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TELECOMMUNICATIONS POLICY: A LOOK AHEAD 

HEARING 

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED EIGHTH CONGRESS 

SECOND SESSION 

APRIL 28, 2004 

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

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED EIGHTH CONGRESS 

SECOND SESSION 

JOHN MCCAIN, Arizona, Chairman 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON H. SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

ERNEST F. HOLLINGS, South Carolina, 

Ranking 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

JEANNE BUMPUS, Republican Staff Director and General Counsel 

ROBERT W. CHAMBERLIN, Republican Chief Counsel 

KEVIN D. KAYES, Democratic Staff Director and Chief Counsel 

GREGG ELIAS, Democratic General Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on April 28, 2004 .............................................................................. 1 

Statement of Senator Burns ................................................................................... 2 

Statement of Senator Dorgan ................................................................................. 40 

Statement of Senator Lautenberg .......................................................................... 1 

Statement of Senator McCain ................................................................................. 1 

WITNESSES

Ferguson, Dr. Charles H., Senior Fellow, Economic Studies, The Brookings 

Institute ................................................................................................................ 7 

Prepared statement .......................................................................................... 10 

Gifford, Raymond L., President, The Progress & Freedom Foundation ............. 31 

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

Gilder, George, Senior Fellow, Technology and Democracy Project, Discovery 

Institute ................................................................................................................ 13 

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

Hundt, Reed E., Former Chairman, Federal Communications Commission ...... 18 

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

Thierer, Adam D., Director of Telecommunications Studies, Cato Institute ...... 2 

Prepared statement .......................................................................................... 4 

(1) 

TELECOMMUNICATIONS POLICY: 

A LOOK AHEAD 

WEDNESDAY, APRIL 28, 2004 

U.S. SENATE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:35 a.m. in room 

SR–253, Russell Senate Office Building, Hon. John McCain, Chairman of the Committee, presiding. 

OPENING STATEMENT OF HON. JOHN MCCAIN, 

U.S. SENATOR FROM ARIZONA 

The CHAIRMAN. Today we will continue to look at the Telecommunications Act of 1996 to identify the successes and failures 

of that law. Today we look ahead to consider potential reforms to 

our telecommunications policy given advances in technology. This 

examination is important because numerous members have discussed reforming the Act. It’s imperative that any new legislation 

will provide a more streamlined statutory framework for a telecommunications policy in the 21st century, one in which technological innovation could flourish, competition could thrive, and the 

need for regulation is either eliminated or greatly reduced. 

I thank the witnesses for being here today and I look forward to 

their testimony. 

Senator Lautenberg. 

STATEMENT OF HON. FRANK R. LAUTENBERG, 

U.S. SENATOR FROM NEW JERSEY 

Mr. LAUTENBERG. Thanks, Mr. Chairman. Today’s hearing, like 

the one yesterday, has a similar focus, and that is on the deployment availability and adoption of broadband technology, which fits 

into the whole examination picture that we have regarding telecommunications. We need to examine which would be a better use 

of scarce Federal resources, to subsidize more broadband deployment or encourage Americans to use the broadband technology that 

already exists. 

My view is that broadband technology is deployed pretty widely 

already. According to a report from CBO, the United States has the 

largest absolute number of subscribers to both high-speed and dialup services. That’s not as surprising as it would be if we looked at 

the relative use. I think the CBO report also found that by most 

measures United States businesses and consumers make more and 

better use of the Internet than do their counterparts in other nations. 

2 

But we do fall short in one important area, and that is 

broadband use. There are just 6.9 broadband subscribers for every 

100 people, a rate that places us only the sixth highest in the 

world. Now the question is, how do we entice consumers to switch 

to broadband, to switch to this much more efficient use of our telecommunications line? One application which will help is Internet 

telephony, which is often referred to as Voice over the Internet Protocol, or VoIP. 

Three Baby Bells: Verizon, SBC, and Qwest; three of the largest 

telephone companies: AT&T, Sprint, & MCI; and three cable companies: Comcast, Time Warner, and Cablevision have all recently 

announced their entry into the VoIP market. I find this development encouraging, because consumers will have their choices for 

their telephone service more available, and that should lead to 

competitive pricing and more features. 

Now, using the Internet protocol facilities, providers like Time 

Warner Cable and non-facilities-based providers like Vonage are 

capable of providing comparable phone service to consumers at reasonable rates. Consumers are responding. Earlier this month, Edison, New Jersey-based Vonage as a provider of phone service over 

high-speed Internet lines, signed up its 150,000th customer. 

They’re not in business very long and their pace of acquisition of 

subscribers is accelerating. It’s twice the number of subscribers 

they had less than 5 months ago. 

So it’s exciting to talk about new technologies like broadband and 

new applications like VoIP, and Mr. Chairman, I look forward to 

hearing from our experts today to hear more about broadband technology and how we can get more Americans to use it. I thank you. 

The CHAIRMAN. Thank you. Senator Burns. 

STATEMENT OF HON. CONRAD BURNS, 

U.S. SENATOR FROM MONTANA 

Senator BURNS. Thank you, Mr. Chairman, for having the hearing. I have no opening statement. I am interested in listening to 

the witnesses and asking them some questions. It is nice to see 

some familiar faces back. Thank you very much. 

The CHAIRMAN. Thank you. We have some very smart people 

here today and we thank you all for coming. We have Mr. Adam 

Thierer, who is the Director of Telecommunications Studies at the 

Cato Institute; Mr. Charles Ferguson, a Senior Fellow of Economic 

Studies at the Brookings Institute; Mr. George Gilder, the Senior 

Fellow Technology and Democracy Project at the Discovery Institute; Mr. Reed Hundt, well known to all of us here, Former Chairman of the Federal Communications Commission; and Mr. Raymond Gifford, the President of the Progress and Freedom Foundation. 

Mr. Thierer, we’ll begin with you. 

STATEMENT OF ADAM D. THIERER, DIRECTOR, 

TELECOMMUNICATIONS STUDIES, CATO INSTITUTE 

Mr. THIERER. Thank you, Mr. Senator. Good morning. My name 

is Adam Thierer and I serve as Director of Telecommunications 

Studies at the Cato Institute. Thank you for your invitation to tesVerDate Nov 24 2008 07:44 Jul 18, 2016 Jkt 075679 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\20707.TXT JACKIE
3 

tify here this morning as the Committee begins its important business of thinking about what the next Telecom Act should look like. 

As someone who worked closely with the Committee and Members of this Committee a decade ago when we started getting serious about telecom reform, I think it’s safe to say that we all share 

a sense of frustration and disappointment that we were not able to 

advance the ball a little further the last time around. Perhaps it 

was wishful thinking to believe we could have undone a century’s 

worth of regulation in just a few short years, but one would have 

at least hoped that we would not be stuck today still debating the 

same issues we were 10 years ago. 

Indeed, if Rip Van Winkle fell asleep in 1994 and woke up in 

2004, he wouldn’t think he’d missed a beat if telecom regulation 

was any guide. But despite the ongoing regulatory quagmire, the 

good news is that we’ve witnessed amazing strides in terms of technological progress and we can confidently say that this marketplace 

has never witnessed such competitive forces at work. 

Still, much remains to be done to clear out the regulatory deadwood that continues to hold back further innovation and competition. In my limited time here today, I’ll just outline what I think 

are the three most important overarching themes that should be 

addressed as part of any reopening or reassessment of the Telecom 

Act. It would include the rationalization of regulatory classifications, dealing with jurisdictional matters, and getting agency power 

and size under control. 

With respect to regulatory classifications, a general consensus exists today that Congress will need to formally close the book on the 

archaic regulatory classifications of the past, which pigeonhole 

technologies and providers into distinct vertical policy silos or titles. Although the communications and broadband marketplace is 

essentially becoming one giant fruit salad of services and providers, 

regulators are essentially still separating out apples and oranges 

and bananas and regulating them all differently. This must end. 

One way to do this is to replace vertical silos or titles in the Act 

with horizontal layers. But I would caution Congress against formally enshrining a network layers model as the new regulatory regime for telecommunications. While it provides a good analytical 

model to help us rethink and potentially eliminate the old vertical 

silos, we do not want the layers to become the equivalent of rigid 

regulatory quarantines or firewalls on industry innovation. 

A potentially better way to tear down the old paradigms and 

achieve regulatory parity is to borrow a page out of trade law and 

institute the equivalent of a most favored nation clause, or MFN 

principle, for communications. In a nutshell, the policy would state 

that any communications carrier seeking to offer a new service or 

entering a new line of business should be regulated no more stringently than its least regulated competition. This would allow us to 

achieve the simplicity and parity we’re looking for not by regulating up, but by deregulating down. 

Second, on jurisdictional matters, which could very well end up, 

I believe, being the most controversial issue this committee will 

face as it reopens the Act, I think we need to think seriously about 

reforming these policies. Specifically, we know that decentralization of political power almost always has a positive effect in terms 

4 

of expanding human liberty. But our founders also realized that 

there were times that there are some important exceptions to that 

rule. 

So let me be perfectly blunt on this point. Telecommunications 

regulation is one of those cases or areas where state and local experimentation just doesn’t work so well. After all, the very heart 

of the notion of telecommunications lies the idea of transcending 

boundaries and making geography and distance irrelevant. If ever 

there was a good case to be made for an activity being considered 

interstate commerce, this is it. And yet, America’s telecom market 

remains riddled with a patchwork of policies that actually thwart 

that goal and seek to divide the indivisible and place boundaries 

on the boundless. This too must end, and the only way it will is 

by Congress taking the same bold and difficult step it did when deregulating other issues and areas. We must get serious about a national policy framework mentioned in the Telecom Act and preempt 

state and local regulation of the sector. 

My third and final big picture reform involves what may be the 

biggest glaring omission from the Telecom Act in my opinion, the 

almost complete failure to contain or cut back the size and power 

of the FCC. Again, we would do well to remember the lessons of 

the past. When Congress deregulated other sectors, lawmakers 

wisely realized that comprehensive and lasting reform was only 

possible if the agencies that oversaw those sectors were also reformed or even eliminated. 

In the telecom world, by contrast, the FCC has grown larger and 

more powerful in the wake of reform with spending, staffing, and 

paperwork all up significantly. It’s safe to say that you cannot deregulate an industry by granting regulators more power over that 

industry. So this too must end. 

The next cut at the Telecom Act must do more than just hand 

the FCC vague forbearance language with the suggestion that the 

agency take steps to voluntarily regulate less. We can’t expect regulators to deregulate themselves. We need clear sunsets on existing 

FCC powers, especially the infrastructure-sharing provisions of the 

last Act, and then we need to impose sunsets on any new transitional powers we grant them in the next Telecom Act and we need 

funding cuts too. If we fail to do so, I fear we’ll be sitting here 

again in 10 years having the same conversation all over again. 

In conclusion, we have a chance to do more than just make a 

clean break with the past. We have a chance to now close the book 

on a regulatory past that has done little to truly benefit consumers. 

Regulators have been given over 100 years to conduct a grand experiment with telecommunications markets. Why not give markets 

a chance for once? Thank you, Mr. Chairman. I’m happy to take 

questions. 

[The prepared statement of Mr. Thierer follows:] 

PREPARED STATEMENT OF ADAM D. THIERER, DIRECTOR, TELECOMMUNICATIONS

STUDIES, CATO INSTITUTE

Good morning, my name is Adam Thierer and I serve as Director of Telecommunications Studies at the Cato Institute. Thank you Mr. Chairman for your invitation 

to testify here this morning as the Committee begins the important business of 

thinking about what the next Telecom Act should look like. 

5 

1 Adam Thierer, ‘‘Number Portability Decision Adds to Wireline Telecom Sector’s Perfect 

Storm,’’ Cato Institute TechKnowledge No. 66, November 20, 2003, http://www.cato.org/tech/ 

tk/031120-tk.html, 2 Adam Thierer, ‘‘A 10-Point Agenda for Comprehensive Telecom Reform,’’ Cato Institute 

Briefing Paper No. 63, May 8, 2001, http://www.cato.org/pubs/briefs/bp-063es.html. 3See generally: Richard S. Whitt, ‘‘A Horizontal Leap Forward: Formulating a New Public Policy Framework Based on the Network Layers Model,’’ MCI Public Policy Paper, Version 1.0, 

December 2003, http://global.mci.com/about/publicpolicy/presentations/horizontallayerswhite 

paper.pdf 

As someone who worked closely with members of this Committee a decade ago 

when we started getting serious about telecom reform, I think it’s safe to say that 

we all share a sense of frustration and disappointment that we were not able to advance the ball a little further last time around. 

If I had to summarize what went wrong with the Telecom Act of 1996, I would 

use the following paradox: Congress wanted market competition but did not trust 

the free market enough to tell regulators to step aside and allow markets to function on their own. 

Consequently, the FCC, the Department of Justice, state and local regulatory 

commissions, and the courts, have spent the last ten years treating this industry 

as a regulatory plaything to be endlessly toyed with. Today there is virtually no element of telecommunications that is not subject to some sort of meddling by some 

or all of these regulatory officials. 

While it’s fair to say that it was probably wishful thinking to believe we could 

have undone a century’s worth of command and control regulatory policies in a few 

short years, one would have at least hoped that we would not be stuck still debating 

the same issues today that dominated the agenda over a decade ago. Indeed, if Rip 

Van Winkle fell asleep in 1994 and woke up in 2004, he wouldn’t think he’d missed 

a beat if telecom regulation was any guide. 

But despite the ongoing regulatory quagmire, the good news is that we have witnessed amazing strides in terms of technological progress and we can confidently 

say that this marketplace has never witnessed such competitive forces at work. 

Whether it’s the wireless revolution that is allowing millions to cut the cord entirely, 

or the Internet and broadband revolution that is opening up a whole new world of 

opportunities that did not exist prior to 1996, by almost any measure, consumers 

are better off and have more choices now than ever before.1

Still, much remains to be done to clear out the regulatory deadwood that continues to hold back further innovation and competition. While there are dozens of 

important regulatory reform objectives I could outline,2 in my limited time here 

today it makes more sense to briefly discuss the three most important over-arching 

themes or priorities that should frame our current thinking about how to reform 

telecommunications policy. These priorities include: 

(1) Rationalizing Regulatory Classifications 

(2) Dealing with Jurisdictional Matters 

(3) Getting Agency Power and Size Under Control 

Regulatory Classifications 

With respect to regulatory classifications, a general consensus exists today that 

Congress will need to formally close the book on the archaic regulatory classifications of the past, which pigeonhole technologies and providers into distinct vertical 

policy ‘‘silos.’’ That is, we still have Title II for common carriers, Title III for wireless, Title IV for cable, and so on, even though rapid technological change and convergence have largely wiped out such distinctions and pitted these formerly distinct 

sectors against one another in heated competition for consumer allegiance. Thus, although the communications/broadband marketplace is becoming one giant fruit 

salad of services and providers, regulators are still separating out the apples, oranges, and bananas and regulating them differently. This must end. 

One way to do this is to replace the vertical silos model with a ‘‘horizontal layers’’ 

model that more closely resembles the way the new marketplace operates. We can 

divide the new industry into at least four distinct layers: (1) Content; (2) Applications; (3) Code; and, (4) Infrastructure, and regulate if we must, each accordingly.3

But I would caution Congress against formally enshrining a network layers model 

as a new regulatory regime. While this model provides a useful analytical tool to 

help us rethink and eliminate the outmoded policy paradigms of the past, we would 

6 

4See: Adam D. Thierer, ‘‘Are ‘Dumb Pipe’ Mandates Smart Public Policy?: Vertical Integration, ‘Net Neutrality,’ and the Network Layers Model,’’ Presentation at Columbia University Institute for Tele-Information conference on Media Concentration and the Internet, (forthcoming), 

April 15, 2004; Adam D. Thierer, ‘‘Net Neutrality: Digital Discrimination or Regulatory Gamesmanship in Cyberspace?,’’ Cato Institute Policy Analysis No. 507, January 9, 2004, http:// 

www.cato.org/pubs/pas/pa-507es.html 5 Adam D. Thierer, ‘‘Telecom Newspeak: The Orwellian World of Broadband ‘Deregulation’,’’ 

in Sonia Arrison, ed., Telecrisis: How Regulation Stifles High-Speed Internet Access, (San Francisco, CA: Pacific Research Institute, January 2003), pp. 9–31, http://www.pacificresearch.org/ 

pub/sab/techno/telecrisis.pdf 6 Adam D. Thierer. ‘‘Federalism and Telecommunications,’’ Federalist Society, 2001, http:// 

www.fed-soc.org/Publications/practicegroupnewsletters/telecommunications/federalismtelecomv3i1.htm; Robert W. Hahn, Anne Layne-Farrar, and Peter Passell, ‘‘Federalism and Regulation,’’ Regulation, Vol. 26, No. 4, Winter 2003–2004, pp. 46–50, http://www.cato.org/pubs/ 

regulation/regv26n4/v26n4-7.pdf 7 Adam D. Thierer, The Delicate Balance: Federalism, Interstate Commerce and Economic Freedom in the Information Age, (Washington, D.C.: The Heritage Foundation, 1999). 8See generally: Adam Thierer, ‘‘Will ‘States’ Rights’ Derail Telecom Deregulation?’’ Cato Institute TechKnowledge No. 49, March 14, 2003, http://www.cato.org/tech/tk/030314-tk.html 

not want these new layers to become the equivalent of rigid regulatory quarantines 

or firewalls on industry innovation or vertical integration.4

A second and better way to tear down the old regulatory paradigms and achieve 

regulatory parity would be to borrow a page from trade law and adopt the equivalent of a ‘‘most favored nation’’ (MFN) principle for communications. In a nutshell, 

this policy would state that: ‘‘Any communications carrier seeking to offer a new 

service or entering a new line of business, should be regulated no more stringently 

than its least regulated competitor.’’ This would allow us to achieve regulatory simplicity and parity not by ‘‘regulating up’’ to put everyone on equal difficult footing 

but rather by ‘‘deregulating down.’’ 5 Given the confusion over the Brand X court 

case and the ongoing FCC investigation into a Title 1 ‘‘information services’’ classification for broadband, this ‘‘Most Favored Nation’’ approach might help us bring 

some resolution to this difficult issue. 

Jurisdictional Matters 

Next we come to jurisdictional matters, which could very well end up being the 

most controversial issue this Committee will take up if you choose to re-open the 

Telecom Act. Here I am speaking of the heated debate between federal, state and 

local regulators for control over the future of communications policy.6

As I noted in my 1998 book The Delicate Balance: Federalism, Interstate Commerce and Economic Freedom in the Information Age, decentralization of political 

power almost always has a positive effect in terms of expanding human liberty.7 But 

as our Founders wisely realized when penning the Constitution, there are some important exceptions to that general rule. 

Let me be perfectly blunt on this point: Telecommunications regulation is one of 

those cases where state and local experimentation doesn’t work so well. After all, 

at the very heart of telecommunications lies the notion of transcending boundaries 

and making geography and distance irrelevant. If ever there was a good case to be 

made for an activity being considered interstate commerce, this is it. And yet, America’s telecom market remains riddled with a patchwork of policies that actually 

thwart that goal and seek to divide the indivisible and place boundaries on the 

boundless.8

This must end. And the only way it will end is by Congress taking the same difficult step it had to take when deregulating airlines, trucking, railroads, and banking: pre-emption. We must get serious about the ‘‘national policy framework’’ mentioned in the preamble of the Telecom Act by comprehensively pre-empting state 

and local regulation in this sector. The rise of wireless and Internet-based forms of 

communications makes this an absolute necessity. 

If you feel compelled to leave some authority to state regulators, why not devolve 

to them any universal service responsibilities that continue to be deemed necessary? 

This is one area where experimentation can work if the states devised targeted assistance mechanisms. But they should not be allowed to impose regulatory restraints or levies on interstate communications to do so. 

