U.S. GOVERNMENT PRINTING OFFICE

58–505CC WASHINGTON : 1999

DEPLOYMENT OF DATA SERVICES

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JUNE 24, 1999

Serial No. 106–50

Printed for the use of the Committee on Commerce

(

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

THOMAS C. SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON TELECOMMUNICATIONS, TRADE, AND CONSUMER PROTECTION

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,

Vice Chairman

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

BILL LUTHER, Minnesota

RON KLINK, Pennsylvania

THOMAS C. SAWYER, Ohio

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

2

C O N T E N T S

Page

Testimony of:

Apfelbaum, Marc J., Senior Vice President and General Counsel, Time

Warner Cable ................................................................................................ 55

Daggatt, Russell, Vice Chairman, Teledesic .................................................. 36

Falcao, Glenn, President, Internet and Service Provider Networks, Nortel

Networks ........................................................................................................ 32

Gray, Stephen C., President and COO, McLeodUSA, Incorporated ............. 82

Kurtze, Arthur, Senior Vice President, Onesprint, Strategic Development,

Sprint ............................................................................................................. 72

Lenox, Howard A., Jr., Director, Federal Relations and Technology Issues,

SBC Telecommunications ............................................................................. 15

Netchvolodoff, Alexander V., Vice President, Public Policy, Cox Enterprises .............................................................................................................. 57

Pickle, Kirby G., President and COO, Teligent ............................................. 41

Scott, David E., President and CEO, Birch Telecom, Inc ............................. 76

Tauke, Hon. Tom, Senior Vice President, Bell Atlantic ................................ 60

Vitale, Mary Beth, President and COO, RMI.NET ....................................... 87

Vradenburg, George, Senior Vice President, Global and Strategic Policy,

AOL ................................................................................................................ 50

Material submitted for the record by:

Kurtze, Arthur, Senior Vice President, Onesprint, Strategic Development,

Sprint, letter dated August 31, 1999, enclosing response for the record . 126

(III)

(1)

DEPLOYMENT OF DATA SERVICES

Thursday, June 24, 1999

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:13 a.m., in room

2123, Rayburn House Office Building, Hon. W.J. ‘‘Billy’’ Tauzin

(chairman) presiding.

Members Present: Representatives Tauzin, Stearns, Gillmor,

Deal, Largent, Cubin, Rogan, Shimkus, Wilson, Pickering, Markey,

Boucher, Gordon, Rush, Eshoo, Engel, Luther, Sawyer, Green,

McCarthy, and Dingell (ex officio).

Staff present: Justin Lilley, majority counsel; Cliff Riccio, legislative clerk, and Andy Levin, minority counsel.

Mr. TAUZIN. The committee will please come to order. We will

keep trying. The committee will please come to order.

I will ask that all of our guests take seats and witnesses please

take your positions at the table. Thank you very much.

The purpose of today’s hearing is specifically to provide this subcommittee with a comprehensive overview of what I believe is the

next generation of telecommunications. The United of America is

rapidly approaching the close of the 20th century with its position

as the world leader in the provision of telecommunication services

to its citizens firmly established. Congress has laid the groundwork

to ensure that, as we move into the 21st century, Americans will

have a mature, dynamic, competitive telephone, cable, broadcast industry both wired and unwired to provide a full range of affordable,

local long-distance video and over-the-air services.

The provisions of the Telecommunications Act of 1996 and the

regulations attendant thereto, while certainly not perfect, have

been the safe harbor in which each of these services has been securely docked now for the last 4 years. But there is a new kid on

the block—a strapping, unruly teenager—now that is barely recognized, in its infancy, and was only vaguely referred to when Congress and America’s great telecommunications companies signed

the uneasy truce of 1996.

It is called high-speed, broadband data. And it can travel from

house to house and business to business around the globe at light

speed through a medium called the Internet. It is swallowing up

all of the great telecommunications services upon which we Americans have grown dependent and come to expect and it is spitting

them out again in great and wonderful combinations the likes of

2

which the world has never seen nor imagined. Because in 1996 it

was just an infant, vaguely acknowledged, ill-defined as some sort

of anticipated, quote, unquote ‘‘advanced’’ telecommunications service, it was left alone to define itself and develop while we policymakers sweated and groaned belatedly crafting policies and rules

for the last generation of telecommunications. And now every telecommunications industry in America—ILECs, CLECs, IOLECs,

satellite, wireless, phone, fixed wireless, electric, cable, and broadcast, probably some we haven’t heard of yet—is gearing up to use

and deploy high-speed broadband data services.

Over the next several years, it can be available to every American home and business that wants to be connected to the next century’s service. It isn’t an exaggeration to say that this technology

has begun and will continue to change the way we live, the way

we do business, not only in this United States, but in every country

on the planet. Its positive effects on our economy is truly staggering.

According to the U.S. Department of Commerce report recently

issued called The Emerging Digital Economy II, information technology industry is driving the U.S. economic growth and although

it comprised only 8 percent of the Nation’s total economic output

from 1995 to 1998, it is responsible now for more than one-third

of U.S. economic growth. The report concludes that by the year

2006, almost half of U.S. workers will be employed in the information technology industry or in a field that heavily relies on such

technology. Here in the northern Virginia area, I am told, 4,500

high-tech industries now employ more people—more people—than

the Federal Government, believe it or not.

We have invited a number of companies to come before us today

to present an overview of the broadband data pipes that are developing or preparing to deploy, as well as the companies which are

creating this remarkable applications and services that are and

will be delivered over these broadband pipes.

To the extent that any of the witnesses today were led to believe

that this hearing is an open invitation to attack other companies

for perceived sins or perceived commissions or omissions or will be

an opportunity to lobby this committee as to your position on particular legislation now before the Congress or possibly before the

Congress or to your company’s opposition to any other company’s

position on any legislation, let me set the record straight at the

outset. There are a number of policy issues attendant to this next

generation of telecommunications, including matters of regulations

versus deregulation, taxation, open access, privacy, competition,

and many, many more. Let me assure the members that those

issues will be addressed in upcoming hearings, specifically on legislation that I, Mr. Dingell, and others will shortly introduce and

others have already introduced.

However, it is not our intention in calling this hearing to attempt

to have the committee explore or debate these matters today. It is

specifically our intention today that this be an in-depth exposure

for members on the various types of broadband pipes and

broadband applications. And I am, therefore, going to ask the witnesses to do something very important. I have read your opening

statements. We reviewed them last night. Put them away. If any

3

of you want to read those statements to us, I will bang the gavel

down and we will move to the next witness. If any of you want to

engage in attacks on each other or on your business practices or

perceived sins or omissions or commissions, I will bang the gavel

and we will move to the next witness.

This is an educational hearing. The purpose of it is to give you

a chance to do something we sorely need and that is to teach us

about the miracle of broadband: what it is; what it does; what it

can do; and why it is important to get it out there. And how are

you getting it out there and how are you not? And to teach us why

it is that we have to, 1 day, consider making some policy in this

area for the good of the country and for the planet. Therefore, put those written statements away. Don’t lobby us

today. We are not interested in that. And I would ask members:

Do your part, too. This is not a day in which you ask witnesses to

attack other witnesses. This is a day to learn. This is a day for you

to teach us.

We have a large panel before us. I am going to suggest several

things. One: I don’t do two panels when we do hearings. I have a

very specific reason for that. I have been here a long time now and

I have been through a lot of hearings with two panels. And whenever I chair a hearing with two panels, it is me and the second

panel alone. We do one panel. That way you can hear from us and we can all

here from you and then we can have a good dialog together. Second, keep your conversation with us conversational. Put those

written statements away. Talk to us about what it is you are doing

and what you can teach us about broadband. And, third, if any of you need a break, just give me a little signal

and we will call a 5 or 10 minute break. This could be a long process.

Let me thank you for coming. I deeply appreciate the time you

are going to spend with us and the fact that we are all going to

go to school today. I thank you and I yield now to my friend, the

gentleman from Massachusetts, Mr. Markey for an opening statement.

Mr. MARKEY. Thank you, Mr. Tauzin, very much. And I thank

you for calling this great hearing today on the subject of the deployment of data services. The subject of data services is not a new one to this subcommittee. This subcommittee has a long history with the development of competitive data services and I think a brief overview of

that history is beneficial. Let us just take a short walk down memory lane. Some of the most important data service hearings were held immediately after the break-up of AT&T in 1984. The newly divested

Baby Bells were clamoring to be relieved of the line of business restrictions of the MFJ which broke up Ma Bell. The most hotly contested issue at the time was the information service restriction

with fledgling information service providers and newspaper publishers battling with the Bells in hearing after hearing. We had long debates in the subcommittee on that subject. We

were told back then if we only let the Bell companies into information services, then they could bring fiber to the home. If they could

do information services, then they could reach rural areas with disVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
4

tant learning or do virtual surgery through telemedicine applications. Sound familiar? Fiber to the home became a bumper-sticker

slogan to promote the Baby Bell data service agenda.

And who could forget Monsieur Minitel in 1987? We explored

Minitel data service that was being deployed in France with Monsieur Minitel who ran it testifying before our committee. We even

projected the service up on the hearing room wall right over here

so that we could right to France and plug right into that system

with their wonderful data service where one could buy airline tickets online, make dinner reservations, or remotely chat with

Bridgette in Lyon.

We needed Minitel in America. What a vision.

Simultaneous with these debates in the late 1980’s, this subcommittee promoted our domestic information services marketplace. As then-chairman of this panel, I convened numerous hearings as we battled the FCC time and again, in bipartisan fashion,

over a proposal to levy so-called enhanced service provider access

charges on nascent information providers such as Prodigy,

CompuServe, and others. The Federal Communications Commission proposal at the time was to assess charges on data service providers such as would raise the subscriber line charge to almost $8

so that access charges could be lowered for everyone else. Sound familiar?

And in what FCC Chairman Bill Kennard has called the most

important decision affecting the development of the Internet, the

FCC finally relented to our subcommittee and put in place an exemption for such charges on information service companies that

still stands today as the most important decision. It was that decision, after some very tense negotiations with this subcommittee,

that helped to spawn the rapid growth of Internet access to residential consumers because it made such service available.

The computer industry was invited to give us its views as well.

We heard testimony from John Scully of Apple; Mitch Kapor, the

founder of Lotus, John Gage of Sun Microsystems. We were told to

get digital; that we were in a period of convergence; that a bit is

a bit is a bit. It didn’t matter if it was a voice bit, a data bit, a

movie bit, a music bit, a fact bit: all bits could flow over the digital

networks and use digital technology. And this subcommittee got

digital. We began to foster national proposals to deal with the communications convergence.

I remember the hearings leading to the passage of the BrooksDingell-Markey-Fields bills in 1993 and 1994 where we talked

about fostering greater growth in data services to help promote

growth in the high-tech computer and software fields. I maintained

that we didn’t need fiber to the home, we could data over copper

wire with digital compression. I argued that it would be a good

start to promote affordable ISDN or some other flavor of digital

service to consumers, a proposal met with great skepticism in the

industry.

Our efforts on all these issues eventually bore fruit. We legislated in the midst of this digital convergence and enacted the landmark Telecommunications Act of 1996. That act broke down historic barriers to competition and was designed to unleash a digit

free-for-all across all market sectors and industries. Central to the

5

act was the notion that we would treat all entities based upon the

services that they were providing and neither based upon their

pedigree as a cable company or phone company nor on the particular type of facility used to deliver this service.

With all this history in mind, one can imagine my surprise when

I was told by someone recently that the Telecom Act was only

about voice. Simply competition for voice bits. There are apparently

many people in the industry suffering from the same bout of telecommunications amnesia. Some people now seem to be saying that

a bit is a bit is a bit, but some bits are more special than other

bits. Rather than communications convergence, people are proposing digital divergence, proposing to rip data bits out of the bit

stream and treat them differently from voice bits. There are also

suggestions that identical telecommunications services offered over

different facilities should be treated differently. How very

undigital.

Now, 3 years after the act, after numerous rulemakings, after

numerous court cases challenging FCC decisions, after a couple of

Supreme Court decisions, and even after a Bill of Attainder suit,

we are now finally starting to see the dividends of digital convergence. We are starting to see the competitive promise of the Telecommunications Act being fulfilled. Companies are turning away

from the courts and renewing efforts to open up markets and competing for all consumers.

As much as this hearing is an exploration for how we can further

foster competitive data services, it is also a celebration of the

handy work of this subcommittee. The fact that the witness table

is so diverse and that some companies present today might not

even have existed if not for the work of this subcommittee and the

decisions which we made is something that we all should take

stock of. Because, in the end, our effort is not just about voice, it

is not just about data, it is about the future. And I think our competitive future is a bright one if we remain true to our history on

these issues.

I thank you, Mr. Chairman, for your incredible panel today. I

think it is going to be one of the most interesting days we have

ever had in the subcommittee. I yield back the balance.

Mr. TAUZIN. Thank you, Mr. Markey. The Chair is now pleased

to yield to my friend from Illinois, Mr. Shimkus, for an opening

statement.

Mr. SHIMKUS. Thank you, Mr. Chairman. And, Mr. Chairman, I

appreciate your opening comments. I do not want to be in the business of taking sides. What I want to be involved in the business

is of fostering competition and I think that is why this hearing is

so important. Many of my constituents have an extremely slow connection to the Internet or none at all. For them, the digital divide

is all too real. They know that broadband technology is out there

and others are receiving it, but no one is willing to make the investment to build out to them.

Mr. Chairman, I also realize that any time we deal with our Federal regulations, it will be controversial. Our constituents demand

that we do all we can to help deploy these services. Again, Mr.

Chairman, thank you for this hearing and I look forward to hearing

from the panel. I yield back.

6

Mr. TAUZIN. I thank the gentleman. The gentleman from Virginia, Mr. Boucher, for an opening statement.

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I want

to commend you for organizing a discussion this morning on various aspects of broadband deployment for data services.

The Internet has become an enormous engine of financial growth,

making an economic contribution that few other industries can

equal. Eighty million Americans are now connected to the Internet

and there are currently more than 5 million websites in use. But

there are barriers, both actual and potential, that limit the experience of current Internet users and, if not removed, will burden future Internet growth.

I hope that, perhaps beginning this morning, our witnesses will

discuss an appropriate avenue for removing these barriers and

then continuing in our discussion next week where we begin to address specific legislative proposals. A continuation of those recommendations to this subcommittee can be made.

One factor that limits the experience of current Internet users is

the paltry pace of broadband deployment over the last mile into

homes and places of work. At the present time, there are only

70,000 users of DSL services, the telephone company’s broadband

offering. And there are only 500,000 subscribers to cable modem

transport services, the cable industry’s competing offering for

broadband connections.

I think we would be very interested in knowing, in the opinion

of these witnesses, what factors are limiting the deployment of both

DSL and cable-modem services. I think we would also be very interested in knowing what pace of deployment we can expect on a

realistic basis in future years. There have been a lot of projections

of what that pace of deployment will be. What, in the opinion of

these witnesses, is a realistic schedule for deployment of both DSL

and cable-modem services. And then I think we also would be very

interested in knowing the opinion of these witnesses with regard

to what policy changes, either administrative or statutory, we

should promote that, in turn, will promote the more rapid deployment of broadband services.

If the Internet is to achieve its potential as a multi-media platform for the offering of voice, video, and data, using the TCPIP architecture—and we all hope that it will achieve that potential—we

simply have got to resolve this bottleneck over the last mile and

increase data rates into homes and places of work. And your recommendations as to how we can best achieve that goal will be welcome indeed.

There is another issue that I hope that we can address in this

hearing and also the one next week. And that is the potential need

for greater competition in the offering of Internet backbone services. There are a number of participants in that market but, at the

same time, we are also witnessing an unprecedented concentration

in the telecommunications industry. And if that concentration proceeds into the market for Internet backbone services, there could

be a threatening of the peering arrangements that today assure

that information moves from one segment of the Internet backbone

to another without charge.

7

Backbone providers assume, I think more or less correctly, that

they are all at having content of roughly equal value attached to

their individual segments of the Internet backbone. But as one

company begins to achieve a larger presence in the Internet backbone market, that company might begin to assume that the content

attached to its segment of the backbone is of greater value than the

content attached to the segments owned by other participants. And

then that company might begin to impose charges on the flow of

information to and from its segment of the backbone.

The question I suppose we would ask of these witnesses—and I

hope you will address this—is, is that a potential problem? And if

it is, would we be well advised to encourage greater competition in

the offering of Internet backbone service to keep these peering arrangements intact and prevent the gateways that today are tollfree from becoming toll booths in the future? And if you believe we

should, how should we approach that?

One final issue I think deserves comment in these remarks and

I hope our witnesses will address this. At the present time, when

telephone companies provide Internet transport—and that is, by

the way, the way that most people get Internet transport today—

they are not permitted to package and price as a unity the transport and any affiliated Internet access service that they also offer.

They can offer Internet access, but they have to provide that Internet as an option and price is separately and give their customers

for transport services an opportunity to purchase Internet access

from any of a variety of Internet access providers.

That rule, however, does not apply to the cable industry and it

is apparent that, as many cable companies begin to deploy cable

modem services, that they will proceed on a very different model

and offer as a unity that cable modem transport and their affiliated

Internet access service. It would be very interesting to hear from

these witnesses any concerns that they have concerning that practice.

I would assume that Internet access providers would be very concerned indeed. There are about 5,000 of these companies across the

United States. They are companies that, by and large, did not exist

5 years ago. These are entrepreneurial startups that are succeeding

throughout our country not only in offering Internet access service,

but, in many instances, in becoming CLECs and qualifying to offer

competitive local telephone services as well.

These 5,000 companies carry with them the promise of giving reality to our vision when we passed the 1996 act of creating a truly

competitive local telephone and local telecommunications market.

And we should be taking every possible step to encourage the

growth and the development of these 5,000 entrepreneurial startup

companies. And yet their business base is threatened by the emerging practice of the cable modem providers of packaging as a unity

their transport and their affiliated Internet access service. These

ISPs can have their business base foreclosed to the extent that

their customers migrate from telephone platforms to the cable platform to obtain broadband access. And we would be interested in

knowing the extent to which that is a serious threat and the extent

to which we ought to consider remedies for that concern.

8

Well, this is a range of questions that I hope our witnesses will

consider and perhaps take this opportunity to respond to. Mr.

Chairman, I, again, want to commend you for scheduling a hearing

on what I think are the most important telecommunications issues

before us today and I look forward to hearing from these very distinguished witnesses.

Mr. TAUZIN. I thank my friend from Virginia. The Chair now recognizes the vice chairman of the full committee, the gentleman

from Ohio, Mr. Gillmor, who passes. The gentleman from Georgia,

Mr. Deal.

Mr. DEAL. Mr. Chairman, I listened to your lecture and I have

done my homework and will submit my written statement for the

record to be graded.

[The prepared statement of Hon. Nathan Deal follows:]

PREPARED STATEMENT OF HON. NATHAN DEAL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF GEORGIA

Thank you, Mr. Chairman, for holding this hearing today regarding the deployment of data services. I appreciate your attention to this important issue.

The 1996 Telecommunications Act requires that high speed data services be made

available to ‘‘all Americans’’ in a ‘‘reasonable and timely manner.’’ However, the interpretation of this requirement by the FCC has been subjective. We must ensure

that regulations do not prevent new competitors from entering markets with alternative services, particularly in rural districts such as mine. As we face reauthorization of the FCC in the near future, we must examine whether deployment of data

services is occurring and also assess whether deregulation would spur new entrants

into the market.

Currently, consumers have two main options for receiving high speed data service—via the telephone and cable networks. Wireless and satellite companies should

also be encouraged to compete. In addition, numerous mergers have occurred in the

field of technology since the 96 Act passed. We must ensure that we continue to foster an environment where all companies have an opportunity to compete, and that

such competition results in consumer choice and affordable prices.

I look forward to learning more regarding the status of data deployment, as well

as hearing from our broad span of impressive witnesses here with us today. Thank

you Mr. Chairman.

Mr. TAUZIN. Without objection, all written statements will be

part of the record and I thank you, Mr. Deal.

The gentleman from Oklahoma, Mr. Largent. Mrs. Cubin is recognized.

Mrs. CUBIN. Mr. Chairman, I do have some brilliant, inspirational, and insightful remarks, but I will submit them.

[The prepared statement of Hon. Barbara Cubin follows:]

PREPARED STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF WYOMING

Thank you, Mr. Chairman, for holding this very important hearing on the deployment of data services.

The hearing is of particular interest to me for two reasons. First, I am eager to

learn more about broadband deployment. Secondly, in a few weeks I will be holding

a town meeting in Wyoming on the same topic.

The specific issues that I want to concentrate on today are parity and access in

rural areas of the country to high speed data services.

The question is: when broadband technologies are fully deployed, will they be

available in rural areas at the same time they are available in urban areas?

Furthermore, will the bandwidth be the same? Just because we live in rural areas

and enjoy a slow paced lifestyle doesn’t mean we will settle for anything less than

the latest and fastest technology available.

Competition in the area of data deployment is vibrant. The industry is falling all

over themselves trying to deploy the fastest data services to consumers.

9

That is certainly good news for rural America. Services such as satellite, wireless,

and fixed wireless will reach where fiber and cable won’t—to the most rural of

areas. DSL and cable-modem technology promise to bring high speed services to the

most rural parts of the country, and I want to see that promise come to fruition.

The other good news is that some in the industry are starting to recognize the

importance of marketing broadband capabilities to small towns.

In the area of e-commerce there is not much difference anymore between a consumer in Wyoming and a consumer in L.A. In fact, businesses such as Tiffany’s,

Macy’s, and Barnes & Noble don’t even differentiate between urban and rural regions of the country any more—as long as their customers are accessible via the

Internet.

The Internet gives an entrepreneur the unique opportunity to set up a business

in Cheyenne or Lusk just as easily as one would in New York or Chicago and have

customers visit from all corners of the globe.

However, I have heard from several business people in Wyoming that they can’t

set up shop in certain towns in the state because the high speed data capabilities

are not yet available.

I want to work with industry to come up with incentives to solve that problem.

However, there are those that would actually define high speed data services differently in rural areas. That, I believe, is short sighted.

The gap in the ‘‘Digital Divide’’ will only grow wider if we start down the road

of legislating or regulating what certain parts of the country should and should not

have, or are capable of having, as far as high speed data services.

I agree with US West CEO Solomon Trujillo when he said ‘‘It will leave us with

a nation of ‘Haves’ and ‘Have Nots.’ ’’

I’m interested in hearing from the witnesses as to what plans their companies

have to deploy high speed data services in rural America.

What hinders them from providing services to small towns across the country?

What incentives do we, the federal government, need to provide to move your companies toward providing the latest technological and highest bandwidth capabilities

to every rural county across the U.S.?

I look forward to the discussion and learning more about this issue.

Thank you, Mr. Chairman, I yield back my time.

Mrs. CUBIN. I do want to just let the panel know that I am very

interested in hearing what plans your companies have to deploy

high-speed data services to rural areas in America. I would like to

know what hinders you from providing services to small towns.

What incentives do we, the Federal Government, need to provide

to move your companies toward providing the latest technological

and highest bandwidth capabilities to all of rural America? I don’t

want any of rural America to be left behind because I represent the

true rural America and that is the whole State of Wyoming. So I

look forward to the discussion, but I do hope you will address those

rural issues. Thank you.

Mr. TAUZIN. Like we don’t have rural America in the bayous of

Louisiana, Barbara. The gentleman from Tennessee, Mr. Gordon, is

recognized.

Mr. GORDON. Thank you, Mr. Chairman. This is a very important and high-stakes issue that we are going to be discussing today

and I congratulate you for bringing this good panel together. The

decisions that this committee will be making in the future is going

to have a tremendous impact on the panel’s stockholders and on

our constituents. And so we need to be well-informed of the consequences of our acts and the potential unintended consequences.

So this is a good effort to try to be educated and we need to make

educated decisions on these very important and difficult questions.

So thank you for bringing this panel together.

Mr. TAUZIN. Thank you very much, Mr. Gordon. The gentleman

from Florida, Mr. Stearns.

10

Mr. STEARNS. Thank you, Mr. Chairman. I notice we have 12

witnesses. That is pretty strong. But I still have my opening statement here.

Thank you for calling this hearing. The roll-out of such

broadband services will be integral to the continued high productivity of our Nation’s economy, but, of course, we are all concerned

how we proceed. Commissioner Michael Powell of the FCC recently

gave a speech in which he stated, quote—and I’d like to put this

in the record—‘‘I find that regulators often are invited or tempted

to take actions and promulgate rules based on sunny or stormy pictures painted by the advocates of action without digging below the

rhetoric and testing whether our intervention will really benefit the

public. One area that risks having that character is that of advanced services and the associated bevy of issues.’’ I think Commissioner Powell’s statement is quite true and applies, also, to Members of Congress here as well.

You know, I think all of us after the recent Portland decision was

announced, have some concern because basically, you know, there

is a statement by one of the Washington attorneys who stated that,

‘‘AT&T’s cable pipe provides public service that should be accessible

to others,’’ end quote. You know, let me ask my colleagues, is this

the new standard we should try to strive for? If it is a public service, then should we regulate? Under this standard, Congress and

the Federal Government could regulate how movie theaters show

their movies and that competitors should have access to those theaters or to the movie cameras because it is providing, quote, ‘‘a public service.’’ Or maybe television networks should have access to

their competitors signals because, again, televisions airwaves are a

public service.

I suggest that this direction is not the right way to go. Congress

created the Telecom Act of 1996 to foment deregulation and to

allow the free market to provide competition. Some of the witnesses

here today represent companies that owe their existence, very existence, primarily, if not wholly, to this act by allowing them to

compete with the incumbent telecommunication providers.

I think the city of Portland decision is a problem. I believe that

States and localities should play a primary role in the development

of telecommunications services, but if we allow every locality to create conditions for mergers, as Portland has done to the AT&T, TCI

merger, we will allow competition to be stifled and that will lead

to the slower roll-out of such services as broadband. The Portland

decision is a direct violation of the Constitution’s Interstate Commerce clause that Congress was bestowed to undertake. I believe

that only the Federal Government and really only the Department

of Justice should place economic conditions on mergers. The path

we have already chosen through the Telecom Act is the road for deregulation.

Deregulation, in the perfect world, would be treated equitably

and broadband, regardless of the delivery mechanism, be it cable,

telephone lines, satellite dishes, or electrical connections. I would

like to see all players have immediate and impartial access to deliver broadband services but, in the case of Bell companies, there

is the hitch of section 271 of the act that provides for the mandated

14 point checklist before the RBOCs provide long-distance voice.

11

But did the act place an equivalent restriction on the RBOCs for

data services?

Most analysts believe that data will soon make up 90 percent of

the traffic delivered. My main fear is that if we provide interLATA

relief, some companies may make an economic choice and forego attempting to offer long-distance voice in their region or in certain

States because it would be much more lucrative to offer local telephone and data services.

Now there are two companies, Mr. Chairman, in particular, who

have been dedicated to getting into the long-distance market: Bell

South and Bell Atlantic. Bell South has dedicated over $700 million

in their effort to comply with the act and its checkpoint list requirements in order to enter the long-distance market. Bell Atlantic has made great strides and is the furthest along in complying

with the checklist. I expect both companies will clear that checklist

and we will see in New York and Georgia, if not in other States,

by the end of the year, full competition.

So hopefully this accomplishment will provide these companies a

guideline to overcome the checklist for every State and every region. So I want to be assured that all the Bell companies will make

every effort to comply with the checklist in their region and in

every State before the interLATA restrictions are lifted. I thank the

witnesses and I thank you, Mr. Chairman, for your time.

Mr. TAUZIN. I thank the gentleman from Florida. The gentleman

from Ohio, Mr. Sawyer, is recognized.

Mr. SAWYER. Thank you, Mr. Chairman. I, like Mrs. Cubin, I

have a wonderful opening statement. I commend it to all of you.

I hope you will all read it.

Some of you will laugh; others may shed a tear. But none of you

will fail to be moved.

I just hope you won’t tell the ending to your fellow readers. It

will spoil it for them.

I am reminded of the moment when Vaclav Havel came to the

Congress and addressed a joint session. It was a compelling speech.

It was compelling because it reminded me of what I had learned

when I was a child and that was in no small way the development

of the printing press changed the world. It lead directly to the development of representational democracy and to the ability to move

ideas from one generation to another in very large ways across

huge portions of the world’s population. If you think in terms of

what the fax machine did all across Eastern and Central Europe

just a little more than a decade ago, it gives you some sense of the

enormous potential of what we are talking about here today.

When Havel came to the Congress, one of the most compelling

things that he had to say was that the events in Czechoslovakia

happened so fast that they did not have time even to be astonished.

That very same thing is taking place today. It may well, before we

complete our consideration of the full range of issues that, Mr.

Chairman, you are opening up today, indeed begin changes in the

nature of representational democracy across the globe in ways that

we can hardly even contemplate. In that sense, thank you very

much for this hearing today and for the work that will proceed

from it.

[The prepared statement of Hon. Thomas C. Sawyer follows:]

12

PREPARED STATEMENT OF HON. TOM SAWYER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF OHIO

Thank you Mr. Chairman for holding this hearing this morning on the deployment of high speed data services. I also want to thank our witnesses for coming to

testify before us.

Mr. Chairman, it would be an understatement to say the internet has changed

the way we do things because it has profoundly reshaped our culture in the United

States, and to a great extent, other developed countries. Electronic commerce is the

driving force of the global economy. People in remote places are able to communicate

with one another on a real-time basis using the internet. Students can download

information to supplement their classroom assignments. Clearly the growth of the

Internet can be attributed to the entrepreneurial spirit of the companies and the

individuals involved in its continuous development.

If we look back five years ago, we would have never thought that we’d be using

the Internet for things we are using it for now. Companies have been able to develop new technologies and products to meet consumers’ needs. The development,

and deployment, of broadband services will help continue to meet those demands.

What does the future hold? We can only speculate. In the very near future, consumers will be able to use nearly any telecommunications device to receive and deliver large quantities of voice, video or data almost instantaneously. And this will

be done regardless of whether you are using a telephone (wireline or wireless),

cable, or satellite company to access or distribute that information.

The deployment of broadband services is one of the most important issues in the

telecommunications industry because of the potential to provide new services to customers. However, questions remain as to who should control the ‘‘last mile’’ or the

connection to the household and whether consumers are given fair access to advanced telecommunications services. These issues need to be addressed so that we

can continue to keep up with the changing technology and move the world forward.

Mr. Chairman these are a few of my observations. Thank you again for calling

this hearing. I look forward to hearing from our witnesses and learning more about

this issue.

Mr. TAUZIN. I thank my friend. It is true that your opening statement, by the way, will be available at amazon.com? I thank the

gentleman.

Mr. SAWYER. And in comic-book version as well.

Mr. TAUZIN. The gentleman from Mississippi, Mr. Pickering.

Mr. PICKERING. Mr. Chairman, I thank you for having this very

important hearing to address these issues. I look forward to hearing this panel. It seems like an old reunion from the 1996 act that

all are gathered here together today. But I do want to look and listen today, based on what I call the three Cs: convergence, certainty, and context.

One of the key objectives of the act was that we would have the

one-stop-shop, that voice, video, data, all of those products and

services would converge and be offered by incumbents and competitors alike to consumers. And so we want to look and listen to these

proposals as to how would it relate to the objective or the goal or

the intent of the act as far as convergence.

Certainty, the second point. We have had a 3-year battle, both

regulatory and in litigation, and now we seem to be, as the gentleman from Florida said, on the verge of some breakthroughs in

271 in New York and Georgia and in Texas. We want to make sure

that whatever we do continues the regulatory certainty and the investment certainty, the market certainty, that we are hoping will

lead to the objectives of the act.

And the third thing, the context, was, again, where are we today?

We are on the verge of that breakthrough. So I hope and look forward to the testimony today and look forward to working with the

chairman on these very important policy questions that we do see

13

the fulfillment of our hopes when we passed the 1996 Telecommunications Act. Mr. Chairman, thank you very much.

Mr. TAUZIN. I thank the gentleman from Mississippi. The

gentlelady from Missouri, Ms. McCarthy, is recognized.

Ms. MCCARTHY. Thank you, Mr. Chairman, for holding this hearing today. I think it is important that we do examine the extent

to which consumers currently have or soon will have access to

broadband facilities and distribution. And we here in this subcommittee must ensure that we allow for adequate and fair competition between all providers so that consumers can benefit from

the best technologies available.

I look forward, especially, to hearing from the expert witnesses

today as we discuss this new and very exciting technology and the

services that are becoming available. And I am pleased that two

witnesses today are from my community. Al Kurtze, the senior vice

president of strategic development of Sprint Communications and

Dave Scott, who is president and chief executive officer of Birch

Telecom. These two companies are leading the way in greater Kansas City in the state-of-the-art technology and, of course, in service.

Al Kurtze led Sprint through its combination of voice and data

to expand both their wireless and wireline presence and through

his continued leadership, Sprint is being transformed into an integrated communications company. This week, Sprint, as you all

know, officially announced its new integrated on-demand ION service which will deliver local and long-distance service as well as

Internet access through a single connection to the home with a single bill. In addition, customers using this service can use several

phones and be connected to the Internet simultaneously because

the basic ION package will include four voice lines and two highspeed data connections. With its new ION service, Sprint is not

only making our lives more convenient, it is bringing competition

to the telecommunications industry and bringing jobs and economic

opportunity to our area.

Dave Scott founded Birch Telecom and is chief executive officer.

Birch Telecom has grown quickly since its founding in 1997 and it

is distinguishing itself by offering service both to residential and

business customers. Because it can offer several packages to small

businesses, Birch customers can save from 15 percent to 40 percent

on their bills. Birch also offers an integrator package, which includes local, long-distance, and high-speed Internet access for its

customers. Birch’s recent mergers with other communications companies have continued its growth and innovation, as well as its continued competitiveness and service to our community.

So, thank you, Mr. Chairman. I do look forward to the insights

which our panelists will share with us today on what Congress

should be doing to encourage more deployment.

Mr. TAUZIN. I thank the gentlelady. And, finally, the gentleman

from Texas, Mr. Green, for an opening statement.

Mr. GREEN. Thank you, Mr. Chairman. And I will submit my

opening statement and I appreciate my colleague from Kansas City

giving that commercial.

Also, following up my colleague from Florida, Mr. Stearns, I

thought we tried to regulate content last week in the juvenile crime

bill. But I will submit my opening statement.

14

[The prepared statement of Hon. Gene Green follows:]

PREPARED STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF TEXAS

The internet is the fastest growing communications medium. Here are some basic

facts about the internet: the amount of traffic on the internet doubles every 90 days;

the amount of voice and data traffic are about equal with data traffic growing at

30% per year; approximately 67,000 people sign up to the internet everyday. These

numbers are approximations of what is happening to the internet, but it clearly

demonstrates that the internet plays a growing role in our day to day lives.

Consumers usually access the internet through a traditional dial up call to their

internet service provider. Since the 1996 Telecommunications act there has been

new developments and innovations in both the accessing and utilization of the internet such as broadband services. Broadband service allows consumers to gain access

to telephony, video, and internet services all over through one pipeline. Also, the development of faster technologies such as the development of both Digital Subscriber

Lines and cable modems are helping to push the deployment of broadband and at

the same time reduces the cost for this service to the consumer.

There is tremendous growth in the internet, and Congress needs to make sure

that we balance the need for networks and backbones with the demand for faster

service and innovation of the internet.

I am interested in hearing about the other distribution services that are starting

to be deployed for broadband service such as two way satellite and wireless applications. I look forward to this hearing and learning more about broadband applications.

I want to thank the chairman for holding this hearing.

Mr. TAUZIN. I thank the gentleman. The gentlelady from California.

Ms. ESHOO. Well, I think that we are here to listen to the witnesses so I will submit my statement and thank you, Mr. Chairman, for holding this very important hearing. And thank you to the

witnesses that are here to enlighten us. And I yield back.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Thank you, Mr. Chairman, and I applaud you for holding today’s hearing.

This is an exciting time for consumers, to say the least. Some of the nation’s biggest and most dynamic companies are falling all over themselves to bring consumers

high-speed access to the Internet.

And each of them has different ideas on how to do it.

Wireline providers are banking on digital subscriber line technology—otherwise

known as ‘‘DSL.’’

Meanwhile, the cable companies are finally delivering on their promise to enter

new markets. Many operators are busily upgrading their networks to enable them

to provide two-interactive services.

And the wireless industry—both fixed and mobile providers—are hoping to find

their own niche.

And then there’s the satellite industry. Some companies, such as Teledesic, plan

multi-billion dollar systems for a constellation of hundreds of low-earth orbit satellites that will enable someone to surf the Web—from anywhere in the world!

Even television broadcasters, who are in the midst of their own digital deployment, will be players.

All this competitive ferment is good news for the economy, American workers ...

and most of all, the American consumer. Competitive choice means lower prices and

better services.

This is also good news for Congress, and this Committee in particular. We worked

hard to enact the Telecommunications Act of 1996, and we are now seeing the fruits

of our labor.

The Act unleashed economic forces that have revolutionized the way in which

Americans live, learn, heal and entertain themselves. Indeed, I suspect that some

of the companies sitting at the witness table today would not be here today were

it not for the 1996 Act. In fact, their efforts would have been illegal in many states.

This good news is only the beginning. As that old saying goes: we ain’t seen

nothin’ yet.

15

The pace of deployment will soon quicken—particularly because the cloud of uncertainty created by all this industry litigation is beginning to lift.

Having firmly established the rules of the road, Congress, the FCC and the courts

need to step aside and let these companies compete. There’s venture capital begging

to be invested, and there are jobs waiting to be created. Let’s press on.

So again, Mr. Chairman, I want to thank you for holding today’s hearing. I look

forward to the testimony of today’s witnesses.

PREPARED STATEMENT OF HON. BOBBY RUSH, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF ILLINOIS

Mr. Chairman, I applaud your initiative and leadership for holding this hearing

today on a matter of growing importance to our country and our economy. When

Congress passed the 1996 Telecommunications Act, no one envisioned that the

Internet would grow at such an incredible rate. Today more and more people conduct commerce on-line. In 1998 consumers spent over $32 billion dollars in on-line

transactions. It seems that every time one reads the business section of any major

newspaper, there is a new Internet-related company or an initial public offering by

a growing list of Internet companies. We’ve also reached that point in time when

massive amounts of information-data-are transmitted nationally and internationally

reflecting the true nature of our global economy.

Mr. Chairman, consumers are now more sophisticated and are demanding better

and faster Internet access. Hence, it is increasingly important that enhanced Internet access and broadband deployment is available to Internet users. The status quo

simply does not cut it any more. It is incumbent upon us, as legislators to remove

any regulatory impediments that may stifle broadband deployment. I hope this

hearing will enlighten us on the new broadband distributing technologies and what

is being done to deploy these technologies at a faster pace to the American consumer.

Thank you Mr. Chairman.

Mr. TAUZIN. Thank you very much. And let us begin, then.

The witnesses will, again, be admonished to be conversational.

You will have 5 minutes. The way we operate is I hit this little

switch, press this little button and when the red light comes on,

kind of wrap it up about that time. Conversational, again. The

written statement is gone. Please don’t attack. Let us educate. We

will start by introducing Mr. Hal Lenox, he is the director of Federal relations and technology issues of SBC Telecommunications—

and he will give us an Internet overview. Mr. Hal Lenox, please.

STATEMENTS OF HOWARD A. LENOX, JR., DIRECTOR, FEDERAL RELATIONS AND TECHNOLOGY ISSUES, SBC TELECOMMUNICATIONS; GLENN FALCAO, PRESIDENT, INTERNET

AND SERVICE PROVIDER NETWORKS, NORTEL NETWORKS;

RUSSELL DAGGATT, VICE CHAIRMAN, TELEDESIC; KIRBY G.

