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[Senate Hearing 106-678]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 106-678

   BROADBAND: COMPETITION AND CONSUMER CHOICE IN HIGH-SPEED INTERNET 
                       SERVICES AND TECHNOLOGIES

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   on

  EXAMINING COMPETITION AND CONSUMER CHOICE IN BROADBAND, HIGH-SPEED 
 INTERNET SERVICES AND TECHNOLOGIES, FOCUSING ON THE IMPACT OF RECENT 
              CONSOLIDATION IN THE COMMUNICATIONS INDUSTRY

                               __________

                             JULY 14, 1999

                               __________

                          Serial No. J-106-36

                               __________

         Printed for the use of the Committee on the Judiciary

                     U.S. GOVERNMENT PRINTING OFFICE
66-614 CC                    WASHINGTON : 2000

                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman

STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri              RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan            ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama               CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire

             Manus Cooney, Chief Counsel and Staff Director

                 Bruce A. Cohen, Minority Chief Counsel

                                  (ii)
                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........     1
Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont...     2
DeWine, Hon. Mike, U.S. Senator from the State of Ohio...........     4
Kohl, Hon. Herbert, U.S. Senator from the State of Wisconsin.....     6

                    CHRONOLOGICAL LIST OF WITNESSES

Panel consisting of C. Michael Armstrong, chairman and chief 
  executive officer, AT&T Corp., Washington, DC; Ivan G. 
  Seidenberg, chief executive officer, Bell Atlantic Corp., New 
  York, NY; Alex J. Mandl, chairman and chief executive officer, 
  Teligent, Inc., Vienna, VA; and William L. Schrader, chairman 
  and chief executive officer, PSINet, Inc., Herndon, VA.........     8
Panel consisting of Anna-Maria Kovacs, first vice president, 
  Janney Montgomery Scott, Boston, MA; Gene Kimmelman, co-
  director, Washington Office, Consumers Union, Washington, DC; 
  and Kevin M. Moore, director, Deutsche Banc Alex. Brown, 
  Baltimore, MD..................................................    56

               ALPHABETICAL LIST AND MATERIALS SUBMITTED

Armstrong, C. Michael:
    Testimony....................................................     8
    Prepared statement...........................................    10
Kimmelman, Gene:
    Testimony....................................................    60
    Prepared statement...........................................    62
Kovacs, Anna-Maria:
    Testimony....................................................    56
    Prepared statement...........................................    57
Mandl, Alex J.:
    Testimony....................................................    21
    Prepared statement...........................................    23
Moore, Kevin M.:
    Testimony....................................................    75
    Prepared statement...........................................    76
Schrader, William L.:
    Testimony....................................................    27
    Prepared statement...........................................    29
Seidenberg, Ivan G.:
    Testimony....................................................    15
    Prepared statement...........................................    16

 
   BROADBAND: COMPETITION AND CONSUMER CHOICE IN HIGH-SPEED INTERNET 
                       SERVICES AND TECHNOLOGIES

                              ----------                              

                        WEDNESDAY, JULY 14, 1999

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:14 a.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch (chairman of the committee) presiding.
    Also present: Senators Thurmond, Specter, DeWine, Ashcroft, 
Abraham, Leahy, Kohl, Torricelli, and Schumer.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    The Chairman. I apologize for being just a little bit late, 
but I had problems I had to handle before I got here, and so I 
apologize.
    Good morning, and welcome to today's hearing on competition 
and consumer choice broadband Internet services and 
technologies. I first would like to thank all of our witnesses 
today for their time and cooperation, and I hope that with this 
hearing we will better understand the so-called broadband issue 
which all of us have heard so much about recently.
    The focus of the hearing will be on how recent 
consolidation in the communications industry, especially within 
the cable industry, might affect competition and consumer 
choice for high-speed Internet service and content.
    Competition, in my opinion, is crucial to the future of the 
Internet. It is competition that has created the robust 
Internet economy that we are experiencing today. Companies and 
venture capitalists have made unprecedented investments in new 
Internet products, services and technologies. Continued growth 
in this area is vital to our economy and our global leadership 
in the information technology sector. Indeed, many of the new 
technologies that we enjoy today are the fruits of deregulatory 
objectives of the 1996 Telecommunications Act.
    As we continue to deregulate the telecommunications 
industry, as envisioned by the 1996 Act, it is our hope that 
fair and rigorous competition in the communications sector 
ultimately will replace burdensome and unnecessary government 
regulations. If further deregulation of the telecommunications 
markets is warranted--and I am not saying that it is at this 
point--this committee and its Chairman intend to continue to 
work with Senator McCain and the Commerce Committee to do what 
is fair.
    In any event, as we move ahead with the deregulations of 
the 1996 Act, timely enforcement of antitrust laws, as 
established through sound legal and economic principles, will 
become even more important in ensuring a competitive 
marketplace. As I have said before, proper enforcement of 
antitrust laws today will and should avoid heavy-handed 
regulation of the Internet tomorrow. That is what we are here 
to examine today--the status of competition in the high-speed 
service and technology markets.
    Today's hearing is about the future of the Internet. And 
when we talk about the future of the Internet, we mean 
broadband. It is only with broadband that the full potential 
and benefits of the Internet and electronic commerce can be 
realized. For example, today's hearing is being streamed over 
the Internet. Those who are watching it online will appreciate 
how much better the images and sounds would be with broadband 
access that can carry 100 times as much data.
    As we move forward, it is important to have an environment 
that provides proper incentives for companies to continue to 
invest in broadband technologies. At the same time, making sure 
there is competition in the broadband service market will be 
critical. If we can achieve these goals, consumers and Internet 
companies will both benefit.
    No single company should control who can access or develop 
applications or content for the Internet, whether that company 
owns the architecture, the hardware, the content of the 
operating systems needed to navigate broadband pipes. As such, 
we should try to address any market distortions that prevent 
software, telephone, or cable companies from entering the race 
to bring cheaper, better technologies to the consumer. We need 
to determine what ultimately is best for consumers. There are 
many important issues that deserve to be examined here and we 
are going to start on those today.
    Now, I particularly appreciate all of you who are appearing 
here today, and naturally look forward to your testimony. You 
are key leaders in this area and we just simply need to have 
your input.
    Let me now turn to our Ranking Member, Senator Leahy, and 
then I will recognize the Chairman and the Ranking Member of 
our Antitrust Subcommittee, Senators DeWine and Kohl, 
respectively, for their opening statements, and we will move on 
from there.
    Senator Leahy.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman. When I was first 
elected to the Senate back in 1974, in the post-Watergate era, 
we knew it was a time of political change in America. But I 
didn't realize it was also the year that the Internet was being 
launched. That was the year that Vince Cerf and Bob Kahn 
published the design for the Transmission Control Protocol, 
TCP, one of the core technologies that makes the Internet run. 
In fact, they used the word ``Internet'' for the first time 
back in 1974 to just say how the technology was going to work.
    Think of that 25 years, the number of industries that have 
grown up that owe their existence to the Internet, and solely 
to the Internet. New applications, new businesses, new user 
demands are evolving exponentially. In fact, even with the 
experts in this room today, nobody could sit here and predict, 
5 or 10 years from now, every type of Internet usage there will 
be. It really has been the engine of the so-called information 
age.
    Mr. Chairman, I commend you and I commend Senator DeWine 
and Senator Kohl for holding this hearing because the issues 
are critical to the future of the Internet. We have great 
panels, a panoply of issues, and we should listen to them.
    I have asked over the past 3 years whether the 1996 
Telecommunications Act has fulfilled its promise of more 
competition or whether it has simply promoted more 
consolidation. I appreciate that the Bell companies, including 
Bell Atlantic which provides my local telephone service both at 
my tree farm in Vermont as well as my home in Virginia, are 
anxious to compete in the long-distance telephone market and to 
offer data transmission services outside their regions. I want 
them to be there competing, but only when they satisfy the 
requirements under the law for unbundling their local loops and 
allowing interconnection to competitors.
    I have raised questions about the elimination of all cable 
rate regulation called for under the Telecommunications Act. I 
raised those questions because many of us have seen our cable 
rates increase over the last few years, just the opposite of 
what we were promised was going to happen.
    We are concerned that the consolidation in the cable 
industry, which will be accelerated further by AT&T's purchase 
of TCI and proposed purchase of MediaOne, is going to result in 
even higher cable rates. These are important issues, and the 
committee may have to have other hearings to explore them.
    The issue I want us to focus on today is the Internet 
because it has had such a profound effect on our society. It 
has been a high-powered engine for our economy. It has been a 
vehicle for citizens to interact with the Congress, our 
government, businesses large and small, and people across the 
world.
    When I am having my breakfast and I log on and I have a 
note from a friend in Sri Lanka, and somebody else in another 
part of the world, as well as a neighbor in Vermont, it is a 
pretty amazing thing. What has made the Internet so successful 
in the narrowband or dial-up world is that virtually anybody 
can start a business or put up a Web site, with very important 
information at low cost and few barriers to entry. It has been 
an open network that has been healthy for the businesses using 
the Internet, and healthy for consumers.
    But when we move from a world of primarily dial-up access 
to the Internet to the high-speed broadband world, the same 
open environment has got to thrive and exist. We all have an 
interest in making sure that the economic and democratic 
vitality of the Internet continues to flourish, that broadband 
is available in all parts of the country, urban or rural, rich 
or poor.
    A significant concern has been raised about whether 
proprietary cable modem broadband service threatens the open 
architecture of the Internet, and whether it would threaten to 
stifle innovation in Internet services. To be specific, cable 
operators are deploying their broadband services through @Home 
under exclusive contracts. Customers get their high-speed 
service bundled with the @Home ISP and content service. They 
are not given the choice of paying a reduced fee for the high-
speed pipe alone.
    Generally if these customers want to get their Internet 
access through some other ISP, or to view proprietary content 
from another online service provider, they have to pay a second 
subscription fee on top of the full @Home fee.
    Just as Bell companies with monopoly holds on the local 
telephone loop are required under the Telecommunications Act to 
unbundle their services and allow interconnection, some local 
municipalities have or are considering requiring cable 
operators to unbundle their high-speed pipeline and allow 
customers to use other ISP's and online services.
    Yet, despite the risks that consolidation in the 
telecommunications and cable industry poses for access to 
broadband networks, would we have the next generation of high-
speed broadband networks without the investment that 
consolidation reflects? These are legitimate questions.
    How could concentrated market power over high-speed 
broadband networks be used as leverage to affect the price, and 
therefore the accessibility? And if you don't have 
concentration, will you have the investments so you could have 
it? I mean, do we have a Hobson's choice here? Do we need 
regulation to ensure open access to broadband networks or can 
we expect the marketplace to do it?
    So I am not suggesting I have the answers to all these 
questions, Mr. Chairman, but I think they are valid questions 
and I think that they are questions that are going to affect 
life and commerce around our country. They are certainly going 
to have a major effect in a rural State like mine.
    Thank you.
    The Chairman. Thank you, Senator.
    Senator DeWine.

STATEMENT OF HON. MIKE DeWINE, A U.S. SENATOR FROM THE STATE OF 
                              OHIO

    Senator DeWine. Mr. Chairman, as the Chairman of the 
Antitrust, Business Rights and Competition Subcommittee, I have 
chaired a number of antitrust subcommittee hearings on 
telecommunications issues, and I am just delighted that we are 
having this joint hearing this morning.
    I am going to focus today on the changing market dynamics 
of the telecommunications industry. It has almost become a 
cliche, I guess, to say that the Internet is changing commerce 
in America. At times, in fact, it appears to be revolutionizing 
commerce.
    The AT&T/MediaOne deal is certainly the latest example of 
how the Internet is changing the face of business in the United 
States. As the demand for high-speed data services has 
skyrocketed, more and more telecommunications providers have 
decided that they need to provide broadband access so that 
consumers can choose from a bundle of different services 
quickly and easily.
    AT&T believes that its deal with MediaOne will help it do 
that. And I might add that many of AT&T's competitors are 
worried about the exact same thing. I am sure that we will have 
a great deal of discussion on this topic today during today's 
hearing. I am looking forward to hearing the testimony.
    For the moment, Mr. Chairman, however, I would like to 
focus on the specific areas of local phone service and video 
service. Since Congress passed the Telecom Act of 1996, we have 
all seen a great deal of change in the industry. Unfortunately, 
not all of that change has been what we expected when we 
crafted the law.
    Instead of vigorous competition, too often we have seen 
mergers among industry participants. Litigation has slowed the 
advent of telephone competition in local markets. And the 
Federal Communications Commission has often been slow to 
resolve disputes between competitors. As a result of the 
logjam, competition has developed more slowly than many had 
anticipated. There are some indications, however, that the pace 
of competition is picking up.
    Much of the litigation has been decided, and some of the 
regional Bell operating companies appear to be close to 
achieving compliance with section 271 of the Telecom Act, which 
will allow the RBOC's to offer long-distance service within 
their own regions. Still, even where competition does appear to 
be thriving, it is mostly for business customers. Competition 
in local residential service remains very limited.
    This lack of competition for local residential service is 
one of the things that makes the proposed merger between AT&T 
and MediaOne so intriguing. AT&T intends to use the cable wires 
to provide facilities-based local phone service to residential 
customers. If this plan works, it will help fulfill one of the 
fundamental goals of the Telecom Act and provide significant 
competitive benefits to consumers throughout our country.
    However, the AT&T/MediaOne deal does pose some serious 
policy concerns. If approved, AT&T would become the largest 
cable operation in the country, with an ownership stake in 
facilities that reach approximately 60 percent of the Nation's 
cable subscribers. In fact, some have asked the question, does 
the deal reassemble the old Ma Bell monopoly under the new name 
of Ma Cable?
    Beyond the obvious concentration concerns raised by such a 
large market share, we need to look closely at the level of 
cross-ownership in industry. Many of the cable systems have a 
share in each other and are vertically integrated to include 
programming holdings. We will explore today what, if any, 
impact is created by that particular industry structure.
    For example, it seems possible that AT&T might be able to 
skew the market if it decided to favor programming in which it 
had an ownership interest. This is certainly a troubling notion 
which needs to be explored. It may be necessary for AT&T to 
divest itself of some systems or to find some other way to gain 
access to cable wires other than buying them. As policymakers, 
Mr. Chairman, we must be wary of creating one monopoly in order 
to dismantle another.
    This is an especially difficult area to examine because the 
FCC does not currently have any regulations in effect 
describing how much national market share a cable company may 
have, or how exactly to determine when a stake in another 
company rises to a level of ownership for purposes of 
attribution. The FCC has been dragging its feet on resolving 
these issues, and it is crucial that they quickly finalize 
their regulations so that the companies involved in this 
industry are able to move forward with certainty.
    Mr. Chairman, beyond the FCC regulations, we need to keep a 
close eye on the competitive structure of the video industry, 
in general. Although cable rates were deregulated recently, the 
industry still has a way to go before it is fully competitive. 
To make sure that we were kept informed about events in the 
industry, last year Senator Kohl and I commissioned a study by 
the GAO, the Government Accounting Office, to examine the state 
of competition in the telecommunications industry. The study is 
being conducted in three parts and we are releasing the first 
part today. The first part focuses on cable competition. The 
study confirms what we have learned in our hearings and 
meetings on this issue over the past 2 years. Video competition 
is on the way, but we are not there yet.
    Mr. Chairman, in conclusion, we will keep working to make 
sure that cable rates do not skyrocket and that competition to 
cable is, in fact, enhanced. Along those lines, we are 
currently holding conference meetings on the Satellite Home 
Viewer Improvements Act, which will provide increased 
opportunities for satellite providers to compete with cable 
television. Senator Kohl and I have worked closely with 
Chairman Hatch and Ranking Minority Member Leahy on that 
legislation. And with their continued leadership, I am hopeful 
that we will have legislation finalized in the next month or 
two.
    Again, Mr. Chairman, I congratulate you on holding this 
joint hearing with us today.
    Thank you.
    The Chairman. You bet.
    Senator Kohl.

 STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE 
                          OF WISCONSIN

    Senator Kohl. Thank you, Mr. Chairman. Let me speak briefly 
today about these promising new technologies, including 
broadband, and their relationship to competition. And then 
allow me to switch gears to AT&T's proposed purchase of 
MediaOne which, though not the largest deal we have seen 
recently, is worth focusing on because it signals the rapid 
pace of change in the telecom marketplace.
    First, the future of the telecommunications industry, many 
believe, lies in broadband networks. And we have already caught 
a glimpse of this brave new world, things like stereos without 
salesmen, bookstores without shelves, the ability to purchase 
without leaving your home or your office. But the news of 
broadband breakthroughs fail to explain when consumers will see 
the benefits and whether they will be available to many or just 
a privileged few.
    A key question today is: What is the proper role of 
government in this environment of convergent technology? 
Sometimes, this answer is easy. We need to prevent bottlenecks. 
We do best when we avoid heavy-handed regulation and rely on 
market forces, and we don't need an antitrust carve-out for 
high-tech companies, as a few have suggested, because the 
existing antitrust laws have served us so well for so many 
years.
    But some answers are more difficult. How big is too big? 
When is the marketplace sufficiently competitive that 
government does not need to regulate any further? When does 
cross-ownership and vertical integration enhance efficiency and 
when does it choke innovation? Is the broadband pipe truly a 
unique product possibly deserving of non-discriminatory access, 
or is this only a self-serving characterization advanced by 
rivals in the marketplace?
    Second, with respect to AT&T's acquisition of MediaOne, the 
answers are also complicated. On the one hand, the merger seems 
to realize much of the hope and promise of the 1996 Telecom 
Act, particularly in its potential for local residential 
telephone competition and speedier rollout of broadband through 
the existing cable pipe. If AT&T follows through on its 
promises--and it has every reason to do so--that will help 
consumers even more by increasing the incentive for people like 
yourselves, Mr. Seidenberg, Mr. Schrader and Mr. Mandl, to 
compete even more aggressively.
    On the other hand, AT&T's acquisition of MediaOne also 
deserves some scrutiny. It continues a troubling trend of 
telecom and cable consolidation that has accelerated enormously 
since the 1996 Act and that our cable competition report 
highlights today. Indeed, as we discussed last year, this deal 
makes clear that a Japanese-style keiretsu is emerging in the 
American media. We aren't going to break it up, so we better 
learn how to make it work more competitively for the people 
that we represent.
    While there are no clear answers, regulators ought to think 
about a variety of approaches when considering AT&T/MediaOne, 
among them requiring more complete separation between AT&T and 
its programming partner Liberty Media, or making AT&T sell off 
some portion of its interest in Time Warner, which will 
increase dramatically as a result of this acquisition.
    The FCC, which has slow-walked its rulemaking on cable 
ownership, needs to pull itself together and figure out whether 
these rules, which were mandated when today's convergent 
marketplace did not exist, still make sense today. Finally, 
Congress needs to move, and move quickly, local-to-local 
satellite legislation. It would be shameful if we didn't enact 
this measure before the August recess, and we on the Judiciary 
are ready to conference at any time.
    Again, Mr. Chairman, thank you for holding this hearing, a 
hearing that looks at both the big picture and the big deal 
with big-thinking witnesses who will help us make big, 
thoughtful policy choices.
    Thank you, Mr. Chairman.
    The Chairman. Well, thank you, Senator.
    Our first witness today will be Mr. Michael Armstrong. We 
welcome you, Mr. Armstrong. Mr. Armstrong is the Chairman and 
CEO of AT&T, and he has been that since November of 1997. Prior 
to joining AT&T, Mr. Armstrong spent more than 3 decades with 
IBM, where he became Senior Vice President and Chairman of the 
Board of IBM World Trade Corporation.
    Next, we will hear from Mr. Ivan Seidenberg, Chairman and 
CEO of Bell Atlantic Corp. Mr. Seidenberg has over 30 years 
experience in the communications industry. Prior to joining 
Bell Atlantic, Mr. Seidenberg served as Vice Chairman of NYNEX 
Telecommunications Group, as well as President of its Worldwide 
Information and Cellular Services Group. We are pleased to have 
you here with us, Mr. Seidenberg, as well.
    Then we will hear from Mr. Alex Mandl. Mr. Mandl has been 
Chairman and CEO of Teligent since the company's founding in 
August 1996. Teligent is a company which offers local, long 
distance high-speed data and dedicated Internet access through 
wireless microwave technology in major markets throughout the 
United States. Prior to Teligent, Mr. Mandl served as President 
and Chief Operating Officer of AT&T, where he was responsible 
for directing the company's long distance, wireless and local 
communications services. We are glad to have you here.
    Our final witness on the first panel is Mr. William 
Schrader. Mr. Schrader is Chairman, CEO and founder of PSINet, 
Inc., a global facilities-based Internet communications 
company. Prior to founding PSINet, Mr. Schrader was founder, 
Chairman and CEO of NYSERNet, a corporation that created the 
first regional Internet network. So we are really pleased to 
have you here as well.
    This is a great first panel. I am counting on all of you to 
help us understand the problems that exist here and what we 
really ought to do about them, if anything. Later, on our 
second panel we will be pleased to hear from Ms. Anna-Maria 
Kovacs, Mr. Gene Kimmelman and Mr. Kevin Moore, who will 
provide their expert opinions on antitrust concerns, consumer 
choice, and Wall Street investor reactions regarding the 
broadband issue.
    So I want to thank all of our distinguished witnesses for 
being here today, and we certainly look forward to all of your 
testimony. So we will begin with you, Mr. Armstrong, and we 
will go right across the board, and then we will have some 
questions for you.

 PANEL CONSISTING OF C. MICHAEL ARMSTRONG, CHAIRMAN AND CHIEF 
    EXECUTIVE OFFICER, AT&T CORP., WASHINGTON, DC; IVAN G. 
 SEIDENBERG, CHIEF EXECUTIVE OFFICER, BELL ATLANTIC CORP., NEW 
YORK, NY; ALEX J. MANDL, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
 TELIGENT, INC., VIENNA, VA; AND WILLIAM L. SCHRADER, CHAIRMAN 
     AND CHIEF EXECUTIVE OFFICER, PSINET, INC., HERNDON, VA

               STATEMENT OF C. MICHAEL ARMSTRONG

    Mr. Armstrong. Thank you, Mr. Chairman. I would like to 
depart, if I may, from the submission that I made and explain 
something I am asked, whether it is in Washington or wherever 
AT&T seems to show up, which is why, not what, are you doing 
investing $140 billion in a 17-month period. That is a lot of 
money even for AT&T.
    And it is really rooted in the Telecom Act of 1996, and 
what we are attempting to do is to invest in a facilities-based 
broadband capability to compete in local communications 
services. We are only about 18 percent of the communication 
revenue in the industry today, and we are zero percent of the 
local telephony service today. And with TCI and MediaOne, we 
will pass about 24.5 million homes. We will be connected to 
about 60 percent of those homes.
    There are about 103 million residences in America, so that 
is something like a 23-percent opportunity for our facilities 
strategy to offer those local communications services. It is 
tough to get to the 60 percent unless you go by the discarded--
or ``suspended'' is a better word--the suspended rules that are 
in the FCC that the court found against the First Amendment, 
where we would be given full attribution for things such as 5-
percent investments that we might have in an old TCI 
affiliation. And that would give us 100-percent attribution for 
that affiliation, and that is how we get to Mike DeWine's 60 
percent, through those attribution rules, which really have to 
be redone because I wouldn't say that 5 percent of a 3- or 4-
million subscriber affiliate would get us there.
    But I am often asked why facilities-based and why 
broadband. And if I may take just a minute, why facilities-
based? Because, first, we wish to control and manage and offer 
the newest and best technology to our customers that we 
possibly can rather than always just be dependent upon the 
resale of our competitors' technology to the marketplace.
    Second, we would like to have access to the market directly 
rather than always go through our competitors for access. 
Third, we would like to control our costs, not resell our 
competitors' costs, so we can have lower prices and a fair 
return. Those are the three reasons.
    Second, why go broadband? I mean, there are a lot of ways 
to go. Why couldn't you just do more narrowband? And a couple 
of fundamentals. One is that it is technology-driven. Many of 
us in the computer industry and electronics and semi-conductors 
understand Moore's law, which is a doubling in price 
performance very 18 months.
    The world of communications is going faster than Moore's 
law today. The world of fiber and photonics, the world of glass 
strands with light waves going over them, is, in fact, going at 
2 to 3 times the pace of technology of Moore's law.
    Just maybe a ``gee whiz'' or two to remember. We are laying 
in this world some 2,800 miles of fiber an hour; everyday, we 
go around the world twice. In fact, if you look just to what 
AT&T is doing in terms of its deployment of fiber and 
photonics, every 2 months we double the capacity of our public 
switch network. And so it is that technology drive that makes 
band width the future of the communications industry, broadband 
width.
    The second, of course, is as we get more band width, 
applications expand. It is the same phenomenon that happened in 
the computer industry with the microprocessor and Moore's law. 
And I can remember for 31 years in the IBM Company always 
worrying about what was everybody going to do with this 
wonderful computing power that we are going to put out there. 
And everybody found out a lot more to do and the market 
expanded. The same thing is happening with band width.
    Just look at the Internet. In many areas, the Internet 
every 100 days is doubling in its volume, consuming that kind 
of capacity. And if I might summarize it, being an old salesman 
I brought two charts.
    This gentleman is what AT&T's $140 billion is all about, to 
provide universal broadband service from any source of 
information, voice, video and data. It is all coming together 
in the world of the digital revolution, and it is coming from 
any source of residence, be it an internet, an extranet, an 
internet or a headend from a cable company.
    And it is going to go over a variety, as you are going to 
hear, of broadband resources, not just fiber coax cable, but 
satellites and DSL and fixed wireless, and mobile wireless as 
well, and the devices are now all converging and coming 
together. This mobile device will become probably the most 
ubiquitous Internet device in the world, and these devices will 
all converge to have the same function and feature over time, 
and they will serve anybody, anywhere in the world.
    What is in it for the consumer has got to be something we 
address. Today, in Fremont, CA, we are rolling out telephony 
over cable. We are offering, at lower prices, higher feature, 
more function, a phone for mom, a phone for dad, a phone for 
the kids, a phone for the fax, a phone with the computer, with 
distinctive rings, at only $5 a line. We are offering going 
from analog to digital services in terms of the television 
video services. So 100 analog channels is going to become 1,000 
digital interactive channels. And, of course, the Internet is 
going to explode and a whole new array of technologies is going 
to come.
    Maybe as important as anything is that everybody in America 
has the opportunity to take advantage of and enjoy this 
explosion of technology, and has the availability of this band 
width. And I am delighted to share with you that AT&T has made 
a series of announcements, maybe culminating in today's, that 
wherever we are in terms of serving our broadband digital 
services, we will, at our expense, connect every school and 
library.
    We will, at our expense, provide service where service is 
not provided, and we announced yesterday with the NAACP, the 
Urban League and the California educational institutions a 
training program to go into the inner cities and train the 
teachers, train the families, and train the untrained, because 
I think we have to be as much concerned and interested in what 
is happening as to who it is happening to and make sure this is 
inclusive of all of our society.
    Thank you.
    The Chairman. Thank you, Mr. Armstrong.
    [The prepared statement of Mr. Armstrong follows:]

