```

[Senate Hearing 108-1021]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 108-1021
 
                   TELECOMMUNICATIONS POLICY REVIEW: 
                          A VIEW FROM INDUSTRY

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 12, 2004

                               __________

    Printed for the use of the Committee on Commerce, Science, and Transportation
    
    
    
    
    
    
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        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
                
                
                
                
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 12, 2004.....................................     1
Statement of Senator Allen.......................................     3
Statement of Senator Breaux......................................    40
Statement of Senator Cantwell....................................    49
Statement of Senator Ensign......................................    37
Statement of Senator Lautenberg..................................     2
Statement of Senator Lott........................................    42
Statement of Senator McCain......................................     1
    Prepared statement...........................................     1
Statement of Senator Nelson......................................     2
Statement of Senator Sununu......................................    44

                               Witnesses

Betty, Charles ``Garry'', President and Chief Executive Officer, 
  EarthLink, Inc.................................................    17
    Prepared statement...........................................    19
Ford, Scott, President and Chief Executive Officer, ALLTEL 
  Corporation....................................................    12
    Prepared statement...........................................    15
Roberts, Brian L., President and Chief Executive Officer, Comcast 
  Corporation....................................................     8
    Prepared statement...........................................    10
Seidenberg, Hon. Ivan, Chairman and Chief Executive Officer, 
  Verizon........................................................     3
    Prepared statement...........................................     5
Wilson, Delbert, Central Texas Telephone Cooperative on behalf of 
  the National Telecommunications Cooperative Association........    22
    Prepared statement...........................................    23

                                Appendix

Letter dated May 18, 2004 to Hon. John McCain from Delbert 
  Wilson, Central Texas Telephone Cooperative, Inc...............    57

                   TELECOMMUNICATIONS POLICY REVIEW: 
                          A VIEW FROM INDUSTRY

                              ----------                              

                        WEDNESDAY, MAY 12, 2004

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:32 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. Today we continue our series of 
hearings reviewing telecommunications policy. I will be brief 
so that we can hear from our witnesses. In previous hearings we 
took a look back at the Telecommunications Act of 1996 to 
identify the successes and failures of that law and looked 
forward to consider potential reforms to our telecommunications 
policy, given advances in technology.
    Today we will hear the perspectives of leading corporations 
in each of various industry sectors regarding the elements that 
should be considered in any legislation seeking to reform 
existing telecommunications law. I thank the witnesses for 
being here today and I look forward to their testimony.
    Our witnesses are: Mr. Ivan Seidenberg, who is the Chairman 
and Chief Executive Officer of Verizon; Mr. Brian Roberts, 
President and Chief Executive Officer of Comcast Corporation; 
Mr. Scott Ford, President and Chief Executive Officer of 
ALLTEL; Mr. Garry Betty, President and Chief Executive Officer 
of EarthLink; and Mr. Delbert Wilson, former Chief Executive 
Officer, Central Texas Telephone Cooperative.
    [The prepared statement of Senator McCain follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
    Today we continue our series of hearings reviewing 
telecommunications policy. I will be brief so that we can hear from our 
witnesses. In previous hearings, we took a look back at the 
Telecommunications Act of 1996 to identify the successes and failures 
of that law, and a look forward to consider potential reforms to our 
telecommunications policy given advances in technology. Today, we will 
hear the perspectives of leading companies in each of various industry 
sectors regarding the elements that should be considered in any 
legislation seeking to reform existing telecommunications law. I thank 
the witnesses for being here today and I look forward to your 
testimony.

    The Chairman. Frank, would you like to make an opening 
statement?

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. My statement will be short, Mr. 
Chairman. I appreciate the opportunity to just say a few words. 
Again, my appreciation for holding this hearing, this third in 
the series, to review the implementation and the effects of the 
Telecommunications Act of 1996.
    The 1996 Telecom Act, as it is called, ushered in what we 
thought would be, and what proves to be partially so, the most 
extensive change in U.S. communications law in the 62 years 
since the Communications Act of 1934. I believe that we should 
view the 1996 Act as part of an ongoing effort to protect 
consumers from potential domination by one telecommunications 
company or by several regional companies with monopoly power 
and to encourage innovation and investment in the industry.
    The best way to accomplish these goals is to facilitate a 
marketplace where all service providers can compete for the 
consumers on a relatively--and I use the term advisedly--even 
playing field. The tough part is creating the even playing 
field. Now, I am sure today we are going to hear from some 
witnesses who will argue that the cable industry is the biggest 
beneficiary of Congress's effort to deregulate the 
communications, telecommunications industry. The oft-quoted 
figure is that since 1996 the cable industry has been able to 
raise and invest over $75 billion on facility upgrades that 
allow operators to provide consumers with a wealth of new 
services, including digital cable, video on demand, cable modem 
service, and cable telephony.
    The witnesses for the telephone companies I am sure are 
going to point to cable's successes--I do not know whether they 
are going to do it admiringly or otherwise, or enviously, but--
point to cable's successes and say that phone companies should 
also be free from the regulatory burden. But I think it is 
important to remember that the Bell telephone companies, unlike 
cable, enjoyed a regulated monopoly status for so many years 
and they were able to negotiate a guaranteed return on their 
investment.
    I am sure today's witnesses, particularly Mr. Seidenberg 
and Mr. Roberts, who operate the biggest telephone and cable 
companies in New Jersey, will help clarify some of the 
implementation issues that we need to address as we revisit the 
1996 Act.
    I thank you, Mr. Chairman.
    The Chairman. Would Senator Allen or Senator Nelson want to 
make brief opening comments?

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Very brief, just to say that I am 
interested in hearing our witnesses' thoughts about the 
strengths and weaknesses of the Nation's telecom policies, 
looking forward to it.
    The Chairman. Thank you, Senator Nelson.
    Senator Allen.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Mr. Chairman, I would like to submit my 
statement for the record----
    The Chairman. Without objection.
    Senator Allen.--with a brief statement that, first of all 
commending you for having this hearing, which is very timely. 
The 1996 Act was certainly of value, but I think the greatest 
value has been all the advancements in technology, and we in my 
view ought to be doing everything that we can to remove burdens 
on the deployment of broadband, which is going to provide so 
many more opportunities, not just telephone lines and cable 
lines, but satellite, Wi-Fi, wireless, even power lines.
    With your help, Mr. Chairman, just a little over a week ago 
we did the right thing on preventing taxation of broadband, 
which certainly will provide all the new applications to get 
out there and provide people with the opportunities in commerce 
and education and access to information.
    We have, obviously, key stakeholders here today. I look 
forward to hearing their testimony as we determine how to, in 
my view, embrace the power of technology to operate in a free 
market rather than arcane government regulations that are 
stagnant, out of touch, or inflexible. To the extent that we 
can look at ways to encourage the infrastructure deployment and 
compelling applications for our Nation, I want us to be one of 
the leaders of the digital information age, and look forward to 
where we can examine the 1996 Act and improve it, update it, 
and make it better for consumers.
    Thank you, Mr. Chairman.
    The Chairman. I again want to thank a very illustrious and 
successful panel here today, or mostly successful panel today. 
We will begin with you, Mr. Seidenberg. Thank you for appearing 
before the Committee again.

          STATEMENT OF HON. IVAN SEIDENBERG, CHAIRMAN 
              AND CHIEF EXECUTIVE OFFICER, VERIZON

    Mr. Seidenberg. Thank you, Mr. Chairman. Thank you very 
much, members of the Committee. It is indeed a pleasure to be 
with you this morning and share our views on industry and our 
company in general.
    As you know, in our written testimony we laid out a lot of 
detail about the shifts that is occurring in our industry, all 
of the technological changes. The bottom line to us is that 
consumers today have more choices in which to provide services, 
telecom services, particularly over wireless, cable, and 
telecom networks.
    The other key point is, with the emergence of the Internet 
over the past several years, all these networks can be 
interconnected using IP protocols and packet switching 
protocols, which in effect tear down the silos that used to 
exist between cable, telephone, wireless, and other types of 
networks, radio networks for example. For example, today you 
can see you can have area codes that are portable. You could 
never do that before. So in our view the whole shift from local 
to national has occurred in the telecom space.
    Technology investment and innovation have created the 
competition and the consumer choice that we think were the 
stated objectives of the Telecom Act. As we further upgrade our 
networks to even higher speed broadband and IP-based 
technologies, consumers will see even greater benefits in terms 
of product innovation and economic growth and job creation.
    Now, Verizon. Verizon is a major player in this broadband 
market. You all know that. The key point I would like to make 
this morning is our record of commitment to deploying new 
technologies is clear and unquestionable. In fact, we have 
invested more as a single company in wireless and broadband 
than any other single company in the industry, and we continue 
to use our more than $12 billion a year in capital spending to 
aggressively transform our networks and our business model 
around new technologies in these markets. Of course, these 
network investments include things like expanded DSL service, 
packet switches that work on IP protocols, large-scale 
deployment of fiber optics, wireless, and the first ever 
deployment of wireless broadband.
    So, Mr. Chairman, there should be no doubt about our 
commitment to manage our business for the future or our 
willingness to take the business risk associated with investing 
in these new technologies. So for us, the question for us goes 
to the wireline or the traditional side of our business, is 
whether this level of commitment that we have made to 
investment is really sustainable over the long term.
    In our view, under the present regulatory regime that we 
operate under we feel that the ability to continue this level 
of investment is highly speculative. Now, the problem lies in 
the imbalance between the rules for investing in the wireline 
network as opposed to other technologies such as cable or 
wireless. The current system subjects those investments that we 
make in wireline to conflicting agendas and interpretations of 
regulatory agencies at every level of government, from 
municipalities to States to the Federal Government, imposing 
costs, injecting ambiguity, introducing bureaucratic red tape 
into every investment decision involving the wireline network.
    This is evidenced in our results over the last four or five 
quarters, including the last quarter, which shows that our 
wireless business has had a steady growth rate of more than 15 
percent a year for the past 2 years, our wireline business has 
been shrinking at an average rate of 4 percent a year.
    Now, our view is that, even in light, in the face of this 
shrinking business, we have been willing to invest to transform 
our growth profile around these new technologies, and we have 
done that with the understanding that over the course of the 
last 7 or 8 years, with the Telecom Act having been passed, 
that we would see a more stable environment for rules and 
investment.
    What we have found is the process is getting worse. So for 
us, we are very much concerned that we will continue to have to 
shift our focus away from wireline if we do not straighten out 
the imbalances that exist in regulation on the wireline side of 
the business. Any business person would tell you that there is 
always a short period of time that we would be willing to live 
with some business risk and some ambiguity, but 8 years now is 
a long enough period of time when we should have this thing 
straightened out. As we look out into the future, we think the 
practices of the past 8 years are likely to become the 
permanent rules under which we operate, which is just not 
acceptable to us.
    So what do you do? What we would ask is that Congress take 
the lead in creating a new legislative framework for the 
broadband era based on the same principles that govern any 
technology-driven industry, including cable or wireless, and 
have a policy that provides stability and uniformity across the 
industry and across the country, a policy free from any form of 
economic regulation of these investments, and common rules for 
enforcement, technical standards, and public safety where the 
Congress thinks they are needed.
    So you know that this is in our interest to see this 
happen. It will give us a chance to grow and compete. We are 
one of the few companies that have the resources and the will 
to participate in this market. Why is this good for you and the 
country? It is obvious. We will create economic growth and 
economic development. For every dollar we spend and invest in 
our business, it creates three dollars in additional investment 
and growth in other industries that depend on telecom services.
    Having said that, I appreciate the opportunity to address 
you this morning and hopefully you can clear the path to the 
future so we can all participate on a more even keel basis.
    Thank you.
    [The prepared statement of Mr. Seidenberg follows:]

         Prepared Statement of Hon. Ivan Seidenberg, Chairman 
                  and Chief Executive Officer, Verizon
    Mr. Chairman, Senator Hollings, and members of the Committee, thank 
you for the opportunity to join in this important examination of the 
future of telecommunications policy. Verizon invests more capital, 
employs more workers, and serves more customers than any other 
communications company in the U.S., so we have a vital interest in the 
outcome of your deliberations, as does the entire American economy.
    I would like to make three points this morning:

   First, that the communications industry has been changed 
        forever by a new era of mobility and broadband networks,

   Second, that Verizon is excited about the industry's future 
        and its potential to contribute to the economy and improve our 
        quality of life,

   And finally, that we urgently need a new approach to public 
        policy in order for us to continue investing in the high-speed 
        broadband networks at the heart of this vision of the future.
A New World of Communications
    This committee has heard a great deal of testimony about how 
radically technology has transformed the communications industry since 
Congress last took up this debate in 1996. This year, the total number 
of long distance calls made over the wireless network will exceed those 
made over the wireline network. More than 160 M Americans have wireless 
phones, almost one in five of whom will use their mobile phones as 
their main communications device. More than 70 percent of American 
households are connected to the Internet, increasingly via broadband 
connections provided by cable, wireline and wireless networks. A 
hundred million Americans now regularly use e-mail. Instant Messaging 
is not only becoming the principal means of communication for young 
people, but is also evolving beyond text into voice and video.
    And with the emergence of the Internet--which interconnects all 
these networks using an IP protocol--you don't need to own the pipeline 
to offer these services to customers; you just have to put your 
application and your content on the Internet, where customers can reach 
it over their broadband connections. That's what we're seeing now with 
the emergence of Voice-Over-IP--basically, as an application that can 
be offered on the Internet and essentially bypass the carrier who has 
the pipe into the customer. So we're seeing a whole new challenge to 
the traditional definition of communications services.
    The result of this explosion of new technologies is that the 
objectives envisioned by the framers of the Telecom Act of 1996--
competition, consumer choice, and rapid innovation--have been realized, 
not because of regulation but because of technology. About 40 percent 
of long-distance telephone and about a third of local telephone use has 
been supplanted by new technologies. But while revenues and access 
lines in the traditional telephone business are declining, the 
electronic communications market is expanding, providing Americans with 
many networks and many services from which to choose.
    In fact, I would argue that the ``telecom industry'' as we knew it 
is history. In its place will be the ``broadband industry'' made up of 
new, superfast, multimegabit networks that can deliver video, data and 
voice in entirely new ways. Today's ``first-generation'' broadband 
connections--whether DSL or cable modems--are just the first step. 
Truly high-speed, multimegabit networks go beyond faster downloads or 
cheaper phone calls, enabling two-way, multimedia capabilities that 
will revolutionize commerce, education and health care.
    Verizon agrees with the Consumer Electronics Association, the High 
Tech Broadband Coalition, and TechNet that delivering 100 megabits of 
capacity to people wherever they are--at home, at work, on the go--
should be the long-term goal for the communications and high-tech 
industries. These kinds of networks will create a platform for new 
applications, services, and communications technologies, giving 
Americans even more choices in the electronic communications 
marketplace than they ever could have imagined.
Verizon's Vision of the Future
    Verizon is a major player in this new broadband marketplace, and we 
are aggressively transforming our wireline and wireless networks around 
new technologies and new markets. My company invests close to $12 
billion in capital every year, more and more of it to deploy the 
broadband networks on which the information economy runs:

   We have equipped over 40 million lines of our network with 
        DSL capabilities and will continue to expand coverage, increase 
        speeds, add customers, and provide new services like VoIP.

   We are converting from circuit switching to packet switching 
        to accommodate the upsurge of IP-based traffic.

   This month, we will begin a large-scale deployment of fiber 
        in our local network. We expect to pass 1 million homes this 
        year and, potentially, another 2 million in 2005.

   And we have the largest and most advanced wireless network 
        in the U.S., which itself is rapidly moving to broadband 
        speeds. In fact, our wireless broadband service, EV-DO, is 
        available right here in Washington, D.C. and we are moving 
        quickly to expand it nationwide.

    Our strategy is to differentiate our company through investment and 
innovation: new applications, services and network platforms. We have 
shown how this dynamic works in our wireless business, which is a 
technology and quality leader in the industry. It is vital that we be 
able to do the same in our wireline business by making the huge 
investments required to transform our copper network around the 
requirements of the broadband era.
    These investments benefit not only the millions of homes, small 
businesses, hospitals, schools and corporations who rely on Verizon's 
networks for high-speed access, but also have an enormous multiplier 
effect on the American economy in general. Every dollar of capital we 
invest generates $3 of investment in the economy as a whole. One study 
finds that accelerated broadband investment by telecommunications 
companies would add more than $400 billion to GDP and 1.2 million jobs 
over the next 10 years. And keep in mind, these jobs will not only be 
in the high-tech sector, but throughout the economy: manufacturing, 
small business, creative, even at-home work.
    That is why the debate over telecom policy--in particular, its 
impact on investment and technological progress--is so important to 
America. The truth is, the U.S. is falling behind the rest of the world 
when it comes to broadband deployment--11th, to be precise, in one 
study. The average household in South Korea has more bandwidth than the 
average American business. Countries like Japan are deploying more 
fiber in their local networks than we are, forcing the U.S. to play 
catch-up in an infrastructure critical to technologies such as fiber-
optics. The extent of the harm to the U.S. economy is evident in the 
latest employment statistics, which show that the information 
technology sector--computers, telecom equipment, and telecom services--
is still losing jobs, even while the rest of the economy is growing.
    Verizon is optimistic about the future of our industry, and we 
believe our company has a positive, constructive role to play in 
delivering a new generation of technology to our customers. As we do, 
we will help stimulate a new wave of productivity growth, create the 
entrepreneurial activity that is key to America's economic leadership, 
and deliver the long-promised social benefits of broadband in health 
care and education.
A Policy Framework for the Broadband Era
    However, for that to happen, we need a policy framework suitable 
for a broadband era. Unfortunately, today's public policies are badly 
out of synch with market realities.
    The world Verizon operates in is characterized by the emergence of 
large, well-capitalized strategic competitors who are rapidly deploying 
IP and broadband networks to offer high-speed data, video and voice 
services in our markets. In fact, the C.E.O. of one of our biggest 
strategic competitors is sitting at this table. Brian Roberts's 
company, Comcast, currently has the leading market share in broadband 
in our markets and is rapidly upgrading its networks to offer IP 
telephony, as well. Unlike Verizon, Comcast can make these network 
investments in response to customer demand and market opportunity. It 
can earn a reasonable return on investment, unfettered by sharing 
obligations or asymmetrical tax burdens. And it can make investment 
decisions in an environment of reasonable stability, without the 
uncertainty of ambiguous and changing regulations.
    Similarly, wireless companies--including Verizon Wireless--can 
invest and innovate like real businesses. Wholesale rates are 
negotiated commercially. Prices are set in the marketplace in an 
environment of vigorous competition. The result is a market in which 
companies compete on price, quality and innovation, to the benefit of 
consumers across the country.
    Yet the world as seen through the lens of telecom policy could not 
be more different. In fact, today's policies ignore these market 
realities entirely--regulating my company one way and Mr. Roberts' 
another with respect to the very same types of services.
    Today's regulations look backwards to a time when the world was 
dominated by a single company, offering a single service. Under the 
current regime, regulators--not customers--set prices, create 
competition, and pick winners and losers. And because these rules focus 
almost exclusively on the old definition of communications--the 
traditional voice business--they discourage investment and innovation 
in the segment of the industry that arguably serves the broadest base 
of customers.
    To see the consequences of a system that imposes costly, burdensome 
rules on one set of competitors, compare the pace of innovation and 
investment in the heavily regulated telecom business with that of 
wireless, cable, Internet and other technology-driven industries.
    This is not good for America's long-term competitiveness in an 
industry vital to our future.
    Let me be very clear. Verizon does not seek to impose new 
regulatory burdens on Mr. Roberts's company or any of our competitors. 
On the contrary, we believe government regulation of broadband 
investments and Internet services is both unnecessary and 
inappropriate. Instead, we seek a forward-looking, market-based policy 
framework for all competitors--one that puts us on the same footing as 
cable and wireless network providers.
    Congress has taken some important first steps in this direction. 
