```

[Senate Hearing 107-1148]
[From the U.S. Government Publishing Office]

                                                       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

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
BILL NELSON, Florida
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
      Jeanne Bumpus, Republican Staff Director and General Counsel

                            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

                   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. 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 century, 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 full-blown 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, slow-
growing 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.
    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 value-added 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 capacity 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.
    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 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 bankruptcies 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 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 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 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.

               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 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 
consumer-led 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 2\1/2\ 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 successfully, 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 because 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 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 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 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 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.
    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 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.

------------------------------------------------------------------------
                                    Local
                    Wireless      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   Low           Medium/High   Medium        Low
 for consumers
Number of         6-8           Residential:  1-3           1-4 (per
 competitors per                 1-4 (UNE-P,   (satellite)   route)
 market                          cable and
                                 RBOC,
                                 wireless)
                                Business:
                                 many
                                 (Multiple
                                 CLEC's,
                                 IXC's,
                                 RBOC)
Key Industry      Excess        Competition   Competition   Labor
 Issues            competition   from          from          unions, low
                   , low         wireless      satellite     product
                   switching     and cable,    providers,    differentia
                   costs, lack   regulation    leverage      tion,
                   of product    (what is      with media    supplier
                   differentia   the true      companies,    concentrati
                   tion          cost of UNE-  balance       on
                                 P?)           sheet
                                               leverage
------------------------------------------------------------------------

    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) 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, tele-commuting, 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 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 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 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 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.
---------------------------------------------------------------------------
    \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, para. 3 (2002).
---------------------------------------------------------------------------
    The issue before this Committee, however, is more challenging: How 
do we get there? Of course, this is not a new question for this 
Committee or our country, but we must approach this question with 
renewed urgency, because the United States is losing the footrace for 
broadband penetration to other countries. To address the current 
inadequacies in U.S. broadband deployment, Microsoft believes this 
Committee and other policymakers can take two straightforward steps:

    Foster a third mode of broadband communications into the 
        home by making more spectrum available for exciting, new 
        unlicensed technologies and subject that spectrum to 
        minimalist, efficiency-enhancing rules of the road.

    Preserve consumers' ability to communicate and interact via 
        the Internet with each other, and with new services and 
        applications, without the threat that the underlying network 
        provider will interfere with those relationships.

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

There is Urgency to Act on These Two Fronts
    Our industry generally has not engaged in the telecom battles of 
the past because we develop software and applications that ride on the 
pipes that other industries supply. But we are watching with great 
concern because the current course is not aimed at achieving the 
broadband future we want as rapidly as possible, and we commend 
Chairman Hollings and other Members of this Committee for exploring new 
paths to a broadband future. The need for action is great because not 
only are we losing ground in the worldwide race to become leaders in 
deployment of broadband, the consequences also are being felt from our 
perspective in the invention of new broadband applications and 
services. If analyzed closely, current statistics are not encouraging. 
According to a recent Commerce Department study, our country has the 
most households of any nation connected to a broadband service (over 11 
million). However, as a percentage, our penetration rate is sixth in 
the world, behind the likes of Sweden, South Korea and Taiwan among 
others. And recent trends lines indicate that we are falling further 
behind, not catching up.
    The gravity of the situation is even starker when one realizes that 
the rules or laws being contemplated today will shape a future version 
of the Internet--a future which is much closer than many of us realize. 
A debate that simply focuses on how to download information faster from 
a Web site is somewhat akin to a debate at Western Union in 1902 as to 
how to move Morse Code faster across the country. We are rapidly moving 
from today's world in which the vast majority of activities focus on 
publishing of content (be it Web pages or entertainment) and person to 
person communications (such as e-mail and instant messaging), to a 
different world, one which preoccupies the tech community and motivates 
all of us to innovate: a world in which literally millions upon 
millions of computing devices will be simultaneously and constantly 
connected to the Internet, and on consumers' behalf, will communicate 
with each other.
