<DOC> [109 Senate Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:21757.wais] S. Hrg. 109-48 SBC/ATT AND VERIZON/MCI MERGERS: REMAKING THE TELECOMMUNICATIONS INDUSTRY, PART II--ANOTHER VIEW ======================================================================= HEARING before the SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND CONSUMER RIGHTS of the COMMITTEE ON THE JUDICIARY UNITED STATES SENATE ONE HUNDRED NINTH CONGRESS FIRST SESSION __________ APRIL 19, 2005 __________ Serial No. J-109-8A __________ Printed for the use of the Committee on the Judiciary U.S. GOVERNMENT PRINTING OFFICE 21-757 WASHINGTON : 2005 _____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800 Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001 COMMITTEE ON THE JUDICIARY ARLEN SPECTER, Pennsylvania, Chairman ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin JOHN CORNYN, Texas CHARLES E. SCHUMER, New York SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois TOM COBURN, Oklahoma David Brog, Staff Director Michael O'Neill, Chief Counsel Bruce A. Cohen, Democratic Chief Counsel and Staff Director ------ Subcommittee on Antitrust, Competition Policy and Consumer Rights MIKE DeWINE, Ohio, Chairman ARLEN SPECTER, Pennsylvania HERBERT KOHL, Wisconsin ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont CHARLES E. GRASSLEY, Iowa JOSEPH R. BIDEN, Jr., Delaware LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York Peter Levitas, Majority Chief Counsel and Staff Director Jeffrey Miller, Democratic Chief Counsel C O N T E N T S ---------- STATEMENTS OF COMMITTEE MEMBERS Page DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1 prepared statement........................................... 49 Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 3 prepared statement........................................... 64 WITNESSES Citron, Jeffrey, Chief Executive Officer, Vonage Holdings Corporation, Edison, New Jersey................................ 7 Cleland, Scott, Founder and Chief Executive Officer, Precursor Group, Washington, D.C......................................... 9 Grivner, Carl, Chief Executive Officer, XO Communications, Reston, Virginia............................................... 5 Kimmelman, Gene, Senior Director for Public Policy and Advocacy, Consumers Union, Washington, D.C............................... 11 SUBMISSIONS FOR THE RECORD Citron, Jeffrey, Chief Executive Officer, Vonage Holdings Corporation, Edison, New Jersey, prepared statement............ 25 Cleland, Scott, Founder and Chief Executive Officer, Precursor Group, Washington, D.C., prepared statement.................... 38 Grivner, Carl, Chief Executive Officer, XO Communications, Reston, Virginia, prepared statement........................... 52 Kimmelman, Gene, Senior Director for Public Policy and Advocacy, Consumers Union, Washington, D.C., prepared statement.......... 66 SBC/ATT AND VERIZON/MCI MERGERS: REMAKING THE TELECOMMUNICATIONS INDUSTRY, PART II--ANOTHER VIEW ---------- TUESDAY, APRIL 19, 2005 United States Senate, Subcommittee on Antitrust, Competition Policy and Consumer Rights, of the Committee on the Judiciary, Washington, D.C. The Subcommittee met, pursuant to notice, at 3:04 p.m., in room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine, Chairman of the Subcommittee, presiding. Present: Senators DeWine, Brownback and Kohl. OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE STATE OF OHIO Chairman DeWine. Good afternoon. We apologize for being late. We had two consecutive votes on the Senate floor, but we are here. The good news is the Senate is now in recess for a while, so we will not be interrupted. Let me welcome all of you to the Antitrust Subcommittee hearing examining the proposed mergers between SBC/ATT and Verizon/MCI. As promised, this is a continuation of the examination that we began last month with the full Judiciary Committee. The difference today is that rather than hear from the CEOs of the merging parties, we will hear from witnesses who take a somewhat different view. As you all know, at that time I expressed some reservations about these mergers. Not surprisingly, the CEOs of the four respective companies acquitted themselves quite well at the hearing and emphasized very clearly that ATT is already leaving the residential market and MCI is likely to follow. In other words, they made the important point that in some ways these mergers don't change the competitive landscape for consumer services. They also emphasized the impact of intermodal competition, meaning competition from other forms of service such as wireless cable and voice over Internet protocol. These are important arguments and the companies made them very effectively. But, frankly, I am still worried. I think there is still a lot more to it. In my mind at least, it is still an open question between the SBC/ATT merger and the Verizon/MCI merger are good for competition and for consumers. That, of course, is what we are here today to discuss and to look at. As we began to explore last month, there are a range of issues that raise concerns. Perhaps the one which has received the most traditional antitrust scrutiny so far is the so-called enterprise market, the sector of the market comprised of large businesses with sophisticated telecommunications needs. All four of the merging parties currently compete in this market sector. So large business customers will likely be affected by the deals. This area will require close scrutiny. There are also questions regarding the impact of these deals on the markets for long-haul capacity and in the market for Internet backbone that today's witnesses are particularly well-suited to answer. We are looking forward to these discussions. As we discussed in our last hearing, however, the critical issue here is