               Prepared Statement of C. Michael Armstrong

    Mr. Chairman and Members of the Committee, I'm pleased to have this 
opportunity today to testify about broadband technology and the 
communications revolution that it will bring to American consumers. It 
is a revolution that promises to transform the way we communicate, 
entertain, inform and educate ourselves. It will provide the foundation 
for a whole new generation of communications, information and 
entertainment services.
    AT&T intends to play its part in these changes. It's what our cable 
mergers and acquisitions have been all about. Last year, I testified 
about our plans to purchase TCI, which we closed in March 1999. I'm 
delighted to tell you that we have already begun to deliver on our 
commitment to bring choice--and a better deal--to residential local 
telephone consumers through TCI's cable plant. In Fremont, California, 
we are now offering cable lines for telephony: one for Mom, one for 
Dad, one for the kids, one for the fax or PC. Each line with its own 
distinctive ring, and for only $11.00 per line for the first line and 
$5.00 per line for each additional line, compared to the $11.25 per 
month Southwest Bell currently charges in California for each and every 
line a customer buys. And, we're on target to bring our cable telephony 
offer to consumers in Salt Lake City, Detroit, Pittsburgh and other 
cities within the year.
    As we implement our plans, consumers will see big changes. Let me 
bring them home--to your home and mine. Start with the capabilities 
digital cable will provide your family. The cable box on your TV will 
not only deliver hundreds of channels and movies--it will be a virtual 
communications center. When you come home, you'll turn on the TV, the 
PC or telephone--which one is up to you--to retrieve your e-mail, voice 
messages or fax. If you want to get onto the Internet, the cable box 
will give you access at speeds a hundred times faster than 28 kbps 
modems. You'll always be online: no need to dial up and wait for your 
computer to connect. That same cable line that brings TV and the 
Internet into your home will give you multiple telephone lines. And, 
customers will get all this at lower prices for telephone and Internet 
services than they pay today. That's what competition delivers.
    With our rollouts to customers in TCI territories underway, AT&T 
recently announced its agreement to purchase the MediaOne cable systems 
for $58 billion dollars in cash and AT&T stock. Our merger with 
MediaOne-just like our earlier acquisition of TCI--will mean that far 
more American consumers will have a choice in local phone service and 
the opportunity to enjoy high speed Internet services. With MediaOne, 
AT&T will gain immediate access--and the ability to provide 
competitive, facilities-based local exchange services--to millions of 
consumers in service areas where we currently have no facilities. 
Together, MediaOne and AT&T will bring video, voice and data services 
to these communities more quickly than we could separately.
    With over $100 billion in acquisitions to bring this communications 
revolution to American families, we've demonstrated that AT&T is 
willing to make the investments necessary to compete in the local 
services market. But, even with this downpayment, there is still a lot 
of work to do.
    AT&T's combination with MediaOne will give us owned and operated 
systems passing about 26 million homes in 18 of the nation's top 20 
markets. That's about 26 percent of American homes. While we are 
hopeful this will give us a base from which to negotiate joint ventures 
with other cable companies to reach more of our customers--who reside 
in every neighborhood across America--we do not have the reach of our 
telephony competitors.
    The MediaOne merger will give us some of the scale we need to 
compete with the larger and more powerful local exchange company 
monopolies. But, from the outset, the pending Bell mergers will create 
combined companies that already serve far greater numbers of customers 
than AT&T has the potential to serve with our cable telephony plant. 
While we begin with virtually no share of the local market and the 
opportunity to win customers, SBC/PacBell/Ameritech will begin 
operations serving every customer within its territory, about 40 
percent of the total U.S. population (or one-third of all U.S. access 
lines). Similarly, Bell Atlantic/GTE will start with a customer base of 
about 35 percent of all U.S. access lines.
    As the FCC reviews AT&T's merger with MediaOne, we will ask them to 
consider these facts and the role cable is playing in local service 
competition. The opportunity is now ripe for the FCC to harmonize the 
now-outdated and suspended horizontal ownership limitations with the 
goals of the 1996 Telecom Act. Simply put, limiting the scope of AT&T's 
cable coverage would limit the growth of competition in the local 
telephony market.
    Of course, the FCC will also look to the original purpose of the 
ownership rules: to prevent abuses in the control of video programming 
by cable companies. The suspended rules pre-date the era of digital 
television and the explosive growth in programming capacity that goes 
with it. Similarly, they do not reflect the now ubiquitous scope of 
direct broadcasting satellite (``DBS'') firms, or the role DBS firms 
will play in the programming market as their competitive position is 
bolstered by the passage of the pending Satellite Home Viewer Act. If 
enacted, DBS firms, for the first time, will have the opportunity to 
offer video and local broadcast packages on par with cable programming 
that will inevitably expand their subscribership. The substantial 
increase in the number of programming outlets created by these 
technological and market changes inevitably will diminish any potential 
for monopsony power over programming by cable systems.
    Let me also make clear that AT&T is not primarily in the content 
business. We're in the communications business. We're distributors. So 
we want to encourage as much content as possible. That's why AT&T 
structured its broadband architecture for maximum openness to content 
providers. Our open software platform is designed to encourage content 
providers, for the simple reason that the more content we can carry, 
the more attractive our services will be to our customers. We are not 
primarily interested in owning content, but in packaging other people's 
content to our customers in the forms they want and at attractive 
prices.
    And that's exactly why AT&T negotiated a very pro-competitive 
relationship with Microsoft. Under our non-exclusive agreement with 
Microsoft, AT&T agreed to expand its Windows CE-based license to cover 
an additional 2.5 million to 5 million digital set-top devices, which 
will enable applications from a number of companies to deliver 
communications, entertainment and information services. The Microsoft 
set-top box software will provide an open environment for the creation 
of services and applications. Microsoft is required by our contract to 
disclose all Application Programming Interfaces (``API's'') that it or 
any other firm uses in the software. This means that any firm will have 
the technical ability to create services and applications that work 
with the Microsoft software and that Microsoft will not have any 
advantage through the use of undisclosed API's.
    AT&T made no commitment to deploy the Microsoft set-top box 
software that it licensed, except in three showcase cities. In the 
third showcase city, Microsoft is obligated to work with AT&T to deploy 
Microsoft set-top box software together with a third party's server 
software. We'll also buy hardware and software from multiple vendors. 
In fact, we have already signed agreements with Sun Microsystems and 
Sony for use of their software products in digital set-top boxes.
    As an endorsement of our broadband strategy, Microsoft has also 
made a $5 billion passive investment in AT&T, amounting to 
approximately a 3 percent equity stake in the company. There are no 
board seats or other dependencies involved in the arrangement. The 
investment in AT&T by Microsoft will be used to accelerate the upgrade 
of AT&T's cable networks. That means quicker delivery of the 
competitive local telephone service, digital television, and high-speed 
Internet access we've promised to customers.
    Now, I can't leave the question of open systems without mentioning 
the issue of cable unbundling--particularly since I know some of you 
have been considering this issue. Contrary to some of the rhetoric, our 
cable networks are not ``closed''. Our customers enjoy open systems in 
terms of content. Our broadband Internet customers can access any non-
proprietary site, portal, or online service on the Internet with one 
click of the mouse at higher speed and with better quality than they 
could before.
    We also will continue to meet our customers' demands for whatever 
content they want to reach on the Net, in partnership with Excite@Home, 
RoadRunner or others. But we will make these arrangements on the basis 
of sound commercial relationships. These commercial relationships will 
recognize the economic, contractual and technical realities that are 
part of doing business.
    And, while we will ensure that our customers will have the access 
to the programs they want to see, we will also make sure that they have 
the control over the programs they don't want to see and the 
information they choose to keep private. This includes giving parents 
the tools they need to protect their children from objectionable 
content in their homes. And, it also means keeping personal information 
private through systems with adequate safeguards and privacy practices 
that give consumers confidence.
    In the end, as I see it, there is no basis for government 
intervention in any of these areas: the market should make the choice, 
competition should spur development and customers will determine what 
they want.
    Already the market is proving this right. Since AT&T unveiled its 
investment in TCI, deployment of multiple broadband pipes and all types 
of advanced broadband services has skyrocketed. The appearance of cable 
modem competition has begun to make the phone companies get serious 
about broadband capacity of their own. Look at the way the Bells and 
GTE have responded. They have had the capability to deploy digital 
subscriber line (``DSL'') technology, which offers broadband over 
ordinary telephone lines, for a decade. But they only began to deploy 
it and lower their prices in response to the emerging competition from 
AT&T. In fact, they're deploying broadband capabilities throughout 
their territories far more quickly than anyone anticipated even a year 
ago. From ground-zero just a year ago, Bell and GTE will convert about 
31 million of their existing copper loops to DSL-capable loops by the 
end of 1999. This will grow to 94 million lines within the Bell 
companies' and GTE's territories by 2002. There's nothing like the 
sight of a determined competitor on the horizon to make dyed-in-the 
wool monopolists get religion about serving customers with new 
technology.
    And, while the deployment of these new technologies hold great 
promise, we all must ensure that all Americans are part of this bright 
future. We cannot allow any American to be left behind. As AT&T deploys 
its all-distance, broadband service through its cable properties, we 
will do so in every neighborhood--urban, suburban or rural--served by 
our cable systems. And, there is evidence already that broadband 
service deployment is not and will not be limited to major cities. 
Smaller independent telephone companies serving rural areas are 
entering the race. Home Telephone Company, based in Jacob, Illinois, 
has introduced its Supernet service providing Internet access and 
speeds up to 50 times faster than 28.8 kbps modems. Buckland Telephone, 
serving 2,000 access lines throughout three counties in Ohio, has begun 
to roll out its DSL service, starting with Wapakoneta, Ohio. Panhandle 
Telephone in Oklahoma is also deploying ADSL in approximately 11 areas 
throughout its service territory. HunTel Systems, based in Blair, 
Nebraska, has plans to introduce DSL service to Washington County, 
Nebraska early next year. DSL access is also being offered in Harrison, 
Arkansas; Sergeants Bluff, Iowa; Winthrop, Maine; and Kamas, Utah.
    AOL, which today serves about 60 percent of Internet subscribers, 
has also stepped up its efforts to use DSL to deliver new broadband 
services. By the fall of this year, as a result of its deals with Bell 
Atlantic and SBC, AOL will have a broadband AOL offer available across 
50 percent of its customer base in 21 states. AOL also recently 
announced a series of agreements with DirecTV, Hughes Network Systems, 
Phillips Electronics and Network Computer, to develop a broadband 
``AOL-TV'' offer that will make AOL accessible through the television. 
Similarly, MindSpring, another large ISP, has made a DSL deal with 
BellSouth and Prodigy has teamed up with Bell Atlantic to offer their 
customers high speed DSL Internet access.
    Satellite and wireless firms are also bringing more broadband pipes 
to homes and businesses. Hughes is investing $1.4 billion in Spaceway, 
a two-way satellite broadband service it plans to deploy by 2002. AOL 
has also agreed to invest $1.5 billion to help fund Hughes' plan to 
offer Internet access via its satellite systems and it will market AOL 
broadband service nationwide via Hughes DirecPC service by early 2000. 
And, Teligent and Winstar are deploying broadband access using wireless 
networks in markets across the country.
    Congress well understood the powerful relationship between 
competition and innovation when it passed the Telecommunications Act of 
1996. It understood that innovation needs the spur of a competitive 
market. That's why Congress mandated that the market for local 
telephone service be opened to competition. And, that's also why 
Congress decided to treat new entrants and cable facilities differently 
than the incumbent Bells. Congress was counting on cable as a second 
wire to the home to give consumers a choice in local phone service and 
to deliver the advanced services you expect in a competitive market. 
AT&T's cable purchases are designed to do just that. And, now, in 
response to AT&T's investment and innovation, other companies are 
building a variety of other broadband paths to homes and businesses 
across the country.
    But I don't mean to imply that all you have to do is stand back--
and let the future unfold. I can't think of a single revolution in 
history that worked that way.
    AT&T has demonstrated its willingness to compete in the local 
service market, but our cable systems will never reach every one of the 
100 million households in America or every one of the 61 million AT&T 
long distance families we serve. Today, to offer local service in the 
majority of communities, we will need to rent the local telephone 
companies' wires if they are economically and operationally viable. And 
even where we do own and operate cable systems, we will need the local 
telephone company's cooperation in switching customers from their 
network to ours.
    That's what the Telecommunications Act of 1996 was all about.
    Congress recognized that it wouldn't be easy to cajole the Bell 
companies to give up a regulated revenue stream they'd had for almost a 
century. So it included an inducement for the Bells to cooperate. It 
established the quid pro quo that the Bells could get into the long 
distance market once real competition is established in the local 
services market.
    Why hasn't this happened yet? For one thing, we all under-estimated 
the practical difficulties of opening up such a huge, technically 
complex market to competition. And for another, too much time and 
energy were consumed in litigation after the Act was passed. That 
litigation seems to have ran its course, and the Telecom Act is still 
intact. More important, I hope that some of the Bell companies now 
recognize not only the inevitability of local competition but its 
desirability as well.
    From the consumer's perspective, the desirability of local 
competition is obvious. The faster the flywheel of competition and 
technology spins, the more consumers have to show for it. Local 
competition will stimulate new investment and new services. Consumers 
will get the classic benefits of a competitive market--more choice, 
lower prices and better value.
    These benefits are close at hand. But close isn't good enough. To 
finish the job, the FCC must re-establish the obligation of the Bell 
companies to provide all of the unbundled network elements (``UNE's''), 
individually and in combination, and including DSL-capable loops.
    Second, the obligations on the Bell companies under the Act to 
price unbundled network elements and access based on cost must be 
diligently applied and vigorously enforced. If the Bell companies agree 
to economically viable rates in setting their wholesale prices for 
network elements and establish operational systems to implement them, 
you can count on AT&T to buy capacity on their networks to offer local 
service. That will be the fastest route to bringing a competitive 
choice to millions of consumers. But I can also promise you that AT&T 
will not show up in any community where the Bell's wholesale prices are 
too high or the operational systems endanger a customer's service.
    We've been down that road before. In the rush to get into the 
market after the Telecom Act was passed, AT&T in 1997 resold the Bell 
companies' service in a number of states. The wholesale prices were so 
high, we lost money on every customer--$3 billion in all. The more 
customers we won, the more money we lost. You don't need an MBA to know 
that's no way to do business. And we won't.
    We learned something else in that experience--changing local 
service companies should be as easy, and as certain, as changing long 
distance companies. But it wasn't in 1997, and it isn't now. We learned 
then that our customers had to wait weeks to switch, some lost dial 
tone and 911 availability. Our business customers were dropped from 
directory services.
    And that brings me to the next plank of my agenda for consumer 
choice. It concerns all the back-office computer systems necessary to 
introduce competition to a local network. These systems handle the 
thousands of individual tasks necessary to provide local phone 
service--they track orders, coordinate circuit provisioning, dispatch 
trucks, render bills. They are the joint responsibility of the 
incumbent local companies and the new local competitors, including 
AT&T.
    With the right systems in place, customers can switch from a Bell 
company to another provider easily, without having service disrupted, 
or access to ``911'' cut off, and without being dropped from the 
telephone directory listings.
    That's why metrics for system performance and consumer quality and 
safety should be adopted and applied. Systems should be tested against 
those standards by a neutral third party. And there should be a real 
market test before we put all the consumers of a state at risk.
    Finally, consumer choice in local services requires that we take 
access charges down to cost. Everybody in this room pays access 
charges, although you won't find them on your phone bill. Local phone 
companies charge an average of about 4 cents per minute to complete 
both ends of a long distance call. Economists say the actual cost is 
less than a penny a minute.
    Now, the local phone companies didn't invent this system. It's a 
holdover from the old Bell System days when long distance and business 
services subsidized local service. But that kind of pricing amounts to 
a hidden tax that costs long distance callers $10 billion a year in 
unnecessary interstate access charges.
    To be fair, the Bells might say their mark-up is considerably less 
than that and they still need the revenue to hold down the cost of 
local service. And we must recognize that access charges are some part 
cost reimbursement and a large part pure profit to the local company--a 
holdover from another era.
    My purpose is not to continue this argument here. Quite the 
opposite. I want to see it ended once and for all. We need a 
comprehensive restructuring of access charges that eliminates all the 
subsidies once and for all, giving American consumers a multi-billion 
dollar tax cut.
    Let me sum up: AT&T's merger with MediaOne will offer more 
customers more choice for local telephony service and new broadband 
services at lower prices and faster speeds. Through cable, we will 
offer residential customers the first real alternative to the incumbent 
monopolies. Already our entry on the horizon has sparked competitive 
responses in the delivery of new broadband services from the Bells, 
GTE, Internet Service Providers, and others.
    But, while we are making tremendous strides in the deployment of 
broadband across all of America, we have a long way to go to break open 
the local services telephony monopoly of the incumbent local exchange 
companies. The Bells and GTE provide local exchange service to 97 
percent of the customers in their territories. They have litigated all 
the way to the Supreme Court to avoid complying with the Telecom Act. 
And, although that litigation seems to have run its course, the Bells 
and GTE now are asking Congress to reward their recalcitrance by making 
exceptions in the Act. Following that path will leave consumers out in 
the cold as the incumbents lose all incentive to comply with the Act.
    My message is simple: Stay the course. Let's get on with 
enforcement of the Act, and finish the business that finally will bring 
American consumers the fruits of your labor. We'll all know when we've 
achieved success:

   Consumers will have a choice of local companies.
   Consumers will have a choice of local services.
   Consumers will have a choice of local prices.
   And they will be able to switch local companies and services 
        as quickly as they can switch long distance companies and 
        services.

    The communications revolution is coming, driven forward by the 
forces of competition and technology. The only question now is whether 
decision-makers, both public and private, will speed the process along. 
Thank you.

    The Chairman. Mr. Seidenberg.

                STATEMENT OF IVAN G. SEIDENBERG

    Mr. Seidenberg. Mr. Chairman, Members of the Committee, 
thank you very much for the opportunity to be here this morning 
and offer Bell Atlantic's opinions and viewpoints on some of 
these issues.
    As you stated earlier, the Internet has been the engine 
driving our economy for the past few years in our industry. The 
current network infrastructure that we serve is delivering an 
amazing amount of service over that network. But customers, as 
you have said, want more. They want more speed, more quality; 
they want more services, they want more choices.
    We think that public policy ought to be driving more 
investment in these areas. This investment in infrastructure, 
or the lack of it, will have real impacts on customers. And 
even today, some are being denied the full benefits the 
Internet can offer. We need infrastructure investment in two 
primary areas--the backbone network that connects all parts of 
the country, and the first mile from the home. Let me address 
these quickly.
    The biggest barrier to growth and investment in the new 
Internet technologies is that companies trying to provide 
services are regulated differently. First, let me talk about 
the backbone network. Here, the regulatory obstacle is the 
FCC's interpretation of the long-distance restriction in the 
1996 Telecom Act. The backbone is a nationwide network of high-
speed facilities. It is similar to our long-haul airline 
routes. So it is with the Internet. The long-haul routes are 
not enough. We need a system of regional airports, or regional 
Internet facilities that gather traffic and deliver it to the 
major hubs.
    In Bell Atlantic's service territory, there are many areas 
without a backbone hub. This prevents users from getting high-
quality direct connections to the Internet. Bell Atlantic 
States are divided into what we call 39 LATA's and independent 
telephone company areas. Of that number, 17 have no backbone 
hub today. Amazingly, places like Atlantic City, NJ, or 
Binghamton, NY; Scranton, PA; and Burlington, VT have no 
backbone hub.
    Bell Atlantic should be allowed to play a bigger part in 
development of this new Internet phenomenon. We are already 
providing local data services to customers in these areas, to 
auto dealers, hospitals, students, and the like. And we have 
the ability and the financial resources, of course, to provide 
them with better connections to the nationwide network. We urge 
the Congress--we urge you to lift the barriers and create the 
big rules that prevent us from doing so.
    The second area that is going in the wrong direction is the 
disparate treatment of providers in the first mile. We now have 
the technology, called DSL, to turn the wire to your home into 
a high-speed pipe. But instead of providing incentives to 
deploy this new technology, regulators are making it more 
costly to do so.
    Right now, regulators are considering additional 
restrictions on Bell Atlantic's high-speed services. Here are a 
few examples: new network unbundling requirements, including 
what they call spectrum unbundling; heavily discounted 
wholesale prices to the point where we can't even get a return 
on the investment we make in the network; rules requiring a 
separate subsidiary for high-speed services; and limits on the 
way we can package and market. At best, talk of more regulation 
creates uncertainty. At worst, it destroys the business case 
for investing in new technology for the first mile. These rules 
are unnecessary. They should certainly not be imposed on Bell 
Atlantic, when my competitors operate without this regulation.
    The Internet's strength is its heritage of openness and 
individual control. But AT&T and cable are telling consumers, 
if you want our high-speed transport, you have to buy our ISP 
as well. We have been down that path before with the cable 
industry. After the 1984 Cable Act, some cable, some cable 
companies started locking up all the video programming, the 
content. It took a law, the 1992 Cable Act, and three antitrust 
consent decrees to open the system and give DBS access to 
programming so it could compete with the cable industry.
    Now, you and the Congress have a chance to get it right 
from the start. Repeat your success by adopting now the open 
access policies of the 1992 Cable Act. I know that you and 
other Members of Congress know how to successfully deal with 
new telecommunications technology, how to encourage investment 
and promote competition. You have done it before in the world 
of wireless, and you can repeat your success in the world of 
data.
    From 1993, when Congress passed deregulatory provisions for 
cellular service, to 1998, the number of wireless telephone 
users jumped from 16 million to nearly 70 million. At the same 
time, the average monthly bill dropped nearly 50 percent. And 
when Congress dropped the long-distance restriction on wireless 
services, most cellular companies responded by offering plans 
with no long-distance charges tacked on to the per-minute of 
air time.
    So we urge you to repeat your success and apply the same 
successful policy of deregulation to new Internet data 
services. Congress can and should ensure that all competitors 
entering the Internet marketplace are treated equally.
    Thank you.
    The Chairman. Thank you.
    [The prepared statement of Mr. Seidenberg follows:]

                Prepared Statement of Ivan G. Seidenberg

    Good morning, Mr. Chairman and members of the Committee. My name is 
Ivan Seidenberg, and I am the CEO of Bell Atlantic Corporation.
    Thank you for the opportunity to discuss what is probably the most 
exciting development in the telecommunications industry in years. That 
development is the astounding growth of the Internet--a 
telecommunications medium that has already changed the way millions of 
Americans live. And what is even more exciting is that this is only the 
beginning--the changes that will come in the next five years will dwarf 
those we have seen in the last five.
    The Internet is a wonderful tool that has developed far faster than 
anyone could have imagined. But its continued development and evolution 
into a technology that can handle any form of communication and any 
type of service from educational to medical may not keep pace, with 
significant consequences for some segments of the country.
    When I look back just five years ago, when the World Wide Web 
really began to take off, I am amazed at what has been accomplished. 
But the plain truth is we have an Internet infrastructure today that is 
nearly tapped out. Yes, there is investment going into the Internet 
backbone. Yes, local broadband connections are beginning to roll out. 
But given the speed of Internet time, we have to unleash all our 
strengths--and free all sectors of the Internet industry--to build out 
broadband networks, put in place more backbone facilities, and build 
the crucial hubs and connection points for the backbone that are 
lacking in many parts of the country. We simply can't afford to have 
some companies that build infrastructure--like the Bell companies--
sitting on the sidelines.

                  CONTINUED ECONOMIC GROWTH IS AT RISK
    The Internet and the information industry have been crucial 
components of the amazing growth we have had in our economy. But we may 
be getting complacent. We may all be starting to believe that this 
growth is inevitable and that nothing will slow it down.
    It would not be wise to tip toe around and hope that the economy 
will simply continue on its upward path. The information industry--
which includes hardware and software and the facilities that connect 
them--is crucial to this economy not just because we all bought 
computers, cell phones and Palm Pilots. It is crucial because it 
networked these devices together through the Internet, creating an 
almost seamless communications fabric that created a powerful engine of 
innovation and efficiency the likes of which the world has never seen. 
This has increased productivity in many segments of the economy, from 
agriculture to manufacturing.
    To keep this growth curve moving rapidly upward, we need to have an 
Internet and communications infrastructure that can do more, do it more 
quickly and do it more reliably. We need to act now to get this 
infrastructure in place, and we need it as rapidly as possible. We 
can't let an infrastructure that is already showing signs of strain 
begin to affect our economy and its health. We can't leave out the many 
parts of the country that are far away from the backbone or have no 
close-by high-speed hubs. We would be far better off setting the stage 
now for an infrastructure that can grow with the economy and stimulate 
even more innovation and efficiency. That is the way to lead the 
country towards an even more prosperous future.

                       THE STATE OF THE INDUSTRY
    A few short years ago, the Internet was something that only serious 
researchers and computer jockeys knew about. Electronic commerce was 
not part of our vocabulary. In 1995, revenues generated by the Internet 
were a mere $5 billion. Since then, the growth of the Internet has been 
astounding, far outstripping the predictions of most experts. Last 
year, Internet revenues rose to an astronomical $301 billion.
    With this growth, there has been increasing demand for bandwidth 
and speed. The modems that were state-of-the-art a few short years ago 
are the slowpokes. As more and more people use the Internet and more 
complex information and bandwidth-intensive applications appear, it is 
clear that even current speeds are not fast enough.
    Consumer surveys demonstrate that speed is very important to users. 
But so are quality and capability. The Internet's problems are only 
partly related to the need for more capacity. It is an end-to-end 
system based on hundreds of connections between different networks. If 
a consumer's data--a web page being transmitted to a person's home for 
example--is slowed at any point in the transmission, data can be lost, 
the connection may drop and some of the more exciting applications for 
education and telemedicine involving video, for example, will simply be 
impossible.
    The Backbone. At the top of this system is the Internet backbone--
high-speed facilities which take traffic back and forth at high speeds 
across the U.S. The faster data can get onto the backbone and the more 
backbone capacity there is, the better the connection and the higher 
the quality of the data transmitted.
    The Internet's structure is like the airline system. National and 
international airports are located in major cities and population 
centers of the country. Major air carriers connect these airports 
together and planes fly at rapid speed back and forth across the county 
into and out of these airports. Thousands of smaller airports are 
``connected'' to these major ``hubs'' taking passengers from the larger 
airports out to smaller towns and cities throughout the states.
    In the case of the airlines, if you have no major airport close to 
you, it may be very difficult, slow or expensive for you to get a 
flight to other parts of the country. The farther you are away from the 
airport, the more difficulty and expense you may have. The same is true 
of the backbone. Only so many backbone facilities exist and most of the 
hubs or connection points for the backbone are located in a relatively 
few areas. Areas without hubs become backwaters--the airplanes flying 
over head with no place to land does not do a waiting customer much 
good.
    There are vast areas of the U.S. that simply have no nearby 
backbone connections or hubs. The three largest backbone carriers--MCI/
WorldCom, Sprint and Cable and Wireless with AT&T coming up fast--have 
little incentive to connect their systems with smaller carriers or 
locate hubs away from major urban centers. And the level of 
concentration is increasing rapidly as the major backbones acquire or 
displace smaller players. Even where backbone exists, such as in major 
urban centers, it is often congested. Many Internet providers have no 
way to get their data traffic to the backbone efficiently and without 
numerous back-ups and delays. Many are simply located too far away from 
convenient backbone connections. And when they do get to the backbone, 
they find that the lack of adequate capacity slows their customers' 
service.
    The Last Mile. Today, most consumers get to the Internet over 
``narrowband'' technology--their ordinary telephone lines. Although 
speeds have increased significantly in recent years, they are nowhere 
near fast enough to support the applications of tomorrow. The two most 
promising landline technologies to provide residential consumers with 
high-speed broadband Internet access at a reasonable cost are Digital 
Subscriber Line (DSL) services and cable modem services.

