Opening Remarks

• Senator Fritz Hollings
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  Opening Remarks

  Senator Fritz Hollings

  Today we examine the depression in the telecommunications industry and begin to consider policy to help revive the sector. What perplexes me is that this industry was destined to ensure America’s economic superiority in the 21st century. Instead, the telecom depression dragged our economy into recession, and now threatens our global competitiveness as critical equipment makers like corning and lucent are staring bankruptcy in the face. Our telecommunications industry has always been unmatched in its preeminence. In 1996, we sought to extend that supremacy with the Telecommunications Act. Six years later, most of the dazzling promises that led us to pass that legislation remain unfulfilled. Only now, are some promises coming true. The Bells are suddenly making progress opening their local markets. Duane Ackerman and my bell south are closest to completion and should be commended. Cable is finally offering voice competition in more markets. There is real competition in the business market. Millions of residential customers have a choice for local phone service. Rates are lower than ever in the long distance and wireless sectors. Broadband is available to 80% of Americans. But, just as customers are enjoying the fruits of competition, times have never been worse for our companies, their shareholders, and their employees, over half a million of whom have lost their jobs. Bankruptcies, accounting scandals, absurd overcapacity, and dozens of bad business plans have destroyed confidence in the industry. This is not how it was supposed to be. And while there is a lot of finger pointing going on among the companies and here in congress, we need to move beyond that. We need to move beyond the intramurals up here over Tauzin-Dingell, and "parity." if the market demonstrates anything, it is that competition, not deregulation drives the Bells to invest in their networks and comply with section 271 to open their markets. That is the record in the business market, where the Bells responded with cheaper, new offerings to combat the CLECs. And it is true in the residential market, where UNE-P lines lost to competitors are forcing the Bells to hurry up and comply with the act where they have yet to do so. Deregulation will not rescue this sector from depression. What ails telecom goes far beyond the regulations governing the Bell companies. Any policy solution must recognize that. I fear my friend Chairman Powell has yet to reach this realization. Abraham Lincoln once said that "the dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew." That is what we must do with today’s telecommunications industry. Wireless companies may need to consolidate and obtain more spectrum. What we call "broadband" may not actually be fast enough. The government may need to subsidize demand and/or infrastructure to promote the higher speeds needed to jump start the industry. We should consider new technologies like "wi-fi" in unlicenced spectrum as high speed alternatives. And while I tend to doubt Bell claims that wholesale pricing regimes discourage investment, perhaps we should examine those too. The federal government has a history of assisting industries to preserve America’s global competitiveness: in the 70's with the aerospace industry and Lockheed Martin; in the 80's with the auto industry and Chrysler, and with the semiconductor industry and Sematech. America has also invested in infrastructure to benefit the economy as a whole – as with the canals and railroads in the 19th century and rural electrification and federal interstate highway programs in the 20th century, all of which expanded interstate trade. Investments in higher speed broadband infrastructures could pay similar dividends. Today we’ll hear from a distinguished panel with different recommendations for revival. I look forward to their testimony.

Testimony

• Mr. Michael J. Price
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  Testimony

  Mr. Michael J. Price

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• The Honorable Reed E. Hundt
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  Testimony

