there is a model of a kind of managed-
access competition where you have an incumbent provider who
will resell services. And I think--you know, the Europeans took
the approach of if they could control the reselling and control
the end-user prices that this would be fair. But the problem
is, if you are the network owner, any investment you make in
your network, if you have to give it to your competitors, it is
really a disincentive for you to invest.
So that is what we find going on today, and, you know, I
will just give you very quick numbers to keep this in mind. Ten
years ago, the EU accounted for one-third of the world's
broadband investment. That number has fallen to less than one-
fifth today. It has absolutely plummeted. And, interestingly,
in the United States we have maintained our level of investment
at one-fourth of the world's total. Even though the whole pie
in the world has been increasing--China is coming online, other
nations are investing in their networks--we have maintained our
level.
So, you know, as far as that goes, the writing is on the
wall. I definitely would say it is challenging if you read the
media, lots of reports about, you know, U.S. is falling behind.
But if you are in Europe today, there is no one in Europe who
says, you know, Europe is beating the U.S. on these things.
Senator Lee. Right, and we have achieved that because we
have maintained competition in part because we have allowed the
government to stand back enough to allow competition to exist
and continue.
In your testimony, your written testimony, you note how
quickly technological markets can develop, and the impact that
creative destruction can have on an industry. They can change
the makeup of an industry very, very quickly in unexpected ways
and in ways that often inure to the benefit of consumers.
Can you give us some examples of how creative destruction
can operate in this market and how it could benefit consumers?
Ms. Layton. Sure. Well, ``creative destruction'' is a very
loaded term. I think it is an important part of our--it comes
from Schumpeter, is an important part of our idea of
innovation. Just my own personal example is, you know, my
office in Copenhagen, we are in the former headquarters of
Nokia. They had an R&D center with 2,000 people, and Nokia
actually used to make more phones than Apple and Android put
together. They invented the smartphone. But nobody knows that
because Apple is the one who brought the iPhone, and finally we
could understand what a smartphone was.
So Nokia was a company that did not really know how to
market, and it was bought by Microsoft for about $6 billion. It
is less than an app company today. But the interesting part
about the creative destruction from that perspective is, you
know, my university took over that R&D location, and so now
they are--Nokia itself is trying to redeploy in different areas
and working in networks and in mapping.
But in terms of the United States, we are no strangers to
this idea of creative destruction. It is certainly a challenge
right now for the mobile industry where the revenues that they
have depended on in voice and text message, those are
disappearing. They know that they are not coming back, and they
have to try to find a way to be interesting and relevant for
their customers. And if you are in Silicon Valley, you can
definitely make a cooler app than, you know, a number of mobile
providers can do.
So that itself is a more potent form of a competition than
anyone, you know, sitting in Washington or in a regulator can
say we are going to make you, operator, do this or that. The
marketplace is exerting the discipline.
Senator Lee. Thank you.
Mr. Spalter, you note that there is an important role that
economies of scale can play in many industries, and in this
industry in particular. How do you balance that role, taking
into account the benefits to the consumer that can flow from
economies of scale against the corresponding risk of one or
more businesses becoming too big and playing too prominent a
role in a particular market? Can those two interests be
balanced?
Mr. Spalter. I do believe, Senator, that those interests
can be balanced, and I think that the record shows that
consumers have voted conclusively that our market is benefiting
not only the evolution in innovation that they are enjoying,
but also the kinds of question of services that mobile
consumers in a wide variety of guises have been experiencing.
One of the reasons that we can actually achieve this
equilibrium, this balance between scale and also ensuring that
market harm does not take place, is because we have a vital and
functioning Federal Communications Commission and its
Enforcement Division that has a number of safeguards and a
number of remedies at its disposal to address market harm. It
also has a number of tools at its disposal to ensure on a case-
by-case basis that specific issues with regard to--including
the question of spectrum, can be evaluated on a transaction and
on a case-by-case basis.
I think that that approach, a muscular and nimble Federal
Communications Commission that has a long checklist of tools at
its disposal to prevent market harm, is a bulwark against any
excesses and has proven to be in the past and will continue to
be in the future.
Senator Lee. Thank you.
Thank you, Chair.
Chairman Klobuchar. Thank you very much.
Senator Flake.
Senator Flake. Well, thank you. Sorry for arriving late.
You have plowed a lot of this ground before, so please indulge
me.
Ms. Layton, talking about the Europe--all the research that
you have done there, I find it very interesting, because the
perception is that they are way ahead of us. That is what we
hear all the time. But in terms of--and that may be the case in
terms of number of users. What is the number of smartphone uses
in Europe, generally, compared to the U.S.? I have not seen
that comparison in what you have done. What is that?
