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S. HRG. 107–1148

GOVERNMENT ROLE IN PROMOTING THE FUTURE

OF THE TELECOMMUNICATIONS INDUSTRY AND

BROADBAND DEPLOYMENT

HEARING

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

OCTOBER 1, 2002

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

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ERNEST F. HOLLINGS, South Carolina, Chairman 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

BILL NELSON, Florida 

JOHN MCCAIN, Arizona 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

KEVIN D. KAYES, Democratic Staff Director 

MOSES BOYD, Democratic Chief Counsel 

JEANNE BUMPUS, Republican Staff Director and General Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on October 1, 2002 ............................................................................ 1

Statement of Senator Allen ..................................................................................... 59

Statement of Senator Burns ................................................................................... 7

Prepared statement .......................................................................................... 8

Statement of Senator Breaux ................................................................................. 12

Statement of Senator Dorgan ................................................................................. 9

Statement of Senator Hollings ............................................................................... 1

Article from BusinessWeek/online, dated October 7, 2002, entitled: When 

Will the Telecom Depression End? .............................................................. 3

Statement of Senator McCain ................................................................................. 6

Statement of Senator Smith ................................................................................... 10

Prepared statement .......................................................................................... 11

WITNESSES

Huber, Peter W., Senior Fellow, Manhattan Institute for Policy Research; 

Partner, Kellogg, Huber, Hansen, Todd and Evans, PLLC .............................. 41

Prepared statement .......................................................................................... 43

Hundt, Hon. Reed E., Former Chairman, Federal Communications Commission ........................................................................................................................ 12

Prepared statement .......................................................................................... 14

Lessig, Lawrence, Professor of Law, Stanford Law School .................................. 31

Prepared statement .......................................................................................... 33

Article from the November/December 2001 Foreign Policy magazine, entitled The Internet Under Siege ..................................................................... 34

Mundie, Craig J., Senior Vice President and Chief Technical Officer, Advanced Strategies and Policy, Microsoft Corporation ........................................ 24

Prepared statement .......................................................................................... 26

Price, Michael J., Vice Chairman, Evercore Partners, Inc. .................................. 17

Prepared statement .......................................................................................... 20

(1)

GOVERNMENT ROLE IN PROMOTING THE

FUTURE OF THE TELECOMMUNICATIONS

INDUSTRY AND BROADBAND DEPLOYMENT 

TUESDAY, OCTOBER 1, 2002

U.S. SENATE, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Committee met, pursuant to notice, at 9:35 a.m. in room SR–

253, Russell Senate Office Building, Hon. Ernest F. Hollings, 

Chairman of the Committee, presiding. 

OPENING STATEMENT OF HON. ERNEST F. HOLLINGS,

U.S. SENATOR FROM SOUTH CAROLINA 

The CHAIRMAN. The Committee will come to order. Today we examine the depression in the telecommunications industry and 

again consider policy to help revive the sector. What perplexes me 

was that this industry was destined to ensure America’s economic 

superiority in the 21st century. It was the motor of growth, we 

were told. Instead, the telecom depression dragged our economy 

into a 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. 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 percent of Americans. But just as customers are enjoying the fruits of the competition, times have never 

been worse for the companies, their shareholders, and their employees, over 1⁄2 million of whom have lost their jobs. Bankruptcies, 

accounting scandals, overcapacity, and dozens of bad business 

plans have destroyed confidence in the industry. 

This is not how it was supposed to be. 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—that crowd 

went from the constitutionality—I have never seen such a group. 

2

They wrote the law, and then they immediately went to court and 

said it was unconstitutional. Then, the next thing they said, there 

was not data. It was not considered. 

When we went through the record and found it mentioned 438 

times, I think it was, they got off of that and they said, ooh, we 

could go rural, we could go rural. We looked at the business practices as they came to Washington, swearing they could go rural—

they were selling rural just as fast as they could. More recently it 

has been broadband, broadband, and then parity. 

They have tried every gimmick in the book. If the market demonstrates anything, it is that competition, not deregulation, drives 

the Bells to invest in their networks and comply with section 271, 

open markets. That is the record in the business market, where the 

Bells responded with cheaper, newer offerings to combat the 

CLECs. It is true in the residential market, where the UNIPI lines 

lost to competitors, 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. Lincoln said 

years ago, ‘‘the dogmas of the quiet past are inadequate to the 

stormy present. The occasion was filled with difficulty, and he said, 

we must rise above the occasion. As our case is new, so must we 

think anew and act anew. 

And so, if we politically can get off of this standoff of working 

against each other for the past few years and see what we can 

work together on, we might help in saving this telecommunications 

economy, and then the Nation’s economy. This is what we have in 

mind with today’s telecommunications hearing. The 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 highest speeds needed to jump-start the industry. 

We can consider new technologies like Wi-Fi and unlicensed 

spectrum as high speed alternatives, and while I tend to doubt Bell 

claims that wholesale pricing regimes discourage investment, perhaps we should examine that also. With everybody going broke and 

declaring bankruptcy, we will take a look at the revenue margin 

trends of the wire line operating margins of Verizon, SBC, Bell 

South, Sprint, Alltel, Century Tel, Citizens TDS over the last eight 

quarters, an average, I would say, of 24 percent for Verizon, 28 percent for Bell South, 31 percent for Sprint, 36 percent—I used to be 

in these hearings at the Public Service Commission back in Columbia, South Carolina, when we fussed around to make sure they got 

12 percent on the rate of return. As the public interest monopoly 

guaranteed no competition, they were guaranteed at least 12 percent on the rate of return. 

The Federal Government does have a history of assisting industries to preserve America’s global competitiveness in the Seventies 

with the aerospace industry and Lockheed Martin, in the Eighties 

with the auto industry and Chrysler, and with the semiconductor 

industry and Sematech. 

America also invested in the infrastructure to benefit the economy as a whole, as with the canals and railroads in the 19th cenVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
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tury, the REA, rural electrification, and federal interstate highway 

programs in the 20th century, all of which expanded interstate 

trade. Investments in higher speed broadband infrastructure could 

pay similar dividends. 

I welcome the panel that we have today, the most outstanding 

panel that we have had in many a year up here. We left off our 

Bell friends and our long distance friends to get away from the yin 

and the yang of who was right and who was wrong, and trying to 

see with some real minds here that maybe something can be done. 

They have the Telecom Depression, when will it end. Without objection, I will include that article in the record here at this time. 

After reading that, I am discouraged. I do not know that you can 

get there from here, but we have got five folks who can tell us if 

we can. I really am grateful for their appearance today. 

[The information referred to follows:]

BusinessWeek/online, October 7, 2002

SPECIAL REPORT—THE TELECOM DEPRESSION

By Steve Rosenbush, with: Roger O. Crockett, Charles Haddad, Jack Ewing, and bureau reports 

WHEN WILL THE TELECOM DEPRESSION END?

The ongoing disaster in telecommunications girds the globe, growing in one place 

just when it shows signs of abating elsewhere 

The telecom crisis is reminiscent of a classic scene in The African Queen. Humphrey Bogart and Katharine Hepburn, desperate and lost on the Ulonga-Bora River, 

rip pieces of wood off the little steamer and use them to fuel the vessel’s engine. 

Today’s telecom companies, struggling to survive one of the greatest busts in business history, are slashing prices below cost and selling precious assets. ‘‘Neither one 

is a long-term survival strategy,’’ says Stephan Beckert, research director at TeleGeography Inc., a Washington consultant. Hepburn and Bogart were rescued by a 

last-moment stroke of good fortune, but today’s telecom titans won’t escape catastrophe so easily. More than a cyclical downturn, what they’re experiencing is a fullblown industrial depression, one that has wiped out half a million jobs and $2 trillion in U.S. market value. That’s about as much as the savings and loan crisis of 

the early 1990s. And turmoil in the $2.3 trillion global industry shows few signs of 

abating. In September, Lucent Technologies Inc. (LU) and French equipment maker 

Alcatel (ALA) issued dire revenue warnings and new layoffs. Throughout telecom, 

frenzied cost-cutters come up short again and again. They can’t catch up to collapsing revenue or predict the timing of a recovery. ‘‘This is an unprecedented period,’’ says Lucent Chief Executive Pat Russo. 

How long will the bloodletting go on? BusinessWeek spent a month examining the 

capacity for each type of telecom service, from long-distance to wireless, and comparing it to worldwide demand. The results show that capacity continues to dwarf 

demand. Prices in America and Europe remain under pressure. Meanwhile, rollouts 

of new cables promise to extend excess capacity to regions such as Asia that have 

been spared much of the pain to date. ‘‘We’re not seeing any turnaround,’’ says 

BellSouth Corp. CEO Duane Ackerman. 

The upshot is that the crisis could last until at least 2004. In the U.S., traffic at 

the core of the networks is leaping ahead at 85 percent a year, with Europe and 

Asia at similar paces. Within two years, that should soak up excess capacity of networks in operation, which are running at 35 percent of capacity in the U.S. and Europe and at higher rates in Asia. An economic upturn, expected by the end of 2003, 

could spell recovery for U.S. telecom carriers six months later. Europe is expected 

to follow suit in late 2004. 

But things could get worse. If the world economy continues to struggle or if 

telecom companies fail to lop off capacity and come up with lucrative new data services, this depression could continue through 2006. Even when recovery arrives, most 

of the once-robust telecom players are likely to perform, at best, like stolid, slowgrowing utilities through the end of this decade. Growth is likely to be 2 percent 

or 3 percent a year, predicts Lawrence Kenny, head of the telecom practice at 

PricewaterhouseCoopers. 

4

The road to recovery for the beleaguered industry involves a three-stage process. 

The first stage, happening now, is managing the glut. This involves slashing costs 

and struggling to come to terms with massive debt. This period, which should last 

another two years, will continue to drive many companies to the brink of insolvency 

or beyond. But relief won’t arrive until stage two, consolidation. That’s not likely 

to come until mid-decade, when the surviving companies have cleaned up their balance sheets and can afford to snap up rivals who have been driven to rock-bottom 

prices—pennies on the dollar. 

Far-sighted companies are already at work on the third stage, transformation. 

The idea: Players that survive this turmoil will emerge with new business models. 

Instead of selling old-fashioned access to a network, they’ll offer a host of valueadded services, from encryption and wireless teleconferencing to management of 

huge video, music, and game programs. 

They’ll need loads of these products to fill up today’s empty pipelines. Much of 

the build-out was based on dreams for revenue and traffic growth that fell far short. 

Internet traffic was supposed to double every three months, but it’s growing at just 

a quarter of that pace. Today, only 1 percent to 2 percent of potential long-distance 

capacity in North America and Europe is in use. The vast majority is dormant cable 

in the ground. No wonder the price of a speedy business connection between New 

York and London has fallen 95 percent during the past three years, to $6,000 a 

month. 

Much of the problem comes from technology itself. Dazzled by the engineering 

prowess of optical systems that can download the entire Library of Congress in a 

flash, few gave any serious thought to the economic consequences of wiring the 

world with these marvels. Now, super-high-speed technology is out of the lab, and 

capacity growth is out of control. This winter, British carrier Cable & Wireless 

(CWP) and Alcatel will begin operating a $443 million transatlantic cable called 

Apollo. Loaded with the latest in optical and Internet Protocol communications 

equipment, the cable’s four pairs of hair-thin fibers will be able to carry 3.2 terabits 

of data—30 percent more than all current transatlantic capacity combined. 

And just try trimming back that capacity. Gap Inc. can pull last season’s unsold 

sweaters off the shelves and sell them at discount prices, and then stock the shelves 

with a new lineup of higher-priced goods. But telecom companies can’t pull fiber out 

of the ground. The result: Capacity, the root of the telecom depression, doesn’t go 

away. 

In the midst of this depression, certain sectors, however, remain healthy. Data 

from Internet services and network management are growing 10 percent to 20 percent a year for many companies. Trouble is, those sectors represent only a fraction 

of telecom revenue. The biggest sectors, local and long-distance voice, are in decline 

and are unlikely ever to grow again. In fact, many companies can see the day when 

voice calls will be offered as a complimentary service to accompany lucrative data 

subscriptions. ‘‘In our projections, voice will be free,’’ says Ilkka Raiskinen, Nokia 

Corp.’s vice-president of mobile applications & services. 

Even in wireless, the booming growth business of the past decade, revenues are 

flattening out as the wave of new subscribers subsides. The wireless Internet, the 

great hope from the bubble years, is trudging along behind expectations. Says Lawrence T. Babbio Jr., vice-chairman of Verizon Communications: ‘‘We don’t see any 

growth trends.’’

And they don’t need much convincing these days to slash capital spending. SBC 

Communications Inc. (SBC) Chief Technology Officer Ross Ireland says he used to 

buy gear to meet multiyear forecasts. Now SBC saves money with a just-in-time approach. ‘‘Before the downturn, it didn’t matter if you guessed wrong because you’d 

just grow into it,’’ he says. But current penny-pinching is leaving equipment makers 

such as Nortel Networks (NT) and Lucent Technologies struggling to survive. To 

make it, they and the rest of the telecom industry face a three-step recovery program: 

WORK OUT THE GLUT. The first period of the recovery, the glut, entails 

unremitting pain and apparent paralysis. Even bankrupt carriers struggle to eke 

out sales, which means that capacity does not disappear. Consolidation promises relief. But that’s still a ways off. Carriers are shouldering far too much debt for acquisitions. For this nasty stage to end, the markets have to work their malicious miracles: Survivors must clean up their balance sheets, usually at the expense of investors and creditors. Meanwhile, losers must be ground down mercilessly, until they 

are cheap enough to buy. 

North America has been wrestling with overcapacity for two years and is about 

halfway through the process. A survey of 20 major long-distance and local trunks 

shows that networks are running at about half of ideal capacity, according to 

telecom researchers RHK Inc. Local and long-distance carriers generally expand caVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00008 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
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pacity on a route when capacity utilization reaches 70 percent to 75 percent. The 

telcos are slashing their capital spending by up to two-thirds—which puts recovery 

at two years away. 

A few signs of stabilization are finally emerging in the depressed market. The 

price of a high-speed circuit between Los Angeles and New York, which fell 50 percent, to $13,000, between the summers of 2001 and 2002, has inched up in recent 

weeks. Sprint (FON) cancelled a high-speed Internet service called ION, which 

would have added more capacity. ‘‘I won’t predict when growth will resume, but the 

market is cleaning itself up right now,’’ says David Dorman, president of AT&T. 

One wild card: Some creditors of bankrupt WorldCom Inc. tell BusinessWeek they 

want to swap debt for equity in a new company. They are pushing other creditors 

to allow WorldCom to emerge from bankruptcy debt-free, which could spark a price 

war a year or two from now. Other carriers might start sooner. ‘‘I’m a low-cost share 

taker,’’ says John J. Legere, CEO of Global Crossing Ltd., which is expected to 

emerge from bankruptcy this year with just $200 million in debt, down from original 

liabilities of $12 billion. 

In some markets, conditions may get worse before they get better. Catapulting demand in Asia, for example, has buffered the region from much of the nastiness to 

date. Wireline phone revenues in Asia have fallen 10 percent over the past two 

years, vs. a 50 percent decline in North America and a 33 percent fall in Europe. 

Yet despite a strong economy, a rising population, and soaring demand for telecom, 

worrisome signs are emerging. Later this year, Tyco’s telecommunications unit will 

begin operating a new undersea cable that will double transpacific capacity. 

The glut grows relentlessly in other markets as well. Last year, the price of a 

high-speed circuit between Tokyo and Hong Kong fell 27 percent, to $62,000 a 

month. But four new cables have begun service in the region during the past eight 

months, raising the risk of a price war. 

One big variable is the economy. In the U.S., consumers are both yakking on the 

phone and surfing the Net more than ever. This makes up for falling prices and 

keeps spending flat. But with corporations slashing costs and laying off workers, 

businesses have cut phone bills by about 6 percent, paring $9 billion from a $141 

billion market. 

And telecom isn’t likely to see a surge in business demand soon. An uptick in 

usage should lag economic recovery by six months. That means relief could arrive 

in 2004. This could trickle down to the equipment makers some six months later, 

producing modest growth in the second half of 2004. 

CONSOLIDATION. It’s waiting to happen in Europe as well as North America—

but it will keep waiting for at least another year. If markets permitted, wireless giants Verizon (VZ), Deutsche Telekom (DT), Vodafone (VOD), and perhaps Japan’s 

NTT DoCoMo (DCM), would be gobbling up smaller competitors, driving down costs, 

and jacking up prices. Local and long-distance carriers like AT&T (T) and BellSouth 

(BLS) might have signed long ago. But debt-wary markets will not tolerate such maneuvering today. Even the whisper of new equity or debt offerings provokes warnings of downgrades from rating agencies and investor stampedes. 

For a consolidator on a holding pattern, look no further than Verizon. The largest 

of the Bells, Verizon could take a large step toward dominance by buying a national 

long-distance carrier, either WorldCom or AT&T. And it could tighten its grip on 

the U.S. wireless market by gobbling up Sprint PCS (PCS). The total outlay for 

AT&T and Sprint PCS: perhaps $25 billion—peanuts back in the bubble. 

But that bubble has popped, and Verizon, with $45 billion in long-term debt, is 

busy cleaning its balance sheet. The company is slashing investments and paying 

down debt with its $2.7 billion in net income. Analysts say that Verizon won’t be 

out shopping for more than a year. 

This is where the passage between phases one and two—glut and consolidation—

gets tricky. When one carrier lines up the first big acquisition, competitive pressure 

could push others into the hunt. That would punish balance sheets while hastening 

a necessary consolidation. 

In the next year, though, look for a slew of buyouts on the cheap. Consolidators 

like IDT Corp., a Net voice company, are prowling the littered landscape for bargains. Last year, it acquired bankrupt carrier WinStar, for $42 million, a small fraction of its book value. And if WorldCom fails to emerge from bankruptcy as an independent company, look for IDT and the Bells to buy it in pieces. 

Deutsche Telekom, which paid $26 billion to buy upstart wireless carrier 

VoiceStream at the height of the market, is now ready to sell the U.S. carrier for 

much less so it can pay down its massive debt. So far, no buyers. When the German 

company finds one, perhaps within the next year, the consolidation period will be 

under way. 

6

TRANSFORMATION. Even while wrestling with capacity and cost issues, phone 

companies must focus on the longer term. To survive, many must undergo a fundamental transformation. In a competitive environment, the century-old practice of 

charging customers for access to a network has produced a punishing, low-margin 

business. 

To make money in an age of plentiful networks, carriers must market new content 

and value-added services that flow through their pipes. The companies already have 

billing relationships with customers—a huge advantage—but have to come up with 

services to sell. ‘‘It’s really about transforming telecom from a transport industry 

into a services industry,’’ says Microsoft Corp.’s Pieter Knook, corporate vice-president for network services providers and mobile devices. 

This is already happening. Over the past decade, AT&T has grown its service arm 

into a $4 billion enterprise that competes with consulting and service companies. 

In time, services may become the heart of AT&T and the carrier division may be 

spun off. 

The signs of change are clearest in wireless. In Japan, wireless data pioneer NTT 

DoCoMo has let thousands of other companies offer an endless array of services, 

from games to music, on its network. DoCoMo gets a small fee for every transaction. 

‘‘DoCoMo has created a new model of the telecom as marketplace,’’ says consultant 

Andrei Jezierski of telecom researcher i2 Partners. AT&T Wireless, a DoCoMo partner, plans to import the model to the U.S. 

In the end, telecom companies may eventually even spin off their networks and 

concentrate on services. The first signs of this fragmentation are evident. Across Europe, so-called virtual phone companies such as Virgin Mobile are selling wireless 

subscriptions and simply renting network capacity from incumbents. 

Even in the midst of this industrial depression, the elements of telecom’s recovery, 

from consolidation to new business models, are coming into focus. The industry that 

emerges from this will be humbler and, yes, poorer, than it was in the bubble. But 

even in these dark days, which are every bit as treacherous as the Ulonga-Bora 

River, the shape of a new industry is in sight.

Senator McCain. 

STATEMENT OF HON. JOHN MCCAIN,

U.S. SENATOR FROM ARIZONA 

Senator MCCAIN. Thank you, Mr. Chairman. I also read that article in Business Week, and it starts out by saying the telecom crisis is reminiscent of a classic scene in the African Queen. Humphrey Bogart and Katherine Hepburn, desperate and lost on the 

Llonga Bora River ripped pieces of wood off the little steamer and 

used them to fuel the vessel’s engine. Today’s telecom companies, 

struggling to survive one of the greatest busts in business history, 

are slicing prices below cost and selling precious assets. 

So when we discuss broadband, I do not see how we can discuss 

it without the background and absolute criticality of the depression 

that we are seeing now in the telecommunications business. If we 

had had this hearing, Mr. Chairman, just a year or so ago, we 

probably would be talking in very different terms than we are 

today, and as much as I respect and admire the experts before us, 

I would be curious when each of you predicted that we would be 

in the situation that we are in today. I have always believed the 

Telecom Act of 1996 contributed to this failure, but we will not continue that debate again today. 

I thank the witnesses. Broadband is a crucial issue. Obviously, 

all of us want as many Americans as quickly as possible to acquire 

broadband services. Starting some massive multibillion central 

planning effort to do so is not what I believe in or support. As you 

said, Mr. Chairman, we continue to be gridlocked on this issue here 

in the Senate and in the Congress, and clearly we will not act this 

year. I hope that perhaps with less campaign contributions maybe 

7

it will free some of us up to be more conducive to negotiations and 

agreement. We are gridlocked by the special interests. 