Agency Power 

My third and final ‘‘big picture’’ reform involves what may have been the most 

glaring omission from the Telecom Act of 1996: The almost complete failure to contain or cut back the size and power of the FCC. Again, we would do well to remember the lessons of the past. When Congress deregulated airlines, trucking and railroads, lawmakers wisely realized that comprehensive and lasting reform was posVerDate Nov 24 2008 07:44 Jul 18, 2016 Jkt 075679 PO 00000 Frm 00010 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\20707.TXT JACKIE
7 

9 J. Gregory Sidak, ‘‘The Failure of Good Intentions: The WorldCom Fraud and the Collapse 

of American Telecommunications After Deregulation,’’ Yale Journal of Regulation, Vol. 20., 2003, 

pp. 207–267. 10 Alfred E. Kahn, Whom the Gods Would Destroy or How Not to Deregulate, (Washington, 

D.C.: AEI-Brookings Joint Center for Regulatory Studies, 2001), http://www.aei-brookings.org/ 

admin/authorpdfs/page.php?id=112 11See generally: Adam D. Thierer and Clyde Wayne Crews, What’s Yours is Mine: Open Access 

and the Rise of Infrastructure Socialism, (Washington, D.C.: Cato Institute, 2003), http:// 

www.catostore.org/index.asp?fa=ProductDetails&pid=1441099 

sible only if the agencies that oversaw those sectors were also reformed or even 

eliminated. 

In the telecom world, by contrast, the FCC grew bigger and more powerful in the 

wake of reform and we witnessed spending go up by 37 percent, a tripling of the 

number of pages in the FCC Record, and there were 73 percent more telecom lawyers after the Act than before. It is safe to say that you cannot deregulate an industry by granting regulators more power over that industry.9

This too must end. The next cut at a Telecom Act must do more than just hand 

the FCC vague forbearance language with the suggestion that the agency take steps 

to voluntarily regulate less. We can’t expect the regulators to deregulate themselves.10 We need clear sunsets on existing FCC powers, especially the infrastructure sharing provisions of the last Act.11 And then we need to impose sunsets on 

any new transitional powers we grant them in the next Telecom Act. And we need 

funding cuts too. 

If we fail to do so, we’ll likely be sitting here again in 10 years having this same 

conversation all over again. 

Conclusion: Ending ‘‘Chicken Little Complex’’ 

In conclusion, it is my hope that Congress rejects the many doomsdayers and 

naysayers in the telecom sector who claim the sky will fall without incessant regulatory oversight and intervention. ‘‘Chicken Little complex’’ seems to run rampant 

throughout this sector even though it is less warranted than ever before. We have 

a chance to make more than just a clean break with the past; we have the chance 

now to close the book on a regulatory past that has done little to truly benefit consumers. 

Regulators have been given over 100 years to conduct a grand experiment with 

the telecom sector. Why not give markets a chance for once? 

Thank you, and I’m happy to take any questions you may have. 

The CHAIRMAN. Thank you, Mr. Thierer. 

Mr. Ferguson, welcome. 

STATEMENT OF DR. CHARLES H. FERGUSON, SENIOR FELLOW, 

ECONOMIC STUDIES, THE BROOKINGS INSTITUTE 

Mr. FERGUSON. Thank you, Mr. Chairman, Members of the Committee. I suspect that we all share in the ultimate goal of having 

a deregulated and freely competitive advanced digital telecommunications industry, but I’m sure that we differ greatly about how to 

get there. There are two examples from the history of information 

technology competition that are quite striking in regard to the current telecommunications case. The first is what happened to IBM 

when it was a declining monopolist over a 20 year period ending 

in the mid-1990s, and the second is what happened with the privatization, deregulation, and competitive freedom of the Internet. 

While IBM controlled about 70 percent of the world computer 

market for roughly a 20 year period, it sold the world something 

like $500 billion worth of computers that were much, much, much 

too expensive, and that led to enormous economic inefficiencies, 

and we face something similar in the current situation. 

The United States, depending on exactly what numbers you believe, is now approximately 20th worldwide in broadband deployment and is rapidly falling further behind. 

8 

The CHAIRMAN. It was alleged yesterday we’re 11th. Whatever it 

is, it’s bad. 

Mr. FERGUSON. It’s bad. And it’s very clear that it’s getting 

worse. The world growth rate is about 80 percent. U.S. growth rate 

is about 35, 40 percent, so there’s no question that we’re falling further behind. And by the way, there are now more DSL lines in absolute terms in China than there are in the United States. 

So let me begin with another statement of this problem. Every 

other digital information technology industry, and I’m going to give 

you a long boring list: semiconductors, personal computers, disk 

drives, servers, software, consumer electronics, local area and corporate networking, fiber optics, telecommunications equipment, 

long distance services. Every other digital information technology 

and every other industry is advancing technologically somewhere 

between 40 and 80 percent per year. The price performance of its 

products and services improves at that rate. 

There is one exception in the world and that exception is local 

telecommunications, including not just broadband services, but also 

local telephone service and you could even include cable service if 

you wish, cable video service. 

The United States has something like one-third of the world’s 

computers. It only has 14 percent of its DSL lines. There are a lot 

of statistics here in my written testimony. I’ll skip them. I will give 

one more important statistic. On a price performance basis, 

broadband service in the United States is about twice as expensive 

as it is in China, eight times as expensive as it is in South Korea, 

and about 30 times more expensive than it is in Japan. 

The CHAIRMAN. Why is that? 

Mr. FERGUSON. That’s a very good question and I now will try 

to answer your question. This has a lot of consequences which I 

think are enormous and still quite substantially underappreciated 

for the American economy, and also, by the way, for national security. There are very serious and very real national security concerns associated with this industry related to emergency video conferencing and quarantine and energy supply shocks and so forth. 

So why? I would argue that the situation has developed and persisted in some cases because of over regulation, but primarily because the dominant providers of local telecommunication services 

have successfully, including through regulation and their influence 

over regulation, have successfully blocked technical progress in 

broadband services, which progress would undercut the monopoly 

positions and current revenue bases of local telephone companies, 

traditional voice and data businesses, and would also eventually 

threaten the video distribution monopolies of the cable industry. 

Once you get to about 40, 50 megabits per second, television over 

the Internet becomes more than acceptable, it becomes in fact superior to cable television. 

Yet I fear that Federal policy, particularly I must say, and I 

apologize if this seems a partisan comment, I don’t mean it that 

way, but particularly under the Bush Administration has been 

quite ineffective and even counterproductive in dealing with this 

problem. The industry remains very insufficiently competitive, even 

in the residential broadband market, which is the market most 

people talk about when they talk about the broadband market. In 

9 

fact, the business broadband market is five times as large in revenue terms and is very important. But even in the residential market, which is the most competitive, most American consumers face 

at most two options, an incumbent cable company and an incumbent cable company, and about one-third of U.S. consumers face no 

options at all, or face at most one option, face at best a monopoly 

situation. 

Most other local telecommunications markets, including most of 

the business broadband market, are dominated by a single telecommunications incumbent, the local telephone company. Remarkably, despite many public statements by the incumbent telephone 

companies implying that it would be rational for them to enter 

each other’s territories and markets, not a single one of these companies has ever done so. In fact, not a single one of the incumbent 

telephone companies has ever competed with another one in any 

market whatsoever worldwide, which is a remarkable situation. 

This industry literally spends more money on lobbying, litigation, 

and paying expert witnesses every year than they do on R&D. They 

spend something like one-quarter to one-half of one percent per 

year on R&D, which is vastly lower than any other information 

technology sector. 

There are many signs that this industry is vastly inefficient, and, 

or perhaps I should say conversely, the nations now leading the 

world in broadband deployment all share two characteristics, a 

strong national policy in favor of deployment and enforcement of 

truly competitive industry conditions based on unbundling and 

open access to local facilities and local interfaces. Some nations 

also have subsidies, which however are designed to reward deployment competition and technical progress rather than simply handing money to existing incumbents. 

Thus, Mr. Chairman, and Members of the Committee, I must 

conclude on a somewhat pessimistic note. I think that current Federal telecommunications policy is failing the American people with 

potentially very serious consequences. Bearing in mind the bad 

IBM example and the much better Internet example related to the 

privatization and deregulation of the Internet backbone beginning 

in 1994, I would recommend the following: the establishment of a 

national broadband policy with the primary goals of creating a 

competitive, open architecture industry; eventually providing universal broadband service not primarily through any regulatory 

mechanism; and providing and having a goal of providing continuous improvements in broadband service that keep pace with the 

information technology sector. 

As a well known man who’s now the chief scientist of Intel said, 

Dave Tannenhouse, putting telecommunications on the technology 

curve, which it has never been on. Second, true mandatory 

unbundling of existing telephone and cable television local loops, 

including the expansion of access rights to all potential providers 

rather than their being restricted to common carriers as is the case 

under the 1996 Act. 

Subsidies, I think, may be helpful. However, if they are employed, they should be linked to actual broadband deployment and 

use, not to vague promises or overall financial investment, and 

they should probably be restricted to services provided by non-domVerDate Nov 24 2008 07:44 Jul 18, 2016 Jkt 075679 PO 00000 Frm 00013 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\20707.TXT JACKIE
10 

inant carriers. Those could include the incumbents if they enter 

each other’s markets as new competitors. 

And I think that it might also be appropriate to consider antitrust investigations directed at the incumbent telephone companies, whose behavior is really quite remarkable for supposedly competitive firms. And then finally, I do agree with some of the comments of the previous witness regarding the need for reform and 

consolidation of the administrative and regulatory structures of the 

FCC, the FTC, the DOJ Antitrust Division and so forth. These 

agencies, my primary complaint would be that they are insufficiently politically independent and that they are very sadly and almost pitifully lacking in high technology expertise. Thank you. 

[The prepared statement of Mr. Ferguson follows:] 

PREPARED STATEMENT OF DR. CHARLES H. FERGUSON, SENIOR FELLOW, ECONOMIC

STUDIES, THE BROOKINGS INSTITUTE

Mr. Chairman, members of the Committee, thank you for the opportunity to discuss U.S. telecommunications policy. 

On September 11, 2001, because it was judged unsafe for President Bush to return to Washington, DC, he conferred with his advisors over a secure 

videoconferencing link, a technology that will be critical to managing future national 

crises ranging from terrorist attacks to energy supply interruptions. Broadband 

technology is also critical to economic performance and national welfare. Yet the 

United States now ranks approximately 20th worldwide in broadband deployment, 

and is falling further behind. Although this industry is phenomenally complex, the 

sources of this problem are ultimately quite simple: broadband services are hostage 

to the self-interest and inefficiency of powerful incumbent firms, and Federal policy 

has failed to create a modern, competitive, open architecture local broadband industry. 

Let me begin with the still under-appreciated importance of broadband services. 

First, most terrorist threats involve significant transportation disruptions and/or 

quarantines, with broadband telecommunications required to replace physical transportation during the crisis. Second, videoconferencing and other broadband services 

are now critical to managing problems such as the cost and quality of health care, 

maintaining economic growth while limiting pollution and global warming, and surviving any future energy shock related to Mideast politics. And third, broadband 

services are critical to restoring and maintaining U.S. economic performance in an 

Internet-driven global economy. 

And yet the United States, which invented the Internet and pioneered the commercial Internet revolution ten years ago, is performing exceptionally poorly in 

broadband deployment, and more generally in local telecommunications services. 

Every other digital information technology industry—semiconductors, personal computers, disk drives, computer servers, software, consumer electronics, local area and 

corporate networking, fiberoptics, telecommunications equipment, long distance 

services—all of these industries deliver to their users exponential improvement in 

performance per dollar, ranging from 40 percent per year to 75 percent per year. 

There is, however, one exception: U.S. local telecommunications services, ranging 

from voice telephone service to broadband service, have displayed low or in some 

cases even zero or negative rates of improvement over the last decade. 

Furthermore, while the United States has one third of the world’s computers, it 

has only 14 percent of the world’s DSL lines. As of year-end 2003, the United States 

had 4.8 DSL lines per 100 telephones, versus for example 5.1 for China, 9.6 for 

France, 10.9 for Canada, 12.3 for Israel, 14.4 for Japan, and 21.4 for Taiwan. China 

and Japan both now have more DSL lines than the United States. World broadband 

deployment is growing 78 percent per year, while U.S. broadband deployment is 

growing only 35 percent per year. On a price-performance basis, U.S. broadband 

service is twice as expensive as China, eight times as expensive as South Korea, 

and thirty times more expensive than in Japan. 

This quite stunning situation generates many problems. First, as all information 

technology becomes more Internet-dependent, all IT products, services, industries, 

and applications are increasingly hostage to the local broadband bottleneck. This affects the health of the U.S. high technology sector and reduces productivity growth 

throughout the U.S. economy, perhaps by as much as 1 percent per year. Second, 

11 

the high cost and low performance of U.S. broadband services is a driver of 

outsourcing, causing higher unemployment and downward pressure on U.S. wages, 

which have now stagnated in real terms for several decades. Third, local broadband 

costs are now the dominant source of the ‘‘digital divide,’’ the growing inequality of 

information access between wealthy and average Americans. Because computers 

continuously become more powerful and less expensive, over a five year period 

broadband costs are now greater than personal computer costs. And fourth, America 

suffers more than necessary with regard to health care costs, medical accidents, lack 

of preparedness for terrorist attacks, pollution, and vulnerability to energy price 

shocks. 

This situation has developed and persisted because the dominant providers of 

local telecommunications have blocked true competition and the development of a 

modern, open-architecture industry. This is rational on their part: competition and 

technical progress in broadband services would undercut local telephone companies’ 

traditional voice and data businesses, and threatens the video distribution monopolies of the cable industry. Yet Federal policy, particularly under the Bush Administration, has been ineffective or even counterproductive. As a result, the industry remains insufficiently competitive. In the residential broadband market, only two 

thirds of users have any choice at all, and even then they face at best a duopoly 

of one telephone company and one cable provider. These residential broadband services are also designed to impede, rather than promote, Internet telephony, advanced 

video delivery, and videoconferencing. Most other local telecommunications markets, 

including much of the business broadband market, are dominated by a single incumbent. And despite many public statements by the incumbent telephone companies 

implying that it would be rational for them to invade each other’s territories, not 

a single incumbent has ever competed against another, in any market. These companies literally spend more money every year on lobbying, litigation, and expert witnesses than they do on R&D. 

However, the nations now leading the world in broadband deployment all share 

two characteristics: a strong national policy, and enforcement of truly competitive 

industry conditions based on unbundling and open access to local facilities. Some 

nations also have subsidies, which however are designed to reward deployment, 

competition, and technical progress, rather than simply handing money to inefficient 

incumbents. 

Thus, Mr. Chairman, and members of the Committee, I must conclude on a pessimistic note. In regard to telecommunications policy, Federal policy is failing the 

American people, with serious consequences. To remedy this problem, I would recommend the following: 

1. A national broadband policy with the primary goals of establishing a competitive, open architecture industry; providing universal broadband service; and 

providing continuous improvements that keep pace with the information technology sector. 

2. True mandatory unbundling of existing telephone and cable television local 

loops, including open-architecture access points analogous to those used in the 

Internet. Access rights should be expanded to all potential providers, rather 

than being restricted to common carriers as is the case under the 1996 Act. 

3. Subsidies may be helpful. However, they must be linked to actual broadband 

use, and possibly restricted to services provided by non-dominant carriers. For 

example, a subsidy for each unbundled loop used for new broadband service, 

in exchange for low loop resale rates, would potentially be helpful. 

4. Antitrust investigations and actions directed at the incumbent telephone firms 

should be seriously considered. 

5. Reform of the FCC, DOJ antitrust division, and other Federal regulatory systems to improve the political independence, efficiency, and high technology expertise of Federal regulation and policymaking. 

For those interested in much further detail, and possibly also something to put 

them to sleep, Brookings Press has just published my book, The Broadband Problem. Thank you. 

12 

ATTACHMENT

Selected Broadband Deployment Data 

Source: www.dslforum.org 

Global 

Ranking 

31 December 2003 

Country DSL Subscribers 

31 December 2003 

Telephone lines 

2001/02 (ITU) 

DSL per 

100 phone lines 

31 December 2003 

1 South Korea 6,435,955 23,257,000 27.7 

2 Taiwan 2,800,000 13,099,416 21.4 

3 Hong Kong 690,000 3,842,943 18.0 

4 Belgium 789,677 5,132,427 15.4 

5 Japan 10,272,052 71,149,000 14.4 

6 Denmark 473,481 3,739,247 12.7 

7 Singapore 242,000 1,927,200 12.6 

8 Israel 380,000 3,100,000 12.3 

9 Finland 336,600 2,850,000 11.8 

10 Canada 2,170,243 19,962,072 10.9 

USA: 4.8 DSL lines per 100 phones, less than half of Canada, which is #10; even 

China is already ahead of the U.S., w/5.1 DSL lines per 100 phones, & its DSL use 

is growing much faster (over 300 percent per year); As a result, by year-end 2003 

China and Japan already had more DSL lines in absolute terms than the U.S., 

which is now #3. 

USA falling further behind: 35–40 percent U.S. annual DSL growth rate vs. 78 

percent world growth rate; U.S. will soon be far behind several nations even in absolute terms (e.g., China, Japan, Korea); see national rankings by total DSL lines as 

of 12/31/03: 

Global Ranking Country DSL Subscribers 

31 December 2003 

DSL per 

100 phone lines 

31 December 2003 

1 China 10,950,000 5.1 

2 Japan 10,272,052 14.4 

3 USA 9,119,000 4.8 

4 South Korea 6,435,955 27.7 

5 Germany 4,500,000 8.4 

6 France 3,262,700 9.6 

7 Taiwan 2,800,000 21.4 

8 Italy 2,280,000 8.3 

9 Canada 2,170,243 10.9 

10 UK 1,820,230 5.2 

13 

The CHAIRMAN. Thank you, Mr. Ferguson. 

Welcome, Mr. Gilder. 

STATEMENT OF GEORGE GILDER, SENIOR FELLOW, 

TECHNOLOGY AND DEMOCRACY PROJECT, 

DISCOVERY INSTITUTE 

Mr. GILDER. Thank you for having me here, Mr. Chairman. 

The CHAIRMAN. Can you pull the microphone over in front of you 

so that the stenographer can—thank you. 

Mr. GILDER. The first rule of holes is that when you’re in one you 

stop digging, and—— 

The CHAIRMAN. That applies to a lot of places in the world today. 

Mr. GILDER. It does. And today Federal regulators, local, state 

regulators, courts, have all dug a huge pit, a canyon from which 

America’s telecom can’t even see what’s going on in the rest of the 

world. And since 1996, fiber optics technology has improved about 

11,000-fold, and the capacity of fiber optic technology has improved 

far faster than microchips or anything else. It has been the spearhead of world technological advance and across the optics range. 

Internet traffic has increased about 9,000fold since 1996. 

But in the midst of this tide of telecom progress, we’ve had a catastrophe, just a disaster inflicted by multiple sclerosis of regulation and hundreds of bodies across 50 states in more than 100 jurisdictions, just an incredible maze of litigation has been created, 

which has effectively privatized the risks of telecom investment 

and socialized the profits and returns to it. And the result has been 

a 1,000 bankruptcies, a million people jobless in telecom, $2 trillion 

of lost market cap, and the United States fallen desperately behind, a lot further behind than previous testimony has indicated. 

Korea now has 40 times more per capita bandwidth to homes and 

businesses, 40 times. Japan has between 10 and 20 times. Italy has 

4 times. 

By world standards, the U.S. has no broadband at all. Stop talking about the big success of broadband. You’re talking about average transmission rates that are one-twentieth to one-fiftieth of the 

rates that a real broadband in Japan and Korea and other countries. But the U.S. does reign supreme in one key telecom area, and 

that’s the communications bar. We’ve got more lawyers than any 

other country in the world by far devoted to this maze of litigation—— 

The CHAIRMAN. And wouldn’t you include lobbyists in that 

group? 

Mr. GILDER. Lobbyists too. They’re called forth by the mazes of 

regulation. You don’t have the whole industry focused in Washington unless Washington’s doing something very bad. That’s why 

they come. Unless you stop this aggressive, pervasive regulation 

and litigation, you can’t accommodate an industry that’s improving 

its cost-effectiveness 11,000-fold in 6 years, where every part of the 

industry is advancing at a tremendous pace and accept the law, 

which still doesn’t even come to terms with the existence of the 

Internet. 

And so if there’s anything in the world that’s interstate commerce, it’s telecom, and the states and localities should have no 

role in telecom litigation. Preempt the states and localities. They 

14 

just cause confusion and paralysis and I don’t know what kind of 

bennies you’re got to give to them to do that, but they’ve got to be 

preempted in telecom law. 

And resist new frameworks of regulation. All sorts of sophisticated people are coming forth with ideas of layering and sort of, 

which Adam correctly described as enshrining the past in the name 

of progress. There are all sorts of valuable vertical integration 

going on across all those companies that Charles listed, and that 

must be permitted. You can’t modularize, prematurely modularize 

all the connections across the country. That just recreates a new 

paralysis. 