Ms. Layton. Well, I think maybe to get to your larger
point, it is an interesting question. You know, why is it
persisting in the United States, this idea that Europe is
somehow doing better? I think that that is really the
interesting question. And I think a lot about that myself. I am
actually doing a study of media bias here in the United States,
and it is interesting. I think it is difficult as a Member of
Congress or member of the public to really understand, because
even the leading publications in the United States--New York
Times, Wall Street Journal--print contradictory information
every day, on the same day. So it is interesting that certain
journalists will have an opinion and look for whichever
information to try to support that.
But what I would definitely say is that there is an
industry in trying to create a fear about America's falling
behind. And I remember this back in the 1980s when it was all
about Japan is taking over America, go destroy your Nissan.
Then it was India. Then it was China. And now it is broadband.
So there is a whole industry about books and selling
magazines and whatnot to try to make us afraid. And I think the
ulterior motive is to get the government to take over
broadband. There is a general fear that the market cannot do
the job. There is a distrust. There is a dislike of companies
to earn a profit for a service that is provided to people who
they happily pay for.
So in that respect, I think it is unfortunate that we have
facts that are maybe manipulated one way or the other.
Senator Flake. Okay. Usually the measure that is used in
order to justify greater government intervention is investment
in basic research, coverage, or whatever else. Mr. Milch, you
mentioned in your testimony that the level of investment per
person here is significantly higher than it is in Europe. What
are those figures?
Mr. Milch. Senator Flake, as I said earlier, you know, last
year alone the wireless carriers invested $34 billion in their
networks, which is four times more per subscriber than anywhere
in the world. So I do not have to break it down country by
country, but as a general overall world level, that is about
four times. And since 2001, that investment is $300 billion in
their networks. So it is one of the characteristics, I believe,
of a competitive market that you have this huge wealth of
investment in the infrastructure in order to compete, and if
there were no competitive urges, there were no competitive
requirements, carriers would not spend so much of their
capital, so much of their shareholders' capital, in constant
investment in networks and in spectrum.
Senator Flake. All right. Mr. Spalter, what are your views
there? Would we likely see more investment in broadband
coverage and research if we had greater government involvement?
If you say that the FCC has an all-ready toolbox to go over
this, is that--do we need to tip the balance in that direction?
Mr. Spalter. Senator, thank you. I think it is both wise
public policy and good economic sense for policymaking to
proceed as I had mentioned with restraint and with humility
regarding the evolution of America's dynamic mobile innovation
sector. The last 20 years have shown us conclusively that this
approach has engendered more, not less, investment in our
infrastructure and innovation, both at its core and at its
edges----
Senator Flake. I am sorry. Back up for a second. When you
say ``this approach'' that we have?
Mr. Spalter. Of regulatory restraint, regulatory humility,
the idea that we should not be prescriptive in viewing future
market problems that have not yet developed, but acknowledging
that this is one of the world's most dynamic marketplaces. It
is changing all the time. It requires intensive continued and
sustained resilience of investment and innovation so that
consumers, who really should be at the core of all of our
consideration here, can continue to benefit, as they have in
the United States and as they will continue to benefit if we
can hew to an approach of, as I had mentioned, minimally
engineering and not over-architecting our laws and regulations
and assumptions about how this market is going to evolve or how
it should evolve. Let consumers be in the driver's seat in this
regard.
Senator Flake. Well, thank you. I have to run to another
meeting, but I just want to say in general, in this industry
and elsewhere, we have benefited where the government treads as
lightly as possible and lets the private sector innovate as
long as there is competition. And if you look at the level of
investment that is going in right now, it would seem that we
have struck a better balance than some other countries have. So
I hope that that continues.
I appreciate the testimony and look forward to continuing
the discussion.
Chairman Klobuchar. Thank you very much, Senator Flake.
I was going to focus here now on the Smartphone Theft
Prevention Act and the work that is going on technologically to
try to reduce theft of the cell phones. I introduced this bill
with Senators Mikulski, Blumenthal, and Hirono, and the bill
calls on the wireless carriers and manufacturers to offer a
technical function to their consumers that would wipe their
data and render the device useless to thieves, therefore
devaluing its resale value. We have a situation, as I
mentioned, where one out of three burglaries now in the country
are cell phone-related. We have seen that all over our State. I
know Senator Mikulski has seen it in Maryland, especially in
the transit system, and part of that is because the cell phones
are fetching between $100 to $500 on the international market.