We just mentioned the yin and the yang. None of those special 

interests will let us move when you give million-dollar contributions either directly to the candidates or to institutions that they 

would set up in their various states named after them, so I hope, 

Mr. Chairman, in the coming year we will be able to work on this 

issue from the broadest perspective, the telecom depression, but 

also on the specific issue of broadband access. Both of those issues 

are indivisible. 

I thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. Senator Burns. 

STATEMENT OF HON. CONRAD BURNS,

U.S. SENATOR FROM MONTANA 

Senator BURNS. Welcome to production agriculture. We have 

been going through this for a long time, folks. It is nothing new. 

Thank you, Mr. Chairman. I have a statement here, and I will 

paraphrase some of it, but I want it to be put in the record. 

I quit reading those things because they are depressing, and so 

we will go on with the business at hand of moving America ahead. 

Last year, we requested a comprehensive GAO report on spectrum management along with my colleagues Senator Hollings and 

Senator Inouye and Senator Kerry. This report, which was unprecedented in its scope, was released yesterday. We have not had all 

the time to go through it yet, but I will tell you that there were 

some very glaring findings in that report. They are nothing short 

of alarming, and I think they beg our immediate attention. 

The report indicates that the U.S. currently lacks a national 

spectrum policy, in large part because it is a divided structure on 

spectrum management. I should add that both the FCC and the 

NTIA has done tremendous work recently in coordinating their actions due in large part to the efforts of Chairman Powell and Secretary Victory, since I am concerned that the split in authority over 

spectrum authority has bred a longstanding institutional turf battle between the two agencies. 

Another troubling finding in that report is the direct state-of-affairs regarding the lack of preparation for the all-important World 

Radiocommunication Conference that is upcoming. The GAO report 

states that the U.S., and I will quote, ‘‘the U.S. position on some 

items has remained unresolved until the eve of the conference, 

leaving the U.S. little time to build preconference support.’’ Furthermore, the head of the delegation, who bears a huge responsibility of negotiating a unified U.S. position at the conference, typically bears the rank of Ambassador for only 6 months, and that’s 

not very long. 

We could cite numerous other examples found in the report that 

faults the U.S. spectrum policy, including severe lack of accountability and, concerning efficient spectrum use by federal agencies, 

I have fundamental reservations about the very auction method 

itself, which views spectrum as some sort of a national resource to 

be exploited for maximum budgetary impact. We have seen the results of this sort of thinking in both Europe and here at home, 

which, instead of maximizing revenue, has often resulted in bankVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
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ruptcies and lawsuits. Rather, spectrum should be viewed as a 

technology, which is a key to the future of the new generation of 

services for American consumers and American companies. 

Given the stark nature of the GAO findings, I will begin immediately working on draft spectrum reform legislation. I look forward 

to working with my colleagues on the Commerce Committee that 

share those concerns. We will also look forward to the GAO’s upcoming early 2003 report on spectrum allocation practices of other 

countries, and will incorporate those findings in the final bill. 

I have become convinced of the need for comprehensive reform 

after traveling. We made a trip to Asia over the Memorial Day recess. During my trip to Korea and Japan I met with top legislators 

and telecommunications CEOs, and was quite impressed with the 

products and services they are making available to their consumers. Making innovative wireless services available to consumers is seen as a national priority in each one of those countries, 

and I believe the key goal should also be a national priority for this 

country, also. 

And then there are some new things that are coming down. We 

hope to talk to some witnesses today about Wi-Fi and other unlicensed wireless technologies. It is amazing to see new entrepreneurs coming up with new ideas, and just using a small slice 

of spectrum, unlicensed spectrum I would say for commercial innovation. 

So Mr. Chairman, I appreciate this hearing today. It will be interesting to hear what our witnesses have to say, but we are 

wounded in this industry a little bit, but we are along way from 

being dead, or counted among the dying. So we think there is a 

great future, and I appreciate the witnesses coming, and I appreciate your having this hearing today. 

Thank you very much. 

[The prepared statement of Senator Burns follows:]

PREPARED STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR FROM MONTANA

Thank you, Mr. Chairman. Today’s hearing concerns a topic of crucial importance 

to the nation’s future: how best to accelerate the pace of broadband deployment. I 

would like to focus my remarks on the need for wholesale reform in our nation’s 

spectrum allocation policy. 

Last year I requested a comprehensive GAO report on spectrum management 

along with my colleagues Senator Hollings, Senator Inouye and Senator Kerry. This 

report, which was unprecedented in its scope, was released yesterday. The GAO’s 

findings are nothing short of alarming and call for immediate action. The report indicates that the U.S. currently lacks a national spectrum policy, in large part because of the divided structure of U.S. spectrum management. I should add that both 

the FCC and the NTIA have done tremendous work recently in coordinating their 

actions, due in large part to the efforts of Chairman Powell and Secretary Victory. 

Still, I am concerned that the split in authority over spectrum policy has bred longstanding institutional turf battles between the two agencies. 

Another troubling finding by the GAO is the dire state of affairs regarding the 

lack of preparation for the all-important World Radiocommunication Conferences. 

The GAO report states that ‘‘the U.S. position on some items has remained unresolved until the eve of the conference, leaving the U.S. little time to build 

preconference support.’’ Furthermore, the head of the U.S. delegation, who bears the 

huge responsibility of negotiating a unified U.S. position at the conference, typically 

bears the rank of ambassador for only six months. 

I could cite numerous other examples found in the report about the faults in current U.S. spectrum policy, including the severe lack of accountability concerning efficient spectrum use by federal agencies. I also have fundamental reservations about 

9

the very auction model itself, which views spectrum as some sort of national resource to be exploited for maximum budgetary impact. We have seen the results of 

this sort of thinking in both Europe and here at home, which instead of maximizing 

revenue has often resulted in bankruptcies and lawsuits. Rather, spectrum should 

be viewed as a technology which is key to the future of a new generation of services 

for American companies and consumers. 

Given the stark nature of the GAO’s findings, I will begin immediately working 

on draft spectrum reform legislation. I look forward to working with many of my 

colleagues on the Commerce Committee who share these concerns. I will also look 

forward to the GAO’s upcoming early 2003 report on the spectrum allocation practices of other countries and will incorporate these finding into the final bill. I became more convinced than ever of the need for comprehensive spectrum reform after 

traveling to Asia over Memorial Day recess. During my trip to Korea and Japan, 

I met with top legislators and telecommunications CEOs and was quite impressed 

at the products and services available to consumers. Making innovative wireless 

services available to consumers is seen as a national priority in each country. I believe this key goal should also be a national priority in the U.S. 

Finally, I want to touch on a topic that could yield tremendous benefits for businesses and consumers—opening up additional spectrum for unlicensed wireless 

broadband technologies. Wireless technologies, with their ability to transfer data 

over vast distances instantly, offer an immediate solution for areas of low population 

density such as my home State of Montana. I hope that some of our witnesses today 

will talk about Wi-Fi and other unlicensed wireless technologies. It is amazing to 

see what entrepreneurs have been able to do when this small slice of spectrum was 

opened up for commercial innovation. So-called ‘‘hot spots’’ of wireless Wi-Fi 

broadband access are springing up across the nation. The Wi-Fi innovation and deployment happened in spite of, not because of, government involvement. We need 

to see, Mr. Chairman, what we can do to remove the interference of government and 

let such innovations take place. 

Right now, Wi-Fi is capable—like DSL and cable—of working only over limited 

distances. But market innovators are already moving to extend its reach. There 

have been stories in the press recently about new Wi-Fi equipment that is capable 

of creating broadband zones of up to 12 miles. During a recent briefing before the 

Internet Caucus, MIT professor Andy Lippman talked about extending the reach of 

Wi-Fi even further, up to a radius of 30 miles. 

In short, comprehensive spectrum reform has the potential to create numerous 

high-tech jobs and jump-start the currently ailing technology sector of the U.S. economy. We need to create a spectrum plan that will focus on managing spectrum in 

a rational way, balancing the needs of industry and federal agencies. The emphasis 

of this plan must focus on developing innovative new wireless technologies. 

I look forward to the testimony of the witnesses. Thank you.

The CHAIRMAN. Thank you. Senator Dorgan. 

STATEMENT OF HON. BYRON L. DORGAN,

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. Mr. Chairman, thank you very much. Let me 

start just by saying, I know there are people who are pushing to 

have the FCC make decisions right now on some very important 

issues. We have a nomination for an FCC Commissioner that is 

pending here. It has been pending for a good long while. It is someone who I care a great deal about, because that person is, in my 

judgment, going to bring a rural voice to the Federal Communications Commission. As has been the case with too many nominations 

on key issues, this nomination languishes. I am not quite sure 

when we can expect some action on it, but I guess I would say, I 

would like the FCC to have a full complement of commissioners 

and the input from all the commissioners before they make some 

of these decisions. 

So we can talk about these things a little later, but I do not quite 

know what we do about this. I mean, how on earth can anybody 

hold up Jonathan Adelstein’s nomination at this point? This ought 

10

to go to the floor for a vote. It ought to be there today. It is just 

unforgivable that we have a commission that has so many important decisions in front of it, we have a nomination that has been 

here, as I said, a long while ago, this Committee has acted on it, 

and so there it sits on the floor of the Senate. 

Well, I will say more about that on the floor in the next couple 

of days, but let me thank the Chairman for holding this hearing. 

The issue of broadband is very important. I carry a Blackberry, 

which is probably both a blessing and a curse. My Blackberry that 

I have with me works just fine in Washington, D.C., but when you 

get off the airplane in the Dakotas, you might as well turn it off, 

because there is no service at all. Yet this company would advertise 

they serve, I think, 90, 94 percent of America. 

I have seen ads about these kinds of devices where they say, we 

cover 90-some percent of the country. That is true. It is just the 

major cities. You gather up all the folks who live in the major cities, and you have got 90 percent of the country, but if you take a 

look at the geography of the country, devices like this do not work 

over a large part of the country. 

The reason I mention this is that people tell us that by 2002, 90 

percent of the people in this country will have access to broadband. 

Well, that is probably true as well, but take a look at the map and 

you will find a large portion of the rural areas of this country that 

will not have access. In order to exercise and maximize the full potential of the Internet, you do need high speed connections. When 

we wrote the telecommunications bill, we talked about advanced 

services, providing advanced services with Universal Service Fund 

support. We were explicit in that as we started in 1996. 

So we have a lot to talk about, Mr. Chairman. I know there is—

once again, I say this often, as I was shaving this morning and getting ready for work, I saw more ads on television by both sides lobbying back and forth. It is like advertising foot powder to hear 

these ads by both sides on the telecommunications industry, but 

frankly, we need an FCC that makes good decisions. We need a 

Congress that is proactive and aggressive in setting goals on the 

buildout of broadband, enhancing broadband capability for all 

Americans, and comporting with the law. 

We wrote the law in a very simple way. We said that Universal 

Service Fund shall support advanced telecommunications services. 

Some people seem to forget that, Mr. Chairman. 

I look forward to the witnesses’ testimony. 

The CHAIRMAN. Thank you. Senator Smith. 

STATEMENT OF HON. GORDON SMITH,

U.S. SENATOR FROM OREGON 

Senator SMITH. Thank you, Mr. Chairman. If I may, I have a 

longer statement that I would like to include in the record. 

The CHAIRMAN. It will be included. 

Senator SMITH. In the interests of time and hearing from our 

witnesses I will not read it, but just simply say that I think 

broadband deployment can be a significant part of economic development, particularly in rural places. There are places in my state 

where they have in one case, Le Grande, Oregon, a deployment. A 

tremendous amount of medical services are given there through 

11

this technology that I think is very, very promising. I think we 

need to structure policies and tax policies in particular to 

incentivize the deployment of broadband all over the place, but 

there are some other questions I hope to ask when we get to the 

witnesses. 

Thank you, Mr. Chairman. 

[The prepared statement of Senator Smith follows:]

PREPARED STATEMENT OF HON. GORDON SMITH, U.S SENATOR FROM OREGON

Thank you Mr. Chairman. Earlier this year, I offered an amendment to the Energy Bill for a broadband deployment tax credit and said that the Federal Government has an obligation to support broadband deployment just as it has supported 

the construction of highways throughout our nation. It is only with federal support 

for the construction of broadband networks that all consumers will be given access 

to the advantages of broadband. 

Broadband networks have the power to bring economic development and opportunity to rural areas, but unfortunately, the communities that often have little or 

no broadband service are rural and low-income areas. We have already seen how 

the information economy has transformed major cities and other industrial areas. 

I believe it is critical that we bring that information economy to all consumers. 

Recent studies show that cost is the biggest impediment to consumer broadband 

growth. More than 70 percent of potential broadband consumers said they were not 

signing up for broadband because it is too expensive. I am very concerned about reports that nearly every major broadband provider increased prices in the past two 

years. 

It is now time for the government to act. The legislation I had offered would create a two-tiered tax credit designed to spur broadband deployment around the country. The first tier would provide a 10 percent tax credit to broadband providers for 

new deployments in rural and low-income areas. The second tier would provide a 

20 percent tax credit for next-generation broadband deployments. The rural and 

low-income credit would be broadly available. For example, in Oregon, 45 percent 

of the households would be eligible for the first tier of tax credit. The second tier 

credit would be available for broadband deployments throughout the country. 

We know that broadband deployment can benefit consumers. In La Grande, Oregon, which was connected to a nearby fiber optic network in 1999, the community 

has developed a telemedicine program that makes it possible for doctors to consult 

with patients remotely and receive needed medical information instantly. Other Oregon towns have seen broadband services help them attract and keep telecommuting 

residents and improve local services. 

The issue I want to explore with the witnesses today is whether the current 

broadband environment is consumer friendly. Is the offering by telcos and cable operators consumer friendly? Do consumers want more broadband choices than just 

two carriers, which are cable and DSL? Is wireless or satellite broadband technically 

feasible? 

I firmly believe that even as we talk today about increasing government’s role, 

it is important that our actions are not heavy-handed. Any government action must 

have—as its first priority—the goal of encouraging private businesses to make a 

substantial investment in public infrastructure. Making high bandwidth broadband 

widespread and affordable is going to require tens of billions of dollars of risky investment by any company in the telecommunications industry. The companies who 

take the risk of deploying last mile broadband facilities should get the benefit if it 

succeeds. 

Our goal is simply to make sure that basic consumer safeguards are in place. The 

widespread availability of broadband technology is essential to ensuring the United 

States’ technological leadership in the world. We must make a commitment to a national broadband policy. 

I look forward to hearing from our witnesses today about what they are doing to 

develop broadband technologies, and what they think we should do to encourage 

broadband in the United States. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you. Senator Breaux. 

12

STATEMENT OF HON. JOHN B. BREAUX,

U.S. SENATOR FROM LOUISIANA 

Senator BREAUX. Thank you, Mr. Chairman. I thank you for having the hearing and for our witnesses. I think by any measure that 

we look at that the telecommunications industry in this country is 

in a tailspin. Whether you are a manufacturer of telecommunications equipment or whether you are a long distance company, or 

whether you are a Bell local service company, you have to look very 

hard to find someone who has really been successful. 

I think one of the companies let go another 12,000 employees on Friday. Nearly 500,000 jobs have been lost, $2 trillion in market 

value, just in the last 24 months, and it is across the board. You 

could say that, well, long distance is doing well, and local service 

is not, but that is not true. The opposite is not true as well. 

There is not a segment of the most important, or one of the most 

important industries in this country, that is not in very serious financial trouble. When this Committee was considering the legislation a couple of years ago to bring the telecommunications industry 

into the 21st century, legislation which I strongly supported, none 

of us, I will bet, would have thought that in a short period of time 

we would be here looking at an industry in the shape that it is in 

today. The real question is, what do we do to help? 

Now, I think there are some things that need to be considered 

and looked at, but we just cannot sit back and watch one of the 

most important industries in this country go down the tank. That 

is what is happening, and I thank you for having the hearings. 

The CHAIRMAN. Thank you. 

The Committee welcomes our very distinguished panel, Hon. 

Reed Hundt, Former Chairman of the Federal Communications 

Commission, Mr. Michael J. Price, vice chairman of Evercore Partners in New York, Mr. Craig Mundie, the senior vice president and 

chief technical officer of Microsoft, Mr. Lawrence Lessig, professor 

of law at Stanford University, Mr. Peter Huber, senior fellow of the 

Manhattan Institute. 

Mr. Hundt, Chairman Hundt, glad to see you back. 

STATEMENT OF HON. REED E. HUNDT, FORMER CHAIRMAN, 

FEDERAL COMMUNICATIONS COMMISSION 

Mr. HUNDT. Thank you very much, Senator. Thank you all for inviting me back. It is a great privilege. It has been 5 years since I 

have had the opportunity to appear in front of you, and 5 years 

since I have left public service, and there certainly has been a lot 

of water that has gone under the bridge since then, and some 

bridges have been washed away. 

Senator BURNS. Do not worry about the Potomac, though. It 

comes and goes. 

[Laughter.] 

Mr. HUNDT. I was trying to think about how to summarize these 

last 5 years. Unfortunately, my high school senior son showed me 

the book he has just been assigned, which is ‘‘A Tale of Two Cities,’’ 

and you only have to read the first paragraph to encapsulate the 

last 5 years. It has been the best of times and it has been the worst 

of times, it has been the time of hope and it has been the time of 

despair, and if you will permit me, I would like in a very, very 

13

short period of time to talk to you about the best of times part and 

the worst of times part in my judgment, and then urge you to take 

the leadership you have shown so often in the past and take the 

steps to build America the finest next generation broadband network in the world that will reach absolutely everybody, especially 

including those of you in your state, Senator Burns, or your state, 

Senator Dorgan, who are the most expensive and the most in need 

of the government’s help in being part of the network. 

So the best of times, actually the telecommunications sector 

measured by revenue is much bigger now than it was in 1996, 

when you signed the law. It is much bigger this month than it was 

6 months ago, measured by revenue. It is $277 billion for this year, 

and was only $164 billion when the Telecommunications Act was 

signed. It has been a story of continued growth measured by revenue. One of the main reasons is the spectacular new services that 

have been introduced all across the country in this time period, the 

Internet, cell phones, even broadband itself, with 15 million subscribers in homes and small businesses. 

These are tremendous growth stories from the perspective of consumers. What lies behind them is the competition has produced 

better prices for new services than ever before in the history of 

telecommunications. Since 1996, long distance prices have dropped 

at a rate of 6 percent per year on a compound basis. Wireless prices 

have dropped at 19 percent a year on a compound basis since 1996, 

and long haul data dropped in just 1 year 99 percent in price. 

As a result of all of these price drops, consumers have purchased 

not the same amount for less money, but more for more money, 

and every time you read a story about how we have a consumerled economy that is just barely keeping us out of recession, it is in 

particular, the epitome of that, that the consumers are buying 

more in the communications sector. 

All of this is because of the magic elixir of competition and innovation at the same time. We have never seen so much innovation. 

We have never seen so much competition. All of this has also produced net job growth in this time period. 

Looking at the telecommunications companies alone, we now 

have 1.6 million jobs. We had 1.2 million 10 years ago. Jobs increased in the telecommunications sector every month from the 

signing of the Telecommunications Act until May of the year 2001. 

Since then, they have begun to decline. 

Now let us talk about the worst of times. The worst of times is 

that in the last 21⁄2 years there has been a flight of capital and a 

retraction of investment in this particular sector. It is true at the 

startup level, it is true at the big company level, it is true in the 

public stock markets. We have the longest bear market in 60 years, 

and it is most dramatically the case that we have a bear market 

in the telecommunications sector. As investment leaves—we all 

know that there is a non-virtuous cycle that goes on. As investment 

leaves, companies begin to lay off people, they reduce the innovation, they do not produce new services, ultimately the dynamic, innovative strength of the sector fades away and dissipates because 

there is not new investment, and as the services are not introduced, and as companies are not trying to market them successVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00017 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
14

fully, ultimately the consumers do not buy more, and the whole 

economy tips into a recession. 

That is where we are right now, I would suggest with great respect, and with great humility in terms of predicting the future. 

We are at the very knife’s edge of decision, where it is absolutely 

imperative that the government play its right role in exercising the 

leadership to make sure that we build on all these strengths of the 

real economy and create a new vigor and a new confidence in the 

market economy and in the capital markets in particular. 

There are two choices that have to be made. Here is the first 

choice, I would say with great respect. Do we adopt a policy of monopoly and try to consolidate industries through a pro-monopoly 

policy at the government level, thereby building the confidence of 

investors in those particular industries, or do we stick with the policy of competition? 

Here is the choice that was faced in the crash of the market in 

1929, and the policy choice made over the 10 years thereafter was 

to revert to monopoly and have big government come in and regulate those monopolies and make sure that there was not too much 

capital invested in any of the infrastructures of America. That is 

why the Federal Communications Commission was created in 1934. 

That is the wrong policy, I would say. That is the policy that reduces jobs, shrinks investment, reduces innovation, reduces the 

number of services, and ultimately will reduce the size of the economy. The right policy is competition, but the essential key—and 

this is the bottom line that I hope will join in the thoughts already 

expressed by the Senators and build a momentum, to the degree 

my testimony can, for a new policy of universal service. 