intermodal competition. According to the testimony we heard from the company CEOs, they are facing competition on numerous different technological platforms, specifically, as mentioned, cable companies, wireless companies and companies that provide voice over IP services. Once again, we must keep in mind that intermodal competition, by definition, does not always provide the type of direct competition we are used to seeing. Wire line, wireless, cable--these services are inherently different and provide similar services in different ways with different pluses and different minuses. Not all will always provide sufficient and competitive benefits for all consumers. In fact, there are a number of concerns that have been raised about each which I know we will explore today. But most important in this context, we must discuss whether or not merger conditions are required to ensure that these multiple modes of competition are, in fact, available. For example, voice over IP is often held up as the poster child for intermodal competition. In fact, Vonage, one of our witnesses today, is a voice over IP provider. It is certainly a very promising product, but our witness himself will testify today that voice over IP is a type of service that is available to the consumer only if he or she has broadband access, and currently that access is widely available only from the phone company or the cable company. Think about it. Voice over IP providers must rely on their competitors to get access to their customers. Clearly, that is a somewhat tenuous situation and we will need to consider if the mergers change it at all. There are several other issues to explore. In most places, residential consumers currently face duopoly choice--buy an expensive bundle of local, long-distance, Internet and wireless service from the phone company or buy an expensive bundle of similar services from the cable company. What impact will the purchase of ATT and MCI have in this situation? Will it allow the phone companies to provide better products and services, or will it remove two of the few potential existing market entrants? Another important point is that high-speed and wireless broadband will clearly be required for the next generation of services and will certainly help competitors such as voice over IP and cable telephone service. ATT and MCI, as independent competitors, had a big stake in promoting the development of broadband. How will these mergers impact the development of those broadband capabilities? Similarly, how will the mergers impact the availability of new wireless spectrum? Finally, I hope that the panelists will share their thoughts about what we in Congress can do more broadly to help promote competition and innovation in the telecommunications industry. Many have noted the need for a rewrite of the 1996 Telecommunications Act, and it is time to start thinking about what such a rewrite would entail. Certainly, it seems that there is a need to free up the spectrum necessary to enhance wireless broadband development. Another issue is the need for the FCC to expeditiously rule on their own proceedings on inter-carrier compensation, special access pricing and the regulation of IP-enabled services. These proceedings have been going on for an extended period of time and the industry is to some extent in limbo awaiting the rulings. Outdated legislation and incomplete regulations can only hinder the type of aggression competition that leads to innovation, better products and lower prices. So with that in mind, we look forward to hearing from our panelists today on a wide range of issues. Before I turn to Senator Kohl, I would just to acknowledge some news that we all heard this morning. Verizon has announced that it will be making stand-alone DSL service available to some of its customers in certain regions. This is an issue that we discussed at some length in our last hearing, and I think we all agree that to the extent that stand-alone DSL is available, it makes voice over IP a stronger and more valuable competitor and provides more choices for consumers. So I applaud Verizon's actions in this regard, and we will be watching to see if Verizon and others within the industry are able to continue down this path. Let me now turn to my colleague and my friend, Senator Kohl. STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF WISCONSIN Senator Kohl. Thank you, Senator DeWine. Today, we return to the topic we began considering a month ago at the full Committee's hearing on consolidation in the telecom industry. As we noted then, the mergers we are examining and the technological changes we are witnessing will fundamentally change how Americans communicate and what we pay for these services. At our Committee's hearing last month, we heard from the four CEOs of the merging companies explain why they believe these deals are in the consumer's best interests, and we agree that today's telecom market is very different from the market that existed when the ATT phone monopoly was broken up 21 years ago, and that there is the great potential for many consumers to benefit from new forms of competition and new choices. But the sheer magnitude of these mergers and a potential to concentrate market power in the hands of two large telecom companies requires us to carefully examine the competitive consequences of these deals. Today's hearing will be an important opportunity to hear the views of consumer representatives, competitors and independent experts as to whether the mergers will be good for competition and for consumers. The Bell companies and their merger partners have testified that new technologies and innovation should allay any concerns we have about the size and market power of the companies that will emerge once these mergers are completed, and we hope