COMPETITION IN THE COMMUNICATIONS MARKETPLACE: HOW TECHNOLOGY IS CHANGING THE

STRUCTURE OF THE INDUSTRY

HEARING

BEFORE THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MARCH 2, 2005

Serial No. 109–13

Printed for the use of the Committee on Energy and Commerce

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Available via the World Wide Web: http://www.access.gpo.gov/congress/house

TECHNOLOGY IS CHANGING THE STRUCTURE OF THE INDUSTRY

COMPETITION IN THE COMMUNICATIONS MARKETPLACE: HOW

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COMPETITION IN THE COMMUNICATIONS MARKETPLACE: HOW TECHNOLOGY IS CHANGING THE

STRUCTURE OF THE INDUSTRY

HEARING

BEFORE THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MARCH 2, 2005

Serial No. 109–13

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

2

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas

MICHAEL BILIRAKIS, Florida

Vice Chairman

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi, Vice Chairman

VITO FOSSELLA, New York

ROY BLUNT, Missouri

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

C.L. ‘‘BUTCH’’ OTTER, Idaho

SUE MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MIKE DOYLE, Pennsylvania

TOM ALLEN, Maine

JIM DAVIS, Florida

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

BUD ALBRIGHT, Staff Director

JAMES D. BARNETTE, Deputy Staff Director and General Counsel

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

(II)

C O N T E N T S

Page

Testimony of:

Capellas, Michael D., President and Chief Executive Officer, MCI ............. 27

Cooper, Mark N., Director of Research, Consumer Federation of America . 86

Donahue, Timothy, President and Chief Executive Officer, Nextel Communications ................................................................................................... 38

Dorman, David, Chairman and Chief Executive Officer, AT&T Corporation ................................................................................................................. 19

Forsee, Gary D., Chairman and CEO, Sprint ................................................ 32

Halpern, Jeffrey, Senior Equity Research Analyst, U.S. Telecommunications Services, Sanford C. Bernstein & Co., LLC ................................... 96

Seidenberg, Ivan G., Chairman and Chief Executive Officer, Verizon

Communications ............................................................................................ 25

Speta, James B., Associate Professor, Northwestern University School

of Law ............................................................................................................ 100

Weiser, Philip J., Associate Professor of Law and Telecommunications,

and Director of Silicon Flatirons Telecommunications Program, University of Colorado School of Law ..................................................................... 110

Whitacre, Edward E., Jr., Chairman and Chief Executive Officer, SBC

Communications, Inc .................................................................................... 16

Material submitted for the record by:

Alliance for Public Technology, letter dated March 10, 2005, to Hon.

Joe Barton ..................................................................................................... 126

Donahue, Timothy, President and Chief Executive Officer, Nextel Communications, response for the record .......................................................... 127

Forsee, Gary D., Chairman and CEO, Sprint, letter dated April 4, 2005,

to Hon. Joe Barton ........................................................................................ 128

(III)

(1)

COMPETITION IN THE COMMUNICATIONS

MARKETPLACE: HOW TECHNOLOGY IS

CHANGING THE STRUCTURE OF THE INDUSTRY

WEDNESDAY, MARCH 2, 2005

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m., in room 2123

of the Rayburn House Office Building, Hon. Joe Barton (chairman)

presiding.

Members present: Representatives Barton, Hall, Bilirakis, Upton,

Stearns, Deal, Cubin, Shimkus, Wilson, Shadegg, Pickering,

Fossella, Buyer, Radanovich, Bass, Pitts, Bono, Walden, Terry, Ferguson, Otter, Myrick, Sullivan, Murphy, Burgess, Blackburn, Dingell, Markey, Boucher, Brown, Rush, Eshoo, Stupak, Engel, Wynn,

Green, DeGette, Solis, Gonzalez, Inslee, Baldwin, and Ross.

Staff present: Howard Waltzman, chief counsel; Kelly Cole, majority counsel; Will Nordwind, policy coordinator; Bud Albright,

staff director; Andy Black, deputy staff director; Jon Tripp, deputy

communications director; Larry Neal, deputy staff director, communications; Anh Nguyen, legislative clerk; Billy Harvard, legislative

clerk; Johanna Shelton, minority counsel; Peter Filon, minority

counsel; Turney Hall, staff assistant; Voncille Hines, research assistant; and Sharon Davis, minority chief clerk.

Chairman BARTON. The committee will come to order. I would

like to welcome our distinguished panel, especially the Texan from

Ennis, Texas, my good friend, Ed Whitacre, whose mother is doing

well in Ennis.

Today’s hearing is entitled Competition in the Communications

Marketplace: How Technology is Changing the Structure of the Industry. We have before us today a very distinguished panel of six

of the top communication executives in the world. We also have a

second panel of representatives from consumer groups, the financial industry, and academia.

Today’s hearing will examine how advanced technologies have

changed the dynamics of the communication industry by enabling

the same suite of voice, video, and data services to be offered over

different networks platforms, and also by permitting entry into

these markets by virtual operators that use Internet protocol and

provide applications such as Voice-over Internet Protocol, or VoIP,

to consumers who subscribe to broadband services. These trends

have resulted in a hollowing out of some traditional telephone marVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 99902.TXT HCOM1 PsN: HCOM1
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keting segments, such as residential and enterprise long distance

telephone service as well as residential local exchange service.

These industry trends have also led service providers with complementary IP and broadband assets to merge.

The communication industry certainly looks very different than

it did 10 years ago when this committee debated the legislation

that became the 1996 Telecommunications Act. Back then, there

were 28 million wireless subscribers. Today, there are over 170 million. Back then, wireless rates were much higher and long distance

was not free. Today, wireless rates have plummeted. Long distance

is almost entirely free. Consumers are beginning to cut the cord

and replace their existing wireline phone service with wireless

phone service.

Today, in addition to providing voice services, wireless carriers

are now offering data services and beginning to roll out video. Back

in 1996, the Internet had not been fully commercialized. Today,

there are more than 140 million Internet subscribers in the United

States, including 40 million broadband customers. These broadband

customers all now have access to innovative new IP services, such

as VoIP that can be offered over broadband platforms at rates far

below what consumers currently pay for traditional local and long

distance packages. And I must tell Mr. Whitacre, that I am about

to become a non-subscriber to Southwestern Bell in Ennis, Texas,

because I now have Internet, so I will have one hard line, but I am

going to save $50 a month on one of my SBC charges. So you will

still be getting $50 a month on my—I will have one hard line in

my home.

In 1995, cable companies offered cable services. Today, the cable

industry leads broadband subscribership in the United States, and

cable companies are aggressively deploying VoIP services.

With an industry that has changed so much in 10 years, it

should come as little surprise that companies are looking at one

another to determine where the partnerships will enable them to

be stronger competitors in the new digital world. The combination

of Sprint and Nextel will create a broadband giant in the wireless

industry that has no affiliation with the Bells. We should not be

wary of such a combined entity; we should welcome it. I want to

repeat that. The combination of Sprint and Nextel will create a

broadband giant in the wireless industry that has no affiliation

with the Bells. We should not be wary of such a combined entity;

we should welcome it.

And once the unthinkable merger of AT&T and SBC is now very

realistic. AT&T is a different company than it was 10 years ago.

AT&T and SBC have complementary assets that will create a company with strengths in the residential and enterprise sectors, local

and long distance, wireline and wireless, and with the ability to

serve as a broadband network provider and an IP application service provider, the same logic applies to the Verizon-MCI deal. And

I would want to emphasize here that if you are going to have one

merger, you need the other merger so that there really is competition. We still have to have competition in the marketplace.

The United States needs to have a vibrant communications industry with strong national players. I believe the companies before

3

us today are creating such players and that U.S. economic growth

and consumers will benefit as a result.

I look forward to the testimony of our witnesses. I would like to

thank them each individually for participating today.

With that, I would like to welcome our distinguished ranking

member from Michigan, Mr. Dingell, for an opening statement.

Mr. DINGELL. Mr. Chairman, you are very gracious. Thank you.

I commend you for holding this hearing. It is timely, and it is important. It is very important that we understand the implications

of the proposed mergers between SBC-AT&T, Verizon-MCI, and

Sprint-Nextel. The scale of these transactions will further transform a rapidly evolving communications industry. So this committee urgently needs to review them carefully. I would note that

the world is changing under our feet, and we must change and be

prepared for making the actions that this committee must make to

address these concerns.

The SBC’s proposed acquisition of AT&T could mark the end of

the line for a wonderful company, a 130-year-old icon, once the

most powerful company in the United States. In its 1984 breakup,

AT&T saddled the local Bell companies with significant burdens.

The industry was then subjected to a difficult period in which one

person controlled its destiny—one person who stifled change and

forward movement in the industry. In 1996, Congress freed the industry from this stifling structure, and since then, AT&T managed

itself into a meltdown. It failed to understand or embrace the farchanging and far-reaching differences that were taking hold in the

industry, including the rise of the Internet and the structural collapse of long distance as a distinct service offering. Some may view

SBC’s acquisition as offering AT&T a way out of a morass of its

own construction.

MCI, on the other hand, began its corporate life as a scrappy

competitor, willing to take risks on new technologies. It evolved

into the second largest long distance company and the world’s largest Internet backbone provider. Unfortunately, Worldcomm’s takeover mired the company in risky and inappropriate ventures. The

backing of a solidly managed company could offer MCI a renewed

opportunity to reshape its future.

The Nextel-Sprint transaction will combine the third and the

fifth largest mobile operators into a larger, third-ranked, nationwide competitor, offering Nextel’s loyal business customers the benefit of a national IP backbone.

These transactions highlight how technology is spurring a revolution in the way that Americans communicate. We are a long way

from the reconstruction of Ma Bell. The modern communications

marketplace bears little resemblance to the prior dominance of the

single phone company. It is incumbent on regulators to leave the

deal of the last century to a bygone era and to put 21st century

deals into their proper context.

Today, many rivals challenge traditional phone companies. There

are now more cell phones than landline phones. Cable operators

provide voice services and have more broadband customers than

phone companies. Internet companies are now connecting voice

calls. All sectors are moving toward a converged world of voice,

video, and data offered across all kinds of platforms. It is this

4

changed telecommunications landscape that is compelling this committee and, indeed, regulators everywhere to rethink our telecommunications laws.

The government has a responsibility to analyze mergers carefully

to be sure that they are in the public interest and not hurtful. I

believe four overriding questions here must be answered.

First, how will these transactions affect consumers? Will consumers, both mass market and enterprise, benefit from more

choices, better quality, lower prices, and innovative products and

services?

Second, how will these mergers affect jobs? Will these transactions support the creations of new jobs for working Americans as

these companies handle increasingly complex telecommunications

needs?

Third, how will these transactions affect competition in the communications market? Consequences for our independent companies,

rural companies, small and mid-sized businesses must be examined

closely.

Fourth, how will these transactions affect telecommunications

policy? What are the implications of bundling voice, data, wireless,

and video? I would note that these transactions could renew efforts

to achieve intercarrier compensation reform and the preservation of

Federal universal service programs.

I do not make any judgments today on these transactions, but I

caution the authorities reviewing these mergers against reverting

to an antiquated mindset of compartmentalized, distance-sensitive

services and providers. Consumers will benefit from a realistic assessment of what telecommunications means in the 21st century.

It is important for this committee to give affected parties a

chance to be heard on whether the public interest lies in any given

matter. I thank the CEOs for coming to explain their mergers, and

I welcome them today. I look forward to the witnesses on the second panel who offer their own insight. This committee can always

benefit from a fully informed debate of the most diverse stakeholders on issues of great importance to the public.

Again, thank you, Mr. Chairman, and gentlemen, our members

of the panel, thank you for your presence and your assistance.

Chairman BARTON. Thank you, Mr. Dingell.

We would recognize the distinguished subcommittee chairman,

Mr. Upton, to make an opening statement.

Mr. UPTON. Thank you, Mr. Chairman. And I commend you for

holding this hearing today and providing us the opportunity to

hear from today’s distinguished witnesses.

It is a constant refrain of mine, which I will repeat today, that

the telecommunications marketplace has evolved dramatically, both

in terms of technology and consumer preference from the days

when Congress debated and passed the Telecommunications Act of

1996. The mergers which we are examining today are further evidence of this dramatic evolution, and they represent a natural and

healthy progression in the marketplace.

These companies seem to be better positioned, combined rather

than separate to do battle in a world where the meaningful fight

will be amongst intermodal competitors as they aggressively seek

to win the hand of residential business, and governmental conVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 99902.TXT HCOM1 PsN: HCOM1
5

sumers in the offering of a suite of IP-enabled voice data and video

services.

Given the dramatic changes in the communication marketplace

over the last 10 years, these mergers are not only logical, but they

are integral to ensuring a vibrant and intermodally competitive

communications marketplace.

I consider these mergers a necessary tune-up for the telecommunications industry ensuring that the country’s economic engine is fully geared up to compete globally. As goes the tech sector,

so goes the economy.

And I yield back my time, Mr. Chairman.

Chairman BARTON. We thank the gentleman.

We recognize the distinguished ranking member of the subcommittee, Mr. Markey of Massachusetts, for an opening statement.

Mr. MARKEY. Thank you, Mr. Chairman.

And I want to commend you for holding this hearing today on

the telecommunications mergers.

Mr. Chairman, in this month of ‘‘March Madness’’, college basketball teams will compete to reach the ‘‘Final Four.’’ In the March

telecom mergers, we may also reach a ‘‘Final Four.’’ In college basketball, to reach the ‘‘Final Four’’, teams have to compete to defeat

their opponents. They don’t get to merge with them in order to

move on. The Bell companies have employed non-market strategies

in the courts, in Congress, and ultimately at the Commission to

beat AT&T and MCI and compel them into these mergers. While

these were perfectly legal corporate strategies, we shouldn’t confuse

them with actually winning in the marketplace with consumers.

It was not technological change that brought about the Bell Company mergers before us today. Rather, it was an unwise change in

government policy by the Federal Communications Commission,

which led to these mergers. We know these mergers were not the

first preference of either MCI or AT&T, both of which had earned

their pedigrees as competitive entrepreneurial companies. With

fewer companies remaining to offering competing, affordable, traditional telephone service to average residential customers, the risk

to the consumer is whether the remaining Bell behemoths will

raise rates. And in the broadband marketplace, the question will

be whether these same companies truly embark upon ruthless,

Darwinian, Adam Smith-like telecom wars or whether we see a digital detante. And these mergers merely presage the cozy coalescence of the communications colossi.

Consumers have a lot riding on the answers to these questions.

Thank you, Mr. Chairman, once again for holding this hearing.

Chairman BARTON. I thank you, Mr. Markey.

By the new rule we have adopted, all of the members are going

to be allowed 1-minute opening statements, and we will start with

the gentleman from Texas, Mr. Hall.

Mr. HALL. Mr. Chairman, I am still trying to figure out what Mr.

Markey said. I yield back my time.

Chairman BARTON. And then we would go to the distinguished

gentleman from Virginia, Mr. Boucher.

Mr. BOUCHER. Thank you very much, Mr. Chairman.

6

In my view, the public interest is well served by the mergers

which are the subject of today’s hearing. The Sprint-Nextel combination creates a strong, national cellular company with a footprint sufficient for vigorous competition with the two largest service providers. The increase in towers will reduce the number of

dropped calls to the broad benefit of rural subscribers. The SBCAT&T and Verizon-MCI mergers will speed the introduction of new

services, including VoIP and multi-channel video as an Internet application. And broadband deployment will accelerate as SBC and

Verizon use their larger integrated networks as a foundation for

the expansion of fiber optics into neighborhoods and then into

homes.

I appreciate the chairman assembling this excellent panel and

look forward to a detailed explanation from our witnesses of the

public benefits that these combinations will bring.

Thank you, Mr. Chairman. I yield back.

Chairman BARTON. Thank you, Congressman Boucher.

The gentleman from Florida, Mr. Bilirakis, the distinguished

vice-chair—okay. The gentleman from Ohio, Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman.

Large-scale mergers in the telecommunications industry have a

significant impact not only on the average consumer, also on the

economic development of communities around our country. Mergers

produce efficiencies that lead to lower prices, however, when large

mega-mergers focus on the most profitable customers, they can

squeeze smaller players, individual consumers and smaller businesses. If smaller phone companies can’t connect to the large companies at an affordable rate, what becomes of the communities that

they serve? If our committee wants the market to work, we can’t

ignore any segment of that market.

Bonding of voice, video, and data services is another example

that is bound to price some consumers out of the market. It is not

just a consumer access issue. It is an economic development issue.

If small business can’t access the same breakthrough technologies

as larger firms, they lose ground against their competition. Federal, State, and local government must all play a role in preventing

lags in access to technology that disadvantage small business and

consumers. In that context, it has never been more important to invest in programs like the Universal Service Fund and E-rate, ultimately helping all consumers gain affordable access to existing and

new technologies as sound economic policy.

Thank you, Mr. Chairman.

Chairman BARTON. Thank you, Congressman Brown.

Does the gentlelady from New Mexico, Ms. Wilson, wish to make

an opening statement?

Ms. WILSON. Thank you, Mr. Chairman.

It strikes me that we are almost at the point where we have gone

full circle over the last two decades. We have had two decades of

vigorous competition and technological innovation. We have got

new technologies at lower costs spurred initially by the breakup of

a very large monopoly. And we are now on the cusp of seeing the

emergence of a duopoly with, I think two large groups that dominate the market who are highly unlikely to compete with each

other on their own home turfs.

7

It will be interesting to see how this works out in two ways. One

is for consumers who I think have benefited tremendously from the

vigorous competition and innovation that has taken place over the

last two decades and to see whether the pace of this innovation and

cost reduction continues. And I have my doubts about that.

And the second is in innovation. Telecommunications innovation

has been one of the key components of American growth in productivity over the last two decades. And keeping on the leading edge

of that innovation will be important for this country for jobs and

for our economy. I have no doubt that the best business course,

given the court decisions you all faced, was to pursue these mergers and acquisitions. But I do have doubt as to whether this will

benefit the American economy and benefit the American consumer

in the long term. And I think that that is an important thing for

this committee to explore.

Thank you, Mr. Chairman.

Chairman BARTON. I thank the gentlelady from New Mexico.

We would like to recognize the gentlelady from California for an

opening statement, but before we do that, Congressman Engel reminded me, that Congresswoman Eshoo just lost her mother. And

all of us who have lost a parent, it is one of the more traumatic

things, so we just want to express our condolences to the gentlelady

from California and wish her the very best as she gets through

that.

The gentlelady from California.

Ms. ESHOO. Thank you, Mr. Chairman, both for holding this

hearing and for what you just said. There isn’t anything that quite

prepares you, regardless of the set of circumstances, when you lose

a parent. They stand between us and our own mortality, and I really think I had the best. So thank you for what you said and for

all of the wishes of the members of the committee. My family and

I appreciate it very, very much.

As I look at the witness table and the impressive lineup of executives who have joined us here today, and I welcome you, I can’t

help but think of how much bigger the table would have been a few

years ago. It is also instructive to think about how small the table

might be in the next few years. We might only need a desk. We

seem to have gone in one direction, and now we are going in another.

I don’t think that all consolidations and mergers are bad, and realignment of a dynamic industry, such as the telecommunications

industry, I think is inevitable. But the course of events that has

led us here is really distressing to me. As someone that served on

the committee when the Telecommunications Act was drawn up

and as a conferee on that bill, I was so excited about what had

been worked out. I really thought that this was one of the great

takeoff points for the industry toward the end of a century that

was going to prepare us for a new one.

But most frankly, I think it has been mangled. What we are left

with are two large competitors that dominate the communications

landscape, the Bells and cable. That is not a good outcome, in my

view, but that is where we are. I think the challenge for us will

be to ensure that the companies that control last-mile access treat

new entrants and competitors fairly. They can put a squeeze on

8

people every inch of that last mile, and I don’t think that is good

for consumers and the country, most frankly. So I think we also

have to ensure that new technologies that offer other avenues to

the consumer are given the opportunity to take root.

So with that, Mr. Chairman, I look forward to hearing from our

witnesses. Again, thank you for having this very important hearing

and also for the sentiments that you have expressed on behalf of

all of the members of the committee.

Chairman BARTON. I want to thank the gentlelady and, you

know, we all get elected as Republicans and Democrats, but we are

all people, and most—believe it or not, in the audience, we all work

together pretty well. But in our offices, you know, if you are a Republican, you have pictures of President Reagan, and you know,

President Bush, and if you are Democrat, you have President

Carter and President Clinton. Well, I have got one photograph of

President Clinton in my office, and it is because Anna Eshoo was

in it that I have that photograph. So I really have the most sincere

affection and respect for the gentlelady from California.

Does the gentleman from Georgia, Mr. Deal, wish to make an

opening statement?

Okay. Does the gentleman from Michigan, Mr. Stupak, wish to

make an opening statement?

Mr. STUPAK. Thank you, Mr. Chairman, and thank you for holding this hearing today on the recently announced mergers.

The title of this hearing is how technology is changing the structure of the industry. There is no doubt that technology has greatly

impacted the paradigm shift in the telecommunications industry.

Voice-over the Internet Protocol and other technologies have

opened the door for new competition between wireless, cable,

wireline, and even power companies. However, I believe the committee would be remiss not to acknowledge the impact regulatory

decisions have had on this industry. Were these mergers inevitable? I believe we are seeing the inevitable consequences of deliberate decisions made by Chairman Powell and backed by the Bush

Administration.

As you know, Michigan was one of the States that benefited from

competition. I want to assurances that the rewards of competition

from which we in Michigan have benefited, lower prices, better

service, and more choice, will not diminish. I also want assurances

that my very rural District that covers the Upper Peninsula and

the northern Lower Peninsula of Michigan will have the resources

to invest in infrastructure, including broadband, and that the digital divide will close and not widen as a result of these mergers.

I look forward to hearing from both panels today, and I yield

back the balance of my time.

Chairman BARTON. I thank the gentleman.

Does the gentleman from California, Mr. Radanovich, wish to

make an opening statement?

Mr. RADANOVICH. No, thank you, Mr. Chairman. I appreciate the

opportunity and look forward to the questions.

Chairman BARTON. Okay. The gentleman from New York, Mr.

Engel.

Mr. ENGEL. Well, thank you, Mr. Chairman. I want to thank you

for holding the hearing today, and I think you touched on why this

9

committee is so special and so important. We do work well together. I want to welcome the distinguished panelists, especially

Ivan Seidenberg, who comes from my hometown. And we always

look at Verizon, in New York, as our hometown company.

Mr. Chairman, as Bob Dylan used to sing, the times they are a

changing. And how they are changing in this industry. For many

years, those of us on the Telecommunications Subcommittee have

been foreseeing the end of the long distance companies, and here

today, we are seeing that come to pass. We, in our lifetimes, will

have experienced telephone service going from a complete monopoly to a radically different, richly competitive industry. I think that

things—certain things are inevitable, and I don’t think that we

need to fear inevitability. I don’t fear change. We have to look at

what is best for the consumer. I think we make the mistake if we

think that once the genie is out of the bottle we should try to push

it back in and yearn for the good old days. Someone once said that

if you think the good old days were so good, you are deluding yourself. The bottom line is what is good for the consumer. And we

have to look in terms of what is best for our country, globally, and

as well internally.

So I yield back. I look forward to listening to what these gentlemen have to say. And I think that together, as a committee, we

ought to not fear the future but move on.

Chairman BARTON. Isn’t America a great country? You have

somebody from your hometown here, and I have somebody from my

hometown here. But your hometown has got about 10 million people, and my hometown has about 10,000 people.

Does the gentleman from Illinois, Mr. Shimkus, wish to make an

opening statement?

Mr. SHIMKUS. Yes, Mr. Chairman, just briefly.

As many of you know, I co-chair the E-911 caucus with Anna

Eshoo, who has been a great partner in this issue. And as we move

forward, there—in current new stories, obviously there is a concern. So in this consolidation debate, it would be helpful for us, especially those who have been watching the public safety aspects of

deploying E-911 and Voice-over Internet Protocol program of all

911 calls is will this help us get to that point in time when all consumers can really believe that when they dial 911, wherever they

are at, that they will know that the 911 folks will know where they

are calling from. And so everybody has their own little niches that

they focus on.

What I hope to hear is that yeah, this is going to be helpful. It

is going to help us address the shortcomings of where we are at in

full 911 deployment, whether it is E-911 identification location or

the most recent reported problems of Voice-over Internet Protocol,

people calling from Illinois and getting it picked up at a Colorado

piece.

So that is my focus. I thank you for your time. I look forward

to working with you all, and I yield back, Mr. Chairman.

Chairman BARTON. I thank the gentleman.

I can’t see down on—the gentlelady from California, Ms. Solis.

Ms. SOLIS. Thank you, Mr. Chairman, and thank you for calling

this hearing and—along with my colleagues here.

10

As one who has express concern over corporate consolidation and

its impact on consumers, I am pleased that our committee today is

taking an active role in addressing these numerous issues regarding mergers in the telephone industry. The telecommunications industry looked very different back in 1996. After a series of court

decisions and FCC rulings, the reality is an ever-changing communications industry where companies are forced to take measures in

order not only to compete but to survive.

One of the issues that continues to concern me is the fact that—

in Districts like mine that are working class, low income, while

high-speed Internet is available to most of the population, very few

subscribers come about in my District. I could even say that about

our classrooms. We are not even linked up to the Internet in many

of our classrooms in the East Los Angeles area. So I hope that with

all of these proposed mergers that we can really look at how we

could provide assistance to our consumers and to larger communities that still fail to have access.

So I look forward to hearing from you and also want to thank

Chairman Barton for calling this hearing today.

Thank you very much.

Chairman BARTON. I thank the gentlelady.

Does the gentleman from New York, Mr. Fossella——

Mr. FOSSELLA. Thank you.

Chairman BARTON. [continuing] wish to make an opening statement?

Mr. FOSSELLA. Thank you, Mr. Chairman.

And let me welcome the distinguished panel and acknowledge

that I know you come as individuals, but you represent tens of

thousands of hard working people across this country. And we are

here, I think, collectively to ensure that the United States will remain as the No. 1 communications network in the world, and hopefully that is a goal that we can agree to as these mergers come and

go. And particularly, let me welcome Ivan Seidenberg, as Eliot

Engel just did. Verizon employees about 35,000 people in New York

State, good, decent people, and among the largest employers. So we

welcome you.

Mr. Donahue from Nextel, I want to compliment you for reaching

an agreement to ensure that public safety in this transition to

megahertz to ensure that a public safety office is across the country, even in light of the merger with Sprint will ensure themselves

and their families and, more importantly, the public at large, that

we will have enhanced communications for our public safety offices,

so I want to thank you for that.

And just as we question and hear the answers, ensure that our

focus remain on the benefits that will come from the investments

these individuals and their corporations have made and will continue to be made to that overriding goal of ensuring that this great

country have the No. 1 communications network in the world.

So with that, I yield back.

Thank you.

Chairman BARTON. I thank the gentleman from New York.

Does the gentleman from Maryland wish to make an opening

statement?

11

Okay. Does the distinguished chairman of the Veterans Committee, Mr. Buyer of Indiana, wish to make an opening statement?

Mr. BUYER. I thank the gentleman. I am pleased that you are

here.

As I listened to my colleague, Ms. Eshoo, I was also a conferee

in the 1996 Act, and I wouldn’t choose the word ‘‘mangled.’’ I would

choose—to prefer to accept responsibility, and that is what all of

us on that conference should do, because we didn’t get it right. And

nor did those in the industry get it right. We thought the whole

future, when we did that bill, was all about voice, and we got it

wrong. It is the convergence of voice, video, and data, in the new

world in which we find ourselves.

So in your remarks, I am hopeful that I can hear counsel to us

with advice on a rewrite. I am hopeful that you will be able to address this lack of competition of broadband in the rural areas. It

is bothersome to many of us as members. And we also will be

watchful with regard to cherry picking.

Third, I would like for you to speak to my constituency in Indiana about how robust this competition will be with regard to mergers.

And fourth, I would like to know the effect upon these mergers

with national security, not only DOD, but also first responders.

And gentlemen, thank you for your time in being here today.

This is very important.

I yield back.

Chairman BARTON. I thank the gentleman.

Does the gentleman from Texas, Mr. Gonzalez, wish to make an

opening statement?

Mr. GONZALEZ. Thank you very much, Mr. Chairman. And I

would like to welcome Mr. Whitacre, one of my favorite constituents, of course, and a great citizen of San Antonio. And of course,

SBC being a great corporate citizen, I pledge to you, Mr. Whitacre,

that today I will try to dissuade the chairman from dropping that

second SBC line. I will caution him to read the fine print and quality, also.

But I think it really underscores what we are here to talk about

today, and that is competition. How will SBC and other similarly

situated companies compete in with this modern technology that is

out there? There is a reason why the chairman is opting to do what

he is doing regarding his own personal choice, and it is something

that the consumer is facing every day. But I do believe this, that

the notions of fair play in creating a competitive environment transcend all technological advances. And any technology and its success is really more a contingent on wise policy that emanates from

Capitol Hill. So hopefully, with your help, we will reach those decisions.

Thanks again.

Chairman BARTON. I thank the gentleman from San Antonio.

The gentleman from Pennsylvania, Mr. Pitts?

Mr. PITTS. No opening statement, Mr. Chairman.

Chairman BARTON. Okay. The gentlelady from Colorado?

Okay. Does the gentleman from New Hampshire, Mr. Bass, wish

to make an opening statement? Ms. Bono was getting ready to

make an opening statement.

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Ms. BONO. Thank you, Mr. Chairman.

I would like to thank you for holding this very important hearing

today, and I would just like to point out that the telecommunications landscape has changed dramatically since Congress passed

the 1996 Act. Over the course of a decade, we have seen competition in long distance, wireless, and high-speed Internet access. Consumers have been the direct beneficiaries of this competition. In

short, I am excited about this competition taking place, but I am

also very excited to hear the testimony today about how consumers

are going to continue to benefit.

Further, as technologies continue to converge, I am very anxious

to hear how copyright and intellectual property rights are treated

and respected in this process. I would like to thank the panelists

in advance for your participation.

And with that, Mr. Chairman, I yield back.

Chairman BARTON. I thank the gentlelady.

Does Mr. Inslee wish to make an opening statement?

The gentleman, Mr. Otter, wish to make an opening statement?

Mr. OTTER. No, thank you, Mr. Chairman. I will submit mine for

the record.

Chairman BARTON. Does Mr. Ross wish to make an opening

statement?

Mr. ROSS. Thank you, Mr. Chairman and Ranking Member Dingell, for having the hearing today to discuss how technology has

changed and is continuing to change the communications industry.

I represent a rural District, about half of Arkansas, 148 towns

and 146 of them are relatively small, and the other two, most of

you all in this room would consider small. And I can tell you that

many of my constituents, many small businesses, some large, are

not receiving many of the products and services that are currently

in the market and have been around for quite some time in some

of the larger cities across this country.

I just want to impress upon you that it is imperative that as innovative products and services become available, as well as those

already on the market, that those of us in rural areas have access

to them.

I look forward to hearing the witnesses discuss how rural America will be impacted by these proposed mergers and how they will

better serve them.

Chairman BARTON. I thank the gentleman from Arkansas.

The gentlelady from North Carolina, Ms. Myrick.

Ms. MYRICK. No, Mr. Chairman. I am just anxious to hear what

the gentlemen have to say.

Chairman BARTON. The gentleman from Oklahoma, Mr. Sullivan.

Mr. SULLIVAN. I waive, Mr. Chairman. I will submit my remarks

in writing.

Chairman BARTON. All right.

The gentleman from Pennsylvania, Mr. Murphy.

The gentleman from Texas, Dr. Burgess.

The gentlelady from Tennessee, Ms. Blackburn.

Seeing no other members present, all members not present will

have the requisite number of days to put their opening statements

in the record.

[Additional statements submitted for the record follow:]

13

PREPARED STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF FLORIDA

Thank you, Mr. Chairman.

We’ve come a long way since Judge Green’s decision in 1984. The telecommunications world is changing in exciting ways and these mergers are the latest indication that these companies are adapting to this ever-changing world.

Despite the excitement and opportunity, there are still many important and complex questions that need to be answered: How many Americans will lose their jobs?

How will these mergers impact wholesale telecommunications markets? Will this increase competition? Will these mergers benefit consumers in the long run?

These are issues that we cannot afford to overlook.

Mr. Chairman, competition led to the rapid innovation that brought us the advanced telecommunications services we have today. We need to ensure that these

monumental consolidations do not undermine this same innovation.

I look forward to listening to the panelists statements, and I thank you Mr. Chairman for holding this hearing.

PREPARED STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF KENTUCKY

Mr. Chairman, I want to thank you for holding this hearing, and I thank our two

panels of witnesses for appearing before this Committee to discuss the important

changes that are taking place in the telecommunications industry.

Mr. Chairman, the telecommunications landscape has changed markedly since the

passage of the Telecommunications Act of 1996. At the time, local and long distance

were the dominant communications platforms, and consequently, Congress sought

to manage competition between the two. A decade later, however, we see that consumer demand has driven innovation in the industry to the point that much of the

Act’s regulatory framework has simply become obsolete.

Gone are the days of ‘‘plain old telephone service’’; today, consumers rely on a vast

array of other services for their communications needs, including wireless and Internet-based platforms. Moreover, telecommunications companies no longer compete for

customers on a domestic basis—companies now are competing for customers on a

truly global scale.

The proposed mergers of SBC and AT&T, Verizon and MCI, and Sprint and

Nextel underscore these dramatic shifts and the need for market leaders to keep

up with the ever increasing pace of consumer demand. Consolidation among companies with complementary infrastructures will allow them to quickly build out on

their existing services. Further, consolidation will provide to the market financially

stable firms that will be better positioned to secure the capital critical for the development and deployment of the communications technologies needed for the 21st century.

At the same time, however, we must be careful to ensure that these proposed

mergers do not have adverse consequences for individual consumers. Any forthcoming merger must not unduly burden the ability for Americans to communicate

effectively and affordably with one another. In addition, consolidation must be consistent with the promise of universal service in providing basic telecommunications

services to high-cost, rural areas.

With that said, I look forward to opening the discussion as to the best way to

achieve these goals. Thank you, Mr. Chairman.

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

FROM THE STATE OF WYOMING

Thank you, Mr. Chairman.

We are working to build a hearing record on the state of the telecommunications

industry and what changes ought to be made to the Telecommunications Act to ensure a reliable and competitive medium. Our hearing today is timely in that there

are some major changes on the horizon; mergers between Sprint-Nextel, Alltel-Western Wireless, SBC-AT&T, and either MCI and Verizon or MCI and Qwest. All of

these are interesting of themselves and illustrate a mature marketplace, but taken

together, they signal a seminal moment in the evolution of telecommunications services.

Frankly, it was hard to imagine this when we passed the ’96 Act. But today, these

prospective mergers make sense. For it is not just competition among legacy telecommunications providers that is powering this debate forward, but intermodal comVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 99902.TXT HCOM1 PsN: HCOM1
14

petition that is the market of the future. All of this is made possible by Internet

Protocol. That has made the cable company the phone company and the phone company the cable company.

I think this hearing will help shed light on the needed changes to the ’96 Act and

illustrate how the economies of scale will help the traditional telecommunications

sector compete with wireless and cable for the delivery of voice, video and data. My

concern regarding these proposals, like always, is how will this help or hurt Rural

America. Often, those of us in less populated areas are on the caboose end of the

train when it comes to technological innovation. I don’t feel that’s the best seat in

the house.

I yield back the balance of my time.

PREPARED STATEMENT OF HON. MIKE FERGUSON, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEW JERSEY

Chairman Barton, thank you for holding this hearing. As a new member of our

telecommunications subcommittee and as a member of Congress who represents a

district that includes AT&T’s world headquarters and Verizon Wireless, I have a

keen interest in the transactions that have recently unfolded.

Thank you to all the CEO’s present here today. I look forward to hearing from

you regarding the impact and effects of your mergers, in particular how your proposed deals will impact the long term viability of the companies that have been acquired. Additionally, I would like to know how these mergers will affect the telecommunications industry and the engine behind it—the American workforce.

Communications technology is moving at an exciting and rapid pace, from

broadband and wireless to Internet Protocol-based services. In many ways, the advent of this technology has dictated the direction of industry, resulting in the mergers that we will examine today. I am eager to hear how these mergers will strengthen the companies and the quality of their services, foster competition, spur domestic

economic growth and ultimately, propel America’s position as a leader the global

communications marketplace. Thank you.

PREPARED STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF PENNSYLVANIA

Thank you Mr. Chairman.

I commend you for holding this hearing today. It’s been nearly 10 years since Congress passed the Telecommunications Act of 1996 and we find ourselves witnessing

mergers between companies that would have seemed improbable if not impossible

at the time of passage. As telecommunication providers have evolved, the market

has evolved with it. More importantly, technology has evolved well beyond what

anyone could have contemplated a decade ago.

These technological advances now allow service providers to offer a combination

of voice, video, and data services over different platforms. Providers can now supply

applications such as Voice over IP (VoIP) to consumers who subscribe to broadband

services without requiring the same facilities based infrastructure traditionally necessary to offer telephone services. These advances have vastly changed the competitive landscape.

One of the most noticeable changes is the push for providers to merge with former

competitors because in many respects they do not compete any longer. Instead they

offer different and complementary assets that when merged create more stable and

diversified corporate portfolios. These mergers create synergetic economic opportunities for investors and customers alike. However, these circumstances must also be

taken with some skepticism too. Will all of these mergers actually stifle competition

by creating enormous corporations that gravitate towards market power with no incentive to compete?

This committee will likely have the privilege of updating current telecommunications law to account for the drastic changes we have witnessed in recent years.

This industry is vital to our economy as witnessed by how its faltering helped cause

an economy wide decline five years ago that we are still recovering from. This country’s innovations and ingenuity, especially in the telecommunications industry, will

continue to drive the economy of the world. It is vital that we alter our laws and

regulations to foster this growth and I look forward to this challenge in the coming

months.

I am pleased to have a diversified witness list today. While I am excited to hear

from the CEOs of some of the aforementioned merging companies and how their

proposed mergers will save consumers money and continue to grow the economy, I

15

am also interested in hearing from consumer advocates, academics, and market analysts. Their testimony will help as we begin the arduous task of revisiting our telecommunications laws.

PREPARED STATEMENT OF HON. SHERROD BROWN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

Thank you, Mr. Chairman.

Large-scale mergers in the telecommunications industry will have a significant

impact not only on the average consumer, but also on the economic development of

communities throughout the nation.

Mergers can produce efficiencies that lead to lower prices. However, when large

mega-mergers focus on the most profitable customers, it can squeeze out smaller

players, individual consumers and smaller businesses.

If smaller phone companies can’t connect to the large companies at an affordable

rate, what becomes of the communities they serve? If our committee wants the market to work, we can’t ignore any segment of that market.

The bundling of voice, video, and data services is another example. It is bound

to price many consumers out of the market.

That’s not just a consumer access issue; it’s an economic development issue. If

small businesses can’t access the same breakthrough technologies as larger firms,

they lose ground against their competition.

Federal, state and local government must all play a role in preventing lags in access to technology that disadvantage small business and consumers.

In that context, it has never been more important to invest in programs like the

Universal Service Fund and E-rate.

Ultimately, helping all consumers gain affordable access to existing and new technologies is sound economic policy.

PREPARED STATEMENT OF HON. JAN SCHAKOWSKY, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF ILLINOIS

Thank you, Chairman Barton and Ranking Member Dingell. I would also like to

extend a special welcome to one of today’s witnesses, Mr. James Speta from Northwestern University’s School of Law. Although the law school campus is not ‘‘technically’’ in my district, the main campus of Northwestern is—so I am going to claim

you as one of my constituents. Welcome.

I am glad we have an opportunity to discuss the questions that are raised by the

overlap of the incredible changes in technology since the 1996 Telecommunications

Act and the recent cascade of mergers in the telecom industry have brought us here

today, especially as they pertain to consumers and those who work in the telecom

industry.

Technological developments have meant more choices for consumers. Industry

now offers consumers the choice between landlines, wireless, or Voice-Over-InternetProtocol phone services, just to name a few. However, as we witness the number

of companies offering the services drop significantly because of mergers that create

a limited number of mega-corporations, we have to ask if consumers will see better

prices, whether there will be more technological innovations, and if service will improve. Before we praise what the mergers will do for big business, we need to consider what they will mean for the consumers. The potential for serious losses are

great. Business interests too frequently are not in the consumers’ best interest.

We also must consider what mergers mean for the workers. Over the past five

years, the telecom industry has seen hundreds of thousands of jobs eliminated. (Remember, this is prior to the mergers.) The pending mergers threaten tens of thousands more positions. The companies readily admit to these ‘‘cost savings’’ cuts.

Workers are being talked about as disposable business liabilities rather than the assets they are. We need to be less glib about people’s livelihood.

Congress must ask the tough questions and we need answers to our concerns before these mergers are approved. I believe that as the process moves forward, we

must not forget those who will feel the likely fallout of the mergers the most—the

employees and the consumers. Thank you.

PREPARED STATEMENT OF HON. TAMMY BALDWIN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF WISCONSIN

Thank you Mr. Chairman.

16

Over the last ten years, our telecommunications systems have been radically

transformed. We have a dizzying array of new technologies. This innovation is providing new business opportunities and novel ways for Americans to relate to one another.

As I look to the future, my objective is to understand how these services and these

technologies impact those I represent. Will my constituents in urban Madison have

healthy competition from a variety of providers using different technologies? Will

my suburban Sun Prairie constituents have advanced services available at a reasonable cost? Will my rural New Glarus constituents have any broadband service at all?

Our nation’s telecommunications policy will be a failure if significant groups of

Americans are left in a telecommunications wasteland, unserved or underserved.

Our policy will be a failure if it leads to telecommunications redlining.

Our history, and our economic theories, tells us that industry concentration reduces competitive behavior, results in less innovation and leads to higher prices. All

bad for the consumer. These mergers raise legitimate concerns and we must examine the potential consequences on competition carefully.

From my two perspectives as a Member of Congress responsible for policy- making, and as a consumer: technological and market change is occurring so rapidly

that it is as challenging to judge the potential outcomes of regulatory and policy

change as it is to figure out what bundled service works best for me as a consumer

at home or at the office.

What I do know is that the American people deserve an innovative, accessible,

and affordable telecommunications system that enhances their lives and builds a

better future.

Thank you Mr. Chairman.

Chairman BARTON. And we would like to welcome our panel. We

are going to start with Mr. Whitacre. We will recognize you—let us

give them 7 minutes to summarize your testimony, and then we

will just go right down the line. Welcome to the committee.

And you have to push that button to turn it on.

Mr. WHITACRE. Can you hear me?

Chairman BARTON. Yes, sir.

Mr. WHITACRE. Great.

STATEMENTS OF EDWARD E. WHITACRE, JR., CHAIRMAN AND

CHIEF EXECUTIVE OFFICER, SBC COMMUNICATIONS, INC.;

DAVID DORMAN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, AT&T CORPORATION; IVAN G. SEIDENBERG, CHAIRMAN

AND CHIEF EXECUTIVE OFFICER, VERIZON COMMUNICATIONS; MICHAEL D. CAPELLAS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MCI; GARY D. FORSEE, CHAIRMAN AND

CEO, SPRINT; AND TIMOTHY DONAHUE, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, NEXTEL COMMUNICATIONS

Mr. WHITACRE. Thank you, Chairman Barton and members of

the committee. It is good to be here this morning. I am distressed

that you are leaving SBC, Mr. Chairman, but we will work on that

later.

Chairman BARTON. I still have one hard line wireline that is

SBC.

Mr. WHITACRE. Well, that is good to know, because Mr.

Seidenberg leaned over after Congressman Engel talked about his

service and hometown and said at least I have still got him as a

customer. So—but I am glad to be here this morning to talk about

the SBC-AT&T merger, which is a very positive development for

our customers, for competition, and for America’s leadership in the

global communications marketplace. The combined AT&T-SBC

company will be a flagship of American communications company

for the 21st century. We will provide business and residential cusVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 99902.TXT HCOM1 PsN: HCOM1
17

tomers alike with complete services over a robust national and

international network using the most advanced technology.

That is why more that 250 consumers, businesses, and civic

groups, as well as unions and elected officials of both parties have

already announced their support for this merger.

Our merger comes as the U.S. telecommunications industry is

trying to get up off the mat. For the first time in a long while, we

can see some light at the end of the tunnel, but the journey

through that tunnel has been pretty hard. Since 2000, telecommunication service providers and equipment manufacturers

have lost more than 700,000 jobs. Annual capital investment has

declined by more than $70 billion. Companies have lost more than

$2 trillion in market capitalization.

Until recently, SBC was losing 60,000 access lines each week. We

have toned that down, and we are somewhere between 20,000 and

30,000, but 60,000 per week for years. And in all honesty, adverse

regulation has contributed to this downward spiral.

So Wall Street is investing less and less in telecom. Telecom is

investing less and less in its products and services. And we can see

the consequences. Today, the U.S. is eleventh in the world in

broadband deployment.

As a result, this industry needs to restructure, and that is why

we decided to do the SBC-AT&T merger. The reasons for combining

these two companies are pretty clear, and so are the benefits.

First, while SBC has a strong presence in many local markets,

we do not have a national or global network of our own. We lease

that network. We rent it, if you will. AT&T has those assets, and

they are very good. And it is a good fit for SBC.

Second, the next big thing in communications technology are

Internet-based services, such as Voice-over Internet Protocol, or

Voice-over IP. IP is changing how people communicate. It will

change how this industry provides service. SBC does not have a

consumer Voice-over IP service, but AT&T does, and so we can use

it to compete in our region, outside our region, and around the

world.

The third reason for our merger is the opportunity it creates for

competition in the large business customer segment. While SBC

has made some progress in this market, it has been really slow

going for us. AT&T will give us the ability to compete much more

effectively in this space. SBC and AT&T will bring together an outstanding set of networks, innovative advanced products and services, unmatched talent and expertise, and a rich tradition of customer service and reliability. And we will ensure that the company

which started it all more than 100 years ago will be part of it for

many years to come. AT&T will remain a viable factor in our industry, and its outstanding heritage will remain alive.

That is why this merger is very much in the public interest. This

is a natural and healthy evolution of a dynamic, competitive industry that is light years removed from when the last Federal telecom

act was enacted in 1996.

Today there are more wireless subscribers in the U.S. than there

are traditional telephone lines. Data traffic now exceeds voice traffic by a margin of 11 to 1. Cable companies will offer phone service

18

to 2⁄3 of American homes this year. And other competitors using IPbased services continue to grow.

