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Mr. Chairman,
thank you for this opportunity to testify before the Committee. I am Tom Tauke, Senior Vice President for
Public Policy and External Affairs at Verizon Communications. I am before you today in support of the Internet Freedom and Broadband Deployment Act
of 2001 and to tell you that, without changes in the current regulatory
regime, the deployment of high speed Internet access will be significantly
impeded, to the detriment of the American economy as a whole and all Americans.
Mr. Chairman, the Internet is a wonderful
tool that developed far faster than anyone could have imagined. Use of personal computers and dial-up access
to the Internet fueled the growth the U.S. and world economy enjoyed in the
late 1990’s. This growth has now
reached a plateau. More is needed now
to move the economy to the next level.
And that stimulus — stimulus to the economy as a whole — could be
provided by greater deployment of high-speed broadband Internet access.
The current infrastructure on which the
Internet rides has proven insufficient to handle the explosive growth. To stimulate the infrastructure investment
that is required, policy-makers must stop applying old regulatory models to
this entirely new, competitive technology.
As the recent economic indicators have shown, the consequences of this
policy are very serious. The entire
Internet economy rests on the ability of businesses to reach consumers and to
reach each other. Without broadband
deployment, many local communities will never realize the promise of high-speed
Internet, and Internet companies will not be able to reach their markets. This has had and will continue to have a
serious impact on the value of the Internet economy itself and the economy at
large.
Using policies for the Internet and
broadband services that were intended for a local voice telephone market has
slowed deployment of broadband, inhibited competition and slowed investment at
the very time when we need every possible player involved to help advance the
capabilities and capacity of the Internet.
The opponents of this legislation will talk
about everything but broadband
services. They will tell you their
stories about narrowband local service competition and about voice long
distance. But this bill is not about
narrowband or voice long distance. This
bill will not change the market-opening provisions of the 1996 Act or the
section 271 tests that Verizon and the other Bell companies will have to pass
if they are to provide voice long distance services. What the bill will
change is rules that were never intended to apply to the Internet world in the
first place and, in doing so, will allow more resources to be devoted to
meeting consumers’ needs for broadband services. That is why I urge you all to support this legislation.
The State of the Industry
As recently as a few years ago, the American
people knew nothing of the Internet.
Electronic commerce was all but unknown. In 1995, when Congress was re-writing the Communications Act,
revenues generated by the Internet were a mere $5 billion. Since then, the growth of the Internet has
been astounding, far outstripping everyone’s predictions. Last year, Internet revenues rose to an
astronomical $130 billion.
With this growth, there has been increasing
demand for bandwidth and speed. The 56k
modems that were fast a couple of years ago now seem to crawl. Consumers who have gotten used to high-speed
connections at work want the same speeds when they go online at home.
This problem is exacerbated in rural areas and
other locations that are distant from backbone connections or hubs. Even where backbone exists, such as in major
urban centers, it is often congested.
Many Internet providers have no way to get their data traffic to the
backbone efficiently and without numerous back-ups and delays. Many are simply located too far away from
convenient backbone connections. And
when they do get to the backbone, they find that the lack of adequate capacity
slows their customers’ service.
If any
leg of the transmission is slow, the consumer cannot enjoy the benefits of
high-speed Internet service. Without
this speed, some of the more exciting applications for education and
telemedicine involving video, for example, are impossible. We need competition and investment in the
Internet from end-to-end — from the local connection to the nationwide and global
backbone. Without it, whole new
industries based on a more advanced Internet will be stymied and the continued
development of our high tech and computer industries will be slowed. The Internet drove the growth of the high
tech sector, and it can drive it again, if we change the regulatory regime that
now inhibits investments by some of the most logical players.
Today, the two landline technologies that provide
residential consumers with high speed Internet access at a reasonable cost are
Digital Subscriber Line (DSL) services and cable modem services. Only one of these services, DSL, is subject
to significant federal regulation. Even
worse, only certain providers of DSL — the Bell operating companies (BOCs) —
are so constrained as to not be able to provide data services across LATA
boundaries that were drawn with traditional voice telephone service in mind.
If consumers are to get widespread deployment of
high speed Internet services from competing providers, it is necessary for DSL
services to be deregulated just like cable modem services. Current regulation hampers significant DSL
deployment and denies consumers benefits.
The Broadband Marketplace
Broadband services are different from narrowband services
and constitute a separate market. As
the FCC found in analyzing the AOL-Time Warner merger, “Residential high-speed
Internet service constitutes a discrete market that must be considered separate
from the residential narrowband market.”
This market is already competitive, as the FCC has
repeatedly held. For example: “The record before us, which shows a
continuing increase in consumer broadband choices within and among the various
delivery technologies — xDSL, cable modems, satellite, fixed wireless, and
mobile wireless, suggests that no group of firms or technology will likely be
able to dominate the provision of broadband services.”
Local telephone companies like Verizon are not the
dominant providers in this market — in fact, they are the new entrants. Cable operators serve more than 70% of all
residential broadband customers, offering these customers high-speed local
access bundled with the service of an affiliated ISP. Local telephone companies are newer entrants
in the residential broadband access market, challenging the dominant market position
held by cable operators.
In addition, local telephone companies must make
substantial improvements to their networks to provide residential broadband
access. As the FCC has recognized, “traditional
telephone” networks “are not ideally suited for broadband.” Specifically, the Commission has found that
“variations in legacy outside plant conditions can limit access to certain
end-users even in upgraded areas.” For example, ADSL service cannot generally
reach customers whose loops exceed 18,000 feet or are routed through a Digital
Loop Carrier. Further, “in contrast to an upgraded cable
network, which can offer upgraded service to all homes it passes, LECs must
‘condition’ each end-user’s line by removing” “devices that were used to
enhance the quality of voice traffic over the copper.” The necessary improvements to the telephone
network will require substantial investments.