For example, we commend this Committee for urging the Senate to pass 
the Internet Tax Moratorium, which keeps new IP services free of 
onerous tax burdens. In particular, we applaud the leadership shown by 
Chairman McCain and chief sponsors Senators [George] Allen and [Ron] 
Wyden, and the strong support from Senators [Trent] Lott, [Barbara] 
Boxer and [Ted] Stevens. It is our hope that the House and Senate can 
come together to ensure that this important legislation is enacted.
    We also applaud Senator Sununu's efforts to ensure that Voice-over-
IP will be free from a patchwork of potentially burdensome and 
inconsistent state regulations. As we move forward, we need a 
comprehensive policy framework to make sure that all investments in new 
fiber networks are not burdened with costly rules that increase risk 
and reduce incentives to invest.
    The President has said we need to clear out the ``regulatory 
underbrush'' to encourage the growth of broadband. The FCC is moving on 
the right path by working to ensure that deployments of new, broadband 
technologies are not burdened by traditional, heavy-handed regulation.
    But regulators must rely on frameworks and guidance from Congress. 
It is clear to me that in order to take the major steps needed to break 
the industry out of the old regulatory structures of the past, Congress 
will need to provide a new vision. That vision should have the 
following elements.

   First, it is imperative that government decision makers 
        understand how radically different the telecommunications 
        market has become and incorporate that understanding into 
        policy decisions. Harmful policies are based on ``old think'' 
        and outdated stereotypes.

   Second, we must shift our view of what government's primary 
        role is in this new telecommunications market. Traditional 
        prescriptive regulation tends to drive all services down to a 
        ``least common denominator'' level where little difference in 
        networks, services or options is possible. Consumers want more 
        options, more control, and more innovation.

   Third, government should not impose price controls on 
        selected services and transactions, thereby skewing the market 
        and the incentives for efficient growth, impose operational 
        constraints on technologies in an attempt to anticipate 
        hypothetical problems, or impose burdensome and uneven taxation 
        and regulation on one technology over another.

   Finally, government should recognize the power and 
        properties of networks because efficient, innovative networks 
        require scale and scale is what drives consumer satisfaction--
        the more people and places any person can reach, the more 
        valuable the network. It should continue to allocate spectrum 
        and continue to facilitate more efficient ways to allow firms 
        to use that spectrum. And it should focus on the role 
        government may play in using broadband and advanced 
        communications technologies to address the social challenges of 
        our time, including telemedicine, improved emergency services 
        and online education applications.

    Before I conclude, let me make one final point about the future of 
public policy. Any effort on the part of Congress to reform the laws 
governing communications must be matched by an equally thorough 
revamping of the state and Federal regulatory process. Without such 
reforms, the objectives of even the most well-intentioned legislation 
are in danger of being thwarted by the conflicting agendas and 
interpretations of multiple regulatory bodies. Only by paying close 
attention to the process by which telecom laws are implemented and 
enforced can Congress make sure new legislation produces the effects 
you intend.
    Complexity and uncertainty are the enemies of investment. You have 
the opportunity to clear the path to the future. I urge you to act on 
that opportunity with all due speed.
    Mr. Chairman, the world has changed in telecommunications. 
Consumers have more options and the market is more competitive than 
ever. We need to stop making policy by looking in the rear-view mirror 
and create a forward-looking framework that rewards the investment, 
innovation and risk-taking at the heart of technology-driven 
industries.
    We believe in this business. We are excited about the future and 
about our role in delivering the promise of the broadband era to 
customers. And we are confident that, with the right policy framework 
in place, communications can once again be an engine of economic growth 
and catalyst for innovation in this vital industry.
    Thank you, and I look forward to your questions.

    The Chairman. Thank you.
    Mr. Roberts, welcome.

 STATEMENT OF BRIAN L. ROBERTS, PRESIDENT AND CHIEF EXECUTIVE 
                  OFFICER, COMCAST CORPORATION

    Mr. Roberts. Thank you. Chairman McCain and members of the 
Committee: I appreciate the opportunity to share our views on 
the status and direction of communications policy in America. I 
think the right place to begin is with the excellent 
articulation that appeared in the preamble of the 
Telecommunications Act of 1996. It called for a pro-competitive 
deregulatory policy to promote investment, innovation, and 
competition in all segments of communications. That vision 
signaled a major change in direction, from decades-old 
interventionist policies that tended to artificially limit 
competition to policies that embraced markets, encouraged 
facilities-based competition, focused on breaking down entry 
barriers, and paring away counterproductive regulation.
    To the extent that we have remained true to that vision, I 
believe consumers have benefited, and the greatest success 
story of the 1996 Act are what has happened in video and 
broadband markets. This chart shows you annual cable investment 
in innovation. From 1992 when Congress regulated cable until 
1996, when the industry was stagnant--our industry was stagnant 
between 1992 and 1996. The investment in new technology was 
literally frozen and new programming networks came to a halt.
    Then in 1996 the Act passed and it really changed 
everything. The Act removed the strict regulations on cable 
pricing and packaging effective in 1999. With the signing of 
the 1996 Act, the investment community finally regained 
confidence in cable and became willing to support the massive 
investment in video and broadband. In the last 8 years, the 
industry as a whole has invested over actually $85 billion in 
new technology. Comcast alone, counting the companies that we 
have acquired, have invested over $39 billion.
    Before deregulation the industry's annual capital 
investment was $4.8 billion. After deregulation, in the average 
year we spent $13.4 billion, more than triple. That has allowed 
all sorts of new services to become realistic to American 
consumers.
    But the 1996 Act was not just about deregulation at the 
Federal level. It was also about competition. The 1996 Act set 
the stage for the Satellite Home Viewer Act, which unleased the 
direct broadcast satellite industry to fully compete with 
cable. Until that legislation passed, satellite TV was mostly a 
rural phenomenon. Since then satellite and other video 
competitors have gone on to serve one out of every four multi-
channel TV homes in the United States.
    The 1996 Act also gave the incentive to invest in high-
speed Internet. Cable modems really drove the broadband 
revolution in America, and today Verizon, SBC and other 
companies compete fiercely with us and they are upgrading their 
networks, just as we have done, to keep pushing the technology 
envelope.
    Broadband is booming. Only cell phones have had a more 
rapid consumer acceptance. More than 20 percent of broadband 
customers, over 16 million homes, subscribe to high-speed 
network from cable and nearly a quarter of all U.S. homes take 
broadband from cable, phone, or other providers.
    The success of video and broadband, and I would add 
wireless, proves the wisdom of focusing government policy on 
promoting facilities-based competition. This is the kind of 
competition that is real and long-term and sustainable. It does 
not depend on a regulatory intervention to simulate competition 
through resale or forced access policies. Promoting facilities-
based competition has been and should remain the paramount 
public policy goal.
    As we look ahead, I think we can agree that the next great 
transforming technology is Internet protocol, or IP, which 
gives us the ability to convert all forms of video, voice and 
data into data packets and move them over our networks with 
greater efficiency and less cost. The main reason we have seen 
very little facilities-based telecom competition over the past 
8 years, particularly in the residential marketplace, is that 
the available technologies were so limiting. It really has not 
been possible to offer a phone service that is anything other 
than me-too.
    But the IP platform lets us offer a differentiated product 
with services like integrated messaging, so you can check your 
e-mail and voice-mail together on any number of different 
devices. As we saw some truly incredible IP videophones at the 
cable industry's national show in New Orleans just last week, 
it gets me even more excited. Voice-over-IP will make cable a 
ubiquitous facilities-based telephone competitor, and we have 
clearly stated, in exchange for the rights we need to compete 
as a VoIP provider, as it is called, we are prepared to step up 
to important social responsibilities like universal service, 
emergency service, and full cooperation with law enforcement.
    We need a clear, strong deregulatory policy on VoIP. The 
FCC's notice and Senator Sununu's bill start us in the right 
direction. We hope these policies will not have to await a 
comprehensive rewrite of the Telecommunications Act. We need 
them sooner rather than later.
    Finally, I think that Congress and the FCC already have the 
right focus: promote facilities-based competition, break down 
barriers to entry, and reduce regulation. Right now the FCC is 
clearing the way for new wireless technologies, broadband over 
power lines, and other broadband alternatives. I believe that 
American businesses should put their energy and capital into 
creating these new facilities, as well as folks like ourselves 
creating new and better facilities, and try not to try to 
regulate competitors.
    Some may not get that message and to them I think Congress 
should offer the advice: Do not just stand there; build 
something. We have. $4.8 billion went to $13.4 billion per 
year.
    Mr. Chairman, thank you again for the chance to share our 
views. I look forward to the members' questions.
    [The prepared statement of Mr. Roberts follows:]

 Prepared Statement of Brian L. Roberts, President and Chief Executive 
                      Officer, Comcast Corporation
    Chairman McCain, Senator Hollings:

    Thank you for this opportunity to share our views on the status and 
direction of communications policy in America.
    In our view, the starting point for this discussion is the 
excellent articulation in the preamble of the Telecommunications Act of 
1996, which calls for a pro-competitive, deregulatory policy to promote 
investment, innovation and competition in all segments of the 
communications industry.
    That vision represented a major change in direction--from decades-
old, interventionist policies that tended to artificially limit 
competition . . . to policies that embrace markets, encourage 
facilities-based competition, focus on breaking down entry barriers, 
and pare away counterproductive regulation.
    To the extent that our Nation has remained true to that vision, I 
believe consumers have benefited. And the greatest success stories of 
the 1996 Act are what has happened in the video and broadband markets. 
This chart shows what I mean.
    Before 1996, the cable industry was stagnant. The heavy-handed 
economic regulation imposed by the 1992 Cable Act had frozen investment 
and innovation. New cable technology and programming had all but 
ceased.
    From 1992 through 1998, the time when the cable industry was under 
heavy regulation, investment in upgrading the networks and in new 
programming was very low. You'll notice in 1992 the industry 
collectively spent only $2.4 billion. By 1995--in what should have been 
peak spending years for the industry--the numbers were just over $5 
billion.
    Then, in the wake of the 1996 Telecom Act and increased competition 
from satellite, the industry made a huge bet. With the lifting of many 
of the most egregious regulations, the industry concluded that ``if we 
build it they will come.'' In the eight years since the Act, the cable 
industry has had a renaissance. We have made massive investments in 
both video and broadband--over $85 billion to date by the industry as a 
whole, and $39 billion of investment just by Comcast and our 
predecessor companies in the markets where we now do business. You can 
see the dramatic rise between 1998 and 1999, when investment almost 
doubled from $5.6 billion to $10.6 billion. As we approach 100 percent 
completion of the rebuild, the numbers begin to level off and drop 
slightly year-to-year.
    But the 1996 Act was not just about deregulation at the Federal 
level--it was about competition. The 1996 Act set the stage for the 
Satellite Home Viewer Act in 1999, which unleashed the direct broadcast 
satellite industry to invest in advanced facilities and to compete with 
cable, hammer and tongs. Until that legislation passed, satellite TV 
was mostly a rural phenomenon. Since then, satellite has gone on to 
serve one out of every four multichannel TV homes in the United States.
    The 1996 Act also gave cable the incentive to invest in high-speed 
Internet services. Our industry really drove the broadband revolution 
in America. And today, Verizon, SBC and other companies compete 
fiercely with us--and they are upgrading their networks, just as we 
have done, to keep pushing the technological envelope.
    Broadband is booming--only cellphones have had more rapid consumer 
acceptance. In the first quarter of 2004, about two million more homes 
signed up for broadband from cable, phone companies and other sources. 
Today, more than 20 percent of cable customers--over 16 million homes--
subscribe to high-speed Internet from cable, and nearly a quarter of 
all U.S. homes take broadband from cable, phone, or other providers.
    The success of the video and broadband marketplaces--and, I would 
add, the wireless marketplace--prove that when government policy 
emphasizes investment in facilities-based competition, markets thrive 
and consumers benefit.
    Facilities-based competition is real, sustainable competition. It 
does not depend on regulatory intervention to ``simulate'' competition 
through resale or forced access policies. Promoting facilities-based 
competition has been, and should remain, the paramount public policy 
goal.
    Incidentally, I want to dispel any notion that the 1996 Act 
``deregulated'' cable. I can point you to over 60 pages of the U.S. 
Code, over 200 pages of FCC regulations and forms, and over 30,000 
separate and distinct local franchise agreements, under which our 
industry must operate every day. While the regulatory load has been 
loosened somewhat, it is still substantial.
    As we look ahead, I think we can agree that the next great 
transforming technology is Internet protocol, or ``IP,'' which gives us 
the ability to convert all forms of video, voice and data into data 
packets, and move them over our networks with greater efficiency and 
less cost.
    I think the key reason we have seen very little facilities-based 
telephone competition over the past eight years--particularly in the 
residential marketplace--is that the available technologies were so 
limiting. It really hasn't been possible to offer a phone service that 
is anything other than ``me too.'' That means the only basis for 
competing is price, and that doesn't create much incentive to invest.
    But the IP platform makes it possible to compete on innovation and 
services as well. With services like integrated messaging, so you can 
check your e-mail and voice-mail together on any of a number of 
different devices . . . or give each person in your home a distinctive 
ring tone so they'll know who the call is for . . . or create a 
videophone service that people really want to use--in fact, some 
exciting new videophones captured the imagination of all of us who saw 
them at the cable industry's National Show in New Orleans last week.
    VoIP will make cable a ubiquitous facilities-based telephone 
competitor. And as VoIP providers, we have made it clear that in 
exchange for the rights we need to compete, we are prepared to step up 
to important social responsibilities like universal service, emergency 
services, and full cooperation with law enforcement.
    VoIP can fundamentally and positively change telephone competition 
in America . . . but only if we can have a clear, strong deregulatory 
policy. The FCC has started down that path. And the legislation on VoIP 
introduced by Senator Sununu goes in the right direction. We sincerely 
hope that getting clarity on VoIP will not have to await a 
comprehensive rewrite of the Telecommunications Act. This is something 
that needed sooner, rather than later.
    In conclusion, I think that Congress and the FCC already have the 
right focus: promote facilities-based competition, break down barriers 
to entry, and reduce regulation.
    The FCC is working tirelessly to clear the way for a wide range of 
new wireless technologies, broadband over power lines, and other 
broadband alternatives. American businesses should put their energy and 
capital into building these new facilities--and not into trying to 
regulate competitors. To those who don't get the message, I hope you 
will offer this advice: ``Don't just stand there--build something!''
    Mr. Chairman, thank you again for the chance to share our views, 
and I look forward to the Members' questions.

    The Chairman. On your chart there, Mr. Roberts, why is--how 
do you account for the downturn there?
    Mr. Roberts. The rebuild cycle peaked out. But if you take 
the annual spending, that adds up to $85 billion since 1996. In 
the last couple years, as a number of systems have the two-way 
fiber-based technology, you are still spending way more than 
you were before it came along, but we are beginning to have the 
peak periods get behind us.
    The Chairman. You are not concerned about that downturn?
    Mr. Roberts. No. I think, you know, we have borrowed to do 
this, so we have got to pay back some of the borrowings. But we 
have in our company----
    The Chairman. I do not know why you have to. We do not.
    [Laughter.]
    The Chairman. Mr. Ford.

STATEMENT OF SCOTT FORD, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
                       ALLTEL CORPORATION

    Mr. Ford. Well, everybody has heard of Verizon and Comcast. 
I am the CEO of ALLTEL, one of the many companies in regional 
sections of the country that get to compete against both of 
them. We are a telecommunications provider, an integrated 
telecommunications provider, with almost 13 million customers 
and over $8 billion in annual revenues. We provide wireless, 
local telephone as an ILEC, local telephone as a CLEC. We 
provide long distance service, Internet access, and high-speed 
or broadband data services to residential and business 
customers in largely rural and smaller metropolitan areas in 26 
states.
    While almost 60 percent of our revenues are generated by 
our wireless business, our roots go back 60-plus years as an 
independent rural telephone company.
    I would like to thank you to have just a minute to give our 
views on the topic in front of you today. In 1996, the Act that 
you passed I think made a good faith effort to deal with the 
rapid technological changes that were sweeping the traditional 
telecom industry. However, politics being what they are, it 
largely resulted in compromise legislation between the largest 
and most antagonistic industry segments, the RBOC's, the 
wireline telephone business, and the long distance companies.
    I think, further, the Act did not view the industry and 
technology as as fluid as it turned out to be and it took a 
fairly static view. I think the Act--I think it would be fair 
to say that in 1996 not even the most outlandish telecom 
futurists would have foreseen the situation that we are dealing 
with today, one where both telephone and cable companies are 
seeing their economic model move from one of service provider 
to that of access provider only, one where the customer will 
increasingly use their broadband access device, from whoever 
they get that from, to replace the traditional telephone and 
eventually to replace the traditional video service offerings 
with self-selected applications, and one where the broadband 
connection is becoming increasingly available in a device, such 
as a wi-fi-enabled PC or an EVDO phone, not through either one 
of the traditional networks that are represented in the 
testimony you have already heard.
    Consumers today have an unprecedented and ever-growing 
array of choices in how they communicate. ALLTEL's customers 
show us every day they value two things: mobility and high 
speed.
    Setting aside the impact of the wireless industry for the 
moment, the evidence of success in the new telecom entrants is 
undebatable and only just beginning. By some estimates, e-mail 
and instant messaging have displaced some 40 percent of 
traditional local telephone calls, and two of America's top ten 
telecom companies are cable companies.
    While local telco's have recently started posting better 
results, according to an article in Telephony magazine last 
week, the cable companies still hold a 2-to-1 lead over the 
telephone companies in providing broadband access. This 
tremendous lead does not reflect simple technological 
differences, but rather economic incentives and regulatory 
freedom. So if we are to have rules, I think we need one set of 
rules for everybody that is in the business. I think that is 
the bottom line take-away from that.
    While the world and technology have changed a lot since 
1996, most of what has been done on the legal side has been 
done in courts. Cable, wireless, satellite, wi-fi, ultra-
wideband, wireless, they all remain largely free from Federal 
and State regulation, as they should be in a competitive 
marketplace in the world's leading free market economy. 
However, ALLTEL, like the other local exchange businesses in 
the country--and this is about 40 percent of our business--- 
remains shackled by Federal and State regulation that limits 
our flexibility and competitive position. Just like the chart 
showed you a moment ago that capital spending in cable has gone 
up, in the wireline business, faced with the inability to 
change prices, to bundle, to offer services in the fashion that 
the consumer would take, we have been decreasing our spending 
in the local telephone business.
    The benefit of minimal regulation under one set of rules, 
though, is probably best illustrated by the enormous growth of 
the wireless industry. The wireless trade association, the 
CTIA, reports that 98 percent of the U.S. population now lives 
in markets that are served by three or more wireless operators. 
93 percent of Americans are served by four or more operators. 
83 percent are served by five or more operators. And a full 66 
percent are served by six or more wireless operators.
    Multiple wireless service providers are offering services 
to effectively all Americans today and the consumers are 
receiving the benefit. In the mean time, wireless service 
providers have continued to build out and invest in their 
networks and introduce new service features. By any measure, 
the wireless marketplace is a true success story for the 
American consumer, where the free market has delivered 
effective competition, sustainable competition in some markets, 
probably unsustainable in others, and the competitive benefits 
that come from that, like radically lower prices, improved 
reliability, and leapfrog-like investment in new technology.
    Local telephone companies, by contrast, are stagnating 
under rules written for a bygone era where any investment made, 
unfortunately, is subject--and we have to view it this way--is 
potentially subject to economic seizure by regulators for the 
benefit of competitors. These rules assume a monopoly on access 
that, frankly, no longer exists. The results have been 
devastating. You have all read about it.
    [Cell phone rings.]
    We do not make any money until you answer that, so we 
appreciate you getting it.
    [Laughter.]
    Mr. Ford. Hundreds of thousands of jobs lost, $2 trillion 
in market value dissipated, and some quarter of a trillion 
dollars in capital investment gone from the telecommunications 
business. Lots of analysis about the fact, and Mr. Seidenberg 
referred to some of it, that up to $3 billion a year in new 
investment would be made in telecom, according to the experts, 
in a free market-based economy rather than a managed 
competitive model.