          TO REGULATE OR NOT TO REGULATE, THAT IS THE QUESTION
    We should not apply traditional voice telephone regulation to the 
Internet and broadband services. This would slow deployment of 
broadband, inhibit competition and risk slowing investment at the very 
time when we need every possible firm involved in advancing the 
capabilities and capacity of the Internet. The Internet has driven the 
growth of the high tech sector. There is a very real danger that if the 
Internet does not advance to a new level, one capable of providing 
higher speed, higher quality connections, the growth our economy has 
enjoyed because of the explosion of information technology could well 
be undermined.
    The high-speed data business of today should not be regulated like 
the voice telephone network of yesterday. In most urban areas, there 
are several companies vying for the high-speed data business. Cable 
companies are upgrading systems to be Internet-capable with high-speed 
cable modems. New entrants, such as Covad, Northpoint, and Rhythms 
NetConnections, provide DSL services to business and residential 
consumers. And unlike the voice markets, local telephone companies are 
not the dominant providers of residential high-speed data services--
cable companies are. They already serve more than 80 percent of the 
residential customers buying high speed Internet access. The old 
policies just don't make sense here.
    Bell Atlantic and the other Bell companies are prohibited from 
carrying data traffic across LATA boundaries. That means that a Bell 
Atlantic customer must rely on other providers to reach the Internet. 
It also means that Bell Atlantic cannot invest in Internet backbone 
services.
    To provide customers reliable end-to-end data services, a provider 
must be able to move data from one end of the country to the other, and 
overseas. Sprint, MCI and AT&T all have this capability today. Cable 
companies and the nascent data-only carriers are not prohibited from 
providing these services. The only companies not allowed to provide 
this service are the Bells.
    There is no justification for the FCC's protection of AT&T and MCI 
from Bell Atlantic's full entry into the data business. These mammoth 
companies have the capital and know-how to compete for data customers. 
Even the start-up data carriers are in an excellent financial position. 
These companies have been the darlings of Wall Street, in spite of the 
fact that most of these companies have only started to build their 
customer base. NorthPoint Communications has a market capitalization of 
$4.5 billion, in spite of the fact that its revenues in 1998 were less 
than $1 million. Covad's market capitalization is $3.1 billion, with 
1998 sales at $5.3 million. Rhythms NetConnections market 
capitalization is nearly $4 billion, on 1998 sales of $500,000.
    There are other existing regulations that handicap Bell Atlantic's 
provision of DSL. The FCC is busy working on applying Section 251 
unbundling and resale requirements to Bell Atlantic and other incumbent 
LEC's. Bell Atlantic is committed to providing unbundled DSL-compatible 
loops to competitors. Any other unbundling of the DSL service or the 
provision of DSL-capable loops is unnecessary and can harm deployment 
of DSL.
    The FCC is currently considering a proposal to require spectrum 
unbundling, also called line sharing. Under this proposal a competitor 
would be allowed to use a portion of the capacity of the loop 
essentially for free to provide DSL service, and the incumbent LEC 
would still be required to provide the underlying basic telephone 
service and cover the full cost of the loop. To split the capacity of 
the loop, however, is bad public policy. Line sharing deters the 
development of competition for local voice services by ``stranding'' 
voice and discouraging competition for voice services. Line sharing 
discourages competitive investment in local voice services by giving 
the new data-only competitors a ``free ride'' on the incumbent's voice 
service, which is priced below cost. Competing carriers do not need to 
share the unbundled loop to offer advanced services. They are already 
free to offer advanced services over an unbundled loop or to invest in 
other technologies, such as wireless technologies. Like the ILEC, they 
can recover the cost of the unbundled loop by offering voice and other 
services over that unbundled loop.
    The FCC is also in the midst of determining whether our DSL 
services should be subject to the resale discounts provided under 
Section 251. Bell Atlantic has filed a tariff at the FCC to provide DSL 
service on a wholesale basis to ISP's such as AOL and to competing 
carriers. CLEC's claim that ISP's are the end-users of that service, 
and therefore CLEC's should be able to obtain an additional discount 
from the wholesale tariff price.
    With the proper deregulation in place, DSL deployment will increase 
significantly. A rising tide will raise all ships, as the standard 
speed for Internet access increases by a factor of 10 or 100, every 
high-speed data provider will benefit. Deregulation often provides 
consumer benefits in deployment, prices, and choices.
The cellular experience
    There are parallels between what happened in the cellular industry 
and what is happening in the high-speed data marketplace. The slow roll 
out of cellular service, and continuing regulation of the service cost 
consumers and the economy billions of dollars. Significant 
deregulation, however, has increased subscribership and lowered 
consumer costs.
    It took 15 years from the time that the FCC began its first inquiry 
to the first commercial cellular service. Even then, no one predicted 
the fantastic growth of cellular. In fact, at the time of the breakup 
of the Bell System, it was unclear as to whether AT&T or the Baby Bells 
would inherit AT&T's cellular spectrum licenses. AT&T had predicted 
that cellular subscription levels would reach one million by 1999. In 
reality, cellular subscribership reached that level in 1987, and at the 
end of 1998, there were more than 69 million wireless subscribers in 
the U.S.
    Deregulation speeded wireless growth. First, the FCC made an effort 
to lessen regulation of cellular service in 1988. In December 1988, the 
average monthly cellular bill was $98.02 for the two million plus 
subscribers. Within four years of the FCC's deregulatory effort, 
cellular subscribership reached 11 million, while the subscriber's 
average monthly bill dropped by nearly 30 percent.
    The second major deregulatory effort was undertaken by Congress in 
1993 in the Omnibus Budget Reconciliation Act. From 1993 to 1998, 
wireless telephone subscribership rose from 16 million to 69 million, 
while the average monthly bill has dropped by nearly 50 percent.
    Some states were allowed to continue to regulate cellular service. 
A Cellular Telephone Industry Association study showed that cellular 
prices in regulated states averaged 17 percent higher than the prices 
in unregulated states. It also found that cellular penetration and 
cellular growth was lower in regulated states than in unregulated 
states.
    The inescapable conclusion is that the cellular industry benefited 
greatly from deregulation. In a deregulated environment, subscribership 
rose and prices dropped.
    The high-speed Internet market is like the cellular industry 15 
years ago. Fewer than 1 million American Internet users have access via 
high-speed cable modem, and a scant 70,000 use DSL technology. Adoption 
of deregulatory measures will permit telephone companies to provide DSL 
technologies at a more rapid pace, hopefully with the same results as 
deregulation of the cellular industry: more consumers accessing the 
technology for lower costs.

                       GIVE THE CONSUMER A CHOICE
    The Internet's foundation and its strength is its heritage of 
openness and individual control. This heritage grew out of a commitment 
to an agreed set of protocols--ground rules for how the Internet is 
supposed to operate--that were developed openly and without government 
direction. Government established the framework--and then it got out of 
the way.
    As we build a new high speed Internet, its heritage of openness and 
individual control should not be forgotten. We should ensure that the 
new broadband networks are as open as the Internet itself has been. 
Otherwise, we will begin to erode the strength of the Internet and to 
undermine what is its core--connectedness. Connecting people, 
businesses, schools, web developers and content makers together and 
creating an open, vibrant market place of ideas and commerce.
    However, some providers have adopted polices that are inconsistent 
with these principles. AT&T, the dominant provider of high speed 
Internet access, has a closed system, in which a consumer using AT&T's 
cable modem service must pay for AT&T's affiliate and ISP of choice, 
@Home. This issue becomes more urgent as AT&T's acquires more cable 
properties.
    Here's what AT&T/cable say to customers: ``If you want my high 
speed transport, you have to pay for my Internet service provider too, 
even if you want to use some other Internet access provider.''
    Why does AT&T want closed systems? It's pure and simple a business 
decision. AT&T spent $48 billion for TCI and is willing to pay $58 
billion for MediaOne because it knows that having captive customers 
means more revenue per customer. By freezing out other providers, AT&T 
can essentially control the content its customers receive. The market 
power of closed systems combined with access to a major percentage of 
the nation's households, gives AT&T the ability to assert substantial 
economic leverage over content providers.
    AT&T apparently thinks that policymakers will let it get away with 
closed systems, because the new AT&T pledges to compete in the local 
telephone market. Even if you believe that this is what it takes to get 
AT&T into the local telephone market, it's a bad deal. More competition 
in the local voice telephone business is a poor trade for an 
unregulated monopoly in the Internet.
    This is not a call to bring the heavy hand of regulation down on 
cable. We can ensure that networks are open without extensive 
regulation. What I am suggesting is a simple mandate that requires 
cable networks to allow consumers a real choice in their Internet 
provider. The terms, conditions, and technical aspects of how this is 
done should be left to the marketplace.
    Congress should establish a simple policy of non-discrimination for 
cable networks, to allow consumers a real choice in their Internet 
provider. I believe that by setting this simple ground rule, we are 
extending the Internet's core strengths into the new broadband arena. 
If we at the same time free the Bell companies from the LATA boundary 
restrictions in carrying Internet data traffic and remove price 
regulation from telephone broadband services to the home, we will free 
all of the companies who have helped build the Internet--from ISP's to 
the local telcos to the cable companies--to invest in and more rapidly 
build out the broadband networks we need now. We will put them all on a 
more level playing field and encourage more competition.
    Congress has had to step in before to require cable companies to 
``open up.'' Direct broadcast satellite (``DBS'') technology offered a 
alternative to cable. However, by the early 1990's, the cable industry 
had sewn up most of the video programming content, and it wouldn't let 
the program providers sell their content to DBS. It took a change in 
the law, through the 1992 Cable Act, to allow DBS to have an 
opportunity to offer some of these programs. Given access to 
programming, DBS has provided a real alternative to cable and has 
provided service in rural areas that cable hasn't tried to serve.

            CONGRESS SHOULD SET THE OPEN COMPETITION POLICY
    As it did for wireless services, Congress must make the FCC 
recognize that the high-speed data business is different from the voice 
telephony business and that it just not be subjected to voice telephony 
rules. The policy that will most benefit the consumer and the Internet 
is an open competition policy--one that applies equally to all 
providers, regardless of their parentage. Congress should adopt a 
policy that permits all data service providers to provide Internet 
backbone services. Congress should encourage last mile broadband 
deployment. Finally, Congress should ensure that regulation is only 
instituted where there is a clear market failure.
    Overlaying existing telephony regulation to the Internet is not the 
answer. Bell Atlantic urges Congress to adopt legislation that 
deregulates the provision of these services and does not favor one 
provider over another.

    The Chairman. Mr. Mandl.

                   STATEMENT OF ALEX J. MANDL

    Mr. Mandl. Thank you, Mr. Chairman and Members of the 
Committee. Thank you for the opportunity to tell you about 
Teligent and what role it plays in the new broadband 
environment.
    I am Alex Mandl, and I am Chairman and CEO of Teligent. 
Some 3 years ago, when I left AT&T, I did so with some very 
specific ideas in mind. In fact, the thing we saw nearly 3 
years ago was this. The data explosion that has been referred 
to was obvious even back then, and it was also clear that this 
data growth and this data explosion would be delivered to 
consumers over networks that consist of two components, one 
component being the long-distance, the backbone component, and 
the other being the local service, the last-mile component.
    It was also clear even back then, 2\1/2\ years ago, that on 
the backbone side there is a fair amount of competition. All 
the existing carriers, as we know--AT&T, Spring, WorldCom, and 
others. And, in fact, there are a lot of new carriers being 
planned, being developed, rolling out their services. Names 
like Qwest, Level 3, Williams, and other companies are putting 
a lot of fiber into the ground to deal with this backbone need, 
this backbone capacity requirement for this data explosion. And 
Mike, I think, outlined that very graphically.
    The second part of the delivery system, the local network, 
is a little different. A high percentage--some debate around 90 
percent, 95 percent--is still being delivered over one network, 
the copper network provided by the LEC's. And that to a large 
degree is still the narrowband network that we all know about. 
Obviously, people are working on expanding that and enhancing 
that.
    I think it was also clear back then that the full potential 
of the Internet, as has been said just a minute ago, will not 
be possible until that last-mile bottleneck has been opened up, 
and that is where Teligent fits into the equation.
    Teligent deploys a new variant of proven technology, 
microwave radio transmission, and we are building local 
broadband networks that totally bypass the existing networks, 
both the LEC networks as well as the cable networks. And we do 
so by using a certain device, the radio, and I have one with me 
here just to show you how small it is. It fits on the top of 
roofs and delivers these data screens to the customer in the 
building. So it is a small and a very non-obtrusive device from 
that point of view.
    We do address the medium and small business markets. We do 
that because it does represent two-thirds of the business 
market, so it is not a niche market. And it is the fastest 
growing market, as well as the market that is, on average, very 
much underserved. And because of our unique technology, we can 
reach beyond just the central office buildings. We can reach 
the suburbs. We can reach the areas that are clearly less 
populated where a lot of the small and medium-size businesses, 
in fact, are operating.
    What about Teligent today? We are headquartered in Vienna, 
VA. We employ today, 2\1/2\ years later, roughly 2,000, 2,300 
people. We are up and running in 28 markets across the country 
today, providing full commercial service. And by the end of 
this year, we will be up and running in 40 markets, in 40 of 
the major markets, providing pretty much national service, a 
national footprint, in this broadband environment.
    Customers are responding well because they see an offer 
that consists of 30 percent less than what they are paying 
today. They see a bundled offer of local, long distance and 
Internet access service, and they see a Web-based billing 
approach that is unique in terms of how they can interact with 
the company. So from that point of view, I think Teligent is 
beginning to address this last-mile bottleneck that we all know 
about and is such a critical component in terms of Internet 
development.
    Now, it is very clear to us Teligent would not exist 
without the Telecom Act of 1996. We all know that the Act is 
not perfect, but it certainly set in motion an irreversible 
momentum in terms of providing more and more competition to 
those markets. And that, of course, will benefit consumers. And 
I am very grateful to you for having accomplished that.
    In my judgment, if Congress were to reopen that Act and 
start debating some of the principal points of this Act, I 
think it would significantly slow down development of 
competition. I think it would create some confusion, and the 
whole momentum of new competitors entering those markets, like 
Teligent, I think would be slowed up and the consumer would not 
benefit from that.
    There are, however, a couple of barriers that are still out 
there that need to be addressed. First of all, I think it is 
very clear that Congress and the FCC must continue to enforce 
the provisions of the Act and require the LEC's to fully open 
up the markets before they are allowed into long distance. I 
think unquestionably there is some progress taking place. For 
example, we have great dialogue with Bell Atlantic in terms of 
how we can work together, but there is also clear room for 
improvement on that front.
    From a data point of view, you know, we don't see any need 
to differentiate that from the voice service. The new networks, 
including the Teligent network, really doesn't make a 
distinction between data and voice services. It is one bit 
stream, one stream of ones and zeroes that delivers both voice 
and data. And as we move forward, to differentiate that, I 
think, would be a mistake because to make such a distinction 
before the LEC's have fully opened up their markets would cause 
a couple of problems. One, I think it would clearly slow the 
development of new competitors in the local market. And I 
think, second, it would take away from the incentive for the 
LEC's to really fully open up their markets.
    There is another barrier that we deal with and that is 
building access. As we deliver and as we try to bring these 
broadband services to office buildings, to apartments, to 
condominiums, we clearly experience some slowness, some 
sluggishness, some non-responsiveness in terms of how we get 
that done.
    We understand that there has to be a reasonable balance 
struck in terms of how that is addressed. There is a balance 
between the legitimate property rights of the building owners. 
Yet, allowing companies like Teligent to enter those markets, 
enter those buildings in a fairly efficient and economic way is 
an important dimension of it.
    We applaud the leadership of Senators DeWine, Kohl and 
other Members of Congress that recognize that there is a need 
for some Federal policy in this regard. And we certainly also 
support the legislation introduced by Senators Stevens, Lott, 
Hollings and Dorgan that would encourage building owners to 
offer non-discriminatory access to all new competitors.
    So working together with Congress and allowing competition 
to flourish, I think, will make this broadband environment an 
exciting one for all consumers, and I thank you for your kind 
attention.
    The Chairman. Thank you.
    [The prepared statement of Mr. Mandl follows:]

                  Prepared Statement of Alex J. Mandl

    Mr. Chairman, Ranking Member and other Members of the Committee, 
thank you very much for giving me the opportunity to come here today to 
tell you a little about Teligent's contribution to this country's 
broadband future--and to describe some of the challenges we face as we 
work toward making that goal a reality.
    My name is Alex Mandl. I am the Chairman and Chief Executive 
Officer of Teligent, a competitive communications company that offers 
local, long distance and high-speed Internet services to small and mid-
sized businesses across the country. Teligent has its headquarters in 
Vienna, Virginia. We employ more than 2,000 people, who work in more 
than 50 facilities throughout the nation.
    Earlier, I served as president and chief operating officer of AT&T, 
and as AT&T's chief financial officer. Before joining AT&T, I was 
chairman and chief executive officer of Sea-Land Services, Inc., the 
world's leading provider of ocean transport and distribution services.
    Mr. Chairman, when I left AT&T to found Teligent nearly three years 
ago, I began with an idea.
    The idea was to use a new variant on a proven technology--microwave 
radio transmission--to build new local communications networks across 
the country, broadband networks that do not rely on the existing local 
telephone companies and their aging narrowband infrastructure.
    The goal was to build unified networks with the ability to 
simultaneously deliver high-speed data and Internet services, as well 
as traditional voice services, to small and mid-sized businesses--at 
significant savings to customers.
    We target small and medium-sized businesses--businesses with as few 
as five or ten telephone lines--because they represent the engine that 
is driving the success of our nation's economy. Small and medium-sized 
businesses make up more than two-thirds of all businesses in the United 
States. Ironically, these businesses comprise the fastest growing but 
most under-served segment of the communications marketplace. Because of 
our unique technology, we're able to reach out beyond the central 
cities to the suburbs and beyond, where these smaller businesses are 
concentrated.
    Today, Teligent is serving customers in 28 markets around the 
country, in states such as Ohio, Delaware, Wisconsin, New Jersey, New 
York and California. We plan to be up and running in 40 markets by the 
end of the year. Eventually, well have facilities in at least 34 
states. I think that represents a major accomplishment for a company 
that launched service in its very first markets at the end of last 
October.
    In the next three to four years, Teligent expects to spend more 
than $1 billion on the construction of local broadband networks 
throughout this nation. Why are we making this significant investment?
    Because we believe that the success of the American economy as we 
enter the 21st Century depends on our nation's ability to move 
information with more speed, efficiency and intelligence than any other 
country in the world. In the last five years, we have witnessed the 
dawn of a new age in which commerce no longer is measured in short 
tons--it's measured in terabits.
    That's what the broadband revolution is all about--the convergence 
of old fashioned voice technology and new, high-speed data technology, 
culminating in a new system of high-capacity communications networks 
that don't distinguish between the two.
    The advent of the Internet and e-commerce is fueling a tremendous 
demand for bandwidth. We're crossing over the threshold into a new 
world of communications--one that's been compared to the advent of 
electricity in terms of the revolutionary changes that will come in its 
wake.
    Forrester Research recently predicted that the U.S. market for 
broadband access and Internet service is ready to--and I use their 
word--``explode.'' Just three years ago, the entire U.S. Internet 
services industry amounted to about $1.3 billion. But last year, the 
business segment of that market alone had grown to nearly $4 billion. 
Forrester predicts that by 2003 that number will hit nearly $60 
billion.
    Anecdotal experience confirms these projections. At Teligent, we're 
already seeing a heightened interest in data and Internet services from 
our base of small and mid-sized business customers. Nearly a fifth of 
them are ordering some type of broadband access service--a much higher 
percentage than we had expected. And many of our new customers are 
using our new, Web-based, interactive management tool called 
emagineSM, an innovate product that allows customers 
immediate on-line access to their billing information 24-hours a day. A 
product such as emagineSM simply wouldn't be 
possible in the old, analog world.
    We think these developments foreshadow ever-greater demand for 
bigger and bigger information pipes. Already, more than five million 
businesses have created their own Internet sites. In fact, business-to-
business commerce on the net is expected to blow through the $1 
trillion mark in the next five years, according to Forrester.
    With all that traffic pumping through the system, businesses that 
rely on a traditional dial-up data connection through their local 
communications network literally will be left in the dust on the 
Information Superhighway.
    Why do I emphasize the word ``local?''
    Since the federal courts broke up the AT&T long distance monopoly 
15 years ago, companies like MCI and Sprint--and now Qwest, Williams 
and Level 3--have been building big ``backbone'' data pipes--analogous 
to the water mains in the streets--to carry high volumes of traffic 
across the country, across the states and across large metropolitan 
areas.
    In fact, one recent article concluded that if all the fiber 
announced by U.S. operators were fully utilized, the backbone capacity 
of the U.S. could increase by as much as 200 times during the next 3 to 
5 years.
    The point was underscored just this past Sunday in a major piece in 
The New York Times' business section. Reporter Seth Schiesel concluded 
that--and I quote--``While consumers and regulators focus on the 
communications bottleneck in the so-called last mile of wire to homes 
and businesses, long-distance communications capacity--or `bandwidth'--
* * * is fast becoming a commodity.''
    That's just the point. What happens when you get to the 
neighborhood? At the neighborhood level, the twisted pairs of copper 
wire that carried analog voice traffic along the ``last mile'' to homes 
and businesses for the past 100 years simply aren't suited--or 
capable--of meeting the bulk of today's digital demands. Futurist 
George Gilder calls these lines ``the copper cage.''
    The highest data speed that most people can squeeze out of these 
copper pipes today using a conventional computer modem is roughly 56 
kilobits per second. At that rate, it takes more than six hours to 
download the Encyclopaedia Britannica. By contrast, Teligent today can 
deliver customers speeds of up to 45 megabits per second.
    At that speed, it takes less than 28 seconds to download that same 
encyclopaedia. And we expect to see dramatic improvements in that 
performance in the not too distant future.
    But the current reality of the Information Age is that more than 95 
percent of the communications customers--businesses and consumers 
alike--are bound by that 56 kilobit per second ``copper cage.'' That's 
the bottleneck that Teligent is trying to break--the bottleneck of 
copper that separates those broadband fiber ``backbone'' networks from 
the end-user.
    Our approach is to build a series of wholly new local networks 
based primarily on a new type of high frequency, microwave radio 
technology. We also integrate traditional broadband wireline technology 
into our local communications networks. Through our local 
SmartWaveTM networks, Teligent offers customers independent 
access to technologically sophisticated, high bandwidth capabilities 
and services. Because Teligent does not need to dig up streets to run 
wires and conduits, it avoids imposing inconvenience and expense on 
cities and neighborhoods in which it offers services.
    Microwave technology has been around for a long time. The military 
used it in World War II to develop radar defenses for our sailors, 
aviators and ground troops. MCI used it in the 1970's and early 1980's 
to create the very first competition in the long distance market. But 
until just a few years ago, the very high end of the radio spectrum in 
which we and other so-called `fixed wireless' carriers operate was 
virtually unusable for commercial communications applications. Now, 
advances in technology have turned that spectrum into a communications 
medium that is not only usable, but highly reliable and very cost 
effective. It's so cost effective, we are able to offer our customers 
up to a 30 percent discount off their existing pricing. We expect that 
these technological advances will not only continue, but accelerate.
    One of the principal reasons that Teligent can pass on these 
savings is that we are a facilities-based company. Jargon aside, that 
means we are not reselling our voice and data services over existing 
telephone networks that were built by the big local phone companies 
over the last 50 years. While we don't resell the incumbent phone 
company's services, we do rely on them to interconnect with our network 
and provide the support necessary to cut over customers and complete 
calls that originate on the Teligent network.
    To reach our fixed wireless customers, Teligent installs small 
antennas, often no more than a foot in diameter, on top of customer 
buildings. When a customer picks up a telephone, accesses the Internet 
or activates a videoconference, the signal travels over inside wiring 
to the rooftop antenna. An electronics box, usually situated near the 
antenna, digitizes all signals, and places them onto a data platform--
we use ATM, or asynchronous transfer mode, for that purpose. The 
customer building antenna then relays the voice, data or video signals 
to a Teligent base station antenna.
    The base station antenna gathers signals from a duster of 
surrounding customer buildings, aggregates the signals and then routes 
them to a Teligent broadband switching center. At the switching center, 
Teligent uses ATM switches and data routers along with Nortel DMS 
switches to hand off the traffic to other networks--the public circuit-
switched voice network, the packet-switched Internet, and private data 
networks.
    You'll note that the Teligent network makes no distinction between 
voice and data. All these signals are carried over the same, broadband 
data platform.
    As we build our local networks, we are making significant 
investments in people, property and equipment. In this year alone we 
expect to spend $300 million on capital equipment. For a company that 
has been in commercial operation for less than a year, I believe that 
investment is significant.
    I've outlined Teligent's plans for delivering broadband access to 
local customers. But we are not the only company working on the 
problem. Nor is fixed broadband wireless the only technology that can 
get us there.
    There has been much discussion lately about DSL--digital subscriber 
line technology. DSL in a sense is an attempt to teach a very old dog 
new tricks by using new electronics to enhance the speed and capacity 
of the old copper networks.
    DSL technology has an important place in this new communications 
landscape. But it also has some limitations. First of all, DSL can't be 
installed everywhere. Lines have to be ``groomed,'' often at 
considerable expense, and central offices must be ``DSL-ready.'' Some 
have suggested that only about half the central offices in the country 
will be able to accommodate DSL equipment. DSL has distance 
limitations--18,000 feet is a generous estimate. There also are 
questions about the kind of network speeds that can be achieved in the 
real world--as opposed to the engineering world.
    But there's an even more important point to be made about DSL 
limitations. No matter how you spell it, D-S-L still equals R-B-O-C In 
other words, when you're dealing with DSL, you're still dealing with 
the RBOC networks--the copper cage. You must still lease or resell RBOC 
service. And we all know about the burden that exercise imposes on 
competitive carriers.
    That's not to say that DSL doesn't have an important role to play. 
In fact, Teligent has found a way to secure many of the benefits of DSL 
technology while avoiding many of the issues usually associated with 
DSL deployment, including the need to co-locate facilities in LEC 
central offices. Just last month, we announced that we will be 
combining DSL technology on copper wiring inside customer buildings 
with Teligent's SmartWaveTM fixed wireless networks outside 
the buildings to provide a lower cost, entry level data service for 
smaller companies.
    Another solution, obviously, is fiber optic cable. Fiber is 
terrific stuff, no question about it. But fiber generally reaches only 
the highest density buildings, because, simply put, it costs a lot of 
money to dig up streets. To date, only 3 percent of the approximately 
750,000 commercial office buildings in the United States are directly 
connected to fiber. In fairness, those buildings account for roughly 
one third of the 60 million or so business fines in the country. But 
that still means that 40 million business fines cannot get a high-speed 
connection via fiber, because it costs too much to reach them.
    What about coaxial cable? A lot of very smart people and some very 
big companies are betting that cable will provide an important 
broadband pipe to the home. Frankly, I don't disagree. But cable passes 
very few businesses today, including small businesses. So that need 
remains to be met.
    Satellite? A number of companies have some very ambitious plans. 
But it is not yet clear in the marketplace exactly what customers these 
companies win serve--and what prices they will charge.
    So what's the answer? It should be dear by now that the creation of 
new broadband networks is not dependent on any one company or any 
single technology. But it is dependent on one very important 
condition--it's called competition--the competition that was created by 
the Telecommunications Act of 1996.
    I mentioned a moment ago that when we started Teligent, the company 
was little more than an idea. But that idea didn't just strike like a 
bolt of lightning. That idea--and through it this company--owes its 
life to three major developments. We've discussed two of those 
phenomena--the explosion in the demand for bandwidth and dramatic 
improvements in radio and electronic technology. Now I'd like to spend 
a moment discussing the third, and most important factor--the enactment 
of the Telecommunications Act of 1996.
    Before I proceed, I want to mention a recent development relating 
to one of our major shareholders, The Associated Group of Pittsburgh, 
Pennsylvania. As I'm sure many of you read in The New York Times and 
The Wall Street Journal, Liberty Media Group announced recently that it 
intends to acquire The Associated Group. If and when that sale is 
completed, Liberty Media, which is independently operated but wholly 
owned by AT&T, will become Teligent's single largest shareholder, with 
approximately 41 percent of our outstanding shares. That said, I want 
you to know that any of the views I am about to express regarding 
legislative and regulatory issues are solely those of the management of 
this company.
    Mr. Chairman, Teligent would not exist without the Telecom Act of 
1996. The Act created ground rules, agreed to by the entire industry, 
which accelerated local competition and opened up new opportunities. 
The Act enabled us to raise the capital we needed to build our business 
by ensuring that we would not be harmed by the historic, government-
sanctioned advantages granted to the incumbent telephone companies.
    Now we are finally near the end of a cycle of industry-wide 
litigation that has created uncertainty and delayed new competitors' 
ability to offer choice and new services to customers. If Congress were 
to reopen a debate over the key principles of the Act, it would only 
create more confusion and further delay the benefits of competition.
    The Act is not perfect, but it has set in motion irreversible 
momentum toward more and more competition in our industry that, over 
time, will benefit all consumers. Most countries across the globe are 
racing to emulate the U.S. model, so their citizens and companies won't 
be left behind as the world moves into the information age. For that, 
we are very grateful to you.
    But some barriers to competition remain. First and foremost, 
Congress and the FCC must enforce the provisions of the Act that 
require incumbent local telephone companies to fully open their markets 
to competition before they are allowed to offer long distance service. 
Even fully facilities-based carriers such as Teligent must have 
adequate interconnection with the incumbent so our respective networks 
can communicate seamlessly. No matter how competitive the industry 
becomes, prompt and seamless interconnection with the existing local 
networks will remain an imperative.
    I have noted that Teligent draws no distinction between voice and 
data services because our local networks make no distinction. For us, 
it is all a single vibrant bitstream of ones and zeros. We believe that 
making any such distinction for the incumbent local telephone companies 
would only serve to slow the development of competitive broadband 
networks, especially those networks that handle local data traffic, 
because it would reduce the incumbent carrier's incentive to fully open 
local market to new competitors.
    Another remaining barrier relates to the impediments that new, 
facilities-based competitors face in bringing broadband services to 
customers in apartments, condominiums and commercial office buildings 
in a reasonable and timely manner. The multi-tenant building market is 
not inconsequential--more than a quarter of all Americans live in 
multi-tenant buildings and an even higher percentage of businesses are 
located there. When consumers decide that they want to take advantage 
of competitive choices, it is important that they be given the ability 
to do so--and the ability to obtain the competitive benefits quickly.
    In our experience, we've found that many landlords recognize the 
benefits that accrue to their tenants--and frankly, themselves--by 
providing timely access to competitive communications carriers in their 
buildings. Competitive services make buildings more attractive to 
tenants--and more valuable in the real estate marketplace. We believe 
that a fair balance can and should be struck between the legitimate 
property rights of building owners--including reasonable concerns about 
safety and security--and the need to bring broadband services to all 
sectors of the economy.
    We are encouraged by the decision of the National Association of 
Regulatory and Utility Commissioners (NARUC) to call for legislative 
and regulatory action to promote non-discriminatory building access. 
And we believe the Federal Communications Commission is taking 
appropriate steps to examine the issue, as outlined in its recent 
Notice of Proposed Rulemaking (NPRM). But legislative action is the 
most certain way to ensure that this issue is handled in a manner that 
will give more customers greater choice as quickly as possible. To that 
end, we applaud the leadership of Senators DeWine and Kohl and other 
members of Congress in recognizing the need for federal policy that 
will address this important issue.
    By providing for reasonable and nondiscriminatory access to 
customers in multi-tenant buildings, Congress can ensure that building 
owners and competitive carriers work together to bring more rapid 
development and widespread availability of competitive broadband 
services. Similarly, securing access on reasonable terms to the wiring 
inside these buildings is another critical factor, a task that is 
further complicated when the inside wiring is controlled by the 
incumbent local telephone company. I believe that Congress can and 
should address these issues.
    Working together, Congress and new carriers such as Teligent can 
create a new broadband world that enables open, fair competition among 
all competitors, no matter how big they are. And that will make a world 
of difference for customers and consumers.
    Thank you all for your kind attention.