And keep the laws clear, simple, bright lines. That’s absolutely 

essential to long-term investment, massive long-term investment 

that is needed in this spearhead of global economic progress. 

In summary, I do not want an industrial policy. I want an end 

to the anti-industrial policy that prevails in the United States 

where we subsidize ethanol but punish U.S. telecom with higher 

taxes than any other industry except tobacco and alcohol. 

Thank you very much. 

[The prepared statement of Mr. Gilder follows:] 

PREPARED STATEMENT OF GEORGE GILDER, SENIOR FELLOW, TECHNOLOGY AND

DEMOCRACY PROJECT, DISCOVERY INSTITUTE

Mr. Chairman and Senator Hollings, thank you for the opportunity to appear before your committee today. Your selected topic is crucial to the well-being of the U.S. 

and global economies, and I appreciate your deep interest in the subject. 

Overthrowing matter and media with the new worldwide web of glass and light 

and air should be a happy and defining event in the history of man. Global information networks offer unprecedented potential opportunities for economic growth, cultural revival, and individual freedom and empowerment. Yet the United States has 

in large part blocked the path of the technologies and companies needed to consummate this vast new infrastructure of chips, fiber optics, antennae, digital storage, 

and software. 

Although American companies invented almost all the technologies crucial to the 

Internet, we have fallen behind many other nations in the deployment of these technologies. The U.S. now ranks eleventh internationally in residential ‘‘broadband’’ access. Using the FCC’s silly 200-kilobit-per-second definition, some now say that 25 

percent of American homes have broadband. But by the standards of Asia—where 

most citizens enjoy access speeds 10 times faster than our fastest links—U.S. residences have no broadband at all. U.S. businesses have far less broadband than 

South Korean residences. South Korea, for instance, has 40 times the per capita 

bandwidth of the U.S. Japan is close behind Korea, and countries from China to 

Italy are removing obstacles to the deployment of VDSL, fiber-to-the-home, and 

broadband wireless networks. 

Asian broadband also proves there was no Internet ‘‘bubble.’’ Today, Korea runs 

over the net between a three and five times larger share of its economy than we 

do. Riding the bus to work, Koreans watch television news and exchange video mail 

over their mobile phones. They enjoy full-motion video education and entertainment 

in their homes. Many of the dot-coms that failed in America due to the lack of robust broadband links are thriving in Korea. Consider that by this time next year 

Verizon Wireless’s 38 million customers will enjoy faster Internet access via their 

mobile phones than through their Verizon DSL connections to their homes. Only the 

most severe disincentives to invest could have yielded such a result, which defies 

the laws of physics. The American Internet ‘‘bubble’’ was actually a crisis of policy. 

The Telecom Act of 1996 was meant to ‘‘deregulate’’ America’s telecom infrastructure and technologies, the most dynamic sectors in the entire world economy. But 

after the usual lobbying and horse-trading, the Act turned into a million-word reregulation of the industry. Regulatory actions by the FCC and the 51 state utility 

commissions greatly exacerbated the bad parts of the Act and distorted many of the 

good parts. As I predicted the day after it was enacted, the result was a carnival 

of lawyers, micro-mis-management by bureaucrats, price controls, the socialization 

15 

1Whitt, Richard S. ‘‘A Horizontal Leap Forward: Formulating A New Public Policy Framework 

Based On The Network Layers Model.’’ An MCI Public Policy Paper. March 2004. http://global.mci.com/about/publicpolicy/presentations/horizontallayerswhitepaper.pdf 2Whitt, Richard S. ‘‘Codifying the Network Layers Model: MCI’s Proposal for New Federal 

Legislation Reforming U.S. Communications Law.’’ March 2004. http://global.mci.com/about/ 

publicpolicy/presentations/layersmodelfederallegislation.pdf 

of infrastructure, the screeching halt of innovation and investment in the ‘‘last-mile’’ 

local loop—and the Great Telecom and Technology Crash of 2000–2003. 

In the last year or so, the FCC has partially reversed some of its most egregious 

errors. Some are still being adjudicated in the courts. But U.S. telecom remains a 

highly regulated, highly taxed sector of our economy. The mistakes of the last 10 

years have greatly harmed the U.S. economy, and continued gridlock and inaction 

threaten to shift American leadership in technology to Asia, which has embraced the 

Internet with open arms. 

Today, just as the telecom and technology sectors exit a three-year depression, we 

are in danger of repeating the very worst mistakes of the 1996 Telecom Act, but 

this time on an even grander scale. In today’s testimony I will address and refute 

one particular proposal that is being offered as the basis for the new telecom legislation. In doing so I hope also to offer an alternative vision. 

The new ‘‘big idea’’ in telecom regulation comes from a host of learned and experienced telecom thinkers: the likes of former FCC authority Kevin Werbach, Stanford 

law professor and technology author Lawrence Lessig, industry analyst Roxanne 

Googin, and IPioneer Vint Cerf, to name just a few. The idea is mandated ‘‘open 

access’’ to the logical layers of the network, and it is embodied in a new legislative 

proposal by MCI, ‘‘A Horizontal Leap Forward: Formulating a New Public Policy 

Framework Based on the Network Layers Model.’’ 1 A horizontal layers approach 

would supposedly be a radical shift from the ‘‘vertical silos’’ approach now used, 

where telephony, cable, and wireless, for example, are regulated based on historical 

industry definitions, not generic functional categories. The common denominator of 

Internet Protocol (IP)—supposedly the basis for all future communications networks—is said to necessitate the new layered regulatory approach. 

Barely recovering from the FCC’s TELRIC and UNE–P ‘‘open access’’ mandates 

that chopped up and assigned ownership rights to the physical infrastructure—the 

hardware—of the Net, we now face the prospect of rigid reassignment of content, 

applications, services, and protocols, too. Whatever it is called, it represents more 

micromanagement of a dynamic industry in the midst of major technological transitions. 

The new proposal feeds on fear—fears that cable TV companies or the Bells might 

seek to leverage their broadband networks by wrapping content into their conduits, 

or that Microsoft might keep ‘‘tying’’ new applications into Windows, or that Google 

might monopolize information on the Net (yes, there is already an organized effort 

to turn Google into a public utility). MCI’s layering proposal defines rigid boundaries between content (voice, text, video), applications (e-mail, browsers, VoIP), protocols (TCP/IP, HTTP, FTP), and infrastructure (wires, switches, spectrum, PCs, 

handsets). In a paper entitled ‘‘Codifying the Network Layers Model,’’ 2 MCI proposes to ‘‘quarantine’’ major providers of one of the layers within that layer, and to 

prohibit them from vertically integrating into another layer unless they offer wholesale open access to all competitors. Lessig, MCI, and company worry that the ‘‘endto-end’’ nature of the Internet—where any terminal attached to the net can be 

reached from any other terminal—will be threatened if these new layering rules are 

not adopted. 

Layering proponents, however, make a fundamental error. They ignore ever 

changing trade-offs between integration and modularization that are among the 

most profound and strategic decisions any company in any industry makes. They 

disavow Harvard Business professor Clayton Christensen’s theorems that dictate 

when modularization, or ‘‘layering,’’ is advisable, and when integration is far more 

likely to yield success. For example, the separation of content and conduit—the notion that bandwidth providers should focus on delivering robust, high-speed connections while allowing hundreds of millions of professionals and amateurs to supply 

the content—is often a sound strategy. We have supported it from the beginning. 

But leading edge undershoot products (ones that are not yet good enough for the 

demands of the marketplace) like video-conferencing often require integration. 

Metaphors from the Telecosm help explain the fluid nature of these layers that 

MCI wants to preserve in concrete. Consider Corvis, our favorite optical equipment 

company and national fiber optic bandwidth provider. It blows apart the MCI approach on several fronts. First is CEO David Huber’s architecture of an all-optical 

network, devoid of electronic regenerators and protocol readers, which unites conVerDate Nov 24 2008 07:44 Jul 18, 2016 Jkt 075679 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\20707.TXT JACKIE
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tent and conduit by using colors of light both to bear the message and to determine 

the path of the circuit. It radically collapses the top layers of the OSI (Open Systems 

Interconnection) stack used in the Sonet voice and data networks of the past, not 

so much redefining the interfaces as transcending them. A ‘‘switchless’’ web of always-on fixed lambdas (wavelengths of light) can function as both the physical and 

logical layers of the Net because the intelligence is embedded in the path. There will 

be some controlling devices at the edge of the network, and IP will still be widely 

used, but the heyday of IP packet switched networks may well be over. Typically 

government enshrines the past in the name of progress. In uniting Corvis, a cutting 

edge equipment provider, with Broadwing, an infrastructure builder and service 

provider, Huber is also betting that IP networks are not inherently modular, where 

equipment from a thousand providers can easily be cobbled together to deliver highbandwidth, low-latency services, but that networks are still in fact in an era of 

undershoot where an integrated provider can deliver a superior product at a much 

lower cost. 

Our favorite digital chip company, EZchip, also explodes the idea that the layers 

of the Net can always be defined and ‘‘quarantined.’’ Where until now data flowing 

through the seven layers and numerous sub-layers were parsed and modified by a 

gaggle of hundreds of chips connected by thousands of wires and glue-logic galore, 

EZ puts all seven layers of the OSI stack onto one chip, performing all the essential 

functions of an Internet router on a single sliver of silicon. The ‘‘layers’’ are once 

again transcended when EZ’s software tools allow programmers to tell the chip what 

to do without even referring to the rigid layers, channelizations, protocols, and interfaces used in the previous software environment. Is this fair? Should EZchip be allowed to invade someone else’s turf, perhaps that of Cypress’s high-end content addressable memories (CAMs) or Broadcom’s Silicon Spice communications processors 

or the sacred code of the OSI idol? Or to blow apart someone’s whole field, like EZ 

could one day do to the many providers of communications ASICs (applications specific integrated circuits), or to Internet router king Cisco itself? 

It might be said that the ‘‘layering’’ proposals now in circulation are yet another 

(if more clever) attempt by competitors to target the Bell telephone and cable TV 

companies. Indeed, MCI’s own paper implies the cable companies (bundling network, ISP, and content) and the Bells (bundling network, ISP, and voice) are already stomping all over the layers, creating a muddy (and hopefully one day illegal!) 

mishmash of vertical integration. What a coincidence that the activities of its rivals 

violate MCI’s framework and cry out for cleansing and re-ordering (read structural 

separation, consent decrees, price controls, divestiture) by new teams of FCC 

horizontalawyers and IPolice. 

But if the proposals are meant as anything more than political lobbygagging of 

rivals, if the proponents really mean their model legislation as a principled, generic 

set of rules, then we must consider the logical consequences of such new laws. If 

applied dispassionately, how would such general rules affect the rest of the Internet, 

communications, and technology industries? 

Should Google be able to leverage search into Gmail, or to supply content using 

its proprietary algorithms and its physical network of 100,000 servers? Shouldn’t 

any rival search provider be able to feed off of Google’s advanced infrastructure? 

After all, wouldn’t it be impossible to recreate Google’s massive web of global intelligence? Doesn’t Google’s superior infrastructure exhibit ‘‘market power’’? Might 

Google actually evolve into a general provider of web-based information management services, rivaling the PC-based Microsoft, or should Google be ‘‘quarantined’’ 

as a search provider? Or maybe we should structurally separate Google into three 

companies: an infrastructure provider (its 100,000 networked servers plus algorithmic IP), a content/advertising company, and an information services company 

(Gmail plus future knowledge management applications). Surely FCC bureaucrats 

can make these easy distinctions and explain the resulting penalties to weary entrepreneurs who have just spent 10 years of their life building a new service that people really like. 

Should Sony be able to demand that its PlayStation gamers get access to 

Microsoft’s Xbox Live online video game network? Should Amazon be able to aggregate and make searchable the text of hundreds of thousands of books? Should Sprint 

PCS or Verizon Wireless be allowed to develop specialized content delivery platforms or applications that take advantage of their superior wireless data networks? 

Sprint was the first to build its own photo-sharing platform, and it is apparently 

the most user-friendly wireless photo-sharing system. Can we let such infrastructure-leveraging stand? 

What if Equinix (the data center company that almost defines of the integration 

of the physical, protocol, application, and content layers of the Net) succeeds in becoming the overwhelming meeting place (peering point) for the world’s network, eVerDate Nov 24 2008 07:44 Jul 18, 2016 Jkt 075679 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\20707.TXT JACKIE
17 

commerce, and content providers? Network economics suggest the concentration of 

all the largest Internet players in Equinix facilities is possible, or even likely. If 

Equinix achieves such ‘‘market power,’’ are we to assume that other ‘‘virtual data 

centers,’’ like the CLECs before them, could force Equinix to ‘‘open up’’ its hosting 

facilities so that the new virtual competitors can offer services over infrastructure 

they did not build? Why should anyone build risky and expensive new infrastructure 

if it can be readily used by competitors. 

What about Microsoft integrating easy-to-use voice-over-IP software into its next 

operating system? Should Microsoft rival Real Networks be barred from aggregating 

music and video for download with its RealPlayer multimedia suite? All of these are, 

to one degree or another, inter-layer integrated products and services. 

Proponents of ‘‘layering, or ‘‘Net neutrality,’’ or a free Internet ‘‘commons,’’ assume 

there is one network, that it is sufficient and timeless, that no new networks are 

possible or needed. They want innovation on the edge, in the form of software apps 

and Wi-Fi attachments. Innovation in the core is either assumed or ignored. The 

logical conclusion, however, is that since the ‘‘best network’’—the free commons— 

cannot make any money, there will be no network. And just how much innovation 

at the edge will there be if there is no innovation—no bandwidth—in the core? 

MCI’s ‘‘horizontal leap’’ asks authorities to pursue vigilantly those who would exploit ‘‘network choke points’’ or take advantage of ‘‘network effects.’’ In industries 

where ‘‘entities seek to obtain market power’’ (i.e., seek to make money in a business 

enterprise), policymakers need to ensure four things: ‘‘open architecture, open access, universal access, and flexible access.’’ When imposed by regulators or courts 

in a national capital, these four euphemisms boil down to one hard reality: socialization and micromanagement of the ‘‘architectures’’ and ‘‘access’’ networks built by 

others. 

The ability to tie and merge and break apart and outsource products, services, 

and technologies are the very stuff of business. As is the ability to pursue an 

unguaranteed return on one’s risky investment. As is the decision how to price these 

products and services. Some services will be bundled. Some will be free, loss leaders 

to leverage the purchase at another point of sale. But the entire system cannot be 

free. Everybody else’s product or service, except one’s own, cannot be a commodity, 

barred from bundling or profit. 

The companies that enable this broadband world will be able to charge for it during the years that they provide the optimal service. Their initial margins will be 

high. When communications becomes a commodity, as it eventually will, the margins will drop. This is not a catastrophe. No one has a right to high margins for 

a commodity service. But the Telecosm is still an arena of innovators, such as 

Corvis, EZChip, Qualcomm, Verizon Wireless, Essex, AFCI, Agilent, and hundreds 

of others, who will enjoy large monopoly rents until their inventions are standardized and commoditized and the leading edge moves elsewhere. 

The telecom industry is nowhere near some mythical paradox of perfection or cul 

de sac bargain basement of commoditization. It is still engaged in a thrilling adventure of putting together worldwide webs of glass and light that reach from your 

doorstep or teleputer to every other person and machine on the planet. It is long 

distance and it is local, it is packetted and circuited, it is multithreaded and aggregated, it is broadband and narrowcast, all at once. These crystal palaces of light and 

air will be hard to do and the world will reward the pioneers who manage to build 

them. The real threat to monopolize and paralyze the Internet is not the communications industry and its suppliers, but the premature modularizers and 

commoditizers, the proponents of the dream of some final government solution for 

the uncertainties of all life and commerce. 

The CHAIRMAN. Mr. Gilder is always not only informative but 

also entertaining, and I thank you for your straightforward remarks, and frankly, I wish many Americans could hear your comments today. 

Mr. Hundt, it’s a pleasure to have you before the Committee 

again. We’ve enjoyed a long relationship with you as our former 

Chairman of the FCC. We appreciate all the great work you’ve 

done and it’s nice to have you back before the Committee today. 

18 

STATEMENT OF REED E. HUNDT, FORMER CHAIRMAN, 

FEDERAL COMMUNICATIONS COMMISSION 

Mr. HUNDT. It’s very much of an honor to be back before you, Mr. 

Chairman, and your colleagues, and it’s also a pleasure to see you 

all. I do feel a little guilty because not only am I lawyer but I’m 

a son of a lawyer, and how could I not feel bad about that after 

hearing the catastrophe that the rule of law has inflicted on this 

sector? But I’m particularly delighted not to be invited here as a 

ghost of FCC past, but rather to be able to talk about the future. 

And I would with great respect like to urge you in my opening brief 

remarks to take four steps, and to be perfectly honest, you could 

take them pretty much today, meaning they do not require that 

you begin what we all know, because we know the rule of law, we 

all know is like it or not the long slog to an overhaul of a law. 

Not only are the four steps I’m going to talk about today some 

things that could be done quite immediately, but astonishingly they 

are unbelievably important to the future of broadband. They are 

four steps that relate to the future of wireless broadband particularly. The great lexicographer, Dr. Johnson, said that men usually 

agree on ends but disagree on means, and there are many, many 

debates to be held about means that could be boiled down to, do 

you trust the market or do you think it needs a little subsidy, do 

you want to regulate or do you want to deregulate. And I’m here 

to say that those issues are not necessary to be decided or those 

battles are not necessary to be fought on those terms in order to 

do what is incredibly important to do with respect to wireless 

broadband. 

In a political season and an election year, particularly in a Presidential election year, everyone on this Committee knows better 

than anyone else that if you can find a blessed island of agreement 

where cool reason can have a place, you don’t get to stay there for 

long, but it’s nice to enjoy it. This is a blessed island of agreement. 

We all note that the President of the United States 2 days ago said 

that by 2007 we should have universal broadband. Senator Kerry 

has said the same thing. Universal in our country is a practical 

matter, it means somewhere around 95 or 90 percent because you 

can never get the last 5 percent to agree on anything and that’s 

OK. 

And we all know this. The one sure, certain way to get to these 

extraordinarily high penetrations is to improve the quality and 

lower the price of whatever it is you’re talking about, improve the 

quality and lower the price. So we have universal VCRs because 

the government didn’t have to do anything, we let innovation lower 

the price and we let the industry work out ways for them to be 

compatible with the existing television industry. 

That’s what can happen with wireless broadband. If this Committee takes these four steps, we can lower the cost and have that 

translated to lower cost and we can improve the quality of wireless 

broadband. I’m not talking about 3G cellular, the handheld devices 

with the new technologies that run off the bay stations. They’re 

primarily about voice with a little bit of short messages. That’s not 

what I’m talking about. I’m talking by wireless broadband about a 

chip set about as big as my thumbnail that you can grab today, 

you’ll have to get some pretty good glasses on to see its workings, 

19 

but you can see it today. That chip set will send out a radio signal 

to a box about as big as a cheeseburger, I’m doing the South Beach 

Diet, so everything seems to me about as big as a cheeseburger, 

but this box is about as big as a cheeseburger and it sits on a windowsill. Its price is going to be less than $100 within weeks. It may 

be less than $100 if I buy it on E-bay, and then the signal goes 

from there to an antenna in a bread box, only food analogies, that 

needs to hang on a lamp pole or a street lamp or a telephone pool, 

something like that. 

The prices for these boxes also are going way down. We’re talking about a radio signal from a chip that can be in a laptop or a 

TV set top box or a refrigerator or anything, George can tell us all 

the possibilities, go from that signal to boxes that hop across the 

air, and ultimately miles away get to a fiber optic cable and become 

part of the Internet. No digging, no huge networks that have to be 

built before there are users, incredible ability to take advantage of 

all the cost efficiencies. 

What are the hurdles? Wireless broadband is being designed as 

we speak. There are trials in have a dozen cities. I mentioned the 

names in my testimony. You can go around, kick the tires. It’s all 

being put in the wrong spectrum. It’s all being designed for spectrum where the radio frequencies are very, very high, and as a result, the radio waves themselves do not penetrate buildings. We did 

not put broadcast TV in that spectrum because we wanted people 

to have TV sets inside houses, not to have to put them out on their 

lawns in Montana where it might be too cold. So we a long time 

ago put broadcast TV in the spectrum that you need to have a high 

quality of service, and this is the most important part, a very, very 

low cost, because if you have the right radio frequencies, you don’t 

need as many boxes and you can design it better. And I’ve attached 

a chart to my testimony, we can lower overall the cost of wireless 

broadband in one fell swoop by 50 percent within months if this 

committee will say to the whole wireless broadband industry, we 

need to be designing in the spectrum that today is occupied by analog UHF channels. 