The fact is that the thieves know a few people might have
turned on their iPhone 5 function which allows them to
basically wipe the data, but still store--it wipes--it allows
the owners of the phone their own right to wipe the data, but
keep the data on the cloud for their own use but not the
thieves' use. But right now what is happening is the thieves
see value in this, of course, because of the market value,
because of the fact that they have actually a functioning phone
when they sell it to someone on the black market, that they
actually have a phone that has stuff in that they can use, not
necessarily the data but the phone is ready to go. And one of
the reasons we introduced this bill was to try to push other
carriers to find this technology.
I guess I would start with Mr. Milch. Verizon has stated
publicly that it has no objection to a secure kill-switch type
application that is free to consumers and secure. Are you
actively as a company engaging with device manufacturers on
possible solutions for Verizon so they can offer it to their
customers?
Mr. Milch. Thank you, Senator Klobuchar. Yes, of course we
are doing that. We believe that this is--to any extent that our
customers are put in danger or could have their phone taken
from them--I recently had a theft in my own family of a cell
phone, and it is quite alarming to everyone. And we were lucky
that in this instance we could turn it into a brick, and we
could turn it into a brick from a foreign country where we
happened to be at the time.
We are eagerly awaiting secure and free kill-switch
capabilities from other phone manufacturers. This is both a
manufacturer and an operating system issue. We believe that it
is important, as with the Apple ability, that it is free, and
we are very, very concerned that it is also secure. We do not
want an instance where it is a hackable kill switch. We have
spoken before of our children and their phones. I can only
imagine that that would be a delightful thing to be able to do
to one of their friends' phones if they could do it. So I think
that it is--or former friends' phones if they could do it.
So it is very important, and we are actively engaged with
both app developers and manufacturers to encourage them to
bring forward these options.
Chairman Klobuchar. Yes, and I think that there has been
something out there about how well they could all be hacked.
Apple developed this for a reason. They saw it as a good thing
to have on the phones. It protects consumers, and it also is
something that gives them a competitive edge, clearly. And so
for people that say, well, this should never be done because it
only could be used by hackers or that somehow the government is
going to be getting ahold of it, the whole idea here is to
allow individual private users to actually protect their own
data.
Mr. Wood, would you agree that consumers are calling for
more security functions on their phones in light of this
exponential increase in cell phone thefts and that carriers and
manufacturers need to listen to these demands?
Mr. Wood. I would agree, and I think that is the key, is
giving people the tools that they want to use, not necessarily
saying, ``Here, you have to take this application because we,
the carrier, have decided that you should have it.''
Chairman Klobuchar. Well, yes, but remember that this would
still be a choice for them to do----
Mr. Wood. Oh, of course. I think that is the key, and that
is what your bill is aiming toward, is giving people that
choice if there has been some road block in between them and
getting access to an app that will do that securely and cheaply
and easily.
Chairman Klobuchar. Okay. Anyone want to add anything? Ms.
Ham.
Ms. Ham. Yes, I would just say that we share your goals. T-
Mobile has been very active in this area as well. We are also
part of the GSMA global IMEI Data base, where stolen devices
are listed on a centralized data base in an effort to prevent
their use in another carrier's GSM LTE network.
I would also add that we load on all of our phones an
application called ``Lookout'' that enables the customer to
locate, lock, and wipe their phone, and that comes free to the
customer, and that is something that we are doing now.
Chairman Klobuchar. Okay. Very good.
Mr. Graham.
Mr. Graham. I would add that we are supportive of the
concept also, but, again, we come to that stratification
problem where, when you get to carriers our size and below, we
do not have the ability to require manufacturers to preload
that onto their phones. You mentioned that Apple does offer it.
It is a competitive advantage for Apple and for those who can
offer that product.
So to the extent Verizon or anyone else develops that with
device manufacturers, it will not reach customers in rural
areas if those devices, that app, that feature is exclusive to
the largest operators. It is the same problem we run into, just
from a different perspective.
Chairman Klobuchar. Okay. Well, thank you. I appreciate
what you have all said here, and I think you know the reason we
introduced this bill is just we feel that this has been taking
too long, and the problem is just mounting, and the bill is
supported by the Major Cities Police Chiefs as well as a number
of Attorneys General from across the country, including New
York, the district attorney in San Francisco, and other places.
You mentioned rural, Mr. Graham, so I think that is a good
segue into some of these issues. Looking at each carrier's
nationwide map, you can see tremendous gaps in coverage in
rural areas. I have talked about this mostly at Commerce
Committee hearings on which I also serve. And I have a bill
with Senator Fisher, Deb Fisher, the Rural Spectrum
Accessibility Act, which would incentivize wireless carriers
with larger quantities of spectrum to coordinate and work with
carriers serving predominantly rural areas in order to expand
coverage into our rural areas.
I know Verizon has its Rural America Program, which is
already working in parts of rural America. Mr. Milch, since
your company has already started partnering with rural
carriers, would you agree that rural carriers need to be part
of the wireless market to make sure that consumers, no matter
where they live or work, that they are able to connect with
their families to contact first responders and to do business
via wireless devices?