The
Regulatory Landscape
Cable operators started first, are ahead in deployment
and have more customers than local telephone companies. And yet cable is unregulated, while
telephone companies are burdened with a set of rules that were designed for the
voice business and that make no sense at all in this marketplace.
This regulatory disparity has a direct effect on
the market. Observers note that “DSL is
a long shot to seize the lead now” in part because “archaic regulations that
forced DSL players to adopt a wrong-headed structure from the get-go.” “Even if the FCC acts quickly [to free the
Bells], it isn’t clear that DSL, in such turmoil, can keep pace with cable.”
Existing federal regulations handicap Verizon’s
provision of DSL. The FCC has applied
the section 251 unbundling and resale requirements to Verizon and other
incumbent local telephone companies.
They require Verizon to allow competitors to put their DSL equipment not
only in our central office equipment buildings but also in small “remote
terminal” boxes in local neighborhoods.
They require us to provide not only unbundled
lines from our locations to customers, but also “subloop” pieces of those
lines. The FCC first required us to
provide DSL-capable loops, then it required “line sharing” — allowing a
competitor to use only a portion of the capacity of the loop almost for free to
provide DSL service while Verizon provided the underlying basic telephone
service. Now we are also required to
“line split” — to arrange for two different competitors to share our lines,
while we provide no service at all to the customer.
The FCC is now considering requests from other
carriers that we be required to provide our new DSL services to them at very
low TELRIC prices — that is prices that are below our costs. If we have to do this, what incentive will
we have to make the investments that make these services possible? And yet that investment is exactly what you
and the public expect from us.
The other characteristic of the regulatory
landscape is uncertainty — participants and investors don’t know for sure what
the rules are. One federal court of
appeals has held that cable modem service is a “telecommunications service”
under the Communications Act; another has held the opposite. A third circuit court has found that
comparable services provided by telephone companies are “telecommunications
services.” Whether Verizon must provide
wholesale DSL services at discounts to their competitors and whether it must
unbundle its retail DSL service are now before the courts. Our investment decisions, and the investment
decisions of our competitors, will be effected by the actions of these courts
and by the Commission’s actions in response to them. If Congress wants to encourage broadband investment, it needs to
set a clear, national broadband policy.
The Cellular Experience
There is a better way. And it is not to heavily regulate telecommunications services.
Arguably, one of the greatest success in this industry in the last twenty years
is the growth of wireless services, but that success came only after regulation
was disposed of and the marketplace was allowed to operate.
In March 1982, the FCC created commercial
cellular service,
and service began in 1983. No one at
that time predicted cellular’s fantastic growth. In fact, at the time of the breakup of the Bell system, it was
unclear as to whether AT&T or the BOCs would inherit AT&T’s cellular
spectrum licenses. AT&T had
predicted that cellular subscription levels would reach one million by
1999. In reality, cellular
subscribership reached that level in 1987, and at the end of 1998, there were
69,209,321 wireless subscribers in the U.S.
Wireless growth was
slow at first. By the end of 1988,
there were approximately two million cellular subscribers in the U.S.,
with an average monthly cellular bill of $98.02. At that point, the FCC made an effort to significantly deregulate
cellular service.. Within four years of the FCC’s deregulatory
effort, cellular subscribership reached 11 million, while the subscriber’s
average monthly bill dropped by nearly 30 percent.
A second major
deregulatory effort was undertaken by Congress in 1993. In the Omnibus Budget Reconciliation Act of
1993,
Congress, to a great extent, deregulated the cellular telephone industry. In the next five years, wireless telephone
subscribership rose from 16 million to 69 million, while the average monthly
bill dropped by nearly 50 percent. Today, there are more than 100 million
mobile customers in this country, paying as little as $15 per month for
basic service. Wireless long distance
service has become so inexpensive that about 40% of mobile phone users make
long distance calls on their cellular phone while they are home.
Regulation was not necessary to keep prices
reasonable — the market did that. In
fact, regulation actually raised cellular prices. During FCC proceedings, a Cellular Telephone Industry Association
study showed that cellular prices in regulated states averaged 17% higher than
the prices in unregulated states. It
also found that cellular penetration and cellular growth is lower in regulated
states than in unregulated states.
The inescapable conclusion is that the cellular
industry — and cellular consumers — benefited greatly from deregulation. In a deregulated environment, subscribership
rose and prices dropped.
The high-speed Internet market today is in a
similar position today as the cellular industry was more than ten years
ago. Of the more than 60 million U.S.
Internet households, 5.5 million access the Internet via high-speed cable
modem, and only 2.3 million use xDSL technology for high-speed Internet
access. Adoption of deregulatory
measures, such as those contained in the Internet Freedom and
Broadband Deployment Act, will
permit telephone companies to provide xDSL technologies at a more rapid pace,
hopefully with the same results as deregulation of the cellular industry: more
consumers accessing the technology for lower costs.
Congress Needs To Act Now
The FCC cannot solve the problem of regulation
that inhibits broadband deployment and skews the competitive marketplace —
Congress must do that. The longer the
delay, the longer consumers will have to wait for services they want and the
longer the economy will have to wait for the boost that these new services
would surely produce. The authors of
this bill want to free the Internet from the LATA constraints that were established
for the voice telephone network nearly twenty years ago. They want to remove burdensome regulation
that discourages innovation and deployment in data services. And they want to put telephone company
broadband providers on a more level competitive playing field with cable. These are all worthy goals. I urge you to start the process and to take
up and report out the Internet Freedom and Broadband Deployment Act without delay.
Thank
you.
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