‘‘BUDDY’’ PICKLE, PRESIDENT AND COO, TELIGENT; GEORGE

VRADENBURG, SENIOR VICE PRESIDENT, GLOBAL AND

STRATEGIC POLICY, AOL; MARC J. APFELBAUM, SENIOR

VICE PRESIDENT AND GENERAL COUNSEL, TIME WARNER

CABLE; ALEXANDER V. NETCHVOLODOFF, VICE PRESIDENT,

PUBLIC POLICY, COX ENTERPRISES; TOM TAUKE, SENIOR

VICE PRESIDENT, BELL ATLANTIC; ARTHUR KURTZE, SENIOR VICE PRESIDENT, ONESPRINT, STRATEGIC DEVELOPMENT, SPRINT; DAVID E. SCOTT, PRESIDENT AND CEO,

BIRCH TELECOM, INC.; STEPHEN C. GRAY, PRESIDENT AND

COO, MCLEODUSA, INCORPORATED; AND MARY BETH

VITALE, PRESIDENT AND COO, RMI.NET

Mr. LENOX. Good morning and thank you, Mr. Chairman and

members of the subcommittee. It is truly an honor to be here today

16

and, with your permission, I will at least use my written words to

kind of keep on the 5-minute track.

I have been asked this morning to speak with you a little bit

about the Internet, not from any particular perspective over than

to speak of it structurally, how it is put together, what the components are, in the hopes that it will add some additional frames of

reference for the discussion that follows me this morning.

Mr. Chairman, even defining the Internet can prove to be quite

problematic. I went to Newton’s Telecom Dictionary in advance of

today’s hearing to hear from the bible what the Internet was and

Mr. Newton admonishes that it is very hard to define the Internet

in a way that is either meaningful or easy to grasp. I share that

definition with you so that if, at the end of my comments, I have

completely confused you, it is the Internet’s fault and not mine.

Well, let us work with this definition, then, and that is that the

Internet is a network of networks linking various individuals together globally through the use of a common computer language.

And there are a variety of languages, but they typically reside

under a suite of protocols called TCPIP and you will hear that

mentioned frequently as it relates to the Internet.

Well, with our working definition in hand, I think it is appropriate to spend just a moment on the history of the Internet. From

its nascent stages in 1969 until today, the Internet has grown to

become the enabler of society’s transition from a service economy

to a knowledge economy and so many of you spoke of that in your

opening statements this morning. It truly is a phenomenal event

for us.

A number of factors have contributed to the Internet’s popularity:

the proliferation of powerful computers, privatization of the Internet itself, and the development of a simple user interface which we

call the World Wide Web. Now the Internet today features over 42

million domains containing in excess of 830 million pages of web

content. Well, let us put that in perspective. In 1996, a year that

is frequently spoken of in these chambers, the Internet contained

an estimated 240,000 domains and roughly 72 million pages of web

content. Now such growth can only be described, I think, as explosive and, in fact, Inc. Magazine recently estimated that approximately 17 new web pages appear on the web every second.

Well, as we know, the growth of PCs really came when they became easy to use. When we moved from DOS into the graphical

user interface environment, the use of PCs really took off. And so

too it is with the web. When we developed the World Wide Web

itself and the accompanying browser, the Internet became accessible and we began to use it with much more regularity than we

had prior to. We had the ability to trade stocks, purchase books

and even automobiles, preview a CD or movie, or simply chat with

a friend in a way that a very few years ago none of us would have

even dreamed possible.

Whatever the application, one thing is certain. Our desire for

content and media-rich transactions will drive the need for more

and more information. We will become less willing to tolerate simple text files and we will demand a great deal more media-rich content. Files that include video, sound, and all these things enrich

our experience on the Net, but they also require a great deal more

17

bandwidth to accommodate the size of the files, lest you try to

download something and then come back to it 20, 30 minutes later

in the hopes that it may have actually arrived. And for those of you

that are on the Net using a conventional modem, I think you know

what I am speaking of.

Well, the Net is hierarchical in nature. I would like to spend a

moment just sort of structurally how it is built. It is hierarchical

in nature and the data feeds up from end-users through a series

of computer networks until they finally reach a set of facilities that

we commonly refer to as backbones. It is a bit like a river system,

if you think about it, in which small streams and tributaries make

their way toward a main body of water, all the while accumulating

greater and greater volume. And you can think of that volume

being the bits of information and the files that we are sending to

one another across the web.

Well, backbones are the main network in a particular network

system. And the circuits making up that backbone are large, highcapacity lines running both across country and around the world.

These networks allow your Internet service provider to exchange

data across regional networks in an arrangement that is commonly

referred to as peering. The hubs or the intersections at which this

data is handed from provider to provider are generally thought of

as being network access points or NAPs.

Now to reach a local provider or ISP, the end-user must have

some connection to the provider themselves. A number of access

methods are currently available or under development. And I am

going to mention just a few and if I have left any out, it was not

intentional. Analog modems, which is probably the most common

way that most of us access the Net, typically now are labeled as

running at 56 kilobits. It is rare if ever that you can get a 56K

modem to sync at that speed and we have all spent time and the

pain of trying to download files in that method.

ISDN came along for a while and is still a product in particular

niche markets. It, like analog modems, uses the circuit switch telephone network. In other words, all these are going over the telephone network that was built to carry voice and, originally, exclusively voice. It does, however, unlike analog modems, it does carry

the traffic from end to end in a digital form. So ISDN is not just

a product, it is actually a set of protocols that make that digital

transmission happen over the circuit switch network.

Well, now if we move to packet networks, which is where we will

spend the bulk of our time, I suspect, talking today, digital subscriber loop is a suite of technologies that you will hear a great

deal about that provide high-bandwidth over existing copper, twisted paid. In other words, we use that last mile that you referred to

in some of your opening statements to provide IP-based digital traffic on those loops. It allows us to move much faster than in the traditional format over either analog or ISDN and it gives you something that is often referred to as ‘‘always on’’ which is to say that

you don’t, like the modem, need to dial into the Internet, wait for

the modem to quite screeching, establish your connections, so forth.

A DSL, like a cable modem connection, allows you to be there as

though you were logged on in your local area network in the office.

18

I mentioned cable modems. They operate over the CATV network. And, again, like DSL, provide an always-on digital connection.

There are many other access methods that are either in development or are already available. They show great promise, including

the electrical industry; wireless, both terrestrial and satellite, offer

a variety of ways to access the Net. In other words, there are

many, many ways to get to the Internet and we are developing

newer and better ways each and every day.

Well, how do these new networks work? The Internet protocol

that I mentioned earlier provides the foundation for that. Think of

the packets as postcards and think of an IP transaction as sending

a novel on postcards through the post office from one end to the

other. So we will break that novel up, we will stick it into individual envelopes, we will mail it out, when it arrives at the other

end, we will reassemble the novel, and put it back together. Then

I read it as thought it had been assembled that way the entire

time.

So that is what IP does, which is dramatically from the way that

the telephone network works in terms of establishing a connection,

which is established for the length of the call, we call it in our business ‘‘nailed-up’’ and we leave that connection in place. IP is different. It just sends those packets in a diverse set of routes to get

where it needs to go following the best way to get there.

Now as telecommunications and technologies evolve toward the

environment of convergence, telecommunications carriers are constructing new, separate data networks that all plug into these—

they are all based on IP, but each of us, in our own way, are finding ways to bring IP to the end-user. And I believe that is what

this subcommittee is looking at now and trying to understand is all

the different ways that this is done and why that is the right thing

to do.

In the late 19th century—I will close with this—we saw the

emergence of the Industrial Revolution and the entrance of the

manufacturing economy. During the 20th century, we saw the migration from a manufacturing economy to a service economy. We

now stand at the threshold of the 21st century, Mr. Chairman,

where we are about to see yet another structural change in our

economy as we move toward a knowledge economy. Now that move

is fueled by a robust Internet and this new economy offers the

promise of opportunity for all Americans.

In their new book—or in their book—excuse me—The Virtual

Corporation, Davidow and Malone observe this, ‘‘In the years to

come, incremental differences in companies’ abilities to acquire,

distribute, store, analyze, and invoke actions based on information

will determine the winners and losers in the battle for customers.’’

That is what the Internet is all about. I think that their comments

offer succinct affirmation of why the rapid development and deployment of broadband is critical and why it will be a key enabler for

a robust development of applications having both economic and social value.

Mr. Chairman and members of the subcommittee, thank you very

much for this opportunity to be with you today.

[The prepared statement of Howard A. Lenox, Jr. follows:]

19

1 Newton, Harry, Newton’s Telecom Dictionary, 9e, pp. 610-611 2 Rowe II, Stanford H., Telecommunications for Managers, 3e, p. 674 3Zakon, Robert Hobbes, Hobbes Internet Timeline v1.1, http://info.isoc.org/guest/zakon/Internet/History/HIT.html 4 Ibid

5 ‘‘Data Data’’, Inc. Magazine, January 1999

PREPARED STATEMENT OF HOWARD A. LENOX, JR., DIRECTOR FEDERAL RELATIONS— TECHNOLOGY ISSUES, SBC TELECOMMUNICATIONS, INC.

Mr. Chairman and Members of the Subcommittee, it is an honor to appear before

you today. I am Hal Lenox, Director of Federal Relations for Technology Issues at

SBC Telecommunications. I have been asked to provide the Subcommittee with a

brief overview of the Internet, the technologies that make it up, and perhaps a prediction or two concerning its future.

Mr. Chairman, even defining the Internet can at times be problematic. In preparation for our discussion today, I consulted Newton’s Telecom Dictionary for a succinct description that I could share with the Committee. Newton’s begins its definition with the following admonition: ‘‘INTERNET: It is very hard to define the Internet in a way that is either meaningful or easy to grasp.1’’ Mr. Newton then goes on

to provide a definition that spans 2⁄3 of a page. At the other extreme, the textbook

Telecommunications for Managers, by Stanford Rowe, a text I taught out of at San

Diego State University, provides the other end of the spectrum. Rowe offers this definition in its totality: ‘‘An interconnected set of government, research, education, and

private networks.2’’ Both definitions are correct, yet neither is wholly useful for our

discussion today.

I would submit that a useful definition might be: ‘‘INTERNET: A ‘network of networks’ linking various individuals and institutions spanning business, education,

and government, together globally through the use of a common computer language’’. The operative elements of the definition include: network, individuals and

institutions, globally, and common language.

BACKGROUND AND HISTORY

With our working definition in hand, I’ll begin with a brief history of the Internet.

In 1962, the Internet was ‘‘born’’ as an outcome of recommendations from the Rand

Corporation in a document entitled, ‘‘On Distributed Communications Networks 3’’.

The document detailed the construction of a computer network featuring the absence of a single outage point. In other words, Rand advocated the construction of

a network with the theoretical ability to survive a catastrophic event such as nuclear war. In 1969, the Department of Defense commissioned ARPANet with four

host computers, or nodes, and a limited number of users made up primarily of scientific researchers 4.

From its nascent stages in 1969 until today, the Internet has grown to become

the catalyst that—together with dramatic improvements in both computing power

and bandwidth potential—has become the enabler of our society’s transition from

a service economy to a knowledge economy. How did an arcane computing network

built solely with the intent of conducting military research rise to its current position of prominence and pervasiveness in our daily lives?

A number of factors have contributed to the Internet’s newfound utility and popularity: the growth in both number and processing power of computers, privatization

of the Internet and the development of a simple user interface, the World Wide

Web. While I will confine the majority of my comments to the Web, it is the concurrence of all three that have made the Internet the phenomenon it has become.

The Internet today features over 42 million domains, or discreet sites that one can

visit on the Net, containing in excess of 830 million pages of web content. To put

things in perspective, it is useful to benchmark these statistics against 1996, the

year that the Telecommunication Act was signed. In that year, the Internet contained an estimated 240,000 domains, and roughly 72 million web pages. Such

growth can only be described as explosive. Nor is it slowing. Inc. Magazine recently

estimated that 17 new web pages appear on the World Wide Web every second 5.

As the Internet has grown, so has the nature of the data carried over it. In its

early days, the content on the web was primarily text-based, similar to our first personal computers. In fact, the PC offers a valuable metaphor for the current geometric growth of data on the Internet. I can still vividly recall the first IBM XT computers delivered to our office. During their delivery and setup, it was not uncommon

to hear the refrain: ‘‘What will we ever do with 10 megs of hard drive?’’! Today, that

10 meg hard drive would barely be sufficient to house a simple movie trailer

downloaded from your favorite movie site on the Web. The real growth in PCs came

20

6Zakon, Robert Hobbes, Hobbes Internet Timeline v1.1, http://info.isoc.org/guest/zakon/Internet/History/HIT.html 7 Rowe II, Stanford H., Telecommunications for Managers, 3e, p. 662 8http://www.pacbell.com/products/business/fastrak/networking/nap

9 ibid

10 ibid

when the graphical user interface was developed, making computers approachable

and easy to use.

The same is true of the Internet. The development of the World Wide Web and

‘‘browser’’ in 1993 had an identical effect; the growth rate in web sites mentioned

previously offers ample evidence.6 Whereas we once accessed text-based interfaces

with programs such as ‘‘FTP’’ and ‘‘Gopher’’ (the Internet equivalent of using DOS),

today we merely point and click on our browser.

What follows that action is the ability to trade stocks, purchase books or even

automobiles, research an affliction suffered by a loved one, preview a CD or movie,

or simply chat with one’s friends. Whatever the application, one thing is certain: our

desire for content and media rich transactions will drive the amount of information

transmitted even higher, making the need for speeds greater than your modem currently supports all the more important.

THE STRUCTURE OF THE INTERNET

The architecture of the Net is hierarchical in nature, which is to say that things

‘‘feed up’’ from the end user through a series of computer networks connected to

local and/or regional service providers until they reach large transmission facilities

commonly referred to as ‘‘backbones’’. One might think of the structure as looking

somewhat like a river system beginning with small streams and tributaries making

their way towards the main body of water.

Backbone Structure

Rowe defines ‘‘backbone network’’ as ‘‘the main network in a particular network

system.7’’ The circuits making up the backbone are large, high capacity lines running both cross-country and around the globe, connecting major cities along the way.

These privately owned networks allow Internet Service Providers (ISPs) to exchange

data across networks. This exchanging of Internet traffic is generally referred to as

‘‘peering’’.8 The hubs, or intersections, at which this data is handed from provider

to provider and backbone to backbone is generally referred to as a Network Access

Point, or NAP.9

Following the privatization of the Internet by the NSF, a total of four NAPs existed in the U.S. However, due to the explosive growth of the Net, additional exchange points—both public and private—appeared. NAP clients may negotiate their

own agreements with other NAP clients for the exchange of Internet. These agreements establish mutually acceptable rules by which the providers transact exchanges.10 It is here that the peering takes place.

End User Access: Narrowband

To reach the local provider, or ISP, the end user must have some connection to

that provider. A number of access methods are currently available with a like number currently under development.

Switched Telephone Network (analog modem): Bandwidth on the telephone

network is generally limited to the transmission of analog voice and modem-based

data in the 0-4 kHz range. Modem manufacturers are now producing 56K modems

with 50K downstream capability and 33K upstream. These speeds represent the

upper limit for analog transmission on a single pair of copper wires within the circuit-switched telephone network.

Switched Telephone Network (ISDN): The integrated services digital network

is both a set of digital transmission standards and a network infrastructure that

allows digital transmission over the existing telephone wiring. ISDN is defined as

‘‘a network, evolved from the telephony network that provides end-to-end digital

connectivity to support a wide range of services including voice and non-voice, to

which users have a limited set of multiple-use user interfaces.’’ ISDN represented

an attempt to increase both the bandwidth availability and overall functionality of

the legacy telephone network.

End User Access: Broadband

Digital Subscriber Loop (xDSL): DSL is a suite of technologies that provide

high bandwidth over existing copper twisted pair local loop cables. DSL employs a

modem-like technology and is available in a number of variations. ADSL service

21

supports both voice and data services. The service provides a substantial increase

in speed over both analog (50 times) and ISDN dial-up access methods. ADSL represents a true, open architecture, high-bandwidth service that is ‘‘always on’’, allowing the user constant access to information without logging on to the Net each time.

Unlike the developing trend in cable modems, the end-user is free to select from any

Internet Service Provider (ISP).

Cable Modems: Cable modems are devices that operate over the CATV coaxial

circuit. Cable modems operate like an analog modem providing the modulation of

the signal, as well as some routing functions. These devices operate in a shared

bandwidth, ‘‘ring’’ topology and offer theoretical speeds of up to 4 MBps according

to Forrester Research. Cable modems, too, are an ‘‘always on’’ technology.

Other Access Methods: A number of wireless technologies, both terrestrial and

satellite are showing signs of promise as high speed Internet access products. In addition, the electrical industry is currently developing a product that utilizes electricity distribution facilities to provide high-speed data access.

INTERNET PROTOCOL

Internet Protocol, or IP, serves as the enabler for data communications networks.

It is the foundation upon which diverse data networks communicate with one other

and pass data traffic between them.

One can think of IP packets as postcards and an IP message as a novel. An IP

communications session is the equivalent of sending the novel through the network

on postcards. The cards contain their own ‘‘to and from’’ addresses as well as part

of the novel’s content. At the receiving post office, the postcards are reassembled in

the correct order so the novel can be read. If some packets (postcards) don’t make

it to their destination, the receiving post office asks the sending post office for a retransmission.

With the digitization of payloads—voice, data, video, etc.—and the evolution of

Wide Area Networking, Internet Protocol has emerged as the clear winner for data

communications. It simplifies management of the network; handles any number of

other protocols; is an open protocol and not proprietary; and allows for scalability

and therefore easier network growth.

CIRCUIT SWITCHED VS. PACKET SWITCHED NETWORKS

The advent of Internet Protocols, or IP, transmission offers the opportunity to migrate from the legacy public switched telephone network onto IP-based networks designed specifically for the transmission of large data streams.

In a traditional voice, circuit switched call, the call is first set up; calls are routed

through traditional class 5 switches, the circuit or path is established and maintained through-out the call; and at the end of the call it is taken down. This is called

connection oriented because a connection is set up and maintained for the duration

of the call. The call route is not available for any other traffic while the call is in

progress.

By contrast, an IP network routes IP packets over diverse and changing routes

on the network. The path packets take between two points constantly varies based

upon network conditions. As they receive them, each router sends packets out to the

other routers and the data eventually makes it to its end point. The path is not preestablished, thus IP is referred to as being ‘‘connectionless.’’

CONVERGENCE AND THE NEED FOR BROADBAND DEPLOYMENT

Much has been written regarding the phenomenon of convergence. Used in the

telecommunications context, convergence may include both services and architectures. As noted previously, legacy network architectures featured payload-specific,

service-discreet offerings to end-users. Cable companies provided one-way, broadcast

services while telephone companies provided two-way, voice and data services.

Today, different providers from previously different industries offer services that

cross traditional industry lines.

As telecommunications networks and technologies evolve, telecommunications carriers are constructing new, separate data networks based upon IP, which will exist

parallel to the ‘‘legacy’’ voice network. (It is important to note that while these networks reside outside of the legacy telephone networks, they may—as in the case of

DSL—employ elements of the Switched Telephone Network.) These networks will

require the commitment of significant amounts of capital, which currently is subject

not only to market risk, but also—in the case of the ILECs—significant regulatory

uncertainty. This regulatory risk represents a potent disincentive to the deployment

of broadband networks capable of supporting the nation’s thirst for media-rich (converged) payloads.

22

11 Eisenach, Jeffrey A., ‘‘Testimony before the Subcommittee on Communications, Committee

on Commerce, Science, and Transportation, United States Senate, April 22, 1998 12Taylor, Dan and Bill Hills, ‘‘Connecting the pipes,’’ The Analyst’s Corner, http://

www.internettelephony.com 13 ‘‘State of the Internet: USIC’s Report on Use and Threats in 1999’’, http://usic.org/usic—

state—of—net99.htm, 14Davidow, William H. and Michael S. Malone, The Virtual Corporation, HarperCollins, 1992

POTENTIAL IMPEDIMENTS TO THE DEPLOYMENT OF BROADBAND

Despite the promise of the Internet, a number of issues stand as impediments to

its fulfillment. Consider these observations:

• ‘‘The single most significant barrier to the continued expansion of the digital economy is the scarcity of digital broadband connectivity to home and offices.’’ 11

• ‘‘The local loop, however, remains the biggest obstacle to network convergence.

The lack of bandwidth... restricts users from accessing broadband interactive

content.’’ 12

• ‘‘The best available date indicates that new broadband technologies are available

in just 10% of US counties . . .’’ 13

CONCLUSION

The late 19th Century saw the emergence of the Industrial Revolution and the

entrance of the manufacturing economy. The 20th Century saw an information revolution and a corresponding migration to a service-based economy. We stand now at

the threshold of the 21st Century, where we are about to see yet another structural

change in our economy as we move towards a knowledge economy. Fueled by a robust Internet, this new economy offers the promise of opportunity for all Americans.

In their book, The Virtual Corporation, William Davidow and Michael Malone observed:

‘‘. . . in the years to come, incremental differences in companies’ abilities to acquire, distribute, store, analyze, and invoke actions based on information will

determine the winners and losers in the battle for customers.’’ 14

Davidow and Malone’s comments offer a succinct affirmation of why the rapid development and deployment of broadband networks is critical as an issue of national

policy. The scale deployment of high-speed services, facilitated by the removal of

regulatory prohibitions, becomes a key enabler for the robust development of applications having both economic and social value. Our children deserve no less.

Mr. Chairman and Members of the Subcommittee, thank you for the opportunity

to appear today. I look forward to addressing any questions you may have.

23

24

25

26

27

28

29

30

31

Mr. TAUZIN. Thank you very much, Mr. Lenox. We, of course,

were generous with time because we wanted this overview to proceed the discussion by witnesses. The Chair would also ask that

you make a hard copy of the slides available for the record of the

subcommittee.

Mr. LENOX. Yes, sir. As soon as possible.

Mr. TAUZIN. I thank you. I might also mention we were discussing—we saw a bumper sticker that said ‘‘Relax. It is just 1’s

and 0’s.’’ And somebody added ‘‘And dollars.’’ Thank you very

much.

We will now go to a discussion of what broadband is all about,

what it is doing, and what its potential for telecommunications is.

And we will start with Mr. Glenn Falcao—did I pronounce it right,

Glenn?—of NORTEL, who has an equipment provider role and the

question of data over electric lines. Mr. Falcao.

STATEMENT OF GLENN FALCAO

Mr. FALCAO Thank you very much. It is a pleasure to be here,

Mr. Chairman, honored committee members.

In the spirit of your opening comments, I would like to give you

some observations from a company that is helping to build this

Internet both in this country and internationally.

As I see what is going on both here and outside of this country,

we are on the verge of fundamentally changing both the social and

political fabric of what is generating wealth, what is generating our

social economy. And the underpinning of this is that ideas are allowed to flow without bounds and this is a very fundamental issue

around what the Internet is all about. And I think how what we

do in the next little while and how we address this technology is

32

going to fundamentally affect our competitiveness in a global economy.

So what are talking about here? The Internet is allowing us to

share knowledge with no boundaries, to provide higher standards

of education to all who have access, including those in the rural

areas, to truly have global reach for E-commerce, and have access

to rich entertainment. And, by the way, it helps us to communicate

in a much more profound manner.

I won’t bore you with a whole lot of facts. I know that you have

seen all the exponential charts and growth of the Internet, but one

thing we can’t get away from is that people are getting more connected and data accounts for more than 50 percent of the total network traffic today and by the year 2005, will account for more than

80 percent of the traffic. And the impact of that is that it is fundamentally changing the business models for both current customers and providing opportunities for new entrants, many of

which are at the table. Much of this is a result of the deregulation

that you are seeing globally and, when you look at the Internet, the

fundamental open architecture of the Internet is a good example of

what open competition in a free market can accomplish.

So, let me talk a little bit about high-speed access. Really what

people are looking for are applications and services and not so

much bandwidth and really what we need to look at is how to open

up the network to provide access to those applications and services.

And the bottleneck in the network today is fundamentally at the

access point. So to enable rich content and applications, we really

do need to look at opening up that access bottleneck. And this has

to be technology agnostic. It has to be on coax, on copper, on fiber,

wireless, and, yes, even power lines. And we at NORTEL Networks

can deliver much of that today, but still much has to be done.

So what I see in the market today is that the increased competition is resulting in new entrants and transformation of existing

players. And it is improving, it is increasing, the amount of investment that is going into the network and to both the existing networks and providing new network architectures. Competition is

speeding up the introduction of new services and it is improving

the overall cost performance of the existing services and the net effect of that is that it is providing much more affordable services

and applications to the public.

But we have got to remember something. Much of what we are

talking about today is running on the existing network infrastructure. A lot of the things that we are using to access the Internet

is the existing public network. So, although we are building new

network structures and overlay networks, we have to ensure that

both the existing network and the new networks have an opportunity to grow in a way that is fostering the use of the Internet.

Because we need both of those networks to continue this growth to

prosper as we go forward. So that is—I think it is something that,

you know, at some point we would need to look at in more detail.

So, in conclusion, I think what you see here is that we have provided the building blocks for this new network technology and this

new engine for growth. I think the telecom and datacom industry,

working with subcommittees like this can really provide the ecoVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
33

nomic engine that is going to make us competitive both today and

in the next millennium. Thank you very much.

[The prepared statement of Glenn Falcao follows:]

PREPARED STATEMENT OF GLENN FALCAO, PRESIDENT, INTERNET AND SERVICE PRO- VIDER NETWORKS, NORTEL NETWORKSCHAIRMAN TAUZIN AND DISTINGUISHED MEM- BERS OF THE SUBCOMMITTEE:

My name is Glenn Falcao. I am the President of the Internet and Service Provider

Networks division of Nortel Networks. It is my pleasure to appear before you today.

I was asked to present an equipment provider’s perspective on the availability of

broadband solutions used in the deployment of data services and applications. My

comments will be made from the viewpoint of Nortel Networks, a world leader in

technology delivering network solutions for telephony and data-based, wireline, and

wireless applications. As a leader in the provision of equipment and cutting-edge

technology, Nortel Networks is facilitating the development and deployment of reliable and cost effective high-speed access for all data service providers—including

transmission via cable, copper wire, fiber optic, and even the power grid.

Nortel Networks supports open and fair competition in the deployment of data

services. The Telecommunications Act of 1996 is helping to promote competition and

deregulation in the U.S. telecommunications arena. Globalization and deregulation

will continue to drive broadband applications, which are critically important to the

continued growth of knowledge sharing, electronic commerce, and electronic entertainment. As the Subcommittee considers legislative options in this area, we recommend that you should strive to facilitate the development of broadband capabilities and increased access to those capabilities.

Nortel Networks and The Internet

Nortel Networks is one of the world’s largest suppliers of digital network solutions

that facilitate the deployment of data services. And it is the most broadly diversified

developer of high capacity switching, transmission, access, and optics technology.

We are at the heart of the Internet. We are a global company with a presence in

over 150 countries where we work with customers to build and deliver communications products and networks for voice and data that we call ‘‘Unified Networks.’’ We

are the best qualified to deliver global applications and services that merge new and

existing networking elements and technologies into a seamless network.

Our U.S. presence has been steadily increasing over the past 25 years and our

U.S. locations represent our single largest pool of highly skilled people. Since our

recent merger with Bay Networks we are an even stronger company with a larger

U.S. presence. About 35,000 of our 68,000 employees worldwide work in our U.S.

facilities. Nortel Networks has an invested base in the U.S. of $10 billion, and growing. Fifty-six percent of our 1998 revenues were generated in the U.S. Indeed, we

export over $2 billion from the U.S. each year.

Like the Internet itself, Nortel Networks is an exciting place to be right now.

Early this year Network World’s annual ‘‘Power Issue’’ listed Nortel Networks

among the top five networking companies in the world and No. 2 among our competitors.

It is clear to Nortel Networks that our customers and the American public want

reliable, affordable, and speedy access to the Internet. In these competitive times

of market and technology convergence it is vitally important to be agile, ever ready

to anticipate and respond to change, and to remain focused on customers’ needs. At

Nortel Networks, we are focused on continuing to enhance the value of our

broadband application solutions—such as Unified Networks—to provide the building

blocks to deliver data, voice, and multimedia capabilities for business and residential customers.

The Internet, Networks, And Broadband Services

Because of the importance of broadband services in fully exploiting the capabilities of the Internet through the deployment of data services, it is important to realize how the Internet itself relies on communications networks. What makes all Webdriven opportunities possible is the world’s telecommunications infrastructure.

There is no Internet without it. The public perception seems to be that the Internet

runs on a separate collection of networking technologies created for some brave new

world of cyber communication. Nothing could be further from the truth. In the real

world, when consumers and millions of businesses access the Web, they use the existing telecom network’s infrastructure and technology. So today, as firms rush to

adapt Internet technology to every purpose and create the hardware and software

needed to make Web communication ubiquitous, we need to remember that none of

34

this would be possible without the trillion dollars that new and traditional service

providers have invested in their infrastructures during the past few decades.

Supporting the growth of the Internet have been some key factors that often are

overlooked. The globalization of business over the last decade created much of the

pressure for better communications networks, new services, and more competitive

rates. These, in turn, drove what is now a global process of deregulation, which has

increased competition among local and national communications network providers.

Deregulation opened formerly monopoly networks to competition. In doing so, it created opportunities for new service providers to enter the market and also enriched

the world’s networks with new technologies.

The result has been the unleashing of both Moore’s Law, that microchip processing performance doubles every 18 months, and Metcalf’s Law, that the value of

a network expands in proportion to the number of users connected to it. These notions explain the worldwide explosion in the use of networked personal computers,

which paved the way for the rise of the Internet and contributed greatly to networks

becoming the new growth engine for wealth creation.

Wireless, fiberoptic, and other high-speed access technologies have provided lowcost networks to developing regions and introduced vast new economies in long-distance services as network capacity increased. In the past five years, Nortel Networks has doubled the carrying capacity of a fiber every nine months, twice the rate

of Moore’s Law, and we expect to continue that for the foreseeable future. Our customers will collectively install more transport capacity in the next three years than

the industry implemented in the past century.

Users are demanding such broadband capacity. Internet traffic is doubling every

four months, a growth rate that over the next three years will result in cumulative

traffic more than 500 times what it is today. By 2002, two million additional businesses will be connected to the Internet and 30 million more consumers will join

the 130 million already online. As dial-up access speeds increase from tens of kilobits per second to thousands of kilobits per second, e-commerce will flourish.

The market changes caused by exploding Internet use require service providers

to reconsider their business strategies. As the Internet and corporate intranets have

grown, so has the amount of data. From virtually nothing in the 1970s, data traffic

now accounts for more than 50 percent of total traffic across the average cross-section of the North American public network. Data traffic in North America grows by

30 to 40 percent a year, which means that data will account for at least 80 percent

of all traffic by 2005.

Nortel Networks has undertaken four leadership initiatives that are good examples of the directions in which the Internet is growing:

• Intranet services, in which corporate networks and the Internet combine to create

new applications and business models that leverage investments in information

technology.

• Internet telephony, the convergence of telephony services and packet technologies.

As these services develop, the existing public networks must be transformed to

help wireline and wireless service providers begin the migration to next-generation packet networks.

• The wireless Internet. The next frontier in wireless is the networking of laptops,

palmtops, and other web-enabled devices.

• The optical Internet. Nortel Networks is building high-speed, high-performance,

IP-optimized optical backbones. We’re focusing on high-speed access for the

‘‘first mile’’ of the network, using wireline and wireless solutions to bring ‘‘megabits to the masses.’’

The Need for Policies That Promote Competition

As the foregoing discussion shows, the Internet is revolutionizing communications.

It offers us a portal for communication, education, commerce, and entertainment. It

impacts every aspect of our private and public lives. We know our customers are

facing new challenges, brought on by the Internet, deregulation of markets around

the globe, changing consumer behavior, and converging technologies. These events

change the traditional boundaries between service providers and enterprises, between local and global networks.

These changing boundaries present a dilemma for policymakers. As new competitors begin to catch up with or even accelerate beyond incumbents, and entrants

from the cable television, wireless, utilities, and other industries vie in the lucrative

data services market, it becomes increasingly difficult for policymakers to strike the

proper balance to facilitate both competition and affordable access to broadband

services. Although this dilemma may be difficult to resolve, the fine distinction between protecting competition and allowing individual competitors to remain competitive must be maintained. Solutions providers like Nortel Networks play an exVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
35

tremely important role in helping solve these public policy dilemmas by providing

the means for the full, fair, and open service competition contemplated by the 1996

Act. Simply stated, it is in our business interest as well as the public’s interest to

see competition flourish in the provision of broadband services. We can’t tell you

specifically how law or regulation should treat one group of providers as opposed

to another group of providers, but the result must be a competitive market. However, in a real sense, the interests of solutions providers in the development of

broadband services are consistent with the public interest in promoting competition.

Nortel Networks is on the side of competition. We believe technology solutions that

promote competition in broadband applications and services are in the best interest

of the American public. Only true competition will provide the solutions to the

issues you are struggling with today.

Broadband Solutions

You are constantly hearing from all sides of the broadband access debate: the incumbent carriers, the new competitors, the Internet service providers, the cable

companies, and the wireless providers—to name a few from a growing list. But I

suspect you also are hearing from your business and residential constituents who

want what I think we all want and need: ready, reliable access to multi-media services and applications at affordable prices that are the product of competition.

We believe that the current 64 kilobit-based infrastructure is the key bottleneck

to enabling new services. Access is critical. The majority of carrier investments, between 50 and 75 per cent, are spent on access for the new networks. Residential

customers need Internet connectivity at affordable prices enabled by industry leading technology like 1-Meg Modem and G.lite. Business customers need bandwidth

greater than 500kb to enable Virtual Private Networks, e-commerce, and Internet

telephony across a single access pipe.

Another trend we are seeing is the movement of intelligence out of the central

office to the ‘‘edge’’ of networks. Line cards have been migrating to colocation cages

for the past five years. Now the line card is being combined with DSL, wireless,

cable products to migrate directly to the home or business offering great economies

of scale and rich feature content.

As a major Internet equipment provider, with 75 percent of all Internet traffic

traveling over Nortel Networks infrastructure, we meet our service provider customers’ demands for broadband solutions so that they can, in turn, provide the services demanded by your constituents. Our customers from all sides of the broadband

access issue are challenging us to meet their demands: (1) to protect their existing

revenue sources; (2) to reduce the costs of operating their networks; (3) to help them

start new businesses, which drive new revenue streams; (4) to help them be successful by serving their customers’ needs.

By providing broadband solutions that meet our customers’ demands we provide

incentives for them to deploy affordable broadband access and applications to all

Americans. For example, our Succession Network helps our customers transform

their existing circuit-switched (voice) networks into packet-switched (data) networks

without having to abandon the investment in their current infrastructure, making

broadband access easier to implement cost effectively nationwide. The Succession

Network helps customers to preserve their investment because it is not a separate

infrastructure layered onto an existing network—it transforms the existing network.

In our many years as an equipment provider we know that technology solutions that

lower network operating costs and increase revenue from data-based services will

give our customers the incentives they need to expand broadband access to their

customers.

Making the best use of existing infrastructure can also accelerate broadband access to a larger base of the American public. For example, fiber optics promises to

be a competitive option for the provision of broadband access, particularly when the

existing fiber infrastructure is combined with bandwidth-enhancing technology, such

as OPTera—Nortel Networks’ Dense Wavelength Division Multiplexing (DWDM)

technology. When applied to existing fiber optic networks, DWDM can greatly expand transmission capacity and can turn a traditional voice-only network into a

powerful multi-media conduit delivering megabits to end users.

Let me illustrate the power of this technology. Using Nortel Networks’ OPTera

broadband solution, a single optic fiber could be expanded to transport the entire

4 million-book collection of the U.S. Library of Congress from Washington, D.C., to

Los Angeles in just seconds. Or, using a highway analogy OPTera converts a 10-

lane highway into a mega-highway of 160, 10-lane highways stacked on top of each

other. If broadband access is the goal, this technology is the solution that could provide simultaneous access to the Internet for 28 million households.

36

Rural Communities

An even greater challenge to broadband access is the difficult business case presented by service to rural communities. Yet here, too, technology and competition

are beginning to provide solutions. Companies, including Nortel Networks, are pioneering broadband technologies that can expand conduits such as power lines and

the electrical wiring in buildings, to carry high-speed data. This type of broadband

application is being deployed now in the United Kingdom and Europe, and in the

future will surely be available in the United States.

Another possible low-cost solution for rural areas could be one that does not rely

on wired infrastructure. Fixed wireless technologies, using unobtrusive antennas

similar to the direct broadcast satellite ‘‘pizza dish’’-size receivers, have been

launched in various countries around the world, and in the United States on an experimental basis using Nortel Networks applications on an Indian reservation that

previously did not have easily accessible telephone service. Wireless applications

could make it possible for even the most remote areas to receive both basic services

and high-speed broadband access. Of course these wireless solutions require access

to appropriate spectrum, an issue we are currently addressing with NTIA and the

FCC.

Bandwidth applications and solutions like the ones I have described will bring the

promise of the Internet to all Americans and help telecommunications service providers and the public benefit from converging technologies. By keeping the costs low,

through competition and technological advances, we can help make the dream of

broadband access for all Americans, as envisioned by Congress three years ago, a

reality.

Conclusion

The technological reality that I described here today should give you confidence

that the telecommunications industry has the technology and the ability to place the

power of the Web into the hands of each and every American. The dramatic technological advances taking place make it possible to deliver ever-larger streams of information at lower costs, making deployment of data services more affordable. In other

words, the cost of technology has plummeted while its capabilities have soared.

In 1996 Congress gave the FCC authority to facilitate availability of advanced

services to all Americans. Competition and technology can provide the building

blocks to make advanced services available to everyone, including those in rural and

hard-to-reach areas. With your help, the telecommunications industry can provide

the innovative solutions, if you provide the leadership and policies that allow competition to unleash its market driven magic.

We at Nortel Networks look forward to working with you.

I want to thank the Subcommittee again for inviting me to appear before you, and

I would be pleased to answer any of your questions.

Mr. TAUZIN. Thank you very much, sir.

And the Chair now recognizes Mr. Russ Daggatt, vice chairman

of Teledesic, for your opening statement. Russ.

STATEMENT OF RUSSELL DAGGATT

Mr. DAGGETT. Thank you, Mr. Chairman, and members of the

subcommittee. It is a pleasure and honor to be here to speak with

you today. My name is Russ Daggatt. I am vice chairman of

Teledesic LLC.

Like the NATO forces and the former Yugoslavia, we are fighting

this battle from the sky. And I hope our vision can stay above some

of the Balkanization of this debate on the ground.

As some of you know, we are in the process of building a satellite

network that will provide people in every part of this country and

the world with affordable, broadband Internet access.

I first joined Teledesic almost 6 years ago and it was a little over

5 years ago that we first introduced this vision to the public. And,

at the time, we described our system as an Internet in the sky and

the service proposition as global broadband Internet access. As difficult as it may be to recall now, 5 years ago the World Wide Web

still had not made its presence felt and the Internet model was

37

definitely not the consensus network model. Most people’s notion of

broadband at the time was what many companies were articulating

as video-on-demand and interactivity being a by-button on the

channel remote. This was over a year before Netscape was formed.

There were still no commercial browsers. Since then, we have also

had to endure the push technology craze.

But our vision was based on a fairly simple one which was that

the continuing improvement in the power of microprocessors was

going to lead to ubiquitous deployment of computing power around

the world in many forms and that the real killer application for the

telecommunications networks would be networking those computers, that even phones would be computers, in effect. And that

vision really required a very different network model and it is the

network model that is now, I think, accepted as the Internet model.

And, without going into that model in depth, there are a few elements of it that are relevant. One is the movement of intelligence

in the network from the core of the network to the edge of the networks. Another is the replacement of proprietary networks and application-specific networks by open networks where all applications

are moving over a common network infrastructure. And, perhaps

most critically, the move from circuit networks to packet networks.

But, again, all of this required a very network infrastructure than

we have in place today. In fact it is, even in relatively developed

countries, it is, when it comes to a telecommunications network infrastructure optimized for networking computers, we are virtually

starting from scratch.

Of course, in most of the world no telecommunications infrastructure exists at all. You have heard all of the statistics like, you

know, there are more phones in New York than in all of Africa.

Over half the world’s population has never made a phone call. But

even where that telecommunications infrastructure exists, for the

most part it is 100-year-old technology: twisted-pair copper wires

and a circuit-based infrastructure.

I think it is not an exaggeration to say that when it comes to

building the infrastructure that is optimized for networking computers, building the networks that will provide global, broadband

Internet access, that this is going to be the single biggest business

opportunity on the planet over the next few decades. Estimates of

the amount of capital that will be invested in telecommunications

infrastructure over the next decade start at, I think, around $2 trillion and go up from there.