Mr. Milch. I certainly do agree with that, Senator
Klobuchar. I think that we are eager to have as many rural
customers as urban customers, indeed, and Verizon is probably
the largest rural carrier there is in America. And we have
extended that capability by, as you said, our Rural America
Program where we have over 20 agreements with rural wireless
operators to bring the benefits of our LTE spectrum, our 700
spectrum there.
The networks cover 2.2 million people as of today and more
than 58,000 square miles, and over 300,000 people use them
every day to do exactly what you said, connect with their loved
ones and utilize mobile broadband.
So we are eager to continue that program with rural
carriers. It is a cooperative program where we supply the
spectrum and we assist them in building out the network in
their footprints. And we are eager to continue that program.
Chairman Klobuchar. Well, as you know, 34 percent of
smartphone users use wireless almost exclusively to access the
Internet, including many in rural areas. Mr. Graham, how is the
600 megahertz spectrum block of particular use to serving rural
America and the demand for mobile broadband? Can you touch on
the importance of interoperability requirements and if there
should be rural buildout requirements for spectrum licensees
who purchase spectrum in the upcoming auction?
Mr. Graham. Sure, I would be happy to. Thank you for the
question.
Let us back up to the 700 megahertz auction for just a
moment, because I think it highlights the problems--or the
potential that was there, the problems that came after it, and
what we hoped for the 600 megahertz auction, 700 megahertz
being low-band spectrum, with spectrum that we acquired, we
acquired the licenses throughout our operating footprint and
beyond, and intended to deploy service, deploy LTE service
throughout our footprint in rural areas, primarily in
Mississippi, which, as we all know, is always in the bottom
rankings when you look at the poorest of States in the country.
What we were unable to do, though, was deploy that service,
the reason being there were separate bands created for that
lower 700 megahertz spectrum that allowed AT&T to take its
spectrum licenses and deploy, while those who got spectrum
licenses in another part of that band were unable to deploy our
spectrum. And, indeed, it was only under the leadership of
interim Chairwoman Clyburn at the FCC that we reached an
interoperability agreement that will finally allow that
spectrum to be put to use.
We talked already about how that spectrum propagates so
much better than mid-range or high-band spectrum. If we repeat
the same mistakes in the 600 megahertz space, then rural
America will once again be left hoping for services that are
available to their brothers, sisters, cousins in urban areas
but are unavailable in their areas because their spectrum does
not--the spectrum covering that area is not interoperable in
the larger ecosystem of devices.
Chairman Klobuchar. Okay. Thank you. I will turn it over to
Senator Lee.
Senator Lee. Thank you very much.
Mr. Graham, in your testimony you express some significant
concerns about contracts for data roaming and for backhaul. Can
you tell us a little bit more about those concerns, where they
are rooted, and let us know if you have any evidence that data
roaming and backhaul contracts are not reasonably available in
the marketplace?
Mr. Graham. I cannot get into the specifics of data roaming
rates because, unfortunately, those are protected under NDA in
the data roaming agreements themselves. In fact, I believe we
are prohibited from even saying who our data roaming partners
are in most cases.
But what I can tell you is that the rates that were cited
earlier in an opening statement of three cents a megabyte, what
customers pay, I can assure you that the data roaming rates
that operators like C Spire sees are multiples of that. Three
cents is not something that we see from those large--the Twin
Bells, the wireless Twin Bells.
On backhaul, wireless towers are, of course, connected back
to the switch that routes traffic, either by a wireline
connection, either copper, these days fiber, or occasionally
microwave connections that eventually hit a wireline connection
and go back to that switch.
Generally small operators are restricted to the incumbent
Bell for that backhaul service, who, of course, have affiliated
wireless companies these days. This became such a problem for
us roughly 10 to 12 years ago that we created our own backhaul
company. It is C Spire Fiber, and it has provided backhaul to
us where they could build for years now. We are actually
leveraging that and beginning a fiber-to-the-home initiative.
But it was such a problem that we had to create our own company
and invest that money in order to build our own backhaul.
I am not sure a public company could do that. I think a
public company would probably be punished by Wall Street for a
move like that. But we are privately held. Our owners take a
long-term view of our business and knew that it was in the best
interest, and 10 years ago that was a difficult call to make.
I can tell you that there have been a number of instances
where we have gone to the incumbent Bell provider for backhaul
services looking for a fiber connection to backhaul traffic
from our tower back to the switch, and though fiber runs to
that location where we are collocated on a tower, we are given
a number of excuses on why it could take months for us to get
that faster backhaul connection and why we have to sit on
typically a T1 or bonded T1 connections to backhaul that
traffic to our switches.