The essential extra ingredient to a competition policy is to have 

the government look at broadband, look at the new technologies of 

fiber and upgrades of existing plants and wireless, and decide that 

the government needs to make an investment of public moneys in 

jump-starting our broadband industry. There has never been a 

communications industry or a transportation industry in the history of America that did not benefit from an original government 

jump start or incentive plan to get going, and this broadband industry needs that help now. 

[The prepared statement of Mr. Hundt follows:]

PREPARED STATEMENT OF HON. REED E. HUNDT, FORMER CHAIRMAN, FEDERAL

COMMUNICATIONS COMMISSION

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 beVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
15

cause of this Committee’s leadership that the telecommunications sector became an 

engine of our dynamic economy of the late 1990s. 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 90 percent of all classrooms 

in less than 5 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 percent 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 percent 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 1990s. And it is always true that this risk is the one policy makers should 

16

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 percent 

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 

17

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 1920s, 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.

The CHAIRMAN. Very good. Mr. Price. 

STATEMENT OF MICHAEL J. PRICE, VICE CHAIRMAN, 

EVERCORE PARTNERS, INC. 

Mr. PRICE. Thank you, Senator Hollings, thank you, Senator 

McCain for holding these hearings today. I would like to present 

you with my views of what has led to the telecom meltdown and 

highlight three observations about industry structure that need to 

be addressed, and leave you with one legislative proposal for you 

to consider. 

The Telecom Act of 1996 created unbridled enthusiasm about the 

opportunities available to new competitors. It also created a consumer-friendly frenzy that has destroyed the balance sheets and income statements of many of America’s largest and most important 

companies. In essence, we have too many competitors, particularly 

18

in wireless and in the backbone transport. Further, our bankruptcy 

laws are a problem. They do not eliminate the capacity. 

Normally, our bankruptcy process would allow the companies to 

reorganize and other companies would buy these assets. Using today’s bankruptcy laws, what many companies do is use these laws 

to reorganize. When they reorganize, it is a path to liquidity, not 

a path to capacity reduction, and unfortunately this perpetuation 

of this capacity is going to make more trouble for the stronger companies as time goes on. You can imagine a WorldCom that is reorganized without its debt. How is it going to compete with AT&T? 

So this is a problem that is not at the forefront yet today, but 

I think portends a looming problem that is going to happen in 2 

or 3 years from now. To make Senator McCain’s point of what did 

you predict in October 2000, when I was running my CLEC in Europe, we saw this coming. In August of 2001 we saw it coming 

again, so we have seen this coming for some time. 

My concern about the bankruptcy laws in this country is, with 

these companies reorganizing debt-free, they will create a terrible 

situation for the companies that have been managed prudently and 

stay in business. 

My second point is that we have too many competitors, particularly in the overcapitalized wireless industry. In my testimony, 

there is a chart which highlights the industry structure according 

to Michael Porter’s five factors, and you can see that the wireless 

industry closely resembles the airline industry. Six, seven, or eight 

competitors are too many for a capital-intensive industry where the 

switching costs are near zero. 

The wireless industry’s capital structures are under tremendous 

strain due to the next generation technologies, upgrades, and marketing costs. In 2002, the wireless industry is expected to have zero 

dollars in free cash flow, yet suffering under $84 billion of debt. 

The European market provides evidence that three or four competitors can still maintain a high degree of competition, and in fact 

competition remains fierce, and penetration has reached 87 percent 

in Europe. My view is that if the same competitive environment 

would exist in the U.S. if there were three or four competitors. Remember, in the late 1990s, in the highly concentrated long distance 

industry, where three players, AT&T, Sprint, and MCI had an 80 

percent market share, competition was intense. This is fundamentally because the switching cost was zero, just like it is in the wireless industry. 

To Senator Burns’ point, beyond allowing consolidation, I believe 

the government should also give additional spectrum to carriers at 

no cost. This is not the government’s piggy bank. I do not think it 

should be seen as such. We can strengthen the remaining carriers 

if we give them this additional spectrum and allow them to have 

60 or 70 megahertz per market. In an engineering context, spectrum is a substitute for capital. It is a direct economic tradeoff. 

This will allow the existing wireless carriers to be a strong, effective competitor to the land line communication network. In fact, it 

will also lead to the RBOCs competing with each other, which I 

also believe should be a broader public policy objective. 

So let us get to the RBOCs. With huge cash flow EBITDA margins of 40 percent, and relatively strong balance sheets, the RBOCs 

19

appear to be the stalwart of this industry. However, this is changing. With the improving coverage of wireless services, home phones 

are becoming optional. Several providers, like LEAP, estimate that 

26 percent of their customers have dropped their home phone. According to USA Today, one in five Americans think of their cell 

phone as their primary phone. 

The cost advantage of cable is an emerging reality. Coax cable 

technically has more capacity for a given level of technology spender than a copper loop. The average charge for the high speed Internet service by DSL is $51, and the average charge for cable is $45, 

and $10 less if you already have video, so the cost advantage that 

they have is reflected in their pricing. This has led to cable capturing two-thirds of all broadband customers. 

Cable’s cost advantage is also due to lack of regulation, which in 

my view was a good policy decision. Freed from price caps 6 years 

ago, effectively, cable has now upgraded their plant for high speed 

Internet and digital cable. In 2 to 3 years, cable telephony will be 

providing voice, another effective competitor to the RBOC monopoly 

in residential voice. 

When I recently surveyed a group of telco executives and asked 

them what they would give up first, their home phone or their 

cable TV, the answer was unanimous, the home phone, so in this 

regard the Telecom Act is an apparent success. The question for 

this Committee, I would pose, and the FCC, is, if facilities-based 

competition to the RBOCs’ residential voice monopoly has become 

a reality, when should the regulatory environment be changed? 

So now, let us get to the need for broadband, which I think is 

an important economic concern. We have all talked about the technology and telecom depression and the job force and the wealth 

loss. Furthermore, the trend of recycled bankrupt assets becoming 

viable again will only serve to hurt the strong players of today. 

Fundamentally, we need a Technology New Deal. I would propose 

a broadband subsidy of $300 per month be paid to the provider if 

the provider agrees to provide high speed Internet service for under 

$30 a month for a 3-year period. Just as we had a comment several 

years ago, ‘‘it’s the economy, stupid,’’ the problem with broadband 

is price. If we fix the price, we will get the demand caught up. 

If we did this for 20 million homes, this plan would cost $6 billion probably over 2 to 3 years. Without a change in the regulatory 

environment, there will be no catalyst to revise investment in the 

wireless networks. The equipment manufacturers will not survive 

the cutbacks that are currently being made in the capital budgets. 

Lucent and Nortel have reacted by partially reducing their 

spending in next-gen technology. If this continues, the U.S. will 

lose its competitiveness. Already, Nortel has cut back its investment in its world-leading optical technology. How much longer do 

we expect Lucent to lose $3.5 billion a year and continue funding 

Bell Labs, and where would the country be without Bell Labs? 

I leave this Committee with three observations and an aforementioned proposal. 

1. Our bankruptcy laws, which allow stand-alone restructurings, 

will perpetuate the overcapacity that plagued this industry for 

years to come by maintaining excess capacity and creating new low 

cost competitors. 

20

2. The wireless industry resembles the airline industry and 

needs to be consolidated and given more spectrum. If they cannot 

earn a respectable rate of return on new equipment due to overcapacity, they will not innovate and continue to invest. 

3. The historical regulation of the telcos needs to be examined in 

light of the changing regulatory environment, cable superior technology plant and the increasing quality of wireless offerings. 

4. No constructive action this government could take with the 

three previous industries will solve this industry’s problems for a 

meaningful time, and we need a Technology New Deal to stimulate 

demand. 

Thank you very much. I appreciate the opportunity to appear before this Committee. 

[The prepared statement of Mr. Price follows:]

PREPARED STATEMENT OF MICHAEL J. PRICE, VICE CHAIRMAN, EVERCORE PARTNERS, 

INC. 

The Telecom Mess: How did we get here and how are we going to get out 

of it? 

My name is Michael Price and I am Vice Chairman at Evercore Partners a private 

equity and advisory firm based in NY and LA. We have 2 private equity funds that 

invest in growth capital and one venture capital fund. Our advisory business focuses 

on strategic corporate services and restructuring. I have spent 20 years in the investment banking and telecom industries. In 1987, I joined Lazard Freres and ran 

their global telecom and technology practice. While there I was responsible for the 

sale of McCaw Cellular to ATT, SBC’s acquisition of PacTel, the breakup of US West 

into Media One and US West, and the sale of MCI to WorldCom. In 1998, I left 

Lazard Freres to start FirstMark Communications Europe and raised $600 mm to 

build a competitive carrier in Europe. 

As an active participant, I have firsthand experience in the dramatic growth of 

this industry, as well as its contraction. I have watched the power shift from the 

incumbents to the upstarts, and now back to the traditional participants, the 

RBOCs and the cable companies. However, the current state of affairs is more dire 

than it has ever been. We are simultaneously fraught with excessive competition, 

fragile balance sheets, regulation which is constraining investment, declining profitability and bankruptcy laws, which recycle assets and allow them back to be competitive with those companies that have not restructured. 

Furthermore, technology is finally creating alternatives for consumers to feast on. 

Wireless is an effective substitute for the landline telephone. Satellite is an effective 

substitute for cable TV, broadband Internet may one day be a substitute for the cinema as video on demand takes off. These dislocations change the power of the participants. 

Today I would like to present you with my views on what led to the current 

telecom meltdown and highlight three observations about industry structure that 

need to be addressed and one legislative proposal for you to consider, which in my 

view, will lead to a more rapid recovery of this sector. 

First, how did we get here? 

The Telecom Act of 1996 created unbridled enthusiasm about the opportunities 

available to new telecom competitors. Unfortunately, it also created a consumer 

friendly frenzy that is economically unsustainable. It has destroyed the profitability, 

and balance sheets of some of America’s most important companies. In essence, we 

have too much competition, particularly in wireless, and backbone transport. 

Early successes like MFS and Teleport proved that investors could make money 

supporting competitive telcos. Extrapolation of early successes in the marketplace 

ignored the difficulty in gaining significant numbers of customers and assumed little 

competitive response from incumbents. In the late 1990s, we believed that telecommunications was a rapid growth industry, as early Internet growth was estimated at 100 percent per quarter for several quarters. This forecast gave proof to 

the capital markets that demand was indeed boundless. Following the closure of 

Napster and the rapid achievement of high Internet penetration, Internet growth 

returned to a much more normal pace. However, the future perceived ‘‘demand’’ 

curve of that moment in time in 1999, dictated the capital budgeting commitments 

21

for the next 18 to 24 months. At the same time, dense wave division multiplexing 

(DWDM) and other next-generation technologies multiplied available capacity, leading to the massive oversupply with which we are now faced. These points we chronicled in last Thursday’s Wall Street Journal. 

Wall Street responded enthusiastically to the ‘‘Telecom Growth Opportunity’’ raising over a trillion in capital and spending in this industry dramatically increased 

with North American telco equipment capital expenditures rising from $28 billion 

to $123 billion from 1990 to 2000. While capital expenditures in this industry 

dropped to $110 billion in 2001 and is expected to drop to $78 billion in 2002, this 

is still above inflation adjusted 1990 numbers of $39 billion. Thus, if we return to 

pre-wireless, pre-hype spending levels, Nortel, Lucent, Corning and Motorola will 

see their sales decline further. 

Bankruptcy Laws Are A Problem 

The good news about telecom deregulation is that it was extraordinarily successful in bringing new entrants to the market and creating new choices for consumers. 

The bad news is that it created too many competitors who did not have customer 

bases and this has resulted in stranded capacity, like the railroads of the 1880s, 

which will take years to disappear. 

Normally the free markets eliminate capacity, however, our bankruptcy laws 

allow companies to be reorganized. In Europe, assets are liquidated. In the United 

States, management teams that have overextended themselves, get to wipe out their 

debt in Chapter 11, and start with a cost advantaged capital structure relative to 

those that have managed their businesses prudently. This means capacity does not 

go away. 

In an industry where we have fundamental oversupply, we have a structural flaw, 

which in fact encourages the perpetuation of this oversupply. This recycling of assets, with their debt free capital structures will put pressure on the ‘‘still’’ strong 

balance sheets. Thus, the complete ‘‘capitulation’’ is still some years away. Chapter 

11 is a path to liquidity, not a path to capacity reduction. 

My first point is that our bankruptcy laws will actually lengthen the time period 

for this industry to recover, and this needs to be appreciated when prescribing 

‘‘fixes’’ for this industry. 

It’s all about Industry Structure 

My second point is that we have too many competitors, particularly in the overcapitalized wireless industry. Michael Porter provides a framework for evaluating 

industries structure in terms of the power of buyers and suppliers, the barriers to 

entry and exit and switching costs. The below chart summarizes the competitive nature of the telecom industry as compared to the airline industry.

Wireless Local Wireline Cable Airlines 

Power of: 

Buyers High Medium Medium High 

Suppliers Medium/Low Medium/Low Medium/Low High 

Barriers to: 

Enter High Medium High High 

Exit High High High High 

Switching costs 

for consumers 

Low Medium/High Medium Low 

Number of

competitors 

per market 

6–8 Residential: 1–4 

(UNE–P, cable 

and RBOC, 

wireless) 

1–3 (satellite) 1–4 (per route) 

Business: many 

(Multiple 

CLEC’s, IXC’s, 

RBOC) 

Key Industry 

Issues 

Excess

competition, 

low switching 

costs, lack of 

product

differentiation 

Competition from 

wireless and 

cable,

regulation 

(what is the 

true cost of 

UNE–P?) 

Competition from 

satellite

providers,

leverage with 

media

companies, 

balance sheet 

leverage 

Labor unions, 

low product 

differentiation, 

supplier

concentration 

22

Using this analysis, the attractiveness of the wireless industry is only slightly better than the airline industry due to the airline’s labor and concentrated equipment 

supplier issues. However, the larger number of (currently) well-financed wireless 

competitors may make its prospects worse. It is important to remember when thinking about this comparison that the cumulative net profitability in both the airline 

and U.S. wireless industry is negative. 

The wireline industry is entering a battle with cable. While the intramural 

broadband wars have begun, and are painful for the ILEC which lose money on each 

DSL line sold, the real fight, over residential voice, has not yet begun. The outcome 

of this fight will determine the fundamental shape of the industry for the next generation. 

So where do we go from here? 

Wireless 

Six, seven or eight competitors are too many for a maturing, capital-intensive industry, where the switching costs for the consumer are near zero. Recently, U.S. 

wireless penetration reached 50 percent. While minutes of use have grown dramatically in the last three years (447 per month for 2002 vs. 171 for 1999) and total 

revenues have grown materially ($65 billion in 2001 vs. $33 billion in 1998), we are 

entering the final stages of this industry’s growth. We may be entering a phase 

where the elasticity of demand for voice services approaches one, i.e., increasing 

number of minutes leads to flat or negative revenue. When this condition occurred 

in the long distance industry in the late 1990s competition became cutthroat. Furthermore, the industry is not yet suffering from the churn caused by number portability. 

The wireless industry’s capital structures are under tremendous strain due to 

next generation upgrades and marketing costs. In 2002, the wireless industry is expected to have $0 in free cash flow (EBITDA less capital expenditures) while it 

struggles under $84 billion of net debt. 

A recent report indicated that for the wireless industry to earn 10 percent return 

on invested capital, given the existing invested capital base, and the current profit 

per subscriber, the industry would have to double the number of subscribers, without investing any additional capital, and with no pricing degradation. Since this is 

unlikely, and as capital needs a return, only two conclusions can be made—consolidation must occur (to share the invested capital plant), or competitors need to leave 

the industry. 

The European wireless market provides evidence that the existence of 3 or 4 competitors still maintains a high degree of competition. In Europe, wireless competition remains fierce and penetration has reached 87 percent. 

My view is that the same competitive environment would exist in the U.S. if there 

were 3 or 4 competitors. Remember that in the late 1990s, in the highly concentrated long distance industry where three players—AT&T, MCI and Sprint, had 

80 percent market share—competition was intense. The long distance industry, like 

the wireless industry, has no switching cost. 

Beyond allowing consolidation, the government should give wireless carriers additional spectrum at little or no cost. In an engineering context—spectrum is a substitute for capital. We can strengthen the remaining carriers if we allow them to 

have 60–70 mhz of spectrum each, and make it available at low cost. This will allow 

the remaining strong carriers to be a truly effective alternative to the landline communication network and provide other broadband connectivity options. It will also 

lead to the RBOCs competing with each other, which ought to be a broader public 

policy objective. 

Wire Line: They Are Not as Strong as They Seem! 

With huge cash flow, EBITDA margins over 40 percent and relatively strong balance sheets, the RBOCs appear to be the stalwart of this industry. However, this 

trend is changing. Aggregate access lines at SBC are down 4 percent from last year 

but retail access line growth was down 6 percent, the difference being low/no profit 

wholesale access lines. It is clear that the RBOCs are facing stiff competition from 

the wireless and cable companies. 

With the improvement in coverage in the wireless services, home phones are becoming optional. Several providers, including Leap Wireless and MetroPCS are pursuing a strategy of landline replacement. Leap estimates that in some markets 26 

percent of its customers have dropped their home phone. According to USA Today,

one of 5 Americans think of their cell phone as their primary phone. 

Further, the cost advantage of the cable plant is an emerging reality. Coax cable 

technically has more capacity for a given level of technology expenditures than a 

copper loop. The average charge for high-speed Internet service by the telcos (DSL) 

23

is $51 per month and the average cable Internet service is $45 per month, and $10 

per month less if you are already a video subscriber. This pricing advantage allows 

cable to capture two-thirds of all broadband customers. 

DSL is a transitional product, which has less capacity than coax cable plant. 

Eventually, the RBOCs will have to spend billions to upgrade their networks to fiber 

just to compete. Nationwide, the estimate is $100 billion to bring fiber to every 

home. If they do not have the profits from existing services they will be unable to 

afford the fiber upgrade. 

Cable’s cost advantage is also due to its lack of regulation. It was effectively freed 

from price caps 6 years ago and cable operators now have upgraded their plant to 

provide high speed Internet and digital cable. In 2 to 3 years cable telephony will 

be implemented using voice over IP at very low incremental costs to the cable TV 

provider. This points to the benefit of regulatory freedom. 

The so-called cable triple play (voice, video and high-speed data) will allow it to 

offer all of the services of the RBOC, plus video, for a lower total cost. 

When I recently surveyed a group of telco executives and asked which they would 

give up first, their home phone or their cable TV, the answer was unanimously the 

home phone. 

The residential voice business traditionally had one strong competitor—the 

RBOC, a monopoly. Today, facilities based alternatives to residential voice, include 

six wireless competitors, with at least one of these wireless competitors offering a 

landline quality product. In the near term, the entry of the cable company into residential voice will add additional facilities based competition. Furthermore, UNE–P’s 

are allowing AT&T and MCI to capture local customers. 

In this regard, the Telecom Act is an apparent success. We have both facilities 

and non-facilities based competition. While the RBOCs still have 80–90 percent 

market share in residential voice, Verizon Wireless the largest wireless company 

has only 25 percent market share in wireless, and the telco industry has only has 

33 percent market share in high-speed Internet. So, in the ‘‘next gen’’ platforms, the 

monopoly is waning, and either the rest of market, in the case of wireless, or cable 

in high-speed Internet access has the dominant share. But in the historical monopoly business—residential voice—competition is here today, before cable launches 

VOIP. 

The question for this Committee, and the FCC, is if facilities based competition 

has become a reality, when should the regulatory environment be changed. 

The Need for Broadband 

We are in a telecom and technology depression. With 500,000 telecom jobs lost, 

hundreds of bankruptcies and two trillion dollars of wealth lost, the effect of telecom 

bust have been wide spread. The trend of recycled bankrupt assets becoming economically viable again, will only serve to hurt the strong players of today in the 

years to come. Just as the 1930’s economy needed a ‘‘New Deal’’, today, we need 

a Technology New Deal. 

My proposal would be a subsidy paid to the provider to stimulate broadband demand. The problem with broadband is that it simply costs too much. At $20 per 

month, America has over 60 percent narrowband Internet penetration. Bill Gates 

has suggested broadband should cost $25 per month—it currently costs 60–100 percent more. Broadband penetration in Korea is 60 percent as the cost of broadband 

($22) is almost the same as narrowband ($20). America will fall behind other nations if we do not have pervasive residential broadband. 

To foster broadband penetration, I would suggest a $300 per subscriber subsidy 

be paid to the provider, if the provider agrees to provide high-speed service (defined 

as 384 kbs or greater) for under $30 per month for a 3-year period of time. The payment would be made on the basis of net adds so the carrier would receive no benefit 

for churn. If we created this incentive for the 20 million new broadband homes the 

cost would be $6 billion, probably over 2–3 years. 

The secondary consequences would be dramatic. Tele-medicine, e-learning, telecommuting, and e-commerce would be more pervasive. Software, hardware, equipment companies and cable and telcos would all benefit. With a large enough installed broadband base, Hollywood will be forced to solve the digital rights issues 

that will eventually enable entertainment content to be broadly available over the 

Internet. This will be the killer-app that will massively stimulate further broadband 

demand. 

The Korean market benefits from greater density (more apartment buildings, 

smaller cities), which has led to the lower cost to provide broadband and thus 

spurred its adoption. An American company ON2 is currently selling VOD using 

DSL in Korea. It cannot find a market here in America. Once broadband penetration reaches 30 percent (up from 10 percent today) the cost structure of the entire 

24

industry will decline and these prices will be able to be maintained, eliminating the 

need for any possible extension of the subsidy. 

