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WALL STREET’S PERSPECTIVES ON

TELECOMMUNICATIONS

HEARING

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 14, 2006

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

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

TED STEVENS, Alaska, Chairman 

JOHN MCCAIN, Arizona 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

DANIEL K. INOUYE, Hawaii, Co-Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

LISA J. SUTHERLAND, Republican Staff Director 

CHRISTINE DRAGER KURTH, Republican Deputy Staff Director 

KENNETH R. NAHIGIAN, Republican Chief Counsel 

MARGARET L. CUMMISKY, Democratic Staff Director and Chief Counsel 

SAMUEL E. WHITEHORN, Democratic Deputy Staff Director and General Counsel 

LILA HARPER HELMS, Democratic Policy Director 

(III)

C O N T E N T S 

Page 

Hearing held on March 14, 2006 ............................................................................ 1

Statement of Senator DeMint ................................................................................. 1

Statement of Senator Stevens ................................................................................ 1

Prepared statement .......................................................................................... 1

WITNESSES

Bourkoff, Aryeh B., Managing Director/Senior Analyst, UBS Investment Research .................................................................................................................... 5

Prepared statement .......................................................................................... 7

Moffett, Craig E., Vice President/Senior Analyst, Sanford C. Bernstein and 

Co., LLC ................................................................................................................ 12

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

Moore, Kevin M., CFA, Managing Director, Telecommunications Services Equity Research, Wachovia Securities .................................................................... 9

Prepared statement .......................................................................................... 11

Szymczak, Luke T., Vice President, JPMorgan Asset Management ................... 2

Prepared statement .......................................................................................... 3

(1)

WALL STREET’S PERSPECTIVES ON 

TELECOMMUNICATIONS 

TUESDAY, MARCH 14, 2006

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

The Committee met, pursuant to notice, at 2:40 p.m. in room 

SD–106, Dirksen Senate Office Building, Hon. Ted Stevens,

Chairman of the Committee, presiding. 

OPENING STATEMENT OF HON. JIM DEMINT,

U.S. SENATOR FROM SOUTH CAROLINA 

Senator DEMINT. [presiding] Gentlemen, the Chairman is on his 

way and believe me, everything that is said will be taken down and 

used in our debates here in Committee, but in the interest of your 

time, and out of respect for you, we would like to get the testimonies started, because we know there is going to be a vote sometime around 3 o’clock. 

And instead of me making an opening statement, the Chairman 

may want to make some comments while he is here. I would just 

like to begin the testimony here. I do not have all of the introductions here, but we have it as part of the record. And if we could, 

we will just start with, is it——

Mr. SZYMCZAK. Szymczak. 

Senator DEMINT. Szymczak. And the Chairman is here. 

We were going to start the witnesses, but if you would like to 

make a statement before they start, I think that is appropriate. 

OPENING STATEMENT OF HON. TED STEVENS,

U.S. SENATOR FROM ALASKA 

The CHAIRMAN. [presiding] Well, I’ll put my prepared statement 

in the record. I am sorry, I apologize. We do have votes, but I got 

caught in a meeting I could not get away from. Please, sir, begin. 

[The prepared statement of Senator Stevens follows:]

PREPARED STATEMENT OF HON. TED STEVENS, U.S. SENATOR FROM ALASKA

Through our hearings we have heard from the different industry segments and 

we have heard about many of the different communications issues that this Committee must address. 

Today, we here about how what we do legislatively and how we do it may impact 

investment and jobs in America from our panel of Wall Street experts. 

In the four years after passage of the 1996 Telecommunications Act, hundreds of 

billions of dollars flowed into the communications sector, pushing stock prices up 

more than 300 percent. But then the bubble burst. Some estimates indicate that the 

2

communications industry lost more than 90 percent of its peak market value in a 

matter of months, and as a whole lost nearly 500,000 jobs, $2 trillion of market 

value, and accumulated nearly $1 trillion in debt. 

While there were many reasons for the collapse, uncertainty stemming from the 

1996 Act certainly played a part. Former FCC Commissioner Furchgott-Roth estimates that nearly two-thirds of the rules passed to implement the 1996 Act have 

been completely or partially overturned. And some rules remanded to the FCC still 

have not been revised 10 years after passage of the 1996 Act. 

As we listen to our panel today the Committee must consider how we can be sure 

that any legislation we approve is clear, competitively neutral, and readily implemented. Among the issues the Committee may consider are whether to impose statutes of limitation in challenges to new legislation or rules. Likewise, it may be wise 

to impose strict time limitations on items remanded to the FCC. 

We will also have to listen carefully to ensure that our legislation does not arbitrarily favor one industry segment over another, altering the flow of capital away 

from market forces and consumer choice.

STATEMENT OF LUKE T. SZYMCZAK, VICE PRESIDENT, 

JPMORGAN ASSET MANAGEMENT 

Mr. SZYMCZAK. Thank you, Chairman Stevens, and other Members of the Committee. My name is Luke Szymczak, and I am a 

Vice President at JPMorgan Asset Management. I appreciate the 

opportunity to address the Committee today and share my perspective as an investor in telecom. 

These are my views, and not those of JPMorgan. 

My role at JPMorgan is both as an analyst, whose responsibility 

is to have an all-encompassing view of an industry and the stocks 

in it, and also as an investor, who makes active decisions about 

which stocks to own in a portfolio, and which not to own. 

My specialty is telecom. I am responsible for both the telecom 

services industry, and the communications equipment industry. 

Investors in telecom and technology stocks have had quite a wild 

ride over the last decade. The excesses of the late 1990s have mostly been wrung from the system. One would hope that the outlook 

for the industry, from an investor’s perspective, would be getting 

more attractive. Unfortunately, clarity is not yet upon us. Investors 

are struggling with a number of issues, including determining how 

the competitive landscape will evolve, attempting to forecast the 

rate of price and revenue declines, and third, estimating the returns carriers will realize from the large investments being made 

in broadband access networks. 

Any one of these factors raises risks, and the investment analysis 

is dramatically more complex and uncertain than it was 20 years 

ago, or even 10 years ago. The questions facing investors are not 

revolutionary. But we are in uncharted territory for telecom now 

that freer competition has been unleashed, and it is unclear where 

this will lead over the next decade. 

We have seen some positive developments in recent years. Industry consolidation has begun to rationalize the cost base from a regulated industry model into one of a competitive industry. This has 

contributed to the strengthening of balance sheets so that companies will have the resources and the financial cushion to contemplate large capital spending plans. Likewise, we have seen continued adoption of broadband access in the consumer market. And 

the incumbent local exchange companies have made good progress 

in refining their marketing strategies and techniques, and the 

3

ILECs in general have done a good job of improving their balance 

sheets, and this should help them weather the storms ahead. 

Nonetheless, concern is widespread that the major carriers’ positions will worsen despite some of these positive indicators. The list 

of negatives is long. First, the decline in access lines at the ILECs 

has a direct and immediate negative impact on their margins and 

profitability. Second, as the wireless market matures, there is an 

increase in concern that wireless growth may begin to slow. Third, 

there is concern that the prevailing price of voice service could be 

reduced dramatically in the next few years. Fourth, there is a concern that we may soon see new entrants using new technologies 

with more attractive economics than existing operators can achieve 

with their current networks. And finally, there is a high degree of 

skepticism that the substantial investment underway at the ILECs 

to build broadband networks to the home will deliver a satisfactory 

return on the incremental investment. The answer to this will 

come with time. 

Fortunately, telecom is a vibrant industry. All the change underway creates new opportunity. Good examples are the progress in 

wireless and in the Internet over the last 10 years. The forecast for 

the next 10 years is still uncertain, but I am very confident that 

it will include even more dramatic and hard to predict change, and 

this will create significant opportunities for growth. 