Very little of this was envisioned when the 1996 Act was passed,

which is why we need the laws to catch up. Policymakers and those

who regulate us have an obligation to keep pace. We need rules

that treat new technologies with the lightest touch possible and

which allow the competitive marketplace to discipline retail prices.

Chairman BARTON. Is the gentleman——

Mr. WHITACRE. I am not through. Close, though.

Such reform so would spur much-needed innovation, investment,

and growth. I am ready to work with members of this committee

to make those reforms a reality on behalf of American consumers

and businesses.

Thank you very much.

[The prepared statement of Edward E. Whitacre, Jr. follows:]

PREPARED STATEMENT OF EDWARD E. WHITACRE, JR., CHAIRMAN AND CHIEF

EXECUTIVE OFFICER, SBC COMMUNICATIONS INC.

Thank you, Chairman Barton, and Members of the Committee.

I am pleased to discuss the SBC-AT&T merger, which is a very positive development for customers, for competition and for America’s leadership in the global communications marketplace.

The combined SBC-AT&T will be a flagship American communications company

for the 21st century. We will provide business and residential customers alike with

the most complete set of services... over the most robust national and international

networks... using the most advanced technology.

That’s why more than 250 consumer, business and civic groups, as well as unions

and elected officials of both parties... have already announced their support for the

merger.

The SBC-AT&T merger is in response to market forces that are reshaping the industry landscape.

The environment in which we are operating has shifted dramatically over the last

several years.

What used to be a phone call made over a wireline network until recently is now

a cell phone call . . . a text message delivered from one cell phone to another . . . an

email sent by Blackberry or PC or laptop at a WIFI hotspot . . . or an Internet call

provided by a cable company.

Today there are more wireless subscribers in the U.S. than there are traditional

phone lines.

Data traffic now exceeds voice traffic by a margin of eleven-to-one.

Cable companies will offer phone service to two-thirds of American homes this

year. And other competitors using Voice over Internet Protocol, or IP, continue to

grow.

Technology is erasing the distinction between types of services and the companies

that provide them. Who can tell the difference anymore between local and long distance service, or interstate and intrastate service, or between voice and data, in an

IP world?

Customer demand is changing, too. Consumers want the choice of buying all their

communications services... voice, data, wireless and video . . . in one bundle. Business customers demand innovation and expertise for managing highly complex communications wherever they do business.

Dealing with rapid technology change and shifting customer demand is challenging enough... but it’s even tougher because our industry has not been in very

good shape for some time, now.

Since 2000, telecommunications service providers and equipment manufacturers

have lost more than 700,000 jobs. Annual capital investment has declined by more

than $70 billion. Companies have lost more than $2 trillion in market capitalization.

And in all honesty, adverse regulation has contributed to this downward spiral

as well.

Wall Street is investing less and less in telecom. Telecom is investing less and

less in its products and services. We can see the consequences: today, the U.S. is

11th in the world in broadband deployment.

19

As a result, the industry is restructuring and re-emerging... and the SBC-AT&T

merger is direct product of those forces of change.

SBC and AT&T will bring together an outstanding set of state-of-the-art networks... innovative, advanced products and services’ unmatched talent and expertise . . . and a rich tradition of customer service and reliability.

We will build on that foundation to deliver the next generation of Internet-based

voice, video and data communications.

And we will ensure that the company which started it all more than one hundred

years ago... will be part of it all for many years to come. AT&T will remain a viable

factor in our industry, and its outstanding heritage will remain alive.

For those reasons and more, this merger is very much in the public interest.

This is a natural and healthy evolution of a dynamic, competitive communications

industry. It is in response to a new competitive reality that is light years removed

from when the last federal telecom law was enacted.

The forces that are transforming the telecom industry put an equal obligation on

policymakers and those who regulate us to keep pace. If the distinctions between

services and service providers no longer exist in the marketplace... how can we justify the regulatory burdens that remain attached to them?

We need rules that treat new technologies with the lightest touch possible and

which allow the competitive marketplace to discipline retail prices.

Doing so would spur much-needed innovation, investment and growth. I am ready

to work with members of this Committee to make those reforms a reality on behalf

of American consumers and businesses.

Thank you.

Chairman BARTON. We thank the gentleman from Ennis, and we

welcome the Chairman of AT&T, Mr. Dorman, for 7 minutes.

Mr. DORMAN. Thank you, Mr. Chairman and members of the

committee.

Chairman BARTON. Use that microphone.

STATEMENT OF DAVID DORMAN

Mr. DORMAN. Thank you very much for inviting me to speak with

you today about the merger of SBC and AT&T.

There is very much to look forward to and nothing to fear from

the joining together of these two companies, which share an ongoing legacy of innovation, integrity, and reliability.

Together, we intend to set the standard for communications for

years to come. Together, we create a national flagship carrier that

will be a leader in delivering seamless, secure, and cost-effective

new communication solutions to our State and Federal customers,

to residential customers, and to small and large businesses. Together, AT&T and SBC will be able to bring advanced IP-based

broadband services to the market more rapidly, more efficiently,

and to a wider range of customers than either company could

alone, heightening competition for voice, data, wireless, and video

services. Together, AT&T and SBC will ensure the United States

retains its traditional role of undisputed leader in global communications with significant benefits to our national economy.

Most of you and your parents and your grandparents have

known AT&T primarily as your phone company, serving residential

consumers. That is not the AT&T of today. The AT&T of today is

a global IP networking provider that enables large businesses,

State and Federal agencies, and other customers to deliver applications securely and reliably.

The reason for that transformation are, I think, well known to

you.

Telecom competitors have experienced a difficult environment.

Admitted fraud, over-investment by many carriers, tremendous

20

oversupply, a wave of new technologies in an ever-shifting regulatory environment. Our traditional wireline services were being

rapidly supplanted by wireless services and Internet-based applications, such as e-mail and instant messaging. And mass-market customers were increasingly demanding bundles of service, including

services that we were not well positioned to provide.

We knew we had to change fundamentally and fast, and I am

proud that the very difficult transformation that we had to accomplish over the last very short few months, frankly. We determined

that we would no longer actively compete in the traditional mass

market and that we would focus virtually all of our attention on

delivering powerful networks, applications, and capabilities to large

business, government, and wholesale customers.

It was a painful choice for us to make, but we are no longer a

mass-market company. The combination with SBC will allow AT&T

to continue this process of transforming its business in response to

market and service developments, enabling it to bring advanced,

attractively priced services to market, and to improve what, in our

view, is the finest global network in the world. The merger will

also ensure that AT&T’s strengths in the large business market

can be deployed for the benefit of smaller businesses and residential customers.

Indeed, bringing together these two companies will create a

world leader in advanced communication services as the new company uses its increased scale and scope and its expertise in local,

broadband, wireless, and global networking to speed the transformation of the legacy networks of both AT&T and SBC into an

integrated IP-based network. It will achieve efficiencies that reduce

our costs, enhance our operations, and allow us to offer better services and better value for our customers. It will allow us to provide

our government customers with more reliable, more resilient, and

more efficient network capabilities and increase the pace and

breadth of the innovations of our renowned AT&T labs with benefits for all types of customers, not just the largest business enterprises on which we now focus.

The combined company will be stronger as a competitor to others, including foreign providers globally, and I believe, that the

other Bell companies around the country as well. And the transaction will not harm competition in any market.

In the mass market, SBC is a leading provider of service in its

13-State region, but AT&T is no longer an active mass-market competitor in those States.

The merger will also not impair competition in the provision of

services to business customers, given the number and diversity of

competitors for businesses, the sophistication of these customers,

and their own purchasing practices. Nor is there any serious argument that the merger will diminish competition in wireless, where

AT&T is not currently a provider, international, where SBC has a

very limited share, or in Internet-backbone services where many

large providers compete. Rather, the merger is a step forward in

the evolution of this industry, creating a healthy, competitive, and

innovative American communications company.

In conclusion, I would like to thank you again for the invitation

to speak with you today about the very significant benefits that

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this merger will produce, and I would be pleased to answer any

questions that you may have.

[The prepared statement of David Dorman follows:]

PREPARED STATEMENT OF DAVID DORMAN, CHAIRMAN AND CHIEF EXECUTIVE

OFFICER, AT&T CORP.

Mr. Chairman and Members of the Committee, thank you very much for inviting

me to speak with you today regarding the merger of SBC and AT&T, and the enormous benefits that the combination of these companies will bring to consumers and

to the nation.

My message to you today is that there is much to look forward to, and nothing

to fear, from the joining together of two companies that share an ongoing legacy of

innovation, integrity and reliability. Together we intend to set the standard for communications for years to come. Together, we create a national flagship carrier for

the 21st century that, from ‘‘day one,’’ will be a leader in delivering seamless, secure, and cost-effective new communications solutions to our state and federal government customers, to residential consumers, and to small and large businesses,

across the country and around the world.

Together, AT&T and SBC will be able to bring advanced, IP-based broadband

services to market more rapidly, more efficiently, and to a wider range of customers

than either company could alone, accelerating broadband deployment and heightening competition for voice, data, wireless, and video services. Together, AT&T and

SBC can provide the base that will ensure that the United States, in the face of

increasing global competition, retains its traditional role of undisputed leader in

global communications, and that our national economy obtains all of the benefits

that accompany that leadership role. And together AT&T and SBC can ensure that

our valued government customers will receive the most advanced, secure, reliable,

robust and resilient services and network capabilities.

WHY AT&T HAS AGREED TO THE MERGER

I speak to you today from a unique perspective. When the 1996 Act was passed,

I led Pacific Bell, one of the incumbent Bell companies that today is part of SBC.

Today, I lead AT&T, where I have been since December 2000. So I am very familiar

with the supremely talented and hard-working people, the best in class networks,

and the research and innovation know-how of these two great companies. And as

I look at the two companies’ assets, I see that they complement one another tremendously—two companies with very different focuses today that, when combined, will

create a much better whole. And a key part of understanding why I think this combination is so good—both for consumers and for my shareholders—is the remarkable

transformation that AT&T has experienced over the last few years.

Most of you, and your parents and grandparents, have always known AT&T primarily as your phone company, a residential consumer-oriented company whose

main business for more than a century was providing basic telephone services to the

mass market. That is not the AT&T of today. The AT&T of today is a global IP networking provider with a software infrastructure that gives large businesses, state

and federal agencies, and other communications providers the flexibility to deliver

applications in a secure and reliable way. The reasons for that transformation are,

I think, well known to all of you.

AT&T has experienced an environment that has been very difficult for telecommunications companies: fraud and overinvestment, tremendous oversupply and

pricing pressures, a wave of technological advances, and a shifting regulatory environment. Our traditional wireline services were being rapidly supplanted by wireless communications and Internet-based applications such as e-mail and instant

messaging. Mass market customers were increasingly demanding broad bundles of

communications and entertainment services, including services we are not well-positioned to provide. Customers were leaving. Prices were plummeting. Over the last

five years, our revenues plunged from $49.6 billion in 1999 to $30.5 billion in 2004.

Much of that decline came from our consumer services division.

We knew we had to change, fundamentally and fast. I am proud of the very difficult transformation that we have accomplished. We determined that we would no

longer actively compete in the traditional mass market and that we would turn our

attention to delivering powerful networks, applications, and capabilities to business

customers worldwide and to our valued government and wholesale customers. It is

difficult for many to accept—and it was a painful choice for us to make—but we are

no longer a residential consumer company. That is simply not a business that

makes sense for AT&T today or going forward. I want to assure you that we will,

22

of course, continue to support and provide first class service to our remaining mass

market customers as they migrate to other active mass market providers. And I

want to point out that by helping other companies find better ways to do business,

AT&T continues to bring great benefits to all consumers nationwide.

The combination with SBC will allow AT&T to continue this process of transforming its business in response to market and service developments. The combination will provide the increased scale and scope that are important to success in

transforming our network to implement IP-based technology and in bringing advanced, attractively priced services to market. It will enable us to expand and improve what, in our view, is already the finest global network in the world. It will

ensure that AT&T’s strengths in the large business customer market can be deployed for the benefit of smaller businesses and residential customers, and that

SBC’s strengths will enhance our ability to provide new and advanced services to

large business customers. The combined company will have the ability and incentive

to increase innovation and development of advanced services for the benefit of all

customers, in the U.S. and globally.

THE MERGER WILL PROVIDE IMPORTANT PUBLIC BENEFITS

Consumers of all types will benefit from this merger because of what the two companies share and, more importantly, because they have complementary and different strengths.

The two companies share a common past and an ongoing legacy of innovation, integrity, reliability, and customer service.

The two companies also bring together different strengths and product sets, ensuring that the merger will produce a combined company that is more than the sum

of its parts. SBC is a provider of voice, data, broadband, and related services to consumers and businesses—especially small businesses— primarily on a local and regional basis in its 13-state region.

AT&T has a different focus. We provide a broad array of voice, data, and IP-based

services to customers on our global and national IP-based networks. We provide

services to the largest businesses, government agencies, and wholesale customers.

AT&T has a presence in more than 50 countries, allowing it to compete for the business of the largest global enterprises. AT&T Labs has ensured that the company

has remained a leader in the invention and development of innovative services and

advanced network capabilities.

The combined SBC and AT&T will be a stronger and more innovative U.S.-based

global competitor than either company could be alone. The merger will produce a

flagship U.S. carrier that will offer the most efficient, highest quality capabilities

to government, business, and residential customers nationwide and globally. The

combined company will continue to provide U.S. government customers with the

most advanced and secure services and network capabilities. The combined company

will have the resources, expertise, and incentive to adapt the sophisticated products

that AT&T has developed for its enterprise customers to the needs of small and medium businesses and consumers, as well as the marketing expertise and infrastructure to reach those customers.

Combining the two companies’ core strengths will result in more investment in,

and faster deployment of, innovative new technologies and network capabilities that

will benefit all customers. The combination of AT&T and SBC will enhance competition, resulting in improved services and lower prices for consumers, and will not impede competition in any market.

Let me elaborate on each of these points:

Global Leadership. The transaction will establish a world leader in advanced communications services, which will provide very significant benefits for all American

consumers. The nation’s economic growth and ever-improving standard of living

have resulted, in substantial part, from the United States’ position as an undisputed

world leader in communications. Recently, that leadership has been questioned, fairly or not, as European and Asian-Pacific carriers and technology companies have

grown rapidly and other markets—different from our own for many and varied reasons—have surpassed the U.S. in broadband penetration.

By combining firms that are recognized leaders in both enterprise and mass market services and in the design and engineering of local, broadband, wireless, and

global networks, the merger will create an American carrier that will undoubtedly

set the global standard for communications service leadership. The companies’ complementary strengths ensure that the combined company can rapidly complete the

transformation of legacy networks to IP. These same synergies will drive the

achievement of end-to-end service quality standards that previously have been

unobtainable and will ensure the United States’ preeminence in communications.

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Service to Government. Federal government departments and agencies, including

those with national security responsibilities and requirements, will directly benefit

from the service and network improvements that this merger will enable. Today,

AT&T provides advanced services to a broad range of government agencies, including those involved in national defense, intelligence, and homeland security. AT&T’s

customers include the White House, the State Department, the Department of

Homeland Security, the Department of Defense, the Department of Justice, and

most branches of the armed forces. AT&T’s support of the intelligence and defense

communities includes the performance of various classified contracts.

The transaction will enable Government customers to receive the most advanced,

improved services and network capabilities. SBC’s and AT&T’s separate networks

will be transformed into a larger and more advanced IP-based network, which will

be more reliable, robust, and resilient. As the Defense Department’s need for integrated, worldwide networks increases, a combined company will be better positioned

than the individual companies to provide these networks on a secure, end-to-end

basis.

Increased Innovation. A crucial benefit of this combination for all consumers is

greater research, development and innovation—especially for advanced and IPbased services and network capabilities. For customers, this should mean lower

costs for existing services, the more rapid development of new services, and the development of services that otherwise would not exist.

The merger will promote and widely distribute the benefits of innovation by enabling the combined entity to take greater advantage of the research and development capabilities of one of AT&T’s ‘‘crown jewels’’—AT&T Labs, which is a direct

successor to the Bell Telephone Laboratories. Innovations undertaken by Bell Labs

and its successors have launched or proved instrumental to the development of basic

innovations that have shaped our daily lives and launched entire industries.

Innovative Mass Market Services. The transaction will increase innovation because the combined company will seek to develop and deploy, for smaller business

and residential customers, the storehouse of existing and ongoing innovations produced by AT&T Labs for large enterprise customers. The potential benefits of research and development, however, are not limited to those customers. Breakthroughs that AT&T achieves in research and development aimed at producing new

enterprise services, or providing those services more efficiently, often will have relevance to other services that could potentially be offered over the combined company’s network facilities, such as mass market services.

• For example, AT&T is a global leader in the development of text-to-speech engines, synthesized voice capabilities, automatic speech recognition, and natural

language speech understanding systems. These technologies have the potential

to allow real-time translation services and exceptionally efficient customer care

and relationship management capabilities. Accelerated deployment of these capabilities into residential and small business offerings holds the potential for

significant public benefits, particularly for visually, hearing, and speech-impaired customers. • Similarly, AT&T Labs is a leader in the development of network security services

for business customers. It is developing capabilities to detect unauthorized use

of communications services and customer information. As demand for anti-fraud

and security services among mass market and small business customers continues to grow, very significant public interest benefits may be realized by additional innovation the combined company will undertake to meet that demand. • AT&T Labs continues to develop advanced e-commerce support and enhancement

capabilities. Translating these ongoing innovations from large business-focused

services to services designed to meet the needs of smaller businesses and residential customers is another source of significant public interest benefits. • And AT&T Labs is developing an IP environment that can support a broad range

of communications services, including video services. AT&T has also developed

a number of innovations to make the delivery and use of video services far more

effective than is achievable today, with clear benefits for smaller business and

residential customers.

Innovative Network Capabilities. In addition, combining the two companies creates scale and brings together complementary strengths that will lower the costs

and increase the benefits of pursuing research and development initiatives—and

thus increase the pace and breadth of innovation. AT&T’s unmatched research and

development capabilities will be combined with SBC’s financial strength, capacity to

capitalize on transformative opportunities, and its local network expertise.

The merger will enable a more rapid transformation of the companies’ networks,

which meet current needs efficiently, to a unified, IP-based service platform, with

numerous advanced capabilities that will benefit customers. Developing these adVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 99902.TXT HCOM1 PsN: HCOM1
24

vanced network capabilities lies at the heart of AT&T’s and AT&T Labs’ core missions and expertise. Through the merger, SBC will bring to the combined entity the

scale, greater financial strength, and network capabilities that ensure that the combined entity will have an increased incentive and ability to develop advanced network capabilities and related services and can do so much faster than AT&T would

on its own. The resulting advanced networks can provide consumers of all types

with the ability to choose, provision, change, and maintain their services with an

almost unimaginably greater degree of speed, efficiency, and efficacy.

THE MERGER WILL ENHANCE RATHER THAN IMPEDE COMPETITION

I believe that this transaction will only enhance competition in communications

markets.

The important network and service benefits I’ve described above reflect improvements in competition. The improved ability of the combined company to bring innovative and advanced services to market, for a broader range of customers, will expand customer choice and offer improved alternatives that competitors of all types

will be forced to match. This includes cable, VoIP, and wireless competitors in SBC’s

traditional local service region.

I also believe that the transaction will inevitably lead to greater competition between the Bell companies themselves. The Bells today already compete against one

another for wireless services. With this merger, the combined company will be competing for large business customers across the nation and very much in the local

service territories of the other Bell companies. They will have to improve their services, both in their incumbent regions and beyond, if they are to remain competitive.

And the combined company will continue to develop AT&T’s VoIP service, which is

designed for residential customers throughout the nation in direct competition with

the Bells’ local service offerings.

For the reasons I’ve outlined above, the merger also will produce a more capable

global competitor with a broader geographic scope of service and a broader line of

more advanced services and network capabilities. This will benefit U.S. companies

as they compete overseas and will benefit all communications customers as other

global service providers must improve their offerings to compete effectively with the

combined company.

Nor will the transaction harm competition in any market, principally because the

two companies’ businesses are largely complementary. In the mass market, SBC is

a leading provider of service in its 13-state region, but AT&T is no longer an active

mass market competitor in those states. AT&T’s earlier irreversible decision to stop

actively marketing to such customers for either local or long distance wireline telephone service means that it is no longer a substantial competitor in mass market

services. Removing AT&T as a separate service provider thus could not harm competition in the provision of those services to residential and small business customers.

The merger will also not impair competition in the provision of services to business customers. The market for services to these customers is exceptionally competitive and will not be impaired by this transaction. Suppliers include interexchange

carriers, systems integrators, equipment vendors and value-added service providers,

other network providers, foreign carriers, CLECs, cable operators, and other ILECs.

Moreover, because large business customers are highly sophisticated, have widely

varied needs, and rely on complicated and detailed bidding procedures, providers

cannot successfully engage in anticompetitive conduct. Given the number and diversity of competitors offering services and products to businesses and the sophistication of customers and the purchasing practices they employ, the marketplace will

undoubtedly continue to be vigorously competitive after the merger is concluded. In

these circumstances, the transaction cannot reduce competition for the business of

these large customers.

Nor is there any serious argument that the merger will diminish competition in

wireless, international or Internet backbone services. SBC has a majority ownership

interest in Cingular Wireless, but AT&T long ago divested itself of its interest in

AT&T Wireless, its cellular service operation. Combining these companies results in

the loss of no significant competitor.

So, too, with international services. AT&T has an extensive global presence, especially for large business customers, but SBC provides only a very limited share of

international communications. Provision of these services is, in any event, highly

competitive and will remain unaffected by the merger.

And while AT&T is one of the largest providers of Internet backbone services,

SBC’s network is much smaller. AT&T—but not SBC—is a Tier 1 provider of InterVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 99902.TXT HCOM1 PsN: HCOM1
25

net backbone services. Following the merger, at least five other Tier 1 providers will

remain to provide robust competition in that market.

In conclusion, I would like to thank you again for the invitation to speak with

you about the very significant consumer and public benefits that this merger will

produce. This transaction will create an American global communications company

for the 21st century—a company capable of delivering advanced services to customers of all types throughout America and around the world. And it will do so by

increasing, rather than by posing a threat to, competition.

I would be pleased to answer any questions that you may have.

Chairman BARTON. We thank the gentleman.

We now recognize the Chairman and Chief Executive Officer of

Verizon, from Eliot Engel’s and Vito Fossella’s hometown of New

York, Mr. Ivan Seidenberg.

STATEMENT OF IVAN G. SEIDENBERG

Mr. SEIDENBERG. Mr. Chairman, Congressman Dingell, thank

you very much for giving us the chance to address you directly

about our proposed transaction this morning.

As you all know, MCI and Verizon have complementary assets

and capabilities. Verizon has strong local assets and a solid presence among local and regional customers. MCI has strong IP networks and products and a solid base of national and global customers. Together, we will create a strong, new competitor with the

products, network reach, and capital capacity required to succeed

in this market.

As I have heard from many of you this morning, technology is

the sole driving reason for this transaction. We feel we need to do

this to stay apace with the changes that are occurring in our industry.

This acquisition does not alter the dynamics that are reshaping

the consumer market. Long distance and local as a standalone

business are really on their way to obsolescence, with or without

this transaction. However, if we look at this in terms of the future,

it is apparent that customers in all segments of the communications market will benefit.

Not at this table are all of the cable, ISP, Internet, and VoIP providers that also provide—I thought they were calling Congressman

Markey out.

Chairman BARTON. It is just a reminder for me to pick up my

laundry.

Mr. SEIDENBERG. There is your chance.

Okay. Well, anyway.

Businesses will also benefit because we will be a strong, stable,

and secure supplier of advanced communication services. In our

merger announcement, our acquisition announcement with MCI,

we indicated, of course, there would be savings, based on combining

the companies, but we also indicated that we would invest an additional $2 billion to take advantage of growing the platforms that

exist between the two companies.

Federal and State government customers will also benefit because we will be able to invest in the networks that are critical to

their public mission. National security will benefit, because we will

continue to strengthen the infrastructure that is a critical component of government communication systems, including those used

by the Departments of Defense and Homeland Security.

26

And the U.S. economy will benefit, because we will invest in the

new technologies so critical to job creation and leadership in the

global marketplace.

We believe that among the places that innovation occurs, innovation is also driven by the capital formation that is required to invest in these new technologies. And certainly a company like

Verizon combined with MCI will have the financial resources to

significantly invest in new technologies.

So to us, this transaction is all about the future. Verizon and

MCI will be a national, full service company with the technology

and financial strength to deliver the broadband future and create

economic growth for America.

Thank you very much.

[The prepared statement of Ivan G. Seidenberg follows:]

PREPARED STATEMENT OF IVAN SEIDENBERG, CHAIRMAN AND CHIEF EXECUTIVE

OFFICER, VERIZON COMMUNICATIONS

Mr. Chairman and members of the Committee, thank you for the opportunity to

be part of this discussion of the restructuring communications industry.

We are here today because of the announcements of three fairly sizable deals over

the past several weeks, one of which is Verizon’s intention to acquire MCI. This recent wave of mergers and acquisitions is simply the latest phase of a process that

began several years ago: the restructuring of communications around new technologies and new markets.

It should be evident to anyone with a cell phone or an e-mail account that the

old distinction between local and long distance is obsolete, as is the need for separate companies to provide them. Competing technologies—cable, wireless, satellite,

IP, and wireline—now offer consumers a wide range of choices for voice, data and,

increasingly, video. And the pace of technological change is accelerating, which

makes these markets more dynamic and competitive with each passing day.

What may not be as apparent is that the same forces are transforming the largebusiness marketplace. Traditional voice services make up a smaller and smaller

piece of the pie. Instead, these large, technologically sophisticated customers are demanding a much wider range of services, platforms and applications from a growing

universe of suppliers—not just ‘‘telephone’’ companies, but systems integrators, software providers, equipment makers and wireless companies. These companies include some of the biggest names in industry, such as Cisco, IBM, EDS and British

Telecom.

Since our formation five years ago, Verizon’s overriding imperative has been to

build a company capable of competing in this technology- and market-driven environment. For us, this has meant gaining scale in the growth segments of the marketplace, such as wireless and broadband; reinventing our networks around new

digital and fiber technologies; and equipping ourselves to compete as other technology companies do, through investment and innovation.

I stress ‘‘investment’’ because it has been Verizon’s willingness to put substantial

risk capital into our networks that has differentiated our company and provided

more value and choice for customers. We have indicated our intention to invest substantially in MCI’s infrastructure once this transaction closes. It is this ability and

willingness to invest in our future that moves the industry forward and strengthens

this country’s communications assets.

We have followed this path in the wireless business, where we put together a national network and invested in spectrum, digital capabilities and, now, broadband

technologies to expand the market and grow through innovation.

We are following this path in the consumer wireline business, where we are transforming our telephone network into a broadband network by deploying DSL and

fiber-to-the-premises, over which we are providing voice, data and—as we move forward—video services.

Verizon’s acquisition of MCI represents the next logical step in this process, as

we transform ourselves around the evolving needs of the large-business, or ‘‘enterprise’’ market.

We have always viewed the large-business marketplace as one of the keys to our

long-term growth strategy. As in all network-centric businesses, scale is important

in this segment, and while we have a solid presence among local and regional customers, we have no significant market share among national and global customers.

27

So we knew we needed to add substantially to our product set and network reach

to be able to compete for these customers, and we have been investing in these capabilities steadily over the years.

The MCI acquisition accelerates that effort substantially. One of MCI’s core

strengths is its network assets, including its leading role in IP-based technologies.

By bringing our companies together, we will create a strong new competitor in the

enterprise space—one with the advanced products, network reach and capital capacity required to invest in these assets and compete in this technology-intensive and

highly competitive market.

I understand that some have questioned how this latest phase of restructuring in

the communications industry will affect consumers. Let me be very clear. Verizon’s

acquisition of MCI does not alter the dynamics that are reshaping the consumer

market.

Long distance and local as stand-alone businesses are on their way to obsolescence, with or without this transaction. Competition from wireless, cable telephony,

e-mail, Instant Messaging and VOIP will continue to drive pricing, with or without

this transaction. And in any meaningful sense of the word, the consumer marketplace will continue to become less concentrated over time—with or without this

transaction—as new platforms and providers vie for the broadband household.

My message to this committee, then, is that to view this deal in terms of the communications business of the past 20 years is to miss the benefits that will accrue

in the next 20 years.

Consumers will benefit because MCI’s IP network and products, combined with

our deployment of fiber directly to homes and business, will be the most advanced

broadband platform in the country, capable of delivering next-generation multimedia services in markets across the U.S.

Enterprise customers will benefit because we will create a strong, stable and secure strategic partner for national and global businesses as they prepare for the

broadband future.

Federal and state government customers will benefit because they will have a

choice of financially stable players that can stay current in technology and invest

in the networks that are critical to their public mission.

National security will benefit because we will continue to invest in and strengthen

the national and international communications infrastructure that is a critical component of government communications systems, including those used by the Departments of Defense and Homeland Security.

And the U.S. economy will benefit because we are creating a strong, U.S.-based

company capable of investing in the new technologies so critical to job creation and

leadership in the global marketplace.

This transaction is about the future. Verizon and MCI will be a national, full-service company with the financial strength and technology resources to deliver the

broadband, multimedia world of tomorrow to customers and create economic growth

for America today.

Thank you. I look forward to your questions.

Chairman BARTON. Thank you, sir.

We would now like to welcome the Chief Executive Officer of

MCI, Mr. Michael Capellas.

STATEMENT OF MICHAEL D. CAPELLAS

Mr. CAPELLAS. Thank you, Mr. Chairman, and members of the

committee for giving us the opportunity to testify today.

While I think, as everyone has already agreed, over the past 5

years, the industry has undergone a series of quite fundamental

technological shifts. And I think the potential of the Internet and

really the things we have not yet seen guarantees that this pace

of change is not actually at its end, but it is probably at its acceleration point. We have yet to see the incredible potential of what

integrated communications and the extension can do in areas such

as healthcare or even in the revolution of education.

And while I have been the CEO of MCI for the past 21⁄2 years,

I actually spent the past 30 years in the computing industry, and

so most of my professional career has actually been as a customer

28

of telecommunication services and as a developer of what applications can do when merged with the power of a global network to

actually fuel innovation.

I actually believe in the power of technology and in the entire infrastructure that the extension of the telecommunications industry

is actually important to that development. I always liked to say

there has actually been a computer on both ends of a network for

a very, very long time.

Most of the changes that we are now seeing in the telecommunication industry are actually being driven by a much broader movement across information technology.

First of all, there is actually a tendency toward standardization

of virtually everything in the computing world. Basic computing

building blocks, such as servers or storage and microprocessors are

actually becoming standard devices that are attached to a network

that are—have an address on the Internet and can actually reside

everywhere.

The second is the rise of the Internet commerce—it has actually

accelerated the adoption of a set of software standards that enable

different systems to talk to each other. At the same time, new tools

like web services are allowing developers to write applications that

go across all different platforms.

Today, communications travel over a network in what we call

‘‘packets.’’ There is no difference between a voice or a data packet

over the network. And whether you are making a phone call or

purchasing an MP3 file for music, it is the same. A packet is a

packet is a packet on the network.

The Internet-driven standards that allow systems to talk to each

other have also redefined network requirements. Formerly, local,

long distance, and data traveled across separate network paths.

Now there is a need for vertically integrated intelligent paths

which can carry voice data or streamed video without the developer

or end user needing to know or care how that path is developed.

One does not need to be a computer scientist to actually think

about this. A ‘‘blackberry’’, which virtually everybody has, is a

great example of a simple device that can do instant messaging,

make a phone call, get news, get sports, or stream a video. And

that is just a classic example of what we call integrated communications.

Today, MCI is a leading global communications provider and operates one of the industry’s largest global IP backbones, and we

serve the most demanding applications in the world. We serve financial institutions, complex engineering and manufacturing centers, and provide complex solutions to over 75 government agencies.

Many of these customers are the early adopters of this technology; where they are using their computing infrastructures, but

also needs new forms of networking. The customers all have a fairly similar set of requirements. They need high reliability and security. They need the capability to be end-to-end in global delivery.

They need a new network that allows for ease of adoption of new

applications, which drives innovation across all sectors, and they

need low-cost infrastructure.

29

Across all of these requirements, there is a need to mesh local

access and wireless capabilities with a core backbone. The core

technology in the backbone of the future was actually partially incubated at MCI through the legendary pioneer of Vint Cerf, a 15-

year MCI employee. It is known as the Internet Protocol, or IP. In

the simplest terms, IP allows applications from wireless or video

streaming to be rolled out without understanding the changing core

network elements that are underneath it.

So where does MCI fit in this sort of perfect storm of IP convergence, market evolution, and regulatory change?

We recognize that it would be virtually impossible to sustain our

traditional voice business. And as a result, we have de-emphasized

our consumer business and refocused on large business and government customers. Our plan is to leverage our IP and expand the

network management, web hosting, and network security.

The second thing we have done is to align ourselves with Verizon

to provide significant strength in facilities and networks that are

complementary. MCI owns a state-of-the-art backbone network but

no significant ‘‘first mile’’ facilities or wireless. Verizon has extensive ‘‘first mile’’ facilities, state-of-the-art broadband, and wireless.

MCI has a large enterprise and government customer base that has

remained loyal, because we provide world-class service. Verizon

provides local access to many of the same customers.

The combined company will deliver end-to-end network capability

that will permit innovation of the next generation of applications.

In conclusion, technological advances and changing customer requirements are the driving force behind the industry restructuring.

Traditional models of competition and traditional notions of ‘‘long

distance companies’’ or ‘‘local companies’’ no longer apply. The combination of MCI and Verizon is a reflection of the broad-based

changes and the right path to meet evolving customer requirements. At the end of the day, technology will march on. But it is

not only innovation, but also the speed of adoption that is important, and we believe this restructuring adds to both.

Thank you very much.

[The prepared statement of Michael D. Capellas follows:]

PREPARED STATEMENT OF MICHAEL D. CAPELLAS, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, MCI, INC.

Good morning. My name is Michael Capellas. I am the President and CEO of

MCI. Thank you, Mr. Chairman and Members of the Committee, for giving me the

opportunity to testify today about the changing structure of the telecommunications

industry. Over the past five years, our industry has undergone a series of fundamental technology shifts. The as-yet untapped potential of the Internet guarantees

even greater change in the future.

While I have been CEO of MCI for roughly the past two and a half years, I’d like

to start by saying that I bring a different perspective to this discussion, having

spent the past 30 years of my career in the computing industry before I arrived at

MCI. I was previously CIO for two global Fortune 50 companies and CEO of

Compaq and President of HP.

My life’s projects include designing and developing systems, from using supercomputers to solve complex human genome problems to utilizing web analytics to better

understand consumers and their online buying patterns. Why is this relevant to the

telecommunications industry? As I like to say, there has been a computer on both

ends of the communications network for a very long time.

I have spent my professional career as a customer of telecommunications services,

as a developer who used the power of global networks to fuel innovation and productivity and I believe in the power and promise of technology.

30

How is computing leading the structural changes within telecommunications?

First of all, there is a movement within computing towards standardization. Basic

computer building blocks such as servers, storage and microprocessors are standard

devices that are addresses on a network and can reside anywhere. Second, the rise

of Internet commerce accelerated the adoption of software standards that enable different systems to talk to each other. At the same time, new tools like web services

are allowing developers to write applications across different platforms.

Today, communications travel over the network in what we call ‘‘packets.’’ There

is no difference between a voice or data packet over the network. Whether you are

making a voice call or purchasing an MP3 music file, it is all the same—a packet

is a packet.

The Internet-driven standards that allow systems to talk to each other have redefined network requirements. Formerly, local, long distance and data traveled separate network paths. Now, there’s a need for vertically integrated intelligent paths

which can carry voice, data and streamed video without the developer or end-user

needing to know or care how the path is developed.

One does not need to be a computer scientist to see this in everyday life. A ‘‘Blackberry’’ is a great example of a simple device that can instant message, make a phone

call, get news or sports, stream a video or send a phone a call. It is called integrated

communications. In more technical terms, we call it wireless broadband to an IP

network. This ability to do integrated communications is becoming commonplace

around the world and the path for future technology is clear. The only question is

the pace of adoption and we may be behind the curve in this country.

Today, MCI is a leading global communications provider and operates the industry’s most expansive global IP backbone. MCI develops the converged communications products and services that are the foundation for some of the most demanding

applications in the world. We service major financial institutions, complex engineering and manufacturing centers, and provide complex solutions to more than seventyfive government agencies.

Many of these customers are the early adopters of new computing infrastructures

and are led by the best and brightest technologists. These customers have some

common requirements:

1. High reliability and security;

2. End-to-end global delivery;

3. Ease of adopting new applications; and

4. Low cost infrastructures.

At the heart of these requirements is the need to mesh local access with wireless

capabilities and the core backbone networks. The core technology of the backbone

of the future was largely incubated at MCI, in part to the vision of the legendary

Internet pioneer Vint Cerf. It is known as Internet Protocol—or IP. In its simplest

terms, IP allows applications from wireless email to video streaming to be rolled out

without understanding or changing the core network elements underneath.

BROADBAND AND INTERNET ADOPTION ARE DRIVING TECHNOLOGICAL CHANGE

The momentum is clear: wireless and broadband connecting to IP is the wave of

the future. On the broadband side, cable modem service and DSL offerings are beginning to be rolled out more widely. Some companies have started to rollout ‘‘next

generation’’ broadband. Public and private entities are starting to deploy wireless

‘‘WiFi’’ networks. Newer and better wireless broadband technologies, such as

‘‘WiMax,’’ offer great potential down the road.

Hand-in-hand with broadband is the move to IP. IP technology has led to a convergence of computing and communications, of voice and data, the first manifestation of which is Voice over IP technology (‘‘VoIP’’). The introduction of VoIP has lead

to the emergence of new and non-traditional providers of voice applications, such as

the cable companies and VoIP providers such as Vonage. Peer-to-peer providers,

such as Skype, have also started to provide voice applications.

But VoIP is only the tip of the digital iceberg, a precursor to what I call ‘‘Everything over IP,’’ or ‘‘EoIP.’’ Think of a future where you communicate not just with

your voice over a telephone, but with new applications such as video e-mail and the

realization of decades-old promise of ‘‘picture-phones.’’ In short, IP makes old voice

telephony seem as archaic as the telegraph. The rapid convergence of computing

and communications has been remarkable.

THE TELECOMMUNICATIONS MARKETPLACE HAS CHANGED DRAMATICALLY

As the technology changes, customer expectations and acceptance of that technology changes. On the market front, we are already seeing a revolution in how we

communicate. Wireless service has become a true substitute for traditional landline

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long distance service. Today, more than half of all long distance calls are made via

wireless devices. The traditional distinctions between local and long distance have

blurred considerably as providers offer products that give consumers ‘‘buckets’’ of

minutes or unlimited local and long distance calling.

A small, but growing number of consumers are abandoning traditional wireline

companies altogether, in favor of wireless or cable companies or other non-traditional providers. This market trend toward new, non-traditional means of communication becomes more pronounced as the new generation becomes on-line. E-mail

and ‘‘instant messaging’’ have become significant substitutes for voice traffic. If you

have ever watched a teenager do instant messaging, you can assume we are not far

from peer-to-peer video as a way of life. Those who grew up on wireless phones and

Internet-based access to music, movies and other forms of content will have little

trouble moving away from traditional phone companies and purchasing communications applications from a host of new companies.

LEGAL AND REGULATORY CHANGES ARE CAUSING INDUSTRY RESTRUCTURING

Lastly, changes driven by Do Not Call legislation, judicial decisions, specifically

the recent decision of the D.C. Circuit in the Triennial Review Order case, and by

federal regulations have had a major impact on the industry. In a series of recent

decisions, the Federal Communications Commission (FCC) has significantly restricted so-called ‘‘intramodal’’ competition, the ability of companies to lease the facilities of other companies via ‘‘unbundled network elements.’’ While MCI has disagreed with the Court and the FCC on these matters, these decisions have forced

the industry to re-examine how they provide service to customers and the types of

markets they address. As important, the decisions highlight the importance of

intermodal competition, and the need to promote facilities-based investment, particularly in ‘‘first mile’’ facilities, those that reach from the customer’s premise to

the network.

We are already seeing this intermodal competition take place with cable companies investing heavily in their networks. Wireless companies, such as Sprint and

Nextel, are moving to provide wireless broadband services. Power utilities are moving to provide facilities-based broadband in some localities. The use of licensed and

unlicensed spectrum to provide new, wireless broadband networks will be an area

of great significance in the coming years.

MCI’S CHALLENGE

So where is MCI in this ‘‘perfect storm’’ of IP convergence, market evolution, and

regulatory changes?

One of the first things MCI recognized was that, given all of these changes, it

would be virtually impossible to sustain its traditional voice business, especially in

the consumer market. As a result, we sought to de-emphasize the importance of our

consumer business and refocus the company on next-generation services for large

business and government customers. As we transition away from our role in the

consumer long distance business, our plan is to build on and leverage the strength

of our IP network. In executing that plan, we have moved recently to expand our

ability to provide network management and web hosting services, as well as network security applications.

The second thing MCI has done is to align itself with Verizon to provide significant strength in facilities and networks that are complementary to our own:

• MCI owns a state-of-the-art IP backbone network, but no significant ‘‘first mile’’

facilities or wireless. Verizon has extensive ‘‘first mile’’ facilities and is upgrading those facilities with state-of-the-art broadband technology. Verizon also

owns an interest in Verizon Wireless.

• MCI has a large enterprise and government customer base that has remained

loyal to us because we provide them with world-class products and service quality. Verizon, in contrast, has a much smaller presence in the enterprise markets

but is very well-positioned in the consumer market.

The combined company will own a powerful end-to-end network that will permit

it to launch a whole suite of next-generation applications that will benefit residential, business and governmental customers.

CONCLUSION

Technological, marketplace and regulatory changes are the driving forces behind

industry restructuring. Traditional models of competition and traditional notions of

‘‘long distance companies’’ or ‘‘local companies’’ are out-of-date. The combination of

MCI and Verizon is a reflection of the changes we must adapt to and a necessity

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if we are to meet and surpass our customers’ expectations. It is a beginning, an important part of a new and exciting era of competition in an expanding and converging ‘‘communications’’ world.

Thank you very much.

Chairman BARTON. I thank the gentleman.

Now I wish to recognize the Chairman and CEO of Sprint, Mr.

Gary Forsee.

STATEMENT OF GARY D. FORSEE

Mr. FORSEE. Good morning, Mr. Chairman and members of the

committee. I would like to thank you for the opportunity to discuss

with you today competition and the ongoing technological changes

in the communications marketplace. The two matters are obviously

very closely related.

Sprint has a proud history dating back to 1899 as an innovative

competitive company driving technology and bringing to the marketplace products and services that have transformed how people

live and work. Today, Sprint is a global communications company

providing wireless, long distance, and local communication services.

Sprint built and operates this country’s first nationwide all-digital,

fiber optic network, which includes a global IP data backbone network as well.

In addition, Sprint built and continues to deploy the first all-digital PCS nationwide wireless network from the ground up. Together with our affiliates and roaming partners, we offer wireless

services in all 50 States, including both voice and data services.

And today, we are further investing in our network to launch a

third-generation wireless data network that will enhance capacity

and provide an order of magnitude increase in data speeds.

I am pleased to have the opportunity to discuss with you the

pending merger of the Sprint Corporation and Nextel Communications. It is a merger that would create a robust, wireless-focused

company that will be positioned to compete, innovate, and change

communications in our Nation for the better. Upon receipt of the

necessary approvals, the combined company will have the opportunity to effectively expand deployment of wireless voice and data

services, as well as high-speed technologies. Once necessary approvals are obtained, we also anticipate spinning off Sprint’s incumbent local telephone assets comprising approximately 7.7 million access lines as a strong independent telecommunications company.

The merger will create a Fortune 50 company that will bring significant technological competitive benefits to our consumers. Sprint

and Nextel combined will have net operating revenues of approximately $34 billion and a market cap, in today’s terms, of $68 billion. The two customer bases will comprise over 40 million wireless

subscribers. As a result of the combination, Sprint Nextel will be

a predominately wireless company able to provide consumers better

services and more choices while they are on the go, at work, or at

home. With the combined capabilities of Sprint’s nationwide CDMA

network, the Nextel’s nationwide iDEN network, the new company

will have the most robust wireless network capabilities and sufficient spectrum to provide the dynamic network services and data

offerings demanded by our customers.

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In addition, continued competition in the wireless marketplace

will drive additional investment in research and development, ensuring that it will result in cutting-edge, multimedia products and

services that will generate economic growth and bring tremendous

innovation and value to our customers.

Sprint and Nextel both have distinguished histories of innovation. Sprint has been the industry leader in developing wireless

data services, and Nextel has a proven differentiating feature in its

direct-connect service.

The companies’ combined operations make possible an even richer set of products and services and features all under one roof.

The mobile telephone business is in a transformational stage: one

where our customers not only expect extensive coverage for their

voice calls, but are demanding the availability of e-mail, Internet

service, and other data service applications as well wherever they

are.

Sprint has begun launching its next-generation network to provide these services and plans to make it available to over 130 million people by the end of this year and coverage extended to all of

our network by the end of 2006. The merger will ensure that

Nextel’s customers have access to this industry-leading broadband

network.

Moreover, the merger is expected to deliver operating and capital

investment synergies with an estimated net present value of more

than $12 billion. Savings come from the efficiency gained by combining our customer bases and by combining our network and other

assets. For example, the merged company will realize economies of

scale in connection with acquisition network equipment and consolidation opportunities as we rationalize our other assets. These

economies will reduce costs and improve the competitive posture of

a converged company to the benefit of consumers.

The improved wireless network that will result from the combination of Sprint and Nextel’s wireless assets not only will benefit

consumers but also for public safety as well. Sprint and Nextel

have been dedicated to providing advanced communication systems

to the public safety community, and a combined Sprint Nextel will

move forward with an even stronger effort to develop wireless products and services that public safety officials can utilize to make

America more secure than it is today.

Fundamentally, this merger is about growth. It is about improving service, driving innovation, and establishing a wireless communication company that can more effectively compete with other

communications companies. Verizon wireless and Cingular each

have a greater subscriber share in many geographic areas.

Cingular will have more spectrum than Sprint Nextel will have in

many areas. After closing, Sprint Nextel will derive more than 80

percent of our combined revenues from wireless services and will

have a greater ability to compete with these and other firms than

either company would have been able to do separately.

Competition in the mobile industry will continue to develop, and

it is a vigorous and dynamic marketplace that will remain so after

Sprint and Nextel are combined. With increased scale, complementary wireless, and IP network assets and the independence to take

on the biggest phone companies, Sprint Nextel will be in a position

34

to compete effectively with both wireless and wireline companies.