they are proved correct. Our first responsibility therefore must be to ensure that the development and deployment of these new technologies are not stifled in their infancy by today's consolidation. We must seek to avoid the creation of a world where consumers are left with only two choices for a bundle of telecom services--the Baby Bell phone company and the cable company. Our witness from the Internet telephone company Vonage is an example of one exciting new way consumers can make telephone calls without using traditional phone lines controlled by the companies involved in these mergers. However, in order to access Vonage's service, consumers still need to obtain high- speed access to the Internet. And, today, the only provider of such high-speed Internet connection for most consumers is either the Bell phone company or the cable company. We need to ensure that these Internet connections come without strings attached and that consumers are free to buy Internet connections without also being required to buy conventional phone service. We need to make sure that the phone or the cable company providing the Internet connection does not attempt to block or degrade the consumer's access to these Internet-based telephone services. So our concerns remain the same as we stated them last month. First, how can we ensure that this consolidation will not decrease the choices and increase the cost to consumers and business customers, both large and small? Second, how can we ensure that new technologies and new services can get access to the Bell company networks? Our goal must be the nurturing of a truly competitive telecom marketplace with a maximum of choice for consumers, a market that will not be controlled by a few dominant players. We must insist that the Justice Department and the FCC scrutinize these mergers properly so that the tremendous gains in telecom competition over the last 20 years are not lost in the midst of this industry consolidation. We thank our witnesses for coming to testify today and we look forward to hearing their views. Thank you, Mr. Chairman. [The prepared statement of Senator Kohl appears as a submission for the record.] Chairman DeWine. Senator, thank you very much. Let me briefly introduce our panelists, and thank you all for being here. Carl Grivner is CEO of XO Communications, the largest independent competitive local exchange carrier. Prior to his tenure at XO, he served as CEO of Global Crossing. He has worked in the telecommunications industry for the past 25 years. Thank you for joining us. Jeffrey Citron is the Chairman and CEO of Vonage. In 1999, he co-founded the company. In addition to his work in the telecommunications industry, he has worked extensively in the financial services industry and founded both Island ECN and Daytech Online Holdings. Mr. Scott Cleland is the founder and CEO of Precursor, and also serves as the chairman of the Investor Side Research Association. He has testified before the Subcommittee on prior occasions and we certainly welcome him back. Gene Kimmelman is the Director of the Washington, D.C. office of Consumers Union, certainly no stranger to this Subcommittee or to the full Committee. Gene, thank you for joining us again. Mr. Grivner, thank you. We will start with you. We will go from my left to right. Each one of you will have five minutes and we would ask you to kind of keep your eye on the clock and that will give us the opportunity to have plenty of questions for you. Thank you. STATEMENT OF CARL GRIVNER, CHIEF EXECUTIVE OFFICER, XO COMMUNICATIONS, RESTON, VIRGINIA Mr. Grivner. Good afternoon. My name is Carl Grivner and I am CEO of XO Communications, one of the Nation's largest facilities-based providers of telecommunication and broadband services to business. XO is headquartered in Reston, Virginia. We have nearly 5,000 employees nationwide. We were formed in 1996, and since then XO has expanded telecommunications offerings from its original four small markets to more than 70 area markets in 26 States today. Our company provides a comprehensive array of voice and data telecommunications services to small, medium and large businesses serving nearly 200,000 customers. I want to thank Senator DeWine and Senator Kohl for inviting me to testify before the Subcommittee on the competitive ramifications of the SBC acquisition of ATT and the Verizon acquisition of MCI. I believe a number of questions were left unanswered following the previous hearings held on these mergers, and I hope that our testimony today will provide you with additional information needed to properly analyze the effects of these mergers. These mergers are truly monumental in scope, as they seek to join the largest telephone monopolies with their largest competitors. There is no doubt that these mergers will reduce the amount of competitive choices for your individual constituents and businesses. With the loss of ATT and MCI, future competition between the incumbents and the remaining competitors will look much like a match between the Green Bay Packers and a Pop Warner team. And I didn't mean that as a partisan comment. I have been a Packer fan for 40-plus years. My written testimony addresses a number of our concerns in detail. However, I would like to highlight a number of specific points that we hope the members of the Committee will consider. First, the SBC/ATT merger and the proposed Verizon/MCI deal will fundamentally reshape this industry, marrying the two largest local telecommunications providers with their two largest competitors. Only the breakup of ATT in 1984 and the 1996 Telecommunications Act can compare to the massive industry restructuring that will result from these mergers. Second, these mergers are particularly harmful to business customers, both retail and wholesale, in local