Ultimately, the degree of carrier success will have a significant 

impact on the communications equipment industry, as well. With 

their long history in wireless, it is no accident that the largest provider of wireless infrastructure is based in Sweden, and of wireless 

handsets is based in Finland. 

Likewise, the U.S. has leading companies in the data networking 

industry as a result of the early adoption in this country of data 

networking in the 1980s, and the brilliant growth of Internet adoption since the 1990s. This has enabled U.S. data networking companies, both large and small, to take a substantial lead over other 

competitors. 

In my view, the success of U.S. carriers in building great businesses around the networks of the future will be critical in giving 

the equipment companies that sell to these U.S. carriers opportunities to develop and improve the technology of the future. 

After these companies help the U.S. carriers in deployment, they 

can then sell these technologies to carriers around the globe. If the 

end result is a success, this should be good for both the stocks of 

U.S. carriers, as well as the stocks of the equipment companies 

that supply them. 

Thank you. 

[The prepared statement of Mr. Szymczak follows:]

PREPARED STATEMENT OF LUKE T. SZYMCZAK, VICE PRESIDENT, JPMORGAN ASSET

MANAGEMENT

Chairman Stevens and other Members of the Committee, my name is Luke T. 

Szymczak and I am a Vice President at JPMorgan Asset Management and I appreciate the opportunity to address the Committee today, and share my perspective as 

an investor in telecommunications. My role is both as an analyst, whose responsibility is to have an all-encompassing view of an industry and the stocks in it, and 

also as an investor, who makes active decisions about which stocks to own in a portfolio, and which not to own. My specialty is telecom, and I am responsible for both 

4

the telecom services industry and communications equipment industry. As a result 

of over a decade of experience with the companies that supply the equipment that 

is used to construct the telecom networks, and the companies that operate the networks, I bring a very holistic perspective on the telecommunications industry. 

Investors in telecom and technology stocks have had quite a wild ride over the 

last decade. Now that the excesses of the late 1990s have mostly been wrung from 

the system, one would hope that the outlook for the industry, from an investor’s perspective, would be getting more attractive. Unfortunately, such clarity is not yet 

upon us. Investors are struggling with a number of issues. These include determining how the competitive landscape will evolve, attempting to forecast the rate 

of price and revenue declines, and making estimates of what returns carriers will 

realize as a result of the large investments that are currently being made in 

broadband access networks. Any one of these factors raises risks, but the combination complicates the analysis substantially, and the conclusions are sometimes far 

from conclusive. 

The result is an investment analysis process that is dramatically more complex 

and uncertain than it was twenty years ago, or even ten years ago. The specific 

questions that investors face are not revolutionary. But we are in uncharted territory for telecom now that freer competition has been unleashed, and it is unclear 

just where this will lead over the next decade. Because so many other industries 

have seen brutal levels of competition following deregulation, investors are reaching 

conclusions that factor in a great degree of skepticism to reflect the high level of 

risk and uncertainty. 

We certainly have seen some positive developments in recent years. Industry consolidation first in wireless, and subsequently in wireline, has begun the process of 

rationalizing the cost base from a regulated industry model into one of a competitive 

industry. This has contributed to the strengthening of balance sheets so that companies will have the resources and the financial cushion to contemplate large capital 

spending plans. Likewise, we have seen continued adoption of broadband access in 

the consumer market. And Incumbent Local Exchange Companies (ILECs) have 

made good progress in refining their marketing strategies and techniques, and also 

in demonstrating that they can at least moderate, and sometimes offset, the impact 

of the decline in access lines with the sale of additional services to the customers 

that remain. And, the ILECs in general have done a good job of improving their balance sheets, which should enable them to weather the storms ahead more 

sustainably. 

There are many concerns. Nonetheless, there remains widespread concern that the 

major carriers’ positions will overall worsen despite some of these positive indicators. Continued decline in access lines at the ILECs has a direct and immediate negative impact on their margins and profitability. Migration of wireline traffic to wireless continues as one of the key factors in the access line decline, but voice offerings 

from other competitors, both cable system operators and voice over Internet protocol 

(VoIP), seem to be playing an increased role. 

Wireless growth continues to be healthy, but there is an increasing concern that 

with wireless penetration in the U.S. now in the 70 percent range, wireless growth 

is likely to begin to slow in coming quarters. Even with consolidation in the industry 

over the last two years, concerns that we could see intensified wireless price competition as companies press harder to show subscriber growth seem reasonable. And 

the potential entrance of new competitors as a result of upcoming auctions remains 

a risk. 

There is a very reasonable concern that the prevailing price of voice service could 

be reduced dramatically in the next few years. Today the average monthly revenue 

that an ILEC receives for an access line is in the $50 range, with a number of companies above this. Clearly, some VoIP services are currently at half this level, and 

some pure Internet services have a price near zero. It is hard to forecast the rate 

at which prices will decline. But the more exposure a company has to traditional 

voice service, the greater impact this price compression will have on its revenues, 

margins, and profitability. 

There is a good degree of concern that we may soon see new entrants using new 

technologies with potentially more attractive economics than existing operators can 

achieve with their current networks. Likewise there is a high degree of skepticism 

that the substantial investment underway at the ILECs to build broadband networks to the home will deliver a satisfactory return on the incremental investment. 

It is true that sometimes investors can be too skeptical, and it seems that telecom 

investors have become extremely risk-adverse. However, in the case of broadband 

access network investments, the skepticism seems entirely rational given that there 

has yet to be a proven business model. Memories of the telecom meltdown that 

started in 2000 and resulted from the big spending programs of the late 1990s, 

5

which proved to be based on entirely misplaced hopes and business models, contribute to the skepticism. The big question is whether carriers’ plans are more realistic and achievable this time around. It is a question for which one could make either a positive or negative argument, and the answer will come only with time, and 

thus the caution. 

Obviously my summary list of negative factors in investors’ views is far greater 

than my list of positives, and this helps to explain the relatively unenthusiastic view 

investors have for telecom services stocks. Clearly, this industry is tougher to analyze now than in the day when investment decisions were made on dividend yield, 

dividend coverage ratios, and return on assets. 

In response, many investors have shifted out of U.S. telecom stocks, into telecom 

in other regions, particularly emerging markets where growth is the dominant element of the story. 

Even so, the U.S. market has some positive attributes relative to alternatives. 

Most notably it is further along in the deregulatory path than some other mature 

markets, notably Europe. The regulatory environment here is likely to be more investor-friendly than it may prove to be in Europe. But it will take time for one to 

be able to prove this conclusion. On some measures, it appears that Europe is at 

least three years behind the U.S. in wireline deregulation. For example, a decision 

on whether carriers will have to resell usage of newly-upgraded broadband access 

facilities to competitors has yet to be taken in Europe, whereas the policy in the 

U.S. was set in the last Triennial Review. And in contrast to the U.S., where major 

carriers have made large commitments to upgrading access facilities, in Europe 

there remains uncertainty as to the attractiveness of upgrading access facilities. 

There are opportunities ahead. Fortunately, telecom is a vibrant industry and all 

the change underway creates new opportunity. Look no further than the progress 

both wireless and the Internet have made in the last ten years. Although the forecast for the next ten years is uncertain, I am very confident that it will include potentially even more dramatic and hard-to-predict change. This will create significant 

opportunities for growth. Even so, it will be important for carriers to make wise 

choices about which opportunities to pursue, and which business models might yield 

the greatest success. 

Ultimately, the carriers’ success, or lack of success, will also have a significant 

impact on the communications equipment industry, which supplies the products to 

build the telecom infrastructure. It is no accident that the most successful competitor each in wireless infrastructure and wireless handsets is based in Sweden and 

Finland, respectively. The carriers in these two countries have always been the leaders in pushing the boundaries in the wireless business for over twenty-five years 

now. And this has created the ecosystem that keeps Ericsson and Nokia on the leading edge. Likewise, it is also clear that the U.S. has the leading companies in the 

data networking industry. This is a result of the early adoption of local area networking (LAN) in this country in the 1980s, and also the brilliant growth of Internet 

adoption over the last decade and a half. This has given U.S. companies, both large 

and small, a substantial lead over other competitors. 