And because Sprint and Nextel intend that the merged company

will spin off Sprint’s incumbent local phone assets, the combined

company will have an unmatched incentive to pursue a wireless

feature, such that wireless and wireline services increasingly compete for customers, and like other large wireless players that are

today primarily owned by the Bell operating companies.

In conclusion, the merger will not change Sprint’s relative market share and market position. Sprint is currently the third largest

wireless carrier, and as a result of the merger, the combined company will still hold the No. 3 position, albeit in a stronger position.

Thank you, Mr. Chairman. I will be glad to respond to any questions from the committee.

[The prepared statement of Gary D. Forsee follows:]

PREPARED STATEMENT OF GARY D. FORSEE, CHAIRMAN AND CEO, SPRINT

CORPORATION

Good morning Mr. Chairman and members of the Committee. Thank you for the

opportunity to discuss with you today competition and the ongoing technological

changes in the communications marketplace. The two matters are closely related.

Sprint has a proud history dating back to 1899 as an innovative, competitive company driving technology and bringing to the marketplace products and services that

have transformed how people live and work. Today, Sprint is a global communications company providing wireless, long distance, and local communications services.

Sprint built and operates the United States’ first nationwide all-digital, fiber optic

network. With this network, which includes a global Tier 1 IP backbone, we provide

a broad suite of voice and data services to domestic and global customers.

Sprint built, and continues to deploy, the first all-digital, all-PCS nationwide wireless network from the ground up, currently serving more than 24 million wireless

customers in more than 350 Metropolitan Statistical Areas. Sprint has been a leader

in advanced wireless technology and was the first carrier to deploy a CDMA network. Sprint then launched 1XRTT voice and data service, expanding voice capacity

and providing end users wireless access to Internet and other data services. Sprint’s

CDMA network covers 99% of major metropolitan areas, airports, and highways in

48 states, the U.S. Virgin Islands, and Puerto Rico. Together with its affiliates and

roaming partners, Sprint offers wireless service in all 50 states. Sprint offers both

voice and data services (with data speeds averaging 50 to 70 kbps) on its wireless

network.

Sprint has also built one of the largest fiber optic networks in the U.S. This network has significant operational advantages, including the ability to seamlessly

interconnect a variety of technologies, accommodate diverse standards and protocols,

and provide secure communications. Sprint’s wireline network is extensive and robust. Its U.S. network consists of more than 34,000 physical route miles of fiber

optic cable. Its global network consists of over 75,000 route miles of fiber, including

an ownership stake in major undersea cable systems.

I am pleased to have the opportunity to discuss with you the pending merger of

Sprint Corporation and Nextel Communications, Inc. It is a merger that will create

a robust, wireless-focused company that will be positioned to compete, innovate and

change communications in our nation for the better. Upon receipt of the necessary

approvals, the combined company will have the opportunity to effectively expand deployment of wireless voice and data services, as well as high-speed technologies.

Once necessary approvals are obtained, we also anticipate spinning off Sprint’s incumbent local telephone assets—comprising approximately 7.7 million access lines—

as a strong independent telecommunications company.

Sprint and Nextel combined have net operating revenue of approximately $34 billion and a market cap of more than $68 billion. The two customer bases combined

have over 40 million wireless subscribers (35 million direct and 5 million through

affiliates and partners). The merger will create a Fortune 50 company that will

bring significant technological and competitive benefits to consumers. As a result of

the combination, capital originally intended to build duplicate networks will become

available. The merged company will be able to deploy that capital to provide consumers better services and more choices while they are on the go, at work or at

home.

35

With the combined capabilities of Sprint’s nationwide CDMA network and

Nextel’s nationwide iDEN network, the new company will have robust wireless network capabilities and sufficient spectrum to provide the dynamic network services

and data offerings demanded by our customers today. In addition, continued competition in the wireless market will necessitate additional investment in research

and development in order to develop competitive cutting-edge, multimedia products

and services that will generate economic growth and bring tremendous innovation

and value to consumers. This will be a function both of the company’s own research

and development activities and of the vendor research and development activities

that our increased scale and scope will induce. Sprint and Nextel both have distinguished histories of innovation. Sprint has been the industry leader in wireless data

services, and Nextel has a proven differentiating feature in its Direct Connect walkie-talkie feature. Sprint Nextel plans to build on these strengths using a next-generation wireless broadband network to provide new communications solutions and

more choice for consumers.

Fundamentally, this merger is about growth. It is about improving service, driving innovation, and establishing a predominately wireless communications company

that can more effectively compete with other communications companies. In particular, the merger will create a robust wireless competitor that will be able to compete very effectively for a broad range of customers in the mobile telephony industry. Verizon Wireless and Cingular each has greater subscriber share and, in many

geographic areas, Cingular will have more spectrum than Sprint Nextel will have.

After closing, Sprint Nextel will derive more than 80% of its revenues from wireless

service and will have a greater ability to compete with these and the other firms

than either company would have separately.

The merger is expected to deliver operating and capital investment synergies with

an estimated net present value of more than $12 billion. Such savings come from

the efficiencies gained by combining our customer bases—both current and potential—and by combining our networks and other assets. For example, the merged

company will realize economies of scale in connection with the acquisition of network equipment and handsets and other terminal devices. These economies will reduce costs and improve the competitive posture of the merged company, to the benefit of consumers.

IMPROVING WIRELESS SERVICES FOR CONSUMERS

Sprint and Nextel, along with other companies that provide either Sprint or

Nextel-branded service, operate networks that directly cover nearly 262 million people across the country. The combined company will noticeably improve wireless service coverage, capacity, and quality by allowing cost-effective optimization of the

Sprint and Nextel cell sites, spectrum, networks, and operations, resulting in increased signal strength, fewer dropped calls and greater geographic coverage. As a

result of the merger, consumers will gain access to the industry’s leading broadband

offerings and push to talk features, all from one carrier, and the companies’ combined operations will make possible a richer set of products, services, and features.

Following the proposed merger, Sprint Nextel will be a predominantly wireless

company operating both Sprint’s current CDMA network and Nextel’s iDEN network, and prospective customers who visit Sprint Nextel retailers after the merger

will be able to ascertain which network and functionalities most efficiently, effectively, and economically address their needs. Customers who prefer wireless

broadband capabilities will be more interested in CDMA service, currently available

on Sprint’s network and handsets. Customers who prefer the robust, instant-communication push-to-talk functionality available on Nextel’s network will be more attracted to the iDEN network and handsets. The merger will allow Sprint and Nextel

to avoid costly duplication in their development and deployment of new technologies,

and, with a larger customer base, they will be able to undertake projects that would

have been uneconomical (i.e., unprofitable) for either to pursue alone. In short, both

current and future Sprint Nextel customers will have a broader array of services

and features to choose from than either company provides today or would be likely

to provide in the future on a stand-alone basis.

The improved wireless network that will result from the combination of Sprint’s

and Nextel’s wireless assets not only will benefit consumers, but also will be a boon

for public safety. Sprint and Nextel have been dedicated to providing advanced communications systems to the public safety community, and a combined Sprint Nextel

will move forward with an even stronger effort to develop wireless products and

services that public safety officials can utilize to make America more secure. Sprint

and Nextel are committed to addressing communications problems for first responders and, as a merged entity, we will continue to work with the public safety commuVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 99902.TXT HCOM1 PsN: HCOM1
36

nity to ensure that their communications needs are met. The combined company

will offer first responders and other public safety organizations a wide range of

products and services designed to meet their unique needs, including Wireless Priority Service, Priority Connect, Emergency Group Connect, Emergency Response

Team, Interoperability Directory, Collaboration Solutions and Emergency Preparedness Services. And, as the companies have made clear since announcing their intent

to merge, Sprint Nextel will continue to move forward expeditiously with the implementation of the FCC’s 800 MHz band reconfiguration process.

Sprint Nextel will also build on each company’s leadership position in providing

innovative communications solutions for persons with disabilities. Sprint is the nation’s largest provider of wireline telecommunications relay service (TRS) to the deaf

and hard of hearing, with innovative services like Internet Relay, Video Relay and

CapTel. For wireless users with speech and hearing disabilities, Sprint offers a wide

range of handsets that are TTY compatible as well as a suite of mobile messaging

services including text messaging, instant messaging and e-mail. For wireless users

that are blind or visually impaired, Sprint offers a number of handsets with voice

input/output technology as well as robust Voice Command service that provides

voice access to dialing and information services. Sprint offers its blind, visually impaired and physically disabled customers free Voice Command service along with 10

free directory assistance calls per month. A combined Sprint Nextel is committed

to making innovative and useful services available to persons with disabilities.

DRIVING INNOVATION

Sprint Nextel will be committed to advancing its industry-leading broadband offerings as it transitions to new third-generation (‘‘3G’’) and other advanced technology platforms. Without question, the mobile telephone business is in a transformational stage, one where our customers not only expect extensive coverage for

their voice calls, but are demanding the availability of e-mail and internet access

wherever they are. Consumer demand for wireless data services is growing tremendously, as demonstrated in part by Sprint’s successes. Millions of Sprint’s current

customers subscribe to data services. At the end of 2004, there were nearly 7.7 million direct wireless data subscribers, including 6.2 million Sprint PCS Vision customers. Sprint Nextel’s deployment of a 3G platform promises to accelerate these

trends.

In June 2004, Sprint announced adoption of a 3G platform to enhance the PCS

Vision network’s data rate and capacity. This platform provides an order-of-magnitude increase in data rates. The platform is expected to provide a peak downlink

data rate of 3.1 mbps, with an anticipated average data rate of 400-600 kbps.

Uplink data rates peak at 1.8 mbps, with average user data rates in the 300-500

kbps range. Sprint has begun launching this service and plans to make it available

to 129 million people in 39 major cities this year; coverage will be extended to the

vast majority of its licensed markets by year-end 2006.

The merger will ensure that Nextel’s customers have access to this industry-leading broadband network. At the same time, it will obviate the need for a multi-billion

dollar investment by Nextel in new advanced network facilities that would offer

services that Sprint is already in the process of deploying.

Looking to the future, the companies expect to make key investments in

broadband technology research and development to deliver more advanced offerings

across all of their spectrum holdings. Combining Sprint’s and Nextel’s assets provides the financial flexibility to pursue opportunities that could have been prohibitively costly or risky for each company individually. Although there will be challenges, the new company’s goal will be to go beyond 3G capabilities to provide customers with a complete interactive multimedia experience. The company expects to

deploy bandwidth-intensive applications that incorporate devices, applications, and

smart network technologies into an intuitive, easy-to-use service that will enable applications like video-on-demand, document collaboration and video conferencing over

wireless networks. Sprint and Nextel intend to provide this advanced service to a

nearly nationwide footprint, including many rural areas, and would offer highspeed, low-latency access to high-quality multimedia content at reasonable prices.

Without doubt, the deployment of new wireless, interactive multimedia services has

the potential not only to enrich the lives of millions of Americans through an enhanced, visual end-user experience, but also to increase productivity and reduce

costs by providing the ability to access more information and more images on the

go than ever before.

37

CREATING A STRONGER WIRELESS COMMUNICATIONS COMPETITOR

Competition in the mobile telephony industry in the United States is vigorous and

dynamic and will remain so after Sprint and Nextel merge. With increased scale,

complementary wireless and IP network assets, and the independence to take on the

biggest phone companies, Sprint Nextel will be in a position to compete effectively

with both wireless and wireline companies. And because Sprint and Nextel intend

that the merged company will spin off Sprint’s incumbent local phone assets, the

combined company will have an unmatched incentive to pursue a wireless future

such that wireless and wireline services increasingly compete for customers, unlike

other large wireless providers that are primarily owned by Bell company parents.

The merger will not change Sprint’s relative market position. Sprint is currently the

third largest wireless carrier, and as a result of merger, the combined company will

still hold the number three position. Sprint and Nextel today have a combined customer base of approximately 40 million wireless subscribers, compared to 49.1 million at Cingular and 43.8 million at Verizon Wireless. T-Mobile and regional wireless players also are key players and compete vigorously in the marketplace.

As a combined entity, Sprint Nextel will enjoy economies of scale and scope that

are expected to improve service quality and reduce the cost of serving an additional

wireless customer and providing an additional minute of wireless service. As a result, the merger will yield a stronger and more efficient wireless competitor.

After accounting for the costs of integrating the two companies as well as other

merger-related costs, it is estimated that the Sprint Nextel merger will result in

total net synergies of approximately $12 billion on an after tax, net present value

basis. These synergies will be realized through numerous cost savings, including,

but not limited to,

• sharing future costs of undertaking research and development efforts and deploying innovations to the networks • sharing the expense of implementing improvements to information technology and

billing, customer care, and sales and marketing systems • sharing each other’s network coverage in geographic areas where the other is not

as developed, thereby avoiding the cost of duplicating cell sites in those areas

• sharing facilities to collocate a significant number of existing and planned cell

sites which will reduce the cost of cell site deployment and ongoing cell site expenses (as well as improve coverage).

These cost reductions and improvements in quality and technology will enable

Sprint Nextel to be more competitive in the future and will benefit consumers by

improving the coverage, quality and scope of the services we offer them. The cost

savings will also allow us to establish new services that are more favorable—in

terms of value, quality and/or features—than would be available from either company absent the merger.

The combined company will be able to offer the benefits of Sprint’s wireline network solutions to Nextel’s business and consumer customers. Sprint has one of the

largest fiber networks in the United States. This network has significant operational

advantages, including the ability to seamlessly interconnect a variety of technologies, accommodate diverse standards and protocols, and provide secure communications. Sprint’s wireline network is extensive and robust. As noted above, its U.S.

network consists of more than 34,000 physical route miles of fiber optic cable. Its

global network consists of over 75,000 route miles of fiber, including an ownership

stake in major undersea cable systems. As a result of the merger, Nextel’s customers will receive access to Sprint’s suite of voice, data and IP products and integrated solutions provided over Sprint’s extensive wireline network.

It is worth noting that Sprint has been a leader in providing other firms with

‘‘second brand’’ opportunities. Under such arrangements, firms use Sprint’s wireless

and wireline networks to provide service to consumers under their own brand names

(i.e., ‘‘second brands’’). These second branding opportunities allow companies like

Virgin Mobile and ESPN to provide wireless services without the time delay and

expense of first replicating Sprint’s wireless network. These companies leverage

their marketing capabilities to become nationwide wireless competitors on their first

day of service. And they do this by utilizing the Sprint network facilities, which allows us to make more efficient use of our network and fixed operational costs. The

merger will advance the availability of wireless service from MVNOs by including

advanced services and functionality in their retail product offerings.

Sprint Nextel will be a formidable competitive force with every incentive to optimize the wireless future. Nextel and Sprint are industry-leading companies in technological innovations and data solutions. These differentiating characteristics will

position the combined company as a strong and innovative competitor. Following the

intended spin-off of Sprint’s ILEC operations, the combined company will lack any

38

material incumbent LEC wireline business restraint on its competitive strategy,

and, with its wireless focus, Sprint Nextel will be a true competitive alternative to

wireline local telephony. I expect, therefore, that this merger will accelerate the increasing substitution of wireless-based services for wireline-based services, thereby

creating growth in the wireless industry.

In closing, I wish to emphasize my view that Sprint Nextel will be the premier

communication solutions provider by providing its customers with an unmatched

portfolio of communications services. Whether it is wireless, IP, data or multimedia,

Sprint Nextel will provide robust integrated wireless and IP-based wireline solutions to businesses and consumers.

Thank you. I would be happy to respond to any questions that Members of the

Committee may have.

Chairman BARTON. We thank you.

And last, but not least, the Chairman and CEO of Nextel, Mr.

Tim Donahue.

STATEMENT OF TIMOTHY DONAHUE

Mr. DONAHUE. Thank you, Mr. Chairman, and thanks to the

members of the committee.

I appreciate the opportunity to be a part of today’s hearing on

the communications industry and how technology is driving change

in the marketplace. It is a theme that captures the entrepreneurial

spirit of our company and speaks directly to Nextel’s founding.

Since 1987, Nextel has been a pioneering, customer-focused competitor with differentiating technology. Nextel is currently the fifth

largest wireless service provider in the United States with a team

of 19,000 dedicated employees serving more than 16 million customers. Nextel provides a wide range of digital, wireless, voice, and

data communications services over its all-digital packet data iDEN

technology network. Nextel’s differentiating direct-connect walkietalkie feature is a significant and innovative advancement in wireless communications that expands typical dispatch service coverage

areas using the spectrum more efficiently and provides extra security to important customers, such as public safety and government

users.

The communications industry, and particularly wireless, is one of

the most competitive, dynamic, and fastest growing industries in

the U.S. This is an industry that is characterized by robust competition and innovation. According to CTIA, The Wireless Association, wireless subscribers grew from slightly more than 97 million

in 2000 to more than 169 million as of June 2004. Total industry

revenues for 2004 are expected to tally more than $100 billion, approximately double the industry revenue in 2000. Customer minutes of use have increased coverage and service has improved, and

innovative new services are introduced every month. Yet the average monthly consumer bill has increased less than 10 percent over

the past 5 years, and the price per minute of use has dropped by

an overwhelming 81 percent to under 10 cents in June of 2004.

I am thrilled to be a part of the proposed merger with Sprint,

as this new company will not only accelerate these trends but also

enable the new company to compete more effectively with large industry leaders. While the proposed combination of Nextel and

Sprint will result in a communications company with more than 40

million customers and networks that cover over 262 million people,

Sprint Nextel will still be only the third largest carrier in terms of

subscribers.

39

Sprint Nextel will be well positioned in the most dynamic areas

of the industry, including mobile data and push-to-talk features,

where Sprint and Nextel are innovators in the technology. This

focus, coupled with Sprint’s global Internet network will enable the

new company to provide differentiated communications solutions

through integrated applications for business and government and

new broadband wireless services for consumers. We will be the only

full service communications provider not affiliated or owned by a

Bell operating company.

Following the close of the merger, Sprint Nextel intends to separate Sprint’s local telecommunications business, including consumer business and wholesale operations from its other businesses

and then spin this separated company off to Sprint Nextel shareholders in 2006. This is a pro-competitive combination that will

provide business and consumers with real and compelling product

and service choices.

For business customers, Sprint Nextel will be able to provide robust, integrated wireless and IP-based wireline solutions. We will

be able to invest in next-generation wireless data services, bringing

new and compelling products to market, including wireless, multimedia, web browsing, messaging, gaming, and music on the go.

And importantly, for all customers, Sprint Nextel will be able to

cost-effectively invest to improve wireless network quality and coverage.

Sprint Nextel will have a clear technology migration path. The

new company will have robust wireless network capabilities, including a nationwide 800 megahertz iDEN network and a Nation

1.9 gigahertz CDMA network, which will enhance—would be enhanced to include nationwide cutting-edge EV-DO Rev.A, highspeed data services. Sprint Nextel will also have the capability to

deploy new wireless interactive multimedia services on the two

companies’ 2.5 gigahertz combined spectrum holdings.

Combining these wireless assets with Sprint’s nationwide global

IP backbone, Sprint Nextel will be positioned as a key partner for

large content providers, system integrators, mobile virtual network

operators, and other new telecommunication entrants. By

partnering with content providers and entrepreneurs, Sprint

Nextel will be able to offer a full portfolio of services, voice, data,

video, wireline, and wireless as well as customized enterprise applications and integrated business solutions.

Nextel has a long and proud history of working closely with the

public safety community. We support their efforts with products

and services and work closely with them in designing communication tools that make us all more secure. Sprint and Nextel have

agreed that the combined company will assume and honor all obligations that Nextel has accepted in the Federal Communications

Commission’s 800 megahertz proceeding, ‘‘Improving Public Safety

in the 800 Megahertz Band.’’ Going into our merger discussions

with Sprint, honoring Nextel’s 800 megahertz obligations was a

non-negotiable item for Nextel, and it was also one of the easiest

ones to resolve. Sprint and Nextel are committed to supporting the

public safety community and its unique communications needs.

Mr. Chairman, if I had to describe in one word why this proposed

merger makes sense and should be approved, it is growth. Sprint

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and Nextel share compatible cultures built on a tradition of innovations and competitiveness. Together, Sprint and Nextel will have

the resources to develop and deploy compelling differentiated services by unleashing the combined strengths of the two companies,

each of which is recognized as a product and network innovator.

This growth through the merger of equals will enable Sprint Nextel

to be a strong competitor and industry leader that drives innovation, technology, and ultimately benefits American consumers.

Thank you again for the opportunity to share my perspectives on

our pending merger with Sprint. I will be pleased to answer any

questions.

[The prepared statement of Timothy Donahue follows:]

PREPARED STATEMENT OF TIMOTHY DONAHUE, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, NEXTEL COMMUNICATIONS, INC.

INTRODUCTION

Mr. Chairman and Members of the Committee, my name is Tim Donahue, and

I am president and chief executive officer of Nextel Communications, Inc. I appreciate the opportunity to be a part of today’s hearing on the role of technology in

mergers within the telecommunications industry. It is a theme that captures the entrepreneurial spirit of our company and speaks directly to its founding.

Since 1987, Nextel has been a pioneering, customer-focused competitor with important differentiating technology. This customer focus and product innovation has

resulted in Nextel having some of the most loyal customers in the industry. Nextel

realizes by far the highest average revenue per unit and has one of the lowest churn

rates in the industry. Our customers like our products and services and they tend

to use them more heavily than the typical wireless customer.

Nextel is currently the fifth largest wireless service provider in the United States,

with a team of 19,000 dedicated employees serving more than 16 million customers.

Nextel provides its innovative all-digital wireless services in 202 of the largest 300

markets in the U.S. where nearly 217 million people live or work. Together with

Nextel Partners, Inc., we serve 297 of the top 300 U.S. markets where approximately 261 million people live or work.

Nextel provides a wide range of digital wireless voice and data communications

services over its all-digital, packet data network based on integrated Digital Enhanced Network, or iDEN , wireless technology developed in conjunction with Motorola, Inc. Operating on licenses in the 800 MHz and 900 MHz bands, Nextel’s

iDEN network provides a comprehensive suite of advanced wireless services and

features, including digital wireless mobile telephone service, Nationwide Direct Connect  and International Direct Connect SM walkie-talkie feature and such wireless

data services as Internet access and short messaging. In particular, Nextel’s Direct

Connect  walkie-talkie feature is a significant and innovative advancement over

traditional analog dispatch services, augmenting critical communications systems

for the public safety community. More specifically, the Direct Connect walkie-talkie

feature expands the typical dispatch service coverage area, uses the spectrum more

efficiently, and provides extra security through digital multiplexing technology.

THE WIRELESS INDUSTRY TODAY

The wireless industry today is one of the most competitive, dynamic and fastest

growing industries in our country and is critical to the nation’s GDP. From the

workplace to the classroom and to the home, wireless devices and their applications

play an expanding role in our everyday lives. According to CTIA—The Wireless Association, wireless subscribers grew from slightly more than 97 million in 2000 to

more than 169 million as of June 2004. Total industry revenues for 2004 are expected to tally more than $100 billion, as compared to approximately $50 billion in

2000. Customer minutes of use have increased, coverage and service has improved

and innovative new services have been made available. Yet the average monthly

consumer bill has increased less than 10 percent over the past five years and the

price per minute of use has dropped by an overwhelming 81 percent to under 10

cents in June 2004. This is an industry that is characterized by robust competition

and innovation, and it is an exciting time to be in it.

41

SPRINT/NEXTEL MERGER

On December 15, 2004, Nextel and Sprint announced their intention to merge,

with the new company to be called Sprint Nextel. Sprint and Nextel are being valued as equal partners in the merger where shareholders will own 50.1 percent and

49.9 percent, respectively. A highly experienced management team will lead Sprint

Nextel, combining the expertise of both companies. Gary D. Forsee, currently chairman and chief executive officer of Sprint, will become president and chief executive

officer of Sprint Nextel, and I will become chairman of the new company. Together

we have a proven track record of leadership and nearly six decades of industry experience. Further, the Sprint Nextel Board will consist of 12 directors, six from each

company, including two co-lead independent directors.

Following the close of the merger, Sprint Nextel intends to separate Sprint’s local

telecommunications business, including consumer, business and wholesale operations from its other businesses and then spin this separated company off to the

Sprint Nextel shareholders sometime in 2006, pending customary regulatory approvals.

The combination of Nextel and Sprint will result in a wireless company with more

than 40 million customers (35 million direct and 5 million through affiliates and

partners), a strong growth profile, a strong spectrum position, the most valuable

customers and networks that directly cover nearly 262 million people, more of the

U.S. population than any other carrier; yet Sprint Nextel will be only the third largest carrier in terms of subscribers. Sprint Nextel will have a balanced mix of consumer, business and government customers, and the ability to meet the communications needs of a broader range of customers than either company on its own. We

will be the only full service communications provider not affiliated with or owned

by a Bell operating company.

Sprint Nextel will be well positioned in the fastest growing areas of the telecommunications industry, including mobile data and push-to-talk features, where

Sprint and Nextel are innovators in technology. With Sprint’s global Internet network, the new company will be positioned to provide differentiated communications

solutions through integrated applications for business and government and new

broadband wireless services for consumers. Without this merger, neither Nextel nor

Sprint would independently achieve all the technical innovations, additional coverage and capacity that I discuss later in my testimony today.

Mr. Chairman, if I had to describe in one word why this proposed merger makes

sense and should be approved, it is ‘‘growth.’’ I am confident that Sprint Nextel will

generate efficiencies that will benefit customers, shareholders and employees and

will allow the new company to invest in innovative new services that each company

would have found to be more difficult and expensive on its own. The new company

will capitalize on its leadership position in key growth areas, unmatched asset mix,

clear technology migration path, brand strength, innovative products and services

and talented employees. We share compatible cultures built on traditions of innovation and competitiveness. We will have the resources to develop and deploy compelling, differentiated services by unleashing the combined strengths of the two companies, each of which is recognized as a product and network innovator.

The Sprint Nextel merger is a pro-competitive combination that will provide customers with real and compelling product and service choices, including wireless

multi-media, web browsing, messaging, gaming and music on the go. For business

customers, we will be able to provide more robust integrated wireless and IP-based

wireline solutions. We will be able to deploy next-generation wireless data services,

bringing new and compelling products to market to benefit consumers and businesses, including a potential third new platform to the home. And importantly, for

all customers, we will be able to cost effectively invest to improve wireless network

quality and coverage.

There are technology synergies between Sprint and Nextel that make this merger

unique. Sprint Nextel will have a clear technology migration path and valuable and

extensive network and spectrum assets. The new company will have robust wireless

network capabilities, including a nationwide 800 MHz iDEN network and a national

1.9 GHz CDMA network, which it will enhance to include nationwide cutting-edge

EV-DO Rev.A, high-speed data services. We will deploy a high performance pushto-talk feature on the CDMA network and create interoperable gateways between

the iDEN and CDMA networks, thereby enabling our current and future customers

to select the services that most effectively meet their wireless communications

needs. Sprint Nextel will also have the capability to deploy new wireless interactive

multimedia services on the two companies’ 2.5 GHz combined spectrum holdings

that together can reach 85 percent of the households in the top 100 markets.

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Sprint Nextel will also use Sprint’s nationwide backbone wireline (long distance)

network that includes 30 Sprint-owned metropolitan area networks in the U.S. as

well as 37 international fiber points of presence. These combined capabilities are expected to make Sprint Nextel a key partner for the largest content providers, systems integrators, mobile virtual network operators and other new telecommunications entrants. By partnering with content providers and entrepreneurs, Sprint

Nextel will offer the full portfolio of consumer services - voice, data, video, wireline

and wireless—as well as customized enterprise applications and integrated business

solutions.

As with any merger, there also will be opportunities for savings through

synergies. The combined Sprint Nextel is expected to deliver operating cost and capital investment synergies with an estimated net present value of more than $12 billion, over 37 percent of which is expected to come from the avoided network capital

costs of building a separate Nextel next-generation network. These synergies will

also include reduced network operating expenses; reduced network capital costs resulting from sharing cell site locations and facilities; lower access costs as a result

of migrating Nextel backhaul and other telecommunications traffic to Sprint’s long

haul infrastructure; reduced network capital expense after the merger by building

a true IP-based multimedia network; and reduced expenses due to economies of

scale in the combined companies’ sales, marketing, general and administrative and

IT costs.

PUBLIC SAFETY

Nextel has a long and proud history of working closely with police, fire, emergency

communications officials and the rest of the public safety community. We support

their efforts with our products and services and work closely with them in designing

communications tools that make us all more secure. Sprint and Nextel have agreed

that the combined company will assume and honor all obligations that Nextel has

accepted in the Federal Communications Commission’s 800 MHz proceeding, Improving Public Safety in the 800 MHz Band. Going into our merger discussions with

Sprint, honoring Nextel’s 800 MHz obligations was a non-negotiable issue for

Nextel, and it also was the easiest issue to resolve. Sprint and Nextel are committed

to supporting the public safety community and its unique communications needs.

After years of fighting for a comprehensive solution to public safety interference

in the 800 MHz band, Nextel is proud of the role it played in helping to bring about

a solution to this important public safety issue. I want to thank members of this

committee, including Chairman Barton, Chairman Upton, Representative Dingell,

Representative Markey, and Representative Rogers, as well as our partners in the

public safety community and the many others that supported us in seeking a fair,

timely and complete solution to the critical issue of public safety communications

interference. As many of you know, on February 7th 2005, Nextel accepted the

terms of the Commission’s order and we have already begun work on this critical

project. We intend to move as quickly as possible to implement the FCC’s decision.

Our nation’s first responders deserve no less from us.

CONCLUSION

Thank you again for the opportunity to discuss our pending merger with Sprint.

This merger makes sense for our customers, our employees and our shareholders.

It will result in a more formidable communications competitor and will accelerate

the introduction of the new products and services our customers demand. I would

be pleased to answer any questions you might have.

Chairman BARTON. We thank you, Mr. Donahue.

The Chair recognizes himself for the first 5-minute questioning

period.

My first question is to Mr. Whitacre, and it is really a statement

and a question. You know, I joked in my opening that I had just

decided to drop one of my SBC lines at my home in Ennis, but I

think it shows what is going on. I have had two telephone lines

there, because one was a—was called a dial-less line that allowed

a dial-up modem for Internet, and the other is the traditional

phone line that is in the phone book that we have always had. But

we always had a—but I also had a cable outlet for TV. Well, the

cable provides broadband, as does SBC, and so we decided to go to

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broadband on the cable, and once we got that, you don’t need that

second line to have the dial-up modem. But the second phone line

was costing $50. The addition to the cable bill was only $30, so you

save $20. Now that doesn’t sound like a lot, but that is what is

going on all over America as people see that there are competitions.

So Congresswoman Eshoo was talking about you are going to have

less competition, but in a way, you are really going to have more

competition because there are so many different ways to get into

the home. So you know, when you said that you are losing 60,000

phone lines a day—did you say a day or a week?

Mr. WHITACRE. A week.

Chairman BARTON. A week, that shows that the marketplace is

changing, and that is why you need this merger. Did you want to

comment on that at all?

Mr. WHITACRE. Well, I would like to comment on that. I think

that is exactly right. It wasn’t many years ago that there was only

one way into the house for voice. If you remember, I don’t think

the Internet was even mentioned in the 1996 Telecommunications

Act. If it was, it was in passing. Wireless was not contemplated.

We now have so much competition from cable companies, from

wireless companies, and from traditional companies like SBC, that

there are many ways for a customer to get service, not only voice

service, but long distance service, broadband service, all kinds of

services now. So it has changed a great deal since 1996, and that

is really why we are here today. This has to be changed. It is just

not working as it is today.

Chairman BARTON. But your competitors are less and less another phone company as it is an information provider company.

Mr. WHITACRE. Well, that is true, I guess. Some of the so-called

c-lex have gone out of business, although there are many still in

business. But the cable companies we would view as our primary

competitor in the future are offering this broadband path, if you

would, which can handle voice and data and Voice-over IP doing

everything. So there is a tremendous amount of competition now

for customers out there.

Chairman BARTON. My next question is to both Mr. Dorman and

to Mr. Capellas who represent AT&T and MCI. Is there any danger, as we go through these mergers, that what we call the long

distance segment of the market becomes non-competitive as you

merge with SBC and as you merge? Do we get to a situation where

we have again created a monopoly of the long distance service and

that raises prices? Would you two gentlemen like to comment on

that?

Mr. DORMAN. Sure. I think there has been a profound change in

how long distance is provided. In fact, the wireless industry today

probably is originating as much long distance in the traditional

sense as the wireline, and that shift has been going on dramatically in the last 5 years as more and more consumers select wireless as their principle tool for communicating and therefore get

long distance service included. I also believe that the number of

competitors in the wireless base, you know, there are at least,

what, five national competitors in wireless, even after the mergers

have taken place, along with the ongoing competition, as Ed mentioned, from cable as well as the incumbent telephone company is

44

going to provide a range of choices in long distance that will be superior.

Chairman BARTON. Mr. Capellas?

Mr. CAPELLAS. Well, I mean, I think we have already heard

somebody say unfortunately, you know, long distance is almost now

perceived to be free. So if you really look at what people purchase,

I mean, you—how many teenagers now growing up will actually

never own a landline? They will simply go to wireless. So if you

think about what will happen in the future, the concept of long distance as a product will cease to exist, whether that is in the consumer market or, frankly, in the business market. Nobody builds

an IP network just to put voice on it. Voice simply becomes a feature on an advanced network. And that is even before we start to

see, for example, Microsoft fully enabling telephony on the desktop.

So one has to think about long distance as a feature on a network

and telecommunications as an integrated provider of different services, and the technology blends it all together that you can’t separate them apart. So even the notion of long distance, I think, is

something that is rapidly fading from the vocabulary.

Chairman BARTON. Right. I am old enough to remember when

somebody said you are getting a long distance phone call, that was

a big deal, because it was very expensive. And they were charging

you $1 a minute. So if they said long distance, you ran to the

phone, because it was important. Somebody had died or somebody

had had a baby or something. I mean, it wasn’t a call that happened every day, so——

Mr. CAPELLAS. And the $1 a minute I can assure you is no

longer——

Chairman BARTON. Yeah. My last question, and my time is expired, but I want to ask Mr. Forsee a question that I asked in my

office to him yesterday. We are going to a marketplace, and again,

we are very interested in the business—the commercial aspects of

this, but all of us, you know, are retail congressmen. We all get

elected by people. And right now, it is—the market, you have got—

you have broadband connection through the phone line. You have

broadband connection through the cable. At what point do you get

the ability for wireless to go head-to-head into the home with some

sort of a broadband capability so that consumers in their homes

not—have just two choices, but three choices?

Mr. FORSEE. I think—Mr. Chairman, I think those choices are

coming very quickly as we continue to deploy data services into the

traditional voice wireless networks. Those choices are being made

as we speak. We estimate as many as 8 to 10 percent of customers

have already cut the cord for basic voice services, and you could

also assume over time that customers will want the flexibility associated with wireless data to become untethered from their DSL

service or from their cable modem. Sprint Nextel will have the opportunity. As I indicated, we are deploying now our third generation wireless data network. And as Tim indicated, as we then have

the opportunity with our 2.5-gigahertz spectrum to consider deploying a nationwide 2.5 spectrum network, which will really be the

fourth generation. At that point in time, I think you have a potential viable alternative to fixed data, and at that point in time, customers truly will have a choice.

45

Chairman BARTON. So although we are going to have fewer companies than we are familiar with, very soon we are going to have

actually more competition, is that safe to say?

Mr. FORSEE. That is the case.

Chairman BARTON. Okay.

My time is expired.

I recognize the ranking member of the subcommittee, Mr. Markey, for 5 minutes.

Mr. MARKEY. I thank you, Mr. Chairman.

Mr. Whitacre and Mr. Seidenberg, you are both acquiring companies that, under different circumstances might have competed

against you for wireline residential customers. When the government created its wireless policy, it created a third, fourth, and fifth

license that was not owned by the two incumbents, and that led to

a plummeting of cell phone bills. The same thing happened when

AT&T was broken up by the government. We saw a plummeting

of long distance rates. Will each of you pledge that residential consumers will not see an increase in their phone service bills as a result of these mergers?

Mr. WHITACRE. Do you want me to take that one, Ivan?

You know, this merger with AT&T, Congressman Markey, they

are leaving, and announced last July that they are not in the consumer markets, so this is—this merger is going to have no impact

on the consumer marketplace. They are not.

Mr. MARKEY. So you aren’t saying it will not result in an

increase——

Mr. WHITACRE. No.

Mr. MARKEY. [continuing] in residential rates? So you are saying

that?

Mr. WHITACRE. They will not. They are not in the business. We

are not acquiring a company that is in the consumer mass market

business.

Mr. MARKEY. So do you pledge not to increase rates to

residential——

Mr. WHITACRE. I can’t pledge that forever, but I don’t see anything that would impact that in the, you know, foreseeable future.

Mr. MARKEY. How long is the foreseeable future, in your mind?

How long could you make a pledge for that residential rates would

not go up?

Mr. WHITACRE. Well, you know, I can’t make a pledge for any

specific length of time, but I don’t foresee that happening. There

are still many competitors. There is the wireless company——

Mr. MARKEY. No, I understand that.

Mr. WHITACRE. But I can’t tell you a specific number of days or

months.

Mr. MARKEY. You—and again, looking——

Mr. WHITACRE. But I don’t foresee——

Mr. MARKEY. We are looking for years, not days or months.

Mr. WHITACRE. I don’t foresee it in years. I really don’t foresee

it. I think the market forces are such, and there are so many people in the business, it probably won’t happen.

Mr. MARKEY. Mr. Seidenberg, would—can you make a pledge

that there will not be an increase in costs for residential consumers?

46

Mr. SEIDENBERG. No, sir; but what I can do is be—is tell—explain the record. In the past 15 years, consumer prices, as far as

we are concerned, have gone down. Technology has driven them

down, and competition has driven them down. If you want to ask

that question, then we need the cable companies at the table. We

need everybody who is providing these services. And I think the

bottom line is we are getting so much innovation in the space, unit

costs are going down and prices have been falling.

Mr. MARKEY. So are you pledging that prices will go down for

consumers, given your analysis of what is happening?

Mr. SEIDENBERG. We are going to pledge to be the best competitor we can, provide the best value to customers, and the market

will take care of the answer, as it has for the past 15 years.

Mr. MARKEY. Well, the best value for consumers is always the

lower price, from the consumer’s perspective. That has happened in

wireless. It has happened in long distance. And it has happened in

residential, and we just don’t want to see, as these two competitors

leave the marketplace, that there is an increase.

Mr. SEIDENBERG. That is a fair point, but now if I can address

that, these two competitors or let us say—just let me mention Michael, in the consumer space, they have decided to get out of the

business not because of us. It was because of the Internet and——

Mr. MARKEY. No, they have decided to exit because of an FCC

decision that was a petition from the Bells to the FCC. That is why

they are out of the business. They would still be in the business,

and that is the only reason they are leaving this business, from

their earlier testimony before the FCC.

Let me ask a question of Mr. Whitacre and Mr. Seidenberg. I am

going to read to you testimony from another witness before the

committee and ask whether you agree or disagree.

‘‘The open access and interconnection requirements placed on

telephone companies should also be applied to the cable industry.

Furthermore, open interconnection can help ensure that competition can still thrive, even before customers have access to at least

two ubiquitous competing broadband networks. As the Nation

makes the transition to a system of multiple broadband networks,

competition can be safeguarded if all information providers are

guaranteed access.’’ Do you each agree with that statement?

Mr. WHITACRE. No, I don’t agree with it.

Mr. MARKEY. Do you agree with that statement, Mr. Seidenberg?

Mr. SEIDENBERG. Well, I agree with Ed.

Mr. MARKEY. You agree with——

Mr. SEIDENBERG. Ed, yes.

Mr. MARKEY. —Mr. Whitacre? Okay.

Well, can you guess who that witness was and the year? It was

Dick Notabart, the CEO of Ameritech, February 9, 1994, before

this committee, representing the Bells in terms of their view of

broadband networks. That was a hearing. That bill was about

broadband networks. On the same day, Mr. Seidenberg, you testified that ‘‘all providers of similar services should be treated alike.

Regulations should be based on the service provided, not on the

identity or parentage of the entity providing it.’’ Do you still agree

with that?

47

Mr. SEIDENBERG. That is a very smart statement. That is a very

smart statement.

Mr. MARKEY. Absolutely. Would it differ whether the service was

voice or video?

Mr. SEIDENBERG. Well, you know, I have been testifying before

this committee and you, sir, a long time, and I have always felt

that regulation has focused on the facilities in the physical plant,

and it shouldn’t. It should focus on the service. And in my view,

we should be moving toward treating services provided by different

carriers the same way.

Mr. MARKEY. So let me just conclude, if I may. In my view, asymmetrical regulation for similar providers is unfair, but we must

keep consumer interests first and foremost, and that means fostering direly needed competition while assuring effective consumer

protection. That will be the test of this committee over the next

year.

And I thank the witnesses.

Mr. UPTON. We recognize co-chairman of the full committee, Mr.

Bilirakis from Florida.

Mr. BILIRAKIS. Thank you, Mr. Chairman.

I have, I guess, the same question to both Mr. Dorman and Mr.

Capellas. Mr. Dorman, what if the deal with SBC did not happen?

Can you tell us what AT&T’s future would be in a year and in 3

years?

Mr. DORMAN. I think that it has been clear of the—our focus on

the business market was one that we believe that we could continue to be successful in. While I remain concerned about how the

industry would evolve, we believe that AT&T, after making the decision to exit the consumer market, could serve business customers

globally as a competitor. We didn’t see ourselves going out of business, certainly.

Mr. BILIRAKIS. And that would be the case for the foreseeable future?

Mr. DORMAN. That is what we believe, yes.

Mr. BILIRAKIS. Mr. Capellas, the same question, really. If the

deal—if MCI was not going to be acquired this year, what would

MCI’s future be in a year and then 3 years?

Mr. CAPELLAS. Well, it is really the same answer and a pretty

much similar business model. I mean, the decision to exit the consumer business, that is one we had made a year ago that was clear.

We were in the process of transforming the company to service

large enterprise and government agencies. We would have technologically consolidated to a common IP core and then started to offer

other services. And the question that we would have faced is how

do we vertically integrate the different services in order to service

our customers, and that would have had to have been done with

different relationships and partnerships, but the answer is quite

similar.

Mr. BILIRAKIS. All right. Thank you.

A question for Mr. Whitacre and Mr. Seidenberg. In his prepared

testimony for today’s second panel, Mr. Halpern from Sanford

Bernstein makes the following statement. ‘‘Absent consolidation,

the four remaining regional Bells would need to spend between $5

billion and $7 billion in operating and capital expenses over the

48

next 5 years to build their credibility and competency serving the

enterprise market.’’ Do you agree with Mr. Halpern’s assessment,

Mr. Whitacre?

Mr. WHITACRE. Congressman, I do agree with that. In fact, we

have announced for SBC alone those kinds of expenditures. We are

just not in that business to get in it as a huge undertaking. We

are in the process of just beginning that. I must admit not doing

extremely well. So it would take those kind of numbers, if not

more.

Mr. BILIRAKIS. Mr. Dorman? I mean, Mr. Seidenberg?

Mr. SEIDENBERG. And I agree with that. The cost for us to enter

the market would be pretty high.

Mr. BILIRAKIS. Okay. Mr. Whitacre, in the public interest showing filed by SBC and AT&T with the FCC, your company states

that the existence of separate local and long distance companies no

longer benefits consumers, so I think that sort of reflects, I guess,

the bottom line of everything we are doing here. Can you elaborate

on why that is the case?

Mr. WHITACRE. Well, I think probably the clearest example is if

you are a wireless company subscriber, it makes no difference

whether you are local or long distance. A call is a call. Long distance is essentially free. So it is not differentiated at all if you are

a wireless customer. The revenues from our long distance customers, which we finally got in in the last year and a half, 2, 3,

or 4 cents a minute. So it is essentially not a cost anymore. It is

not, as the chairman said, not what it used to be. So long distance

and local, there is no difference, and the cost is the same.

Mr. BILIRAKIS. Thank you.

Mr. Chairman, I yield back.

Mr. UPTON. Thank you.

We recognize Mr. Boucher for questions.

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

And I would like to join with you in thanking these witnesses for

their excellent testimony today.

As Mr. Whitacre noted in his testimony, the United States is lagging much of the developed world in terms of broadband deployment. When you look at the percent of the Internet-using population that employs broadband, we are number 11, and we can do

far better.

Can we anticipate that these mergers will give you a financial

incentive to accelerate the deployment of broadband over landlines

and perhaps over your wireless networks as well by utilizing 3G

technologies more rapidly than you would in the absence of these

mergers? Mr. Seidenberg, Mr. Whitacre, and Mr. Forsee.

Mr. WHITACRE. Well, I can go first.

You know, the—broadband has been held back by uncertain regulations. What did it mean? Did we have to build a network and

then sell it to somebody else at below our cost? Just what were the

rules surrounding it? It is really based on business decisions. Some

of that has been clarified recently, and SBC pronounced—for example, has announced Project Light Speed, which puts fiber further

into the network, which enables broadband. But today, we are able

to reach, I believe, about 80 percent of our customers with

broadband, those not out in the rural. Wireless is certainly going

49

to take care of that, as Mr. Forsee said earlier, because we are

right on the cusp of using wireless broadband deployment. You

know, even late this year or early next year, I think you will see

that go out and go big time. Cable companies are also in

broadband, so I think we are going to move forward rapidly on

broadband. And I think these mergers will help that a great deal.

Mr. BOUCHER. Mr. Seidenberg?

Mr. SEIDENBERG. Yes, Congressman. As most people know, we

already have a very aggressive program to deploy broadband, both

in our land-based business and in our wireless business. What this

transaction will help us do is take further inefficiencies out of

building advanced platforms, having that traffic and those savings

run over to the rest of our business and give us even more financial

strength. So in the long term, what I think this transaction will do

is make our network investment-based activity more robust in the

long term.

Mr. BOUCHER. Thank you.

Mr. Forsee, do you anticipate your merger with Nextel as having

the effect of encouraging the deployment and perhaps making more

rapid the deployment of 3G technology over your wireless network?

Mr. FORSEE. Congressman, I think that is absolutely the case.

Both Sprint and Nextel have been very aggressive in looking at our

network deployment plans, and this combination will allow the

Nextel users to migrate over time to the CDMA network, and as

we do that, we will be putting in, as I indicated earlier, our third

generation—our DO network. That will move to DO Rev.A, which

will allow the features and function that is on the Nextel network

to be compatible with our CDMA network. And as we do that, customers will begin to have choices. Customers will have the choice.