Conclusion 

Without a change in the regulatory environment, there will be no catalyst to revive investment in wired and wireless networks. The equipment manufacturers will 

not survive the cutbacks the carriers are making in their capital budgets. Lucent 

and Nortel have reacted by partially reducing their spending in next-gen technology. 

If this continues, the U.S. will lose competitiveness. Already Nortel has cut back its 

investment in its world leading optical technology. How much longer do we expect 

Lucent, which is projected to lose $3.5 billion this year to fund Bell Labs and where 

would this country be without Bell Labs? 

Without a rebound in carrier spending within 24 months, Corning, Lucent, and 

Nortel will either be bankrupt or become subsets of their current capabilities. 

I leave this Committee with 3 observations and the aforementioned

proposal:

1. Our current bankruptcy laws, which allow stand-alone restructurings, will 

perpetuate the over-capacity that will plague this industry for years to come by 

maintaining excess capacity and creating ‘‘low cost competitors’’. WCOM without its $30 billion debt burden may now really have a lower cost structure than 

AT&T.

2. The wireless industry resembles the airline industry and needs to be consolidated and, GIVEN more spectrum. If they cannot earn an acceptable rate of return on new equipment due to overcapacity—they will not innovate new services and continue to invest.

3. The historical regulation of telcos needs to be reexamined in light of the 

changing competitive environment, cable’s superior technology plant and the increasingly quality of wireless offerings. Their current regulatory regime may be 

appropriate in a monopoly context, but the RBOC monopoly is rapidly waning.

4. No matter what constructive action this government could take to the previous three issues, it will not solve the industry’s problems for a meaningful 

time to come and thus this industry needs a Technology New Deal to stimulate 

broadband demand.

When considering the need for economic stimulus, I ask this Committee to consider this proposal in the backdrop of our overall economy, where the airline industry is deeply troubled, the consumer is becoming weary even before a possible war, 

and the auto industry may be ‘‘stuffing’’ the channel, with unsustainable free financing. In fact, the auto industry today, reminds me of what Nortel and Lucent did 

for their customers in the late 1990s in financing purchases they cannot afford. 

Without some ‘‘HELP’’ the technology and telecom markets have little prospect for 

recovery until 2005. My hope is that with a broadband stimulus bill we can enliven 

the broader technology, media, telecom and entertainment sectors by creating a new 

pervasive communication medium called BROADBAND. 

Thank you Chairman Hollings and Members of this Committee for inviting me 

to share my views.

The CHAIRMAN. The full statement of both Chairman Hundt and 

you, Mr. Price, and all the panelists will be included. 

Mr. Mundie. 

STATEMENT OF CRAIG J. MUNDIE, SENIOR VICE PRESIDENT 

AND CHIEF TECHNICAL OFFICER, ADVANCED STRATEGIES 

AND POLICY, MICROSOFT CORPORATION 

Mr. MUNDIE. Thank you, Mr. Chairman, Members of the Committee. My name is Craig Mundie. I am senior vice president and 

chief technical officer of advanced strategy and policy at Microsoft 

Corporation. I am very glad to be here today, because I think we 

bring a different perspective than many witnesses the Committee 

would have seen in the past on telecommunications matters. 

I think Microsoft has an almost unique perspective. We are not 

in the telecommunications business, but, rather, like many other 

high technology companies we are in the business of developing 

25

software and services that will excite consumers enough that they 

will actually pay for bigger pipes to run ever more innovative services and applications and, like everyone in our industry, we believe 

that reasonably priced ubiquitous broadband deployment will advance economic opportunity for the American public. 

The issue today before this Committee is how to use public policy 

to promote broadband deployment. We have two straightforward 

suggestions. First, make more unlicensed spectrum available and 

regulate it minimally but more smartly than we have in the past. 

Second, protect consumers’ ability to use the Internet free from 

any artificial interference by the underlying network provider. We 

understand several Members of the Committee are exploring proposals to address these goals, and we fully support those efforts, 

but time is of the essence, because the U.S. is falling behind in 

broadband deployment. 

If analyzed closely, current statistics are not all that 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 the recent trend lines 

indicate that we are falling further behind rather than catching up. 

The stakes in this debate are not as many would have portrayed 

it. The Internet is becoming a programmable medium, creating a 

potentially different model of broadband usage, not just one of carrying media. Therefore, reexamining our policies is critical, because 

we are rapidly moving from today’s world, in which the vast majority of activities focuses on publishing of content, like web pages, to 

a different world, a world in which literally millions upon millions 

of computing devices will be simultaneously and constantly connected to the Internet, and on consumers’ behalfs will be communicating with each other continuously. 

Again, we need to take two critical steps. First, we need to have 

wireless broadband connections that will provide a third way for 

consumers. In particular, these are not the traditional forms of 

wireless communications that we all know today as cellular telephony. In particular, policy makers should more aggressively manage 

the Nation’s unlicensed spectrum. 

These systems are currently referred to today, as they get deployed, as 802.11b, radio LANs, or more popularly now, Wi-Fi. 

More generically, you should think of them or refer to them 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. 

To do this, the industry needs more spectrum for unlicensed use, 

and the FCC should adopt spectrum etiquette for the benefits of all 

Americans. If policy makers here 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 interfere with each other, the result will 

26

be more choice for consumers and stimulated innovation in 

broadband services overall. 

That value proposition, higher speeds with relatively cheap and 

fast deployments, is especially compelling in rural areas, where distance is so frequently the enemy of network efficiency and a major 

cost driver for broadband deployments, as well as in the inner city 

areas, where the high cost of broadband is a significant inhibitor 

to deployment. 

The second critical step is to assure consumers’ freedom from 

network operator interference. We are troubled that in the ongoing 

debate on what our Nation’s broadband policy should be, a fundamental lesson from the last century, and that has been an integral 

part of the Internet’s success up to this point, may, in fact, be slipping away. Proposals pending before the FCC would remove longstanding obligations of network operators not to interfere and not 

to discriminate in their customers’ use of the network. 

At the same time, we see ominous signs that network operators 

will frustrate consumers’ ability to go anywhere on the net. Already, cable operators have adopted provisions that impair the ability of consumers to use their broadband connection as they see fit. 

These issues have been documented to the FCC by a coalition of 

trade associations, the so-called High Tech Broadband Coalition. 

In response to these kinds of restrictions, the High Tech 

Broadband Coalition has developed basic connectivity principles 

that we believe should be respected as we enter the broadband era. 

The first principle is that consumers should be free to attach to a 

broadband network any device which they may choose to purchase 

at retail, and second, that consumers should be able to use these 

devices to access any application or service for any lawful purpose, 

as long as it does not harm the network. As a company, we have 

urged the FCC to apply these principles to both DSL and cable 

modem providers. 

In closing, let me be clear that we are not advocating forced or 

open access to these networks, nor do we suggest that DSL and 

cable modem providers should be limited in how they offer their 

services and bundle it with other services. At their core, the 

connectivity principles articulate nothing more than a noninterference rule. 

We commend Chairman Hollings and this Committee for focusing attention on these issues, and I look forward to taking your 

questions. Thank you. 

[The prepared statement of Mr. Mundie follows:]

PREPARED STATEMENT OF CRAIG J. MUNDIE, SENIOR VICE PRESIDENT AND CHIEF

TECHNICAL OFFICER, ADVANCED STRATEGIES AND POLICY, MICROSOFT CORPORATION

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 

27

1 In re the Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, Universal Service Obligations of Broadband Providers, Notice of Proposed Rulemaking, CC 

Docket No. 02–33, ¶ 3 (2002). 

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.’’ 1 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 

28

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 consumers themselves—using their 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 

29

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 

30

2Full text of the agreement can be provided to the Committee. We have made the citation 

generic in order to illustrate our point without singling out a particular company. 

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.’’ 2

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 comVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00034 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
31

pany, 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.

The CHAIRMAN. Thank you very much. Professor Lessig. 

STATEMENT OF LAWRENCE LESSIG, PROFESSOR OF LAW, 

STANFORD LAW SCHOOL 

Mr. LESSIG. Thank you, Mr. Chairman. There is a fundamental 

point that is being overlooked in this debate, and I borrowed—I insist, borrowed—from my hotel this morning some props to help 

make this point clear. 

There are 65 million homes in America today that have two networks that enter the home. One network looks like this. It is the 

electrical network. The second network looks like this. It is the 

cable network. These are fundamentally different networks. This 

electrical network does not care whether I plug a Sony TV into the 

plug or a Panasonic TV. It does not know whether my computer 

runs Microsoft’s operating system or Apple’s operating system. 

Innovators realize that if they develop technology that plugs into 

this network, the network will run it regardless of the preferences 

of the network owner. This network, the electrical network, has 

32

produced extraordinary innovation in the past 100 years in America. 

The cable network is fundamentally different. A consumer sits 

here with this device and selects among the choices that a network 

owner has made for him or her. These choices, of course, are expanding. There are hundreds now, and 20 years ago there were 

only 12. But still, the fundamental architecture of this network is 

that the network makes the choice about what you see and what 

you get to do, and the consequence is, the only innovators for this 

network are the network owners. 

The Internet took off and was the engine of innovation and 

growth when it looked like the electrical network, when anybody 

could devise an application or content and plug it into the network, 

and the network ran it whether or not the network owner wanted 

it. This was the principle of end-to-end in the network. 

Senator McCain asked, who was pessimistic? I am the most famous pessimist about the Internet. I will take that claim. Since 

1999, I have been predicting this decline. The decline in the Internet has happened as the Internet has become more and more like 

the cable network, as the network owners have increasingly been 

in a position to pick and choose what kind of content and what 

kind of applications will run on this network. 

The key to innovation and growth in the broadband network is 

regulation that gets us back to the electrical network a neutral, 

end-to-end network. I think the model to get us there is exactly 

what Mr. Mundie has just proposed. It is two steps, but I am going 

to reverse the order. 

The first step is to make sure that the wired providers of network service respect basic principles of neutrality, that they, like 

the electrical service, do not build in technologies that say, if you 

are running Microsoft’s X-Box you have got to pay us 12 cents a 

month, but if you are running something else you do not have to 

pay us anything. That principle of neutrality is critical to assure 

that the next Microsoft can come along and displace this Microsoft. 

Neutrality on this network is crucial. But to get there it may well 

be that open access is no longer the solution. If not, then at least 

we need principles of neutrality enforced in a way that the competitive connectivity principles that Craig has described would. That is 

the first step, but the most critical step is what Mr. Mundie presented first, wireless. 

Wireless technologies have got to be opened up for innovators to 

develop unimagined technologies for exploiting this network. This 

requires not more regulation. This requires a different kind of regulation. It requires opening up unlicensed bands and protecting 

them from government interference that protects particular uses of 

the technology. Mr. Mundie says we need certain minimal protocols, and so long as we insist on the word, minimal, as minimal as 

possible, I agree with that, too. 

But those two changes would produce in the wireless context exactly what the Internet looked like 10 years ago today. It would 

produce a platform where an extraordinary range of competitors 

could develop new technologies that would drive demand for 

broadband services and explode the Internet on wireless technologies in the way 10 years ago wired technologies did the same. 

33

The critical focus here is not whether there is regulation or not 

regulation. It is the mix of regulation and regulation to a single 

end, a platform where the innovators are not the network owners. 

The innovators are the people who build products that plug into 

that network. There are millions of those innovators, and it is that 

diversity of innovation that produced the explosion that we think 

of as the great innovation in the 1990s. 

Thank you. 

[The prepared statement of Mr. Lessig follows:]

PREPARED STATEMENT OF LAWRENCE LESSIG, PROFESSOR OF LAW,

STANFORD LAW SCHOOL

Every free and competitive market depends upon effective regulation. From rules 

that establish property rights, to courts that enforce contracts, to laws that assure 

competition is sustained, the government is always intimately involved in guaranteeing the conditions under which innovation and growth occur. 

The growth of broadband technologies will be no different. It too will depend upon 

effective—and the right kind of—regulation. In my view, the sole and central purpose of that regulation must be to assure that the network maintains its character 

as a neutral platform for innovation. That neutrality produced the growth and innovation of the Internet in the 1990s. Corrupting that neutrality will stifle growth 

within the broadband market, and in markets that are affected by broadband technologies. 

This neutrality was originally a feature of the network’s technical design. Network architects call that design the ‘‘end-to-end’’ principle. But the ideals of endto-end neutrality are familiar within many ordinary and important networks. Our 

highway, or ‘‘freeway,’’ system was not built to favor one auto manufacturer over 

another. Electrical outlets don’t function differently if you use a Sony rather than 

a Panasonic TV. The post office doesn’t deliver mail favorable to Republicans any 

more quickly than it delivers mail favorable to Democrats. All of these networks are 

instead neutral among a wide range of compatible uses. These networks are not in 

the business of picking and choosing which applications or uses will be allowed. 

That neutrality in turn invites an extraordinary range of innovation. 

This neutrality in the original Internet is now under threat. Changes in the ownership of the network, and in the legal rules under which the network is owned, 

increasingly give network owners the power to choose which applications will be allowed on the network, and which content will be preferred. That power in turn will 

reduce the incentive of others to innovate for this network. Corruption of the original network design will thus stifle growth of the Internet. 

Open access regulations were originally intended to resist this corruption. By 

promising adequate competition at the physical layer of the network, the aim of 

open access requirements was to guarantee that no single network owner would 

have sufficient monopoly power to direct the network’s evolution. If one provider biased the access it offered, then because of open access requirements, users would 

be able easily to switch to a different network provider. The competitive market 

would thus assure network neutrality without direct government intervention. 

There is now a strong resistance to open access regulations. The current administration seems keen to remove any requirements that network providers make their 

facilities open to competition. The FCC is moving quickly to implement these policies. 

Whatever the wisdom of open access, however, it would be a mistake to remove 

regulatory oversight from the broadband market. The consequence of total regulatory retreat will be an extraordinary concentration in network ownership, leading 

to less broadband competition, and higher broadband prices. That concentration will 

also, in turn, threaten the neutrality of the network, and hence growth and innovation on the broadband network. 

In my view, it is crucial for Congress to insist that if the FCC intends to remove 

open access requirements, then it must substitute a different form of regulatory 

oversight to assure network neutrality. This oversight must guarantee that Internet 

service providers not corrupt the principles of neutrality built into the original network, by providing biased or non-neutral Internet service. Just as the electricity 

grid does not discriminate against Japanese televisions, or GE toasters, Internet 

service should not discriminate against games from Microsoft, or streaming video 

from Disney. And thus if regulation at the physical layer of the network (open acVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
34

cess) is to be terminated, then regulation at the ‘‘logical’’ layer of the network (to 

assure neutrality) must take its place. These regulations must assure that consumers using the network have the freedom to deploy legal content and legal applications as they choose, not as the network owner decides. Separating control over 

the use of the network from ownership of the wires that make-up the network is 

a necessary step to restoring the growth and innovation of the original Internet. 

The ‘‘connectivity principles’’ described by the High-Tech Broadband Coalition are 

an important step to this end. At a minimum, Congress should require that no 

change in open access policies be permitted until the FCC articulates a set of principles like the ‘‘connectivity principles’’ to assure that all Internet networks provide 

neutral Internet service. The FCC should not unilaterally withdraw from regulation 

without assuring that rules to guarantee network neutrality continue to govern the 

Internet. 

If the FCC implemented a strong set of rules designed to assure neutrality in the 

network, then it may well be advisable to relax requirements of open access. As a 

first step, in my view, this is the extent of the change that Congress should allow 

the FCC to effect. If this proves insufficient to spur growth in broadband adoption, 

then as with highways, it may well make sense for the government to subsidize further deployment. At this stage, however, I do not believe subsidy is merited. 

In addition to these principles of neutrality, Congress should direct the FCC immediately to develop spectrum policies that will enable wireless ‘‘Wi-Fi’’ networks 

to compete with telecom and cable providers in last-mile service. The greatest innovation and growth in spectrum usage has come within ‘‘unlicensed’’ spectrum bands. 

This is consistent with the original history of the Internet, and it follows from major 

technological advances in spectrum technologies. It will soon be apparent that these 

changes in technology will fundamentally alter the way in which spectrum is allocated. In the meantime, the government could spur a great deal of competition in 

broadband access by freeing a much greater range of spectrum for unlicensed, or 

‘‘commons’’ use. 

For the first time in the history of network technologies, the United States is falling behind our allies. Korea, Canada, and even Japan are increasingly outstripping 

the United States with fast, cheap Internet service. In none of these countries has 

this deployment been produced by a totally unregulated market. In each case the 

government has played an important role in assuring that the infrastructure of the 

digital age get deployed quickly and efficiently. So too should our government. 

I have described these principles more fully in the attached article from Foreign 

Policy magazine, which I submit for the record. 

Foreign Policy magazine, November/December 2001

THE INTERNET UNDER SIEGE

By Lawrence Lessig 

WHO OWNS THE INTERNET? UNTIL RECENTLY, NOBODY. THAT’S BECAUSE, ALTHOUGH

THE INTERNET WAS ‘‘MADE IN THE U.S.A.,’’ ITS UNIQUE DESIGN TRANSFORMED IT INTO

A RESOURCE FOR INNOVATION THAT ANYONE IN THE WORLD COULD USE. TODAY, 

HOWEVER, COURTS AND CORPORATIONS ARE ATTEMPTING TO WALL OFF PORTIONS OF

CYBERSPACE. IN SO DOING, THEY ARE DESTROYING THE INTERNET’S POTENTIAL TO

FOSTER DEMOCRACY AND ECONOMIC GROWTH WORLDWIDE.

The Internet revolution has ended just as surprisingly as it began. None expected 

the explosion of creativity that the network produced; few expected that explosion 

to collapse as quickly and profoundly as it has. The phenomenon has the feel of a 

shooting star, flaring unannounced across the night sky, then disappearing just as 

unexpectedly. Under the guise of protecting private property, a series of new laws 

and regulations are dismantling the very architecture that made the Internet a 

framework for global innovation. 

Neither the appearance nor disappearance of this revolution is difficult to understand. The difficulty is in accepting the lessons of the Internet’s evolution. The 

Internet was born in the United States, but its success grew out of notions that 

seem far from the modern American ideals of property and the market. Americans 

are captivated by the idea, as explained by Yale Law School professor Carol Rose, 

that the world is best managed ‘‘when divided among private owners’’ and when the 

market perfectly regulates those divided resources. But the Internet took off precisely because core resources were not ‘‘divided among private owners.’’ Instead, the 

core resources of the Internet were left in a ‘‘commons.’’ It was this commons that 

35

engendered the extraordinary innovation that the Internet has seen. It is the enclosure of this commons that will bring about the Internet’s demise. 

This commons was built into the very architecture of the original network. Its design secured a right of decentralized innovation. It was this ‘‘innovation commons’’ 

that produced the diversity of creativity that the network has seen within the 

United States and, even more dramatically, abroad. Many of the Internet innovations we now take for granted (not the least of which is the World Wide Web) were 

the creations of ‘‘outsiders’’—foreign inventors who freely roamed the commons. Policymakers need to understand the importance of this architectural design to the innovation and creativity of the original network. The potential of the Internet has 

just begun to be realized, especially in the developing world, where many ‘‘real 

space’’ alternatives for commerce and innovation are neither free nor open. 

Yet old ways of thinking are reasserting themselves within the United States to 

modify this design. Changes to the Internet’s original core will in turn threaten the 

network’s potential everywhere—staunching the opportunity for innovation and creativity. Thus, at the moment this transformation could have a meaningful effect, a 

counterrevolution is succeeding in undermining the potential of this network. 

The motivation for this counterrevolution is as old as revolutions themselves. As 

Niccolo` Machiavelli described long before the Internet, ‘‘Innovation makes enemies 

of all those who prospered under the old regime, and only lukewarm support is 

forthcoming from those who would prosper under the new.’’ And so it is today with 

us. Those who prospered under the old regime are threatened by the Internet. Those 

who would prosper under the new regime have not risen to defend it against the 

old; whether they will is still a question. So far, it appears they will not. 

The Neutral Zone 

A ‘‘commons’’ is a resource to which everyone within a relevant community has 

equal access. It is a resource that is not, in an important sense, ‘‘controlled.’’ Private 

or state-owned property is a controlled resource; only as the owner specifies may 

that property be used. But a commons is not subject to this sort of control. Neutral 

or equal restrictions may apply to it (an entrance fee to a park, for example) but 

not the restrictions of an owner. A commons, in this sense, leaves its resources 

‘‘free.’’

Commons are features of all cultures. They have been especially important to cultures outside the United States—from communal tenure systems in Switzerland and 

Japan to irrigation communities within the Philippines. But within American intellectual culture, commons are treated as imperfect resources. They are the object of 

‘‘tragedy,’’ as ecologist Garrett Hardin famously described. Wherever a commons exists, the aim is to enclose it. In the American psyche, commons are unnecessary 

vestiges from times past and best removed, if possible. 

For most resources, for most of the time, the bias against commons makes good 

sense. When resources are left in common, individuals may be driven to overconsume, and therefore deplete them. But for some resources, the bias against commons is blinding. Some resources are not subject to the ‘‘tragedy of the commons’’ 

because some resources cannot be ‘‘depleted.’’ (No matter how much we use Einstein’s theories of relativity or copy Robert Frost’s poem ‘‘New Hampshire,’’ those 

resources will survive.) For these resources, the challenge is to induce provision, not 

to avoid depletion. The problems of provision are very different from the problems 

of depletion—confusing the two only leads to misguided policies. 