Although Teledesic will be only one star in this constellation of

broadband services, it will provide some unique capabilities.

Teledesic’s network will be a low-Earth orbit satellite network,

which means a non-geostationary satellite network. Once you move

out of the geostationary orbit, by definition, the satellites move in

relationship to the Earth. Which means to provide continuous coverage of any single point on Earth, you have to provide, in effect,

global coverage. Which means we will have a unique ability to

serve customers in all parts of the world at a cost independent of

location.

But the fuel that is feeding this telecommunications build-out, including novel technologies like that that Teledesic will provide is

access to capital. And the capital markets require a fair degree of

38

regulatory certainty. The actions of this committee and the Congress have helped provide that regulatory certainty and I would encourage you to preserve the universal service principle, which has

been perhaps the great social policy success of the 20th century,

but also to preserve the regulatory certainty that is necessary for

these investments.

Thank you very much.

[The prepared statement of Russell Daggatt follows:]

PREPARED STATEMENT OF RUSSELL DAGGATT, VICE-CHAIRMAN, TELEDESIC LLC

Thank you Mr. Chairman and Members of the Subcommittee. It is a pleasure and

an honor to be here to speak to you today. My name is Russell Daggatt, and I am

the Vice-Chairman of Teledesic LLC. At Teledesic, we are in the process of building

a satellite network that will provide people in every part of this country and the

world with affordable access to broadband communications services.

As this Committee and other organs of the government consider how to promote

the development of advanced telecommunications, it is of utmost importance that

you continue to support the goal of universal access by all Americans, as well as

the new technologies that will make this universal access a reality. I want to emphasize to you that this is not just a matter of economic or regulatory significance,

but it is of profound social import as well.

When I first joined Teledesic over 5 years ago, it was necessary to explain not

only why broadband communication was important, but also what it was. At that

time we described our system as an ‘‘Internet in the Sky’’ and our service proposition as ‘‘global, broadband Internet access.’’ As difficult as it may be to recall now,

five years ago the World Wide Web had not yet made its presence felt and the Internet had not emerged as the consensus network model. This was before Netscape was

started—before there were any commercial Web browsers. Since then, various different notions of ‘‘broadband’’ have been put forth. We had to endure the ‘‘video on

demand’’ period, followed by the ‘‘push technology’’ craze. Five years later the World

Wide Web has become a daily part of most of our lives and the Internet an increasing necessity for things we associate with a high standard of living—from education

and health care to economic development and public services.

As evidenced by the plethora of different companies and technologies represented

on the panel here today, many of which didn’t even exist just 5 years ago, clearly

there is no shortage of interest in providing broadband communications. Fiber optics, coax, copper, terrestrial wireless and satellites will all play a role in serving

the insatiable demand for bandwidth.

When trying to understand which technologies will be most efficient for servicing

which needs, it is important to understand that in the traditional circuit-switched

telecommunications model, you can break the network out into ‘‘access’’ or end-user

connections and ‘‘transport’’ or backbone elements. The two elements have very different economics. In the Internet model, a third major element comes into play—

‘‘quality-of-service’’—which sort of summarizes the whole. It is important to understand all three in comparing the economics of a wireline technology like optic fiber

with a wireless access technology like Teledesic.

The capabilities of optic fiber are truly amazing and growing more so every day.

Optic fiber is certainly in the ‘‘miracle technology’’ category. In point-to-point applications, the economics of fiber absolutely overwhelm any other technology. In the

‘‘transport’’ networks, the cost per bit of a loaded system (including all the up-front,

fixed costs) will be very low, nearly infinitesimal. Unfortunately, the challenge is in

extending broadband to the access networks, to make this technology available directly to end-users. infinitesimal. For this reason, distance will largely disappear as

a pricing criterion in telecommunications (putting aside legacy regulatory distortions

to the market). In the transport network, fiber dominates.

Unfortunately, the challenge is in extending broadband to the access networks

(point of end-user interface). In the traditional circuit-switched networks the rule of

thumb was that, on average, about 80% of the network cost is in the access portion.

But that only takes into account those areas that have access (which does not include the vast majority of the Earth’s surface and the vast majority of the world’s

population). With the economics of fiber coming to dominate the transport networks,

with packet networks replacing circuit networks, and with the ubiquity of access increasing (or, more accurately, the lack of ubiquity decreasing), it is probably reasonable to assume for all relevant purposes that almost all of the network cost is in

39

the access network (especially as the Internet model redefines ‘‘access’’. That is

where the economics of wireline vs. wireless get more interesting.

The relative economics of wireline access technologies versus a wireless approach

(including a satellite approach like Teledesic) are a function of both density and intensity of usage. The density part is pretty obvious. The cost to connect a customer

with a wireline technology depends on the length the cable and the number of users

it serves. That leaves most people and areas around the world unserved today. You

can say that there is no demand for broadband telecommunications access in rural,

remote and undeveloped or underdeveloped urban areas, but that is a bit circular

in its logic. Any activity that requires an advanced information infrastructure today,

almost by definition, must migrate out of those areas that don’t have such an infrastructure. It’s dictated by the economics of wireline access.

The intensity of usage determines the relative economics of access technologies.

In the connections to most individual offices and homes, most of the capacity of a

fiber connection would sit idle most of the time. The average residential subscriber

in the U.S., for example, uses the phone for only something like 20 minutes a day.

Internet applications are making usage patterns even more bursty and intermittent.

It might be necessary to burst up to broadband speeds for only for a few seconds

or a few minutes for a particular application, but the total number of megabytes

sent and received over a day or week might still be very small. For example, I live

in the heart of Seattle and have a DSL line. I work on my computer at home maybe

10 hours a week between evenings and weekends (pretty high usage). But the total

number of megabytes I send and receive is pretty small (even though I want high

speed when I do burst). With wireline technologies like fiber, all of that awesome

capability must be rigidly dedicated to a particular end-user at a particular location,

whether or not they need it at that moment. Given the very significant cost of extending fiber to individual offices and homes, i.e. using fiber as an ‘‘access’’ element,

the cost per bit is most definitely not infinitesimal. Nor are the increases in the capabilities of fiber of much relevance—even on a neighborhood level, the capacity of

the fiber is not the limiting factor in the economics of its deployment. Even at

Teledesic’s headquarters, with 150 or so very data intensive users sending and receiving very big files, the company collectively bursts up to the full capacity of its

T-1 line for a very few moments during an average day.

Wireless technologies, including satellites systems like Teledesic, that offer bandwidth-on-demand can provide a more economic access technology in a wide range

of settings by dedicating only the bandwidth required by a particular application at

a particular moment. Because demand for broadband services will generally be uneven and diffuse, it won’t be possible to justify fiber buildout for most of the world’s

geography and the vast majority of its population. Even in the highly-developed

urban areas, the early adopters who want a T-1 connection at their homes, for example, are likely to be fairly randomly distributed throughout each of those areas.

On a neighborhood level, few areas will have the aggregate demand for two-way,

interactive, broadband network connections that would justify the full area buildout that wireline technologies require. Where an existing coaxial cable or copper access infrastructure can be upgraded, the economics improve. But you don’t see many

(if any) overbuilds of those existing networks, which says something about the economics of the access network.

Nonetheless, it is fair to say that Teledesic is not likely to be the broadband access technology of choice for most users in developed urban areas. Which is just as

well, because any satellite system is ultimately constrained in its ‘‘capacity density’’—that is, the amount of capacity it can focus in a given, concentrated area.

The Internet model introduces a third element to network economics, which I

would argue, is the most important—quality-of-service (QoS). In the traditional circuit network, QoS is not an issue. For each voice conversation, an end-to-end connection is established that is dedicated exclusively to that conversation (or data session). Of course, this assures a very high service quality, but it is also very inefficient. Packet-switched networks like the Internet, however, carry traffic from multiple sources that move over the same network infrastructure, making them up to

10 times more efficient than circuit networks. The economics of a packet network

kill those of a circuit network. Because packet network traffic has to compete for

network resources, network congestion becomes a big factor in how efficient packet

networks can be. But in a packet network traffic has to compete for network resources. Network congestion becomes a big issue. The ability to establish and enforce priorities, latency guarantees and other service quality parameters becomes

the distinguishing characteristic of a packet-switched network. In fact, with the

Internet today, QoS issues are a bigger deal than bandwidth per se.

A critical point here: QoS is an end-to-end concept. It is not enough to provide

QoS guarantees only part of the way to the destination, because the connection is

40

only as strong (or fast) as its weakest link. It is also not enough to take the traffic

from the end-user and dump it into the Internet cloud. Even fiber access is of limited value if it only connects to that Internet cloud (which, itself, includes abundant

fiber). QoS is only meaningful as an end-to-end concept—it all has to be tied together with enforceable service guarantees. As a result, in the Internet world, the

concept of ‘‘access’’ changes. In the traditional voice world, access only requires a

connection from the end-user to the nearest central office where a circuit connection

can be established with any other circuit network. In the Internet world, that’s not

enough.

Teledesic is an end-to-end access network. Teledesic defines access in terms of the

Internet model—in other words, in QoS terms. ‘‘Access’’ is the connection from the

end-user to the nearest point of presence (PoP) that can provide the end-to-end QoS

required by a particular application. In some cases, that might be only a kilometer.

In other cases, it might be 1000 km . . . or 5000 km. Let me explain this in more detail, because it is a critically important concept.

If you want to see where the applications are going to come from for the

broadband networks of the future, look to where there are broadband networks

today . . . in the local area networks (LANs). What are the applications running over

these LANs? Enterprise Resource Planning applications, SAP, Peoplesoft, SNI,

BAAN, Oracle Financials, and the like. These are very demanding applications, particularly when it comes to latency. They were designed to run on LANs, not on the

public Internet. Yet, increasingly, enterprises want to connect all their sites as well

as their customers, suppliers, and the homes of their executives. They want to be

able to run these enterprise applications not just at one isolated site, but everywhere to which their networks extend. This demands very high QoS guarantees

from the network service providers.

UUNet (now part of MCI Worldcom) was the first major service provider to offer

a product with a guaranteed maximum latency (of 150 ms). Others—Sprint, MCI,

AT&T—soon followed with similar products. (Recent service level agreements I’ve

seen have latency guarantees of 80 ms or less.) In every case, however, the service

provider can only provide these guarantees where they actually control the network

end-to-end. That is pretty limited availability, even for the largest service provider.

MCI Worldcom, for example, only serves through its own facilities something like

40,000 sites worldwide.

This leads to another important point: It is not enough that there is some carrier

nearby that might be able to provide a particular service guarantee. In a competitive world it matters very much whose network infrastructure is available. For example, Teledesic is headquartered in a suburb of Seattle. Let’s say there is a

USWest PoP a kilometer away from where Teledesic is located. That doesn’t necessarily do Teledesic any good if it is a customer of, let’s say, France Telecom. If

Teledesic is a customer of France Telecom its traffic might have to go 1000 km, to

a France Telecom PoP in the San Francisco Bay Area, in order for France Telecom

to be able to provide the necessary end-to-end QoS to the destination. In this example, ‘‘access’’ becomes 1000 km, not one kilometer. In other settings, in other parts

of the world, ‘‘access’’ might be 5000 km, or more, in order to route around missing

or problematic links or to connect into a unified infrastructure. Again, I would emphasize, it is not enough to take the traffic and dump it in the Internet cloud, or

to hand it over to a competitor—or, more typically, to half a dozen carriers on the

way to the destination.

It is not enough that there is a potential fiber connection to the customer. In a

competitive world, it matters very much whose fiber it is. For example, running

under the street in front of Teledesic’s former headquarters in Kirkland, Washington, there are six fiber cables. Each one of those six cables could carry more than

100% of all the traffic moving on all six of those cables. So why six cables—because

competitors don’t want to rely on the facilities of their competitors. (As an aside,

it is interesting to note than none of the many condominium complexes running

along that street connects into any of those fiber cables. The cost to slice into any

one of those cables is about $50,000.)

Another example: Let’s say that the Swedish national carrier, Telia, has the task

of connecting all of Volvo’s sites around the world, including an operation in Sao

Paolo, Brazil. That Volvo site might be Telia’s only customer in Sao Paolo. It doesn’t

make sense for Telia to build out facilities in Sao Paolo just to serve that one Volvo

site. But it may be that the local service provider is affiliated with a competitor of

Telia. Or the local service provider might be seeking exorbitant fees to provide the

facilities for Telia. Or the local carrier itself simply might not have the facilities to

provide service with the necessary QoS (this is most likely the case in most parts

of the world today—even in most urban areas).

41

Teledesic is an end-to-end network. Teledesic will be able to carry traffic from any

point on Earth to any other point on Earth. That doesn’t mean that Teledesic will

carry the traffic end to end in every case—rather, that it can. Which means that

Teledesic (or its partners) can provide end-to-end QoS guarantees to any customer

from any place on Earth to any other place on Earth. Teledesic’s satellite infrastructure will not be the preferred technology for all of a customer’s sites in all cases

(or even in most cases). But it is what enables the universal guarantee.

Teledesic has unique economics that enable the provision of broadband access

(with end-to-end QoS guarantees) at a cost independent of location and independent

of user density anywhere in the world (including maritime and aviation applications). That ability to aggregate diffuse demand globally creates a very robust business model that does not depend on the conditions of any single market. That can

make even a $10 billion investment seem quite modest. Companies like Level 3 are

spending comparable amounts just to undertake yet another fiber backbone overbuild in the U.S. The ability to aggregate diffuse demand globally makes Teledesic

almost perfectly complementary to (rather than competitive with) fiber, which requires heavily aggregated demand (rather than diffuse demand) in a single pointto-point location to unleash its economic advantage.

It is not an exaggeration to say that building the infrastructure to provide

broadband Internet access globally will be the single biggest business opportunity

on the planet over the next few decades. In most of the world, no telecommunications infrastructure exists at all. Where such infrastructure does exist, it consists

largely of 100-year-old technology—twisted-pair copper wires with a circuit-switched

architecture. Even in relatively developed countries, when it comes to a telecommunications infrastructure optimized for networking computers, we’re virtually

starting from scratch. Estimates of the amount that will be invested in telecommunications infrastructure globally over the next decade start at around $2 trillion and go up from there.

Access to capital is indisputable element to the current global broadband buildout. The Telecommunications Act of 1996 established the regulatory certainty needed by the capital markets to fund an unprecedented number of new competitive

start-up telecommunications providers. Due in large part to the ground-rules established by the Act, in the US alone Wall Street investors have committed with tens

of billions of dollars for competitive infrastructure. Therefore, it critical that Congress not take any action that could upset the capital markets that are providing

the investments necessary to bring broadband services to all Americans.

Although the $10 billion Teledesic network will only be a drop in the ocean of

global bandwidth required, it will enable a unique capability to provide broadband

Internet access to all those areas of the world that would not be economic to serve

by other means. And—at least as important—it will provide a competitive overbuild

in all the areas that do have an existing broadband Internet access infrastructure.

Mr. TAUZIN. Thank you very much, Mr. Daggatt.

And next will be Mr. Kirby ‘‘Buddy’’ Pickle, president and COO

of Teligent here in Vienna, Virginia. Mr. Pickle.

STATEMENT OF KIRBY G. ‘‘BUDDY’’ PICKLE

Mr. PICKLE. Thank you, Mr. Chairman. And thank you for giving

me a chance today and come talk about those new companies that

you mentioned earlier, those new companies in northern Virginia

that are coming about as a result of the Telecom Act.

Teligent is a unique entity in that we are trying to do a very old

business in a new way. We are trying to be a communications provider of voice, data, and video using a unique twist on a very, very

solid technology which is fixed microwave. And we will talk about

that in just a moment.

But, before I do that, I would like to step back just a minute because Teligent is a little more than 2 years old now. And we had

this idea, we had a goal. And that was that we could, in fact, be

the person that brought a bundled solution to small and medium

business customers. And we focus on small and medium business

customers because we feel like that is the segment of the industry

today that is clearly the least served. We look for small and meVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
42

dium business people who have between 10 and 200 telephone

lines. We don’t serve IBM. We don’t serve the government. We look

for people who need help and that is what we do. I like to say that

we are not a technology company, but in fact a solution company

using technology to meet people’s needs.

Now what we have done is interesting in that, by using this

unique technology, we can actually go out to the suburbs and further out into the rural areas because we can, in fact, for a very

small amount of money, build networks that provide this

broadband pipe. And if you think about the economy today, most

of the small and medium businesses are growing up in the suburbs.

And that is what we are trying to do is serve those people.

Now Teligent has grown very quickly in those 2 years. We have

service today in 28 markets. We will be in 40 by the end of this

year. So we are very pleased with that. And we are investing hundreds and hundreds of millions of dollars to build these networks.

And why are we doing that? Because we believe that America

needs that broadband capability and we also believe we can meet

the needs of a part of that.

Now in the last 5 years, you know, we have seen in this industry

an unbelievable thing happen. Information has become critical to

what happens in this country. Companies live and breathe with information and we want to be the person that provides that. And

that is what the broadband revolution is really all about. But, in

fact, the country faces some significant challenges. You know, the

advent of the Internet and E-commerce is fueling a huge, huge demand that is, in fact, outstripping the capacity of the small little

copper wires that have existed for all these years in this country.

In communications jargon, I have heard it mentioned up here before we call that the last mile. So what we are trying to do is help

people get access to high-speed on that last mile because we have

a technology and an understanding of how to do that. Now going

forward, if we don’t fix this problem, businesses relying on 56 kilobits per second will literally be left in the dust on the information

superhighway and that is where Teligent and others like us come

in.

Now more than 95 percent—95 percent—of the communications

customers in the United States, whether they are business or residential, are still served by copper loops. And that is what Teligent

is all about, giving the small and medium business person access

to some other type of technology that allows that broadband future

to come to play. And our approach is to build a series of local networks across the country, based primarily on this new type of technology I talked about, fixed microwave. We also, however, integrate

traditional broadband wireline technologies into our networks to

make sure we can all for everyone.

Now to reach our fixed wireless customers—and I have brought

an example because it looks very strange—we install small antennas on top of customer buildings. This is what one of those would

look like. Now most people think of microwave as huge, giant

drums. That is no longer the case. Now to help educate the panel,

what I thought I would do is I brought a diagram to real quickly

give you an idea of how a company like Teligent does what is old

with something new.

43

[Chart.]

So if you look over here, what happens is that if a customer picks

up a telephone or accesses the Internet—and that is very important because we are not a telecommunications company. We are a

communications company. You pick up this particular phone and

off goes a series of digits to our antennae. We send that series of

digits to our switch and then, through a base station, we concentrate that information and send it to wherever it is supposed to

go. This is no different than the way the country has been using

communications for years, but is an example, I think, of how technology can help this country move into the next century doing

things differently and better for everyone.

So, in terms of technology, we don’t believe there is any one way

to do it. Fixed wireless is great. DSL is great. What is important

is that we allow it to flourish. Teligent is proud to be part of this.

So thank you very much for the opportunity to be here today.

[The prepared statement of Kirby G. Pickle, Jr. follows:]

PREPARED STATEMENT OF KIRBY G. PICKLE, PRESIDENT AND CHIEF OPERATING

OFFICER, TELIGENT

Mr. Chairman, Ranking Member and other Members of the Subcommittee, thank

you very much for giving me the opportunity to come here today to tell you a little

about the part that Teligent is playing in building this country’s broadband future.

My name is Buddy Pickle. I’m the President and Chief Operating Officer of

Teligent, which is based about 16 miles west of this room, in Vienna, Virginia.

Earlier, I served as president and COO of the MFS Intelenet Companies, and

president and COO of UUNET Technologies, Inc., following its acquisition by MFS.

As you know, MFS was one of the very first companies to deliver competitive communications services to business customers, and UUNET is one of the nation’s largest providers of high-speed Internet access services. Previously, I held a number of

positions at Sprint, MCI, and the Southern Bell unit of AT&T, before the 1984 divestiture.

I also serve on the executive committee of the Association for Local Telecommunications Services, or ALTS, the trade association representing facilities-based CLECs.

However, the testimony I am presenting here today is solely on behalf of Teligent.

Mr. Chairman, when I joined Teligent more than two and a half years ago, the

company was little more than an idea. The idea was to use a new variant on a proven technology—microwave radio transmission—to build scores of new local communications networks across the country—networks that would offer a real choice to

customers who wanted not only local and long distance service, but broadband data

and Internet services at savings of up to 30 percent off what they are paying today.

Teligent targets small and medium-sized businesses—the most under-served, but

fastest growing, segment of the business market. We offer service to businesses with

as few as 5 telephone lines—businesses that simply don’t have access to the large

discounts or personal service that are readily available to the Fortune 500. In fact,

most of our current customers have fewer than 25 telephone lines and most of the

buildings we serve are not connected to fiber. I like to say that Teligent’s mission

is to level the playing field for these ‘‘under served five million’’ companies by giving

them the bandwidth and the pricing that they need to compete with the biggest

players in the marketplace.

Today, Teligent is offering service to customers in 28 markets around the country,

and we intend to be up and running in 40 markets by the end of the year. We

launched service in our very first markets at the end of last October, so I would

say that we’re very much off to a running start. We have more than 2,000 employees—and coincidentally, we have about 2,000 customers. Obviously we’re working

hard to increase that ratio, and we expect to do so in the coming weeks and months.

It’s important to note that Teligent is 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 100 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.

44

Teligent is investing hundreds of millions of dollars to build our own local voice

and data networks to compete with the existing telephone companies. Teligent is offering service in places like New Orleans, Louisiana; Boston, Massachusetts; Richmond, Virginia; Cleveland, Ohio; and Miami, Florida—as well as New York City,

Los Angeles, Chicago and twenty other markets around the country. Together, these

markets comprise more than 460 cities and towns of all sizes, and represent a combined population of more than 83 million. Eventually, we plan to offer service in 74

markets with more than 550 cities and towns and a total population of 130 million.

Our approach is to build a wholly new local network 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 SmartWave TM 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.

With this combination of fixed wireless and broadband wireline technologies,

Teligent is able to reach outside the core urban markets where most of the other

new competitive local telephone companies are deploying fiber optic cable. That

means we can serve emerging businesses that don’t yet have the revenue or the desire to locate offices in the traditional downtown business centers.

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 cluster 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.

It’s important to note that Teligent operates at the very high-end of the frequency

range—at 24 gigahertz—using spectrum licensed by the Federal Communications

Commission. That means that each Teligent antenna must have a clear line of sight

to the base station. The line of sight requirement creates both advantages and disadvantages for us. Because each customer building uses its own, specially-directed

‘‘beam’’ of spectrum, we can reach many different buildings using the same radio

frequency, as long as those buildings are not too close together. On the other hand,

our spectrum does not permit us to send signals through trees or around walls. That

is a significant drawback when it comes to serving smaller buildings or single-family

homes.

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 mentioned a moment ago that when I joined 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. I’d

like to take a moment to discuss each of those right now.

The first and most important factor in Teligent’s genesis was the passage of the

Telecommunications Act of 1996. In a very real sense, my company is a child of the

Telecom Act. We wouldn’t be here today if it had not been passed. Our business of

providing competitive local communications services literally was illegal in many of

the states in this country prior to the enactment of the Act.

The Act created ground rules, agreed to by the entire industry, which accelerated

local competition and opened up opportunities for companies like Teligent. Because

of the Act, which ensured that we would not be harmed by the historic, governmentsanctioned advantages granted to the incumbent telephone companies, we were able

to raise the capital we needed to build our business.

We now 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. Bluntly put, high-paid lawyers from the best law firms in Washington

would tie us up for years.

45

The Act is not perfect, but it has set in motion an irreversible push toward more

and more competition in our industry that will over time 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. In a very real sense, each of you who

helped shape the Act enabled us to create this company.

We also owe our existence to some dramatic improvements in technology, particularly the rapidly increasing capacity and declining cost of high-frequency radio technology. 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 1970s and early 1980s to create the very first competition

in the long distance market. Remember, the letters M-C-I originally stood for Microwave Communications, Inc. Now we are using the latest advances in point-to-point

and point-to-multipoint microwave radio technology to build competitive local communications networks in the local loop.

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, that we are able to offer our customers

that 30 percent discount off current pricing that I mentioned earlier. So in a large

measure, we owe our creation to these technological advances, which we expect not

only to continue, but to accelerate.

Finally, we owe our life to a significant shift in customer needs, especially the demand for broadband services—a demand that is driving almost everything going on

today in the communications industry.

I think the best analogy for what is happening today relates to the history of municipal water systems. Before the turn of the century, most homes didn’t have any

water pipes that connected them to the system. Demand was relatively low, and

most needs were met by a well in the basement or the backyard. But with the advent of new technology—steam heat, indoor plumbing—the demand for water delivery to businesses and homes dramatically increased—and builders and municipalities began installing water pipes directly to homes and businesses.

The same thing is happening today in the communications world, albeit much

more dramatically. The advent of new technology—the Internet and e-commerce—

is fueling a demand for communications services that is far outstripping the capacity of the small communications pipes that serve most homes and businesses in this

country.

In this case, those small communications pipes are the copper telephone lines that

lead into an office building or a house. These lines were built to deliver analog voice

traffic and were intended to be in use only a few minutes out of every hour. In communications parlance, these lines are referred to as ‘‘the last mile.’’ The futurist

George Gilder calls them ‘‘the copper cage.’’

As we move from an analog to a digital world, and from a voice world to a data

world, these little copper pipes are no longer adequate to handle the surge of new

data traffic coming to and from end-users. 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 45 megabits per second, it would take only 27.5 seconds to download that

same encyclopaedia. And we expect to see dramatic improvements in that performance in the not too distant future.

Why do people need bigger information pipes?

As you know, we’re not only crossing the threshold into a new millennium. We’re

also crossing 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.

I think that comparison is right on target. It’s true not only in terms of how electricity shaped the world we now live in. But also in terms of how people in the past

century viewed the transition to electric power.

Back then most people couldn’t easily think beyond the advantages of a gas lamp.

A bigger lamp, with maybe a longer lasting wick, or better burning fuel, was viewed

as quite acceptable progress. Change was conceived in increments of what existed.

We’re at a similar point today. But that is about to change very quickly.

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

46

last year alone, the business segment of that market had already grown to nearly

$4 billion. Forrester predicts that by 2003 that number will hit nearly $60 billion.

Datamonitor recently predicted that IP traffic will surpass telephone voice traffic

sometime during 2000. That’s not hard to believe when IP traffic is doubling every

9 to 12 months, compared with under 10% growth for voice.

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 midsized business customers. Nearly a fifth of them are ordering some type of

broadband access service—a much higher percentage than we had expected.

We think this foreshadows ever-greater demand for bigger and bigger 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—that’s trillion with a ‘‘T’’—market in the next five years, according to

Forrester.

With all that traffic pumping through the system, businesses who must rely on

a 56 kilobit per second dial up connection through their local network literally will

be left in the dust on the Information Superhighway.

Why do I emphasize the world ‘‘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.

An article in the McKinsey Quarterly this month reckons 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. And that’s

great news for this country.

But what happens when you get to the neighborhood? The 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

we discussed earlier. 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.

Obviously, there is more than one company working on the problem—and there

is more than one technology that can get you there.

First, of course, there is 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. Two days ago, we announced that

we will be combining DSL technology on copper wiring inside customer buildings

with Teligent’s SmartWave TM 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, as I’ve mentioned, 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 lines in the country.

But that still means that 40 million business lines cannot get a high-speed connection via fiber, because it costs too much to reach them.

47

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? Teledesic, Iridium, GlobalStar and others have some very ambitious

plans. For the larger companies that can afford these services, I think they will provide an important alternative. But I don’t believe that broadband satellite services

will offer a real alternative to the residential market or to small and medium-sized

businesses. And that’s the market that will be in the forefront of demanding new,

broadband connections. So what’s the answer? In terms of general principles, the

most important answer is competition. If we allow the Telecom Act to do the job

it was intended to do—open local communications markets to full competition—we’ll

go a long way toward spawning the innovation and investment that will bring the

benefits of lower costs and greater choice to customers and consumers—big and

small—all across the country.

In terms of the technology that will get us there, I don’t believe that there is ONE

answer. But I do believe that fixed broadband wireless will play a very important

role as an enabling technology that breaks open the ‘‘copper cage’’ for the small and

medium-sized business market in the United States—and around the globe.

At Teligent, we have branded it as digital ‘‘SmartWave TM’’ technology. But whatever you call it, it offers communications providers a leg up on their competition.

What are the principal advantages of fixed wireless technology? I hope you’ll pardon me for using one of Teligent’s advertising slogans, but I think it sums up my

point nicely: Big Savings; Big Service; Big Bandwidth.

For the target market of small to medium-sized businesses, businesses that have

between, say, five to five hundred DS-0s, fixed wireless offer significant cost advantages. In fact, we’re pricing our package of services at 30 percent below what customers are currently paying their incumbent carriers.

How can we do this? In the world of fixed wireless, 80 percent of our costs are

associated with electronics. Anyone who has bought a computer or a stereo lately

knows those costs are declining at dizzying rates.

In addition to the cost advantage, fixed wireless has a speed advantage. By that

I mean both network speed—bandwidth—and speed of deployment. Most of the

businesses we’re targeting today don’t have access to the Internet. Those that do

most likely have a dial-up account using that 56 kilobit per second modem that I

mentioned earlier.

In the past, they never even considered T-1 dedicated access because of the prohibitive cost of obtaining that service from a Bell company or an existing ISP. But

Teligent and other fixed wireless carriers can offer them that bandwidth at a reasonable cost. And that, for the first time, is opening up a new world of e-commerce

and the Internet to small and medium businesses.

We chose fixed wireless because we think it is absolutely the best way to bring

bandwidth and broadband services to this tremendously important segment of the

business market.

Each of us at this table is a pioneer. We are part of a revolution and part of a

new solution. Our challenge is to keep our gaze fixed beyond the next quarter and

into the future to continue to drive competition and to level the playing field for our

customers.

We need to focus on what we do best. Keep the race fair and open to all runners.

Drive innovation. Put the customer first. That’s our mission. In closing, I’ll note

briefly how I believe Congress can help facilities-based carriers more rapidly deliver

on that promise and bring the benefits of broadband services to our customers.

Notwithstanding the laudable success of the 1996 Act, some barriers to competition remain.

First, Congress should insist that all players comply with the provisions of the

1996 Telecom Act. Specifically, the incumbent local telephone companies must comply with the Act’s requirement to open their local markets for competition before

they are permitted to enter the long distance market. ILECs control essential facilities to which many competitive carriers require access before they can begin to offer

competitive service. Even fully facilities-based carriers such as Teligent must have

adequate interconnection with the incumbent so that networks communicate

seamlessly and traffic flows smoothly. No matter how competitive the industry becomes, prompt and seamless interconnection with the existing local networks will

remain an imperative. Shortcomings in this area are being addressed, but we are

far from achieving full compliance.

Another remaining barrier—and an issue addressed by this subcommittee in its

recent hearing—is the impediments that new, facilities-based competitors face in

48

bringing broadband services to customers in multi-tenant buildings in a reasonable

and timely manner.

The multi-tenant building market is not inconsequential—about one-third 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 agree with the members of this subcommittee who believe that a fair balance can and should be struck between the legitimate property rights of building

owners including reasonable, safety and security concerns and the need to bring

broadband services to all sectors of the economy.

By providing for reasonable and nondiscriminatory access to customers in multitenant 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.

49

50

Mr. TAUZIN. Thank you very much, Mr. Pickle.

And next on the list will be Mr. George Vradenburg, senior vice

president, global and strategic policy, for AOL. Mr. Vradenburg.

STATEMENT OF GEORGE VRADENBURG

Mr. VRADENBURG. Thank you, Mr. Chairman. And I will comply

with your injunction not to read my prepared statement. I have

some notes and I would like to pick up on a number of comments

from members of the committee and also represent myself as one

of those employers in northern Virginia that is in fact one of those

startup companies that is employing more and more people every

day in our Nation’s region.

First I would like to identify myself with the comments from the

Chair about the need to keep a broad vision as we approach the

policies that ought to govern broadband in this arena. The world

has been moving from analog to digital at an extraordinary rate.

It is going to continue to do so. We estimate that what we would

currently call traditional voice telephony will be perhaps 1 percent

of the bits that are and the traffic on the world’s communication

systems within the next 5 to 10 years.

And the development of these Internet developments are, in fact,

transforming the Nation’s economy. The value chain made up of

the Internet today, the 6,000 ISPs, the Internet access providers,

in the country, the scores of portals, the websites, the computer

equipment suppliers, and the software suppliers, and now those

components of our economy, in recent estimate, now represent $300

billion, which is larger than the traditional local telephone, longdistance telephone, and cable industries combined. So we are talking about major transformative effects.

Remarkably, most of this growth has occurred since the passage

of the 1996 act. But, in fact, has been, I think, fostered by the philosophy of the 1996 act, which was basically that the infrastructure

ought to be open to competing providers of services, that, in fact,

it ought to be shared, and, in fact, beyond that, service providers

ought not to be regulated. And, in fact, the Internet has been largely, indeed almost with ideological devotion, maintained as a deregulated aspect of our economy, but the infrastructure on which

it rides is shared.

Remarkably, the infrastructure on which the Internet rides is a

single monopoly infrastructure. It is basically borrowed from the

old voice telephony system. And the reason that we have been able

to layer multiple levels of competition at increasing levels of the

value chain on top of this monopoly infrastructure is because of the

philosophy of the 1996 act, which is keep it open and keep those

facilities shared.

Now I think the challenge as we go forward and we see increasing different kinds of technology platforms on which broadband

might be developed, is to maintain that philosophy, which essentially says keep that Internet deregulated, keep that infrastructure

shared so that all service providers can get to all customers. All

service providers can invest the necessary marketing and capital

needed to build out new services and new business models, but no

gatekeeper or bottleneck develops in this new world. So I think the

challenge is to drive all of that competition that we have seen at

51

every level of the value chain, now drive that competition into the

infrastructure on which we are going to build our broadband arena.

Now what is the secret sauce to that? As I said before, I think

it has been the openness of the infrastructure. Uniform connection

requirements, non-discrimination requirements, most of the players

that you have heard from today, at least so far, in fact, follow that

philosophy and have been open to competitors. And, indeed, as you

move downward the multiple infrastructure world, it seems to me

that the government has got to take enormous care that it treats

the infrastructures in a similar fashion. So that, in fact, government itself is not weighting, putting its hand, its finger on the

scales as between cable, as between telephone, as between wireless,

and satellite. That, in fact, the government take some great care

here that it treats these infrastructures in a similar manner, that

parity of government treatment of these infrastructures be similar,

and that, in fact, these infrastructures be kept open and that that

Internet be kept deregulated.

As a consequence of that philosophy, we have seen an absolute

blossoming of competition, choice, lower prices, better service. The

one thing I will refer to in my written testimony, Mr. Chairman,

is the chart attached to my written testimony which demonstrates

that the prices in virtually all aspects of communications-related

products and services has been falling over the last several years

except for one. And, as a consequence, it seems to me, Mr. Chairman, that we take some lessons that competition and deregulation

is good and that infrastructures ought to remain open and shared

and available to all service providers. Thank you very much.

[The prepared statement of George Vradenburg follows:]

PREPARED STATEMENT OF GEORGE VRADENBURG III, SENIOR VICE PRESIDENT,

GLOBAL & STRATEGIC POLICY, AMERICA ONLINE, INC.

Introduction

Chairman Tauzin, Ranking Member Markey, members of the Subcommittee,

thank you for the opportunity to discuss the important issue of the Internet in a

broadband world. I believe that this hearing marks an important step in Congress’

examination of issues that are critical to the future of the American economy and

society as we move further into the Information Age.

The Internet Today

Unlike any other communications technology that has preceded it, the Internet is

a truly remarkable phenomenon. In only a few short years, the medium has literally

transformed the way Americans communicate, engage in commerce, educate themselves and even participate in our democracy. It is a place where an untold number

of new entrepreneurs have discovered that if they build something—a Website, a

business or a new access service—thousands, even millions, will come. Always open

for business, always open to new ideas, the Internet is perhaps the most dynamic

force in our society and economy today.

More than half of American households—a total of 53 million —now own PCs.

And about one-third of American households now have access to the Internet. Every

month, nearly 1.5 millions Americans join the online world for the first time, bringing the percentage of the US population online from nearly zero in 1990 to over 30

percent today. Indeed, the number of online households in the United States grew

by a factor of eight between 1994 and 1998. In five years, nearly 60 percent of

Americans are expected to be online. This same rapid growth path can be seen

throughout the world, where the number of online users is expected to reach 250

million by the year 2002. As one would expect from all of these users online, traffic

on the Internet is doubling every 100 days and analysts are predicting that by 2002

consumers will spend nearly $43 billion a year online, compared to $8 billion last

year.

52

The most significant aspect of this online phenomenon in many ways is the degree

to which consumer choice and competition at all levels of the Internet marketplace

has fueled its growth; consumer adoption rates are far out-pacing the predictions

of even the most aggressive analysts only a few short years ago—and far outpace

the track record of any other medium in history. Today over 6000 ISP’s offer a wide

variety of price, feature and service packages; over 90% of Americans have available

to them competing Internet services with local dial-up connections. Competition has

brought prices down, raised the quality of service and expanded the range of Internet features at all points in the Internet value chain. From the migration to flat

rate pricing in the access market to rapid innovation in business models, no Internet business man or woman has been able to lose sight of competition for even a

moment lest the rug be pulled out from under them.

Consumers are the drivers—and the ultimate beneficiaries—of this fierce competitive and open environment. With virtually no barriers to entry into the Internet

marketplace and no gatekeepers collecting tolls from new businesses, consumers

have seen their product choices expand, been granted access to a wealth of information historically available only to those with means and have been empowered to

participate in civic life in ways that were previously imaginable.

The Broadband Future

In the next few years, the interactive medium will be available not only over today’s ‘‘narrowband’’ technologies but also through ‘‘broadband’’ connections 100

times faster than today’s access speeds.

As broadband becomes widely available, affordable and easy-to-use, it will meet

the needs of consumers, small businesses and our community in new ways we have

only begun to imagine.

Online shopping—and online-selling—will explode as more sophisticated technologies expand the range of products and services available online and make it possible to view, tour, test and even ‘‘try on’’ a range of products.

And beyond online shopping will come the home office. Telecommuting—involving

everyone from typists to traders—will come into the mainstream through

broadband’s capabilities, benefiting cities across the country through reduced traffic

and pollution. One-person Internet-based operations will compete with multinational corporations, creating whole new local industries.

As broadband expands the capabilities of the Internet, its role will expand as society’s ‘‘great leveler’’—putting world-class resources, the widest range of products and

services, and even access to the outside world at the fingertips of anyone capable

of flipping a switch or dialing a telephone.

The Future will be Multidimensional

Remarkably, today’s Internet is built on a single access platform borrowed from

the world of voice telephony. Tomorrow, broadband Internet may well be built on

multiple access platforms—telephone, cable, satellite and wireless. Indeed, our vision for residential Internet access is one of a true ‘‘broadband tapestry.’’

In a multiple-platform environment, it is our view that consumer choice and competition can and should be enhanced not limited—consumers should be able to

choose among infrastructures, as well as services.

In this vision, multiple service providers will offer services of varying speed and

functionality to their consumers through multiple platforms. Ideally, any Internet

service provider could offer consumers different applications using different access

technologies—and the consumer would never have to know whether their Internet

service provider was using DSL telephone lines, cable modems, or hybrid satellite

delivery. Indeed, the consumer, in a fully competitive broadband world should not

be aware of which access technology its Internet service provider is using—the consumer cares about service and applications, not technology. The transparency or invisibility of the technology employed by a service provider is critical to the success

of the Internet as a mass medium.

It is important to recognize that despite this vision, for the next several years,

two-way broadband access to the Internet for the consumer marketplace will be offered primarily through two sources, both wireline—DSL through traditional phone

lines and cable modems over cable systems. In the case of DSL, telephone companies offer non-exclusive and non-discriminatory interconnection arrangements. We,

and our Internet competitors, have entered into such arrangements with the prospect of higher speed Internet services and more robust applications becoming widely

available in neighborhoods accessible by DSL by the end of the year.