That’s what we need to do, not just right away, but we need to 

do it for the future. We’ll lower the cost, we’ll add tens of millions 

of people, not because we threw money at the problem, but because 

we let innovation lower the cost of the problem. 

What are the four steps? These are the following four. Number 

one, you recall, Mr. Chairman, the debate years ago about 85 percent penetration being the threshold for when we could begin to 

allow new data and broadband uses for the UHF channels. If the 

FCC is encouraged by this Committee, it only needs encouragement, to cast three votes for a sensible interpretation of the 85 percent in which you count everyone that now receives a satellite signal that is digital and now receives a cable signal that is digital, 

if you allow them to count that as 85 percent, then we’ve already 

hit the threshold, and you can take the very high UHF channels 

that literally we are down to only a few 100,000 people in the country who are watching them over the air as opposed to on cable and 

satellite. 

You can tomorrow say that that spectrum is available for wireless broadband, take out 50 percent of the cost, greatly improve the 

20 

quality of service, and allow new wireless broadband technologies 

to be marketed by the market, by cable, by telephone companies, 

by new startups, by long-distance companies, by Gilder Inc., anyone who wants to go in this business. That’s step one. They just 

need to count it right. 

Step two, the FCC needs to be told that, for example, if I might, 

in Senator Burns’ state, where there is spectrum allocated to 

broadcasters, but no one is using it, because when you go out with 

a measuring device, you’ll see that there are no signals because of 

the tremendous open spaces, allow what’s called a secondary use 

that by law must not be permitted to conflict or interfere with any 

TV. That would be true in any state other than in a high density 

metropolitan area. That would be possible today. That’s just a 

stroke of a pen at the FCC. It’s not a big rewrite of the law. 

Third, they need to immediately proceed with respect to all the 

spectrum that will ultimately be retrieved. They need at the FCC 

to issue an order immediately that says this will be used by wireless broadband, some will be licensed, some will be unlicensed, 

some will be auction. They need to decide today what the plan is 

and promulgate it so that the engineers know what they’re designing for. And that can be done today. 

And last, and it’s absolutely not least, the FCC needs to be urged 

by this Committee to do the following, to say to the localities, to 

municipalities, these poles, these telephone poles, these street 

lamps, these public buildings, you have to let people put these 

bread boxes about this big on top of them. 

That’s all. We’re not talking about saying that they have to provide electricity. We’re not talking about saying that they don’t get 

to charge what’s called a make-ready cost. They can charge that. 

We’re just saying they have to allow it. They can’t get bogged down 

in their own bureaucracies and say 3 or 4 years from now we’ll let 

you know whether or not you can build those networks. 

These four steps, if this Committee could get everybody to sign 

the letter bipartisanally, because I don’t think there’s a Republican-Democrat, left-right division on these topics, if you all could 

just say, these are the four steps, and FCC, if you’ve had trouble 

getting three votes for things, we want you to have five votes for 

these four steps. You will totally transform the future of wireless 

broadband, completely transform all of the penetration rates. Everybody on this panel will be talking about how we’re going to be 

growing at the 60, 80 percent rate instead of the current rate. 

Thank you very, very much. 

[The prepared statement of Mr. Hundt follows:] 

PREPARED STATEMENT OF 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 future of this country’s telecommunications industry. 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. (Such associations are in the summary resume ́ attached 

hereto.) 

As you know, the only right economic policy for a nation is to seek to obtain a 

high and rising standard of living. Social policies may be aimed at other goals, but 

that is the purpose of an economic policy. To do that, productivity gains and full 

21 

employment are both necessary. The conundrum of telecommunications is that it 

has contributed more than any other single sector to overall productivity gains, but 

in the process many of the telecommunications jobs of the past have become unnecessary. At the same time many new jobs, particularly in wireless and Internet companies, have been created. 

The challenge for this Committee is how to foster both continued productivity 

gains and job growth in our whole economy by means of establishing a particular 

legal regime for the communications sector. Would we have more or less overall productivity gains if we had an unregulated communications monopoly, a rate-regulated communications monopoly, a set of competing firms that shared certain essential facilities, a contribution of public funds to make up for market failures, or a 

way to capture such externalities as network effects? All these questions must be 

asked anew very often and we can expect that answers will evolve over time. I 

honor and thank this Committee for engaging in this process of continued reassessment of the right answers to these questions, and indeed continued efforts to determine the right questions. 

Technology creates potential; in a capitalist society economics is the science by 

which we describe how the potential of technology is translated into the actuality 

of the marketplace. But the culture of a country ultimately determines the shape 

and function of the marketplace’s outcomes. That culture is composed of many 

things, but one key element is the rule of law. 

Today we look back at the era of regulated monopoly in telecommunications and 

conclude that its advantages in terms of efficiency were ultimately outweighed by 

the cost of regulation and the discouragement of productivity enhancing innovation 

that was an inevitable corollary of monopoly. For the better part of30 years the 

United States, acting often through this committee, has led the world in replacing 

the paradigm of regulated monopoly with a new framework of competition coupled 

with certain key elements of legal obligation placed on the owners of bottlenecks or 

essential facilities. This new framework is the grand outline of the 1996 Telecommunications Act and the 1997 World Trade Organization telecommunications 

treaty. It is the outline of the rules of law being put in place in more than 90 countries around the world. It is the outline of the rule of law that is helping such huge 

new economies as China and India take the place that the size and work ethic of 

their populations should earn them on the global stage, barring such dreadful catastrophes as war or the reversion to communism. 

We should take a look at some of the outcomes of this new paradigm here in the 

United States. The telecommunications industry since 1996 has experienced unprecedented growth and American consumers and businesses today enjoy the widest 

array of services at the lowest prices in American history. The industry itself-like 

its related computer hardware and software industries—consists both of firms that 

have done better and those that have done worse over the last 8 years. In our system, we do not regard an economic policy as a failure if one or more firms fail in 

fair marketplace competition. We do regard that policy as a failure if it does not 

contribute to productivity gains and therefore to a high and rising standard of living 

for all Americans. 

While industry gross revenues are not the only metric by which we should judge 

the success of a policy, they are relevant. Industry revenues, both overall and by 

segment (with one exception) have increased tremendously since passage of the 1996 

Act. By my current calculations, based on data drawn from several different sources, 

total sector revenues grew at a compound annual rate of almost 7 percent between 

1997 and 2002, increasing from $266 billion to $371 billion. That growth rate substantially exceeds the growth rate of the overall economy for those years. And that 

revenue growth has come in conjunction with falling prices. 

Moreover, these impressive gains are dwarfed by the performance of particularly 

innovative service segments. Demand for wireless services simply exploded-growing 

from $30 billion in 1997 to $78 billion in 2002, an annual average compounded rate 

of more than 20 percent. Mobile services are so cheap on a price per minute basis, 

because of competition and innovation, that cellular customers here purchase nearly 

twice as many minutes per month as they do in Europe. The result of the growth 

of wireless voice is that revenues in this segment will exceed revenues from local 

wire-based voice in the next couple of years, even though local voice revenues have 

gone up about 5 percent on a compound annual basis since 1996. 

Another tremendous growth story is that Internet access revenues increased annually by more than 25 percent, from a modest $7 billion in 1997 to $24 billion in 

2002. E-commerce firms have greatly increased in market capitalization as a result 

of greater Internet access. 

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cent compounded annually, according to a study by Professor Tom Eisenmann of the 

Harvard Business School. More generally, telecommunications capital expenditure 

in 2005 will be higher than in 1997, although the trend now is downward unless 

and until new technologies are deployed. 

It follows that if revenues are up, then consumer spending by both business and 

residential consumers on telecommunications services during this period similarly 

grew strongly. Retail spending by business customers increased from $101 billion 

in 1997 to $141 billion in 2002 and consumer spending rose from $121 billion in 

1997 to $172 billion in 2002. Yet, for almost all communications services the prices 

have gone steadily down. 

In short, consumers have spent more because they have been offered lower prices 

for similar services and attractive prices for new services. Whole new markets have 

been created, especially in wireless and Internet markets. 

An exception to this amazing story of economic expansion is the wireline long distance business. Revenues in that industry segment declined, in absolute terms, from 

$76 billion in 1997 to $55 billion in 2002. 

Congress in 1995 was rightfully concerned about the potential for such a downturn in the long distance business. Prices have gone down because of technology innovations that lowered fundamental costs, the actions of the FCC to lower steadily 

the contribution to cost of the interstate access charge, and the proliferation of competition from both Bells on the fixed line side and the wireless firms offering wireless long distance. Prices have gone down so much that they have outstripped the 

willingness of consumers to pay more for long distance-elasticity effects did not 

make up for the price drop and so total revenues are down. The result is that firms 

depending on long distance revenue have found that it is increasingly difficult to 

compete in telecommunications. By contrast, those depending chiefly on local voice 

or cable revenues have had their own challenges, but faced them with a more reliable revenue stream at their disposal. 

The Members of this Committee in particular were keenly aware that the traditional long distance carriers like AT&T and MCI would be hard-pressed to offset 

their losses in toll revenues with revenues from local voice markets. Those carriers, 

even armed with the market-opening tools Congress provided in the 1996 Act, faced 

formidable barriers to entering local Bell markets. Generally they have been unable 

to obtain new revenues in any new market fast enough to overcome the loss of revenues in long distance. This was one of the possible outcomes of the 1996 Act. 

I want to step around debate about the troubling role of the extraordinarily prolonged judicial review of the 1996 Act in producing this outcome. Although the judiciary collectively has not acted with clarity or alacrity, competition’s benefits have 

been obtained to a large, if imperfect, degree. Under a competition paradigm the key 

goals are and ought to be productivity gains, as well as lower prices. These goals 

necessarily can be achieved only by reducing regulated costs and by promoting innovation. By and large the communications sector has never seen so much in the way 

of innovation, productivity gains, lower prices and higher revenue as it has seen in 

the 8 years since the 1996 Act was passed. That is somewhat a function of the wisdom of the law, somewhat a function of technological change and somewhat a function of the effective strategies of various firms. 

What then comes next? 

As matters now sit, the American telecommunications industry will continue to 

experience steady growth in wireless, Internet, and traditional voice services, both 

local and long distance. For the voice business, the pace of growth will not resemble 

what we have witnessed in the years since passage of the 1996 Act. But the one 

industry segment that has the potential to re-ignite the engine of economic growth 

that drove the Nation’s economy in the late 1990s is broadband services. 

This has been and ought to continue to be a subject of Committee attention for 

three principal reasons. First, measured by the scale of broadband (meaning the 

percentage of households subscribing), the scope of broadband (meaning the range 

of bandwidth speeds and proffered services), and the price of broadband, the United 

States does worse than important rival nations. Second, broadband has the potential 

to generate very large new productivity gains, and to create many hundreds of thousands, and ultimately millions, of new jobs here in the United States. Third, we are 

on the verge of a new technological breakthrough that can be brought more quickly 

and efficiently into the marketplace if the government takes timely and effective 

and comparatively minimal action: I refer to wireless broadband and to the wisdom 

of letting it flourish at frequencies on the spectrum chart that will in any event be 

vacated soon. 

If this Committee now can lay out a path for virtually immediate use of a modest 

amount of spectrum on the frequency chart below one gigahertz, then wireless 

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ing the Internet, making a voice call, sending and receiving video, providing health 

care, education, job training, and universal service. It can be not just a universal 

service, but a universal solvent that can dissolve many of the roadblocks to innovation and deregulation in communications markets. With an effective spectrum allocation for wireless broadband at the frequencies that permit signals to reach inside 

buildings, we will in just one or two years be able to commence a step by step process that will achieve fairly soon the complete deregulation of retail prices in communications, among many other long desired goals of the 96 Act. 

Let’s start with how the United States lags woefully behind many other countries, 

especially South Korea, in broadband penetration. See pages 20–22 for charts. Our 

broadband is Little Broadband, about one megabit per second, whereas in Korea and 

Japan very large percentages of the population can buy Big Broadband, meaning up 

to 8 megabits per second. Their services are priced lower: their users get up to 10 

times the bandwidth for the buck. Their household penetration is much higher: 

South Korea’s penetration is about three times higher than America’s, measured by 

percentages of households. 

The rapid penetration of broadband in South Korea and other Asian markets is 

not a coincidence. Particularly in Japan and South Korea, the national governments 

played key roles in promoting the build-out of a truly broadband network. In Korea, 

for example, the government provided $1.5 billion in subsidies to finance the buildout of a broadband network backbone and an additional $1 billion in low-interest 

loans to operators for the construction of last-mile links. 

In addition, both South Korea and Japan implemented policies that were designed 

to foster vibrant competition between providers of broadband services. Japan, for example, required incumbent carriers to make available access to their dark-fiber facilities as well as copper loops. Japan also adopted regulatory directives to prevent 

the dominant incumbent provider of local voice service from deterring the entry of 

new providers. 

South Korea’s approximately 70 percent penetration is the product of a number 

of different factors, including favorable demographics and strong consumer interest. 

But, it would be mistaken to understate the importance of government policy in 

making Korea by far the largest user of broadband services in the world. The South 

Korean government, for instance, sponsored programs to encourage the purchase of 

personal computers, including low-interest loans, and to encourage the schools and 

government to obtain broadband communications links. It closely regulated Korea 

Telecom in various respects. 

The United States, by contrast, has fallen well behind these other countries. Indeed, today, the United States is not ranked among the top ten countries in the 

world in terms of broadband penetration. Moreover, our version of broadband is little, versus the Big Broadband that can be found in Korea and Japan and elsewhere 

in Asia, where speed can be ten to even 50 times faster. 

If Big Broadband in America reached 100 percent of all households at affordable 

prices, we would see the growth of many new markets. Other countries show us that 

video games, for instance, produce new revenues for communications carriers. This 

may not be of much appeal to fumble-fingered formerly youthful people like me, but 

it’s a new market that creates new jobs and new revenue. And it isn’t growing in 

this country as fast as in other countries because our infrastructure is not as welldeveloped. Moreover, in other countries, where the speed of access tends to be higher, video can be more readily sent over the Internet. Not just entertainment, but 

education and health care are best delivered in part through video. These social 

services can be supplied effectively by broadband. We have every reason to worry 

about burgeoning costs of health care and our shortfall in providing education: 

broadband is an essential part of obtaining the productivity gains in both health 

care and education that will help up address our concerns. 

However, the good news is that the United States has an opportunity to regain 

worldwide leadership in telecommunications by taking advantage of a new technology that is on the verge of deployment. Wireless broadband has the potential to 

energize our broadband services segment. 

When Congress in the early 1990s authorized the FCC to auction radio spectrum, 

it gave technologists and entrepreneurs the tools needed to use not just Bell, but 

also Marconi to build an information economy. In the decade since, wireless has 

emerged as the most important means of voice communications and the Internet has 

emerged as the most important new medium of pictures and text. 

We are now entering the decade of wireless broadband, the era in which airwaves 

can be used to carry Internet transmissions much more cheaply, with easier access, 

than mere fixed wire networks can do. 

One species of wireless broadband is called Wi-Fi. Many people are familiar with 

a radio technology called Wi-Fi. If you have a laptop that is Wi-Fi enabled, you 

24 

know that it connects over the air to a router, which in turn connects to a cable 

modem or a DSL box. You can walk around the house with the laptop and stay always on the Internet. 

Wi-Fi can be found not only in homes but in airports, coffee shops and many other 

places. These hot spots are places where you can use the laptop today to log on to 

the Internet using Wi-Fi. Just as the Internet has gone in about a decade from 6 

million to about 600 million users globally, in the next 10 years hotspots will proliferate from about 7 million to about 700 million locations. The reach of such hot 

spots is about 300–1000 feet from an existing wire line Internet connection. 

However, in order to do without DSL or cable connections, many cities are contracting with service integrators to deploy antennas that create a mesh of Wi-Fi 

connectivity over very large radii. These mesh networks are based on principles 

similar to those on which the Internet is based. Any laptop or other device with WiFi capability can connect to the network of antennas and stay connected even while 

the owner carries the laptop from place to place. The networks consist of routers 

with antennas on street lamp poles and telephone poles. Cities with such networks 

today include HalfMoon Bay, San Mateo and Cerritos in California, Baton Rouge 

and Lafayette in Louisiana, and North Miami Beach, Florida. These are representative illustrations. A large scale example is a recent request for proposals issued by 

the City of New York. See http://www.nyc.gov/html/miscs/rfplmobilelwireless ldownload.shtml. 

Another technology on the near-term horizon is called Wi-Max. It also uses open 

standards negotiated by engineers and private sector firms in the well-recognized 

IEEE process. Wi-Max also promises to bring inexpensive, high-speed Internet connections to the American home and workplace. Wi-Max is a label used to describe 

the following: a communications chip in a laptop (or really any other appliance) that 

sends a signal to an antenna at least several miles away. 

Wi-Fi is a synonym for a suite of ‘‘802.11’’ protocols developed by the IEEE for 

use in unlicensed bands worldwide. Wi-Fi radio technologies are in use today on unlicensed spectrum in the 2.4 GHz and 5.7 GHz bands. Wi-Max is a wireless 

broadband radio technology specified by the IEEE in its 802.16a protocol. As of now, 

it also uses unlicensed frequencies fairly high in the spectrum chart. Both are open 

technology standards that can be used by any wireless broadband provider. Both 

have been endorsed by a wide variety of companies. Most interestingly, both these, 

and other related technologies, can be designed for use on various frequencies, including the far more desirable lower frequencies where radio waves are much longer 

and more useful for communications. 

In addition there are still other flavors of wireless broadband that use related 

technologies and alternative standards. In general, the technology world assures us 

that wireless broadband can provide a data rate that will over a short period of time 

run up to the range of Big Broadband (10 Mbps or higher), and provide a cost-effective alternative to fixed line broadband such as DSL or cable modem, if the government takes the right steps to welcome wireless broadband into the competitive 

arena. Indeed, the cost for the wireless mesh network might be as low as one 

tenth—or even lower-than the cost of building new fiber to people’s houses. With 

lower cost, we will at last have an effective efficient way to bring broadband to rural 

America. 

Wireless broadband can also help keep the United States at the forefront of the 

technology revolution, creating new jobs and giving a much-needed stimulus to our 

economy. 

To be clear, what I’m talking about is not the so-called third generation of cellular, also known as 3G. That term describes advances in cellular phones to carry 

data along with voice calls. The acronyms for 3G are: EVDO, UMTS, WCDMA, and 

EDGE. These technologies enable handheld devices to send and receive data to mobile users in amounts ranging up to several hundreds of kbps. This service is sufficient for applications such as short rnp3 downloads, limited Internet browsing, ring 

tones, e-mail, low-resolution pictures, and video clips. 

These 3G technologies are the evolution path for the technologies used today by 

the mobile carriers and can be installed as an add-on to their network infrastructure. They are important and are being deployed now in the United States and 

worldwide. 

But for higher speed, affordable broadband-and certainly Big Broadband at a rate 

of 10 megabits or more per second—a user must look to a wire-based connection or 

the new wireless broadband technologies. 

Wireless broadband is not a new technology, by any means. The industry has been 

around for 15 years. Indeed, the Nation’s leading experts on high speed wireless 

have been working on wireless broadband, learning lessons from years of trials, and 

their relentless efforts are now corning to fruition with the deployment of techniques 

25 

such as Orthogonal Frequency Division Modulation, beam forming for antenna reception, and, of course, IP as the way to deliver the bits. What is now possible is 

ubiquitous, metropolitan area wireless broadband coverage. 

Wireless broadband can eliminate the need for per node wiring. The technology 

enables a self-organizing system, just like today’s Internet, allowing nodes to be 

added or subtracted as needed, a feature that remedies defaults in wireline 

backhaul that may arise or interference that may be encountered. Advances in software claim to provide the reliability, security, and redundancy/diversity that are the 

foundation of public safety and other government communications systems, which 

are even more critical in this era of heightened national and local security. 

Implementing this technology does not require digging up the streets. It does not 

require installing a vast infrastructure. There are no zoning ordinance encroachments. It requires no new towers. The entire infrastructure does not have to be completed before it can commence. Significantly, it can be modified to meet changes in 

requirements very cheaply. 