    This is not futuristic in the least. Personal digital assistants, 
smart appliances and computer-drive set-top boxes are just a few 
examples of the types of devices that will need affordable access to 
``always on'' high speed connections in order to automatically bring 
new services and capabilities into the home. Wouldn't it be convenient 
to monitor who is knocking at the front door of your home from the 
computer at your office? Or while away for the weekend, license via 
your PDA the right to view the latest episode of ``The Sopranos,'' then 
have it delivered to your home entertainment system to be viewed when 
you get home from your trip? The Internet is in transition. It is 
becoming much more than publishing. It is becoming a programmable 
environment in which computers, devices and services will need the 
ability to constantly stay in touch, and the ability to do so in a 
seamless, unfettered way.
    To take full advantage of the programmable nature of the Internet, 
consumers will need affordable, reliable and fast connections. Some 
advocate that, with some rule changes, telephone companies will have 
greater incentives to deploy advanced services over their copper and 
fiber facilities. The argument is that without greater regulatory 
parity between telephone companies and cable operators the former 
cannot compete as effectively with the latter. We have a good degree of 
sympathy with these arguments and have been working with others in the 
tech community to promote greater parity here on the Hill and at the 
FCC.
    Others have argued that the key to stimulating broadband deployment 
is to ensure that high-value content is available online. I know this 
Committee has addressed that question in other hearings, and that it is 
not the topic of this hearing. I want to assure the Committee that 
Microsoft is doing all it can to develop its own compelling content, 
services and applications for the broadband era, and we continue to 
work with other content producers to give them the tools they need to 
develop their own broadband offerings.
    At the end, however, we submit that these ongoing efforts are not 
enough. Policymakers can and should do more. They should more 
aggressively manage the nation's radio spectrum--and in particular, 
unlicensed spectrum--in order to give unlicensed wireless broadband 
services an opportunity to meet the demand that is simmering for these 
new technologies. And equally important, to assure the programmable 
Internet that is rapidly approaching is not derailed, policymakers 
should reaffirm that network providers should abide by certain, basic 
``connectivity principles.''

Wireless Broadband Connections Provide a Third Way for Consumers
    Although much of the current debate over broadband services has 
focused on two platforms, cable and DSL, that perspective fails to 
consider that other technologies are available--other technologies that 
can jump-start consumer-driven investment in broadband services, 
provided policymakers aggressively manage the regulatory environment to 
foster that outcome. Specifically, I am referring to potential advances 
in the wireless sector, and even more specifically, advances in the 
development of unlicensed radio-based networks. These systems are 
currently referred to as 802.11b, radio LANs, or Wi-Fi. More 
generically, they might be referred to as ``emerging radio 
technologies.'' These technologies--and even more futuristic ones such 
as Ultra Wide Band and Software Defined Radios--not only offer an 
additional means of delivering packets at high speed, they also allow 
new business models for delivering broadband connectivity to emerge. 
These are not your ``same old'' radio services. Because they can be 
deployed in an unlicensed manner, the broadband connections can be 
deployed by the 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 and office, such as 
coffee shops, airports, and hotels. These ``hot spots'' can provide 
speeds of 11 mbps, which is more than 10 times what 3G providers have 
promised, and 150 to 200 times faster than dial-up service. For those 
who have even greater bandwidth needs, a second generation of Wi-Fi has 
the capability to reach speeds of up to 54 mbps. Notably, these 
connections can be ``always on,'' assuring a pathway for the type of 
programmable services I described above.
    What is even more compelling is that consumers who want this degree 
of connectivity can buy unlicensed equipment at a consumer electronics 
store, just as they buy a cordless telephone today, and then take it 
home to install it. An astonishing array of advanced communications 
equipment is now being developed, sold, and used to provide wireless 
broadband access in the unlicensed bands. These bands provide 
tremendous flexibility and are the opposite of the FCC's traditional 
approach to spectrum regulation, which reflects centralization of 
control and specification of use. The current challenge is to provide 
adequate spectrum and the minimalist rules to allow this spectrum to be 
used for truly dependable communications by consumers. Current 
unlicensed approaches fail in both dimensions, creating a situation 
where the more successful the development and deployment of systems the 
more congested the environment becomes, frustrating attempts to make 
this a sustainable alternative to traditional broadband services.