In my view, the success of U.S. carriers in building great businesses around the 

networks of the future will be important in giving the equipment companies that 

sell to these U.S. carriers the opportunities to develop and refine the technologies 

of the future. After these companies help the U.S. carriers in deployment, they can 

then take these technologies and sell them to carriers around the globe. If the end 

result is a success, this should be good for both the stocks of U.S. carriers, as well 

as the stocks of the equipment companies that supply them.

The CHAIRMAN. Thank you. Mr. Bourkoff is the Managing Director of Media for Cable Satellite Entertainment Equity and Fixed 

Income. We appreciate you being here, thank you. 

Mr. BOURKOFF. Thank you. 

STATEMENT OF ARYEH B. BOURKOFF, MANAGING DIRECTOR/

SENIOR ANALYST, UBS INVESTMENT RESEARCH 

Mr. BOURKOFF. Good afternoon. I am honored to be here today 

to present my perspectives on the cable television and telecommunications landscape in front of this Committee. I will provide a brief overview of the current Pay TV landscape and then discuss investor sentiment and viewpoints of valuation, highlighting 

key investment considerations. 

6

In the mid-to-late 1990s, the cable industry deployed approximately $90 billion of capital in order to materially upgrade its network capacity to better position the industry to offer advanced digital video services, interactivity, and other applications. The majority of this investment was financed with internal cash-flows and 

through public market debt financing. The cable industry has historically enjoyed access to the capital markets given the overall stability and predictability of its financial model. 

During this period, the Pay TV marketplace became increasingly 

competitive. Satellite operators aggressively took market share, 

driving cable’s share down from a peak of roughly 95 percent in 

1994 to about 63 percent today. In fact, cable’s penetration is now 

as low as 50 percent for many of the cable operators. 

As a result of the heightened competition for video services, the 

cable industry is seeking to differentiate its product by offering a 

robust suite of services to homes passed by its high-capacity network. 

Today, with the network upgraded and advanced offerings in 

place, the industry is at the very early stages of potentially its 

most operationally successful period. Nearly 85 percent of the country’s homes will have voice available from the cable operators by 

the end of this year, with consumers receiving a bundle of voice, 

video, and high speed data products at lower packaged prices with 

the convenience of a single bill. 

Evidence suggests that consumers have embraced the bundled 

product offering. Penetration of voice services has proliferated at a 

rate above expectations with operators like Cox, Cablevision, and 

Time Warner Cable reaching approximately 20 percent penetration 

of homes in certain markets already. Cablevision recently reported 

a full 24 percent of its subscribers now take the ‘‘Triple Play’’ bundle a figure we expect to grow to nearly 50 percent by the end of 

2007. Other advanced services including high-definition, digital 

video recorders and video on demand are also growing in popularity. 

Despite these promising prospects, the cable companies’ share 

prices remain depressed, with valuations that are at or near historical lows. 

In my opinion, there are several key topics affecting investor sentiment toward the sector, and I highlight several of the most 

prominent here. First is the onset of intensifying video and bundled 

competition from the telecommunications operators, who are in the 

process of constructing robust wireline-based fiber networks themselves. Increased competition could result in higher customer acquisition costs and lower pricing in the mature U.S. Pay TV industry. 

Second is the perpetual concern over another capital expenditure 

upgrade cycle, particularly as more capacity is devoted to high definition services. Both of these factors depress expectations of future 

free cash-flow which impact valuation. 

Last, and perhaps most prominent, are the risks associated with 

disintermediation and regulatory uncertainty. Key issues that we 

consider in this category include the availability of content over 

various mediums with direct access to consumers; for example, Apple’s iPod, Google Video, et cetera, as a la carte cable pricing proVerDate 0ct 09 2002 13:54 Sep 26, 2006 Jkt 029945 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\29945.TXT JACKF PsN: JACKF
7

posals, the net neutrality debate and the video franchise licensing 

process. 

As a result of these concerns, investors who typically make decisions based on fundamental views of valuation and the prospects 

of the business model are likely to shy away from cable industry 

investments, given the increased risk to the predictability of cable 

model cash-flows. 

A heightened level of uncertainty and the diminished predictability will continue to weigh on valuation for the sector. Further, 

the capital structures for the group could be at risk given an estimated $80 billion of debt that is currently outstanding and held by 

investors. This is relevant given that the access to capital in the 

public markets has historically been robust due to the stability of 

the cable model and the well-understood and defined regulatory environment. 

As the Committee reviews issues related to video franchising, I 

stress the importance of maintaining a level playing field among all 

operators while allowing consumer preference to dictate changes to 

current models. Uncertainty among investors will persist if the 

rules for obtaining a video franchise fluctuate based on the nature 

of new entrants. In my analysis, I assume that there will be a fully 

competitive state between cable, satellite, telecommunications, and 

other providers. 

With respect to the buildout requirements for new video franchise applicants, I draw a comparison to the onset of new competition in the U.K. in the early 1990s where operators such as Diamond, Videotron, and Telewest Cable were required to meet certain 

milestones in order to preserve their licenses. Note that these operators were competing with industry incumbents, like BSkyB and 

British Telecom. 

As media consumption over the Internet develops at a rapid 

pace, I believe that it is too early to introduce regulation on key 

issues such as a la carte packaging and pricing and on net neutrality, as the market is still in its early stages. In fact, the broader 

media and communications sector is perhaps at its most dynamic 

stage of evolution, as media content is available across multiple 

platforms under various pricing structures. Changes are occurring 

at such a frenetic pace that any possible regulation today carries 

a risk of stunting this innovation if it does not build in enough 

flexibility for the complexion of the sector in the coming years, if 

not months. Thank you. 

[The prepared statement of Mr. Bourkoff follows:]

PREPARED STATEMENT OF ARYEH B. BOURKOFF, MANAGING DIRECTOR/SENIOR

ANALYST, UBS INVESTMENT RESEARCH

Introduction 

Good Afternoon. My name is Aryeh Bourkoff and I am Managing Director and 

Senior Analyst at UBS covering the equity and fixed income debt securities of the 

cable TV, satellite and entertainment sectors within Media and Telecommunications. I am honored to be here today to present my perspectives on the cable television and telecommunications landscape in front of this Committee. 

I will provide a brief overview of the current Pay TV landscape and then discuss 

investor sentiment and viewpoints of valuation, highlighting key investment considerations. 

8

Industry Background 

In the mid-to-late 1990s, the cable industry deployed approximately $90 billion of 

capital in order to materially upgrade its network capacity to better position the industry to offer advanced digital video services, interactivity, and other applications. 

The majority of this investment was financed with internal cash flows and through 

public market debt financings. The cable industry has historically enjoyed access to 

the capital markets given the overall stability and predictability of its financial 

model. 

During this period, the Pay TV marketplace became increasingly competitive. Satellite operators aggressively took market share, driving cable’s share down from a 

peak of roughly 95 percent in 1994 to about 63 percent today. In fact cable’s basic 

penetration—which we measure as basic subscribers as a percent of homes passed—

is now as low as 50 percent for many of the cable operators. 

As a result of the heightened competition for video services, the cable industry 

is seeking to differentiate its product by offering a robust suite of services to homes 

passed by its high-capacity network. 

Current Environment and Valuation 

Today, with the network upgraded and a full suite of service offerings in place, 

the industry is at the early stages of potentially its most operationally successful 

period. Nearly 85 percent of the country’s homes will have voice available from the 

cable operators by the end of this year, with consumers receiving a bundle of voice, 

video and high speed data products at lower packaged prices with the convenience 

of a single bill. 