This confusion is particularly acute when considering the Internet. At the core of 

the Internet is a design (chosen without a clear sense of its consequences) that was 

new among large-scale computer and communications networks. Named the ‘‘endto-end argument’’ by network theorists Jerome Saltzer, David Clark, and David 

Reed in 1984, this design influences where ‘‘intelligence’’ in the network is placed. 

Traditional computer-communications systems located intelligence, and hence control, within the network itself. Networks were ‘‘smart’’; they were designed by people 

who believed they knew exactly what the network would be used for. 

But the Internet was born at a time when a different philosophy was taking shape 

within computer science. This philosophy ranked humility above omniscience and 

anticipated that network designers would have no clear idea about all the ways the 

network could be used. It therefore counseled a design that built little into the network itself, leaving the network free to develop as the ends (the applications) wanted. 

The motivation for this new design was flexibility. The consequence was innovation. Because innovators needed no permission from the network owner before different applications or content got served across the network, innovators were freer 

to develop new modes of connection. Technically, the network achieved this design 

simply by focusing on the delivery of packets of data, oblivious to either the contents 

36

of the packets or their owners. Nor does the network concern itself that all the packets make their way to the other side. The network is ‘‘best efforts’’; anything more 

is provided by the applications at both ends. Like an efficient post office (imagine!), 

the system simply forwards the data along. 

Since the network was not optimized for any single application or service, the 

Internet remained open to new innovation. The World Wide Web is perhaps the best 

example. The Web was the creation of computer scientist Tim Berners-Lee at the 

European Organization for Nuclear Research (CERN) laboratory in Geneva in late 

1990. Berners-Lee wanted to enable users on a network to have easy access to documents located elsewhere on the network. He therefore developed a set of protocols 

to enable hypertext links among documents located across the network. Because of 

end-to-end, these protocols could be layered on top of the initial protocols of the 

Internet. This meant the Internet could grow to embrace the Web. Had the network 

compromised its commitment to end-to-end—had its design been optimized to favor 

telephony, for example, as many in the 1980s wanted—then the Web would not 

have been possible. 

This end-to-end design is the ‘‘core’’ of the Internet. If we can think of the network 

as built in layers, then the end-to-end design was created by a set of protocols implemented at the middle layer—what we might call the logical, or code layer, of the 

Internet. Below the code layer is a physical layer (computers and the wires that link 

them). Above the code layer is a content layer (material that gets served across the 

network). Not all these layers were organized as commons. The computers at the 

physical layer are private property, not ‘‘free’’ in the sense of a commons. Much of 

the content served across the network is protected by copyright. It, too, is not ‘‘free.’’

At the code layer, however, the Internet is a commons. By design, no one controls 

the resources for innovation that get served across this layer. Individuals control the 

physical layer, deciding whether a machine or network gets connected to the Internet. But once connected, at least under the Internet’s original design, the innovation 

resources for the network remained free. 

No other large scale network left the code layer free in this way. For most of the 

history of telephone monopolies worldwide, permission to innovate on the telephone 

platform was vigorously controlled. In the United States in 1956, AT&T successfully 

persuaded the U.S. Federal Communications Commission to block the use of a plastic cup on a telephone receiver, designed to block noise from the telephone microphone, on the theory that AT&T alone had the right to innovation on the telephone 

network. 

The Internet might have remained an obscure tool of government-backed researchers if the telephone company had maintained this control. The Internet would 

never have taken off if ordinary individuals had been unable to connect to the network by way of Internet service providers (ISPs) through already existing telephone 

lines. Yet this right to connect was not preordained. It is here that an accident in 

regulatory history played an important role. Just at the moment the Internet was 

emerging, the telephone monopoly was being moved to a different regulatory paradigm. Previously, the telephone monopoly was essentially free to control its wires 

as it wished. Beginning in the late 1960s, and then more vigorously throughout the 

1980s, the government began to require that the telephone industry behave neutrally—first by insisting that telephone companies permit customer premises equipment (such as modems) to be connected to the network, and then by requiring that 

telephone companies allow others to have access to their wires. 

This kind of regulation was rare among telecommunications monopolies worldwide. In Europe and throughout the world, telecommunications monopolies were 

permitted to control the uses of their networks. No requirement of access operated 

to enable competition. Thus no system of competition grew up around these other 

monopolies. But when the United States broke up AT&T in 1984, the resulting companies no longer had the freedom to discriminate against other uses of their lines. 

And when ISPs sought access to the local Bell lines to enable customers to connect 

to the Internet, the local Bells were required to grant access equally. This enabled 

a vigorous competition in Internet access, and this competition meant that the network could not behave strategically against this new technology. In effect, through 

a competitive market, an end-to-end design was created at the physical layer of the 

telephone network, which meant that an end-to-end design could be layered on top 

of that. 

This innovation commons was thus layered onto a physical infrastructure that, 

through regulation, had important commons-like features. Common-carrier regulation of the telephone system assured that the system could not discriminate against 

an emerging competitor, the Internet. And the Internet itself was created, through 

its end-to-end design, to assure that no particular application or use could discrimiVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
37

nate against any other innovations. Neutrality existed at the physical and code 

layer of the Internet. 

An important neutrality also existed at the content layer of the Internet. This 

layer includes all the content streamed across the network—Web pages, mp3s, email, streaming video—as well as application programs that run on, or feed, the network. These programs are distinct from the protocols at the code layer, collectively 

referred to as TCP/IP (including the protocols of the World Wide Web). TCP/IP is 

dedicated to the public domain. 

But the code above these protocols is not in the public domain. It is, instead, of 

two sorts: proprietary and nonproprietary. The proprietary includes the familiar 

Microsoft operating systems and Web servers, as well as programs from other software companies. The nonproprietary includes open source and free software, especially the Linux (or GNU/Linux) operating system, the Apache server, as well as a 

host of other plumbing-oriented code that makes the Net run. 

Nonproprietary code creates a commons at the content layer. The commons here 

is not just the resource that a particular program might provide—for example, the 

functionality of an operating system or Web server. The commons also includes the 

source code of software that can be drawn upon and modified by others. Open source 

and free software (‘‘open code’’ for short) must be distributed with the source code. 

The source code must be free for others to take and modify. This commons at the 

content layer means that others can take and build upon open source and free software. It also means that open code can’t be captured and tilted against any particular competitor. Open code can always be modified by subsequent adopters. It, 

therefore, is licensed to remain neutral among subsequent uses. There is no ‘‘owner’’ 

of an open code project. 

In this way, and again, parallel to the end-to-end principle at the code layer, open 

code decentralizes innovation. It keeps a platform neutral. This neutrality in turn 

inspires innovators to build for that platform because they need not fear the platform will turn against them. Open code builds a commons for innovation at the content layer. Like the commons at the code layer, open code preserves the opportunity 

for innovation and protects innovation against the strategic behavior of competitors. 

Free resources induce innovation. 

An Engine of Innovation 

The original Internet, as it was extended to society generally, mixed controlled 

and free resources at each layer of the network. At the core code layer, the network 

was free. The end-to-end design assured that no network owner could exercise control over the network. At the physical layer, the resources were essentially controlled, but even here, important aspects were free. One had the right to connect 

a machine to the network or not, but telephone companies didn’t have the right to 

discriminate against this particular use of their network. And finally, at the content 

layer, many of the resources served across the Internet were controlled. But a crucial range of software building essential services on the Internet remained free. 

Whether through an open source or free software license, these resources could not 

be controlled. 

This balance of control and freedom produced an unprecedented explosion in innovation. The power, and hence the right, to innovate was essentially decentralized. 

The Internet might have been an American invention, but creators from around the 

world could build upon this network platform. Significantly, some of the most important innovations for the Internet came from these ‘‘outsiders.’’

As noted, the most important technology for accessing and browsing the Internet 

(the World Wide Web) was not invented by companies specializing in network access. It wasn’t America Online (AOL) or Compuserve. The Web was developed by 

a researcher in a Swiss laboratory who first saw its potential and then fought to 

bring it to fruition. Likewise, it wasn’t existing e-mail providers who came up with 

the idea of Web-based e-mail. That was cocreated by an immigrant to the United 

States from India, Sabeer Bhatia, and it gave birth to one of the fastest growing 

communities in history—Hotmail. 

And it wasn’t traditional network providers or telephone companies that invented 

the applications that enabled online chatting to take off. The original communitybased chatting service (ICQ) was the invention of an Israeli, far from the trenches 

of network design. His service could explode (and then be purchased by AOL for 

$400 million) only because the network was left open for this type of innovation. 

Similarly, the revolution in bookselling initiated by Amazon.com (through the use 

of technologies that ‘‘match preferences’’ of customers) was invented far from the 

traditional organs of publishers. By gathering a broad range of data about purchases by customers, Amazon—drawing upon technology first developed at MIT and 

the University of Minnesota to filter Usenet news—can predict what a customer is 

38

likely to want. These recommendations drive sales, but without the high cost of advertising or promotion. Consequently, booksellers such as Amazon can outcompete 

traditional marketers of books, which may account for the rapid expansion of Amazon into Asia and Europe. 

These innovations are at the level of Internet services. Far more profound have 

been innovations at the level of content. The Internet has not only inspired invention, it has also inspired publication in a way that would never have been produced 

by the world of existing publishers. The creation of online archives of lyrics and 

chord sequences and of collaborative databases collecting information about compact 

discs and movies demonstrates the kind of creativity that was possible because the 

right to create was not controlled. 

Again, the innovations have not been limited to the United States. 

OpenDemocracy.org, for example, is a London-based, Web-centered forum for debate 

and exchange about democracy and governance throughout the world. Such a forum 

is possible only because no coordination among international actors is needed. And 

it thrives because it can engender debate at a low cost. 

This history should be a lesson. Every significant innovation on the Internet has 

emerged outside of traditional providers. The new grows away from the old. This 

trend teaches the value of leaving the platform open for innovation. Unfortunately, 

that platform is now under siege. Every technological disruption creates winners 

and losers. The losers have an interest in avoiding that disruption if they can. This 

was the lesson Machiavelli taught, and it is the experience with every important 

technological change over time. It is also what we are now seeing with the Internet. 

The innovation commons of the Internet threatens important and powerful preInternet interests. During the past 5 years, those interests have mobilized to launch 

a counterrevolution that is now having a global impact. 

This movement is fueled by pressure at both the physical and content layers of 

the network. These changes, in turn, put pressure on the freedom of the code layer. 

These changes will have an effect on the opportunity for growth and innovation that 

the Internet presents. Policymakers keen to protect that growth should be skeptical 

of changes that will threaten it. Broad-based innovation may threaten the profits 

of some existing interests, but the social gains from this unpredictable growth will 

far outstrip the private losses, especially in nations just beginning to connect. 

Fencing off the Commons 

The Internet took off on telephone lines. Narrowband service across acoustic 

modems enabled millions of computers to connect through thousands of ISPs. Local 

telephone service providers had to provide ISPs with access to local wires; they were 

not permitted to discriminate against Internet service. Thus the physical platform 

on which the Internet was born was regulated to remain neutral. This regulation 

had an important effect. A nascent industry could be born on the telephone wires, 

regardless of the desires of telephone companies. 

But as the Internet moves from narrowband to broadband, the regulatory environment is changing. The dominant broadband technology in the United States is currently cable. Cable lives under a different regulatory regime. Cable providers in general have no obligation to grant access to their facilities. And cable has asserted the 

right to discriminate in the Internet service it provides. 

Consequently, cable has begun to push for a different set of principles at the code 

layer of the network. Cable companies have deployed technologies to enable them 

to engage in a form of discrimination in the service they provide. Cisco, for example, 

developed ‘‘policy-based routers’’ that enable cable companies to choose which content flows quickly and which flows slowly. With these, and other technologies, cable 

companies will be in a position to exercise power over the content and applications 

that operate on their networks. 

This control has already begun in the United States. ISPs running cable services 

have exercised their power to ban certain kinds of applications (specifically, those 

that enable peer-to-peer service). They have blocked particular content (advertising 

from competitors, for example) when that content was not consistent with their 

business model. The model for these providers is the model of cable television generally—controlling access and content to the cable providers’ end. 

The environment of innovation on the original network will change according to 

the extent that cable becomes the primary mode of access to the Internet. Rather 

than a network that vests intelligence in the ends, the cable-dominated network will 

vest an increasing degree of intelligence within the network itself. And to the extent 

it does this, the network will increase the opportunity for strategic behavior in favor 

of some technologies and against others. An essential feature of neutrality at the 

code layer will have been compromised, reducing the opportunity for innovation 

worldwide. 

39

Far more dramatic, however, has been the pressure from the content layer on the 

code layer. This pressure has come in two forms. First, and most directly related 

to the content described above, there has been an explosion of patent regulation in 

the context of software. Second, copyright holders have exercised increasing control 

over new technologies for distribution. 

The changes in patent regulation are more difficult to explain, though the consequence is not hard to track. Two decades ago, the U.S. Patent Office began granting patents for software-like inventions. In the late 1990s, the court overseeing 

these patents finally approved the practice and approved their extension to ‘‘business methods.’’ The European Union (EU), meanwhile, initially adopted a more 

skeptical attitude toward software patents. But pressure from the United States will 

eventually bring the EU into alignment with American policy. 

In principle, these patents are designed to spur innovation. But with sequential 

and complementary innovation, little evidence exists that suggests such patents will 

do any good, and there is increasing evidence that they will do harm. Like any regulation, patents tax the innovative process generally. As with any tax, some firms—

large rather than small, U.S. rather than foreign—are better able to bear that tax 

than others. Open code projects, in particular, are threatened by this trend, as they 

are least able to negotiate appropriate patent licenses. 

The most dramatic restrictions on innovation, however, have come at the hands 

of copyright holders. Copyright is designed to ensure that artists control their 

‘‘writings’’ for a limited time. The aim is to secure to copyright holders a sufficient 

interest to produce new work. But copyright laws were crafted in an era long before 

the Internet. And their effect on the Internet has been to transfer control over innovation in distribution from many innovators to a concentrated few. 

The clearest example of this effect is online music. Before the Internet, the production and distribution of music had become extraordinarily concentrated. In 2000, 

for example, 5 companies controlled 84 percent of music distribution in the world. 

The reasons for this concentration are many—including the high costs of promotion—but the effect of concentration on artist development is profound. Very few 

artists make any money from their work, and the few that do are able to do so because of mass marketing from record labels. The Internet had the potential to 

change this reality. Both because the costs of distribution were so low, and because 

the network also had the potential to significantly lower the costs of promotion, the 

cost of music could fall, and revenues to artists could rise. 

Five years ago, this market took off. A large number of online music providers 

began competing for new ways to distribute music. Some distributed mp3s for 

money (eMusic.com). Some built technology for giving owners of music easier access 

to their music (mp3.com). And some made it much easier for ordinary users to 

‘‘share’’ their music with other users (Napster). But as quickly as these companies 

took off, lawyers representing old media succeeded in shutting them down. These 

lawyers argued that copyright law gave the holders (some say hoarders) of these 

copyrights the exclusive right to control how they get used. American courts agreed. 

To keep this dispute in context, we should think about the last example of a technological change that facilitated a much different model for distributing content: 

cable tv, which has been accurately hailed as the first great Napster. Owners of 

cable television systems essentially set up antenna and ‘‘stole’’ over-the-air broadcasts and then sold that ‘‘stolen property’’ to their customers. But when U.S. courts 

were asked to stop this ‘‘theft,’’ they refused. Twice the U.S. Supreme Court held 

that this use of someone else’s copyrighted material was not inconsistent with copyright law. 

When the U.S. Congress finally got around to changing the law, it struck an importantly illustrative balance. Congress granted copyright owners the right to compensation from the use of their material on cable broadcasts, but cable companies 

were given the right to broadcast the copyrighted material. The reason for this balance is not hard to see. Copyright owners certainly are entitled to compensation for 

their work. But the right to compensation shouldn’t translate into the power to control innovation. Rather than giving copyright holders the right to veto a particular 

new use of their work (in this case, because it would compete with over-the-air 

broadcasting), Congress assured copyright owners would get paid without having 

the power to control—compensation without control. 

The same deal could have been struck by Congress in the context of online music. 

But this time, the courts did not hesitate to extend control to the copyright holders. 

So the concentrated holders of these copyrights were able to stop the deployment 

of competing distributors. And Congress was not motivated to respond by granting 

an equivalent compulsory right. The aim of the recording company’s strategy was 

plain enough: shut down these new and competing models of distribution and reVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
40

place them with a model for distributing music online more consistent with the traditional model. 

This trend has been supported by the actions of Congress. In 1998, Congress 

passed the Digital Millennium Copyright Act (DMCA), which (in)famously banned 

technologies designed to circumvent copyright protection technologies and also created strong incentives for ISPs to remove from their sites any material claimed to 

be a violation of copyright. 

On the surface both changes seem sensible enough. Copyright protection technologies are analogous to locks. What right does anyone have to pick a lock? And 

ISPs are in the best position to assure that copyright violations don’t occur on their 

Web sites. Why not create incentives for them to remove infringing copyrighted material? 

But intuitions here mislead. A copyright protection technology is just code that 

controls access to copyrighted material. But that code can restrict access more effectively (and certainly less subtly) than copyright law does. Often the desire to crack 

protection systems is nothing more than a desire to exercise what is sometimes 

called a fair-use right over the copyrighted material. Yet the DMCA bans that technology, regardless of its ultimate effect. 

More troubling, however, is that the DMCA effectively bans this technology on a 

worldwide basis. Russian programmer Dimitry Sklyarov, for example, wrote code to 

crack Adobe’s eBook technology in order to enable users to move eBooks from one 

machine to another and to give blind consumers the ability to ‘‘read’’ out loud the 

books they purchased. The code Sklyarov wrote was legal where it was written, but 

when it was sold by his company in the United States, it became illegal. When he 

came to the United States in July 2001 to talk about that code, the FBI arrested 

him. Today Sklyarov faces a sentence of 25 years for writing code that could be used 

for fair-use purposes, as well as to violate copyright laws. 

Similar trouble has arisen with the provision that gives ISPs the incentive to take 

down infringing copyrighted material. When an ISP is notified that material on its 

site violates copyright, it can avoid liability if it removes the material. As it doesn’t 

have any incentive to expose itself to liability, the ordinary result of such notification is for the ISP to remove the material. Increasingly, companies trying to protect 

themselves from criticism have used this provision to silence critics. In August 2001, 

for example, a British pharmaceutical company invoked the DMCA in order to force 

an ISP to shut down an animal rights site that criticized the British company. Said 

the ISP, ‘‘It’s very clear [the British company] just wants to shut them up,’’ but ISPs 

have no incentive to resist the claims. 

In all these cases, there is a common pattern. In the push to give copyright owners control over their content, copyright holders also receive the ability to protect 

themselves against innovations that might threaten existing business models. The 

law becomes a tool to assure that new innovations don’t displace old ones—when 

instead, the aim of copyright and patent law should be, as the U.S. Constitution requires, to ‘‘promote the progress of science and useful arts.’’

These regulations will not only affect Americans. The expanding jurisdiction that 

American courts claim, combined with the push by the World Intellectual Property 

Organization to enact similar legislation elsewhere, means that the impact of this 

sort of control will be felt worldwide. There is no ‘‘local’’ when it comes to corruption 

of the Internet’s basic principles. As these changes weaken the open source and free 

software movements, countries with the most to gain from a free and open platform 

lose. Those affected will include nations in the developing world and nations that 

do not want to cede control to a single private corporation. And as content becomes 

more controlled, nations that could otherwise benefit from vigorous competition in 

the delivery and production of content will also lose. An explosion of innovation to 

deliver mp3s would directly translate into innovation to deliver telephone calls and 

video content. Lowering the cost of this medium would dramatically benefit nations 

that still suffer from weak technical infrastructures. 

Policymakers around the world must recognize that the interests most strongly 

protected by the Internet counterrevolution are not their own. They should be skeptical of legal mechanisms that enable those most threatened by the innovation commons to resist it. The Internet promised the world—particularly the weakest in the 

world—the fastest and most dramatic change to existing barriers to growth. That 

promise depends on the network remaining open to innovation. That openness depends upon policy that better understands the Internet’s past. 

[Want to Know More?] 

This essay is based on arguments developed in Lawrence Lessig’s The Future of 

Ideas: The Fate of the Commons in a Connected World (New York: Random House, 

2001). 

41

The literature on the commons is vast. The notion of the ‘‘tragedy of the commons’’ was made famous in Garrett Hardin’s ‘‘The Tragedy of the Commons’’ 

(Science, Vol. 162, No. 3859, 1968). Hardin’s view has led many to assume that any 

commons presents a ‘‘tragedy.’’ For a powerful empirical and theoretical view to the 

contrary, see Elinor Ostrom’s Governing the Commons: The Evolution of Institutions 

for Collective Action (Cambridge: Cambridge University Press, 1990). The importance of the commons within Anglo-American law is well described in Carol Rose’s 

‘‘The Comedy of the Commons: Custom, Commerce, and Inherently Public Property’’ 

(University of Chicago Law Review, Vol. 53, No. 3, 1986). 