    The Chairman. Mr. Schrader, you are next.

                STATEMENT OF WILLIAM L. SCHRADER

    Mr. Schrader. Thank you, Mr. Chairman and distinguished 
Senators. I am Bill Schrader. I am Chairman, Chief Executive 
Officer and founder of PSINet. I founded it 10 years ago. We 
were the first commercial Internet service provider, and we are 
the largest independent service provider in the world today. I 
am also testifying on behalf of the Commercial Internet 
eXchange, the largest trade association of Internet service 
providers in the United States which PSINet co-founded in 1991.
    Since the passage of the 1996 Act, the explosion of 
Internet access and Internet services to American consumers and 
businesses has been unprecedented in the history of 
communications. Never before has communications technology 
penetrated consumer markets so quickly and offered such a rich 
variety of information opportunity as the Internet has since 
the 1996 Act.
    In PSINet's experience, the key to rapid deployment of 
broadband service is competition in the local telecom markets. 
The stunning advance of the Internet in just a decade 
demonstrates that competition, not the deregulation of telecom 
monopolies, provides consumers with greater innovation, higher 
quality service, and more choices, all at lower prices.
    It is no coincidence that the highly competitive Internet 
backbone market has brought the United States a level of 
broadband capacity that other countries envy. But the challenge 
for deployment of broadband service will be played out the 
local level, where competition is only beginning to take root.
    Under current law, local telecom monopolies have a specific 
path to deregulation. Only if they open up their local markets 
can they enter interLATA voice and data markets. This balance 
safeguards competition, and at the same time it provides the 
Bell companies with the keys to their own deregulation.
    The 1996 Act ain't broke and attempts to fix it will only 
make broadband deployment slower, not faster. I urge you to 
stay the course of competition and to consider policies that 
will encourage building additional backbone pipelines into the 
home using cable, satellite and wireless technologies.
    The Bell companies argue that their data service offerings 
should be deregulated so that they can offer DSL service at a 
faster pace. But the Bell companies are already deploying DSL 
services, spurred on by competitive pressures. Furthermore, 
this argument ignores the fact that competitive carriers are 
responsible for spurring deployment of Bell company DSL 
offerings.
    For example, PSINet recently entered into a strategic 
partnership with Covad Communications Company to offer DSL 
services directly to our customers. As local competition grows, 
many more of these opportunities will be available and 
incumbent Bell companies will be forced to respond by rolling 
out their own broadband offerings more quickly and at lower 
prices.
    The Bell companies also argue that deregulation is of 
critical importance to accelerating the deployment of DSL 
services to rural America. This argument may make a good sound 
bite and appeal to Senators from rural States, but it makes 
little sense. ADSL does not work when a customer is more than 
18,000 feet from the phone company's central office, as is 
common in the rural areas. Furthermore, if Bell companies are 
so committed to rural deployment, why are they selling off 
significant portions of their rural exchanges?
    There is reason to be skeptical of Bell company claims that 
if you just give us one more regulatory break, we will roll it 
out. This sort of compromise has been struck before and 
invariably the fabled services never quite materialize. In 
fact, other technologies such as satellite and wireless 
delivery systems may offer more significant potential for 
delivering high-capacity broadband service to high-cost areas 
of the country.
    Some Bell companies have attempted to justify regulatory 
relief on the basis of a supposed backbone capacity shortage. 
In reality, Internet backbone capacity is increasing at an 
exponential rate, doubling every several months, fed by a 
vibrant, highly competitive market. For example, PSINet's 
network traverses the entire country with more than 230 points 
of presence, what we call PoP's, in the United States, and ours 
is one of several nationwide Internet backbones.
    PSINet has brought high-speed backbone band width to cities 
and towns across America, including Salt Lake City; Joplin, MO; 
Toledo, OH; Troy, Syracuse and Buffalo; and despite what Ivan 
said earlier, Binghamton, NY; Rutland, VT; Columbia, SC; Des 
Moines; York, Lancaster and Scranton; Dublin, OH; Mobile, 
Montgomery; Green Bay; Chico and Bakersfield, CA, as well as 
Atlantic City. These places are as important to our network as 
New York, Phoenix and Wilmington.
    Our network is designed specifically to deliver broadband 
capacity in response to increasing demands by customers 
throughout the country. PSINet and other Internet backbone 
providers are doing their part, bringing high-speed Internet 
access to rural, as well as urban America.
    Several features of PSINet's network advance the goal of 
rural broadband service. For example, PSINet allows other 
Internet service providers to peer with PSINet--that is, to 
exchange traffic, much like telecommunications 
interconnection--with more than 100 PSINet points of presence 
around the country for free. These direct connections with our 
network, which itself carries more than 10 percent of all 
Internet traffic, bypass potential congestion points at public 
peering points and help speed data traffic significantly to the 
areas served by these small regional ISP's. Our free peering 
arrangements make it possible for rural ISP's to access 
PSINet's backbone quality services at numerous PoP's.
    We also believe that cable providers, as they enter the 
Internet access arena, will bring diversity to that market, 
especially for consumers. We strongly believe that consumers 
will demand access to the ISP of their choice over cable 
broadband systems, and that the marketplace, not government 
mandates, will provide the best mechanism for ensuring that 
choice.
    We congratulate you all for exploring these important 
issues and we look forward to working with the committee as it 
examines the issues of broadband deployment.
    Thank you.
    The Chairman. Thank you, Mr. Schrader.
    [The prepared statement of Mr. Schrader follows:]

               Prepared Statement of William L. Schrader

                                SUMMARY
    I am Bill Schrader, Chairman and Chief Executive Officer of PSINet, 
the first and largest independent facilities-based Internet service 
provider in the United States. I am also testifying on behalf of the 
Commercial Internet eXchange, the largest trade association of Internet 
Service Providers, which PSINet co-founded in 1991.
    Since the passage of the 1996 Act, the explosion of Internet access 
and Internet services to American consumers and businesses has been 
unprecedented in the history of communications. Never before has a 
communications technology penetrated consumer markets so quickly, and 
offered such a rich variety of information opportunity, as the Internet 
has since the 1996 Act.
    In PSINet's experience, the key to rapid deployment of broadband 
service is competition in local telecom markets. The stunning advance 
of the Internet in just a decade demonstrates that competition--not the 
deregulation of telecom monopolies--provides consumers with greater 
innovation, higher quality service, and more choices--all at lower 
prices. It is no coincidence that the highly competitive Internet 
backbone market has brought the United States a level of broadband 
capacity that other countries envy. But the challenge for deployment of 
broadband service will be played out at the local level, where 
competition is only beginning to take root.
    Under current law, local telecom monopolies have a specific path to 
deregulation. Only if they open up their local networks, can they enter 
interLATA voice and data markets. This balance safeguards competition, 
and at the same time, it provides the Bell Companies with the keys to 
their own deregulation. The 1996 Act ``ain't broke''--and attempts to 
``fix it'' will only make broadband deployment slower, not faster. I 
urge you to stay the course of competition, and to consider policies 
that will encourage building additional broadband pipelines into the 
home, using cable, satellite and wireless technologies.
    The Bell companies argue that their data service offerings should 
be deregulated so that they can offer ADSL services at a faster pace. 
But the Bell companies are already deploying DSL services, spurred on 
by competitive pressures. Furthermore, this argument ignores the fact 
that competitive carriers are responsible for spurring deployment of 
Bell company DSL offerings. For example, PSINet recently entered into a 
strategic partnership with Covad Communications Company to offer DSL 
services directly to our customers. As local competition grows, many 
more of these opportunities will be available, and incumbents will be 
forced to respond by rolling out their own broadband offerings, more 
quickly and at lower cost.
    The Bell companies also argue that deregulation is of critical 
importance to accelerating the deployment of DSL services to rural 
America. This argument may make a good sound bite and appeal to 
Senators from rural states, but it makes little sense. ADSL does not 
work when a customer is more than 18,000 feet from the phone company 
central office, as is common in rural areas. Furthermore, if the Bell 
companies are so committed to rural deployment, why are they selling 
off significant portions of their rural exchanges? There is reason to 
be skeptical of Bell Company claims that ``if you give us just one more 
regulatory break, we'll roll it out.'' This sort of compromise has been 
struck before and, invariably, the fabled services never quite 
materialize. In fact, other technologies, such as satellite and 
wireless delivery systems, may offer more significant potential for 
delivering high-capacity broadband service to high-cost areas of the 
country.
    Some Bell Companies have attempted to justify regulatory relief on 
the basis of a supposed ``backbone capacity shortage.'' In reality, 
Internet backbone capacity is increasing at an exponential rate, 
doubling every several months, fed by a vibrant, highly competitive 
market. For example, PSINet's network traverses the entire country with 
more than 230 points of presence (what we call ``PoP's'') in the U.S., 
and ours is one of several nationwide Internet backbones. PSINet has 
brought high-speed bandwidth to places like Salt Lake City, Utah; 
Joplin, Missouri; Toledo, Ohio; and Troy, Syracuse and Buffalo, New 
York. We maintain PoP's in locations as diverse as Rutland, Vermont; 
Columbia, South Carolina; Des Moines, Iowa; York and Lancaster, 
Pennsylvania; Dublin, Ohio; Kalamazoo and Grand Rapids, Michigan; 
Mobile and Montgomery, Alabama; Manchester, New Hampshire; Pittsfield 
and Westford, Massachusetts; Green Bay, Wisconsin; Chico and 
Bakersfield, California; and Vineland, New Jersey. These places are as 
important to our network as New York, Phoenix, and Wilmington. Our 
network is designed specifically to deliver broadband capacity, in 
response to increasing demand by customers throughout the country. 
PSINet and other Internet backbone providers are doing their part--
bringing high-speed Internet access to rural, as well as urban America.
    Several features of PSINet's network advance the goal of rural 
broadband service. For example, PSINet allows other ISP's to peer (that 
is, to exchange traffic, much like telecommunications interconnection) 
with more than 100 PSINet PoP's in the U.S.--for free. These direct 
connections to more than 10 percent of all Internet traffic help speed 
data transmission significantly, by avoiding potential congestion 
points at public peering sites. PSINet's free peering arrangements make 
it possible for rural ISP's to access our backbone-quality services at 
numerous PSINet PoP's.
    We also believe that cable providers, as they enter the Internet 
access arena, will bring greater diversity to that market, especially 
for consumers. We strongly believe that consumers will demand access to 
the ISP of their choice over cable broadband systems, and that the 
marketplace--not Government mandates--will provide the best mechanism 
for ensuring that choice.
    We congratulate you for exploring these important issues, and we 
look forward to working with the Committee as it examines the issues of 
broadband deployment.
                                 ______
                                 

                            I. INTRODUCTION
    Good morning, Mr. Chairman, and thank you for the opportunity to 
appear before your Committee as it examines broadband communications 
and competition policy. I am Bill Schrader, Chairman and Chief 
Executive Officer of PSINet. I am here to offer testimony on behalf of 
my company, PSINet Inc., and as a founding member of the largest trade 
association of ISP's, the Commercial Internet eXchange Association.
    When I founded PSINet in the eighties, our company was the first 
commercial Internet service provider (``ISP'') in the United States. We 
continue to be a leader in deploying high-speed, high-performance 
Internet services. PSINet, located in Herndon, Virginia, is now the 
largest independent facilities-based ISP in the United States. It is 
also the second largest ISP in Japan and the far east. PSINet's network 
today includes more than 230 points of presence (``Pop's'') in the 
United States, and more than 500 PoP's worldwide, each designed and 
built specifically to handle Internet traffic from customers that 
employ a range of access methods.
    I want you to know that Salt Lake City; Rutland; Columbia; Des 
Moines; York; Green Bay; Syracuse; Mobile; Manchester; Chico; Vineland 
and Kalamazoo are as important to our network as New York, Phoenix and 
Philadelphia. PSINet and our customers that are Internet service 
providers deliver Internet access to both business and individual 
residential users in these areas.
    PSINet offers a full line of services to business, government, and 
educational customers, including 37 of the Fortune 100 companies, and 
federal agencies such as the Federal Trade Commission. The PSINet 
Carrier and ISP Services unit also offers consumer and commercial 
Internet services on a private label basis to a community of more than 
6,000 U.S.-based ISP's, as well as some 500 large telecommunications 
providers.
    PSINet engineers and executives have developed many of the most 
significant technical and product innovations in the Internet's 
history, and are at the forefront of broadband Internet backbone 
investment and development. PSINet also is actively exploring satellite 
and wireless delivery mechanisms in rural and other underserved areas. 
PSINet has a major stake in delivering to its customers throughout this 
country and the world high-quality, high-speed broadband communications 
capability.
    Mr. Chairman, I am at this hearing today to tell you that the key 
to rapid deployment of broadband service is competition in local 
telecommunications markets. As the remarkably rapid deployment of 
Internet service this decade demonstrates, competition--not 
deregulating and expanding telecommunications monopolies--provides 
consumers with greater innovation, higher quality service, and more 
choices--all at lower prices. It is no coincidence that the United 
States has ample broadband capacity in the highly competitive Internet 
backbone market, and that the challenge for deployment of broadband 
service relates to deployment at the local level, where competition is 
only beginning to take root.
    Under current law, local telecommunications monopolies have a 
specific path to deregulation. If they open up their local networks, 
then they can enter interLATA voice and data markets. This balance 
safeguards competition, while providing the Bell Companies with the 
keys to their own deregulation. I urge you to stay this course of 
competition, while encouraging additional broadband pipelines into the 
home via cable, satellite and wireless technologies.

     II. CURRENT LAW HAS CREATED A VIBRANT FRAMEWORK FOR INTERNET 
                         GROWTH AND COMPETITION
    The explosion of Internet access and Internet services to American 
consumers and American businesses has been unprecedented in the history 
of communications. Never before has a communications technology or 
medium penetrated consumer markets so quickly, and offered such a rich 
variety of information opportunity. Some recent statistics provide a 
sense of the growth of narrowband Internet access. Just prior to 
passage of the 1996 Telecommunications Act, there were 9.5 million 
Internet user computers that store and relay Internet communications; 
today there are approximately 43.2 million user computers in the U.S. 
The ISP market in the United States today is made up of more than 6,000 
ISP's serving more than 60 million Internet users. Competition and 
service for the consumer is abundant--approximately 96 percent of 
Americans today have a choice of at least four ISP's within their local 
calling area. And the market should continue to grow explosively; one 
recent study estimates that one-third of U.S. households have Internet 
access today, and that two-thirds of U.S. households will obtain access 
by the year 2003.
    As you consider what is the best set of rules for accelerating 
broadband deployment of local telecommunications services, think about 
whether you want rules that further entrench the Bell Companies in 
their local telecommunications monopolies or whether you want rules 
that encourage a competitive structure for the local telephone system 
and that support a competitive Internet. In contrast to the Internet, 
today's local telecommunications market is marked by the absence of 
competition. In fact, incumbent local exchange carriers control 99 
percent of the country's local service business.
    PSINet is one of the largest customers for each of the Bell 
Companies, and faces on a daily basis the consequences of the lack of 
competition in the local telecommunications market. Lack of local 
telecommunications competition produces fewer telecom choices, sub-
optimal telecom offerings, and overpriced telecommunications services 
for Internet companies like PSINet, and ultimately for each and every 
Internet user in America. However, competition in local 
telecommunications markets will change this. For example, PSINet 
recently joined in a strategic partnership with Covad Communications 
Company to offer DSL services directly to our customers. As local 
competition grows, through competition over the incumbent monopolists' 
lines, as well as competition from cable, satellite and wireless 
providers, many more of these opportunities will be available.
    I know based upon our experience dealing with monopolists in the 
local telecommunications market, as opposed to competitive ISP's in the 
Internet market, that the balanced incentive structure created by the 
1996 Telecommunication Act is critical for broadband services such as 
DSL to reach their potential. It ain't broke, and attempts to fix it 
will make broadband deployment slower, not faster.
    There is absolutely no reason to exempt the services offered from 
monopoly facilities from the pro-competitive provisions of the 1996 
Telecommunications Act. The incumbent's underlying local facilities 
used to provide DSL services are fundamentally part of its monopoly 
network, and have been paid for by the captive ratepayer. The 1996 
Act's obligations for monopolies--open access to unbundled elements of 
the incumbent's network, cost-based interconnection, reciprocal 
compensation, and flexible collocation arrangements--are all necessary 
for competing DSL providers to gain a foothold in the market.
    Consumers have benefited enormously from competition in the 
``narrowband'' Internet. Once competition for broadband services begins 
to take hold in local telecommunications markets, the American consumer 
will be amazed at what the Internet/telecommunications industry can 
offer. Congress should stay the course and keep the 1996 
Telecommunications Act intact to do its part to support the arrival of 
that competitive broadband market of tomorrow.
    The principal justification for offering incumbent 
telecommunications monopolists regulatory relief is highly suspect. 
Bell Companies claim that such relief will greatly hasten their 
deployment of DSL services. However, due largely to competitive 
pressures, the Bell Companies already have significantly and 
aggressively rolled out ADSL products. The current regulatory 
environment clearly has not stopped the Bell Companies from entering 
the broadband market.
    Some Bell companies argue that removing pro-competitive safeguards 
will accelerate deployment of their broadband ADSL services in rural 
areas. Now this argument makes a good sound bite, and I imagine that it 
is very appealing to Senators from rural states. But, based on my 
experience leading my company, and my understanding of high-speed 
Internet technologies, I have to tell you that it makes very little 
sense. ADSL is poorly suited to serving rural customers. It does not 
work when a customer is more than 18,000 feet from the provider's 
central office, as is common in rural areas. Furthermore, Bell 
Companies such as U.S. West have sold off many of their more rural 
exchanges.
    Policymakers should also be skeptical of Bell Company claims that 
``if you give us just one more regulatory break, we'll roll it out.'' 
This sort of compromise has been struck before and, invariably, the 
fabled services never quite materialize. Instead, the Congress should 
stick to its commitment that competition, not deregulating monopolies, 
will get the Bell Companies to hasten deployment. Compromises made in 
the name of helping rural Americans may never, in fact, deliver DSL 
services to those same Americans.
    Loosening regulation of incumbent monopoly providers is inadvisable 
because the 1996 Telecommunication Act already provides a sensible 
framework for Bell Company deregulation in this area. Current law does 
not saddle Bell Companies with any regulations that they do not have 
the power to release themselves from. It does, however, provide very 
sensibly that such deregulation be preceded by specific and significant 
demonstrations from the Bell Companies that they have, indeed, opened 
their local monopolies to competition. The Congress should let the Bell 
Companies deregulate themselves, as current law provides.

 III. THE INTERLATA RELIEF THE BELLS PROPOSE WOULD RETARD, RATHER THAN 
        ADVANCE, COMPETITIVE, COST-EFFECTIVE BROADBAND SERVICES
    Under the 1996 Act, interLATA relief and local competition go hand-
in-hand, which is good for the deployment of competitive broadband 
services. The Bell Companies have an enormous incentive actually to 
open their local market monopolies. That incentive is entering the 
interLATA market--both the traditional voice long distance market and 
the Internet backbone and interLATA information services markets. 
Congress was well aware in 1996 that the restriction applies across all 
of the interLATA services.
    Providing the Bell Companies with premature interLATA relief before 
they fully open their local markets would fatally undermine local 
competition. For example, what Bell Company would have any real 
incentive to open its local markets to competitors if it were allowed 
into the interLATA data market today?
    Some Bell Companies propose allowing interLATA data entry as a 
Section 271 ``compromise.'' In reality, this is no compromise at all 
because incumbent monopolists could easily shift their voice traffic to 
their deregulated interLATA ``data'' lines. A ``bit is a bit,'' whether 
voice or data, and incumbents would have powerful incentives to shift 
traffic in this manner. That would produce a variety of significant 
negative impacts, including ending the Bell Companies' incentives to 
open their facilities to local competition by innovative competitors. 
Broadband deployment would be set back, not furthered.
    Further, some Bell Companies have attempted to justify their desire 
for interLATA relief on the basis of an alleged ``backbone capacity 
shortage.'' As the FCC confirmed in a recent report, nothing could be 
further from the truth. In reality, Internet backbone capacity is 
increasing at an exponential rate, doubling every four to six months, 
fed by a vibrant, highly competitive market. PSINet alone maintains 
more than 230 points of presence (``PoP's'') in the U.S., including the 
communities I mentioned earlier, that are connected to each other and 
to the Internet by T1 and T3 dedicated lines, augmented by 10,000 mile 
OC-48 backbone arrangements. Simply stated, PSINet's network is 
designed specifically to deliver enormous backbone capacity, as 
demanded by the customer. Each PoP is built to a precise, full-service 
standard to allow customer choice of access method--dial-up analog, 
ISDN, or dedicated lines, and in selected markets, wireless 
transmission--so that it serves both large and small customers. 
PSINet's national PoP deployment illustrates how Internet backbone 
providers are serving smaller communities with high-speed network 
access points, even if that community may not be able to support a 
large DS3 PoP. PSINet and other Internet backbone providers are doing 
their part--bringing high-speed Internet access to rural, as well as 
urban America.
    Several features of PSINet's network--which traverses the entire 
country--advance the goal of rural broadband service. For example, 
PSINet allows other ISP's to peer (exchange traffic, much like 
telecommunications interconnection) with more than 100 PSINet PoP's in 
the U.S., for free. These direct connections to more than 10 percent of 
the traffic on the Internet speed data traffic significantly by 
avoiding potential congestion points on the Internet. As PSINet's free 
peering arrangements illustrate, rural ISP's may access PSINet's 
backbone-quality services at numerous PSINet PoP's.
    Keep in mind, as you think of our network, that in the highly 
competitive Internet market, PSINet is only one of many ISP's that 
provide backbone access and services to all Americans. Other companies 
competing in this market include: AT&T, MCI WorldCom, Sprint, Qwest, 
and Level Three.
    Further, other technologies than Bell Company wireline facilities, 
such as cable, wireless and satellite delivery systems, offer 
tremendous potential to deliver additional high-capacity broadband 
service to all areas of the country. For this reason, while I agree 
wholeheartedly that cable plant should be open to competition, 
government regulation is not the appropriate way to ensure that goal. 
Cable companies must make massive investments in their infrastructure 
to deliver reliable, two-way Internet access. Once that investment is 
made, if cable operators refuse to open their systems to those of 
competing Internet service providers, then I am convinced that 
consumers will turn their backs on cable Internet access. If the market 
for broadband Internet access eventually becomes a ``duopoly'' (instead 
of the current ILEC-dominated local monopolies), perhaps there will be 
a role for Government to address that situation. But in the meantime, I 
believe that the market, not regulation, will most effectively ``open'' 
the cable plant to a variety of Internet service providers.

          IV. THE INTERNET SHOULD REMAIN FREE OF ENCROACHING 
                        GOVERNMENTAL REGULATION
    The other message I would like to share with you today is that 
competitive markets--and the Internet, unlike local telecommunications 
markets, is a classic competitive marketplace--should be left to 
operate free from government regulation. This, too, is a fundamental 
aspect of current law, and I urge you to stay that course, as well.
    In contrast to the local exchange market, today's Internet market 
is highly competitive and dynamic. Backbone providers may build high-
speed capacity, or acquire or lease it from long distance providers or 
providers of newer transmission methods. Unlike the local 
telecommunications market, no Internet provider today enjoys a monopoly 
on services, so that issues of reliability, speed, and quality of 
service are key determinants to the survival and success of each 
provider, whether one looks at the Internet backbone providers or the 
local dial-up ISP providers.
    Indeed, the innovation driving much of today's Internet stems from 
the market imperative for competing providers to develop new and better 
approaches to enhance speed, reliability, and customer satisfaction. 
This market-based innovation furthers the highest objectives of U.S. 
telecommunications policy by promoting advanced services through 
competitive markets. The remarkable success of the Internet flourishes 
because there are a multitude of innovative providers and because the 
market, and not regulation, dictates success. Congress should continue 
to exercise restraint, and resist any urge to ``control'' the Internet 
or to make providers of Internet services--be they independent 
providers like PSINet, or incumbent monopolists--liable for the actions 
of third parties.
                             v. conclusion
    By maintaining pro-competitive regulation of local 
telecommunications monopolists, while refraining from regulating the 
highly competitive Internet market, Congress will best promote the 
rapid, low-cost deployment of broadband services to all Americans.

       william l. schrader, Chairman and Chief Executive Officer

    William L. Schrader is chairman of the board of directors, chief 
executive officer, and founder of PSINet, a global facilities-based 
Internet Protocol data communications carrier focused on the business 
marketplace. Publicly traded on the NASDAQ market as PSIX, PSINet 
operates in 14 countries, serves over 60,000 companies, and offers a 
broad suite of advanced commercial Internet and Web service products.
    Schrader has authored numerous position statements, spoken at 
industry events, and appeared on Capitol Hill to present industry and 
corporate positions on such issues as Internet encryption, the domain 
name system, and the Communications Decency Act. In addition, he has 
participated in panel discussions of industry trends and issues on 
mainstream electronic media such as CNN, CNBC, MSNBC, FNN, First 
Business, and TechnoPolitics.
    As PSINet chairman and CEO, Schrader has been instrumental in the 
formation of such industry groups as the Commercial Internet Exchange 
(CIX), the Internet Society (ISOC), and the Internet Operators Group 
(IOPS.ORG). He is also the driving force behind PSINet's innovative 
peering initiative for U.S. Internet service providers. Recently, 
Schrader was named 1998 Master Entrepreneur of the Year by Ernst & 
Young and he was listed as one of the industry's ``20 to Watch'' by 
Computer Reseller Magazine and ``Top 10 to Watch'' by Telephony 
Magazine.
    Prior to forming PSINet in 1989, Mr. Schrader was founder, 
president, and chief executive officer of NYSERNet, a corporation that 
created the first regional Internet network, providing networking 
services to university, corporate, and government communities in New 
York state. Earlier, Mr. Schrader was director and founder of the 
Northeast Parallel Architectures Center at Syracuse University, a 
research organization for advanced parallel supercomputing technology.
    Previously, Mr. Schrader was executive director and co-founder of 
the Cornell Theory Center, where he helped plan and build the $100 
million supercomputer center that supports basic research in 
computational science and engineering. At the Theory Center, he led the 
development of the NSFNET Backbone Network to connect the national 
supercomputer centers, which became the basis for the NSFNET system.
    Mr. Schrader earned a bachelor of science degree in biology from 
Cornell University, as well as completing graduate work in business and 
finance.