    Now, in all fairness, I think the pink elephant in the room 
is this. The effects of major technological change that we are 
undergoing in our industry is probably going to express itself 
in a very deflationary cycle for all of us sitting at this 
table.
    The key policy issue----
    The Chairman. Because?
    Mr. Ford. I am sorry, sir?
    The Chairman. Because?
    Mr. Ford. Because new technology allows cheaper service 
that will be moving from the networks and the way that we build 
networks, the way that we sell our networks, onto applications. 
Right now you buy voice as a service and you buy cable TV as a 
service. The technology that is being deployed, largely by 
cable companies and some in the wireless business, is going to 
be able to let you make a decision, do you want to do business 
with Verizon for voice or do you want to take that application 
from somebody else. Everybody's prices drop to meet that kind 
of paradigm shift.
    So I think the key policy issue is this: the wireline 
telephone companies, probably for lots of historical reasons--
and I think some of the views have already been expressed this 
morning--but they are prohibited from making the next 
generation of investments that are going to be required for 
them to be competitive 5 to 10 years from now because of the 
disparate regulatory and legal frameworks that exist across the 
country. It is true for us, so I know it is true for companies 
that are larger than we are.
    So while the current environment may not provide the 
perfect opportunity to write new legislation, I think it is 
past time, frankly, if we can get a framework that will reward 
companies for moving into the future.
    I will summarize this way. Investment is a forward-looking 
act of faith. Where we have had spectrum rules and competitive 
dynamics that we could understand, we have invested in the 
wireless business. Where we have regulatory rules on a State by 
State, city by city basis in the wireline business, we have 
pared our capital spending and will continue to pare our 
capital spending. And we are the ones--we represent many 
companies, about a thousand of us--that actually serve rural 
America, the actual opposite of everything that we say we are 
trying to get done.
    But because we are not free to invest because we cannot 
turn our shareholders' money over to a regulatory scheme that 
then some regulator says, I do not like the mix in the 
business, so I am going to take it and make you sell it to 
somebody else. It is a systemic problem and if you can do 
something about it with a set of rules that encourage 
facilities-based competition, frankly, I stand to gain and I 
stand to lose by such a set of rules. But I think long-term it 
is the policy that will benefit the consumer and, frankly, the 
economy and the country long-term.
    Thank you very much for the opportunity to be here this 
morning.
    [The prepared statement of Mr. Ford follows:]

    Prepared Statement of Scott Ford, President and Chief Executive 
                      Officer, ALLTEL Corporation
    Mr. Chairman and Members of the Committee:

    Thank you for the opportunity to appear before you today. I am 
Scott Ford, President and Chief Executive Officer of ALLTEL 
Corporation. ALLTEL is an integrated telecommunications provider with 
almost 13 million customers and over $8 billion in annual revenues. 
ALLTEL provides wireless, local telephone, long-distance, Internet 
access and high-speed or ``broadband'' data services to residential and 
business customers in largely rural and smaller metropolitan areas in 
26 states. While almost 60 percent of our revenues are generated by our 
wireless operations today--our roots go back some 60 plus years as a 
rural, independent telephone company.
    I commend Chairman McCain and the Members of the Committee for 
holding this hearing and the two previous hearings on telecom policy. 
These are important steps in reviewing how telecom policy might be 
changed to better meet the needs of customers in the 21st century.
    In passing the 1996 Act, Congress made a good faith effort to deal 
with the rapid technological changes that were sweeping the traditional 
telecom industry--however, politics being what they are--the 1996 Act 
was largely a compromise between the largest and most antagonistic 
industry segments--namely the local wireline and long-distance 
companies. And while it did allow new market entry by some, in the end, 
the Act represented a static view of the industry and the market. The 
Act also did not fully anticipate the rapid development and deployment 
of the numerous alternative technology platforms and providers that 
have emerged as the most formidable competitors to the regulated local 
telephone companies.
    In fact, I think it fair to say that in 1996 not even the most 
outlandish telecom ``futurists'' would have foreseen the situation we 
are dealing with today. One where both telephone and cable companies 
are seeing their economic model move from one of ``service provider'' 
to that of ``access provider'' only. One where the customer will 
increasingly use their broadband access device to replace traditional 
telephone and video service offerings with self-selected applications. 
And one where the broadband connection is becoming increasingly 
available in a ``device'' such as a WiFi enabled PC or a 1xEVDO 
wireless phone, not just through a ``traditional network''.
    Consumers today have an unprecedented and ever-growing array of 
choices in how they communicate. ALLTEL's customers show us every day 
that they highly value mobility and broadband speed, as the number of 
homes and small businesses that use wireless phones for voice and 
broadband connections for data continues to increase while the number 
of traditional telephone lines--even in our non-urban markets--
continues to shrink.
    Setting aside the impact of the wireless industry for the moment, 
the evidence of the success of new telecom entrants is undebatable and 
only just beginning. By some estimates, E-mail and Instant Messaging 
have displaced some 40 percent of traditional local phone calls and two 
of America's top telephone service providers are in fact cable 
companies. And while the local telco's have recently started posting 
better results, according to Convergent Consulting,\1\ at year end 
2003, the total broadband connections provided by traditional cable 
companies outpaced their telephone counterparts by a two to one margin. 
This tremendous lead does not reflect simple technological differences, 
but rather, economic incentives and regulatory freedom. So if we are to 
have rules, we need one set of rules for all broadband service 
providers, regardless of the technology or method used to deliver it or 
what origin the service provider had.
---------------------------------------------------------------------------
    \1\ Telephony, ``RBOCs Gird For Broadband Battleground'' (May 3, 
2004).
---------------------------------------------------------------------------
    While the world and technology have changed a lot since 1996, the 
regulation governing telecom has remained the same. Cable, wireless, 
satellite, Wi-Fi and ultra wideband wireless are all largely free from 
Federal and state government regulation--as they should be in a 
competitive marketplace in the world's leading free-market economy. 
However, ALLTEL, like the other local exchange businesses in the 
country, remains shackled by Federal and state regulation that limits 
our flexibility and competitive position.
    The benefit of minimal regulation under one set of rules is best 
illustrated by the enormous growth and vitality of the wireless 
industry. The Cellular Telecommunications & Internet Association 
(``CTIA'') reports that 98 percent of the U.S. population now lives in 
markets served by three or more operators, 93 percent in markets served 
by four or more operators, 83 percent in markets served by five or more 
operators, and 66 percent in markets served by six or more operators.
    Multiple wireless service providers are offering services to 
effectively all Americans today, and consumers are benefiting from the 
unprecedented choice of service offerings. In the meantime, wireless 
service providers have continued to build out and invest in their 
networks and introduce new service features. By any measure, the 
wireless marketplace is a true success story for the American 
consumer--where the free-market has delivered effective competition, 
and competitive benefits like radically lower prices, improved 
reliability and ``leap-frog'' like technological investment.
    Local telephone companies, by contrast, are stagnating under rules 
written for a bygone era where any investment made is subject to 
economic seizure by regulators and competitors. These rules assume a 
monopoly on access that no longer exists. The results have been 
devastating: hundreds of thousands of jobs lost, $2 trillion in market 
value dissipated and a drop by some quarter of a trillion dollars in 
capital investment. According to recent analysis, capital spending on 
communications equipment alone would increase by almost $3 billion a 
year for the next five years \2\ and our economy would see some 1.2 
million additional jobs over the next 20 years \3\ under a market-based 
competitive model. Rules that incent a robust and vital telecom 
industry benefit consumers, our economy, and our society as a whole. 
Public policy in this arena is potentially a major driver of economic 
growth. If unchanged though, our laws will continue to block investment 
and the benefits of the resulting competition.
---------------------------------------------------------------------------
    \2\ Decision Economics, ``Macroeconomic Effects of 
Telecommunications Regulation'' (May, 2004).
    \3\ ``The Effects of Ubiquitous Broadband Adoption on Investment, 
Jobs and the U.S. Economy,'' New Millennium Research Council 
(September, 2003).
---------------------------------------------------------------------------
    Now in all fairness, it should be noted that the ``pink elephant in 
the room'' is that this kind of disruptive technological change is 
probably going to have a deflationary effect on all traditional 
participants. The key policy issue remains though that the wireline 
telephone companies are virtually prohibited from making the next 
generation investments required to be competitive over the next several 
years by the disparate regulatory and legal frameworks that exists 
across the country.
    While the current environment may not provide the perfect 
opportunity to write new legislation, the need for rules that 
acknowledge the radical technological progress in our industry is clear 
and we must build a legal framework that will reward companies for 
moving into the future.
    I believe that this country would be well served if this body were 
to write rules that treat all competitors providing similar services 
equally without regard to the definitions of the past--rules that rely 
on the operation of our free-market economy rather than management by 
our Federal and state governments. Investment is a forward-looking act 
of faith. Without free and fair markets we will not attract the 
capital, the economy will go without the associated growth, and our 
customers will go without the benefits that only economically 
sustainable competition can bring.
    Free markets work for America in virtually every sector of the U.S. 
economy today. Market-based competition enables innovation, better 
services, better technology, and ultimately the choice to take your 
business elsewhere. The telecom industry has extraordinary potential to 
create jobs, enhance our quality of life, open up new economic 
opportunities in American communities, and benefit our economy.
    Achieving fundamental telecom reform for the 21st century will 
likely not be an easy task to accomplish, but it is achievable if we 
take our cue from the reality of the market and the basic principles of 
consistency and simplicity. It involves a choice between embracing the 
new and dealing with it's inevitable changes--some good and some bad--
and letting the market sort it out--or being encumbered by the past and 
its traditional definitions and limitations.
    Finally, in my opinion, we must keep faith in the American belief 
that great things can come for our country if we free the marketplace 
to drive powerful new cycles of American investment, innovation, and 
growth. And frankly, our company stands to lose as well as gain from 
such a marketplace--but we look forward to the opportunity to compete 
on a level playing field. I recognize that divining truth in this arena 
must be a very daunting task for the members of Congress from so many 
disparate voices--so on behalf of the 20,000 employees of ALLTEL I 
extend our gratitude for your public service.
    Mr. Chairman and Members of the Committee, thank you for holding 
these hearings. I look forward to answering your questions, and stand 
ready to assist your efforts. Thank you.

    The Chairman. Thank you very much.
    Mr. Betty, would you pull the mike up. Thank you. Welcome.

   STATEMENT OF CHARLES ``GARRY'' BETTY, PRESIDENT AND CHIEF 
               EXECUTIVE OFFICER, EARTHLINK, INC.

    Mr. Betty. Thank you, Mr. Chairman and members of the 
Committee. I am Garry Betty. I am President of EarthLink. We 
serve 5.3 million subscribers. We are one of the largest 
independent Internet service providers in the United States, 
providing dialup, broadband, web hosting, and wireless Internet 
services.
    As you know, the purpose of today's hearing is to review 
our telecommunications policy. As the members of the Committee 
are aware, such policy is the focus of several ongoing 
proceedings both here and at the FCC. However, we are troubled 
by the far-reaching attempts by the FCC to classify the 
facilities used to provide broadband services as end to end 
information services.
    Common carrier transmission services are the foundation of 
the information economy. If such services were no longer 
available to information service providers upon reasonable 
request on nondiscriminatory terms and conditions, incumbents 
could close their networks to competitive providers, services, 
and innovations. This would hurt consumers.
    Congress has enacted a body of laws over the years to 
promote competition, to protect consumers, and provide for 
public safety. Neither the FCC nor incumbent companies can 
ignore the plain language that Congress wrote in the 
Telecommunications Act of 1996.
    The central issue in this hearing, several current FCC 
proceedings, and in any proposed rewrite of the 1996 Act would 
be the regulatory classification of broadband services. Let me 
be clear in answering this question. All Internet access 
services, whether provided by an independent ISP like 
EarthLink, a telco affiliate like Verizon On Line, or a cable 
company like Comcast, are information services.
    Let me be equally clear, though, that the information 
services are delivered via telecommunications and offering such 
telecommunications, whether by telco or cable company, for a 
fee to the public makes them telecommunications services. 
Internet access, broadband or otherwise, is therefore an 
information service riding on top of a transmission component, 
which is telecommunications service.
    Today the RBOC's have enjoyed a government-granted monopoly 
for almost a century as they built out their transmission 
networks while rate of return regulation ensured profits. Cable 
companies talk about risk capital, but enjoyed monopoly 
franchises, the cable-telco cross-ownership ban, and low-cost 
access to poles, ducts, conduits, and rights of way for decades 
as they built out their networks. Thus, incumbent telephone and 
cable companies still have 85 percent or more of their 
customers in their core business and some 95 percent of all 
broadband or cable modem customers respectively.
    Eight years after the passage of the Telecommunications 
Act, it is clear that no one has benefited more than the 
incumbent providers. Regional Bell operating companies have 
gained 271 authority to offer long distance services in all 50 
States. At the same time, CLEC's have seen their ranks 
decimated, while UNEEP, their best tool for offering local 
voice service competition, was taken away by the D.C. Circuit's 
recent vacatur of the FCC's review order. In broadband, that 
same order even eliminated line sharing on existing copper 
loops. The FCC thus has not only granted the Bells the 
regulatory relief they demanded, but has erased a key component 
that promoted DSL deployment to date.
    Until recently, cable providers held almost a two to one 
share advantage over DSL. Telco's blame this shortfall on 
regulatory disparity, but in the first quarter of 2004 DSL 
sales actually exceeded those for cable modem service. So the 
regulatory disadvantage of which the Bells complain does not 
withstand scrutiny.
    In cable, competition is also scarce. Incumbent providers 
still control over 95 percent of broadband cable modem 
services. Unfortunately, the FCC's misguided attempt to 
classify cable modem service as an end to end information 
service has allowed most cable companies to extend their 
monopolies to broadband. However, the Ninth Circuit Court of 
Appeals in October 2003, overturned the FCC's cable modem order 
and correctly ruled that cable modem service contains an 
underlying telecommunications service transmission component.
    In March 2004, the full court denied petitions for 
rehearing the FCC and cable companies. I am sure they will 
likely seek Supreme Court review, but even review, not to 
mention reversal, is questionable.
    In sum, rather than trying to rewrite the 1996 Act, 
Congress should insist that the FCC enforce the provisions of 
the current act. In many respects the 1996 Act has been a great 
success. Over 35 million on-line households now have broadband 
access. In many cases prices are falling and speeds are 
increase, and DSL is even catching up to cable's market share. 
The incumbents are doing better than ever.
    In fact, the only area where the Act has fallen short is 
promoting more widespread competition in products and services 
to benefit consumers. So-called facilities-based competition 
exists between cable and phone companies and that is good as 
far as it goes, but it only creates a duopoly. And even this 
limited competition only reaches two-thirds of American 
households, leaving many consumers with only one choice, if 
any, for broadband service.
    Only by ensuring that consumers can choose their broadband 
providers regardless of which wire they use will they enjoy the 
widest deployment, the best products, features, customer 
services, price, and innovation.
    Thank you for inviting me here today.
    [The prepared statement of Mr. Betty follows:]

  Prepared Statement of Charles ``Garry'' Betty, President and Chief 
                   Executive Officer, EarthLink, Inc.
    Mr. Chairman and members of the Committee. Thank you for the 
opportunity to testify before you today. My name is Garry Betty and I 
am the President and CEO of EarthLink. EarthLink is the Nation's 3rd 
largest Internet Service Provider (ISP), serving over 5 million 
customers nationwide with dial-up, broadband (DSL, cable and 
satellite), web hosting and wireless Internet services. EarthLink 
regularly receives awards for its customer service and innovation, 
including the J.D. Power and Associates award for highest customer 
satisfaction among dial-up ISPs and (tie) highest customer satisfaction 
among broadband ISPs.
    The purpose of today's hearing is to review telecommunications 
policy. As the members of the Committee are aware, such policy is the 
focus of several ongoing proceedings at the Federal Communications 
Commission (FCC). Particularly troubling to EarthLink, and I would hope 
troubling as well to the members of this Committee, are the far 
reaching effects of attempts by the FCC to classify the facilities used 
to provide broadband services as end-to-end ``information services'' 
under the Communications Act.
    Common carrier transmission services are the foundation of the 
information economy. If such services were no longer available to 
information service providers upon reasonable request on non-
discriminatory terms and conditions, incumbents would be free to close 
their networks to any competitive providers, services, or innovations. 
This would work against consumer interests. Even laws like CALEA would 
no longer apply as the DOJ, FBI and DEA have made clear in recent 
filing with the FCC. Congress has enacted an entire body of laws over 
the years to promote competition, protect consumers, and provide for 
public safety. Neither the FCC nor incumbent companies can ignore the 
plain language that Congress wrote in the Telecommunications Act of 
1996.
    The central issue in this hearing, several current FCC proceedings 
and in any proposed re-write of the 1996 Act would be the regulatory 
classification of broadband services. Let me be clear in answering this 
question. All Internet access services--whether provided by an 
independent ISP like EarthLink, a telco affiliate like Verizon Online, 
or a cable company like Comcast--are information services. Let me be 
equally clear that all information services are, by definition, 
delivered via telecommunications, and the offering of such 
telecommunications, whether by a telco or a cable company, for a fee to 
the public makes them telecommunications services. This is true whether 
the Internet access is provided by an independent ISP or by the network 
operators themselves. Internet access, broadband or otherwise, is 
therefore an information service riding on top of a transmission 
component which is a telecommunications service.
    In the world of dial-up Internet access these two components are 
easy to see. Consumers purchase their phone line from their telephone 
company and their Internet service from an ISP such as EarthLink. The 
telephone company provides a telecommunications service which can be 
used to transmit voice or data. The ISP provides an information 
service. The consumer dials an EarthLink access number, which 
establishes an underlying transmission link through the customer's 
phone line; the consumer can then use EarthLink's services to access 
the Internet. The underlying transmission link is a regulated common 
carrier telecommunications service. The Internet access service is an 
unregulated information service.
    In the broadband world, the same rules apply. Underlying DSL 
transmission provided by Verizon is regulated as a common carrier 
telecommunications service, but Verizon Online's Internet access 
service is still an unregulated information service. This is the regime 
that the FCC crafted in its seminal 1980 Computer II proceeding, which 
has been affirmed by the FCC and Federal courts many times in the 
intervening years, and which Congress adopted in the Telecommunications 
Act of 1996. As a result, competition in the provision of information 
services flourished because the facility owners could not use their 
ownership of the underlying transmission facilities to leverage their 
position in the information services market.
    Yet, in the case of broadband Internet access, the FCC seems 
determined to take the exact opposite approach from the one that proved 
so successful in promoting Internet usage in the first place. For 
broadband, the FCC suggests that, so long as the facility owner refuses 
to offer consumers the option of buying the transmission link 
separately from the information services component, the entire bundled 
package of transmission and information service is an ``information 
service''. As a result, facility operators are able to shield their 
transmission networks from requirements for non-discriminatory access 
by independent ISPs. This all but eliminates competition among 
broadband Internet service providers and not only violates the letter 
and intent of the Telecommunications Act, but also does great harm to 
small businesses and to consumers.
    Today's Regional Bell Companies enjoyed a government-granted 
monopoly market for almost a century as they built out their 
transmission networks while rate of return regulation ensured profits. 
Cable companies like to talk about ``risk capital'' but enjoyed 
monopoly franchises, the cable-telco cross ownership ban, and below-
cost access to poles, ducts and conduits for decades as they built out 
their networks. Today, incumbent telephone and cable companies still 
each have 85 percent or more of the customers in their core businesses 
and some 95 percent of all broadband DSL or cable modem customers, 
respectively. Yet competitors to these incumbent facility owners would, 
under the FCC's interpretation, have to undertake the impossible task 
of building their own last-mile network--without any protection or 
subsidy--in order to continue to compete in the information services 
business. This result stands the 1996 Act on its head.