    Congress and the FCC can do more to encourage alternative wireless 
broadband connections using unlicensed spectrum. Today, there is 
insufficient unlicensed spectrum and, where it is being used for 
unlicensed networks, the nation's regulations foster a tragedy of the 
commons. Use of the spectrum is so lightly regulated that, to assure 
their own success, radio manufacturers may have an incentive to 
maximize their use of spectrum to others' detriment and, over the long 
haul, likely to their own. Within some groups of manufacturers, there 
are incentives to cooperate (such is the case with manufacturers of 
today's Wi-Fi systems). However, without a modest degree of greater 
regulation, it is difficult to assure cooperation across different 
manufacturing interests.
    Unlicensed spectrum bands, if upgraded modestly and in a targeted 
way, are uniquely well suited for the creation of broadband 
infrastructure for a variety of reasons. They are easily accessed by 
everyone, from the largest corporations to the smallest entrepreneurs 
to individual consumers. Indeed, the 2.4 GHz band, which supports 
everything from cordless telephones to radio-based LANs, reflects a 
significant level of innovation from entrepreneurs attracted by the 
band's easy availability and lack of individual licensing requirements. 
It will not surprise the Committee when I say that the market moves a 
bit faster than the FCC's licensing bureaus, however well-run.
    Moreover, because unlicensed bands are open to anyone who buys a 
compliant device at a retail store and attaches it to the network, a 
significant proportion of the capital invested in the creation of 
networks comes from individuals and businesses, not from network 
operators. Wireless networks are truly built from the ground up, 
tapping an entirely new source of capital to build networks--the 
financial resources of the users themselves. This is remarkable for two 
reasons. One, there is no ``build it and they will come'' mentality, 
with its legacy of overinvestment and stranded capital. Instead, the 
wireless networks will grow organically, fed by new demand and marginal 
supply. Two, while this alternative source of capital would be 
important at any time, it is critical now, when even the most 
successful carriers have difficulty navigating capital markets.
    Finally, unlicensed spectrum is open to and can support a 
multiplicity of technical solutions and contributes to redundancy, 
since future unlicensed wireless networks may be dramatically different 
from existing networks.
    Over the last few years, the FCC, recognizing the potential 
benefits of new technologies and creative uses of spectrum, has been 
increasingly willing (with some helpful prodding by this Committee) to 
grant individual licensees greater flexibility in how they use their 
spectrum. This trend toward relaxing use specifications on individually 
licensed bands is an important and worthwhile innovation in spectrum 
management. It is in the same spirit of innovation that Congress should 
encourage the Commission to adopt more deliberate regulation of some 
unlicensed bands. No single approach to spectrum regulation is perfect, 
and unlicensed bands are no exception. While current rules for 
unlicensed blocks of spectrum have been enormously successful and have 
brought numerous benefits to the public, they have also permitted less 
than optimal use of available frequencies. Inevitably, where there are 
virtually no rules of the road and almost anything is possible, someone 
will design a technology that causes harmful interference to other 
technologies. Sometimes this is because there is no technologically 
feasible alternative. And sometimes it is simply cheaper to shout 
noisily than to speak in measured tones. Unfortunately, a spectrum 
free-for-all is not only messy, it carries a cost: innovative companies 
will steer away from developing competitive unlicensed broadband 
networks unless rules of ``spectrum etiquette'' have been developed and 
implemented.