    The Chairman. Let me turn to you, Mr. Armstrong. Given how 
you emphasized the convergence of various consumer devices--
appliances, the desktop computer, and the Internet--I think my 
first question may be particularly important to the discussion 
we are having today.
    Set-top boxes will be for most consumers their way of 
accessing the Web in the future. These will be instrumental in 
the convergence of the television and the desktop computer. And 
once we have cable broadband, these, ``boxes,'' will likely 
replace the desktop computer as the preferred method by which 
consumers will intersect and access the Internet.
    Some have raised concerns regarding AT&T's agreement with 
Microsoft to install up to 10 million broadband set-top boxes. 
The concern, as you can imagine, is that the agreement will 
create a de facto standard for set-top box operating systems 
and foreclose the market for competing operating systems.
    Now, I want to note that I am not picking on Microsoft and 
would be asking this same question if AT&T's agreement had been 
with any other software maker. It is a legitimate question and 
it is one we have to resolve, and I know you can, or at least I 
believe you can. I do wish Microsoft the best in this new 
market as long as they compete fairly and win market power due 
to the superiority of their product. If they do that, I am all 
for them.
    Now, Mr. Armstrong, what I would like to know is if a 
consumer were to purchase AT&T's broadband service, would that 
consumer be able to choose between set-top boxes in the same 
way that consumers can choose between competing desk-top 
computers today, or will consumers be limited to the set-top 
box chosen for them by AT&T?
    Mr. Armstrong. The answer to that question is they will be 
able to choose. And if I could put some substance behind that 
statement, first, in the arrangements with the supplier base of 
both hardware and software for set-top boxes, because both are 
very important and one could preempt or preclude opportunity if 
not done appropriately, AT&T and the cable industry, through 
its cable labs, has retained control of the architecture, which 
will be an open cable architecture.
    And by open cable architecture, what that means is, very 
similar to the computer industry, there will be standards. That 
means there will be protocols set. That means there will be 
interfaces established. That means there will be specifications 
that are anticipated, and that all of that will be publicly 
known and that all suppliers, be they hardware or software, who 
wish to participate must comply and, in fact, must go through a 
compliance testing to make sure they have complied so the 
consumer doesn't have something that is not mobile through time 
and technology as those both move forward.
    Second, specific to Microsoft, they did get an increase 
from 5 million to 7.5 million for their software layer. They 
happen to be the only one who can provide it in that time 
frame. However, we are working with Sony for their software 
layer, and we are working with Sun for their Java software 
layer, and we anticipate that those will be in market.
    On the set-top box, we are working not only with General 
Instrument, but we are working with Scientific Atlanta, both of 
which use a variety of software in their boxes. And we are in 
discussions with a Japanese consumer electronics outfit because 
we really wish the whole industry to participate and compete.
    And let me just say that you can count on this in the 
future, not out of any grand malevolence on our part, but out 
of self-interest, because the more that participate in a multi-
supplier and vendor hardware and software environment, the more 
value they are going to bring to the consumer and thus to the 
set-top box offering, and the more we are going to be able to 
offer consumers as a result.
    The Chairman. Let me follow up with another question, Mr. 
Armstrong. In your testimony, you stress that the agreement 
between AT&T and Microsoft requires Microsoft to disclose all 
application programming interfaces, or API's, which allows any 
firm to have the technical ability and access to create 
services and applications that work with the Microsoft 
software.
    Now, how does your agreement with Microsoft ensure that, in 
fact, the API's are properly disclosed, and how will this be 
enforced?
    Mr. Armstrong. We police that and we require its 
enforcement. The API's are the application program interfaces, 
and any other software supplier or any device manufacturer who 
wishes to interface to those layers of software that Microsoft 
might provide needs those interfaces in order to use the 
function to transport information back and forth, to exercise 
the control between the devices and the applications. And so we 
require as a matter of contract the timely and effective 
publication of those interfaces, or we just will enforce it or 
constrain Microsoft going forward.
    The Chairman. Should an independent third party similar to 
the independent third party you suggest oversee the RBOC's to 
ensure consumer safety and quality service in the local 
telephone market? Should an independent third party ensure that 
AT&T and Microsoft are providing open access with regard to 
set-top box applications and content development?
    Mr. Armstrong. Well, this is so much in our own interest 
and there are so many industry participants that if we didn't 
do it, we would be dumb. And if we didn't do it, all the 
industry participants, Mr. Chairman, that I indicated, from Sun 
Microsystems, to Scientific Atlanta, to the Japanese 
manufacturers, to General Instrument, would be absolutely 
outraged. And so we are encouraging an open system and policing 
an open system and enforcing an open system. And I think we 
will be accountable to the market, the public, and our supplier 
base for that.
    The Chairman. Let me just finish with one question to all 
of you and then we will turn to our other Senators. Some would 
say that because the high-speed broadband market is so new--
indeed, broadband services are just now beginning to be rolled 
out--that Congress should wait and let the market and 
technology develop before deciding whether legislative action 
is necessary.
    Both Mr. Mandl and Mr. Armstrong have testified that 
wireless, DSL, fiber optic coaxial cable, and satellite are all 
methods for delivering broadband Internet services. I am 
interested in learning whether the playing field is level so 
that these various methods and the companies employing them can 
compete fairly in the broadband Internet services market. I 
also would like to know if any of these promising technologies 
might be hindered by unnecessary government regulation.
    So maybe we will start with you, Mr. Schrader, and just go 
across the table.
    Mr. Schrader. The only problem PSINet sees in my experience 
with all the other ISP's is the local loop, which is dominated 
and absolutely iron-fisted controlled by the regional Bell 
companies. They will not allow us access to DSL, as they should 
and must if they want to compete. That is why we hope that you 
don't disrupt the 1996 Act, and require them to comply with the 
1996 Act before they are allowed to use their monopoly power 
against us.
    The other playing fields--satellite, wireless, cable--all 
of those choices are not monopolies. They are a direct result 
of investments made by companies who have a strategy. We 
appreciate those strategies. They have the right, in my 
opinion, including AT&T, to use their asset which they 
purchased with their money and are continuing to invest in any 
way they wish. They will be forced by market pressure--Mr. 
Armstrong will be forced by market pressure from the wireless, 
from the satellite folks, and from us using DSL to open up 
their system over time to other ISP's. I don't think you need 
to do anything with the non-regional Bell company situation.
    The Chairman. Mr. Mandl.
    Mr. Mandl. I have commented on sort of two, you know, 
issues that we face as a new company. Certainly, the local 
environment we have touched on. We have addressed the building 
access issue is an issue for us that is being worked on both by 
the FCC and some of you.
    But I think beyond that I want to say it is clear that 
these technologies that you have referred to are evolving at a 
very rapid pace. And I think competition in the marketplace 
ought to allow for those technologies to prove themselves, to 
demonstrate that they can deliver services in a cost-efficient 
way to consumers. And I would suggest that the less 
interference, the less of a regulatory environment that has a 
bearing on these technologies, I think the better off we will 
be.
    As a new company, frankly, and just getting started 2\1/2\ 
years ago, the regulatory environment needs to be one that has 
a minimal impact on us. We are still a regulated business and 
we have to get approval for a lot of things, and these 
approvals sometimes take time. The less the regulatory 
environment slows us down, impairs us, holds us back, I think 
the faster we can develop our capabilities and address the 
issues in the marketplace.
    The Chairman. Thank you.
    Mr. Seidenberg. Mr. Chairman, on this point, as you might 
expect, I do think there are many areas of unnecessary 
regulation. Just quickly, a lot of the panelists talked about 
the capacity being put into broadband. By FCC reports, Bell 
Atlantic puts more fiber in its network than all of the long-
distance industry combined. So it is not an issue of capacity. 
It is an issue of where it is going, and we don't feel it is 
going to a broad spectrum of all of the customers that we 
serve.
    The key thing to us is we think the market is open. People 
are making investment. Wall Street rewards companies for 
spending lots of money in these markets. People have access. 
When you look at the things that we have done in terms of the 
Act, the Act is generally working. But I think as the Congress 
has said in making some adjustments in the cable situation 
several years ago, there is a need to adjust some big rules.
    And the issue is very simple to us. Wireless has worked 
well; it is lightly regulated. Standards are regulated by the 
authorities, but pricing and market entry rules are regulated 
differently. Intranet is a very important new phenomenon, new 
technology, and we should not be regulating the Internet the 
way we regulate the old voice business. It should be regulated 
more like the way the wireless industry is being regulated, and 
therefore I think there is a need for Congress to adjust some 
of the big rules and make sure that this is moving in the 
direction that it should.
    The Chairman. Mike.
    Mr. Armstrong. Mr. Chairman, I think the Internet industry, 
as several of you in your comments indicated, is a very nascent 
industry. We are just at the beginning of this revolution. Now, 
we have got three speeds at which we conduct it at. We have 
dial-up narrowband, we have high-speed, and we have broadband.
    As a matter of fact, the narrowband is growing faster than 
the broadband. I think AOL last quarter added 1.8 million 
narrowband customers, and I think in our @Home service we have 
300,000 to 400,000 in total history to date. And so this whole 
phenomenon is just beginning; it is nascent. And I would really 
urge us to let the market sort out the dynamics of Net speed 
that are happening in the fast-moving technology and companies 
that are moving into it.
    I would like to make the point, however, on DSL that I am 
probably going to be Mr. Seidenberg's biggest customer. He 
doesn't treat me always like that, but I am going to be because 
in the majority of the market I will not have a facilities-
based offering. In the majority of the market, I will have to 
resell communications services which he produces. And so we do 
need an economical and operational resale of both voice and 
data, since they are obviously converging.
    The Chairman. Thank you.
    Senator Leahy, we will turn to you.
    Senator Leahy. Thank you, Mr. Chairman.
    Mr. Armstrong, we seem to bring you down this same time 
every year and so it is good to have you back again. If we have 
to suffer Washington this time of the year, we want company.
    Mr. Armstrong. I hope I am good company.
    Senator Leahy. Mr. Seidenberg gets more of a chance to come 
up to Vermont and see me there.
    When you were here before the committee a year ago, I asked 
you whether you would offer your, I believe, valuable broadband 
pipeline to Internet access providers and service providers 
other than your own affiliated Internet and online service 
providers. And you said, ``It would be absolutely silly for 
that to be a closed system.''
    But it appears that AT&T is fighting local efforts across 
the country to require that you unbundle your pipeline from ISP 
and OSP services and allow your broadband customers to use an 
ISP or OSP of their choice without paying twice, as I said in 
my opening statement, once for @Home and a second time for the 
ISP or OSP of their choice. Is this consistent with what you 
said last year?
    Mr. Armstrong. Yes, sir, Senator, it is, and may I explain 
why?
    Senator Leahy. Sure.
    Mr. Armstrong. First, I meant open to content, and I 
believe the service is open to content, whether the content is 
from the producer, such as a Disney or a Fox, that contracts 
with us and exists on our system, or from a consumer standpoint 
I want to get to content, because with one click with the @Home 
broadband service, I go right to anyplace on the Internet. I am 
never impeded by extra promotions and advertising and 
subsequent screens I have to deal with. I get the content.
    The second thing is it is open to communications. Our chat 
lists, our addresses, our numbers, our messaging, our e-mail 
are all open beyond our own domain, so that anybody can 
communicate with anybody else.
    Second, we are very much open to the access of our 
competitors. Many portals are very highly used and accessed 
from @Home. Yahoo and Lycos are both very heavily accessed, not 
just Excite, which is the portal that is on @Home, and are used 
in access. And so, yes, I believe that we are open. Our 
architecture is open, our communications are open, our content 
is open, and our ability to get to other Net and portal 
providers is open.
    Senator Leahy. But if somebody wanted a different ISP or 
OSP, they have got to pay for that on top of @Home.
    Mr. Armstrong. They don't have to pay me anything. Let's 
talk about an OSP, AOL, because this is the one I have heard 
the most about. They have a bring your own access service, 
bring your own ISP. So if you, say, take your Internet service 
from a local ISP and you pay them whatever you pay them, $21.95 
a month or $25 or whatever a month, and AOL says bring your own 
access and we will charge you $9.95 for our content service, we 
have the same arrangement. We are an access provider.
    For $39.95, with the modem and free installation, you can 
get to AOL just like that, and you can be an AOL customer if 
you pay that $9.95. We have not chosen to charge that $9.95. 
Yahoo doesn't charge that $9.95. Lycos doesn't charge that 
$9.95. But AOL has a business model and they can charge that 
$9.95 for their portal services.
    Senator Leahy. Well, your arrangement--and correct me if I 
am wrong on this--is between @Home and cable operators and it 
is an exclusive licensing arrangement that you have, is that 
correct, that expires in a few years?
    Mr. Armstrong. Yes. In 30 months, there is--I didn't make 
this up. There was a contract that the cable companies had put 
together with @Home for promotional front-page exclusivity.
    Senator Leahy. But at the end of that time, the cable 
companies are free to either renew it or they can shop around 
for other ISP or OSP partners.
    Mr. Armstrong. That is right.
    Senator Leahy. Can they simply unbundle the broadband 
pipeline and let broadband customers choose their own ISP or 
OSP?
    Mr. Armstrong. The cable companies at that time would have 
to consider what their relationship would be.
    Senator Leahy. The reason I ask is I am thinking of places 
like Broward County, in Florida, or Portland, OR, that are kind 
of stepping in and regulating in this area. We have not done 
that in the Congress. We could either wait to see what happens 
when the exclusive licensing arrangement expires and see what 
the market does, or we could step in, as Broward and Portland 
have.
    And I don't pretend to be an expert in what they are doing, 
but to use a recent film, they are sort of the ``mini me'' of 
us. I am going to catch hell from my kids for doing that. But 
why shouldn't we just step in and do the same thing they are 
doing? I will just toss you a softball and see what you do with 
it.
    Mr. Armstrong. Well, for three reasons. One is that the 
Cable Act very specifically calls out conditions in which 
municipalities can invoke their jurisdiction. This cable 
situation is not one of them, so the jurisdiction is a national 
jurisdiction. There are maybe 20 or 30,000 municipalities. I 
don't think it would be good for the country to have the 
jurisdiction for either cable or communications, which I would 
consider as one, at a municipal level in America. It needs to 
be at a national level.
    Second, it violates the contract that we have with the 
municipality. And, third, of course, it violates the contract 
with @Home and the cable companies. So I don't think it is a 
very good ruling and, of course, we will appeal it.
    Senator Leahy. Well, Mr. Chairman, I know my time is up, 
but I thought Mr. Seidenberg had suggested a mandate that 
requires cable networks to allow consumers a real choice in 
their Internet provider, with the terms left to the 
marketplace.
    The hope of the Telecommunications Act was that the cable 
companies would provide a facilities-based alternative to the 
incumbent phone company for local telephony. We talked about 
the editorial cartoon where the phone rings and the guy walks 
over and picks up his television and says ``hello, hello.''
    We have cable Internet service. We don't have cable 
telephony, except in test markets. And I am just wondering how 
long it will be before all that comes. I am reluctant to speak 
of regulation because, on the one hand, it is so difficult to 
anticipate where the markets go. On the other hand, I worry 
that if we are going to allow the market to sort of set some of 
these parameters, is it a totally free market?
    Mr. Armstrong. May I comment on how fast?
    Senator Leahy. Sure.
    Mr. Armstrong. We are piloting in 1999 in 9 of the 10 
cities in our TCI cable communities telephony over cable, where 
we will offer any number of lines, package features and 
function, distinctive rings, at lower prices. But the cable 
companies' infrastructure--and I don't just mean the fiber and 
the repeaters and the connections that are out in the field, 
but I am also talking about the ordering and the provisioning 
and the dispatching and the inventorying and the billing and 
the remittance processing and the customer care and the 
servicing--all have to be trained in order to do this with the 
quality and the reputation of AT&T.
    And so getting it right is as important as doing it fast. 
And so in 1999, we are going to pilot in 9 cities. We are 
spending billions and billions of dollars to upgrade the 
physical plant and equipment. In Fremont, we are rolling out to 
thousands of customers. In the year 2000, those pilots will 
also roll out to hundreds of thousands of customers.
    We are talking about the opportunity to scale to millions 
of customers, and that will probably be in the year 2001. And 
that is not out of a lack of money or our interest in acquiring 
more customers. It is a matter of scaling with quality.
    Mr. Seidenberg. Senator, just very quickly, I would point 
out today at Bell Atlantic, a customer can procure facilities 
and use any ISP they choose, including Bell Atlantic's. We are 
not allowed to say to the customer, you will buy our ISP and, 
oh, by the way, if you want access to another one, also pay us 
for ISP.
    I think what you might ask is a different question, and 
that is when you procure a cable modem, @Home and RoadRunner 
with any of the cable services, yes, you can get access to 
other ISP's, but you also must pay for the @Home or RoadRunner. 
In our case, going forward, people can order this new DSL, this 
new broadband service, and we have open access. You can use any 
ISP you want.
    I think this is an area that there is an imbalance in the 
direction that we are heading in, and I think there is some 
room here for some adjustment of the law to make sure that this 
is done in a way that is balanced in both sets of companies 
offering the same services.
    Senator Leahy. Thank you, Mr. Chairman. I would recommend, 
because the record does stay open, if both of you want to add 
to what we just did--and I realize we went somewhat 
superficially, but, Mr. Seidenberg, if you want to add, or, Mr. 
Armstrong, you want to add to your testimony on that or write 
to me directly, I would appreciate it.
    Mr. Chairman, I think you and Senator DeWine and Senator 
Kohl have done a service in having this hearing. Unfortunately, 
I have to go to another hearing.
    The Chairman. Thank you, Senator. We will keep the record 
open for you to add additional statements because, by 
necessity, we can't get into everything here, but we would like 
you to be able to put whatever case forward you would like to 
to help us to understand this better.
    Senator Thurmond.
    Senator Thurmond. Thank you, Mr. Chairman.
    Mr. Armstrong, if AT&T purchases MediaOne, you will have an 
ownership interest in cable systems serving 40 percent of the 
Nation's households. You have said in the press that this will 
not make AT&T broadband too large a player in the 
telecommunications marketplace. If AT&T continues to expand 
into cable, what percentage of the marketplace would make AT&T 
too large?
    Mr. Armstrong. I think when the marketplace or the Congress 
or the regulators judge that we were not pursuing a course of 
competitiveness and promoting competition and that we were too 
powerful and keeping or stifling competition.
    Senator if I may, the purchase of MediaOne has 5 million 
subscribers and 8 million homes passed. And TCI has about 10.5 
million, 11 million subscribers and 16 million homes passed, 
and that only adds up to 24 million out of 103 million. And the 
only way that I can get to 40 percent is if I owned and 
operated Time Warner or I had all the attribution rules applied 
to the minority equity investments. And I can't seem to make 
deals with these guys in order to get that kind of access.
    So what I am confronted with right now--and that is why I 
think I am going to be one of Ivan's biggest customers--is that 
my broadband cable reach with MediaOne and TCI will be about 24 
percent, with, I hope, an opportunity to strike a joint venture 
of some sort with Time Warner.
    Senator Thurmond. Mr. Armstrong, you say in your written 
statement that you will employ your broadband service in every 
rural area served by your cable systems. What plans do you have 
to continue building out these cable systems to serve more 
Americans living in rural areas?
    Mr. Armstrong. This year, we are committing billions of 
dollars in order to upgrade those facilities wherever we can 
accomplish that. What that means is that we want to take the 
old analog video, which is just broadcast, and we want to 
upgrade it so that it will be high-capacity for the 1,000 
channels. It will be two-way for interactive, including data, 
and we will convert it from analog to digital.
    And we are absolutely committed to serving everybody that 
we can serve, whether they are rural or inner-city. And that is 
why I made the comment that where our digital services exist, 
we will offer connectivity to the schools and libraries. We 
will offer service free of charge to those schools and 
libraries, and we have already announced and are implementing 
with the Urban League and the NAACP technical training 
programs. And so you can count on us to serve all of the 
communities that we have facilities in.
    Senator Thurmond. Mr. Armstrong, I understand that GTE has 
conducted some tests with America Online in Clearwater, FL, 
that GTE says demonstrate the technical feasibility of opening 
up access to cable modem platforms. What is your assessment of 
these GTE tests?
    Mr. Armstrong. I haven't had an opportunity to speak with 
the GTE engineers directly, but I have had a summary of it, 
Senator, that several ISP services were conducted through a 
router that interfaced to a headend, which is a cable headend, 
to just a couple of customers. I think we all know how to do 
that. The issue is, with 8,000 cable companies and tens of 
thousands of headend and 8,000 ISP's, how, in volume, would 
that diversity ever be managed on the traffic flow.
    Unlike the Bell network, the cable network is a shared 
network. When that cable line comes down to the households in a 
neighborhood, everybody shares that capacity. And so the more 
traffic and the more diversity, the more performance 
degradation that takes place. Thus, we have to manage, if you 
would, from the headend the traffic that goes down there and 
keep the performance levels up. If GTE has got a good idea, or 
even a better idea, I promise you I will grab it and I might 
even take credit for it.
    Senator Thurmond. Mr. Seidenberg, I understand that many 
Wall Street analysts believe the telecommunications market is 
going to evolve into largely a data market rather than a voice 
market in the near future. If you get authority from the 
Congress to provide data services without any restrictions, how 
can we be assured that you will still aggressively seek to 
offer voice services in competition with long distance carriers 
like AT&T?
    Mr. Seidenberg. Senator, the overriding vision for our 
company is to transform ourselves into providing digital 
signals everywhere in high-band-width ways, get out of the old 
voice business and move into the new digital world. With 
changes in the law, we will be able to create the investment 
base to get out to more places than currently the competition 
and the people who are entering these markets provide.
    There is a big question about whether or not somehow our 
eye would be taken off the ball, and I think the issue on this 
is pretty simple. The voice business today is still growing at 
7 percent. It represents a huge opportunity for our company. 
There has been no indication on our part that we are seeking to 
change any of the 14-point check list issues as they apply to 
the voice business.
    As some people know, we are working through that right now, 
and while I think the rules may be a little bit awkward and 
biased, the fact is we will comply with the voice business. To 
us, this is about not applying old rules to a new technology 
and denying large numbers of people the opportunity for Bell 
Atlantic to participate in the market. So I don't think there 
is any issue with incentives because we are not asking for any 
change in the law as it relates to the voice business.
    Senator Thurmond. Mr. Seidenberg, what is your view of the 
$5 billion investment recently made by Microsoft with AT&T?
    Mr. Seidenberg. Well, Senator, I am not an expert on 
Microsoft or on set-top boxes. But as a pragmatist, what I 
would say is if we took everything that AT&T says about this, 
my only question is let's measure it, verify it, and create 
some big rules and make sure somebody can enforce it. I think 
the issue we have here is one of--I think that putting all this 
responsibility in the hands of two companies, Microsoft and 
AT&T, to make sure that our self-interest works, where I come 
from I don't think that would work.
    Senator Thurmond. Mr. Schrader, I have one question for 
you. Many say that broadband access is at an early stage of 
development in the industry and that it is too soon at this 
point for there to be a need for the Congress to regulate 
broadband access. Do you agree, and explain.
    Mr. Schrader. Yes, Mr. Thurmond, I agree. The broadband 
technology is the driving force here. The availability of 
Internet at very high speed is the driving force. There appears 
to be only one slowness in the deployment other than 
technology, and that is the availability of the regional Bell 
companies' copper loops. And if we could have access to that 
openly and quickly, as opposed to them controlling it for their 
own deployment, then things would move much faster. The rules 
for doing that are already in place. The 1996 Act is what we 
need.
    Senator Thurmond. Mr. Chairman, thank you very much.
    The Chairman. Thank you, Senator.
    We will turn now to Senator Kohl.
    Senator Kohl. Thank you, Mr. Chairman.
    Gentlemen, you are all rivals in the marketplace, and while 
you have all been gracious and articulate today, clearly you 
have concerns about each other's behavior. And also, I am sure 
all of you have concerns about the FCC.
    I would like to ask each of you briefly, do you believe 
that the Telecom Act is working or do you have some 
reservations about it? I will start with you, Mr. Schrader and 
we will move leftward.
    Mr. Schrader. Yes, Senator Kohl, it is working, and the FCC 
is doing a fine job implementing. Things are a little slow, but 
it is not slow because of the inaction of the FCC. It is slow 
because of the inaction of the regional Bell companies. Their 
foot-dragging, the court battles, the lack of interest in 
actually opening up their facilities--all of these things are 
slowing it down. The FCC probably does not have enough teeth to 
go after them. That is the only slowness.
    Senator Kohl. Mr. Mandl.
    Mr. Mandl. Well, I would say that it is working. And I 
think as I said in my comments before, the notion of opening it 
back up and revisiting it and addressing some of the key 
issues, I think, would set things back enormously. It is not 
perfect. It as some problems that are being addressed by the 
FCC, but it is, I think, overall a great success and we ought 
to accept that.
    Senator Kohl. Mr. Seidenberg.
    Mr. Seidenberg. Well, it is working for everyone but us. So 
I think that, you know, just at the broad level, Merrill Lynch 
published numbers a couple of months ago that said there has 
been about $175 to $180 billion worth of debt and equity poured 
into this industry since the Act started. So you have to say 
that is good. That doesn't even count the premiums and the 
costs of the acquisitions that AT&T has made in their movement. 
So, certainly, the Act has created some open opportunities for 
people to invest in this new market.
    As far as we are concerned, what we feel has occurred in 
the last couple of years is that the processes have been 
administratively slowed down by the competition agenda. We have 
delay after delay after delay. No one has ever accused Bell 
Atlantic of not spending $1 billion; we have over 1,000 people 
every day of the week trying to comply with the 271 check list. 
And every day of the week, the carriers come up with new 
requirements that we have to find a way to satisfy.
    So what we think is we have a process that was well-
intentioned when it started, but it is broken. And the only 
people who are suffering for this are the consumers who do not 
have Bell Atlantic providing them long-distance service at this 
time, who do not have Bell Atlantic providing Internet hubs to 
those 17 LATA's in our area alone, and don't have Bell Atlantic 
as a vibrant national player competing in these very same 
markets. So our view is there is something broken and somebody 
needs to address it.
    Senator Kohl. All right. What about you, Mr. Armstrong?
    Mr. Armstrong. Well, I too believe that the Telecom Act is 
working, but let me explain for a moment why. The Telecom Act 
for several years, you would have to say, wasn't working 
because it was hung up in litigation. It never had a chance to 
go to the FCC for implementation, never had a chance to get in 
the marketplace. So it is a fairly recent event, even though it 
was passed in 1996.
    But once it was reaffirmed, all of us now had a stable and 
predictable, level playing field environment that we could look 
forward to. And if there is anything investment can't stand, it 
is fear, uncertainty and doubt, and the Telecom Act cleared 
that up. And if the Bell operating companies want to get into 
all these businesses like long distance, voice and data that 
they would like to and to be a national player, all they have 
to do is comply with the Telecom Act and the 271.
    Senator Kohl. All right. Gentlemen, some believe that cable 
companies should be required to permit all Internet service 
providers to grant access to their broadband networks on non-
discriminatory terms. However, some of these same advocates 
also say that they don't think the mass market is clamoring for 
broadband services.
    Mr. Schrader, is cable broadband so unique that cable 
companies should be required to permit Internet service 
providers, including AOL, equal access to their broadband 
services on a non-discriminatory basis, or do you believe that 
the marketplace will leave these systems open?
    Mr. Schrader. The latter. I believe that the marketplace 
will force Mr. Armstrong and all of his compatriots that 
control somewhere 5 and 80 percent of the cable-provisioned 
homes with the technical ability to deliver multiple ISP's on 
the same physical plant. And the marketplace will dictate to 
them that they have no choice but to do it.
    Their business models will be enhanced once they do it. 
They have at least 60 channels, perhaps 170 channels, under 
some physical plant. Once they have two-way, they could very 
easily--in fact, we have done it. In fact, we had the first 
cable television-Internet service introduction in Boston with 
Continental Cable Systems in 1993. We know how to do it; he 
knows how to do it. It is technically feasible.
    When the business plans require it, which means that the 
three gentlemen on the right side here all have a technology 
that delivers broadband into the same home, then you will see 
Mr. Armstrong do it willingly. He does not need government 
requirements.
    Senator Kohl. Mr. Seidenberg.
    Mr. Seidenberg. Well, I don't think the marketplace has 
policed cable increasing their rates every year since 1996. In 
fact, you know, our rates haven't moved at all. So I think 
there is an issue here, and the issue really boils down to we 
are not proponents of more regulation. We are proponents of 
deregulation of the Internet and making sure that we have the 
same rules. We have two different sets of companies offering 
the same products and services and they are regulated 
differently. It makes no sense.
    Senator Kohl. Mr. Mandl, what do you think?
    Mr. Mandl. Well, I am a strong believer in the free 
marketplace. And as this industry is evolving as quickly as it 
is from a technology and from a customer point of view, I think 
the marketplace ought to give us a chance. I understand the 
concerns and I understand the issues from a consumer 
perspective. And, you know, down the road if there are some 
issues that need to be addressed, you know, so be it. But I 
don't think we ought to start off before we know all the facts 
impacting or regulating things, when the marketplace in all 
likelihood will drive these things in the right direction.
    Senator Kohl. All right. My last question, gentlemen, is 
this. If phone companies and cable companies partner up to form 
the networks of the future, then a lot of other companies, like 
Internet service providers, will need to go through those 
networks to reach their customers. Is there any danger that we 
will see toll collectors attempting to profit from any 
roadblocks along the network?
    Mr. Seidenberg. Well, since I will be in the minority on 
this question, I might as well go first. The answer is you have 
that today. If you get a cable modem today, you pay for the 
@Home or RoadRunner independent of any other ISP or portal you 
want. So the issue is I think you already have the question.
    And, again, I will come back to my theme here. Certainly, 
Bell Atlantic doesn't propose the myriad of rules and 
regulations imposed on anybody else. That would be a fate worse 
than death, I suspect. But I believe what needs to happen is 
readjusting the rules so for new technologies we are all under 
the same set of conditions in the marketplace.
    Senator Kohl. Any other comments?
    Mr. Schrader. Yes. With respect, I think it may be the 
wrong question, sir. There is a roadblock everywhere. In fact, 
to get access to Mr. Seidenberg's network, you have to pay him 
money. We call that service, he calls it service, and you can 
call that a roadblock. Under his rules which were created 
decades ago to enable him to have a monopoly that gives him a 
guaranteed return, he is required to open up his system and 
charge us the same prices he charges everyone else. That is his 
rules, that is his system.
    The TCI system and the entire cable industry is built on a 
different set of rules; that is, they did the investment. There 
is no guaranteed return. There never has been a return to any 
of the cable operators. And unless they do something, there may 
never be a return. So they are attempting by spending billions 
of dollars to get a return. I encourage that.
    You can't take Mr. Seidenberg's argument and implement it 
without understanding his base. He is a monopoly with a 
guaranteed return. TCI is not a monopoly across the United 
States, only on their turf, and they have a different set of 
rules and they do not have a guaranteed return. I say give the 
marketplace a chance and you will see us drive Mr. Armstrong 
and Mr. Seidenberg, and as well as Mr. Mandl's company and 
their competitors, to carry our traffic.
    Senator Kohl. Mr. Armstrong.
    Mr. Armstrong. I would just like to reiterate a point on 
both access and contract. @Home over cable is an access to the 
broadband distribution. That means it has got computers and 
disk drives and cashing and mirroring throughout its 
infrastructure that is an access to the consumer for this 
broadband service.
    When @Home acquired Excite, which is a portal, Excite does 
not make its money off of subscriptions. Excite makes its money 
off of advertising, services, e-commerce and transactions. We 
did not charge for Excite. It is a portal. It makes its money 
by how it attracts commerce and eyeballs. And the access, in 
effect, to the portal Excite is $39.95. The access to the 
portal Lycos is $39.95. The access to the portal Yahoo is 
$39.95. AOL chooses to charge $9.95, in addition to that 
access, and so I don't think it is a bottleneck.
    Second, there is an exclusivity contract that was mentioned 
by the Chairman between @Home and the cable providers that will 
expire in 30 months. And what that means is that they have the 
exclusive first page which is defaulted to if you are an 
Internet user, and that exclusive real estate on the screen 
will expire and the cable companies will have to determine at 
expiration how to deal with other OSP's and ISP's relative to 
that.
    Senator Kohl. Mr. Chairman, my time is up.
    The Chairman. Thank you, Senator.
    We will now turn to Senator DeWine.
    Senator DeWine. Thank you, Mr. Chairman.
    Mr. Armstrong, you made the point earlier that a share of 
the ownership of a cable company is not the same as owning the 
entire company. And I certainly agree with that and I think it 
is a point well taken. I think we can both agree that it is 
sometimes difficult, though, to locate the point at which your 
share of ownership begins to translate into a measure of 
control over the operations. That difficulty is why I indicated 
in my opening statement that the FCC, I think, needs to quickly 
move forward to provide some guidance in this area.
    Now, with all that said, however, it seems to me that the 
fact that AT&T does have ownership shares of varying degrees in 
a number of different cable operations must have some 
competitive significance, and that is what I would like to 
explore with you.
    For example, if AT&T has an ownership share, in a cable 
system that also sells programming content, doesn't that 
provide some incentive to favor that programming over other 
systems? Even on a more general level, again, as policymakers, 
can we really ignore the fact that AT&T does have some share of 
a number of cable operations, and doesn't that have any impact 
on competition?
    If not, will AT&T be willing to meet the concerns that some 
have expressed about these ownership stakes and just sell them? 
Or perhaps AT&T can sell these stakes and come to terms with 
systems on a contract to use the cable wires of these systems. 
Where are we? What do you think?
    Mr. Armstrong. First, Senator, I agree 100 percent that the 
cable reg that we are both referring to that got suspended, 
what, 4 years ago needs to be redefined. And I hope it needs to 
be redefined in a policy environment rather than a transaction 
environment. I don't think the best policy is made based on a 
transaction, but rather hearing all concerns and interests and 
then a policy process.
    The attribution rules really confound anybody. And none of 
us here invented them, but to have a 5-percent interest and be 
given, because there is no controlling interest of a second 
party--let's say on 2 million subscribers, we get full 
attribution, whereas we may have the same 2 million subscribers 
and have a 49-percent interest, but there is a second party who 
has a controlling interest. Then there is zero attribution, and 
that exists today in the suspended reg.
    And so we have agreed to work with both the Congress and 
the regulators to define the balance between the concerns of 
the Cable Act, which were vertical integration--and you were 
mentioning this in your second point in terms of content 
blockage and getting all that content available to everybody 
who wants it--and the Telecom Act, which says go like hell to 
invest in facilities-based competition for local exchange 
services. There are some conflicts in that, and we have said 
that we will work with the FCC and the Congress, and will 
comply with whatever the outcome is.
    In terms of content bottleneck, with the investments that 
we are making that I tried to outline where we are taking the 
50- to 100-analog channel world to a 1,000 to 1,500 digital 
channel world, I do not believe that content blockage is going 
to be one of the concerns going forward. And, second, our 
interests lie primarily in distribution and not in content. And 
so I do not believe that you will see us in any way, shape or 
form vertically integrated.
    Liberty Media, which was part of the TCI transaction, we 
paid no value for, we have no interest in. We have no 
management over it, and it is owned and operated and run by the 
Liberty management independent of AT&T. And so both legally and 
practically, AT&T just doesn't believe that it brings value to 
the production of content, but rather to the broadband 
distribution of all content, video, voice and data, is what our 
investments are in.
    Senator DeWine. Let me move to another area. Do you want to 
tell us how you are going to upgrade the existing cable 
facilities to accept two-way traffic and how much is that, in 
fact, going to cost? You touched on that a moment ago. And what 
are you going to do if it doesn't work? Is that possible? Is it 
possible it couldn't work?
    Mr. Armstrong. Mike, it is working. It is not possible that 
it won't work. It is working.
    Senator DeWine. Your stockholders will be glad to hear 
that.
    Mr. Armstrong. I will invite you to Fremont, CA, and we can 
both watch it. It is working. What you have to do is the plant 
of the first 25 years of cable was fundamentally a broadcast 
plant that was low-capacity and analog. And so we are going to 
spend about $2.3 billion on converting that from a 350-
megahertz plant to an 860-megahertz plant so we can get a lot 
more stuff through that megahertz.
    We are going to convert it from analog to digital so we can 
get the compaction that we need for the expansion, and we are 
going to go down there and put repeaters so that we can not 
just go one-way, but two-way. And it is not rocket science or 
brain surgery. It is working and it is a matter of deployment.
    Senator DeWine. Mr. Seidenberg, you mention in your 
testimony the need to build new backbone facilities in order to 
continue the growth of the Internet. It seems that to this 
point there has been sufficient backbone to allow the Internet 
to grow at a practically unlimited pace. Is that true, and if 
so, what circumstances have changed to make this a concern 
today? And don't the backbone providers have an incentive to 
meet demand?
    Mr. Seidenberg. Well, I think there is clearly a phenomenon 
that there is a lot of capacity. I don't think anyone would 
argue there isn't a lot of capacity. Our point is it is not 
getting everyplace. We have 17 out of 39 LATA's that don't have 
hubs in them, and I think that would be a clear indication that 
the economic incentives don't quite exist to make it as 
ubiquitous as it should be. And the reason is pretty simple to 
us. This is not a hard problem.
    When you look at all the backbone facilities providers, 
they tend to have been bought up by the two or three or four 
long-distance companies. So what we have is a situation where 
clearly we are looking at our competition, in effect, having 
bought up the opportunity to provide the backbone facilities. 
And we think there is a little bit of an imbalance in that 
question.
    Senator DeWine. Mr. Schrader, do you have any comment on 
that?
    Mr. Schrader. I disagree completely. We are in some of the 
17 that no one is in. So I don't know that we don't count, 
Ivan, or not. We certainly have broadband capability deployed 
there. The basic problem in Binghamton and Atlantic City is the 
high cost of the local loop which he dictates through the 
tariff procedures, and there you have it. Deregulate them. 
Under the rules already set by the 1996 Act, there will be 
competition and everything will be fine.
    Senator DeWine. Mr. Seidenberg, you get the last rebuttal. 
My time is up.
    Mr. Seidenberg. I think what is interesting is PSINet has 
done a good job. And I would not compare PSINet to us, but 230 
PoP's is the point I think I saw in the testimony. We have 266 
municipalities in the State of Pennsylvania alone, so I am not 
so sure that the vision that has been talked about here has the 
scale to get to all the customers that we all need to serve. So 
I don't disagree with the details, but the issue is it is not 
anywhere near scalable to make a difference.
    Senator DeWine. My time is up. Thank you very much. Thank 
you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Let me just say for the record that AOL has been most vocal 
on the cable open access issue and has taken a different 
position from PSINet. They were invited to appear today and 
they declined. So I just will say that for the record.
    Senator Torricelli.
    Senator Torricelli. Thank you, Mr. Chairman, very much, and 
thank you very much for holding this hearing. It has been very, 
very helpful.
    To those who are testifying today, first, thank you very 
much for being with us. I should explain that in these 
hearings, for those of you who have not been before the Senate 
before, this is the Democratic side of the institution where we 
tend to protect against excessive government interference in 
the marketplace. [Laughter.]
    The Chairman. I hope we can get more laughs than that.
    Senator Torricelli [continuing]. And against the overly 
ambitious exercise of antitrust laws by the Justice Department, 
just for those of you who don't have experience with the Senate 
before.
    Mr. Armstrong, I wanted to return to the question of cable 
television because I think it is important for the record to 
fully reflect some of these facts which have been presented to 
us today, at some variance, I think, with reality.
    Is it your estimation that with your purchases and current 
arrangements, you would control about 23 percent of the cable 
television market?
    Mr. Armstrong. Yes, that is right, but that is only of 
homes passed, Senator, not of homes connected.
    Senator Torricelli. I understand.
    Mr. Armstrong. When we speak of the 97 percent of the Bell 
operating companies' presence, those are customers of theirs. 
When I speak of homes passed, that is just the cable run down 
the street. Only 60 percent of those are customers.
    Senator Torricelli. So the actual number of homes served?
    Mr. Armstrong. Right, so the homes served is 5 million for 
MediaOne, and about 11 million. So it is 16 million homes 
served out of 103 million.
    Senator Torricelli. Out of 103?
    Mr. Armstrong. Yes, sir.
    Senator Torricelli. And before you assumed this leadership 
position, what would the accurate numbers be of the previous 
industry leader in homes served and passed?
    Mr. Armstrong. Probably, Time Warner was number one and 
they had homes passed probably of 18 to 19 million. TCI would 
have been number two, and then it as kind of a food fight.
    Senator Torricelli. Eighteen to nineteen, so this new 
concern about whether or not there is a need for government 
intervention and whether we have reached some point in the 
marketplace that it should not be permissible is the difference 
between 19 percent and 23 percent?
    Mr. Armstrong. Yes, I guess that is right.
    Senator Torricelli. For all the years I have been in this 
institution, I haven't heard this concern at 19 percent, but 
now the question is raised at 23 percent. Is that what we are 
talking about?
    Mr. Armstrong. That is right, and that is a very good point 
because even the suspended cable regulation has a threshold of 
ownership of 30 percent.
    Senator Torricelli. Now, in my experience with cable 
television in the past, in all of these contracts with local 
communities they contracted with a single company and in that 
community the people in the community had a choice of an 
individual company.
    Mr. Armstrong. That is right.
    Senator Torricelli. How has that changed?
    Mr. Armstrong. They still have that choice.
    Senator Torricelli. In fact, it hasn't changed at all?
    Mr. Armstrong. That has not changed at all, and license 
transfers are not a grounds of authorization or of contractual 
flexibility for them to impose new conditions.
    Senator Torricelli. Now, on the issue of content, it 
appears to me, though a strong advocate, you may have 
understated your case. In the case of Time Warner, they 
actually have an internal division of the company wholly owned 
and operated that dealt with content issues.
    Mr. Armstrong. Yes. They are a combination of a cable 
company and a content company.
    Senator Torricelli. So with AT&T, with Liberty, you do not 
exercise control?
    Mr. Armstrong. No.
    Senator Torricelli. They have a separate tracking stock and 
they deal with content?
    Mr. Armstrong. Right, and separate governance and separate 
control.
    Senator Torricelli. So, indeed, the fact that you operate 
with 23 percent of the potential market and they operated with 
19 really understates the comparison because indeed, in direct 
control of content, they have excessively more control than 
AT&T now operates.
    Mr. Armstrong. Oh, yes. They have a very strong content 
business, a very successful one, and I don't believe they think 
that they are being blocked from getting any distribution 
anyplace.
    Senator Torricelli. Now, getting beyond the 23-percent 
number to Senator Thurmond's number of 40 percent actually 
requires that we are of the belief that AT&T is operating Time 
Warner.
    Mr. Armstrong. Yes, that would assume that we have control.
    Senator Torricelli. How many board seats do you now operate 
on Time Warner?
    Mr. Armstrong. Zero.
    Senator Torricelli. And so your policy control over Time 
Warner would be estimated how?
    Mr. Armstrong. Zero.
    Senator Torricelli. So, indeed, there is no 40 percent?
    Mr. Armstrong. No. In fact, Mr. Levin consolidates the Time 
Warner entertainment operation into a consolidated income and 
balance sheet.
    Senator Torricelli. I am running out of time, so let me 
just go very quickly. You have been introduced with a number of 
superlatives. One of them that was not said would be 
``generous,'' but indeed let me get to your generosity as a 
corporation. What do you estimate to be the investment you will 
have to make now after purchasing these cable operations in the 
continued putting of fiber into place? You talked about it in 
terms of mileage, not dollars. How do you estimate your 
investment?
    Mr. Armstrong. Well, to upgrade the TCI system, it will be 
$2.3 billion. Then every subscriber that we convince that this 
is a good deal to take telephone service and compete for local 
exchange, we will have to spend on the average $750 per 
subscriber, in addition.
    Senator Torricelli. $2.3 billion, and then $750 per 
subscriber. A Merrill Lynch analyst wrote on January 29 
concerning the decision to unbundle, ``This decision will 
encourage further investment to get high-speed broadband two-
way plant widely deployed. High-speed data or cable modem 
rollout will be accelerated by this removal of regulatory 
overhang.''
    Indeed, given this level of investment, if this Congress or 
an agency of this Government will require this unbundling, this 
degree of raising capital and this level of expenditure--would 
it either be financially wise or even maintainable at current 
costs if we were to require you to share this investment with 
competitors?
    Mr. Armstrong. The way it has been described by many is 
that they would like to ride wholesale on AT&T's investment. I 
would like to ride wholesale on AT&T's investment. But the 
facts are that wholesale in this life is more than retail 
because the services that we offer subsidize the 
infrastructure.
    You pull away or don't succeed in those services and the 
costs are going to go up. You take those services away and 
wholesale is going to be higher than retail. And so it would 
have been a very foolish investment if all I had to do was step 
back and buy pipes that are cheaper than they are costing 
somebody else to provide them. And I don't think it is in the 
best interests of this country to ask anybody to subsidize 
anybody else.
    Senator Torricelli. Finally, Mr. Chairman, just for one 
moment, if I could, to Mr. Seidenberg, with interLATA data 
transmissions over the phone lines outside your territories, as 
you look at the cost basis of doing so compared with 
competitors, if you indeed had this ability for data, can it be 
done on a cost-competitive basis so the marketplace would be 
giving an alternative to customers?
    Mr. Seidenberg. Well, I think the easy example there is our 
proposed merger with GTE. GTE has a national data business that 
is very cost-effective, very efficient, has large scale that 
probably ranks just behind Sprint and UUNET in terms of its 
size. It has got peering locations all over, and actually it is 
a bigger operation than----
    Senator Torricelli. So you see your investment in capital 
cost as being competitive. Mr. Armstrong, then, unless the 
Federal Government is to force him, I believe 
unconstitutionally, to share his investment with competitors--
then indeed there would be ground-based wireless and satellite 
competitors. We could have a marketplace that is full with a 
number of competitors on a relatively even capital cost basis.
    Mr. Seidenberg. Well, I think your answer is right and you 
come out the right place. I think the inputs aren't quite what 
we think. I think in all the numbers here that you looked at, 
the denominator is wrong. It is not 103 million; it is 69 
million. So you have to look at market share based on not the 
households, but look at the number of customers. So if you do 
all your arithmetic, the percentage of concentration is much 
higher than the 23 percent.
    Senator Torricelli. Maybe, but doesn't it fairly come out 
to the point, though, that Mr. Armstrong with his investment 
has not radically changed the marketplace?
    Mr. Seidenberg. I agree. I mean, the biggest point to us is 
that everything that AT&T suggests about getting a return on 
our investment is exactly the problem we are having with people 
trying to ride wholesale on our network. This is just a 
smokescreen to get lower wholesale prices from us and reduce 
the return that we get.
    Senator Torricelli. I am sympathetic to that, and I want to 
see you in the data transmission business. I just don't want to 
see us compound the problem you have had by now forcing 
somebody else to make an investment and have people share on 
that investment.
    Mr. Seidenberg. We agree.
    Senator Torricelli. Thank you very much, and thank you for 
the time, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman, and I first want 
to thank you, Mr. Chairman, for holding these hearings and for 
keeping our committee on top of this issue, as we should be.
    You know, my general view on all of this is very simple, 
and that is that you folks know more about this than we do, but 
that the markets and the investors and the inventors know much 
more about it than even you do. And 5 years from now, we can't 
predict what is going to be happening in large measure. There 
are going to be new developments that we don't know about, and 
that is why the business is somewhat of a precarious business, 
even though it is such a large business, in my judgment. A few 
years ago, I guess they were writing cable off and now all of a 
sudden cable is the hot thing. A few years from now, maybe it 
will be written off again.
    Given all that, my general inclination would be to just say 
let it rip. In other words, why should the Government be 
involved? Since we don't know where the markets are going to 
be, since we are doing so well in the private sector, why 
should the Government be involved, except maybe at an antitrust 
level, which is always legitimate in every type of industry?
    So my question to the four panelists is very simple. If 
there were a proposal out there to remove all regulation--
everyone here has a reason to want certain regulations to be 
removed and certain regulations to be kept, but if there were a 
proposal to remove it all, let everybody do everything right 
now, because there are so many competing needs, would you and 
your companies support that?
    Mr. Armstrong. We will just go down here, Senator?
    Senator Schumer. Well, it will go in ascending or 
descending order, depending on which end of the table we pick.
    Mr. Armstrong. Well, I am used to it with ``A,'' all right?
    Senator Schumer. OK.
    Mr. Armstrong. I certainly support no new regulation and no 
new legislation. I certainly support don't regulate the 
Internet. It is new. I do certainly support opening up the 
local markets. I do support enforcing the Telecom Act. I am not 
for taking the Telecom Act off the books.
    Senator Schumer. Why not?
    Mr. Armstrong. Because I think that it is necessary to open 
up the local exchange market. I mean, if there is a 97-
percent----
    Senator Schumer. But the proposal I am making would allow 
anybody to enter the local telecommunications market and allow 
anybody to enter the long-distance market and allow anybody to 
enter all these other markets.
    Mr. Armstrong. Well, how would you enter? There are only 
two wires that go to the home.
    Senator Schumer. Right.
    Mr. Armstrong. You have got a copper wire and you have got 
a coax wire. Now, let's say it took 30 years for the coax to 
get built and 75 years for the twisted copper pair to get 
built. So if you said let's let everybody in and compete, there 
is nothing to compete with unless you have some ability to use 
those wires.
    I am investing in some cable, but most of what I am going 
to be able to compete in local exchange is in the resale of the 
existing copper wire. That is most of what I am going to be 
able to do. If you say eliminate the Telecom Act, and thus I 
cannot resale that wire, you are not going to have any 
competition because the facilities would take decades and 
decades to build out.
    In 1984 when you deregulated the long-distance industry, 
you forced AT&T to resale its wires, and today they give 50-to 
60-percent discounts to people like Ivan and others at a 
wholesale level. We have 500 long-distance companies and the 
prices have come down 55 percent. It is a good track record.
    Senator Schumer. You bet.
    Mr. Armstrong. Resale is important. Market opening has to 
happen.
    Senator Schumer. Well, go ahead, Mr. Seidenberg, and I will 
come back to Mr. Armstrong.
    Mr. Seidenberg. I take it, and it is pretty simple here. I 
think what Michael just described is what I have been saying is 
the problem. How can you go out and make $140 billion worth of 
acquisitions? In turn, however you want to characterize it, you 
are the largest long-distance company, largest cable company, 
and yet still somebody wants to write rules associated with 
regulating Bell Atlantic.
    Senator when you use the term ``deregulate,'' the largest 
gravity is on our company. So I always worry about where the 
details are in this process. But I would point out, in the 
space of 11 months, we dug up all the streets in Manchester, 
NH, and put in new coax. So where there is a will, there is a 
way. It could be done. So our view is if there were big rules, 
because I think realistically you need some big rules, and let 
it rip, we are there.
    Senator Schumer. Mr. Mandl.
    Mr. Mandl. I am one of the strongest believers in the free 
market and let competition, you know, take its course. But I 
also need to tell you, and especially from my recent experience 
the last 2\1/2\ years in building this new business from 
scratch, without some fundamental rules it would be impossible 
for us to be successful in the marketplace.
    So, unfortunately, for example, the Telecom Act, if that 
were to disappear, as I said earlier, I am not sure Teligent 
would exist today and would provide those services to the 
marketplace. So I think there has to be a foundation of a 
platform of regulation that allows new competitors to even 
begin to compete. Without that, I don't think it would be 
possible.
    Mr. Schrader. Senator Schumer, if I can paraphrase your 
question, would it be wise public policy to take a team of 
monopolists who have been trained by behavior modification for 
the past 50 years to abuse their customers, charge them too 
much, given them absolutely no innovation, and then say now you 
don't have to be fair when you compete with your competitors? I 
don't think so.
    Senator Schumer. Would you state your real view, Mr. 
Schrader? [Laughter.]
    Mr. Schrader. I think in 5 years, if the Telecommunications 
Act actually works and they stop dragging it through the courts 
and they actually do their job, in 5 years you and I will be in 
agreement. There should be no FCC needed in 5 years, except for 
regulating the constrained resource, which is wireless.
    Senator Schumer. And wireless may become less constrained. 
Again, I don't know much about it, but my guess is they will 
find ways of doing more and more on less and less on each 
little whatever it is, molecule of electronic transmission. So, 
that may be a change that happens.
    Mr. Schrader. We are hoping for DWDM, dense wave division 
multiplexing, to attack his band width, then open it up to 
everyone.
    Senator Schumer. Thank you, Mr. Chairman. I appreciate 
everybody's answers. I thought it was a good exercise in the 
differences in the opinions here.
    The Chairman. This has been a good panel. We have learned a 
lot here today.
    Just one last question, Mr. Armstrong. One of the exciting 
promises that broadband holds is it will give consumers 
virtually an infinite choice of video programming. By this, I 
mean I will be able to go home, turn on my television or 
computer, and through my broadband service provider, get on to 
ABC.com or CNN.com and watch Ted Koppel or Larry King directly 
through their Web site. Now, I could either watch it live or 
watch it whenever I get the chance to watch it. That would be a 
terrific thing for a lot of people.
    Now, it is my understanding that AT&T and other cable 
companies have stated that they contractually prohibit 
consumers from downloading or streaming video in excess of 10 
minutes in length. I do recognize that these contractual 
restrictions were imposed before AT&T purchased the cable 
assets. As you can imagine, this has raised some eyebrows. 
Video streaming, of course, threatens to compete with the 
monopoly cable video product. Many people believe protecting 
this monopoly is the motivation behind the 10-minute streaming 
limit.
    Now, can you explain the public interest, if any, behind 
this restriction and whether, as the new owner with a 
controlling interest in @Home and the cable facilities, will 
you continue to impose such restrictions on the consumer's 
ability to choose video programming?
    Mr. Armstrong. You are right. The video streaming 
limitation of 10 or 12 minutes imposed was that way before AT&T 
became a cable company, and the purpose of that imposition was 
to keep prices down. The build-out of the infrastructure has a 
certain set of assumptions as to how many users, how much video 
digital analog people can track for, how much Internet they can 
track for, and then what utilization they have.
    You have everything from the casual user to the Net hog who 
seems to live on the Internet. And so the capital to upgrade 
the network is based upon a certain set of assumptions. Video 
streaming, which is what you are referring to, taking a Web 
site and just video streaming it like a television channel, 
consumes a huge amount of capacity. And so if a lot of sites 
did a lot of streaming, it would cost a lot, and thus we would 
have to raise prices or we have got to find a way to 
participate in that video streaming revenue.
    So I think that you are right in the observation that that 
limitation needs to change, but we need to find out a 
commercial equation to pay for the change because obviously a 
lot of video streaming is going to fill up a shared network. 
People's performances are going to go down and they are going 
to be mad. And we are either going to have to charge them more 
for what they used to get or we are going to have to find a way 
for the people who are video streaming to pay for the upgrade 
that enables the performance to video stream to the consumer. 
It is something we have got to go work on.
    The Chairman. Mr. Seidenberg, does your company impose such 
a restriction on its broadband products, DSL, or does it plan 
to do that?
    Mr. Seidenberg. No. We have open access, open architecture. 
People can buy the loop, condition it the way they want, or 
they can buy the whole DSL service as a packaged offering.
    The Chairman. Well, this has been an excellent panel and we 
have learned a lot here today. We would appreciate any 
additional information you can give the Senate Judiciary 
Committee and the Senate as a whole that will help us to 
understand these very complex issues even better than we do. 
You have all graciously given your time and we really 
appreciate it very much. I think you have helped us a lot here 
today, so I want to thank each of you for being here.
    Mr. Armstrong. Thank you, Senator.
    Mr. Seidenberg. Thank you.
    Mr. Mandl. Thank you.
    The Chairman. Our first witness on the second panel is Ms. 
Anna-Maria Kovacs. Ms. Kovacs is First Vice President and 
Telecommunications Analyst at Janney Montgomery Scott, a 
brokerage and investment banking firm. She has been involved in 
the telecommunications industry for 17 years, working as a 
financial analyst or consultant. We are pleased to have you 
here, Ms. Kovacs.
    Next, we will hear from Mr. Gene Kimmelman, Co-Director of 
the Washington Office of Consumers Union. Mr. Kimmelman was the 
lead consumer advocate on the Omnibus Telecommunications Act of 
1996 and is a recognized expert on deregulation and consumer 
protection issues within the telecommunications industry. Prior 
to joining Consumers Union in 1995, Mr. Kimmelman served as 
Chief Counsel of the Antitrust Subcommittee of this committee. 
So we are really happy to have you back, Mr. Kimmelman.
    Finally, we are fortunate to have Mr. Kevin Moore. Mr. 
Moore is Director of Deutsche Banc Alex. Brown, an investment 
banking firm. He serves as the firm's senior communications 
analyst. Mr. Moore specializes in communications services, 
including emerging growth and large cap telecommunications 
companies in the Internet access, competitive access, long 
distance, and local exchange sectors. So we are happy to have 
you here as well.
    So we want to thank you all for appearing before the 
committee today. We are fortunate to have the benefit of this 
panel's expertise to help us learn more about the broadband 
issue. I may have to leave a little early. Senator DeWine will 
be here to finish off the hearing.
    We will begin with you, Ms. Kovacs, and then when Senator 
DeWine gets here, I will turn the hearing over to him.