Evidence suggests that consumers have embraced the bundled product offering. 

Penetration of voice services has proliferated at a rate above expectations—with operators like Cox Communications, Cablevision Systems, and Time Warner Cable 

reaching approximately 20 percent penetration of homes in certain markets already. 

In fact, Cablevision recently reported a full 24 percent of its subscribers now take 

the triple play bundle—a figure we expect to grow to nearly 50 percent by the end 

of 2007. Other advanced services including high-definition, digital video recorders 

and video on demand are also growing in popularity. 

The cable financial model has evolved from a focus on annual price hikes to drive 

ARPU (average revenue per subscriber) which sacrificed customer penetration—to 

one focused on bundled pricing designed to attract customers and boost take rates 

and unit growth. Capital expenditure requirements are shifting toward variable 

subscriber acquisition costs rather than fixed network-related costs—with 70 percent of capital budgets now devoted to set top boxes and other consumer devices 

rather than backhaul and headend infrastructure investments. 

Despite these promising prospects, cable-company share prices remain depressed, 

with valuations that are at or near historical lows. 

Topics Impacting Investor Sentiment 

In my opinion, there are several key topics affecting investor sentiment towards 

the sector, and I highlight several of the most prominent here. First is the onset 

of intensifying video and bundled competition from the telecommunications operators, who are in the process of constructing robust wireline-based fiber networks 

themselves. Increased competition could result in higher customer acquisition costs 

and lower pricing in the mature U.S. Pay TV market. Second is the perpetual concern over another capital expenditure upgrade cycle, particularly as higher capacity 

high definition services begin to fill up the cable network dial. Both of these concerns would depress expectations of future free cash flow which impact valuation. 

Lastly, and perhaps most prominent, are the risks associated with 

disintermediation and regulatory uncertainty. Key issues that we consider in this 

category include the availability of content over various mediums with direct access 

to consumers (e.g. Apple’s iPod, Google Video, etc.), a la carte cable pricing proposals, the net neutrality debate and the video franchise licensing process. As a result of these concerns, investors who typically make decisions based on fundamental 

views of valuation and the prospects of the business model are likely to shy away 

from cable industry investments given the increased risk to the predictability of 

cable model cash flows. 

A heightened level of uncertainty and the diminished predictability will continue 

to weigh on valuation for the sector. Further, the financial and capital structures 

for the group could be at risk given an estimated $80+ billion of debt that is currently outstanding and held by investors. This is relevant given that the access to 

capital in the public debt markets has historically been robust due to the stability 

of the cable model and the well-understood and defined regulatory environment. 

9

Conclusions and Viewpoint 

As the Committee reviews issues related to video franchising, I stress the importance of maintaining a level playing field among all operators while allowing consumer preferences to dictate changes to current models. Uncertainty among investors will persist if the rules surrounding obtaining a video franchise fluctuate based 

on the nature of the new entrants. In my analysis of the sector, I assume that there 

will be a fully competitive state between cable, satellite, telecommunications, and 

other providers with all operators given an equitable opportunity to service the customer base. With respect to the buildout requirements for new applicants of video 

franchises, I draw a comparison to the onset of new cable/telecommunications competition in the United Kingdom during the early 1990s where operators such as Diamond Cable, Videotron, and Telewest were required to meet certain milestones in 

order to preserve their licenses. Note that these cable providers were new entrants 

in that market competing with industry incumbents, including British Sky Broadcasting and British Telecom. Failure to build out a defined percentage of homes 

within the service territory resulted in fines and progress was closely monitored by 

regulatory bodies. 

The consumption of video and other media services over the Internet is developing 

at a very rapid pace. I believe that it is too early to introduce regulation on key 

issues such as a la carte packaging and pricing and on net neutrality as the market 

is still in its early stages. Instead, I feel that at this point it is essential that market 

forces and consumer demand drive the economic model. Moving to an a la carte pricing structure would have an impact on the predictability of the distribution model 

as well as impose risks to content providers over the longer term. 

The broader media and communications sector is perhaps at its most dynamic 

stage of its evolution as media content is available across multiple platforms under 

various pricing structures. This introduces investment opportunities as well as risk 

factors as the market place and business models are altered to meet demands of 

consumers. We believe that the most important place for regulation in the context 

of this environment is to ensure a level playing field for new entrants as well as 

incumbents, recognizing that we are already in a competitive situation, as well as 

in the close monitoring of potential conflicts that may arise. Further, we believe that 

there are profound risks of unintended consequences in the event that key fundamental aspects of today’s landscape are regulated at such an early stage of development, innovation, and creativity. Changes are occurring at such a frenetic pace that 

any possible regulation today carries a risk of stunting this innovation if it does not 

build in enough flexibility for how the sector will look in the coming months and 

years.

The CHAIRMAN. Thank you. Mr. Moore, Wireline Telecom Analyst, Managing Director, Wachovia Securities, thank you for being 

with us. 

STATEMENT OF KEVIN M. MOORE, CFA, MANAGING DIRECTOR, 

TELECOMMUNICATIONS SERVICES EQUITY RESEARCH, 

WACHOVIA SECURITIES 

Mr. MOORE. Thank you. Chairman Stevens, Members of the 

Committee, thank you for another opportunity to discuss Wall 

Street perspective on telecommunications with members of the 

Senate. My role on Wall Street is to advise institutional investors 

on the investment prospects of the overall telecommunications industry and of specific companies including RBOCs, rural local exchange carriers and competitive service providers. 

My general outlook for the industry is that both telecommunications and media applications are going to become increasingly 

more mobile and portable and more separated from underlying 

physical networks over the next 5 years. However, in my prepared 

comments today, I would like to focus on Wall Street’s views on 

telecommunications regulation. 

I will start with some specific regulatory concerns we have heard 

from investors over the last year, speak about what we think Wall 

10

Street wants in general from regulation, and finish with two areas 

where I think regulation can promote investment. 

First, on some recent investor concerns. The rural local exchange 

investors are concerned about the change in regulatory support for 

the universal service funding. Competitive service provider investors are most concerned these companies will have continued access 

to unbundled network elements, at reasonable prices. 

Finally, while RBOC investors remain divided on benefits of 

RBOC investments in video, the investors in the related equipment 

companies are concerned that uncertainties around the franchising 

process could potentially dissuade the RBOCs from aggressively entering the video market. 

On Wall Street’s general perspective on regulation, first of all it 

is important to note that Wall Street’s role is not to have a prescriptive view on regulatory policy, but only to determine which 

companies have the best outlook for investment. Relative to telecommunications, we believe that Wall Street’s biggest desire is to 

minimize the need to constantly re-evaluate the role of regulation 

in its investment decisions. We have enough to worry about in considering the rapidly changing competitive and technological environment. In other words we want regulatory stability and certainty. 

I believe that regulation that has three characteristics would aid 

in the perception of regulatory stability. First is minimal regulation. This statement should not be interpreted as a request to 

eliminate regulation, but for it to take a minimalist form. In the 

past 10 years, I believe we have seen a direct correlation between 

regulatory instability and regulatory complexity. 

Second is flexibility. We would all agree that the 1996 Telecom 

Act did not contemplate many of the subsequent technological developments. However, I think that it’s more important that we 

agree now that we cannot imagine what will happen over the next 

10 years. It is then critical that any new regulatory framework 

takes this uncertainty into account and is sufficiently flexible. 

Third is technological consistency. I believe this means that regulation must not be overly application-specific; in other words, it 

cannot overly differentiates between voice, data and video. A 2006 

telecom act that is built on application-specific regulation, that 

doesn’t take into account the movement of voice, data, and even 

video, into the Internet and into wireless technology could become 

unstable within a few years of enactment. 