If they want the portable service in their home, whether it is on

802-11 or Y-fi or the benefit of true mobility. With the networks

that we are deploying, customers will be able to make those

choices. And as we indicated, customers are doing that today.

Mr. BOUCHER. Okay. Thank you very much.

Contrary to what some have suggested, it appears to me that you

are going to have the capability to compete with each other out of

region should you choose to do so. And the arrival of Voice over

Internet Protocol clearly creates a national market that can be exploited for the delivery of voice-based telephone service, using the

Internet as the delivery mechanism. Could you, Mr. Seidenberg

and Mr. Whitacre, comment on the extent to which you anticipate

offering a national VoIP service and therefore competing with each

other in voice traffic?

Mr. SEIDENBERG. Well, on this point, I would make the comment

we vigorously compete with both Sprint, Nextel and Cingular

today, so it is—shouldn’t surprise anybody that our businesses

have a history in the wireless side of vigorous competition.

In the enterprise market, which is the one we are talking about

this morning, we already compete. We operate in 80 of the top 125

MSOs around the country, and we are competing as others around

the table are doing the same with use. We have a VoIP service that

we have offered. It is available to customers anywhere in the country. And I think that my comment on this is that we will pursue

what makes sense in the marketplace as we go forward, but the

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transaction will open our eyes and give us capabilities we never

had before. And once we get the transaction completed, we will be

in a better position to see how quickly we can move in some of

these areas.

Mr. BOUCHER. Thank you.

Mr. Whitacre, any comment?

Mr. WHITACRE. I would have the same answer. We compete vigorously now on the wireless side. Ivan and I compete vigorously on

the business side and the Voice-over IP space at the present time.

I am in New York and Boston, and he is in Dallas. He is in San

Antonio, so he is everywhere. He is in too many places, but he is

everywhere. And I think that is—what we are going to see is a natural extension of that into the consumer-type markets. I don’t

think there is any question there will be more competition, not less.

Mr. BOUCHER. Thank you very much, gentlemen.

Thank you, Mr. Chairman.

Mr. UPTON. Thank you.

And I will now recognize myself for 5 minutes.

I appreciate, again, all of your testimony, and I, in reading the

full testimony, Mr. Whitacre, you indicated that the teleco industry

has been critical for domestic economic growth. It amounts to about

3 percent of the U.S. GDP. I noticed in Comm Daily last month,

it says the U.S. telecom industry turned the corner in 2004. Spending grew from 7.9 percent to $784 billion according to TIA’s 2005

telecom market review and forecast. It said that there was a significant improvement from gains of 3.6 percent in 2003, 1.9 percent

in 2002. It goes on to further say that equipment spending saw its

first gain after 3 years of decline, TIA said. Total equipment and

software revenue grew 5.2 percent in 2004 compared to cumulative

declines the previous couple of years.

I am interested in everyone’s thoughts. Where are things going

to go with these three mergers if they come about?

Mr. WHITACRE. Well, to preface that, SBC, which is the only one

I can speak for, has been in a revenue decline, earnings per share

decline, been pretty miserable for Wall Street for 4 or 5 years, losing those kind of customers, obviously. There were some regulatory

changes affecting items. New technology has some impact on this,

but for the last quarter of last year, our revenues were actually

slightly positive for the first time in 4 years. That spending, in my

judgment, will continue to—it has turned positive. It will go up.

For example, we are spending a lot in the fiber markets to build

Project Light Speed. There has been some work in Voice-over IP,

so I think in general, maybe the economy, the technology, and some

of these changes in regulation have had an impact, beginning late

last year, and I think we are going to see a slight upturn in going

forward.

Mr. UPTON. Mr. Dorman, did you want to comment?

Mr. DORMAN. I think the boom and bust cycle that we have witnessed have certainly impacted the total capital spending in certain

areas, the deployment of national fiber. Networks exceeded all forecasts of demand. On the other hand, wireless technology deployment has grown at pace. Where capital budgets in wireless have

actually expanded, new technologies that Mr. Forsee talked about,

taking on new demands. Those equipment providers in the wireless

51

base have actually prospered and grown. In our world today, AT&T

is deploying most of its new capital in the IP area. So we are adding capabilities to go from the traditional circuit-switch networks

of the past, the so-called legacy networks, to the IP networks of the

future, and that is both at a local level for the, if you will, on and

off ramps to the network, as well as in the backbone and globally.

So most of our spending, in terms of new spending, is focused in

that area.

Mr. UPTON. Mr. Seidenberg?

Mr. SEIDENBERG. Yes. I—just to make sure I got the question,

this was a—how much money we will spend on technology?

Mr. UPTON. Yeah, well, it is just—the industry itself——

Mr. SEIDENBERG. Right.

Mr. UPTON. [continuing] has finally turned the corner, so are we

going to continue the upward drift?

Mr. SEIDENBERG. We are big believers in investing in our network. Our wireless company is investing—last year, it invested

$5.5 billion in the business. Our telecom invested over $7 billion.

We are very comfortable with that. I happen to believe that the

more that regulation shapes around the market, the more you will

see more investment. I think the places where we haven’t invested

is where we think regulation has lagged and created, I think, disincentives for investment. I think the events of the last 6 months

give me great hope that, if we are allowed to chase the market, we

are willing to take the risks to make the investments.

Mr. UPTON. Mr. Capellas?

Mr. CAPELLAS. Well, I don’t think there is any question that, you

know, if we just sort of look at the traditional world, virtually all

of the testimony said the traditional world will decline. That is a

fact. We understand it. The more interesting question is, as we

have now set a foundation of all of this IP and technology in the

ground, is the next generation comes, what do we put on top of it?

I mean, one of the things that is powerful about the combinations

we are doing here, we now can offer new kinds of services to the

customers. For example, nocontent delivery systems that are entirely on the network that allow you to move voice or video around.

If you ever watched teenagers do instant messaging, the next generation of, you know, pure peer-to-peer video and what could that

do for an investment. So I think it is a classic case of the traditional will decline, the IP and the capability of broadband allows

us to build new services, and now the question is the innovation

of what we build on top of that. So I think you will probably see

investment increase, but it is going to be in spaces we have never

been before. And this new integrated service is why we need to

have some of these combinations happen so that we can go to the

next stage.

Mr. FORSEE. Yes, I agree with Mr. Capellas. I think what we

have had the confidence to do is to continue, excuse me, to deploy

network capital, because at the same time, we are investing in applications and content to ride on those networks. If you only invested with your know-how in building networks but don’t invest

in innovation to create application to customers where they want

to use the network for, then that path won’t work over time economically for investors. So we are very confident in our plans, as

52

Sprint and Nextel come together, that that is the path that will

work for us as we invest both in networks but also in applications

that can make those networks work better for consumers and for

business customers.

Mr. UPTON. Mr. Donahue?

Mr. DONAHUE. Mr. Chairman, I don’t think there is any question

about the fact that capital spending in the wireless space, especially when Sprint and Nextel get together, is going to continue to

increase. If you just look at Nextel, for example, this year, this is

the largest program that we have had since our inception, yet we

are in the process of putting together a merger where we are to get

some capital efficiencies. But the demand is so great that we will

spend $2.6 billion this year alone on expanding the footprint and

expanding just to make sure we have quality for the customer.

In addition to that, if you take a look at fourth generation technologies, which we are very interested in, you are looking at new

network builds on our 2.5, for example. So my view of the world

is going to meet the demands of the customers, and they are significant in the wireless world.

Mr. UPTON. Well, I wish I could go on further. My time has expired. But I appreciate your answers.

I yield to Mr. Engel.

Mr. ENGEL. Thank you very much, Mr. Chairman.

Mr. Seidenberg, I want to read part of your testimony, because

I want to highlight it, because I couldn’t agree with it more when

you say that the recent wave of mergers and acquisitions is simply

the latest phase of a process that began several years ago, the restructuring of communications around new technologies and new

markets. And then you continued by saying, ‘‘It should be evident

to anyone with a cell phone or an e-mail account that the old distinction between local and long distance is obsolete, as is the need

for separate companies to provide them. Competing technologies,

cable, wireless, satellite, IP, and wireline, now offer consumers a

wide range of choices for voice, data, and increasingly video.’’ And

I think that my colleagues should really bear that in mind. There

are a lot of things that we didn’t foresee under the Telecommunications Act of 1996. Technology created new competition that we

didn’t contemplate. No one thought of VoIP then. That eliminated

a lot of barriers. Long distance is certainly cheaper now than it was

many, many years ago.

So I know you had mentioned some of this before, and by the

way, I also agree with your statement if we want to discuss competition, then cable and wireless should really be at the table as

well. Can you tell us, Mr. Seidenberg, the impact of the Verizon

purchase of MCI, what it will be on consumer prices? I know that

Mr. Markey had sort of asked the question, but I am wondering if

you care to elaborate on it.

Mr. SEIDENBERG. Thank you, Congressman.

Look, I think the result of all of this competition and consolidation has been a restructuring of the industry and a reduction in

prices. When we are asked for a pledge, it is hard to pledge, but

the fact is that the practice in the marketplace is prices have been

coming down. And I am sure, as many members have been sitting

here using their e-mails, no one has sent a local e-mail or a longVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 99902.TXT HCOM1 PsN: HCOM1
53

distance e-mail. You send an e-mail. And so we have an industry

that we can’t spend money to build a business around a local email or a local—or a long-distance e-mail. So we need to integrate

it. So I think when you build these advanced platforms, just like

you reference and my colleagues here have referenced, you lower

the cost of these services and, in return, you pass that on to consumers in the form of lower prices.

I need to make just one last comment on this.

I don’t think it is—anybody, even the consumer groups, have any

complaint about unit costs going down and the pricing of services

going down. What we shouldn’t confuse is the fact that people use

this a lot more than they did in the past, and so it is possible that

usage is up, but in terms of unit pricing, it is way down from

what—from any historical levels that we have ever seen.

Mr. ENGEL. Thank you.

Mr. Whitacre, would you agree with Mr. Seidenberg’s in the

terms of your own merger with AT&T? And I might also add,

thank you for pointing out in your testimony that Mr. Seidenberg

still has me as a customer.

Mr. SEIDENBERG. I would agree with what Ivan said. I think he

is right on target.

Mr. ENGEL. Let me ask you another question, Mr. Seidenberg.

MCI has one of the most important backbones for the Internet

in the world today, and not only do millions of consumers use it

every minute, but the Federal Government relies on it greatly. I

am wondering if you could tell us Verizon’s plans to maintain and

upgrade the MCI infrastructure.

Mr. SEIDENBERG. Well, in our merger agreement, our document,

we have talked about what we need to do to add some capabilities,

and we have indicated we will do that. Now beyond that, to be perfectly honest about it, we haven’t sat down and planned through

this. Until we go through the early stages of the merger approval

process and the DOJ, we will probably pick that up later on. But

one of the most important attractions to us of the entire MCI company was the exquisite relationships and network they have been

building and the services they have been providing to the Federal

Government for a long time. So it is a very important part of where

we are heading. But we don’t have a specific plan laid out yet.

Mr. ENGEL. Thank you.

Mr. Whitacre, could you answer the same question for SBC and

AT&T’s networks?

Mr. WHITACRE. Well, both have an important part of the Internet

backbone. But that is not all. There are many companies that have

part of the Internet backbone, and my recollection is 5 or 6. And

you would know those names, but nobody has a controlling piece

or even a piece over 10 or 15 percent. But we are certainly not

going to do anything to impact that. We would be looking at it with

an eye to improve it and use it going forward for our business purposes for SBC.

Mr. ENGEL. Thank you.

I see my time is up, Mr. Chairman. Thank you.

Mr. UPTON. Ms. Wilson.

Ms. WILSON. Thank you, Mr. Chairman. I also appreciate your

having this hearing this morning.

54

I wanted to start out with a question, if I could, to Mr.

Seidenberg. I saw something, and I know all of us here know that

we only—we don’t believe much of what is reported. I—but I did

see something reported that a member of your company called into

question, and I know—and I also know that folks say things when

merger talks are going on and competing bids that maybe they

shouldn’t have said, but the comment was made that the potential

of a Quest merger with MCI raised national security concerns. And

I wonder if you would elaborate on that or if that was just an error.

Mr. SEIDENBERG. Well, I think that one of our executives did

mention that, and with respect to the capital that is required to

sustain investment going forward, we felt that the Verizon-MCI

transaction would offer superior financing and capital capacity over

a long period of time. So in that context, that is probably what you

are referring to.

Ms. WILSON. Well, I heard financial concerns, but where does national security come into this, and I—or is that just a—probably

shouldn’t have put it that way?

Mr. SEIDENBERG. Like I said, I don’t know the exact quote that

you are talking about, but I—in my view, it is national concern, national security is all part of the mix of services that MCI provides.

Michael is right here. He can help me with that. But the issue is

I think one of the driving factors in our transaction has been

Verizon’s financial capability to continue sustained investment in

the network, including national security services.

Ms. WILSON. If there is something more than this that we need

to talk about off-line, I would certainly like to hear about it, and

I—and both in this capacity on this committee and in other responsibilities that I have. So I don’t know what you are referring to,

and if there is something we need to know, I would like to know

about it, but I don’t see a national security issue here, and I would

like to know about it if there is. And if we need to do that in another place, then we certainly can do so.

I also wanted to ask, concerning the—if I look at where we are

going in consumer wireline as well as the business government

market, it looks to me as though this combination of SBC-AT&T,

Verizon and MCI together, these two new companies will control

about 70 percent of the consumer wireline market and nearly 80

percent of the business government market. So what can we do to

make sure that companies and the—and future users of Internet

Protocol have access to the broadband infrastructure that those

companies now control?

Mr. SEIDENBERG. Well, maybe we could exchange information. I

don’t know those numbers you just mentioned. There is no way the

two of us control 70 percent of the consumer wireline and 80 percent of the other, so——

Mr. WHITACRE. I agree with that.

Mr. SEIDENBERG. I mean, it is not even close.

Mr. WHITACRE. Those numbers can’t be correct.

Mr. SEIDENBERG. Right. Right. The—I am sure—Mr. Dorman

and Mr. Capellas are here. They may be able to answer what percentage the two of them control of the business market, which I

don’t even think comes to half that. But Congresswoman, I think

the point that I would make is that in the enterprise space, our

55

view is there are multiple providers that, even with these two

transactions, these two new companies are still not a dominant

part of the enterprise space.

Ms. WILSON. Does anybody else have an answer that you would

like to share on access to the broadband infrastructure?

I think that is going to be a major issue that Congress may ultimately get involved in. Just for the record, the—this is the data

that I am looking at, and the source of the data is Bernstein research, January 21, 2005. And it is business long-distance, voice,

and data by revenues. And maybe their data is wrong.

Mr. SEIDENBERG. Yeah. They are also recommending the QuestMCI deal, also.

Ms. WILSON. I am sorry?

Mr. SEIDENBERG. They are also recommending the Quest-MCI

deal, also.

Ms. WILSON. Well——

Mr. SEIDENBERG. So the data might be suspect. Yeah.

Ms. WILSON. You may want to question their data, but you asked

what the source of it was, and that is the source of it.

Thank you, Mr. Chairman.

Chairman BARTON. I thank the gentlelady.

And the gentleman from Texas, Mr. Gonzalez, is recognized for

5 minutes.

Mr. GONZALEZ. Thank you very much, Mr. Chairman.

And the first question would go to Mr. Whitacre. There are, of

course, some citizens back in San Antonio and elsewhere and some

of my colleagues, when they hear the word ‘‘merger’’, they really

believe that is anti-competition, because, by its very nature, if you

merge something and you have less—or fewer a number of competitors out there. How do you respond to that general mindset that

some people have?

Mr. WHITACRE. Well, in this case, I think it is very clear, in our

acquisition of AT&T, they are not in the business we are in, so it

is not a merger of us buying a business they are in or doing the

same business. We are in totally different businesses. We are acquiring AT&T because we don’t have a network, they do, a global,

international network. We don’t have a Voice-over IP platform.

They do. We don’t have a big base in enterprise customers. They

do. So we are not acquiring something that we both already do. We

are getting new skills from them in an effort to change this industry going forward and make some financial sense out of it. So it is

not getting the same skills.

Mr. GONZALEZ. One thing that we don’t talk about, and I know

we talk about things in a domestic sense, domestic markets, and

again, this question is to Mr. Whitacre, regarding your merger and

any other mergers that you foresee or contemplate regarding international competition.

Mr. WHITACRE. Well, America needs, I believe, a flagship carrier

that can operate internationally. Nobody does that at this point in

time. We have some interest in Mexico. AT&T is in some places,

but this country certainly needs a global flagship communications

carrier that can operate all over the world. And I think this gives

us the ability to do that. We do not have that now.

Mr. GONZALEZ. Thank you, Mr. Whitacre.

56

Mr. Seidenberg, I—because I have almost 3 minutes, but I had

a question for you, because you had indicated—I am new on the

committee, and I know one thing that we have always struggled

with is how we define things and whether the Telecommunications

Act—since it did mention the Internet, but you still have the service that is being provided, a rose by any other name would smell

just as sweet, and I think that is what they are saying. It is the

nature of the service that is provided. But let me ask you, Mr. Barton has already indicated that he is basically going to go with cable

because it provides certain advantages, obviously how they bundle

certain services. What do you foresee in the near future regarding

mergers or otherwise that will allow Mr. Barton, our chairman, to

have some choice as to who provides that bundled service to him?

What can we do or what do you see the industry doing?

Mr. SEIDENBERG. Well, okay—well, thank you for the question.

I think the—assuming Mr. Barton were a customer that we served,

I think that we would be doing a lot of the same things that Southwestern Bell is doing, which is providing advanced DSL services

and eventually fiber-based services and offering a choice. I think

one of the—probably the unspoken implications of where the industry is heading is that while we were—while Congressman Markey

was seeking some cap on prices that we would control, cable companies are raising prices. And I think if we invest in these advanced networks, I think the choice that Chairman Barton would

get would be the fact that we would offer broadband services

through DSL, DSL-like, and fiber-based services over time. We

would also do the same thing—we are doing this. Today, we have

a nationwide wireless broadband service that we call EV-DO, which

is advanced generation, which offers customers up to 700 kilobits

of speed in terms of their services.

So I think all of this technology is leading to choice in the marketplace.

If I just may make one last point.

Mr. GONZALEZ. Go right ahead.

Mr. SEIDENBERG. Your point about mergers, I think the public,

our surveys would tell us this, is skeptical of mergers until after

they see what companies do. Verizon Wireless is made up of 21

companies that were merged into Verizon Wireless. We have a

great network, national reach. Some of our services are on the podium. And if customers see low-price, high-quality, they like the

merger. And I think our record, across our industry, has been we

have done mergers very well.

Mr. GONZALEZ. Thank you.

I yield back.

Chairman BARTON. I thank the gentleman.

And we go to the other gentleman from Texas, Dr. Burgess.

Mr. BURGESS. I thank the chairman, and I thank the panel members for being at this hearing. I won’t ask you to take any pledges.

Mr. Seidenberg, I am privileged to represent the town of Keller,

Texas in the 26th Congressional District, and I am very pleased

about the fiber to premises technology project that Verizon has undertaken in this community. In Keller, Verizon has already rolled

out this technology, and it has been very well received. Can you tell

57

me about how this purchase of MCI will expand the deployment of

your new fiber technology?

Mr. SEIDENBERG. Well, it is a—thank you, sir. And we are very

excited about the activity in Keller, Texas. And in that case, we are

competing directly with Charter Communication, who is the cable

company there. It is an indirect benefit. This transaction will

strengthen our approach in the enterprise market. We will get

synergies and savings across our national backbone network. As Ed

said, we will avoid having to spend money to build our way into

the enterprise market, and therefore, we will have more resources

available to us to do the kind of thing we are doing in Keller.

Mr. BURGESS. Thank you.

One of the critical benefits of the transaction of the proposed

merger between yourself and MCI remains—that MCI remain a

stable provider of the telecommunication services. Being concerned

about MCI’s ability to continue to provide services to the government, can you elaborate—and perhaps Mr. Capellas can also weigh

in on this, can you elaborate on how this transaction helps the government as a consumer of telecommunication services?

Mr. SEIDENBERG. May I defer to Michael on this one?

Mr. BURGESS. Yes, sir.

Mr. CAPELLAS. There are a couple of things that, you know, you

sort of—at—when we look at the merger, I always like to start;

what are the customer requirements, because then it helps to suit

customer requirements. Over the coming period of the last two

major bids we have seen from large government enterprises, and

the next three that we are coming up, they are demanding that

wireless be part of the overall bid. Wireless, whether it is the delivery of a handset or whether it is the delivery of broadband wireless

to be able to do the application, the end customer doesn’t want to

stitch together an IP network, a wireless strategy, wireless

handsets, wireless broadband, and local access. To the end customer, they can’t tell it apart, and so we are now seeing, as a requirement of most big bids, to be able to do bid wireless with it.

We don’t have a wireless capability. So in order to bid those, we

would either have to stitch together a partnership or not bid. So

quite frankly, when we look at what our customers are asking for,

they are asking embed the local, make it transparent, include wireless, do end-to-end security. For example, on an integrated network, you can trace security all of the way from the point of entry

all of the way through, which is hugely important for customers

like DOD and certain agencies. So it makes a more secure network,

allows us to bundle wireless, allows us to integrate local with the

IP backbone, and allows us to put on the next generation application. So at the end of the day, you know, if you look at government

requirements, it is the natural definition of why we are doing this.

Mr. BURGESS. Thank you.

Mr. Forsee, if I could, I get a question from constituents all of

the time, and I don’t have an answer for it. But why is it that it

is so hard to text message on Sprint equipment? I have a Sprint

phone myself that I use, and my son can text message me. I am

amazed that youngsters today can carry on a conversation with you

face to face and at the same time be typing in a text message with

their thumb. They are truly taking multi-tasking to the next level.

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But I can not communicate with my child, because I have a Sprint

phone and he has a Verizon phone.

Mr. FORSEE. It should be getting better and better all of the

time, Mr. Congressman. We, obviously, over time, have picked our

spots in terms of where we made our technology investment in the

devices and in the applications. Text message is one that, in the

past 6 months, we have come up with some new capabilities that

we have put into our newer devices. And so again, that service is

one that is very important to us. We certainly have seen the trends

develop in this country and around the world, and have been on

top of that issue in terms of—related to what our customers want.

That service is getting better as we speak.

Mr. BURGESS. Thank you.

In my remaining time, Mr. Capellas, I just—it is not really a

question. It is more of a comment. I—taking off from what you said

from point-to-point security, I am excited by that. I think that is

so important. I, of course, carry a Verizon blackberry device with

me wherever I go and can be instantly notified if a chairman is

having an event later in the day that I probably ought to attend.

But as a former physician, I can’t help but think that heart failure

patients could be wired in—their scales could be wired into their

blackberry so when their weight went up on Thursday afternoon,

they could be called into their doctor’s office for an adjustment of

medication rather than an emergency room visit on Friday night

and admission to the ICU. So it is tremendously powerful technology, and if we can ensure the security so that people can be confident about it, I think that is a—the potential for saving money

down the road is almost limitless.

Mr. CAPELLAS. And it would be interesting if we have this conversation in 5 years and we think about communications. We will

be talking about sensors and their relationship, sensors you will either wear or the different sensors that will be in the car. We will

actually be talking about the relationship of how the sensors pass

data seamlessly to a core engine. And so we may be having a completely different discussion, but you know, it is rethinking what

communications is and why I think we are all here today.

Mr. BURGESS. That is correct. Our belts that we wear may say

‘‘Intel inside’’ in the future.

I will yield back.

Mr. PICKERING [presiding]. Ms. Eshoo.

Ms. ESHOO. Thank you, Mr. Chairman.

I want to thank all of the witnesses for really being outstanding.

I think that this has been an enlightening hearing, which is what

hearings are supposed to be all about. And Mr. Capellas, I think

that you could offer a very successful class on Telecommunications

101 for all Members of Congress. So maybe we could sign you up

for that in the future.

I just want to touch on two questions. I am going to read my

questions and then have you respond to them.

Many of the intermodal competitors that are being touted depend

on access to the Internet backbones over which you now have substantial control. This is to SBC and Verizon. How can we ensure

that these competitors are not excluded or given inferior access to

this critical infrastructure? And I ask this because my recollection

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is that SBC opposed the MCI Worldcomm and Sprint Worldcomm

mergers on this basis.

And my second question: SBC has successfully partnered with

Yahoo to offer DSL service, and Verizon has a similar arrangement

with Microsoft. As the number of broadband and DSL providers diminish, how do we protect the open nature of the Internet and ensure that smaller providers of Internet content and web services

are not blocked out of the market?

Mr. WHITACRE. Well, I will try those two.

Your first one, I think, is how can you be assured that intermodal competition will remain where nobody is blocked from access

to the network. I think it is pretty plain that that is not going to

happen. First of all, if SBC is successful in this acquisition, and I

suspect this is true for Verizon, there are many other providers,

but we are not going to do that. I mean, the law is pretty clear on

access. It is pretty clear that people can have access to it and under

what conditions. Plus, there are many other providers. And in California, for example, we have competitors like Cox Cable, who have

been hugely successful against us and done very well. There is no

chance they will be blocked from the network. They have many alternate ways to go. There are many providers of that service. I

think the laws are pretty clear, and so they are not going to be denied that. That is not going to happen. It is not even a factor.

The second thing is, on Yahoo, for example, and thank you for

recognizing that, it has been very successful—there are ways and

there will be ways, and I think that is covered today and covered

very well about what is required to have access to that for ISPs or

whoever wants to be accessed or have access on the Internet, and

that is not going to change either. Nobody is going to be denied a

path on the Internet.

Mr. SEIDENBERG. Given that Ed is the—I would never say anything different. I will agree. Just let me add two quick things.

On the first point, remember, we are one of the biggest users of

Internet traffic on their network. So if you want a policeman to

worry about if he is going to stay in line, it is us.

Ms. ESHOO. Good.

Mr. SEIDENBERG. And he is the same way with us. So I don’t

think there is any issue with respect to this Internet traffic issue,

because I know it is couched in terms of big and little, but everybody uses the Internet in the same way, and so there is a clear

benchmark to make sure that there is open access on the things

that you mentioned.

With respect to the other question, maybe I didn’t understand it,

but I think it is the marketplace reaction will be just the opposite.

The more we put fiber-based solutions and increase the bandwidth,

the more content providers are going to be able to provide services

and applications over a network, and we see this in wireless. We

have over 500 application providers providing content over our network. And as the experience that SBC has with Yahoo and we have

with Microsoft, we even build greater bandwidth. And then you will

see IP TV, and you will see all sorts of other kinds of things. So

I think the more bandwidth, you lower the entry barrier for content

people to provide services.

Ms. ESHOO. Thank you very much, Mr. Chairman. I yield back.

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Mr. PICKERING. Thank you.

Mr. Murphy.

Mr. MURPHY. Thank you, Mr. Chairman.

Mr. Seidenberg, I want to address this one to you and actually

have other panel members respond, too, because what we are dealing with here is an issue of competition and a concern that so few

companies will dominate the market and what it will really do to

affect services.

We have seen the market begin to consolidate around one platform that provides voice, video, and data, however many consumers

who reside in rural areas are not afforded access to broadband at

this time. In several instances, municipalities have taken proactive

steps to build their own networks and thus provide broadband to

their residents. In Pennsylvania, for example, this happened in

Kutztown, and Verizon mustered its full force to ensure legislation

occurred—was passed that prevented such independent network

building. And similar issues have occurred in many other States.

Now I fully understand, having met the Pennsylvania Senator

before. There are inherit inequities when a municipality sets up its

own network, namely, they don’t have to comply with the same regulations. They can raise capital via bond issues, and then use them

over your wires. That is a whole different setup there. However,

the bottom line is that a lot of these consumers feel they are being

left out of the system. So now before me, I see three potential companies that have the potential to really dominate the entire market. And so I want to ask what assurances do you provide that innovation, price competition, and coverage will actually improve

with such a dominance in the marketplace of a couple companies?

Mr. CAPELLAS. I don’t quite know how to answer that question,

but I think—I have to start with the premise of the question, which

is I don’t think we are as concentrated as some have said this

morning. I think we are big. I would agree with that. But in the

markets that we participate in, we are not the only players. If you

can go to—in the State of Pennsylvania, there are 50 C-lex operating, at least. In the rural areas, we have satellite TV providers.

We have all sorts of other carriers that are operating in the marketplace. So I think what guarantees high-quality, low-price is robust competition. And I believe that if you think about all of the

substitutable forms of services that we have talked about this

morning, consumers every place in the country have more choices

today than they have ever had before, and I am confident that, to

your question, innovation will continue to drive prices down and

you will continue to see higher quality services. I mean, we have

had lots of consolidation in wireless, and yet we have had prices

lower and we have had quality go up. And you will see the same

thing occur with advance platform networks in the enterprise space

and in the consumer space.

Mr. MURPHY. Well, certainly my rural constituents are concerned

that they feel that they have been left out of things, and I understand how the size of a company can help fund innovation, which

would drive down prices, but it is an issue that I certainly want

to go on the record of raising with all of you that it is also an issue

that competition also helps drive down prices. And there is a concern that there is this huge market dominance here. And I would

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just like to know from some of you how you can assure us that

competition will still exist when you have so few companies controlling the market.

Mr. WHITACRE. Well, I think—as Ivan said, I think there are

going to be more companies, not fewer. And I know in Texas, for

example, there must be 100 C-lex. The cable companies are—have

now entered the business, the satellite companies, the wireless

companies. The wireless companies are on the verge of offering

broadband to customers in rural areas, and they can reach them

easier than the wireline company can. But in terms of total competitors, I think there is more, not less. There is going to be more.

Mr. MURPHY. Mr. Dorman.

Mr. DORMAN. I would just add that I think one of the things that

is hard to grasp is that as broadband technologies are deployed,

whether it be cable modem or DSL or fiber into the home or EVDO Rev.A whatever in the wireless world, all of these high-capacity

technologies will be able to serve all of the applications that we

have traditionally thought of as simply the domain of the telephone

company, particularly with voice. And frankly, the comment Mr.

Capellas made about long distance really applies to all voice service. It is indistinguishable to the user, in most cases, what network

they are using as their voice passes through. We haven’t talked

about companies like Skype and some of the newer pure Internetbased communications providers. This is a company that was in

Astonia that is now exporting technology that can be loaded on any

PC. And I suspect that the definition problems are still plaguing

us. I believe that there are going to be lots of choices for high-capacity service, even in rural communities, as wireless evolves. I

think wireless is very important. The idea that we are going to rely

on a copper wire only in the rural communities is not economically

sustainable.

Mr. MURPHY. I appreciate that. I appreciate you getting your

comments in the record regarding this, because it is an issue that

is raised by my constituents. And I also know that much of these

things to make sure we have assured competition, which will drive

innovation, is going to be addressed in the telecomm bill that,

hopefully, this committee will get out soon. And I am sure all of

you will have valuable input on that, too.

Thank you, Mr. Chairman.

Mr. PICKERING. Thank you.

Ms. Baldwin.

Ms. BALDWIN. Thank you, Mr. Chairman. And I also want to join

in thanking our panel.

What is really exciting is that the convergence of these technologies are providing consumers with new ways to communicate.

I want to follow down a similar angle as our previous questioner,

because it is increasingly clear that, to be off the information superhighway is to really be left out and left behind. It leads me to

a series of related questions.

As we saw historically with electrification and wireline telephone

service, not all areas of our country provided sufficient economic incentive to attract service at anywhere close to an affordable cost.

And that appears to be the case still today with some of these technologies, and particularly, as we have drawn attention to, in rural

62

areas. Assuming you agree, and feel free to point out if you do not

agree with that, my question is specifically where do you expect to

see these gaps in coverage and access closed, the good news, and

the bad news, where do you expect to see them persist? And if you

want to follow up with plans you would have to build out or invest

to those areas where you expect the gaps to persist. I will throw

it open to whoever wants to jump in.

Mr. Whitacre?

Mr. WHITACRE. Well, I will start that, Ms. Baldwin.

I think if we were having this conversation a year from now, you

wouldn’t be so concerned, because I think in the rural areas, for example, while we don’t have broadband to all of them now, it is

quickly coming. And we have certainly moved our broadband offerings closer to the rural areas, and we will continue to do that. But

wireless is sitting there very close, and it covers all of the United

States. Wireless is going to be able to offer broadband capability to

all of those rural areas, and I think that happens rather quickly.

So I think while you are—you have a right to be concerned, and

you should, I think we are right on the edge of technology changing

that, as well as, in our case, extending the fiber further out. And

the technology is changing on the wireline side, too, where it is now

possible to offer customers our DSL service further out than we

have ever been able to do it. It is a matter of technology. It is not

wanting to do it. So I think it is about to happen.

Mr. SEIDENBERG. Well, I agree. I—just to make you comfortable,

it—you know most of these statistics, but you know, the cable companies pass almost 90 percent of all of the homes or DSL services

pass 80 to 85 percent of all of the homes. Statistics will show that

85 percent of all teenagers use cell phones, and they don’t distinguish between city and rural. There is this universal service fund

issue that is working in the background.

Mr. BALDWIN. That is my next question.

Mr. SEIDENBERG. Yeah, well, I had a feeling you were setting us

up for that.

So I think, you know, from my perspective, the—if it is targeted

correctly and if it is applied in the right way to the people who

need it, it is something that we have always been willing to participate in. I think the issue with universal service is—that sometimes

the disease—the cure is worse than the disease, so we have to just

be careful that we don’t take this beyond the point. But where

there are legitimate gaps, it is something we will work with on

making sure we have it.

Ms. BALDWIN. Well, let me jump right in with the universal service fund question.

If we recognize the need to ensure broader access and to advance

telecommunication services, obviously the need for the USF will be

larger than ever. If we don’t expand the source of funding beyond

traditional wireline services, I suspect we will have insufficient

funds. So I would like to hear your suggestions for how we should

fund the USF in the future and how we determine its scope.

Mr. SEIDENBERG. Well, you know, we have been trying to fix this

for a long time. We have never gotten this right, but I think there

are a couple of principles here. First, I don’t know that we have

ever gotten agreement and how—as to how big it needs to be. So

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I think as we look at all of the deployment of all of these services

and technologies, we need to find a way to take off the table those

places that are really getting the choices that are necessary and

then focus on what is left. And then the principle on what is left

is everybody plays, not just one group of carriers. And we shouldn’t

be administering this through, for example, State commissions or

the FCC. It needs to apply to a broader set of players, and I suspect in the long term that is one of the things Congress probably

should address.

Mr. DORMAN. I would just add that since 1999, AT&T has paid

about $9.5 billion into the universal service fund, and that is about

30-some-odd percent of the total. With the acquisition of AT&T,

MCI, SBC, and Verizon will become the biggest payers, or even

larger payers into the fund. And so I would agree. Everyone paying, regardless of mode, is very important. As we have said repeatedly here today, convergence of capability and substitutes is clear,

having the old wireline long distance regime bearing most of the

cost is not sustainable. So whether it be VoIP, wireless, all of the

other different forms, this is long overdue in terms of funding reform and that is, I think Mr. Seidenberg said, I couldn’t agree

more. What is it we are trying to fund is also very important.

Mr. FORSEE. Let me just add quickly. Sprint today is the only

company that owns assets across local access lines, across long distance, and across wireless, and I think our perspective on this has

been that universal service fund and intercarrier compensation

need to be joined, because those two are economic issues that have

impacted, you know, what has been going on in our industry across

those three sectors. The technology has changed. The basis of competition has changed, and those two issues need to be vectored together to recognize what has changed, and I agree with the comments of my colleagues here.

Mr. PICKERING. Thank you.

Mr. Terry.

Mr. TERRY. Thank you.

I—just to get on the record, then, on the universal service fund,

I, too, wanted to ask questions—first of all, I agree with your principles. I think that absolutely has to be our starting point. As I

have tried to work through the principles to details, that is where

the problems come in. But we will continue to work.

But I received a letter from Grange today that has expressed

concerns that these mergers will reduce your payments into universal service fund, or at least that is what they are insinuating

in this letter. I don’t know if a merger particularly sets up a reduction in funds to the universal service fund. Will it or will it not?

Mr. Whitacre and Ivan, either one of you?

Mr. SEIDENBERG. To be honest with you, the States that I deal

with always figure a way around whatever it is they think they

need, so I don’t think the mergers themselves create any change.

But I think what Dave said is right. When you have fewer companies, we scream louder if we are the sole supporter of the system.

So I think what we need to finally grapple with is changing the

system so we can serve those people and those communities that

need it and do it in a way that is equitable.

64

Mr. TERRY. I agree with the principle, but the—I am focusing on

whether there will be a reduction in revenue in the universal service fund by the——

Mr. SEIDENBERG. I would be happy to get back to you. I don’t

know that the transaction creates a mathematical change. I

don’t——

Mr. TERRY. Well, they don’t set it out in the letter, but——

Mr. WHITACRE. I don’t think so, Mr. Terry. I don’t think there

is any change——

Mr. TERRY. All right.

Mr. WHITACRE. [continuing] as a result of this.

Mr. TERRY. Speaking—Mr. Seidenberg, speaking—oh, okay, Mr.

Dorman.

Mr. DORMAN. The fund is based on interstate revenues, and so

that is not going to change, you know, based on they are what they

are.

Mr. TERRY. Yeah.

Mr. Seidenberg, you had mentioned the States. My staff meeting

yesterday, we entered into kind of a discussion about what it takes

to go through a merger like this. What entities are involved in

signing off or express approval. FCC maybe DOJ. Do the States get

involved in this process?

Mr. SEIDENBERG. The States do.

Mr. TERRY. Mr. Whitacre is already going through it, I assume,

and Mr. Seidenberg and MCI will be entering that phase.

Mr. SEIDENBERG. Yeah, we are—I think—I won’t speak for them,

but we will be filing very shortly in a lot of States that—and the

genesis of it is we are seeking to transfer a 214 license or a public

convenience certificate in the State, and therefore, the States feel

they have some sort of a—they have jurisdiction over it in some

place—some States don’t. But in our previous mergers, we have

had to achieve approvals in—between 30 and 35 States in addition

to the Washington agencies that normally oversee these things.

Mr. TERRY. Wow.

Mr. SEIDENBERG. We have——

Mr. TERRY. So even those States that just have the wireless, you

will still have to—those——

Mr. WHITACRE. No, what is in their State law, vis-a ́-vis their

oversight of a merger, we have already filed in, I think, 28 States.

I think that is all. But we also have to file in foreign countries.

Don’t forget that.

Mr. TERRY. Well, that is interesting. The—would Verizon have

to?

Mr. SEIDENBERG. Well, sure. Sure. It operates globally, absolutely.

Mr. WHITACRE. It is not an easy process.

Mr. TERRY. No, I wouldn’t expect that. For—with Verizon-MCI,

would it be about 30 or 35 States? Don’t you do business with more

States than that?

Mr. SEIDENBERG. Yeah, I—not every State requires it. My attorneys are here scrambling around trying to figure it out, but I think

the answer is somewhere in the 20’s——

Mr. TERRY. Interesting.

65

Mr. SEIDENBERG. [continuing] is the number of States we will file

in.

Mr. TERRY. What is the length of time estimate that it would

take to get 20-some States and Federal and foreign governments to

sign off?

Mr. SEIDENBERG. Well——

Mr. WHITACRE. Years.

Mr. SEIDENBERG. A year, that is exactly right.

Mr. WHITACRE. Yes, year is a good guess. 12 months.

Mr. TERRY. All right.

In my last 1 minute, I am going to ask a question by one of my

colleagues. I think this is a follow-up to Heather’s. After the mergers, approximately what percentage of the Nation’s Internet infrastructure facilities will be under the control of SBC-AT&T and

Verizon-MCI?

Mr. WHITACRE. Okay. You answered that.

Mr. DORMAN. Based on publicly available data, the market share

of Internet service providers suggests that currently AT&T and

MCI both have somewhere in the range of 15 to 16 percent of current Internet traffic, and Verizon and SBC are not in the top 10

in terms of backbone traffic today. So in the case of SBC-AT&T, we

would see our market share somewhere in the range of 15 to 18

percent of Internet traffic today. In fact, if you look at the two of

us at approximately 30 percent, the other 70 percent is in the

hands of about 30 different competitors.

Mr. CAPELLAS. And that is today. I just certainly agree with

Dave, but then you start streaming video. What is a video? A thousand fold of phone calls over the Internet. Where do those numbers

go when you start streaming video across it? I am not sure how we

answer the question in a year, to be honest with you, as fast as

things are changing on the delivery.

Mr. TERRY. Thank you.

Mr. RADANOVICH. Mr. Stupak.

Mr. STUPAK. Well, I thank you, Mr. Chairman.

Like Mr. Terry, we have worked on the universal service fund

and trying to distribute it to the States in a more equitable way.

But universal service fund, the mergers really should not affect the

amount of money going in universal service fund, but rather the

technologies. Isn’t as you use technologies where you don’t have to

make the wire connections, that really determined—that is why

there has been a loss in the universal service fund, isn’t that correct? I see a lot of heads nodding and——

Mr. SEIDENBERG. That is true.

Mr. STUPAK. That is true? Okay.

Mr. Capellas and Mr. Dorman, let me ask you this question, if

I can. I indicated in my opening statement that Michigan has

reaped the benefits of the competition. In a 5-year period, there

was a steady and continued growth in the percentage share where

the competitive local exchange carrier lines in Michigan from 4 percent in 1999 to 26.5 percent in 2003. Can you explain why you

were able to compete in Michigan and how that competition benefited my constituents and consumers? And what effect did the recent FCC and court decisions have on your ability to grow competitively in Michigan and other States?

66

Mr. DORMAN. Well, the mechanism that we use is no longer going

to be available, so——

Mr. STUPAK. Because of the FCC and court ruling?

Mr. DORMAN. Right. Basically the construction of the rules

around the platform went to court multiple times. They were remanded multiple times. And in the end, the FCC’s construction of

the rules to meet the requirements of the court have fundamentally

changed that. I—looking beyond it, it would be my view that wireless competition and cable-based competition, as well as Voice-over

IP competition, have rapidly emerged as a substitute for what that

was offering. While it did uniquely affect, I think, AT&T and MCI

as competitors, those are technologies certainly that the new combined Sprint Nextel in the wireless area will be competing for residential customers with. So I think that what we have seen is while

we were all arguing about the shape of the playing field and

wireline the last 9 years through these repeated appeals and litigation, a whole new set of fields had evolved, and customers are taking advantage of it. And that is the—I think the simple fact of

where we are today.

Mr. STUPAK. Mr. Capellas, do you want to add anything?

Mr. CAPELLAS. No, I wouldn’t have much to add to that other

than I certainly agree with Dave. It was the perfect storm of cable

delivery plus wireless plus changing the regulatory world that all,

you know, just worked against the economics.

Mr. STUPAK. And Mr. Whitacre, let me ask you this. SBC tried

to sell their entire Upper Peninsula of Michigan system last year.

And it seems to be indicative of a trend that—to sell off rural exchanges. At the same time, the Bells are pursuing deregulation in

the States. The Bells have entered into a regulatory compact with

the States in exchange for service territory and an opportunity to

earn a fair return. They must agree to serve anyone who can pay.

It is an obligation to serve all comers. What assurances can you

give us that if you get the deregulation you are looking for from

the States or from the Federal Government that you will stay in

rural areas, areas that are more costly and have fewer customers?

Mr. WHITACRE. I don’t know where you got your information, Mr.

Stupak. We, from time to time, try to value the market of that, but

we never negotiated nor tried to sell the Upper Peninsula, never

got in serious negotiations with anybody.

Mr. STUPAK. Well——

Mr. WHITACRE. We are the carrier of last resort.

Mr. STUPAK. Sure.

Mr. WHITACRE. We have a geographical territory. We are, obviously, obligated to serve, and we will continue to uphold that. We

intend to stand by—behind that.

Mr. STUPAK. I will be happy to send you those articles where it

indicated you were trying to sell the Upper Peninsula.

Mr. WHITACRE. I read those articles, too, but as somebody said

earlier, you don’t believe everything you read.

Mr. STUPAK. Well, I will agree with you, that is why I am glad

to see you answer my question, but having been up there for a

number of years and seeing how—that much like when you were

doing pronto, you—SBC was going to do pronto, everywhere in

Michigan but the Upper Peninsula, so that was my concern. I hate

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to see services be offered—but in areas which are rural, or even

inner city areas, which may be under-served areas in the cities,

they are just sort of skipped over for new technologies and that.

And that is what we are trying to protect against as these mergers

go through.

Mr. WHITACRE. And I would like to talk to you, if you are agreeable, off-line about some of the regulatory circumstances.

Mr. STUPAK. Sure.

But if we are now talking about intermodal competition, I think

we need to recognize the realities of rural America. In my District,

wireless coverage is spotty, at best. And now there will be further

consolidation into wireless service. And in addition to the fact that

Verizon owns Verizon Wireless and SBC and Bell South owns

Cingular, VoIP requires broadband deployment. Cable is not an option for many of my northern Michigan constituents. How do we

ensure that rural America, again, is not left behind or, as I said

in my opening statement, that the gap doesn’t widen, the technology gap? I want to make sure that when we have less of—what

less company is doing wireless in this?

Mr. WHITACRE. Well, do you want to answer that, Ivan, for

Verizon Wireless?

Mr. SEIDENBERG. Sure. I will—if I might answer that a little differently. I think in the case that you mentioned, having fewer companies in wireless will get you better service, because the problem

that we have had in the past is we have had six, eight, nine carriers operating in markets. The market can’t support that number

of players, and therefore people don’t have the capital to deploy in

far regions of the country. We know that every year we keep adding more towers, more coverage every place we go. And what we

find, by the way, here is the good news, the people in rural areas

talk just as much on the phone as anybody else, so it is a great

market for us. And I think it is the financial capacity we need to

make sure we serve those markets. And it is the same thing in

broadband. You have got to get a tipping point where you can start

to deploy further and further out into the rural communities.

Mr. STUPAK. Yeah, I agree with everything you said except when

it comes down to the fact, okay, from the—deployed broadband in

the Upper Peninsula. I need more towers, and therefore, while they

talk just as much on the phone, I can take that same money and

I can go to an area, like Green Bay, Wisconsin, just south of me,

which has more people and where I get the best return on my dollar. It is not the rural areas, it is more in the urban areas. While

there may be less wireless competitors, you are still going to go to

the place where you get the greatest return on that dollar. And unfortunately, because of the sparseness of the population in the

Upper Peninsula, 312,000 people, I don’t see anyone coming there.

Mr. SEIDENBERG. Well, this is a chicken and egg problem. I

mean, we all have these areas.

Mr. STUPAK. Sure.

Mr. SEIDENBERG. I get——

Mr. STUPAK. I don’t want to be the chicken or the egg. I just

want to get service.