    It is therefore crucial to distinguish between broadband 
information services and the underlying telecommunications services 
which deliver them. Internet access services, whether narrowband or 
broadband, and whether offered by an independent ISP, an RBOC, or a 
cable company, remain unregulated information services. But the 
facility based transmission services that underlie all information 
services remain common carrier telecommunications services, regardless 
of whose broadband Internet service the customer subscribes to and 
whether or not the facilities operator offers those transmission 
services separately to consumers or as part of a combined package of 
services that includes information services. Consumers and the economy 
have benefited over the past two decades from robust competition in an 
unregulated information services industry. This competition was made 
possible because the underlying transmission networks remained subject 
to regulations that require that they be offered to all ISPs on non-
discriminatory terms and conditions.
    In most areas of the country today there are at best two broadband 
networks; for many residential consumers there is effectively only one. 
Both the telephone networks and the cable networks were built with 
government-granted monopolies over public rights of ways using Federal 
authority using rate-payer money. To allow these facility owners to now 
repudiate their obligation to share those transmission networks on a 
non-discriminatory basis with others who seek to offer 
telecommunications or information services to the public is an abuse of 
the law and is anti-competitive. Such an approach would take a robustly 
competitive and level playing field and tilt it heavily in favor of a 
few players by allowing them to leverage their transmission facility 
monopoly into domination of new areas and services. Clearly that was 
not what Congress wrote or intended when it passed the 1996 Act.
    Eight years after the passage of the Telecommunications Act of 
1996, it is clear that no one has benefited more than incumbent 
providers. Regional Bell Operating Companies (RBOCs) have gained 
Sec. 271 authority to offer long distance service in all 50 states. At 
the same time, Competitive Local Exchange Carriers (CLECs) have seen 
their ranks decimated. Incumbent Local Exchange Carriers (ILECs) still 
control over 80 percent of the local voice market for businesses and 
over 90 percent of the residential market. And CLECs have just seen 
UNE-P, their best tool for offering local voice service competition, 
taken away from them by the DC Circuit's recent vacatur of the FCC's 
UNE Triennial Review Order.
    In broadband DSL, the FCC in the same order not only barred 
competitors from access to new networks like fiber-to-the-home (FTTH), 
but also barred access to hybrid fiber loops (HFL) and even eliminated 
line sharing on existing copper loops. The FCC has thus not only 
granted the Bells the regulatory relief they have so long demanded, but 
has erased a key component that has promoted DSL deployment to date.
    As Chairman Powell correctly pointed out in his dissent to this 
Order, such a scheme actually eliminates the regulatory incentives for 
incumbents to deploy new broadband technologies. Why build expensive 
fiber to the home when even a piece of fiber spliced into a loop is 
enough to inoculate it from any access by competitors? And eliminating 
line sharing strikes a blow to competitive wholesale DSL providers like 
Covad. Eliminating wholesale DSL competition will only further enhance 
the Bells' position as the dominant providers of retail DSL service. 
While we are encouraged that Covad recently struck a commercial 
arrangement for line sharing with Qwest, none of the other Regional 
Bell Companies have done so. It is untenable for a retail competitor 
such as EarthLink to have to rely solely on its biggest competitors for 
an essential component of their service.
    Meanwhile, incumbent Bell companies use their market power to 
engage in anti-competitive and discriminatory pricing, often selling 
their retail DSL service at or below the wholesale DSL loop price they 
charge to competitors. No doubt, recent price drops in DSL service are 
good for consumers. However, with fair pricing of wholesale inputs, 
more companies could offer such deals to even more consumers.
    Until recently, cable providers held an almost 2-1 share advantage 
over DSL. Telcos blame this shortfall on regulatory disparity, but 
that's not the reason for it. Rather, the Bells sat on DSL technology 
for 10 years. Selling T-1 services to businesses for $750 a month 
instead of similar-speed DSL services to consumers for $50 a month was 
a business decision which cable exploited to get a jump on the 
residential broadband market. Also, DSL has inherent distance 
limitations. Even with aggressive build-out, DSL will never reach all 
the homes that cable modems can. Nonetheless, in the first quarter of 
2004, DSL sales actually exceeded those for cable modem service and DSL 
now has approximately 20 million customers compared to 26 million for 
cable. So the regulatory disadvantage that Bells complain of does not 
stand up to scrutiny.
    In cable, the competitive landscape is no better. Incumbent 
providers still control over 97 percent of cable services, over 80 
percent of the multichannel video market, and again over 95 percent of 
broadband cable modem services. Time Warner Cable is required to sell 
network access in its 39 major markets but the rest of the industry 
remains virtually closed to competition. Unfortunately the FCC has 
aided and abetted this situation. Original inaction, followed by a 
misguided attempt to classify cable modem service as an end-to-end 
information service, has allowed most cable companies to expand their 
monopolies to broadband cable modem service as well. However, the 9th 
Circuit Court of Appeals in October 2003 overturned the FCC's cable 
modem order and correctly ruled that cable modem service contains an 
underlying telecommunications service transmission component. The full 
court also denied petitions for rehearing by the FCC and cable 
companies. The FCC and cable companies will likely seek Supreme Court 
review, but even review, much less reversal, is questionable.
    Finally, the emergence of Voice Over Internet Protocol (VoIP) 
drives much of this debate. The FCC has just opened a docket to develop 
rules concerning VoIP. Chairman Powell and others have expressed a 
desire to regulate VoIP as little as possible, but quickly note the 
need to preserve universal service, 911, disabled access, CALEA 
compliance and inter-carrier compensation. At the end of the day, we're 
not sure how much differently VoIP would be treated from traditional 
voice service, but we might suggest that Congress allow both the VoIP 
record and marketplace to develop a little more before taking on the 
task of re-writing the 1996 Act.
    While VoIP certainly poses a potential threat to the Bells' core 
business model, it can also drastically slash their costs. Whether a 
call is routed over the public switched telephone network or through 
Internet Protocol is invisible to the customer. VoIP may ultimately 
serve as a better, cheaper way to route the voice traffic the Bells 
already handle. In the end, the biggest users of VoIP may be the Bells 
themselves.
    In sum, rather than trying to re-write the 1996 Act, Congress 
should insist that the FCC enforce the provisions of the current Act. 
Before we try to fix the current Act, we must answer ``What's 
broken?''. In many respects, the 1996 Act has been a great success. 
Over 46 million online households now have broadband access. In many 
cases, prices are falling and speeds are increasing. And DSL is even 
catching up to cable's market share. The incumbents are doing better 
than ever.
    In fact, the only area where the Act has fallen short is in 
promoting more widespread competition in products and services to 
benefit consumers. So called facilities-based competition between cable 
and phone companies is good as far as it goes, but it only creates a 
duopoly, or more precisely, a ``double-headed monopoly''. And even this 
limited competition only reaches about 2/3 of American households, 
leaving many consumers with only one choice, if any, for broadband 
services. Only by ensuring that consumers can choose their broadband 
providers regardless of which wire they use will they enjoy the widest 
deployment and the best products, features, customer service, prices 
and innovation.
    Thank you for hearing me today and I look forward to your 
questions.

    The Chairman. Thank you very much.
    Mr. Wilson.

           STATEMENT OF DELBERT WILSON, CENTRAL TEXAS

        TELEPHONE COOPERATIVE ON BEHALF OF THE NATIONAL 
           TELECOMMUNICATIONS COOPERATIVE ASSOCIATION

    Mr. Wilson. Good morning. I am Delbert Wilson with Central 
Texas Telephone Cooperative, Incorporated. Central Texas is a 
member-owned telephone cooperative headquartered in 
Goldthwaite, Texas. Our service area encompasses over 3,302 
square miles, which roughly equates to the size of Delaware and 
Rhode Island combined. We have 17 telephone exchanges providing 
local exchange service to approximately 7,700 access lines. 
That is a density of only 2.33 subscribers per square mile.
    Through Central Texas' infrastructure investments, we are 
key to the local economy and the rural economic development of 
our rural service area. Central Texas is representative of the 
Nation's small rural incumbent local exchange carriers. The 
good things we stand for and do make our rural communities a 
better place in which to live and work. That is why I am 
honored to be appearing today on behalf of the hundreds of 
rural local exchange carriers that are represented by NTCA and, 
more importantly, on behalf of their several thousand employees 
and several million subscribers.
    NTCA members and their fellow rural independents provide 
service to 7 percent of this Nation's access lines, but 
actually cover 40 percent of the land mass of this country. We 
have a mission of service that supersedes profitmaking. We have 
a mission that is based on responsibilities to the community 
and the industry rather than focusing only on the bottom line. 
We have a mission of providing universal service, which means 
service to all Americans, not just the 92 percent majority that 
many FCC policies attempt to address. We have done this despite 
the tremendous regulatory and economic barriers that have 
historically stood in our way.
    For well over 100 years, small rural incumbent local 
exchange carriers have been engaged in the provision of local 
telecommunications services throughout rural America. These 
carriers are the embodiment of the universal service concept, 
having built the infrastructure that provides ubiquitous high-
quality local exchange service and exchange access, as well as 
a variety of other telecommunications services, to some of the 
Nation's most economically challenging to serve areas.
    This would have not been possible were it not for their 
dedication to their community and the Nation's longstanding 
commitment to the policy of universal service. It is no secret 
that the ability to fully recover costs is the very lifeblood 
of the small rural ILEC's. Thus, of particular concern to us 
today are the many regulatory and judicial proceedings that 
could destroy this ability and subsequently the continued 
investment in rural telecommunications infrastructure 
throughout this country.
    During this hearing series, you are receiving input from a 
wide range of witnesses. In many ways their themes are similar 
in that they revolve around the theory that absolute 
competition and deregulation are always in the public interest, 
the telecommunications world can only evolve to the next level 
with a hands-off policymaking approach, we must let go of the 
footings of our past, such as universal service and access 
charges, and we must abandon the legacy network in favor of the 
intriguing technologies of the future.
    The flaw with all these theories is that none of them alone 
or even in combination will produce the results their advocates 
so desperately seek. Why? Because they ignore the fact that 
through a combination of longstanding social policy, innovation 
and cooperation a preeminent communications network has been 
built. They are in denial of the reality that it is only 
through our national universal service policy and the 
infrastructure it has yielded that we are able to even think of 
contemplating the technological wonders of this era.
    So if we learn nothing else from these hearings, let us 
take away the knowledge and recognition that the foundation of 
our past is at least as important to our future as the mist of 
so many dreams.
    We agree that now may be the time for Congress to weigh in 
on these matters. Policymakers, the judiciary, the public, and 
competitors alike must be reminded of the importance of our 
longstanding national universal service policy. It must be 
carefully managed to fulfil its public interest goals of 
providing affordable, high-quality telecommunications services 
to rural consumers throughout this Nation. Universal service is 
not a tool to be used to incite artificial competition. It is a 
tool to help ensure the existence of a nationwide ubiquitous 
telecommunications network, a network that has been proven 
again and again to be so critical to our national and economic 
security.
    NTCA and others have particular ideas regarding the future 
of this program. We will be looking to you for help in arriving 
at a legislative solution that will ultimately accomplish these 
objectives. In terms of a broader rewrite of the Communications 
Act, we would implore the Committee to remain cognizant of the 
following specific areas that are so critical to rural carriers 
and the consumers they serve: network compensation, smart 
regulation over deregulation, access to spectrum, leadership in 
encouraging nationwide broadband deployment, and above all 
ensuring a level playing field for all carriers in this 
competitive environment.
    Congress must continue to support the longstanding policy 
of providing all Americans with access to comparable, 
affordable telecommunications services now and in the future.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Wilson, follows:]

     Prepared Statement of Delbert Wilson, Central Texas Telephone 
 Cooperative on behalf of the National Telecommunications Cooperative 
                              Association
Executive Summary
    For well over 100 years, small rural Incumbent Local Exchange 
Carriers (ILECs) have been engaged in the provision of local 
telecommunications services throughout rural America. These carriers 
are the embodiment of the universal service concept, having built the 
infrastructure that provides ubiquitous, high-quality local exchange 
service and exchange access (as well as a variety of other 
telecommunications services) to some of the Nation's most economically 
challenging to serve areas. This would not have been possible were it 
not for their dedication to community, and the Nation's long-standing 
commitment to the policy of universal service.
    As the industry continues its rapid evolution, and as the calls for 
a rewrite of the communications act continue to escalate, policymakers 
and the public alike must not lose sight of the fact that emerging 
technologies are not free, as many people have come to believe because 
they are generally riding on the backs of the Nation's existing 
telecommunications infrastructure. As the migration away from voice 
only service toward a mix of voice, video and data continues, 
policymakers must ensure that the universal service policy of this 
Nation evolves to ensure the dreams associated with the migration 
ultimately equate the reality of the superiority of the underlying 
network helping to support them.
    Now is the time for congress to weigh in on these matters. 
Policymakers, the judiciary, the public, and competitors alike must be 
reminded that the universal service support mechanism, and the 
intercarrier compensation mechanisms that are in place today that 
effectuate this policy are resources that cannot be abandoned and that 
must be carefully managed to fulfill the public interest goal of 
providing affordable, high-quality telecommunications services to 
consumers and helping to protect our national and economic security.
Introduction
    Good morning! I am Delbert Wilson with the Central Texas Telephone 
Cooperative, Inc. CTTC is a member-owned telephone cooperative 
headquartered in Goldthwaite, Texas, which is geographically located in 
the center of the state. Our service area encompasses over 3,302 square 
miles, which roughly equates the size Delaware and Rhode Island 
combined. We have 17 telephone exchanges providing local exchange 
service to approximately 7,700 access lines. That is a density of only 
2.33 subscribers per square mile.
    CTTC is rich in history. Created in 1951 by the people of Mills 
County, it was built to provide telephone service to rural consumers 
who had never before had service. Due to the sparse population, this 
area was economically unattractive to the larger telephone companies. 
Today, throughout our service area, we are involved in many activities 
that have helped to bring new services, technologies and opportunities 
to our rural subscribers. Besides local exchange service, CTTC provides 
wireless cable TV, wired/wireless digital subscriber lines (know as 
DSL), Internet access, long distance, distance learning, and wireless 
phone service. Through CTTC's infrastructure investments, we are key to 
the local economy and the rural economic development of our rural 
service areas.
    CTTC is representative of the Nation's small rural incumbent local 
exchange carriers. The good things we stand for and do, make our rural 
communities a better place in which to live and work. That is why i am 
honored to be appearing today on behalf of the hundreds of rural local 
exchange carriers that are represented by NTCA--and more importantly, 
on behalf of their several thousand employees and several million 
subscribers.
    NTCA members and their fellow rural independents provide service to 
7 percent of this country's access lines, but over territory covering 
40 percent of the land mass of this Nation. We have a mission of 
service that supercedes profit making. We have a mission that is based 
on responsibilities to the community and the industry rather than 
focusing only on the bottom line. We have a mission of providing 
universal service which means services to all Americans, not just the 
92 percent majority that many of the policies emerging from the FCC 
attempt to. We have done this despite the tremendous regulatory and 
competitive barriers that have historically stood in our way.
The Landscape
    During this hearing series, you are receiving input from large 
providers, a former regulator, think tanks and myself. While the 
testimony of the other witnesses is not identical, many of their themes 
are similar and they are that: ``absolute competition and deregulation 
are always in the public interest. The telecommunications world can 
only evolve to the next level with a hands-off policymaking approach. 
We must let go of the footings of our past such as universal service, 
and access charges. We must abandon the legacy network in favor of the 
intriguing technologies of the future.''
    The flaw with all of these theories is that none of them alone or 
even in combination will produce the results their advocates so 
desperately seek. Why? Because they ignore the fact that through a 
combination of social policy, innovation, and cooperation, a preeminent 
communications network has been built. They ignore that all of this has 
evolved under a longstanding national policy based on the premise that 
universal service is in the country's best interest. They are in denial 
of the reality that it is only through this national policy, and the 
infrastructure it has yielded, that we are able to even think of 
contemplating the unlimited wonders we are experiencing with technology 
changes today and will continue to encounter in the future. So, if we 
learn nothing else from these hearings, let us take away the knowledge 
and recognition that the foundation of our past is at least as 
important to our future as the mist of so many dreams.
    Please don't misinterpret my message today. In fact let me be 
perfectly clear. As small businesses, rural community based 
telecommunications providers strongly support the idea that new 
technologies and services should remain free of needless regulatory 
oversight. Yet they concurrently recognize that there is a stark 
difference between such restraints, and the core industry 
responsibilities that have and will continue to ensure we have a 
ubiquitous telecommunications system that is capable of protecting our 
national and economic security. We will settle for nothing less.
The Rural Spirit
    During the course of the past decade, the telecommunications 
industry has confronted nearly unfathomable technological change. Yet 
without exception, the Nation's small rural community based 
telecommunications providers, that are representative of NTCA's 
members, have always been at the forefront of aggressively embracing 
and deploying new technologies and services.
    It still regularly comes as a surprise to most people to learn that 
it was a small rural LEC in Pennsylvania, in June of 1979 that placed 
in service the first commercial fiber optic telephone system in the 
Nation. That feat is representative of our segment of the industry. We 
led the transition to digital switching and actually completed the job 
well ahead of the rest of the industry. Likewise, we got into the cable 
TV business years ago because no one else would serve our rural 
communities. The same goes for the satellite television business. We 
led the way 15 years ago in the migration to distance learning and 
telehealth applications. We partnered and have tried to persist in 
wireless endeavors despite tremendous uphill battles with the FCC and 
the industry members with the deepest pockets. We ran headlong into the 
business of Internet provision. And we have engaged ourselves in the 
business of long distance whether through resell or other partnerships. 
While others have developed a long history of making grand 
pronouncement on the Washington luncheon circuit, we have been silently 
plodding ahead doing what we do best--serving our communities.
    Now we find ourselves at yet another crossroads. Again we find 
competitors old and new, policymakers, and others endlessly proclaiming 
that the law as it exists today is broken. We are told over and over 
that the law is incapable of meeting the technological necessities of 
the era in which we live--that it doesn't allow innovation, and 
subsequently hurts consumers. I think our record, outlined above, 
speaks to the contrary. Certainly, we do not dispute that the law could 
be better written. But our refrain is that such modifications will help 
us do even more for our consumers by ensuring that scarce resources are 
used in the wisest possible manner.
Critical Nature of Cost Recovery
    From our perspective, perhaps the single most important area that 
congress could provide help on is ensuring that we recover our costs. 
It's no secret that the ability to fully recover costs is the very 
lifeblood of small rural ILECs. Thus, of particular concern to us today 
are the many regulatory and judicial proceedings that will either 
sustain or destroy this ability--and subsequently continued investment 
in rural telecommunications infrastructure.
    Any adjustment to one of the three components of our cost 
recovery--the local rate, intercarrier compensation such as access 
charges, and universal service--requires the inverse adjustment of the 
others. Not surprisingly, the local rate component is the least able to 
tolerate increased pressure. Already rural rate payers face higher 
monthly charges for access to fewer local numbers. Conversely, the 
intercarrier component is the one most susceptible to regulatory and 
competitive oriented pressures. This leaves universal service as the 
most likely to contend with cost recovery fluctuations. And despite its 
history of strength, we fear that at this time, it is ill prepared to 
take on such added burden.
    Specifically, today small rural providers are faced with an FCC, 
and an industry dominated by large carriers, that are bent on moving 
access charges--legitimate forms of compensation for the use of a 
carriers facilities and a longstanding principle of capitalism--to a 
zero cost basis. We do not dispute that access charges in their current 
per/minute form may be unsustainable. However, we do dispute the 
contention by these parties that we are not entitled to legitimate 
compensation for the use of our facilities.
    Indeed, the bill and keep regime they are advocating will not work 
for rural carriers. NTCA recently conducted an extensive data request 
of its members and found that moving to this approach would cost rural 
carriers in excess of $2 billion annually. Moving in this direction 
will not help build or maintain the telecommunications infrastructure 
that is necessary to our economic and national security.
    It has been asked why this shortfall couldn't simply be made up 
through the USF. There are a variety of reasons. Today, the states, and 
the FCC are granting USF etc status to competitors at an alarming pace 
and under rules that result in competitors receiving inflated support 
levels that are based upon the incumbents' costs rather than their own 
as the law requires. The Federal State Joint Board on universal service 
has chosen to ignore such issues for now and instead suggest limiting 
support only to primary lines. How will that build infrastructure? 