And finally, I want to talk about a couple of areas of regulation 

where we think it can promote investment. The first is interconnection. And the second is last mile access. 

Relatively low cost and non-discriminatory interconnection, 

known as ‘‘peering’’ in the Internet world, have contributed to the 

success of the two most investable areas in telecommunications, 

wireless and the Internet, over the last 10 years. 

The second key area is non-discriminatory last mile access. This 

not only includes unbundled network elements but also includes 

the ability for carriers to carry digital signals over their own last 

mile without regard to whether those signals contain voice, data, 

or video. 

11

Thank you, Mr. Chairman. I look forward to answering any of 

your questions. 

[The prepared statement of Mr. Moore follows:]

PREPARED STATEMENT OF KEVIN M. MOORE, CFA, MANAGING DIRECTOR, 

TELECOMMUNICATIONS SERVICES EQUITY RESEARCH, WACHOVIA SECURITIES

Good afternoon. Chairman Stevens, Co-Chairman Inouye and Members of the 

Committee, thank you for another opportunity to discuss Wall Street’s perspective 

on telecommunications with members of the Senate. In 1999, I testified to the Senate Judiciary Committee hearing on ‘‘Broadband: Competition and Consumer Choice 

in High-Speed Internet Service and Technologies’’ a subject that seven years later 

continues to be very important. As it was then, my role on Wall Street is to advise 

institutional investors on the investment prospects of the overall telecommunications industry and of specific companies including RBOCs, Rural local exchange 

carriers (RLECs) and competitive service providers (CSPs/CLECs). 

My investment research and conclusions are published and I can make copies of 

it available to Committee Members. My general view on the industry is that both 

telecommunications and media applications are going to become increasingly more 

mobile/portable and more separated from underlying physical networks over the 

next five years. However, in my prepared comments today, I would like to focus on 

Wall Street’s views on telecommunications regulation. These views represent my 

own observations and not those of any specific investor. 

I will start with some specific regulatory concerns we’ve heard over the last year, 

then move on to what we believe Wall Street wants in general from regulation, and 

finish with two areas that we think regulation can promote investment. 

Some Recent Investor Concerns 

Three specific concerns seem to have weighed on investors minds over the last 

year. First, RLEC investors are concerned about the continued commitment of regulators to universal service funding (USF). Second, competitive service provider investors are most concerned that these companies will have continued access to 

unbundled network elements (UNEs) at reasonable prices. Finally, while RBOC investors remain divided on the benefits of RBOC investments in video, the investors 

in the related equipment companies are concerned that uncertainties around the 

franchising process could potentially dissuade the RBOCs from aggressively entering the video market. 

Wall Street’s General Perspective on Regulation 

It is important to note that Wall Street’s role is not to have a prescriptive view 

on regulatory policy but only to determine which companies have the best outlook 

for investment. In this context, telecommunications companies have to compete with 

thousands of other public companies for debt and equity investment. In the competition for capital, the relative regulatory environment is important in determining 

which industries and companies will get capital. 

Relative to telecommunications, we believe that Wall Street’s biggest desire is to 

minimize the need to constantly re-evaluate the role of regulation in its telecommunication investment decisions. We have enough to worry about in considering 

the rapidly changing competitive and the technological environment. In other words 

we want regulatory stability and certainty. I believe that regulation that has three 

characteristics would aid in the perception of regulatory stability. 

First is minimal regulation. I want to make sure that this statement is not interpreted as a request to eliminate regulation but for it to take a minimalist form. In 

the past 10 years, I believe we have seen a direct correlation between regulatory 

instability and complexity in regulation. This has been evident in the many legal 

battles including the most recent battle over the FCC’s Triennial Review Order. We 

believe that all of these battles have hurt investment in the sector. 

Second is flexibility. We would all agree that the 1996 Telecommunications Act 

did not contemplate the impact of the growth of broadband and Internet applications. However, I think that it more important that we agree now that we can’t 

imagine what will happen technologically over the next ten years. It is then critical 

that any new regulatory framework takes this uncertainty into account and is sufficiently flexible. This flexibility would ensure that future investment can keep pace 

with industry changes undeterred by constant regulatory uncertainty. 

Third is technological consistency. I believe this means that regulation must not 

be application specific (i.e., it overly differentiates between voice, video or data). A 

2006 telecom act that is built on application specific regulation which doesn’t take 

12

into account the increasing separation between physical networks and applications 

and the accelerating movement of those applications to the Internet and wireless 

technology could become unstable within a few years. This destabilization would 

again negatively impact investment in the sector. 

Application specific regulation could hurt investment in existing services like 

third-party VoIP (i.e., not provided by a facilities-based carrier) but more importantly in the rapidly emerging area of third party provision of video directly over 

the public Internet. 

Specific Regulatory Issues That Can Impact Future Investment 

Finally I want to focus on two specific areas of regulation that I believe are critical to capital being available to support innovation and competition in the future. 

These areas are interconnection and last mile access. 

Relatively low cost and non-discriminatory interconnection (known as peering in 

the Internet world) have contributed to the success of the two most investable areas 

in telecommunications, wireless and the Internet. We believe that interconnection 

will continue to be important in the future. 

The second key area is non-discriminatory last mile access. This not only includes 

UNEs but also includes the non-discriminatory ability for carriers to carry digital 

signals over their own last mile without regard whether those signals contain voice 

data or video. 

Thank you Mr. Chairman. I look forward to answering the Committee’s questions.

The CHAIRMAN. Thank you, Mr. Moore. 

And now, Mr. Moffett, Vice President and Senior Analyst of U.S. 

cable and satellite broadcast media, thank you for being with us. 

Mr. MOFFETT. Thank you. 

STATEMENT OF CRAIG E. MOFFETT, VICE PRESIDENT/SENIOR 

ANALYST, SANFORD C. BERNSTEIN AND CO., LLC 

Mr. MOFFETT. Chairman Stevens, and Members of the Committee, I want to express my thanks for your inviting me here to 

participate this afternoon. I cover the cable and satellite sector. 

And while I have written a great deal about issues such as a la 

carte retransmission consent, franchising rules, and broadcast indecency, I am going to confine my statements today to issues related to physical networks, and the constellation of issues that 

have been given the name, ‘‘net neutrality.’’ I believe that there is 

a risk that we are embarking on a course that will discourage network investment. 

The net neutrality debate has become a catchall for a number of 

competing public policy needs. We want to ensure the availability 

of ubiquitous and reliable high-speed Internet access, and we want 

to do it while minimizing consumer prices and maximizing consumer choice. That means we need to foster investment in the networks themselves, and we need to do that while at the same time 

protecting inalienable First Amendment principles, and creating a 

vibrant climate for innovation in network-reliant businesses. 

Now, with respect to the first part of that balancing act; that is, 

fostering investment in the networks themselves, Wall Street has 

by and large already cast its vote, and the capital markets see a 

bleak future for network operators. Cable stocks have suffered 5 

years of valuation declines relative to the broader market. Telecommunications firms like Verizon and AT&T have been given 

similar treatment. Comcast stock is punished every time the company even mentions the words ‘‘capital investment.’’ And Verizon’s 

stock, likewise, was punished throughout 2005, due to the capital 

market’s distaste for expansive capital investments in their fiberoptic deployment. 

13

Now ironically, that comes at a time when consumer broadband 

demand is exploding. But despite that strong demand for networks, 

Wall Street harbors grave doubts about the ability to earn a return 

on network investments. Excessive competition and an uncertain 

regulatory environment are dampening capital formation, and 

slowing the pace of investment. 

That investment is critical, though, because despite a great deal 

of arm waving from visionaries, our telecommunications infrastructure today is woefully unprepared for the widespread delivery of 

advanced services, especially video, over the Internet. 