markets. We have gathered for the Subcommittee preliminary high-level data that demonstrate the substantial injury that occurs. The charts here that we are showing, which use the same data employed by the RBOCs in the FCC's triennial review process, provide a sobering look at what these mergers can do to local competition. The first set of charts shows the current status of competition in Cleveland, Ohio, and Milwaukee--no coincidence. Chairman DeWine. We thought that looked familiar. Mr. Grivner. Yes, okay. I hope so. Chairman DeWine. The shoreline looked a little familiar to us, yes. Mr. Grivner. As measured by the presence of competitors in commercial buildings, ATT is in red, while all other CLECs are in green. Indeed, competitors have made some headway in these local markets as a result of the 1996 Act. The second chart shows what these markets will look like after the mergers with the removal of ATT. You will notice that these markets are significantly altered. The presence of competitive providers drops by a staggering 53.6 percent for Cleveland and 64 percent in Milwaukee. In other words, the competitive injury to customers from ATT exiting the market will be real and substantial. And don't expect alternative providers to make up this competitive gap. ATT is unique. It entered local markets with an enormous advantage. It had tens of millions of long-distance customers, including relationships with top business customers throughout the country. It had tremendous financial resources, $11 billion of which it spent to acquire the largest local provider, Teleport, and then it continued to expand its local network. The only other local competitor with similar resources is MCI. And as I am about to demonstrate, post-merger, it too will not fill this gap. The next set of charts depict the effect of MCI's departure from the market. You can see that the competitive presence declines even further, a total of 61 percent for Cleveland and 69 percent for Milwaukee. The reason we took MCI out of the market leads me to my third point regarding these mergers. No one should expect that SBC and Verizon will compete head-on. Today, SBC and Verizon are the number one and number two local telephone providers. In the hand-outs that we provided you, you will see that in the Los Angeles market SBC and Verizon share a common geography. Yet, neither is competing in the other's territory. So why should we assume they will compete if these mergers are approved? SBC and Verizon operate under that old Cold War principle of mutually-assured destruction. Each company is a mirror of the other, and each knows the other has an overwhelming competitive advantage in its home territory. So why attack and face annihilation? Better to operate under a strategy of containment. Fourth, these mergers will reduce, not encourage the innovation that has flourished in the competitive environment. It was competitive companies that brought your constituents DSL, and now voice over IP. It was companies like XO that incurred the enormous expense of laying much of the fiber that is now used for advanced telecommunications services, and it is competitive companies that are continuing to innovate to find solutions to the so-called last-mile access. The basic fundamentals of antitrust law demand a thorough examination of these mergers. It is not consolidation, per se, that is the paramount concern. It is the massive concentration and the injury to customers that ensues. It is important that Congress understand that if these mergers are approved, SBC and Verizon will control nearly 80 percent of the business wire line market, more than 63 percent of ILEC lines and more than half of all wireless subscribers nationwide. We hope that the members of the Subcommittee will resolve to fully examine the competitive impacts of these proposed mergers we are discussing today. I thank you for the opportunity to testify today. [The prepared statement of Mr. Grivner appears as a submission for the record.] Chairman DeWine. Thank you very much. Mr. Citron. STATEMENT OF JEFFREY CITRON, CHIEF EXECUTIVE OFFICER, VONAGE HOLDINGS CORP., EDISON, NEW JERSEY Mr. Citron. Good afternoon, Chairman DeWine, Senator Kohl and members of the Subcommittee. Thank you for the opportunity to appear today. I am Jeffrey Citron, the CEO of Vonage Holdings Corp. We are the largest provider of consumer and small business voice over IP service, as we refer to the industry, with over 600,000 subscriber lines. For once, the entire telecommunications industry can all agree that today's phone service market is highly competitive. Consumers have many choices, from plain old telephone service, to wireless service, to new and exciting offerings from voice over IP providers like Vonage. But no matter what kind of competitive phone service you choose, all providers need access to certain critical facilities. These facilities are network bottlenecks where there is little or no competition. Vonage would like to express our concern that the proposed mergers of SBC and ATT or Verizon and MCI would diminish existing competition by further consolidating the ownership and control over the critical building blocks upon which all communications service rely. A good example of this critical infrastructure is the 911 emergency service network. There is only one 911 network for every market, which is typically owned and operated by the local phone company. There is no competitive marketplace for 911 services. All calls to 911 must go through this unique system. Vonage has requested access to the Bell's 911 network and to date has been denied by all but one of the major phone companies. In an attempt to resolve this issue, Vonage has built a basic 911 solution, but it has limited functionality. Since there is no alternative to the Bell 