  The Honorable Reed E. Hundt

  Mr. Chairman and Members of the Committee: Thank you for inviting me to testify today on the government's role in the future of telecommunications and broadband deployment. This is a vital subject and a timely hearing, as the telecommunications sector, which led the economy through extraordinary growth in the 1990s, is now leading the capital markets in the wrong direction in this decade. I am grateful for the opportunity to present my views. My testimony today reflects only my personal views, and not the views of any company with which I am associated. My two key points are that (1) competition is the right policy to build broadband networks, but (2) to ensure truly high speed and universal broadband networks, government needs to help pay at least for the early stages. By year-end, about 15 million homes will have broadband at speeds approximately 1 megabit per second (“mgbps”). This committee should vow to get 100 million homes on broadband at speeds never less than 10 mgbps by the end of the decade. I am certain, Mr. Chairman, that you and the other Members of this Committee know well the current state of the telecommunications sector. It is in large part because of this Committee's leadership that the telecommunications sector became an engine of our dynamic economy of the late 1990's. The 1993 Budget Act opened the airwaves, or spectrum, to competition by making new licenses available through auction. The 1996 Telecommunications Act opened telephone markets to competition, and created the single most successful universal service program in history – the so-called E-Rate, which has put Internet access in ninety percent of all classrooms in less than five years. Thanks to your visionary legislation, competition policies and tremendous technological innovation have together lowered prices for communications services. As a result, consumers and businesses have purchased more services than ever before, and aggregate revenues for telecommunications have grown steadily from the beginning of the 1990s to this date. Aggregate employment in the sector also grew steadily from 1992 until the middle of 2001. However, capital markets and profits in telecommunications have been in decline since mid 2000. Inevitably, the decline for investors has translated to reductions in employment. Net job loss has plagued telecommunications for more than a year now. Ultimately, if firms do not make profits and investment does not begin to grow, instead of shrink, in telecommunications, we will not see the same rate of innovation, new services, competition, and revenue growth that characterized the 1990s. The good news is that, as a whole, the telecom sector continues to grow rapidly, and consumers are spending a growing percentage of their income on an expanding array of telecommunications and information services, while benefiting from sharply lowered prices. The pace of growth in the U.S. telecommunications industry, including voice and data, wireline and wireless, is enviable. Total U.S. telecommunications revenues grew from $164 billion in 1996 to $242 billion in 2000, and current estimates indicate they will reach $277 billion in 2002, and a staggering $383 billion in 2006. Although revenues for long distance voice are shrinking and local voice revenues are under pressure, local data, long distance data, and wireless voice revenues are growing rapidly, with the result that revenues for the sector as a whole continue to grow. Telecommunications, moreover, is posting healthy gains as measured by its share of the gross domestic product (GDP). For example, U.S. telecommunications revenue represents an increasing percentage of GDP – just over 2 percent in 1996, projected to increase to over 3 percent in 2006, which represents a 4 percent compound annual growth rate. Residential telecom spending, as a percent of disposable income, is growing at an even faster rate– at a 5.7% compound annual growth rate. Customers benefit tremendously from the price reductions that have occurred over the past few years as Congress’ national competition policy has begun to take hold in all sectors of this industry. Long distance prices dropped an average of 6 percent per year from 1995 to 2000; wireless prices dropped 19 percent annually; frame relay prices fell 12.6% per year; and OC-3 prices fell a staggering 99 percent annually. Prices for local voice and for Internet access have been more or less stable over the past few years. The effects of the competition policy introduced by this Committee, combined with technological innovation, have been profound. Specifically, that policy has lowered greatly the barriers to entry in all segments of the telecommunications sector; fostered extensive innovation and the deployment of a vast array of new services; and made possible the explosive growth of the most revolutionary communications medium in history - the Internet's network of networks. Moreover, the growth of competition has been largely responsible for both the ongoing reductions in the prices for most telecommunications services, as well as the continuing increases in aggregate revenues for the sector since the early 1990s. The number of jobs in the telecom sector, while down from its peak in 2001, is still much higher in 2002 (1.6 million jobs) than it was in 1992 (1.3 million jobs). Finally, net income for the telecom sector is still positive, although it has shifted away from some firms and some technologies and toward others. My conclusion from these facts is that competition provides exactly what the economists advertise -- tremendous advantages for consumers, opportunities for entrepreneurs and new capital to take risk and introduce new technologies, and continued growth in the nation's economy. It is also clear that a competitive sector means that companies can fail, as they do in every competitive economy, and that has happened to many firms in telecommunications. Some of the failures in this sector are due, it seems, to excessive investing in redundant business models; others to shoddy or even fraudulent practices. Good sense among investors, better corporate governance, and stricter regulation in financial markets are all right and proper remedies for these serious problems. But it is always true that there is some risk of misallocation of capital by the private sector, as we saw in the second half of the 1990’s. And it is always true that this risk is the one policy makers should permit investors to take, in return for a competitive, innovative telecom sector. The potential reward significantly outweighs the risk. Despite the recent downturn, I am confident that new capital spending will return to this industry. I am also quite sure that there is a right way and a wrong way for government to act during this prolonged period of disinvestments. The wrong way is to react by repudiating the benefits of competition, and blessing monopoly instead. Down that path lies job loss, price increases, reduced innovation, reduced capital investment in the aggregate, fewer new services, a smaller GDP, and ultimately the loss of the spirit of entrepreneurship and risk-taking that is part of the American spirit. The right way is to encourage new investment and to foster competition and innovation. And a key part of the right way is to recognize that certain essential elements of a modern telecommunications network are not likely soon to be constructed purely by the operation of competitive private markets. Therefore, to some degree public monies should be spent to provide a base or floor for private sector capital