Downloading a single half-hour television show on the web consumes more bandwidth than does receiving 200 e-mails a day for 

a year. Downloading a single high-definition movie consumes more 

bandwidth than does downloading 35,000 web pages, and it is the 

equivalent of downloading 2,300 songs off of Apple’s iTunes 

website. 

Today’s networks simply are not scaled for that kind of usage. In 

a recent series of reports that I entitled, ‘‘The Dumb Pipe Paradox,’’ 

that I believe provided the original impetus for the Committee’s invitation to testify today, I tried to address the misconception that 

telcos are rapidly rushing in to meet this need and provide competition for cable incumbents. 

In fact, by their own best estimate, the telcos will be able to 

reach no more than 40 percent or so of American households with 

fiber over the next 7 to 10 years. And most of that will be in the 

form of hybrid fiber-legacy copper networks such as that being constructed by AT&T under the banner of ‘‘Project Lightspeed.’’ Those 

hybrid networks are expected to deliver 20 megabits per second average downstream bandwidth. And after accounting for significant 

standard deviations around that average, that will mean that 

many enabled subscribers will receive far less than that. I and 

many others on Wall Street harbor real doubts about whether 

those hybrid networks are going to prove technologically sufficient 

to meet future demands. 

More importantly, for 60 percent of the country, there are simply 

no new networks on the horizon. And the existing infrastructure 

from the telcos, DSL running at speeds of just one and a half to 

three megabits per second or so, simply will not be adequate to be 

considered broadband connections in 5 years or so. That includes, 

by the way, wireless networks. Current and planned wireless networks, including the overhyped WiMAX technology, offer the promise of satisfying today’s definition of broadband, but they cannot 

simply feasibly support the kind of bandwidth required for dedicated point-to-point video. 

Again, Wall Street’s view is that even these investments are unwarranted. Verizon’s network investment strategy is predicated 

largely on cost savings, not on potential returns from providing 

new services. We expect Verizon’s return on investment to be marginally positive. AT&T’s is less costly, but generates even fewer 

cost savings, so it is significantly worse. Without cost savings, the 

cost of these networks is far beyond what the returns of the new 

services can provide. 

The notion of ‘‘Net Neutrality’’ as it is currently construed would, 

I believe, just dampen enthusiasm for investments even further, 

14

and would trigger a host of unintended consequences. Mandated 

net neutrality would further sour Wall Street’s taste for broadband 

infrastructure investments, make it increasingly difficult to sustain 

necessary capital returns, and would likely mean that consumers 

alone would be required to foot the entire bill for whatever network 

investments do get made. 

Conversely, from a Wall Street perspective, allowing a multiplicity of payers; that is, advertisers and web service providers, to 

support network investments, would greatly bolster the business 

case, and would offer the prospect of better returns, and more consumer choice in the end. 

Thank you for your attention. 

[The prepared statement of Mr. Moffett follows:]

PREPARED STATEMENT OF CRAIG E. MOFFETT, VICE PRESIDENT/SENIOR ANALYST, 

SANFORD C. BERNSTEIN AND CO., LLC 

Chairman Stevens, Co-Chairman Inouye, and distinguished Members of the Committee, I want to express my thanks for the opportunity to participate in today’s 

hearings. 

I’ve spent the past three years as an Equity Research Analyst at Sanford C. Bernstein covering the U.S. Cable and Satellite sector, and I believe I’m here to reflect 

the views of Wall Street. But you should also note that I previously spent more than 

a decade consulting to telecommunications companies as a partner and Global Leader of The Boston Consulting Group’s telecommunications practice (where I lived 

through the drafting and the aftermath of the 1996 Act) and I’ve also been the 

President of a 400-person Internet auction business, so my views today are likely 

to reflect those perspectives at least as much as the Wall Street view. 

While I’ve written a great deal about issues such as a` la carte, retransmission 

consent, franchising rules, and broadcast indecency, I’ll confine my prepared comments today to issues related to physical networks, and the constellation of issues 

that have been given the unfortunate name of ‘‘Net Neutrality.’’ I believe there is 

a risk that we are embarking on a course that will discourage network investment, 

to the long-term detriment of the economy and our society. 

The ‘‘Net Neutrality’’ debate has become a catch-all for a number of competing 

public policy needs. We want to ensure the availability of ubiquitous and reliable 

high speed Internet access, and we want to do it while minimizing consumer prices 

and maximizing consumer choice. 

That means we need to foster investment in the networks themselves. And we 

need to do that while at the same time protecting inalienable First Amendment 

principles, and creating a vibrant climate for innovation in network-reliant businesses. 

With respect to the first part of that balancing act, i.e., ‘‘fostering investment in 

the networks themselves,’’ Wall Street has, by and large, already cast its vote. The 

capital markets see a bleak future for network operators. Cable stocks have suffered 

five years of valuation declines relative to the broader market. Telecommunications 

firms like Verizon and AT&T have been given similar treatment. Comcast’s stock 

is punished every time the Company’s management even mentions the words ‘‘capital investment.’’ Verizon’s stock was likewise punished throughout 2005 due to the 

capital markets’ distaste for the expansive capital investments in their FiOS fiber 

optic deployment. 

Ironically, this comes at a time when consumer broadband demand is exploding. 

Sony’s PlayStation and tech companies like Microsoft talk about ‘‘owning the living 

room,’’ and AOL and Yahoo! and Google are all planning video-rich strategies. New 

applications like video telephony and video surveillance over the web have barely 

started yet. 

Despite this strong demand for networks, however, Wall Street harbors grave 

doubts about the ability to earn a return on network investments. Excessive competition and an uncertain, and at times hostile, regulatory environment are dampening capital formation and slowing the pace of investment. 

And that investment is critical, because despite a great deal of arm waving from 

‘‘visionaries,’’ our telecommunications infrastructure is woefully unprepared for 

widespread delivery of advanced services, especially video, over the Internet. 

Downloading a single half hour TV show on the web consumes more bandwidth 

15

* The information referred to has been retained in Committee files. 

than does receiving 200 e-mails a day for a full year. Downloading a single high 

definition movie consumes more bandwidth than does the downloading of 35,000 

web pages; it’s the equivalent of downloading 2,300 songs over Apple’s iTunes 

website. Today’s networks simply aren’t scaled for that. 

In a series of recent research reports that I entitled ‘‘The Dumb Pipe Paradox’’ *—

which I believe provided the original impetus for the Committee’s invitation to testify today—I tried to address the misconception that the telcos are rapidly rushing 

in to meet this need and to provide competition for cable incumbents. In fact, by 

their own best estimates, they’ll be able to reach no more than 40 percent or so of 

American households with fiber over the next seven years. 

And most of that will be in the form of hybrid fiber/legacy copper networks, such 

as that being constructed by AT&T under the banner of ‘‘Project Lightspeed.’’ These 

hybrid networks are expected to deliver 20Mbs average downstream bandwidth. 

After accounting for significant standard deviation around that average, that will 

mean many ‘‘enabled’’ subscribers will actually receive far less. I and many others 

on Wall Street harbor real doubts as whether these hybrid networks will prove technologically sufficient to meet future demands. 

More importantly, in 60 percent of the country, there are simply no new networks 

on the horizon, and the existing infrastructure from the telcos—DSL running at 

speeds of just 1.5Mbs or so—simply won’t be adequate to be considered ‘‘broadband’’ 

in five years or so. That includes wireless networks, by the way. Current and 

planned wireless networks—including the over-hyped Wi-Max technology—offer the 

promise of satisfying today’s definition of broadband, but simply can’t feasibly support the kind of bandwidth required for the kind of dedicated point-to-point video 

connections that will be required to be considered broadband tomorrow. Those demands will continue to fall to terrestrial wired networks. 