The enclosing of the commons is described in many contexts. Mark Lemley and 

Lessig describe it in the context of cable in ‘‘The End of End-to-End: Preserving the 

Architecture of the Internet in the Broadband Era’’ (Stanford: John M. Olin Program in Law and Economics Working Paper No. 207, 2000). Yochai Benkler discusses a related enclosure of spectrum in ‘‘Free as the Air to Common Use: First 

Amendment Constraints on Enclosure of the Public Domain’’ (New York University 

Law Review, Vol. 74, No. 2, 1999). For a wonderful review of copyright’s enclosure, 

see Siva Vaidhyanathan’s Copyrights and Copywrongs: The Rise of Intellectual Property and How It Threatens Creativity (New York: New York University Press, 2001). 

The end-to-end argument was first described in J.H. Saltzer, D.P. Reed, and D.D. 

Clark’s paper, ‘‘End-to-End Arguments in System Design’’ (ACM Transactions on 

Computer Systems, November 1984) available on the Massachusetts Institute of 

Technology’s Web site. A later paper, ‘‘Active Networking and End-to-End Arguments,’’ by Reed, Saltzer, and Clark (IEEE Network, May/June 1998) describes the 

importance of end-to-end to the network’s development. David Isenberg, who developed a similar set of ideas when he was an engineer at AT&T, praises ‘‘The Rise 

of the Stupid Network’’ (Computer Telephony, August 1997). 

Finally, to track the progress of the range of cases affecting these matters, see 

the Web site of the most active organization in resistance, the Electronic Frontier 

Foundation. Further resources are online at the Center for the Public Domain.

• For links to relevant Web sites, as well as a comprehensive index of related Foreign Policy articles, access www.foreignpolicy.com.

The CHAIRMAN. Very good. Mr. Huber. 

STATEMENT OF PETER W. HUBER, SENIOR FELLOW,

MANHATTAN INSTITUTE FOR POLICY RESEARCH; PARTNER,

KELLOGG, HUBER, HANSEN, TODD AND EVANS, PLLC 

Mr. HUBER. Mr. Hundt remarked a moment ago there are two 

basic choices, monopoly or competition, but there is a third, and it 

can be implemented quite effectively if you have enough authority, 

which this city does, and the third is to impose from above on an 

industry a suicide pact, and we have come fairly close to doing that 

with broadband. 

Three concrete facts about broadband which you do have to come 

back to after the long bombs are not working: first, demand for capacity keeps rising. You cannot subsidize your way to broadband, 

because broadband is not an end point. It is going to keep moving 

out ahead of us for as far forward as anybody can foresee. 

Second, you really have to get concrete about the engineering 

here. Most of the traffic and the highest speed traffic will always 

be on wires. There are important innovations to be made in wireless, particularly for rural service, and for very short haul at the 

LAN level, and the short-haul level of things, but for the fastest 

systems—and these are solidly rooted in the laws of physics—the 

wires are crucial. You have to have a solid cornerstone of competition. 

We are lucky to have two wires beginning to approach the level 

where they can compete head to head. They can get fully there if 

we give the right environment for this, but the foundation, the essential cornerstone of broadband policy, is going to be on wires. 

42

This is not to take away from wireless policy, it is very important, 

but you have get real about where the traffic really moves, and 

moves fast. 

And finally, the simple, plain, unambiguous fact—deploying 

wireline networks is enormously expensive. It takes very long planning. You have to have long, stable horizons of regulation and from 

that, horizons of investment to get these wires rolled out and to get 

this capacity upgraded. Without that, it simply does not happen. 

Everybody can point the fingers of blame in this city and, as you 

have said, Mr. Chairman, it is not very productive, but the fact of 

the matter is, the broadband policies put in place in the immediate 

aftermath of the 1996 Act and still in place today remain an unmitigated disaster. Roughly speaking, the FCC, with all the best 

intentions in the world, decided that one wired medium would be 

left completely unregulated to do what it wished in the broadband 

arena, and the other medium would be intensely regulated, that it 

would be unbundled and price-regulated. 

One medium was cut loose to build, the other was told to negotiate, for however long it might take, how to share this network 

that had not even yet been built, and at what price to share it. And 

that process has created tremendous delay and uncertainty, not 

just for the regulated targets, but for the entire industry, because 

the prices are ultimately set, and the level of competition is ultimately set by the lowest common denominator on price and on performance, the highest performance, the lowest price, and so long as 

there is intense uncertainty about how one half of this house is 

going to be regulated, and very long delays in determining how it 

is going to be regulated, you pull down the entire industry. 

Time after time, the high tech industry has learned that the 

most important thing to get things moving is growth. Suppressing 

one rival helps one side in the short term. Cable has been the 

short-term beneficiary of these policies that have suppressed the 

telephone wire. It has gained approximately a two-to-one ratio of 

market share because of these policies in the short term, but that 

is not what creates growth in these infant industries. What cable 

most needed, what all the broadband sector needed, was the rapid 

innovation in digital content from the software providers and the 

video and audio and other providers, and that has not come because the market has not grown up fast enough. 

Cable would have developed faster and would have invested faster, paradoxical though it may sound, if this entire industry had 

been deregulated, and if cable itself had faced much more competitive rivalry. The same is almost certainly true on the wireless side. 

But we got instead from the policies we put in place—and I know 

hindsight is easy, but in this case some of us were even saying it 

with foresight—we got a bubble of foolish investment in companies 

that neither had the resources nor the technical capability to build 

broadband networks. 

We had more than 20 major data local exchange carriers, 

DLECs, growing together quarter-baked business plans. Nine of 

them went public when they had an average of under 300 employees each and they were serving fewer than 2,000 lines each. That 

was the kind of euphoria we created between a rising stock market 

and a regulatory system that could make profits for everybody. 

43

The Internet bubble burst, the DLECs burst, and now we have 

to return to reality and see how we can get two wires competing 

head to head robustly, innovatively. What we ought to be seeing in 

this market today is the kind of leapfrog competition that we have 

seen in other sectors, with microprocessors and memory chips and 

software and so on, where no one player is solidifying a dominant 

position, where whoever is fastest today and has gained some edge 

in the market today seriously risks being overtaken a year from 

now, or 2 years from now, by a higher-speed, better-performing system. 

Once again, wireless has a real role to play here. It will offer mobility and will offer large footprint service, particularly in rural 

areas, that wireline cannot match. But the backbone, the core competitive battle that has to be the central focus of people who really 

want to make a change here, has got to be wireline service. That 

is point number one. 

Point number two is, you simply cannot subsidize your way to 

the end point here. It is almost meaningless, in my view—forgive 

me, Mr. Chairman—to talk of jump-starting this industry. Where 

did it start? I had a 300-bit-per-second modem 20 years ago; everywhere now, we are 20- to 50- to 100-fold faster than that, but we 

are nowhere near fast enough, and to think that we can ever subsidize our way to some ‘‘fast enough’’ end point is mistaken. 

The new digital television standards are talking 20 megabits per 

second. Microsoft’s CEO, or Intel’s CEO says we will not even get 

excited about broadband until we are at 5 megabits per second, or 

possibly 100 megabits per second. This Congress cannot subsidize 

us to that end point. That kind of spending will have to come from 

the private sector; it has to come from a stable, balanced, competitive environment in which capital will return to this market and 

compete head to head. 

Thank you very much. 

[The prepared statement of Mr. Huber follows:]

PREPARED STATEMENT OF PETER W. HUBER, SENIOR FELLOW, MANHATTAN INSTITUTE

FOR POLICY RESEARCH; PARTNER, KELLOGG, HUBER, HANSEN, TODD AND EVANS, 

PLLC 

The uncertainty and delay that infect broadband regulation today are sharply depressing both investment and innovation. What the industry most needs from Washington isn’t any new form of affirmative regulation or subsidy; the industry needs 

even-handed and complete deregulation. 

‘‘Broadband’’ is a horizon that keeps receding. Microprocessors, computer buses, 

local area networks, and Web connections all run much faster today than they did 

5 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. 

44

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 bitmiles 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 5 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 to 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 highspeed 

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 hightech 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 

45

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 highspeed 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 6 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 $250 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 

46

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 a 

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-forall, 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. 

47

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.

The CHAIRMAN. Dr. Lessig, I agree, we have got to maintain the 

neutrality of the network. I think that is something that perhaps 

we can all agree on. We ought to get onto the FCC about that. Mr. 

Huber says no jump start, and yet I am hearing jump start from 

the first two witnesses. 

Mr. Price, you say that $300 will be paid to the provider. That is a price less than $30 a month, or a 3-year program. Now, is that 

$6 billion a year? 

Mr. PRICE. No, it is $6 billion in total. 

The CHAIRMAN. $2 billion a year? 

Mr. PRICE. It would be for the first 20 million homes, however 

long that took, so 20 million, if it took 3 years, it would be $2 billion a year. 

Let me comment on Mr. Huber’s point, because he makes a good 

point about the speed at which broadband should be available. He 

is right, it should be that fast, but in order to do that it is $100 

billion to upgrade the fiber network, or $30 billion to upgrade the 

cable plant, and that is not happening tomorrow, so little steps are 

good. 

The benefit of a broadband policy, the Commerce Department 

has pointed out, is way beyond the telcos and the cable companies. 

It is to society, so any bit of broadband is a good thing, and that 

is what my proposal is about. 

The CHAIRMAN. But Chairman Hundt, you differ. You think what 

we ought to do is subsidize the actual broadband rather than the 

demand side? 

Mr. HUNDT. I think that what we need to do, Senator, is find a 

way for consumers and users to be able to award a subsidy, a sum 

of money to the service provider in return for that provider building the underlying network, the underlying system. 

Take the ancient and positive story of Ford Motors. What does 

that have to do with telecom? Henry Ford started two businesses, 

and they both failed, before he finally invented a car that changed 

the world, but what he did not do was go to the private markets 

to raise the money for the roads, nor did the first people who 

bought those cars have the job of themselves building roads. Instead, the Secretary of Commerce, Herbert Hoover, all through the 

1920s led the Nation, and led all the municipalities, in using public 

money to build road systems. 

We have always needed to find a way to get the transportation 

system to the farmer at the end of the road, to the small business 

in the building. It has always been the case, and there is no reason 

to think that a tremendously expensive broadband network relying 

on fiber and wireless technologies can be built entirely by the private market, and it certainly cannot be built by the private market 

at a time that capital is fleeing this industry, so the government, 

just as Secretary Hoover stepped in and created a national proVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
48

gram for roads, the government needs to step in and find a way 

to get that underlying network out there so the old users, the companies that attach the electronics, the companies that want to sell 

the PCs, the companies that want to distribute the software, the 

companies that want to distribute entertainment, all the users can 

find a way to benefit from that infrastructure. 

The CHAIRMAN. And the money is to come, I take it, from spectrum auctions? 

Mr. HUNDT. Senator, this is one of those cases where the witnesses get to say, this is where your leadership steps in. 

[Laughter.] 

The CHAIRMAN. Mr. Mundie, elaborate on Wi-Fi, because that 

fiber is too expensive to go all the way into that last mile. How do 

we subsidize and get it going, or what are the roadblocks or problems right now? 

Mr. MUNDIE. I think there are two problems relative to wireless, 

and Wi-Fi, as you mentioned, is sort of the currently popular one. 

The first is that Wi-Fi has emerged, but along with it has emerged 

many other innovative uses of this current 2.4 gigahertz unlicensed 

band. Because, in fact, there are no rules of the road for operating 

within this band, each of these devices brought forward by different 

manufacturers around the world can actually conflict with each 

other, in fact to the point where they may not work at all, so this 

has the potential to create a tragedy where the more successful we 

are in getting people to adopt the technology the less well it might 

actually work, thereby undermining the ability for people to use it 

as a dependable alternative to other types of connectivity, and that 

is why we recommended that you need, and Larry endorsed the 

idea that you have to have some minimalist regulatory environment. 

The second is that there is not really enough spectrum available 

for people to make business plans broadly that depend on that as 

the primary form of communication. You see innovation—I mean, 

I could have brought another socket from the Four Seasons today 

which actually has two little Internet jacks on it, all right, and in 

fact those things are Wi-Fi connected. 

This morning in the Four Seasons there was a laptop sitting in 

the restaurant that said, this is connected by Wi-Fi for use of the 

patrons of the restaurant, so in these limited environments people 

are, in fact, using it, but you cannot really depend on it yet, both 

technologically and in terms of adequate capacity, and that is why 

we think we have to have more spectrum allocated. 

The CHAIRMAN. Well, we get more spectrum allocated, and then 

what happens after that? 

Mr. MUNDIE. I think what happens after that is, you will continue to see the kind of innovation, both in technological senses 

and also in business model senses. 

One of the things that is—the reason I emphasize unlicensed 

spectrum as opposed to the traditional notion of licensed allocations 

that have been used for television or for cellular telephony in the 

past is that it allows communities to basically step forward. So, for 

example, if a rural community wanted to get together and put a 

transmitter on their silo and broadcast Internet services throughout the county, that could happen. In fact, that is happening today, 

49

but it is hard to encourage that thing to happen because of the 

spectrum limits today. 

The CHAIRMAN. Senator McCain. 

Senator MCCAIN. Well, I want to thank the witnesses. This has 

been a very helpful panel to this Member, and I think I have been 

informed, and I know the rest of the Committee has been. 

I do note that cable rates are up 45 percent since the passage 

of the 1996 Act. That cannot be right, and maybe it has something 

to do with Mr. Huber talking about two wires competing on a level 

basis. How do you do that, Mr. Huber? 

Mr. HUBER. Well, there are several different ways to get there, 

and this at least does sharply divide the panel. The FCC has on 

the table now two proposals, one more or less implemented, the 

other still pending, to move broadband under Title I. That is where 

broadband should have been put in 1996. That is where it belongs 

today, a broad, complete definition of broadband, not just part of 

it, not just some of the facilities. 

This movement of broadband into Title I, which is essentially the 

unregulated sphere, has got to extend to all mixed use facilities. It 

has got to extend to—anybody who wants to take glass, to take optical concentrated devices, to take the terminals, actually put them 

in the ground, which is an enormously expensive thing to do, and 

market them to end users ought to be able to do that secure in the 

knowledge that if they have done something stupid they will eat 

every last dollar of the loss, and if they have done something really 

smart, they will get the benefit from it. 

That is not the law today. It ought to be the law today. You do 

not have to share those facilities. They are not yet built, and a law 

that is obsessed with how we are going to divide up that pie after 

it gets built is counterproductive. 

Senator MCCAIN. Thank you. I have a question for all the witnesses, beginning with you, Mr. Hundt. You are either the czar of 

the FCC, which you once were, or have a majority in both Houses 

of Congress and are President of the United States. What would 

the law and/or regulations look like in order to address this problem, beginning with you, Mr. Hundt? 

Mr. HUNDT. I would recommend to this Committee, to Congress 

that we face the economic reality that under any system of competition, or under any monopoly approach, it is simply not the case 

that the private sector is going to invest at the present time, in the 

present economic climate, is going to invest enough money to build 

a truly broadband 10 to 100 megabit second system——

Senator MCCAIN. What does your regulations or law look like, 

Mr. Hundt? 

Mr. HUNDT.—so consequently you need to throw money at it. You 

need to have the consumers be able to have a subsidy in their pocket they can award the service provider to build that kind of network. The exact amount of money would be, I might add, a fraction 

of what we spent to build roads in this country, the kind of numbers that Mr. Price is talking about represent a fraction of even 

federal spending on roads on an annual basis. So——

Senator MCCAIN. So your answer is to set up a process and program of subsidization of broadband for all Americans? 

Mr. HUNDT. That is right. 

50

Senator MCCAIN. Thank you. Mr. Price. 

Mr. PRICE. First, I think broadband should be unregulated. 

There are two competitors for it right now. I think a wireless, 

maybe a third competitor, and I think there is no reason for 

broadband to be regulated. 

Second, I think we need more spectrum, and it needs to be available at low cost. 

Third, I think we do need some short-term subsidy just to kickstart the market, to show a little bit of confidence to the whole industry participants. 

And fourth, I think longer term, when cable is an effective competitor on the wire for voice in the home, we need to look at the 

regulation for the RBOC’s and the residential voice monopoly. 

Senator MCCAIN. Mr. Mundie. 

Mr. MUNDIE. I would address it in two tranches. The first would 

be to create regulatory parity between the telephone wire and the 

cable wire. I agree with Mr. Huber that facilities-based competition 

is, in fact, the only way that we are going to get sustained investment in this area, and I would move aggressively to do that. 

However, I think that regulation would essentially have to have 

a meet-in-the-middle property so that some of these attributes that 

Larry and I talked about in terms of the connectivity principles are 

applied uniformly to those, which would mean a diminishment of 

the regulations on television, but the addition of these connectivity 

principles to cable. 

The second tranche would be essentially direction to the FCC 

and the NTIA to aggressively manage the country’s spectrum to the 

benefit of creating many, many unlicensed uses of these novel radio 

technologies. Wi-Fi is just the tip of the iceberg. 

The FCC this year approved ultrawide band, but due to concerns 

with the Department of Defense it was so narrowly constrained as 

to really limit its usefulness in many applications. I think there are 

many other techniques that could be applied to dramatically increase this. 

The reason the two are necessary is that the historical regulatory 

environment in which the cable environment was invested in and 

the telephone environment was invested in has created a situation 

in this country where it has been demonstrated to be pretty much 

impossible to build a third wired network. It is noneconomic, and 

therefore if you really want to create competition it should be headto-head facilities based within the existing wired plants with the 

encouragement through applications to grow their investment in 

that plant, and then essentially the wild card of wireless communication, but not in the traditional cellular telephony 3–G sense, 

but in the use of these novel radio techniques, but that can only 

happen if, in fact, people are confident. 

I agree with the confidence question, and that is why the 

connectivity principle gives people confidence to develop apps for 

the wireline network, but it would be the regulatory change in 

spectrum that would actually give people confidence to develop the 

new products and the new services that would complement that 

and potentially create new types of networks that would compete 

with the wire line ones at much lower capital cost. 

51

Senator MCCAIN. What about subsidy, as Mr. Hundt and Mr. 

Price recommend? 

Mr. MUNDIE. I personally favor creating a lot more competition 

than direct subsidy. I think that as we have seen in other countries—I mean, last week, ironically the United States was now 

passed by Brazil in terms of the penetration of broadband usage in 

households. 

If you look at Korea, where game usage is essentially one of the 

single biggest drivers of broadband adoption, Korea is now at 70 

percent of all households penetrated, and our belief is that if you 

have these new kind of driving applications which will be brought 

forward if people have confidence that they have a sustainable 

business model, then in fact I think the cash flows will return to 

these networks, and therefore would not require the kind of subsidy that has been proposed. 

Senator MCCAIN. Mr. Chairman, can I ask your indulgence for 

the final two panelists? Mr. Lessig. 

Mr. LESSIG. I would agree with the same structure. I think if 

there are only two competitors, if it is the only two wired competitors that could provide broadband, then subsidy makes sense. But 

I think right now we can open a third line of competition to provide 

broadband if we had a much more aggressive wireless policy along 

the lines that Mr. Mundie was just describing. Wireless Last Mile 

is a technology which 4 years ago seemed impossible to imagine, 

but right now is being built by people who have technological capability to set up broadband connections. These do not require extraordinarily expensive investment to put wires out there. If the 

FCC’s policy as to wireless were much more embracing of this wireless technology, that would produce extraordinary new competition 

here. 

Senator MCCAIN. Such as Wi-Fi? 

Mr. LESSIG. Wi-Fi and other technologies around Wi-Fi, meshed 

networks that would enable actually potentially increasing capacity 

as the number of uses increased. This is a potential that we have 

just not seen before in this context, but it is extremely important 

that one feature of it be emphasized. 

Right now, the FCC has a string of companies coming to them 

saying, we like unlicensed. Unlicensed is great, but you have got 

to pass rules to protect us to make sure that our use of unlicensed 

does not get destroyed by some other person’s use of unlicensed. 

But what that would do is lock in today’s technology against future 

technological innovation. If there is an agreement between Mr. 

Mundie and myself about this, the critical feature about minimal 

regulatory protocols is that they truly are as minimal as technologically possible, the most minimal position, so that it enables lots 

of new technologies to come along and use this wireless capacity to 

compete with wired capacity. 

I think my tendency is, on this side of the table, to believe that 

that will get us where we need to go without the subsidy, but if 

it is not, the subsidy point is an important one. When we built the 

highways we did not call up GM and say, if you build the highways, you can then build them so that only GM trucks run on the 

highways, or Ford trucks run a little bit slower. But my concern 

is that we are building the Internet such that the people who give 

52

us must-see TV are giving us must-see Internet: where they get to 

say, ‘‘here is the Internet you are going to get, here are the applications you are allowed to use,’’—defeating the basic neutrality of 

this network. 

So subsidies may be an important part of this, but the critical 

feature of what made the original Internet run was not subsidy, it 

was not the fact that wires were there, it was that the rules enabled broad range competition among innovators outside of the network, not the network itself. 

Mr. HUBER. I really hate this highway metaphor, and you should hate it, too. If you have $1,000 per home to put 5 megabits in, or 

$100 billion for the Nation as a whole, go ahead and spend it, and 

spend it fast, but if you are going to go a quarter way there, do 

not waste your money, because you will not even begin to catch up 

with what is needed and what ought to be happening in the market, and what the market—the market will spend $100 billion. 