But there are potential barriers that could delay or frustrate the entry of wireless 

broadband providers. One potential barrier is spectrum access. Wireless broadband 

today uses ’’unlicensed’’ spectrum. As the name suggests, unlicensed spectrum users 

do not need a license from the FCC to transmit over the airwaves. This is in contrast to licensed users of the spectrum like Verizon Wireless, Cingular; or T-Mobile; 

these companies hold FCC licenses that give them the exclusive right to use a particular set of electromagnetic frequencies in a particular geographic area. Unlicensed operators, on the other hand, do not have exclusive use of the spectrum they 

use. They must also use equipment that complies with various technical requirements that minimize the amount of signal interference they cause to other spectrum 

users. 

The FCC has set aside some spectrum for unlicensed devices. These devices include cordless telephones, garage door openers, and wireless broadband. But there 

two problems with relegating wireless broadband to the unlicensed spectrum at and 

above 2 GGHz. 

First, many of the current unlicensed spectrum bands are already too congested 

with other devices-there are a lot of cordless telephones and garage door openers 

out there. 

Second, the current unlicensed spectrum allocations are at regrettably high frequencies. Waves at lower frequencies are longer in length. Longer length waves hold 

their energy over longer distances and also bounce around physical objects such as 

buildings. As a result, longer wave lengths are ideal for broadcast television—they 

can travel miles from a tower and find their way inside living rooms. These are the 

ideal wave lengths for wireless broadband, just as they were ideal 60 years ago for 

the original allocation to broadcast television. Another similarity is that broadcast 

television waves carry tremendous amounts of information (for example, digital TV 

waves will carry up 20 megabits per second.) Correspondingly, wireless broadband 

can deliver very high bit rates at lower cost and greater equality if it also uses the 

lower frequencies of broadcast television. 

Of course, it is possible to relegate wireless broadband to higher frequencies. 

Those frequencies are useful for garage door openers—after all we do not want garage door opener to send signals over long distances, since the user wants to be 

opening his or her own garage and not the neighbor’s. But to treat wireless 

broadband the same way as garage door openers would be to lower the value and 

raise the cost of this new technology. 

Of course any frequency can be used for any kind of wireless business, if you ignore the cost. For example, the shortcoming of higher frequencies for PCS has led 

cellular firms to build more base stations to retransmit signals. But that has cost 

more money, hurt industry return on capital, and embedded additional costs for consumers for decades. 

Engineers today for the most part agree that the cost of wireless broadband Internet access in the 700 MHz or 800 MHz bands is likely to be about 50 percent lower 

than if the technology is consigned to the unlicensed spectrum bands at or above 

around 2 GHz. See chart on page 24. The consequence of higher costs is higher 

prices for the consumer. If we want truly high speed Big Broadband Internet access 

for all Americans we need to help lower costs for the technologies being invented. 

This is a particularly important goal for rural America, where costs are inevitably 

going to be higher due to reduced density of customers, and for emerging markets, 

where higher costs take the prices of service beyond the reach of populations with 

much lower national incomes per capita than in the developed world. 

Quite literally, the lower the frequencies assigned for wireless broadband, the 

more millions of people in rural America will be able to afford Big Broadband InterVerDate Nov 24 2008 07:44 Jul 18, 2016 Jkt 075679 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\20707.TXT JACKIE
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net access, the more hundreds of millions of people in the world will be able to afford joining the Internet community. 

Fortunately, in the United States new spectrum will become available in the 700 

MHz band. This is ideal spectrum for wireless broadband. It has excellent propagation characteristics that will allow the build out of an inexpensive and ubiquitous 

wireless broadband network. 

This spectrum is currently being used by TV stations operating on UHF Channels. 

The broadcast industry is converting from analog technology to digital technology, 

and during this conversion process every TV station in the country has been given 

two TV channels-one analog and one digital. 

However, under the law, these stations must tum in their analog channel. This 

will clear UHF TV Channels 52–69 for other uses, including wireless telecommunications services. That spectrum covers from 698 to 806 MHz in the spectrum band, 

a total of 108 MHz. That spectrum should be the fit and proper home of wireless 

broadband. 

So once again the tough job for Congress and the FCC is to push the recalcitrant 

and incentivize the willing participants in the private sector to promote innovation, 

productivity gains, and new job creation. The current chapter in this ongoing story 

of facilitating the creative innovation of capitalism will be written if Congress and 

the FCC can find ways to let businesses use the best spectrum physics can find for 

us not for analog UHF TV but rather for wireless broadband. This transformation 

of the use of that spectrum means for the economy literally hundreds of billions of 

dollars of extra growth and hundreds of thousands, if not ultimately millions, of new 

jobs-provided it were done quickly. 

The first step I suggest is for Congress to urge the FCC to read correctly the 

meaning of legislation passed by Congress in 1997. That legislation requires broadcasters to tum in their analog channels at the end of2006, or when 85 percent of 

the TV audience is capable of receiving a digital television signal-whichever occurs 

later. As mentioned recently by the FCC staff, all households that get their TV 

through cable or satellite services should be counted in order to determine whether 

we have reached 85 percent penetration of digital television. 

This certainly makes sense: anyone with cable or satellite is obviously no longer 

dependent on over the air broadcast for the television consumption, and so those are 

the households that should be counted to determine whether we have crossed the 

85 percent threshold for the relinquishment of the UHF analog spectrum. Moreover, 

cable and satellite can either deliver a HDTV broadcast signal to a digital TV set 

in the consumer’s home, or permit the consumer to convert such a signal through 

a set top box into an analog TV set. By simply telling the FCC to count wisely the 

85 percent, Congress can make available the spectrum most useful for wireless 

broadband. 

Next, Congress should take steps to allocate part of the 700 MHz spectrum for 

unlicensed use by broadband wireless services. In 1997, Congress directed the FCC 

to allocate 24 MHz of the 700 MHz band for public safety communications, and to 

allocate 36 MHz of the band for commercial use to be assigned through spectrum 

auctions. In order to facilitate wireless broadband in this spectrum, Congress could 

amend this 1997 law to allocate 30 MHz of this commercial spectrum for unlicensed 

services that would not be subject to an auction. In this way, Congress would have 

provided for wireless broadband public safety, licensed spectrum for wireless 

broadband, and unlicensed spectrum for wireless broadband: this perfectly wise trio 

of actions can produce millions of new jobs and billions of dollars of economic 

growth. 

Congress should also instruct the FCC to resolve quickly a notice of inquiry it 

opened in December 2003. In that NOI the FCC asked about the feasibility of allowing unlicensed devices to operate in the TV broadcast spectrum at locations and at 

times when this spectrum is not being used. The FCC should quickly adopt a rule 

embodying that proposal. Then wireless broadband services could use UHF TV spectrum provided they do not cause interference to full-service television stations. This 

would be especially important in rural areas where there tend to be far fewer television stations, and thus vacant UHF TV spectrum. Furthermore the wireless 

broadband technologies that are deployed in rural America will prove to be ideal in 

developing markets where there also are relatively few broadcast television stations 

and much unused spectrum in the 700 MHz range. 

The Congress should ask the FCC to take still other steps to facilitate the growth 

of wireless broadband. Wireless broadband requires the deployment of antennas in 

small boxes, small enough that they can be attached to a streetlamp pole or a utility 

pole. Due to the fundamental physical characteristics of wireless signal propagation, 

delivering the higher speeds enabled by wireless broadband requires a higher density of smaller cells as compared with traditional cellular networks. Therefore, wireVerDate Nov 24 2008 07:44 Jul 18, 2016 Jkt 075679 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\20707.TXT JACKIE
27 

less broadband needs access to these platforms so that its service is available ubiquitously. The FCC can and should ensure that no one exercise control over these 

platforms so as to prevent the deployment of wireless broadband services. 

We are on the verge of being able to unleash a revolutionary broadband technology. This Congress and the FCC have a chance to take certain steps that will 

deliver tremendous cost savings to the emerging wireless broadband technology 

firms. We can save billions of dollars in cost, and thereby make wireless broadband 

available more efficiently to millions more people, without a significant expenditure 

of public funds on a subsidy program. We need only to allocate the optimal spectrum 

to the future of communication instead of to its past, and to remove other impediments to the rolling out over the airwaves of this new way to connect everyone to 

each other and to all the knowledge in the world. 


428HUNDT1.eps
28 


428HUNDT2.eps 428HUNDT3.eps
29 


428HUNDT4.eps
30 

RESUME ́ OF REED E. HUNDT

Reed E. Hundt is a senior advisor on information industries to McKinsey & Company, a worldwide management consulting firm. His work with McKinsey has focused on helping senior management and boards address a wide range of strategic 

and other leadership challenges. 

Mr. Hundt serves on the board of directors of Intel, Pronto Networks, Tropos Networks, Polyserve, Megisto, and Entrisphere. He is a special advisor to Blackstone 

Group, a New York-based private equity firm. He serves as a member of the advisory committee at the Yale School of Management. 

Mr. Hundt served four years as Chairman of the Federal Communications Commission (FCC), from 1993 to 1997. 

Mr. Hundt is the author of, ‘‘You Say You Want A Revolution: A Story of Information Age Politics.’’ (Yale University Press, 2000). He is Co-Chairman of The Forum 

on Communications and Society at The Aspen Institute. 

Mr. Hundt is a magna cum laude graduate of Yale College, earning a Bachelor 

of Arts with Exceptional Distinction in History (1969). He is also a graduate of Yale 

Law School (1974) where he was a member of the executive board of the Yale Law 

Journal. He clerked for the late Chief Judge Harrison L. Winter of the U.S. Court 

of Appeals for the Fourth Circuit, and is a member of the District of Columbia, 

Maryland, and California bars. Prior to his position as Chairman of the FCC, Mr. 

Hundt was a partner in the Washington, DC office of Latham & Watkins, a national 

and international law firm. 

Apri1 2004 


428HUNDT5.eps
31 

The CHAIRMAN. Well, thank you very much, Mr. Hundt. 

Mr. Gifford, welcome. 

STATEMENT OF RAYMOND L. GIFFORD, PRESIDENT, 

THE PROGRESS & FREEDOM FOUNDATION 

Mr. GIFFORD. Thank you, Mr. Chairman. I find myself in the unanticipated position of having George Gilder call for the elimination 

of my former job and agreeing completely with Reed Hundt’s comments. Thank you for the opportunity to speak with you—— 

The CHAIRMAN. In America, anything is possible. 

Mr. GIFFORD. It’s a new broadband world, Mr. Chairman. My 

name is Ray Gifford. I’m President of the Progress & Freedom 

Foundation, a think tank that explores the legal and policy issues 

of the digital age. Also relevant to my testimony here today, from 

1999 to 2003, I served as Chairman of the Colorado Public Utilities 

Commission, which means I had to try and implement what Congress thought it meant and what the FCC told me Congress meant 

in the Telecommunications Act of 1996. 

To think about a new communications act, we first need to think 

about the current Act and what we have learned. The Telecommunications Act of 1996 should be judged a qualified failure. It 

may have been a failure of concept or of implementation, but it certainly did not live up to the hopes of its framers. The current Act 

is a failure because it does not provide a framework that anticipates the broadband, packetized Internet age. It is a failure because it presumes that two mutually incompatible goals, market 

competition and universal service, can be seamlessly reconciled. It 

is a failure because it added a pervasive layer of wholesale regulation to an already encompassing retail regulatory layer. It is a failure because of statutory ambiguity and self-contradiction. Finally, 

it is a failure because the competitive successes of the past 8 years 

happened despite the Telecommunications Act of 1996, not because 

of it. 

That failure is qualified, however, because the sectors the Act left 

relatively unregulated, wireless and cable, provide a road map of 

how to allow markets to emerge, regulation to receive, and consumers to benefit. 

I have two points of counsel for the next Telecommunications 

Act. First, law and regulation should not, and indeed cannot, contain the dynamic, multi-platform competition of the broadband 

Internet age. This promise counsels a recognition that regulatory 

burdens need to be minimized, and more importantly, that the incentives for special interests to manipulate regulation to preordain 

a given market outcome need to be written out of the next Act. 

My second point is that the institutions charged with implementing the legislative vision you enact are in need of fundamental 

reform and redesign. These progressive era institutions, the FCC 

and state commissions, which served us well, must have a different 

charge in the age of spectra and photons. Communications is no 

longer local or confined to a single platform. It is no longer just 

voice, but undifferentiated packets of voice and data that know no 

geographic bounds. The traditional jurisdictional distinctions cannot hold. 

32 

Next, the self-contained regulatory world and the legal distinctions that sustained it no longer signify. Legal definitions of information service and telecommunications service have no relation to 

today’s underlying technological reality. Thus, while legal fights remain, to quote my colleague, Randy May, mired in metaphysics, 

the underlying technological reality remains that a bit is a bit is 

a bit, and should therefore be regulated as such in the next Act. 

The regulatory regime needs to adapt to the architecture of today’s networks. Thus, the physical layer should be regulated the 

same across all platforms, and the remaining logical applications 

and content layers may or may not be integrated depending on the 

preferences of producers and consumers. That said, a premature 

common carriage requirement on all physical layer connections 

could destroy integration that serves consumers best, and there is 

reason to believe that an unregulated market will drive to the optimal result. 

This equally regulated, multi-platform world means regulators 

must loosen their control over pricing decisions. The old regulatory 

system allowed rates to be set to effectuate a vast cross-subsidy 

mechanism. In the new world, technologies like VoIP will evade 

regulators’ attempts at special regulatory treatment. 

Related to this, the intercarrier compensation system must be 

radically reformed so that access arrangements between carriers 

are rationally related to cost or better yet, left to the market, as 

is done currently in the Internet backbone market. 

And last but not least, the flourishing of networks means universal service policy needs to be rethought and refocused. What is 

universal service for? Well, it subsidized basic local voice line or a 

broadband connection. If you’re going to subsidize connections, who 

is eligible to receive compensation and how much? 

Rural American need not be left behind, but recognize that the 

traditional means of service values, rate averaging and cross subsidies are not sustainable. Rural America then needs a universal 

service policy that encourages innovation, scale, and competition. 

Subsidy mechanisms that spur competitive innovation rather than 

protect legacy industry structure need to be encouraged. 

The Committee also needs to think about what sort of institutions need to implement the next Communications Act. The current 

FCC is slow, technology is fast. The current FCC is riven by muddied political compromises and legal uncertainty, capital markets 

that will finance the next generation of networks need certainty 

and legal clarity. Administrative regulation such as currently practiced by the FCC and state commissions is Mother-may-I regulation. Mother-may-I regulation relies on advanced permission for engaging in this practice or that. Thus, companies have to get permission from the regulator to do business, get permission from the regulator to define the terms of a contract, and get permission from 

a regulator to charge a given price for a given set of services. This 

regulation was devised for an era of regulated monopoly and can 

no longer be sustained. 

By contrast, ‘‘wait until your father gets home’’ regulation occurs 

after the fact. This for the most part is what we empower agencies 

like the Federal Trade Commission and the Antitrust Division with 

doing. In this sort of world, the market and market players are free 

33 

to do what they want and use what technologies they want, subject 

only to ‘‘after the fact’’ antitrust and consumer fraud supervision. 

This, I submit, is the sort of regulatory model that is suited for 

the next Communications Act. It is law applying rather than law 

making. It minimizes regulatory errors. State regulation, meanwhile, in its traditional role of regulating prices and terms and conditions, has no place in the next Communications Act. State agencies have proven politically attentive and possess skills and resources to regulate franchise monopolies, but they are ill-suited to 

make competition policy. This is not to say that all state regulation 

need be wholly tossed aside. States, for instance, have adjudicative 

capabilities that the FCC does not. 

Finally, I urge you to reconsider the size and structure of the 

FCC. I think it’s not beyond the pale to consider things like a single administrator agency such as Britain’s OFTEL and also making 

the FCC part of the administration so there’s accountability for the 

decisions it makes. 

In conclusion, the next Communications Act is of enormous import. Congress cannot write a statute that means all things to all 

people. It will have to make choices about what sort of laws it 

wants to govern for the broadband Internet age. Those choices will 

dictate the nature and speed of the current and next generation 

broadband networks. Thus, this is not merely a matter of which 

company wins with this provision or that provision of the next Act. 

It is a matter of international competitiveness and America’s role 

as the preeminent digital age economy. 

On Monday, President Bush noted that clearing out the underbrush of regulation will get the spread of broadband technology and 

America will be better for it. President Clinton’s Administration 

championed the unregulation of the Internet. Unregulation and 

clearing out the underbrush should be the charge that you accept. 

Thank you for your time. 

[The prepared statement of Mr. Gifford follows:] 

PREPARED STATEMENT OF RAYMOND L. GIFFORD, PRESIDENT, THE PROGRESS & 

FREEDOM FOUNDATION (FORMER CHAIRMAN OF THE COLORADO PUBLIC UTILITIES

COMMISSION) 

Mr. Chairman, members of the Committee, thank you for the opportunity to speak 

with you this morning. My name is Ray Gifford. I am President of The Progress 

& Freedom Foundation, a think tank that explores legal and policy issues of the digital age. Also relevant to my testimony here today, from 1999–2003, I served as 

Chairman of the Colorado Public Utilities Commission, which means I had to try 

and implement what Congress thought the 1996 Telecommunications Act meant, 

and what the FCC told me Congress meant in the Act. 

The topic here today is what a reworked Communications Act should look like. 

I have some thoughts about that. First, however, before thinking about a new Communications Act, we need to think about the current Act and what we have learned. 

I believe that the Telecommunications Act of 1996 should be judged a qualified 

failure. It may have been a failure of concept or of implementation, but it certainly 

did not live up to the hope of its framers. The current Act is a failure because it 

does not provide a framework that anticipates the packetized, broadband Internet 

age; it is a failure because it presumes that two mutually incompatible goals—market competition and universal service—can be seamlessly reconciled; it is a failure 

because it added a pervasive layer of wholesale regulation to an already encompassing retail regulatory layer; it is a failure because of statutory ambiguity and 

self-contradiction. Finally, it is a failure because the competitive successes of the 

past eight years—in wireless, in broadband and now-emerging Voice over Internet 

Protocol (VoIP) services—happened despite the Telecommunications Act of 1996, not 

34 

1See 47 U.S.C. § 153(46). The legal counterpart to a ‘‘telecommunications service’’ is an ‘‘information service,’’ defined at 47 U.S.C. § 153(20). 2See Douglas C. Sicker, ‘‘Delocalization of Communications Networks,’’ Progress on Point 11.2 

(The Progress & Freedom Foundation, Jan. 2004). 

because of it. That failure is qualified, though, because the sectors the Act left relatively unregulated, wireless and cable, provide a roadmap of how to allow markets 

to emerge, regulation to recede and consumers to benefit. 

I understand that you are always supposed to have three overarching points to 

make, but I’ll consider my testimony a success if I convince you of two. My first 

point is that law and regulation should not—indeed, cannot—contain the dynamic, 

multi-platform competition of the broadband Internet Age. This premise counsels a 

recognition that regulatory burdens need to be minimized, and, more importantly, 

that the incentives for special interests to manipulate regulation to preordain a 

given market outcome need to be written out of the next Act. 

My second point is that the institutions charged with implementing the legislative 

vision you enact are in need of fundamental reform and redesign. These progressiveera institutions—the FCC and state commissions, which have in many ways served 

us reasonably well in the age of the circuit switched, copper network—must have 

a different charge in the age of spectrum and the photons. 

The System Is No Longer Closed 

The Communications Act of 1934 was written when the country had a unified, 

closed platform, the twisted-copper-pair-based Public Switched Telephone Network 

(PSTN). Every consumer needed access to that platform. People who wanted to communicate were locked-in to that platform. Because it was distance-sensitive, the regulatory apparatus could encompass the entire communications universe. There was 

a single product. It was voice communications. State commissions could set retail 

and intra-state rates; while the FCC could handle inter-state long distance. Rates 

could be manipulated to serve the social goals of keeping rural and residential rates 

low by making business and long distance rates high. 

Of course, technology started to erode this hermetic world. First, competitive 

entry came in the long distance market, where artificially high long distance rates 

attracted entry. Next, gradually, competition came to the business market in the 

late 1980s and early 1990s, where artificially high business rates induced new competitors to enter under the incumbents’ price umbrella. This world, interrupted only 

slightly by the Modification of Final Judgment (MFJ), led us to the Telecommunications Act of 1996, which aimed to bring competition into the local voice communications market. 