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Mr. SEIDENBERG. I think the answer is coverage is getting better

every year, and with fewer companies, there is no question that

you will see better coverage every year.

Mr. STUPAK. Thank you, Mr. Chairman.

Mr. RADANOVICH. Thank you.

Ms. Blackburn.

Ms. BLACKBURN. Thank you, Mr. Chairman.

I want to thank our panel. As you all can tell, by the time you

get to me, you are getting to—your time is about over, getting to

the end of the line, but we do thank you for your patience. We

thank you for your frankness and for being here to talk with us.

We certainly appreciate that. And it is fascinating to listen to you

as you talk about competition and the convergence of the technologies. And they are all things we should think through, not only

as it relates to the mergers that you are discussing, but also as it

relates to the telecom bill and for the lifespan of that bill as we

look at the reauthorization and the speed with which the technologies that you all deal with every day are changing. Mr.

Capellas, I enjoyed the fact that you used the term ‘‘everything

over IP.’’ And as we do consider the way we are moving in wireless

technology, that is certainly something that we—it behooves us to

be mindful of such.

Mr. Dorman, I do have a question that I would like to talk with

you about. With—we have heard some about R&D and the next

thing coming down in the everything over IP, and then you all

touched on but really didn’t discuss very much, more or less, the

cost and the impact of government regulations and compliance

costs on your businesses. And as you look at a merger, I wish you

would just briefly speak to what you think will be an adjustment

or an increase or a decrease in your compliance cost, and do you

anticipate this—that that will assist you and help you with what

is available for R&D and how you are planning for that?

Mr. DORMAN. Well, compliance covers a lot of ground. Certainly,

in the current world, we are all focusing on Sarbanes-Oxley 404

compliance certification process. That has taken an enormous

amount of time, effort, and money. As a combined company, presuming that both SBC and AT&T are compliant, we won’t be paying for that money twice through separate processes. And the context of regulatory compliance, we do have to file in some States for

service provision different ways. You know, today, the state of deregulation differs greatly State by State and at the Federal level.

And as you know, we have witnessed a fairly significant power

struggle between States and Federal regulators over the jurisdiction of things like Voice-over IP. All of those things have costs. And

to the extent that we can’t adequately predict them or understand

them, it adds to the risk profile and, frankly, dissuades further investment waiting for clarification. Some people may be so bold as

to build ahead of knowing the answer. I can tell you that over the

last 6 years in telecom, many people who did that paid a huge price

as things changed or evolved or were clarified. It would be my hope

that, as new telecom legislation is contemplated, that we would

look carefully at the last 10 years and say should we debate whether the telecom act failed or succeeded may be interesting historically, but where we are today, in my view, is the writers of the Act

69

can say for whatever set of reasons, we now have competition

across multiple modes. People have more choice. There is a lower

price. There has been a huge impact on the incumbent businesses,

as Mr. Whitacre said, and job loss, a boom and bust cycle of investment. But I do think we are at a point now where we can look at

this industry going forward in all forums and say this should be

a healthy, vibrant industry that can grow at the rate of GDP or beyond, because it serves the needs to so many constituents: customers, governments, consumers, and businesses alike.

And I would just like to say that hopefully we are going into an

era of much less regulation and much more market managed competition than more compliance.

Ms. BLACKBURN. Thank you, sir. My hope would be that we

would be moving toward something that is free market oriented

and that we do our part to be certain that you all stay vibrant,

American companies. You did reference some of the international

competition as we look at wireless and other forms.

Mr. Seidenberg, very quickly for you, I represent Fort Campbell.

That is located in Montgomery County, Tennessee. I have had the

opportunity to meet with some of those folks and to do a little bit

of training with our troops as they are getting ready to re-deploy.

You all have a lot of contracts, government contracts. If you will,

just speak very briefly to the impact that the merger would have

on our military operations, both here and as our troops are deployed.

Mr. SEIDENBERG. Well, I think we would look to increase our

penetration of services to military and to use the vast resources

available to the two companies to do as much as we can, like we

always have.

Ms. BLACKBURN. Thank you.

I appreciate that, Mr. Chairman. I yield back.

Chairman BARTON. Thank you. The very patient gentlelady from

California, Ms. Solis, is recognized for 5 minutes.

Ms. SOLIS. Thank you very much, Mr. Chairman.

I want to change the subject a little bit and address my question

to Mr. Whitacre from SBC. And you talk—when we talk about

mergers, we don’t often talk about the human resource potential

there. And my understanding is that if this merger takes place between yourself and AT&T, that we are looking at a job loss of about

12,000 employees before the merger and 13,000 after. That is a

total of 25,000 jobs, a large number, to say the least. And during

your testimony, you spoke of the benefits you believe the merger

will generate. With the job losses over 25,000, and most of them

from highly skilled individuals, my question to you is who, then,

is reaping the benefits here? And is it difficult then—or for me it

is a little difficult to believe that it would be for—benefits for the

employees and the consumers. And this is a big issue for many of

us, because my question also goes toward, well, if we are going to

downsize and consolidate, are we also then outsourcing jobs, because I have heard, from many of my constituents who are employed by your organization, as well as others that are seated at

the table, that in fact they train employees from other countries for

their jobs? So if you could, please elaborate on that, and give us

some cost——

70

Mr. WHITACRE. Sure.

Ms. SOLIS. [continuing] savings that are truly going to be beneficial for the consumers.

Mr. WHITACRE. Okay. I will be glad to do that, and it is a good

question. And job reductions, if any, I point out, are a function of

how well we do after this acquisition is completed. So with that caveat, if we do very well, there is obviously going to be less or none

or maybe we will grow. And that certainly would be where we

would start from. And that is a function of how well we can manage it. We normally, at SBC, lose every year about 12,000 employees just from normal attrition. That is retirements or people change

their jobs. They don’t want to work at SBC anymore. Mostly retirements. But we would do 1,000 a month, or 12,000 a year. And that

is a standard number for us. It goes back many years. There are

obviously going to be duplicate jobs when we do this—complete this

deal, and I think good examples are we will have people in networks that overlap functions or perhaps in marketing or sales, but

I can’t give you an accurate number. It is going to be a substantial

number, but again, it is a function of how well we do. But I guess

what I am saying is I think a number has been published of about

13,000, and you can’t add those two numbers. You can’t add 13,000

and 12,000. It was 13,000. We normally lose 12,000. If you net

that, it is really only 1,000, if you look at it that way. I wish I could

give you a number, because I don’t know what is going to be required as we go forward, but I would like to tell you that we are

going to do everything humanly possible to not have that, and if

we do, to deal with that in a way you would want us to deal with

it. And if we are successful, I hope we can grow this company and

put some excitement in Wall Street and maybe good things will

happen, not necessarily the bad stuff that everybody thinks is

going to happen.

Ms. SOLIS. Could you tell me——

Mr. WHITACRE. So we are just going to have to wait and see.

Ms. SOLIS. Could you tell me how many jobs have been

outsourced?

Mr. WHITACRE. We have done some outsourcing. We have a few

software or programming jobs in India. I think it is less than 1,000.

I think it is around 600. I would have to go back and check, which

I would be glad to do.

Ms. SOLIS. Could you, please?

Mr. WHITACRE. Sure.

Ms. SOLIS. And maybe——

Mr. WHITACRE. But it is about that number.

Ms. SOLIS. Okay.

Mr. WHITACRE. And then we do some customer service contact

work in the Philippines. And incidentally, those jobs were turned

down by the union that represents us. You should know that, because those jobs didn’t pay as well, and they really weren’t interested in them at one time. I can’t tell you that number, either, but

it is not a huge number, and interestingly enough, we are moving

some of those back to this country.

Ms. SOLIS. Why is that?

Mr. WHITACRE. Because we find that customers—and we are trying to be responsive to that. The customers react more favorably

71

when they talk to somebody here, which doesn’t surprise anybody.

It is a matter of cost and how you deal with that.

Ms. SOLIS. Right. Thank you. If you could pass that information

on.

My next—oh, well, I don’t have enough time.

Chairman BARTON. You can ask one more question.

Ms. SOLIS. Okay. I just wanted to ask——

Chairman BARTON. You waited a long time, so you ought to get

to ask another question.

Ms. SOLIS. This is directed to Verizon. This whole issue of universal access and service, copper lines versus fiber, that is a big

issue in the State of California in different parts, and I am concerned that what happens to those poor communities where we still

have copper lines. Do we get neglected? Are you going to continue

to service those areas? What amount of money and timeframe will

you have to try to bring up those areas that are still not in the

fiber main?

Mr. SEIDENBERG. Our highest penetration of DSL in our company

is in California.

Ms. SOLIS. Well, rural areas and others?

Mr. SEIDENBERG. Well, it is—well, we serve about 20 percent of

the State, and over 80 percent of all of those lines have——

Ms. SOLIS. Okay. But what about other parts of the country——

Mr. SEIDENBERG. Well——

Ms. SOLIS. [continuing] that you have kind of heard from other

members here?

Mr. SEIDENBERG. Yeah, well, the way we have our telephone

franchise, we have excellent deployment, so the answer to your

question is we spend money every year to continue to deploy DSLbased technologies, and we will continue to do that.

Ms. SOLIS. The information that I have indicates, I guess, there

has been a drastic change, for example, in the State of New York,

areas like Westchester and Nassau Counties where there have—

where there are differences——

Mr. SEIDENBERG. No.

Ms. SOLIS. [continuing] in terms of——

Mr. SEIDENBERG. I am not exactly sure what you are reading

from, but when we deploy fiber, we don’t do it every place at the

same time, so you pick and—you make choices.

Ms. SOLIS. So you—do you pick higher income areas and it

leaves——

Mr. SEIDENBERG. No.

Ms. SOLIS. [continuing] the lower incomes behind or——

Mr. SEIDENBERG. No. We pick—as a matter of fact, we have

picked locations in every State, and they have—and they are based

on a lot of factors.

Ms. SOLIS. Random? What is your criteria?

Mr. SEIDENBERG. Well, the criteria is pretty clear. It is based on

where we get market penetration——

Ms. SOLIS. Um-hum.

Mr. SEIDENBERG. [continuing] where we could physically do it,

where it is cheaper to do it, where we can get the cost savings,

and——

Ms. SOLIS. And a higher rate of return.

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Mr. SEIDENBERG. Higher rate of return, but by the way, we get

a higher rate of return every place when we eventually deploy it

when you get the scale. But this is not a question of not deploying.

This is a question of how quickly we can deploy as many places as

we can get the technology out there.

Ms. SOLIS. Okay. Thank you very much, Mr. Chairman.

Chairman BARTON. Thank you.

The gentleman from Mississippi, Mr. Pickering, the vice chairman.

Mr. PICKERING. Thank you, Mr. Chairman.

Each of you have testified that these mergers and acquisitions

can bring about the benefits of increased competition, choice, investment, innovation, and I do believe that that can happen, but

it is not guaranteed. And I think much of that depends on the decisions that you make, but also the decisions that we will soon make

in upcoming legislation.

To that end, I would like to ask a few questions.

Mr. Whitacre, you had responded to Ms. Eshoo that as far as

competitive access to your network that the laws are clear and

won’t change and that you will continue to have competitors either

through IP or other forms of communication, having that access to

network—to your network. Does that mean—is that your belief

that the laws are now clear after the decision, after the court decision, after the FCC’s tri-annual review. Do we—the current rules

on access to the network, is that something you support?

Mr. WHITACRE. No, it is not clear. And that has been one of the

problems——

Mr. PICKERING. Right.

Mr. WHITACRE. [continuing] it has not been clear for years.

Mr. PICKERING. Now—but to Ms. Eshoo, you said the law was

clear. I wanted——

Mr. WHITACRE. In terms of access. For example, anybody can buy

a local loop from SBC. That is pretty clear. That is settled. That

is done. That is over. That is clear. It is not clear on special access.

It is not clear on—totally on broadband. So it is not clear at all,

in its totality. Some pieces of it are clear, but it is not totally clear.

And it needs to be cleared up with a new law.

Mr. PICKERING. Now Mr. Dorman——

Mr. WHITACRE. Does that make sense?

Mr. PICKERING. Yes.

Mr. WHITACRE. Okay.

Mr. PICKERING. And to be honest, that was what I expected you

to say.

Mr. WHITACRE. Oh, okay.

Mr. PICKERING. But Mr. Dorman and Mr. Capellas, as you know,

you all have been voices for access so that competition could

emerge and so that competition could be sustained. With these

mergers, your voices on those positions could go away. Do you

think that the current rules by the FCC on access to networks

should be reformed or changed or maintained as we go forward

with these acquisitions?

Mr. DORMAN. As I said before, I think you can debate this, perhaps, internally, but the courts have spoken as to what FCC

proposed——

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Mr. PICKERING. Well, we do advocate future changes as we debate now.

Mr. DORMAN. Well, I——

Mr. PICKERING. And based on these acquisitions, and for the future of competition, should we maintain the access that we now

have, or should that be reformed as Mr. Whitacre suggests?

Mr. DORMAN. I would agree that the current state of affairs

leaves a crazy quilt of regulation between States and Federal jurisdictions, and it leaves some services defined in the historic past. I

am on the record as saying that, for instance, an intercarrier compensation reform, I have nine different rate structures that I currently pay to local telephone companies for access. There are interstate jurisdictions, intrastate, ESP waiver, reciprocal compensation,

bill and keep, and also VoIP, which pays, you know, virtually nothing. That has got to be dealt with. I think the most important thing

that I would say to public policymakers and lawmakers at this

point is that universal service and intercarrier comp reform are

very much tied together. There is an abundance of volume to support universal service if it is done in a technology-neutral way. So

I think, in my view, when you talk about access, it has got to be

done for all players on a very neutral basis, whether you are cable,

telecom, historical long distance, VoIP provider, wireless. And if we

do that, I think we can deal with a lot of the concerns that those

representing rural constituencies have about deployment, because

we can focus, as Mr. Seidenberg said, on where the real needs are

if there is an information divide. We can do that.

Mr. PICKERING. Mr. Dorman, I—excuse me for cutting you off,

but I—my time is running out, and I have a couple of other questions that I hope—that I can ask.

The question that I just asked pertains to going forward rules

and what we may do here, but your decisions, your marketplace

business decisions, are equally or more important. Mr. Seidenberg,

will you—and with MCI, will you be going into SBC territory and

other Bell territory now to compete for residential and business?

Mr. SEIDENBERG. We are going to follow the technology. And in

wireless, we are going to definitely do that, and in the enterprise

space, we will definitely do that. And we will see what happens

with national VoIP services, how they develop. But we are going

to follow the technology that we invested, and we will definitely be

nationally competitive for us where it makes sense.

Mr. PICKERING. For example, you need a major new platform in

the south, I would assume, so you need a—to be able to compete

in all of those markets, and I hope that the new Verizon South

could come in to, say, some facilities in Mississippi——

Mr. SEIDENBERG. Yeah.

Mr. PICKERING. [continuing] to——

Mr. SEIDENBERG. Okay. Well——

Mr. PICKERING. Just off the top of your head of——

Mr. SEIDENBERG. Actually, why don’t we ask Donahue that question?

Mr. PICKERING. Okay.

Mr. SEIDENBERG. He is sitting here doing nothing. Let us see

what he is going to say.

Mr. PICKERING. Yeah, that is right.

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Chairman BARTON. Your time has expired, Mr. Pickering.

Mr. PICKERING. Mr. Chairman, could I ask one question of Mr.

Forsee?

Chairman BARTON. If it is a quick one.

Mr. PICKERING. It is a quick question.

Dr. Burgess had a question about his Sprint phone not being

able to get a text message from his son, who may have a Verizon

phone. Is that a software question or an interoperability question?

And do we need to have some type of going forward rules on interoperability, especially on the data, so that networks can communicate? And again, are—competitive positions are most logical?

Mr. FORSEE. And the answer is—really is both. We operate in the

wireless space and on two different platforms, one GSM one

CDMA. There has to be extra provisions made, software provisions

made for those two networks to interoperate. We do that today on

global phones and other capabilities to allow us to make that work.

Certainly, as our merger comes together with Nextel, we will be

interoperating our networks so that our users get the benefit of

both sets of services. So it clearly is achievable, and with our merger, we will be able to do that. And any other relationships we

would have with Verizon, for example, on CDMA technology, we do

have roaming agreements so our networks can interoperate today

at the voice level.

Mr. PICKERING. Should that be legislated——

Chairman BARTON. One question.

Mr. PICKERING. [continuing] as a requirement, interoperability?

Chairman BARTON. Mr. Inslee is waiting very patiently.

Mr. PICKERING. Okay.

Mr. FORSEE. No.

Mr. PICKERING. No.

Mr. FORSEE. It should not be legislated.

Chairman BARTON. In Texas, that question would be a Ph.D. thesis, but I guess in Mississippi, that is a quick question.

The gentleman from Washington, Mr. Inslee.

Mr. INSLEE. Thank you.

For Mr. Seidenberg and Mr. Capellas, another CEO, Dick

Notebaert, in the Wall Street Journal talking about the potential

plans of this new unit, and he said that after this merger, ‘‘the

odds are that these behemoths would not compete head-to-head in

most local markets but would instead flex their muscles to squeeze

out smaller competitors, emptying the playing field.’’ What could

you tell us about competition in local markets and the behemoths

not competing in the local markets?

Mr. SEIDENBERG. Well, let me not address the specific comment,

but the general thing we have talked about this morning is that

we are a big company, true. We will be bigger with MCI, but the

fact is in the markets that you are talking about, the consumer

markets, every single one of the markets that we operate in has

cable providers, they have wireless providers, as well as us. There

is plenty of robust competition. This transaction changes nothing in

the consumer space. It is just a different transaction. This is a

transaction that is focused in the business market, sir, that is not

focused on the consumer. So I think what we tried to—the point

we have tried to make here this morning is that these mergers

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don’t change the technological direction that the market is taking

with respect to these consumer-based technologies.

Mr. CAPELLAS. The only thing I would add, as Dave and I have

both said, it is that our decisions to exit a constructively consumer

market were made long ago.

Mr. INSLEE. Right.

This is an open question to anyone who wants to chime in, but

is there a general concept that ultimately the ultimate, if there is

such a thing, players here are going to be providing content as well

as just communication, just data, either business or consumer and

that ultimately the markets driving whoever the real communication players are going to be, some were to provide the entertainment content as well as personal and business communication? I

don’t think we have talked a lot about that here this morning. I

just wonder if any of you could address whether that is the dynamic of the market or there are some dynamics to go the other

way that actually drive you to be a more specific, more niche players as opposed to providing movies, video games, personal data, et

cetera. Which—where are the dynamics going here?

Mr. WHITACRE. Mr. Inslee, I can speak for SBC, but I think we—

I know we have made it pretty plain. We intend to go in the TV

video business, which means you have to have content. And so we

have made that commitment. We have spent hundreds of millions

of dollars to put a video network. We have done a deal with Microsoft, Yahoo, and others, and so we are clearly going into the video

business. That is our intent.

Mr. DORMAN. I would say that the publishers of content of all

kinds are morphing. Artists are now contemplating having their

own distribution vehicles, going around traditional record company

contracts, being able to get to any consumer who would like to hear

their music, whether it be popular artists or even libraries that

exist. What I have heard content players say over and over is they

welcome more distribution channels beyond the traditional cable

distributors, and those who make the content welcome it as well.

Mr. INSLEE. Are these mergers driven a little bit by this dynamic, the need to be in the content business? They—are they a

player in these decisions at all or not?

Mr. WHITACRE. Sure. We believe that the consumer or customer

wants all of these services available from one company bundled, if

you will, and video is a critical piece of that. And to do that, in our

world, you have got to have Voice-over—or you have got to have

the Internet Protocol broadband networks. Sure. That is part of it.

Mr. DONAHUE. I think it is important that we provide the facilities in which you can enable content, but in our space, for example,

we work with multiple third parties to provide the content for us.

And I see that model continuing as you move forward. So for example, Sprint has an affiliation with ESPN, who is the perfect example of that, and I think that trend will continue.

Mr. SEIDENBERG. If I might, where it may be a teeny bit different, directionally, I understand where we are, but this is a

smaller transaction. MCI doesn’t have any particular expertise in

video distribution or in the consumer marketplace outstanding in

the enterprise market, so for us, this transaction is driven by moving into the enterprise base.

76

To your question directionally where is Verizon going, I think we

are more interested in the distribution and packaging and bundling

of content than we are in the making of movies. So I think we want

to fill up the networks that we have as opposed to getting the video

business the way you might think cable companies get in the video

business, because they both own the networks and also, to some extent, own the content. I don’t know where we—this will go eventually, but our initial—into this is really more in the network side

of it distributing, packaging, and bundling it.

Mr. INSLEE. Well, we are just happy that many of you are using

great Microsoft products from my District, so thank you very much.

Take care.

Chairman BARTON. I thank the gentleman.

The gentleman from Indiana, Mr. Buyer.

Mr. BUYER. I thank the gentleman.

I—Mr. Seidenberg, I am not surprised at all that, as a businessman, you would say that you have to follow the technology. I think

that is very clear. We—even some of my colleagues that are now

sort of scratching their heads that really don’t follow this issue, say

well, how can a baby Bell now merge with an AT&T? And my counsel to them is because we created this problem. And you don’t find

Members of Congress willing to say we caused a problem, but we

have caused this problem. In fact, we thought we got it right. And

I hate to go back to visit this, but we thought it was all about the

voice. We set out these regulations. Our fears were about all of this

competition that we—where these monopoly power—those of whom

could exert monopoly power with they could actually compete, and

so we created this problem.

And I am concerned about a couple of things. I want to make

sure in the rewrite we get it right, and when I—we move in that

direction, I am a good listener. I think it was Mr. Whitacre that

said please make sure there is a light touch with regard to technologies. I think that was very well put, but it should also be a

light touch to the framework to which we got wrong. And that

framework to which you have, you call it the ‘‘patch.’’ You know,

we were very clear of saying well, we are going to go in there and

we are going to regulate with regard to the baby Bells, but we are

not going to regulate over here and we repeal the Cable Act and

we have this explosion of technology. And it is exciting. And now

I have—there is no question that you have to follow that, because

you can not exist under that framework—the box that we had you

put in. So as we do a rewrite, we want to do a rewrite that does

what? Draws down the walls of the box that we had you in? Yeah,

I think so. Now there—some may disagree, because they still want

access to networks, so what? How fair is that, though, to continue

to build out if we are going to allow people, then, to be parasitic

upon your build-out? So I think that we are going to have a very

strong tussle doing this rewrite, because you are still going to have

people who have interest in gaining access to your investments.

And so you wonder why Wall Street doesn’t want to invest. I think

it is pretty clear why they are hesitant at times.

I opened up in my opening with regard to four questions. I have

been informed that you have covered several of them. But please

let me know about—with regard to the—to verizon-mci. MCI, you

77

have a lot of government contracts, interagency. Please let me

know the effect of this merger upon the interagency, not only in

DOD but in their cooperation with Homeland Security and first responders and how this is going to work out with existing contracts,

please.

Mr. CAPELLAS. Obviously, while specific operating principles and,

you know, the short strokes of how we will execute haven’t been

determined, I don’t think there is any question that we are continuing to invest in those networks through the merger. I don’t

think there is any question that the financial strength of Verizon

will allow us to even extend it farther. I don’t think there is any

question that from how you actually execute security on a network

the fact that we have recently purchased, you know, another small

company that deals in security to extend our footprint helps. I don’t

think there is any question that the size of some of the capabilities

on local access to be able to go end-to-end and be able to do

tracability all of the way across the endpoint of the network actually proves that. So frankly, from our government perspective, and

even if I sort of look at the reaction of our employees in our Federal

space, it is nothing but positive.

Mr. BUYER. All right. Thank you.

Do you concur?

Mr. SEIDENBERG. Oh, absolutely. By the way, can I go for extra

credit?

Mr. BUYER. Sure.

Mr. SEIDENBERG. Yeah. Your comment about the refreshing of

the Act and being willing to be accountable, before we reinvent a

brand-new mousetrap, if we look at some of the things that actually work well, like wireless, there is a model that we could extend

there rather than think we have to start raising the house and

building the whole thing over. So there are some examples of how

the marketplace has helped achieve the things that you articulated.

Mr. BUYER. Well, when government gets out of the way. If government gets out of the way and lets the marketplace work and

free enterprise creativity initiative, at-risk capital, exciting things

happen. People benefit. Competition brings lower prices, not government interaction making demands upon you, keeping you in a

box, and saying, ‘‘Oh, we are going to help the consumer.’’ No, we

limit the choice, and we hurt the consumer. Right?

Mr. SEIDENBERG. Right.

Mr. BUYER. I mean, that is how I rate this one.

The—well, gentlemen, I would like to work with you. I would like

to work with your Washington offices how we do this rewrite for

all of you, because we want to make sure we get it right this time.

Do you know how I think we get it right? By having less government involvement and creating a very big box, because we can’t

keep up. This committee can not keep up. We don’t visit these

issues very often, and I think we need to give greater latitude,

depth and breadth, for you to operate within that box for the society to benefit.

Thank you.

Chairman BARTON. I thank the gentleman.

We have got a few more questions, but you all have been here

for 3 hours. If you all want to rotate for personal convenience, it

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is acceptable. Just don’t more than one of you go at a time, because

we want to keep this—keep the hearing going.

So with that, we are going to recognize the gentleman from Chicago, Mr. Rush, for 5 minutes.

Mr. RUSH. Thank you, Mr. Chairman. Mr. Chairman, I really

want to commend you for holding this timely hearing. It is very important.

I want to commend all of the witnesses who have participated

over these last 3 hours. It has been very informative, and I certainly appreciate it, and my constituents appreciate it.

And may I regard, I just want to acknowledge and single out

the—Mr. Whitacre. I really appreciate your involvement in helping

to close the digital divide in my District, particularly in the Englewood community and also, Mr. Seidenberg, you are—to a lesser extent, you are really have done a remarkable job working with some

of my constituents, and I appreciate that.

I have a couple of questions that I—and these are some—in an

area that I don’t think has been touched on in previous—until now.

With these mergers—and this is to everybody here. With these

mergers, do you envision areas where you would have to invest

some of your assets and if so, what areas or regions are you looking

at investing these assets? And you can—if your—if the answer is

yes, would you also answer this question along with that question?

Where would the opportunities for minority entrants to acquire—

be to acquire some of these assets? So I am looking—okay, you are

getting ready to merge and a lot of other kind of rippling effects

are getting ready to occur. Are there opportunities for minorities to

become owners of some of your divested assets?

Mr. Whitacre, start.

Mr. WHITACRE. Thank you, Congressman.

We are taking the position, and I think rightfully so, that since

we don’t overlap in any businesses, we shouldn’t have to divest

anything, because we are not in the same businesses. So I guess

we will have to wait and see as it goes through the process whether

that occurs or not. But as you know probably better than anybody,

in the past, we have worked with minority groups in those cases,

and in fact, have sold some businesses and divestitures. But we are

taking the approach it is not an overlapping business, and we will

have to see how the process goes. If that unfolds, then maybe we

can discuss that as we go down the line.

Mr. SEIDENBERG. Well, just quickly, I agree. We don’t think this

transaction will cause the need to divest things the way we see it.

But let me just add, we just participated in the FCC auction on

wireless, and there were plenty of opportunities for a designated

entity, which is another way of looking at minority ownership, bid

on a lot of the licenses in terms of who we partner with downstream. So there are opportunities for minority ownership in the

wireless area.

Mr. FORSEE. Similarly, we don’t believe that the Sprint Nextel

merger itself will require any divestitures of assets. We have made

the decision to spin-off to our share owners our local business,

which we operate in 18 States with close to 8 million access lines,

so that will occur after our merger closes. And we would expect

that would occur 6 to 9 months after the close of a merger with

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Nextel. So we don’t expect there to be any other assets that we require because of the merger to be divested.

As Mr. Seidenberg said, we also participated in Auction 58,

which was, again, specifically identified for designated entities, and

that is how Sprint acquired, through that vehicle, the spectrum in

that caution.

Mr. RUSH. This merger, how will it help ensure that more Americans receive the benefits of broadband and the new services it

makes possible, such as Voice-over IP and video? And specifically,

how would you assure that under-served areas have access to

broadband services, particularly the African American and Hispanic households? And let me just give you, if I could, a framework.

This is a testimony that came in from the Consumer Federation.

And you have probably seen this before. And I am just going to

quote it, and that would—might give you the framework so you can

pinpoint the answers. It says, and I don’t necessarily agree with

this, but I am just—I want you to know this is what is being proposed here. ‘‘Unfortunately, the telecommunications industry looks

like it is headed in the direction of cable. SBC and Verizon are

scrambling to put together their own bundles. To do so, they want

to be excused from the public interest obligations of video service

providers, such as community-wide build out and local access channels. For example, in one of the’’—well, it says, ‘‘SBC and Verizon

are seeking to be excused from serving undesirable customers and

simultaneously seek to prevent local governments from serving

those same very—those very same customers.’’ And then they want

to say—they called this redlining. Is there any truth to that position? And if not, clarify it for me, will you please?

Mr. SEIDENBERG. Not only do I disagree, it is offensive to me, because that is not the way we do business. We deploy our technology. We don’t redline. We deploy it across the whole State. Our

systems are open. Cable systems are not open. So I think, Congressman, that—I think that—I think our record should speak to

this, and I think the CFA, you know, they have their objections to

these transactions. It is sort of theological. It is religious. They just

don’t like any mergers, let me say that. But our record, in all of

the transactions we have done, is we have never done that, and we

have a good record to support that.

Mr. MURPHY [presiding]. The gentleman’s time has expired.

Mr. RUSH. I agree.

Thank you.

Mr. MURPHY. The gentlelady from Wyoming is recognized.

Ms. CUBIN. Thank you. And I, too, would like to thank you for

being patient and lasting for these 3 hours.

Most of the—well, all of the questions that I had prepared before

I came have been asked, so I will be brief.

But I want to bring up a subject that I am tired of bringing up,

and I am sure those of you who listen to me are tired of hearing,

but I am talking about real rural America. My cellular phone, my

voice wireless, is with Verizon when I am in Wyoming. And I had

the wonderful experience to be traveling all over Wyoming while

we were home for the last 2 weeks. And as I traveled from Newcastle to Torrington, Wyoming, which is 50 to 60 miles, I had no

wireless, I had no voice. My cell phone didn’t work. There was no

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service. Now that is not just a little spot. That is almost an hour

where I don’t have any access to voice. I understand the dynamics

of investing in service. I know that you have to make money, but

I also think there is something about service. So when I have heard

the discussion here today about wireless broadband deployment

and I don’t even get wireless voice, I am just skeptical. And that

is just one example. By the way, this area is flat. The area that

I am talking about. It is not as though there are big mountains interrupting that—the service. This area is flat. It just doesn’t have

any service.

So competition isn’t working so well in Wyoming for us. The deployment of broadband fiber is very limited. And so I guess I would

like you, Mr. Seidenberg, to just respond to that, because your company is what I use. Mr. Inslee read an article where someone said

that the—this merger will squeeze out small companies. We are

not getting this service from the big guys.

Mr. SEIDENBERG. Well, I wrote it down, Newcastle to where?

Ms. CUBIN. To Torrington, Wyoming.

Mr. SEIDENBERG. Excuse me?

Ms. CUBIN. Torrington.

Mr. SEIDENBERG. Torrington, Wyoming. Okay. We are going to

find out. Thank you for having our service. At least we serve most

of the other places you operate.

Ms. CUBIN. Well——

Mr. SEIDENBERG. Okay.

Ms. CUBIN. [continuing] my point is, you know, this isn’t—you

know, everyone accepts that there is spotty service.

Mr. SEIDENBERG. Yes.

Ms. CUBIN. Everybody—everyone accepts that. But all over Wyoming, this is the rule, not the exception.

Mr. SEIDENBERG. Yeah. No, I think the simple answer to your

question is we could do better. I don’t have any debate or any disagreement that the issue is we could do better. And what I need

to find out is whether or not we serve that jurisdiction. But let us

assume we did. I need to find out why—or what the sequencing of

events of putting more towers in. But I will go back to what I said

before. You happened to choose us. Obviously, if there were another

carrier serving it, you would have switched, and so maybe there

isn’t any carrier there. So the issue is all of us together need to

keep filling out the footprint across the country, and I think—I

don’t want to speak for my colleagues, but I know that Donahue

would agree with that. He absolutely would agree.

Ms. CUBIN. Well, my next question was going to be for him. And

I wanted to ask how the Sprint Nextel spectrum will serve wireless

broadband in rural America. And will Wyoming be left behind like

it is in voice? I mean, what I want to say is when the rewrite comes

up, you have heard everybody—practically everybody up here today

talk about rural America and service to rural America. And I want

you to know we are serious. We demand services. And whatever we

have to do to get them, I am willing to do that. I represent 500,000

people over 100,000 square miles. That is really rural America.

Anyway, so if you would answer my question.

Mr. DONAHUE. Well, thank you for your question.

Ms. CUBIN. And Mr. Forsee, too, if you have any——

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Mr. DONAHUE. Of course. And as much as it pains me, I will say

that Mr. Seidenberg is right that we—all of us are taking a look

at expanding our footprint. If you take a look at our 2 to 5-year

bill plan, it covers a significant amount of rural America moving

forward. And so it is our intent to continue to increase the coverage. And I think that this merger is going to help accommodate

that, because we are going to have the financial resources and the

wherewithal to get that done.

Now in terms of broadband, I think that if you take a look at our

spectrum position and what our future plans are, we are taking a

look a deploying not only the third generation technology on the

current networks, but we have an opportunity for a fourth generation technology using our 2.5 spectrum, and that spectrum is nationwide across the entire country, and it will give us a much better opportunity to cover those areas in rural America that aren’t

covered today.

And finally, I would say that technology is getting more efficient.

And as the technologies get more efficient, it gives us the capability

of rolling out more coverage, because from a financial perspective,

it makes much more sense for us.

And finally, I would say the demand is there, and we see it all

of the time. And we are very cognizant of it and are working very

hard to try to increase coverage in rural America.

Ms. CUBIN. Thank you.

I don’t have anything further, Mr. Chairman.

Mr. MURPHY. The gentlelady’s time has expired.

The gentleman from Texas is recognized.

Mr. GREEN. Thank you, Mr. Chairman.

I was going to tell our guests that they could all be excused in

a few minutes, but I see my colleague from New Hampshire back

here.

I have got a couple of things. One, SBC predominately provides

the local telephone service, and of course, I have a Verizon Wireless

center in Houston that is very familiar with us, but now with your

District, you and I share part of Verizon’s service area in Baytown

in East Harris County. And so I have some questions concerning

that, just like my other colleagues. But I have visited the SBC call

centers in Houston that are predominately for the Hispanic market, and I don’t know if any—see, I was there with both SBC and

CWA representatives, so they didn’t say they didn’t want those

jobs, at least in Houston. I don’t know about California.

But let me ask both Mr. Whitacre and Mr. Dorman. I would like

to hear your views on the state of phone competition in both consumer and business markets in the major metropolitan areas, like

Houston. And I think the area is a good example, because I have

Time Warner, who is beginning to roll out their Voice-over IP, and

service and bundled it with video and broadband. And one of the

goals I think of everyone on the committee is make sure there is

competition. And would be SBC be able to—at some time, be able

to provide that competition for not only the phone service but also

the broadband and video? I know you can do broadband now.

Mr. WHITACRE. We are in the broadband now, Congressman, as

you say. We do offer a video product through a dish network, so

we can provide video now, but it is satellite video, and what we are

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attempting to do is provide video through our infrastructure that

we are building. I certainly hope that we can. The state in Houston, for example, is an amazing amount of competition. There are

many C-lex. There are cable companies. There are wireless companies. On the business side, there are some big-name companies

doing a lot of things there, so there is a lot of competition in all

of the cities, and it is certainly our hope with this merger we can

provide more than we are presently doing.

Mr. GREEN. Okay. What do you think from—Mr. Dorman, from

AT&T’s side?

Mr. DORMAN. I really don’t have anything to add. The business

environment has continued to have dozens of competitors, particularly in places like Houston, and we see them every day.

Mr. GREEN. Okay. But Mr. Whitacre, your goal is to be able to

do the video over your infrastructure, not necessarily always have

to do the satellite?

Mr. WHITACRE. No, we are going to do it over our infrastructure,

and we have got Project Light Speed going full blast, and we hope

to be out there with a video product near the end of this year,

through our infrastructure and not satellite.

Mr. GREEN. Good.

Mr. Seidenberg and Mr. Capellas, I would like to ask a similar

question, but the answer may be different, given the different companies that you have, and the committee is focusing on the convergence of phone service, residential business, and broadband and

video. What would the merger with Verizon and MCI, would that

be similar to what SBC and AT&T? Because, again, since I have

Baytown and East Harris County now, I am interested in making

sure they have some of those same services and competition to our

local cable that does a great job, but I like to see the competition.

Mr. SEIDENBERG. Well, just quickly, I think it is similar, but we

are a smaller transaction, and we are focused on the enterprise

market mostly, so I think you will continue to see robust competition for business services, and the government.

Mr. GREEN. Okay.

And the last thing, again, since it is in Houston and with the

merger of SBC and AT&T, what does it mean to our jobs in our

community, and I guess, Mr. Whitacre, you could probably answer

that the best? I think AT&T probably has 100 employees in Houston, and I know SBC has thousands.

Mr. WHITACRE. We do have a large employment base there.

Again, it is—it depends on how successful we are going to be, but

in a local area like Houston where we have an operation center and

AT&T does, too, I don’t think it will have any impact at all. I don’t

see any job changes there of any significance.

Mr. GREEN. Okay.

Mr. Chairman, I have a few seconds left. Mr. Whitacre, just say

hello to a former colleague of mine, John Mumford, who I served

with in the State Senate and who was a good friend for many

years. Just——

Mr. WHITACRE. I will do that, Congressman. He is very busy with

the Texas legislature.

Mr. GREEN. I understand, having been there, but again, just

make sure he knows I said hello.

83

Thank you, Mr. Chairman.

Mr. MURPHY. I think I am going to do the prerogative and ask

next.

Mr. Seidenberg, I think as reported recently in the Washington

Post that there is alleged certain VoIP traffic is being blocked by

some major providers. And I think the FCC is looking into this

issue. I am concerned that post-merger Internet transport will be

significantly consolidated to the point that network discrimination

against unaffiliated VoIP providers will become a more frequent

headache for the industry, and I guess Congress and the FCC,

through complaints. I guess you could even raise anti-trust concerns. It seems that this is potentially an issue and could be reasonably addressed, perhaps, voluntarily as a condition to these

mergers, just the case in point. I guess the question is are you open

to such a suggestion?

Mr. SEIDENBERG. Well, first of all, I am going to check into this,

but I don’t think that exists with us, I mean, not that I know of,

and——

Mr. MURPHY. Okay. Well, I would ask Mr. Whitacre, too, the

same question.

Mr. SEIDENBERG. And just quickly, if I might, we also need to

hand off VoIP traffic to others, so I don’t know why we would block

it if we needed others to carry our traffic.

Mr. MURPHY. Are you familiar with the Washington Post article

I am talking about?

Mr. SEIDENBERG. I am not, and I will look into it, but——

Mr. MURPHY. Okay.

Mr. SEIDENBERG. [continuing] it is the Washington Post, so——

Mr. MURPHY. Yeah. Okay.

Mr. Whitacre, would you like to—had—you are familiar with the

Washington——

Mr. WHITACRE. I am not familiar with that article, either, but I

am sure we are not doing that.

Mr. MURPHY. Maybe my staff is the only one that read this article.

Mr. Forsee, Sprint is also a major government contractor when

it comes to communications services. And if the SBC and AT&T

and Verizon-MCI deals are approved, what impact, if any, would

the deals have on the government service businesses, and do you

see a reduction in competition in that market?

Mr. FORSEE. I think Sprint has been a long-time government contractor. Nextel has as well. As our two companies come together,

we would intend to continue to invest disproportionately in public

safety and homeland security. The issues have been very important

to our country. And I see no diminishment of the competition today

on any government bid. There are multiple providers that are willing to step forward. Wireless has become a much more important

part of that discussion, and with Sprint’s global IP capability, I

think you will continue to see us invest in the government business

and certainly with Nextel to continue to lead in the public safety

sector.

Mr. MURPHY. Okay.

Another question for you. I think you indicated earlier that

Sprint will be ruling out wireless broadband services aggressively

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this year. And I guess the question is can you safely say, I guess,

will the price of that service be competitive with DSL and with the

cable modem services?

Mr. FORSEE. Yeah, the service we are rolling out this year, Mr.

Congressman, is what we will consider our third generation wireless data network. The speeds on that network will not yet be up

to the speeds of the landline-based services, like could be acquired

from a DSL service or from a cable modem. But nevertheless, it

will be significantly better than what wireless data networks that

are deployed today as we continue to step up that capability. Tim

mentioned earlier, as we consider deploying a fourth generation of

wireless data, which would be in the 2007 and 2008 timeframe,

perhaps, then you are at the point where there could be, if customers choose to use it for a substitution for DSL and broadband

and rest assured price competition, because another alternative

would be available, would certainly be part of that discussion.

Mr. MURPHY. This is just a question of personal—I just got back

from Europe, and I had a phone, the Trio 650. And I could use it.

And Cingular was the provider for this one. And I could use it in

Germany and France. And I was sitting next to a man who was

CEO of T-Mobile. And he pulled out a phone that he could use in

150 countries. And it combined everything the 650 Trio had, but

it seemed to have a little bit more capability. And the idea of the

reciprocity between European countries and the United States and

the access for Americans when they go over there to use it has

been a little bit of a problem. And I guess I would ask Mr.

Seidenberg, do you see Verizon being able to provide the service

that—in 150 countries you could use your service and still use it

in the United States with ease?

Mr. SEIDENBERG. No, absolutely. I think in our case, you know,

we measure this. You know, less than 5 percent of our customers

roam in Europe. But we—you are probably one of them, I guess.

But what I think—or Ed’s customer. But I think in the long-term,

we will have roaming agreements and interoperability agreements

with all of the international carriers, and I think that is something

that the industry will take care of over the course of the next few

years.

Mr. MURPHY. Also, when I went on the web, when I first got to

Germany, I couldn’t get on the web with the 650, but it seemed

after a day, it suddenly kicked in. So I guess there was a period

there when I was roaming and that these interoperable agreements

that they had, it either couldn’t find it or something, so it came in.

So what you are saying for the voice is also true for probably the

web?

Mr. SEIDENBERG. I don’t know this, but in your—in that case,

somebody may have just needed to validate the number and it took

a little bit of time for that to happen.

Mr. MURPHY. Yeah. Okay.

My time is expired.

The gentleman——

Mr. BASS. Am I recognized, Mr. Chairman?

Mr. MURPHY. The gentleman is recognized.

Mr. BASS. Thank you.

Mr. MURPHY. Absolutely.

85

Mr. BASS. Thank you. Thank you very much, and I apologize for

keeping you guys here. Ten o’clock was a long time ago. I will be

very brief.

Mr. Seidenberg, I—one of the many memories of 9/11 and its

aftermath that I will not forget is my visit with some of my colleagues here on the committee to the West Street facility and the

heroic efforts that many of your employees were making to—in

fact, the chairman was there in the same trip. In the—on the

streets of New York trying to reconnect all of the wires and the

work that they did is truly extraordinary.

Now I also understand, of course, since that time, you have had

a number of other national security events, including the GOP and

Democratic Conventions and others. My question is, by merging

with MCI, you are going to have—you are going to be responsible

for considerably a greater number of Federal agencies and clients.

And are you willing to put the resources into homeland security

and cybersecurity activities if the merger is approved that would—

you would—that would normally have been expended? And do you

see any special challenges facing the new company as a result of

that merger in this particular area?

Mr. SEIDENBERG. No, actually—thank you for the question, because it should be just the opposite. We want to do more, and we

will do both. I don’t think there is any—this is not an either/or

question. Our interest in surveying large-scale projects like the

GOP or the Democratic Convention or the Federal Government, we

have a great interest in doing that, and we will put the resources

to make that happen.

Mr. BASS. The—if you merge, a lot of the technology that went

into the creation of the Internet will be merged into your business,

most notably Ray Tomlinson at BBM in Cambridge, Massachusetts

who came up with the @ for the Internet and the—Vint Cerf who

is now at MCI created the Internet Protocol that we use today. Despite this legacy, many critics point to the rate of deployment of

DSL and other advanced services by Verizon and claim that it has

been too slow and only occurs when competitors offer the service

first. How, in your opinion, would the merge firm use its—this legacy or its legacy to bring these innovations to all Americans, including those who live in rural areas, such as found in my District?

Mr. SEIDENBERG. Okay. Am I blessed with this question, too?

Mr. BASS. Sure.

Mr. SEIDENBERG. Yes. Okay. The—here is the way I would respond to that. Very quickly, when we have had an absence of regulatory interference, we have deployed technology as fast as anybody

in the industry. Just look at what we have done in wireless. I think

what MCI lets—gives us the capability to do, as Michael mentioned

before, all of the platforms, all of the Ethernet access, and all of

the—all of those services that customers on the enterprise level, we

will do that. And as far as the deployment of consumer-based technologies, I think, as we have said during the hearing, all of this

will just increase the capacity of the company to generate the savings and the earnings and the capital formation to do that.

Mr. BASS. Okay. Fair enough.

Thank you very much, Mr. Chairman.

Mr. MURPHY. Thank you.

86

And anyone else seek time?

We want to thank you for your long patience and forbearance

here, and you are excused. And we will ask the second panel to

come forward: Dr. Mark Cooper, Director of Research, Consumer

Federation of America; Mr. Jeffrey Halpern, Senior Equity Research Analyst at Telecommunication Services; Mr. Jim Speta, Associate Professor, Northwestern University School of Law; and Mr.

Phil Weiser, Associate Professor of Law and Telecommunications,

and Executive Director of Silicon Flatirons Telecommunications

Program at the University of Colorado School of Law. I want to

welcome all of you here, and we welcome your opening statement

of 5 minutes, and we will start with Dr. Cooper.

So if we will just make sure the people in the back are quiet for

you, Mr. Cooper, I think we are—I beg your pardon, you each have

7 minutes. I have been corrected. So you have 7 minutes for your

opening statement.

And with that, Dr. Cooper, I think we will start with you.