Senator Lee. So in some cases, you have been effectively
excluded, and that is one of the reasons why you----
Mr. Graham. Either delayed or excluded. The need was
immediate, so in that sense, excluded; but delayed, certainly.
Senator Lee. Okay. Mr. Wood, in your testimony you state
that the demand for licensed spectrum may be overstated, and
you advocate for more unlicensed use of spectrum. Can you tell
us a little bit about how this would work and how this would
allow carriers to better accommodate the increased demand for
data in the coming years?
Mr. Wood. Sure. Thank you, Senator. Glad to do it and thank
you for the question.
We have seen, I think in the last 10 years alone, a
dramatic shift in the conversation about unlicensed. Without
impugning their motives, I think 10 years ago or so, carriers
thought of unlicensed as some kind of threat to them, and today
they use it as a valuable part of their own portfolio to
decrease congestion and more efficiently handle their own
customers' traffic. You might have seen yourself when you try
to download some apps from the Internet or from an apps store,
it will say, ``Please switch to WiFi. That will be better for
you''--and, frankly, better for the carrier as well.
So the numbers, I think, are always growing and always
changing, a little bit uncertain as to the present snapshot at
this very moment, but I think the estimates now are that
something like 37 percent of all U.S. wireless traffic from
smartphones goes over a WiFi connection already. And by smartly
combining licensed and unlicensed, we can have a more efficient
system and a more affordable system for everybody because it is
not really an either/or choice. It is something that both new
entrants and licensed carriers make use of already today.
Senator Lee. Thank you. I appreciate that.
Let us go back to Mr. Graham for a minute. In your
testimony you indicate that the wireless industry went through
a period of over a decade of effective competition, but has
since shown some signs, some indicia of perhaps returning to
kind of a duopoly, a duopoly kind of arrangement. Some have
suggested that this might be the product of some unfair
competition, or others have suggested that it might just be the
product of very good, sound business decisions by a couple of
carriers who, as a result of their good business decisions,
have achieved more prominence in the industry.
If it is the latter, that is to say, if, in fact, the two
largest carriers have achieved that much market share simply as
a result of sound business decisions, wouldn't there be some
pretty profound implications to our adopting policies that
would, in effect, punish those carriers for those sound
business decisions?
Mr. Graham. Let me restate the question to make sure I
understand it.
Senator Lee. Yes.
Mr. Graham. Under an assumption where sound business
decisions led to the growth of the two largest carriers, would
policies that restricted--or that promoted competition then
punish them for sound business practices?
Senator Lee. Yes. Would policies that were designed to
diminish their market share, in other words, so they have
achieved some market share, and if you start from the
presupposition that they achieved that market position as a
result of sound business decisions, does that present a dilemma
for us as policymakers if we are asked to do something
specifically designed to undermine their position?
Mr. Graham. Right. I think it would be difficult to justify
any policies that would specifically take away market share,
intervention by the government to pull market share away.
Having said that, I think the country prospered when Judge
Greene broke up Ma Bell years ago. At this stage we saw so much
consolidation, unfettered consolidation, which is what led to
the size of Verizon Wireless and AT&T Mobility these days. It
was not a decade of beating others in the market. It was a
decade of buying others in the market, which conceivably had no
limits until AT&T tried to go for the one that was too big,
acquiring T-Mobile.
If you look back to what happened in 2008 when Alltel was
acquired, that sort of closed that period of consolidation.
There have been a couple of others--MetroPCS and Leap Wireless
Cricket. But I think we could clearly see it has been
consolidation, it has been acquisition of companies, not
acquisition of customers, that has led to this stratification
in the industry these days.
Senator Lee. Okay. Thank you.
Mr. Spalter, I was wondering if we could get you to respond
to Mr. Graham's answer to the question I asked two questions
ago about backhaul and data roaming. Do you have any particular
response to his point about the lack of availability of
contracts in this area?
Mr. Spalter. In 2011 the FCC, working closely and in good
cooperation with the American carrier community, evolved a set
of protocols, a set of very clear principles regarding data
roaming, which included provisioning recourse, a set of very
clearly etched tools that are available to any competitor to be
able to go to the FCC and bring issues of concern to the FCC.
As far as I am concerned, as far as I understand, Senator,
I am not aware of any such complaints that have been brought,
and the system that has been architected on a voluntary basis
by industry participants working with the FCC seems to be
working quite well.
There is an adage, sir, that, ``If it ain't broke, don't
fix it,'' and I think in this regard there is some wisdom to
that.
Senator Lee. Thank you.
Mr. Graham, do you care to respond?