Again, the Wall Street view is that even this amount of investment is unwarranted. Verizon’s network investment strategy is predicated largely on cost savings, 

not on the potential returns from delivering new services. We expect Verizon’s return on investment to be marginally positive. AT&T’s is less costly, but generates 

fewer cost savings, and so is likely significantly worse. You simply can’t make a case 

for major new investments on the basis of voice, video, and data as currently conceived. 

In Part I of the ‘‘Dumb Pipe Paradox,’’ I noted that if a telco was in the business 

of providing broadband connections only—that is, if phone service becomes, as many 

predict, simply another bit stream on top of a data connection—then the cost to provide service would be as much as $80 per month. And from a consumer’s perspective, that would be the pipe only, before paying for any content over the web. 

And the cost, and therefore the price, would likely be much, much more. Some 

recent comments from BellSouth’s Chief Architect, Henry Kafka, at the Optical 

Fiber Communication/National Fiber Optics Engineers Conference last week put 

this in perspective. He estimated that the average residential broadband user today 

consumes about two gigabytes of data per month. Heavy users who regularly 

download movies consume an average of 9 gigabytes of data per month. In the future, watching IPTV would consume 224 gigabytes, and would cost carriers $112 per 

month to deliver. And if IPTV is going to deliver High Definition, then the average 

user would be consuming more than one terabyte per month, at a cost to carriers 

of $560 per month. 

That, I believe, puts the ‘‘Net Neutrality’’ debate in context. The very valence of 

the phrase suggests that the First Amendment is about to be trampled lest it be 

legislatively protected. And the very idea that third parties who benefit from Internet infrastructure investments—say, Google and Yahoo!—might economically contribute in some way to these costs has been roundly greeted as if it is a threat to 

basic liberties. 

But the notion of ‘‘Net Neutrality’’ as it is currently construed would, I believe, 

likely trigger a host of unintended consequences. Mandated ‘‘Net Neutrality’’ would 

further sour Wall Street’s taste for broadband infrastructure investments, making 

it increasingly difficult to sustain the necessary capital investments. 

It would also likely mean that consumers alone would be required to foot the bill 

for whatever future network investments that do get made. That would result in 

much higher end-user prices, much steeper subsidies of heavy users by occasional 

ones, and, in all likelihood, a much sharper ‘‘digital divide.’’ By discouraging the deployment of new networks, it would also likely freeze in place the status quo cable/

telco duopoly (or worse in much of the country, where we are, as previously described, on a trajectory to a near cable monopoly for genuine broadband). The U.S. 

16

as a whole would, in all likelihood, fall further behind other countries in broadband 

availability and reliability. 

Conversely, from a Wall Street perspective, allowing a ‘‘multiplicity of payers’’ 

(say, advertisers, or web services providers) to support network investments would 

greatly bolster the business case for deploying new infrastructure, as it would offer 

the prospect of more attractive returns. And while current network operators would 

undeniably benefit in such a regime, so too would consumers, who would likely see 

both greater choice and lower prices. 

And despite their current howls at the idea of paying for such services as packet 

prioritization (what some have referred to as a ‘‘fast lane’’ for data), it is likely that 

the Internet services community would be the biggest beneficiaries of all, inasmuch 

as they would be assured of an infrastructure capable of supporting innovation in 

new high bandwidth Internet-based services. 

The First Amendment concerns surrounding ‘‘Net Neutrality’’ are very real. But 

surely these concerns they can be dealt with—say, though anti-blocking provisions, 

or through the carve-out of a neutral ‘‘basic tier’’—without triggering this laundry 

list of unintended consequences. Indeed, it is my belief that network operators can 

feasibly meet the needs of unfettered access to any and all web-based content by 

providing a ‘‘basic access tier’’ that provides for a fixed minimum amount of bandwidth (or, alternatively, a fixed percentage of total bandwidth) in which pure neutrality would be maintained, and that the provision of resources over and above that 

minimum can then be left entirely to market forces. 

Once again, I thank you for your kind attention.

The CHAIRMAN. Thank you, gentlemen. None of you painted a 

particularly rosy picture of investment in the telecom industry, yet 

we see that as one of the most promising industries in our country 

today. And I think as a Congress, as a committee, what we are trying to connect is this potential with the legislation of the regulatory 

structure that needs to be in place to encourage that investment. 

I had hoped to hear a little more from you about what we need 

to do to create incentives for investment. Mr. Moore, you suggested 

I think some consistency in regulation, and I think several of you 

had other things to suggest. But in the few minutes that we have, 

if you could all maybe just give us your quick, or highest priority 

thing that we need to do as a Committee to encourage more investment, more buildout in the industry? Who would like to start us? 

Mr. Bourkoff? 

Mr. BOURKOFF. Thank you. Well, I think the key issue is clarity. 

I think when you have issues like video franchising, and a la carte, 

and net neutrality, these really go to the fundamental tenets of the 

business models we are talking about, creates a lot of uncertainty 

in the market which restrict potential investments for future services. 

I think once we have clarity on things like video franchising, especially, which seems to be more near-term, I think that will establish a level playing field, and will allow the investors to make investments on a debt and equity basis that could see a return over 

the next few years. I think that would probably encourage investments. 

Mr. MOORE. I would also agree with that. Clarity and certainty 

are probably the two biggest things the government can do to 

incentivize investment. And I think incentivizing it proactively can 

be very difficult. The key thing for regulators is to do no harm, and 

to keep regulation on a minimal basis, so that the market can react 

with a certainty as to the opportunities. 

Mr. MOFFETT. I would second the point about doing no harm. I 

think some of the more draconian proposals that we have seen, 

with respect to net neutrality for example; while they protect very 

17

important First Amendment rights, I think they have the unintended consequence of dampening the potential returns of network 

investments, and effectively requiring the consumer to foot the entire bill for future network buildout. That is a very challenging future, because it suggests that consumer prices will end up being 

very high. In the face of very high prices, there are natural disposable income limits that will dampen the demand for broadband at 

those kind of prices, and you will not get the kind of innovation 

that I think the network neutrality debate is actually trying to foster, simply because it prevents the investment in the underlying infrastructure that is necessary for that ecosystem to thrive. 

Senator DEMINT. Mr. Moffett, just a question about net neutrality. I understand the clarity, the certainty of regulations, that 

if you are going to invest generally for a longer term; we do not 

want the regulations to change. Are you saying that regardless of 

net neutrality or not, it just needs to be done, it needs to be permanent? Or are you suggesting a way that it is done that would work 

better for investment? 

Mr. MOFFETT. Well, I am saying that the way that it is done in 

this case makes a great deal of difference. And if there are hard 

and fast rules that say, for example, prioritization or what network 

operators have called creating ‘‘fast lanes,’’ for example, is off-limits 

because it in some ways favors one over another and therefore is 

deemed to be objectionable to legislators, then that has the unintended consequence of saying that it is therefore not possible to 

charge third parties for network services; therefore, the consumer 

has to foot the entire bill. That inevitably will dampen investment 

in the sector even if the legislation is enacted for enviable goals. 

The CHAIRMAN. I don’t know if you are familiar with a book that 

was written by the former FCC commissioner, Commissioner 

Furchtgott–Roth. He takes the position, as we understand it, that 

about two-thirds of the rules that were put into place after the 

1996 Act, were overturned, and that really created the instability 

in the industry. Do you all agree with that? 

Mr. MOORE. Mr. Chairman, I strongly agree. As I mentioned in 

my comments, I think, complexity of regulation almost inevitably 

equates to investment and regulatory instability. 

The CHAIRMAN. This was not complexity. This was complete reversal. He points out many of the mandated regulations were never 

issued, and two-thirds of those that were issued were overturned 

by courts. 

Mr. MOORE. I think that is because there were too many, that 

many of them had to be overturned. 

Mr. MOFFETT. Mr. Chairman, I would concur with that. I believe 

that there is also an inherent difficulty when technology is moving 

as fast as it is in this sector to try to anticipate technology changes. 