That single-platform voice world had some defining characteristics that made it 

necessary and relatively easy to regulate. First, it was localized, meaning that it 

was divisible into distinct local and long distance parts, and the infrastructure on 

which the communications traveled followed a knowable geographic path. Second, 

it was self-contained, meaning that the regulator could accomplish social goals by 

manipulating rates to accomplish desired ends. Third, this world had a single product—voice—integrated onto a single platform, the PSTN, and therefore could be regulated distinctly as a ‘‘telecommunications service.’’ 1 Finally, that world could be 

regulated according to the broadest of broad standards, the ‘‘public interest.’’ 

This age is at an end. Today multiple existing and emergent platforms compete 

for consumers’ communications dollars. Along with traditional PSTN-based service, 

consumers can choose between wireless PCS, e-mail and instant messaging, circuitswitched cable telephony and emerging VoIP technologies. VoIP in particular promises to bring a torrent of choice and progress that will rush over, through and past 

the old legacy regulatory rules. Moreover, these emerging platforms will only thrive 

so long as they avoid the old legacy regulatory quagmires and classifications. 

If we have moved from a closed to an open system of competing platforms, what 

does this mean for law and regulation? 

As an initial matter, communications is no longer local, but instead national and 

even international in scope.2 A packetized communication, be it voice or data, does 

not followed a prescribed geographic path. The traditional jurisdictional distinctions 

cannot hold. 

Second, the self-contained regulatory world and the legal distinctions that sustained it no longer signify. Further, maintaining these distinctions into the future 

will do serious harm to consumers and producers. Legal definitions of ‘‘information 

service’’ and ‘‘telecommunications service’’—such as are fought about endlessly in 

the Brand X Internet case, the FCC’s VoIP proceedings, and the FCC’s title I 

Broadband proceeding—have no relation to today’s underlying technological reality. 

Thus, while the legal fights remain, to quote my colleague Randy May, mired in 

35 

3 A shining example of how the law of unintended consequences applied to the Telecommunications Act came with the reciprocal compensation debacle. There, the prospect of garnering 

huge windfalls from Internet-bound reciprocal compensation distorted innumerable telecommunications business plans, all to no competitive benefit. 

‘‘metaphysics,’’ the underlying technological reality remains that a ‘‘bit is a bit is a 

bit,’’ and should therefore be regulated as such in the next Act. 

Third, it is no longer necessary for carriers to integrate facilities and services at 

the physical layer of the communications platform. The regulatory regime needs to 

adapt to the architecture of today’s networks. Thus, the physical layer should be 

regulated the same across all platforms, and the remaining logical, applications and 

content layers may or may not be integrated depending on the preferences of consumers. The layered conception of regulation means voice is merely another application running over a physical network, and thus cannot be distinguished for special 

regulatory purposes. 

Just because a layered conception of an Internet communications world is helpful, 

that does not mean it dictates given regulatory outcomes. We simply do not know 

the optimal degree of bundling and integration that will best serve consumers. In 

a competitive broadband, packetized world, there is reason to believe the market 

will drive to an optimal result of integration and bundling that is beneficial to consumers. A premature ‘‘common carriage’’ requirement on all physical layer connections could destroy the integration that serves consumers best, and there is reason 

to believe that an unregulated market will drive to this result. 

Further, this equally-regulated, multi-platform world means that regulators loosen their control over pricing decisions. The old regulatory system allowed rates to 

be set to effectuate a vast cross-subsidy mechanism. In the new world, technologies 

like VoIP will evade the regulators’ attempts at special regulatory treatment. In the 

end, just as now, the costs of networks must be borne by consumers. A freer, more 

explicit pricing system will serve them best. Related to this, the intercarrier compensation system must be radically reformed so that access arrangements between 

carriers are rationally related to cost, or better yet, left to the market, as is done 

currently with the Internet backbone market. 

Last but not least, the flourishing of networks means that universal service policy 

needs to be rethought and refocused. What is universal service for? Will it subsidize 

a basic, local voice line or a broadband connection? If you are going to subsidize connections, who is eligible to receive compensation and at what rate? 

Rural America need not be left behind, but recognize that the traditional means 

of universal service values—rate averaging, cross-subsidies—are not sustainable. 

Rural America then needs a universal service policy that encourages innovation, 

scale and competition. The viability of programs such as reverse auctions, which 

would create competition for universal service support and encourage low cost 

innovators, need to be studied. Likewise subsidy mechanisms that spur competitive 

innovation rather than protect legacy industry structure need to be encouraged. 

The Institutions Must Reform 

The Committee also needs to think about what sort of institutions need to implement the next Communications Act. The FCC is slow; technology is fast. The FCC 

is riven by muddled political compromises and legal uncertainty; capital markets 

that will finance the next generation networks need certainty and legal clarity. Because of its tendency toward political, as opposed to legal, determinations, the FCC 

has a dismal record in the courts on appeal. 

Put broadly, there are two sorts of regulation—‘‘mother may I’’ and ‘‘wait ‘til your 

father gets home.’’ Administrative regulation, such as is currently practiced by the 

FCC and state commissions, is ‘‘mother may I’’ regulation. ‘‘Mother may I’’ regulation relies on advance permission for engaging in this practice or that. Thus, companies have to get permission from the regulator to do business, get permission from 

the regulator to define the terms of a contract, and get permission from a regulator 

to charge a given price for a given set of services. This regulation was devised for 

an era of regulated monopoly, when there was a single provider and a limited set 

of services. 

This regulation is prone to high error costs because it presumes to set rules in 

advance. By its nature, mother may I regulation assumes the regulator knows best. 

But if the regulator does not, or even makes an honest mistake, then the whole industry can suffer.3

By contrast, ‘‘wait ‘til your father gets home’’ regulation occurs after the fact. This, 

for the most part, is what we empower agencies like the Federal Trade Commission 

36 

4This is not strictly true with functions such as merger reviews conducted by the Department 

of Justice or the Federal Trade Commission. The other salient difference between the FTC, DOJ 

and the FCC is that the former agencies are held accountable—by having to bring and prove 

their cases in court—to a rigorous standard of proof. By contrast, the FCC is subject only to 

after the fact review of their rulings under a deferential—but in recent years rarely met—administrative review standard. 5 But, finally, states themselves need to think about their willingness to allow their state resources to be conscripted into a Federal statutory and regulatory scheme. The current clamor 

for more state involvement in Federal communications law decisions belies that this is a Federal 

mandate on the states, and an unfunded one at that. 

and Antitrust Division with doing.4 In this sort of world, the market and market 

players are free to do what they want, use what technologies they want, do business 

with whom they want and charge what they want, subject only to after the fact 

oversight for antitrust violations, consumer fraud or other breaches of legal or contractual obligations. 

This, I submit, is the sort of regulatory model that is better suited for the next 

Communications Act. It is law-applying rather than law-making. It minimizes regulatory errors. ‘‘Wait till your father gets home’’ regulation has the added advantage 

of allowing technological ingenuity and entrepreneurial dynamism to take the market in places the regulators cannot have ever imagined. 

State regulation, in its traditional role of regulating prices, dictating contractual 

terms and conditions, has no place in the next Communications Act. State agencies 

have proven politically attentive and possess skills and resources necessary to regulate franchised monopolies. But they are ill-suited to make competition policy. This 

is not to say that state regulation need by wholly tossed aside. States have adjudicative capabilities that the current FCC does not. So long as private carriers do not 

resort to private arbitration models for contracting and dispute resolution, there 

could be a state role here. Likewise, state regulators might be better prepared to 

assume a greater role in consumer protection.5

Finally, the size and structure of the FCC should be reconsidered. Congress needs 

to consider whether a single agency administrator, like Great Britain’s communications regulator, would better serve the policymaking needs of the broadband Internet age. Congress should also consider making that administrator part of the executive branch, thus making communications policy—like antitrust policy—accountable 

to the President. 

My experience with the FCC is of an agency of singularly dedicated and qualified 

individuals working tirelessly to follow the law and make sound policy. Yet, the 

FCC’s record in the courts is dismal. The fluidity of the FCC’s processes and the 

political nature of its compromises are designed for an agency charged with closeregulation. To become an agency geared toward implementing sound competition 

policy, the FCC must be reformed to speak more singularly, adjudicate disputes lawfully and regularly, and become less of a forum for lobbying campaigns, than one 

of neutral legal disputations. 

Conclusion 

The next Communications Act is of enormous import. 

Congress cannot write a statute that means all things to all people. Congress will 

have to make unambiguous choices about what sort of laws it wants to govern the 

broadband Internet age. Those choices will dictate the nature and speed of the current and next-generation broadband networks. The choices will further determine 

the competitive station of the U.S. compared to the rest of the world. Thus, this is 

not merely a matter of which company ‘‘wins’’ with this provision or that provision 

of a rewritten Communications Act. It is a matter of international competitiveness 

and America’s role as the preeminent digital age economy. 

On Monday, President Bush noted that ‘‘clearing out the underbrush of regulation, . . . we’ll get the spread of broadband technology, and America will be better 

for it.’’ President Clinton’s administration championed ‘‘the unregulation of the 

Internet.’’ 

Unregulation and clearing out the underbrush should be the charge you accept. 

I do not deny that in lawmaking there is an element of predictive judgment in my 

testimony today. With the proper regulatory conditions in place, new technologies 

will eclipse what remaining pockets of market imperfection persist in the communications space. But your choice is not between correcting market imperfections with 

perfect regulation. Your choice is between slightly immature, but largely self-correcting markets and demonstrably imperfect regulation, regulation that does not 

self-correct and, to the contrary, often impedes progress and economic growth. 

37 

As you sit down to fashion our next Communications Act, remember what we 

have learned since the ’96 Act. Competition and innovations flourishes where regulation retreats. I urge you to bring that to the whole communications sector. 

Thank you again for the opportunity to speak with you this morning. 

The CHAIRMAN. Thank you very much. Just to have on the 

record, beginning with you, Mr. Thierer, do you all support the extension of the Internet tax moratorium? 

Mr. THIERER. Yes, I think that’s a very important proposal that’s 

moving right now on the Senate floor. 

The CHAIRMAN. Or not moving, depending on—— 

Mr. THIERER. Not moving, and I’m glad to see that you’re attempting to broker a compromise on it. 

The CHAIRMAN. It’ll have ethanol and perhaps minimum wage to 

consider along with the Internet and others. 

Mr. THIERER. This is quite a discouraging development to say the 

least, but I’m glad to see that you’re trying to broker a compromise 

on this front. One hopes that we can get this finalized, because this 

is just the beginning of a potential flood of problems on the state 

and local front in terms of taxation, and VoIP is certainly the next 

target there, and then there’s Wi-Fi. 

The CHAIRMAN. Well, as you know, the opposition, and I’ll go to 

Mr. Ferguson next, but the opposition, all they have to do is obfuscate and delay. You have enough ethanol amendments, you have 

enough minimum wage amendments, and then it dies and they 

succeed, so it’s a situation where we have to act proactive rather 

than let existing law, which has already lapsed. 

Mr. Ferguson? 

Mr. FERGUSON. Senator McCain, I would support the extension 

of the Internet tax moratorium, but I would like to add and question everyone involved that taxes or the absence thereof with regard to these questions in this industry are extremely unimportant 

relative to accelerating the rate of technological change. If you get 

50 percent per year improvement in price performance, in 5 years 

that will totally drown out even a very large tax. 

The CHAIRMAN. Thank you. Mr. Gilder? 

Mr. GILDER. I’m for the moratorium and on taxation of the Internet. 

The CHAIRMAN. Mr. Hundt? 

Mr. HUNDT. I have a more conditional view. I believe that e-commerce is so certain to be huge, it already is very large, it’s so certain to be huge that sooner rather than later it’s important to figure out the answer to the sales tax problem. 

The CHAIRMAN. You know, I agree with you, Mr. Hundt, but I 

look at the spectacular failure of a simplified tax system with regard to catalog sales, and so to wait until it happens I think would 

be a long wait. 

Mr. HUNDT. I have no disagreement with your observation, but 

this problem is growing by hundreds of percent per year. Point 

number two, local municipalities, as you well know, have one issue 

that I’m sympathetic with and I suspect everyone is sympathetic 

with. They are almost always constitutionally in their states 

obliged to have equal treatment across all the different communications media, and it’s not clear to me that any of them know how 

to do that with the new paradigm of broadband access and converVerDate Nov 24 2008 07:44 Jul 18, 2016 Jkt 075679 PO 00000 Frm 00041 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\20707.TXT JACKIE
38 

gence and there’s no need, I agree, there’s no need to be approaching this brand new world of broadband with a sense of what taxes 

do we want to impose. But in terms of parity, I don’t think there’s 

guidance to be found for these municipalities in Federal law or in 

their own state law, and it’s an unsolved problem. 

Why does it matter? Because they do have to pay for swimming 

pools and public schools and libraries and local roads, and I’m sure 

the Committee knows, in the last 3 years of economic downturn 

and flatness, localities all across the country have lost somewhere 

between 10 and 40 percent of their revenue base. 

The CHAIRMAN. In reality, that’s not true. In the last couple of 

years, they’ve all had increases in state and local budgets. I’ll be 

glad to provide you with that information we presented on the 

floor. They’ve experienced an economic recovery over the last couple of years and a significant increase in revenues, including my 

own state of Arizona. Spending has gone up faster than their revenue increase, but their revenue has increased. I’ll be glad to provide you with that information, because this is the refrain we hear 

from the opponents of the extension on the moratorium. 

Mr. HUNDT. I had 100 of them tell me this at a conference 3 days 

ago so I wish I had had your information. 

The CHAIRMAN. Like to have been there and shown them their 

spending charts, yes. Drunken sailor, I believe, is the operative. 

Mr. HUNDT. I wouldn’t have said that to them. 

The CHAIRMAN. Thank you, Mr. Hundt. Mr. Gifford? Because I 

have one more quick question, if you’d respond and pull the microphone please. 

Mr. GIFFORD. I absolutely support extension of the Internet tax 

moratorium. I think it’s crucial. 

The CHAIRMAN. Thank you. Mr. Hundt, I want to get into this 

proposal of yours. As you know, Chairman Powell has made pretty 

much the same proposal. What’s the hang up? Broadcasters obviously, and also, perhaps more important to me anyway, are, as you 

mentioned, a few hundred thousand people who are still dependent 

on over-the-air television broadcasting for their television viewing. 

It seems to me, and I’m not trying to put words in your mouth, 

if we could experience the literally hundreds of billions of dollars 

of benefits from the use and auction and allocation of, as you mentioned, of analog spectrum given back, that we could easily afford 

to provide every one of those homes with a set top box or some 

other device. I’m not one who generally favors government giveaways, but when you look at the incredible benefit associated with 

the acquisition of that analog spectrum, that that would be at least 

some way of taking care of the ever-shrinking number of American 

households, and they are low-income households, so I am more and 

more inclined to taking some of those proceeds and providing those 

households with the ability to get their television viewing in return 

for this enormous benefit. 

And that’s my question to you, but also, how do we overcome the 

National Association of Broadcasters? They sat right here and 

guaranteed us that those analogs would be returned, and I said at 

the time, I said, it’s not true, you’re not telling us the truth. And 

they weren’t. 

39 

Mr. HUNDT. By way of violent agreement, this Congress, and you 

were very much a part of this, Senator, after the 1996 Telecom Act, 

followed up with the Satellite Home Viewer Act a couple of years 

later, that was a tremendously wise statute because that produced 

a new capability for satellite to deliver digital video, and as everyone here from a rural state knows, it has completely transformed 

the viewing habits of Americans primarily outside metropolitan 

areas. When you take the cable penetration and add it to the satellite penetration that has been obtained, we are now pushing 

against 90 percent. 

The problem that you and I, Senator, were on the same side of 

with respect to digital broadcasting 8 years ago, it was sublimely 

difficult then, it is ridiculously easy now, because we are down to 

such a tiny percentage of homes that depend on over the air for 

their TV. Yes, everybody would like to have it if it’s free, everybody 

says I’d like to have it, but they don’t depend on it. They have cable 

or they have satellite, we have roughly 90 percent that have 

reached that number. 

If indeed it is absolutely necessary to buy a dish or a cable subscription for the remaining 5 or 6 percent or whatever number it 

is, first of all, I would find that passing strange, but if it were necessary, the cost that we would be talking about for doing that 

would be in the neighborhood of just a couple of percent of the economic benefits to be obtained, not just from auctioning the spectrum, but from opening all that spectrum up to wireless broadband 

so that we would actually have broadband be affordable for 95 percent of Americans. 

So it’s a question of whatever it takes, but right now all the FCC 

has to do is look at that 85 percent that I remember you were crucial in making sure wasn’t 95 percent, look at that 85 percent and 

that number and count it right, and say when you add up everybody who has a cable subscription that gives you a digital feed, and 

when you add up everybody who has a satellite subscription that 

gives you a digital feed, and you realize that with a digital feed if 

it pleases you to buy a digital receiver you’ll watch HDTV, if it 

pleases you to buy a box you can translate it to that. That’s up to 

you. If you add them up right, you’re going to be at 85 percent, the 

threshold will have been met. 

The CHAIRMAN. Could I have brief comments since my time’s expired, from the other panelists about this issue? Mr. Thierer? 

Mr. THIERER. I find myself as well in violent agreement with this 

and I like the Reed Hundt plan. I haven’t had a chance to say that 

much in the last 10 years, but I really like what Mr. Hundt outlined, and I love what you said, Mr. Chairman, I think it’s the right 

path. We should probably consider a transitional subsidy mechanism, and I usually don’t endorse that either, but here it makes 

sense to return the very valuable analog spectrum or whatever we 

can get back from the broadcasters. We need to structure that as 

a limited, means-tested targeted approach, but it’s very much doable. There are boxes on the market today that can be utilized for 

this, that can be handed out for that purpose. I personally right 

now have three HDTVs in my house and three set top boxes that 

are about to be obsolete, but they’ll still receive a digital signal. 

They could be handed out to a lot of other people for a very low 

40 

cost, and that could assist us in getting up to the threshold, whatever it is, 95 percent to have universal television service, and then 

we can get that analog spectrum back. 

The CHAIRMAN. Mr. Ferguson? 

Mr. FERGUSON. Senator McCain, I’m going to in some way repeat 

myself. I’m all in favor of spectrum reform, I’m all in favor liberating that spectrum from the National Association of Broadcasters, 

I feel your pain. But I once again must caution everyone concerned 

that this is not going to solve the broadband problem for extremely 

fundamental technological reasons. It has long been the case and 

continues to be the case that wireless technologies are behind wire 

line technologies by about two orders or magnitudes, well, two generations, one order of magnitude in their price performance characteristics, and all of the nations that are now well ahead of us in 

broadband deployment are using wire line deployment and they are 

doing so using competition in the wire line sector. 

The CHAIRMAN. Mr. Ferguson, I don’t disagree with anything you 

say, but I’m trying to free up the spectrum. I’m trying to free it up 

as quickly as possible, and if you’ve got a better way of doing that, 

I’d love to hear it. 

Mr. FERGUSON. No, no, I don’t mean to disagree with the proposition that it should be done. I’m sorry. 

The CHAIRMAN. Thank you. Mr. Gilder? 

Mr. GILDER. I agree with the proposition with no buts. 

The CHAIRMAN. Mr. Gifford? 

Mr. GIFFORD. Absolutely. 

The CHAIRMAN. Thank you. Senator Dorgan. 

STATEMENT OF HON. BYRON L. DORGAN, 

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. Mr. Chairman, thank you. First of all, this is 

I think an interesting discussion and one that is really important 

and necessary. Let me ask a couple of questions about some of the 

testimony about the pace of broadband deployment in, for example, 

South Korea and Japan. Can one of you tell me what kind of involvement by government incentive or regulation or policy has resulted in that kind of development or build-out or is it just serendipitous that they decided somehow as a group of people living 

on this Earth we all want to create a new demand for broadband? 

Was there something that represented government policy that has 

resulted in this extraordinary rate of build-out? Mr. Ferguson? 

Mr. FERGUSON. The answer is yes. There are common characteristics to most of the nations that are now well ahead of who are 

not, by the way, just the nations you mentioned, but they include 

Israel, they include Canada, they include France. The most dramatic are South Korea and Taiwan and Japan, but the others are 

important too. 

And they all share one characteristic and most of them, not all 

share a second. The first that they all share is that there has been 

a strong government recognition that this technology is imperative 

for their societies and that they must overcome the opposition of 

their incumbents and create a truly competitive industry, and in 

fact, if you look at the Japanese market, it is fiercely competitive 

based up on resale at very low prices of loops to competitors. 