Other broadband access technologies will also become available at some point in

the future. In fact, just this week AOL announced an alliance with Hughes Electronics to help bring a hybrid form of high-speed Internet access through satellite

53

to consumers by early next year. As a result, consumers will be able to benefit from

affordable, convenient and faster Internet service even if they live in traditionally

hard-to-serve communities like rural areas. In today’s Internet environment, rural

consumers and those in other high cost areas have choice and flexibility in Internet

access. Tomorrow’s rural Internet customer should have the same choice and flexibility. What makes satellite broadband connectivity distinctive is its availability nationwide, particularly where other services are not rolling out. In the next few years,

satellite systems can provide their download speeds up to 14 times faster than the

standard 28.8 kbps modem, with uploads over phone lines at speeds up to 56 kbps.

In the longer term, two-way, higher-speed connectivity will be available by next-generation satellite systems, such as Hughes’ Spaceway, TM expected to be available for

residential applications by 2003.

It is in the cable environment where we see the potential for consumer choice and

competition in broadband services to be at risk. Unlike in other broadband facilities,

providers, cable companies do not plan to offer access to Internet services—insisting

that a customer purchase the cable-owned or affiliated service before buying or accessing a competitive service. This practice has at least three adverse consequences.

First, it eliminates competition in the access market, thereby challenging the Internet model that has kept prices falling and service quality rising over the last several

years. Second, it forces consumers to pay twice to get the Internet service of their

choice, thus depriving moderate and low income families of cable-based Internet

service. Third, it discriminates in service quality between the cable-owned Internet

service providers—whose content is directly accessible—and independent Internet

service providers—whose content is only indirectly available through the Internet.

To make matters worse, the cable companies have even stated their intention to

preclude access to content otherwise available to the consumer on the Internet, material with which the cable system does not wish to compete, including video material longer than ten minutes.

The Policy Environment

AOL believes that competition, openness and consumer choice are the essential

ingredients of the success of the Internet, whether consumers access the Internet

by broadband or narrowband means.

As technologies converge and all services—voice, data, video and others ‘‘ are offered over traditionally distinct voice or video platforms, old regulatory classifications will not be sustainable. As a result, regulatory parity should become a clear

priority, lest Congress favor one technology platform over another.

In moving toward regulatory parity, Congress must choose between the open

model of the Internet or the closed model of the old AT&T and of cable.

We believe the choice is clear. As the Internet marketplace has demonstrated,

competition in an open environment will deliver to all American consumers’ lower

prices, better services and more innovative products.

Further, the goal of Congress in this area should be to rely increasingly on the

marketplace, and less on regulation. We can do that by assuring a market-oriented

framework where entry costs are low and where business success is achieved by a

better product and lower price, not by ownership of bottleneck facilities or more favorable government regulation.

We decided nearly 20 years ago that open interconnection and nondiscriminatory

treatment of national service providers by owners of last-mile bottleneck facilities

should be the cornerstone of our national and international communications policy.

The remarkable developments in the Internet over just the last 5 years have proven

the wisdom of that choice. The rules of the game have changed; we gave monopoly

a chance and it failed; we decided to take a different, more competitive, path; and

we as a nation are better off as a result. Indeed, the attached chart shows the benefits of competition across multiple communications media, only, in cable, where

there is little competition have prices risen.

While Congress’s role in this area should be as ‘‘hands off’’ as possible, you and

your colleagues, have in my view, a responsibility to consumers to ensure that the

benefits being delivered by the Internet marketplace are preserved and fostered in

the future. It should be our ultimate goal to continue an environment of consumer

choice and competition—where prices have been shooting down instead of up and

services have gotten better and better. This Internet DNA of choice and competition—not the gatekeeper DNA of vertical integration—should be our guiding star.

If gatekeepers want to play in the new Internet game, we should require them to

play by Internet rules. We owe consumers no less.

Thank you for the opportunity to appear before you today.

54

55

Mr. TAUZIN. Thank you very much, Mr. Vradenburg.

And now Mr. Marc Apfelbaum, senior vice president and general

counsel of Time Warner Cable.

STATEMENT OF MARC J. APFELBAUM

Mr. APFELBAUM. Thanks very much, Mr. Chairman, for inviting

us. I am the general counsel of Time Warner Cable, as you said.

I didn’t throw away my prepared remarks because I used the back

page to write some new notes.

I wanted to just mention a little bit, you asked us to talk about

our businesses and Time Warner is really a content company. That

is what we have always been and we have always seen technology

as something to use in the service of content. But we have been on

the forefront of technology in the cable business, going back to

QUBE in the 1970’s, which I think was the first interactive cable

system. I think we were also at the forefront of developing hybrid

fiber-coax. We also had our FSN experiment in Orlando where we

have developed a lot of interactive services that are just really becoming to come into practice today.

On the Road Runner front, the whole service is really made possible by the upgrades that we have done with our cable plant which

will allow us to offer all kinds of new digital services, not just

Internet services. Road Runner is a fully integrated service. It is

not just created by an ISP, as such. It is really a jointly created

product between the Road Runner joint venture, which we created

with Media One and some other companies, and us as the local

cable operator, where we have local online editors in each of the

communities we serve and they do a really wonderful and creative

job of developing local content in a way that I think a lot of national companies just haven’t done. They have worked with local

museums, local schools, local everything and have developed some

really unique work.

I guess the thing that we are trying to do is, as we go along, figure out the best way to provide these services, what is best for customers. And I think that is the most important thing that we all,

everybody who is building facilities, which is in the end what provides these new services, that all facilities providers have the freedom to experiment. That if, at this early stage in the development

of these services, government would come in and say here is how

you have got to do it, it would all be over. So on the policy front,

I do think it would be a huge mistake for government to step in

and say, here is how you have got to do it and, you know, no more

experimentation.

And a couple of the Congress people asked, you know, what stops

us from deploying this more quickly? I would say it is a very complicated thing we are out there trying to do. It is not an easy thing

on either the technology side or the business side and, again, it is

our freedom to figure this thing out, as we go along, that will make

it possible to roll this stuff out more quickly.

And the other thing I would say about what government can do

is that we really do need a national policy on this. You know, there

has been some reference to the Portland decision. It seems to us

that it is simply impossible to run our business and let hundreds

56

or thousands of different communities decide how we should make

this business work.

So, again, I would just like to thank you for having us here today

and I would be glad to answer any questions.

[The prepared statement of Marc J. Apfelbaum follows:]

PREPARED STATEMENT OF MARC J. APFELBAUM, SENIOR VICE PRESIDENT AND

GENERAL COUNSEL, TIME WARNER CABLE

Chairman Tauzin and distinguished members of the Subcommittee, my name is

Marc Apfelbaum and I am senior vice president and general counsel of Time Warner

Cable. I appreciate the opportunity to appear today to discuss the deployment of our

broadband service, known as Road Runner, and to discuss the future of broadband

technology. I commend you for holding this hearing as we at Time Warner believe

that the pro- competitive policies adopted by this committee in the 1996 Telecommunications Act and the policies we are discussing today to encourage deployment of broadband technologies are critical to the future of our economy and the

continued development of the Internet.

Time Warner has a long history of technological innovation and leadership and

has long been interested in providing advanced services to consumers over its cable

systems. In the early 1980s, Time Warner developed QUBE, the first interactive

programming service offered over cable. In the early 1990s, Time Warner constructed the first hybrid fiber-coaxial cable network located in Queens, New York,

and experimented with a variety of new services through its Full Service Network

in Orlando, Florida. These earlier groundbreaking initiatives provided the foundation for the on-line services the company is now introducing across the Nation.

Building on that foundation and as a result of the regulatory certainty created

by the 1996 Telecommunications Act, Time Warner is well into the process of upgrading all of its cable systems to a state-of-the-art, hybrid fiber coaxial architecture. When these are substantially completed by the end of the year, Time Warner

will have invested about $4 billion upgrading its cable systems to provide increased

capacity for both video programming and other new digital services.

To make full use of the upgraded plant, Time Warner teamed with Microsoft,

Compaq, Media One, and Advance Newhouse to develop Road Runner, a new highspeed on-line service that provides local and national content. The Road Runner

service is jointly created by the Road Runner venture and its affiliated cable operators. Road Runner provides an innovative mix of local and national content, as well

as a high-speed connection to the Internet. The joint venture provides content on

a national basis from various sources including CBS Sportsline and Barnes and

Noble. Road Runner’s cable operator affiliates, including Time Warner Cable, Media

One and third party cable operators, provide additional local content, among other

things our local on-line editors also assist schools, libraries and museums in developing their content.

The foundation of our Road Runner service is our upgraded cable fiber-coaxial

network. This network provides the enhanced reliability and capacity of fiber optics

and results in an increase in the delivery of content to the PC at speeds up to 100

times greater than today’s residential telephone line. Customers reach our Road

Runner service and the Internet over the cable system, without any need to dial in

to a local telephone number and the service is ‘‘always on,’’

The Road Runner service allows customers to visit any site on the Internet. Nothing on the Internet is off limits to the Road Runner customer, including the sites

of Internet Service Providers. As you know, most content on the Internet is free,

but some content providers, such as AOL, charge for their services. If a Road Runner user has installed AOL on her computer or if her computer came with AOL already installed, she need only click on the AOL icon on her computer screen. She

will obtain access to AOL, and thereby obtain all AOL content, web access, e-mail

and other services. Road Runner customers similarly can reach any other ISP posted on the Net with a single mouse click.

We believe our Internet services provide subscribers with an enormous value. For

about the same price as today’s dial-up phone line plus an ISP, Road Runner provides consumers with Internet service that is faster and provides more immediate

access to on-line services.

The development of the Internet is the quintessential example of the power of the

free market. It was Congress’s respect for market forces over governmental interference that allowed the market to meet the needs of consumers, to develop innovative new technologies, to grow the economy and to provide the ultimate forum for

communications. No one player has the ability to stand in the way of the global pheVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00059 Fmt 6633 Sfmt 6621 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
57

nomenon that is the Internet today. For some to suggest that might be the case is

nothing short of ridiculous. For although Time Warner and other cable companies

are investing billions of dollars in upgrading our infrastructure, cable modem services is still in its infancy, with fewer than 1 million subscribers nationwide out of

the current total of 29 million residential Internet subscribers.

At this early stage in the development of broadband services, it would be a mistake for government to choose and impose one business model on all broadband providers. Time Warner believes that cable companies and other players—be they satellite, wireless, or telephone companies-should be encouraged to invest in the development of these new Internet access services through pro-competitive policies that

leave each one free to experiment and develop its own business strategy. It is our

strong belief that consumers will be best served by government policies that spur

the rapid rollout of high-speed broadband Internet services by multiple players and

multiple technologies, rather than by government mandates about the business

models such entities should employ. Those companies that have urged a contrary

approach are simply using the tired old Washington game of seeking to use government to advance their own ‘‘competitive advantage’’. However, as FCC Commissioner Michael Powell wisely stated in a recent speech on this issue: ‘‘Competition

policy should focus on the benefits and harms to consumers, not the effect on firms.’’

As I’ve stated, upgrading cable plant and developing and deploying advanced services are expensive and risky ventures. Imposing new regulation on companies as

some have suggested will not only slow development but will deter further investment of private capital. Therefore, Time Warner strongly urges policymakers to resist those attempts to determine through regulation how this market might develop.

Such attempts fly in the face of history of Internet regulation up until now and inevitably result in the freezing or slowing of technological development and thereby

harm consumer welfare.

Time Warner also strongly believes that broadband policy must be set at the national level. As FCC Chairman Kennard and Commissioner Powell have also stated,

these important policy questions cannot be answered hundreds or thousands of different ways by state and local authorities, and we therefore urge this Committee

to keep a watchful eye on such developments.

Mr. Chairman, Time Warner applauds your Committee’s pro-competitive policy

approach. I thank you again for giving me the opportunity to share Time Warner’s

views with you and look forward to you questions.

Mr. TAUZIN. Thank you very much, Mr. Apfelbaum.

And now, Mr. Alex Netchvolodoff. And everybody calls you Netch,

right?

STATEMENT OF ALEXANDER V. NETCHVOLODOFF

Mr. NETCHVOLODOFF. That is right. Just think of the great advertising campaign ‘‘With a name like Smuckers, it has got to be

good.’’

Mr. TAUZIN. It has got to be good. Of Cox Enterprises. Welcome,

Alex.

Mr. NETCHVOLODOFF. Thank you, Mr. Chairman. The written

part of my statement, which I am discarding with your encouragement, tried to make one point, which I will summarize, and then

you invited us to perhaps do a little bragging about what we are

trying to do within our own operations. So I will proceed to do that

afterwards.

I think that the question before policymakers is this: Is Internet

access going to be a competitive service or not? And what do the

people that analyze this who are not stakeholders, who are neither

telephone operators nor cable operators or wireless providers, but

folks in think tanks in Boston and California, what do they think

is going to happen with respect to Internet access?

And what they think is going to happen is that there are going

to be six or seven non-affiliated, facilities-based providers of access

to the Internet and the technologies that are going to be used vary.

You are going to have microwave. You are going to have satellite.

58

You are going to have third-generation PCS. You are going to have

DSL. You are going to have cable modems. And that is just the beginning. Electric utilities are also going to be involved in this.

And, therefore, the idea that government, at the very early

stages of the enormous amount of investment that is teed up to

occur over the next 3 or 4 years, would somehow decide it appropriate to regulate, to impose what would inevitably become, in the

words of Mr. Powell and Mr. Kennard at the expert agency, a very

difficult and complicated and costly cost-based analysis in order to

tease apart all the business elements so that seamless access could

be provided to non-facilities-based players—resellers and packagers—is just simply not an appropriate thing at this point for the

government to entertain.

So the first point I would make—and it is summarized, as I say,

in my written comments—is that it is way too early, I think, for

policymakers to consider an intervention, a regulatory intervention.

Now, when the 1996 act was signed into law, Cox was a cable

company. We simply video one way to our customers. Since the enactment of that legislation, we have spent $4 billion literally transforming our networks so that you wouldn’t recognize them today in

terms of what they were at the time that the 1996 act was passed.

We have activated the return path and we have done that in a way

in which we have had to be very careful about noise on the network.

We have brought switches so that we can provide digital telephone service. We have invested in the enormous complexity of developing a national network, distributed network, with servers so

that the people that are using our data access services can benefit

from the speed of having content downloaded into servers. We

started a joint venture with a firm called At Home. And all of this

was done so that we could begin to offer our customers a new service at a lower cost and at a higher speed than is currently available

in the marketplace.

The gating factor for us is complexity. The gating factor is not

demand. Our customers want high-speed data services faster than

we are willing to provide it to them because we get only one bite

at the apple. Either the services that we provide, whether they are

telephone or data services, work and work very well or we are out

of business. The cable industry does not enjoy the kind of reputation that the regional bell operating companies do. And when we

go to our customers and say try us on new technology. Try us on

new services. They either work very well or we are in trouble.

So, for Cox, the concern here is, A, we have made these investments, not with a guaranteed rate of return because, as you know,

under the Cable Act, we couldn’t pass through any of the capital

investments that we have made to the end-user in the form of our

cable rates. It was prohibited under the act. So all of the investments that we made were made under the basis of being, essentially, venture capital. And, Mr. Chairman, the promise, we think,

is there. By the end of next year, our original customer base, which

was 4 million—it is now 5 million because we have done some consolidating transactions, but our original customer base—we would

be able to provide data access, telephony, and digital video to about

85 percent of our customer base by the end of next year.

59

So we think that this is an enormous success. We would simply

ask that the Congress be very careful to permit the incredible

spending of money. I mean, I think it is hundreds of billions of dollars that are going to spent by facilities-based providers to create

Internet access and that that enormous investment ought to proceed with as little government intervention as possible. So that is,

essentially, Cox’s story.

[The prepared statement of Alexander V. Netchvolodoff follows:]

PREPARED STATEMENT OF ALEXANDER V. NETCHVOLODOFF, VICE PRESIDENT, PUBLIC

POLICY, COX ENTERPRISES, INC.

Chairman Tauzin and distinguished members of this Committee, I appreciate the

opportunity to appear here today representing Cox Communications, a subsidiary of

Cox Enterprises, Inc. When it comes to deployment of data services, here’s what Cox

Communications is providing to its customers—fast, cheap, high quality, competitive

Internet access with national and local content. And we’re connecting schools and

libraries to the Internet...for free.

Mr. Chairman, many industries—telephone, cable, wireless, electric utility and

satellite—will be investing tens, perhaps hundreds, of billions of dollars in private

risk capital in the next few years to deploy broadband infrastructure. Injecting new

government regulation into the way competitive high bandwidth Internet access

services are provided would have an entirely predictable result—it would slow investment and hinder deployment. Indeed, one winning strategy for government to

accelerate the deployment of advanced services would be to reduce regulatory burdens not increase them.

Just consider the dynamic nature of today’s marketplace. The cable industry’s annual spending on two-way broadband facilities is about $10 billion. Since the ’96

Act, Cox alone has invested more than $4 billion. For the industry, the number of

high-speed data homes passed will exceed 35 million by December 31.

The phone industry is answering this competitive cable challenge by spending billions of dollars of its own to activate high bandwidth DSL capable loops. By yearend, Bell Atlantic has announced 8 million lines, SBC 8.4 million, Pacific Bell 5.2

million, and Bell South 5 million. The most current ARMIS data from 1997 reveal

that almost a year and a half ago ILECs had 831,000 high-bandwidth, customerterminated T1 lines yielding about $11 billion in annual revenue. US West alone

has told analysts that it would add 80,000 DSL customers this year to a total industry subscriber base that is growing at a substantial rate.

Sprint has plans to offer its broadband Integrated On-Demand Network (ION) in

27 major markets and, to that end, is spending hundreds of millions of dollars on

wireless spectrum to create broadband access. Last month, MCI Worldcom agreed

to purchase CAI Wireless to launch broadband access. Motorola and Cisco have

formed a wireless joint venture to provide high-speed access. Winstar, Nextel, and

Microsoft have joined this broadband parade. And certainly smaller facilities-based

players are not excluded. In Seattle, ReFlex Communications and TUT Systems

have formed a venture to offer Multiple Dwelling Units high-speed access using

microwave spectrum and fiber optic rings.

The satellite industry is emerging as a very major part of the marketplace for

broadband access. Hughes is spending $1.4 billion to launch two-way access. And

AOL has just announced a $1.5 billion investment in Hughes. Not to be outdone,

Lockheed Martin/TRW is spending $3.5 billion.

Electric utilities are joining with RCN to offer broadband services along the east

and west coasts passing 40% of U.S. households.

And finally, 3rd generation PCS broadband capability will start to be deployed

next year.

I am not trying to suggest that the entirety of this business activity and the billions of dollars of venture capital that it represents will all bear fruit. But much

of it will. In the last several months, there simply has been an undeniable and unprecedented amount of time, effort and money committed by dozens of unaffiliated

stakeholders to the task of providing broadband Internet access. Under these circumstances robust competition is inevitable. And it is important to note that this

will not be competition reliant on repackaging or reselling. This competition will result from deployment of facilities by numerous unaffiliated industries. It will lower

costs for end users and provide a rich array of broadband choices specifically related

to intended uses.

60

Mr. Chairman, the cable industry is taking on enormous risk to provide new digital services to its customers. In the case of broadband data, I can tell you that even

with a carefully integrated service like @Home the details of both technology and

business relationships have proven to be extremely complicated. The gating factor

for Cox is not consumer demand, it’s execution in a way that delivers a dependable

product. From a public policy standpoint, the proposition that government should

never attempt to regulate a nascent and competitive consumer product like

broadband data service is apparent on its face. From an operational standpoint,

such regulation can only introduce cost and complexity for the consumer into an already costly and complex offering. And from a governmental standpoint, as Chairman Kennard has noted, the imposition of seamless access regulation can only be

accomplished through a prolonged and difficult cost-of-service proceeding to determine how to price the myriad network elements and business services that are involved. Such a regulatory thicket is precisely what the ’96 Act aggressively discourages.

In conclusion it would be a pity if, instead of a nation of facilities-based communications providers, we became a nation primarily of resellers and re-packagers.

Global competitiveness will not be furthered by policymaking that creates heavy incentives for resale instead of promoting facilities-based business strategies. As I

have just noted, a highly regulatory, cost-based, rate-of-return unbundling of competitive cable Internet access facilities has no public policy or legal predicate. High

bandwidth Internet access is now and will continue to be highly competitive. In this

context, cable controls no essential facility. Old-fashioned regulation is the last thing

needed for the Internet to continue to flourish.

Mr. TAUZIN. Thank you very much, sir. Dr. Evil would have said

it would only cost $1 million. Thank you.

We will now turn to the Honorable Tom Tauke, a former member

who has served on this committee. And, Tom, I want to welcome

you back to the other side of the table now representing Bell Atlantic. Mr. Tauke.

STATEMENT OF HON. THOMAS TAUKE

Mr. TAUKE. Mr. Chairman, it is good to be back. When I talked

to the chairman this morning, he indicated I was a little boring.

So I am going to try to liven up my presentation this morning for

all of you with a couple of——

Mr. TAUZIN. You weren’t supposed to quote me on that, Tom.

Mr. SAWYER. Mr. Chairman, the microphones don’t work any better than they did when he was here.

If he could move it a little closer, it would help.

Mr. TAUZIN. You have got to move it a little closer, Tom.

Mr. TAUKE. This is as close as it gets. I will speak up. I will move

over a little closer.

As many of the members have already indicated—or those that

have testified this morning—have already indicated, the Internet is

a terrific phenomenon. It is doing great things for our economy. As

the Department of Commerce study pointed out that was released

just this week, the Internet is fueling the growth in the economy

the last couple of years and it is the hope for growth in the economy in the future.

But the infrastructure, which has also been referenced this

morning, the infrastructure on which the Internet rides is an infrastructure that really wasn’t built for this market or for this technology or for this use. It was an infrastructure that was, in large

part, built for voice services, has been used for some simple data

services like downloading text, but now is being challenged in a

whole new way.

61

Customers are going online today not just to tap into CNN to get

the news of the day. Customers want to be able to go to a furniture

store, pick out a sofa, see how it looks in their room, walk around

the sofa, and do all that online. That takes a whole lot more bandwidth. That takes a whole lot more infrastructure than is there

today. So the challenge that we face is to get the infrastructure out

there that will meet the needs of the new economy.

Well, what is the—when we think of this infrastructure, then,

what should we be thinking about? I try to think of it in two terms.

One is the last mile, which we have talked about. The second is

the infrastructure that is around the backbone. And when it comes

to last mile of the infrastructure, we have been attempting to deploy more and new technology in the last mile in order to speed

up the service that people get to the home.

I have a little demonstration here that I would like Link to run,

if he would.

[Slide.]

On the left, you just saw a 28.8-K modem that is the typical residential customer that is trying to download 6 pictures. They got 4

percent, a little less than a third of a picture.

[Slide.]

In the second—we didn’t get the rest of it up—but the second one

is the highest speed modem that we have today. You got less than

the first picture.

[Slide.]

Meanwhile, if you have DSL service, the lowest speed DSL service that Bell Atlantic is employing today, you can get all six pictures during that timeframe.

So that is one of the things that we are attempting to do for the

last mile.

But there is another issue——

Mr. TAUZIN. Could you redo that?

Mr. TAUKE. Sure.

Mr. TAUZIN. It went kind of fast. I want to make sure people

kind of saw it. Could you back it up and do it again. All right.

Mr. TAUKE. So that is the last mile.

But you can have the greatest last mile in the world, if you don’t

have connection to a backbone that also is providing speed to this

level, it isn’t going to do you a lot of good. And when it comes to

the backbone, I have personally had a lot of difficulty figuring out

what is going on. I look at these maps and they are put out there

and there are networks flying all over the country. I read stories

about how we have all this capacity.

I have finally concluded that the backbone is a lot like a regional

airport system or the Nation’s airport system. You know, my own

State of Iowa, you can look at a map and you see all of these flights

flying from New York to Los Angeles going over Iowa and they are

high-speed flights, you know, direct service. They don’t do the people in Iowa a bit of good. They don’t land in Iowa because if they

did it would slow down the traffic.

Well, the same is true with much of the backbone. It goes crosscountry. There are not stop-off points because stop-off points slow

down the traffic. So, instead, you have to build a lot of regional airports to get you into the hub so you can get on the main backbone.

62

Building those regional airports is where the real money comes in

and where the real investment is needed. We, today, have barriers

that prevent us as companies from building those regional airports

and other players are busy putting the resources they have into the

major backbones.

So I believe that those are the two challenges: the last mile and

the regional system that is part of the backbone system that allows

people to get on to this new world of information. I think that if

you look at what is the barrier, then, to the investment—and it is

huge amounts of investment that need to be made to get that last

mile and the regional system in place—a big part of the barrier is

regulation. A number of the people have said the government

shouldn’t be in here telling us how to deploy the technology. I don’t

want to shout this too loudly, but that is what is happening. At

least that is what is happening for the major providers of the technology, including Bell Atlantic.

Essentially, the way I look at it is this. We have a telephone

market. We have a cable video market. We have telecom legislation

and 1934 act and various revisions thereof that apply to those markets. But today we are taking the regulation from the telephone

market and applying it to the new infrastructure and the new technology that we are attempting to deploy. And it is hamstringing

that deployment; it discourages the investment. In the last mile, it

makes our environment in which we are making this investment

very uncertain. We don’t know from day to day what the rules will

be. And so, as a result, it deters that investment. We have lots of

plans, but there are lots of uncertainties in the regulatory world.

In the regional airport or backbone world, we can’t make the investment today because of the rules that are on the books.

I would encourage the committee to look at the wireless model.

When the wireless industry came forward, which, again, uses part

of the existing infrastructure as this new world is using some of

the existing infrastructure, that when the wireless world came forward, the Congress and the FCC said, let us set up a new regulatory paradigm for that world. Let us not regulate it. Let us instead have limited regulation so the new technology will be deployed and, indeed, that is what happened. New technology was deployed. It was deployed rapidly, much faster than was ever predicted. There has been great competition in that arena and in the

wireless arena you have seen prices go down and services expand.

So I guess my last point is this. That what can this committee

do to promote growth of the Internet in its infrastructure? I think

what the committee can do is to try to clear away some of the regulation that is restricting and inhibiting investment. And if you are

able to do that, then I think you will see the kind of speed at your

homes, not just in business, but in homes, that I would like to show

in this last demonstration. Demonstrations always take longer.

This is why we need speed.

[Slide.]

These are pictures that are being downloaded right now. 10 pictures being downloaded very rapidly using 7.1 megabits per second.

And the point that I want to make is that with this kind of rapid

downloading, you get great clarity which you don’t get today. You

would be able to download a novel, a good-sized novel, in 2 seconds.

63

You could transfer x-rays in 4 seconds. The fact is you would also

have the infrastructure in place which would permit this world of

E-commerce that consumers want and the economy needs to move

forward. Thank you.

[The prepared statement of Hon. Thomas Tauke follows:]

PREPARED STATEMENT OF THOMAS TAUKE, SENIOR VICE PRESIDENT, GOVERNMENT

RELATIONS, BELL ATLANTIC CORPORATION

Mr. Chairman, thank you for this opportunity to testify before the Committee. I

am Tom Tauke, Senior Vice President of Government Relations for Bell Atlantic. I

am before you today to tell you that, without changes in the regulatory architecture,

the deployment of high speed Internet access will be significantly impeded, to the

detriment of all Americans.

Mr. Chairman, 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 communications and any type of service

from educational to medical is threatened.

The current infrastructure on which the Internet rides is insufficient to handle

the explosive growth, and the danger is that we won’t recognize the scope of the

problem until it seriously impairs our economic growth. Policy makers must avoid

applying old regulatory models to an entirely new, competitive technology. The consequences of inaction are very serious. The entire Internet economy rests on the

ability of businesses to reach consumers. Without BOC broadband deployment many

local communities will never realize the promise of high-speed Internet, and Internet companies will not be able to reach their markets. This will have a serious impact on the value of the Internet economy itself—the sector that everyone agrees

is driving economic growth.

If we slip into using policies for the Internet and broadband services that were

intended for a local voice telephone market, we will slow deployment of broadband,

inhibit competition and risk slowing investment at the very time when we need

every possible player involved to help advance the capabilities and capacity of the

Internet.

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 14.4k modems that were state-of-the-art a few short years ago are the slowpokes, with 56k being the top speed achievable by most mass-marketed dial-up

modems. As more and more people use the Internet and more complex information

and bandwidth-intensive applications appear, it is clear that 56k just is not fast

enough.

Consumer surveys demonstrate that speed is a very important issue to users. But

so is 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. At the top of this system is the Internet backbone

which links together thousands of web sites and Internet providers and takes traffic

back and forth at high speeds across the U.S. The faster data can get on the backbone and the more backbone capacity there is, the better the connection and the

higher the quality of the data transmitted.

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.

64

1There are different types of DSL services. The most popular today is Asynchronous DSL, or

ADSL. DSL technologies are generically referred to as xDSL. 2These companies are sometimes referred to as data local exchange carriers, or DLECs.

3Without a change in the regulatory treatment of DSL services, however, cable may become

a de facto monopoly provider of high speed Internet services.

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 current lack of competition in the backbone market and the threat of telephone style regulation of

broadband connections deployed by incumbent telephone companies threaten to slow

the improvement needed in the Internet. We need competition and investment in

the Internet from end-to-end—from the local connection to the nationwide and global backbone. Whole new industries based on a more advanced Internet will be stymied and the continued development of our high tech and computer industries will

be slowed. 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 information superhighway is exploding while driving at 56k, imagine what

will happen when we allow consumers to drive at 10 or 100 times that speed.

Today, the two most promising landline technologies to provide residential consumers with high speed Internet access at a reasonable cost are Digital Subscriber

Line (DSL) 1 services, and cable modem services. Only one of these services, DSL,

is subject to significant federal regulation. Even worse, only certain providers of

DSL—the Bell operating companies (BOCs)—are so constrained as to not be able to

provide data services across LATA boundaries.

If consumers are to get widespread deployment of high speed Internet services

from competing providers, it is necessary for DSL services to be deregulated. Current regulation hampers significant DSL deployment and denies consumers benefits.

To Regulate or Not to Regulate, That is the Question

The question before Congress is ‘‘Why should companies that are best able to

bring broadband to all Americans be constrained from doing so by an antiquated

regulatory structure?’’ Bell Atlantic thinks they should not.

The high-speed data business of today should not be regulated like the 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 2, 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 80 percent of the residential customers buying high speed

Internet access.

Even though there are several willing providers of the service, there is still precious little deployment of high-speed Internet services. The players who can make

the financial commitment to widely deploy DSL services, and can help new entrants

in their deployment of the services, are being held back by the regulatory regime

in place today.

Bell Atlantic and other Bell operating companies (BOCs) 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 operate 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 DLECs

are not prohibited from providing these services. The only companies not allowed

to provide this service are the BOCs.

Remember that the reason that AT&T was split into local and long distance components was the threat that AT&T would use its market power in one market to

harm competition in another market. At that time, AT&T had a monopoly over the

local exchange market. There is no current monopoly for high-speed data services.3

In fact, out of the nearly 100 million Internet users, there are only 70,000 total DSL

customers nationwide. There are seven times more high-speed data customers using

cable modems (500,000) than DSL.

65

Bell Atlantic may not even provide its Bell Atlantic.net customers direct Internet

access. Instead, Bell Atlantic.net must contract with a third party to provide the

Internet portion of the Bell Atlantic.net service.

There is very little justification for the FCC’s protection of AT&T and MCI from

Bell Atlantic’s pro-consumer entry into the data business on an equal footing. These

mammoth companies have the capital and know-how to compete for data customers.

Even the start-up DLECs 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 LECs. 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 only

a portion of the capacity of the loop 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 CLEC investment in local voice services by giving the new

DLEC competitors a ‘‘free ride’’ on the ILEC’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 LEC 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 ISPs such as

AOL and to competing carriers. CLECs claim that ISPs are the end-users of that

service, and therefore CLECs should be able to obtain an additional discount from

the ISP tariff price. What they are trying to do is give themselves a better deal for

DSL services so that it is impossible for ISPs to compete against carriers in the residential mass market. But that makes no sense from either a legal or policy perspective. First, as a legal matter, the Section 251(c)(4) discount applies only to services

that are provided ‘‘at retail’’ to ‘‘subscribers’’ of those services. The xDSL services

provided to Internet service providers (ISPs) and other carriers, however, will be

used as an input to their own retail Internet services and resold to their own subscribers. It is the ISPs and other carriers that purchase under this tariff that will

perform the retail functions of marketing, advertising, billing and customer. There

are no further retail costs that Bell Atlantic would avoid by providing these same

wholesale arrangements to carriers and therefore there is basis for applying the

avoided cost discount that is normally applied services offered at retail.

Second, as a policy matter, imposing a wholesale discount requirement on wholesale xDSL services would make it impossible to provide ISPs the lowest possible

price. If any price made available to ISPs, no matter how deeply discounted, automatically would have to be available to CLECs at a further 20 percent discount, the

simple fact is that carriers will be unable to offer ISPs as significant a volume discount. And ISPs will be unable to compete in the residential mass market against

carriers that are getting the same service, but at a significantly lower 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 some 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 has cost consumers and the economy billions of dollars. Significant deregulation, however, has increased

subscribership and lowered consumer costs.

66

4Ten years earlier, the FCC chose to grant additional spectrum in the UHF band to broadcasters, rather than mobile radio. 5First Report and Order and Second Notice of Inquiry, Docket No, 18262, 35 F.R. 8644 (1970).

6 Report and Order, 86 F.C.C. 2d 469 (1981), modified 89 F.C.C. 2d 58 (1982), further modified

90 F.C.C. 2d 571 (1982). 7 Estimate of the Loss to the Unites States Caused by the FCC’s Delay in Licensing Cellular

Telecommunications, National Economic Research Associates, Prepared by Jeffery H. Rohlfs,

Charles L. Jackson and Tracey E. Kelly, released November 8, 1991 (revised). 8 CTIA Semi-Annual Wireless Industry Survey Results.

9 Id.

10 Amendment of Parts 2 and 22 of the Commission’s Rules to Permit Liberalization of Technology and Auxiliary Service Offerings in the Domestic Public Cellular Radio Telecommunications Service, Report and Order, 3 FCC Rcd. 7033 (1988), recon. in part 5 FCC Rcd 1138

(1990). 11 CTIA Semi-Annual Wireless Industry Survey Results. 12Omnibus Budget Reconciliation ACt of 1993, Public Law 103-66. 13 CTIA Semi-Annual Wireless Industry Survey Results. 14Letter to Reed Hundt from Thomas, E. Wheeler, President and CEO, CTIA, March 10, 1995,

in PR Dockets 94-103, 94-104, 94-106, 94-107, 94-108, 94-109, and 94-110. 15The Cost of Cellular Regulation, Jerry Hausman, McDonald School of Economics, MIT, January 3, 1995.

In 1968, the FCC initiated its first inquiry into reallocating UHF spectrum for

mobile telephone service.4 The Commission issued its first report and order in 1970.5

Several decisions and reconsideration followed, and the first experimental cellular

system finally became operational in 1979 in Chicago. In March 1982, the FCC

issued its Report and Order creating the commercial cellular service.6 Commercial

cellular service finally began in 1983, even though the technology was developed

and ready for market more than 10 years earlier. According to one estimate, this

delay in cellular licensing cost the U.S. economy a staggering $86 billion.7

Moreover, no one predicted cellular’s fantastic growth. In fact, at the time of the

breakup of the Bell system, it was unclear as to whether AT&T or the BOCs 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 69,209,321 wireless

subscribers in the U.S.8

Wireless growth was actually very slow at first. By the end of 1988, there were

approximately two million cellular subscribers in the U.S.9 The FCC made an effort

to significantly deregulate cellular service in 1988.10 This first of two significant deregulatory events in the cellular industry help make wireless telecommunications

the ubiquitous service it is today.

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.11

The second major deregulatory effort was undertaken by Congress in 1993. In the

Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) 12, Congress, to a great extent, deregulated the cellular telephone industry. From 1993 to 1998, wireless telephone subscribership has risen from 16 million to 69 million, while the average

monthly bill has dropped by nearly 50 percent.13

OBRA 1993 allowed states to petition the FCC for continued rate regulation. During the pendency of these proceedings, the Cellular Telephone Industry Association

filed a study with the FCC detailing the effects of state cellular regulation.14 The

study, performed by Jerry Hausman, concluded that cellular prices in regulated

states averaged 17% higher than the prices in unregulated states. He also found

that cellular penetration and cellular growth is lower in regulated states than in

unregulated states.15

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 in a similar position today as the cellular industry was more than ten years ago. Of the nearly 100 million U.S. Internet users,

only 500,000 access the Internet via high-speed cable modem, and a scant 70,000

use xDSL technology for high-speed Internet access. Adoption of deregulatory measures, such as those contained in the Tauzin-Dingell draft bill will permit telephone

companies to provide xDSL 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.

67

Give the Consumer a Choice

With AT&T providing high speed Internet access over a closed system, whereby

the consumer using AT&T’s cable modem must pay for AT&T’s ISP of choice—(At

Home), consumers will want a different provider to give them a choice of both the

high speed pipe and the ISP. Bell Atlantic’s DSL will allow consumers to choose

from many ISPs, including Bell Atlantic’s own ISP. Bell Atlantic will not condition

the deployment of DSL on the requirement that a customer use Bell Atlantic’s own

ISP.

Customers want choice. Some customers are very happy with their current ISPs.

Bell Atlantic would like to provide those consumers with a high-speed Internet option using their ISP of choice. This is good for the consumer and good for the industry.

Data Services Are Different

Congress must make the FCC recognize that the high-speed data business is separate and distinct from the voice telephony services business. The FCC seems intent

on applying the Title II common carrier regulation of voice services on telephone

companies’ providing data services, and applying the Title VI cable regulation, or

lack thereof, on cable operators’ providing the same service. A company’s parentage

should not determine that company’s regulations in a different business. This is a

classic case of regulatory disparity—those customers purchasing high-speed Internet

access service from a BOC have their service restricted by regulation, while those

purchasing similar high speed Internet access service from AT&T’s cable system

have no such regulations.

Rather than impose additional regulations for data provision by cable operators,

the FCC should not be regulating data services under Title II, Title VI, or any other

provisions of the Communications Act. Congress gave the FCC the opportunity to

set the proper deregulatory environment for high-speed data services by including

Section 706 in the Telecommunications Act of 1996. Unfortunately, the FCC failed

to take advantage of the opportunity and continues to constrain the deployment of

advanced services to all Americans through its imposition of a regulatory scheme

designed for voice services. Clearly, consumers will benefit from deregulation where

there is competition as there is for data services.

Some have argued that providing interLATA data relief is a back-door way for the

BOCs to enter the interLATA voice business. This argument is a red herring. Bell

Atlantic will not provide interLATA voice telephony until it gains the approval to

provide that service pursuant to Section 271. Bell Atlantic is committed to opening

its local telephone network, and gaining approval to provide long distance services

in every state in its region.

Congress Should Adopt an Open Competition Policy for Data Services

The policy that will most benefit the consumer and the Internet is an open competition policy. 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 will not work. Bell Atlantic urges Congress to adopt legislation that deregulates the provision of data services and does not favor one provider over another. The legislation should empower

consumers with choice. Bell Atlantic believes that the Tauzin-Dingell draft legislation meets all of these policy objectives, and Bell Atlantic respectfully urges Congress to take immediate action in passing such legislation.

68

69

70

71

72

Mr. TAUZIN. I thank the gentleman.

And next will be the senior vice president of One Sprint strategic

development for Sprint Corporation, Mr. Al Kurtze. Al.

STATEMENT OF ARTHUR KURTZE

Mr. KURTZE. Thank you, Mr. Chairman. And I too will be mindful of your admonition not to——

Mr. TAUZIN. Microphone. Let us crank it up again. We have to

download this stuff over here. You know, that is how it gets to——

Mr. KURTZE. I spent the last 4 years in the wireless world, so I

keep clicking. I thank the chairman for the opportunity to speak

here and I will be mindful of not dragging in our written statements. And I see that the Congresswoman has had to step out, but

I would thank her for the kind words she said on our behalf at the

opening.

Mr. Chairman, I have been in the communications industry for

33 years now. In fact, we started just down the street here in an

old building at 1225 Eye Street with what was then C&P Telephone Company and I can tell you that the changes that the committee is wrestling with are significant and I know very complicated from what I have observed over that period of time. I

would like to also apologize in advance if I get accused of a little

bit of advocacy here. And I will talk a little bit about Sprint’s experience in deploying new networks and it is one that we are very

proud of and I would like to think it gives us at least a point of

view on the challenges of deploying new technologies and new networks over the years.