investment. And a final part of the right way is to identify as well the extent to which public money must be spent to make essential communications services available and affordable to all Americans. All private markets leave some services too expensive to be affordable to all. For most services and goods, there is no good public policy reason to address this issue. But part of maintaining democracy and our uniquely inclusive society is to include everyone in our country – those in distant rural areas and those in high cost demographies and those in nonaffluent income classes and those in classrooms and government buildings and health care facilities – as part of a single fabric of communication. Just as roads link every small town and farm to every big city and business location, so we have long set as a national goal the linking of everyone in America to the most modern conceivable communications networks. And where private markets do not through the operation of innovation and competition make such networks available and affordable to everyone, the government should step in. At this perilous time for capital markets it is doubly important to reaffirm this traditional universal service goal because the right amount of public money, spent in the right way, can help build essential facilities that are necessary for the further evolution of America’s communications networks and industries. Everyone in the information sector acknowledges that the next technological leap in telecommunications is broadband. Policy and competition has to date built a broadband market of about 15 million households and small businesses now subscribing to high speed connections that deliver data, also known as Internet content and communication, over cable modem or DSL. But 15 million is not enough, especially when we see that more than 40% of households in Korea, for example, have broadband. We need a broader dissemination of broadband than private markets, under today’s economic constraints, are likely to provide, if we want to make broadband universally available and affordable. Moreover, if we want a communications network that would serve as a base for advanced data services then we should not be content with the speeds of today's broadband networks. Our goal should be speeds to all business users that range from 100 megabits per second to 1 gigabit per second, or even 10 gigabits, and to all residential users at speeds from at least 10 megabits per second to 100 megabits. These speeds will require a combination of upgrades of existing facilities, deployment of new wireless technologies, and ultimately installation of fiber. Whether it is in connection with education, business, health care, entertainment, or any other part of our modern life, a robustly networked America will be a productive America. I would like to describe the best approach to broadband as "Having our cake and eating it too." We should take advantage of competitive market structures to build this broadband network. That’s the cake. And every American should have broadband available to them; it should be universal and it should be affordable. That’s the eating. The only way we will get a broadband market that meets these twin goals is if the government provides the leadership and economic stimulus to accomplish it. It took government leadership and some public funding to build a truly national electric system and a truly national highway system, and it will take it here. Unfortunately, as of today private capital simply will not invest to build a universal broadband system. There is capital available to build the current lower speed version of broadband in parts of the country, where the population density and the economics of the families or businesses passed justify the investment, but it is not universal and it is not high speed enough. I am sure the Members of this Committee know that there are many countries around the world that are ensuring that broadband is universally available, with networks touching every citizen. If they succeed and we falter, the applications and the hardware for these networks will be developed in those countries, not here. For decades, we have been the world leader in technology and telecom, but there is no guarantee that we will remain the leader. It would be great if we could sit back and watch private capital build a universal high-speed network. But it won’t happen soon enough, nor will it be universal, nor will it provide efficient communications services to all business and residential users and service providers, unless government establishes a plan to make it happen. Only if the federal government provides leadership, and financial incentives, will we have the high-speed networks that ensure our continued world leadership in telecommunications. We can afford it, because these networks will pay for themselves over time, but they will not pay for themselves soon enough to attract private capital today and they will not pay for themselves in important but remote or underserved parts of the country. There are many ways that the federal government could provide the leadership. I don't favor government ownership of a broadband network, but I do favor government assistance to communities that need the help to provide broadband to all their citizens. Wireless technologies are advancing rapidly, and we should be doing everything we can to make sure that the spectrum is available and the technology is encouraged so wireless can be part of our broadband solution. A next generation, universal broadband network will cost tens of billions of dollars. But we know consumers will pay for the network over time if the monthly user price is affordable and the applications are attractive, and everyone is on the network. Therefore, to some extent this network, like all transportation and communications services since the telegraph and the first macadam roads, simply has to be built in order to attract the traffic, as opposed to waiting for unmet demand to build before the network is built. After all, did America wait to build roads until after every garage had a car? Not at all; even while Ford’s cars were pouring out of factories in the 1920’s, Secretary of Commerce Herbert Hoover used government leadership to build a network of roads linking every town and city in the country. Similarly, even while computer processing speeds continue to double every couple of years and Internet applications consist of more and more bits all the time, we need to extend and expand the underlying communications networks so that they have the reach and the capacity to take advantage both of processing speeds and the complexity and volume of Internet applications. If the government will help finance the network, in time it will recover the cost, directly from the fees paid by consumers, and indirectly from the gains in technology and productivity that will be part of our economy. Mr. Chairman, as you and the Members of this Committee know from your deliberations and actions over the last many years, it takes vision and leadership to ensure that a sector of the economy like telecommunications remains vigorous, competitive and dynamic. Unfortunately, it is a job that requires constant attention. As markets and technology change, new visions are necessary. We will fail if we sit back, take a break, and hope that we can continue to lead the world by doing nothing here in Washington. Technology advances and we can either use the combined forces of the government and the marketplace to make technological innovation available to all Americans, or others will take the lead.