41 

Senator DORGAN. Is it a type of UNE–P process almost? 

Mr. FERGUSON. Yes. The details are very different because these 

countries are different, their regulatory systems and industries are 

different, but in effect yes, it’s the government saying you must sell 

to anybody at roughly this price and you have to let them into your 

central offices and you have to let them connect, and if you don’t 

do it in a prompt and timely way, we are going to make damn sure 

that you do. 

Senator DORGAN. And that has created robust wire line competition for broadband? 

Mr. FERGUSON. Yes. 

Senator DORGAN. Mr. Gilder, I only heard the last part of your 

testimony, I read it, and as Senator McCain indicated, it is interesting. If you had been advising the Japanese, would you have advised against what Mr. Ferguson just described they did? 

Mr. GILDER. Yes, I would have advised against that, but the key 

thing about Japan is it’s simple, there’s one body that sets the 

rules and they observe the rules. It’s not litigated through 50 states 

and the FTC and FCC, it’s not this maze of rules and opportunities 

for litigation. 

Senator DORGAN. Mr. Gilder, would you believe that we should 

continue some kind of universal service fund? 

Mr. GILDER. No. 

Senator DORGAN. Do you believe a universal service approach 

should be abandoned? 

Mr. GILDER. I think so. 

Senator DORGAN. And therefore price and open competition 

should determine what people pay for a service? 

Mr. GILDER. Yes. 

Senator DORGAN. Universality is not any longer a national goal 

or of national interest? 

Mr. GILDER. Well, I think you can retain universal wire line 

phone service if it’s a deep commitment. I think it will reduce the 

universality of a service, that a free market will deliver more telephony, more broadband, more services of all kinds than a regulated, universal regime. 

Senator DORGAN. But if a free market would decide that the cost 

of a communications service is $180 in a small county in a rural 

part of North Dakota versus $22 in an urban county in New York, 

that’s just the way it is and if the folks who can’t afford it in that 

small rural county can’t afford it, tough luck? 

Mr. GILDER. I think it’s regulation that’s resulted in costs in the 

United States that far exceed the costs that are being delivered demonstrably in other countries at far lower prices, the services that 

are delivered at far lower prices. 

Senator DORGAN. The reason I asked the question is I wanted to 

see how far this entertaining philosophy goes, and I obviously have 

some very significant disagreements with you about universal service. I think that in this area, whether they build out a broadband 

or a basic telecommunications service, I think the principle of universality has been a critically important principle, and we have by 

public policy driven that principle in a constructive way to benefit 

all citizens in this country. 

42 

So having said that, let me just also ask a question about something we have done. Senator Burns and I have authored legislation 

that is on the books that provides a substantial number of dollars 

in loan guarantees, well over $1 billion in loan guarantees at RUS 

for the build-out of broadband services. Both of us are a little chagrined that there has been very little happening with respect to 

that. I think in terms of public policy, I think our country ought 

to decide and describe a public policy that is aggressive, that uses 

the market system, but also uses the capability of effective regulatory judgments here and tries to accelerate the build-out of 

broadband. 

Mr. Hundt, are you aware of the provision that is now law that 

has this money resting at RUS down at the Department of Agriculture, but effectively not being used in any significant way? 

Mr. HUNDT. Yes, and by contrast, in Korea, the government spent about $1–1/2 billion on direct cash grants for network backbone build-out and also set aside more than $1 billion, I think it’s 

roughly the same number, although it’s a much, much smaller 

country, for low-interest loans to operators for actually building 

high-speed, physical mediums, typically fiber. That didn’t pay for 

all of it, but it was a catalytic effect on the development. 

Senator DORGAN. And that’s what we have done here, and we’ve 

obviously talked to the Secretary of Agriculture and said, let’s get 

moving here, the Congress has appropriated this money, it’s available, and we want to accelerate the deployment. 

But let me also make another point that I think is important. It 

relates a little bit to the universal service issue. I saw an ad a 

while back, I think it was about Blackberry, and most of you perhaps walk around with some form of electronic communication. Do 

some of you have a Blackberry? Yes. And so if you read an ad 

about it, it says covers 95 percent of the country. What they mean 

is population, because you get on an airplane here and fly to a substantial portion of America and deplane at an airplane someplace, 

your Blackberry’s not going to work. But it’s true that it covers 95 

percent of the population centers, but go to North Dakota, for example, and try to pick up your signal, it doesn’t exist. 

My point is that the build-out of some of these services, as we 

talk about them in these hearings, we sort of describe them as, 

well, everybody has access to all of this right now. They don’t. It 

is very uneven. Obviously the market system will move to those 

areas where the income stream most robustly provides support for 

the build-out immediately, and so you do have then digital divides 

in a number of areas, and it causes those of us from rural areas 

no amount of angst, as you might imagine. 

And that’s what I feel very strongly that our country ought to 

embark on a national policy of aggressive, robust build-out. I don’t 

necessarily share a couple of the comments about regulation, quote, 

unquote. I think in some areas regulation has been wholly constructive and very important in the development of policies of how 

we move. 

And if I might just make one comment, when AT&T was broken 

up and we developed by regulation in this country the opportunity 

for a very competitive long-distance service. It was so God-awful 

competitive that you couldn’t eat meals without having your phone 

43 

ring having somebody ask you whether you wanted to change your 

long-distance service, and it drove down price dramatically. That 

was good competition, aggressive competition that benefited the 

consumer, but it only happened because of constructive government 

interference requiring AT&T to make their system available to others at wholesale price, because all these competitors didn’t build facilities base competition models. 

So as we proceed down this road, I think it’s very important for 

us to understand we need thoughtful regulation, regulation that 

works, and then we need to use the market system, absolutely use 

the market system and all the juices that it contains to benefit consumers and help this build-out. 

Your testimony, I’ve read all the five pieces of testimony, I think 

it is a really interesting contribution to what we face, because we 

have to think through about the 1996 Act what did we do, what 

has been the result of it, and there are some that want to go in 

immediately and just change it because they think it was just a 

complete failure. I don’t believe that at all. I believe competition is 

coming slower in local exchanges than I would have liked, but I 

think that the basic philosophy behind this to try to create more 

competition in local exchanges to benefit the American consumer is 

basically still pretty good philosophy, and I hope that if there are 

changes to be considered here that they will be changes that will 

improve the Act, not represent a notion that the Act was somehow 

unworthy, because I don’t share that vision. 

I had some questions and I’m out of time. I’m sorry I didn’t ask 

the questions, but I did want to say I think the statements that 

all of you have written are a really interesting contribution following on yesterday’s hearing as we begin thinking through what 

we do now in the next 6 months or a year. 

The one thing all of you have said, which is important for us, is 

our country needs a national policy with some urgency to catch up 

as it were, not necessarily to catch up in technology but to catch 

up in the will of our country to express itself with respect to an 

aggressive build-out of these new opportunities, because it will be 

job-creating and will produce greater productivity and economic 

growth in this country. 

Mr. Chairman, thank you very much. 

Senator BURNS. [presiding]. Thank you, Senator. Mr. McCain 

had to go to the floor and I’ve got a couple of questions and I think 

you’ve answered most of the questions just in your testimony. I can 

remember back in 1990, and Mr. Hundt, you were around about 

that time but you weren’t chairman yet but you were going to rise 

to that position. I was sitting way down there where you had to 

have field glasses to see if I was there, brand new Senator, and the 

discussion on this Committee on that time was the re-regulation of 

the cable industry. 

And I had it in my mind that rather than to re-regulate them, 

let’s provide some competition, and I came up with a little idea 

called video dial tone. Remember that? You bet. And I offered my 

amendment, and the Chairman was Mr. Hollings, and he was 

caught off-guard. I remember Mr. Inouye, Wendell Ford, I mean, 

the whole gamut of the Commerce Committee, and all at once this 

idea that the competition into that where we had franchises at that 

44 

time and the state utility commissions were very much involved, 

Mr. Gifford. 

And so I didn’t know if I had enough votes to pass it and Mr. 

Hollings didn’t know if he had enough votes to defeat it. When you 

get into a situation like that, you immediately adjourn the Committee and move to the back room and discuss things. And so we 

decided we’d have a hearing and we’d look at the law as it pertains 

to this and we would go on to another subject. 

When I first came to the Senate, I was the only one in this town 

who did not think that spectrum was a national resource. I said it 

was a technology. The very reason for the FCC was to engineer it, 

and to make sure everybody who had some spectrum stay in their 

lane, just stay in their lane, and to use it any way that they so 

choose, and I still basically in my heart still believe that. 

But I’m the only one that does. Maybe Mr. Gilder may agree 

with me on certain points. I know Mr. Ferguson would not. So we 

went into the auction idea. What happened? People come in and 

bought this spectrum and just spent money like you can’t believe, 

especially in light of the 1996 Act. Now, there’s a lot of you says 

it’s been a failure, it hasn’t worked, but up until the 1996 Act, this 

is the first time that this town acted since 1935, 1934. 

We’re dealing with technologies with a 1930s kind of tool. That 

wasn’t going to work. And nobody had made a move to do anything. 

Whatever we did we had to get off a high center. So in that respect, 

I think the Act has contributed to a new dialogue and will probably 

lead to a new paradigm because there’s no way we could have written that thing correctly. There is no way we could have done it. 

So my question is, if spectrum is going to be treated as a national resource, let’s approach the spectrum use and the fees as we 

do, like on any other piece of government ground, that we charge 

grazing fees, access fees, park fees. Let’s go, we might sell it, but 

there’s also going to be a little royalty paid every year and that you 

must put the spectrum into use, because we had a lot of spectators 

just bought spectrum out here and set it aside because it’s going 

to be worth a lot more money later on and we don’t have to do 

nothing, and that didn’t work either. 

So we’ve been looking at this spectrum policy a lot and we’ll 

probably come up with one. We won’t do it this year because we’re 

going to talk about ethanol and minimum wage on an Internet tax 

bill, but next year I think you’re going to see a lot of movement 

toward spectrum reform and new spectrum will be added and a 

new way of doing things, and I know several countries have looked 

at the royalty idea, and besides that, that brings more income to 

the Federal Government in perpetuity down the years than just 

one sale and then we spend the money, and the budgeteers always 

spend that money. I know they spent the same, out of the same pot 

for the last 5 years, and everybody spends out of it. 

So I’m going to ask just a simple question. Since we got the dialogue started, since there wasn’t anybody else around here that decided basically that little idea of video dial tone, led to a dialogue 

that finally got us to the 1996 Act, because that dialogue picked up 

and it just kept gaining, maybe we should look at this thing. Digital, everybody says the Internet was never mentioned, or emerging 

technologies. What in the world do you think ones and zeros; we 

45 

knew that everything was going to come down one pike and you 

weren’t going to be able to identify a message as this is a radio 

band, this is a TV band. You’re going to lose that identification because everything is going to be ones and zeros. 

So it had to happen. We knew that then, and that’s why we had 

several sections in there that applied to the build-out of broadband, 

and we knew that was coming, although there are a lot of people 

that overlooked those different sections. 

What’s the single greatest mistake that we made in the Act? The 

single greatest mistake when we passed the Act? And then I’m 

going to ask you, what is the single greatest mistake that the FCC 

made in applying the Act? Mr. Thierer? 

Mr. THIERER. Well, thank you, Senator. Very simply stated, I 

think the biggest mistake was that the Congress delegated broad, 

ambiguous, vaguely worded authority to the FCC and trusted them 

to enforce something as complicated as the Telecom Act in a simple, efficient fashion, and that failed because the single biggest 

mistake the FCC made is it overzealously attempted to micromanage a lot of results into existence that might not have been 

tenable at the time, and we are now living with the repercussions 

of that. We have a much larger FCC that regulates now more than 

ever before and they’re able to do that because the Telecom Act 

broadly delegated so much authority but didn’t really have any way 

of reining them in, and there has been unfortunately, not enough 

done to pull back on some of those broadly worded authorities and 

powers. 

Senator BURNS. Mr. Ferguson? 

Mr. FERGUSON. Somewhat uncharacteristically, I will agree substantially though not completely with my colleague from Cato. I 

think that much of the law is correct and what has gone wrong is 

that the law has not been effectively enforced. I think that the FCC 

tried, but the combination of lobbying from the incumbents, the 

court system, arbitration, state jurisdictions, resistance from the 

incumbents which was not prosecuted effectively by the Department of Justice, even under the Clinton Administration, permitting 

the mergers, all those things subverted and eventually destroyed 

the intent, subverted the Act and eventually destroyed the ability 

of the FCC to do its job and of the law to be enforced. 

Senator BURNS. Mr. Gilder, your writings and teachings are very 

refreshing. What do you think the biggest mistake that we made? 

Mr. GILDER. I think you tried to privatize the risks and socialize 

the returns and prevented the emergence of a single industry by 

balkanizing it into scores of different categories. 

Senator BURNS. Would you agree with the statement though, the 

initial step of this Act didn’t benefit consumers? 

Mr. GILDER. No. 

Senator BURNS. Mr. Hundt? 

Mr. HUNDT. Well, this is a bit of a when did you stop beating 

your wife question, Senator. I think it’s important to recognize that 

we finally found an area of very radical disagreement even between 

Mr. Gilder and me. Benefit consumers, the prices for virtually 

every single communications service have dropped precipitously. 

The only exception is local telephone and that’s gone up at approximately the same price as the correlation with the GDP growth, and 

46 

that’s also because that’s capped and set by the states, and that’s 

a constitutional power that they have. 

Now, overall the GDP in this sector is much, much higher, grew 

at more than double the GDP growth rate for the whole economy. 

Productivity gains are fantastic. Whenever Dr. Greenspan is up 

here telling you all about productivity gains and how that justifies 

super low interest rates, he’s actually giving credit to the communications and computer sectors of this country, but not just the 

computer sector, because there were no productivity gains until the 

computer became a communications device. 

Now, if you wish, my colleagues here all could say that happened 

in spite of the law, but I would like to say that it certainly wasn’t 

stopped by the law, and as you said, it was stopped by the 1934 

Act. It was important to kick that thing out and bring in something 

else, and I think you should feel very, very good about the changes. 

Is there anything that was imperfect? There’s one single thing. 

Whether you like the regulations or don’t like the regulations, 

whether you think that the courts got it right and the courts got 

it wrong, everyone in the world ought to agree that there’s no possible excuse for a judicial review process that 8 years after this law 

was signed is not even close to being finished. That is not a function of the FCC. That is a function of the absolutely intolerable inattention by the judiciary to the importance that they do their job 

crisply, clearly, and promptly. 

We have had so much litigation that has lasted so long, and even 

now the FCC is in the middle of some kind of public opinion poll 

about whether to take the most important case back to the Supreme Court for what in effect is the fourth round on the same set 

of issues. 

How can that be fixed in other statutes and other areas? Congress picks special courts and they expedite the judicial review 

process. If we had known in 1995 and 1996, how unbelievably protracted would be the judicial review process, I’m sure that all of us 

involved in that statute would have said we’ll think of an expedited 

way to handle that. Even if you didn’t like the court results, if I 

didn’t like them, Adam liked them or vice versa, we all wished that 

they had actually happened instead of going on ad infinitum. 

But I just want to say one thing. The four things I’ve asked you 

all to do here today, Senator, they are all within the ambit of the 

law. They do not require that you rewrite the law or that you have 

spectrum reform or philosophical changes of mind. They can all 

happen right away, and if they don’t happen now, you will be saying to the entire world of engineers, don’t design the cheapest wireless broadband, put all your R&D in designing much more expensive broadband will be slowing radically the whole development of 

wireless broadband. There’s no reason for it. 

We just need to nudge right over our friends at the FCC and say 

to them, this is important to the American people for competitiveness, for the social reasons Senator Dorgan talked about, for a 

standard of living going up, and the things I’ve suggested don’t undercut the broadcasting medium. They’re absolutely on the margin. 

I haven’t said anything that should bother any broadcasting network governing 85 percent of the people. 

47 

And you know in your state, if you took that measuring stick, although people still happily hear your voice wafting in their memory 

over the radio waves, most of the spectrum isn’t used. You know 

that. 

Senator BURNS. Mr. Gifford? 

Mr. GIFFORD. I think the Act did do some good things, Senator, 

but it was both too broad, as Adam said, in that it gave a very vast 

grant of amorphous power to the FCC to define what in a regular 

market we would call contract and property rights that various carriers have with one another. But it was also too narrow in certain 

circumstances if you take for example the reciprocal compensation 

piece of the Act, which was a very benign part, it appeared to be 

a very benign part of the Act. It turned out to be a multi-billion 

dollar arbitrage opportunity that distorted many companies’ business plans—— 

Senator BURNS. That is true. 

Mr. GIFFORD.—and led to no wealth creation or competition. And 

I think the second thing that the Act didn’t anticipate, and in some 

ways it couldn’t have, which is why we need to go through another 

iterative process to decide what the next Act should look like, is it 

was aimed at bringing competition to the voice market, and the 

voice market is not really what we should be focused and fixated 

on. As George Gilder said, it maintained the old distinctions between cable and wireless and common carriage and it prevented 

them from becoming one big, undifferentiated broadband market. 

And where you look where we’ve had successes since the 1996 

Act, it’s those areas where there hasn’t been as much regulation, 

which is the wireless sector and the cable sector. 

Senator BURNS. But we knew those signals were going to merge, 

just like I said a while ago. We’re not going to be able to tell if we 

intercepted any communication, whether it’s coming from a television station, AM, FM radio, there was always differences, everything that we did. There was high band, low band, all these things 

were different. 

But when that digital technology come in, it’s just ones and zeros 

and it can travel high band, low band, whatever band. 

Mr. GILDER. However, it travels better and farther in rural areas 

in low band, and that’s why Reed’s proposal is so important for 

those rural concerns which Senator Dorgan was raising. 

Senator BURNS. I think you’re exactly right. I appreciate your 

opinion on that, because we get hung up on little things. 

Mr. Nelson, it’s up to you. 

Senator NELSON. Thank you, Mr. Chairman. I just want to ask 

Mr. Hundt, the goal that you’ve laid out I think is an important 

goal, that what’s in the interest of the consumer is to deliver this 

product at the most efficient way, the cheapest price without interruption. 

Now, what you have laid out you said we could do overnight by 

coming out with legislation in this Committee. As a practical matter, when you’re talking about only 10 percent of the consuming 

public would have to be dealt with as you were talking, is it at the 

moment, since there’s the resistance to go from analog to digital 

and therefore people haven’t bought digital TV sets, isn’t that resistance going to be a lot greater? 

48 

So would you walk me through that, the fact that the American 

consuming public aren’t on digital TV sets now except that 10 percent. So walk through the practicalities of that. 

Mr. HUNDT. Yes, sir. That’s a very good question. This Committee, I think, for many, many years and virtually unanimously 

has felt that one of the things that ought to be universal is the receipt by everybody in the home of a television medium with lots of 

different channels so that you can choose your different entertainment and news and different points of view and so forth and so on. 

But what has happened is that Americans have not wanted to 

settle for just the on average two or three channels that come out 

of metro markets in many of the states represented by the Members of this Committee for two reasons. First of all, there are not 

enough channels, not enough choice. They don’t get to watch any 

of the cable news, they don’t get to go to ESPN, don’t get to watch 

the NFL draft for 46 hours. They wanted more choice. 

Point number two, in rural America, those signals weren’t reaching anyhow, so Americans said en masse, now nearly 90 percent, 

we’re willing to pay as long as we get a competitive price, as long 

as it’s a fair deal in terms of value, we’ll pay for cable, we’ll pay 

for satellite. That’s what’s happened. 

There’s no evidence that cable and satellite, now that they do 

compete since the Satellite Home Viewer Act allowed satellite to 

deliver broadcast signals, there’s no evidence that affordability is 

the problem here for people. There are people who say, I don’t really like TV, but we’re down to such a tiny number of people for 

whom it is sincerely an affordability issue and they just can’t afford 

it that it is perfectly possible to say with respect to that, we’ll let 

states, we’ll let localities, we’ll let cable and broadcast have some 

money out of the spectrum, anything at all in order to close that 

gap if there’s a real need, if there’s something the equivalent of 

food stamps for being together in a national medium. 