911 network, Vonage cannot offer true 911 service if not guaranteed access to this public trust. At this critical juncture, we are crippled from meeting our collective social policy goals to deploy 911 for all. These mergers cannot be approved without conditions guaranteeing consumers with Internet phones direct access to 911 service. Another good example of critical telephone network infrastructure are the Bells' network tandems. Tandems are where competing providers of phone service meet to link their networks together. The core of the public telephone network is made up of these tandems. These tandems are essential because they enable customers from one phone network to talk to customers of all other phone networks, and vice versa. To be clear, this is not about reselling the Bells' network, as it has been debated to death. I don't want to resell plain old telephone service. I just want my customers to be able to call grandma. In an effort to link Vonage's network to the public telephone network, we have requested direct access to the tandems that are controlled by the major phone companies and all these requests have been rebuffed. This has forced Vonage to seek other alternatives such as purchasing these services from third parties like MCI and ATT. Now, the combination of MCI with Verizon and ATT with SBC puts two of the largest competitive carriers and long-distance companies under the control of the two largest Bells, giving them additional ability and incentive to deny competitors access. Congress must ensure that voice over IP providers have the right to directly interconnect with the merged companies that comprise the public telephone network to prevent the collapse of the competitive phone market. Another essential piece of many new communications services is the Internet itself. In order for us to offer our service, Vonage must have access to both the Internet and the traditional telephone network. MCI and ATT are two major providers of access to the public Internet backbone. Post- merger, the Internet would largely be controlled by the Bells, all of whom have the incentive, ability and history of denying Vonage access in order to gain a competitive advantage in the retail market. Congress must ensure that the merged entities provide their competitors nondiscriminatory access to the Internet backbone. Furthermore, wireless spectrum has slowly been consolidated into the hands of the powerful local phone companies. As the spectrum caps and resell requirements for these services have eroded, to accommodate our increasingly mobile customers Vonage must have access to this critical infrastructure in order to compete with local phone companies. Recent industry analysis indicates that when these mergers are complete, SBC and Verizon will control more than half of the wireless market. These mergers leave the interconnection rights of yet another essential facility at the discretion of the Bells. The final concern I would like to raise today is that the consolidation of retail services and broadband network providers will continue to put pressure on consumers' rights to switch their phone service to a provider like Vonage. Today's consumers are prevented from moving their phone service to Vonage if they have DSL. If a customer wants to transfer their number to Vonage or to another competitive service, SBC and Verizon will cancel their DSL service. This practice slows broadband adoption and reinforces anti-competitive practices. DSL tying also holds consumers hostage by controlling which services they can and can't use their phone number with. Less than 20 percent of our customers use Vonage over DSL. Stand- alone broadband is a critical driver for this emerging competitive market. Therefore, Congress should ensure that the merged companies allow existing customers to switch their phone service and keep their stand-alone DSL. In light of all these concerns, we respectfully submit that these mergers cannot be approved by the FCC and the DOJ without appropriate conditions to remedy these problems. Policymakers must ensure that retail providers like Vonage have fair and equal access to the essential facilities, the 911 network, the tandems and the Internet backbone. These conditions are necessary in order to protect retail customers and to allow for the continued innovation of voice over IP and other Internet- based applications. I look forward to answering any questions that you might have. Thank you. [The prepared statement of Mr. Citron appears as a submission for the record.] Chairman DeWine. Thank you very much. Mr. Cleland. STATEMENT OF SCOTT CLELAND, FOUNDER AND CHIEF EXECUTIVE OFFICER, PRECURSOR GROUP, WASHINGTON, D.C. Mr. Cleland. Yes, thank you, Mr. Chairman and Senator Kohl and Senator Brownback, for letting me share my views today. I will take a little different tack today. What I want to do is emphasize kind of a forward-looking view to the extent that I can. I think antitrust is very relevant to these transactions, but in a traditional way I am not one that believes that these mergers pose a potential antitrust threat that warrants disapproval. On the condition issue, I think these mergers are subject to a tremendous amount of existing regulation that can be adapted and modified to address many of the concerns that people have in this merger context. Now, that being said, that does not mean that I don't think that there are serious antitrust and enforcement issues here. I want to respectfully suggest how I think antitrust needs to adapt to what we call a techcom future. What is really going on here is we are seeing the convergence of tech and telecom. It is becoming a new industry which we call techcom. In my testimony, we have a piece that summarizes it and explains kind of where that is going. The one point on a