• Mr. Peter Huber
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  Testimony

  Mr. Peter Huber

  “Broadband” is a horizon that keeps receding. Microprocessors, computer buses, local area networks, and Web connections all run much faster today than they did five years ago. There is no reason to expect that our pursuit of higher speed in the processing and delivery of bits will ever end. Modem speeds on ordinary dial-up phone lines increased more than a hundred-fold over the last two decades. Broadcasting bandwidth progressed from radio to analog television to cable and digital satellite; the new digital television standard provides effective transmission speeds (with compression) of almost 20 megabits-per-second (Mbps). Speeds of 10 Mbps used to be quite adequate for office LANs, but 100 Mbps is now commonplace. Intel CEO Craig Barrett has remarked that “broadband” only “get[s] exciting when you get to 5 megabits per second or even 100 mbps.” By the time those connection speeds become widely available, however, they will no longer be exciting. New applications will inevitably emerge to push the threshold of excitement out further still. Demand for broadband isn’t uniform across users, either. Businesses, universities, schools, and residences have different needs. Some require full two-way capabilities, others require mobility, others need far more bandwidth in one direction than in the other. Sound policy must start with a clear understanding of how dynamic and varied broadband markets really are. Demand for broadband connectivity, and the technologies that supply it, evolve quickly and continuously. Connection speeds and the aggregate bit-miles of deployed capacity will continue to double and redouble every few years, indefinitely into the future. New applications will spur new demand for bandwidth, and new bandwidth will attract new applications. Most of the applications that will generate data traffic five years hence aren’t running today, at least not in any way comparable to what they will become. Most of today’s users aren’t yet using broadband for what they’ll be using it for in five years. Most of today’s broadband infrastructure, both wired and wireless, will have to be upgraded again and again to meet the continuous rise in demand. In such circumstances, policies must be shaped to promote dynamic and adaptable competition, nothing more or less. Whether by design or otherwise, regulations that favor some providers or technologies over others will do far more harm than good. So will fixed “universal service” targets, or sweeping plans to subsidize or “jump start” broadband service, because there is no start or finish to the broadband enterprise. At their least harmful, such policies will simply be overtaken by the market before bureaucracies can be set up to implement them. At worst – as is in fact happening today – such policies will impede investment, stifle innovation and penalize creative effort industry-wide. The broadband market does not need more help from Washington. It needs considerably less. Competition Cable modem service is currently available to between two-thirds and three-quarters of U.S. households; DSL service is available to between half and two-thirds. Approximately one-third of all U.S. households have access to both cable modem and DSL service. Approximately 20 percent of online households are broadband subscribers. Cable and DSL providers are now adding five million new broadband connections a year – an annual growth rate of nearly 50 percent. One way to look at these numbers is complacently: the infrastructure is basically there now; the demand hasn’t yet caught up; and the customers will come when the online games, music, and videos arrive to drive demand for broadband connections. But this is quite the wrong way to look at things. Sound policy must promote a dynamic competitive process – one that will keep pushing the boundaries for decades to come. Most cable networks have been upgraded at great expense, but they still rely on shared bandwidth at the end of the line; they will have to be upgraded further, and then further still, as bandwidth requirements continue rise. Substantial parts of the legacy telephone network are now capable of providing DSL, but phone companies will have to make huge investments in remote terminals and fiber-optic glass to keep pace with cable, or to forge ahead of it – DSL can’t be provided at all over certain older loops, nor over loops that run further than 18,000 feet, nor can the bandwidth in ordinary copper loops be pushed much higher than where it’s at now. So telephone and cable companies alike will have to extend fiber deeper and deeper into the local exchange, until it finally reaches the home. Comparable levels of new investment will be required to develop broadband wireless networks. DBS companies have, in the last year, deployed a two-way high-speed Internet service capable of competing on equal footing with cable modems and DSL; other terrestrial and satellite technologies (MMDS, 3G, Digital SMR, 2 GHz MSS satellite systems, L-Band satellites, and Big LEO satellites) are also under development. The television set is now morphing into a personal computer, and the radio into a mobile digital receiver, both linked to high-speed digital wireless networks. DVDs, digital games like Microsoft’s Xbox, and high-end digital video recorders like TiVo and ReplayTV already feed their content into analog televisions; in due course, the transition to digital TV sets and digital broadcasting will propel a new constellation of high-speed digital terminals and connections into the average American home. When broadband wireless services do come of age, they are likely to expand very fast, just as satellite and wireless telephony did after their early years of incubation. Wireline services generally get rolled out incrementally, but wireless services tend to get turned on abruptly, to serve an entire geographic area. That wireless providers currently lag behind wireline providers in serving broadband customers reflects the none-to-all dynamic of wireless roll out, more than anything else. The broadband market, in short, ought to be experiencing the kind of leap-frog competition that has characterized competition in many other sectors of the high-tech industry. No one network provider should be securing an overwhelming market share; the fastest and most affordable option today should always face the risk being overtaken by a faster, cheaper, or better alternative. Wireline networks should compete on both raw speed and quality of service; wireless networks will offer mobility as well. Broadband content should be adding yet another important dimension to competition: the demand for the digital bandwidth depends on the supply of digital content, which should depend, in turn, on how successfully broadband suppliers package, promote, and protect the content that their networks distribute. All of this should be happening, but much of it isn’t. A legacy of botched regulation is largely to blame. Regulation The regulation of broadband has been split into two separate and unequal parts. One regime promotes a get-it-built objective: it is deregulatory, it leaves planning, investment, price, and profit with the cable and wireless companies that deploy real facilities, and it is working – the facilities are indeed getting built. The other regime requires phone company competitors who do build networks to unbundle and interconnect, at cut-rate prices prescribed by regulators, with free-riders who don’t. This share-it-cheap regulation is intensely intrusive, it empowers the FCC and state commissions to control planning, investment, price, and profit, and if it has forced sharing, it has done so at the expense of investment and innovation. To its credit, the FCC has recently begun to take the steps necessary to classify both cable modem and DSL as “information services” under Title I of the Communications Act. The logical culmination of that process, if the Commission sees it through, will be complete deregulation of both services, with no further unbundling, interconnection, or wholesale price regulation imposed on either service, by either federal or state regulators. To get to that point, however, the Commission must completely eliminate all sharing obligations in new, mixed-use facilities, that are deployed to provide broadband service but that can be used, as well, to provide traditional voice service. The continued regulation of legacy voice services cannot be permitted to continue depressing investment in the new facilities required for high-speed