    For this reason, it would be helpful for Congress to prompt the 
FCC, as we have, to foster the creation of more ``unlicensed broadband 
spectrum'' specifically for use by emerging technologies, such as Wi-
Fi, UltraWide Band and Software Defined Radios, and new business 
models, such as community wireless data networks, that could supplement 
cable modem and DSL services. This is not a request for more spectrum 
for cellular or PCS or some generation of 3G. Instead, it embraces a 
flexible model that is driven by consumer demand and innovation and not 
the deployment schedules of cash-strapped carriers. Immediate steps by 
the FCC to allocate unlicensed broadband spectrum and adopt minimum 
regulations could accelerate the creation of wireless broadband 
services across the United States, making service available more 
quickly in unserved and underserved areas and stimulating rivalry with 
cable modem and DSL services. We strongly support proposals to address 
this important spectrum policy.

Consumer Freedom From Network Operator Interference Is Equally 
        Important
    Broadband connections accomplish little, however, if consumers are 
deprived of the ability they enjoy now in the dial-up and corporate 
network environments to roam freely over the Internet; to run the 
applications they want using the equipment they choose; to gather, 
create, and share information; and to connect to Web sites with no 
interference. Long before the creation of the Internet, policymakers 
around the globe recognized that freedom from interference by network 
operators was critical to consumer trust, as well as fostering gains in 
productivity and economic activity. The history of the Internet itself 
has been fundamentally characterized by unfettered consumer ability to 
use an unprecedented array of content, services, and applications via 
an ever-increasing array of products.
    We are troubled, however, that in the ongoing debate on what our 
nation's broadband policy should be, this fundamental lesson may have 
been lost. Proposals pending before the FCC would remove long-standing 
obligations of network operators not to interfere and not to 
discriminate, obligations which go back at least to the famous 
Carterfone decision and some of which go back to 1934. Watching the 
debate from afar, it appears that the freedom to connect to where one 
wants--the ultimate hallmark of the Internet--may be left behind. That 
would be a mistake, because the Internet and the economy have been well 
served by the unfettered ability of consumers to communicate and 
interact with each other.
    This concept of promoting free interaction among people is embodied 
in our policy of universal telephone service--one of the singular 
successes of American communications policy. Universal telephone 
service is good social policy and good economic policy. Economists 
refer to the benefits of adding more people to a network as Metcalf's 
Law. The principle is that by adding more users to the communications 
network, the economic value of the network increases for every user 
exponentially. But if network operators interfere with this 
interaction, or erect tolls on broadband highways that drive consumers 
in one direction or another, then they will be affirmatively 
undermining Metcalf's Law. Those actions, if tolerated by policymakers, 
will frustrate our collective goal of adding more users, device types, 
and services to the network, benefiting not only new users, but the 
users who are already there.
    One cannot ignore the ominous signs that network operators will 
frustrate consumers' ability to go anywhere on the Internet. As a major 
user of broadband services, we think it would be a mistake for 
policymakers not to address these concerns.
    Already, cable operators have adopted provisions that impair the 
ability of consumers to use their broadband connections. These issues 
have been documented to the FCC by a coalition of trade associations, 
the so-called High Tech Broadband Coalition. In one instance, a 
subscriber agreement says:
    ``You agree to only connect [company] approved equipment to the 
[company's] network. . . . You will not connect the [company's 
equipment] to any outlet other than the outlet to which the equipment 
was initially connected by the [company] installer. [Company] may 
relocate the equipment for you within the premises at the your [sic] 
request for an additional charge. . . . You understand that failure to 
comply with this restriction may cause damage to the [company] network 
and subject you to liability for damages and/or criminal prosecution.'' 
\2\
---------------------------------------------------------------------------
    \2\ Full 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.
---------------------------------------------------------------------------
    In response to these kinds of restrictions, the HTBC has developed 
four connectivity principles that should be respected in the broadband 
era. And as a company, we have urged the FCC to apply them to both DSL 
and cable modem providers. Specifically:

    Consumers should have unrestricted access to their choice 
        of lawful Internet content using the bandwidth capacity of 
        their service plan.

    Consumers should be allowed to run applications of their 
        choice and to attach any device they choose, as long as they do 
        not harm the provider's network, enable theft of service or 
        exceed bandwidth limitations of their service plan.

    Consumers should be given meaningful information regarding 
        the technical limitations of their service.