Give the market—if you want a one-line law, say that any provider 

or broadband service, any provider above 200 kilobits, say, can opt 

into the regulatory structure that is applicable to any other provider above 200 kilobits and see what happens. 

Senator MCCAIN. Thank you. Thank you very much, Mr. Chairman. 

The CHAIRMAN. Senator Burns. 

Senator BURNS. Well, we have pretty well gone over that. Everybody gets a version of it. 

I want to ask Mr. Lessig. You said, OK, interference in these unlicensed spectrum, tell me how you would award that spectrum? In 

other words, if we are going to be plagued with interference, then 

we are going to have to have some sort of a protection or licensing 

situation. How would you do that? 

Mr. LESSIG. Well, the premise of the unlicensed spectrum is that 

the FCC is not in the business of awarding who gets to use it and 

who does not, and what has to happen in that context is that protocols have to be developed to facilitate exactly the kind of cooperation of the space that Mr. Mundie was describing. The only issue 

is at what stage the FCC plays a role in establishing or enforcing 

those protocols, and in my view, historically the FCC’s role in establishing and enforcing protocols has stifled competition for many 

reasons. 

Mr. Huber’s work is excellent in showing this to be true, so I 

would resist the FCC’s role, except at the most minimal layer, and 

I think to cite Mr. Mundie’s proposal, it is actually at the 5 

gigahertz band, not the place that we typically see Wi-Fi going on 

right now, the 2.4 gigahertz band. 

Senator BURNS. In other words, the FCC would be in the business of developing protocols, rather than licensing the spectrum, is 

that correct? 

Mr. LESSIG. I would not say the FCC is in the business of developing protocols. I would also say they are not in the business of 

regulating access. I would see protocols to be developed by the private sector, including protocol organizations, and then those protocols at some stage might need to be adopted as this minimal protocol to make sure that there could be cooperation among the uses 

at the different spectrum layers. 

53

Senator BURNS. Would you like to comment on that, Mr. Mundie? 

I am really unclear on it. 

Mr. MUNDIE. I think there are two things that are very important. The first is the idea that these are not allocated bands in the 

sense that there is no single entity who is given a right or permission to do anything with the band. In fact, to the contrary. The 

public is authorized to do anything they want with the band. 

The key problem we have right now—and that is essentially 

what is driving Wi-Fi into existence. It drove Citizens Band Radio 

to some extent, and now the family radio services. These are all the 

things that were a bit more specific in their application, but it is 

an example where the public was given something they could take 

up and use. 

The unlicensed bands, however, in the digital era, are not set up 

in a way that reflects how digital systems work. They are still designed and essentially controlled per the FCC’s specifications, or 

rules, according to the way people have always used analog radios, 

and so there is an opportunity now to take the techniques that are 

used within that cable that hooks up your PC to the network, to 

take a similar kind of protocol and apply it in the air. 

And if that is done, and there are a number of companies, and 

in fact the DOD are in dialogue now about how you would specify 

such a minimalist hand-shaking mechanism and, given that, we do 

believe it is possible to have really unlimited innovation within any 

one unlicensed band. 

I think in addition we will need—and we propose, for example, 

how that might happen in the 5 gigahertz band, which would be 

Wi-Fi version, too, but we think other bands will also be required 

below 1 gigahertz to deal with both the distance propagation problem in the rural area and also to deal with the penetration of walls 

and concrete structures, like in the inner city. The current 5 

gigahertz and 2.4 bands do not have the propagation properties we 

would want there, and that is why I recommend that there ultimately will have to be other unlicensed bands allocated, but they 

should all have the same uniform property of hand-shaking before 

use. 

Senator BURNS. Mr. Price, walk me through what changes you 

would make in the bankruptcy law to facilitate the situation we are 

going through now. 

Mr. PRICE. I really do not have any specific proposals. I merely 

brought it up to point out to the Committee how this is working. 

I will tell you, though, that I have witnessed first hand in our work 

in advising creditor committees and companies how companies can 

get bankruptcy judges to give them an enormous amount of leniency in terms of spending creditors’ money and keeping the companies alive, so I just think that is a subject for another day. 

Senator BURNS. I am really interested in this unlicensed thing, 

because I guess I am the only one in this room that ever said that 

spectrum was never the property of the United States Government. 

I always said it was the technology that was developed, and the 

reason we put the FCC in business in 1934 was to make sure that 

everybody stayed in their lane, so to speak. But it is interesting, 

on the unlicensed part of the spectrum, I am having a hard time 

converting over. It says, OK, you are going to be given so much. 

54

Are they going to get it on a lottery, or is it just going to be a freefor-all out there? 

Mr. MUNDIE. It is a free-for-all. That is how it works. Everybody 

can come forward, and the way the radios actually work allow people to all come forward and participate, and the radios sort out 

from each other who gets to talk, and that is how it actually works 

today. 

Mr. LESSIG. Can I just add, Senator, that one way to think about 

this in on the model of the Internet. Right now, the capacity of the 

Internet is such that everybody talks in some sense at the same 

time, and the Internet protocol figures out how to make it all function without an FCC coming in and saying, you get to talk now, 

or you get to talk in this particular way. It is the same insight. It 

is just being applied in a different context. 

Senator BURNS. If there is anything I love to watch, it is a good 

old-fashioned free-for-all. That is a great spectator sport. 

Mr. MUNDIE. I think the one other thing that I might just go on 

record as predicting, I believe certainly 20 years from now, maybe 

even 10 years from now, we will look back and realize that the historical notion of band-oriented management of spectrum was, in 

fact, a quaint idea and that, in fact, we will find that eventually 

there are completely different ways to use the spectrum to control 

these things, and the challenge for this country and others will be 

to try to figure out how we carefully take ourselves from the bandoriented approach that we have as our legacy now, as does the rest 

of the world, into the management of the entire spectrum capacity 

that will allow the emergence of these new technologies, and that 

should actually be the long term mission of the FCC with respect 

to husbanding the spectrum. 

Senator BURNS. Very interesting approach, and I think it merits 

more thought. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. Senator Dorgan. 

Senator DORGAN. Mr. Chairman, we are really having a couple 

of conversations here, and let me try to ask about both of them. 

First of all, Mr. Mundie, will there be enough unlicensed spectrum for all the applications that want to use it? I am trying to 

think through with you ahead here. How will it affect the wireless 

carriers who paid a substantial amount to use the spectrum that 

they do control? 

Mr. MUNDIE. As the unlicensed bands are allocated today, I will 

tell you that there is not sufficient spectrum either in absolute 

bandwidth, and specifically not in the right places in the spectrum 

to allow a comprehensive and reliable, let us say, community network to form in your community or any other one, but both of those 

could be addressed by the FCC quite directly, and without forsaking any huge traditional notions of the amount of money that 

might have been garnered from the auction of those particular 

bands, in my opinion. 

I think the more difficult question is, how do the applications 

emerge in this environment, and without assurances that these 

bands are going to be available you will not know. 

Relative to the second part of your question, which is, how does 

this relate to the telecom companies who bought their spectrum, in 

essence, this is, as he has indicated, and Mr. Huber indicated, a 

55

situation where you pay your money, you take your choice. At the 

point where you bet on what we know today as cellular telephony 

as the core of wireless technologies, which are big antennas with 

multimile radius transmission and receive capability, and what we 

know today as cellular phones, they have met and made a good 

business out of that, but in fact, the history of the technology industry is one that says you are always going to be surprised by the 

next thing that comes along, and essentially what I am advocating, 

and in fact what I think you see some of the cellular carriers today 

recognizing, is that they did not anticipate Wi-Fi and its popularity. 

This little hunk of unlicensed band usage in this particular computer application is now getting some of those cellular companies 

to come forward and say, I want to buy a controlling interest in 

these little Wi-Fi hot spot companies, because, in fact, they recognize that that is likely to be true. 

I have—I mean, this thing I use every day now is a combination 

of—you have a Blackberry. I used to have one. It has been replaced 

by this. It is a cell phone, World GSM cell phone with a pocket 

computer in it. 

Senator DORGAN. Have you tried to use that in Fargo? 

Mr. MUNDIE. No, I have not, but I expect it probably will not 

work, but it turns out that the next version of these things will actually support simultaneously not only the traditional telephone 

network, but the Wi-Fi network, and so, in fact, if somebody in 

Fargo decided to put up a Wi-Fi hot spot, I could come into town, 

and while I find that I might not get my telephone connection, I 

would get a local area connection, and I would have an alternative, 

and that is why I speak, you know, so enthusiastically about the 

potential for competition between the unlicensed band—which does 

not depend on capital flowing from Wall Street. It does not depend 

on any company owning or controlling spectrum. Its rate of diffusion at that point is limited only by the choice of the consumer to 

go down to the good guys, or Circuit City, and buy a little box, and 

take it home and plug it in, and therefore you get to do this third 

option on the back of the bank accounts of the American public at 

their discretion, as opposed to some large a priori allocation. 

Senator DORGAN. Let me ask—well, I do not want to use my 

whole 5 minutes on one question. 

Mr. PRICE. Senator, if I could just explain, we at Evercore have 

an investment in a company called Boingo. Its purpose is to negotiate with the guy in Fargo, the guy in South Carolina who has the 

hot spot and provide a universal access mechanism to that, so it 

cobbles together all of the entrepreneurs to a uniform system, and 

you sign up for a service called Boingo. Wherever you are, it works. 

Senator DORGAN. I will not ask the question, but I am curious, 

because all of you have talked about competition, how many of you 

have the same local telephone provider you had in 1996? I will not 

ask you, but the reason I would ask the question if I had time, it 

would be about how much competition really does exist in the local 

exchanges around the country. The answer is, not much, and I believe in competition. I believe we ought to do what we can to foster 

more and more competition. 

56

I am going to ask two things quickly in my remaining time. One 

is the issue of the Universal Service Fund, which has kind of become a forgotten stepchild in these days of telecommunications policy. We specifically wrote in law in 1996 that the Universal Service 

Fund shall support advanced telecommunications services, so that 

seems to me to be a platform for policies that make sense in terms 

of what some of you are suggesting as we try to provide the impetus for a better and more robust buildup. 

Mr. Reed, you might want to comment on that, but second, some 

of you mentioned Korea. I do not know much about Korea, but I 

am curious. You said 70 percent of the Korean households have access to broadband? 

Mr. MUNDIE. Subscribe. 

Senator DORGAN. Subscribe to broadband. Presumably, then, it is 

affordable in Korea, is that correct, or is it subsidized? 

Mr. MUNDIE. It is partially subsidized by the government, I 

think, but there is really aggressive competition between two DSL 

providers. 

Senator DORGAN. But if it is partially subsidized by the government, if you come here and tell us how great things are in Korea, 

and someone says, it is because they are playing video games, and 

the government subsidizes the subscription to broadband, I think 

it suggests at least that whether it is through the Universal Service Fund or some other device, that governments are deciding that 

in order to have universal access, like the old REA program, you 

have to do something to stimulate that. Would you disagree? 

I raise it only because you all have raised the question of Korea, 

and someone Brazil. I do not know much about those countries, but 

I assume that if it is affordable there, the ingenuity of the American marketplace could make it affordable here if we had public 

policies that supported that through some kind of cross-subsidy, if 

we need to, through the Universal Service Fund. 

Mr. MUNDIE. Maybe I could comment that many, many countries 

have contemplated this question over the last few years, because 

they recognize that having an accelerated deployment of broadband 

is an opportunity to steal a march on the major, established countries, including and especially the United States in terms of participating in this sort of information economy, so many of them have 

actually been more aggressive than we have in this country either 

in subsidies or regulatory environment. 

Canada, for example, I do not think has done anything in subsidy, but they actually forced cable to provide open access. 

Senator DORGAN. Is there also more aggressive competition in 

those areas? 

Mr. MUNDIE. In many cases there are. For example, there is both 

real competition between different, mostly telephone suppliers in 

those countries, because cable is not as uniformly deployed. The 

reason I say the United States is slightly different is because we 

have such a huge penetration of cable already in place, and largely 

upgraded for these services, and we also have the telephone network, which could be fairly directly used to provide these services. 

Senator DORGAN. I should just confess that I still have the same 

local exchange service I had when we wrote the law, and I assume 

you do. 

57

Mr. MUNDIE. Has the company changed names? 

Senator DORGAN. I have not had one telephone call during dinner 

time suggesting I change it, because there is no competition. 

Mr. HUNDT. Senator Dorgan, I recall you when I first came into 

office at the FCC explaining to me the cost of telephone service, the 

economic cost of telephone service in your home town, which was 

$300 a month, I think was the number. That is the problem with 

broadband, whether it is your home town, not a large place, not 

even Fargo in North Dakota, or whether it is even some of the suburbs around our major cities, the underlying economic cost of building a truly high speed fiber-based wireless LAN, all the different 

technologies, even the most efficient, the underlying economic cost 

is greater than any private market is going to invest. 

That is why Korea, that is why China and Shanghai, that is why 

the European countries all are going to have policies—some will be 

wise, some will be less wise, but they will all have policies in which 

the government steps in, as it did with the road system, as it did 

with broadcast TV, as it did with radio, as it did with rural electrification, and figures out how the network is going to reach everyone, and it is an imperative that we do that in this country, but 

it would be a godsend to our capital markets to know that there 

was such a plan, so that all the other technologies that the learned 

gentlemen are speaking about would be able to enjoy the benefits 

of it. 

Senator DORGAN. I should—just to clear it up, in my home town 

they drove down the price of that, or the cost of that telephone 

service by the Universal Service Fund support in order to make it 

affordable, which was the case all across the country. 

Mr. Chairman, as is always the case, I am supposed to be in two 

places at once, and I have to leave. I really appreciate your holding 

this hearing. I know we have got tough decisions ahead of us, but 

we need to start making those decisions. 

The CHAIRMAN. We have got the best of advice. 

Senator Breaux. 

Senator BREAUX. Thank you very much, Mr. Chairman, members 

of the panel. Mr. Hundt, I am not sure I agree with your suggestion that we apply the Herbert Hoover economic model to the telecommunications industry, and apparently the rest of your panel do 

not think too highly of it either, from what I take from their testimony. 

Mr. Huber, comment on Mr. Hundt’s last statement about the 

fact that the government came in and built the roads, built the television, and there was a whole bunch of other things that Mr. 

Hundt said that we did through subsidies. Why isn’t that a good 

example of why we should do it in this area? 

Mr. HUBER. Well, to begin with, certainly with the major network industries there was a long period of private sector incubation 

before the government even touched them. Edison built the Pearl 

Street Station in New York to sell light bulbs; the first radio broadcasters were built to sell radios. It was completely closed in the private sector. 

Number two, the key problem with this highway metaphor is, go 

ahead, subsidize the highways, but keep in mind that it is 4 lanes 

this year, within 3 years it is going to be 8, and then it is going 

58

to be 16, and then it is going to be 32, and there is no sign whatsoever that that progress will stop. It ought not to stop. We are not 

going to pave over the whole country and then have to stop building digital highways. You cannot subsidize your way to a horizon 

that is always receding on you, and receding that fast. 

Senator BREAUX. Your testimony on page 3 I think answers what 

I was going to ask, but can you elaborate on it? Are there things 

that are short of what Congress can do to help move this process 

forward? I think Congress is hopelessly log-jammed on these 

issues, and someone pointed out all the television ads are back on, 

do this, do that. I mean, most people quite frankly do not understand what the ads are advocating. It is very, very difficult. I just 

do not get a lot out of that. 

You talked about the FCC having various issues before them now 

that if they acted on it, what do you think the results could be? 

Mr. HUBER. Well, on broadband we simply have to get back to 

where we ought to have started in 1996. We have to move the main 

wireline infrastructure broadband regulation to a system that applies one set of rules for all, a system that says, we mean it, it is 

going to stay this way, and you can invest your next $100 billion 

in joint-use facilities, and if it turns out to be a stupid investment, 

you’ll lose your money, or else you are going to get as rich as 

Croesus if it is a really good one. You have got to get that message 

out emphatically. It is not hard, but you have got to do it. 

As for subsidies that everybody was discussing, before you cook 

up the next one, try enforcing the 1996 Act, which said subsidies 

had to be made explicit. People are not competing for residential 

service in Dakota because it is ridiculous to compete for residential 

service in Dakota. It is subsidized like crazy internally, the subsidies are not explicit, nobody can beat the rural rates when they 

are so heavily subsidized. 

Make the subsidies explicit. In other words, implement what was 

in the 1996 Act, and then talk about your next round of subsidies, 

but do not do it the other way around. 

Senator BREAUX. Mr. Price, you mentioned on page 12 of your 

testimony—can you elaborate on number 3, when you talked about 

the historical regulation of telcos need to be examined in light of 

the changing competitive environment in cable’s superior technology plant and the increasing quality of wireless offerings? The 

current regulatory regime may be appropriate in a monopoly context, but the RBOC monopoly is rapidly waning. There are some 

who would argue that they still have a lock, mortal cinch from a 

monopolistic standpoint. Can you elaborate more about what you 

meant on that point number 3? 

Mr. PRICE. RBOCs generally——

Senator BREAUX. Use your mike. 

Mr. PRICE. The RBOC generally provides three services today, 

residential voice, data, and wireless. In the residential voice business they have 80 to 90 percent market share, in data it is onethird market share, and in wireless the strongest person nationwide, Verizon, has a 25 percent market share, so the only monopoly 

that still exists is in residential voice. 

In residential voice, we have wireless carriers increasingly impinging on this monopoly. If any of you has college kids, just ask 

59

them which phone they use. I mean, there is a sea change coming 

like this, that is going to take maybe a half a generation to be implemented, but it is coming with respect to the wireless phone. 

With respect to cable, it is going to impinge upon the residential 

voice business, and what I am saying is, in a very short period of 

time, relatively, 3 years, 4 years, you are going to see the RBOC 

residential voice monopoly gone, and at that point in time, you 

need to examine the entire regulatory regime for the RBOC. 

Senator BREAUX. Mr. Huber, you outlined this in your testimony. 

Maybe you would be the best. Suppose the RBOCs had the same 

regulatory requirements that they had to meet in providing a 

broadband that the cable companies currently have to operate 

under. What would be the result of that? 

Mr. HUBER. They would be rolling out glass very aggressively. 

The copper network, they are squeezing it out to the very last limits of what it can do today, and they have had concrete proposals 

like this on the table, and they spend 3 to 4 years negotiating with 

the FCC and with State regulators to see how they can share this 

glass network once they have deployed it. They would be pushing 

remote terminals out to rural areas. 

Senator BREAUX. Well, how different is it from what the cable operators have to do versus what the telco companies have to do in 

providing a broadband? 

Mr. HUBER. Cable, of course, has—they do not like to talk about 

it, but they are still a shared medium. In the last 1⁄2 mile or mile 

they are bandwidth limited. They claim that they have got more 

than they have got. They cannot actually deliver real broadband 

during peak usage. They have a lot of work to do. So do the wireless people, and they will all do it in an environment that leaves 

them free to upgrade and build, or else be beaten by the competition. 

Senator BREAUX. You are talking about the regulatory requirements and comparing that to what the telcos have to compete with? 

Mr. HUBER. Cable is under Title I for broadband. They can do 

what they like and charge what they like. Telcos today, if they 

build it, they will find out sometime, next year or two years from 

now, whether Illinois or the FCC or somebody else will tell them, 

look, you have just put in $5 billion here now, take it apart and 

sell it at the price we prescribe. That is the situation, that is the 

law today. 

Senator BREAUX. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Allen. 

STATEMENT OF HON. GEORGE ALLEN,

U.S. SENATOR FROM VIRGINIA 

Senator ALLEN. Thank you, Mr. Chairman, and thank you for 

holding this hearing. I have thoroughly enjoyed it. Whether I agree 

with each one of the witnesses, your perspective has been outstanding for us. I think it might be helpful, and we have gotten 

into it, looking at this in a third way, or a different way, and alternatives, rather than worrying about the ILECs and CLECs and the 

old way of looking at things, whether they are highways, rural electrification and so forth, and I think we ought to focus on spectrumVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00063 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
60

efficient technologies, satellite services, wireless technologies, and 

possibly even power line broadband capabilities. 

All of these incentives, there are not enough incentives or tax 

credits available to make sure that folks will dig up into mountain 

hollows or across wide expanses of our country and to that extent 

I have been working, along with Senator Boxer, for several months 

now, and our staffs have been working very diligently on coming 

up with the proper approach, and I have heard our witnesses talk 

about it as far as Wi-Fi, wireless fidelity. 

I think that that is a third way that is not bogged down by all 

of the legacy litigation, regulations, precedent, animosity, and everything else that is engendered in the other way of thinking, and 

I feel that we are making progress, and I do want to commend Senator Boxer and her staff and mine for working together on this, 

and we are working also with the FCC and the Department of Defense, which has not really been mentioned much in here, but is 

very, very important as we move forward, and this is just a working draft of where we are, and I am going to ask some of the gentlemen, especially those who focused on this, their views on it as 

we are trying to go forward. 

And Senator Hollings, I know you care a great deal about Wi-Fi 

as well. In listening to some of the comments of others, we might 

be able to get a convergence of views. The goal of our legislation, 

at least at this stage—and this is not the legislation. This is a 

working proposal to provide an alternative to broadband wireless 

service by using advances in wireless technology and spectrum efficiency. It is to accelerate the development of wireless broadband 

networks in both residential and business markets, and allow 

schools and libraries the ability to purchase wireless devices that 

deliver broadband services under the Universal Service Fund. 