data. Until the Commission finishes its job – if it finishes it – phone companies must continue to “unbundle” the wireline spectrum they use to provide broadband; cable companies don’t. Phone companies must permit their broadband competitors to “collocate” equipment in telephone company premises to make it easier to use that “unbundled” broadband capacity; cable companies don’t. Phone companies still remain largely locked-out of the multi-billion dollar market for Internet backbone service; cable companies aren’t. Phone companies must offer their retail broadband transmission services to competitors at a federally mandated discount; cable companies have no such obligation. Phone companies have to pay into universal service funds when they provide broadband access; cable companies don’t. The unbundling mandates of the 1996 Telecom Act should never have been extended to broadband services at all; Congress created those mandates to open up competition in the legacy voice markets, which incumbent phone companies had long dominated, not in broadband markets, which were traditionally dominated by analog cable. Almost four years ago, the Supreme Court made clear that – as Congress itself specified in the 1996 Act – unbundling is to be extended only to network elements that can’t be provided competitively. It is, of course, preposterous to maintain – as the FCC has in fact maintained for almost six years – that competition in broadband markets would be impaired absent access to the unbundled elements the phone company’s network, when the phone company itself is scrambling to catch up with the dominant provider of broadband service, the cable company. Costs A few years ago, one incumbent phone company concluded it would have to deploy new “remote terminals” and optical concentration devices (OCDs) to upgrade its broadband capabilities and extend them out to rural and other users located far from end offices. After the better part of a full year of painstaking discussion, regulators decided that the phone company would have to undertake various obligations for the “right” to complete this upgrade, including deployment of more capacious facilities to make sure there would be sufficient capacity to share with potential competitors. The phone company reluctantly complied with regulators’ demands, at a total cost of approximately $300 million dollars. Two years have since passed, but no competitor has arrived to lease any part of the new facilities. This kind of experience is not the exception, it is the rule. The current regulatory regime imposes massive uncertainty and delay on new investment. Sharing regulation assumes that the network is already in place, and focuses entirely on how to divvy up access. This form of regulation does not promote innovation or investment; it assumes that the innovation and investment have already happened, or are inevitable regardless of what regulators do. Sharing regulation operates entirely for the benefit of competitors that don’t build facilities, and its costs are shouldered by competitors that do. It is retrospective in that it kicks in only after facilities get built – but everyone knows that it will kick in, nobody knows on just what terms, and this uncertainty alone slows and depresses investment. In the worst circumstances, new investment doesn’t happen at all because would-be investors fear that the benefits of good investment are destined to be shared with competitors, while the costs of bad ones are shouldered by shareholders. That is exactly what has happened wherever the prices set for shared elements have been set ruinously low, as they now have been in many major markets. In an environment as dynamic as the market for broadband services, the forced sharing of innovation and new facilities has done little good even for the intended beneficiaries and their investors. Between 1998 and early 2000, more than twenty “data local exchange carriers” (DLECs) threw together business plans, raised large sums of money on the public market, and launched preposterously ambitious marketing campaigns. With an average of fewer than 300 employees each, and at a point when they were serving an average of fewer than 2,000 lines, nine DLECs completed successful IPOs. But as they and their customers soon learned, most of the new challenge and value in the broadband market lay in getting the broadband loop up and running, and that was especially difficult on copper wire that had been deployed, originally, only to carry voice. Counting on regulation to solve all their problems, the DLECs simply ignored the engineering and economic realities. When the Internet bubble burst, many of the DLECs burst with it. Up to a point, and in the short term, cable and wireless operators benefited from all this turmoil on the DSL side of the house; roughly two out of three residential broadband subscribers are now with cable. But the development of broadband as whole was seriously delayed, and that has harmed cable broadband as much as anyone. Some critical threshold size of broadband connectivity has to be reached to attract broadband content and software; the content and the software then propel further growth in broadband connectivity. In the early stages of the evolution of markets like these, competitors benefit much more from fast growth of the market as a whole, than they do from regulations that suppress competitive rivalry. Finally, the competition-suppressing regulation has certainly harmed consumers, equipment manufactures, and providers of broadband content. Robust competition between cable and DSL would have pushed up demand and pushed down prices; instead, however, unregulated cable has opened up a wide lead while phone companies have sunk deeper and deeper into the regulatory quagmire. In a true free-for-all, each major advance in one network will spur a comparable advance, and then some, in a rival’s. The one sure way to kill innovation and new investment is to regulate in ways that allow a single provider to become so dominant that it no longer has to worry seriously about being overtaken by anyone else. The delays in the synergistic development of broadband content are especially worrisome. As content providers have correctly recognized, broadband networks represent a huge new opportunity for distributing their products – and an equally huge threat if networks evolve in ways that facilitate theft. The potential downside has spawned many different proposals for mandatory new technology standards or legal liabilities for network providers. Standards and copyright laws do have important roles to play, but experience teaches that the best defense of intellectual property will be found in collaborative agreements hammered out privately between providers of content and conduit. The best way to protect the economic interests of content providers is to have different broadband service providers vie for the right to distribute the content. Cable already distributes significant amounts of digital content in ways that provide acceptable assurances against theft. Providers of broadband service know that content is what ultimately sells the broadband connection to the consumer. Robust competition among broadband providers is what will deliver the innovative technologies to protect – and thus attract – the valuable content. Policies Congress should urge – or direct – the FCC to complete the deregulation of broadband immediately. This means placing broadband service – in its entirety, including all underlying broadband transport components – under Title I of the Communications Act. Broadband Internet access service is an “information service,” not a “telecommunications service.” Wireline broadband service should not be regulated at all; wireless broadband service should be regulated only as needed for the normal allocation and assignment of underlying spectrum. Sharing obligations must be confined to legacy voice service, provided on legacy networks, and even then, must extend only to network elements that are competitively essential to new entrants. State and local authorities cannot be permitted to regulate broadband services in ways that undermine implementation of a uniform national broadband policy; patchwork regulation creates a serious impediment to the development of broadband services. Effective protection of content is essential to the long-term development of digital broadband networks, but it won’t come through technology prescriptions issued from Washington. The best long-term protection for providers of content lies in robust competition among providers of broadband connectivity.