going-forward basis that is absolutely critical to get right is there is, I think, in the United States a core constant, unshakable principle that is embedded in the 1934, the 1996 Act and in the Internet, and that is the national value of free and unfettered access of every American to every other American. That is critical for our social and political cohesion as a Nation, our economic growth and innovative society, and for national security and homeland security. Let's remember the 1934 Act basically required interconnection because ATT successfully monopolized the market by denying interconnection to small players. The 1996 Act in this respect got it dead right--a mandated duty to interconnect and be interoperable. Then the Internet is the ultimate example of this principle, where it is what connects everybody as simply, broadly and universally as possible. So I think the biggest anti-competitive threat that faces the techcom world is not pricing power that many may discuss here. Pricing in this market is plummeting because of Internet protocol substitution. Prices are plummeting. Now, that does not mean there aren't antitrust issues here. What it means is you all should be concerned about subtle and naked attempts to gain market power by impeding or denying interconnection or network access for the purpose of competitive gain. It is going to require, I think, some real vigilance among the Congress, the Department of Justice and the FCC. But I think with market forces and with that vigilance, I think it will turn out to the benefit of all. What I want to do is list four anti-competitive concerns on a going-forward basis that are very important to focus on. The first is bit interference. That is basically trying to impede, sabotage, block, slow down somebody else's traffic that is going over your network. And we know from the recent Madison River case that affected Mr. Citron's company that this exposed potentially the most lethal risk to emerging techcom competition. If companies are allowed to technologically sort, block, impede or sabotage bit transmissions, competition cannot develop or flourish. Another one that you should be looking at very closely is the rather innocuous term of ``quality of service.'' That can be used to discriminate where, say, a large network says I am going to allow my customers to get premium passage and fast traffic and anybody that doesn't use my service gets put in second-class or the slow lane. And the fastest way for an incumbent to win and shut everybody else out is to create two tiers of discriminatory quality of service. That has to be watched very, very closely. It could also be lethal to competition. The most insidious form of anti-competitive behavior that I have seen is the non-cooperation on 911. It is absolutely unacceptable that people are denying or impeding or not cooperating as incumbents with any competitor that is trying to promote what we all agree is a national goal of 911. Every American expects that that is there and it needs to be. That is very insidious. Another one that people don't think about as being insidious is muni broadbands, the opposition to municipal networks, and I want to characterize that in a little different way. These are technological and equipment companies that are trying to sell to the single largest market, which is municipal broadband buyers. If they are banned by the government, that is probably singularly the most anti-competitive thing that can go and prevent most Americans from enjoying the benefit of alternative competitive sources. So with, I believe my time is up, but thank you for the opportunity to talk about this in front of the Subcommittee. [The prepared statement of Mr. Cleland appears as a submission for the record.] Chairman DeWine. Mr. Kimmelman. STATEMENT OF GENE KIMMELMAN, SENIOR DIRECTOR FOR PUBLIC POLICY AND ADVOCACY, CONSUMERS UNION, WASHINGTON, D.C. Mr. Kimmelman. Thank you, Mr. Chairman, Senator Kohl, Senator Brownback. On behalf of Consumers Union, the print and online publisher of Consumer Reports, it is a pleasure to be here again to discuss with you these mergers. I want to take all the points that Mr. Cleland makes and put them into a consumer context, because I believe he is right on the mark and I believe all the conditions that XO and Vonage have requested are on point. Enormous technological explosion leaves us at a juncture now where consumers ought to be in the near future receiving broadband service, local telephone and unlimited long distance for as little as $40 a month. If you put together the prices that the muni wireless broadband networks can offer with the $25 package like Vonage offers for unlimited local and long distance, that is the average phone bill today for local and long distance for more than 50 percent of consumers, but that would have broadband included in it. It would be a marvelous innovation. But the companies that are merging are charging $75, $80 for it, as are the cable companies, and they have every incentive to prevent that from happening. That is what is the fundamental danger for consumers in these mergers. They may not see the day of these price declines that Mr. Cleland pointed out we have had in the past and that we ought to have in the future. Let's look at the world of intermodal competition that could have and should have brought us this with these mergers. Who are the biggest players out there to challenge the Bells? ATT, MCI, gone, part of the almost total dominance in the SBC territory for local and long distance, and in the Verizon territory as well. Wireless is out there, someday may be price-competitive, may improve its quality, but it is still twice to three times as expensive as wire line service for the average consumer use package. And who owns wireless? Verizon wireless