STATEMENTS OF MARK N. COOPER, DIRECTOR OF RESEARCH,

CONSUMER FEDERATION OF AMERICA; JEFFREY HALPERN,

SENIOR EQUITY RESEARCH ANALYST, U.S. TELECOMMUNICATIONS SERVICES, SANFORD C. BERNSTEIN & CO., LLC;

JAMES B. SPETA, ASSOCIATE PROFESSOR, NORTHWESTERN

UNIVERSITY SCHOOL OF LAW; AND PHILIP J. WEISER, ASSOCIATE PROFESSOR OF LAW AND TELECOMMUNICATIONS,

AND DIRECTOR OF SILICON FLATIRONS TELECOMMUNICATIONS PROGRAM, UNIVERSITY OF COLORADO SCHOOL OF

LAW

Mr. COOPER. Thank you, Mr. Chairman.

We told you that the law wouldn’t work. Mr. Buyer has stood up

and said we have—he has to admit it. We told you to vote against

it when it came to the floor. But frankly, this shell game you heard

this morning is not going to solve the problem. And it was quite

a shell game. You heard Mr. Whitacre say, ‘‘The law says we can’t

discriminate, so we won’t.’’ But then he is there at the FCC seeking

to be excused from Section 201 and 202 of the Communications

Act, which is the obligation to not discriminate.

Mr. Seidenberg says, ‘‘We don’t redline. We serve everybody,’’ but

in Pennsylvania when they forbade cities from providing community wireless networks, they committed to building out by 2015.

That is 15 years rural Pennsylvania falls behind: 3, 4, 5 generations on the Internet. Justice delayed is justice denied.

We heard wonderful figures about a 15 or 20-percent market

share in Internet backbone, but access to Internet backbone is a

local commodity. I can’t connect to the Internet in Houston with facilities in Dallas. You have to look at this at a—as a local market.

And those local market shares are much more concentrated than

all of the numbers you heard this morning. You did hear a bit of

truth this morning when all of the people at the table said, ‘‘We

have exited the consumer market.’’ I represent consumers. They

have exited our market. But of course, what happened was the

Bells killed the competition by leaning on the FCC, and now that

the competition is dead, they say, ‘‘Nothing to lose here, because

there is no competition in wireline facilities.’’

87

The merged entities you had before you today are essentially Bell

behemoths reconstituting their Bell operating system. For the residential customer in local markets, they will have a 90-plus-percent

market share of dial tone, a 70-plus-percent market share of long

distance, and a 40 to 50-percent market share of wireless. They

will own and control the assets of the public switch network and

have the same anti-competitive incentives that the old Bell system:

to discriminate, to price squeeze by overcharging for access. And

they are seeking the legal right to discriminate against competitors

and application service providers who want to use their networks.

The weakness of this industry structure from the residential consumer point of view is absolutely clear. The baby Bells you had

here today, the Bell behemoths, will not sell naked DSL. I realize

we have to be careful where that word is in public these days on

TV, ‘‘naked DSL’’ means you sell someone DSL with—on a standalone basis. They require you to buy their voice service when you

get DSL. Well, why would any consumer buy two voice services?

How is VoIP going to compete when all of the DSL lines in their

service territory require that—you to buy their voice service? And

of course, the cable operators won’t guarantee VoIP service’s quality of service. All VoIP service providers will be subject to the discriminatory practices of the network owners.

This is not competition. This is a crummy duopoly. In order to

get VoIP, you have to have broadband. 70 percent of the people in

this country don’t have broadband. So in order to get VoIP, they

would have to double or triple their phone bills. That is not competition. That is what in business we call a crummy duopoly.

So from our point of view, the steps to reforming this industry

are quite clear. The box, so to speak, that Mr. Buyer talked about,

has to be built with certain fundamental principles. One, nondiscrimination in the access to the networks. That has been a principle of communications in this country since its founding. Two, access charge reform so there are no price squeezes. Three, community wireless, community services so that when, in fact, some communities aren’t served, they can engage in some self-help. And

community wireless is actually significantly less expensive than the

services that these entities are rolling out.

Meaningful universal service, the way the FCC has treated

broadband, it will not be eligible for any support under universal

service, because it is not a telecommunications service. That is a

disaster for rural America. That is a disaster for low-income America, because the base of funds to support a ubiquitous affordable

network will be destroyed. So yes, there is a way to reform this industry. But what we must not allow to happen is the thin competition between a couple of facility owners to destroy the vigorous

competition we have had at the level of applications.

And finally, the worst shell game you have heard today was the

promise that this is the next merger that will unleash competition.

We have been coming up here for 8 years. Each year, another

merger, another promise. ‘‘This is the one that will get me competition.’’ And maybe there will be a new competitor in 2009 or 2010.

The simple fact of the matter is that Congress adopted a bad law

and has bought a bill of goods from entities who have now reconstituted the Bell operating system.

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1The Consumer Federation of America is the nation’s largest consumer advocacy group, composed of over 280 state and local affiliates representing consumer, senior, citizen, low-income,

labor, farm, public power an cooperative organizations, with more than 50 million individual

members. 2 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws

of the state of New York to Provide consumers with information, education and counsel about

good, services, health and personal finance, and to initiate and cooperate with individual and

group efforts to maintain and enhance the quality of life for consumers. Consumers Union’s income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union’s own

product testing, Consumer Reports with more than 4 million paid circulation, regularly, carries

articles on health, product safety, marketplace economics and legislative, judicial and regulatory

actions which affect consumer welfare. Consumers Union’s publications carry no advertising and

receive no commercial support. 3 I am making available to the committee for the record several studies prepared by our organizations in the past year that document how anticompetitive behavior and regulatory failures

made it impossible to develop the vigorous competition that Congress hoped for in the 1996

Telecommunications Act. 4 Yang, Catherine, ‘‘Behind in Broadband,’’ Business Week, September 6, 2004

Thank you.

[The prepared statement of Mark N. Cooper follows:]

PREPARED STATEMENT OF MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER

FEDERATION OF AMERICA ON BEHALF OF THE CONSUMER FEDERATION OF AMERICA

AND CONSUMERS UNION

SUMMARY

The recent wave of proposed mergers in the telecommunications industry—SBC

attempting to gobble up AT&T, and Verizon trying to swallow MCI—mark the ultimate demise of the era in which consumers could expect more and more choices and

lower prices for local, long distance, wireless, and new Internet-based services exploding on the market.

The Consumer Federation of America (CFA) 1 and Consumers Union 2 believe that

the drumbeat of consolidation and ill-conceived regulatory policies have already undermined consumers’ greatest hopes for ongoing and expanding competition. If not

rejected or dramatically altered, these mergers could set the marketplace back to

a world more akin to monopoly than competition.3

OVERVIEW OF THE INDUSTRY

The Failure of Vigorous Competition for Residential Customers

We urge you to ponder the following anecdote from the computer world, which

demonstrates the level of competition consumers would like to see in the telecommunications sector—particularly the increasingly consolidated wireless and

wireline industries. When asked about whether his company would buy another

computer manufacturer, Michael Dell is reported to have said: ‘‘I like to acquire my

competitors one customer at a time.’’ That competitive ethic simply never took hold

among the Regional Bell Operating Companies (RBOCs).

Instead of entering one another’s service territories and competing to win customers in a new location, our nation’s largest telecommunications companies chose

to merge and buy each other up. As the companies acquired a larger and larger footprint, it became harder and harder for new entrants to gain a toehold in the market.

The proposed SBC-AT&T and Verizon-MCI mergers, if approved, will be the final

nails in the coffin of the local competition experiment the Congress launched in the

1996 Act.

The residential consumer today is faced with at most only two facility-based alternatives—the local telephone and cable companies. These two form what Business

Week has called a ‘‘crummy duopoly.’’ 4 They do not compete vigorously on price or

innovate. They are more concerned about protecting a core franchise product (phone

or cable services) rather than in competing against the other’s core product through

lower price or better quality. Because their prime profit-maximizing customer base

consists of upper-income households that purchase many telecom and video services,

they tend to offer high-priced bundles of services that the majority of consumers either do not want or cannot afford. As a result, to get a variety of good marketplace

choices and prices, consumers must buy extra services—DSL tied to local phone

service, or cable modem service tied to a cable video package or cable Internet ServVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6621 99902.TXT HCOM1 PsN: HCOM1
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5 A Nation Online, (Washington, D.C.: National Telecommunications Information Administration, September 2004), Current Population Survey Data Base, for subscription to specific services. Zimmerman, Paul R., Reference Book of Rates, Price Indices, and Household Expenditures

for Telephone Service (Washington, D.C.: Industry Analysis and Technology Division, Wireline

Competition Bureau, Federal Communications Commission) for local and long distance bills.

Bundle prices are from visits to web sites of major carriers. Comparisons based on average basic

local plus average long distance. Cable modem service costs about $45 per month. DSL service

costs about $30. However, the local phone companies serving 85 percent of the nation require

DSL customers to also take voice, making the basic connectivity costs for a high speed line that

will support VOIP even more expensive. UNE Fact Report 2004, Prepared for and Submitted

by BellSouth, SBC, Qwest, and Verizon, In the Matter of Unbundled Access to Network Elements,

Review of Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, WC Docket No. 04-313, CC Docket No. 01-338, October 2004. Federal Communications Commission, Reference Book of Rates, Price Indices, and Household Expenditures for Telephone Service, 2004. 6Federal Communications Commission, Local Telephone Competition: Status as of June 31,

2004, December 2004, Tables 6, 11, show this figure at just over 80 percent of SBC and just

under 80 percent for Verizon. This is prior to the impact of the UNE-P decision. 7Precursor, Telecom Vital Statistics: Pillars of the Bell 2005 Competitive Respite Thesis, January 24, 2005, put Verizon and SBC long distance market shares at close to 40 percent at yearend 2004, and predicted a gain of another 10 percent, without the mergers. AT&T and MCI national market shares were approximately 30 percent and 20 percent, respectively, as reported

in Industry Analysis and Technology Division, Trends in Telephone Service (Washington, D.C.:

Federal Communications Commission, May 2004), p. 9-5. Because of their respective geographic

foci, the in-region market share of the long distance companies being acquired respectively is

likely to be higher than the national average. Thus, a 70 percent residential market share is

a cautious estimate. 8 Consumer Federation of America and Consumers Union, Letter to Chairman Michael Powell,

September 16, 2004. 9See Cooper, Mark, The Public Interest in Open Communications Network (Washington, D.C.:

Consumer Federation Of America, July 2004), Chapter IV, for a discussion of past anticompetitive practices of telephone companies against CLEC and ISPs. For a discussion of the problem

of vertical leverage against intermodal competitors see ‘‘Petition to Deny of Consumer Federation of America and Consumers Union,’’ In the Matter of Application for the Transfer of Control

of Licenses and Authorizations from AT&T Wireless Services Inc., and Its Subsidiaries to

Cingular Wireless Corporation, WT Docket No. 04-70, May 3, 2004 and ‘‘Reply of Consumer Federation of America and Consumers Union,’’ In the Matter of Application for the Transfer of Control of Licenses and Authorizations from AT&T Wireless Services Inc., and Its Subsidiaries to

Cingular Wireless Corporation, WT Docket No. 04-70, May 20, 2004. 10On a national average basis, cable has just under an 80 percent share of the MVPD market

(see Federal Communications Commission, In the Matter of Annual Assessment of the Status of

Competition in the Market for the Delivery of Video Programming, Eleventh Annual Report MB

Docket No. 04-227, February 4, 2005, Table B-3). Since the market share of head-to-head cable

competitors (overbuilders) is only about 1 percent (Eleventh Annual Report, pp. 48-49), the cable

market share is certainly greater than 75 percent. Moreover, the competitive overlap between

cable and satellite is not perfect, with satellite still having a substantial rural base. Thus, on

a market-by-market basis, cable’s market share may be over 80 percent. 11Federal Communications Commission, High-Speed Services for Internet Access, June 30,

2004, Table 4. 12The vertical problem in the cable video and high speed Internet markets are discussed in

Cooper, Mark, Cable Mergers and Monopolies: Market Power in Digital Communications Networks (Washington, D.C.: Economic Policy Institute, 2002), Chapters 4 and 5; see also The Public Interest in Open Communications Networks, Chapter IV.

ice Provider (ISP). In order to get the benefits of this ‘‘bundle-only’’ competition, the

average household must double or triple its spending.5

At the end of the day, the Bell behemoths will have reconstituted and extended

a dominant ‘‘Ma Bell-type’’ company in their service areas. They will have about a

90 percent market share in residential local wireline,6 70 percent in long distance,7

and 40-50 percent in wireless.8 They will have the incentive and opportunity to discriminate by using a price squeeze against competitors (both ISPs and telephone

service providers, TSPs) that need access to the local or interstate long-haul networks.9 If these mergers are not blocked or substantially altered by the Antitrust

Division of the Department of Justice (DOJ) and the Federal Communications Commission (FCC), these so called Baby Bells will become regional Behemoth Bells that

swallowed up their original parent company (AT&T) and its main competitor (MCI),

leaving consumers almost no better off than they were before the old Bell monopoly

was originally demolished.

Making matters worse, the cable industry is dominated by behemoths as well.

What’s more, cable’s two largest companies—Comcast and Time Warner—are

threatening to become even larger with an acquisition of the Adelphia properties.

The average cable operator has over a 75 percent market share in video 10 and over

an 80 percent market share in advanced services for high speed Internet.11 They too

have an incentive to discriminate against ISPs and TSPs.12

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13 Cooper, Mark, Stonewalling Local Competition: The Baby Bell Strategy to Subvert the Telecommunications Act of 1996 (Consumer Federation of America, January 1998); Competition At

The Crossroads: Can Public Utility Commissions Save Local Phone Competition? (Consumer

Federation of America, October 7, 2003) 14 Cooper, Mark, The Consumer Case Against the SBC-Ameritech Merger (Consumer Federation, et. al, January 20, 1999) 15See note 6 above.

Administrative and Congressional Action That is Needed to Protect Consumers

The proposed telecommunications mergers would lead to such high levels of concentration that we believe the antitrust and regulatory authorities should not allow

them to proceed without imposing extensive nondiscrimination requirements and requiring substantial divestitures of assets to restore competition in numerous in-region markets dominated by SBC and Verizon. These mergers must not be allowed

to proceed until public policy ensures that these companies will not have the opportunity to squeeze out their competitors through inflated access charges or other

anti-competitive practices.

However, even if regulatory and antitrust authorities diminish the anticompetitive effect of these two mergers, the vigorous competition Congress had envisioned

during passage of the 1996 Telecom Act has failed to materialize. Congress must

take action to correct fundamental errors in the FCC’s implementation of the Act.

Congress must restore the obligation of nondiscriminatory interconnection and

carriage that the FCC has abandoned. Communities must be allowed to meet the

needs of their citizens to ensure ubiquitous, affordable service. This would also

0ensure that communities have the right to jump-start competition by providing

telecommunications services. Policymakers must expand the availability of unlicensed use of the spectrum so that entrepreneurs and citizens are no longer dependent upon monopoly networks to expand competition across all telecommunications

and media services. And Congress must reaffirm the goal of universal service, taking action to bring affordable telephone and broadband services to all citizens.

THE REINTEGRATION AND RECONSOLIDATION OF THE TELECOMMUNICATIONS INDUSTRY

Today, RBOCs claim that they are no longer monopolies and face substantial competition within the wireline market and from cross-technology competitors. This is

not even the case today, pre-merger. If there is even further consolidation in the

market, the problem will only grow worse for consumers.

Local Voice Competition

Those who point to competitive local exchange carriers (CLECs) as the source of

competition had better look again. SBC and Verizon have litigated, stymied, and

strangled local voice competition until it has almost completely withered, and the

CLECs that were supposed to offer so much competition to the dominating Bells are

dying in droves.13 Born as local monopolies, the RBOCs have remained anti-competitive to the core. Once the 1996 Act was signed into law, the RBOCs immediately

set out to bulk up their local monopolies into regional monopolies through mergers

and acquisitions. In the end, they never competed in one another’s regions as envisioned by Congress.

There was a moment, however, soon after the 1996 Act passed when these

telecom giants were considering whether to take on one another. Instead of growing

by competing, however, they decided to do the opposite—to expand by merging,

bringing more consolidation to the industry and less competition. Rather than earning an out-of-region market share one customer at a time, the way that Michael Dell

had envisioned, the RBOCs decided to buy the entire out-of-region market, to create

a bigger footprint. Verizon dominated the Northeast through the merger of Bell Atlantic and NYNEX and added to its heft with the acquisition of GTE. Texas-based

SBC dominated the middle of the country as a result of its acquisition of Ameritech

and held outposts on the coasts, with its acquisition of Pacific Telesis and Southern

New England Telephone.

Even when they promised to compete out of region, as a quid pro quo, as in SBC’s

‘‘national local strategy’’ pledge in the Ameritech merger, they never did.14 It was

(and remains) always the next merger that should unleash competition, but it never

does. Only in the fantasy world of industry-funded think tanks do we get competition without competitors.

And in the residential market, SBC and Verizon today have about an 80 percent

market share,15 and that number will go up as a result of the latest acquisitions

and the decision of the FCC to eliminate unbundled network element platforms

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16Facilities-based competition accounted for only about one-fifth of total competition (Local

Competition, Table 10). Most of this competition was in the medium or large business market. 17Local Competition, Tables 6 and 11. 18Matt Richtel, ‘‘Valuing MCI in an Industry Awash in Questions,’’ New York Times, February

2, 2005, C-4, puts AT&T’s national market share for the ‘‘corporate telecommunications market’’

at 15 percent and MCI’s at 12 percent. 19The fact that the geographic overlap of assets is more concentrated in specific regions and

products than the national average has been noted in the press accounts of the proposed mergers. Almar Latour and Dennis K. Berman, ‘‘Qwest Presses Its Bid for MCI,’’ Wall Street Journal,

February 4, 2005, C-4, the Wall Street Journal described Verizon and MCI as follows: ‘‘A tieup between Verizon and MCI also could fact cultural challenges: The companies have been fierce

competitors and have been at loggerheads in court.’’ The map accompanying Matt Richtel, ‘‘Valuing MCI in an Industry Awash in Questions,’’ New York Times, February 2, 2005, C-4, shows

a concentration of MCI data centers in the Northeast. 20See note 7 above. 21 Cooper, Mark, Expanding the Digital Divide and Falling Behind in Broadband Falling Behind in Broadband, (Consumer Federation of America and Consumers Union, October 2004),

shows that penetration of the Internet into homes has stalled below 60 percent, while just over

half of all Internet households have broadband. 22 ‘‘Comments Of Consumer Federation Of America and Consumers Union,’’ In The Matter Of

IP-Enabled Services, Petition Of SBC Communications Inc. For Forbearance, Before The Federal

Communications Commission, WC Docket No. 04-29, 04-36, July 14, 2004. 23 Reference Book of Rates, Table 1.6.

tors—relied on to compete.16 By buying up their largest competitors and eliminating

UNE-P, the market share of these two behemoths will likely exceed 90 percent in

the residential sector.

The big business service market, known as the ‘‘enterprise’’ market in the industry, appears to be only barely more competitive. On average, these two companies

have about a 75 percent market share for medium and large business lines.17 These

two proposed mergers, if allowed to go through, will increase this market share substantially. Because AT&T and MCI are the largest players in the enterprise market

and because of the geographic patterns of competition, the in-region market shares

of SBC and Verizon in the enterprise market for voice would rise to the mid-80 percent range.18 These regional fortresses would also anchor their dominance of national corporate accounts.

Given this increasingly consolidated market for landline services, and especially

considering the demise of the CLECs, it is critical for policymakers to consider the

geographic distribution of the SBC and Verizon markets when analyzing these two

mergers. MCI had its most intense competitive presence in Verizon’s service territory; the MCI-Verizon merger will eliminate Verizon’s most vigorous in-region competitor.19 The situation with SBC ‘‘AT&T is similar. AT&T has a large presence in

SBC’s service territory. If these mergers go through, SBC and Verizon will effectively be buying market power to eliminate their strongest in-region competitors.

The market is concentrated enough now; these mergers would make it much more

so.

Long Distance

SBC and Verizon have run a brutal bait-and-switch game with long distance service. After having been allowed to re-enter the long-distance market because policymakers determined local markets were open—a finding that was overwhelmingly

based on the availability of UNE-Ps—they launched a vigorous campaign to eliminate the availability of UNE-Ps. SBC and Verizon’s gambit was a success and, as

expected, the competition is drying up.

The two corporations each already has about a 40 percent market share in the

residential long-distance market within their regions, but if this merger is approved,

this will increase substantially to an estimated 70 percent.20 This is, of course, well

above the threshold where antitrust authorities become concerned about the abuse

of market power. Once again, this merger would further concentrate and alreadytoo-concentrated market.

Voice Over Internet Protocol (VoIP)

Given that 70 percent of households don’t have broadband service and therefore

cannot take advantage of Voice over Internet Protocol (VoIP) calling,21 which requires such a connection, VoIP is not an effective competitor to the traditional

landline. It is one thing for big-spending residential customers to consider VoIP as

an alternative, notwithstanding its lower reliability (because it does not run when

the power goes out) and lack of a fully functional E-911 service.22 It is quite another

to expect those families who pay an average $25 per month 23 for local service to

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24These prices are based on web site visits, exclusive of short term promotions. 25 ‘‘Petition to Deny’’ and ‘‘Reply Comments,’’ see note 9 above. 26Letter to Michael Powell, September 16, 2004. 27See Cable Mergers and Monopolies, note 12 above, and ‘‘Petition to Deny’’ and ‘‘Reply Comments,’’ note 9 above.

pay another $30-$50 for broadband in order to have access to VoIP, which costs another $25-$30.24

Making matters worse, SBC and Verizon also use an anti-competitive bundling

tactic to ensure that VoIP can never effectively compete with their basic local voice

services. Neither Verizon nor SBC will sell a consumer DSL on a stand-alone basis,

what is known as ‘‘naked’’ DSL. Both force consumers to buy their voice service in

order to get a DSL line. So a consumer who wants to buy VoIP from a competitor

has to pay for local service twice.

While they cite VoIP as a competitive threat, SBC and Verizon are seeking to be

excused from the obligation to allow VoIP service providers to have access to the

underlying telecommunications network in a just, reasonable, and nondiscriminatory manner. They will do to these unaffiliated telephone service providers

(TSPs) exactly what they did to CLECs and what the cable modem operators did

to ISPs—foreclose, discriminate, and delay until they wither and die.

Ironically, when AT&T and MCI exited or pulled back from local competition as

a result of the FCC’s decision to eliminate UNE-P, they both declared that they

would look to VoIP as an alternative approach to putting the bundle of local and

long distance together. These mergers, if approved, will remove the two largest potential VoIP competitors from the market where they are needed most—in the home

service territories of the two largest RBOCs. AT&T will no longer exist to compete

against SBC’s wireline business in SBC’s service territory. The same holds for MCI,

which will no longer compete against Verizon’s wireline business in Verizon’s service

territory.

Wireless

Two critical factors limit the ability of wireless services to effectively compete with

wireline. First, even with a big bundle, wireless costs about ten cents a minute for

the typical pattern of use of local calls, five times as much, on a per-minute basis,

as local flat-rate dialtone, which is the staple of local service. Wireless is also less

reliable than wireline and still does not have 100 percent access to the E-911 system. Second, Cingular and Verizon Wireless, the nation’s two largest cell phone

companies, are owned by two large RBOCs—SBC (with BellSouth) and Verizon, respectively—and therefore have little incentive to compete with their own wireline

business.25 Through mergers and acquisitions, as well as their brand name prominence, SBC and Verizon are each the leading wireless supplier within their local

RBOC market.26

Backbone Services

These mergers also pose severe problems because they would increase the vertical

integration of assets (i.e., when a firm owns the inputs into the process, making it

that much more difficult for competitors to get those inputs). AT&T and MCI are

large providers of Internet and interstate transport (backbone). As independent companies, their interest is in maximizing traffic. SBC and Verizon are larger purchasers of Internet and interstate backbone services. As unaffiliated buyers, they

make up a large portion of the market. From a competition standpoint, it is important to keep SBC and Verizon, which need the Internet and interstate backbone

services as inputs, separate from AT&T and MCI, which provide this critical input.

Otherwise, SBC’s and Verizon’s competitors will have difficulty gaining this input

and are more likely to go out of business.27

The result of these proposed mergers—called ‘‘upstream integration’’ in the parlance of economics—would therefore likely have a dramatic impact on the rest of

market for Internet and interstate backbone traffic. SBC and Verizon would have

an incentive to abuse their control over those assets to diminish competition for

their retail businesses, rather than maximize the revenue flowing over those assets.

As a vertically integrated entity, both of the resulting behemoth companies would

have an incentive to maximize profits by using their leverage in the form of a price

squeeze. Unfortunately, the opportunity to run a classic price squeeze will be readily

available in the form of excessive access charges. The RBOCs have been overcharging for access, particularly special access that was prematurely deregulated by

the FCC. AT&T and MCI were the leading critics of the access charge system.

Should these mergers go through, those who profit from those overcharges will have

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28 Cooper, Mark, The Failure of ‘‘Intermodal Competition in Cable and Communications Markets (Consumer Federation of America and Consumers Union, April, 2002). 29See note 10 above. 30See note 11 above. 31Scovill, Kim Robert, ‘‘Cable/Telephony IP Network Basics and the Relationship to Comcast

Digital Voice,’’ Pennsylvania Public Utility Law Conference, PBI NO. 2005—3354, Vol. III, p.

433. 32Public Interest in Open Communications, Chapter IV.

sumers. These mergers should not be allowed to proceed until access charges are

reformed.

This prediction is no paranoid delusion, but the logical extension of SBC and

Verizon’s current activities. In Court cases like Brand X, regulatory proceedings

such as the wireline proceeding, and petitions to the FCC including those Bell

South, Verizon and SBC, SBC and Verizon both support the elimination of the obligation to interconnect and carry traffic on just, reasonable, and nondiscriminatory

rates terms and conditions. They are buying the assets that provide critical inputs

for their competitors, but at the same time they are seeking the right to discriminate against those competitors. These mergers would undoubtedly exacerbate the

price-inflating, anti-competitive dangers that already exist in today’s market.

Intermodal Competition

Intermodal competition is also limited, with a ‘‘crummy duopoly’’ an ineffective

base of competition, and it is not substantial enough to protect the public from

abuse. For evidence, just look at a parallel industry—cable—where operators were

also born as monopolists and have faced only limited competition from satellite.28

Not surprisingly, they have remained anti-competitive to the core in order to maximize their profits.

Cable prices have been unaffected by intermodal competition from satellite (which

lacks the capacity to deliver high-speed Internet, a critically-valued bundled product, particularly among the desirable high-income customers). Since the passage of

the 1996 Act, the average monthly cable bill has more than doubled. Consumers are

offered almost the very same type of choice they were nine years ago: take the bundle, switch to a similarly high-priced satellite alternative, or live without a decent

package of television programming.

Cable operators continue to have a market share in the 75 percent range in the

multi-channel (MVPD) market 29—well above the minimum threshold level to count

as a monopoly under antitrust law. Their high-speed Internet market-share in the

residential sector is also in the same range.30 In fact, when one looks at what the

FCC calls ‘‘advanced services’’ (those with at least 200k in both directions), cable

has over an 80 percent market share.

Cable companies bundle their services in a brutally anti-consumer and anti-competitive fashion. They discriminate against unaffiliated VoIP service providers, reserving for themselves quality-of-service guarantees, while relegating others to best

effort delivery of voice traffic.31 They force consumers to pay for their affiliated ISP

and foreclose competition for Internet access services.32 This has the effect of undermining ISP competition over the cable wire/platform. They create a virtual tie between the provision of video and Internet service. Consumers who only want to buy

cable modem service are charged $55 to $60, but for those who buy the underlying

cable service, the price is lower—$40 to $45 dollars.

This anticompetitive strategy substantially weakens satellite’s ability to compete

with cable. Moreover, cable companies bundle video programming and use it as

lever to exclude competition (directly by refusing to sell programming they own and

distribute through coaxial cable/fiber optic lines and indirectly where they can leverage their power over distribution to deny competitors unaffiliated programming).

Unfortunately, the telecommunications industry looks like it is headed in the direction of cable. SBC and Verizon are scrambling to put together their own bundles.

To do so, they want to be excused from the public interest obligations of video service providers, such as community-wide buildout and local access channels. For example, in one of the most outrageous examples of corporate chutzpah in recent

years, SBC and Verizon are seeking to be excused from serving ‘‘undesirable customers’’ and simultaneously seeking to prevent local governments from serving

those very same customers. This is redlining taken to a new level; ‘‘we won’t serve

these customer and you cannot.’’

THE ECONOMIC AND SOCIAL CONSEQUENCE OF THE FAILURE OF TELECOM COMPETITION

The ‘‘crummy duopoly’’ that now confronts residential customers—a cable wire

centered on defending its franchise video market and a telephone wire centered on

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33 Expanding the Digital Divide. 34To quote Michael Powell’s exact words: ‘‘I think the term [‘‘digital divide’’] sometimes is dangerous in the sense that it suggests that the minute a new and innovative technology is introduced in the market, there is a divide unless it is equitably distributed among every part of

society, and that is just an unreal understanding of an American capitalist system . . . I think

there’s a Mercedes Benz divide, I’d like one, but I can’t afford it... I’m not meaning to be completely flip about this—I think its an important social issue—it shouldn’t be used to justify the

notion of, essentially, the socialization of deployment of infrastructure 35 Expanding the Digital Divide.

defending its franchise voice product—simply will not serve the public or the nation

well, especially if these two wire owners are excused from the obligations of nondiscriminatory interconnection and carriage. The vigorous competition that we have

enjoyed in the applications marketplace created by the Internet is being strangled.

Regulators have allowed feeble facilities-based competition to strangle vigorous applications-based competition, and antitrust authorities have allowed huge cross-platform, vertically integrated behemoths to dominate the telecommunications marketplace.

Policymakers have made a gigantic public policy mistake, and all of us are paying

a huge economic price for it. The United States has slipped from third in the world

in broadband to fifteenth.33 Americans pay more on a megabit basis for broadband

than a dozen countries around the world, and the explanation is not population density or government subsidies; rather, it is the lack of competition and the abuse of

vertical market power. With lagging penetration, innovation in the applications

layer has gone abroad. Jobs follow the exit of innovation.

Moreover, the digital divide that FCC Chairman Michael Powell belittled in his

first press conference as a ‘‘Mercedes Benz divide’’ 34 has substantially worsened

during his tenure. Penetration of the Internet in households has stagnated. Half of

all households with incomes above $75,000 per year have broadband; half of all

households below $30,000 do not even have the dial-up Internet at home.35 Black

and Hispanic households are particularly hard hit by Chairman Powell’s ‘‘Mercedes

Benz’’ divide; white households are fifty percent more likely that Black or Hispanic

households to have Internet access at home and twice as likely to have high speed

access. The false characterization of the ever-increasing digital divide as a ‘‘Mercedes

Benz’’ divide highlights the reason why the bundled quadruple-play (local phone,

long-distance/wireless, video and broadband) competition that the cable and telcos

are pushing does not do the average consumer any good. There is little competition

for voice, video, and high-speed Internet. Three-quarters of Americans do not have

high-speed Internet access, so they can’t benefit from VoIP. In order to get the ‘‘benefit’’ of intermodal competition the average American household has to double or triple its monthly bill.

THE POLITICAL LANDSCAPE

Policymakers and authorities in various arenas and at all levels of government

could take action to alleviate some of these concerns. Here is a preview of what lies

ahead:

The Supreme Court’s review of the Brand X case has the potential finally to press

the FCC to restore the obligation of nondiscrimination in interconnection and carriage. The 9th Circuit Court of Appeals held, properly in our view, that the advanced telecommunications services offered by cable operators to the public are telecommunications services and therefore are subject to regulation and open access.

The 9th Circuit decision might have finally persuaded the FCC to enforce the obligation for nondiscrimination on the advanced telecommunications networks of the 21st

century. Even if the Supreme Court upholds the Ninth Circuit, the FCC seems determined to go in the opposite direction, which the Congress should not allow.

We hope the Department of Justice and the FCC will understand the brutally

anticompetitive in-region impact of the SBC-AT&T and Verizon-MCI mergers and

order large-scale divestitures of long distance/backbone capacity and impose nondiscrimination/fair access charge requirements as they review the mergers. Unfortunately, this is an equally unlikely outcome.

On the state front, we hope state legislatures will resist the efforts by the RBOCs

to completely deregulate basic phone service based on the smoke and mirrors of

competition from wireless—owned by the very same Behemoth Bell—and from

VoIP—available only to those households that can afford broadband and only if the

cable and telephone behemoths do not strangle VoIP competitors with discrimination and price squeezes. As important, state legislatures must stop RBOC-led campaigns to prevent local communities from meeting the needs of their citizens, by

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banning community Internet systems. There are tough fights brewing all across the

country and the outcome is up in the air.

THE ROLE OF CONGRESS: THE TELECOM ACT REVISITED

Given the troubling track record of the regulatory authorities and the behavior

of these two ‘‘crummy duopolists,’’ it is imperative that in its review of the Telecommunications Act of 1996, Congress takes a critical look at the communications

landscape.

This time, Congress will have to restructure the landscape to ensure the existence

of competitive markets and provide as little room as possible for the FCC to flaunt

the will of the Congress. This will be even more important if the telecommunications

market becomes even more concentrated through the approval of the proposed mergers. At the very least, Congress will have to address the following issues to even

begin to create a semblance of competition.

Nondiscriminatory Interconnection and Carriage

Congress must clearly establish that the obligation to provide nondiscriminatory

access to the means of communications, which has been part of our national and

cultural heritage for centuries, is inviolable. The tried and true principle of nondiscrimination is clearly stated in the Act

All charges, practices, classifications, and regulation for and in conjunction with

such service, shall be just and reasonable . . . It shall be unlawful . . . to make any

unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities or services for or in connection with like communications

service, directly or indirectly, by any means or device, or to make or give any

undue or unreasonable preference or advantage to any particular person, class

of persons, or locality or to subject any particular person, class of persons, or

locality to any undue or unreasonable prejudice or disadvantage.

This sounds good to consumers. Congress defined telecommunications service providers clearly in the 1996, regardless of the facility used. The FCC ignored this

language and invented a new definition to let cable operators escape form the obligation of nondiscrimination. It is seeking to let the telephone companies evade the

obligations as well. Just as the Congress recently took away the authority of the

FCC to set the cap on national broadcast ownership, Congress should remove from

the FCC the ability to abrogate the most basic right of nondiscriminatory treatment.

Community Access to the Public Airwaves

Congress must reaffirm the interconnected principles of community-based provision of local services, which has been part of our heritage since the founding of the

Republic, and public ownership of the airwaves, which has been recognized for almost eighty years. When Congress says that ‘‘any entity’’ should be allowed to provide communications services, it should mean any entity, not just the ones the Bell

or cable behemoth want.

Unlicensed use of the spectrum, which is the transmission medium that supports

Wifi and community Internet applications, must be expanded. The practice of licensing the public’s spectrum for exclusive use by a single entity was adopted as an expedient, second-best solution eighty years ago in a response to weak technologies

that could not handle interference well. Technological progress over the past century

has rendered this expedient, second-best solution unnecessary. Allowing unlicensed

use of the spectrum by all citizens subject to simple rules of noninterference is far

more deregulatory and pro-competitive than the status quo and serves the aspiration of the First Amendment to ensure ‘‘the widest possible dissemination of information form diverse and antagonistic voices’’ far better than the current regime of

exclusive licenses.

Universal Service

Congress must give much more precise meaning to the goal of universal service,

which has been the cornerstone of the communications marketplace for seventy

years. The Act has

the purpose of regulating interstate and foreign commerce in communications

by wire and radio so as to make available, so far as possible, to all people of

the United States, without discrimination on the basis of race, color, religion,

national origin or sex, a rapid, efficient, nationwide and worldwide wire and

radio communications service with adequate facilities at reasonable changes.

More specifically, it set forth the following requirement:

Consumers in all regions of the Nation including low-income consumers and

those in rural, insular, and high cost areas, should have access to telecommunications and information services, including interexchange services and advanced

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36 ‘‘Brief for the Respondents States and Consumer Groups in Opposition to Petitioners,’’ National Cable & Telecommunications Association, et. al. v. Brand X, Nos. 04-277 & 04-281.

telecommunications and information services, that are reasonably comparable to

those services provided in urban areas and that are available at rates that are

reasonably comparable to rates charged for similar services in urban areas.

The FCC must be required to take this goal seriously and not cut advanced telecommunications services off from universal service by misclassifying them as information services.36 A Mercedes Benz divide has nothing to do with today’s problem

of affordable telephone and high-speed Internet services.

Sometimes traditional values are the best. The balance that this nation struck between private investment and public obligations has worked remarkably well since

the founding of the republic. We need to return to those basic principles.

Mr. MURPHY. I thank the gentleman.

Mr. Halpern, welcome.

STATEMENT OF JEFFREY HALPERN

Mr. HALPERN. Thank you, Mr. Chairman and members of the

committee, and thank you for inviting me to testify on the future

of the telecomm industry at this exciting time in its development.

I am Jeff Halpern, Senior Equity Research Analyst at Sanford C.

Bernstein covering U.S. Telecomm. And those not familiar with

Bernstein, we are the oldest and one of the best respected independent equity research firms.

To keep Bernstein’s lawyers happy and the SEC, I have to submit that—for the written record, a set of disclosures relative to the

business we do with the companies we have discussed.

Mr. MURPHY. By unanimous consent, so ordered and put in as

part of the record.

[The information appears at the end of the hearing.]

Mr. HALPERN. Thank you.

In the interest of brevity, I have organized my prepared remarks

this morning into three parts.

The first is the impact of consolidation on mass-market wireline

customers. The second is the impact on enterprise customers. And

third is the impact on the wireless segment.

I have also submitted for the public record, several pieces of research that I have authored over the past 2 years that directly address a few of the topics I will discuss.

Looking at the consumer and small business wireline services

segment, I see no immediate risk to the competitiveness of the

market from the proposed mergers. Specifically, the consumer and

small business market can be divided into three competitive fronts:

the Bells, who today dominate the retail voice services market; the

large interexchange carriers, who have built positions competing on

wholesale connections, as we have heard about; and the cable

multi-system operators, who have the strongest positions in multichannel video and broadband data.

Within the past year, the changes in the regulatory landscape

surrounding wholesale competition have fatally eroded the economics for the wholesale competitors, like AT&T and MCI, in the mass

consumer and small business markets. These changes led both

companies to announce their withdrawal from active customer acquisition or attention long before the proposed mergers were negotiated. This competitive capitulation, however, occurred at the

same time that technological advances supporting the carriage of

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voice services over broadband connections has emerged. This capability is generically referred to, as we have heard, as Voice-over IP,

or VoIP. By our estimates, over the next 5 years, the cable MSOs,

the leading facilities-based providers for consumer VoIP services,

as a group, will win at least as much share of the consumer primary connections as the Bells lost over the past 5 years to wholesale competitors. And importantly, the MSOs will compete against

the Bells with far more favorable marginal economics than the

wholesale competitors had. Therefore, we believe it is very reasonable to believe that—to expect that despite the withdrawal either

organically or through consolidation of AT&T and MCI from this

space, that voice prices in the future will fall at least as rapidly as

they did over the past 5 years. And for comparison, that is about

7 to 8-percent on average for a bundled local and long distance line.

Thus while the Bells are proposing to buy their largest consumer

market competitors, we would note that those same companies are

doing nothing to pursue new customers or retain existing ones and,

thus, do not believe the mergers are inherently bad for consumers

or small business competitors to choice—sorry, small business competition or choice.

Turning to the enterprise market, we would draw the committee’s attention to two reports authored over the past few years in

a series entitled a ‘‘Tough Nut to Crack.’’ This series title attempts

to say it all.

This is a very tough market to enter. Providers competing for

share of the large enterprise in government communication services market must be capable of delivering very high quality of service, provide redundancy, custom solutions, and frequently global

connectivity. In addition, they must have the relationships and the

credibility necessary to convince a customer the size of Citigroup

or the Department of Defense that they can secure, monitor, and

maintain mission critical communications under adverse conditions. To date, the Bells have been scrappy competitors relegated

to the provision of only the most commoditized services. AT&T,

MCI, and Sprint dominate this segment while backbone providers

like Level 3 and Global Crossing, and I might add, about ten others, play price spoilers for basic transport. Absent consolidation,

the four remaining regional Bells would need to spend, as we heard

earlier this morning, my estimate is about $5 billion to $7 billion

at least, over the next 5 years to build their credibility and competency serving this market. In our opinion, for their investment,

the Bells would add relatively little to the innovation in the industry and would likely drive the ultimate demise of AT&T and MCI,

at least over the next 10 years, if not sooner. Thus, while on the

one end I could argue that combining the most likely share gainers,

the Bells, with the incumbents and largest share losers, AT&T and

MCI, is not inherently pro-competitive, it does, in my opinion, simply hasten the ultimate end game, which would have been the

eventual removal of AT&T and MCI from the landscape.

Finally, let me turn to wireless. Wireless is a business built on

a capitalistic investment model, not a regulated monopoly one.

Market forces drive quality and innovation. As evidence, I submit

that T-Mobile and Verizon Wireless, the two carriers that have won

the greatest number of customer satisfaction awards over the past

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several years, have also been the leading share gainers. By comparison, AT&T Wireless and Cingular, which have received the

poorest service marks, have been the largest share losers. As we

look at the impact of consolidation, I would say that so long as the

U.S. is not allowed to devolve into a duopoly market structure in

which the Bells control all of the scale wireless carriers, competition, investment, and innovation should remain robust.

So where does this leave us? My conclusions are four-fold.

First, none of the proposed wireline mergers is intuitively a recipe for higher consumer prices or reduced choice.

Second, the SBC-AT&T and Verizon-MCI combinations will likely

result in modestly greater stability for enterprise service pricing

than we have seen over the past few years, but competitors like

Level 3 will continue to exert downward pressure for less differentiated services.

Third, in wireless, so long as there are three scale competitors

and a handful of smaller players, I would not be overly concerned

about choice pricing and service quality.

And fourth, if there is a concern regarding the longer-term competitiveness of the industry once the cable companies and Bells

achieve a measure of stability in their own consumer market positions, then I would very strongly encourage this committee and the

FCC to jointly focus attention on fostering the development of additional broadband pipes to the home, not, again, shackling the Bell

companies with outdated regulations.

Finally, if I can just set the record straight on something Mr.

Seidenberg said earlier, I have not actually endorsed any combination with MCI but think that both possible combinations, in a

Verizon-MCI and a Quest-MCI combination, both have merit and

both have risks. And I can elaborate at the committee’s pleasure.

And that concludes my prepared remarks.

[The prepared statement of Jeffrey Halpern follows:]

PREPARED STATEMENT OF JEFFREY HALPERN, SENIOR EQUITY RESEARCH ANALYST,

U.S. TELECOMMUNICATION SERVICES, SANFORD C. BERNSTEIN & CO., INC.

Good morning Mr. Chairman and members of the committee and thank you for

inviting me to testify regarding the future of the US telecommunication services industry at this exciting time in its development. I am the Senior Analyst at Sanford

C. Bernstein covering the US Telecommunications industry. For those of you not familiar with Sanford Bernstein, we are the oldest and one of the best respected independent sell-side equity research firms in the industry. We do no investment banking, and thus, have no conflicts on that front. I have, however, submitted for the

written record a full list of relevant disclosures concerning my and my company’s

ownership of and business dealings with the all of the companies we will likely discuss today.

In the interest of brevity, I have organized my prepared comments around the

various wireline customer segments of consumer, small business, and enterprise and

then separately address wireless. I have also submitted for the public record several

pieces of research I have authored over the past two years that directly address a

few of these topics.

CONSUMER & SMALL BUSINESS COMPETITION

Looking at the consumer and small business wireline services marketplace, I see

no immediate risk to the competitiveness of the marketplace from the proposed

mergers. Specifically, the consumer and small business market can be divided into

three competitive fronts: the Bells—who, today, dominate the retail voice services

market; the large interexchange carriers—AT&T, MCI most notably—that have

built positions competing on wholesale connections leased from the Bells; and, the

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cable multi-system operators or MSOs who have the strongest positions in multichannel video services and broadband data.

Within the past year, the changes in the regulatory landscape surrounding wholesale competition due both to FCC and court actions has fatally eroded the economics

for competitors like AT&T and MCI, leading both companies last year to announce

their intention to harvest their positions and to actively do so through the cessation

of advertising and promotional activity. This competitive capitulation, however, has

occurred at the same time that technological advances supporting the carriage of

voice services over broadband connections has emerged. This capability, generically

referred to as Voice over IP, offers those competitors capable of providing or

transiting a broadband connection very favorable economics. By our estimates, over

the next five years the cable MSOs as a group will win at least as much share of

consumer primary connections as the Bells lost over the past five years to wholesale

competitors. And, importantly, the MSOs will compete with the Bells on owned networks not wholesale ones and, thus, will have with far more favorable marginal economics than did the wholesale competitors competing over Unbundled Network Element Platform or UNE-P lines. Thus, it is reasonable to expect that despite the

withdrawal either organically or through consolidation of AT&T and MCI from this

space, that voice prices in the future could fall at least as rapidly as the 7-8% rate

experienced over the past five years. Further supporting this point, I would highlight that where the Bells have already been competing head-to-head against the

cable companies, in the consumer broadband market, prices have fallen on average

over 10% annually—and at times faster—for the past five years. Thus, while the

Bells are proposing to buy their largest consumer market competitors today, we

would note that those same companies are doing nothing to pursue new customers

or retain existing ones and, thus, we do not believe the mergers are inherently bad

for consumer or small business competition so long as the cable companies and, potentially, other facilities-based competitors continue to pursue sales of bundled services.

ENTERPRISE SERVICES COMPETITION

Turning to the enterprise market, we would draw the Committee’s attention to

two reports we authored over the past few years in a series entitled a Tough Nut

to Crack. The title attempts to say it all.

Providers competing for share of the large enterprise and government communication services market must be capable of controlling and delivering high quality of

service on their own networks. In addition, they must be able to provide redundancy, custom solutions and, frequently, global connectivity. And, finally, they must

have deep sales relationships with the customers and the credibility necessary to

convince a customer the size of Citigroup or the Department of Defense that they

can secure, monitor and maintain mission critical communications under adverse

conditions. To date, the Bells have been scrappy competitors relegated to the provision of only the most commoditized services for this customer segment. AT&T, MCI

and Sprint dominate this segment. While backbone providers like Level 3, Global

Crossing play the price spoiler role for basic transport. Absent consolidation, the

four remaining Regional Bells would need to spend between $5 billion and $7 billion

in operating and capital expense over the next five years to build their credibility

and competency serving this market and that investment would not even begin to

cover the buildout of long-haul transport capacity for which each would still need

to contract. In our opinion, for their investment, the Bells would add relatively little

to the innovation in the industry and would likely, over the course of the next five

to ten years, drive the demise of AT&T and MCI. Thus, while on the one hand I

can argue that combining the most likely share gainers (the Bells) with the incumbents and largest share losers (AT&T and MCI) is not pro-competitive, it does, in

my opinion, simply hasten the ultimate end-game which would have been the eventual removal of AT&T and MCI from the landscape.