• Mr. Craig Mundie
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  Mr. Craig Mundie

  Mr. Chairman and Members of the Committee, my name is Craig Mundie, and I am Senior Vice President and Chief Technical Officer of Advanced Strategies and Policy at Microsoft Corporation. I am glad to be here today because we bring a different perspective than many witnesses the Committee has seen on telecommunications matters. Microsoft’s Perspective on the Importance of Robust, Reasonably Priced Broadband. My company approaches this issue as a worldwide leader in developing software, services and Internet technologies, as well as a user of bandwidth. We are not in the telecommunications business, but rather, we, along with many other high-tech companies, are in the business of developing software and services that excite consumers enough so that they actually will pay for “bigger pipes” to run ever-more innovative services and applications. Like others in the tech community, we see robust, reasonably priced broadband services as essential for enabling and encouraging the development of new applications and services that improve worker productivity, enrich personal lives and business operations, and deliver benefits to every sector of society and the economy. From that perspective, we see the topic before this Committee as important not just for the near term. Getting broadband policy right, here at the onset of the broadband era, will impact our national welfare and global competitiveness long into the 21st century. Two Straightforward Steps That Will Promote Broadband Deployment. There is no doubt that the government, consumers and businesses now fully recognize the importance of broadband to our communications capabilities and the economy. As the Federal Communications Commission explained earlier this year, “ubiquitous broadband deployment will bring valuable new services to consumers, stimulate economic activity, improve national productivity, and advance economic opportunity for the American public.” We agree with that view. Indeed, I expect that everyone agrees with that view. The issue before this Committee, however, is more challenging: How do we get there? Of course, this is not a new question for this Committee or our country, but we must approach this question with renewed urgency, because the United States is losing the footrace for broadband penetration to other countries. To address the current inadequacies in U.S. broadband deployment, Microsoft believes this Committee and other policymakers can take two straightforward steps: · Foster a third mode of broadband communications into the home by making more spectrum available for exciting, new unlicensed technologies and subject that spectrum to minimalist, efficiency-enhancing rules of the road. · Preserve consumers’ ability to communicate and interact via the Internet with each other, and with new services and applications, without the threat that the underlying network provider will interfere with those relationships. We understand that several members of the Committee are exploring proposals to address these goals, and we fully support those efforts. There is Urgency to Act on These Two Fronts. Our industry generally has not engaged in the telecom battles of the past because we develop software and applications that ride on the pipes that other industries supply. But we are watching with great concern because the current course is not aimed at achieving the broadband future we want as rapidly as possible, and we commend Chairman Hollings and other members of this Committee for exploring new paths to a broadband future. The need for action is great because not only are we losing ground in the worldwide race to become leaders in deployment of broadband, the consequences also are being felt from our perspective in the invention of new broadband applications and services. If analyzed closely, current statistics are not encouraging. According to a recent Commerce Department study, our country has the most households of any nation connected to a broadband service (over 11 million). However, as a percentage, our penetration rate is sixth in the world, behind the likes of Sweden, South Korea and Taiwan among others. And recent trends lines indicate that we are falling further behind, not catching up. The gravity of the situation is even starker when one realizes that the rules or laws being contemplated today will shape a future version of the Internet – a future which is much closer than many of us realize. A debate that simply focuses on how to download information faster from a Web site is somewhat akin to a debate at Western Union in 1902 as to how to move Morse Code faster across the country. We are rapidly moving from today’s world in which the vast majority of activities focus on publishing of content (be it Web pages or entertainment) and person to person communications (such as e-mail and instant messaging), to a different world, one which preoccupies the tech community and motivates all of us to innovate: a world in which literally millions upon millions of computing devices will be simultaneously and constantly connected to the Internet, and on consumers’ behalf, will communicate with each other. This is not futuristic in the least. Personal digital assistants, smart appliances and computer-drive set-top boxes are just a few examples of the types of devices that will need affordable access to “always on” high speed connections in order to automatically bring new services and capabilities into the home. Wouldn’t it be convenient to monitor who is knocking at the front door of your home from the computer at your office? Or while away for the weekend, license via your PDA the right to view the latest episode of the Sopranos, then have it delivered to your home entertainment system to be viewed when you get home from your trip? The Internet is in transition. It is becoming much more than publishing. It is becoming a programmable environment in which computers, devices and services will need the ability to constantly stay in touch, and the ability to do so in a seamless, unfettered way. To take full advantage of the programmable nature of the Internet, consumers will need affordable, reliable and fast connections. Some advocate that, with some rule changes, telephone companies will have greater incentives to deploy advanced services over their copper and fiber facilities. The argument is that without greater regulatory parity between telephone companies and cable operators the former cannot compete as effectively with the latter. We have a good degree of sympathy with these arguments and have been working with others in the tech community to promote greater parity here on the Hill and at the FCC. Others have argued that the key to stimulating broadband deployment is to ensure that high-value content is available online. I know this Committee has addressed that question in other hearings, and that it is not the topic of this hearing. I want to assure the Committee that Microsoft is doing all it can to develop its own compelling content, services and applications for the broadband era, and we continue to work with other content producers to give them the tools they need to develop their own broadband offerings. At the end, however, we submit that these ongoing efforts are not enough. Policymakers can and should do more. They should more aggressively manage the nation’s radio spectrum – and in particular, unlicensed spectrum – in order to give unlicensed wireless broadband services an opportunity to meet the demand that is simmering for these new technologies. And equally important, to assure the programmable Internet that is rapidly approaching is not derailed, policymakers should reaffirm that network providers should abide by certain, basic “connectivity principles.” Wireless Broadband Connections Provide a Third Way for Consumers. Although much of the current debate over broadband services has focused on two platforms, cable and DSL, that perspective fails to