is dominant in the Verizon region; Cingular, owned by SBC and Bell South, dominant in the SBC territory. It doesn't solve the problem. Voice over Internet offered by cable. Well, if you are going to pay the high price, you might be able to get it. Only 30 percent or less of consumers right now have it. It is not clear how many can afford it at those price levels. And what you heard from these witnesses is the underlying Internet backbone that needs to be there with the adequate resources available to support competition may decline, may diminish, because ATT will pick up a lot of the traffic they were carrying, as will MCI. We may not have that service fully available to consumers. The final opportunity for meaningful intermodal competition is municipal wireless. You have companies like Verizon and SBC leading the charge to prevent communities from building out these networks. Whether it is not the community and a public entity, the critical point there is that, looking at the actual costs of providing wireless broadband, Philadelphia has found they could offer it at wholesale for $9 a month to Internet service providers, who claim at that price they could turn it around for as little as $15 a month for residential consumers. I don't care if it is municipality or if it is a start-up company. That is where the market ought to be moving. These companies are trying to block that innovation, block that competition. So we believe from a consumer perspective that these mergers need to be substantially revamped. The conditions that Mr. Cleland were not that big a deal--quality of service, bit interference--yes, there are regulatory tools for them. But, boy, are they hard to police. That has been the Achilles heel in getting competition in telecommunications for 35 years. They are very important. We need the right incentives. They are not just a regulatory police force. So conditions are very significant here. I am not even sure that is enough. Even if you have DSL stand-alone, naked DSL, what is the price? How much control of the customer information, the quality of service, the bits, is there still going to be in these dominant Bell companies? Mr. Chairman, members of the Committee, we think it is really time for Congress to step in beyond the merger and look at whether your goals of competition in the 1996 Act are really being delivered to consumers, whether we are going to be able to sustain it in this environment, mergers conditions or not, and reopen the Act and think about what really needs to be done. Do you really want competition? Do you really want a $40 package for all these wonderful services? If you do, I suggest it is going to take some reworking by Congress. Thank you. [The prepared statement of Mr. Kimmelman appears as a submission for the record.] Chairman DeWine. Senator Kohl. Senator Kohl. Thank you, Mr. Chairman. Mr. Citron, Mr. Kimmelman, one important new way for consumers to make phone calls is through the technology, as we know, voice over Internet protocol. This allows consumers to make phone calls over the Internet rather than over conventional phone lines. Making phone calls using voice over Internet requires a high-speed Internet connection, a service many consumers obtain from their phone company. With the exception of Qwest, until now none of the regional Bell companies will sell consumers high-speed Internet service without also requiring that the consumer also buy local phone service. This clearly eliminates any incentive for the consumer to purchase voice over Internet phone service and is therefore a significant obstacle to the deployment of this technology. At our last hearing, we asked the Bell companies whether they would be willing to sell high-speed Internet DSL service without also requiring that the consumer buy phone service. The Bell companies answered that they would do so only if they could make a profit on stand-alone DSL service. Mr. Citron, what is your reaction to this statement? Can you market your voice over Internet service to consumers who use DSL Internet connections if these consumers are also required to buy phone service? Mr. Kimmelman, I am interested in your view, and what do you think of Verizon's plan announced today to offer limited stand-alone DSL to their existing customers in the Northeast? Mr. Citron. Senator Kohl, Vonage has found it incredibly difficult for our ability to sell voice over IP services to customers who have DSL. We find the problem in two forms. First, in order to go ahead and get the DSL, most customers are required to buy phone service. So buying voice over IP and then being required to keep a phone service you don't want makes it, of course, too cost-prohibitive to go out and get the service. Even in examples where people are able to go ahead and purchase stand-alone DSL, the ability does not exist yet for people to transfer their phone service, when tied with DSL, over to Vonage's service, the ability for them to keep their phone number and move the service seamlessly over. Both are enormous barriers to competition and for people to switch. Senator Kohl. Mr. Kimmelman. Mr. Kimmelman. From the consumer perspective, you pay $25 for your local phone service and then you can get, for about $30, DSL. But they have told us up until now you have to buy both. Well, why go out and then pay extra money to get the same service you have already paid for? It undermines competition, as Mr. Citron says. Is what Verizon is offering a real stand-alone DSL? Boy, I hope it is. It doesn't look like it. At least from what I saw from press accounts, they are offering it to existing DSL customers. Well, that leaves out more than 90 percent of their current customers. Why can't somebody who is interested in getting a high- speed connection tomorrow call Verizon and say