WIRELESS COMPETITION

Finally, let me turn to wireless. Two years ago, we had six national competitors

fighting aggressively for marketshare. Despite that competition, average monthly

revenue per user didn’t fall. Why? Because demand remained robust and network

differentiation drove price stability. Though I know there has been an outcry for

quality of service regulation for wireless, I would posit for the committee that wireless, a business built on a capitalistic investment model not a regulated monopoly

one, will be far better served allowing market forces to drive quality and innovation

than regulation. As evidence, I submit that T-Mobile and Verizon Wireless, the two

carriers that have won the greatest number of customer satisfaction awards have

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also been the leading share gainers, have high customer loyalty and have shown

some of the strongest average revenue per user trends. By comparison, AT&T Wireless and Cingular which have received the poorest service marks have been the largest share losers among the big-six carriers over the past three years. As we look

at the impact of consolidation, I would say that so long as the US is not allowed

to devolve into a duopoly market structure in which the Bells control all of the scale

wireless carriers, competition, investment and innovation will remain robust.

SUMMARY

So where does this leave us? My conclusions are four fold:

First, none of the proposed wireline mergers is intuitively a recipe for higher consumer prices or reduced choice;

Second, the SBC-AT&T and Verizon-MCI combinations will likely result in modestly greater stability for enterprise service pricing than we have seen over the past

few years but it should also be noted that pricing in that market has been declining

at very unhealthy rates since the bursting of the internet bubble unleashed massive

overcapacity for transport services.

Third, in wireless, so long as there are three scale competitors and a handful of

smaller players, I would not be overly concerned about choice, pricing or service

quality; and,

Fourth, if there is concern regarding the longer-term competitiveness of the industry once the cable MSOs and Bells achieve a measure of stability in their consumer

market positions, then I would encourage this committee and the FCC to jointly

focus attention on fostering the development of additional broadband pipes to the

home not once again shackling the incumbents. Further, given the Bells’ desire to

deploy video services in competition with another former monopoly business, the

cable companies, I would encourage this committee to focus efforts on removing the

outdated roadblocks currently standing in the way of that innovation and competition.

Thank you, again, for the opportunity to share my thoughts.

Mr. MURPHY. Thank you, Mr. Halpern.

We now want to hear from Mr. Jim Speta, who is an associate

professor of the Northwestern University School of Law.

STATEMENT OF JAMES B. SPETA

Mr. SPETA. Thank you, Mr. Chairman.

I am grateful to you and to the committee for the opportunity to

testify on these topics. Telecom’s policy and, in particular, competition policy for the emerging broadband era are the focus of my

scholarship.

Following on the testimony this morning, I don’t want to dwell

on the technological drivers that have changed the communications

marketplace. Increases in bandwidth, in computing power, and in

conversion and transmission protocols have made possible the new

data-centric networks that we have heard about on which application services whether they are voice or video will ride merely as applications. And increasing penetration of these platforms into the

mass market will increase competition in markets where we have

traditionally seen relatively little: basic voice services and basic access services.

I, therefore, want to address the bulk of my comments to what

Congress can do to continue and perhaps even to accelerate the

path of increasing competition, and that is to accomplish fundamental spectrum reform.

The two wireline mergers that we here discussed of AT&T and

SBC and of MCI and Verizon provoke the fear, which have been

variously stated, that mass market consumers will face only two

huge companies, their incumbent local telephone companies and

their cable companies, for all of their communication services. And

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while two is better than one, having only two companies in the

market, is not the ideal of competition.

The best answer to getting a third competitor or a fourth competitor is to get a third platform, get it soon, and that is fundamental

spectrum reform. I do not claim to be able to out-guess the market

as to where telecommunications technology is going, and that is

one thing we should have learned in the last 8 years since the 1996

Act. But we do know that decreasing barriers to entry into wireless

services can allow new technologies to come to market. And we are

seeing glimpses of high-speed wireless data services, vast Internet

access provided by wireless technologies. Incredibly exciting things

are happening in this market. But more spectrum needs to come

to the commercial market for wireless to ensure the entry of new

broadband competitors. And that new spectrum ought to be structured so that companies can use it with whatever new technologies

develop. The Commercial Spectrum Enhancement Act, which was

signed last December, was a step in the right direction. But that

spectrum is likely to be used for premium mobile services, and

most of the services that we heard about this morning are still premium services. Getting more spectrum into the market would allow

truly mass-market data, wireless Internet access services to develop.

In my written testimony, I have described in more detail some

steps Congress should take in spectrum reform, which would increase the competitiveness of the total market.

First, existing licensees ought to be given the fullest opportunity

to introduce new, innovative services, even if that means ceasing

to provide the services originally contemplated by their licenses.

This sort of transition, creative destruction, if you will, is one of the

central engines of this great American economy. And it just following on the technological development that has changed the

structure of the communications marketplace.

Second, the transition to digital television must be completed by

a hard date and soon. The subcommittee recently held a hearing

on this, but the analog TV licenses represent some of the most attractive spectrum for new broadband wireless data services.

Third, legislation should increase incentives for government spectrum users to economize on spectrum to enable more of it to move

to commercial uses.

I have described in my written testimony some other steps that

Congress could take to ensure that the law helps create conditions

for increased competition wherever it may come from. And of

course, the total right of the Communications Act has enormous appeal. The number of us academics are coming together with the

Progress and Freedom Foundation to work on language for a new

digital age communications act, and hopefully, over the summer,

we will have some more to present to the committee on this question.

But even apart from a complete rewrite, spectrum reform can be

the first, most important step. It will create a third platform, and

that third platform can have multiple companies competing with

each other and in competition with cable and telephone companies.

Perhaps equally significantly, wireless can bring true broadband

data services to rural areas and other areas in which there is no

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1See, e.g., James B. Speta, Deregulating Telecommunications in Internet Time, 61 Wash. &

Lee L. Rev. 1063, 1069 (2004) (outlining a ‘‘comprehensive program to substantially increase the

prospects for intermodal competition in local telecommunications services’’ and telecommunications more generally) (also available at http://ssrn.com/abstract=614523); James B. Speta, FCC

Authority To Regulate the Internet: Creating It and Limiting It, 35 Loy. U. Chi. L.J. 15 (2003)

(also available at http://ssrn.com/abstract=490122); James B. Speta, A Common Carrier Apbroadband to address the concerns of a number of the members.

Rural wireless ISPs, while still in relatively few areas, are an

emerging success story that true spectrum reform could accelerate.

As I said, this is an incredibly exciting time. Things are happening in the wireless space, and spectrum reform can be a first

step toward increasing competition in the data-centric world we are

entering.

Thank you.

[The prepared statement of James B. Speta follows:]

PREPARED STATEMENT OF JAMES B. SPETA, ASSOCIATE PROFESSOR, NORTHWESTERN

UNIVERSITY SCHOOL OF LAW

SUMMARY

We are beginning to see in the marketplace the effects of a technological convergence that began in earnest fifteen years ago, with the advent of fiber optics and

digital transmission in long-haul communications networks. Today, developments in

electronic switching, high-capacity transmission, and conversion and computing protocols are having three significant effects on the structure of the communications

marketplace. First, distance is increasingly irrelevant as a matter of economics. Although capital costs still depend on distance, at the margin the transmission of data

is largely insensitive to the distance it travels. Technological and legal distinctions

between ‘‘local’’ and ‘‘long-distance’’ services should increasingly disappear. Second,

transmission platforms are no longer service-specific. ‘‘Services’’—be they voice or

video or newer services—can be provided as applications on any data platform of

sufficient bandwidth. Third, these advances are increasing competition in some markets that have historically seen little. Voice-over-Internet-protocol telephony is allowing cable companies to become more competitive for voice services; but the hype

over VoIP hides the increasing competition that cellular telephony has brought to

traditional telephone services. Similarly, assuming the announced build-outs by the

telephone companies occur, video over IP will be the next stage of marketplace development, and will introduce a substantial new competitor in that domain. The announced mergers between SBC Communications, Inc., and AT&T Corp. and between

Verizon Communications, Inc., and MCI, Inc., reflect many of the changes that technology has brought to the market structure.

Looking to the future of the communications marketplace, several imperatives appear. First, Congress should ensure that competition continues to develop, by creating the conditions necessary to enable new access platforms to challenge those

owned by the telephone and cable companies. Spectrum reform is of utmost importance: wireless could be a third, full-service access platform (with multiple providers

in each market), but more spectrum, with flexible use rules, needs to come into the

commercial market. Second, Congress should ensure that the Federal Communications Commission has adequate authority to preempt state laws that create barriers

to or uncertainty for the development of new communications platforms, such as

wireless and broadband over power line. Third, should it turn to a comprehensive

re-write of the Communications Act, Congress should create a telecommunications

law that is technologically neutral, that links regulatory authority in most regards

to the principles of competition law, and that seeks to pursue social goals such as

universal service through transparent and competitively balanced mechanisms.

INTRODUCTION

I am grateful for the opportunity to testify before the Committee on changes in

telecommunications technology and the changes in the marketplace that technological change has wrought. My testimony here summarizes some of the work that

I have been doing on broadband competition policy and on the need for legislative

action to eliminate legal and economic barriers to the development of additional

competition in the future. 1 The catalysts for this Hearing, the announced mergers

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proach To Internet Interconnection, 54 Fed. Comm. L.J. 225 (2002) (also available at http://

www.law.northwestern.edu/faculty/fulltime/Speta/Speta.html). 2 As of the date of this written testimony, Qwest Communications International, Inc., continues to have a counter-offer pending for MCI, and the foregoing should not be read as a statement about the eventual acquisition of MCI. The two transactions have much in common from

a structural marketplace perspective, however, and do not substantially affect the conclusions

that I offer here. 3Pub. L. 108-494 (signed Dec. 23, 2004).

4See generally Joseph D. Kearney, From the Fall of the Bell System to the Telecommunications

Act: Regulation of Telecommunications under Judge Greene, 50 Hastings L.J. 1395 (1999); Glen

O. Robinson, The Titanic Remembered: AT&T and the Changing World of Telecommunications,

5 Yale J. on Reg. 517 (1988) (reviewing Peter Temin, The Fall of the Bell System). 5See generally Philip J. Weiser, Law and Information Platforms, 1 J. Telecomm. & High Tech.

L. 1 (2002). 6See generally James B. Speta, Policy Levers in Korean Broadband, 5 J. Korean L. 1, 6 (2004)

(noting widespread availability of 20 megabit DSL service in South Korea, by contrast to typical

1.5 megabit service in the U.S.).

between SBC and AT&T and between Verizon and MCI,2 are signs of a convergent

and increasingly competitive marketplace. They are not, as some have suggested,

simply the reincarnation of the Bell System twenty years after its breakup. For one,

these two companies have the potential to compete with one another in many markets. More importantly, technological advance is allowing cable and wireless companies to be increasingly competitive with the traditional local telephone companies

in their core local access markets. To be sure, competition in these and other telecommunications markets is not the perfect competition of micro-economics textbooks, due to the substantial investments required to build a network and the need

to interconnect with multiple other networks to provide services. But, with a few

cautionary notes, technological convergence seems to be advancing competition.

Looking to the future, communications law can either provide a hospitable environment for continuing technological change and the introduction of new, competing

platforms and services, or it can itself be a barrier. The first priority should be to

address the barriers that currently exist to the introduction of new competitive access platforms, and, here, the first priority is spectrum reform. Congress should continue the path set by the Commercial Spectrum Enhancement Act 3 and move additional spectrum into commercial service, subject to flexible licensing or to full private ownership. Second, Congress should ensure that state and local regulation does

not present a barrier to emerging technologies and services. Third, Congress should

begin to address the competitive neutrality of the communications law as a whole,

either through a strategy that essentially deregulates new platforms or that rewrites the Act from the bottom up.

I. WHERE TECHNOLOGICAL CHANGE HAS BROUGHT US

Technological change, in the form of microwave technology, was one of the principal drivers of the break up of the Bell System in the early 1980s.4 That technology

was rapidly replaced by fiber optics and the digitalization of the long-haul portions

of the telecommunications network. On a largely independent track, the Internet

protocols allowed the development of general purpose data networks, which could

carry the data created by any application over any interconnected physical infrastructure.5 Today’s telecommunications market reflects these revolutions in transmission and computing power and in the techniques of data conversion and transmission.

The technological change experienced in the communications marketplace can

usefully divided into three types. First, advances in electronics and in materials

have greatly increased the bandwidth that carriers can deploy. Modern fiber optics,

boosted by the development of dense wave division multiplex transmission electronics, can carry enormous amounts of data over long distances almost instantaneously. Similarly, digital transmission technologies in the access networks—such

as cable modem service, DSL, and digital cell phone service—have increased the capacity of those systems far beyond anything imagined when cable TV or wireline

and wireless telephony were initially conceived. Demand has, of course, increased

exponentially as well, and the bandwidth of many access services in the United

States still lags. Telephone company DSL networks are not yet fast enough to provide multi-channel video services; in South Korea, by contrast, video over DSL is

common.6 Still, this greater bandwidth begets new services.

Second, advances in internetworking have allowed communications networks to

transmit services widely, as soon as the new services have been deployed. In this

category, the Internet protocols are the most notable. But advances in electronic

switching and the development of multiple, high-capacity interconnections among

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7See FCC, Industry Analysis and Technology Division, Local Telephone Competition: Status

as of June 30, 2004, table 1 (Dec. 2004); FCC, Industry Analysis and Technology Division,

Trends in Telephone Service, tables 7.1, 11.1 (May 2004). To be accurate, the number of

switched wireline access lines does not reflect all voice telephone lines, as many businesses use

their own premises equipment to aggregate calls from extensions (both those that have their

own telephone number and those that do not) and deliver those to the telephone network over

a higher capacity connection. 8 Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993, Annual

Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile

Services, Ninth Report, FCC 04-216, at para. 212 n.575, 213 (Sept. 28, 2004). 9See Cable VoIP Subs Jump 900%, Light Reading, Feb. 23, 2005 (http://www.lightreading.com/

document.asp?site=lightreading&doclid=67093) (reporting data from Infonetics Research). 10See, e.g., Ben Charny, Year in Review: VoIP’s Voice Gets Stronger, Cnet.com, Jan. 5, 2005

(http://news.com.com/Year+in+review+VoIPs+voice+gets+stronger/2009-7352—3-5499915.html). 11See also Ben Charny, Cablevision Rings in 270,000 Subscribers, zdnet.com, Feb. 23, 2005

(http://news.zdnet.com/2100-1035gG7X22-5587465.html). 12See Annual Assessment of the Status of Competition in the Market for the Delivery of Video

Programming, Eleventh Annual Report, FCC 05-13, table B-1 (Feb. 4, 2005). 13 Id. at para. 53. 14See, e.g., Local Telephone Competition: Status as of June 30, 2004, supra note 7, at 1-4. 15FCC, Industry Analysis and Technology Division, Wireline Competition Bureau, High-Speed

Services for Internet Access: Status as of June 30, 2004, at 1-4 (Dec. 2004).

Internet backbones have also played a significant role. These technologies erode the

traditional barriers between types of networks and will, over time, completely erase

the barriers between ‘‘telephone networks,’’ ‘‘cable television networks,’’ and ‘‘Internet networks.’’ In the core of the networks, such distinctions are almost without

meaning today.

Third, the increased computing power available to users of the telecommunications networks—in their telephones, cameras, and personal computers—drives the

creation of digital information and new services for the use of that information.

Scanning a picture at home and e-mailing it to far-away relatives was but a precursor of video instant-messaging and multiplayer on-line gaming.

The consequences for market structure are significant. Costs of service have been

falling, and platforms are now capable of providing multiple services. This has increased competition in several dimensions. Core network providers have substantial

capacity and can serve the needs of large businesses, but they can also carry aggregated traffic from individual users and small businesses.

This technological change is also introducing competition into historically less

competitive access markets—reducing the so-called last mile problem. Although

VoIP has been garnering much of the attention, cellular telephony has been quietly

gaining ground on traditional, wireline voice. We are reaching a point at which

there are at least as many wireless telephones as there are traditional, switched access lines to the telephone network. In fact, the number of traditional telephone

lines has been falling in recent years, from a high of just over 192 million lines in

2000 to under 180 million lines in mid-2004, while the number of wireless phones

reached almost 170 million.7 The FCC reports an estimate that 5-6% of U.S. households have dropped wireline service entirely, in favor of wireless, and another that

23% of all voice minutes are originated from wireless telephones.8

The hype around VoIP seems justified to a large degree, as one research group

has reported a 900% increase in the number of cable VoIP subscribers in just the

past year,9 with total current VoIP subscribers being estimated variously between

600,000 and 1 million.10 As cable companies convert existing voice customers to

VoIP and as the technology otherwise matures, the service will continue to grow to

reach the millions by year end.11

The story is similar in multi-channel video services, where over the past 10 years

DBS has gone from a mere 3% of the market to more than 25% of the market.12

Here, both technological advance and regulatory change were necessary to allow

DBS to carry local television channels, which was important to its ability to compete

with cable service. Nevertheless, DBS’s growth rate of subscribers far exceeds that

of cable.13

These are significant changes, although competition is in many respects still

emerging. Incumbent local telephone companies continue to dominate basic residential and small business voice services in most markets.14 VoIP service, although

itself competitive in price with traditional telephone service, requires the subscriber

to have broadband access, at least doubling the total price. For the nearly 30 million

subscribers to high-speed services,15 VoIP may be in the same market as traditional

service; for those not subscribing to high-speed services, the analysis is more comVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00112 Fmt 6633 Sfmt 6621 99902.TXT HCOM1 PsN: HCOM1
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16The 1992 Horizontal Merger Guidelines focus on an increase in price of the relevant goods

of, usually, 5% (sec. 1.1). Thus, a wide disparity between the price of two products suggests that

they would not be in the same market. 17 Compare Nondiscrimination in the Distribution of Interactive Television Services over

Cable, Notice of Inquiry, 16 FCC Rcd. 1321, ¶ 6 (2001) (discussing possibility that only cable television companies could offer the interactivity necessary for interactive television services). 18 A second cable company provides service in only a few locations. See generally Eleventh

Video Report, supra note 12, at paras. 66-70. DBS provides competing video service, but its twoway Internet service is not comparable. Some emerging wireless services, such as EVDO and

WiMax, could provide another access platform. As I discuss later, this prospect justifies attention to spectrum reform. 19 I do not share the unrelenting scorn that many have heaped on the 1996 Act’s unbundling

regime. See Speta, Deregulating Telecommunications, supra note 1, at 1151-53. But, there is no

doubt that facilities-based competition is much more effective. See Jean-Jacques Laffont & Jean

Tirole, Competition in Telecommunications 207-09 (2000) (discussing competitive difficulties of

competition through unbundling, where squeezing monopoly profits out of wholesale prices decreases incentives to deploy new facilities while permitting incumbents to earn monopoly profits

in their wholesale prices makes competition soft). 20See Progress and Freedom Foundation Website (http://www.pff.org/daca/). 21 In business markets, the possibility of multiple facilities-based carriers is greater. 22 Competition may improve as the number of market participants increases above three, but

it is not the case that more competitors always increases the level of competition in a market.

More importantly, this is not a law of economics, simply a rule of thumb based on experience.

plex.16 Similarly (but more speculatively), if developing services require significant

increases in both up and downstream throughput to users and if the telephone companies do not quickly increase the amount of fiber optics in their local access networks, then the cable companies may not have a substantial competitor for these

services in the mass market (barring the development of new access networks).17

Even if telephone companies do upgrade their networks and otherwise keep pace

with the bandwidth possible over cable networks, the residential and small business

high-speed access market will most likely have only two competitors for the foreseeable future.18

Despite these cautionary notes, this emerging competition is cause for optimism,

for two reasons: it is platform-based, and it is often intermodal. Because this emerging competition is among facilities-based carriers, it stands in sharp contrast to the

type of competition envisioned by the unbundling provisions of the 1996 Act, which

were premised on the idea that local telephone company networks would not be duplicated.19 Facilities-based competition, especially where companies try different

technologies to provide services, allows the market to reward efficient providers and

efficient technologies.

II. WHERE WE SHOULD GO

The regulatory issues raised by these technological advances, by developing convergence, and by expanding competition are multifarious, and they range from those

traditionally linked with sector-specific regulation, such as interconnection policy, to

the social policies of telecommunications regulation, such as universal service, to the

broader questions of efficient tax policy, for some states and local governments today

raise significant revenues by taxing some communications services. The breadth of

these challenges have led many—inside and outside of government—to call for a

comprehensive re-write of the nation’s communications laws, and I am one of the

co-chairs of a project centered at the Progress and Freedom Foundation to write a

new Communications Act for the Digital Age.20

A. Spectrum Reform

Short of writing a new statute, however, some legal reforms should follow as a

response to these changes in market structure, in order to build on the possibilities

of competition. As noted above, the most likely market structure for mass market

broadband IP access is one in which only the incumbent telephone companies and

the cable television companies are significant players.21 Two companies are certainly

better than one, but, as a rough rule of thumb, competition is increasingly likely

when the market includes at least three substantial competitors.22

Wireless is the leading possibility for a third platform to challenge the telephone

and cable companies, but the prospects of such wireless competitors are reduced due

to the lack of available spectrum for such services. Although the Commercial Spectrum Enhancement Act (CSEA) took an important step to make spectrum available

for third-generation wireless services, more such spectrum should be made available

for new data platforms. The FCC has been taking substantial, beneficial action in

this regard, re-tasking certain underutilized spectrum and introducing a degree of

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23Many of these actions are summarized in the FCC’s Spectrum Policy Task Force Report.

See FCC, Spectrum Policy Task Force Report, ET Docket No. 02-135 (2002) (available at http:/

/hraunfoss.fcc.gov/edocs—public/attachmatch/DOC-228542A1.pdf/). 24 Richard Shim, WiMax To Lead Broadband Wireless Market, Cnet news.com, April 21, 2004

(http://news.com.com/2102-1305—3-5196795.html). 25 E.g., Chairman Michael K. Powell, ‘‘Broadband Migration III: New Directions in Wireless

Policy, Remarks at the Silicon Flatirons Telecommunications Program,’’ University of Colorado

at Boulder, October 30, 2002 (available at http://www.fcc.gov/sptf/). 26Spectrum is theoretically unlimited, and substantial open spectrum exists at extremely

short wavelengths. But not all spectrum is created equal. Some has better propagation characteristics, such as the ability to penetrate walls, and transmitters and receivers are more expensive to produce in some ranges. 27See Pub. L. No. 108-494 (amendments to 47 U.S.C. § 923(g)). 28See Ewan Kwerel & John Williams, A Proposal for a Rapid Transition to Market Allocation

of Spectrum, FCC OPP Working Paper No. 38, at 28-30 (Nov. 2002). 29See, e.g., Martin Cave, Independent Review of Spectrum Policy (2002). 30This proposal is made in a number of articles, in addition to the Kwerel & Williams paper

(supra note 28) and builds on Ronald Coase’s seminal article pointing out that spectrum rights

could be treated equivalently to private property. Ronald Coase, The Federal Communications

Commission, 2 J.L. & Econ. 1 (1959). Several central articles, which themselves provide entry

into most of the other literature, are: Stuart N. Benjamin, Spectrum Abundance and the Choice

Between Private and Public Control, 78 N.Y.U. L. Rev. 2007 (2003); Thomas W. Hazlett, The

Wireless Craze, The Unlimited Bandwidth Myth, The Spectrum Auction Faux Pas, and the

Punchline to Ronald Coase’s ‘‘Big Joke’’: An Essay on Airwave Allocation Policy, 14 Harv. J.L.

& Tech. 335 (2001); Gerald R. Faulhaber & David J. Farber, Spectrum Management: Property

Rights, Markets, and the Commons, in Rethinking Rights and Regulations 193 (Lorrie Faith

Cranor & Steven S. Wildman, eds. 2003); Ellen P. Goodman, Spectrum Rights in the Telecosm

To Come, 41 San Diego L. Rev. 269 (2004). 31 Norman Ornstein & Michael Calabrese, A Private Windfall for Public Property, Wash. Post,

Aug. 12, 2003, at A13.

flexible use rights,23 but legislative action to confirm and accelerate these moves

would be useful.

Indeed, wireless has, in several significant episodes, provided important competition to wireline incumbents. MCI originally used microwave transmission, the economics of which were more favorable, to challenge AT&T’s long-distance monopoly.

As noted above, DBS today provides the main competition to cable video services.

The increasing numbers of especially young people dropping wireline service is another confirming factor, although these current wireless services are not competitors

to high-speed IP-based services.

Glimpses do exist of the wireless future, with higher-speed data services from cell

phone companies now coming to market, such as Verizon Wireless’s 300-500 kbps

service. But truly broadband services, such as WiMax or EVDO, using speeds that

compete with cable and DSL services, are still a few years away.24 More importantly, widespread deployment of these services will certainly require that additional spectrum be made available to the market. FCC Chairman Michael Powell

has linked the availability of additional spectrum to the development of potentially

competitive wireless broadband platforms.25

A significant move in the direction of spectrum reform requires two steps. First,

more spectrum must be made available to commercial markets, and such spectrum

can only come from either government or existing private users.26 The CSEA’s technique of using auction proceeds to fund the relocation of government users and the

purchase of more efficient equipment does provide some balance between commercial demand and the interests of government users,27 but the Act does not provide

any systematic incentives for government users to economize on spectrum or release

it for commercial uses. This could be done by giving government agencies the right

to monetize their spectrum by auction or, in a more extreme version, requiring them

to do so. Under this approach, government agencies would have to purchase spectrum rights on the open market, much as they must do with real property.28 Alternatively, government users could be required to include within their budgets expense amounts for the use of spectrum. This proposal has been made and well-received in the United Kingdom.29

Current commercial licensees should also be given the right to auction their spectrum to those who would use it for new, more valuable uses.30 Although some have

objected to this proposal on the ground that it creates a ‘‘windfall’’ where the licenses were originally granted without charge (or even by auction, but restricted to

a limited term),31 this objection should not stand in the way of a transition to a

more efficient, market mechanism. Today, many if not most of the holders of the

most valuable licensees purchased those licenses on the secondary market at prices

that included the economic value of the license. Any ‘‘windfall’’ from the no-cost alloVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00114 Fmt 6633 Sfmt 6621 99902.TXT HCOM1 PsN: HCOM1
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32 Current licensees who would sell their licenses as property would receive an increase in

value if those licenses had greater flexibility of use, but trying to recapture that value is probably not worth the transaction and delay costs involved. 33See generally Howard A. Shelanski & Peter W. Huber, Administrative Creation of Property

Rights to Radio Spectrum, 41 J.L. & Econ. 581 (1998); Douglas W. Webbink, Radio Licenses and

Frequency Spectrum use Property Rights, 9 Comm. & L. 3 (1987). 34Most recently, the Subcommittee on Telecommunications and the Internet held a hearing

on February 17, 2005, entitled ‘‘The Role of Technology in Achieving a Hard Deadline for the

DTV Transition.’’ 35 Eleventh Video Report, supra note 12, at para. 8. 36See generally Speta, Deregulating Telecommunications, supra note 1, at 1118-21 (arguing

that the need to develop intermodal competition from wireless to wireline platforms suggests

a property rights approach to spectrum reform); Farber & Faulhaber, supra note 30. 37See 47 U.S.C. § 253. 38 Its ability to continue to do so will be at issue in the Supreme Court’s consideration of the

Brand X case, which is scheduled to be argued later this Term. See Inquiry Concerning HighSpeed Access to the Internet over Cable and other Facilities, Declaratory Ruling and Notice of

Proposed Rulemaking, 18 FCC Rcd. 4798 (2002) (classifying cable modem services as information services), rev’d in part, Brand X Internet Servs. v. FCC, 345 F.3d 1120 (9th Cir. 2003) (adhering to prior opinion that such services were telecommunications services), cert. granted. 39Most recently, the FCC has issued an order preempted state and local regulation of many

aspects of VoIP. See In the Matter of Vonage Holdings Corp. Petition for a Declaratory Ruling

Concerning an Order of the Minnesota Public Utilities Commission, Memorandum Opinion and

Order, FCC 04-267 (Nov. 12, 2004). 40See generally Speta, FCC Authority To Regulate the Internet, supra note 1. But see Philip

J. Weiser, Toward a Next Generation Regulatory Strategy, 35 Loy. U. Chi. L.J. 41, 66 (2003)

(suggesting that FCC has adequate Title I authority to address new services, and advocating

a common law approach, informed by antitrust principles, to regulation).

cation of licenses was received by the original licensees who are now long gone.32

Moreover, the statute already recognizes very strong expectations of renewal of licenses and of transfer approval and, in these two regards, the rights are already

very similar to property rights.33 Thus, any ‘‘windfall’’ is likely small, and an acceptable cost of moving to a market-based system of allocation.

Short of a full-blown change to spectrum allocation policy, the Congress can continue to work to free up government and commercial spectrum. In the latter regard,

the Committee has previously given attention to the need to accelerate the transition to digital television, because television broadcasters’ analog licenses represent

some of the most desirable spectrum for new data services.34 Current statistics show

that more than 85% of all U.S. households subscribe to either satellite or DBS.35

The transition raises important issues, but the value of moving that spectrum to

other uses must be weighed against any transition costs suffered by the relatively

small number of households receiving terrestrial service. Moreover, the cost of digital television tuners is falling rapidly, and is now below the $200 mark even for

HDTV functionality.

It is my sense that new spectrum rights ought to be privatized, to allow owners

instead of government to determine the most appropriate and efficient uses. At a

minimum, licenses should permit the maximum amount of flexibility in use. Some

spectrum should be dedicated to unlicensed uses, such as local networking and other

low-power services that have proved recently successful. But property rights in spectrum have the advantage that a single provider can more easily internalize all of

the coordination problems that a new service may entail, such as equipment standards, operating protocols, and interconnection with other networks. Similarly, a

spectrum owner captures all of the gains from monitoring spectrum use, increasing

the efficiency of equipment, and eliminating interference.36

B. Reducing Legal Uncertainty

Short of re-writing the Communications Act from top to bottom (on which more

below), Congress could make several salutary changes that would have the effect

of decreasing the barriers to entry for new services. The 1996 Act forbade state and

local laws that prohibited (or had the effect of prohibiting) the provision of telecommunications services by any entity.37 But, to ensure that new services are not

subject to the heavy-handed utility regulation of Title II of the Communications Act

(which governs telecommunications services), the FCC has generally characterized

newly emerging data services as ‘‘information services.’’ 38 In so doing, the FCC exercises its so-called ‘‘ancillary’’ authority under Title I of the Act to prevent states and

localities from themselves placing burdensome regulations on these new services,39

but the scope of the FCC’s authority to do so is uncertain and subject to attack.40

Congress should confirm the FCC’s authority to preempt state and local regulation of any emerging, facilities-based two-way data network, to decrease the barriers

to entry for such services. To be sure, some networks will need to be regulated, to

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41The centerpiece of this effort is Directive 2002/21 of March 7, 2002, on a Common Regulatory Framework for Electronic Communications Networks and Services, O.J. 2002 L108/33

(‘‘Framework Directive’’). See generally J. Scott Marcus, The Potential Relevance to the United

States of the European Union’s Newly Adopted Regulatory Framework for Telecommunications,

in Rethinking Rights and Regulations 193 (Lorrie Faith Cranor & Steven S. Wildman, eds.

2003); James B. Speta, Rewriting U.S. Telecommunications Law with an Eye on Europe, in Connecting Societies and Markets (forthcoming 2005). 42 E.g., Richard Whitt, A Horizontal Leap Forward: Formulating a New Communications Public Policy Framework Based on the Network Layers Model (MCI Layers Paper) http://global.mci.com/about/publicpolicy/presentations/horizontallayerswhitepaper.pdf. 43See Weiser, supra note 40. 44 I have discussed most of these matters in greater depth in Speta, Deregulating Telecommunications, supra note 1. 45 Jean-Jacques Laffont & Jean Tirole, Competition in Telecommunications 184 (2001). 46Such effects may be, in the language of network economics, either direct or indirect. A direct

network effect is where the good itself is a connectivity good, such that value derives from the

number of others that one can connect with—such as telephony or fax machines. Indirect network effects prevail in markets characterized by a hardware and a software good—such as computer operating systems and software applications or video tape players and prerecorded movies—such that greater numbers of consumers purchasing the hardware good drives demand for

a wider variety of software goods, which variety in turn makes the hardware good itself more

valuable. See generally Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and

Compatibility, 75 Am. Econ. Rev. 424, 426-27 (1985). Some network goods, such as the Internet,

exhibit both characteristics.

ensure the meeting of non-economic goals such as 911 service and law enforcement

intercepts. But, as has been the case with VoIP, the FCC should have the power

to move toward these goals in a manner that does not compromise the initial deployment of the services. Universal service (and other state and local revenue needs)

will also require consideration, but a continuing patchwork of state and local regulation of telecommunications services can create a hurdle to entry of new services.

Apart from confirming FCC authority, Congress should also consider a new category of federal regulation for new, two-way, facilities-based data networks. Such a

move would not require eliminating the current service categories of the Communications Act, which continue to serve some important purposes. A new category of

services—what Chairman Powell has called an IP-migration model—would allow the

market, if deploying new facilities, to move itself into a much more unregulated status.

C. A New Act?

Of course, the most intellectually appealing approach would be to draft a new

Communications Act from the ground up. There is a widespread consensus that the

current service-based categories of the Communications Act, which provide significantly different levels and kinds of regulation based on service classifications that

are tied to legacy status, no longer match the converged data platforms that technological change has made possible. The European Union has recently adopted a new

regulatory structure that attempts to address all ‘‘electronic communications,’’ 41 and

commentators have offered a number of other models, ranging from a regulatory

scheme built on the technical ‘‘layers’’ of the network 42 to the use of a common-law,

but antitrust-principles grounded, case-by-case approach to regulation.43

Because our work on this continues and given the scope of this Hearing, I will

only outline a few of the principles that should govern consideration of a new telecommunications statute.44 First, telecommunications law—as an independent body

of law, superintended by some expert regulator—should continue. An expert regulator will address changing technology better than generalist antitrust courts. More

importantly, telecommunications markets present problems that are beyond the traditional scope of competition law. For example, even where the market for telecommunications services is structurally competitive, each individual carrier will

have a ‘‘terminating monopoly’’ on services delivered from other carriers or networks

to that individual carrier’s customers. As two leading economists have shown, even

competitive carriers will have the incentive to raise off-network termination charges,

resulting in inefficient multiple marginalization.45 Price-setting regulation, or mandatory bill-and-keep rules, can increase efficiency.

Moreover, government may wish to assure that network competition does not

eliminate fundamental interconnection. Two-way telecommunications networks,

such as telephone, Internet, and integrated data networks, exhibit direct network

effects.46 If network competition is simultaneous, with numerous relatively small

communications networks competing against one another, then each network will

have a strong incentive to interconnect with the others, ensuring that all consumers

can reach one another as well as reaching all services and content available on

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47See generally id. at 190. 48See Stanley Besen & Joseph Farrell, Choosing How To Compete: Strategies and Tactics in

Standardization, 8 J. Econ. Persp. 117, 119 (1994). 49See generally id.; James B. Speta, Handicapping the Race for the Last Mile?: A Critique of

Open Access Rules for Broadband Platforms, 17 Yale J. on Reg. 39, 81-85 (2000). 50Frank Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 15 (1984). 51 It will be necessary to reevaluate the scope of the universal service commitment, and especially to consider whether Internet or video services should be brought further within its ambit.

Those matters are beyond the scope of this paper. See generally Speta, Deregulating Telecommunications, supra note 1, at 1148-51. 52See, e.g., Gregory Rosston & Bradley S. Wimmer, The ABCs of Universal Service: Arbitrage,

Big Bucks, and Competition, 50 Hastings L.J. 1585, 1606 (1999). 53This may mean taxing access—whether that access is voice, Internet, or other interactive

service—or it might mean pegging the tax to the use of public telephone numbers. Although

these would change the general notion that IP-based services should not be taxed at all, leveling

the playing field requires addressing tax policy as well.

other networks.47 But, if competition among networks is monopolistic or serial, then

networks effects suggests that denial of interconnection may be a strategic tool in

inter-network competition.48 Regulation to maintain interconnection may increase

total welfare (or serve non-economic goals, such as maintaining a single community

of speakers and access to information), even if it cabins the dimensions on which

competition can occur.49 In particular, mandatory interconnection rules seem valuable at the physical and logical layers of communications networks—so that competition is channeled to the quality of service and price dimensions and away from

the possibility of fragmenting an integrated communications network. Although

such interconnection could potentially entrench certain kinds of networks, the social

and economic benefits of maintaining an interoperable network probably outweigh

the risks of entrenchment.

Second, apart from maintaining fundamental interconnection, regulatory action

under a new telecommunications law should be keyed to an affirmative finding of

market power in a relevant market. The principles of antitrust law and economics

provide a strong guide to reduce the burdens of regulation generally, by ensuring

that regulation responds to a consumer welfare interest and not merely to the interests of other competitors. As Frank Easterbrook has noted in the antitrust context,

‘‘the economic system corrects monopoly more readily than it corrects [regulatory]

errors,’’ 50 and legislatures, agencies, and courts should be circumspect about intervening in markets without a showing of market power in need of correction.

Third, a new statute ought to treat all newly-deployed, emerging data networks

similarly, without regard to the legacy of their providers. Although the 1996 Act embraced competition, it did relatively little to address convergence. A new Communications Act would eliminate regulatory separation and competitively unbalanced

treatment of identical services offered using different technologies and focus on the

economic realities of the services.

Fourth, social goals regulation—and especially universal service funding—should

be applied broadly (in the sense of subjecting services to similar burdens), but

should not be the basis for maintain regulatory separation or public utility regulation.51 It is necessary to reiterate that the most economically efficient manner of

providing universal service is through the general income tax, and not through a

specific tax on telecommunications services.52 But if sector-specific funding is necessary, that funding should be spread more widely. Currently, the universal service

charge on interstate telecommunications is just over 10%, and the total tax burden

on telecommunications services (but not Internet and not VoIP) in some areas

reaches 25%. Given that telecommunications technology is itself an input into many

other processes and increases their overall productivity, heavily taxing telecommunications is counterproductive. A statute designed to treat services equally would

spread taxes in a competitively neutral manner.53

CONCLUSION

Technological advance is continuing to restructure telecommunications markets.

The transition to IP networks and IP services effects several significant changes:

platforms become service independent, distance diminishes in importance, and service competition can increase. In consumer markets, traditional cable and telephone

companies will likely go head-to-head with a similar package of services. Spectrum

reform is needed to enable a third competitive platform, with potentially multiple

competitors, to challenge these two wireline platforms. And legislation should begin

to eliminate utility regulation, to create a level playing field for these new data-centric services.

110

Chairman BARTON. Thank you, sir.

Last but not least, we have Mr. Phil Weiser, who is an Associate

Professor of Law and Telecommunications and Executive Director

of the Silicon Flatirons Telecommunications Program at the University of Colorado School of Law. Welcome, sir, and you are recognized for 7 minutes.

You have to push that button.

Mr. WEISER. How am I doing now?

Chairman BARTON. There you go.

STATEMENT OF PHILIP J. WEISER

Mr. WEISER. Thank you, Mr. Chairman. I appreciate the opportunity to testify today before you.

And I would like to make one central point about the role of telecommunications regulation and anti-trust law in the information

industries, which is vitally important to protect the possibility of

technological change and innovation. As I think history teaches us,

most of the established players in the information industries, like

other industries, are unlikely to develop the new technologies and

the disruptive technologies that will bring vast benefits to consumers. It was MCI and Sprint who developed fiber optic technologies and some of the precursors for today’s Internet age that

we are living in. It is Vonnage, a scrappy upstart, that helped us

develop Voice-over Internet Protocol and finally Tivo who helped

pioneer digital video recorders. In these cases and others, the established companies will come in afterwards and compete with the

upstarts, giving consumers double benefits. But it is vitally important that we protect the opportunity for innovation and new entry

in these industries.

Thus, the role of regulation, in a period of technological change,

should be to look for market failures and to prevent the abuse of

market powers, that any company could prevent entry. In the era

of the Bell system, that was the major problem. As I recount my

testimony, Dow Corning invented fiber optics and wanted to come

in with this vastly better technology in the long-haul market.

AT&T responded, ‘‘Look, we are not going to lay off our existing

network. And once we want to put in fiber optics, we will do it ourselves in about 20 years.’’ So if AT&T still had a monopoly grip on

long distance, we probably would still be waiting for fiber optics.

We would probably still be waiting for the Internet.

The point is, the vast era we have had with deregulation has enabled new entry and new technologies. And as we go forward, the

most critical role for regulation, and the concern of this committee,

should make sure that that form of entry can continue to happen.

And I would like to echo what—a couple of things that have been

said earlier. First, it is vitally important that we look to facilitate

a new platform, because if you only have two rival platforms, that

limits the opportunity for experimentation and innovation. The possibility of four, I think this was getting back to Congressman Markey’s comment, the final four, if you get four platforms, that raises

the possibility of innovation and entry. And the best opportunities

we have for a third and fourth broadband platform is wireless, and

the best opportunity to get more of those, a spectrum of four, I

know you are pushing hard on the DTV transition, in short, that

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is why it is so important. And today’s regime says if I am a UHF

broadcaster and nobody is watching over the air, I can’t sell my

spectrum to a broadband provider who could provide rural services.

That is crazy. The FCC is trying to figure out whether it can help

on an unlicensed basis, wireless ISPs come in and provide wireless

broadband where it won’t disrupt existing transmissions. These

sorts of initiatives are critical to our broadband feature, and I encourage the committee’s leaderships in this regard.

Finally, I want to get to one point that was talked about and

eluded to by Dr. Cooper, which is in a broadband world, one of the

exciting opportunities for innovation is I can be an applications

provider of Voice-over Internet Protocol or Video-over Internet Protocol. I don’t need to own my own platform. And so a critical opportunity is if all sorts of application providers can provide new services, what they need to know, and I believe this was asked by Congressman Stearns, that they won’t be discriminated against. And

so one concern that the FCC has had is to ensure that anyone can

provide their applications on a broadband network. That concern is

an important one, and frankly, the state of the law in this area is

somewhat cloudy.

Finally, I would like to just underscore what many people have

said, which is today’s mergers are reflective of a changing marketplace environment. The expectations of the United States Telecommunications Act have not come to pass, but lots of other important things in wireless and broadband have. That has rendered this

Act totally antiquated, focused on irrational distinctions, like local

versus long distance, broadband services provided by cable companies as opposed to those provided by telephone companies. And in

time, I am sure this committee will help to change those distinctions.

Going forward, protecting the innovation and entry that we have

seen is a critical role for regulation. Regulation should be smart.

It should be succinct, and it should focus on avoiding market failures and abuses of market power. It also should invite the large

companies to respond and to provide the benefits to consumers that

will be a double benefit with respect to the original innovators.

Thank you very much.

[The prepared statement of Philip J. Weiser follows:]

PREPARED STATEMENT OF PHILIP J. WEISER, ASSOCIATE PROFESSOR OF LAW AND

TELECOMMUNICATIONS, UNIVERSITY OF COLORADO

Mr. Chairman and members of the Committee, thank you for the opportunity to

speak with you today. Since working in the Justice Department’s Antitrust Division

from 1996-1998 as a senior counsel, I have observed, taught, and written about telecommunications policy. Most recently, I have co-authored the book Digital Crossroads: American Telecommunications Policy in the Internet Age (MIT Press) (with

Jonathan Nuechterlein). I also have founded and serve as the Executive Director of

the Silicon Flatirons Telecommunications Program, which holds regular conferences

and seminars on cutting edge topics in technology policy, including the recent conference on ‘‘Rewriting the Telecom Act.’’ Finally, I am involved in the Progress and

Freedom Foundation’s Digital Age Communication Act project, which is developing

a set of recommendations for Congress to consider in its deliberations over telecommunications policy.

Today’s topic is a very timely one, as it focuses on the main challenges of telecommunications policy: keeping up with technological changes as well as facilitating

innovation. In my remarks, I will explain how competition and innovation have reshaped the telecommunications industry and how regulation can continue to facilitate competition and innovation in the future. In short, my bottom line is that the

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1 JOHN NAUGHTON, A BRIEF HISTORY OF THE FUTURE 107 (2000). 2Scott Woolley, Into Thin Air, Forbes (April 26, 2004) (http://forbes.com/forbes/2004/0426/

098lprint.html).

principal benefit of promoting competition is to facilitate innovation that challenges

today’s incumbents. Historically, both telecommunications policy and antitrust policy have promoted that objective to great effect and they should continue to do so.

THE ESSENTIAL RATIONALE FOR COMPETITION

In the midst of a number of high profile mergers that some claim are the effort

to put Ma Bell back together, many consumers are asking whether the basic rationale of the 1996 Act—to facilitate competition and innovation in telecommunications—was sound. My answer is that the essential logic of the Act was sound,

even if a number of its particular tactics and statutory provisions have proved

flawed.

To appreciate the power of competition, let me highlight one of the often underappreciated aspects of the original antitrust case against AT&T. In general, commentators often underscore the cost savings that consumers enjoyed in long distance

service as a result of the break-up. But equally important was the boom that the

break-up provided to innovation in general and for the Internet in particular.

In the late 1970s, Dow Corning began developing fiber optic technology and approached AT&T about installing this innovation in its long haul network. In response, AT&T replied that it would be thirty years before it installed fiber into its

network and when it did, it would develop the technology itself. Thus, if AT&T still

maintained its monopoly grip on telecommunications, as it had in the 1970s, consumers would probably still be waiting for the deployment of fiber optic technology.

Almost immediately after the AT&T break-up guaranteed long distance competitors equal access to local telephone lines, both MCI and Sprint announced plans to

deploy fiber optic long haul networks. And after Sprint began advertising that consumers could hear a pin drop on its network, AT&T wrote off its undepreciated longhaul assets and invested in its own fiber optic network.

In terms of the Internet, AT&T evinced an attitude similar to its approach to fiber

optic technology. In a famous rebuff of the Defense Department’s request that it operate the Internet backbone, an AT&T executive replied that ‘‘it can’t possibly work,

and if it did, damned if we are going to allow the creation of a competitor to ourselves.’’ 1 Consequently, the Internet developed in spite of AT&T and without its assistance, leaving both MCI and Sprint to play important roles in its development.