consider that other technologies are available – other technologies that can jump-start consumer-driven investment in broadband services, provided policymakers aggressively manage the regulatory environment to foster that outcome. Specifically, I am referring to potential advances in the wireless sector, and even more specifically, advances in the development of unlicensed radio-based networks. These systems are currently referred to as 802.11b, radio LANs, or Wi-Fi. More generically, they might be referred to as “emerging radio technologies.” These technologies – and even more futuristic ones such as Ultra Wide Band and Software Defined Radios – not only offer an additional means of delivering packets at high speed, they also allow new business models for delivering broadband connectivity to emerge. These are not your “same old” radio services. Because they can be deployed in an unlicensed manner, the broadband connections can be deployed by the consumer herself – using her purchasing power and interest to meet her personal demand for a broadband connection. If this Committee and policymakers at the FCC and indeed around the world make more spectrum available for these devices and, simultaneously, adopt minimalist spectrum rules or “etiquettes” that limit the devices’ ability to engage in mutually destructive behavior (i.e., by interfering with each other), the result will be more choice for consumers and stimulated innovation in broadband services overall. These emerging, unlicensed technologies can support the transmission of data at high speeds for a low cost. That value proposition – higher speeds with relatively cheap and fast deployment – is especially compelling in rural areas where distance is so frequently the enemy of network efficiencies and a major cost driver for broadband deployment, as well as in inner-city areas where the high cost of broadband is a significant inhibitor to deployment. With unlicensed technology and the appropriate wireless rules, Internet access and other types of community communications could be provided at comparatively lower costs. This promise is more than theoretical. In Iowa, one company, Prairie iNet, is using wireless technology attached to the side of grain silos to operate as a wireless ISP in 150 communities in the Midwest, with 5000 sites. Three fourths of their customers are residential. Today, Wi-Fi technology is deployed at lower costs where there is demand to provide consumers with more convenient wireless Internet access in places away from home and office, such as coffee shops, airports, and hotels. These “hot spots” can provide speeds of 11 mbps, which is more than 10 times what 3G providers have promised, and 150 to 200 times faster than dial-up service. For those who have even greater bandwidth needs, a second generation of Wi-Fi has the capability to reach speeds of up to 54 mbps. Notably, these connections can be “always on,” assuring a pathway for the type of programmable services I described above. What is even more compelling is that consumers who want this degree of connectivity can buy unlicensed equipment at a consumer electronics store, just as they buy a cordless telephone today, and then take it home to install it. An astonishing array of advanced communications equipment is now being developed, sold, and used to provide wireless broadband access in the unlicensed bands. These bands provide tremendous flexibility and are the opposite of the FCC’s traditional approach to spectrum regulation, which reflects centralization of control and specification of use. The current challenge is to provide adequate spectrum and the minimalist rules to allow this spectrum to be used for truly dependable communications by consumers. Current unlicensed approaches fail in both dimensions, creating a situation where the more successful the development and deployment of systems the more congested the environment becomes, frustrating attempts to make this a sustainable alternative to traditional broadband services. Congress and the FCC can do more to encourage alternative wireless broadband connections using unlicensed spectrum. Today, there is insufficient unlicensed spectrum and, where it is being used for unlicensed networks, the nation’s regulations foster a tragedy of the commons. Use of the spectrum is so lightly regulated that, to assure their own success, radio manufacturers may have an incentive to maximize their use of spectrum to others’ detriment and, over the long haul, likely to their own. Within some groups of manufacturers, there are incentives to cooperate (such is the case with manufacturers of today’s Wi-Fi systems). However, without a modest degree of greater regulation, it is difficult to assure cooperation across different manufacturing interests. Unlicensed spectrum bands, if upgraded modestly and in a targeted way, are uniquely well suited for the creation of broadband infrastructure for a variety of reasons. They are easily accessed by everyone, from the largest corporations to the smallest entrepreneurs to individual consumers. Indeed, the 2.4 GHz band, which supports everything from cordless telephones to radio-based LANs, reflects a significant level of innovation from entrepreneurs attracted by the band’s easy availability and lack of individual licensing requirements. It will not surprise the Committee when I say that the market moves a bit faster than the FCC’s licensing bureaus, however well-run. Moreover, because unlicensed bands are open to anyone who buys a compliant device at a retail store and attaches it to the network, a significant proportion of the capital invested in the creation of networks comes from individuals and businesses, not from network operators. Wireless networks are truly built from the ground up, tapping an entirely new source of capital to build networks – the financial resources of the users themselves. This is remarkable for two reasons. One, there is no “build it and they will come” mentality, with its legacy of overinvestment and stranded capital. Instead, the wireless networks will grow organically, fed by new demand and marginal supply. Two, while this alternative source of capital would be important at any time, it is critical now, when even the most successful carriers have difficulty navigating capital markets. Finally, unlicensed spectrum is open to and can support a multiplicity of technical solutions and contributes to redundancy, since future unlicensed wireless networks may be dramatically different from existing networks. Over the last few years, the FCC, recognizing the potential benefits of new technologies and creative uses of spectrum, has been increasingly willing (with some helpful prodding by this Committee) to grant individual licensees greater flexibility in how they use their spectrum. This trend toward relaxing use specifications on individually licensed bands is an important and worthwhile innovation in spectrum management. It is in the same spirit of innovation that Congress should encourage the Commission to adopt more deliberate regulation of some unlicensed bands. No single approach to spectrum regulation is perfect, and unlicensed bands are no exception. While current rules for unlicensed blocks of spectrum have been enormously successful and have brought numerous benefits to the public, they have also permitted less than optimal use of available frequencies. Inevitably, where there are virtually no rules of the road and almost anything is possible, someone will design a technology that causes harmful interference to other technologies. Sometimes this is because there is no technologically feasible alternative. And sometimes it is simply cheaper to shout noisily than to speak in measured tones. Unfortunately, a spectrum free-for-all is not only messy, it carries a cost: innovative companies will steer away from developing competitive unlicensed broadband networks unless rules of “spectrum etiquette” have been developed and implemented. For this reason, it would be helpful for Congress