 PANEL CONSISTING OF ANNA-MARIA KOVACS, FIRST VICE PRESIDENT, 
    JANNEY MONTGOMERY SCOTT, BOSTON, MA; GENE KIMMELMAN, CO-
 DIRECTOR, WASHINGTON OFFICE, CONSUMERS UNION, WASHINGTON, DC; 
   AND KEVIN M. MOORE, DIRECTOR, DEUTSCHE BANC ALEX. BROWN, 
                         BALTIMORE, MD

               STATEMENT OF MS. ANNA-MARIA KOVACS

    Ms. Kovacs. Thank you, and in the interest of time I will 
summarize the written statement that I have submitted.
    The Chairman. That will be fine. We will put the full 
statement in the record.
    Ms. Kovacs. OK, thank you.
    My perspective, having watched both the cable and phone 
industries, since I do cover both, is that, first of all, I 
think the Telecom Act is now at the point where it is actually 
beginning to work. We have gotten to the point where there are 
several million resold lines. So on a non-facilities basis, we 
have some indication that both sides have developed systems 
that make it possible to exchange customers.
    But more importantly, with investments like AT&T's 
investment in TCI and the proposed investment in MediaOne, and 
with the actual demonstration of cable telephony through Cox 
and MediaOne, we know that cable competition for residential 
telephony is a very real event, which is something that a year 
or two ago was not clear.
    I think we have also seen, not so much directly through the 
Cable Act, but through the Telecom Act, that the kind of 
competition that DBS has brought to cable which prompted the 
cable industry to upgrade itself to the 1,000-channel level, 
750-megahertz level, two-way, in order to be able to provide 
better video services that can compete with the DBS, that made 
the first step of investment that has made it possible for 
cable to further upgrade itself to provide broadband Internet 
and ultimately telephony.
    We have seen in the business market CLEC's and data LEC's 
now competing. But I guess to me what is encouraging is that we 
are beginning to see the competition come into the residential 
market. And to me, the key lesson out of all of this is that 
once you bring a second competitor into the market like DBS 
which has promoted new behavior out of the cable industry, 
prompted the cable industry to make investments that had made 
broadband Internet possible, that then further incented the 
telephone companies to make the investments in DSL which will 
create a competitive environment in broadband services.
    To me, having at least two players in high-speed broadband 
Internet access is really the key to having an open network. 
When I look at the kind of vertical integration that a Time 
Warner or arguably an AT&T could have, yes, one can easily 
imagine a situation in which a company like that advantages 
itself on the content side. But I think when you have got a 
second real competitor, which DSL is now becoming, out in the 
marketplace offering the same kind of high-speed at essentially 
the same price and offering the consumer a broad array of 
services and a broad array of ISP's--in other words, not only 
high-speed and my ISP, which is what the cable industry is 
right now offering, but high-speed and pick your own ISP, which 
is where DSL is taking the telephone industry--I think in that 
environment it becomes strategically foolish for the cable 
industry to continue to have a closed platform.
    So I guess my belief is that anything that can be done to 
encourage both sides to increase their investment and incent 
each other to compete with each other to offer more and more 
services and more and more broadband is what you really want to 
be doing, and you want to get in the way of that investment as 
little as possible through regulation.
    The Chairman. Thank you.
    [The prepared statement of Ms. Kovacs follows:]