Nevertheless, as desperately as those issues need our attention, there 
is an even more critical facet of the program that requires attention--
its contribution methodology.
Universal Service Contribution Methodology
    We have all heard a great deal of discussion about the virtues of 
moving away from the universal service system's current revenues based 
assessment methodology toward a numbers or connections based approach. 
We contend moving in this direction would be a mistake. The problem 
with these alternative approaches are that they dramatically shift the 
responsibility of paying for universal service onto incumbent and 
competitive local exchange carriers and wireless carriers, while 
relieving long distance and other types of providers of such 
responsibilities. The impact of the flat-fee nature of these approaches 
would be particularly harsh on low-volume users such as rural and 
elderly credential consumers. In addition, we contend the revenues 
approach is the best suited to ensuring that all those that should be 
participating in this responsibility are indeed doing so.
    We do go two steps further however with regard to our advocacy of 
the revenues approach. First, we also believe the law should be changed 
to allow not just a provider's interexchange and international revenues 
to be assessed for these purposes, but also their intrastate revenues. 
The major reason for this is that too many carriers today are 
manipulating their way out of fully complying with their universal 
service responsibilities by reclassifying interstate revenues as 
intrastate in nature and thus making them inaccessible. The expanded 
revenues approach also helps lower the overall universal service 
responsibility of any one carrier, and will help sustain the fund for 
the long-term. Second, we advocate expanding the base of providers 
whose revenues are assessed so that many of those that are not being so 
assessed today would become participants in this national 
responsibility.
The Future of Our Industry
    We have registered our views both in the state and Federal 
regulatory arenas. And in many cases we have done so with the judiciary 
as well. Yet, we now believe it is time for congress to weigh in on 
these matters. We are hopeful that with your direction, policymakers, 
the judiciary, the public, and competitors alike, will be guided by the 
principle that USF is a valuable, yet scarce, national resource. 
Congress has the ultimate authority and responsibility to ensure that 
the USF is carefully managed in order to best serve the public 
interest. And now is the appropriate time for Congress to reassert its 
intent with regard to this program. NTCA and others have particular 
ideas regarding the future of this program, which center around the 
issues just noted. We will be looking to you for help in arriving at 
legislative solutions that will ultimately accomplish these objectives.
    Despite what you have heard from some of the other witnesses during 
this hearing series, it is clear that universal service must remain the 
hallmark of our national telecommunications policy. We have built and 
will continue to maintain a system of telecommunications infrastructure 
that is ubiquitous and integrated regardless of whether it is voice, 
video, or data oriented or a combination thereof. And it should be 
particularly evident that this support system will only work if it 
remains carrier oriented in terms of how support is distributed. After 
all, it is a tool that is designed to build and maintain 
telecommunications infrastructure, not to serve as a consumer welfare 
program as some have suggested to this panel.
    In addition, contrary to what most people have been led to believe 
today, the new technologies of this era are not free. In fact, the only 
reason they appear so is because they are riding on the underlying 
network that has been built by the likes of CTTC. We must maintain this 
critical element of our ability to adequately recover our costs.
Conclusion
    If the Committee arrives at no other conclusion from these sorts of 
deliberations I would urge you to take away this thought above all 
else. We are fast moving away from a voice dominated network 
orientation. Concurrently we are engaging in and making use of a 
variety of forms of communications at a rapidly increasing pace and in 
ways upon which we are increasingly reliant. Our nation today views all 
of these as necessities, not luxuries. Consequently, we will need to 
maintain infrastructure no matter what form such communications 
ultimately take. Universal service will be necessary to accomplish 
this. It is not a tool to be used to incite artificial competition, nor 
is it a responsibility to be escaped. It is a policy and program to 
ensure the existence of a nationwide ubiquitous telecommunications 
network--a network that has been proven again and again to be so 
critical to our national and economic security. Congress must continue 
to ensure that the underlying principles of this long-standing national 
policy are faithfully adhered to now and in the future. Thank you.

    The Chairman. Thank you very much.
    Mr. Seidenberg.
    Mr. Seidenberg. Yes, sir.
    The Chairman. Last Friday an article in the L.A. Times 
reported, quote: ``Reversing their long-held disdain for the 
competitors that lease Bell networks and equipment to provide 
local phone service, some of the Bells now want to bind rivals 
to those facilities and prevent them from installing their own 
gear. SBC Chairman Whittaker Junior has argued that leasing the 
entire platform of services `is not real competition' and that 
the industry needs, among other things, `real facilities-based 
competition.' ''
    ``But in SBC's negotiations for a lease deal with Talk 
America Holdings Corporation, sources said SBC is proposing a 
requirement that the small Virginia-based firm use SBC's 
network for nearly all of its phone traffic, discouraging it 
from installing its own equipment and preventing it from 
leasing from other providers. MCI said it faced a similar 
demand last fall from Verizon Communications in talks that have 
since halted.''
    In your negotiations with your competitors over the use of 
Verizon's facilities, has Verizon demanded that they commit to 
staying on Verizon's network?
    Mr. Seidenberg. No, sir, we have not done that.
    The Chairman. You have not done that?
    Mr. Seidenberg. No. I think what happens in these 
negotiations is that the longer they agree to stay on the 
network the lower price they get. So if you have a contract 
that runs 7 years you will get a price, if the contract runs 3 
you will get a slightly higher price. Of course, the carriers 
want the 7-year price for one day.
    I think--let me just shed some light on this for a second. 
We believe that a good wholesale regime is very important. Let 
us take the simple example. Wireless companies every day 
terminate calls on landline phones. That is a form of 
interconnection, it is a form of wholesale interconnection. 
They are willing to pay fair rates for it. We are willing to 
give them volume discounts.
    Now, the article you talk about is specifically geared to 
the IXC's and some of the smaller CLEC's that are looking for a 
continuation of the past practices of regulators forcing us to 
give these services away at below cost. So our view is we want 
them on our network; all we want them to do is pay the going 
rate.
    The Chairman. In your written testimony, and other 
witnesses have mentioned the same thing, that the average 
household in South Korea has more bandwidth than the average 
American business. Countries like Japan are deploying more 
fiber in their local networks than we are. We have had 
testimony before this committee on broadband; we are tenth or 
eleventh or somewhere around there in the world.
    Your comments suggest that we should emulate whatever 
public policies these countries have employed. What specific 
policies--and I will expand this question to Mr. Roberts and 
Mr. Ford and Mr. Betty. What specific policies from these 
countries should we consider if we are falling behind?
    Mr. Seidenberg. We would be the last to suggest that we 
follow what they are doing in South Korea or Norway. But I 
would say this, that all of these countries have a consistency 
of their policy that drives investment in a fashion that is 
fair and balanced. What we have here is a well developed cable 
industry, we have a well developed wireless industry, we have a 
well developed telecom industry. I do not think we need to copy 
any model of any company, other than go to the principles under 
which they operate, which is they incent investment, they allow 
the companies to get a return on that investment, and they do 
not require unbundling.
    What you will find in all ten countries that are on the 
list before us is no one is requiring anybody to give away 
their facilities at below-cost rates to competitors in the name 
of simulated competition.
    The Chairman. Mr. Roberts?
    Mr. Roberts. I would say that I think that we are in a lot 
better shape than people would suggest by looking at how fast 
the cable industry, a business I am familiar with----
    The Chairman. Let me just interrupt a second. There is 
numerous testimony of witnesses we are falling way behind, we 
are tenth or eleventh or twentieth or something, we better do 
something quick.
    Mr. Roberts. I do not know that that is true.
    The Chairman. Apparently neither Mr. Seidenberg or you feel 
that there is any need for any drastic change in policy?
    Mr. Roberts. Well, that, I would agree with that last 
statement. I would say that my industry--cable modems were 
invented in 1996-97. We went to one conference, just to give 
you an anecdote, where Andy Grove of Intel stood up and said: I 
do not think a cable modem can work. And there was a trillion 
dollars literally of investment capital in the room when he 
made that statement.
    So this is risk-based investment with ideas that nobody 
ever predicted. And I agree with the testimony earlier that it 
is hard to know how fast the world keeps changing and to make 
accurate predictions. But I believe the fastest growing part of 
Comcast is our high-speed Internet business. So we do not need 
any more incentive than that to try to get out and make that 
business happen, not because Korea is doing better or worse by 
some standard that may or may not be exactly accurate.
    I think it is a great opportunity, and regulatory stability 
is what allows the capital spending that I was referring to 
having tripled on an annual basis for an entire industry.
    The Chairman. Mr. Ford?
    Mr. Ford. Well, I think it would be easy to echo what both 
of them said. I think what you hear and I would agree with is 
you will get more broadband deployment because every time the 
cable company deploys broadband they are eating into the 
telephone service revenue potential. Every time the telephone 
company deploys broadband that is a high enough speed to 
deliver video, they are eating into the traditional video 
business. They will compete with each other--we have to compete 
with both of them in different markets. They will compete with 
each other when they both are free to invest.
    The issue right now is in wireless--the technology is not 
mature enough to offer video wirelessly yet. We are working 
hard to try and make that a reality over the next several 
years, but it is not in the next 3 to 5. But the cable guys, 
where we compete with Mr. Roberts' company he is free to invest 
and he is done once he has put his fiber in the ground. And 
when we put our fiber in the ground, we are only beginning 
because then we get--I can tell you a lot more about what 
Nebraska and Kentucky are doing than South Korea or Japan.
    But each one of those States then starts to want to take 
our network back apart individually for their particular view 
of what they think the world should look like. So our answer to 
that is, well, then we just will not invest, and we cannot.
    The Chairman. Good.
    Mr. Betty, real quick.
    Mr. Betty. I do not think the United States has as big a 
problem as people think. Japan and Korea have some unique 
circumstances of a lot of people located in a very small area 
and it makes the capital that is deployed much more effective. 
I do think that not providing consumer choice does impact the 
ultimate deployment.
    We heard a lot about the damages people incur. We lose 
about 50,000 customers every month to a facilities-based 
provider because I have nothing that I can provide them because 
I cannot gain access. Those are customers that we have served 
for a long time.
    The Chairman. One fix to the 1996 Act, beginning with you, 
Mr. Seidenberg, quick. One fix.
    Mr. Seidenberg. One fix?
    The Chairman. What is your priority?
    Mr. Seidenberg. Oh, definitely, definitely get rid of the 
entire unbundling regime and allow investment to move to the 
risks that they are willing to take with that.
    The Chairman. Mr. Roberts?
    Mr. Roberts. I do not think you need a wholesale rewrite. I 
think you should let it stay. But if you want to focus on one 
thing, I would say focus on VoIP and Internet protocol; and as 
I mentioned, Senator Sununu's proposed legislation, be targeted 
in not creating a whole long process that will perhaps 
destabilize a lot of businesses, but rather say, OK, what is it 
we are most focused on, if we want more telephony competition 
what are the barriers.
    I think the IP technology is going to be the delivery way 
to get there and there is probably a legitimate conversation 
around that.
    The Chairman. So you endorse the indecipherable Sununu 
legislation?
    Mr. Roberts. No comment. No comment.
    The Chairman. Mr. Ford?
    Mr. Ford. Senator, I think the one thing if we could wave a 
magic wand, I think the one thing we would ask you to look at 
is, with all due respect, I know Mr. Seidenberg's company has a 
telecom background, I know Mr. Roberts' company has a cable 
background. Out in the markets where we compete with them, they 
look an awful lot alike to me.
    The Chairman. What is your fix?
    Mr. Ford. My fix is put everybody on the same playing field 
and then you will get sustained competition.
    The Chairman. Mr. Betty?
    Mr. Betty. I agree with Mr. Ford.
    The Chairman. Mr. Wilson?
    Mr. Wilson. I think from a rural carrier's perspective, 
maintain a strong universal service policy. That is very 
important to us out in the rural areas.
    The Chairman. I thank the witnesses.
    Senator Lautenberg.
    Senator Lautenberg. Thanks, Mr. Chairman.
    Mr. Seidenberg, currently all telephones, including the 
regional Bells, are permitted to provide long distance and 
local service throughout the country. What does Verizon do by 
way of competing with other companies, former Bell companies, 
in their markets for local subscribers, non-business?
    Mr. Seidenberg. We have the largest and most successful 
wireless company in the country and those services clearly 
substitute for local services everyplace, including in our own 
footprint. So I think that wireless represents a facilities-
based technology that easily provides customers with 
alternatives to spending money on local telecom services. There 
is not any question in my mind that wireless is the single 
biggest competitor to any existing incumbent for local calling 
that there exists in the country.
    Senator Lautenberg. We had a question come up in New Jersey 
about some regulation that was being considered and Verizon 
said that they would pull out of a plan to invest some $250 
million in the state of New Jersey. That is a lot of muscle to 
be exerting, Mr. Seidenberg. What is the intent there? Is it to 
say that if you do not play our game we are taking away the bat 
and the ball and we are going home?
    Verizon is not suffering from lack of opportunity or lack 
of profits. So why would that kind of a threat be a good 
business policy for either our State or the company?
    Mr. Seidenberg. The state of New Jersey has a requirement 
that we lease our network for approximately $12 a line. The 
average across the country is $19. AT&T charges $54 for its 
bundled services across the country and the average across the 
country that they pay is $19 a month. Therefore, in the state 
of New Jersey, AT&T is making an extra $7 a month for charging 
everybody the $54 without returning a single nickel of that to 
the customers in the state of New Jersey.
    Our position is we will not invest incremental capital in 
the state to do broadband if we are in business to support our 
competitors. Now, you claim this is a lot of money. It is 
absolutely a lot of money. I would point out, however, Senator, 
that for the past 5 years we may have invested $6 or $7 billion 
in the state and we have a negative return on that money in 
terms of how we are earning in the state.
    I think the bottom line to this is we want to do broadband, 
we are doing it in other places, but in any jurisdiction that 
continues to provide an environment in which our invested 
capital cannot get a reasonable return on investment we are 
going to slow down the investment.
    Senator Lautenberg. You said in your testimony that you are 
investing some $12 billion a year in capital investment.
    Mr. Seidenberg. Yes, sir.
    Senator Lautenberg. What is typically the life of the 
assets that you buy in that $12 billion a year?
    Mr. Seidenberg. It depends. Some of them are long. It could 
be 8 or 9 years for switches. For fiber in the ground it could 
be as much as 12, 15 years. The electronics are shorter periods 
of time.
    To give you a perspective on how we think about it, 
wireless is very hot today, so we invest money in wireless. The 
investor thinks that we will get a return on our wireless 
investment in 6 or 7 years. For 6 or 7 years we will incur a 
loss until we see a positive return on net income in our 
wireless business.
    Today there is no business model that would suggest any 
investment in the wireline business has any positive return 
ever. But we have been willing to do it, on the theory that we 
think we can remake our business and turn this regulatory 
quagmire around. If we cannot turn the regulatory quagmire 
around, then focus is going to continue to be shifted away from 
the wireline business.
    If I just may give you a couple of facts, because I know 
you hear all these numbers about investment. In the past 4 
years, we have cut our telco investment by 50 percent. So it 
used to be running at $12 billion a year just in the telco. It 
is now running a little bit over $6 billion in that time 
period. Our employment, we used to employ 240,000 people in our 
telco. We are down to 140,000.
    Senator Lautenberg. Is that technologically created?
    Mr. Seidenberg. Some of it is. Some of it is 
technologically created, as it was said before.
    But here is the issue. Unless we invest in new technologies 
and recreate growth, all we are doing is heading down a path of 
going to zero. I think our view is broadband gives us a chance 
to recreate an industry around a new technology. Government 
policy, particularly regulatory policy, we think is frustrating 
that entire opportunity.
    Senator Lautenberg. You can see that by the results of 
growth in your company, with all of these regulated years that 
you are complaining about. The progress of the company is 
incredible.
    I wish that you and I could sit over my phone bill. I am a 
New Jersey resident and I would like to examine what we get, 
how much less we seem to get for the money we are spending.
    Mr. Seidenberg. Senator, any time you want to look at our 
balance sheet, I think you will find that we have not grown 
over the last 4 or 5 years, that we do not get a return on our 
investment. The fact that you use our services I appreciate. I 
think it is a good thing.
    The Chairman. I would like you to explain my phone bill to 
me just so I could understand it.
    Mr. Seidenberg. Just pay it. Just pay it.
    Senator Lautenberg. I come out of the computer industry, 
Mr. Chairman.
    Mr. Seidenberg. It is one of the best values you will ever 
get, Senator.
    Senator Lautenberg. Mr. Roberts, what do you think about 
the negotiations between the Bell companies and the competitive 
carriers in the wake of the D.C. Circuit decision?
    Mr. Roberts. Well, I was enjoying the previous exchange.
    [Laughter.]
    Senator Lautenberg. But I get a chance at you, too.
    Mr. Roberts. I think regulating the Internet, which if you 
boil it all down is what is at stake--and I am in the camp that 
you should look at what is the end goal and I think it is to 
promote competition and have multiple facilities-based 
providers.
    The comment that was made that the telephone companies are 
now selling more DSL's than the cable companies in the last 
quarter is a true statement, and that is the first time that 
happened. That did not happen for any other reason than, as I 
said earlier to Senator McCain, that I believe it is a good 
business and that is what the consumer wants and you are racing 
to get the consumer what they want. The same thing in wireless.
    So to turn around and take a law that was passed 70 years 
ago and apply it to an Internet-based product, high-speed 
Internet and broadband, does not seem to make sense to me. The 
FCC recognized that and hopefully the Supreme Court will 
recognize that, because I think whether you are talking 
wireless technologies, cable technologies, or power line 
technologies or whatever, I do not think you want to go back in 
time.
    If need be, take a look at the rules that still apply to 
others and try to take some rules off. Do not put new rules on 
in the name of trying to promote competition. I do not think it 
proves that that will work.
    The Chairman. Thank you.
    Senator Allen.
    Senator Allen. Thank you, Mr. Chairman.
    My key concern here and view is that we need to make sure 
broadband is more available to more people. It benefits 
consumers, encourages innovation, and it stimulates jobs and 
economic growth and clearly individual opportunity for 
consumers, particularly in small towns and rural areas, for 
those businesses, individuals, whether they are in schools or 
telemedicine, in a variety of ways--distance learning and so 
forth.
    I think that to worry about the telephone aspect is 
secondary to broadband because the applications are way more 
than e-mail and instant messaging, and it is more even than 
telephone. It is video. It will get competition against the 
cable, so to speak, but give consumers more choices in it. 
Again, it is not just cable modem and DSL; it is ultra-
wideband, it is the power lines, it is satellites, wi-fi, and 
so forth.
    Now, we recently passed the Internet Tax Freedom Act 
extending the Internet tax moratorium, and most of you 
supported that effort and I appreciate it. Can you tell me what 
you think the impact of taxing the Internet would have on the 
deployment of broadband by your company? We could go through 
all of you, to the extent you all in one way or another are 
involved in broadband. Start with you, Mr. Seidenberg.
    Mr. Seidenberg. Well, in addition to it being a bad idea, 
taxing the Internet, I think I will come back to my theme. I 
think it will take all or most business risk associated with 
wanting to invest in new technologies and frustrate it.
    I think that you have a hard job in terms of public policy. 
You can get revenues into the treasury by creating growth or 
you can tax it. I think if we tax it we are not going to get 
the growth. So I think in this case I err on the side of 
wanting to see capital formation, continue to have people 
invest, all the services that you talk about will occur. And 
investors will flee from this market in a nanosecond if they 
feel the heavy hand of taxation enters the success formula for 
these kinds of services.
    Senator Allen. Mr. Roberts, while you are not considered by 
the ones who want to tax it a telecommunications company, which 
gave you an advantage over some of those States that looked at 
loopholes and taxed DSL, one thing we do not want, at least I 
do not want, is an Internet service bill, monthly bill, to look 
like the telephone bill that Senator McCain and no one can 
understand, with the multiple State taxes, local taxes, and 
Federal taxes, including a luxury tax put on to finance the 
Spanish-American War that remains there.