And much of what happened in the 1996 Act was trying to anticipate technology changes. That turned out to be an impossible task. 

We are in that same position today. We are trying to create—to 

return to the network neutrality debate, for example, neutrality 

with respect to things like peering sites, and spam, and antivirus 

protection, and spyware, that are sort of natural things that a network operator does. Legislatively, that would be an incredibly difficult task, and would be obsolete even before it was written. 

18

The CHAIRMAN. You all seem to be saying, at least I think I am 

hearing, if we try to protect the consumer, we are going to hurt the 

investor; is that right? That is your position? 

Mr. MOFFETT. Mr. Chairman, I do not mean that that is the case. 

I mean that we have to be careful as we try to protect the consumer, first to recognize that in many cases protecting the investors and protecting the consumers are the same thing, because a 

great deal of consumer welfare, here, comes about because of creating additional choice, and that means fostering investment. 

But as was said by Mr. Moore, it is important to recognize that 

a light touch from a regulatory perspective is probably the best outcome, and does not assume no regulation. It simply assumes that 

the most unobtrusive path to consumer welfare is probably the best 

one. 

The CHAIRMAN. Go ahead, Mr. Bourkoff. 

Mr. BOURKOFF. Thank you, Mr. Chairman. I would also say that 

I think the consumer is benefiting tremendously right now. The 

landscape is shifting so quickly that the media content is being 

really demanded by consumers rather than being pushed to them, 

right now. And that is evidenced by the fact that there are different devices now like the iPod, and like Google Video, where consumers can now go and watch different shows where they want; 

video on demand, and so on. 

And I think the industry is catering to that consumer. I think 

the danger is to put a line in the sand as the consumer behavior 

is shifting, and to sort of set it at a moment in time, because it 

really may look a lot different in the next few months. 

The CHAIRMAN. All right. Any of you concerned about our white 

spaces concept, of making available the white spaces to unlicensed 

activities? Are you familiar with what we are doing? 

Mr. MOORE. Yes, Senator. I think that any kind of provision of 

additional capacity or bandwidth, particularly on an unlicensed 

basis, which by default means its lack of regulatory depth, is going 

to be good for development. I think WiFi is a huge example of how 

things can really explode when there is a very light regulatory 

touch. 

And you know, addressing your previous comment, I would say 

look at the Internet and wireless; two of the most lightly regulated 

areas. I think consumers have incredibly benefited by that light 

regulatory touch, you know, beyond those people’s expectations. 

The CHAIRMAN. Mr. Szymczak, you noted in your statement, I believe, that the price for voice services is likely to fall in the future. 

What services or revenue streams do you think would make up 

that loss? How do you predict that? 

Mr. SZYMCZAK. Well, the driver on this decline, of course, is 

greater competition, and the voice traffic moving onto Internet-type 

of backbones, away from the traditional circuit-switched network. 

And I think the opportunities for carriers are to push more aggressively into broadband. We are seeing broadband, obviously, into 

homes, and we are also seeing broadband wireless, now, starting 

to roll out, at different carriers here in the U.S. And so these are 

incremental revenue opportunities for them. The hope is that the 

growth in the high-speed can offset the decline in the voice revenues. I think there is much risk in the calculation, and I think that 

19

is why you see these aggressive efforts to find other revenue opportunities to help justify the investments they want to make in the 

network, which has led into the network neutrality debate, as well 

as other things. So clearly, we have great telecom networks in the 

U.S. And to maintain them, you need a revenue stream to continue 

the investment to maintain those networks into the future. 

The CHAIRMAN. My last question for this group: the universal 

service payments have been made primarily by the long-distance 

carriers, by the customers of long-distance carriers. We are looking 

to broaden the concept of universal service contributions so that all 

communications pays in a very minimal amount. What effect will 

that have on the markets? We envision that everyone that has a 

number, or some similar address, would be paying a very small 

amount into this fund, and the fund will still be maintained by the 

industry itself. What is that impact on the investment market? 

Mr. MOORE. Senator, I cover the rural local exchange industry. 

And as I mentioned, one of the biggest concerns of investors in that 

sector is continued support for USF. I think broadening the base 

and ensuring the stability of the Fund is going to have a tremendous benefit to both the investors, companies, and the consumers, 

in the rural space. 

The CHAIRMAN. Anyone disagree? 

Mr. BOURKOFF. Aryeh Bourkoff. Mr. Chairman, I think there is 

a risk that the discrepancy of profitability will expand if that were 

to happen. The RLECs enjoy margins materially higher than the 

ILECs and the cable companies, right now, I think as a result of 

the Fund. And if that were to redistribute, so to speak, and I think 

the Bells and the cable companies may have even more of a profitability disadvantage. 

The CHAIRMAN. Disadvantage? 

Mr. BOURKOFF. Yes, because obviously, the cable companies 

today do not pay into the Universal Service Fund. And if they were 

to participate, it would drag their margins down even further, 

where the RLECs right now enjoy margins above 50 percent. The 

cable and the ILECs are around 40 percent, right now. 

The CHAIRMAN. Let me ask you about this net neutrality problem 

that two of you have mentioned substantially. Do you think a network operator could block access to a company like Google or 

Yahoo! and really get away with it? 

Mr. SZYMCZAK. I think that would be very difficult to sustain on 

an ongoing basis. Because if we think about it from a competitive 

perspective, if the phone company were to block access to a 

website, a lot of its customers would switch within that day or the 

next day to a cable operator. So it would always offer an opportunity to the fellow who is not blocking it to take customers. So I 

think that pressure will make it very difficult for an access provider to block access to an important service. 

The CHAIRMAN. Go ahead, Mr. Bourkoff. 

Mr. BOURKOFF. Thank you, Mr. Chairman. I agree. I think that 

blocking an access would be a devastating outcome. But I think the 

middle ground is probably that there has to be a tiering structure 

put into place, where some of the higher-capacity content over the 

Internet that really requires a lot more bandwidth, you may have 

to pay more for packet prioritization, for some of that content. 

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Otherwise, there is a risk that the CapEx cycle will continue to 

increase, and that there may be a sort of inequitable distribution 

of that capacity. So there should be equal access, in my view, of 

video content across the spectrum, but maybe at a defined capacity 

level. If it gets above or below that, there may be a tiering structure, which could help differentiate that. 

The CHAIRMAN. We were visited by some minority groups recently about the lack of access for minority groups, in terms of access to channels, and just general access to being able to provide 

content. If we get into that, is that going to have much effect on 

your testimony here today? If we mandate some percentage participation in markets, what is the impact on the stock market? You 

do not want to touch that? 

Mr. MOFFETT. I am sorry, you are referring to inducements for 

minority investment in some of these areas like in the past, wireless——

The CHAIRMAN. I am talking about having Congress mandate 

that each area must allow a participation of a dominant, or one or 

two of the dominant minorities in the area, have access to channels, and to provision of content. 

Mr. BOURKOFF. I am a proponent of the fact that there is equal 

access that should be enabled. And if it is not happening, it could 

be mandated. But the rate card, or the prices paid for that content 

could vary, depending on the market factors like demand, and obviously, viewership, and so on. 

The CHAIRMAN. Well, we thank you. I am sorry the other members were not here today. This is what we call a ‘‘vote-a-rama,’’ 

starting out there right now, at least seven votes in a row on the 

budget bill, and we did not anticipate that when we scheduled the 

hearing. 

Thank you all for taking the time and going to the trouble of preparing the statements and appearing here. We would appreciate 

your comments as you see us keep going on this markup, which we 

will take up, I think will start sometime after Easter, and really 

get down to trying to get a bill out on it. So if you have any further 

comments you would like to get to us, we will appreciate receiving 

them. 

Thank you very much for coming. 

[Whereupon, at 3:20 p.m., the hearing was adjourned.]

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