                Prepared Statement of Anna-Maria Kovacs

    Thank you for giving me the opportunity to appear before you today 
to discuss the broadband Internet-access market. My name is Anna-Maria 
Kovacs and I am the telecommunications and broadband services analyst 
for Janney Montgomery Scott, a brokerage and investment banking firm. 
My job is to make judgments about the strategies, business plans and 
financials of firms within the telecommunications and cable industries 
and to gauge their chances for success in the face of their 
competitors' strategies and plans, so that I can help our investors 
pick stocks within this industry.
    One of my observations is that the Telecommunications Act is on the 
verge of bearing the kind of fruit that was hoped for when the Act 
passed. Meaningful competition in various segments of the 
telecommunications market has finally emerged, and where it existed 
before the Act it is taking an increasingly strong hold.
    Facilities-based competition against the incumbent telcos is 
becoming a reality in the consumer as well as business markets. 
Competition in the business markets was real even before the Act 
passed. Cable-telephony has been deployed in large enough volume to 
assure us that competition in residential markets is becoming real, as 
well. While mass deployment may take a couple of years and another 
generation of technology, there can be no doubt that it is coming. 
Video competition has become a reality, with satellite-based services 
providing real competition to cable. Competition for high-speed 
Internet access is becoming a reality as well. Cable modems are 
proliferating and telcos have begun to deploy DSL, with both 
technologies able to run data at speeds 20 or more times those we have 
been accustomed to. In the backbone, long-haul segment, several new 
competitors are creating networks each of which provide more potential 
capacity than the total current traffic requires. Wireless is beginning 
to replace wireline.
    The major players in each of these segments are trying to play in 
all segments, as they prepare for a world in which they expect a large 
part of the market to require bundled services. Thus, they are moving 
from their traditional areas of strength into new areas, concerned that 
they will not be able to defend their original position unless they are 
equally competitive in the other segments. Cable companies have 
upgraded their video capabilities and moved into data carriage and have 
begun to move into voice carriage because they see threats to their 
traditional markets from satellite-based video and need the new sources 
of growth that Internet access and telephony provide them. Telcos have 
accelerated their deployment of DSL in response to the threat posed by 
cable modems, which could decimate the telcos' second-line growth 
unless the telcos can offer a product that offers competitive speed. 
The long-distance carriers have moved both into Internet-based value-
added services and into local markets, AT&T most notably with its 
enormous investments in the cable industry. In each case, the presence 
of a real, facilities-based competitor has spurred the incumbent to 
move more rapidly to provide new technologies, products and services.
    That is an important lesson, in my view, to keep in mind as we look 
at the Internet access market and concern ourselves with ways to insure 
that the Internet continues to flourish and that there is unimpeded 
access to it by both consumers and content providers.
    Today, there are two primary ways to access the Internet. The vast 
majority of users do so over the telcos' networks. Some do so at high 
speed, most often off corporate networks. Millions of consumers do so 
at relatively low speed, generally at or below 56 kilobits, though as 
many as 100,000 consumers may be gaining high-speed access via DSL. The 
telco network these customers use provides point-to-point connections 
to any of thousands of ISP's, who in turn provide access to a plethora 
of websites that hold the actual content the customers want to reach. 
Slightly under a million consumers reach the Internet over cable 
networks, at speeds that may reach a megabit or more. They generally 
have direct access to one Internet Service Provider, @Home or 
RoadRunner, through whom they may reach other ISP's and the content of 
the Web. From the consumer's standpoint, today's choices can be roughly 
described as ``low-speed and the ISP of my choice on my telco'' or 
``high-speed and a single ISP on my cable,'' for a more or less 
comparable total price of about $40 for the connection and ISP. Speed 
vs. ISP of my choice.
    That clear-cut choice, however, is blurring. It is becoming 
possible in more and more locations to get high-speed on the telco via 
DSL, and @Home has made it possible to access other ISP's through it, 
albeit at an extra charge. In other words, there are real technologies 
deployed in the field that make it realistic to expect that within a 
year or two, most consumers will be able to get high-speed access to 
the Internet via at least two media, cable and telco-DSL. The ability 
of cable to offer high-speed is spurring telcos' deployment of 
comparable speed even though it is not necessarily economic at this 
early stage in DSL's learning curve. I believe that the deployment of 
DSL, in turn, will spur the cable industry to insure that it offers 
consumers a choice in content, content providers, and gateways that is 
comparable to what the telcos can offer. In other words, I believe that 
consumers, given a choice of two media which offer equally high speed 
at comparable prices will select the provider that gives them the 
content and ISP of their choice. The best guarantee that consumers will 
enjoy the benefits of broadband and the content of their choice, and 
that content providers will have access to all consumers, is to do 
everything possible to encourage both sides to deploy as vigorously as 
technology, human resources, and capital allow.
    Both sides face some barriers on each of those fronts. DSL is a 
difficult technology to deploy. It is sensitive to distance from the 
central office as well as to the quality of the loop, and current 
versions of it are not compatible with the digital loop carrier that 
the best modernized telcos have deployed. All of these make it 
expensive to deploy and account for the slowness with which it has 
reached the field. Once it is deployed, however, it provides a secure, 
point-to-point connection whose speed is predictable and controllable. 
Some of these problems will disappear as new generations of DSL come to 
market over the next year or two, thus increasing the market that can 
be physically targeted and lowering the cost of deployment. A factor 
that will lower deployment cost for both DSL and cable-modems is the 
appearance of PC's that are DSL-and/or cable-ready. Those have begun to 
come to market and will help to further lower deployment cost and 
alleviate the human-resource problem--the shortage of competent 
technicians who today have to go out and install either cable-modems or 
DSL directly into the PC. Thus, it is reasonable to foresee that at 
some point during 2000, DSL deployment will kick into high gear, which 
I would define as passing the million customer mark that cable-modems 
are already approaching. By that point, cable companies will have to 
face the fact that telcos can provide a product that is equally 
attractive in terms of speed and price to cable-modems. Consumers will 
no longer face the current choice of speed vs. my favorite ISP, but 
will be able to get both over DSL.
    At that point the pressure will be on cable to open access to its 
network, a task that faces some real technology barriers. Cable 
networks are shared pipes. Because they are shared, it becomes 
difficult to control the actual speed any user will enjoy when multiple 
users are on-line. @Home and RoadRunner are able to some extent to 
control bandwidth allocation, to ensure that a few customers do not hog 
the entire pipe and exclude all others. There is today no network 
management system that can do that bandwidth-allocation job when many 
ISP's are providing service over the cable network directly to the end 
user during periods when the network is carrying a full load. It is 
likely that such an operating system could be developed for cable 
networks, but it is not here today. Hence, the cable industry's 
insistence that other ISP's use @Home or RoadRunner as their gateway to 
the customer.
    There are many who insist that the cable industry is motivated to 
limit or control access to its network not only by technical 
difficulties but by anti-competitive motives. The potential for that 
certainly exists given the vertical integration in this industry and 
the small number of horizontal players providing local access. It does 
not take much imagination to envision the potential for a player like 
AT&T that controls access to the majority of cable homes in the U.S. 
through its own properties or its affiliates, which is a part-owner of 
@Home and will be of RoadRunner, and which has a variety of content 
properties, finding ways to advantage its own content and sites on its 
own network. But it also does not take much knowledge of history to 
understand that in a competitive market that is likely to be a highly 
self-destructive strategy. Consumers who, at comparable prices and 
speeds, can get unlimited choice of content over the telcos vs. limited 
choice over their cable network are not likely to opt for the cable 
network. Beta vs. VHS and Apple vs. Microsoft both tell us that 
customers primarily care about content and applications and will flock 
to the vendor that gives them the best and widest selection of each. 
Thus, if AT&T were inclined to try to limit the number of ISP's and the 
content on its network, it would be punished severely by the market 
place, assuming there is another choice in that marketplace. Most 
Internet access would happen over the telcos' DSL pipes. Given the 
enormity of AT&T's investment in cable systems and its inability to 
earn adequately over those systems without a hefty penetration of 
cable-modems and telephony, its stock would suffer severely if it 
maintained a closed-access strategy once DSL is readily available in 
the market-place.
    The key, then, to ensuring that the cable industry, and especially 
AT&T which has invested so heavily in its cable networks, do not act in 
ways that anti-competitive against ISP's and content providers is to 
ensure that it has a real competitor at the network level. That is, the 
key is to ensure that DSL can be deployed as efficiently, economically, 
and rapidly as possible. That will put pressure on the cable industry 
to open its network. Ultimately that means creating new cable-network 
operating systems that allow network capacity control to be distributed 
among multiple ISP's. In the short run, it may mean reaching agreements 
with ISP's that enable them to look to the consumer like the primary 
ISP even when @Home is actually providing the network control.
    Regulators can also have some impact on the speed of deployment on 
each side. On the DSL side, rules that are likely to discourage 
deployment by the telcos themselves include the requirement that telcos 
to have separate data subsidiaries, that they provide competitors with 
a portion of the spectrum on the line on an unbundled basis, that they 
provide collocation for DSLAM's in already-crowded field-vaults. Each 
of these makes it operations more difficult and expensive for the 
telco. On the other hand, each of these facilitates deployment by Data 
LEC's who ride on the telco's network. If the primary need is to 
encourage as much DSL deployment as possible to put pressure on cable 
operators to open their networks, then the key question in considering 
such regulations has to be whether more DSL will be deployed by the 
telcos themselves, if they are left free of regulation, or by the 
DLEC's, if they are helped by such regulations.
    Similarly, regulators can have some impact on cable deployment. It 
is unlikely that cable will refuse to upgrade its networks in the face 
of regulation. AT&T, in particular, has already spent so much on buying 
TCI and will spend so much more on MediaOne, that it has no choice but 
to upgrade its networks to make as much money as it can on Internet 
access and telephony. However, regulations that do not take into 
account actual technological realities could slow deployment. Forcing 
kluged solutions to allow multiple ISP's direct access to customers 
before an effective operating system is ready would be one such 
possibility, because it could increase expense and might degrade 
service and therefore the marketability of cable Internet access.
    How Wall Street allocates capital within this industry, or more 
simply how stock prices will move, will depend on the development of 
these various technologies, on the strategies chosen by the various 
players, and on regulation as well. To focus most specifically on the 
latter with some examples, minimizing regulations on the telcos is 
likely to help their stocks, but is likely to hurt the Covads and other 
Data LEC's who provide DSL over the telco networks. Immediate open-
access rules are likely to help the stocks of ISP's other than @Home, 
and to hurt @Home's as well as to some extent cable stocks. That means 
that regulators need to be very clear on what their over-riding goals 
are, and to balance short-term vs. long-term goals. Is it more 
important to pit telcos vs. cable to ensure that each side is as 
aggressive as possible right now or is it more important to promote the 
health of the Data LEC's? Is it critical to ensure open-access on cable 
today via regulations that might impose extra expenses on cable 
companies and will probably damage the financial health of @Home, or is 
it possible to wait and see whether DSL-based competition takes care of 
the problem? How regulators answer these questions will help determine 
which companies and industry segments receive support from investors.

    The Chairman. Mr. Kimmelman.

                  STATEMENT OF GENE KIMMELMAN

    Mr. Kimmelman. Thank you, Mr. Chairman. On behalf of 
Consumers Union, publisher of Consumer Reports, we appreciate 
the invitation, and it is always nice to come back to the 
Judiciary Committee.
    The Chairman. We are glad to have you back.
    Mr. Kimmelman. You have heard a lot this morning from 
esteemed CEO's of companies about the fiber revolution, the 
explosion in the Internet. And all this has occurred 
predominantly over a narrowband system, and here we are today 
talking about the next generation, the broadband system.
    What is critical, though, is that what led to that 
explosion, what led to that enormous takeoff, what lead to the 
importance of the Internet today was the openness of the 
narrowband system predominantly off of a telephone wire. Today, 
the broadband system is dominated in its infancy by a much 
fatter wire, the cable wire, that is not open, and that is a 
problem.
    The cable company guides, steers, decides what to charge, 
and controls what goes over that wire. It comes out of a 
totally different set of public policy regulations than the 
openness of the Internet people have grown to need, want, and 
want more of.
    In this environment, the DSL line that is being described 
is not the same as the cable line. It is not the same fast 
speed and it cannot offer the same video programming, the same 
television programming that Mr. Armstrong's AT&T cable company 
can offer.
    Size is important because in this business you start with a 
monopoly. It is not like any widget business. You start with a 
cable monopoly. It is an infrastructure system which is hard to 
replicate, as you heard in response to Senator Schumer's 
question about deregulating everything. And most importantly, 
it depends on eyeballs, it depends on scope, it depends on 
advertising revenue, it depends on sales. So it is unique.
    When Mr. Armstrong talks about the scope from his point of 
view and he talks about a little company, if you go and look at 
his own application with the FCC for his merger with MediaOne, 
he is not talking about a company that is little and just is 
worrying about 5-percent stakes in other companies. He is 
talking about a company that has 90 percent, 85, 75 percent, 50 
percent, down to as low as 33 percent in cable companies that 
do serve 60 percent of all consumers in this country, not 5-
percent stakes, 90- to 33-percent ownership stakes.
    Now, why is that important? It is not just an issue of how 
many people sit on the board. The attribution rules come out of 
the broadcast world, where we cared about open discussion. Did 
it make sense to have the few broadcasters in the community 
also own 5 percent of each other? Were they likely to compete 
head to head and be vigorous presenters of different points of 
view? No. We set limits on that.
    The new broadband world is that same world of open 
discourse. Will it truly be open to diversity and competition? 
It is unclear, with the structure that Mr. Armstrong's AT&T is 
presenting here. This is not 5-percent ownership. This is 33- 
to 100-percent ownership in companies serving 60 percent of all 
consumers.
    Now, what does this mean for the consumer? Well, the 
consumer wants broadband services, the consumer wants choices, 
the consumer wants openness. The consumer wants the Internet we 
have grown accustomed to. Mr. Armstrong's companies are the 
companies that have driven up cable rates 3 times faster than 
inflation, driven up the price of connecting to the Internet, 
the building blocks of the Internet, connectivity, 3 times 
faster than the price of the telephone wire, which is supposed 
to be the alternative. And is two enough? In most markets, it 
is not.
    Mr. Chairman, consumers need changes in policy here to 
ensure that we truly have open broadband networks, not just 
one, but multiple networks; that we truly have fair pricing and 
no discrimination in the building blocks that allow you to 
communicate, to receive the services you want. So we believe it 
is time to open up the 1996 Act to stop spiraling cable rates, 
the $5 billion in new telephone fees that are on people's 
bills, and to infuse more competition into this market, 
preserving the openness of the Internet as we enter this 
broadband era.
    Thank you.
    The Chairman. Well, thank you.
    [The prepared statement of Mr. Kimmelman follows:]

                  Prepared Statement of Gene Kimmelman

                            i. introduction
    Consumers Union \1\ believes it is time for Congress to address the 
competitive shortcomings of the Telecommunications Act of 1996.\2\ With 
cable television rates soaring and many telephone charges on the rise, 
the majority of consumers are not receiving the benefits that Congress 
promised through elimination of traditional ownership and price 
regulation in telecommunications markets. And massive consolidation 
among telecommunications and cable companies is threatening development 
of competition and fair pricing for new services that rely on the 
telephone or cable wire, like high-speed Internet access.
---------------------------------------------------------------------------
    \1\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the State of New York to provide 
consumers with information, education and counsel about good, services, 
health, and personal finance; and to initiate and cooperate with 
individual and group efforts to maintain and enhance the quality of 
life for consumers. Consumers Union's income is solely derived from the 
sale of Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees. In addition to reports on Consumers 
Union's own product testing, Consumer Reports with approximately 4.5 
million paid circulation, regularly, carries articles on health, 
product safety, marketplace economics and legislative, judicial and 
regulatory actions which affect consumer welfare. Consumers Union's 
publications carry no advertising and receive no commercial support.
    \2\ Public Law 104-104, 110 Stat. 56 (1996).
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    So long as local telephone and cable companies face limited 
competitive threat in their core service markets, and their wires 
remain the most viable transmission systems for broadband, high-speed 
Internet services, consumers are in danger of monopolistic abuse. 
Strict antitrust enforcement, careful regulation, and legislation to 
correct flaws in the 1996 Telecommunications Act are needed to open the 
door to broad-based competition.

                  II. RISING PRICES IN TODAY'S MARKET
    Contrary to the goals of the Telecommunications Act, consumers face 
rising prices and extremely limited competitive choice for numerous 
television and telephone services. Since passage of the Act in February 
1996, cable TV rates have risen about 23 percent, more than three times 
the rate of inflation during that period.\3\ Despite significant growth 
in the satellite industry, the high price of purchasing a satellite 
dish, expensive installation charges and the inability to provide local 
broadcast signals have enabled cable to avoid price competition from 
satellite providers. On the other hand, the few consumers who have a 
choice of cable service from two providers (head-to-head competition 
from two cable companies or one cable and one telephone company) 
receive approximately the same programming, new services and 
infrastructure upgrades for about 14 percent less than cable monopolies 
charge.\4\ If cable monopolies were limited to charging these 
competitive prices throughout the country, consumers would save about a 
$4 billion a year.
---------------------------------------------------------------------------
    \3\ Bureau of Labor Statistics Cable Consumer Price Index and 
Consumer Price Index--All Urban Consumers.
    \4\ In the Matter of Implementation of Section 3 of the Cable 
Television Consumer Protection and Competition Act of 1992, REPORT ON 
CABLE INDUSTRY PRICES, MM Dkt. No. 92-266, May 7, 1999, at 3.
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    The picture for some telephone rates is starting to look almost as 
bad as for cable. Federal Communications Commission (FCC) pricing 
policies have resulted in new ``line-item'' charges on phone bills that 
will cost consumers almost $5 billion a year. New universal service 
fees, subscriber line charges, federal access fees, and number 
portability charges are requiring the average single-line customer to 
pay about $3.00 per month more, and consumers with two lines at least 
$7.00 per month more for phone service, before they place a call. These 
figures do not include new monthly minimum charges assessed by long 
distance companies like AT&T and MCI, which require consumers to pay 
$3.00 to $5.00 a month even if they make no calls. While large-volume 
long distance users are finding competitive options and declining per-
minute prices, consumers who make less than 30 minutes of interstate 
long distance calls per month have seen their rates double since 
passage of the Act.\5\
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    \5\ Industry Analysis Division, Common Carrier Bureau, Federal 
Communications Commission, REFERENCE BOOK OF RATES, PRICES, INDICES AND 
EXPENDITURES FOR TELEPHONE SERVICE, June 1999 at Table 2.4.
---------------------------------------------------------------------------

                       III. MARKET CONCENTRATION
    Failure of our antitrust authorities to take an aggressive stance 
against telecommunications and cable mergers has contributed to a bleak 
picture for the development of local telephone, cable, high-speed 
Internet access, and increased long distance competition. The Justice 
Department's Antitrust Division is in the process of allowing six of 
the eight big local telephone companies (GTE and the Bell Companies) to 
merge into two giant super-regional monopolies. After gobbling up 
Pacific Telesis and Ameritech, SBC will control about one-third of all 
telephone lines into consumers' homes. Similarly, with the acquisition 
of NYNEX and GTE, Bell Atlantic will control another third of the 
country's local phone lines. These were the companies that, during 
consideration of the Telecommunications Act, claimed they would be 
``seven new competitors'' in long distance and other markets.
    In response to this massive local telephone consolidation, AT&T has 
purchased substantial ownership stakes in cable television companies 
that serve about 60 percent of all households in the country. Through 
its merger with TeleCommunications Inc. and proposed purchase of 
MediaOne, AT&T will dominate not only the majority of cable wires, but 
also the major high-speed Internet access providers (@Home and 
Roadrunner) and control more than 60 cable television channels.\6\
---------------------------------------------------------------------------
    \6\ In the Matter of Annual Assessment of the Status of Competition 
in Markets for the Delivery of Video Programming, FIFTH ANNUAL REPORT, 
CS Dkt. No. 98-102, Dec. 23, 1998 at Appendixes C and D.
---------------------------------------------------------------------------
    To avoid antitrust and regulatory scrutiny, AT&T has attempted to 
divert attention from its minority ownership stakes in a vast universe 
of cable properties, TV channels, cable set-top box developers, and 
Internet service providers. See Exhibit 1. However, even with recent 
sales of some cable assets,\7\ AT&T's excessive market power in cable 
TV and related markets requires massive antitrust and regulatory 
surgery to prevent inflated consumer prices and barriers to 
competition. See Exhibits 2-5.
---------------------------------------------------------------------------
    \7\ Leslie Cauley, ``AT&T Realigns Cable-TV Empire with Cox Deal,'' 
Wall Street Journal, July 8, 1999.
---------------------------------------------------------------------------
    Despite AT&T's stated goal of expanding its cable business into the 
local telephony market, the fact that the underlying cable monopoly is 
not subject to any limits on pricing (unlike the local telephone 
monopoly) and is not subject to common carriage/nondiscrimination 
requirements (unlike the local telephone monopoly), makes this 
consolidation particularly troubling. For consumers, AT&T's promise to 
try to compete in the local telephone business in the future is not 
worth today's skyrocketing cable rates and discrimination in new 
Internet services. And AT&T's preferential deal with Microsoft to 
install Windows CE in cable set-top boxes could put a damper on 
competition for the equipment that accompanies broadband services.
    It is important to note that, while everyone expects the telephone 
and cable wires some day to offer the same set of services in 
competition with each other, they do not compete today! Without 
enormous infrastructure investments, elimination of technical barriers, 
and experimentation with network management of bundled services, cable 
and local telephone companies cannot effectively compete against each 
other. And no one else is even close to them, measured either by 
technical or financial standards, to serve as a mass market competitor 
for the most important telephone, television and Internet services. We 
may therefore be experiencing an enormous consolidation that, at best, 
yields a duopoly. What does this mean for consumers?

                         IV. THE DIGITAL DIVIDE
    In a report we released with the Consumer Federation of America in 
February,\8\ we found that at least one-half and as many as three-
quarters of all consumer do not generate enough revenue opportunity--
because of their small local, long distance, wireless, cable and 
Internet consumption--to be attractive to the companies seeking to 
expand into these markets. This fact is unlikely to change in the 
foreseeable future. Therefore all the talk of deregulation designed to 
spur investment in new infrastructure and advanced services may do 
little or nothing for the needs and desires of the vast majority of the 
consumer market. Our report demonstrates that cable, local phone and 
long distance companies are only likely to compete for the top 20 
percent of the consumer market. Market forces are not strong enough to 
prevent a growing world of telecommunications haves and have-nots.
---------------------------------------------------------------------------
    \8\ Dr. Mark Cooper and Gene Kimmelman, ``The Digital Divide 
Confronts the Telecommunications Act of 1996,'' Consumers Union and 
Consumer Federation of America, February 1999.
---------------------------------------------------------------------------

                   IV. IT IS TIME FOR CONGRESS TO ACT
    If neither antitrust officials nor the FCC are willing to stop the 
telecommunications consolidation juggernaut, it is imperative that 
Congress step in to establish comparable public obligations for the two 
wires that may some day be in a position to compete for the most 
important telecommunications, Internet and television services. We 
believe the Telecommunications Act should be adjusted to:

          (1) protect against inflated pricing of monopoly telephone 
        and cable services;
          (2) ensure that monopoly telephone and cable services do not 
        subsidize other services;
          (3) prevent either telephone or cable companies that have 
        market power as a result of their transmission facilities from 
        discriminating in any way against consumers or independent 
        vendors who must rely on those companies' transmission 
        facilities to offer services (e.g., cable channels, Internet 
        access) or equipment (like cable set-top boxes) to the public; 
        and
          (4) ensure that low-volume telecommunications users 
        (including long distance customers) are not overcharged for 
        their limited communications needs.

    Consumers Union supports preservation of the portions of the 1996. 
Telecommunications Act that will open local phone markets to 
competition. We believe that efforts to enhance deployment of broadband 
facilities by local phone companies must coincide with, and not replace 
efforts to open the local telephone market to competition. And where 
competition does not develop, Congress must also ensure that prices for 
the local phone service that connects Internet and other broadband 
applications remain reasonable and affordable to all consumers.
    Rather than focus on distinctions between services--data, voice, 
video--that are disappearing, we suggest a different basis for 
revisiting the Act. It is now obvious that modest users of virtually 
all communications services--local phone, long distance, cable, 
Internet--are unlikely to benefit from the deregulatory, market opening 
provisions of the 1996 Act. In the foreseeable future, competition will 
not penetrate these low-volume markets, either for individual services 
or a bundle of these services combined. We therefore suggest 
modifications to the Act that ensure reasonable prices for local 
telephone, cable and long distance services where competition does not 
exist or is insufficient to keep prices down. Consumers will only 
receive the maximum benefit of new broadband Internet services if the 
prices for the building blocks these services depend upon-telephone and 
cable services--are reasonable.

                            VII. CONCLUSION
    Consumers Union urges swift action to correct the flaws in the 1996 
Telecommunications Act. As consumers experience spiraling cable rates, 
rising monthly telephone charges, and the restricted choices that 
result from massive industry mergers, it is obvious that the Act is not 
meeting its competitive goals. Either massive cable and telephone 
industry consolidation must be blocked, or new consumer protection 
policies implemented to ensure reasonable prices and maximum choice for 
high-speed Internet access, cable and telecommunications services.

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    The Chairman. Mr. Moore, we will take your testimony.