Sprint is well-known for its deployment of the first fiber-optic, a

long-distance network, now over 15 years ago. And learned a lot in

the challenges of deploying that technology, new technology at the

time, of stringing fiber-optics across the country and continues to

benefit from that experience.

More recently, we have deployed the first all digital, nationwide

PCS network over the last 4 years. Which was my specific assignment at the time. And I can tell you, the challenges there of building almost 15,000 cell sites in various communities throughout the

country were significant and varied and really does open your eyes

as to the demands of various communities, the specific circumstances when it comes to deploying those technologies, always

dealing with local citizens who have their own points of view and

trying to do what they think is best for their communities.

Right now, Sprint is on the verge of deploying its new integrated

on-demand digital network. That network will ride on a substantial

backbone of which Sprint has invested throughout the country in

new ATM technologies. What it does, in fact, when it comes to

reaching out to individual consumers, residential consumers, if you

will, in the short-term depend on technologies that would be available from other suppliers of the last mile service. The contemplation of constructing new facilities to each individual home is one

that we will eventually get to, but do now depend on existing carriers to provide those services.

Sprint is investigating and working with new types of technologies. We have recently acquired rights to companies that have

spectrum previously designated as MMDS spectrum that was origiVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
73

nally thought would be used for alternate forms of distribution of

television, which we think hold great promise for delivering

broadband data, but I would tell the committee that that is probably a year and a half away in terms of implementation, if not

longer. Those are new technologies that are just underway.

We are also experimenting, as was commented earlier, with our

PCS spectrum in new forms of data transmission. We have just introduced low-speed data, low-speed relative to Internet type speeds,

14.4 kilobit data, with any PCS phone, but we are pushing the edge

of that envelope and looking at new technologies. But I would also

say that the broad use of that technology is probably a year or 2

away in terms of faster data.

So I think the issue of the last mile is one that has to be dealt

with at least on a transition basis. It would be inappropriate, I

think, for the committee to assume that there are many choices

available today for companies that want to go in service today and

we must look at the transition for what might be and what we expect will be technologies at some point down the road, but are not

available in the marketplace today.

I would say that Sprint has a long record of cooperating with

many of the companies, in fact, that are represented here and we

look to continuing to do so. But we hope it is an environment that

allows that evolution from where we are today to where we would

like to be. Thank you, Mr. Chairman.

[The prepared statement of Arthur Kurtze follows:]

PREPARED STATEMENT OF ARTHUR KURTZE, SENIOR VICE PRESIDENT, ONE SPRINT

STRATEGIC DEVELOPMENT, SPRINT CORPORATION

Thank you Mr. Chairman and members of the subcommittee, for the opportunity

to present Sprint’s views on the deployment of broadband and high-speed data services.

My name is Al Kurtze. I am Senior Vice President for One Sprint Strategic Development at Sprint Corporation, a position I have held for the past four months. Prior

to that, I was the Chief Operating Officer of Sprint PCS for four years, where I had

responsibility for construction and operation of the nation’s first and only all digital

nationwide PCS network. Prior to that, I was Senior Vice President and chief of

staff for Sprint’s local telephone division and was also an executive at Centel Corporation. During my thirty-three years in the telecommunications industry, I have

been fortunate to be in the forefront of technological innovation, and I can assure

you that the topic we are discussing today is as important as any topic to the future

of telecommunications. Broadband access, and particularly broadband to the home,

is the last roadblock inhibiting many Americans from enjoying the benefits of the

telecommunications revolution. I applaud the subcommittee for taking a hard look

at broadband technologies because proposals before Congress would have the unintended effect of fortifying and perpetuating that roadblock.

Sprint is uniquely suited to address broadband issues because we are a technological leader. We changed the paradigm for long distance service by building the

first nationwide all-digital, fiber optic network in the United States, which allowed

us to bring ‘‘pin drop’’ clarity and ‘‘dime a minute’’ long distance calls to America.

We also spent billions of dollars to buy licenses from the government and build

Sprint PCS, the only nationwide PCS wireless network. Concurrently, Sprint has

shown its technical leadership by Synchronous Optical Network (SONET) and

Dense Wave Division Multiplexing technologies in its backbone network.

Sprint has considerable experience in packet switching technology. In fact, both

Sprint’s core long distance network and its PCS network utilize packet technology

extensively. In these networks voice and data traffic are both transmitted in packets

and are often indistinguishable.

While we are proud of these achievements, our most exciting technological breakthrough is a new service Sprint announced about a year ago called Integrated OnDemand Network, or ION for short. ION is a family of broadband-based services for

both business and residential markets. ION provides all distance, voice, video, and

74

data services, using a transmission facility over Sprint’s network. Sprint ION service replaces multiple access networks from multiple suppliers and provides the opportunity to offer a package of multiple services over a single network.

For small business and residential customers, the basic ION package will include

four virtual voice lines, each equipped with caller ID and voice mail, two high-speed

data connections that can be used for Internet service, and virtually unlimited local

and domestic long distance voice service. If a customer wants a different configuration, the change can be made quickly by the customer. All of this can be provided

over one access connection through the Sprint ION broadband network. This will

eliminate the need for multiple ‘‘plain old telephone’’ lines when customers needed

to use the Internet at the same time they needed to make a voice call. With Sprint

ION, everything is available at once over one connection.

Sprint ION is an elegant service in large part because it is capable of using multiple last mile access technologies. This fact has led Sprint to state that ION is ‘‘access technology agnostic.’’ Sprint ION can use broadband capabilities provided by

wireless solutions, dedicated special access circuits, normal telephone lines upgraded

using xDSL technologies, and communications enabled, broadband cable plant.

While multiple methods of access may be used and Sprint is aggressively pursuing

several of them, the reality is that there are only two technologies currently available and generally deployed to reach most American homes—the telephone line to

the house and the cable line to the house. Thus, Sprint’s ability to provide ION to

businesses and residences depends in most cases on either the phone company or

the cable company making its facilities available. And, that’s a serious problem.

The Bell Companies and GTE have successfully stonewalled to date in making

xDSL capable facilities available on reasonable terms. Now they are urging Congress to change the law to remove the current legal obligation to provide access to

their needed facilities. The cable companies have adopted a similar stonewall approach, with AT&T trying to buy up cable companies or tie them up in exclusive

arrangements and then denying access to competitors such as Sprint.

In an effort to get around this ‘‘last mile’’ roadblock, Sprint has begun a massive

effort to collocate Digital Subscriber Line (xDSL) equipment in many Bell and GTE

central offices. Unfortunately, Sprint and other companies have had well documented problems in obtaining access to broadband capable local loops. In nearly 20

per cent of the Bell and GTE offices where Sprint has requested collocation for the

placement of broadband equipment, that critical collocation has been denied.

Further, many local loops are not broadband capable for use by Sprint and others.

The phone companies have placed so-called ‘‘pair gain’’ or Digital Line Concentrator

(DLC) remote equipment in neighborhoods rather than install copper wires directly

from central offices to individual customers. These DLC devices, while cost effective

for the ILECs, make it impossible to gain a broadband capable loop at the central

offices for connection to the xDSL equipment Sprint is deploying. In order for xDSL

to work, there must be copper wire from the xDSL equipment to the subscriber. The

placement of DLCs breaks this discrete copper connection between the customer and

the xDSL equipment that is installed in a central office.

Because the RBOCs and GTE continue to install new DLCs in their networks,

Sprint believes that soon more than 50 per cent of the ILEC local loops will not be

capable of supporting broadband services offered by competitive carriers through

collocation in ILEC central offices. In order to provide competitive broadband services such as Sprint ION to customers behind ILEC DLCs, Sprint and other competitors will need access on a line-by-line basis to the bandwidth created by the ILECdeployed xDSL facilities and packet switching, something the Bells and GTE have

been unwilling to provide.

In another attempt to circumvent the roadblock, Sprint is in the process of purchasing rights to companies holding licenses or lease rights to frequency spectrum

in the Multichannel Distribution Service (MMDS) band. It is Sprint’s hope that by

utilizing this spectrum with equipment that is still under development Sprint can

provide broadband last mile facilities to at least a portion of the market. Unfortunately, this spectrum, originally intended for television signals, is in short supply

and Sprint can cover only a small portion of the potential market through MMDS

spectrum. Further, even in areas where Sprint has MMDS spectrum available, not

all businesses and homes can be reached because MMDS requires line-of-sight between the transmission tower and a unit on the side of the customer’s home. This

means that hills, trees and buildings can block a signal from being received.

MMDS technology is also essentially untried for two-way data transmission and

will require significant buildouts. These buildouts will involve many of the same

siting and zoning issues encountered by the recent PCS construction activity. While

Sprint is optimistic that a cell-based, fixed wireless broadband network can be constructed, and has backed up that optimism by spending hundreds of millions of dolVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00077 Fmt 6633 Sfmt 6621 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
75

lars to obtain rights to spectrum in parts of the country, it’s probably at least 18

months before service can be offered on a meaningful basis. And, there are major

parts of the country not covered by Sprint’s acquisitions at all. For example, Sprint’s

acquisition of MMDS licenses does not cover many of this Subcommittee’s Congressional districts. For example we do not have licenses for Louisiana, Massachusetts,

Georgia, Mississippi, Virginia, Tennessee, or Los Angeles.

Some may argue that broadband wireless spectrum in both the geostationary and

low earth orbit satellite (LEO) bands is available. However, geostationary satellites

are at such a high orbit that signal delay caused by the distance signals must travel

creates significant voice and real-time two-way video problems that make use of geostationary satellites inappropriate. While geostationary satellites may work for surfing the Web, they do not work well for services requiring real-time two-way communications. When voice services were offered over geostationary satellites about 15

years ago, the market rejected these voice services because of the degradation in

quality caused by the signal delay. LEO applications conceptually hold some promise, but the economics of LEO service appear to make practical broadband consumer

service impossible in markets with any significant density.

Sprint PCS operates a nationwide, state-of-the-art second-generation mobile services network. So-called third generation (3G) technologies that are likely to become

available for use in PCS mobility networks are likely to increase network efficiency

and enable Sprint PCS to provide new services and capabilities to the public. While

3G technologies are complex and involve many components, two features deserve attention. First, 3G aims at facilitating the evolution from incompatible second-generation systems towards systems that will offer users genuine global roaming and

interoperability. Second, with 3G, carriers will be able to extend additional bandwidth to consumers to satisfy diverse mobile communications needs including access

to email, the Internet, and potentially, in certain circumstances, even interactive

multimedia such as video telephony. The mobile wireless industry has agreed to

three general ranges of data rates: (1) improved data transmission (64-144 Kbps);

(2) medium multimedia transmission (384 Kbps); and high multimedia transmission

(1-2 Mbps).

These data speeds agreed to for 3G technologies appear to provide PCS a seat at

the broadband table. It is important to emphasize, however, that 3G is still at the

early stages of spectrum allocation and standards setting. In fact, carriers only

began deploying second generation networks a few years ago. While 3G capabilities

will be implemented sometime in the future, at what time and at what prices is unknown and will largely be governed by market needs and customer requirements.

It is difficult to predict the data needs of mobility customers in the future because

mobile networks carry very little data today. It is likely that mobile access to the

Internet will complement more robust broadband offerings such as Sprint ION, as

mobile voice telephony today complements wireline voice telephony. Due to expected

capacity limitations of spectrum available to PCS carriers and the economics of deploying 3G networks, Sprint does not believe that broadband mobile services will

substitute for the types of broadband access needed by Sprint ION and other highspeed data services.

There are also several broadband wireless carriers offering service to medium and

large business customers. These companies operate generally in the 24-38 GHz

range. These services do not envision and are not designed to provide service to individual subscribers. Moreover, these systems only appear economical when there

is a reasonable density of demand.

Sprint believes that broadband wireless services available to the mass market,

provided by multiple competitors, could be created through the availability of additional spectrum for this purpose and encourages that such spectrum in useful bands

be made available.

In conclusion, Sprint has innovative and currently available advanced telecommunications, broadband products whose performance will thrill customers. However, Sprint, lacking last mile broadband facilities to most of the nation, is stymied

in offering these products to many potential customers. The sad fact is that the

Bells, GTE, and the cable companies, are not only denying access to their broadband

facilities, they are slowing the availability of robust integrated broadband products

such as Sprint ION in most regions of the country. Perhaps in five to 10 years there

will be other alternatives to the phone company and the cable company lines to the

house. Until that time, Congress should be demanding greater access, not deregulation of the monopolist’s essential facilities.

Mr. TAUZIN. Thank you very much, Mr. Kurtze.

We have three more witnesses and we are being called to a 15-

minute vote followed by a final passage vote which will occupy us,

76

I am sure, for the next half hour. If it is acceptable with you all

what I would like to do maybe is take a little break. Let us take

a 45-minute break. That will give you a chance to catch some

lunch, perhaps. We will go and vote, take care of our business, and

we will reassemble here at 12:30. So the committee stands in recess until 12:30.

[Brief recess.]

Mr. TAUZIN. The committee will please come back to order.

We will ask someone to catch the doors and ask our guests to be

seated. And we will proceed to hear from the last panelists. And

then offer members a chance to dialog with you.

Next will be Mr. Dave Scott, president and CEO of Birch

Telecom, Incorporated, of Kansas City, Missouri. Mr. Scott, you are

on, sir.

STATEMENT OF DAVID E. SCOTT

Mr. SCOTT. Thank you very much, Mr. Chairman. And I want to

say it is a distinct privilege for us. This is something that we rarely

get a chance to do, being a small company. We don’t have the resources to typically do this and so we really want to thank you for

the opportunity to make our point of view known on this very important topic.

Mr. TAUZIN. One day, Mr. Scott, we will be able to reach you in

Missouri on the Internet and do this sort of interactive.

Mr. SCOTT. Just do this virtually.

Mr. TAUZIN. Virtually. Thank you, Mr. Scott.

Mr. SCOTT. I guess I want to say I like to think that Birch was

the kind of company that you had in mind when the Telecom Act

was passed in 1996. We are a startup. We acted immediately after

the passage of the act to begin the foundation of Birch.

And Birch was established in early 1997 and immediately began

providing service. And not the way it had typically been done by

competitors to large businesses. Our mission wasn’t to serve big

business. Our mission was to serve, as fast as we could, consumers

in small to mid-sized businesses. And we have done that. We have

been working very hard since we founded that company over the

last 21⁄2 years to establish a real presence in the industry. And I

think we have had some real success in that area.

I won’t give you a long drawn-out discussion of what the company does, but I will focus on what this subcommittee is taking a

look at and that would be advanced services, data services, and

Internet. We really feel like that is something that Birch has to do

to survive in this business. We have to be innovative. We have to

do it at a very rapid rate. We have to do things better than they

have been done before and bring those services to our constituents.

And we have done a good job of that.

We have a product that we have just recently launched which is

called the integrator. It combines both voice and data service on

the same line and we deliver that to very small businesses, businesses who could not afford dedicated Internet access before.

We also have a line of services called the Internet complete line

where we are taking both equipment and the line and the Internet

services on the other end, packaging those together, and making

them very easy and convenient for businesses who don’t have inVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00079 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
77

house experts to deal with programming a route or trying to maintain that. We actually make the equipment at the customer’s

premise a part of the network and manage that. And we are finding that is really tapping into a need out there. This technology is

new. It is complicated. It is relatively confusing for the small businesses who don’t have the in-house resources to become experts in

it. And so we have found a tremendous of demand for that.

We have also deployed an ATM network, which is state-of-the-art

switching facilities. We have ATM switches in Kansas City and in

St. Louis and Wichita and are starting to deploy them in Texas.

And that is the foundation for our ability to provide high-speed access to our customer base. And we are also using and trying to

solve the last mile problem through a partnership that we have recently announced with another 2-year-old company, Northpoint,

using DSL service to provide high-speed connections over the existing copper facilities.

I think there is one thing I would like to point out is that I do

think it will be impossible in the future to distinguish voice and

data. I know there has been some debate over whether the regulations should apply to just voice services and not to data. From our

perspective, we think that is a practical impossibility, that voice

and data are already being combined in the network and that manufacturers are working hard on equipment that will make voice

and data services equate to the same thing.

Since we started providing service, it has been a struggle, quite

frankly, to build a complicated business in a complicated industry

and one of the things that has been of a great help for us is knowing what the framework or the structure for competition would be,

as defined by the 1996 act. And so I think a lot of the benefits have

been provided already, especially in the data services area where

all the competitors are in a competitive frenzy right now to provide

these services. And I think one of the reasons that we have been

able to do that is because the competitive framework has been

nailed down.

I think that is important in terms of raising capital for the business. It is important as companies such as Birch Telecom plan to

do things. And, frankly, it has been, for us, more of a struggle on

the voice side to get things down, to nail down some of the rules.

When you look at the level of competition in the industry, I think

that one of the real bright points of the 1996 act truly was what

has happened in the data services field where you have small companies, you have large companies, you even have the incumbent

Bells were all racing against time, against each other to deploy

new services throughout the marketplace. And so I think, as we

take a look at ways that Congress can help do this, I think we need

to focus on measures that will reinforce the competitive framework

that is already in place.

Thank you very much.

[The prepared statement of David E. Scott follows:]

PREPARED STATEMENT OF DAVID E. SCOTT, BIRCH TELECOM, INC.

Mr. Chairman and members of the subcommittee, I am Dave Scott, president and

chief executive officer of Birch Telecom, Inc. Birch is a small but growing competitive local exchange carrier headquartered in Kansas City, Missouri. I am testifying

today on behalf of Birch and the Competitive Telecommunications Association.

78

Thank you for inviting me to testify before the subcommittee today on issues regarding the deployment of data services. The prompt and widespread availability of

internet and other data services is of vital importance to Americans throughout the

Nation.

There is no longer debate on whether such services have revolutionized the way

we conduct our personal and business affairs. The debate now centers instead on

what policies will best promote the prompt availability of data services to all our

citizens, including those in rural as well as urban areas.

The good news is that data services already are being rapidly deployed. Dial up

internet access via a local phone call currently is available to more than 95 percent

of the population and carriers and internet service providers around the country are

focussed on how to serve that remaining 5 percent.

Higher speed access to the internet and other higher speed data services also are

being deployed at a rapidly accelerating pace. Competitive local exchange carriers,

such as birch, are using unbundled network elements in conjunction with their own

equipment and facilities to provide digital subscriber line (‘‘DSL’’), asynchronous

transfer mode (‘‘ATM’’), frame relay and other high speed data facilities and services

to residential and business customers. The growth in high speed data services provided by cable television companies and satellite carriers also has been rapid. The

stimulus of all this competition spurred by the telecommunications act of 1996 has

also had a positive effect on the bell companies. The Bell companies, in response

to these competitive stimuli, are aggressively rolling out DSL services that use their

investment in ubiquitous copper line facilities.

This rapid expansion is, however, potentially threatened by proposed legislation

that may inadvertently disrupt the competition-fueled progress made to date. Such

legislation would (1) exempt the Bell companies from their current obligations under

the Telecommunications Act of 1996 to make their data facilities and services available to CLEC’s and (2) allow the Bell companies to provide long distance data services before they open their local exchange markets to competition.

Although the goal of these bills is the laudatory one of spurring the deployment

of data services by the bell companies, particularly to rural areas, I am convinced

that the bills, if enacted, would not serve their intended purpose. To begin with, the

Bell companies, by design, do not serve many of the Nation’s rural areas. Further,

as noted above, the Bell companies in response to the kinds of competitive pressures

contemplated by the 1996 act already are aggressively deploying data services.

Finally, I am greatly concerned that the practical effect of such legislation, if enacted, would be to position the Bell companies to re-establish themselves as monopoly carriers in both the local and long distance markets for both voice and data services. The public interest would be ill-served by such a result. I believe the better

policy is to encourage competition among data service providers within the framework established by the 1996 act. Such a policy will far better serve the interests

of the American public.

Before I turn to my specific reasons for urging you to adhere to the policies established by the 1996 act, it may be helpful if I provide you some information about

Birch.

About Birch

Birch initiated local service in march 1997 and now serves approximately 50,000

access lines. We employ 650 people, including 220 at our headquarters in Kansas

City, and 225 employees in Emporia, Kansas where our customer service and call

center is located.

We serve customers primarily in Missouri, Kansas and Texas. In Missouri, we operate in Kansas City, St. Louis and St. Joseph, and have customers located throughout the state, including Carthage, Chillicothe and Springfield. In Kansas, we have

customers in every county and have substantial operations in Wichita, Topeka,

Manhattan, Lawrence, Emporia, Salina and Dodge City. In Texas, we recently

began operations in Fort Worth, Beaumont, Waco, Tyler and Houston.

We offer a menu that includes local and long distance services, high-speed internet access services and customer premises equipment to residential and small and

mid-sized business customers. Forty percent of our customers are residential customers.

In addition to our voice-oriented circuit switches in Kansas City, St. Louis and

Wichita that route local and long distance calls, we are deploying an ATM packet

switching network. Packet switches initially are being installed in Kansas City, St.

Louis, Wichita and Fort Worth. These data-oriented packet switches will be linked

by high-speed ATM transport facilities. For reasons I’ll explain shortly, I want to

emphasize that we plan to use this packet switching network to carry voice as well

as data traffic.

79

We provide our services through our own switching equipment and, pursuant to

provisions of the 1996 act, through use of leased network facilities and resold services obtained primarily from Southwestern Bell.

Southwestern Bell is also our principal competitor. Although it has been a struggle, and although we still are a small company, we have grown into one of the larger

CLEC’s in the territory served by Southwestern Bell.

That’s who we are today. Tomorrow, if we continue to work harder and smarter

than our competitors, and if the rules of the game remain fair, we expect to emerge

as a major regional provider of data and other telecommunications services to small

and mid-sized businesses and residential customers.

The Rules of the Game

The rules of the game were set by the 1996 act, a law which several of you on

today’s subcommittee were instrumental in fashioning. Overall, I believe the act established a reasonable balance between the interests of incumbent local exchange

carriers and competitors, such as Birch, who want to enter local markets. most importantly, the act recognized that because incumbent carriers have strong economic

incentives to maintain their de facto control of essential bottleneck facilities, both

a stick and a carrot will be required to open the local exchange market.

The stick and the Carrot

The stick is the mandate of sections 251 and 252 of the act requiring incumbents

to open their markets to new entrants by making available interconnection, access

to unbundled network elements and resale on just, reasonable and nondiscriminatory terms. Access to such facilities and services is absolutely essential to CLEC’s

such as Birch. Incumbents must be held to strict accountability under the act, and

the fcc must be willing to assess fines and award damages when incumbents fail

to comply with their obligations to competitors.

Equally important, incumbent carriers that do not comply with the act must not

get to eat the carrot. The carrot is the offer in section 271 to allow the incumbent

local carriers into their in-region long distance markets once they have opened their

monopoly local markets to competition. To date, based on their behavior, the Bell

companies have not been strongly drawn to the carrot of long distance voice service.

Perhaps that is because prices and profit margins for long distance voice traffic have

been plummeting since the passage of the act.

It’s a different matter for long distance data traffic. That’s a carrot over which

the incumbent carriers have started to drool, and they are searching for ways to

enter that market without having to comply with the obligations or seek the incentives of the 1996 act. For several reasons, I urge you not to let that happen.

Voice Traffic Can and Will Flow Over Data Networks

If the bell companies are allowed to establish data networks on an interlata basis,

it won’t be just data traffic flowing over those networks. there will be voice traffic

as well. I am aware that the proposed legislation contains a ban on any bell company using the internet or other packet switching networks to carry voice-only traffic until it has satisfied section 271 requirements. As a practical matter, that ban

is ineffective.

Even if the ban could be enforced, which it cannot, it applies solely to ‘‘two-way

voice-only’’ traffic. This leaves a gaping loophole that would allow incumbent carriers to carry voice traffic on trunks as long as some nominal percent of the total

traffic on the trunk were non-voice or one-way voice.

As I mentioned earlier, Birch is in the process of deploying packet switching networks. We know how such networks operate. When fully deployed, packet switching

networks are equally capable of supporting both high bandwidth applications and

traditional voice calls. Because packets from the same communication will travel

over a number of different paths simultaneously, it is impossible to limit users to

data traffic or to police effectively the transmission of voice calls over such networks. ‘‘Leakage’’ of voice traffic would be uncontrollable, even in the unlikely event

the Bell companies were motivated to police their customers’ traffic.

Allowing the Bell companies to provide interlata data services now would blow

apart the central premise of the 1996 act: that the Bell companies be allowed into

long distance service only after opening their monopoly local markets.

Birch’s experience with Southwestern Bell

Even with the obligations and incentives the 1996 act imposes on and offers to

the Bell companies to open their local exchange markets to competition, Birch’s experience in dealing with Southwestern Bell has been, and still is, an exasperating

80

1Direct Testimony of David E. Scott on Behalf of Birch Telecom Of Missouri, Inc., In the Matter of the Application of Southwestern Bell Telephone Company to Provide Notice of Intent to File

an Application for Authorization to Provide In-Region InterLATA Services Originating in Missouri Pursuant to Section 271 of the Federal Telecommunications Act of 1996, Case No. T0-99-

227. 2Direct Testimony of Richard L. Tidwell on Behalf of Birch Telecom Of Missouri, Inc., In the

Matter of the Application of Southwestern Bell Telephone Company to Provide Notice of Intent

to File an Application for Authorization to Provide In-Region InterLATA Services Originating in

Missouri Pursuant to Section 271 of the Federal Telecommunications Act of 1996, Case No. T0-

99-227. 3 Request of Dunn & Associates, Inc. d/b/a Boulevard Phone Company to Reopen Arbitration,

Docket No. 97-BCSC-546 ARB (Kansas Corporation Commission). Dunn & Associates is a subsidiary of Birch.

one. I have attached to this testimony as exhibit 1 1 and exhibit 2,2 testimony that

Birch has presented in state proceedings that discusses some of the Bell tactics

Birch has encountered. To summarize just a few of the areas (details are provided

in the exhibits):

Collocation: Southwestern Bell has imposed unreasonable conditions in terms of

price (recurring and non-recurring), construction requirements, application and

specification requirements, delivery dates, and premises access, the cumulative

effect of which is to deter potential local competitors, such as Birch, from entering the local market. These conditions strike Birch particularly hard, as we

serve the market broadly. If we wanted to limit our customers to big businesses

in downtown areas, the number of collocation arrangements would be few. But

Birch believes that small businesses and residential customers deserve the benefits of competition too, and in large cities they are served by dozens of different

Southwestern Bell central offices, multiplying the effect of these policies.

Collocation Revisited: On top of imposing unreasonable collocation practices,

Southwestern Bell then makes it very difficult to compete without accepting unreasonable terms and conditions. For example, Southwestern Bell does not

make available without unreasonable charges in Missouri or Kansas a combination of the unbundled loop with a multiplexer and transport to create a single

unbundled network element, known as an ‘‘extended loop’’ or ‘‘enhanced extended loop’’ (‘‘EEL’’). The EEL makes it possible for CLECs to collocate at one

central office which then provides access to several others. Once again, these

policies constrain the geographic area that Birch can afford to cover.

Arbitration delays: Southwestern Bell has refused to execute an interconnection

agreement reached as a result of an arbitration order. Southwestern Bell is trying to force a renegotiation of the agreement despite efforts at compromise.3

‘‘UNE-P’’: ‘‘UNE-P’’ allows a competitor to purchase a complete package of network elements combined to provide service to the competitor’s customer. Even

though Southwestern Bell has signed agreements in Texas and missouri allowing UNE-P, Birch cannot get Southwestern Bell to provide the service in Kansas without unreasonable charges.

Resale: Southwestern Bell refuses to allow Birch to resell customer specific arrangements or contract arrangements at the standard resale discount. In fact,

Southwestern Bell even refuses to allow Birch to assume the liability on those

contracts and resell them to Birch’s customers with no reduction in the amounts

payable to Southwestern Bell. Rather, Southwestern Bell takes the position that

any attempt to convert the service covered by the contract requires the customer to pay large termination fees to Southwestern Bell.

Operational Support Systems: These systems simply are inadequate and fail to

provide competitors such as Birch the ability to provide their customers the

same level of service as Southwestern Bell representatives are able to provide

Southwestern Bell customer’s using Southwestern Bell’s internal systems, as required by the statute. Details are provided in exhibit 2.

Directory Listing: Since 1997 Birch has from time to time found customers that

had listings in the Southwestern Bell Telephone Directory omitted after they

converted to Birch. In late 1998, Southwestern Bell admitted that a problem

had been found and reported that it had been fixed. Just this past Monday,

June 21, 1999, another omission was found. How long must we work before this

problem is fixed? What incentive does Southwestern Bell have to fix this?

Locking in customers: Southwestern Bell’s Customer Choice Protection (‘‘CCP’’)

is a service offered to Southwestern Bell end users that allows a customer to

prohibit a change in the customer’s interLATA and/or local service provider

without the customer’s consent. Birch believes such anti-slamming procedures

have become necessary. But Southwestern Bell put its system in place with inadequate mechanisms for a customer to remove the CCP so the customer could

81

change his or her service to a Southwestern Bell competitor. Only after several

months of prodding by Birch and the intervention of the FCC did Southwestern

Bell put these procedures in place. As yet, they are not fully functioning. As a

result, it is a struggle for many customers to attempt to convert to Birch.

Early Disconnection of Service: In several cases Southwestern Bell has disconnected the customer’s Southwestern Bell service before the specified time for

conversion of the customer service to Birch and left the customer without any

telephone service. This has happened to business customers. The end result is

that some customers are now afraid to move their service.

Coordination on installation of new UNE loops: The systems and procedures

Southwestern Bell has in place to provide unbundled loops make the service

much more complicated and provide for many potential problems upon conversion. Problems such as poor loop quality, missing cross-connections, and lack of

coordination at cutover are all common problems encountered.

Billing Issues: Southwestern Bell ignores due dates and deadlines. Over the last

year Southwestern Bell has repeatedly failed to deliver billing information

which Birch must have in order to bill our customers. In the last 10 days,

Southwestern Bell has again failed to provide a group of monthly billing records

and information. Southwestern Bell’s failure to provide the billing records in the

proper manner has forced birch to suspend its own billing, bringing Birch’s cash

flow to a halt. Yet, Southwestern Bell demands prompt payments.

Birch as an agent of the customer: Upon receiving written agreement from the

customer, in the form of a ‘‘Letter of Agency’’ in the form required by Southwestern Bell, birch may act as the customer’s agent, and should be treated in

exactly the same manner as the end user by Southwestern Bell. This is generally not the case. For example, Southwestern Bell provides information to a

retail end user directly within an hour of the request. When Birch requests the

same information the response normally takes several days. It has recently become Southwestern Bell’s practice to ‘‘white out’’ any retail pricing information

before the information is sent to Birch.

There are many other examples. But I will end this discussion by mentioning one

of Southwestern Bell’s most effective tactics. Southwestern Bell continues to underresource its CLEC account teams. For example, for many years the interexchange

carrier account teams have been assigned a technical representative to deal with the

many operational issues. We know the account teams have requested this technical

support and yet Southwestern Bell management has not allocated the required resources. This results in service disruptions and delays in providing services for companies like Birch, who are competitors of Southwestern Bell.

Southwestern Bell’s tactics are a replay of the types of resistance MCI and other

competitive carriers encountered in opening up the long distance market to competition. I first entered the telecommunications business in the pre-divestiture days of

the early 1980’s. Back then, MCI and others referred to AT&T as the 800 pound

gorilla.

With Southwestern Bell, Birch feels like it’s dealing with a 1500 pound mule.

Even with the stick of sections 251 and 252, and the carrot of 271, we’re having

a hard time getting it to move.

The 1500 Pound Mule

Southwestern Bell’s behavior reminds me of a quote attributed to Lyndon Johnson

when he was President. One afternoon, after the protests against the Vietnam war

had begun to intensify, the President, who had grown up in the hill country of

Texas, assembled his beleaguered staff. ‘‘Boys,’’ he said, ‘‘we’ve got to hunker down

like a jackass in a rainstorm.’’

I feel like that same guidance must have been offered at Southwestern Bell headquarters following the passage of the 1996 act. Certainly that’s how we perceive

southwestern bell’s behavior. They’re hunkered down, they’re big and they are tough

to budge.

I’m from Missouri and I know something about mules. Mules are not only stubborn, they are intelligent. A horse will work or run itself to death. A mule won’t.

It generally knows what’s in its self interest.

The same is true with Southwestern Bell. It knows that the longer it hunkers

down, the longer it will be able to keep competitors from getting into its local exchange market. Every day Southwestern Bell can stop or hinder its competitors is

another day it can retain the level of its monopoly revenues.

Getting Southwestern Bell to move requires the stick (a two-by-four if necessary)

of sections 251 and 252 of the act, and the carrot of section 271. Given the powerful

economic incentives Southwestern Bell has to maintain its bottleneck position, both

methods are essential.

82

The Bell Companies, as well as CLECs and other providers, will deploy broadband

services rapidly

If there is one area where the Bell companies’ behavior is not mulish, it’s in the

deployment of advanced broadband services. Now I know they say they need a special set of rules ‘‘ or exemption from existing rules ‘‘ before making an investment

in broadband facilities.

Actually, the Bell companies are already making the investment, and at a fast

pace. They and other ilecs have to deploy broadband services quickly or they will

be beaten to the marketplace by CLEC’s, cable companies and other service providers. Southwestern Bell today is aggressively marketing its DSL product and pricing the service at such low levels that CLEC’s using unbundled network elements

cannot match, much less beat, the Southwestern Bell price. Other Bell companies

around the country are doing the same.

Indeed, it is this competitive pressure from the cable industry and the CLECs

that has forced the bell companies in some states to finally begin making genuine

efforts to satisfy section 271 conditions so they can enter the in-region interlata

market. They will move in that direction because, and only because, they want to

get into the interlata data market and know they will not get that carrot unless

they open their monopoly local exchange markets to competition.

The Right Incentives

If you had an opportunity to review the biography I submitted, you may have noticed my interest in deregulation. This interest stems from my graduate school days

at the University of Chicago where I studied under Professor George J. Stigler.

Professor Stigler was the 1982 winner of the Nobel Prize in economics for his

work on the economics of regulation. His work helped establish the principle that

regulation often fails to achieve the public policy goals that give rise to the regulation in the first place. Instead, competition is almost always more effective in

achieving those same goals.

But competition can only work when there are no bottlenecks in the marketplace.

My fear is that if the Bell companies are allowed into the long distance data market

before they open their local markets, they will be positioned to re-establish themselves as monopoly carriers in both the local and long distance markets. The result

would be that we would have turned back the clock to the pre-at&t divestiture days.

The Congress set economic incentives in place in the 1996 act that will soon lead

to a truly competitive telecommunications marketplace. Deregulation will follow in

due course. I urge you not to tamper with those incentives by prematurely allowing

the Bell companies into the interlata data market or by exempting them from their

obligation to provide critical bottleneck facilities and services to CLEC’s.

That concludes my remarks. Thank you for inviting me to participate in this hearing.

Mr. TAUZIN. Thank you very much, Mr. Scott.

Next will be Mr. Stephen Gray, president and COO of

McLeodUSA Incorporated of Cedar Rapids, Iowa. Mr. Gray.

STATEMENT OF STEPHEN C. GRAY

Mr. GRAY. Good afternoon, Mr. Chairman. And thank you. If I

may beg your indulgence just to begin with, since Tom left Iowa—

our headquarters is in Cedar Rapids—we built a couple of airports,

we bought four planes, and I think we built about 3,000 miles of

fiber. So we are doing okay there these days.

A little bit about who McLeodUSA is. Mr. Chairman, we have

been in business a little over 5 years, which, quite frankly, was 2

years prior to the act itself. Today we serve about 260,000 customers, of which two-thirds of those are residential customers and

about one-third small business customers. And, unlike Buddy, our

small business customers are about five lines. We also operate in

20 States, all 14 of the US West markets as well as 4 of the 5

Ameritech, current Ameritech, markets, serving 500 cities with an

average population of less than 60,000.

But with all that said, I think what we think is more important

is what is going to happen in the future. And our perspective kind

83

of is this. Currently, there are 150 million access lines in the

United States. By our projections, that should grow at about 6 percent per year or be a little over 250 million access lines within 10

years, or customer connections. In addition to that, we believe that

there is over 5 million miles of fiber, copper, coax currently deployed in the United States. With over 5 million distinct network

elements managing that network.

Well, if that weren’t complicated enough, we have to make sure

that that network works. When something is wrong, we need to

know what is wrong with it. And then we need to know how to fix

it. Well, if that weren’t enough, then you have got the customer

who is involved. And the customer, in our opinion, over the next

10 years, will have to change out every element of their telephone

and data equipment, which will be rendered obsolete.

Well, at the end of the day, I happen to agree with Dave, we believe it will be a kilobit business where there will be a pipe to each

home and each business where these artificial distinctions of voice,

data, wireless, wireline, local, long-distance will all go away. It will

be much like the electricity business where, when Thomas Edison

invented electricity, he didn’t know about the microwave oven and

he didn’t know about the television. It was to power a light bulb.

So there are going to be kilobits coming into and out of the homes

much like kilowatts.

The keys to our success, quite frankly, will be technology, the efficiency and the economics associated with that technology. Two,

our ability to find and keep great people. Our company has created

5 jobs per day for the last 1,000 calendar days. And if you look at

the unemployment in most of our States, one of the biggest challenges we will have is providing a great environment for those people. And last but not least, access to capital markets.

So the so-what of all of that, if I could beg anything of you, Mr.

Chairman, and this group is please understand that this is going

to take a little bit of time. To rebuild, overbuild, or overlay this network, it takes a crew an hour to build 1 mile of network. The access right-of-way permitting issues, whether you are going through

fields, sidewalks, up on towers, or through the airways and the

ability to find crews, equipment, and real estate are all challenges

that companies like ours face on a day-to-day business.

Second, the access to the capital markets. If you fundamentally

think about this 5 million mile network that is going to need to be

replaced in today’s dollars, that is in excess of $500 billion to rebuild or overbuild. I have to have access to the capital markets in

order to survive. And in order to have access to the capital markets, from a public policy perspective, we need stability. We absolutely need stability at the Federal, State, and local level. The Supreme Court began giving us some of that stability and guidance

just 6 months ago. So we like to talk about how the act is 31⁄2 years

old, but, for all practical purposes, there wasn’t much just clarity

until a few months ago. And we need to give it some time to provide that guidance to the States and the local governments as well.

So thank you very much for your time.

[The prepared statement of Stephen C. Gray follows:]

84

PREPARED STATEMENT OF STEPHEN C. GRAY, PRESIDENT AND CHIEF OPERATING

OFFICER, MCLEODUSA INCORPORATED

On behalf of McLeodUSA, I would like to thank the Subcommittee for the opportunity to talk with you today. I would like to accomplish three goals today: first,

provide a high level overview of McLeodUSA; second, summarize our concerns with

providing broadband data ‘‘relief’’ to the RBOCs; and third, emphasize Wall Street’s

predictable reaction to providing data ‘‘relief’’ to the RBOCs.

I. McLeodUSA Overview

Clark McLeod and I formed McLeodUSA, headquartered in Cedar Rapids, Iowa,

in 1992. This is not our first foray into telecommunications. In the early 1980s,

Clark formed Teleconnect and built it into the fourth largest long distance company

in the United States. In 1990, MCI purchased the company, then named

TelecomUSA. McLeodUSA is a member of the major trade associations representing

the competitive telecommunications industry, the Competitive Telecommunications

Association (CompTel), and the Association for Local Telecommunications Services

(ALTS).

In 1992, desiring to bring competition to the local telephone industry, we what

today is called McLeodUSA Incorporated. Our primary focus as a company has been

to serve small business and residential customers in the Tier 2, 3, and 4 markets

in our target states. As a result (as of March 31, 1999), we provided competitive

local exchange services to about 91,000 residential customers, and about 53,000

business customers, in the 11 Midwest and Rocky Mountain states. (We have targeted an additional 9 states for expansion in the near future). Our average business

customer subscribes to 5.6 lines.

McLeodUSA’s corporate team, with over 250 years of experience, is recognized as

one of the strongest management groups in the telecom industry. Strong because

of our breadth, and strong because of our depth.