to prompt the FCC, as we have, to foster the creation of more “unlicensed broadband spectrum” specifically for use by emerging technologies, such as Wi-Fi, UltraWide Band and Software Defined Radios, and new business models, such as community wireless data networks, that could supplement cable modem and DSL services. This is not a request for more spectrum for cellular or PCS or some generation of 3G. Instead, it embraces a flexible model that is driven by consumer demand and innovation and not the deployment schedules of cash-strapped carriers. Immediate steps by the FCC to allocate unlicensed broadband spectrum and adopt minimum regulations could accelerate the creation of wireless broadband services across the United States, making service available more quickly in unserved and underserved areas and stimulating rivalry with cable modem and DSL services. We strongly support proposals to address this important spectrum policy. Consumer Freedom from Network Operator Interference Is Equally Important. Broadband connections accomplish little, however, if consumers are deprived of the ability they enjoy now in the dial-up and corporate network environments to roam freely over the Internet; to run the applications they want using the equipment they choose; to gather, create, and share information; and to connect to Web sites with no interference. Long before the creation of the Internet, policymakers around the globe recognized that freedom from interference by network operators was critical to consumer trust, as well as fostering gains in productivity and economic activity. The history of the Internet itself has been fundamentally characterized by unfettered consumer ability to use an unprecedented array of content, services, and applications via an ever-increasing array of products. We are troubled, however, that in the ongoing debate on what our nation’s broadband policy should be, this fundamental lesson may have been lost. Proposals pending before the FCC would remove long-standing obligations of network operators not to interfere and not to discriminate, obligations which go back at least to the famous Carterfone decision and some of which go back to 1934. Watching the debate from afar, it appears that the freedom to connect to where one wants – the ultimate hallmark of the Internet – may be left behind. That would be a mistake, because the Internet and the economy have been well served by the unfettered ability of consumers to communicate and interact with each other. This concept of promoting free interaction among people is embodied in our policy of universal telephone service – one of the singular successes of American communications policy. Universal telephone service is good social policy and good economic policy. Economists refer to the benefits of adding more people to a network as Metcalf’s Law. The principle is that by adding more users to the communications network, the economic value of the network increases for every user exponentially. But if network operators interfere with this interaction, or erect tolls on broadband highways that drive consumers in one direction or another, then they will be affirmatively undermining Metcalf’s Law. Those actions, if tolerated by policymakers, will frustrate our collective goal of adding more users, device types, and services to the network, benefiting not only new users, but the users who are already there. One cannot ignore the ominous signs that network operators will frustrate consumers’ ability to go anywhere on the Internet. As a major user of broadband services, we think it would be a mistake for policymakers not to address these concerns. Already, cable operators have adopted provisions that impair the ability of consumers to use their broadband connections. These issues have been documented to the FCC by a coalition of trade associations, the so-called High Tech Broadband Coalition. In one instance, a subscriber agreement says: “You agree to only connect [company] approved equipment to the [company’s] network. . . . You will not connect the [company’s equipment] to any outlet other than the outlet to which the Equipment was initially connected by the [company] installer. [Company] may relocate the Equipment for you within the Premises at the your [sic] request for an additional charge. . . . You understand that failure to comply with this restriction may cause damage to the [company] network and subject you to liability for damages and/or criminal prosecution.” In response to these kinds of restrictions, the HTBC has developed four connectivity principles that should be respected in the broadband era. And as a company, we have urged the FCC to apply them to both DSL and cable modem providers. Specifically: · Consumers should have unrestricted access to their choice of lawful Internet content using the bandwidth capacity of their service plan. · Consumers should be allowed to run applications of their choice and to attach any device they choose, as long as they do not harm the provider’s network, enable theft of service or exceed bandwidth limitations of their service plan. · Consumers should be given meaningful information regarding the technical limitations of their service. Let me be clear that we are not advocating “forced” or “open” access. In our view, network operators need not be compelled to create a wholesale offering of a “bit transport service” so that third-party Internet service providers can compete with the facility owner on the same wire. Nor do we suggest that DSL and cable modem providers should be limited in how they offer their own service and bundle it with other services. At their core, the connectivity principles articulate nothing more than a noninterference rule. These restrictions in existing contracts that interfere with consumer interests are troubling, and the Committee should review the complete record on these provisions that the high-tech industry submitted to the FCC. Unfortunately, the response by some at the Commission so far has been more of a yawn than of concern, as if those issues are out of fashion. Speaking on behalf of one company which thinks every day about how to use broadband capability to deliver better software and services to consumers, we disagree. As users of the Internet and builders of the Internet age, we believe that our success and consumers’ enjoyment of the Internet has grown out of one fundamental feature – the ability of consumers to use their internet connections without interference from network providers. This freedom has made the Internet the powerful communications and technology tool that it is today, stimulating small business development and benefiting the entire economy. Freedom from interference from network operators has fostered tremendous gains in productivity and economic activity over the past decade. As this Committee and the FCC develop policies for next generation networks, now is not the time to abandon this fundamental feature. The lessons from the 20th century with respect to promoting consumer access to networks are as valid as ever. They will become all the more important as the Internet and the growth of Internet-based data services continue to blur the distinction among facilities-based broadband services, and as the high-tech community continues to develop smart devices and smart applications that can be attached to and run over those facilities. It is time to reaffirm that a basic noninterference rule – an essential element of today’s dial-up Internet world – must be carried forward into the 21st century. * * * * We commend Chairman Hollings and this Committee for focusing attention on these issues. Clearly, as our nation develops a broadband policy, we urge aggressive congressional attention on how to promote rapid, efficient, Nation-wide, and consumer-friendly broadband deployment.

• Professor Lawrence Lessig

  Stanford Law School
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  Professor Lawrence Lessig

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