                  STATEMENT OF KEVIN M. MOORE

    Mr. Moore. Thank you, Mr. Chairman, for the opportunity to 
present before your panel today. First of all, I would like to 
begin by saying that we believe ultimately the issues faced by 
the committee are ones of public policy. However, we are 
encouraged by the committee's interest in Wall Street's view on 
the subject, since Wall Street typically has a very significant 
effect on the behavior of the participants. In my written 
testimony, I submitted 10 observations from one Wall Street 
analyst's perspective. I will summarize six of them here in the 
interest of time.
    First, from our standpoint, we are not expecting 
significant leadership and innovation from the RBOC's. Over the 
last 5 to 10 years, their record has been dismal, including 
such faux pas' as ISDN, as well as a full-service network. We 
are looking for mainly new providers, including in that 
category AT&T to be the source of most of the innovation in the 
industry.
    Second, we believe that AT&T is incentivized to open up its 
cable plant to ISP's and to others. I think the logic is fairly 
clear here. AOL and others will be customers of someone's local 
network, and I think it would be in AT&T's best interest in the 
long term for that local network utilized by AOL to be its own.
    Third, one of the issues facing the committee in consumer 
access is that Wall Street has typically favored business-
oriented communications models. In other words, they favored 
companies in B-to-B businesses over those in consumer 
businesses. Typically, it has required a monopoly or semi-
monopoly type situation, such as cable or @Home, to really 
cause a widespread endorsement by Wall Street.
    Next, Wall Street has typically favored small companies to 
carry out innovation. In some cases, that has actually hurt 
both the RBOC's as well as AT&T because the investments in 
broadband and other new services often require them to dilute 
their earnings, and they are often penalized for doing so. 
Obviously, this is something we would like to improve from a 
Wall Street perspective, but it is a reality which I think the 
committee should understand in the behavior of the 
participants.
    Next, I think Wall Street is looking for Wall Street-
friendly legislation. I think Mike Armstrong mentioned it today 
when he said that we are looking for stability and consistency. 
I don't believe that we got that out of the 1996 Telecom Act, 
and it may have prematurely limited funding for some of the 
CLEC's, as the amount of litigation made it clear that this was 
not going to be a slam dunk for the new players.
    However, I do believe that the telecom bill has been 
somewhat successful in promoting broadband competition. We 
would note that while many lament the fact that less than 5 
percent of the access lines in the voice world are now 
competitive, this year we estimate that 15 percent of all the 
DSL lines--at least 15 percent will be installed by new players 
and not by the incumbent providers. So the new providers are 
doing roughly 3 times better in data than they are in voice in 
terms of a market share perspective.
    Finally, I would like to say that even though we are not 
counting on the RBOC's for leading the pace of innovation, we 
do believe that it is important from a raw resource and 
capacity standpoint that they are engaged and are able to 
provide the services that ultimately consumers want. However, 
we do not believe that the fact that the RBOC's have fallen 
behind in broadband access relative to the cable providers has 
anything to do with regulation, and we would encourage the 
committee to focus on providing strong, competitive incentives 
for other competitors to force the RBOC's into providing 
similar type services as opposed to regulating the competitors 
or in some way inhibiting them.
    Thank you.
    [The prepared statement of Mr. Moore follows:]

                  Prepared Statement of Kevin M. Moore

    Mr. Chairman and Committee members, thank you for the honor of 
testifying before your Committee hearing on ``Broadband: Competition 
and Consumer Choice in High-Speed Internet Services and Technologies''. 
I am Kevin Moore, a senior telecommunications analyst and Director at 
Deutsche Banc Alex. Brown. Deutsche Banc Alex. Brown is an investment 
banking firm focused on middle market companies in industries 
experiencing high levels of growth and/or change. I believe that we 
would all agree that the telecommunications industry fits this 
category. However, the views expressed here are mine alone. My primary 
job is to forecast the growth and earnings and stock performance of 
selected companies within the telecom industry. While my coverage list 
includes the largest companies, such as the Regional Bell holding 
companies (RBOC's), AT&T and WorldCom, it also includes Internet 
Service Providers, Web Hosting, Digital Subscriber Line (DSL) and other 
Internet infrastructure companies. In addition, I assist our investment 
bankers in raising capital for emerging growth companies and have 
personally been involved in over $4 Bn in financing over the last four 
years including capital raised for the first public ISP (NetCom Online 
Communications) and the first public DSL Service Provider (COVAD 
Communications). In terms of our current industry position, we are 
bullish on AT&T, WorldCom and all of the Internet Infrastructure plays. 
We are generally bearish on the RBOC's with the exception of BellSouth, 
which we recommend with a buy rating.
    For the record, I would also like to advise the committee that 
other companies that are important in the current debate such as AOL, 
@Home and the Cable Industry are covered by my colleagues Shaun 
Andrikopoulos, Lawrence Marcus and Doug Shapiro. Additionally, I co-
cover AT&T with Stuart Conrad. None of these colleagues are present 
here today.
    I would like to begin with some brief comments and leave maximum 
time for questions and answers. We believe that ultimately the issues 
faced by the committee are ones of public policy, however we would like 
to submit 10 industry observations from the perspective of ``Wall 
Street'' which we hope will be helpful framing the issues and the 
potential solutions.

 1. WE BELIEVE THAT THE INTERNET AND TELECOMMUNICATIONS ARE NO LONGER 
                          SEPARATE INDUSTRIES
    We believe that the acquisition of the largest ISP, UUNET, by the 
CLEC MFS communications in 1996 was a landmark event in the industry 
that marked the beginning of the convergence of the Internet and 
Traditional Telephony, which we believe ultimately as brought us to the 
current debate. We outlined our beliefs about the new world order in a 
theme piece called ``Dawn of the Multimedia Communications Services 
Model.'' Copies of this piece have been provided for the Committee. 
Three years later, industry pundits believe that as much as 95 percent 
of the traffic on the World's communications networks will be Internet 
traffic within 10 years. The bottom line is that 95 percent of the 
world's legislation/regulation is currently oriented to what will be 5 
percent of the world's traffic. Therefore we expect the issues of 
broadband, data and the Internet to dominate the regulatory debate, 
with voice increasingly taking a back seat. While we are not 
recommending increased regulation of the Internet, we believe that 
consumer interests will be better served by more focus on the Internet. 
The last several years of debate and litigation around reciprocal 
compensation for ISP's illustrates the amount of energy and resources 
that can be wasted when regulatory policies do not consider the 
Internet.

   2. VIABLE LOCAL BROADBAND IS ONE OF THE MOST IMPORTANT ISSUES IN 
                     COMMUNICATIONS/COMPUTING/MEDIA
    We believe that the impact of the current debate extends well 
beyond the telecommunications industry. The ``bottleneck'' in the local 
loop could be negatively impacting the future growth of the computer as 
well as the media industry. As we saw the proliferation of PC's with 
the advent of the corporate LAN, or local area network, we believe that 
broad proliferation of broadband local could set off a new round of 
software and hardware growth in the computer industry as vendors take 
advantage of the possibilities enabled by ``always on'' connectivity. 
From the consumer standpoint, we expect the high speed Internet to 
extend beyond the current perceived role as ``entertainment'' to a 
critical delivery mechanism of everything from government and public 
services to medical and education services. The possible implication is 
that given the importance of ensuring that deployment of broadband 
takes place, regulators may have to avoid policies which seemingly are 
``technically'' procompetitive but which would stifle investment and 
make dampen overall growth in the industry. We believe that current 
investor sentiment (rightly or wrongly) is that highly regulated open 
cable access would dampen investment in cable as broadband alternative.

     3. WE'RE NOT EXPECTING SIGNIFICANT INNOVATION FROM THE RBOC'S
    We believe that there is little historical precedence to support a 
thesis of RBOC's innovation. At best they will be fast followers and at 
worst they could actively inhibit the deployment of new technology. 
From MCI to WorldCom and cable modems, history has shown that the most 
significant innovations in telecommunications have come from outside 
the Bell System. However, the record of RBOC innovation is scattered 
with no action and grossly failed attempts such as ISDN and the ``Full 
Service Network.'' We believe that it is the success of the cable modem 
that is causing the current wave of RBOC investment in DSL services. We 
believe that legislators/regulators should take this history into 
account as they weight polices that may stifle small company investment 
because the policy may be perceived favorable to the RBOC's. We believe 
that the primary reason for lack of innovation is that ultimately, 
every new innovation either creates opportunities for RBOC competitors 
and/or cannibalizes existing services, neither of which is good for the 
RBOC's.

   4. WE BELIEVE AT&T IS INCENTIVISED TO OPEN THE CABLE PLANT TO THE 
                            ISP'S AND OTHERS
    We believe that AT&T will, as it has stated, open up its cable 
plant to other players. The incentives for it to do so are rather 
clear. First, companies such as AOL and others will be a major customer 
of some local company. We believe that AT&T would rather have the 
online providers utilizing its facilities instead of someone else's. 
Second, while counter to traditional RBOC and even traditional AT&T 
thinking, a company wholesaling its network to increase network 
utilization is a very financially viable strategy. It has often been 
successfully utilized by emerging players such as WorldCom. While we 
doubt that either the RBOC or AT&T will ever wholesale their respective 
networks to the full satisfaction of third parties (or each other), we 
do believe that, as they offer more advanced (and financially risky) 
services, both parties will be increasingly incentivised to be more 
wholesale friendly.
   5. WALL STREET FAVORS BUSINESS ORIENTATED COMMUNICATIONS SERVICES 
                                 MODELS
    With a few exceptions, Wall Street has tended to favor business-
oriented business models both in traditional telecommunications as well 
as the Internet. Only monopoly (e.g., cable TV), and semimonopoly 
(e.g., @Home) situations, have been attractive enough to attract 
widespread investment. Key detractors from residential investment 
appear to be the greater propensity for price-based competition and the 
lower concentrations of revenues. As a result, with the exception of 
AT&T/Cable Companies and the RBOC's, both of which have existing 
consumer franchises and facilities, we do not currently see significant 
investment in residential broadband facilities. Consequently, we expect 
these two players provide the greatest prospects for broadband to the 
home.

           6. WALL STREET FAVORS SMALL COMPANY INNOVATIVENESS
    Wall Street is more willing to provide capital for smaller 
companies to innovate than it is for larger companies. This partially 
contributes to why larger companies are less likely to innovate. Not 
only do their efforts often go unrewarded, they are sometimes punished 
as the dilative impacts of their investments negatively affect the 
bottom line. This suggests that ``Wall Street'' may be slowing the 
efforts of both the RBOC's and AT&T/cable companies in bring broadband 
to the home. However, the ``Street'' continues to be interested in 
funding new upstarts who will eliminate bottlenecks in the existing 
communications infrastructure. This year investors have answered the 
call to open the ``local bottleneck'' by eagerly funding three new DSL 
providers: COVAD, Rhythms and NorthPoint. Although these companies 
focus mostly on business customers, they provide services to 
residential users through telecommuting applications and are exploring 
general consumer offerings. While they may not have the critical mass 
of the RBOC's and AT&T, ``Wall Street's'' willingness to actively fund 
their innovations makes them vitally important to moving the broadband 
``ball'' ahead even when the bigger players would tend to be more 
cautious.

    7. ``WALL STREET'' FRIENDLY LEGISLATION/REGULATION WILL PROMOTE 
                               INVESTMENT
    The number one criteria that the ``Street'' is interested in from 
legislation/regulation is stability and certainty. Investors were 
particularly disillusioned by the uncertainty caused by the ease with 
which the Telecom bill of 1996 was easily derailed by RBOC lawsuits 
less than a year after it was passed. We believe that this regulatory 
uncertainty contributed significantly to the substantial decline in 
CLEC stock prices in the spring of 1997. While there were other 
contributing factors, we believe that this ultimately resulted in the 
premature end of CLEC funding and therefore a reduction in amount of 
facilities-based competition. The key takeaway here is that maximum 
``Wall Street'' investment will occur in environments where regulation 
is stable for at least three to five years.

      8. TELECOM BILL HAS HELPED ACCELERATE BROADBAND COMPETITION
    While it is easy to look at the limited levels of competition in 
the local loop three years after the 1996 telecom act, we would argue 
that the glass is half full and not half empty. Particularly as it 
relates to the deployment of local broadband the results have been 
encouraging. While the traditional CLEC's are expected to still have 
less than 5 percent access line market share in 1999, we expect the 
independent DSL lines to have at least 15 percent market share of the 
estimated 700,000-800,000 DSL lines that will be services. The 
implications are that the Act may being doing much better in 
facilitating data/broadband competition, which as we have mentioned is 
the most important area going forward, than it has for the voice 
services that it was nominally designed for. We view this as a success 
and believe that the key to bringing competition to telecommunications 
will be with ensuring that the next generation services are 
competitive.

      9. RBOC'S HAVE INSUFFICIENT INCENTIVE TO OPEN THE LOCAL LOOP
    We believe that the RBOC's actions since the Telecom act was passed 
demonstrate that there was little ``true'' incentive to force them to 
quickly open the local loop to competitors. However, we believe that 
their actions were rational. First, opening up the local market is 
expensive in terms of the direct cost of systems alone. Second, the 
RBOC's already have access to the most profitable portion of long 
distance, access charges. Third, the incremental prospect of lost 
customers due to not having long distance is, in our opinion still 
small. In this environment, long distance is nice to have and should be 
pursued over the long term but not of urgent importance. Consequently, 
while the competitive environment somewhat changes this outlook, we 
doubt that any legislative/regulatory strategy based solely on 
motivating the RBOC's through the long distance industry will yield 
fast enough results to meet incredible demand for broadband services.
10. RBOC'S MUST ULTIMATELY BE ABLE TO PROVIDE SERVICES FOR THERE TO BE 
                           WIDESPREAD ROLLOUT
    Despite our less optimistic outlook on the ability for the RBOC's 
to lead innovation, we do believe that they are a key element to the 
widespread deployment of any new technology including broadband. The 
reason is simple: they have greatest amount of telecommunications 
manpower and resources. In fact, we believe that for the foreseeable 
future they will be the largest providers of both voice and data 
communications services. As a result it is important to ensure that the 
RBOC's are participants. However, we do not believe that RBOC's are 
materially disadvantaged by the current regulatory structure or that 
any unfair advantage of the cable companies has led to the substantial 
lead that cable modems has over RBOC DSL deployment. So, in our 
opinion, to maximize the consumer broadband, the challenge for 
legislators and regulators is to create a stable regulatory environment 
that will spur innovation and investment by competitors to the size 
where the RBOC's no longer have the option to lag behind. In our 
opinion, with less than 1 percent of households and/or businesses 
expected to have broadband access by the end of the year, those 
competitors have not yet achieved that critical size.

             Additional Information Available Upon Request

    Deutsche Bank Securities Inc. maintains a net primary market in the 
common stock of MCI WorldCom, Inc. and Covad Communications Group.
    AT&T Corp., BellSouth Corporation, MCI WorldCom Inc. and Covad 
Communications stocks are optionable.
    MCI WorldCom, Inc. has convertible issues outstanding.
    An author of this report has a long position in the common shares 
of MCI WorldCom, Inc.
    Deutsche Banc Alex. Brown Incorporated has been engaged as 
financial advisor to CAI Wireless Systems, Inc. in connection with its 
pending acquisition by MCI Worldcom, Inc.
    Within the past three years, BT Alex. Brown Incorporated or a 
predecessor has managed or co-managed a public offering of Covad 
Communications Group, Inc.

[GRAPHIC] [TIFF OMITTED] T6614.011

    The Chairman. I am going to ask one question and then I 
would like you to answer it for the record because I have to 
leave, and then Senator DeWine will follow up. And I would like 
all three of you to take a crack at this, and please forgive me 
for having to leave after I ask it, but I am way behind on 
things I have got to get done.
    There has been legislation introduced in Congress that 
would provide data relief to the local telephone companies. I 
am interested in your views on the impact that this type of 
legislation would have on the market for investment in Internet 
products and services, as well as the development of broadband 
networks.
    So I would like to have each of you take a crack at that. 
We will start with you, Ms. Kovacs, and then I will turn the 
rest of the hearing over to Senator DeWine. If you would come 
up here, Senator DeWine, I would appreciate it. And if you 
would answer for the record, I would certainly want to read 
that later.
    Ms. Kovacs. Thanks. I think that kind of legislation which 
would make it easier for the RBOC's to deploy their data 
networks would clearly encourage them to invest and would 
encourage Wall Street, in turn, to invest in them. There is a 
tradeoff, clearly, because that legislation which would favor 
the RBOC's would make life potentially somewhat more difficult 
for the data LEC's, the Covads and Rhythms and NorthPoints of 
the world.
    So while you might get a lot more DSL deployed a lot more 
quickly through the RBOC's themselves, you might wind up 
getting somewhat less deployed through the data LEC's. As I was 
trying to say earlier in my initial statement, if the key 
regulatory goal becomes to try and get as much broadband out on 
both sides as fast as possible, to have DSL become a 
marketplace check on the cable industry's ability to engage in 
anticompetitive behavior, then you may very well want to lift 
the ban on the RBOC's and just go for sheer high-volume DSL 
through them. If your concern is more to just make sure that 
there are a lot of competitors out there and to protect the 
small competitors, then you would not want to have the 
regulation.
    Wall Street, I don't think has a policy view. That is not 
our role. Our role is essentially to pick the winners and 
invest in them and make money for the small investors for whom 
we work. And if you do the free-the-BOC kind of bills, a lot 
more investment will go the BOC's, but the kind of market caps 
and the ability to raise money that the data LEC's have would 
collapse. If, conversely, you leave the rules as they are, then 
you are helping the small players, but getting access to 
capital at comparable kind of valuations becomes impossible for 
the RBOC's. So it is a complicated question.
    Senator DeWine [presiding]. Mr. Kimmelman.
    Mr. Kimmelman. The biggest problem, I think, with this 
issue, Mr. Chairman, is it increasingly is impossible to 
separate data from voice from anything else. Everything is 
digital bits, and to the extent that we preserve the structure 
of the law that the local phone companies need to open their 
networks to competitors, separating out a different set of 
rules for data from voice, I think, is unenforceable and 
unworkable.
    On the other hand, since we do recommend opening the Act, I 
would urge this committee and the Congress in general to look 
at the opposite end of the market, where I think there is a 
bigger problem. Low-volume long distance, not just the high-
volume data, is suffering from substantial rate increases. The 
FCC indicates prices are up, double what they were a year-and-
a-half ago for low-volume customers. This is where we need an 
infusion of competition. Also, we believe there is a need for 
openness on the AT&T cable systems.
    So there are a variety of policy issues that we think do 
need addressing. And in the context of that there is a way of 
looking at data without this artificial distinction between 
data and voice, that may be appropriate.
    Senator DeWine. Mr. Moore.
    Mr. Moore. Yes. Mr. Chairman, I would agree with Mr. 
Kimmelman. The artificial distinction between voice and data 
would definitely come into play. As you may know, voice has 
been tested over DSL services, thereby allowing RBOC's into 
interLATA data would, in effect, allow them into interLATA 
voice, given the way the technology is moving.
    I also would state that I don't think it would 
significantly enhance the RBOC's activity unless it somehow 
motivated competitors to act. And I would say that it would 
definitely demotivate competitors because many of the 
competitors rely on the capital markets to fund their 
capabilities, and this would tremendously demotivate Wall 
Street to invest in these smaller competitors and increase 
their cost of capital significantly.
    Senator DeWine. Mr. Kimmelman, you heard Mr. Armstrong 
testify and he was fairly adamant that AT&T does not exercise 
control over very much of its cable holdings. In fact, 
basically what he said was that AT&T controls about 24 percent 
of the cable systems, and that AT&T's other holdings pose 
really no competitive threat.
    You have attached to your testimony some interesting 
charts, two of them, in fact, which you have labeled Exhibit 2, 
for the record, and the one I am holding now is Exhibit 4. They 
show, I guess, AT&T's various business connections. I wonder if 
you would like to comment on what Mr. Armstrong had to say.
    Mr. Kimmelman. I certainly would, Mr. Chairman. The issue 
is not some simple notion of control as if this is the widget 
business. This is the communications business and this is the 
infrastructure over which democratic discourse takes place in 
our society today. This is our future. This is how we know what 
we know, communicate what we need to learn from each other, and 
receive entertainment. It is critical to First Amendment 
rights. That is the first key point, so the notion of control 
is more complicated.
    Second, we are taking an old monopoly telephone system and 
an old monopoly cable system and, through the 1996 Act, 
suggesting that there ought to be broad-based, wide open 
competition. In order to do that, it doesn't make a lot of 
sense if the few big players in the market own even 5 percent 
or 10 percent of each other. They lose the incentive to 
challenge each other as wide-open rivals in the marketplace.
    So Mr. Armstrong starts from a very, very narrow image of 
AT&T and you have to own 100 percent. Well, I went back to look 
at what his company does own in other companies. He was talking 
about a 5-percent attribution rule. I don't think he needs to 
worry about that too much. He needs to worry about where he 
owns 90 percent of Cable Vision Association, 75 percent of 
District Cable Vision Limited, 97.98 of InterMedia Partners, 
and I can go on and on, 85, 80, 75, 50, down to 33 percent of 
Cable Vision Systems.
    Time Warner, he says to Senator Torricelli, he has no 
involvement in. Well, through his MediaOne acquisition, he gets 
almost 25 percent of Time Warner Entertainment, with board 
representation. He indicated no board representation before. 
These are substantial stakes in companies that could have 
aligned with someone else in the marketplace to challenge AT&T, 
to challenge TCI. Will they do that even with a small ownership 
stake?
    The final point, Mr. Chairman. I mentioned before these are 
network systems coming out of a monopoly environment where we 
are asking for competition. In order for a programmer to make 
it, they need to get broad distribution. In order for an 
Internet service provider to make it, they need to reach a 
large portion of the public, and they are often looking for 
advertising dollar support. That means eyeballs.
    If AT&T has any say in the vast majority of decisions of 
who gets on these systems, what services are provided, at what 
price, and whether they have any arrangements with anyone else 
who may want to compete with AT&T, that could undermine the 
development of broadband competition.
    Senator DeWine. Ms. Kovacs and Mr. Moore, in your testimony 
you both stated that the Internet is most likely to continue to 
grow if it is not regulated. And I certainly agree that as 
policymakers we need to avoid regulation of the Internet. I 
think it is particularly interesting, though, that you do not 
think the Government should take a role in forcing AT&T to open 
up its cable system. You have stated that the market will 
eventually force AT&T to open its system, but I would like to 
explore that just a little bit more with you today.
    If AT&T can offer a good product, such as RoadRunner or 
@Home which does allow easy access to the Internet, and if they 
can combine that good rates on other bundled services, do you 
think a significant number of consumers will still demand other 
options?
    Ms. Kovacs. To me, the key is whether DSL really becomes 
broadly deployed over the next year or two. And there are some 
technology issues and some regulatory issues there, but it 
looks right now like we might very well see 1 million or more 
DSL subscribers out there next year being offered more or less 
the same sort of band width that the cable companies offer, 
possibly better security on the network and a choice of any ISP 
and any content you want to get.
    If that scenario develops, then I think the pressure will 
be on AT&T and the other cable companies to provide the same 
kind of openness. If a year from now we are sitting here and 
there are still only 100,000 DSL subscribers, then I think you 
have got a problem. So I am not looking at this as sort of a 
forever answer. I think given the way the market looks like it 
will develop at this point, it is reasonable to assume that the 
telcos with DSL will provide a check on the cable industry and 
force it to open. If that turns out to be a wrong prediction, 
then you probably will need to reexamine the issue and very 
well might need to do something to open up the cable industry.
    Senator DeWine. Mr. Moore.
    Mr. Moore. As we have stated, we believe that AT&T will 
open up its cable plant. And if the RBOC's also sufficiently 
open up the local loop for DSL resale, we believe that a number 
of other third parties will introduce a variety of different 
services that will also be appealing to consumers. And at the 
end of the day, neither the RBOC's nor AT&T will have 100 
percent market share and that consumers will demand new service 
offerings as they are presented to them.
    Senator DeWine. Let me ask the whole panel this question. 
The first panel this morning was asked about AT&T's plans to 
contractually prohibit consumers from downloading or streaming 
video for longer than 10 minutes. I am concerned that this 
prohibition on video streaming will serve only to protect the 
cable companies' monopoly in providing video services. I would 
be interested in your views on that, and also will this in any 
way affect investment.
    Mr. Moore, do you want to start?
    Mr. Moore. Yes, Mr. Chairman. I would agree with you that 
this constraint is somewhat onerous and will become somewhat 
onerous over time. I would also point out that perhaps from the 
RBOC's standpoint, they may limit voice over DSL. So I think 
both players in this broadband game will have to be watched for 
abuses relative to their core service offerings, and I think 
that both the regulators as well as the market will have to 
continue to place pressure on them to avoid doing that.
    Senator DeWine. Mr. Kimmelman.
    Mr. Kimmelman. I think it is a very legitimate concern, Mr. 
Chairman. Mr. Moore says watch them carefully and prevent 
discrimination. Ms. Kovacs says if competition doesn't develop, 
you will need to step in. I suggest you have a policy paradigm 
here, which is quite clearly putting the players in the market 
on warning that you expect pro-competitive behavior and that 
you intend to step in with open access requirements and 
prevention of discrimination through these kinds of streaming 
restrictions if they are used to prevent the development of 
competition. I think that is the appropriate way to go. I think 
your concern is absolutely right.
    With cable rates rising and soaring, we have heard promises 
before that satellite was coming and others were coming, and it 
didn't happen in the time or as yet in the way we had hoped. We 
can't rely on those promises. I think we need a framework to 
ensure that things that are discriminatory are prevented right 
up front so we get more competition.
    Senator DeWine. Ms. Kovacs.
    Ms. Kovacs. I think again the issue comes down to whether 
cable has the entire field to itself or whether it faces 
competition. And for video, it faces competition not only 
potentially from DSL, but also from satellite. And down-loading 
very high-capacity from satellite is something that can be done 
very efficiently, although the upstreaming is not as efficient. 
So I think again the pressure will be on the industry to open 
itself up.
    And I think that Mr. Armstrong's point that in a world of 
1,000 channels your behavior is very different from your 
behavior in a world where you only have 30 channels--I think 
that is a valid point. And I think that the value of content is 
what is going to become very, very high, and that in a world of 
essentially infinite access, the distributors are going to be 
looking for content, not shutting it out. And I think that 
ultimately as the pipes become fatter and capacity constraints 
disappear, it will lead to the streaming video problem going 
away.
    Senator DeWine. Mr. Kimmelman, do you want to comment on 
what standards you think the FCC should adopt with regard to 
ownership attribution?
    Mr. Kimmelman. Mr. Chairman, I think the FCC, following its 
direction from Congress in 1992, ought to quickly enforce its 
horizontal rules. They are not as tough as we had asked them to 
impose. Controlling 30 percent of the market is massive size 
compared to other players in the market. However, it is at 
least a good starting point.
    Their attribution rules, I think, are appropriate. And I 
think if AT&T needs to make a case that to be larger than that 
is essential to try to compete against the telephone monopoly, 
we have an enormous problem in this country that looks like it 
can at best sustain a duopoly. We need to know that right now, 
so I say the rules ought to be as the FCC had proposed. The 
stay on them should be lifted. I think there is absolutely no 
question that with recent Supreme Court rulings, those rules 
are constitutional and valid. And then we ought to understand 
whether we have a bigger problem with the 1996 Act than we even 
guessed.
    Senator DeWine. Ms. Kovacs or Mr. Moore, do either one of 
you want to comment on that?
    Ms. Kovacs. I am not a lawyer. I am not going to address 
that one.
    Mr. Moore. I would like to comment, Mr. Chairman. In terms 
of the way Wall Street is looking, or at least I personally am 
looking at the AT&T situation, we see AT&T, as Mr. Armstrong 
mentioned this morning, having about 18 percent market share of 
all the telecom spending in the U.S. over every square foot, 
whereas the RBOC's pretty much have the remainder. So our 
excitement about AT&T is their ability to capture more market 
share and not to make it a less competitive situation.
    When you look at the amount of network deployed, AT&T 
probably has a tenth of the overall network deployed in this 
country. Just from a raw dollar standpoint, we do not see a 
critical issue in terms of AT&T's control of facilities in this 
country.
    Senator DeWine. Mr. Kimmelman.
    Mr. Kimmelman. Could I just comment?
    Senator DeWine. Sure.
    Mr. Kimmelman. That is an interesting perspective, not at 
all consistent with antitrust law, but Wall Street has a 
different view. I would just go back to something that is very 
indicative of what Wall Street thinks, and that is that the 
price per subscriber of cable systems with the recent AT&T 
transactions more than doubled.
    Now, the world didn't change overnight. The infrastructure 
is the same. The Internet is what everyone knows it to be. This 
wasn't a new technology that they invented with these 
transactions. They paid more than twice as much for these cable 
monopolies and Wall Street endorsed it for one simple reason, I 
believe, and that is that they are in the position to get that 
revenue back from the customer and there is no one else in 
reach to challenge them. That may be great for Wall Street, but 
that is extremely troublesome for the consumer's pocketbook.
    Senator DeWine. Ms. Kovacs.
    Ms. Kovacs. I guess I can move on with that point for a 
second. I think one of the reasons for that is that AT&T has 
the brand and the scale to actually be able to make cable 
telephony a reality, which I don't think any other player can 
do. You need a fairly high level of penetration to make it 
economic, and AT&T is probably the only player that has any 
hope of really doing that. So to the extent that the Act 
originally envisioned a facilities-based competitor in 
telephony, I think that acquisition is a positive.
    I guess to go back to another sort of financially-related 
issue that came up earlier, the distinction that was made 
between the telco networks and the cable networks, with the 
telcos described as monopolies paid for on rate of return by 
ratepayers and the cable networks having been paid for 
essentially by shareholders--that distinction is one I am very 
uncomfortable with and I guess I would like to make that point 
in the record.
    At least as I look at it, both of them have been sort of 
the only in players in franchises where some franchising 
authority gave them that ability. When I look at their 
financials, both of them run fairly similar cash flow-to-
revenue ratios, and the only reason cable has been unprofitable 
is that it chooses to handle the way it manages itself very 
differently. It doesn't operate under the kind of depreciation 
rules that the regulators imposed on the telcos, or whatever. 
But at least just sort of as a matter of what I see as fact, I 
think it is important to understand that the two networks were 
financed very, very similarly, and essentially both with more 
or less equal risk to shareholders.
    Senator DeWine. Well, I want to thank this panel as well as 
our previous panel for your testimony. It has been very, very 
helpful. Clearly, we are dealing with a critical set of issues. 
Cable and telephone are already important industries, vitally 
important, and broadband is fast becoming a critical part of 
our economy as well.
    We need really, as we continue to look at this, the input 
of experts like yourselves, and this committee and the 
subcommittee will continue to consult with you as we look at 
these issues. So, again, I think this morning's hearing has 
been very helpful. We appreciate your time and your patience.
    Thank you very much.
    [Whereupon, at 12:56 p.m., the committee was adjourned.]

                                

  
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