    Let me be clear that we are not advocating ``forced'' or ``open'' 
access. In our view, network operators need not be compelled to create 
a wholesale offering of a ``bit transport service'' so that third-party 
Internet service providers can compete with the facility owner on the 
same wire. Nor do we suggest that DSL and cable modem providers should 
be limited in how they offer their own service and bundle it with other 
services. At their core, the connectivity principles articulate nothing 
more than a noninterference rule.
    These restrictions in existing contracts that interfere with 
consumer interests are troubling, and the Committee should review the 
complete record on these provisions that the high-tech industry 
submitted to the FCC. Unfortunately, the response by some at the 
Commission so far has been more of a yawn than of concern, as if those 
issues are out of fashion. Speaking on behalf of one company which 
thinks every day about how to use broadband capability to deliver 
better software and services to consumers, we disagree. As users of the 
Internet and builders of the Internet age, we believe that our success 
and consumers' enjoyment of the Internet has grown out of one 
fundamental feature--the ability of consumers to use their Internet 
connections without interference from network providers. This freedom 
has made the Internet the powerful communications and technology tool 
that it is today, stimulating small business development and benefiting 
the entire economy.
    Freedom from interference from network operators has fostered 
tremendous gains in productivity and economic activity over the past 
decade. As this Committee and the FCC develop policies for next 
generation networks, now is not the time to abandon this fundamental 
feature. The lessons from the 20th century with respect to promoting 
consumer access to networks are as valid as ever. They will become all 
the more important as the Internet and the growth of Internet-based 
data services continue to blur the distinction among facilities-based 
broadband services, and as the high-tech community continues to develop 
smart devices and smart applications that can be attached to and run 
over those facilities. It is time to reaffirm that a basic 
noninterference rule--an essential element of today's dial-up Internet 
world--must be carried forward into the 21st century.
    We commend Chairman Hollings and this Committee for focusing 
attention on these issues. Clearly, as our nation develops a broadband 
policy, we urge aggressive congressional attention on how to promote 
rapid, efficient, Nation-wide, and consumer-friendly broadband 
deployment.

    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 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.
    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 end-to-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 access) 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 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 ``end-to-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 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 
discriminate 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, e-mail, 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 community-based 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 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 pre-Internet 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.
    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 
replace 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).
    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. 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.
    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.
    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 high-tech industry. No one network provider should 
be securing an overwhelming market share; the fastest and most 
affordable option today should always face the risk being overtaken by 
a faster, cheaper, or better alternative. Wireline networks should 
compete on both raw speed and quality of service; wireless networks 
will offer mobility as well. Broadband content should be adding yet 
another important dimension to competition: the demand for the digital 
bandwidth depends on the supply of digital content, which should 
depend, in turn, on how successfully broadband suppliers package, 
promote, and protect the content that their networks distribute.
    All of this should be happening, but much of it isn't. A legacy of 
botched regulation is largely to blame.

Regulation
    The regulation of broadband has been split into two separate and 
unequal parts. One regime promotes a get-it-built objective: it is 
deregulatory, it leaves planning, investment, price, and profit with 
the cable and wireless companies that deploy real facilities, and it is 
working--the facilities are indeed getting built. The other regime 
requires phone company competitors who do build networks to unbundle 
and interconnect, at cut-rate prices prescribed by regulators, with 
free-riders who don't. This share-it-cheap regulation is intensely 
intrusive, it empowers the FCC and state commissions to control 
planning, investment, price, and profit, and if it has forced sharing, 
it has done so at the expense of investment and innovation.
    To its credit, the FCC has recently begun to take the steps 
necessary to classify both cable modem and DSL as ``information 
services'' under Title I of the Communications Act. The logical 
culmination of that process, if the Commission sees it through, will be 
complete deregulation of both services, with no further unbundling, 
interconnection, or wholesale price regulation imposed on either 
service, by either federal or state regulators. To get to that point, 
however, the Commission must completely eliminate all sharing 
obligations in new, mixed-use facilities, that are deployed to provide 
broadband service but that can be used, as well, to provide traditional 
voice service. The continued regulation of legacy voice services cannot 
be permitted to continue depressing investment in the new facilities 
required for high-speed data.