Now, the specifics are as follows, and again, this is a draft at this 

point, but we would require the Federal Communications Commission to make additional unlicensed spectrum available for wireless 

broadband services. The draft approach would also require the FCC 

to establish quality of service and technical rules of operation that 

facilitate spectrum efficiency for unlicensed wireless broadband 

technologies, require the FCC to establish baseline Internet 

connectivity principles that ensure consumers have access to Internet content services, applications and devices, as was mentioned, 

and obviously allows the schools and libraries to pay for it with the 

Universal Service Fund. 

What is your horseback reaction to such a draft proposal, and 

again, we have been working for several months and have gotten 

to this, and we are obviously getting comments, but I certainly 

would like your comments and insights on such a framework or 

structure of principles. 

Mr. LESSIG. Senator, let me start by saying I would agree with 

the framework and, in particular, in response to some of the discussions about subsidy, as Mr. Mundie suggested, the critical feature 

about wireless technologies is that, like computer infrastructure, 

the subsidy for this technology is in large part coming from consumers purchasing the devices necessary to make it work. It is not 

Wall Street that needs to do it. It is actually the consumers that 

61

are developing the technology to make this work, so you are getting 

consumers to help make this project go forward. 

The one thing that I would again emphasize, though, is that 

quality of service protocols should not interfere with experimentation for the next generation of technologies. 

The history of damage that the FCC has done—and again, Mr. 

Huber’s book is, I think, excellent in describing this—has been the 

FCC putting out the equivalent of ‘‘quality of service’’ protocols, 

that have had the effect of stifling the next generation technologies. 

It has got to be minimal in the way that Mr. Mundie has described, 

leaving open an extraordinary range of experimentation. Technologists are humble. 

This is a rare quality among lawyers, and I do not know about 

Congress, but technologists will tell you that they do not know 

what the future could hold for wireless technology. There is a great 

potential that it could provide more capacity as the users increase, 

something we have not seen before. But technology needs the space 

to experiment with that, and the FCC regulations that set up certain protocols have the potential to interfere with that opportunity 

in a way which I do not think has yet been appreciated. 

Senator ALLEN. Thank you. Mr. Mundie, what is your view, seeing how you obviously focused on this, and we seem to share similar philosophies and ideas? 

Mr. MUNDIE. Well, clearly your bill, as you have outlined it with 

respect to wireless, seems to be completely compatible with the recommendations that we made. Again, I think the thing that is important to realize is that if this is really going to be what I would 

say is a dependable medium today, I mean, if you think back to 

Citizens Band Radio and other things, people used it, but it was 

hard to really depend on it, and I think the problem we have got 

today is, two problems. If we do not get the etiquette right to allow 

this innovation to occur, then, in fact, even within the bands we 

have, we will end up with just congestion, or cacophony. 

I think the other problem with dependability is the fact that we 

ultimately want to see this used in many different environments, 

inner city, rural, et cetera, and to do that, physics plays a real role 

here, and the different bands have different propagation properties, 

so for example, the good old television band was chosen because it 

goes through bricks and mortar and everything else, and you can 

watch TV with your rabbit ears. 

None of the spectrum in that band, for example, has been allocated for these kinds of applications and, as a result, it is very hard 

to get those kind of propagation characteristics, and so I think as 

I mentioned earlier, the other key idea that you should consider is 

directing that we need a bouquet, if you will, of bands that are all 

unlicensed and managed in a compatible way so that people could, 

in fact, have assurances that it would be both dependable under 

heavy use, and that it would be dependable relative to the different 

propagation environments. 

Senator ALLEN. I thank you. My time is up. I was going to ask 

that question. 

The CHAIRMAN. Go ahead. 

Senator ALLEN. You generally have—well, in response to a question from Senator Burns as to which of the gigahertz, bandwidths 

62

and so forth, the part of that spectrum is most important, and you 

answered that previously on the record, and obviously I am not 

sure if in our legislation, or any legislation, you would want to 

micromanage to that level. I do not mean to be legislating on a 

draft proposal here. I think that if you establish the proper principles, that is the way to go with it. 

If necessary, I suppose you do have to come in and tell them 

what to do, but nevertheless, if you have knowledgeable people 

such as yourself and others working on that and adapting the bottom line principles, hopefully it would be done. 

Mr. MUNDIE. The industry is fully engaged, both with the FCC 

and the DOD, around these questions to try to find a compromise 

that works for everybody, and I agree with your statement about 

principle. It is less important to pick which bands than it is to realize that there are two fundamental principles. One is that it has 

to be reliable under heavy use, and the second is, it has to work 

no matter whether you are in Kansas or Manhattan, in a building 

or on a farm. 

Senator ALLEN. There is a Manhattan, Kansas. 

[Laughter.] 

Senator ALLEN. Or in Washington, D.C. 

Well, I do think the application, Mr. Chairman, is—you and I, I 

know, care about rural areas, and rural areas look at access to 

broadband as they did rural electrification. I hate to get back to 

those, and interstates and railroads and so forth, and it is important in rural areas. It is also important in inner city areas, or metropolitan areas, where it gives the consumer another choice, and 

you are not having to dig up all the roads constantly for another 

wire to be laid, so it is applicable anywhere, and I look forward to 

working with you, Mr. Chairman, and I know Senator Boxer will 

and also these gentlemen. 

I thank you all for your insight and perspective, and really I 

think Wi-Fi, out of this whole hearing, which was generally gloom 

and doom, that this is one area where I think innovation is exciting 

and has tremendous potential, and I thank you again for your 

great leadership on this issue, Mr. Chairman. 

The CHAIRMAN. We are just trying to find something we can get 

done along that line, and you mentioned rural. Chairman Hundt, 

you heard Mr. Huber say, let us take broadband out from Title II, 

put it under Title I, remove the common carrier obligation on the 

one hand. What happens to the CLECs? On the other hand, remove 

the support of universal service. What happens to the rural areas? 

What happens if we do that? You heard that suggested. 

Mr. HUNDT. Well, the CLECs, the competitive local exchange carriers have, in fact, broad competition in voice and data to small 

businesses in the United States since 1996. There are now 22 million lines supplied principally to small businesses by CLECs. 

The CHAIRMAN. But they are not facilities-based. They depend on 

that connection. 

I am an RBOC, and now on broadband I do not have to really 

make that connection under 251. 

Mr. HUNDT. Well, those CLECs——

The CHAIRMAN. What happens to me? 

63

Mr. HUNDT. As you know, Senator, those CLECs have only been 

able to come into existence and provide that competition because 

they have been able to lease the last mile, or the local loop. Now, 

if that is going to be upgraded to fiber, which is what we are all 

talking about as a core technology because the wireless solution is 

not going to be a complete solution, although I agree with Senator 

Allen, it is going to be a tremendous advance, that local loop, if it 

is going to be subsidized, needs to be available to be leased by competing companies. 

The CHAIRMAN. But Mr. Huber is against all of that subsidization. We are not going to have the subsidy. I am talking about the 

situation today, and I am just trying to find where I am with respect to broadband. If I take it and put it under title I, remove any 

kind of common carrier obligation, specifically I do not have as an 

RBOC, then, to connect to any CLEC, and other than Covad or 

something like that, they all depend on that business customer you 

are talking about for connection, so I have eliminated—I am an 

RBOC. I can eliminate that competition by getting that done, is 

that not correct? 

Mr. HUNDT. I think that is right. I think that the move to title 

I, if that is what we are going to do, is pretty much tantamount 

to the attempt to recreate the old AT&T monopoly, at least in this 

particular space. 

The CHAIRMAN. And what happens to the rural areas that Senator Allen and I are both interested in? What happens to the universal service contribution? No contribution at all. 

Mr. HUNDT. No contribution at all. 

The CHAIRMAN. You know, it is very interesting, I have been trying to get—you see, what we had is, you and I seven years ago, 

prior to 1996, we all owned, let us say at that time, Bell Atlantic 

up here. I have been paying the rates for the last 36 years, or back 

home, not 80 years, but almost that. I am still 20 years younger 

than Strom. 

[Laughter.] 

The CHAIRMAN. But that was Bell South, but what we had was 

not a subsidy. We set up the monopoly and said, you do not have 

any competition, and you have got the right of way and everything 

else of that kind and no competition, and the guaranteed return, 

and it worked, and so here we were sitting around, everybody 

agreed, wait a minute, when we deregulate, deregulate, deregulate—particularly me, it did not work with the airlines, and it did 

not work with natural gas, and it did not work with trucking. It 

did not work with the Securities and Exchange Commission, all of 

this deregulate, deregulate, deregulate. 

I said, wait a minute, I am a born again regulator now. Before 

I go along with this deregulation, I want to make sure we do not 

mess up the RBOCs, the Bell Companies. You used the word dependable seven times, I counted them, Mr. Mundie, and they are 

dependable. I can pick up my telephone and I can get Verizon right 

now, and so the system is working. 

One of the biggest reasons they have all gone broke is, my early 

morning TV, the district attorney in New York is carrying five of 

those super duper, wonderful executives to the hoosegow. I can tell 

you that right now. I mean, they were swapping each other and evVerDate 0ct 09 2002 12:10 Feb 27, 2006 Jkt 094288 PO 00000 Frm 00067 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\94288.TXT JACK PsN: JACKF
64

erything else. That is why they lost all the money, and now they 

lost all the employees you know what I mean, so nobody says something is wrong with the law. If somebody had said it, we would 

have amended the law right away. You could get a majority vote 

around here. 

I am back to Mr. Price’s observation that the RBOCs’ monopoly 

is gone. What we had was the task of letting the RBOCs continue 

to perform and give that good universal service, common carrier responsibility and public interest. It was working fine. And yet—let 

the competition ensue. Let it be deregulated. How do you deregulate a monopoly? And I am hearing you, Mr. Price, saying the monopoly is gone in 3 or 4 years. How does that happen? Tell us about 

it. That is wonderful. 

If we can get that and get all of the competition going, that is 

what we all around here keep telling each other, is that what we 

are trying to get is the competition, so how do you get it? They 

have still got 91 percent, right this minute. That is why Senator 

Dorgan says, you pick up your line—I have got the same one that 

I have had for years, and still have the same one here. There have 

been some mergers, but how has the monopoly gone, as you see it? 

Mr. PRICE. We acknowledge that cable has two-thirds market 

share in broadband. 

The CHAIRMAN. You have got two-thirds market share in 

broadband in the business area? 

Mr. PRICE. No, in the residential. 

The CHAIRMAN. I mean in the residential area. 

Mr. PRICE. That is right, in the residential. We acknowledge that 

in wireless no one RBOC has more than a 25 percent market 

share, so now it is down to residential voice, is the market that we 

are talking about. Ninety-one percent is your figure. Let us take 

that as a good figure. 

We see increasing substitution today from wireless. We are going 

to see increasing substitution from cable. Now, is cable ever going 

to have power down the line? I do not think so, not near term, so 

we are talking about second lines. We are not necessarily talking 

about lifeline voice service, so there may be some period of time 

when it is still the primary line. Reed tells me that two-thirds of 

lines are lifeline lines, the first line. 

I would tell you that 20 percent of the people today have a proclivity to give up that lifeline service for mobile service, and have 

the freedom of flexibility, so in time the residential voice monopoly 

gets withered away. Does it go down to 40 percent, 50 percent, 60 

percent? Probably towards the higher end of that is what I would 

see in some period of time. 

Now, with respect to broadband, broadband is already a competitive market with respect to interconnecting a CLEC so that he can 

have access to that business customer. Somehow I think that needs 

to be preserved. I do not quite know how, but in that part I am 

in agreement that we should allow the competitor to get there, but 

there is a fundamental technology difference and a choice that this 

country is going to have to make, because if we want the RBOCs 

to upgrade to fiber, they cannot do that easily any more, so there 

is a policy decision that is going to have to be made here of, do you 

65

want pervasive broadband, or do you want to preserve those 

CLECs in providing that service to anybody. 

The CHAIRMAN. Well, I am back, then, to the universal service. 

I am thinking out loud, if I go all to wireless and there is no universal service, and the rural areas and the sparsely populated 

areas are underserved or unserved, they could come undone. I 

mean, if you have got my monopoly gone there is no reason for me 

to continue the wireline. Yes, the RBOCs have taken on now the 

wireless, too. They will take on that wireless, but why should they 

carry it into North Dakota? That is a big problem. 

Mr. PRICE. The whole telecommunications system is fraught with 

subsidies. 

The CHAIRMAN. All the time we get these smart witnesses. Is 

there any comment, something you all want to correct, or elaborate 

on? Chairman Hundt. 

Mr. HUNDT. Senator, I just would say that the whole economy is 

looking in particular at the information sector for leadership in the 

right direction, not in the wrong direction, and this is a time when 

the government could play a crucial role. The kind of bill Senator 

Allen was talking about would be a big contribution, expanding 

universal service and having the plan over the next 5 or 10 years 

to really have a truly high speed network everywhere in this country, would be a tremendous contribution. 

We are right at that brink where we could—we all hope it is not 

so. We could slip into our second recession in 2 years. We should 

go the other way. We could have another resurgence of growth in 

our economy. The congressional leadership is absolutely critical. 

The CHAIRMAN. Very good. Mr. Price, have you got any elaboration? 

Mr. PRICE. I think we need to do two things. One is the new 

technologies. I am a big fan of Wi-Fi. I have it on my PC. I love 

it. It is great service, but recognize the technology issues that Craig 

points out. At 21⁄2 or 5 gigahertz it goes 2 miles. 

Mr. MUNDIE. 300 yards. 

Mr. PRICE. So if you want to get a 50-mile radius in rural areas 

you are down at 300 megahertz, or some pretty low——

Mr. MUNDIE. Well, it is different power, different antenna. There 

are many ways to solve the problem without necessarily changing 

the frequency, but the way that the band is regulated today makes 

it very hard for people to do that. 

Mr. PRICE. So it is not a little leap. It is not a little snap to get 

there. 

The second thing I would say is, I am very pessimistic about this 

economy. When I look at the auto companies today financing the 

customer purchases, it just brings to mind Lucent and Nortel stuffing their equipment down the throats of all their CLEC customers 

and financing consumer purchases that would become 

unsustainable next year. So I worry about this economy, and I am 

more free market than you would ever think, but I am so scared 

for this economy that I say, let us do something—let us do something that stimulates demand, because if we do not, I feel bad 

about this sector in particular. 

The CHAIRMAN. Very good. Mr. Mundie. 

66

Mr. MUNDIE. First of all, I thought I would share with you at the 

end that this really is an issue for ultimately the country’s national 

security. We learned on 9/11 among the NSTAG, the National Security Telephone Advisory at the White House, when the buildings 

fell down in New York and took out the wireline network, we had 

congestion in the cell phone network, and it turned out the only 

thing that people could work with was their Blackberries, and they 

worked because they were wireless, and they were not one of the 

centralized environments as much, and the economic security today 

is critical to national security, and the IT sector is, in fact, one of 

the biggest contributors to overall productivity. 

The reason other countries are so focused on this is, they understand that, and we have kind of taken it for granted because it was 

all invented in America, but I think for both economic well-being, 

and then ultimately to have flexibility in our critical communications infrastructure, finding a balance between these wire line and 

wireless technologies and getting them deployed I do not think can 

be emphasized enough these days. 

The CHAIRMAN. Technically you said, with the wireless and everything else, but a lot of the firemen and policemen did not get 

the wireless message in the building, that it was about to come 

down. Technically, have you corrected that? Can we correct that? 

Mr. MUNDIE. Yes, I believe that can be corrected. And to some 

extent those firemen are using radios that were designed conceptually about in the 1940s and 1950s. 

The CHAIRMAN. So the new designed radios is the logic that——

Mr. MUNDIE. It is my opinion some of these novel radio techniques could, in fact, be made to work in that environment. I mean, 

for example, just having—Larry mentioned the idea of having these 

mesh radios, where every radio guy gets to talk to the next radio, 

and they become a lifeline, if you will, so if you had that as the 

architecture that was on the belt of every fireman in the World 

Trade Center, it might have been a different result, because you 

did not have to worry about propagating from a central tower, or 

down all the way to the truck, and these are the kind of innovations that I think we need to enable, and that is not happening 

now with the way we manage spectrum in these highly regulated 

bands. 

The CHAIRMAN. Mr. Lessig. 

Mr. LESSIG. First of all I want to go to something Senator Allen 

said about finding a third way. I think it is important to note what 

has been said on this panel about the different ways to deal with 

this regulatory problem. 

We had in the broadband wire context with the telcos a requirement of open access, and Mr. Huber is describing moving all of the 

broadband into a place where there would not be that requirement 

anymore for open access at the physical layer of the network—no 

common carrier requirements at all. 

But I think what I have described, and in a minimal way I think 

what Mr. Mundie has described is, even if you do that, and you 

eliminate open access requirements at the physical layer, it is critically important that you have a different kind of regulation to assure that at least neutrality on the network is sustained. So it 

might be that you give up a failed method of regulating—(I am still 

67

a believer in many contexts in open access, but let us just assume 

it fails.) But that does not mean you go to no regulation. That 

means you change the kind of regulation that you embrace. 

The second important point, is that these new wireless technologies, as Senator Allen and Mr. Mundie were suggesting, are 

fundamentally different from the wireless technologies that existed 

for the last 70 years. We do not understand them yet, and they 

need lots of encouragement and space to grow, and the FCC so far 

has been pretty good about protecting the unlicensed band from 

lots of regulation. But it has got to be encouraged by this Congress 

to open up a much wider range of spectrum for this type of unpredictable innovation, not controlled by the traditional carriers, because it is not the traditional carriers that produce the great innovation that produced the Internet. 

It is shifting the ability to innovate and build outside of those 

carriers to the millions of innovators at the edge of the network 

that will be the key to turning this wireless opportunity into something special. 

My parents live in South Carolina, Senator, and I promised them 

broadband as a Christmas present 5 years ago. But today, I still 

cannot deliver on that promise, because there still is not broadband 

in their community, even though they come from the Hilton Head 

area. This is a failure of national policy. 

Right now, I am living in Japan for this semester. In Japan, they are offering 12 megabits per second DSL service for $20 a month. 

That is 12 times what you can get in the United States for 1⁄2 the 

price that you pay for DSL service in the United States right now. 

For $50 a month you can get 100 megabits per second. Now, that 

is a fundamentally different opportunity for growth in Japan and 

many other countries that we are missing because we failed to find 

a way to push this innovation into the broadband space. 

The CHAIRMAN. You see what Senator Allen and I have. We have 

to contend with the Department of Defense. We have got to contend 

with the FBI, Mr. Huber, because if we transfer it over from Title 

II to Title I, then the FBI says, wait a minute, we cannot wiretap 

and enforce the law. 

But excuse me, Mr. Huber, your comments. 

Mr. HUBER. If the FBI has, in fact, told you they cannot wiretap 

Title I services, I can give them some help, believe me, Senator. It 

can be done. 

The CHAIRMAN. We will have to work it out. We are working it 

out. 

Mr. HUBER. Mr. Chairman, however much we may disagree 

about what the law ought to be, we should be able to agree about 

what the law is, and the law today is that the dominant provider 

of broadband service to residents is—the provider that actually 

serves two out of three residential customers that subscribe to 

broadband today is deregulated, not ‘‘should be,’’ not ‘‘might be 

some day’’: it is deregulated today, has been deregulated since well 

before 1996. So all we are debating is, ought we deregulate or regulate the nondominant providers, and that makes no sense. 

There is no serious disagreement among anybody, including the 

Bell Companies, about the legacy copper network and legacy voice 

services. That sharing decision has been made, and it is going to 

68

stick. There is a lot of debate about pricing, but there is no debate 

about the principle. The debate is about the glass network that 

ought to be built by phone companies that has not been built yet. 

The CHAIRMAN. Well, one last question, George, unless you have 

got any. 

Senator ALLEN. No, I do not. 

The CHAIRMAN. I am, Mr. Price, concerned not just about communications, but the economy. I agree with you. I know yesterday 

was a $386 billion deficit for fiscal 2002. Now, it got up, in the 

early part of September. Last month, it got up to 412, something 

like that, but they have been moving things over into October to 

try to get it down below the 400 mark, but you watch it, in the 

next 2 weeks it will zoom right over the 400 mark. So we ended 

up, instead of a $5.6 trillion surplus this time last year, now we 

ended up this one fiscal year $400 billion, and the deficit and the 

balance of trade $400 billion, and the manufacturing sector is just 

about gone. 

Jack Welch led the way several years ago. He said I am not contracting with any subcontractor for General Electric unless you 

move to Mexico. People just do not factor that in. They are talking 

about jobs, jobs, jobs, and fast track. Free trade, I believe in free 

trade and everything else, so the economy is on its heels, and we 

have got to do something, but—and I am intrigued by the point, 

and I do not want to be quoted as having asked a question, would 

you deregulate the RBOCs? 

Mr. PRICE. Not yet. 

The CHAIRMAN. When, at what stage? 

Mr. PRICE. I would have a market share test. When market 

share gets below X, then they are deregulated, and then you would 

have to put some subsidy back in for rural. You would have to do 

that. 

The CHAIRMAN. Well, this has been outstanding. The Committee 

is indebted to each of you. The Committee record will stay open for 

further questions. Thank you very much. The Committee will be in 

recess. 

[Whereupon, at 11:45 a.m., the hearing was adjourned.]

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