    What would the impact of taxation be on you? And Mr. Ford, 
Mr. Betty, and Mr. Wilson.
    Mr. Roberts. Well, first of all, we do have local franchise 
fees, so there are taxes at stake in this debate as well, 
because a cable operator gives 5 percent of their revenue to 
the local municipality, depending on how you define what the 
service is.
    Senator Allen. Right, but not in Internet service.
    Mr. Roberts. In the past there has been some municipalities 
that have wanted that, and so that is part of the question. I 
think when you create a tax in something that is growing like 
this, you are obviously going to depress demand. If you go back 
to what Chairman McCain said or what the President said, should 
we not be thinking about growing the appetite, not depressing 
the appetite?
    I would agree with what Mr. Seidenberg said, that I do not 
think that is in any way going to help grow demand, and I think 
that is better for the Nation as a policy.
    Senator Allen. Mr. Ford?
    Mr. Ford. Well, sir, one comment would be we pay--I did not 
realize until the last few weeks when all the articles starting 
coming out, we pay 6 to $700 million in State and Federal 
taxes. I did not know we were in such a minority in just the 
Nation as a whole.
    But one of our primary competitors that is trying to sell 
service promotes having a $10 cheaper price for a similar 
bundle of voice services. That is because they have about $8.50 
of less taxes, fees, surcharges, and etcetera on the bill. So 
again, it is maybe not just the question of do you tax the 
Internet and how you take that into State tax revenues and 
balance that, but one set of competitors are being taxed, one 
set of competitors are not being taxed. Again, I think that is 
worthy of looking at as you go through your review of this.
    Senator Allen. Mr. Betty.
    Mr. Betty. Taxes clearly would have the effect of dampening 
demand. It would make it unaffordable for even that many more 
Americans.
    Senator Allen. Thank you.
    Mr. Wilson.
    Mr. Wilson. Senator Allen, when I go back and think about 
our rural cooperative, when we deployed the Internet back in 
1996 and I talked to many of the people when they took the 
service, we have over 3,000 dialup subscribers and around 300 
DSL subscribers. To be frankly honest with you, whether it had 
been taxed or not I think would have had little impact upon 
people wanting the service. They wanted the service, they 
needed the service bad.
    Senator Allen. What would--beyond the issue of taxation, if 
each of you could say this. Beyond the issue of taxation, what 
is the key issue facing your company preventing further 
deployment of broadband services? We will go in the same order.
    Mr. Seidenberg. I will just give two things. I think, as 
Senator McCain said earlier, I think in our case requiring the 
FCC to implement the court rules without all these silly 
pricing distortions; and treating adjacent industries the same. 
I think the theme comes out here that--and I did not make this 
point, make it a point to come here this morning to comment on 
this, but there is no question that the cable industry, with 
all its success, has a different set of rules than we have, and 
in some cases we provide exactly the same service.
    The Chairman. And different kind of taxes.
    Mr. Seidenberg. Absolutely. Now, I am not suggesting that 
they are doing anything that is not good. They are taking 
advantage of an opportunity. But the issue is we cannot go 
downstream and have a different set of rules for us and for the 
cable. It is not sustainable.
    Senator Allen. Mr. Roberts?
    Mr. Roberts. Well, first of all let me just comment on that 
last part. If you take the video business, one out of every 
four homes now buy their video products from somebody other 
than their cable company. There has been several laws about 
video competition. You have two national competitors. We are 
not in the satellite business, really not allowed in the 
satellite business. The biggest competitor to telephone is 
wireless.
    Senator Allen. I do not want to get in that whole debate.
    Mr. Roberts. OK, no problem.
    Senator Allen. I understand there is competition. What is 
the biggest and key impediment to you all?
    Mr. Roberts. The biggest impediment would be regulatory 
instability, and in our case that is here and now and 
immediate, which would be the so-called Brand X case which 
Senator Lautenberg was referring to is under review. The 
question is whether they are going to appeal it to the Supreme 
Court, the FCC's rulemaking.
    Senator Allen. So you are saying legal uncertainty?
    Mr. Roberts. Legal uncertainty.
    Senator Allen. All right. Mr. Ford?
    Mr. Ford. Mr. Allen, I have to say that it is regulatory 
uncertainty as well. The technological advances are hard enough 
to forecast. We struggle with it every day. But when we do not 
know what regulatory scheme we would be making that capital 
investment decision, the only decision we can make is not to 
push.
    Senator Allen. Mr. Betty?
    Mr. Betty. Nondiscriminatory open access to the 
infrastructure.
    Senator Allen. I know we could have a good debate with you 
and Mr. Seidenberg on that one.
    Mr. Wilson.
    Mr. Wilson. As a rural carrier, it would have to be 
regulatory instability, too. We need a stable environment of 
investment recovery so we can build that broadband out in rural 
America. I think it will bring untold opportunities to many of 
our subscribers.
    Senator Allen. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman.
    If we move forward on a goal that I would like to see of 
helping consumers and a regulatory environment without 
hampering technological innovation, something that would also 
allow wireless broadband to be rolled out quickly, and ensuring 
that all Americans have access to this kind of technological 
innovation, so with that in mind, which is one of my goals, Mr. 
Betty, suggest to us how you think we could redesign the laws, 
the telecommunications laws, so that they do not become 
outmoded by the new technological innovations?
    Mr. Betty. Well, that is a tough question. I mean, IP 
fundamentally is changing how things are delivered. I think 
Scott talked about the view that it is going to be applications 
that people are buying, not necessarily the service. That genie 
is out of the bottle. It is not going to change. And IP is 
going to be delivered by a number of different infrastructures.
    If the Congress decides that access needs to be provided 
for everyone, I do not see how anything but some subsidization 
is the only way to fund cost effectively the delivery of those 
services to many of the rural areas. But I do not think 
providing a framework where you are limiting or setting up a 
duopoly of interests or having only a couple of people that can 
provide those services is for the public good. Whatever you do, 
I would suggest that you provide a framework that takes these 
public, somewhat public, infrastructures and makes it available 
to other third parties.
    Senator Nelson. Mr. Roberts, you have thrived in the cable 
industry since the 1996 Act, in part because of being relieved 
of many of the regulatory restraints. Now, the wireless 
industry is also minimally regulated. Should the incumbent 
local telephone providers be similarly deregulated?
    Mr. Roberts. Well, if the choice is that versus regulating 
others, then I would say yes. I do not consider myself an 
expert on all the machinations, and I did not mean to get us in 
with Senator Allen's question, but I think you do have to look 
at who are the largest wireless companies in America. They are 
the telephone companies. In the case of our industry, the 
satellite companies are not owned by the cable companies.
    So you do have--it is simple to say, oh, just have one set 
of rules for everybody. I do not think that is necessarily 
totally realistic. We have local municipalities that regulate 
our business, other businesses have different regulations. So I 
think what you should be doing is looking at the end user and 
saying, how can we promote more and more competition and 
thoughtfully take rules off of people that are no longer 
necessary.
    I do not know that I know every rule affecting the local 
telephone companies. But if the answer in the name of parity is 
to put more regulation on, then I have a very strong point of 
view. If the question is should you take regulation off, I 
think it is a question that should be thoughtfully revisited, 
and there are many witnesses and I think you are doing the 
right process to ask those questions.
    Senator Nelson. Mr. Seidenberg, you are negotiating 
interconnection agreements with competitors over the use of 
their networks. How would you characterize the progress that is 
made thus far?
    Mr. Seidenberg. Well, it has only been 2 or 3 weeks. I 
think the progress is fine. I would prefer that we call them 
customers because they are customers. They spend a lot of money 
with us. And we do--we have had interconnection agreements with 
most of them for the last 25 years.
    What we need to do here is find the right balance between a 
fair price to be paid for the facilities and the services that 
we offer. We have negotiations going on with close to 20 
different carriers right now. Most of those carriers feel that 
they would like to cut an individual deal with our company 
because each of them has built differentiation in their 
company, and we would like to accommodate that by giving them 
whatever it is that they feel would be reasonable under the 
law.
    So I am very pleased that the discussions are ongoing and 
active, and we should end up with some good results over the 
next several weeks.
    Senator Nelson. You think those interconnection agreements 
should be filed with the government?
    Mr. Seidenberg. This is a difficult question. I think my 
instinct is the following. We were asked to settle this 
commercially. I think my concern would go to, if we cut a deal 
with you, sir, should we take all of your intellectual property 
and make it available to Senator Sununu? This is what happens 
in the regulatory process. So you go through this very tortuous 
process to treat customers as individuals, only to find out 
that every term and condition of every single contract is 
spread across the entire industry.
    So I think we want to follow the commitments we have made, 
which is to do bilateral agreements, cut these deals with these 
major customers, and go forward on the basis that will keep the 
information confidential.
    Senator Nelson. Mr. Ford, should Congress consider amending 
the Act to support wireless or broadband applications to permit 
universal service funding instead of just supporting only the 
basic voice applications?
    Mr. Ford. That is a deep set of issues. I could probably 
make money if I said yes and you did it, but I do not know that 
that would be the right policy. I think that there is plenty of 
money in the pools. We are a rural telephone company. We take 
out about 100, we take out about $150 million from the State 
and Federal pools; we pay in about $100 million.
    There are plenty of pools to incent lifeline support, 
whether it be wireline or wireless. There has been an 
interesting evolution on that topic in the last couple of 
years, and I think a reasonably fair one.
    Do we need to go and incent that for the delivery of 
broadband in rural America? We probably will not build out 
extreme rural America with wireless broadband in the first few 
years, but I think the technological progress that is being 
made will allow us to get there over the next 10 years without 
having to introduce a new Federal subsidy or a new State 
subsidy.
    So while I would profit if you did that and I will avail 
our company of that revenue stream if you decide to do that, I 
do not know that that is essential long-term.
    Senator Lott [presiding]. Senator Allen--no, I am sorry. 
Senator Ensign.

                STATEMENT OF HON. JOHN ENSIGN, 
                    U.S. SENATOR FROM NEVADA

    Senator Ensign. Thank you, Mr. Chairman.
    I want to delve a little deeper on this topic. Senator 
Allen talked about taxation. Well, another tax is regulation, 
and you all are operating not only nationally but even 
internationally. So I would like your comments on how, because 
this is definitely one of our roles, in terms of regulating 
interstate commerce, when do we preempt States; and for the 
deployment of broadband, getting more broadband out there, 
making it more competitive, as Senator McCain talked about in 
regards to Korea and Japan.
    Can you comment on that aspect of the States appropriate 
role and the difficulties of having different laws in each 
state you think that affects broadband deployment, pricing, and 
the like? This might be something most of the panel at least 
can agree on. Just start down the line.
    Mr. Seidenberg. You want me to start?
    Senator Ensign. Yes.
    Mr. Seidenberg. OK, fair enough. Maybe I could just quickly 
offer why it is time to take up the questions you just 
mentioned. If we believe the technology, we now have services 
that are more national in scope rather than local. Let us take 
the example of wireless for a second. The U.S. was criticized 
because we had multiple standards, CDMA and GSM. Europe created 
one technical standard across Europe. They had faster 
deployment of wireless in Europe.
    Now let us take a look at the phone situation or the 
telecom situation in the U.S. We have 53 jurisdictions setting 
prices, setting terms and conditions. We have the FCC setting 
terms and conditions. We have heard here that when you deploy 
networks you have IP protocols and packet switching that create 
national formats.
    I think if we do not eliminate the unintended consequences 
of having 53 different statutes regulating different aspects of 
this, trying to divide a chip on a device and trying to 
allocate costs, we are going to continue to disadvantage the 
formation of broadband networks. So I think it is time for the 
Congress, the FCC--most state commissions will not like me, 
will not appreciate this, but time to preempt it, cut across 
the top and create uniform standards.
    You have heard this before, but we need common rules for 
enforcement, technical standards, public safety; we do not need 
economic regulation of prices. We do not have it in wireless, 
we do not have it in cable. It works. And we need policy that 
provides stability and uniformity across the country. It is 
time we did that.
    Senator Ensign. Thank you.
    Mr. Roberts. I think you are right, I think we will 
probably have a lot of agreement on this point. I also think 
pointing out that regulation is another form of tax is exactly 
right. Without a doubt, as we look to the daunting challenge of 
going into the phone business and all the interconnection rules 
and all the myriad of consumer necessities that are the phone 
business if you really want to be a primary line company, which 
is what our goal to offer the service is, having preemption of 
53 or whatever State rules is critical.
    It happened in 1996 and that is a big part of why high-
speed Internet took off. There is one set of broadband policies 
that are under judicial review and so that is part of my 
concern. I think doing it again for VoIP makes an awful lot of 
sense.
    Mr. Ford. I would agree completely on the wireline side. 
The wireless industry, this has been one of the primary issues 
we have dealt with in the wireless industry the last few years, 
as one State after another wants to come in and start--they do 
not want to regulate price. They cannot. But the terms and 
conditions becomes an ever-expanding room for them in terms of 
their view of what they need to regulate, including in one 
State what font size various parts of our ads should be.
    There was another State where we passed on an acquisition 
because part of it did business in one State where we knew the 
regulatory burden would not pay for us to even have the 
operations in the State. So it is a real issue.
    Mr. Betty. I agree with the other panelists.
    Mr. Wilson. I guess mine would be just a little bit 
different. I do not have the experience of all these other 
States, but I can tell you in the rural areas that we serve, 
for DSL broadband type services to remain regulated to receive 
a rate of return is imperative for us to be able to get this 
stuff out there.
    There has been quite a bit of rhetoric over the last year 
or so about deregulating these information services, and if so, 
if there is no rate of return, for us as rural carriers we are 
probably as far as we are going to be able to go. We definitely 
need the help from rate of return regulation to deploy this 
stuff.
    Senator Ensign. Just to go a little further along these 
lines to get into the Voice-Over-IP: taxation, obviously at the 
local level and regulation. There is a lot of promising work in 
the Sununu bill and I think it is one of the most important 
technologies that we allow to develop, and I say ``allow to 
develop'' because it is developing. This body up here can mess 
it up.
    That is kind of the bottom line, is how do we get out of 
the way so that it does develop in a way that I think is going 
to revolutionize the way that people send and receive 
information in their homes and their businesses. So please 
offer your comments on, once again, the State and local 
preemption of taxes and regulation that would apply to this 
particular technology that is dependent broadband?
    Mr. Seidenberg. I have the feeling that I was just given a 
pass in open court and no one between me and the basket and I 
cannot lay it up. I apologize.
    I would say this. I think that from all these years of 
participating in this industry, there is a gravity of 
regulators, of regulatory thinking, that will not let go of the 
old in order to try the new. It does not mean that they are 
doing anything wrong. They are following what they view as the 
statutes.
    I think it is time for the Congress to change the statutes, 
so you change the job. If you change the job, they will change 
the behavior. I think what we are facing is, if you look at 
wireless--I can speak from that because of our experience--we 
started a wireless business from almost nothing, just a few 
licenses. We have a national company. Arguably we have the 
superior asset in the entire industry, and it is based on 
investment. We have invested more per customer than anybody 
else in the industry. We have the best service, the best 
coverage, the best distribution.
    I think the same thing has to occur on the wireline side. 
So we have to trust the market. We have to believe that the 
market is competitive enough at this juncture.
    Now, having said that, I am not a person that believes that 
we just obliterate all regulatory responsibilities. Somebody 
has to be the referee, somebody has to enforce, somebody has to 
set standards, somebody has to make sure it is uniform, there 
is nondiscrimination. I think there is a legitimate role for 
regulatory work, but it needs to shift away from micromanaging 
price and winners and losers to regulating the terms and 
conditions of market behavior.
    Senator Ensign. Thank you.
    Mr. Roberts. Well, I concur with a lot of that and I think 
it goes back to is the glass half full or half empty approach 
to what you are trying to accomplish and recognizing that this 
is changing. So in our company we are taking three cities this 
year and we are rolling out Voice-Over-IP. Again, the 
technology changes every day. We are thinking should we go into 
videophone, should we just go into voice? Should an Internet 
connect with your TV or should it be a stand-alone device? How 
does it relate to wireless?
    These are all questions that I cannot sit here today and 
tell you that we know until we go do it. I totally agree that 
it is about innovation and investment, and we are fully 
committed to taking our cash-flow and putting it back in and 
hoping that we are going to develop products where we can 
compete.
    In order for the government to support that and, as you 
say, get out of the way and not slow it down, I think the best 
thing you can do is to look at the existing regulatory 
regimes--in the telephony case that is clearly the States--and 
it is to recognize that any tax will slow this down or any 
regulation will slow this down, and have a stable platform, 
because Wall Street, which all of our companies basically or 
most of our companies have to answer to, wants to put their 
investment where they know there is not going to be a change 12 
months later and suddenly your investment is wiped out.
    Senator Lott. Anybody want to add to that?
    [No response.]
    Senator Lott. Senator Breaux.

                STATEMENT OF HON. JOHN BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. I am sorry, I have my Verizon Blackberry 
here.
    Thank you, Mr. Chairman.
    I think it is really important that we are doing what we 
are doing. If you think about Congress, we are so far behind 
technology in the laws that we pass. We passed the 1934 
Telecommunications Act. We came around in 1996 and passed an 
update 62 years after the first one. And then now it is 
arguable that what we did in 1996 has little relation to the 
technology that exists today.
    I mean, if you look at where we are going, just check the 
teenagers in this country as they move around on their 
Blackberries and their wireless telephones. I mean, these kids 
do not even use a wireline any more and probably will never use 
it in the future. And you look at e-mail and instant messages 
and broadband. Really, none of that was very common when we 
passed and debated the 1996 Act.
    So it is incredibly important that the next Congress, that 
I will not be part of, uses this opportunity to try and once 
again bring the laws regulating this industry into the modern 
world in which technology prevails. There is a disconnect 
between the 1996 Act now and what is needed in the year 2004 
and into the future. So it is really important, I think, that 
we have taken this opportunity to set the stage for next year 
to come in with legislation that addresses the new technologies 
so we can try and keep up with the laws, with the technology 
that is out there.
    Mr. Roberts, Mr. Seidenberg, and maybe if someone else 
would comment, it seems to me that what we did in 1996 was 
extremely regulatory in the sense of the RBOC's and the 
requirements that Mr. Roberts and his cable companies do not 
have those same standards. I think Mr. Roberts' response I 
think is correct, but I will get you to elaborate on it.
    Currently the regulations on the RBOC's, Mr. Seidenberg's 
company, in comparison to what is there for the cable 
companies, there is a huge difference. I mean, the cable 
companies do not have to negotiate with your competitors for 
access to your network, you have no duty to interconnect with 
your competitors, sometimes at below cost, you have no duty to 
follow a detailed system of regulatory accounting, no duty to 
file tariffs, no duty to provide network ISP service, and 
others.
    But I would think, Mr. Roberts, that what you are 
suggesting is, rather than let Congress come in and provide 
these same regulations to you that you have on Mr. Seidenberg's 
companies, that the preferable answer would be to create a 
level playing field which moves toward deregulation in this 
area, as opposed to more regulations. Can you comment on that?
    Mr. Roberts. Yes, I think that is right. I think that, in 
fairness, there are other regulations on cable, and in fairness 
there are other competitors in, quote, our ``core business,'' 
the video business, that in Mr. Seidenberg's core business that 
there are people at this table, not at this table, who would 
say, well, here is why there should be a difference. And you 
can have that intellectual debate.
    But I think ultimately, if the policy of is broadband going 
fast enough in this country, to thoughtfully go back and look 
at issues as he described in New Jersey or wherever that are 
retarding their advancement are legitimate to revisit. And 
there may be--again, it is a nice goal to say let us have 
exactly the same rules for all parties. But in the end, last 
quarter there were more DSL's sold in this country than cable 
modems.
    Senator Breaux. Yes, but you are so far ahead. I mean, they 
could have a good quarter, they have got a hell of a lot of 
making up to do to come close to catching up with cable.