Mr. Graham. Yes, if I might. We actually went through that
process, so we did not--there are two ways you can do this. One
is the official filing of a complaint, and then there is also
sort of a mediation process, an unofficial process that you can
go through. We tried this actually with another panelist, went
through the mediation process, and although data roaming rates
were able to become somewhat more rational, rational in this
respect is relative. And it does not take away from anything I
have said earlier about the three-cent figure that was cited
being anything realistic that our customers would see.
Senator Lee. You went through this with another panelist
whom you are not going to mention.
[Laughter.]
Senator Lee. We will leave folks to guess.
Ms. Ham. It was not us.
[Laughter.]
Mr. Spalter. If I could just also just comment, you asked
about backhaul and special access. One of the exciting features
of this dynamic marketplace that we are experiencing is the
evolution and the continued advancement of technology standards
in the generations of technologies consumers are being able to
use, and that includes the actual technical means for backhaul.
We are transiting to a next generation of much higher capacity
and much higher-speed backhaul facilities based on the
ethernet. The existing special access regime, 95 percent of
that marketplace still covers 1.5 megabit per second speeds,
which is actually even slower than plain old telephone service.
Universal service funds would not even provision speeds at that
level.
I think the policy focus going forward should be to migrate
beyond legacy regimes and legacy networks and legacy
approaches, and thinking about creating abundance and creating
advancement by focusing our efforts in the transition toward
better, faster, quick, more scalable technology, that should be
the policy focus.
Senator Lee. Okay. I am over time, but I see Mr. Wood is
itching to----
Mr. Wood. Well, just to the special access point, we are
all for more abundance, but this has been a 15-year struggle in
some ways. The FCC actually largely deregulated special access
in 1999 based on the promise of--not actual competition but the
promise of competition from MCI and from AT&T before it was
acquired by SBC. And so you asked about evidence that it is
harming competition. There are reams of evidence, but the FCC
is still in data-gathering mode here about a decade and a half
later. So the FCC definitely does have some tools at its
disposal, and we think sometimes it has been too slow to use
them, not to try to structure the future in any way that Mr.
Spalter or I would not like, but to make sure that carriers
have access to these crucial inputs they need to provide
service to their own customers.
Senator Lee. Mr. Milch.
Mr. Milch. Thank you. I, too, am very interested in the
details of the mediation between C Spire and Free Press, which
would be very interesting.
[Laughter.]
Mr. Milch. I just want to make two points on this.
Number one, Verizon has over 50 data-roaming agreements in
existence right now. If C Spire were uncomfortable with the
rates, it could have always taken the formal route. It did not.
It made a business decision that it was going to move forward
on the rates that it got.
As for backhaul, this is a burgeoning business for us, but
it is a very competitive business for us. We see significant
entry by the cable companies into this very business of
providing backhaul and providing special access. We are eager
and try to look every day to make sure that we provide our
backhaul customers with the best service we can provide them.
And we are eager for the FCC to complete its data gathering. I,
too, agree that it has taken a long time for them to gather the
data. The data they have not yet been able to gather is the one
from the competitive providers of backhaul services. So when
that data is in, we are looking forward to seeing it as well as
everyone else. Hopefully there will be significant response to
their requests, and we will be able to see what the true lay of
the land is on the competitive backhaul issue.
Thank you.
Senator Lee. Thank you.
Thank you, Madam Chair.
Chairman Klobuchar. Thank you. I was actually going to ask
some questions on special access, but you pretty much covered
the landscape. I will maybe follow up with a few in writing, so
I guess I will have to turn to something less interesting: the
Comcast/Time Warner merger.
That was a joke.
[Laughter.]
Okay. Last year, Americans consumed double the amount of
monthly data than they did in 2012, and demand is expected to
increase as more video is available online. With four
nationwide carriers, consumers have meaningful competition for
wireless broadband, although we are always concerned about that
competition and believe that we need to keep it strong.
Now, this is in stark contrast to fixed broadband where a
large number of American consumers have only a cable company to
choose from. Competition for broadband connectivity will be one
of the central focuses, as you know, of our examination of the
Comcast-Time Warner cable merger in the hearing coming up
shortly.
I guess, Mr. Wood, I will start with you. As more and more
consumers use their phones and wireless tablets in a way to
connect to the Internet, do you view wireless service as a
substitute for fixed broadband provided by cable, DSL, or
fiber, such as Verizon?
Mr. Wood. I would say it is an alternative, but not a
perfect substitute, especially when you talk about the prices
people pay and the caps they have typically faced from their
wireless providers or at least from some wireless providers.
DSL may be slower than some LTE offerings today, but in
general, wireless is still slower and then more expensive,
especially once you take into account potential overages for
doing the kinds of things most people expect to be able to do
easily with their home broadband connection.