McLeodUSA has already become the leading facilities-based Integrated Communications Provider (ICP) in our market area, providing local, long distance and

Internet services. And due to a series of recent and dynamic events, our market opportunity has more than doubled to $80 billion in 2009.

McLeodUSA derives its revenues primarily from the sale of telecommunications

services and the publication of telephone directories. McLeodUSA has developed one

of the largest competitive white and yellow page directory companies in the United

States. In fact, McLeodUSA Publishing will print and distribute nearly 21 million

directories in 22 states over the next 12 months.

The opportunity for our employees is incredible: one third of our stock ownership

resides with employees. This is an important linkage for our investors, and gives

our employees a major stake in our success.

McLeodUSA’s three-part phased execution is success based. First, building local

line market share by resale and by leasing Bell facilities... concurrently expanding

our brand presence.

Second, building the platform, with inter-city fiber connecting regional gateways.

And third, our current phase, migrating customer traffic on-switch/on-net, which

involves constructing intra-city fiber which connects our customers with our regional

gateways.

This execution allows us 100% access to build customer share, while capital is efficiently and effectively deployed.

In our first phase of building customer share, we have leased RBOC central offices, which allows us to sell to 100% of the customers in our 400 cities. In addition

to pervasive coverage, this service is relatively easy for the Bells to provision and

is generally a transparent switch over. Once the switch has occurred, we control

many of the features for the customers through on-line provisioning terminals.

Our recent data strategy announcement will add new revenue opportunity from

our collocations and XDSL technology.

Concurrent with building customer share, we have executed the 2nd phase of our

strategy and deployed the most advanced platform in our region. Nearly 7,800

miles, both intra-city and inter-city, high-density fiber, SONET ring topology, with

incredible capacity, is capable of supporting all our voice, data and video applications.

For the last 5 years, McLeodUSA has been focused primarily on the voice market;

however, the data opportunity is explosive. Data revenues will surpass voice revenues in 2009. And the bandwidth required to capture data will require companies

to own or control high capacity networks. McLeodUSA is positioned for these opportunities in several key areas.

85

First, the market position. Our customers conveniently have only one number to

call for customer service, and one bill provides the best value proposition—one company, simple and complete.

Second, our customer service is World Class. Our goal is to have a real person

answering calls within 20 seconds, 24 hours a day, 7 days a week, with one call

resolutions. Great people providing great service. McLeodUSA has proof. Since 1994,

we have averaged 0.5% business customer churn, the lowest in the industry.

Finally, from a platform position, we can pick the best solution for the customer

and the company. Our collocations connect to local access rings, which connect to

500 mile backbone rings, which then attach to high capacity regional gateways. This

design is a low cost way to serve 1st, 2nd and 3rd tier markets with one regional

center, robust capacity, and functionality. It also allows us to use both our network

and the Bell network to optimize the economics.

Our results through 1998 have been incredible.

Directories: 1998: 14 million. 1999 industry estimates: 21 million

Local Lines: 1998: 400,000. 1999 industry estimates: 650,000

Network: 1998: over 7,000 miles. 1999 industry estimates: 9,000 miles

Revenue: 1998: $600 million. 1999 industry estimates: $900 million

II. Concerns about providing data ‘‘relief’’ to the RBOCs

Based on the progress that McLeodUSA has made in bringing competition to its

markets, it is tempting to conclude that all must be going well in the world of

emerging telecommunications competition. This optimistic conclusion, however, ignores the reality faced by McLeodUSA every day: that the incumbent RBOCs upon

whom we depend for inputs are doing everything in their power to limit our ability

to serve our customers. Those companies, at every turn, make use of each opportunity to introduce delay, uncertainty, and unnecessary expense into our business

relationship.

This situation reveals an important fact about the relationship between emerging

competitors like McLeodUSA and established incumbent RBOCs: the grossly unequal commercial power between those entities. Typically, when two companies negotiate a commercial agreement, both parties have something to gain and something

to lose; and that situation leads both parties to seek a result where there is mutual

benefit. In such a case, because either party can seek a better bargain elsewhere,

both parties seek a compromise solution that maximizes their mutual gains. In contrast, our relationships with RBOCs show clearly that those companies believe they

have nothing to gain by dealing with McLeodUSA. As a result, we typically find that

compromise is not possible, and we are told that, if we disagree with an RBOC position, we will need to seek regulatory relief.

An example of this type of conduct is instructive. We have had a dispute with an

RBOC about the charges that we pay when we order unbundled loops; not the recurring ‘‘monthly’’ charge (which we also believe is generally too high), but simply the

one-time charge to have the loop supplied at all. We are sometimes charged thousands of dollars when the RBOC supplies these loops for ISDN service, even though

there is no charge at all when the same ISDN service is provided to the same location by the RBOC for its own end-user customer. We know that this is the case because, when these charges have made it financially impossible for use to serve the

customer ourselves, that customer has ordered the same service from the RBOC and

not been charged for such ‘‘special construction.’’

Under the forward-looking TELRIC pricing standards used to determine rates for

unbundled loops, we believe that loop costs should already include the ability to

‘‘unbundle’’ loops like ISDN loops. Even if this were not the case, however, there

is certainly no reason for competitive carriers to be charged by the RBOC when the

RBOC would not charge its own end-users. We believe this situation is a clear example of discrimination against companies like McLeodUSA. At least one state commission—the Michigan Public Service Commission—has agreed, and has refused to

allow such ‘‘special construction’’ charges for unbundled loops.

Of course, the RBOC has appealed that decision to court; and when we have attempted to use the reasoning of this Michigan decision in the RBOC’s other states

to convince them to change their position on this issue, the response we received

was a flat ‘‘no,’’ with the notation that we were free to litigate before the other state

commissions if we so desired.

This result plays into the RBOC’s long-term strategy in two ways. First, by requiring new competitors to expend their resources litigating issues multiple times

before regulatory agencies and in subsequent court appeals, they are effectively diverting the competitor’s resources away from the goal of providing competitive services to customers. Second, by simultaneously attempting to convince state legislatures and the Congress that regulatory oversight must be reduced, they are trying

86

to close the only channel available to us to obtain fair treatment. And that brings

us squarely to the subject before the Subcommittee today.

It is clear to me in my job as President of McLeodUSA that the RBOCs with

which we deal are not committed to allowing competitive markets to develop in their

historical monopoly territories. Instead, it appears that these RBOCs are committed

to finding a way to enter markets which are ‘‘off limits’’ under the Telecom Act

while preserving their local exchange monopolies essentially intact. Deregulation of

data services is an integral part of that strategy.

News reports, industry analysts, and assorted pundits have all noted the ‘‘convergence’’ of voice and data technology in recent years. My company firmly believes in

such convergence. Given this phenomenon, it is not at all clear why policy-makers

should spend the effort required in an attempt to develop separate legal frameworks

for voice and data. The Telecommunications Act itself defines ‘‘telecommunications’’

to include any ‘‘information of the user’s choosing.’’ This definition on its face includes voice, data, video, and all other sources of ‘‘information.’’ If the data services

were not to be included within the procompetitive framework of the Act, it would

have been a simple matter to specify that telecommunications included only ‘‘voice’’

services; yet the Congress did not do that when the Act was passed in 1996. Existing law makes no artificial distinction between voice and data services; both are considered to be ‘‘telecommunications.’’ This is a wise course, and it should be maintained.

In fact, attempting to develop separate frameworks is bound to result in an artificial situation which is more complicated, less efficient, and ultimately does not serve

the needs of our customers. In the long run, there will be no reasonable distinction

that can be made between voice and data as it is carried over telecommunications

networks. Even now, much of the voice traffic carried on existing telecommunications networks is carried in digital form. Since digital information is nothing more

than a string of binary digits (carried either electronically or in optical form), there

is no way to distinguish digital voice signals from other digital signals once the conversion to a digital signal is made. Thus, a legal distinction based on differences between ‘‘voice’’ and ‘‘data’’ is bound to fail.

The only way this traffic can be practically separated is before digital conversion.

Yet, we will increasingly see digital conversions taking place at the home, or within

the telephone network prior to switching. As a result, by the time the digital signal

is ready to be switched, it will already be in digital form, ready to be placed onto

a packet-switched network. There will be no distinction to be made between voice

and data in such a world.

The structure of the Telecommunications Act is not based upon specific technologies or traffic patterns. Rather, that structure is based upon an immutable fact:

for the foreseeable future, in most circumstances, new competitors will have no alternative but to use the existing loop distribution plant (the ‘‘copper wires’’) of the

incumbent RBOCs. The Telecommunications Act makes those copper wires available

for lease by competitors not because they are necessary to provide voice service, but

because they are necessary to provide any service to the household served by them.

Those wires constitute a bottleneck which the RBOCs will use to stifle the drive toward competitive local markets unless prevented by regulators and legislators from

doing so. A drive to ‘‘deregulate’’ those bottleneck facilities simply because they are

used for data transmission is exactly the wrong response if we want competitive

markets to fully develop.

RBOC control of that bottleneck will be just as damaging to the development of

competition for data services as it has been for voice service, if control of the bottleneck facility is not held in check by regulatory oversight. Even if one attempts to

distinguish between voice and data service, it is clear that those wires are just as

necessary for data as they are for voice. Increasingly, consumers will use those copper wires to transmit both voice and data, with little distinction between the two.

Constructing differing regulatory regimes for each will only confuse customers and

hinder our pursuit of the ultimate goal of competition in all telecommunications

markets.

III. Wall Street’s reaction to RBOC data ‘‘relief’’ proposal

Finally, if high speed data services and facilities are deregulated, confusion about

ultimate goals will not be limited to customers. Our company is acutely aware of

the need to maintain investor confidence in the national goal of bringing competition

to the telecommunications marketplace. That confidence has been bolstered by the

clear commitment to the 1996 Telecommunications Act, and the efforts of the FCC,

to reach that national goal. Legislation which would carve out data services from

the procompetitive goals of the Act could only be seen in financial markets as a retreat from that national commitment. As a result, the ability of new entrants to

87

raise the capital needed to bring true, facilities-based competition to all telecommunications markets could be placed in jeopardy. Thus, the drive toward competition could be slowed even though that is not what was intended by supporters

of such ‘‘data deregulation.’’

IV. Conclusion

The Telecommunications Act is working to bring competition to telecommunications consumers in all areas of the country. While that competition is not progressing as rapidly as many would hope, the delays have resulted not from inadequate legislation, but from a failure of the incumbent RBOCs to fulfill their duties

under that legislation. Attempting to impose an artificial distinction between data

and voice services will only serve to delay the deployment of advanced services and

the development of competition in general. This result will disadvantage consumers,

and delay the goal of providing faster, better, less expensive telecommunications

services to all Americans.

Again, I thank the Subcommittee for the opportunity to appear before you today,

and would welcome any questions that any of the Members might have.

Mr. TAUZIN. Thank you very much.

Finally, Ms. Mary Beth Vitale who is the president and COO of

RMI.NET in Denver, Colorado. Ms. Vitale.

STATEMENT OF MARY BETH VITALE

Ms. VITALE. Thank you, Chairman. And thank you, members of

the committee, for allowing me to share information about

RMI.NET.

Mr. TAUZIN. I want you to know I resisted the urge to introduce

you as the femme fatale.

Ms. VITALE. Well, I am glad you saved me for last. I would like

to just first start with a little bit about who RMI.NET is and what

types of products and services we offer. Congressman Boucher

talked the 5,000 ISPs out there. Well, we are one of the 5,000 ISPs

that exist. We started back in 1994 as really a dial-up type of

Internet access provider. And once the act was signed in 1996, the

expansion really started to grow. Besides offering dial-up the dedicated access services to consumers and small and medium-sized

businesses, we offer web hosting, E-commerce capability, long-distance, high-speed data access for our customers along with voiceover telephony, just to mention a few of the products.

We also have purchased a backbone network. We purchased a

company in December called Data Exchange. And with that we

have a nationwide backbone network that, with that particular

company, has allowed us to resell products and services across the

United States and make us a national provider for all of the products to consumers and to small and medium-sized businesses.

A couple of our plans. Our plans for growth. One is organic

growth, which we do from our sales, our marketing, our packaging

of products and services together and bundling them to the consumers that we have in our area and nationwide. But, most importantly, we are also doing it through acquisition. And we have purchased, just even last week, we purchased 3 new companies and we

have purchased about 15 so far in the past year and hope to purchase 20 in the year of 1999.

Those acquisitions have been companies that are located in

small, rural areas, many of them. And, for example, we have services in Huntsville, Utah, to Steamboat Springs, Colorado, and, most

recently, in Bloomington, Illinois. We bought a little company

called Dave’s World. And, yes, the owner’s first name was Dave.

88

And Dave’s World serviced very small, rural communities. In fact,

this is rural America. Farmers and, in fact, I think, just not long

ago they got their first Pizza Hut in Dave’s World.

But I think the most important thing about that is that we have

lots of choices and options in order to service them with high-speed

data access. Right now some of the witnesses have mentioned companies like COVAD or Northpoint. We will be able to, in just next

year, be able to offer DSL service in Bloomington and throughout

that network, which is really what I think this is all about, to be

able to have ubiquitous access for everybody to high-speed data.

We have people like COVAD and Northpoint banging down our

doors in order to purchase the DSL services from them and then

to offer them to our consumers. So we have been fortunate. And

just most recently, the RBOCs and GTE have now stepped up to

the plate to be able to offer those services for us to resell. And so

they have been able to do this in the environment that we currently have and we have them as a choice of our services to resell.

I wanted to at least, last, to explain the reason why the growth

has happened and has occurred for us is that we have had open

access to unbundled local loops. We have been able to do that. And

we have been able to grow because of that. We have also not had

access, which I think is important, and we have not access, is to

the cable modems that we want to be able to have access to all the

technology that is out there.

I would like to make just one reference to a chart that is here

to my right. And it talks about the growth. And this chart is dated

in July 1998, but I think I will hopefully explain really where the

growth has been. If you look first to the left, the first map talks

about where the cable modem providers were for that particular access, if you move to the right, it talks about the CLECs where

there distribution is. But, today, that particular chart, you would

have to put five times more blue dots on that because of the

COVADs and the Rhythms of the world. It has expanded.

And, because of that, in the lower left-hand corner, the RBOCs

and GTE have had to respond to the competition. So they have

started to respond and have their DSL service available. And then

the last map gives you the overlay of what is there, but keep in

mind, as of July 1998, and you just need to write about 5 times,

and that is happening today. So all that I would leave the panel

with is that I really would think that keeping the—what the act

has done for us, keeping access open and available to both existing

technology and the new cable technology that is going to be available shortly in all areas. Thank you.

[The prepared statement of Mary Beth Vitale follows:]

PREPARED STATEMENT OF MARY BETH VITALE, PRESIDENT AND CHIEF OPERATING

OFFICER, RMI.NET

Good morning Chairman Tauzin, Ranking Member Markey and Members of the

Subcommittee. My name is Mary Beth Vitale and I am President and Chief Operating Officer of Denver-based RMI.NET. On behalf of RMI.NET and the Competitive

Telecommunications Association or CompTel, I appreciate the opportunity to appear

before the Subcommittee today to help illuminate the competitive issues related to

the deployment of advanced data services. These are critical issues. Virtually all of

the services RMI.NET provides to small and medium-sized businesses and consumer

end users are dependent on our ability to acquire and interconnect to high-speed

or advanced data communications services.

89

I would like to tell you about the role of RMI.NET and other competitors in the

industry, then make three points about the deployment of broadband in this country. First, the competitive industry is doing a good job of deploying advanced data

services, even to high-cost rural areas. The business plans of RMI.NET and many

others like us are proof of that. Second, claims by the Regional Bell Operating Companies or RBOCs that deployment of advanced services cannot be fully realized

without special regulatory relief are overblown. As a former US West employee, I

have heard all of their justifications for requesting data relief. I find those justifications disingenuous and aimed more at expanding their market than at bringing relief to consumers. It is, in fact, possible to foster the development of advanced data

services in today’s environment. In fact, spurred by competitors, the RBOCs and

GTE are deploying new data services without special regulatory exemptions. Just

as competition has pushed the RBOCs and GTE to finally deploy advanced data

services to densely populated areas, competition will push them to deploy to more

rural areas. Third, legislation that alters the competitive landscape created by the

Telecommunications Act of 1996 would actually be destructive, as it would undermine the position of competitors and the positive force they exert on incumbents.

Ironically, legislative proposals to exempt the RBOCs and GTE would remove competitors from the equation, thus eliminating the pressure on incumbents to deploy

and endangering the price competition and choice that are critical to consumer welfare. Allowing the RBOCs special interLATA relief now, when they have demonstrated their antagonism toward competition, will kill the promising—but nascent—competition that exists in the market for advanced data services. RMI.NET

and CompTel would strongly oppose any such proposals.

RMI.NET provides convergent e-business and packet-based communications solutions for small and mid-sized companies. At the most basic level, RMI.NET has been

offering dedicated and dial-up Internet access services to businesses and consumers

since 1994. Currently, we provide access in 90 of the nation’s top 100 market areas

via a combination of points of presence that we own ourselves or lease from others.

RMI.NET recently purchased DataXchange Network, the sixth largest national

Internet backbone provider, giving us the capability to provide access at speeds up

to DS-3 in New York, Chicago, Atlanta, Washington, Dallas, San Francisco and Los

Angeles. DataXchange’s network is based on a dual OC-3 fiber optic ring, and interconnects via peering arrangements with all significant backbone providers at multiple network access points. We also provide website hosting, and competitive local

exchange, long distance, and Internet protocol voice service.

Over the years, our Internet Service Provider, or ISP, business has expanded

through both internal growth and acquisitions, many of which are focused on small

markets and rural areas—the very areas that are at the center of the drive to deploy bandwidth. RMI.NET recently acquired Dave’s World, an ISP headquartered in

Bloomington, Illinois, which serves a number of downstate Illinois communities, including Peoria. We have also added Internet Connect, based in Salt Lake City,

Utah. Internet Connect serves the small mountainous communities of Heber, Morgan and Huntsville, Utah, in addition to the relatively larger communities of Salt

Lake City, Ogden and Provo. Within our home state of Colorado, we offer Colorado

Mountain Net, headquartered in Steamboat Springs, which brings service to scattered communities in northwestern Colorado.

The Internet access business is particularly competitive; there are more than

5,000 ISPs in the U.S. Although we are the largest locally based ISP in Denver, we

face competition there, and in every major market we serve, from national, regional

and local ISPs. Even in the smallest cities and towns, there are almost always several ISPs vying for consumers’ accounts. It is estimated that upwards of 90 percent

of the U.S. population has local dial-up access to more than one ISP.

The fact that RMI.NET and other competitive companies are quickly and efficiently deploying advanced data services to smaller and even rural communities

makes evident the fallacy of RBOC and GTE claims that consumers can only realize

the full benefits of these services if the Telecommunications Act is altered to provide

special incentives for them. One hallmark of RMI.NET and other competitive ISPs

is our extensive use of broadband transmission capacity to provide our service offerings. The sources and availability of broadband capacity do vary somewhat from

route to route and city to city. As a general rule, the longer competition has existed

in a market, the more plentiful the supply of bandwidth and the lower the cost. On

interstate and interLATA routes, where competition was first authorized, there is

ample broadband capacity available. Ultra-high speed digital links capable of carrying the vast quantities of voice and data traffic that the American information

economy generates are readily available from the major long distance carriers

(AT&T, Sprint, GTE and MCI WorldCom) as well as from several newer national

network providers, such as Qwest, Frontier and Level 3.

90

Within the major metropolitan areas, the sources of broadband capacity began to

multiply with the emergence of competitive access providers; in the three years

since the barriers to local competition were removed by the Telecommunications Act,

the pace has accelerated and fiber rings have been, or are being, deployed in first,

second and third tier markets throughout the country. Just look at the markets we

already serve in Western states. And look at other CompTel members like ITC

DeltaCom, a competitive local exchange carrier and backbone provider offering services in the Louisiana communities of Lafayette, Lake Charles, Monroe, Shreveport,

and West Monroe, as well as in Baton Rouge and New Orleans. RMI.NET and ITC

DeltaCom are representative of the many competitors deploying advanced services

in large and small communities across the country. Over time, we fully expect that

this process will continue, at an accelerated pace, as companies expand their operations in smaller cities and towns to attract workers and to address the quality of

life issues facing many employees. In light of present and future deployment by

competitors, RBOC claims that consumers will not enjoy widespread access to advanced data services do not recognize the true status of the market. The competitive

market is, in fact, addressing the broadband infrastructure needs of the nation.

Second, although slow to react as usual, the RBOCs nonetheless are deploying

broadband—and without regulatory relief. From my experience with US West I can

tell you that it was because of competition, not in spite of it, that US West has finally deployed broadband services in its service area. The benefits to consumers are

clear, as more widespread, better, cheaper services have become available.

We are already beginning to see the effects of competition in the broadband access

market. An example can be found in the contrast between two of our ISP markets,

Denver, Colorado and Bloomington, Illinois. Within the past few weeks, a start-up

company called Rhythms NetConnections Inc. announced the availability of high

speed data services (using DSL technology) in several Western markets, including

Denver. US West, which had initiated a similar service offering in Denver and other

markets nearly a year earlier, almost simultaneously announced a nearly fifty percent reduction in its basic DSL rate for residential subscribers. In Bloomington, Illinois, there is still only one facilities-based DSL provider (the incumbent LEC, GTE),

and prices remain substantially higher than in those markets where competition exists.

US West and other RBOCs, unfortunately, have done little to improve the competitive landscape. Although US West currently offers advanced services to 5.5 million households in 39 cities in its region, it has earned an extremely poor record

over the years in terms of delivering on its promised data services to competitive

providers. For example, RMI.NET has been waiting months for US West to install

DS-3 lines in areas where there is not yet an alternative supplier. US West is capable, from a regulatory and a business point of view, of providing this service now,

but refuses to do so.

This brings me to my third and final point. The robust and growing competition

that now exists in the data market would be a thing of the past if the ability of

competitors to access broadband data facilities were compromised as a result of legislative proposals now under consideration. While RMI.NET and other competitors

provide some of our own networks, and to a large extent have been successful in

deploying services to both rural and urban areas, the fact remains that the RBOCs

and GTE control vast local networks that cannot readily be duplicated. Thus, we

must rely on incumbents for access to these networks, just as competitive local exchange carriers must rely on access to voice networks. The very existence of a competitive market for advanced data services is made possible only by the unbundling,

resale discount and interconnection requirements of the Telecommunications Act.

Particularly in more rural areas, competitors need access not just to loops, but also

to the other elements of incumbent networks in order to make network extension

feasible. For example, in the absence of unbundled network elements or resale (both

denied under pending RBOC proposals) competitors would be forced to ‘‘collocate’’

their own equipment in incumbent LEC end offices—more than 23,000 of them nationwide—and, in many cases, remote terminals, which number in the hundreds of

thousands. This will cripple broadband competition in rural America where thin

population densities will make it economically infeasible for more than one local provider to install the necessary equipment. Clearly, fortifying the incumbent’s advantage is not the answer. Instead, we must ease the way for competitors to push the

incumbents to serve new areas. If the basic pro-competitive requirements of the

Telecommunications Act are obliterated through legislative fiat, the competitive

market will die as quickly as it was born.

In addition to threatening the very elements of the Telecommunications Act that

competitors rely on to provide communications services, some proposals would strip

the FCC and the state public utility commissions of their authority to regulate the

91

provision of broadband data services. These proposals would slow competition and

ultimately disadvantage consumers by giving incumbents the green light to favor

their own services. If freed from existing legal obligations to refrain from unreasonable discrimination, incumbents would doubtless give priority service to their direct

customers. Companies such as ours, that purchase broadband services from the incumbents (and others, where it is available), could face even greater delays and potentially higher costs, particularly over the short term. Consumers, and competition,

would suffer.

Finally, I would like to highlight that there is a loophole in the current data relief

proposals. These proposals fail to recognize that data networks could be used to provide prohibited long distance voice traffic as well. It is an error to assume that voice

and data can be treated differently. Today, and for more than a decade, both circuitswitched voice traffic on the public switched telephone network and packet-switched

data traffic on the network of networks which comprise the Internet, are transformed into the ones and zeros characteristic of a modern digital network. This was

true when the Telecommunications Act was enacted, and it remains true today. As

a practical matter, there is no way to limit the breadth of these proposals to relieve

the RBOCs of their obligations under the Act. Proposals to allow RBOCs to provide

interLATA data services should be rejected because they may lead to untimely relief

from the market opening provisions of the Telecommunications Act that are prerequisite to RBOC provision of interLATA voice traffic.

The Telecommunications Act is working, as evidenced by the explosive growth of

the Internet and e-commerce. Hundreds of billions of dollars have been invested in

companies that have been created, or that have diversified their business activities,

to take advantage of opportunities provided by the Act. Preservation of the current

framework, including the unbundling and resale requirements, is essential to the

continued growth of this vital sector of the U.S. economy.

Thank you.

Mr. TAUZIN. Thank you very much. And that wraps up our panel’s opening statements. Let me make a couple of announcements

for the purpose of the panel and particularly for the membership.

In July, CATO is sponsoring a retreat for our committee, which I

urge you to all attend. We will focus on the knowledge we are gaining on broadband and the policy issues attendant to that knowledge at that retreat and hopefully get into some of the real fights

that lay ahead in terms of who is right and who is wrong about

what policy we should adopt. Today I want to thank you for keeping away from that and for concentrating more on what you are

doing and what you see is happening in the world of broadband.

I also wanted, second, to commend to all of your attention if you

haven’t seen this yet a little book entitled The Victorian Internet

which is absolutely fascinating—a book by Mr. Tom Standey—it

compares the arrival of the telegraph to the arrival of the Internet

and makes some incredibly startling comparisons of the two. For

example, when the telegraph first hit, a fellow by the name of

Claude Crappy invented it, the quote in a poem written in tribute

to Samuel Morse was: We are one, said the nations, and hand met

hand in a thrill electric from land to land.

It details in great detail the incredible parallels where scam artists found crooked ways to make money by manipulating the transmission of stock prices and results of horse races using the telegraph. And it was setting up fake fronts, just as they have done

on the Internet. And people worried about inadequate security so

codes were developed and encrypted messages were employed and

eventually there were telegraph weddings and telegraph divorces.

And the phenomena spread around the world and it was predicted

to change the way we did business and did life.

And in one ominous parallel, Claude Crappy is depicted as not

too happy a fellow because he had pretenders claiming to have inVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00094 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
92

vented the telegraph—his invention and he sank into a great depression, increasingly paranoid, and on January 23, 1805, killed

himself by jumping into the well outside the Telegraph Administration Building in Paris. He was buried, by the way, under a tombstone decorated with a telegraph tower, showing the sign for at

rest.

It is an incredibly interesting little book and has a great deal

about the Internet in it in relation to the development of the telegraph. I would commend it to you for research. Pretty good tutorial.

Let me now recognize members for 5 minutes and the Chair will

begin with the 5-minute session. Let me first acknowledge something Mr. Scott said, that we know broadband is going to deliver,

as Mr. Tauke pointed out, pictures in real-time, video in real-time.

And just as we see 1,700 radio stations now broadcasting on the

Internet, we can assume there will be video broadcasters on the

Internet as the Internet merges with the television set as the predominate monitor in our homes.

We also know that data includes voice and so telephony may be

a part of the integrated package of services. We know that Cox is

delivering telephone service, standard telephone service, right now

competitively in communities in America. But we also hear of

something called IP telephony, Internet protocol telephony. I take

it that is packet-switched telephony. But I need to know more

about it. Mr. Falcao, would you give us an idea of what is IP telephony as opposed to ordinary telephony? What is the state of it

now? When is it really going to pose a policy problem for it? When

has it really arrived, in effect?

Mr. FALCAO. I will be glad to do that, Mr. Chairman. So let me

characterize the different. IP telephony, essentially, is delivering

your suite of voice telephony services on a packet network. And, in

this case, an IP network. So, fundamentally, as was explained how

the Internet differs from the existing network, everything is

packetized in data format, the IP telephony is delivered in that

type of network. So that is the difference between IP telephony and

the existing telephony.

Now you asked an important question of where is it today and

when will it be ready for prime time. IP telephony has made a lot

of advances in the last I would say year where it has moved from

being a very exploratory science project type offering to something

that can now be rolled out in the real world. I believe it still has

a little way to go from a quality of service perspective to deliver

the type of public network telephony that you would like to deliver

on a public network. However, IP telephony in an enterprise, in a

business environment, is actually very good today. And I would

suspect that you could probably not tell the difference between current telephony and IP telephony in a business environment, in a

closed-network environment.

Mr. TAUZIN. Well, let me ask, anyone could come back now.

When do Americans—when are we likely to see a day when we

turn our television and, with a touch of few buttons, dial up a

friend and see our friend’s picture on the television and communicate with them, really with technology like IP telephony, when

is that likely to arrive for Americans or citizens in general? Is that

93

close upon us? Is that a year away, 2 years away, 3 years away,

5 years away? Where is it? Anyone? Please?

Mr. FALCAO. Take a guess?

Mr. TAUZIN. Yes.

Mr. FALCAO. So, you know you can actually do some of that right

now.

Mr. TAUZIN. You can do some of it now.

Mr. FALCAO. You can do some it right now. The problem we have

is it is not ubiquitous. It is not available to everybody.

Mr. TAUZIN. So that it will—the answer is, when there are networks available and the technology has reached the right stage.

Mr. FALCAO. Yes.

Mr. TAUZIN. Predictions on it? Three, 5, 10 years?

Mr. FALCAO. I would hope it would be in the 3 year range.

Mr. TAUZIN. So those things are going to be happening pretty

fast, I take it.

Mr. FALCAO. With one caveat. So I think a lot of the things we

talked about today is going to be very dependent on the decisions

you make as a committee to enable those networks to be built. So

there are things that need to get done to ensure that those networks do get built.

Mr. TAUZIN. Now, Mr. Vradenburg, you and I have had some conversation about this. Maybe you want to come back. I mean, if

some of us want to join in. But timing seems to be an issue about

when things are laid out and when these networks are built and

when all this service is available to people from different pipes, different providers. Can any of you kind of lay out to me when you

think systems like Teledesic are going to be really available and

when they will be fully competitive with landscape technologies?

Mr. Daggatt, you want to try and I will get Mr. Vradenburg?

Mr. DAGGATT. Mr. Chairman, you raise a good point about IP telephony because it brings out one of the big issues with the Internet model and that is quality of service becomes a critical element.

The ability to provide and enforce service quality guarantees

through the network. In the traditional circuit network model, you

have a pair of copper wires exclusively dedicated to a particular

connection. Quality of service isn’t an issue. In the packet model,

where you have traffic from a lot of sources competing for network

resources, it becomes a bigger issue, probably a bigger issue than

bandwidth, per se.

And, whereas in the traditional model, you think of access and

transport as being sort of the two major network elements, in the

Internet model, quality of service comprehends both of those. And,

in fact, I would even redefine access as being not just the connection to the central office, but the connection from the end-user to

the nearest point of presence that can provide the end-to-end quality of service that is required. And that could be a kilometer. It

could be 1,000 kilometers, because, for the most part, you have to

have a carrier, some service provider, that can actually put all

those elements together with those service quality guarantees.

So it is not just a question of when do you get a broadband connection, but when are you able to connect all those network elements in a way where you can enforce those quality of service

guarantees. And that is probably going to take quite a while. We

94

expect to have the Teledesic network up and operational in 5 years.

At that point, we would be able to provide an end-to-end service

guarantee from any point on the planet to any other point on the

planet.

Mr. TAUZIN. The point I was trying to get to is that we do have

a timing problem for all of this to be laid out, connected, and those

last miles problems solved. Mr. Vradenburg, what I am getting into

is the questions of what policy we have to engage in, can you just

sort of teach us a little bit about how you see that happening and

how AOL, for example, is going to be delivered and by what pipes

and when?

Mr. VRADENBURG. Mr. Chairman, I think it is very important, as

we discuss timing, to distinguish between the business marketplace

and the residential marketplace.

Mr. TAUZIN. Okay.

Mr. VRADENBURG. Because in the business marketplace, a number of these services are beginning to be delivered today with good

quality of service and with a variety of choice because perhaps 40

percent of our businesses in major urban centers already have

broadband connectivity, both either internal or among their major

offices and major urban centers. So at the moment, some of these

new services are being rolled out today among businesses or within

businesses in major urban centers.

The great challenge, it seems to me and the timing question in

terms of when we can get broadband delivery into the marketplace

is residences and smaller businesses and businesses in rural areas.

And that challenge, it seems to me, goes something like the following. Cable is beginning today to roll out a cable modem service

in certain communities in larger urban areas. DSL is beginning to

get rolled out. We ourselves have deals with Bell Atlantic and

Southwestern Bell, plan to have more, which will begin to roll out

DSL to consumers, a high-speed AOL service to consumers, beginning at least in test this summer and then in quantity by this fall.

We have also announced a satellite ability, a one-way, broadband

capability, which will be broadband dam and the telephone return

path that will begin to roll out to rural areas or to areas of the

country that don’t otherwise have access to DSL or cable modems.

Again, probably early next year.

So we are going to begin to see these services in the residential

marketplace now, but rolling out, increasingly, over the next couple

of years. But in the business marketplace, it will move a lot faster.

So I do think, as important, as you think about the policies in this

area, is are you focusing on business-to-business, are you focusing

on residential, are you focusing on urban, are you focusing on rural

areas. Because the answer in terms of the timing of these different

technologies, particularly as they are being delivered in quality-ofservice standards, as has just been discussed, is quite different in

those different areas.

Mr. TAUZIN. Anybody else want to respond before I move on?

Yes, sir.

Mr. NETCHVOLODOFF. I am not a technical person, but our engineers tell us that IP telephony, with respect to the Cox systems,

is at least 2 years, perhaps more, away.

95

But the more interesting piece is the economic analysis that goes

into what makes a business. If IP telephony is to be a lifeline service, that is, if people are going to use it as a dependable telephone

service, just as they use their telephone service today, then the economic advantage of IP telephony begins to disappear because you

have a powering requirement. In our business analysis and technology analysis is not so sure that, in fact, utilization of the cable

platform may be just as economic in terms of telephone service by

continuing with the digital service that we are providing normally

under title II.

Mr. TAUZIN. Thank you. Anyone else? Yes, Ma’am, and then the

two of you and then I will move on to you, Mr. Boucher. Yes,

Ma’am.

Ms. VITALE. Just briefly. In respect to IP telephony, we deliver

IP telephony right now. We have customers that are using that

product. We give them a very good price for it and they are willing

to pay that price for possibly not the most perfect service that

you——

Mr. TAUZIN. Is that commercial or residential?

Ms. VITALE. Residential. So we have that right now.

Mr. TAUZIN. And Mr. Tauke, finally.

Mr. TAUKE. As you know, I am not a technician either, but I

have been involved in a planning group within Bell Atlantic on the

issue of Internet telephony or IP telephony and we are of the view

that it will not make a major presence in the marketplace as a substitute for traditional telephony for the next 5 years. There are a

variety of reasons for that. Some are issues such as numbering and

how you handle those kinds of issues.

But a lot of it has to do with reliability of networks. A lot of people will use IP telephony as a supplement to the existing networks,

but there is a robustness in our current networks dealing with the

powering of the networks, of the electricity can go out and you still

make a phone call, and a variety of duplications of networks and

so on that we expect will not be present in the Internet arena, at

least over the next 5 years. So it will be in the marketplace, but

as a full substitute for the current telephony, no, not for 5 years.

Mr. TAUZIN. Thank you very much. The Chair, Mr. Boucher, I

notice Mr. Dingell has arrived. Do you want to yield? The Chair

will now recognize the ranking member of the full committee, Mr.

Dingell, for a round of questions.

Mr. DINGELL. Mr. Chairman, I thank you for that and I commend you for holding these hearings. I believe they will be very

useful to us and I want to thank our panel for being here with us

to discuss the matters before the committee.

As I would recall—and this question is directed particularly to

Mr. Apfelbaum—the central premise of the Telecommunications

Act of 1996 was to regulate or not to regulate like services in a like

manner. We believed that was the best way to give truly competitive services to the American people. We have heard a lot about

technological changes and they have been enormous. And, as a result, advanced telecommunications services are now being or soon

will be provided by a myriad of companies.

There is no question these companies currently are subject to a

wide dichotomy of regulation at the Federal and State levels, deVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
96

pending on what their original mission may have been. It is interesting to note that the practical result of this is that the differences

in regulation may imbalance the competitive opportunities in the

different forms of services and the impact that it would have on the

opportunity of the citizen to have freely competitive services available to him.

Now, Mr. Apfelbaum, can you tell me, is there any good policy

reason to regulate advanced telecommunication services provided

by cable companies such as yours differently than similar services

offered by telephone companies, satellite companies, land-based

wireless companies, broadcast companies, or any other company,

for that matter, who may or may not have a shared mission to

yours?

Mr. APFELBAUM. Our view has always been that we have advocated a deregulatory approach for anyone who is offering advanced

services. I think different approaches have developed, historically,

because these business have been distinct, historically. How you go

forward from there, you know, there are a lot of issues for you all

to decide, especially when some companies have been regulated,

the issue of how to let them out of existing regulation, you know,

can be a complicated one.

But our basic view is that deregulation is the way to go for all

of these advanced services and, unlike some of our competitors, we

have not tried to use the congressional process to gain a competitive advantage. In the recent Satellite Act, for example, we didn’t

oppose at all the ability of DBS providers to be able to provide local

broadcast services. So our view is that there should be a deregulatory approach for all of these services and that is how we would

see things going forward.

Mr. DINGELL. Now, Mr. Tauke, do you want to give a comment

on that?

Mr. TAUKE. Well, as you know, Mr. Chairman, there has been a

migration of regulation from the telephone market to the new

Internet data market. And so when we begin to deploy the new infrastructure that would deliver high-speed data services, we are

subject to unbundling of some of that technology. We are required

to resell those services, things which no other provider of those

services must do. We are prohibited from providing any kind of

backbone service or full Internet service to a customer, so we cannot provide the service in some instances and in other instances we

have to take apart pieces of our network or resell the services that

we offer in a way that no other competitor does.

Mr. DINGELL. Mr. Vradenburg, do you want to make a comment?

Mr. VRADENBURG. Yes, Mr. Dingell. We very much believe that,

in fact, we have to approach these different, historically different,

structures with a common mindset. Now whether or not that results in a common scheme or not obviously depends a little bit on

history and technology and the like. But at least with a common

mindset—and the one thing that I think you are hearing out of everyone on this panel today is that in the future, the similar kind

of digital transmission techniques offering a wide variety of voice

data and video services are going to be offered over exactly the

same technology and the same sets of infrastructures.

97

And it seems to me unconscionable for us to proceed into the 21st

century with a regulatory system that makes those distinctions.

That, in fact, we ought to look at these systems to see how we can

move toward a closer regulatory paradigm across all these infrastructures and that the main message ought to be keep the Internet deregulated and keep the infrastructures open to all service

providers.

Mr. DINGELL. The point, I gather, that the three of you gentlemen are making is that the result of this regulatory approach is

to essentially pick winners amongst technology on the basis of a

regulatory scheme and also to pick the companies who would prosper greatest through the regulatory process rather than through

the competitive prowess of the company or the particular desirability from an economic or technical standpoint of the particular

kind of service used. Is that right?

Mr. VRANDENBURG. I think, Mr. Dingell, that you have hit it

right on the head. The government ought not to be picking winners

and losers. A product or service ought to win in the marketplace

based upon its merits and not on whether the government favors

it or whether you own the wire.

Mr. DINGELL. Now, Mr. Tauke—and, by the way, welcome back

to the committee, old friend. Glad to see you. I was interested to

note in your testimony a discussion about the role of Internet backbone networks in making sure consumers have access to the information superhighway at the highest speed and the lowest cost.

Would you describe how concentration can develop in these networks and what the implications of this concentration could be on

prices consumers pay for Internet access.

I am particularly interested and concerned about the historic role

of so-called peering arrangements in which, I understand, traffic is

exchanged between these networks free of charge and the potential

exists for these agreements to break down if full competition is not

maintained. Is there a danger here for us to concern ourselves

with?