    Until the Commission finishes its job--if it finishes it--phone 
companies must continue to ``unbundle'' the wireline spectrum they use 
to provide broadband; cable companies don't. Phone companies must 
permit their broadband competitors to ``collocate'' equipment in 
telephone company premises to make it easier to use that ``unbundled'' 
broadband capacity; cable companies don't. Phone companies still remain 
largely locked-out of the multi-billion dollar market for Internet 
backbone service; cable companies aren't. Phone companies must offer 
their retail broadband transmission services to competitors at a 
federally mandated discount; cable companies have no such obligation. 
Phone companies have to pay into Universal Service Funds when they 
provide broadband access; cable companies don't.
    The unbundling mandates of the 1996 Telecom Act should never have 
been extended to broadband services at all; Congress created those 
mandates to open up competition in the legacy voice markets, which 
incumbent phone companies had long dominated, not in broadband markets, 
which were traditionally dominated by analog cable. Almost four years 
ago, the Supreme Court made clear that--as Congress itself specified in 
the 1996 Act--unbundling is to be extended only to network elements 
that can't be provided competitively. It is, of course, preposterous to 
maintain--as the FCC has in fact maintained for almost 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 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-for-all, each major 
advance in one network will spur a comparable advance, and then some, 
in a rival's. The one sure way to kill innovation and new investment is 
to regulate in ways that allow a single provider to become so dominant 
that it no longer has to worry seriously about being overtaken by 
anyone else.
    The delays in the synergistic development of broadband content are 
especially worrisome. As content providers have correctly recognized, 
broadband networks represent a huge new opportunity for distributing 
their products--and an equally huge threat if networks evolve in ways 
that facilitate theft. The potential downside has spawned many 
different proposals for mandatory new technology standards or legal 
liabilities for network providers. Standards and copyright laws do have 
important roles to play, but experience teaches that the best defense 
of intellectual property will be found in collaborative agreements 
hammered out privately between providers of content and conduit. The 
best way to protect the economic interests of content providers is to 
have different broadband service providers vie for the right to 
distribute the content. Cable already distributes significant amounts 
of digital content in ways that provide acceptable assurances against 
theft. Providers of broadband service know that content is what 
ultimately sells the broadband connection to the consumer. Robust 
competition among broadband providers is what will deliver the 
innovative technologies to protect--and thus attract--the valuable 
content.

Policies
    Congress should urge--or direct--the FCC to complete the 
deregulation of broadband immediately. This means placing broadband 
service--in its entirety, including all underlying broadband transport 
components--under Title I of the Communications Act. Broadband Internet 
access service is an ``information service,'' not a 
``telecommunications service.''
    Wireline broadband service should not be regulated at all; wireless 
broadband service should be regulated only as needed for the normal 
allocation and assignment of underlying spectrum. Sharing obligations 
must be confined to legacy voice service, provided on legacy networks, 
and even then, must extend only to network elements that are 
competitively essential to new entrants.
    State and local authorities cannot be permitted to regulate 
broadband services in ways that undermine implementation of a uniform 
national broadband policy; patchwork regulation creates a serious 
impediment to the development of broadband services.
    Effective protection of content is essential to the long-term 
development of digital broadband networks, but it won't come through 
technology prescriptions issued from Washington. The best long-term 
protection for providers of content lies in robust competition among 
providers of broadband connectivity.

    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 program 
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, 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.
    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 
kick-start 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 head-to-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.
    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 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.
    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. Are they going to get it on 
a lottery, or is it just going to be a free-for-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 band-oriented 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 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.
    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.
    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 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 one-third market share, and in wireless 
the strongest person nation-wide, 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 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 spectrum-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 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 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?
    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 everything 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 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 2\1/2\ 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.
    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 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 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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