Chairman Klobuchar. Mr. Graham, C Spire has invested in
building fiber networks to compete with local cable and DSL. Do
you view your wireless service as competing with fixed
broadband?
Mr. Graham. If you look purely at Internet connectivity, I
think eventually wireless will be able to compete with
broadband. But today when most people look for the fastest
broadband connection they can find, they want to pair that with
video. Eventually we will reach the point where consumers take
their video content over the top. That is probably roughly the
time that wireless technology will hit speeds that consumers
expect today out of their broadband connection. Until that
time, I do not think wireless could be a true substitute or
competition for landline broadband connection by fiber or, in
some cases, even by cable.
Chairman Klobuchar. Mr. Milch, Verizon Wireless offers a
wireless broadband Internet product called ``home fusion
broadband.'' It markets home fusion in FIOS markets as an
alternative FIOS Internet. Do you view Verizon Wireless
substitute as a substitute for fixed broadband?
Mr. Milch. We believe that home fusion, which is a great
product and is available not only in the FIOS areas but all
across our footprint--Verizon Wireless sells it wherever it
can. We do believe that it is a valuable substitute in some
circumstances. In other circumstances it is probably better
thought of as an alternative. The marketplace is quite varied,
so you have to look not only at what the competitive
alternatives are in a particular geography as well as what the
needs of the customer are.
Customers in some geographies would not want to pay for the
extra costs of getting broadband, wired broadband to their
homes, particularly if those homes were only being used for
certain parts of the year or not--there would be high fixed
costs and other costs.
So I think that it is a valuable alternative depending on
the circumstances of the customer and of the competitive status
in a particular geography.
I also believe that looking forward there will be, as there
always are, technological advances that will increase the speed
and lower the costs per unit of broadband, wireless broadband,
as it has been. There will be advances in compression
technologies. There will be advances in all sorts of
technologies that will probably increase its competitive force
in more circumstances than are currently--where it currently is
a competitive, a real competitive alternative.
Chairman Klobuchar. Okay. Anyone want to add anything to
this subject?
[No response.]
Chairman Klobuchar. Okay. Another question for you, Mr.
Milch. In 2009, Verizon sent a letter to Congress noting a
commitment to limit exclusivity agreements with regard to
competitive carriers. Can you reaffirm that commitment? And
will Verizon continue to work to ensure that market share will
not dictate access for smaller carriers to the latest devices?
Mr. Milch. Our commitment that we made in our July 17,
2009, letter to then-Senator Kerry remains fully in force. We
have limited any exclusivities that we have to the six months
for all manufacturers and all devices, and there are, you know,
a score of handsets that are in this program right now.
I would say, if I could, that--it might be a bit
heretical--exclusives have served a significantly pro-consumer
purpose, I believe, in the marketplace. I do not believe--it is
not clear to me that if AT&T and Apple had not agreed to an
exclusivity relationship for the original iPhone whether there
would have been the level of investment by both parties to make
sure that worked. So it does, I believe, broaden device
capabilities and incent innovative efforts for a certain level
of exclusivity.
Now, that being said, we recognize the issues that were in
front of us, and we did make the commitment in July 2009, and
we stand by that commitment today.
Chairman Klobuchar. Okay. I am going to turn now to number
portability, which is something I remember from my past in the
late 1980s, early 1990s. We actually had an entire hearing on
it in Minnesota. Number portability is essential to
competition, as we all know, in the wireless industry. At that
time, I was representing competitive companies. It was a big
deal to us. Without the seamless and fast portability that
takes place today, consumers would be more reluctant to switch
carriers. The whole system is overseen by a consortium of large
telecom companies that solicit bids from contractors interested
in running the portability system, and there is currently a new
contractor selection process underway. The new cost and process
for switching numbers as well as the speed and reliability of
that transition will be central to consumers.
Mr. Graham, does C Spire have concerns about changes to the
number portability system?
Mr. Graham. Well, the number portability system, as it
exists today, is local number portability, meaning numbers can
only be ported within the same LATA or to switches that exist
within various LATA.
Chairman Klobuchar. Right.
Mr. Graham. So we think the time has come, especially as we
get closer and closer to an IP-based world--we are in this sort
of hybrid world. The time has come to make true number
portability a reality. Do not tie those numbers to LATAs. We
see this frequently where students will come from other States
to college in Mississippi. They want to become a C Spire
customer, but they want to keep their number. And,
unfortunately, they cannot port that number to us because we do
not have switches where they came from, and we cannot accept
that number in our switches where they would live and go to
school.
In that case they often decide the number that everyone
back home knows is more important than switching carriers. That
is not unique to us. That happens across the country with
carriers our size and smaller.