Mr. TAUKE. We believe that there is a danger to be concerned

about relating to the what-have-been traditional peering arrangements in the Internet world. Just for purposes of those who may

not be familiar with the term peering, in the Internet world,

peering is like interconnection in the telephony world and, essentially, if you have a network and I have a network, you send traffic

to my network. I send traffic to your network. We have, traditionally, we have exchanged that traffic free of charge.

What has been happening over the last couple of years in the

Internet world is that we have had some concentration of ownership in the backbone arena that was addressed parenthetically by

the Department of Justice in the MCI Worldcom merger and, as a

result, there is some concern that those who have garnered great

power in the backbone world are changing that peering structure

and essentially saying to the smaller carriers, if they are bringing

a small amount of traffic on the backbone, they are saying, instead

of peering with you, you will be paying us when you deliver that

traffic.

The other thing that is happening is that the quality of some of

the networks is in question and so, therefore, some major compaVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00100 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
98

nies and ISP providers are, like At Home, which recently announced they are going to build their own proprietary network nationally so that they can ensure quality but also then they are not

involved in the peering arrangements. Going back to my regional

airports story, in essence, they are saying they are building a regional airport, but only for their planes, not for other players.

And so both of those phenomena are having an impact or straining this traditional notion of peering. So one of the longer term

issues for the Congress is how do you ensure that there is free and

open interconnection, if you will, in this new arena.

Mr. TAUZIN. The gentleman’s time has expired.

Mr. DINGELL. I noted that, Mr. Chairman. Thank you.

Mr. TAUZIN. I thank the gentleman. It is likely that we have time

to do another round if members would like to do that. So if you

would like to stick around and do another round, we will probably

have a chance. The gentleman from Illinois, Mr. Shimkus, is recognized.

Mr. SHIMKUS. Thank you, Mr. Chairman. As you saw, I had my

family here. Competing interests, so I appreciate your being patient.

In my opening statement, I commented about the rural areas.

And I know other members are very concerned about that. And excuse me if this question has been asked before, but also my focus

in my opening comments was the need for competition and the belief in competition. What do we need to do—I guess is the question

I want to ask—what needs to be done to ensure that the competitive marketplace comes to rural America, in other words, a competitive marketplace where there is a choice between competitors?

And how can we help that occur?

That is an open question. I guess the best way to do this with

so many panelists is just who wants to try to answer that first and

we will bounce back and forth.

Mr. VRADENBURG. Let me try first, Congressman. I would say,

first, that we ought to look at what has happened to date. In the

narrow-band world, what we have seen is that between 90 and 95

percent of American households have access to the Internet via a

local dial-up phone number. As a consequence, we have in, for example, Blacksburg, which I know Mr. Boucher is from, 376 ISPs.

Now Blacksburg is not a major community, but there are multiple

Internet service providers in that community.

Now why is that the case, because there is only one phone company? We are only using one set of wires. It is because the phone

company, in essence, is obliged to interconnect and to sell its facilities to, in Blacksburg, 376 independent service providers. And, in

fact, those people called up, ordered business lines, set up modem

banks, and began to offer service in Blacksburg. So we have a great

deal of competition in the existing environment because of the

openness of the telephone system.

Now as we move to broadband, we have to continue that same

framework and not only have our ability to offer DSL service and

those 376 Internet service providers in Blacksburg offering a highspeed service through DSL, but also get competition in the infrastructure itself so that, in fact, those 376 ISPs can get access to the

local cable system and use whichever system is most accessible to

99

a household and also be able to service their particular customers

using whichever infrastructure is best suited to the applications

that they want to deliver.

Now we also have this in satellite and we have announced a deal

with Hughes, we have got to recognize that cable is only going to

be able to serve maybe 60 percent of the American public, even at

total build-out. DSL and current technology is probably only going

to be able to reach 40 percent to 50 percent of American homes.

So we are still going to need additional services and additional capacity infrastructure to reach all of America. And, hence, satellite,

at the moment, seems to be the best opportunity to do that. So we

will need competition as well and open access inside satellite systems to ensure that, in fact, multiple service providers are having

access to that portion of the country that is not serviced by either

cable or by telephone.

Mr. SHIMKUS. Yes, sir.

Mr. GRAY. Yes, sir, if I may. I am Steve Gray with McLeodUSA.

In your particular State of Illinois, if I may. We serve 144 markets

in Illinois; 1,500 employees; and we have deployed almost 3,000

miles of fiber in the State of Illinois. None of those statistics include the city of Chicago. We acquired Consolidated Communications about 21⁄2 years ago. Our plan over the next 5 years is to

build and deliver broadband pipes to every home and every business, either through the construction of our own facilities or

partnering with Ameritech and utilizing the copper and providing

DSL over the copper itself.

Mr. SHIMKUS. Okay. We are trying to do two things at one time.

Thank you. I am glad you brought up the issue of direct satellite,

because cable is not everywhere in America and it is not everywhere in my district. So the direct satellite is going to be a big

player in this. Will there be needs from us at the Federal level to

provide tax incentives, capital investment? Again, can it be done by

just easing the regulatory burden and staying out of the way, is

that enough to encourage the capital investment to go out to these

small, rural regions? Yes, Ma’am, go ahead.

Ms. VITALE. I think on two points, in terms of addressing your

issue on the capital investment. Yes, it is very helpful in order to

do that. We purchased a company in Opelika, Alabama, which is

a very rural territory. And the Federal and both State areas have

given us capital funding in order to expand—thank you—to expand

that particular area in a very small, rural town in Opelika. The

closest town of any size is Auburn. So I think we look at it from

that angle, yes, that has been, you know, beneficial.

But I think as far as what I would share with the committee that

would be critical is to take the Telecommunications Act of 1996 and

continue with what the progress has happened. I mean, it has allowed us to have access and grow because of having access to the

local lines in order to deliver our services. So that would be something I would stress.

Mr. TAUZIN. The Chair will recognize Mr. Boucher. I recommend

the other members go out and make the vote. Mr. Shimkus will return and continue the hearing. So if you would like to leave now

and make the vote, your call. Mr. Boucher will be the next to be

recognized. Mr. Boucher.

100

Mr. BOUCHER. Thank you very much, Mr. Chairman. Chairman

Tauzin was asking a series of questions directed toward a prediction on the general availability of telephony using the IP protocol and we got some interesting answers from the panel concerning that. I would like to follow that series of questions with questions directed toward determining when we might expect general availability throughout the country of both DSL and cable modem services. Now we have seen a number of projections, all varying, I

might add, for when these services will generally be available. This

is a panel of experts who are well-qualified to talk with us about

that.

And so I would like to ask for projections here. Let us just take

a date. Let us say by the end of the year 2000. How many DSL

subscribers will there be? How many cable modem subscribers will

there be? Today, we start with a base of 70,000 with DSL and

about 500,000 with cable modem service. Where are we going to be

at the end of the year 2000? Mr. Apfelbaum. Mr. APFELBAUM. I couldn’t predict a number. I could tell you that

we are trying to roll out the service as quickly as we can in all of

our service areas. And, you know, a lot of that depends on the policy that is set here, whether we are fettered with unnecessary regulation or left free to develop our business the way our business

people think is best to serve customers. Mr. BOUCHER. Do you have any estimate at all? Take one case

and the other.

Mr. APFELBAUM. Well, you know, it is also hard to say what the

numbers are because with all of these new services being developed, I think they are all going to be rolling out and they are all

going to be getting customers. We would like to get a large number

of them, but, you know, I predict a number for—— Mr. BOUCHER. Mr. Netchvolodoff, do you have a prediction for

us?

Mr. NETCHVOLODOFF. Well, I can only speak for Cox, but by the

end of the year 2000, we would expect in excess of 80 percent of

our total customer base to have access to all 3 digital services:

video, telephony, and high-speed data. With respect to the phone

companies, the only thing that I can comment there is the public

pronouncements that have been made by the phone companies that

by the end of this year they will have activated over 25 million

DSL lines and I would presume that by the end of the year 2000

that would accelerate, not decelerate since activating DSL lines involves defense of their core business.

Mr. BOUCHER. Mr. Tauke, would you care to comment on that?

Offer a projection for us with regard to DSL? Mr. TAUKE. An independent third party, International Data Corporation, says that there will be, they estimate that there will be

6 million lines of DSL services in operation by the year 2002, which

is not the year 2000 figure. I can speak for Bell Atlantic. By the

end of the year 2000, we believe we will have DSL capability for

14 million homes of the some 30 million residential customers we

serve.

Now that projection, however, has a lot of caveats. For example,

just to give one, we anticipate that we will be able to deploy DSL

services over some fiber. In order to be able to do that, you have

101

to have remote terminals in your network. The question arises:

Will we have to unbundle the remote terminals? Will we have to

provide co-location in those remote terminals? If the FCC would

come forward with those kinds of rules or a State commission, for

that matter, that might throw way off the kinds of projections that

we are making.

So we believe, right now, given the current state of affairs, 14

million homes would be passed, have it available. How many will

take it, I don’t know.

Mr. BOUCHER. I have one other question and then I am going to

have to go to vote as well and so will the chairman.

The discussion about whether or not transport platforms should

be open so that the consumers of transport services have a choice

of Internet access providers has both technical and policy components. Chairman Dingell was discussing some of the policy implications of that decision a moment ago. Let me focus on a technical

question. We have heard from some of the cable companies that if

they are required to open their platform to Internet access providers other than the one with which they are affiliated, that significant technical barriers are raised. And that, in fact, it may not

be possible to accommodate more than one Internet access provider

on a given cable platform.

I read with great interest last week about a demonstration by

GTE and AOL concerning a cable platform that now can accommodate multiple Internet access providers. And Mr. Vradenburg, I

would like to give you an opportunity to comment about that demonstration and about the technical feasibility of accommodating

multiple ISPs on a single cable platform. And, at the same time as

you are describing that demonstration, if you would, tell us if, in

your opinion, based upon that experience and your other research,

there is any practical upward limit on the number of ISPs that can

be accommodated on a cable platform.

Mr. VRADENBURG. Thank you, Mr. Boucher. We did do a trial in

Clearwater, Florida, on a GTE cable plant. Actually, it was GTE’s

trial in which they utilized access to our service as well as to two

other ISPs. And what they were able to do was to demonstrate was

that there is a simple technical solution to this problem of multiple

ISPs. They demonstrated it with a routing device that they have

modified but is essentially off-the-shelf equipment that has been

used in the multiple ISP DSL world that, in fact, for roughly a onetime capital investment of $1 per home that, in fact, it is not only

feasible but relatively straightforward to provide multiple ISP access for households.

There are also off-the-shelf software management systems which

enable a cable MSO to continue to manage the data traffic on that

network to assure there aren’t data hogs and to provide that, in

fact, the data is effectively moving through those systems. In fact,

they have demonstrated that by stacking those routers, they don’t

see a natural upward limit on the number of ISPs that can be supported. What they have determined is that, in fact, the scaling

issues inside the cable plant are a product of the number of subscribers, not the number of ISPs.

Mr. BOUCHER. Thank you, Mr. Vradenburg. Let me give our

friends from the cable industry an opportunity to comment on that

102

question if they desire to do so. And I am afraid I am going to have

to be impolite and leave. I won’t hear the answer to your question.

I assure you I will read it in the record.

Mr. APFELBAUM. Okay. We have never taken the view that it was

technically impossible to have multiple ISPs. We have really approached it from the policy end. But we think the technical end is

a big component of the policy end. And the question is what do you

get out of the resources it takes to configure a system to allow multiple ISPs? If your goal is to have multiple ISPs, you can do that.

If your goal is to serve consumer welfare and give consumers what

they want, I don’t think you would build your system that way. It

increases the cost tremendously. It increases the inefficiency tremendously.

And I did read the LA report that came out the other day and

they seem to very quickly answer the technical feasibility answer

by saying if you put two engineers in a room, they can do anything.

And they quoted that old NASA line that with enough thrust, you

can make anything fly. We don’t leave two engineers alone in a

room very often in our company because they can do anything and

oftentimes they want to do everything, but if we let them make

these decisions, the cost of cable service would probably be about

$1,000 a month.

So there are all kinds of other competing considerations that go

into this. And, again, the question I think also is do you want to

pick one business model now and require every facilities-based

competitor to follow that model? Our view is it is better to encourage the deployment of facilities-based competitors by allowing them

to be free to develop the business models that work best.

Mr. SHIMKUS [presiding]. The Chair recognizes himself for a second round of questions. And the first one I have is to Mr. Scott and

Mr. Gray. If you are able to get unbundled network elements to

compete for business in the voice market, but you cannot get

unbundled network elements to compete for the business in the

data market, what will this do to your company’s incentive and

ability to enter markets that lack the population density to justify

the installation of your own facilities? Pretty complex.

Mr. SCOTT. No, I think it is pretty clear. If we did not have access to unbundled elements for data service, that would be crippling to our ability to do that. And that becomes more important

as time goes on. We started by mainly providing voice services, but

rapidly we have been pulled by customer demand into providing

voice and data services. So we would absolutely need access to

those elements for the provision of data services to remain competitively viable, regardless of the size of the community. That would

apply in a large market or in a small market.

Mr. GRAY. I directionally agree with Dave. I will come at it just

a little bit differently. A, I still submit that it is an artificial distinction, from a consumer’s perspective, to differentiate voice from

data. All I know is that our consumer customers want a service

that works all of the time and when it breaks they need to call us

and whether they have the same line for Internet or telephony,

they don’t draw that distinction so I shouldn’t be able to.

With respect to the ramifications, if premature Bell operationing

company entry is allowed into the interLATA data business, Dave

103

and I, I think, lose access to the capital markets. We are losing—

I am losing $200 million a year and will need sustained access to

the capital markets for a while in order to support our emerging

efforts. So I think the consequences are somewhat grave. I also

would remind you, Mr. Congressman, if I may, that we are in an

open registration period with the SEC, so please nobody run out

and buy or sell our stock based on anything I have just said.

Mr. SHIMKUS. And I am going to go to Mr. Tauke, but I want to

follow up before I do that. Why is this more critical—again, you understand my focus is on the rural areas—why is this even more

critical in the rural areas versus the urban?

Mr. GRAY. If I may go first—and I will speak specifically to US

West and, with all due respect to Mr. Tauke, the fact of the matter

is, the quality of the service is declining from the incumbent local

exchange company. And, two, they are not investing in those rural

markets. And, three, one could read into the tea leaves with all

that is going on with either Quest or Global Crossing that they

may further forget where Pierre, South Dakota, or even how to say

Peer, South Dakota, what that really is.

So I think if we send the wrong message in 14 of those States

and if I go out of business and US West starts investing in international markets, what are the alternatives for rural companies in

those areas?

Mr. SHIMKUS. Mr. Scott, did you want to follow up?

Mr. SCOTT. Yes, I will follow up.

Mr. SHIMKUS. And then I am going to go to Mr. Tauke.

Mr. SCOTT. I will follow onto Mr. Gray’s comments. For us it is

very important. I mean, there are a lot of people in our markets

who are clamoring to provide Internet services, high-speed Internet

services in St. Louis, in Houston, and Dallas. But, as far as I know,

we are the only ones who are eager to do that in Topeka, Kansas.

And so we may be the only one out there who is ready to stand

by and provide service, high-speed Internet services, in those communities. So I do think that access to those unbundled elements is

critical for relatively quick delivery of such services to small markets.

Mr. SHIMKUS. Let me just follow up one more question. To what

extent is certainty important to the ability to raise capital?

Mr. SCOTT. Central to it. I couldn’t agree with Mr. Gray more on

that. And, in fact, McLeod is an older company that we are and

probably has better access to the capital markets than a company

such as Birch. I will guarantee you that when people look at investing in Birch, we spend most of the time discussing the regulatory scheme at the Federal level and at the State level and discuss the contingencies that might be brought to bear on the availability of unbundled network elements. So capital for companies

such as Birch could dry up overnight.

Mr. SHIMKUS. And now, Mr. Tauke, thanks for being patient and

have at it.

Mr. TAUKE. Happy to be patient. I think it might be worthwhile

to take just a moment to say a few words about unbundling and

the network element issue that you raised. The first point is that

I basically agree with my two fellow witnesses here that for rural

areas and for competition in rural areas, that it is relatively imporVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00106 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
104

tant that these companies have access to unbundled network elements, have access to the loop, they are not, in the near-term,

going to be building loops to the home—that they have access to

be able to co-locate in our central offices in order to be delivering

services. And I want to underscore that Bell Atlantic is not asking

that we be given relief from those requirements to make our loops

to the home available or to avoid co-location or any of the other section 251 requirements.

The second observation that I want to make is we are also not

asking that any of those requirements be imposed on the cable industry. Although we believe in the notion of regulatory parity that

Congressman Dingell offered, we are not suggesting that those requirements which have traditionally been imposed on us be transferred to somebody else, because they are pretty onerous requirements.

What we are suggesting is, as we deploy new technology, such

as DSLMs, that we not have to unbundle the DSLMs, that any of

the new companies can purchase that technology as well, use our

network, and deploy those services on our network and be able to

compete with us in the high-speed data market as well as the voice

market.

So I just want to be clear. We believe that the unbundling is important for competition. We are willing to live with that for the existing network. But we do not believe that it should be extended

to all the new technology.

Mr. SHIMKUS. Thank you. And I want to follow up with Mr. Gray

and Mr. Scott on a question of why isn’t US West investing? Could

it be that their incentives are lacking, given the requirement that

they are unbundled, that they unbundle the new services? Because

we have heard in cable companies, they strongly suggest that a

similar requirement on them would remove the investment incentives.

Mr. GRAY. I personally do not think that is a fair argument. In

fact, if you look at the State of South Dakota, for example, to Mr.

Tauke’s point—who, by the way, I am very much aligned with that

position as well. An unbundled network element, the pure copper

itself, is $28 per loop per month in the State of South Dakota. The

retail rate for business services is $30 and for residential service

$14. So the cost of the loop itself is 2X times what the residential

unbundled loop is—I am sorry, the residential retail line and almost the equivalent of the business line.

So we have failed to see the merit of that argument. In fact, their

access charges are $.06.5 a minute in South Dakota. So I fail to see

the economic merit of that argument.

Mr. SHIMKUS. Mr. Scott.

Mr. SCOTT. I can’t comment about US West because we don’t provide service in US West’s territory, but I will make comments

about Southwestern Bell. And we would not seek to imply that

Southwestern Bell is not investing in its basic network plant, especially in metropolitan areas. We are also seeing that independent

telephone companies are using their access to universal service

funding and subsidies to continue to invest in the infrastructure in

small towns and in rural areas.

105

So we think that, currently, there is strong incentive for phone

companies to continue to invest in their plant and the marketbased incentives where cable companies and providers such as

Birch are using and employing our own technology are creating a

competitive environment where they must continue to invest very

aggressively in advanced services. And you are seeing that today.

Southwestern Bell, in particular, unveiled earlier this year an aggressive DSL roll-out throughout their entire region with the projections of having hundreds of thousands or even millions of DSL

lines in service in a very short period of time.

So we do see that the current competitive environment is driving

all players in the industry to invest significantly in these facilities.

Mr. TAUZIN. The gentleman from Tennessee is recognized for a

line of questions.

Mr. GORDON. Thank you, Mr. Chairman. Again, thanks for having this very good hearing today. I have a couple of questions just

because I am not that informed, I would like for you to help me

with.

One, we have talked about the different vehicles of which people

are going to be plugged up. But electric wasn’t one of those. Are

we going to have some kind of a supercharged electric additional

wire into the house that can be a part of this competition? That is

one of my questions.

And the other is we have talked about the various elements to

get service and get people hooked up. I am interested in what kind

of combinations we are going to have. I assume that wireless has

to be a part of the finished product if you are going to have universal service. But as we look into the future, in terms of price and

quality, is cable and telephone, are they going to be comparable?

Or are we going to have winners and losers there? I mean, ultimately, does one, because it is more efficient, better quality, less

expensive, is it going to beat the other out? So where are we going

to wind up in the future here?

Let me start first with the is electric wire, is that out of the picture?

Mr. FALCAO. Certainly is not out of the picture. We are currently

deploying Internet access using the power facility in Europe and

we have at least one trial in North America and there are other

companies that are trialing that as well. So I believe you will see

the power utilities using their electric infrastructure as an access

technology.

Mr. GORDON. Does anybody disagree with that? Is it going to be

economically and technically viable?

Mr. VRADENBURG. Mr. Gordon, I think it is very difficult to predict the future and I think if you sat here and tried to predict what

was, in fact, going to win or lose in a technology environment, you

would have missed the Internet, you would have missed a lot of

things. I came to AOL when there were a lot of busy signals going

on and the company was going under and that was a little over 2

years ago. So I think it is very difficult to predict the future.

I do think what is important to try and do is to try and maintain

a framework for these businesses in which the technology either

will deploy effectively because, in fact, there is a utilitarian quality

to it, in fact, it in terms of cost and reliability of service that it,

106

in fact, succeeds in the marketplace. And the fact that if, in fact—

the electric utility is an interesting example earlier mentioned that,

in fact, if the electric utility only, in fact, wants you to buy their

light bulbs, that ought not to be the way that the business is being

done.

So that, in fact, all service providers have access to all of these

access technologies. Allow them to compete on their merits and

allow the American people to get services through which everyone

is successful. But I do think it is very difficult to be predictive yet.

Mr. GORDON. Your whole message today—and I understand

that—and certainly you are not a soothsayer to know what the future is. But I am trying to get a technical question answered to the

best of this, you know, widely talented group here. So let me, if I

could, go back to is the power companies, are they going to be a

player in this both in terms of the quality and economics? Does

anyone think they are not?

Mr. KURTZE. I think the actually perfectly technical answer is it

depends. And, as it often is in these technologies, the capability is

there for some technologies and some power companies to be able

to do that, but it will depend, I think, on the configuration of their

individual networks. All power grids are not built identically. All

customers are not located essentially the same.

Within Sprint, we are trying to do some things that would mix

a lot of technologies—wired, wireless. We would love to have the

power companies as an alternative source of access. We wouldn’t be

launching our ION network in the fall as we are in three cities—

Kansas City, Denver, and Seattle—without using currently

unbundled network elements from the incumbent carrier. But we

would love to have these alternatives. So we are going to pursue

those.

So I think the precise answer to your question, Congressman, is

it is difficult to come up, but I would expect the answer is in many

cases, yes, but it won’t be a ubiquitous yes and it won’t be equal

in all parts of the network.

Mr. GORDON. Mr. Falcao, what are your thoughts?

Mr. FALCAO. So I absolutely agree. I believe it is not going to be

a technology issue here. It is going to be very much a business

focus issue. And I know there are a number of utilities today that

are considering this an additional revenue stream, additional methodology of capturing customers, but it is very much on their business model. It won’t be a technology issue.

Mr. GORDON. Mr. Falcao, you are somewhat unbiased, I guess,

in the terms of your product. You want everything, you know. Are

there technical and financial advantages to either the telephone

line or the cable line or the wireless that is going—with the knowledge that we have now—to make one appear to be a superior being

that is going to win this battle?

Mr. FALCAO. I think the answer to that is not—again, it is going

to be an economic answer. So if I look at the investment required

to get them all to the same place, I think you are going to find very

different investment patterns that are required to get everyone to

the same place that they are all equal. So the way I can answer

that is that if you want to everyone to equality, it is going to reVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00109 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
107

quire very different investment streams in each one of those technologies you talked about.

Just to give you an example, today cable and the wire, the copper

telephone lines, are growing very rapidly and the copper wires are

pretty much ubiquitous. So getting to copper wires to deliver highspeed access is not going to take as much as possibly building a

different cable infrastructure. However, there is no reason that

they can’t all deliver the same quality of service.

Mr. VRADENBURG. May I take a shot, Mr. Gordon?

Mr. GORDON. Sure.

Mr. VRADENBURG. Let me describe how, first you have got the

difference in footprint of DSL and telephone wires because of the

technical constraints in the current technology, probably can only

reach about 50 percent of American homes. The cable probably can

reach somewhat more, albeit the footprints aren’t going to be overlapping. But let us assume that you are in a geographic area in

which both access technologies were available to a home.

It is our view, our vision of how this would work, is that AOL

would offer a higher speed suite of services to its customers and

that a customer would order up, either for an additional $10 or $20

or $30 a month, what they wanted in terms of speeds and applications. And that the customer would never know whether we delivered that service through the cable modem or through the highspeed telephone wire. And that the high-speed telephone wire may

be better for some applications and the cable plant better for other

applications.

So that, in fact, we see a world in which both could coexist and

which the customer basically can order up the kind of service with

the kind of application they want and never would know what was

the nature of the access technology that we employed in order to

get that service to their home. So if the customer were truly interested in a high-speed, just brute strength, download capability and

was less interested in upload, it could be we would deliver that via

the cable plant. If they needed some symmetrical quality to the

transmission because they were in a home office or something, we

might use the telephone plant because its architected differently.

So that, in fact, the consumer may never know.

So my own judgment on this is that these, even in areas where

they both coexist, will coexist because they will be better for different applications and the service providers, the 6,000 ISPs, will

end up picking one or the other or both for different sets of applications and both will coexist.

Mr. TAUZIN. The gentleman’s time has expired. The Chair will

now recognize the gentleman from Florida, Mr. Stearns, for a

round of questions.

Mr. STEARNS. Thank you, Mr. Chairman. Mr. Apfelbaum, this is

a question for you. The architecture for cable broadband is much

different than DSL technology because cable broadband will require the sharing of cable lines between residents, rather than a

dedicated line that a telephone company could provide. How does

this fact complicate the ability to offer open access to cable? If we

mandate open access to cable, would the regulations resemble the

common carrier regulations that telephone companies must proVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00110 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
108

vide? And what effect would that have on the roll-out of broadband

cable services?

Mr. APFELBAUM. I do think that the architecture is very different

and that that would make unbundling a very complicated thing for

us. And I think I said earlier—you may have been out of the

room—is that that kind of regulation, while it might be feasible or

it might be possible to do, is very costly and very inefficient. If we

were required to do that, I think it would make our lives much

more complicated and really interfere with our ability to offer the

services that we think consumers want.

And the networks that we build are not only shared in the sense

that customers share them to get services like Internet services,

but it is one network that we use to provide everything we do, including providing video programming, providing telephony, and

providing these new services. I think sometimes some of the people

who advocate open access act as if we were kind of irrelevant to

the thing and they can say, well, we will use phone for this. We

will use cable for that. And I guess, you know, their view is that

whatever demand they choose to make, our system will somehow

magically respond.

But our view is that all of this is a very delicate process and that

we are the ones in the position to meet consumer demand and try

to build a service that will be something customers want. If we had

this unbundled open system where all of these ISPs would say,

well, I want this much of your capacity because I have signed up

this many customers. I want that many. I don’t think it would

work very well, from the consumer’s point of view.

And I do think that the goal of policymakers should be to encourage the deployment of facilities and that the best way to do that

is to leave the facilities companies free to make their own decisions

about business models. And I think, as we have heard today, there

are so many different companies doing so many different things, let

those people go out and experiment and let the marketplace decide

what the best business model is.

Mr. STEARNS. Let me ask Mr. Vradenburg from AOL if he has

any comments to the comments that Time Warner just gave.

Mr. VRADENBURG. Yes, sir, Mr. Stearns. Two or three points

here. First, the demonstration that we made in Clearwater, Florida, demonstrated that a $1 per home, one-time cost is a simple

and straightforward solution to offering multiple services over the

same cable plant and that off-the-shelf software can manage this.

It is not only feasible, but it is a relatively low-cost, inexpensive solution so that, in fact, customer choice and competition can, in fact,

be built into the cable plant as well as the telephone plant.

It seems to me that to allow the facilities provider to basically

choose the services that is offered over their system has several

disadvantages. First we have known the cable system’s track

record in terms of price and service quality in this country and that

is the product of the fact that they are local video monopolies, basically relying on government-granted exclusive franchises for their

position. As a consequence, not only is the price higher and the

service quality less in that particular environment, we are also seeing that the service that they delivered for competitive services or

for content over their plant is different, depending on whether it

109

is there’s or somebody else’s. If it is there’s, it is cashed. If it is

somebody else’s, they get access to the Internet.

The third thing I think you will see in that particular business

model is that they basically limit the amount of video content that

will come through the wire. So, basically, in a model in which the

facility is the only service provider over that system, you have less

competition, less consumer choice, and, in fact, you have constrained services that are being offered. And this is not a matter

of technical feasibility. It can be technically opened up, both feasibly and in terms of cost efficiency, and so that it need not be so.

And we have seen in the Internet as a whole that it is a network

of networks, all interrelated, all interconnected, and it all works responsively behind the scenes and it is totally and transparent and

invisible to the consumer.

Mr. STEARNS. Mr. Chairman, I just have one more question.

Mr. TAUZIN. The gentleman may proceed.

Mr. STEARNS. In my opening statement, I talked about the decision in Portland, Washington, and you and I just talked briefly, you

might indicate what AOL’s reaction is to the Portland decision.

Mr. VRADENBURG. Well, we have been hearing a great deal from

the cities recently and they seem to be saying to us that they are

hearing from their local constituents that constituents are angry

about the lack of choice in cable-delivered services in their communities. The cities think that they have a legitimate interest here because they own the rights of way over which a cable plant is built

and they traditionally have had a responsibility for protecting competition in cable-delivered services in their local markets.

They are, in a sense, on the front line of this particular issue in

terms of what the consumers are thinking and they are telling us

that consumers want choice and competition. In a sense, the cities

here are laboratories of democracy. I do think that, through time,

we are going to see other cities pick up this issue because they are

responding to local constituent pressure for consumer choice and

competition in cable-delivered cities in their communities.

Mr. STEARNS. Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Stearns. The Chair is pleased now

to welcome and recognize the gentleman from Massachusetts, Mr.

Markey, for a round of questions.

Mr. MARKEY. Thank you, Mr. Chairman. In the old days when

telecommunication and finance was one great glorious subcommittee, I could go to a banking meeting, which I just had to do

because that bill is coming up next week, on our own schedule.

But, unfortunately, we don’t have that luxury any more and I have

got a privacy amendment I am trying to make to that bill that required my presence to all of you.

Mr. TAUZIN. My dad used to talk to me about the good old days,

too, until I looked at them. They weren’t so good.

They were old.

Mr. MARKEY. Well, you were a Democrat in those days.

Mr. TAUZIN. Like I said they weren’t so good.

Mr. MARKEY. Mr. Tauke, in your testimony, you state that the

notion that Bell companies would use interLATA data relief as a

back door for interLATA voice relief is a red herring. And you state

that Bell Atlantic will not provide interLATA voice telephony until

110

it gains the approval to provide that service pursuant to section

271, the checklist. Are you stating that when you get section 271

relief in New York or Massachusetts that such relief will only cover

voice and that to do interLATA data, you would need some other

relief?

Mr. TAUKE. When we receive 271 approval in the State of New

York, we could begin to offer some data services to consumers in

the State of New York. But, as you know, the way networks are

constructed and the way the Internet works, it is very difficult to

know precisely where traffic is going and so on. And so, as a result,

while we can provide certain services to the State of New York, it

does not permit us to enter the Internet and data markets in the

way we would like until we have the ability to gain 271 relief in

all of our States. So, in order to be a player in the market, we really need to go through the 271 process in all of our States if the 271

process is required for us to haul data across LATA lines.

Mr. MARKEY. But you will move quickly in other States, as well?

Mr. TAUKE. We are trying to move just as quickly as we can

through the 271 process. And we could have a whole hearing on the

271 process and, after we finish the process in New York, I could

even talk more freely about the 271 process. But the bottom line

is that, when this committee passed the 1996 act, you were among

those who predicted that Bell Atlantic, then NYNEX would be

through the process in New York by the end of 1996. We are now

in 1999. I don’t think that the process has evolved in the way that

any of us anticipated.

Meanwhile, the world has changed a lot. And I think our point

is that, essentially, we have huge incentives from a revenue standpoint to continue to pursue the 271 process, separating data from

voice services. And allowing us to engage the Internet market in

the interim is not going to reduce our incentives or the necessity

for us to complete the 271 process.

Mr. MARKEY. I guess the only point I am trying to make is that

the Telecom Act of 1996 does provide for your entry into the

interLATA data marketplace, but that it does require for Bell Atlantic to open its local loop as the precondition.

Mr. TAUKE. There is no question that if we complete the 271

process in all of the States, that then we can enter the data market

without restriction or for backbone purposes. We still will have all

of the restrictions I alluded to earlier relating to the last mile.

Mr. MARKEY. But the chief issue for you is that it is just taking

a little bit longer than you thought to resolve these 271 interLATA

data, the local loop issues, but once they are resolved, you are free

for voice and data.

Mr. TAUKE. Right. We are talking about what happens between

now and the time we complete the 271 process. And from your

standpoint, if I may be so bold to suggest it, you shouldn’t be that

concerned about what happens to Bell Atlantic. What you should

be concerned about is what is Bell Atlantic not delivering to the

constituents you serve and people all across the rest of our region

because of these restrictions. What does that mean to their ability

to enter the world of E-commerce, the new data world that is available? And is there anybody else who is able to do what we could

111

do over the 1 year or 18 months or 2 years to make this world advance so that we get the economic benefits that come from it?

Mr. MARKEY. So, I mean, so that is why I want to work closely

to you to get those restrictions lifted and get it resolved, that 271

provision resolved, knock heads with these State regulators and

you and the Justice Department and get it done. Because it is really not a question of what, you know, Bell Atlantic can do for me,

it is what I can do for Bell Atlantic. I mean, that is my motto.

And I want to work with you to get that 271 restriction——

Mr. TAUKE. Well, now that we are entering into a new era of

good feeling, I am looking forward to it.

Mr. MARKEY. Let me—is it Vitale?—if I could, Ms. Vitale and Mr.

Vradenburg, I would like to read you a quote from a hearing held

in February 1994 before this committee on the issue of developing

legislation to deal with the issue of the convergence of these technologies.

This is what it said: ‘‘The open access and interconnection requirements placed on the telephone companies should also be applied to the cable television industry. The asymmetrical application

of these provisions will frustrate the development of an integrated

network of advanced networks. If we are to realize the full potential of the information highway, all telephone and cable networks

should be open and unbundled. We must move away from information bottlenecks and transmission monopolies. If some networks are

open and others closed, we risk creating a tangle of private toll

roads, not an open highway. With mandatory interconnection and

equal access, customers on one network will be able to reach other

networks. Open access requirements also encourage the robust development of niche information providers who can deliver their

products to consumers with little or no capital investment.

Furthermore, open interconnection can help ensure that competition can still thrive even before we realize the vision of legislation

where customers have access to at least two ubiquitous competing

broadband networks. As the Nation makes the transition to a system of multiple networks, competition can be safeguarded if all information providers are guaranteed access. This protection will be

especially important in less densely populated areas where, at least

initially, it may be financially prohibitive to construct more than

one broadband network.’’ Now this was testimony by Dick

Notabach, who was the CEO of Ameritech at that time. Could you

comment on that testimony? Ms. Vitale, Mr. Vradenburg.

Ms. VITALE. Well, I couldn’t agree more with the particular testimony in terms of opening it up and having access available to everyone. And I think that it is critical that we are able to purchase

the unbundled loops, that you have access to customers. And that

is how RMI.NET has thrived and been able to offer different products and services throughout the country and we are able to do

that. And we are able to do that in small, rural areas also because

of the opening of that.

And the more choice that we have, rather than only one and, if

we were dependent upon the RBOCs to deliver high-speed access,

we would be in a world of hurt. And we are able to have other

choices. And I mentioned earlier that we have companies in Bloomington, Illinois, and we are able to be able to deliver high-speed acVerDate 13-MAR-2000 10:32 Mar 17, 2000 Jkt 060293 PO 00000 Frm 00114 Fmt 6633 Sfmt 6602 E:\HEARINGS\58505.TXT pfrm07 PsN: 58505
112

cess to them starting next year because of these companies that we

are able to resell their products.

Mr. MARKEY. Thank you. Mr. Vradenburg, very briefly.

Mr. VRADENBURG. Well, I agree with the comment. It echoes

comments and sentiments made in a speech by Vice President Gore

in 1994 on exactly the same subject. It was a very visionary look

at how the future was going to develop and we have only partially

realized that.

Mr. MARKEY. Okay. Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Markey. The gentlelady from Missouri, Ms. McCarthy. I am sorry? Oh, Mr. Apfelbaum wanted to respond.

Mr. APFELBAUM. Could I respond to that? I am sorry. You know,

I thought it was a fairly established principle that common carrier

regulation was only to be employed when there was some kind of

market failure. Some of the speakers today, while they are talking

about at least seven different kinds of providers, seem to say that

each of those providers is a monopolist. I think that makes no economic sense.

Also, some people have said it is crucial to be able to buy access

to these different providers and I think the policy question is crucial to whom? As Commissioner Powell said the other day, the

point of competition policy isn’t to look at the effects on individual

companies, it is to look at the effects on competition. When a market is in its very early stages and there is no indication that the

market is failing, that is the very worst time to come in and say

here is how it is going to work for everybody from this moment forward.

Finally, I do want to emphasize, too, that, in terms of this debate

about whether ISPs can have access, Road Runner provides access

to any content that any of our customers wants.

Mr. MARKEY. Can I ask just to conclude—I thank you, Mr. Chairman—is your point that it is technologically feasible for multiple

access? Or is it just a business model that you wish to pursue?

Mr. APFELBAUM. Well, I think that the technical component is

part of the policy issue and——

Mr. MARKEY. Are you saying it is infeasible to do that?

Mr. APFELBAUM. I think that it adds a clot of costs and inefficiencies for no consumer benefit. So in that sense it——

Mr. MARKEY. So are you saying the engineers say they can’t do

it? Or that you don’t derive the full consumer benefit from doing

it?

Mr. APFELBAUM. It is more the latter.

Mr. MARKEY. Yes.

Mr. APFELBAUM. I think engineers can do anything they want to

do. The question is whether the costs are worth it.

Mr. MARKEY. Okay. Thank you.

Mr. NETCHVOLODOFF. Could I just add just something to that?

Mr. TAUZIN. Mr. Netch, proceed.

Mr. NETCHVOLODOFF. I think that the question here is a question

of scale. Are we talking about 6,000 ISPs? Are we talking about

500 ISPs per market? And the complexity is not a straight line. It

is asymptotic. It is logarithmic. And the more equal access you are

providing for under a regulatory scheme, the higher the cost to the

113

end-user. And this is especially problematic when most ISPs are

not adding value. They are simply providing a service that is already being provided by whoever is providing it.

Mr. TAUZIN. Yes, we will do another round if we need to. I need

to recognize Ms. McCarthy who has another appointment.

Ms. MCCARTHY. Thank you, Mr. Chairman. Mr. Kurtze, your eye

on technology is very phenomenal and in your testimony you talk

about the importance of the last mile and how critical it is to getting it to potential customers like me. I would like you to expand

upon that because I think it is a very impressive technology and

you took the law quite seriously in 1996 and abided by it and here

you are today on the cutting edge of these new technologies and

better service to customers. So if you would expand a little bit on

that last mile broadband and what we in the Congress should be

doing to help you get there, I would appreciate that.

Mr. KURTZE. Well, as I have said earlier, we have designed the

ION concept, an integrated, on-demand network to be access technology agnostic. So as other opportunities present themselves to us,

we are prepared to look at wireless, to look at different forms of

access technology to the end-customer and there are more available

to us today at the small business and large business arena than

there are at the consumer.

So our concern has been, in the short-term, that we are in fact

using unbundled elements and DSL type technologies from the incumbent as we roll-out this initial product to consumers because

that is all that is practically available to us if we want to launch

that network and get consumers to see—the value to the consumer

is not in the access technology. The value to the consumer is in the

services and the kind of things we put on our networks and others

might as well. We want to get that value out so consumers can see

it and to do that, to date, as I said, in our initial 3 markets we are

launching this fall, we are depending on the unbundled access that

is available to us from the ILEC as a function of the 1996 and

other current regulations.

So our position is, you know, that process is working now and,

in the short-term, we would like to see it continue while these

other technologies get a chance to mature and actually present

themselves in the marketplace.

Ms. MCCARTHY. I assume by your response that you would favor

having interconnection rights to the last mile, whether it be by

telephone wire or cable?

Mr. KURTZE. Oh, yes, we—the more technologies that are available to us, the more we think our overall network will give us the

opportunity to present an acceptable proposition to the end-user.