Finally, the development of the market for telecommunications equipment provides yet another powerful reminder of how facilitating entry and innovation can

pay huge dividends to consumers. After the FCC finally rejected the AT&T’s stalling

tactics to enable equipment to attach to the telephone network, rival manufacturers

of a number of products from cordless telephones to fax machines to computer

modems entered the market and brought a vast array of benefits to consumers.

DIGITAL DISRUPTION

The principal oversight of those who criticize the Telecom Act as failing to produce

benefits in the local telephone market is that they have defined success in telecommunications policy too narrowly. On a narrow definition that fails to appreciate

the benefits of innovation, even the AT&T break-up can be judged a failure. After

all, some consumers, like my grandmother, continued to rent her telephone from

AT&T and did not change long distance providers. Unfortunately, for consumers

who are unable to take advantage of technological progress, deregulatory policies

will often present greater hassles and confusion than benefits.

The continuing pro-competitive agenda in telecommunications policy has facilitated new technologies that have spurred significant consumer benefits. In telecommunications, the greatest consumer benefits have emerged in the long distance,

wireless, and Internet-related markets—a number of which have challenged and

have caused the prices of traditional telecommunications products and services to

fall. Commenting on this trend, Qwest CEO Richard Notebaert put it succinctly:

‘‘[t]he voice industry—whether long distance, local or wireless—finds itself in a commodity market with deflationary pricing. Volumes will rise, but prices will fall even

faster.’’ 2

Like the long distance example outlined above, the increased competition in wireless telecommunications markets provides consumers with significant benefits. In

the late 1990s, wireless providers began offering packages of bundled minutes that

did not distinguish between local and long distance services, leading consumers to

increasingly rely on their cellphones for long distance calls. More recently, Sprint

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3 By ‘‘the Internet,’’ I mean Internet technology generally (including private or managed IP

networks) and not simply the ‘‘public Internet’’ in particular. 4Michael K. Powell, Remarks at the Wireless Communications Association International 1

(June 3, 2004) (http://hraunfoss.fcc.gov/edocslpublic/attachmatch/DOC-248003A1.pdf). 5For the Report from the FCC Spectrum Policy Task Force, see http://hraunfoss.fcc.gov/

edocslpublic/attachmatch/DOC-228542A1.pdf. For Chairman Powell’s explanation of its this

initiative, see Michael K. Powell, ‘‘Broadband Migration III: New Directions in Wireless Policy,’’

Remarks at the Silicon Flatirons Telecommunications Program, University of Colorado at Boulder, October 30, 2002 (http://www.fcc.gov/Speeches/Powell/2002/spmkp212.html).

has enlisted an array of resellers—whom it invites to use its network on a wholesale

basis—to use a variety of marketing techniques to lure new subscribers to its network. Of particular note is Virgin Mobile, which is a so-called ‘‘Virtual Mobile Network Operator’’ and has used a creative marketing approach and reliance on prepaid services to lure many first-time cellphone subscribers onto Sprint’s network.

The most fundamental force transforming telecommunications today is the increasing shift of the entire system of communications toward the Internet.3 Initially

developed as an academic curiosity, the Internet is increasingly the Pac-Man of telecommunications: gobbling up everything in its path. Part of why the Internet is

such a disruptive force in telecommunications is that data traffic provides consumers far more value for the bit than traditional voice traffic. Thus, when a consumer signs up for a broadband connection, they will increasingly use email instead

fax or instant messaging instead of telephone calls. More particularly, when consumers sign up for a voice over the Internet service—such as those provided by

Vonage and, increasingly, the cable companies—they can actually make telephone

voice calls at a far cheaper rate than they can with their traditional service providers.

THE ROLE FOR TELECOMMUNICATIONS POLICY

Some argue that in a world of ‘‘creative destruction’’ and increasingly dynamic

technological change, there is no role for telecommunications regulation. To be sure,

there is no useful role for a telecommunications policy that distinguishes between

local and long distance calls; data and voice traffic; or cable companies and telephone companies that provide broadband Internet access. In short, the statutory

silos of the 1996 Act continue to impede sound communications policy and must be

discarded for a more holistic view of the marketplace as it is being re-shaped around

the Internet.

In terms of the principal role for a new policy framework, its key objective should

be to address important concerns about supporting rival service providers and ensuring that innovation and entry are not stalled or deterred by incumbent providers.

Moreover, it can also be crafted to achieve certain social policy goals—such as supporting universal service—but those goals should be advanced in a manner that

does not distort efficient entry and innovation.

The recent spate of mergers is causing some to ask at what point consumers

should worry about losing the benefits that comes from rivalry between different

service providers. In short, Chairman Powell eloquently answered this question in

explaining ‘‘[m]agical things happen in competitive markets when there are at least

three viable, facilities-based competitors.’’ 4 In the wireless market, for example, the

merger of Sprint and Nextel would leave consumers with four rival national service

providers, almost assuredly still providing this ‘‘magical rivalry.’’ In continuing to

provide such rivalry, we can expect Sprint to continue its practice of affording outside innovators—such as Virgin Mobile—access to its network.

In the case of broadband platforms, the Holy Grail remains spurring additional

competition in this important market. The most promising opportunity for additional entry is through the use of wireless spectrum, such as either next generation

mobile services (the so-called 3G offerings) or fixed wireless services such as the

much touted Wi-Max standard. At this point, we are still a long way away from

knowing whether these new technologies will succeed. Among other challenges, it

is critical that the FCC and Congress press ahead in reforming the legacy regulation

of wireless spectrum to ensure that more opportunities for both licensed and unlicensed spectrum are available to those who are developing new wireless technologies.5

In the current broadband environment, where cable companies and telephone

companies are the primary service providers, there is an important role for telecommunications policy to ensure that all application and content providers are able

to enjoy non-discriminatory access to broadband platforms. In terms of appreciating

the role of outside innovation, it is important to recall, as Andrew Odlyzko observes,

that ‘‘[i]n spite of many attempts, the established service providers and their supVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00121 Fmt 6633 Sfmt 6621 99902.TXT HCOM1 PsN: HCOM1
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6 Andrew Odlyzko, Telecom Dogma and Spectrum Allocations 7 (June 20, 2004) (http://

wirelessunleashed.com/papers/TelecomDogmas.pdf). 7See Michael K. Powell, Preserving Internet Freedom: Guiding Principles for the Industry, Remarks at the Silicon Flatirons Telecommunications Program, University of Colorado at Boulder,

February 8, 2004 (http://hraunfoss.fcc.gov/edocslpublic/attachmatch/DOC-243556A1.pdf). 8For my suggestion as to how the FCC could do this, see Philip J. Weiser, Toward a Next

Generation Regulatory Strategy, 35 Loy. U. Chi. L.J. 41, 66 (2003) (http://www.luc.edu/law/activities/opportunities/docs/weiserlrevisedlII.pdf).

pliers have an abysmal record in innovation in user services...The real ‘‘killer

apps,’’ such as email, the Web, browsers, search engines, [instant messaging], and

Napster, have all come from users.’’ 6

The role for regulation to ensure continued access to broadband networks does not

necessarily mean a heavy-handed approach to ensuring access to broadband networks. Rather, as Chairman Powell’s Net Freedom initiative underscores, policymakers can announce the forms of protection they advocate and await any departures from it before taking action.7 If there are any attempts to discriminate against

or block rival services, it is critical that the FCC not tolerate those that lack a legitimate business purpose (such as those related to reasonable network management).8

The FCC’s legal authority to regulate broadband platforms is under great strain

and a set of currently litigated cases (namely, the Brand X case now at the Supreme

Court and the Broadcast Flag litigation at the D.C. Circuit) will test whether its

regulatory authority holds up. In particular, (1) if the FCC is not able to use its

‘‘ancillary jurisdiction’’ to regulate broadband; or (2) if it is afforded only limited authority under that doctrine, its ability to regulate broadband platforms effectively

will be greatly compromised. In short, if the FCC loses on either score in court, Congress will almost assuredly have to remedy the matter by providing the FCC with

sufficient and appropriate authority to regulate broadband markets.

THE ROLE FOR ANTITRUST POLICY

The challenge of reviewing mergers that emerge out of a deregulatory environment is one of the most difficult jobs assigned to antitrust authorities. In many

cases, antitrust authorities will not have a prior baseline to examine in assessing

whether a particular merger would truly restrain competition. At the same time, the

artificial market structures that emerged from a regulated era may well mean that

certain combinations will produce more efficient operations. Balancing the expected

competitive harms and benefits is the mainstay of antitrust analysis and the authorities’ access to a variety of documents, business plans, and experts enable them

to make the best informed judgments they can.

My respect for the fact-intensive nature of the merger review process makes me

reluctant to offer too many observations about any specific merger that will undergo

such a careful scrutiny. Nonetheless, in the case of two major pending long distanceBell mergers, I will offer two preliminary observations that will be, I suspect, a

starting point for the relevant antitrust reviews.

First, it is very important for policymakers to get past the ‘‘emotional logic’’

against a merger of AT&T (or MCI) and a Bell company. Notably, AT&T and MCI

were the firms who were supposed to be the main competition to the Bell companies

and thus a merger between them strikes many as antithetical to the goals of the

Telecom Act. This ‘‘supposed to,’’ however, is increasingly at odds with reality, as

AT&T and MCI’s base of long distance customers is eroding and their future is increasingly cloudy. To be sure, one could imagine a recent history in which AT&T

(or MCI) emerged as a far more formidable and important competitive force than

it is today. But due to a series of unfortunate circumstances (ranging from

Worldcom’s accounting fraud to AT&T’s overpaying for its cable assets), events did

not turn out that way.

Second, in examining the real areas of overlap between the long distance and Bell

companies, the one that is likely to attract the most scrutiny is where the companies

own competitive assets that would go to waste if combined into a single firm. In

particular, I am confident that the antitrust authorities will take a close look at the

fiber networks that MCI and AT&T purchased over the last ten years to compete

directly with the Bell companies for big business customers. At the height of the

boom, both AT&T and MCI (then Worldcom) paid billions of dollars for companies

specializing in local access networks; whether those assets can and should be divested are likely to be a main area for antitrust authorities to scrutinize carefully

on a market-by-market basis. Although I raise this as a concern, I recognize that

this issue requires a careful fact-specific inquiry and thus I am not in a position

to judge how antitrust authorities should address this issue.

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9 All of these issues are taken up at length in JONATHAN E. NUECHTERLEIN & PHILIP J.

WEISER, DIGITAL CROSSROADS: AMERICAN TELECOMMUNICATIONS POLICY IN THE INTERNET AGE

(MIT Press, 2005).

THE ROLE FOR CONGRESS

The Telecommunications Act of 1996 is unquestionably broken. It was designed

primarily to address the expected entry of the Bell companies into long distance and

the long distance companies into the local Bells’ markets. It did not anticipate the

rise of the broadband Internet or even the increased importance of wireless services.

Almost ten years later, it is quite clear that broadband and wireless services are

increasingly defining the challenges of telecommunications policy. In many important respects, the recent mergers are both a recognition of and response to this reality.

In evaluating any possible revisions to the 1996 Act, Congress should be careful

not to codify a particular technology or vision of competition into law. Similarly,

Congress should be succinct in drafting the relevant statutory provisions and thus

avoid the risk of providing self-contradictory instructions to the FCC. In providing

self-contradictory and vague instructions to the FCC in the 1996 Act, Congress set

the stage for an array of litigation that undermined many of the Act’s goals and

left a legacy of legal uncertainty.

To be more specific, Congress should seek to transition away from a number of

policies that are in tension with the current realities of the telecommunications

marketplace. In particular, the rules governing both the hand-off of traffic between

different networks (the matter of ‘‘intercarrier compensation’’) and universal service

support for subsidized telephone service are increasingly out-of-date and a hindrance to efficient competition. Similarly, ensuring the most effective use of spectrum—including allowing some users (such as UHF broadcasters) to sell to others

(say, wireless broadband providers)—should be a very high priority for Congress and

the FCC. Finally, Congress should evaluate how best to reform the FCC itself so

that it can carry out a mission very different from the one it was designed to perform.9

CONCLUSION

The anxiety over the developments in the telecommunications marketplace is understandable and can be constructive if it helps to frame the appropriate policy debate. That debate should not center on what some may have expected to happen

or what some wished would happen in the wake of the 1996 Act. Rather, it should

focus on the realities of the telecommunications marketplace and ask how regulation

can continue to facilitate entry, technological change, and innovation.

Chairman BARTON. Thank you.

And we want to thank all of you gentlemen for waiting so patiently to provide your testimony.

The Chair recognizes himself for 5 minutes.

I am going to start with you, Dr. Cooper. I was visiting with

some of my local constituents and wasn’t able to be here in person,

but I did listen to it on a television set. You are very opposed to

these mergers. Could you consolidate—I mean, do you—your primary reason, you just think the market will not work. Is that why

you oppose them?

Mr. COOPER. The—there are two levels of concern here. One is—

as I said, there is a bit of a shell game here. The dial tone competition we had from C-lex was killed by a regulatory decision, which

was pushed by the baby Bells. And so we are losing the people who

competed for basic telephone service, not VoIP and not the big bundles, because you need broadband. So we are losing those. The fact

that these two companies that are about to be bought out exited

the market after that decision doesn’t change the fact that that decision will hurt consumers. First answer.

Chairman BARTON. But we are not repealing the universal service requirement for basic telephone service. So everybody is still

going to be guaranteed one basic phone line if they don’t want anyVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00123 Fmt 6633 Sfmt 6602 99902.TXT HCOM1 PsN: HCOM1
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thing else, and that will—that basic service will still be regulated

in terms of the price at the State level.

Mr. COOPER. Well, it——

Chairman BARTON. So what——

Mr. COOPER. [continuing] may be, it may not be. In Texas, there

are proposals to do away with that. The problem here is—though,

if you look at the two mergers, what we have here is a series of

markets in which the acquiring companies are, in one sense, eliminating competition. And you could hear a little bit of it. Well, they

are buying up the people who serve most of the local competitors

for dial tone. Even though AT&T and MCI had stopped getting new

customers, they have the bulk of the old customers of the C-lex.

Second of all, they are eliminating competition for enterprise customers, especially in region, but also a little bit out of region.

Third, they are vertically integrating between the local public

switch network and the Internet backbone. And that is exactly the

vertical integration that gave us trouble in the old Bell system, because once you are vertically integrated, you have a different set

of incentives about how you are going to let other people interconnect with your network. And of course, at the same time that

they are vertically integrating, they are asking the FCC to eliminate the obligation of nondiscrimination.

Chairman BARTON. Well, I have got—I would love to have a—I

mean, I am sincerely glad you are here to present that—and I don’t

mean this facetiously, because it needs to be presented and both us

and the Justice Department need to think about those kind of

issues. So I have got a few other questions, but you know, we may

follow up with you in writing on some of those questions.

Mr. Halpern, you gave us more information than anybody—everybody else put together. You have got about a 100-page document

where you have looked at the telecom industry. And if I could summarize it, you are very bullish on the cable companies, and you are

not nearly as bullish on these companies, these merged companies.

Why do you think that the cable platform is going to be preferred

over these merged platforms that are based on the more traditional

telephone service? And if I have misstated your thesis, then correct

me on that.

Mr. HALPERN. When I tried and—said it a little bit—my thesis

a little bit differently than you put it, which is, first, I don’t cover

the cable companies. To say I am bullish on them is outside of my

realm of expertise. But what I would say is when you look at the

telephone companies, and there is plenty of research that also—

that I have done that shows that if you look at how many employees that have been cut out of the telephone companies over the last

couple of years, the regional Bell companies, since 2000, it is about

25 percent of the workforce is—has been reduced, and largely a

function of the competition that the Bells have faced as a result of

wholesale competition from AT&T and MCI, which as we now

know, is going away. That said, costs have stayed almost completely flat. So you are talking about companies who are losing a

tremendous amount of people out of their workforce and still can’t

cut costs. That is a function of the networks they are operating

under—the networks are operating with. When you look at the consumer market, and I respectfully disagree with Dr. Cooper, I think

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that you are going to have a tremendous amount of competition in

the consumer market, and I think the cable companies are going

to be the largest drivers of that competition. They have a cost

structure for voice services that will be very, very competitive

against the Bell companies. Just to give you an example, CableVision, when it came into New York, Verizon’s prevailing price for

a bundle of local and long distance was $59.95. That is what I was

paying every month. CableVision came in, and they offered $35.

That is approximately a 40-percent discount to Verizon’s prevailing

rate. That is a very difficult—if you can’t cut your costs and you

are competing against a competitor who is willing to be incredibly

aggressive on your core business, that has nowhere to go but

straight—you know, to take money straight out of your bottom line.

Chairman BARTON. So you believe that while you may not have

the traditional type of competition, you are going to have different

sources of competition that will be just as effective. Is that safe to

say?

Mr. HALPERN. I think that is—and it is very safe to say, and I

would add to that that I think that that competition will drive

some very significant investment by the Bell companies. One document I didn’t submit, which would have been another 100 pages for

you, was another one of the big studies that I did, which was on

fiber and the economics thereof. And one of the things that we

showed in that was that if the Bells roll out fiber, I can actually

make you a financial and economic justification, if they do a certain

way, for why it makes tremendous sense to do it. And that is not

fiber everywhere with respect to some of—you know, some of the

other Congressmen and women here who cover more rural markets. Those are not going to be markets that are—that the economic case is particularly justifiable for fiber, which is very expensive. But there is a very real economic case to be made for a fiber

network.

Chairman BARTON. And my—I will let Dr. Cooper comment, and

then I have a question for Mr. Weiser, and then we are going to

go to Mr. Stupak.

Mr. COOPER. One simple point. The $35 for VoIP assumed $45 for your cable modem service. So that is $80. And 70 percent of the

American people don’t pay the $45. The average local bill is $25.

So at one level——

Chairman BARTON. But for basic telephone service.

Mr. COOPER. For basic telephone service, but—so at one level,

the comparison is between that $25, and throw in $15 for long distance, even. So $40 versus $80, okay. And that is the fundamental

problem for 1⁄2 to 3⁄4 of the American——

Chairman BARTON. Well, there is no question that if you are not

a wired household, and you are not of—if you are a low-income

household and you have basic phone service and over-the-air television service, so you don’t have a cable, then to participate in this

revolution is going to cost you more, unless you decide to ditch all

of that and get a wireless telephone. You can get a wireless telephone, and you can get basic wireless service for $30 a month.

And—anyway, I need to ask Mr. Weiser a question, because you

talk about allowing the innovation—these entrepreneurial companies that we don’t know who they are but we want to protect their

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right to get into the marketplace to force the big boys to do something, it is very difficult proactively to protect something that

doesn’t exist. So when we get ready to rewrite these—the Telecommunications Act, which we are going to do, and Mr. Speta

talked about that, how do we proactively protect and guarantee

entry into a market that we don’t even know might exist?

Mr. WEISER. It is a terrifically important question. Let me offer

a couple perspectives. One is the importance of spectrum policy. I

believe a sound spectrum policy allows a healthy role for unlicensed spectrum. And one role that unlicensed spectrum has proven exceptionally good at is allowing lots of innovation and new developments, like Y-fi, which came from outside the established

players. And Y-fi is an unbelievable, you know, revolution in terms

of this marketplace growing hugely every year, using, you know,

outside innovation.

Another important role is ensuring access to broadband platforms. The FCC’s authority to ensure that anyone, like Vonnage or

like the next Video-over IP player, can make sure that their application is available to you on your SBC DSL line or me on my cable

modem line, or what have you. And the FCC’s authority to ensure

that is shaky. There are some court cases going on now about that,

and at the end of the day, who knows how it will get settled out.

Chairman BARTON. That would be something to put into the statute at some——

Mr. WEISER. That is right. To make clear the FCC—that is right.

Chairman BARTON. Access guarantee.

Mr. WEISER. That is right. And if there are reasons for concern

about whether people will get that access, it is going to be a huge

deterrent for innovation. So these people who don’t know who they

are, they are going to be deterred from innovating.

Chairman BARTON. I would assume, Dr. Cooper, you would support that.

Mr. COOPER. Yeah, I—there is not a lot of disagreement on this

panel. I mean, some form of nondiscrimination is critical. I support

the use of spectrum. I prefer to unlicense, which is the Y-fi example. I bet we could agree on universal service reform pretty quickly,

because I firmly believe, as was said earlier, we need to get every

connection. We need to shift, in my opinion, to a connection-based

fee where we count cable, we count everybody who is hooked to

that public network contributes. So I think the principles for reform are clearer now, after 10 fairly ugly years in the industry, of

how to go forward.

Chairman BARTON. All right. Last comment before I go to Mr.

Stupak.

Mr. Halpern, you have been raising your hand, which you don’t

have to do when you are—but——

Mr. HALPERN. Quick question—a quick point on that, which is

when do—we haven’t said it all, but when we are talking about

other platforms, I would—we have one—we already have one there,

and that is the power lines. You have power line coming into the

home. You know, I think there—and I could certainly provide this

committee, you know, some research that we have done on power

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nies to do what we are talking about, to provide a third broadband

pipe into the home.

Chairman BARTON. That is a very good——

Mr. HALPERN. And one of the biggest issues, if you want to create

an incentive for them, is allow them to cross-subsidize it, if you

need to. Because the benefits actually fall under the ability to manage the power grid better, more reliably and more securely, et

cetera. And then there is a secondary opportunity, which is the

ability to provide a broadband pipe.

Chairman BARTON. Very good idea.

Okay. Congressman Stupak.

Mr. STUPAK. Well, thank you, Mr. Chairman.

You mentioned power companies. I actually mentioned in my

opening statement, because I would like to see them come to rural

areas, like I represent, because many times that is the only—where

we are going to get anything done. I would have to disagree with

my chairman that all people would have to do is get a wireless

phone and they would be connected, because where I come from,

one part of my house I can get cell phone service, the other part

of my house, I can’t get it at all. So we do need some better development and competition in rural areas, which I think the FCC has

taken away from us underneath the current law. So—and in fact,

my blackberry, you know, after 9/11 they gave us all of these blackberries to keep in instantaneous touch with Members of Congress.

It worked beautifully everywhere in the United States except my

District. They couldn’t get a hold of me if they had to. It is just

crazy.

But Dr. Cooper, let me ask you this, because some of the questions that the chairman asked I was interested in. What do these

mergers mean for rural broadband deployment in phone service?

The Bells have argued that if Congress relieves them of the overly

burdensome State regulations, they can go and invest in broadband

for rural America. It is basically, like, ‘‘Unleash us and we will go

build it.’’ That is sort of the argument they make. And I know Mr.

Whitacre and I went back and forth a little bit, you know, when

I said they were going to pull out of the Upper Peninsula of Michigan, and he said, ‘‘No, no. Those are just news stories. Don’t believe

it.’’ But at the same time, they are talking to Michigan Public Service Commission basically saying, ‘‘You better stop regulating us or

we will pull out of the Upper Peninsula of Michigan.’’ So I had my

facts based on more than just what I read in the newspaper. So

what is the evidence that this has happened in States that have

deregulated?

Mr. COOPER. Well, I think rural America is a tremendous challenge for these kinds of services. We have a 70-year commitment,

which was strengthened in the 1996 Act, to assure ubiquitous, affordable, comparable service for all areas of the nation. That

doesn’t always make economic sense. It makes darn good political

and social sense from my point of view. So the fundamental—and

the claims that we will have more resources so we will build out

in more rural areas, they are going to go where the money is, and

low-density rural areas are not the most attractive places. That is

why I mentioned the Pennsylvania statute, which promises to build

out to serve the whole State in 10 years a 1.5 megabit network, at

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the same time, denying local communities the possibility of building their own networks next year for 5 megabits. All right. And so

from our point of view, the—we can not analyze service in rural

America as a purely economic issue. It is a social issue. We thought

we handled it well in the 1996 Act. We didn’t get there. I have

been—I have participated in cases where the companies decided

that relatively—reasonably comparable cost—was relationship to

cost. They wanted to charge people $150 a month for a phone in

rural areas under the statute. This commission—this committee

has to really write a commitment, a genuine commitment to universal service, which we point out in my testimony.

Mr. STUPAK. Well, go ahead, Mr. Speta.

Mr. SPETA. If I could just say something about wireless in rural

areas, and that it is about spectrum reform and especially the digital television transition, because not all spectrum is created equal.

Mr. STUPAK. Correct.

Mr. SPETA. Right. Your cell phone spectrum probably isn’t the

kind of spectrum that really penetrates walls very well, and it

needs a lot more towers a lot more closely spaced together. It——

Mr. STUPAK. Which is more expensive for them to put in——

Mr. SPETA. Right.

Mr. STUPAK. [continuing] if they are going to come to the rural

areas.

Mr. SPETA. Spectrum reform can get us the——

Mr. STUPAK. Right.

Mr. SPETA. [continuing] kinds of spectrum at an economic case

where the price of buying that spectrum at auction goes down to

make the business case for rural areas a lot better.

Mr. STUPAK. Well, that was my next need, because you and both

Professor Weiser mention the spectrum and spectrum reform. And

I was going to ask you to explain why is it important for wireless

development and competition, and what would your recommendations for this reform be? And then this—let these—and then we

will go back to——

Mr. WEISER. Sir, let me start with one point, which is painful

from a policy standpoint. In the UHF spectrum, because of the way

it was originally allocated, they are spaced really far apart, right,

so channel 55 and then channel 45.

Mr. STUPAK. Right.

Mr. WEISER. If you could get some of those people, literally, off

the air, you free up an amazing amount of spectrum, which is referred to as beachfront property.

Mr. STUPAK. Right.

Mr. WEISER. What you can do with that for public safety, for

commercial providers, and with unlicensed spectrum is tantalizing.

For example, in the case of your house, you can have community

networks that can help strengthen existing cell phone coverage

that you and your neighbors can get together to do.

Mr. STUPAK. Sure.

Mr. WEISER. You can have new generation of technology, which

will have a cell phone, which will actually work over your home

wireless networks. So it will actually move between where you

have cell coverage. It will work on that, and where you don’t it will

work over a Wi-fi network. And——

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Mr. STUPAK. But we have to change the spectrum to do that.

Mr. WEISER. You have to change the regulations and laws governing spectrum to do that. That is right. And you have to be more

thoughtful about universal service policy, which is to say it is not

going to be a one-size-fits-all program.

Mr. STUPAK. Correct.

Mr. WEISER. If you can allow for some experimentation and adaptation so that where you can support innovative wireless-based

universal service programs, that might well be superior to a tradition notion of universal service. And so the amount, I think, of

thought and flexibility that should go into the new Act is a point

I can’t stress enough.

Mr. COOPER. The ultimate kick in the pants about spectrum is

that in the Upper Peninsula, most of that beachfront property is

empty.

Mr. WEISER. Correct. Yes.

Mr. COOPER. Because you only get 2 or 3 broadcast stations, and

all of it—the rest of it is right there, so you don’t even have to kick

anybody off. You just have to have the right to use it. And it has

essentially been laid—it is laying fallow. And so that is the area

where we can solve those kinds of problems, and it is very, very

effective stuff.

Mr. STUPAK. But you are going to need some incentive to go in

there to use that——

Mr. COOPER. Well——

Mr. STUPAK. [continuing] because there is only 300,000 people

spread across——

Mr. COOPER. That—well, and so you need to support that with

a universal service fund. As long as the service provider is willing

to commit to what we consider basic telephone service.

Mr. STUPAK. Well, as we all know, universal service fund is

shrinking because technology is making——

Mr. COOPER. Well, we have to——

Mr. STUPAK. [continuing] it less——

Mr. COOPER. [continuing] fix the fund.

Mr. STUPAK. Well, we brought that up a little bit earlier in the

first panel. Go ahead, Mr. Halpern.

Mr. HALPERN. Well, I was going to say, but there is a solution

to that——

Mr. STUPAK. Sure.

Mr. HALPERN. [continuing] and I think we have talked about it.

Mr. STUPAK. I would like to hear it. Sure.

Mr. HALPERN. Which you have, you know—if you look—assume

the universal service is, first and foremost, a voice service capability or you want to ensure. Now the President has obviously indicated his desire to have universal service for broadband. That

raises a whole list of other types of issues. But what I would say

there is the North American Numbering Plan does—you know, why

not just have universal service funded through the North American

Numbering Plan? If you are assigned a number, there is a tax on

your bill that is associated with funding it, and it spreads across

everybody, and it solves that issue.

Mr. STUPAK. And even if you had the money available, we wrote

the rural utility service, which it brought up forth Federal money

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to do it. And then as soon as we tried to put it in the Upper Peninsula, because we are identifying with Traverse City below the

bridge, which is a more affluent area, we were denied the whole

application by the regulator. It goes back to the regulation of the

Department of Commerce. And——

Chairman BARTON. This will have to be the gentleman’s last

question.

Mr. STUPAK. Thank you.

Chairman BARTON. You might want to comment on what he just

said before we go.

The gentlelady from Tennessee, Ms. Blackburn.

Ms. BLACKBURN. Thank you, Mr. Chairman, and I thank all of

you for your patience with us today.

A quick question for Mr. Weiser, Mr. Halpern, and then I will go

to Dr. Cooper.

Mr. Weiser, I—you have worked with the end trust division of

the Department of Justice, and I would like for you just to comment a little bit. Talk about the sure number of competitors in a

market as opposed to the financial health of those companies. And

if you would quickly just talk about which do you see as being the

most important.

Mr. WEISER. This is a really important question. Let me start by

saying that this marketplace, the telecom marketplace, generally,

is not like the market for sandwich shops, so in my neighborhood,

there are probably about—within walking distance, about eight

sandwich shops. They are very low-entry barriers. We have much

more, what we think about as textbook competition. These markets

are capital-intensive. There tend to be less numbers to providers.

In terms of, I would say, a safety zone or a comfort level, I would

disagree slightly with Mr. Halpern. Let us say in wireless, I am

comfortable with four providers. With three, I would say it depends. Clearly, if it gets down to two major wireless providers, I

get very uncomfortable. So the current wireless marketplace has

generally been very healthy. If it stays at four, I continue to be

comfortable.

The question is how do you find the right balance between the

concerns about making the capital investments, financial health, as

opposed to consumer welfare. In the broadband marketplace, we

are sort of at an opposite perspective, which is we have two major

broadband providers, and the question is how do we get more,

which is not so much a question of anti-trust policy, it is more the

regulatory policy concerns we have talked about.

Ms. BLACKBURN. Okay.

Mr. WEISER. And I think—does that answer your question?

Ms. BLACKBURN. Yeah, it does. And I thank you. I thank you for

that.

I—you know, as we look at the options that are there, as we look

at convergence and the different technologies, and as one of our

former panelists had said, everything over IP. You know. I think

that it does cause us to think more closely on those issues.

Mr. Halpern, very quickly, what do you see with the financial

condition of AT&T and MCI in 5 years or 3 years or a year if the

merger doesn’t take place?

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Mr. HALPERN. I think that you see AT&T continue to shrink at

rates similar to what you have seen now. What happened—if you

think about AT&T, think about it as a bunch of waves. The first

wave was very much the Bell companies getting into long distance

and consumer. That broke on the side of their—you know, their

ship and caused a massive degradation. I think the average decline

rate in the consumer business over the last 4 years, average per

year, has been about 20 percent of revenues.

The next wave was, obviously, the wholesale—the impact on

wholesale from regulation and the courts. And that has just further

exacerbated the situation ultimately that led them to exit that

market.

The next wave is here and coming, and that is really the small

business market. And you are seeing that now. And the following

on that, you are going to have the Bells basically going into the enterprise market, you know, the way we have described, which is a

slow, organic, you know, very unpleasant strategy for the Bells to

undertake, but they will do it. And it will take, you know, 4 or 5

years, and it is going to be a very tough thing, and it will continue

to cause AT&T a tremendous amount of pain. As I said in my opening comments, I personally would bet that, you know, 7 to 10 years

from now, AT&T would not be here necessarily.

Ms. BLACKBURN. Okay. Thank you very much.

Dr. Cooper, I have got two things for you.

First of all, in your testimony, you express concerns about concentration in the cable industry, and then your testimony seems to

call for more regulation on the R-box, and even as they plan to

offer IP TV and trying to get into competition. So I am trying to

figure out if you are for more competition or if you are for more

regulation. What is most important to you?

And let me ask a second question to finish this.

I also noticed in your testimony, when I was reading through

this last night, you kept referencing a crummy duopoly and crummy duopolist. And so this morning, I went in and pulled this Business Week article that you referenced. And you even, when you

were doing your testimony, referenced that. It—and the article

talks about a cozy duopoly. So did you just misappropriate the

term, or is there something there that we are missing?

Mr. COOPER. Well, I—if you are a consumer and you have got

two duopolists who are cozy, from your point of view, it is pretty

crummy, because they don’t compete very hard. And that is the

point here. I think here is a way to describe the balance between

competition and regulation that we need now, because you have

heard discussion about 2 or 3 or 4. We need another platform,

which is the facilities, okay. But my point is that—and so we want

more facilities, but two is not enough. They won’t compete. They

will—it is too easy for two guys to figure out, or two gals to figure

out, how not to really go at it head-to-head, how not to drop prices.

And that is why we have been falling behind the rest of the world.

But the point is, we want more. We want 2—we want 3 or 4. There

is an expression in economics that 4 is few and 6 is many, but the

problem is, these are very capital-intensive industries.

But here is the question. Suppose I have four platforms. Do I

want to allow those platform owners to pick and choose, discrimiVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00131 Fmt 6633 Sfmt 6602 99902.TXT HCOM1 PsN: HCOM1
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nate against, the VoIP providers so that each platform owner only

has one VoIP provider who can then—so now I have taken what

could be competition among 50 applications companies and shrunk

them down to 4 or 3. Right. I don’t want to give up the vibrant

competition we have had on the Internet for this crummy competition among facilities owners. So that is the balance. I want more

competitors, but given the facilities, it is not going to be enough.

I need some regulatory principles to let me capture the other benefits as well as applications competition. And that is a balance that

I think was struck in the 1996 Act. The courts may decide otherwise, but I think this committee needs to make some form of nondiscrimination among application service providers. The more platforms, the better. If we were talking about ten platforms, you probably wouldn’t listen very long, because ten is a big number. But we

are only talking 2, 3, or 4. And that is not enough to really guarantee me competition.

Chairman BARTON. The gentlelady’s time has expired.

Ms. BLACKBURN. Thank you, sir.

Chairman BARTON. For our last round of questions, the good doctor from Denton, Texas, Dr. Burgess.

Mr. BURGESS. Thank you, Mr. Chairman.

I—and I apologize for being out of the room, and if this question

has already been answered, but Mr. Halpern, if we could just start

over today with a blank sheet of paper, what—from a financial perspective, what types of companies would be the strongest competitors and what, ultimately, would be best for the consumers?

Mr. HALPERN. Boy, there is a tough question for you.

Chairman BARTON. That is why we saved him for last.

Mr. HALPERN. Well, I am going to actually ask the question back

again, which is when you say start over with a clean sheet of

paper, how far back are we going with—in getting clean? Are we

going to eliminate the——

Mr. BURGESS. The stone tablets. The Ten Commandments. I

don’t know. You pick a point in history and go forward from there.

Mr. HALPERN. All right. I mean, if I look and I say, okay, we

can’t do anything about where we are today, to some degree, and

you say okay, so what would I do if I were going to figure out, you

know, what I was going to do from here, you have in front of you

a bunch of companies saying they want to get together. On the

wireless side, as I said in my opening comments, I feel pretty comfortable. I agree 3 versus 4—I mean, ideally you would really want

four big-scale competitors, but frankly, I am not sure how you get

four big-scale competitors. Right. At this point, I am very happy to

see Sprint and Nextel getting together, because you know they will

provide a—you know, a sort of a safety net in the market for competition against, sort of, the Verizon Wireless, Cingular Wireless,

you know, behemoths. And they will be able to compete, I think,

very effectively at that. If I look at the—and I separate wireline

and wireless. I recognize these things are all sort of converging in

their own ways. If I look at the enterprise market, I mean, you

know, Verizon conveniently used a bunch of my research this

morning, which I thought was humorous that Mr. Seidenberg, you

know, then said he had no idea, you know, what I had been saying

and it was wrong, even though he didn’t know what it was. But

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I thought the Congresswoman from New Mexico may—you know,

when she asked him the question, I will tell you there are, you

know, 13. I—literally, I counted up 13 backbone providers in the

U.S. Right now it is true. Level 3 does not get nearly the credibility

when they walk into an enterprise customer, but they certainly

play a price spoiler role. Right. And those 13 backbone providers,

to go to Mr. Cooper’s 10, I have got 13, and that is a lot. If I could

write who would buy what and who would be where and feel comfortable with it, I don’t really personally care if Verizon gets MCI

or Quest gets MCI from a regulatory perspective. I think similarly

why Sprint and Nextel is a good thing. I think certainly a QuestMCI deal is probably better regulatory-wise than a Verizon-MCI

deal. Verizon can, frankly, do it themselves if they wanted to.

Quest is going to have a very hard time organically building its

own, you know, scale, and so they really need to go merge with

someone like MCI to get that scale. But from a clean slate, it is

hard to say, because, you know, it is a difficult question that way.

Mr. BURGESS. Just in the remaining time that I have, I get a lot

of questions from my Ham radio operators about broadband over

power line, but what can I tell them? What comfort can I give

them?

Mr. HALPERN. Well, I—the issue of interference on BPL is—it is

a real issue. I have—from what I have been told by people who are

much more technically savvy than I am, there are ways to carve

out, you know, where there is—where the interference resides.

That alone is not—I don’t think a reason not to pursue BPL. I

think that there are technological workarounds on the interference

for Ham radio operators. And I think—if you just think about from,

again, consumer good, right, I think anything you can do to try to

encourage another emphasis—and now I am going to put the emphasis on the word scale, another scale competitor, to the regional

Bell companies and the cable companies, the guy—the only guy I

think of that is going to give you that scale on day one is going to

be a power company.

Mr. WEISER. Let me—one thing to tell them, which is important,

this effort by the FCC is a regulatory innovation. They are putting

a little bit of burden on the Hams to quickly identify interference

and report it, and at which point the power guys have to remedy

it. And so the traditional model of spectrum management was let

us be as proactive, preventing any possibility of any interference.

The consequence was a lot of spectrumalized fallow. That is a little

bit why we have this UHF problem that Dr. Cooper referred to earlier. The Hams now are suffering a little bit in the new model,

which is, we will take some risks but make sure to remedy them

very quickly if they actually materialize. So tell them the FCC is

putting them a little bit at risk, but that there is a regime in place

so that the risk will get remedied very quickly, as soon as they can

report that they are experiencing interference.

Mr. COOPER. I want to go back to the first point, because this

also will go back to the first question that Mr. Barton asked. Mr.

Halpern has outlined in his scenario in which it is quite clear that,

boy, it is hard to break into markets. Verizon will have to spend

a bunch of money to get in. That is what capitalism is about. The

interesting thing here is that the proposition he has offered is the

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1 APT is a nonprofit membership organization based in Washington, D.C., which was founded

in 1989 to foster public policies that ensure access to advanced telecommunications technologies

for all Americans.

following: If Quest acquires MCI, they will be in the enterprise

market, and Verizon will have to get in it as well, which is the different—so I end up with two competitors when I would have had

one. Now we don’t always do that thinking right, but the—and certainly anti-trust authorities don’t get into that game, but this committee needs to think about that and say, ‘‘Well, too bad. You

know. You have to earn your way into this market.’’ And so if I can

end up in a situation where I have two competitors or three competitors or four competitors as opposed to losing that competitor,

that is a public policy concern.

Mr. BURGESS. Thank you. My time has expired, I yield back.

Chairman BARTON. We thank the gentleman.

I want to thank this panel and our audience. I want to make one

announcement since there was quite a bit of discussion in this

panel about digital transition. I expect to introduce very quickly a,

hopefully, bipartisan bill with a hard date of December 31, 2006 for

digital transition, and we are working with Mr. Upton, Mr. Dingell,

and Mr. Markey to get the details. And of course, we have to work

with the Senate where the senior Senator over there, Mr. Stevens,

has indicated some support for a hard date, but not necessarily

that hard date. So your testimony had an added benefit in that it

has put on the record some support for that concept.

I want to thank you all. We may have written questions for each

of you, and if so, you know, reply very quickly. I would tell Mr.

Speta, who talked about an academic group that is being formed,

to look at putting together some legislative language for a rewrite

of the Telecommunications Act. This committee is going to work

more quickly than your academic committee. I think we are going

to—Mr. Upton has every indication to put a bill together and report it out this summer and report it to the floor before August.

Mr. SPETA. We will get moving.

Chairman BARTON. Yes. If your group is going to do something,

you better put your saddle on and put the spurs on the horse, because we are going to move on that.

The last announcement, the Energy and Air Quality Subcommittee is going to hold a hearing in this room, and it is going

to start at approximately 3 this afternoon. This hearing is adjourned.

[Whereupon, at 2:35 p.m., the committee was adjourned.]

[Additional material submitted for the record follows:]

ALLIANCE FOR PUBLIC TECHNOLOGY

March 10, 2005

The Honorable JOE BARTON, Chairman

Committee on Energy and Commerce

U.S. House of Representatives

2125 Rayburn House Office Building

Washington, DC 20515

DEAR MR. CHAIRMAN: The Alliance for Public Technology (‘‘APT’’) 1 applauds the

Committee’s decision to conduct hearings on a number of recently announced mergers within the telecommunications industry. APT respectfully requests that this letter be included in the Committee’s hearing record.

The pending and proposed transactions highlight a number of significant trends

within the telecommunications industry: the end of meaningful distinctions between

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markets for local and long distance voice services; the growing importance of IPbased services and wireless technologies; the impact of intermodal competition on

incumbent providers; and, the need for many companies to be able to serve customers of all sizes, on a national, if not global, basis. Without question, these mergers will reshape the telecommunications marketplace, and they are likely to spur

additional deals among the remaining industry players. As the Committee’s title for

this hearing suggests, however, such transactions are less the cause of the massive

changes underway within the industry, than they are reactions by corporate entities

to the technological forces that are rapidly changing how we communicate in the

21st century.

You and your colleagues asked a number of critical questions of the merging parties, and they will face many more as they undergo the formal process of demonstrating that their specific transactions serve the ‘‘public interest, convenience

and necessity.’’ At this time, APT does not seek to comment on the merits of any

particular merger or proposed combination. Instead, we wish to urge the Committee,

as well as the FCC and the state regulatory bodies specifically charged with reviewing the transactions, to examine them in light of whether they promote the goals

of Section 706 of the Telecommunications Act of 1996: to ‘‘. . . encourage the deployment on a reasonable and timely basis of advanced telecommunications capability

to all Americans . . .’’

The issues the reviewing agencies must consider include the following: What effect will a particular transaction have on deployment of affordable broadband services in rural areas, communities with lower income residents, or among Native

American populations? Will a resulting entity be better equipped to ensure the accessibility of advanced services and equipment to persons with disabilities or other

functional limitations? Will a merged company be in a position to improve access

to essential health care facilities and educational opportunities, in every community

it serves? Will a transaction help or hinder the achievement of important social

goals, including better public safety communications and E911 services? As a combined entity seeks to derive potential cost savings from the integration of previously

separate operations, what will be the impact on its future investments in human

capital, new equipment, and research and development?

In short, the names and structures of the corporate entities that compete in the

communications marketplace of the 21st century will surely continue to evolve. The

technologies that are deployed within our telecommunications networks will continue to change, as well. What will not change, however, is the need for all Americans to have affordable access to a modern telecommunications infrastructure. The

FCC and the state regulatory agencies that review such mergers should remain

mindful of their ongoing obligations under Section 706 to take appropriate measures

to promote such access.

Finally, these transactions and your hearing have helped to focus national attention on how the legislative framework established by the Telecommunications Act

of 1996 has been impacted by rapidly evolving communications technologies. APT

agrees that these technologies are making a number of the core provisions of the

1996 Act increasingly outmoded or irrelevant. Our current regulatory structure may

be serving to discourage needed investments and growth in our telecommunications

industry. We are pleased that your Committee has commenced the process of considering necessary legislative reforms, and APT’s members stand ready to work with

you in these efforts. In part, our goal should be a structure under which future telecommunications deals will be made for sound economic, business, and public service

reasons, not because current regulations may favor certain providers and technologies over others, in contravention of the ‘‘competitive’’ and ‘‘technological’’ neutrality mandates of the 1996 Act.

Thank you for your consideration of APT’s views.

Sincerely,

DAN PHYTHYON

Public Policy Director

cc: The Honorable John Dingell

The Honorable Fred Upton

The Honorable Ed Markey

RESPONSE FOR THE RECORD FROM TIM DONAHUE, NEXTEL COMMUNICATIONS

THE HONORABLE JOSEPH R. PITTS

Question #1: Early last year, many wireless companies, including yours, were

ready to unveil a wireless directory assistance program. This received significant opVerDate 11-MAY-2000 11:32 Aug 04, 2005 Jkt 000000 PO 00000 Frm 00135 Fmt 6633 Sfmt 6621 99902.TXT HCOM1 PsN: HCOM1
128

position from the public and Sprint withdrew its decision to participate in the directory. What will the plan be for directory assistance for the new company?

Response: Sprint and Nextel will remain competitors until the merger is complete

and thus we have not made a joint strategic decision concerning WDA.

Question #2: It has become clear over the last 18 months that the biggest wireless

companies are planning to implement a wireless directory assistance service. This

met significant resistance from the public and Sprint, along with Alltel, withdrew

their participation in the directory. No such decision was made by Nextel. Once your

companies merge how will the new company approach the directory? Will you participate? If so, how will you inform subscribers? If not, can you please share your

reasons?

Response: The proposed merger between Sprint and Nextel has not been completed and as such any decision regarding WDA on behalf of the merged company

has not yet been made.

SPRINT

April 4, 2005

The Honorable JOE BARTON

2125 Rayburn House Office Building

Washington, D.C. 20515

DEAR CHAIRMAN BARTON: Thank you for giving me the opportunity to appear before the Committee on Energy and Commerce on March 2, 2005, to present Sprint’s

views on ‘‘Competition in the Communications Marketplace: How Technology is

Changing the Structure of Industry.’’

I am in receipt of your follow up questions regarding Wireless Directory Assistance (WDA) asking whether a merged Sprint-Nextel company will participate in a

WDA, and, if so, how subscribers would be informed that they may be listed. Due

to the still pending Sprint and Nextel merger application, it would be premature

to comment on the company’s future business plans with respect to offering WDA.

Sprint believes that there are substantial numbers of customers who want to have

their wireless numbers listed. As you note, however, Sprint has elected not to offer

WDA at this time. I can assure you that if we decide to implement WDA at some

point in the future, it would be offered in a consumer friendly manner that respects

the privacy of our customers.

Sincerely,

GARY D. FORSEE

Chairman and Chief Executive Officer

cc: Congressman Joe Pitts

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Æ