Chairman Klobuchar. I am just thinking back to this hearing
I did when I remember cell phones were the size of Gordon
Gekko's cell phone that too up an entire briefcase in the movie
``Wall Street.'' And I remember then that the arguments were
being made that people are going to have cell phones all the
time and no one will really know what the area code is. A lot
of the groups are going, ``No, that is not true. Everyone will
care about having the same area code of where they live.'' And
that clearly was not quite the case.
Mr. Graham. That is right. Look at Google Voice, for
instance.
Chairman Klobuchar. Yes. Mr. Spalter, are smaller carriers
right to worry that larger rivals have an incentive to make the
porting process costly and burdensome because it helps protect
large user bases against competition?
Mr. Spalter. I do not believe that to be the case, and I
think the FCC has evolved a conduct--rules for that conduct
with regard to local number portability, those rules, and it
seems to be working. And the conduct of companies with respect
to those rules also seems to be proceeding appropriately.
Chairman Klobuchar. Okay. Any other--someone wants to add
anything? Mr. Wood.
Mr. Wood. We have heard about the tools the FCC has. I
think the important thing to remember with the largest carriers
is that they have a lot of tools themselves to diminish
people's portability, not just for numbers but for devices. So
to the point made earlier about capital expenditures and
intensive--the intensivity of those capital expenditures, AT&T,
when they had that iPhone exclusive, was routinely ranked as
one of the worst carriers in terms of service, but people
stayed with them because that was the only place they could use
their iPhone. Obviously we do not live in that world today, so
I would say perhaps there were some benefits to exclusivity,
but there were even greater benefits to letting carriers like
Verizon and T-Mobile and others have access to those devices.
And the exclusivity in all these methods to reduce churn would
really be foreign to us in other markets, even in wired
broadband, which we say is not as competitive. It does have
more device portability in some ways. It would seem outlandish
if you could not take your PC or your MacBook from Comcast to
Verizon wired broadband.
So I think there are lots of things the FCC can continue to
do, not to dictate the technology in any sense but to make sure
every customer has access to it, no matter which carrier they
choose.
Chairman Klobuchar. Okay. Thank you.
I will have a few more questions in writing. I think we are
getting into the weeds. Would you say that now, Senator Lee?
And then maybe we will do the rest in writing.
[The questions of Chairman Klobuchar appear as submissions
for the record.]
Chairman Klobuchar. Do you have any other questions that
you want to ask?
Senator Lee. Yes, I want to go into the weeds just a little
bit more.
Chairman Klobuchar. Excellent. You are in Nerd Land up
here. We are loving this stuff. Senator Lee.
Senator Lee. So, Mr. Wood, I have heard some concerns
expressed regarding the dominant players in the wireless device
operating system market. Some have suggested that the dominant
players in that market are unfairly leveraging their market
power. Are you familiar with those concerns? And if so, do you
share them? What do you think of them?
Mr. Wood. I am familiar with them. I think that the
interplay between the operating system manufacturers, the
equipment manufacturers, and the carriers are all a matter of
some concern, because when those things break down, it can
ultimately harm the real people who depend on these devices. I
do not know that the FCC or Justice or the FTC is necessarily
the appropriate body because I have to say I am not as familiar
with some of these concerns. But, of course, there is a lot of
market power in all of these different markets. We just see
usually that the carriers have more of a shield against this
kind of creative destruction that Professor Layton talks about
because they have this 100-year head start or decades-long head
start when it comes to the inputs that they need to provide
service. But I do not say that to diminish the possibility that
an equipment manufacturer or an operating system manufacturer
working in conjunction with a carrier could make agreements
that are not ultimately to the benefit of competition or to
consumers.
Senator Lee. Okay. Thank you very much. I may have some
additional questions on other matters in writing.
Thank you, Madam Chair, and thanks to all of you.
Chairman Klobuchar. Well, thank you. Once again I would
like to thank our witnesses for testifying today. Your
expertise is critical to help us understand the competition in
the wireless market. I think that the takeaways today are that
while the industry is competitive and benefiting consumers and
that we have recently seen a surge of competitive activity,
there are still challenges, particularly when it comes to rural
areas where the competitive carriers face an uphill battle to
be able to offer consumers the benefit of competition. So any
further consolidation in this market will naturally raise
concerns, and there will be a high bar to meet to show that
further concentration will truly benefit consumers.
Our Subcommittee will continue to be involved in these
issues. As you know, we have several hearings coming up that
touch on these issues, and I want to thank Senator Lee for his
continued partnership on this Subcommittee, and I want to thank
you all for coming. The record will remain open for one week,
and the hearing is adjourned.
[Whereupon, at 12:01 p.m., the Subcommittee was adjourned.]
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