    Mr. Roberts. Again, so part of that is----
    Senator Breaux. You have got what, 25 million subscribers? 
They have got 16?
    Mr. Roberts. I think it is a little higher, but I think 
that conceptually we would not argue we did better, because I 
think we recognized that this was a business a little faster, 
and that is good for competition.
    Senator Breaux. Yes, but you also did not have all the 
regulations that Mr. Seidenberg had.
    Mr. Roberts. That may be part of the answer, and I think 
that is worth taking a look at.
    Senator Breaux. Mr. Ford, you have a comment on this?
    Mr. Ford. I think you have got it square.
    Senator Breaux. Mr. Seidenberg, do you want to elaborate? 
Maybe this is another jump shot for you.
    Mr. Seidenberg. I would just make, I would just like to--
Senator, you have been working these issues a long time. I know 
you understand this. I think that this whole issue of DSL and 
cable modem would suggest there is a lot of competition. 
Regardless of who is on top, the fact is we compete every day. 
Cable does a good job. We are trying to do a better job. We 
happened to have one good quarter out of the last 30, so I 
guess it does not mean we are on a winning streak. But that is 
fine.
    But I think the other point that I would like to just offer 
you is, what makes this different today is that there are no 
boundaries to separate voice from high-speed from video. As 
these industries come together--Senator, you asked a question 
before about applications and the software industry. If we do 
not begin to treat these technologies as they serve the myriad 
of applications across these technologies, we are going to 
continue to suboptimize the process.
    I think that is the reason why we need to cut across the 
regulatory structure and obliterate those things that draw us 
to the past and try to create something that is more level 
going forward.
    Senator Breaux. Well, I may be hoping for the impossible, 
but it would be so incredibly positive if the industry itself 
could look at this in a way without getting into problems with 
antitrust, to make recommendations to the next Congress as to 
how this should be handled. You have been through the battles 
and had TV ads ad infinitum from both sides talking about what 
we should do and what we should not do. If as much time was 
spent on trying to present a united recommendation, it would be 
incredibly helpful.
    I believe in regulation when there is no competition. If 
there is a monopoly, there should be regulation. But you need a 
lot less regulation when there is true competition, because the 
competitive system can work, but it can only work if you have 
in fact competitors. I think that we are moving in that 
direction and the recommendations I think would help the next 
Congress a great deal to try and get together on this.
    I thank all of you for your testimony.

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. Well, let me say, Senator Breaux, no matter 
what we do next year or the next, it will not be as much fun 
without you helping us write the legislation. You would 
certainly add some complication and entertainment to the 
process, but we are going to miss you as we try to do that.
    I want to thank Senator McCain, even in his absence, for 
having this series of hearings. I think it is helpful to begin 
to frame the discussion and help us understand a little bit 
more about the tremendous technology changes that are under 
way, and we need to try to deal with it, hopefully in a 
positive way, in terms of what we do with the law, the 
regulations, legal concerns.
    So I think this has turned out to be a good idea. I want to 
thank the panel for being here. I think you have done a very 
good job.
    But to change things up just a little bit, I am going to 
start down on this end with you, Mr. Wilson. One of the things 
obviously that will be a key factor when we develop legislation 
is what do we need to do, what kind of reform should we have in 
the universal service fund and in the way the distributions are 
made that would help guarantee the stability of the fund in the 
future? Where can we get more money to help provide the funds?
    Do you have any thoughts on either part of that question?
    Mr. Wilson. Yes, sir. We at NTCA believe that the 
contribution base needs to be expanded, for one thing, to all 
telecommunications providers, also including information 
providers as well. We believe that the current revenue 
assessment base is the way to stick with. We do not really--we 
do not believe we need to move toward a numbers or a 
connection-based. That will shift a lot of the responsibility 
to telephone companies, to wireless providers, and to CLEC's as 
well, and relieving a lot of the inter-exchange carriers of 
their statutory responsibilities.
    So yes, sir, we believe that the base should be expanded.
    Senator Lott. Mr. Seidenberg, do you have a thought on 
that?
    Mr. Seidenberg. Well, yes, sir. Senator, I think universal 
service to us is important. I mean, all the rural customers are 
very important. We serve rural locations, as you know. I guess 
technically we are probably as large a rural provider as 
anybody is.
    I think the issue for us is to make sure that the fund is 
administered correctly and is targeted. If we could do that and 
get the support where it belongs, to those that need it, there 
should not be a big objection to it. I think in the past these 
funds have tended to be bigger than they need to be, they tend 
to go to companies rather than people. If we can sort through a 
way to do that, we are willing, we absolutely are going to 
participate and try to make it work.
    Senator Lott. Do you want to add anything to that, Mr. 
Roberts?
    Mr. Roberts. One point that I think as you think about how 
the USF can be relevant in the future with new technological 
development, the very last point of whether the money is ending 
up in the right place I think is a fair question. So one idea, 
just as you are evolving ideas, is if you want to continue to 
take--obviously we want to participate if we are in the phone 
business; we do today pay into the fund--whether it should get 
to the user as compared to the provider. So that tends to pick 
winners and losers.
    I do not know how you do that. I think if you have this 
discussion you should be thinking about, OK, the incentive is 
there, the question is whether it is low income or rural. What 
can you do to spur the demand side is again in my mind an 
interesting way to at least revisit the question.
    Senator Lott. I noticed in your testimony, Mr. Roberts, 
that you refer to the preamble of the Telecommunications Act, 
and what a worthy description that was. You can debate about 
whether or not we have achieved that goal. But my thought when 
we were working on that legislation in 1996 and today is we 
need to always keep our eye on the ultimate goal, which is to 
provide the customers with the best service at the best rates, 
with the least hassle.
    I think we have made some progress in giving them 
tremendous options, and for the most part pretty good rates. 
But I still think to the average consumer it is a confused 
mess. I look forward to the day when I as a customer can get my 
television, the Internet, the telephone, the works, local, long 
distance, all of it from one company that I choose, so I can 
pay one bill. I am getting damned tired of having to pay Bell 
South, Verizon, AT&T, cable, and the satellite company every 
month. It takes half my checkbook just to pay those. Now, 
partially because I live in two different places.
    But Mr. Roberts, since you have been very aggressive and 
innovative, do you envision that day? And I want it with 
competition. I worry that you can get all that, but I do not 
want it provided by one company. I want to be able to choose 
between at least a couple, so that I can keep a little heat on 
both of them to control their prices for that myriad of 
services.
    Mr. Roberts. I think that is the vision. I mean, I think 
that is--all kidding aside, how can the various networks evolve 
the technology to where you are offering all the products to 
the consumer, whatever the definition of the products will be 5 
or 10 years from now. So as you think through the model, you do 
want a facilities-based competitor that is willing to 
integrate. In the marketing lingo, that is the bundle.
    And bundling, Verizon is a leader in that. Get your 
cellular, your telephone, your DSL, they are offering 
satellite, and all in one bill. Cable is doing that, and I 
think that that is a lot of what some customers want.
    The key point that you also made, having competitive 
choices for all those bundles, is also happening. So in our 
case you can get Rupert Murdoch's DirecTV, you can get 
EchoStar, the Dish Network, you can get DSL. They are bundling 
together.
    So how do you innovate? So the real thing, so if you are in 
our shoes, is obviously trying to have local service, be a 
company that is community-based. So as you know, we take great 
pride in the fact that we started this company locally.
    Senator Lott. In Mississippi.
    Mr. Roberts. In Mississippi.
    Senator Lott. Do not ever forget that.
    Mr. Roberts. I never forget it. Tupelo, Mississippi, my 
father.
    Senator Lott. That is what got you started off on the right 
note, yes.
    Mr. Roberts. Forty years ago. So whether it is being part 
of the community or now doing 24-7, again, the change that you 
are talking about I think has happened, so we are open 7 days-
a-week, 24 hours-a-day. You call, you talk to somebody from 
Comcast. That is a very different business model than your 
cable company 10 years ago.
    So that is the competition part that you referred to. But I 
think that is a vision that we are all shooting for, which is 
the bundle.
    Senator Lott. Mr. Ford, my staff tells me that you 
indicated maybe you might want to comment on the universal 
service fund, go back to that.
    Mr. Ford. That is an observant staff.
    Well, I wanted to say one thing on that. As a rural phone 
company, we never quite got it right. We started in Arkansas 
instead of Mississippi, but that is as close as we could get.
    Senator Lott. But you do serve part of my State now.
    Mr. Ford. We do, sir.
    Senator Lott. So you are making progress.
    Mr. Ford. That is a crack staff you have got back there.
    Just to kind of stay on my mantra today of sighting the 
pink elephants in the room, when you talk about universal 
service, as I am sure you are aware, the high cost subsidies 
that used to flow only to the wireline companies, whatever that 
subsidy was now flows to any wireless company for any number of 
lines in that marketplace. So the universal service fund has 
grown tremendously over the last several years. It is not like 
it is dying on the vine.
    I am a beneficiary of it. But if you are looking for people 
in the industry that would say, look, enough of a good thing is 
enough, if you really want to policy where people have to 
compete and evolve their business models to stay competitive, I 
think you would find more support in the telecommunications 
industry than you might suspect.
    Senator Lott. Thank you very much.
    Now we will hear from VoIP Sununu in person.

                STATEMENT OF HON. JOHN SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you very much, Mr. Substitute 
Chairman.
    [Laughter.]
    Senator Sununu. I want to point out that you are doing an 
outstanding job presiding over this hearing.
    Senator Lott. Feel free to extend your remarks in that 
vein.
    [Laughter.]
    Senator Sununu. One of the points that seems to have been 
made in a number of different forms is the importance of 
regulatory parity and a level playing field, and also 
consistency, because it is the consistency that creates an 
environment where people can take a risk and put up some 
capital, invest in a new service, new infrastructure, and keep 
serving those customers in Mississippi and elsewhere that are 
the heart and soul of your businesses.
    Along those lines, Mr. Seidenberg, I think you talked about 
regulatory parity with regard to voice and video and data, 
whatever might be carried over the system. Mr. Betty, in your 
remarks I think you made a similar point about looking at these 
applications and treating them all in a similar way.
    Does VoIP fit that description that you provided in your 
testimony, Mr. Betty, an application that rides over the 
Internet?
    Mr. Betty. Absolutely.
    Senator Sununu. And do you agree that all of these 
applications, voice or instant messaging or video, ought to be 
treated as information services?
    Mr. Betty. Absolutely.
    Senator Sununu. Mr. Seidenberg, do you agree with that?
    Mr. Seidenberg. I am not a technical expert on the law 
here, so I do not want to get in trouble. But I think that to 
the extent that we can treat the VoIP services absent the 
common carrier regulation that would create a disparity with 
other services, then I would agree.
    But I want to make sure I read the fine print because this 
is what I have learned in this industry after all these years. 
But generally we have been making the case that broadband 
services should not be treated under Title 2, they should be 
treated under Title 1.
    Senator Sununu. Mr. Wilson, do you agree with Mr. Betty?
    Mr. Wilson. No, sir, I do not. I think VoIP is another form 
of telecommunications and should be treated so. I look at 
Voice-Over-IP as just another natural evolutionary step in the 
innovation of telecommunications. If you go back years ago, we 
had the old central switchboard, we had open wire lines with a 
great number of people on party lines. We migrated to eight-
party, to four-party, to one-party, buried copper to fiber, 
hybrid coaxial networks, went from step switches to digital 
switches, now to soft switches.
    I think it is just innovation, another step in innovation 
in telecommunications.
    Senator Sununu. So instant messaging, e-mail, video on 
demand, those are also telecommunications services that should 
be regulated under Title 2?
    Mr. Wilson. I do not think e-mail and text messaging should 
be, but I think the Voice-Over-IP should be.
    Senator Sununu. So looking out toward the future, 
regulators are going to have some sort of a sieve that enables 
them to determine which bits carry a telecommunications voice 
call and which bits carry an instant message and which bits 
carry an e-mail?
    Mr. Wilson. Well, sir, I think the fact may be that we have 
to have some type of a network compensation for just a bit, 
period, because we will not be able to distinguish those bits 
for sure. But still, we will have usage of our network. This 
stuff, it is not magically just getting from point A to point 
B. It is still riding over a network. We have got network 
investment and somehow we need to be compensated for use of our 
networks whether it carries VoIP or text messaging or whatever 
else it carries.
    Senator Sununu. So your point is not really whether you 
have regulatory parity or not. It is just whether anything 
affects the rate of return model that your business is based 
on?
    Mr. Wilson. Yes, sir, we just need to be compensated for 
our network usage.
    Senator Sununu. I appreciate that directness.
    Mr. Seidenberg, I believe the FCC has encouraged and you 
and others have participated in discussions around modifying 
the inter-carrier compensation system, moving to maybe the 
nirvana, or perhaps the mirage, of a bill-and-keep system. Is 
that realistic? Are you making any progress there? And where 
will that leave, if we were to move to a bill-and-keep system, 
where would that move folks like Mr. Wilson?
    Mr. Seidenberg. I think there are two different questions 
here. Let me see if I can address the question of the rural 
support. I think from an inter-carrier compensation system, 
some progress is being made. I guess we always make progress, 
depending on where you sit. I think what is important to us in 
that whole debate is to evolve the inter-carrier compensation 
art form here to--``bill-and-keep'' is not a bad way to say it, 
but, you know, to every complex solution there is a simple 
answer and it is usually wrong in this environment.
    I think we need to move more in that direction. We need to 
move more in the direction of people paying for the facilities 
they use. Now, here is the only place that we have a very 
strong view on this, is that every time we get into one of 
these debates we find ourselves supporting other companies' bad 
business models. This is where you get into all the trouble in 
the regulatory process.
    If everybody had to make a return like Comcast on their 
investor capital, the debates would be different. But when some 
companies come to the table with no stake in the game, no skin 
in the game because they do not invest anything, the whole 
discussion goes a different direction.
    Senator Sununu. Who would that be?
    Mr. Seidenberg. The interstate carriers and all those 
companies that--we know who they are. I guess we are talking 
about pink elephants. There is one of them around here 
someplace.
    I think, to the other question, I think that I believe that 
wireless, take for example, we have expanded coverage, we have 
grown the market. We have moved wireless coverage further and 
further into the rural communities. I would not give up on the 
idea that the marketplace will drive coverage and we do not 
need rate of return guarantees in order to make sure we provide 
services into the rural areas.
    So I think there is a balance here. We can push things out 
a little further through investment and growth before we get 
into the situation of trying to mandate these things through 
regulators who, frankly, it does not work. You come from a 
rural State. You know this.
    Senator Sununu. I would not say that. My state, it is a mix 
of suburban areas who go through the hand-wringing of being 
included in the Boston DMA and all the problems that that can 
create in a number of different areas, and yes, we have got 
some rural areas and the issues associated with broadband 
access as well.
    However--sorry, Mr. Chairman. Let me just be clear. You did 
not really answer my question, which was about moving to bill-
and-keep and whether or not you thought that was a realistic 
goal, whether we could achieve a bill-and-keep system, and 
whether or not, if we did that, whether that would create a 
problem.
    Mr. Seidenberg. I apologize. I mean, I think moving in that 
direction is right. But I want to be very careful. I want to 
make sure I read the fine print to make sure that somebody does 
not call it that and when I get finished with it it is 
something else, because that has been the history.
    Senator Sununu. Thank you, Mr. Chairman.
    Senator Lott. Senator Lautenberg, would you like to pursue 
a couple more questions?
    Senator Lautenberg. Yes, thank you, Mr. Chairman.
    One of the things I noticed, Mr. Seidenberg, in your 
response to my question about how you are competing in local 
markets, you turned immediately to wireless. Is that because of 
an abandonment of the traditional opportunities that came from 
the wire-connected subscribers?
    Mr. Seidenberg. No, sir. I think--and fair enough. I could 
have answered that question a little differently.
    Senator Lautenberg. Do you compete for the wire-connected, 
the more traditional kind of phone subscriber, in other 
marketplaces?
    Mr. Seidenberg. No, we do not.
    Senator Lautenberg. OK. I just wanted to be sure, because 
what we are talking about here is how those companies who would 
like to enter into the competitive marketplace with traditional 
service really do not have much of a chance.
    I noticed a company called Convergence Consulting estimates 
that 20 to 25 percent of DSL customers, the customer base, are 
businesses compared to only 3 percent to 4 percent for cable. 
Now, Mr. Roberts, do you have a view of that? Is that because 
you were not interested, the cable industry is not interested 
in the business marketplace?
    Mr. Roberts. No, we definitely are interested. I think we 
see that as a future growth opportunity. But traditionally we 
did not have the suite of services necessary that businesses 
wanted. Verizon has a very successful longstanding relationship 
with those businesses. But I do think part of our plan as the 
Voice-Over-IP technology happens, I think one of the themes 
here is that may well be the path to real competition in phone, 
is through VoIP. And should that occur, then I think a lot of 
the other conversations we have been having today will play 
out, and hopefully we will then go into the small business 
market.
    But in the big business market, it is unlikely that we are 
going to be a meaningful competitor any time soon.
    Senator Lautenberg. So that is a good marketplace for 
Verizon and the others?
    Mr. Roberts. Yes.
    Senator Lautenberg. And that is without any regulation 
interfering, is it not?
    Mr. Roberts. Yes.
    Senator Lautenberg. Is that so for you, Mr. Seidenberg, for 
Verizon?
    Mr. Seidenberg. That is true, sir. But may I just add 
something to this?
    Senator Lautenberg. Sure.
    Mr. Seidenberg. Because I think, if I understand the 
premise of the question, is that we have no natural platform to 
build local facilities in Atlanta. We have a network that we 
operate in New Jersey, for example, and other places. Our first 
choice is to upgrade that network to the next generation of 
service, while others are coming in and overbuilding us. So our 
focus in the local area has always been to upgrade what we 
have.
    I think the same thing applies to any cable company who 
would choose to get into the business market. They first have 
to upgrade their networks to provide those services, and then 
as a future service they will do that.
    We have plenty of competitors in our market for local 
services--wireless, cable, and all the little companies that do 
this. We have chosen not to go out of our wireline franchise to 
build, overbuild facilities, because new technologies like 
wireless and IP will supersede those technologies soon enough.
    Senator Lautenberg. So that that marketplace can be thrown 
wide open? You do not much care about it in terms of--let me 
not exaggerate what you have said. But what happens is the 
pressure that comes as I see it is that there is little 
opportunity for others to break into the local marketplace, and 
part of that has to do with fee structure.
    I do not want regulation on fees, but I wonder, where does 
the consumer right get protected here? Should that be 
regulated? Should there be some regulation that guarantees the 
consumer that their service is reliable and efficient and 
reasonably costed?
    Mr. Roberts. If I might take a shot at that, I think this 
is where the regulatory parity is a little too simplistic to be 
the right solution, because you are pointing out that there are 
parts of the market where there is not enough competition, 
where in other parts of the market there may be more healthy 
competition.
    So the model of saying, I believe, facilities-based 
competition is the sustainable competitive model. Let us 
promote policies that are encouraging people to make that 
investment. I think I believe--the last time I will say it, so 
I am not a broken record--I think VoIP presents that 
possibility. We do not know yet whether it will materialize 
that way. And we hope to be a leader in making that happen by 
making that investment.
    Senator Lautenberg. Mr. Roberts, when Comcast moved to 
acquire the AT&T broadband installations you argued that the 
combined companies would be able to accelerate the delivery of 
broadband services to the American public. You have had that 
company or that relationship now 18 months. How successful have 
you been on delivering that promise?
    Mr. Roberts. I appreciate that opportunity to answer that 
question, because I am very proud of the fact in the first 18 
months we have basically rebuilt to 95 percent plus the AT&T 
systems, which were about 70 percent rebuilt at the time we 
bought them. They had lost 500,000 customers to our competitors 
in the year between signing and closing. We got 150,000 of 
those back.
    We were able to--we had set guidance for the company 
internally and externally of 1.2 million broadbands last year 
that we would sell and we sold 1.67, call it 1.7, million, 
substantially more than we had expected, because of the 
investment, because of the return to localism from a national 
company to a local company, I believe. Certainly, for an 18-
month report card we think it has been the most significant and 
transforming event in our company's history.