But what’s absolutely clear are two things. You don’t need legislation. You just need to sign, with all due respect, a letter that is 

by everybody here to the FCC saying to all five members, and 

hopefully you all could get all five to agree in telling them the following things, read the law. When it says that 85 percent is 

enough to call the conversion over, then call it over, and 85 percent 

means 85 percent of the people in the households in the United 

States are receiving a digital signal, which they are, they are right 

now, either on cable or satellite. And if they don’t want to buy a 

digital receiver to show it digitally, that’s their choice. If they want 

to wait till the price goes down next Christmas, which it will, and 

it’ll be lower the Christmas after that and lower still the Christmas 

after that, if they want to wait, let them wait. 

Senator BURNS. I just switched to color. 

Mr. HUNDT. I’ve got a black-and-white in the basement I’d be 

happy to offer here as an exhibit. They do never break, and that’s 

one reason why people are taking their time about switching. 

But your job has been accomplished. You wanted the digital signal out there, and through cable and through satellite, it is out 

there. So all we have to do is count the 85 percent right. This Committee negotiated that to a fare thee well in, I think, 1997, and it 

was a fair answer and just count it right. 

49 

Point number two. When you look at the spectrum that Mr. Gilder here pointed out quite accurately is the way to get these wireless 

broadband signals to go a long way in rural areas, it’s just so costly 

to dig up trenches 3 and 4 and 5 miles long, too costly. In the rural 

areas, just say to people, at the FCC they just have to sign a little 

order, they just have to get the votes to sign a little order. Just say 

to people, where the spectrum in the 700 MHZ range is not being 

used, and as long as you promise that your technology won’t interfere if it ever is used, as long as you make that promise, you can 

use this spectrum for wireless broadband. It’s called a secondary 

use. 

The engineers in the United States will go, I never knew there 

was a U.S. Government that was going to do something right. They 

don’t even know that there is a U.S. Government, but to the degree 

that they could find out that good news, you would lower the cost 

of wireless broadband in one fell swoop by 50 percent. You’d go so 

far toward making it affordable for everyone. You’d accomplish so 

much toward the goal of universality that within a short period of 

time, we would be back her talking about what do we do about the 

last million people that wireless broadband doesn’t’ work for. That’s 

the problem we want to have. 

Senator NELSON. I had said thank you, but I just thought of 

something else. Technology is changing so fast, to get that person 

out there in a rural area with a telephone, you’re not going to have 

to run a line out to them in the future. So can’t we approach universality in a whole new way because of the changes in technology 

and do it a lot cheaper? Because you don’t have the costs of running poles and lines for hundreds of miles. 

Mr. HUNDT. Absolutely, yes. 

Mr. GIFFORD. And I think, Senator, you’re exactly right. But 

right now that’s not the universal service system that we have and 

that’s why I think when you look at the next act that you can think 

and reconceive universal service, look at things like reverse auctions to where you’re getting that innovation out to the rural areas 

to where low-cost and low-priced innovators have the incentive if 

they need a subsidy to go out there and do it, which means you 

both reduce the universal service subsidy as a whole and bring 

rural America the advanced technology that you want to get out 

there. 

Senator NELSON. Then a Senator like Senator Dorgan from a 

rural state ought to embrace the changes that you’re talking about 

instead of being locked in the old definitions of universality. 

Mr. GIFFORD. I would never want to tell Senator Dorgan what to 

think, but I do think there are dynamic ways to do universal service that recognize that there are some reliance interests of the incumbent rural phone providers, particularly the rural ILECs, 

which are highly dependent on the old legacy regulatory system of 

access charges, universal service subsidies. They have to be weaned 

from that and they have to realize that technologies like VoIP 

mean they’re going to be weaned gently and seamlessly through a 

transition phase or very abruptly when there’s no money in the till 

to subsidize them with. 

Senator BURNS. But to follow up on that, and if the Senator 

would yield, my cooperative telephones and rural telephones have 

50 

done really a better job of getting more fiber in the ground and 

doing more about distance learning and two-way interact in rural 

areas than the RBOCs have done in areas where they had a more 

densely populated areas. And so they’ve done a commendable job 

and should be recognized for that. 

But there’s also a time, I am like Mr. Gilder, there is in universal service, there is a point of diminishing returns, and in fact, 

it may in some areas be boiled down to the fact to where it really 

limits and bars innovation and the deployment of new services. So 

there is a point there. 

Senator NELSON. That’s what it seems to me, Mr. Chairman, that 

we got to break out, not the fact that your telephone companies 

have put fiber optic cables in the ground, but what’s the most costefficient, good service for the future for your rural constituents. 

Senator BURNS. Well, the thing about it is, the reason they did 

that is because of the spectrum thing and the spectrum that they 

were allowed would not allow them to put the technology on there 

that would push that signal out a long way. So you also had to 

weigh that, and so we’ve been down that road. 

Yes, sir? 

Mr. THIERER. The way we might be able to solve this in the next 

Act is to once again reiterate the importance of making sure universal service is technologically neutral in character, and maybe 

the best way to do that is something that actually Senator McCain 

suggested many years ago, which is make the subsidy or assistance 

direct and targeted toward the end user, but let them decide how 

they’re going to go and use that subsidy or assistance to maybe buy 

a line from their coop or from their RBOC or from a cable company 

or a cell phone. 

Just yesterday in the Investors Business Daily, the latest stats 

came out on cell phone users who have cut their cord entirely. It’s 

up to just 5 percent, but that’s still impressive, but it’s estimated 

to go up to 30 percent by 2008. 

Senator NELSON. I couldn’t hear you. Cut their what? 

Mr. THIERER. Cut their cord, their wire entirely, who are completely wire free now, and this includes a lot of people in rural communities. 

Senator NELSON. I have a son and daughter that’s done the same 

thing. 

Mr. THIERER. And when I go back to my old farm home in rural 

Illinois, I see that people have cell phones everywhere. That may 

be the better way for the truly needy is to deliver that assistance. 

It might even be something that the states could administer better 

than the Federal Government and allow that sort of targeting to 

take place and that solves our problem in a technologically neutral 

fashion. 

Senator BURNS. Senator Cantwell. Sorry I didn’t get to you there. 

Senator CANTWELL. Thank you, Mr. Chairman. I appreciate it. 

Gentlemen, I don’t think anybody’s asked about CALEA. One thing 

that I would like to ask, I guess starting with you, Mr. Hundt. 

There obviously is now a petition before the FCC by DOJ and the 

FBI on what I equate to basically putting a network architecture 

into the infrastructure of the Internet and voiceover IP to get access. Are you concerned about that? 

51 

Mr. HUNDT. Yes. And I know you know, Senator, that this discussion has about 10 years of life in it already and—— 

Senator CANTWELL. It certainly does remind me of the Clipper 

chip, but yes. 

Mr. HUNDT. Exactly. Let me mention something here that I 

think speaks to this, and that is a request for proposal that the 

City of New York has put out for how to create across New York 

a wireless broadband mesh network that will be absolutely secure, 

absolutely reliable, and will permit them at last to solve communications problems across their firemen and policemen and all their 

different public safety organizations. 

Now, they have as much concern about security as anybody else 

does for tragic reasons that we all know. That proposal is a proposal in which they’re saying to the hardware and software community of the world that you’re so familiar with, tell us your solutions and we’ll pick the one that meets our bid requirements and 

is the lowest price, and so systems integrators have gotten together 

and they’ve contracted out the security problem to different firms, 

I don’t know who they all are because it’s a sealed process but it 

will be revealed, and I believe that we will see in that process a 

very instructive experiment in a very important city with tremendous technology issues and security issues. And I think that will 

teach us a great deal about how to address all the security issues 

that the FBI and other agencies are constantly addressing here. 

But here’s the main thing about it, because I’m kind of riding 

this horse. That whole proposal is pitched for the unfortunately 

high frequencies in the spectrum chart because the FCC did not 

say you could put this in 700 MHZ, and so it’s way up in the high 

frequencies and everything is more costly and more problematic. 

Senator CANTWELL. Mr. Gilder, is there something unique about 

bits over voiceover IP that they shouldn’t go before a judge to get 

access to? Is there something so unique about them that there’s 

only one way to capture them and that is to have the FBI have a 

systems architect into the Internet? 

Mr. GILDER. I think that the problem is that this technology is 

changing so rapidly, as you know, that any fixed solution enacted 

at this point and deployed over the next 5 years will be hopelessly 

obsolete by the time it’s actually adopted. 

So I think that there should be more freedom for the FBI and 

the police to conduct their own arms race with possible abusers of 

the system rather than trying to provide some specific technological 

change now that will be easily circumvented as time passes by miscreants. And so I think what’s really critical is to understand we 

are in an arms race with terrorists and that we don’t disarm our 

people and prevent them from using information technology, data 

mining, all the various techniques that are commonly used already 

by insurance companies and credit card companies and use some 

of this technology rather than try to have technical fixes that are 

going to be obsolete by the time that they’re adopted. 

Senator CANTWELL. I don’t want to misinterpret your comments. 

So then you would be more in favor of the petition that’s currently 

in front of the FCC? 

Mr. GILDER. Yes. I’m not familiar exactly with what the petition 

is, so I can’t discuss it in specific terms, but in general terms. 

52 

Senator CANTWELL. Maybe we could followup, because I think 

you’re right, the task is difficult and the technology will continue 

to change and how do you keep them on top of it without giving 

them the—the three-legged stool of now going to a judge to get access is a pretty nice protection I think we’d like to keep. Thank you 

for your testimony in general, Mr. Gilder. I love your term lobbygagging, political lobby-gagging. I didn’t realize that was a term 

but I don’t know if you used it in your oral testimony but it’s in 

your written testimony. 

You discuss a lot the layer concept, which we had a little bit of 

opportunity to talk about yesterday, and I think I’m understanding 

what you were trying to articulate, you’re saying, don’t make the 

same mistakes of trying to over regulate, don’t try to come up with 

a framework, because it is moving so fast. 

But what then would you establish as you call it, the bright line? 

What would be your structure or bright line that you think we 

would have to have, or are you just saying, just get rid of the 1996 

Act and just let the market roll? 

Mr. GILDER. I’m for letting the market roll. There are plenty of 

laws out there. If serious abuses or monopolies or fraud or all of 

the vast array of laws that we have are ample to prevent any significant danger from the abolition of this huge regulatory maze 

that has paralyzed our progress and left us 11th in the world, I 

think actually massively behind the Asians in per capita bandwidth to homes and business. 

Senator CANTWELL. Do you think everybody’s going to end up in 

the same business, the various players, the telcos, the cable industries? Everybody’s going to end up basically providing the same 

services, the same bits, per se? 

Mr. GILDER. Right. And there are going to be lots of advances. 

Some of it’s going to be vertically integrated, they’re going to be all 

optical networks with wireless access. I think that’ll probably be 

the optimal solution, but I don’t want to prescribe it myself, because I think there will be other technologies now that they’re proposing power line delivery. I mean, there are just so many different 

ways to render this particular arena the single most competitive 

arena in the entire global economy, that the idea that you need a 

special set of rules to protect consumers is obsolete. 

Senator CANTWELL. And as the competition—and I think in your 

testimony you basically say that people will then integrate, we 

won’t have to worry about open access, we won’t have to worry 

about competition, it’ll just take care of itself. 

Mr. GILDER. Yes. I believe that. I don’t think you make money 

by depriving people of goods and services. 

Senator CANTWELL. And so do you worry about one or two big 

players? 

Mr. GILDER. No. I think there are ample players. This is a global 

economy. You have to compete with companies all around the 

world, and I think, I’m not at all worried about one or two players. 

Senator CANTWELL. So we don’t get all our bits from one person, 

one entity in the future? 

Mr. GILDER. Not unless the government mandates some continued balkanization and creates a whole area of monopolies and prevents the vertical integration which is absolutely always the first 

53 

step in the introduction of new technologies. It’s always going to be 

vertically integrated and a monopoly within its own defined sphere, 

but the competition comes and competing among the spheres. 

Google will be competing with Verizon with Deutsche Telekom with 

Time Warner. It’s just going to be a general competitive industry 

which happens to be the central industry of the world economy, 

and thus, it’s appropriate that it be free. 

Senator CANTWELL. Well, I think it’s a very interesting point. I 

don’t think that when Vocal Tech brought its first petition or when 

the first petition was brought before the FCC on IP telephony, I 

think that was probably like 1995, I don’t think everybody thought 

we’d be sitting here today with everybody going to be in the 

voiceover IP business. And yet the FCC could have ruled at that 

point in time on Internet telephony and made some decisions, so 

I think your point is right. 

And I just want to clarify, I think you’re saying then about these 

issues that we sometimes get obsessed with back here on things 

like universal service, your exchange with one of my colleagues, 

you think that will take care of itself. 

Mr. GILDER. I really do. I mean, think of TV. You didn’t have a 

universal mandate for TV and universality was achieved a lot faster with TVs than with telephones despite the universal service 

mandate. 

Senator CANTWELL. OK. Any other panelists like to comment on 

that vision of the future by Mr. Gilder? 

Mr. FERGUSON. I guess I would in principle agree with George, 

if antitrust law and enforcement were absolutely perfect, frictionless and instantaneous, but as we all know, they’re not. It was an 

antitrust action that led to the breakup of the original AT&T and 

that gave us competition in long-distance service and in telecommunications equipment. The last mile is basically the last piece 

of unfinished business in the American high technology economy, 

and it’s a gigantic critical bottleneck. 

If we were simply to deregulate the current incumbents without 

any effort to promote competition, to enforce competition, then 

what we would almost certainly get would be a duopoly in residential broadband service and in most cases, a single dominant telephone company in business broadband services. And both of those 

companies, both members of the duopoly in the case of residential 

service would have extremely strong incentives not to improve their 

broadband services, because the logical result of doing so would be 

the obliteration of their current entrenched monopoly businesses. 

In the case of the telephone companies, voice telephone service, 

including enhanced services, cost far more than it should and proper Internet-based technology riding a 50 percent per year improvement in broadband services delivered to homes would result in extremely drastic reductions in the price of voice telephone service 

over the next 5 years and the same would happen with regard to 

broadband services, real broadband services, which are currently 

extortionally expensive in the United States, and are showing no 

improvement or very little improvement in cost performance and 

haven’t shown any improvement over the past decade. 

In the case of the cable industry, the broadcast HDTV standard 

requires 19.2 megabits per second. Once you get to 30 or 40 megaVerDate Nov 24 2008 07:44 Jul 18, 2016 Jkt 075679 PO 00000 Frm 00057 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\20707.TXT JACKIE
54 

bits per second over a wire, you can deliver HDTV over the Internet and the utility of having a cable television monopoly declines 

rather precipitously. 

Both of these industries have shown absolutely no propensity to 

cooperate with—excuse me, to compete with, slip of the tongue 

there—to compete with either each other, except in the very limited 

case of residential broadband service, or to compete with other 

members of the same industry. Not a single incumbent telephone 

company has invaded the territory of any of the others or competed 

with any of the others in market whatsoever. 

Mr. GILDER. Except wireless, right? 

Mr. FERGUSON. No. In wireless they do not compete with each 

other. 

Mr. GILDER. Cingular and Verizon? 

Mr. FERGUSON. Cingular and Verizon have begun to compete 

with each other in a very limited way. They still do not offer primary service in the others’ operating areas, and if you look at their 

ownership structures, you can see why. They are being forced 

gradually to increase their competition with each other by competition from others in the wireless market, which made their duopoly 

status unsustainable, and that is what we should and must do in 

the broadband case. 

If we had the same kind of system that every other nation that 

leads us in broadband deployment has, namely obligatory resale 

and serious competition among multiple competitors using the 

lines, the least lines of the incumbents, that’s what works in 

Japan, it’s what works in South Korea, it’s what works in Canada, 

which has unbundled both its telephone and its cable infrastructures, if we had that, then, yes, the incumbents would begin to 

really compete with each other. 

Senator CANTWELL. Mr. Gilder, is Mr. Ferguson looking at a 

shorter-term view of the future and you a longer-term view? 

Mr. GILDER. Yes, and I also, I don’t agree that, in Korea, most 

of the fiber runs directly to the apartments or the basements of 

these big apartment buildings and then they have a variety of connections up through the apartment buildings, and there are only a 

couple of carriers in Korea and they don’t exploit each other’s lines 

very much. It’s not a major factor in Korea. It was a bigger factor 

in Japan because they only had one carrier essentially, NTT. 

Senator CANTWELL. Mr. Thierer, did you want to comment? 

Mr. THIERER. Yes, please. Senator, I think it’s very important we 

recognize the fact that in a network industry like communications 

and broadband, we’re not going to have the same economics as a 

corner lemonade stand. There are not going to be hundreds or 

thousands of small Mom and Pop providers in this industry ever. 

But it doesn’t mean with three or four very large integrated providers we can’t have true, facilities-based competition. And when 

we talk about the threats of monopoly and last miles, I always pull 

out my cell phone and say there’s my last mile right there. My last 

home had two satellite dishes and two cell phones. I didn’t have 

any wires and I got rid of that and I went to a new house and now 

I have wires again. Those are choices we’ll have between maybe 

two or three or hopefully four major competitors. That is a realistically competitive marketplace. I do not believe that a marketplace 

55 

based on mandatory unbundling and infrastructure sharing across 

the board can get us to that future, and it just pretends that we’ll 

have sort of hypothetical competition among a lot of smaller players trying to squeeze a lot of juice out of the same old lemon. Let’s 

go with entirely new wires for maybe three or four highly integrated providers. 

Mr. HUNDT. If I might, Senator, the reason that telephone exists 

and works and does the things that Adam is saying is because this 

Congress in 1993 passed a law ordering that the FCC make the 

spectrum available for the company to buy it on auction, to then 

use that spectrum to build the network, and now he’s locked into 

the technologies on his telephone. Yes, they will evolve, but they’re 

not going to change on the frequencies, and the reason they’re not 

going to change on the frequencies, and the reason he doesn’t get 

good reception inside buildings is because there was lock-in for decades because the only spectrum that was given for that was roughly 2.1 GHZ. 

Industries have lock-in. When you write a million lines of software code, I know you know this better than I, when you write a 

million lines of software code, you don’t then say for the next patch, 

I’m going to write the whole thing all over again. You’re locked in 

to the architecture that you start with. 

The reason we don’t have fiber networks in the United States but 

have copper instead was not because everybody was just dumb, but 

because when we built our networks, copper was the medium of 

choice because people hadn’t invented the optical technologies that 

George and others here have written about. 

So what I’m saying about wireless broadband is, let us not lock 

in this new technology to what is not the right frequency, what is 

the high cost solution, and what is the way to make sure that it 

goes as slow as possible and expensive as possible and reaches the 

smallest number of people. 

Let’s instead say to wireless broadband, we’re going to let you 

use the spectrum that long ago, 60 years ago, we said was the primary spectrum for tying everybody to the common medium of that 

age, which was broadcast TV. Broadcast TV didn’t just happen universally without the government. It happened because the government stepped in, made some mistakes, but by and large got it right 

in the sense that it said in every single city and town in the United 

States, more than 400 separate allocations of spectrum, it said to 

individuals in those towns, you have the legal right to use this 

spectrum and put up a tower and it’s the right spectrum for getting 

the signal out over a certain distance, and so the framework of universality was created, even as the technology of the TV transmission and receiver was being invented and the standards were 

set, and we had the same standards for years and years and the 

costs went farther and farther down. That’s how we got universality. 

There were lots of mistakes, but by and large, it was a relatively 

perfect marriage between a plan for spectrum use that the government presided over and technology innovation. The reason that 

era’s over is that, as you know, we’ve gone digital, and now we 

need that spectrum at the higher ends to be used for these new 

technologies. And if we don’t do that now, it is not going to get 

56 

easier later. It will be impossible later because we’ll be locked into 

the wrong spectrum choices. 

Senator CANTWELL. Thank you, and thank you, Mr. Chairman. 

I know I’ve been long over my time and I’m sure this debate could 

go on, and perhaps it should in a different forum, because I think 

really this is at the crux of how we—it’s not necessarily about just 

getting rid of the 1996 Act, it’s what’s the framework by which we 

look at the new world emerging before us, and is that more of a 

hands-off approach, and if that’s so, is it totally hands-off? 

So anyway, it’s been an interesting answers. Thank you very 

much and thank you, Mr. Chairman. 

Senator BURNS. Well, do you have another question? I think 

we’ve squeezed all out of this onion that we could get in one day. 

I want to thank the witnesses today and their testimony and their 

views. I’m sure you’ll be asked again as we debate this, because I 

think I can see a very exciting next 2 years coming up as far as 

this issue is concerned, and being that we’ve got everything out of 

this onion that we can get, this hearing is closed. 

[Whereupon, at 11:30 a.m., the hearing was adjourned.] 

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