Ms. MCCARTHY. Thank you. Mr. Scott, you, too, have abided by

the 1996 act and here you are. And we wish we could duplicate you

all over America because that kind of competition is what we hoped

to foster in the act. I wonder if you, since you in your statement

talked about the carrot and stick and the critical difference in carrot right now and the true importance of it both to you and companies like you and to those companies that would like to be like you

but the hurdles in the way as well. Would you mind touching upon

this IP telephony that will be a viable business, how soon you think

114

that might be available and what we in the Congress could be

doing to help make it possible?

Mr. SCOTT. Sure. I guess I differ a little bit from some of the

opinions expressed on how quickly IP telephony will be what we

call ready for prime time, providing voice service in the local exchange. We are predicting that, given the amount of resources that

are being dedicated to this task within the vendor community, that

it could be feasible within a year to a year and a half. We are actually beginning to trial some technology that would allow us to put

voice over a DSL loop as an overlay technology and are beginning

those trials in Kansas City right now. That technology is here. So

I am more optimistic about that.

And it may interest you to know that we are already using

packetized voice in our long-distance network to carry services. It

is trickier, granted, to actually move it into a local exchange, but

many carriers in the long-distance market are already converting

the voice signal into a data signal and carrying that around for reasons of efficiency.

And your earlier comment about the carrot and the stick.

Ms. MCCARTHY. Yes.

Mr. SCOTT. I have been somewhat pessimistic up until relatively

recently at ever getting through the process of interconnection and

all of the requirements for opening up the local exchange as laid

down by the act. But I think the carrot has finally worked and it

has been skillfully employed by the Texas Commission in working

through a number of different interconnection agreements that parties had fought over for, well, ever since the act and actually before

that. So we have seen that the carrot aspect, section 271 of the act,

has really started to make some progress in the Texas jurisdiction.

And we think that will serve as a model for other States.

Ms. MCCARTHY. And could I take from those remarks that Congress ought not get in the way of the commissions—Missouri,

Texas, or otherwise—proceeding? Are there things we should be

doing up here to help facilitate?

Mr. SCOTT. Yes, I think you are right. Congress should not get

in the way of the implementation of that. Everybody has been patient and I think we are starting to see some progress in that and

so changing the regulatory scheme, I think, would be the worst

possible thing to do.

In terms of encouraging, I would have one suggestion. It may be

both an issue for the U.S. Congress and also for State legislatures

to deal with. But the subsidy mechanisms that are set up to support universal service. We are waiting to see the specifics of that

and whether those are targeting subsidies toward particular companies or if they are subsidizing the consumers. Because we see a

lot of innovation that could occur in meeting the demands in highcost or rural areas. And so I think one thing that would be very

important for Congress to consider is that the subsidies not accrue

out of default to a particular provider of service, but that it be independent of provider or technology to give us all maximum incentive

to compete for those market opportunities.

Ms. MCCARTHY. That is a very good idea and I thank you for it.

And I have run out of time. And, Mr. Chairman, I thank you for

your graciousness.

115

Mr. TAUZIN. Thank the gentlelady. And the Chair now yields to

the gentleman from New York, Mr. Engel, for a round of questions.

Mr. ENGEL. Well, thank you, Mr. Chairman. First of all, I want

to commend you for doing this. I know we are going to be doing

more of this in the next months and I apologize for just coming in.

This has been one of those days for me. Since I really didn’t hear

the testimony, I really just have a general question that anyone

who might want to answer it could. When we passed the Telecommunications Act a few years ago, most of us were in favor of

it because we thought it would bring about increased competition

for consumers. Increased competition, the theory goes, brings about

lower prices because there is, obviously, more people competing for

the same thing.

I think that my constituents in New York have experienced disappointment the way constituents have across the country that

they haven’t seen the benefit of lower prices and they have a growing fear that not only will the lower prices never come, but that

they will ultimately lack the access to broadband technologies, the

very technologies that we are discussing today.

So, as this committee in the next several months—I know the

chairman is planning on getting the members together at a retreat

and I know that we are going to be studying this issue a lot and

one of the nice things about this committee is whenever you think

you know everything, you realize how little you really know—as we

are dealing—this subcommittee and the committee—with legislation that advances the broadband technologies and the access to

the consumers’ homes, what assurances will the consumer have or

can the consumer have that these technologies will ultimately be

available for all Americans and at reasonable prices? Because, obviously if it is not reasonable, we could say it is available but my constituents, many of my constituents, would not be able to afford it.

So I am wondering if any one in the panel—a lot of people here.

I see my colleague—my former colleague—Mr. Tauke and other

friends here. So does anyone want to take a stab at it? I would be

appreciative.

Mr. VRADENBURG. Mr. Engel, my name is George Vradenburg

from America On Line and I would like to try and answer that

question. At the end of the day, it is what the consumers demand

and whether or not there is some additional service or features

that we can deliver to them through broadband that they can’t get

through narrow band. And whether we can get the price of that

service down and the applications or the features or the services

improved so that they will pay whatever additional price needs to

be paid.

In terms of access to the marketplace, it seems to us here at AOL

that is very important that we maintain the policy that we have

had over the last few years, which is to keep the Internet deregulated and to keep the infrastructure open. We are buying DSL lines

now from Bell Atlantic in your region and we are able to do that

because Bell Atlantic is obliged to sell them to us. We would also

like to see competition in these access technologies so that we have

urged, Mr. Engel, that the cable systems as well sell us access technologies so that, in fact, we can buy transport from either or both

of their plants and drive the costs of this down so that we can get

116

consumers’ prices down. At the end of the day, it is consumer demand.

We have seen consumer demand in Internet narrow band services now roll out a new medium faster than any medium in history.

We have rolled out the Internet to 33 million American households,

which is 5 times faster than we have been able to do in the television or the radio marketplace. Why is that? Consumer choice and

competition and broader services and we would like to be able to

do that as well in broadband.

Mr. ENGEL. Mr. Tauke, I guess you would have a little different

opinion.

Mr. TAUKE. Actually I have a very similar opinion. I think, first

of all, as we alluded to earlier, that there are a lot of things in the

1996 act that are working very well, but it has taken a lot longer

than anybody wanted for a lot of these things to work and we can

have a long discussion about that. But on a going-forward basis, it

seems to me that where the key question is how do you deal with

the new market? And we do have a new market with new technology and new opportunities, if you will, and how do you get the

infrastructure for that new market deployed and how do you get

it deployed ubiquitously and how do you get it at a reasonable cost

to consumers?

I believe that in the foreseeable future, the best policy that the

Congress can pursue to achieve those objectives is to follow the

model that was used in the world of wireless. When wireless technology was in its infancy, then the great telephone companies said

we would have 1 million users by the year 2000. Well, obviously,

that has been totally bypassed years and years ago. We have many

technologies now in the wireless market. We have lots of competition in the wireless market. There are a variety of packages of

services consumers can buy. And the price has come down.

Why has that happened? In part, because companies were able

to make decisions without excessive fear of regulation about deployment of technologies. Not everybody succeeded. Some tried it.

Some lost. But it has resulted in a robustness in that market,

which I think has served consumers well. Part of the difficulty we

have today is that there is not the same kind of opportunity available for many players in this new data market, Bell Atlantic being

one of them. I won’t go through all we have talked about today, but

there are a lot of barriers to our being able to deploy the services.

Just one example: The FCC has talked about having us do our

DSL services in a separate affiliate, which means we would have

to buy separate trucks, hire new people, you know, and so on, to

have them go out and serve the people in the city of New York.

This is enormously expensive. We believe it would increase the cost

$8 a month per customer to provide the same service. But that one

regulatory requirement, if it were adopted—it hasn’t been adopted—but if it were adopted, would have tremendous impact on costs

to consumers. That is the kind of thing that we have to avoid.

Mr. ENGEL. Yes.

Ms. VITALE. Congressman Engel, I am Mary Beth Vitale. I am

president of RMI.NET, one of the small, 5,000 ISPs out there. And

I wanted to address one point that you made about are the consumers really getting more products, more technology for lesser

117

price. And I think one example I would like to cite is that ISDN

has been around for quite some time at a very large price point for

a consumer and it was not ubiquitously available or distributed. It

was very slow to come and at the time it was just the RBOCs that

were delivering that service.

As the 1996 act started to be implemented, more and more competitors came in delivering the DSL service that you are seeing

right now and whereas ISDN was at a certain level of technology

for $200 a month, you can now have a DSL service that gives you

even faster speed, higher technology, delivered to consumers and to

businesses at around a $40 price range. So here they have gotten,

you know, a better technology, quicker, and cheaper.

So I think it is starting to work. It is starting to happen. And

it is because of the act. And we see it right now. And we are able

to resell those products.

Mr. ENGEL. Well, thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Engel. The Chair would now recognize himself again. Let me take you through all of the various

pipes and examine what is the difference in governmental treatment insofar as broadband would be concerned and get you to comment for me. When it comes to whether or not a platform can legally limit consumer’s choice of an ISP today, clearly ILECs and

CLECs, incumbent telephone companies and the new competitive

local telephone companies, clearly they are common carriers. No

one disputes that the telephone companies could today limit consumer’s choice of an ISP. Is that correct?

They cannot. That is right. But cable can, right? Cable today can

limit because it is a private network, it can limit. What about—and

maybe you can help me here, Mr. Apfelbaum and Mr. Netch—what

about if cable decided to offer IP telephony? Would they then be

under the act, a telecommunications carrier with common carriage

obligations, under current law? Mr. Apfelbaum. Or even circuit

switch?

Mr. APFELBAUM. I am not really sure there is a clear answer to

that under the existing law. I think our view would be that, generally, what we do is provide cable service and that, under that

law, we are not obligated to function as a common carrier.

Mr. TAUZIN. Even in IP telephony?

Mr. APFELBAUM. I am not sure that is 100 percent clear under

existing law. And, you know, I think that is one of the issues going

forward, but, generally, I think the Cable Act is pretty clear that

what we do is not subject to common carrier regulation.

Mr. TAUZIN. Mr. Netch, you want to comment? Do you think that

either switched or IP telephony is or is not subject to common carriage obligation today when delivered by a cable company?

Mr. NETCHVOLODOFF. Well, switched telephony clearly is under

title II and we are in full compliance with title II in the 1996 act.

Mr. TAUZIN. How about IP?

Mr. NETCHVOLODOFF. IP telephony is a grey area. I think that

Congress was not clear about this. There is, as you know, a report

from the FCC which Barbara Aspen who was the author of that report cited some ambiguities and also cited the fact that there were

certain statements on the floor and in report language indicating

that the cable usage of Internet services would be under title VI.

118

Whether or not that survives, I have no way of knowing. But I

think it is a grey area.

Mr. TAUZIN. Fixed wireless, mobile wireless. Probably not, right?

Anybody want to challenge that? Would fixed wireless and mobile

wireless have the capacity to limit a consumer’s choice of an ISP

or would they be treated as common carrier?

Mr. PICKLE. You know, Mr. Chairman, today at Teligent, we actually have ISPs as customers of our network. One of the great

things about building a facility-based network as opposed to using

other facilities provided by other suppliers, you can do with your

network whatever is best for your business and best for the consumer. We do do that today. We don’t believe it is a legal requirement, we just believe it is the right thing to do because we believe

in competition.

Mr. TAUZIN. What about if it is a retail service you provide?

Mr. PICKLE. We would do that as well.

Mr. TAUZIN. You would? Do you think you are obligated to be—

are you treated as a common carriage under the law under those

circumstances?

Mr. PICKLE. Oh, I think, yes.

Mr. TAUZIN. Satellite. Here I want to turn you, George, if you

can, because I want to get your interaction on this. You know, you

commented about your company’s recent deal with Hughes Direct

TV. Since the 1996 act, it seems to indicate that, except the Commission shall determine whether the provision of fixed and mobile

satellite service shall be treated as common carriage. That until the

Commission should make a determination, it seems at least that

satellites, until the Commission says otherwise, may not be common carriage or instruments. In that case, could Hughes, in your

business arrangement with them, limit the choice of ISPs to consumers?

Mr. VRADENBURG. I don’t know that answer, as a matter of law,

Mr. Tauzin. Our deal with them is not exclusive.

Mr. TAUZIN. What is your business plan there? Can you tell us?

Mr. VRADENBURG. Well, the business plan is to be able to offer

to an AOL customer a broadband service no matter where they are

in the United States.

Mr. TAUZIN. What if I am not an AOL customer?

Mr. VRADENBURG. A non-AOL customer we wouldn’t be offering

services to.

Mr. TAUZIN. Yes, you wouldn’t be doing it. But would——

Mr. VRADENBURG. One of our competitors would be. They can do

it over the DSL platform. They could do it over a wireless platform.

They can do it over a satellite platform.

Mr. TAUZIN. I guess what I am asking you, is your agreement

with Hughes exclusive?

Mr. VRADENBURG. Oh, no, sir.

Mr. TAUZIN. Hughes could offer other ISPs. And the question

that is hanging out there is do they have to offer other ISPs access

to that system?

Mr. VRADENBURG. I don’t know the answer to that question.

Mr. TAUZIN. Okay.

119

Mr. VRADENBURG. They can, under our deal. I think it is a matter of capacity. I think we are clearly investing in them and that

we want to build out a platform up there.

Mr. TAUZIN. If they don’t have to offer other ISPs access, then

you would agree with me that it is possible that then AOL would

be the beneficiary of it because you would deal with AOL and nobody else.

Mr. VRADENBURG. Well, that is certainly true, although, clearly,

we have not sought to make it exclusive because we believe that,

in fact, the more choices there are for the American consumer, the

more applications are out there off of the Internet, the faster these

Internet services will be adopted, and we will compete for our fair

share. But we would like to see the tide go up for everybody and

then compete for it rather than try and constrain the growth of the

business.

Mr. TAUZIN. When it comes to electric lines, now, Mr. Falcao,

maybe you can help us here, I would assume that if an electric

company decides to offer broadband services, that it would be treated as a common carrier. But would it? Or would it be a cable company at that point, which is exempt because it is not defined as a

telecommunications carrier. Which is it? What do you think it is

going to be when NORTEL begins to unveil its electric line,

broadband services?

Mr. FALCAO. I honestly don’t know. I would think it would fall

into the same category as you were discussing with the cable company, but I honestly don’t know.

Mr. TAUZIN. Well, I guess you get my drift here. I heard a lot

of don’t knows and a lot of grey area. A lot of we think but we are

not sure. A lot of we would like to see it work this way, but we

are not certain it does. And the strange thing about it is that, you

know, there are some of you who were telling us don’t mess with

the act, don’t mess with the law, just let it work. But there are a

lot of don’t knows out there. And we are talking about the same

service, the same ones and Os. Broadband distribution of the same

services, just coming on all these different pipes with a lot of I

don’t know what the rules are.

You can understand why we are going to have a good time exploring this not only in future hearings, but at our retreat.

Let me ask you to help us in that regard. Mr. Boucher and I

opened up our line of questions with asking you to prognosticate

a little bit for us, to guess when you thought things might be out

there for people. What I would like you to do is to come back to

us in writing on that.

What we would like to know, for example, from the ILECs and

CLECs is when do you think, on a time line, the various broadband

services are going to be available to what percent commercial and

what percent residential customers if we don’t change the law? If

whatever uncertainties or handicaps currently exist in the law, if

we do nothing? We would like to hear the same thing from cable.

Some ideas over the next 3, 5, 10-year period when broadband

services are going to be available to people, what people, and what

services? What percent commercial? What percent residential?

And we would like to hear the same thing from the mobile and

wireless and from the satellite folks. And eventually we are going

120

to ask the same thing from broadcasters who might be able to do

some similar broadband services over the new spectrum we have

provided for them. And we are going to have to ask the electric

companies, I suppose, to comment as to whether or not they think

they are going to be in this game and when, too.

What I would like to be able to do as we further explore the I

don’t knows and the maybes and I think and I guess and I am not

sure about these issues is to see, without changing any laws, without Congress getting into this act at all, or the FCC doing anything

differently than they are doing today, when are consumers likely

to see what broadband service is offered by what pipes? So that we

can get a picture as to which of those pipes are going to be open

and which of them are going to be closed networks and when they

are likely to be available to offer consumers the kinds of choices we

are talking about.

The reason I would like to ask you to do that—I mean, we have

been through this a number of times at this committee level. And

Mr. Tauke, you were here when we were first debating communications deregulations issues all the way back in the early 1980’s. This

issue of timing always plagues those of us in Congress and I am

sure at the FCC. The issue of timing, the question is will there be

competition available in a market at the right time to ensure that

not only the players can enter that market and compete, but that

consumers are not inappropriately stuck with only one provider

that is, perhaps, in some cases, not an open network. Perhaps a

closed or private network. In which case, what is our responsibility

under those circumstances? How can we aid the timing of the deployment of these services so that choice is out there rather than

the necessity for somebody to regulate?

And those issues are going to plague us as we try to unravel

these I don’t knows and maybes and I guesses as the way it is

going to work, until we can give you some kind of certainty. All of

you talked about certainty. Mr. Pickering I think centered his comments on that, that clearly business certainty requires regulatory

certainty and governmental policy certainty so you can move forward. And I will go back to what Mr. Shimkus said. Our role is

not pick winners and losers out here, our role is to try to make

sure that you all can play. And, more importantly, that Americans

will have real choices out there and that they have the full services

available to everyone as close as possible at the same time, recognizing that, you know, in deploying services, some people are going

to have it sooner than others.

If you would kindly do that for us. Kindly come back to us in

writing on as good a time line as you can predict. No change in

law, no change in regulation, making whatever assumptions you

want to make as to whether or not you are common carriage or not.

Mr. Kurtze, you had your hand up, sir? No. And I don’t see any

other members here. Let me offer each of you right now, a final

word if you would like to make it, on the record, before the committee. Any one of you? Final words. Mr. Apfelbaum.

Mr. APFELBAUM. I would just like to say one thing. I think the

way you framed that question, we were talking about whether ISPs

could serve as ISPs as such, but we don’t have a closed network.

121

We have an open network where our customers can get any content

they want. And I would just like to clear about that.

Mr. TAUZIN. I understand. My question was whether or not the

platform could legally limit consumer’s choice of ISPs, though. And

your answer was yes it can as a cable platform, but you are not

quite sure about the laws on IP telephony.

Mr. APFELBAUM. Right. But I just want it to be clear that we

don’t run a closed network because our customers can get any content that they want.

Mr. TAUZIN. Any other final comments? Yes, sir, Mr. Vradenburg.

Mr. VRADENBURG. I would first say that they run a closed network and obviously customers cannot get access, direct access, to

AOL or to other ISPs. They can, obviously, go to us through the

Internet which is, of course, is open to everyone because it is the

Internet.

But the final word I would say, Mr. Chairman, is the following.

What I think I have heard today and I hope that you have heard

is that we are going to have in the world of convergence a set of

digital services which are voice, video, and data, which are going

to go through a variety of different platforms and are going to be

single mixes and bundles of services going through a common technology through quite different platforms treated differently because

of their historic legacy.

And that, as a consequence, there is going to be a strong need

for the government to assure that it does not pick winners and losers, that its inadvertent action, inattention to this issue, does not

result in an imbalance in the marketplace and a choice that results

as a consequence of government, as opposed to consumers.

We have right now a problem which is big enough to see, but still

small enough to solve. And if the government does not do anything

now, then it will of necessity begin to be having an effect in the

marketplace because of its actions or rather because of its inertia.

And, as a consequence, this is an issue that I commend you for taking up right now. This is a problem, now. Not in 5 years, not in

10 years, but now.

The government, by its action, historic in character, legacy, and

quality, is beginning to have an effect in the marketplace which is

differential because of its differential treatment of different platforms which are now beginning to offer like services. And so I commend you, Mr. Chairman, for taking the steps now to focus on this

problem.

Mr. TAUZIN. Thank you, sir. Ms. Vitale.

Ms. VITALE. The comment I would like to make to sum up is, addressing your last question about the electric industry, cable industry, and the telephony industry and whether there is similarities

and should they be held by the same restrictions or requirements.

And I think those industries have, you know, a lot in common in

the respect that they are the only real access to the consumer at

their home. And for emerging companies such as myself currently

right now, RMI.NET can only deliver services from an unbundled

loop through the telephone company to consumers there.

Once technology advances and, obviously, in cable it already has

been advanced and then electric utilities are moving forward, they

would not be required, if they are not underneath the act, to resell

122

those products. So I am relegated to really only having access

through one means because of the law.

And if we keep in mind that those three industries, in order to

be delivering the products for their industries, got regulatory relief

to be a monopoly—there were pricing advantages and return on investment advantages, you know, to deploy their networks and their

infrastructure. And now the lines are crossed and blurred because

everybody is in everybody’s business. And I think that having the

technology to be open and access to be available to everybody will

only just ensure that there is an economic growth and new companies that will evolve from that. Thank you.

Mr. TAUZIN. Thank you, Ma’am. Mr. Tauke.

Mr. TAUKE. There has been quite a bit of discussion about openness in the sense of consumer choice and whether or not it is fair

and equitable. But I just wanted to mention something that I don’t

think has been mentioned and that is the way the rules in this

matter have impact on deployment. Just bluntly speaking, if we

are in a situation where we operate by one rule where, A, we cannot package our service with an Internet service provider and, B,

we can’t designate an Internet service provider for our consumers

and therefore derive the revenue from that to supplement the revenue from the line, it is hard for us to compete with somebody who

is able to package and designate an Internet service provider. And,

if we, therefore, are not competitive in the marketplace because of

a rule, then that slows down the deployment of the alternative

services that the consumer might want.

So the rules relating to openness and the ability of consumers to

choose an ISP have real implications for the way in which technology will be deployed and how, graphically, it will be deployed.

I just would cite the video dial tone model, which was something

of years past and was obviously a failure. There were a variety of

reasons why it failed. But one reason why it failed is because one

technology, in this case the cable industry, was able to say to a customer, we will give you transport and the programming package

and the other industry was supposed to come in and say to the customer, we will give you transport but we can’t give you the programming package, but we have to offer you a variety of options.

Economically that didn’t work. There were technological issues too,

but economically it didn’t work.

So, as you examine this, think of the economics and what it

means for the roll-out and deployment of services as well as the

fairness and consumer choice issues.

Mr. TAUZIN. Yes, sir, Mr. Falcao.

Mr. FALCAO. First I want to commend you on this because I believe it is a very important issue. The only observation I would

make is the Internet has achieved a faster penetration than any

other technology in history, so our decisions are going to have to

be made in that context, very rapidly.

Mr. TAUZIN. We are not good at that. You know that.

Mr. FALCAO. So my only comment is I think we really are under

a very, very right time pressure to make decisions quickly.

Mr. TAUZIN. Mr. Netch.

Mr. NETCHVOLODOFF. Mr. Chairman, first, thank you very much

for having this hearing. I think it is a privilege to be here and to

123

participate. I think that one thing that is very important to bear

in mind is that the deployment of technology is very, very capitalintensive. There are hundreds of billions—and I mean literally

hundreds of billions—of dollars that will be spent, probably in the

next 5 to 10 years, developing high-bandwidth capabilities in this

country and there are a number of unaffiliated sectors in the economy that are committed to do this.

We read every day in the newspaper announcement from various

parties, whether they are using microwave spectrum or whether

they are going to do it by satellite or whether they are going to do

it over utility lines, the one thing that is very clear about all of

these plans are that they are going to cost a ton of money and I

think that one of the things that the government has done successfully with respect to the Internet is to try to do no harm with respect to imposing regulatory overlays.

And so I would suggest that, as you consider whether or not

there is a strong likelihood that there would be five or six, perhaps

even seven, competitive, unaffiliated facilities-based, broadband

providers of access from the home, that the marketplace will be

fully capable and able to discipline the pricing and the selection for

the consumer under those circumstances. If the cable model is

closed, which we don’t think it is, but if it is closed, from the standpoint of the consumer, we will lose because there are a number of

broad, high-bandwidth competitors that are going to tee up infrastructure to provide access.

So if the customers don’t want what we are providing, they won’t

take it. So that would be my comment, that the government should

try to do not harm from a regulatory point of view.

Mr. TAUZIN. Mr. Pickle.

Mr. PICKLE. Mr. Chairman, if you will take into consideration the

Telecommunications Act of 1996. We are, in fact, we like to say a

product of that act. Now it is not perfect. We all agree with that.

But I think—we think—that it has set in motion an irreversible

force toward competition. And we think competition is the only way

the broadband revolution will ever be realized. And so we would

only suggest: Allow people to compete and compete fairly and we

think the Nation will gain from that.

Mr. TAUZIN. Mr. Kurtze.

Mr. KURTZE. Thank you, Mr. Chairman. I think I would agree

with most of the comments of this panel hearing. And I would say

that the issue is the one you framed correctly where you have

asked for supplemental information and that is timing. When does

this competitive marketplace really exist? And when will it serve

the American consumers? Because what consumers want to buy are

the applications that will be available on these networks and the

services. They really aren’t technology junkies like some of us here

on the panel that really understand the difference. But they want

those applications and those applications will flourish when there

are multiple ways to reach the consumer and there is that competitive dynamic. So I think the timing issue that you have raised is,

in fact, the pivotal issue as to when things should evolve.

Mr. TAUZIN. Anyone else? Let me ask one other thing of you that

can either respond or not, your choice, but I would appreciate some

of you trying. What we are basically talking about when it comes

124

to common carriage, the question of common carriage, is that common carriage, even must carriage for cable companies when it came

to video programming, was always designed, as you said, in a broken marketplace where there was not competition and there was

only one provider and therefore some sort of common carriage law

had to be applied to that monopoly provider or that near-monopoly

provider.

In fact, must carry has been sustained pretty much legally on

that basis that cable was the video provider for America for a long

time and should be obliged to carry the programming of television

stations, which were operating under the quote, unquote, ‘‘public

interest standard.’’ Is there a need for us to examine the term of

common carriage in any other context, as we think of broadband

services? Or is the old context sufficient? And by that, I mean, will

it be enough if there are four or five or seven competitors out there,

1 day, none of which may have a common carriage obligation, all

of whom may pick the ISPs they want to deal with and consumers

can then choose from among those carriers who they want to deal

with and what content they are interested in receiving from which

one of those carriers? Or will there always be a need for someone

to be open to everybody under some new theory of what common

carriage means when it comes to information or knowledge and

communications?

You can either do that now or later. Mr. Netch.

Mr. NETCHVOLODOFF. One of the things that happens is that

scale is important. To the end-user, scale is important. But scale

is also important to the provider. And if we are talking about perfect democracy here where 6,000 ISPs have all equal opportunity

to engage somehow in a variety of networks, it isn’t going to work

because you can see already that AOL has an arrangement with

Bell Atlantic, which is based on scale. And, therefore, the smaller

ISPs have said this isn’t fair because we are at a price disadvantage.

The problem here is you can’t repeal the laws of economics. And

if you have seven competitors, five or six competitors, and there is

no market power amongst them, then I do believe that the marketplace is the place to put your trust.

Mr. TAUZIN. Mr. Vradenburg, you had your hand up.

Mr. VRADENBURG. You raise, I think, what is the pivotal point.

Because the chairman of the FCC has posited a world in which

there are four or five facilities-based providers and that is a world

of which he would like to get to and think that that is adequate.

And if one said each of those facilities providers could designate

their ISP or their access point to the Internet, you would have four

or five or six competitors in the marketplace. And you say to yourself, well, what is the level of performance there of that marketplace? Well, we have seen that marketplace in a number of aspects

of our economy: the broadcast television or record companies or motion picture companies.

We have also seen in the last 5 years something remarkable. And

your Houma, Louisiana?

Mr. TAUZIN. Houma. ‘‘Houma on the ranga.’’

Mr. VRADENBURG. Yes, you have got one cable provider, but you

have got 400 ISPs.

125

Mr. TAUZIN. That is right.

Mr. VRADENBURG. And what you have in a world in which there

are 100 competitors is a world where you get this extraordinarily

tumbling effect. You have price and feature options from those people which fix every niche and cranny of a consumer’s desire and

you get technological innovation and business model innovation of

type this country has never seen before, indeed the world has never

seen before. You get customer adoption rates faster than any medium in history. You get technological progress faster than any in

history. So there is something different about a marketplace which

has 100 competitors than there is about a marketplace for 3 or 4.

Mr. TAUZIN. No question, Mr. Vradenburg. The question I pose,

though, is a legal one. Assuming that that is a good idea to have

that kind of a marketplace when it comes to knowledge and ideas,

when you do have five, six, seven different platforms to deliver

those ideas, does the government of the United States have any

legal right to regulate content on some common carriage theory for

one or any of those pipes at that point?

And I want to yield to my friend from Massachusetts for a final

comment, so if you can brief and then come back to us in writing

on it.

Mr. KURTZE. Mr. Chairman, I think what you are really asking

is, you know, where—to go back to maybe our joint good old days—

this is a supplier of last resort argument. And is there a requirement still, at some point in time in the future, for a supplier of last

resort?

Mr. TAUZIN. Yes. I guess that is a better way to phrase it. Yes.

Mr. KURTZE. That is a social question.

Mr. TAUZIN. But can you do that legally?

Mr. KURTZE. We would like to think theoretically, no. That there

wouldn’t be a requirement, that the marketplace would work. But

I think that is a good question.

Mr. TAUZIN. Well, anyhow, if you would kindly come back to us

on it, I would like to hear your thoughts on it. Because, I mean,

it is a philosophical question as to whether or not it is a good idea

to do it for a marketplace that could be as vibrant as you describe,

Mr. Vradenburg. And that is as vibrant in many communities

today. So it a question: Is that a good idea? Second, is it a legal

idea that is enforceable in law in a country that is pretty strict

about seeing government takes its hands off of free speech? In our

society, you don’t try to regulate content.

Mr. Markey.

Mr. MARKEY. I thank you, Mr. Chairman. And it is not so long

ago that the most contentious issue was whether or not the telephone company should be able to buy the cable companies in their

own market. That is the central provision in the Telecom Act, that

they are not allowed to. So we have a two-wire world. And the interesting thing was both industries opposed that provision, that

they both saw wonderful synergies in having one huge pipeline and

the cable companies, of course, would have telephone companies

bidding, you know, on giving their shareholders an enormously

great return. But as a matter of public policy we don’t allow that

to happen. That is central in the 1996 act.

126

And I guess the question is when do the witnesses believe that

we will reach a point when we have four or five networks? Give us

a date when you think that is possible?

Mr. TAUZIN. The gentleman came in after I made the specific request. I have asked each one of the various industries to give us

a time line so we can actually draw a map of it as best we can for

the gentleman. Then I thank you. Unless anyone has a final word,

then let me thank you again for your extraordinary patience today.

This has been very good, but it is only the first step.

As I began it, let me end it on the same request. You saw members coming in and out. Some had the benefit of some of this discussion, some did not. That is unavoidable. Members have so many

duties that I can’t fault anyone who could not be here for the full

hearing. You saw we had to leave for votes, even. There are members on our committee who are going to end up having to make

some pretty important decisions that will affect all of you. Please

do me the favor of continuing this education process.

We will get to a point where you will have a chance to throw all

of the brickbats at each other you want to. And I promise you, we

will get there sooner or later. But in the meantime, as we go into

retreat, as I try to get members to focus on the critical importance

of broadband. I mean, it is truly revolutionary. It is truly going to

make a huge difference in what this country is all about. Maybe

what the world is about. I need your help in making sure they understand all of the applications and how they work in different

pipes and different communities with different consumer groups

with different content. And the more you do of that for me, individually and collectively, I think it is going to move our process along

a lot quicker and we will get that date where you can be throwing

those bricks at each other again.

Thank you very much. This has been a very productive hearing.

This hearing stands adjourned.

[Whereupon, at 2:54 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

SPRINT

August 31, 1999

The Honorable W.J. ‘‘BILLY’’ TAUZIN

Chairman,

Subcommittee on Telecommunications, Trade and Consumer Protection

2183 Rayburn House Office Building

Washington, DC 20515-1803

DEAR MR. CHAIRMAN: Thank you for the opportunity to testify on June 24th before you and your Subcommittee on Telecommunications, Trade, and Consumer Protection concerning the deployment of data services, particularly broadband services.

I believe that the question of when such services will be more broadly available is

important to the public; I know it is vitally important to Sprint.

At the close of the hearing, you invited us to provide further information concerning the provision of these services, including when can customers expect to see

broadband services at home? Over what pipes and in what order will they be available? Who will have an open network and who will have a closed network? What

can Congress do—if anything—to move up the timeline?

The purpose of this letter is to provide additional information on these issues, as

you requested.

The telecommunications industry, due to changes in technology, is going through

a period of convergence where voice and data communications are rushing toward

each other. Due to packet switching technology and other developments, there will

no longer be a difference between voice and data traffic on modem networks. As a

result, broadband services will increasingly include voice capabilities intermingled

127

with other data packets. I believe that we must make sure that any broadband deployment facilitates both voice and traditional data uses.

When you ask the question ‘‘when can customers expect to see broadband services

at home?’’ you are focusing on the right issue. Large business customers have had

access to Telephone Company special access broadband facilities for several years.

Companies such as TCG and other competitive access providers have also provided

broadband capability to big business locations. Recently, specialized wireless carriers have also offered broadband capabilities to large business locations. Small

businesses and residential customers are another story because there are fewer

broadband options currently available. Telephone companies are currently deploying

xDSL service to provide broadband capabilities and cable companies are providing

broadband through the use of cable modems. There are dozens of ISPs and other

companies that provide services that could use broadband plant, but only a few options exist for broadband transport to these service providers. In each case, the owners of last mile telephone wires and cable facilities to the home are exercising their

market power to harm competition and to deny the availability of competitive, robust broadband services to small businesses and everyday Americans. I believe that

if the Regional Bell Operating Companies (RBOCs) and GTE chose to open this last

mile to others in accordance with the purposes and requirements of the Telecommunications Act of 1996, broadband services from a variety of competitors, including the RBOCs and GTE, would be rapidly available and at increasingly competitive prices. I also believe that cable companies should open their broadband

transport facilities so broadband service alternatives are available to customers of

cable companies.

Conversely, I believe that without this last mile open to competitors as the Telecommunications Act intended, it will be an unfortunately long time before there will

be the widespread competition and competitive pricing that Sprint desires and that

we believe consumers desire.

Although the RBOCs and GTE, as well as the cable companies, have argued that

their last mile facilities are subject to extensive competition from other technologies

such as broadband wireless facilities, this isn’t true, as your questions recognize.

The only facilities that are currently ubiquitous and that are well on their way to

being upgraded to handle broadband communications are the local distribution facilities of the incumbent local telephone companies and cable companies.

There are today only a handful of ways to potentially provide broadband services,

e.g., over the existing telephone wires of the RBOCs and GTE by installing Digital

Subscriber Line (xDSL) equipment; over cable lines that have been upgraded for

data communications; just emerging wireless broadband; geosynchronous satellites

(GEO) that are not suitable for voice; and as yet unproven low earth orbit satellite

(LEO) systems. My prepared remarks before the Subcommittee discussed in general

the challenges and uncertainties of these several mechanisms.

The bottom line is that it will take a few years before the xDSL and cable technologies are widely deployed. Satellite technologies will likely prove to be economically unworkable on a large scale for both voice and data uses. And it is possible

that there will be no near or mid-term broadband availability or choice at all for

consumers if the current local monopolies succeed in extending their monopoly into

the provision of broadband services.

On the other hand, if the last mile transport services of telephone and cable companies were made available for competition as intended by the Telecommunications

Act, a choice of competitive broadband services traveling over these transport systems would be rapidly available. I think this could begin as quickly as 2000.

Sprint is eager to provide broadband services right now using both the MMDS capability it is acquiring in portions of the nation and through the last mile facilities

of the telephone companies

About a year ago Sprint announced its Integrated On-Demand Network, called

ION. ION is a family of broadband-based services for both business and residential

markets. ION provides all distance, voice, video and data services, using a common

protocol over Sprint’s ATM integrated network. Sprint ION service replaces multiple

access networks from multiple suppliers and provides the opportunity to integrate

multiple services on a single access and transport network.

Sprint ION will serve not only large business locations, but also residential and

small business customers. Sprint ION will bring a broadband ray of light to small

businesses and the homes of America. These smaller locations will have access to

multiple voice sessions, which will act much like multiple lines to the home. In addition, high-speed data products such as always-on high speed access to the Internet

will be provided. Video conferencing, e-commerce, gaming and other new and innovative applications will be offered over the broadband ION network.

128

The Sprint ION service is a reality today. Service is currently being offered to

large business customers in many locations and, as announced on June 21st, will

rollout to residential customers this year.

The availability of ION will be limited in the small business and residential markets because broadband last mile access continues to be a significant problem for

Sprint and for other potential broadband providers. While Sprint ION services are

the most technologically advanced broadband products in the industry, the RBOCs

and GTE, along with a very aggressive AT&T, are blocking deployment of Sprint

ION to the consumer market.

Unfortunately, under the current rules the RBOCs and GTE have the opportunity

to create a network that allows them to deploy xDSL broadly but greatly restricts

xDSL deployment by competitors using their last mile facilities. Sprint estimates

that over 50 per cent of the phone lines of the RBOCs and GTE will not be available

for xDSL provided by competitors through collocation in RBOC and GTE central offices. This problem is caused by the widespread installation of digital line concentrator equipment outside central offices that defeats central office xDSL. In addition,

the RBOCs and GTE continue to stymie broadband competition and products by denying reasonable access to the remainder of their essential last mile facilities. AT&T

is firmly denying access to its facilities to other potential competitors. Indeed, AT&T

is hard at work attempting to assemble exclusive broadband deals with non-affiliated cable companies or buying them up to create an massive exclusive network of

its own.

Over what pipes and in what order will broadband services be available to small

businesses and residences? Other companies who are pursuing different strategies

to get broadband services into the home or small business are better able to give

estimates of their estimated time of widespread deployment and those estimates will

produce the order in which they are available. Sprint is currently collocating xDSL

equipment in hundreds of RBOC and GTE central offices serving approximately 13

million households by yearend 2000, but many RBOC and GTE lines will be unavailable. As I’ve already said, if the RBOC and GTE xDSL facilities were opened

to competitors, additional broadband services would be available quickly. Sprint is

aggressively pursuing MMDS technologies and hopes to have broadband services

available to approximately 19 million households by year-end 2001. Useful wireless

broadband spectrum is in short supply and while Sprint is actively pursuing this

means of bringing broadband services to residences and small businesses, wireless

broadband spectrum can cover only a small portion of the potential market through

MMDS/ITFS spectrum available to Sprint. Indeed, even in areas where Sprint has

MMDS/ITFS spectrum available, with reasonable success in the marketplace, problems will arise with capacity because of the scarcity of spectrum available to us.

Geostationary satellites are at such a high orbit that signal delay caused by the

distance signals must travel, creates significant voice and real-time two-way video

problems. While geostationary satellites may work well for old fashioned data transfer, they do not work well for services requiring real-time two-way communications.

LEO applications conceptually hold some promise.

My prepared remarks before your Subcommittee and my testimony discuss other

features and other problems with the limited number of means by which broadband

services can be offered to residences and small businesses.

Who will have an open network and who will have a closed network? Unless

forced to do otherwise, the local telephone lines will be closed and the overwhelming

majority of cable will be closed. By the time other technologies are available for wide

deployment it may not matter. By then, there will be an oligopoly for the provision

of these critical services.

What can Congress do—if anything—to move up the timeline? Open up the last

mile of telephone wires to competition and require cable companies to allow competition on their lines. Nothing else will achieve rapid deployment of broadband services, competitive offerings and market-driven prices. Nothing. Allowing the RBOCs

to offer broadband services while maintaining their local monopolies would probably

result in a momentary increase in broadband availability, but at a tremendous

cost—a continuing phone company monopoly of voice, a new monopoly of broadband

services, inferior competitive offerings and much higher prices.

So far, the incentives for the ILECs to open the last mile to competition as set

forth in the Telecommunications Act have not been sufficient for them to open up

that last mile to competition. Maybe their desire to offer broadband services will be

what gets them to open up the last mile. I hope so. And if so, it would be a tragic

mistake to remove that incentive by repealing the essential compromise of the Telecommunications Act. But if their desire to provide broadband is not sufficient to get

them to open up the last mile, then Congress needs to look at ways to force them

to do so.

129

Again, I appreciate the opportunity to have testified before your Subcommittee

and for your consideration of these views.

Sincerely,

ARTHUR A. KURTZ

Senior Vice President