    Senator Lautenberg. Thanks, Mister--I cannot find the 
Chairman.
    Senator Sununu [presiding]. If you just say ``Mr. 
Chairman,'' somebody over here will answer.
    [Laughter.]
    Senator Sununu. Senator Cantwell.

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Thank you, Mr. Chairman.
    Gentlemen, it is great to see all of you here this morning. 
I know you have had a healthy discussion about what will give 
us predictability and investment for the future that will help 
promulgate even better products and services in the broadband 
space.
    I am curious. We have had, this is I think our third 
hearing, Mr. Chairman, about this issue and the complexities of 
moving forward, given the framework of current statute and the 
development of technology, particularly IP telephony and the 
advent of many of your business models, let us just say, 
coalescing or coming together. And I know you are not 
soothsayers, I know you cannot predict the future, and some of 
this is still evolving.
    But I have a question as it relates to where we are today. 
We have a current Telecom Act and an FCC that tries to 
interpret that, obviously at times stretches in its challenge 
of information services in defining it, and obviously we all 
end up in litigation and complex outcomes to what we think 
would be a clearer solution if the Act was changed and defined 
in certain ways. And we have a moratorium proposed now on 
Voice-Over-IP.
    So I just want to understand where you are in looking at 
this context, of whether the moratorium process will get us to 
that point of predictability and certainty in investment, or 
whether you think that in fact the Act has to be changed in 
some ways so that we can get that predictability and certainty 
that you have been talking about today.
    So whoever wants to start with that.
    Mr. Seidenberg. Brian volunteers that I go first.
    Senator Cantwell. That easy question.
    Mr. Seidenberg. This is an easy issue for us, OK. The 
status quo is a slow death. So I think the moratorium is a 
reasonable first step. I think some of the other steps that 
have been taken are small, they are positive, but they do not 
do anything.
    If I could just answer this very quickly from our 
perspective----
    Senator Cantwell. And tell me--I am assuming a moratorium 
without a change to the FCC. So in that environment, describe 
how you see it playing out?
    Mr. Seidenberg. Well again, let us look at--if we look at, 
if we were in our board room and we were looking at what our 
opportunity is and we are looking at this through our lens, 
which is I think what you really want us to tell you, here is 
what we see. We see ourselves in a position that we have an 
open-ended opportunity to develop wireless and we have spent 
more in wireless than anybody else and, frankly, we are 
spending it as fast as we can figure out how to spend it.
    When it comes to the wireline side of the company, the 
challenge is that technology continues to eat away at the 
traditional revenue streams for that business. You are familiar 
with that. And the only way for us to overcome that inertia is 
to reinvest our earnings, our cash, and create something 
different.
    So we are not trying to create next year's voice business. 
We are trying to create a broadband business. The problem we 
have with the current rules is that there is no--there are no 
levers that can be pulled to stop the train of all the 
destructive policies that are going on right now across the 
industry, short of somebody preempting all of the mischief that 
goes on, however unintentional it might be, and create an 
investment-friendly environment so that we can recreate the 
industry.
    If we do not recreate the industry, it just will continue 
to shrink and we will continue to push our resources someplace 
else. I think you understand this very well. So as far as we 
are concerned, there is nothing the FCC could do under its 
current mandate that will stop the forces of natural technology 
and investment from disengaging from the wireline business over 
time.
    The history of it is that is exactly what has happened in 
the last 8 years. Since the Act, the only way any company has 
made money in the wireline business is by selling itself. That 
is a 100 percent true statement. So no one is making any money 
organically. They are making it because they run the business 
to a certain point and they have to merge with somebody or sell 
the assets. It is not a good model. It is not what was 
intended.
    Senator Cantwell. So you are saying do both because----
    Mr. Seidenberg. I am saying that we have to completely 
revamp the current regulatory structure, State and Federal, 
around an investment-friendly, forward-looking model.
    Senator Cantwell. But if you are revamping and putting a 
moratorium on, those are different things.
    Mr. Seidenberg. I do not think I would do both. I would 
change it.
    Senator Cantwell. OK. Mr. Roberts?
    Mr. Roberts. Well, again I think the details of the 
telephone business are not something that I would sit here, and 
as I have said previously, that I am necessarily an expert on 
their industry. They are in the wireless business and they are 
the largest competitor to local telephone is wireless, and they 
are the largest wireless company. So I do think it is a 
complicated process of how you unravel the 70 years of 
regulations.
    But I think the goal should be competition. And to your 
point, because no one has a crystal ball, it is all--as a 
competitor, it is all about innovating. You do not know whether 
the consumer wants VoIP or not. Nobody knew whether high-speed 
Internet would work, let alone how much you could sell to 
recoup your investment. So to do a massive rewrite of the 
Telecommunications Act I think will create nothing but 
instability, will destabilize the capital markets, to want you 
to continue to make long-term decisions where there are short-
term uncertainties and medium-term uncertainties as to what 
those rewrites will be.
    I think if there is a problem and somebody wants to target 
and fix it and that involves reducing some regulations without 
creating new regulations, then I certainly think that is a 
better path. In our case, the government has a choice right now 
about whether to pursue the Brand X case in the Supreme Court, 
whether or not you want to start regulating the Internet and 
allowing it to be regulated in a law that was created in 1934. 
I do not think that is what we should be doing. I think we 
should be trying to focus from is there competition.
    We talked last quarter the phone companies sold more DSL 
lines than cable companies. That is not because of government. 
That is because it is a good business opportunity and they are 
going after it aggressively, as I think they should. I think 
that model of competition, innovation, and less regulation is 
where we are at.
    Senator Cantwell. I am not trying to put anybody in a box, 
but I am just trying to understand because we think of things--
well, we should think outside the box here. In the framework of 
this discussion, I think Mr. Seidenberg was saying, I will take 
my chances with a new framework, and you are saying, I will 
take my chances with the moratorium.
    Mr. Roberts. I would think that what worries me about a 
complete rewrite is then it gets into many, many other issues 
and not into let us do a targeted series of things that are 
clearly either a moratorium or focused on VoIP only, however 
you want to phrase it.
    Senator Cantwell. Mr. Ford?
    Mr. Ford. I think the underlying issue is there are going 
to be winners and losers any time the rules change. I sense, 
just personally I sense a strong reluctance on the part of 
regulators to let any company go out of business. But I think 
the reality is, until there is a common set of rules where 
people can fully compete on a facilities-based approach and run 
some companies, frankly, out of business, you are not going to 
get to a systemic change that allows competition to renew 
itself and renew the investment that we are struggling with.
    I will give you a great example--go ahead, ma'am.
    Senator Cantwell. No, I was just going to say I think some 
people think that you might get there with the moratorium, that 
some people might be run out of business with the moratorium. 
So if that is your definition of letting the playing field 
happen.
    Mr. Ford. Really, to just speak very frankly, the issue is 
do we want to take some companies, who have a business model 
that frankly does not make sense, and continue to take money 
from the shareholders of people who made a decision to invest 
in a model that at the time made sense? We have now got a set 
of rules that say, well, we have got another company here whose 
shareholders are going to lose because their managements took 
them in the wrong direction and we need to take money from 
these folks and give it to these folks to keep them both alive.
    That is fundamentally, that is fundamentally why we have 
gotten to the point--and we are not a big participant in this 
battle. That is fundamentally where we have gotten, I think, in 
terms of the issue around the moratorium today.
    Senator Cantwell. So you are for new rules?
    Mr. Ford. I am for new rules, but may I throw in 30 
seconds? At great danger, it looks like.
    Senator Cantwell. Oh, no, no.
    Mr. Ford. The wireless business is a great example of this. 
We are spending all of our time--we have taken our business 
model over the last 5 years from four to one wireline to 
wireless to three to one wireless to wireline, and we spend all 
of our time and energy trying to create new applications over 
the wireless business, because if we come up with a new 
application or a new service and we spend the capital to put it 
out, I know, even though it is a very competitive world, I know 
that I can compete on a heads-up basis.
    We spend no time, no time, trying to invest in the wireline 
business because even if we do we cannot keep it because the 
regulatory scheme says, well, that disadvantages some other 
company's shareholders and I am going to take some of that from 
you and give it to them. So we just do not invest.
    Senator Cantwell. Mr. Betty, new rules or a moratorium?
    Mr. Betty. I would support a moratorium, but I hear a lot 
of--what they want is to go back to the way it was before 1996. 
The 1996 Act did do a lot of good. Transit costs are down 75 to 
80 percent. Broadband deployment and acceptance would not be 
there absent the technology changes that helped make the cost 
to deliver that a lot more effective.
    I fear that we are going to reach an environment where the 
only place innovation can occur is if you go to a cable 
operator or to a telephone company and try to cut some 
arrangement to have some chance of creating a business. Absent 
a way for third party companies to help--what is going to 
happen to Vonage? I mean, we talk about VoIP and people that 
are creating this thing. If you do not allow those companies 
the opportunity to compete, they are going to get squeezed out 
of the marketplace because the only people who can deliver 
anything are the cable operators and the telephone companies.
    Senator Cantwell. Mr. Wilson, did you want to cast a vote 
on this?
    Mr. Wilson. Well, I guess I have just a little bit 
different perspective, being a rural telephone cooperative with 
2.33 subscribers per square mile. I guess I will go back and 
kind of address your question about where we think things are 
going and about investment and getting there.
    Senator Cantwell. Particularly, do you think the path ought 
to be through a moratorium or through new rules?
    Mr. Wilson. Probably a moratorium. We need a stable 
environment of investment recovery so that we can deploy these 
new technologies. I think it is imperative to our rural areas 
to move toward the IP broadband world, to create opportunity 
for our rural subscribers.
    Senator Cantwell. Thank you, Mr. Chairman. I know that took 
longer probably than my allowed time.
    Senator Sununu. Fortunately, there is no one here to 
complain about it.
    I have just a couple of additional questions, although I do 
want to point out that, Mr. Ford, I think you are the only 
panelist that has advocated for a regulatory framework that 
allows competitors to run other competitors out of business, 
although in a level playing field. There is something very 
American about that. I am not criticizing.
    Mr. Ford. I could win or lose.
    Senator Sununu. I am not criticizing. Just it is a bold 
choice of words for a panelist, at least in this committee.
    Mr. Ford, I wanted to ask you a little bit about universal 
service. You referred to this, I think, in one of your other 
answers, but I just wanted you to clarify a little bit about 
any proposed changes or changes that you might recommend or 
advocate regarding collection methodology or distribution 
methodology.
    Mr. Ford. Collection methodology, we would literally fall 
into all of the discussions about bill-and-keep, numbers, 
revenues, connections. I do not have an elegant statement on 
that, so I----
    Senator Sununu. You do not have a particular----
    Mr. Ford. I do not have a particular preference on revenue 
source. My comment was aimed at the distribution of the funds. 
I think if you look at the joint State-Federal board issues 
that were recently--well, at least the talk about the meetings 
that they held--one of the key issues is, well, should 
universal service or high cost subsidies, maybe more broadly 
speaking, be available to the primary wireline, the second 
wireline into the home, the third wireline access point into 
the home, the first wireless business to apply for funds in 
that State, the second wireless business, the third, the 
fourth?
    The issue that we have right now, to the great advantage, 
frankly, of rural telephone company providers like ourselves, 
is you pay it all, which puts more pressure on the fund. And, 
keeping with my theme of you ought to let the market sort this 
out, I am just wanting to point out that it does not have to be 
that way, and we as one rural telephone provider would not jump 
up and down and say you have got to make it available to the 
primary line, which goes back to the politics of the 1930s and 
everybody needs to have a phone, a chicken in the pot and a 
phone in the home.
    So we want to incent companies like the one my grandfather 
started, where he dug poles and my mother was an operator, to 
go out into rural areas and build networks where no one would 
ever be able to pay for them. So I understand that and 
appreciate it and would support it.
    But do you need it for the second line, the third line? 
Every wireless provider? Or do you need the customer to say, I 
want a lifeline connection and I will choose whether it is the 
wireline provider or the wireless provider? I think you would 
be able to take an enormous amount of pressure off the subsidy 
pool.
    Senator Sununu. Should that valuable subsidy be provided to 
the provider or to the customer?
    Mr. Ford. You are going to effect the same means. I am not 
versed in whatever is going through your mind right now on the 
split out of that, and so I am not really sure.
    Senator Sununu. I would hope that your answer to any 
question is not predicated on what I am thinking.
    Mr. Ford. I think I have established that.
    I am not sure.
    Senator Sununu. Mr. Wilson, in your comments regarding 
universal service I think you were pretty clear, although in 
talking about expanding the base you talked about including 
information providers. It was not clear to me exactly who you 
were referring to and who that might cover.
    Mr. Wilson. Well, Senator, I do not necessarily have the 
definition with me of what all we included in that. I always 
look at the information provided by the NTCA where we think the 
base should be expanded to all providers of telecommunications 
services. I do not guess I could sit here and tell you at the 
moment what all we included in information services. I do not 
have it available to me.
    Senator Sununu. You talked about instant messaging or e-
mail services being telecommunications service. So would those 
service providers, IP service providers, be covered? You would 
have them pay universal service rates?
    Mr. Wilson. Yes, sir, I think they could fit that 
definition.
    Senator Sununu. How big is your company?
    Mr. Wilson. We have 7,700 access lines.
    Senator Sununu. What is your revenue base?
    Mr. Wilson. Our revenue base is about $16 million a year.
    Senator Sununu. How much of that comes from universal 
service payments?
    Mr. Wilson. About 60 percent of it.
    Senator Sununu. 60 percent?
    Mr. Wilson. Yes, sir.
    Senator Sununu. And how much of it--how much of the balance 
comes from, or how much of the total revenue base comes from 
access charges from terminating calls from other providers?
    Mr. Wilson. I do not have that off the top of my head. I 
know about 9 percent of our total revenues come from local and 
the remainder of our revenues come off State and Federal USF 
and access revenues, State and Federal access revenues.
    Senator Sununu. Thank you. Not what I would have guessed.
    Mr. Roberts, what do you expect the per-customer costs for 
adding VoIP to be?
    Mr. Roberts. That is a great question that I do not know 
that I know the answer to that. We are hoping to get it 3 to 
$400 a home, where you put in the technology. Hopefully, as 
with high-speed Internet, that cost will drop substantially. It 
has been higher than that in the last couple of years. So we 
are doing three markets this year, three different States, to 
be able to thoughtfully know the answer to that question.
    I do not think anybody yet has rolled out VoIP that can 
say, yes, it is a winner, we are going to go. I think that 
there is a number of cable companies almost universally who 
have all said: If you charged around $40 a month for the 
product, with that type of investment you ought to be able to 
make a return.
    Senator Sununu. Mr. Seidenberg, what are your per-customer 
add costs for VoIP expected to be?
    Mr. Seidenberg. That is a good question. I do not really 
have one number for that, simply because if we install new--let 
us take the case of installing new fiber into the home and we 
will offer VoIP services over a greenfield network. Those 
costs, initial costs, can be anywhere from $1,000 to $2,000 
depending on if the plant is buried.
    Senator Sununu. You do not need to install fiber into 
someone's home to offer them VoIP service, do you?
    Mr. Seidenberg. No, that is correct. We have to put a 
packet switch in so we can put VoIP in.
    I do not think we have identified the costs that way. 
Frankly, to be honest with you, even if I did know it directly 
it is a competitive piece of information, so I am not sure I 
would disclose it in that fashion anyway.
    Senator Sununu. I guess that is the witness version of ``If 
I tell you I have to kill you.''
    To both of you, what do you think they are relative to the 
installation of a circuit switch, an add for a circuit switch 
customer? Greater, less? Do you anticipate them to be less?
    Mr. Roberts. It is our great desire that it is less, 
because we are not convinced that the circuit switch model is a 
business that you can long-term get a good return from.
    Senator Sununu. Do you disagree with that, Mr. Seidenberg?
    Mr. Seidenberg. No. I would just like to add something to 
that, though, just to make sure that--I can see you are a 
techie into this, so just to make sure. In this marketplace, 
the install cost of the packet switch or the electronics over 
time might be less than what we spend on the circuit switch, 
but the cost of acquisition, the marketing and the customer 
care, is going to be much higher.
    So I think when we look at the total cost of acquisition of 
a customer, it is going to be substantial. I think the issue is 
that without an opportunity to get, to hold that customer long 
enough to get a return, it is very hard, it is a very hard 
thing to do in the long term.
    Senator Sununu. A final question for all of you. If and 
when we reopen the 1996 Act and start modifying, change, I have 
heard a lot of discussion about limiting regulation to 
establish greater parity between modes, being concerned about 
taking away regulations that may be associated with universal 
service. But are any of you advocating a new regulation, a new 
rule that you would like to see as part of this debate? Left to 
right, Mr. Seidenberg?
    Mr. Seidenberg. Your left to right, OK. No. The answer--and 
I probably misled or maybe Senator Cantwell misheard me. We are 
focused on fixing what applies to us. If you cannot fix it and 
you have got to change a bigger piece, so be it. But our first 
choice would be to correct what we think are the infirmities 
that exist.
    Senator Sununu. You are not proposing adding new set of 
rules or regulations?
    Mr. Seidenberg. Not that my staff has told me about that I 
know of, no.
    Senator Sununu. They are all whispering behind you. I do 
not know if that is a good sign or not.
    Mr. Roberts?
    Mr. Roberts. No.
    Senator Sununu. Mr. Ford?
    Mr. Ford. No, sir.
    Senator Sununu. Mr. Betty?
    Mr. Betty. I think we should enforce the existing rules.
    Senator Sununu. Enforce the existing rules. I am always 
for, if you have a set of rules, they ought to be enforced. 
That way you are a little bit more credible as both legislators 
and regulators.
    Mr. Wilson?
    Mr. Wilson. No, sir, no new rules.
    Senator Sununu. Thank you very much. We are adjourned.
    [Whereupon, at 11:43 a.m., the Committee was adjourned.]

                            A P P E N D I X

                  Central Texas Telephone Cooperative, Inc.
                                       Goldthwaite, TX, May 18,2004

Hon. John McCain,
U.S. Senate,
Washington, DC.

Dear Senator McCain:

    On behalf of NTCA and myself, I would like to express my sincere 
gratitude for the opportunity to participate on the panel in last 
week's Telecommunication Policy Review. It was an experience I'll never 
forget.
    I would like to follow up on a question you asked regarding the 
need for a national broadband policy. I believe such a policy is very 
much needed. Currently, there is no real framework in place to ensure 
this kind of infrastructure will be universal and interconnected. The 
telecommunication industry needs direction from Congress if such a 
ubiquitous network is to ever be built in this Nation. Despite the 
tremendous progress of small rural carriers in deploying broadband 
capable infrastructure in their areas, if left entirely to market 
forces, I contend broadband investment will be piecemeal with many 
parts of the Nation never having access to a truly broadband network. 
This would leave many Americans never being able to realize and take 
advantage of all the potential opportunities and benefits such a 
network could yield.
    I see a national policy directive from Congress that creates a 
partnership between government and private industry where: (1) 
standards are established; (2) interoperability issues are addressed 
for interconnection of all types of broadband technologies; (3) a 
network with flexible bandwidths and unlimited capacities is the 
objective; and most important, (4) our policies are developed in a 
manner to make it future proof.
    To encourage players, Congress should create a more stable 
regulatory environment with incentives such as tax credits for large 
players and USF recovery for small players. Such a project could 
potentially pump billions into the economy creating an untold number of 
new jobs.
    The United States should be leading the world in the deployment of 
broadband, not be number eleventh or twelfth as was alluded by some 
during your hearing series. This type of network would not only make 
the country more globally competitive, it would usher forth a new era 
of untold benefits and opportunities to all Americans now and for 
future generations to come. I want you to know that NTCA, as well as 
myself, are at your disposal should you chose to pursue such a course 
of action.
            Sincerely,
                                            Delbert Wilson,
                              Central Texas Telephone Cooperative, Inc.
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