all I want is high-speed? Why can't they get the same thing that they have just offered someone else? I don't understand it. I mean, limited is better than nothing. I don't want to criticize it in that respect. Once you get past technical barriers, which clearly Qwest has shown there are not--they offer this on a stand-alone basis--I don't understand why Verizon is offering so little. It is really very little for very few people. Hard to understand. Senator Kohl. Mr. Citron, on February 17 the Washington Post reported that the FCC was investigating complaints by your company that local phone companies were blocking or disrupting access to your voice over Internet service. Has your company's service been the victim of such actions by telephone companies, and are you concerned that this will occur in the future? Will these mergers make it easier for phone companies to have increased capabilities to block or to degrade access to your phone service in the future? Mr. Citron. Well, yes, it is true, Senator. A company known as Madison River, a small ILEC, went out and started blocking Vonage's service. Of course, we did go to the FCC and the FCC under its Title II authority was able to investigate the matter and ultimately a censure and a fine against this company. Vonage is highly concerned about this problem. We see the effects of what we call port blocking or disruption of the service occurring in a number of different sectors. We are seeing it occur right now with a wireless Internet service provider. We are seeing it with a very, very, small cable company that is also blocking Vonage's service. So we find this to be problematic and we find this to be a growing trend. But beyond the last mile, we are also concerned about being able to purchase that Internet backbone. As I have already mentioned in my testimony, we buy a lot of capacity from MCI and ATT and others, and with the majority of the Internet backbone controlled by the Bells post this merger, we are concerned that not only do we have to worry about tampering in the last mile, but potential tampering inside the core of the network with, quite frankly, the inability to purchase services at the core of the network level. Senator Kohl. Are there remedies that the regulators can enforce that will prevent this from happening? Mr. Citron. Well, in the case of a phone company DSL provider, yes, under the Title II authority the FCC did find that capability. But there are a lot of concerns about whether or not you can enforce this on other providers or players. So this is something that we take issue with. Senator Kohl. Mr. Kimmelman and Mr. Cleland, as you know, one important possible alternative to traditional phone service for consumers will be wireless connections to the Internet. Using these connections, consumers can access alternative phone providers such as voice over Internet and provide the Bell companies connections to their homes. Cities and municipalities such as Philadelphia have begun to build such wireless networks and plan to offer it to their residents as a municipal service. At our hearing last month, the Bell companies admitted that they were actively lobbying State legislatures around the country to pass laws forbidding cities from building these new networks to deploy these technologies. Pennsylvania recently adopted such a law and other States considering such laws include Illinois, Texas and Florida. What are we to make of such lobbying efforts? Do these municipal networks offer competitive alternatives? What do you make of the Bell companies' claim that it is unfair to ask them to compete with a municipal system? Mr. Cleland? Mr. Cleland. I think it is patently anti-competitive, and what they have done is they have framed the debate that it is a municipality that is trying to compete directly with them and it is a fundamental misunderstanding of the technology and how they service is provided. Essentially, the WiFi phenomenon emerged because Intel decided without telling anybody that people wanted wireless access and they put it in a chip. And then people bought for less than $50 a WiFi stick and they put it in their home or in Starbucks or wherever it was. It is a form of a gorilla network. It doesn't require an operator or a service provider like we know that a Bell is. Somebody can put up a WiFi stick for virtually no cost and you can replicate not everything that a DSL can have, but you can replicate a lot of it. Why it is anti-competitive is incumbents don't fear the municipalities as competitors. What they fear is the massive price deflation of people realizing that there is an extremely cheap technology that replicates what they do that can be put up very, very simply. You can put up WiFi sticks on light poles, on mailboxes, or whatever. You put them around extremely cheaply and it can be a tech company supplier who is in this instance is a competitor to the incumbent. By getting it banned, what they are doing is they are basically shutting down the greatest competitor potentially to an incumbent, which is technology companies selling new technology that really doesn't require a traditional operator. So the last analogy that I will leave you with here that I think is a powerful one is would you have thought it was good public policy in the past when railroad companies came and said I don't think municipalities should be in the road-building business, they shouldn't build highways and they shouldn't build an airport because that would be an unfair subsidy to the automobile companies and the plane companies? Of course not. It is patently absurd in the sense that municipal broadband networks are much like what it was to build roads and to build airports in the past. Mr. Kimmelman. I couldn't agree more with Mr. Cleland. This is patently anti-competitive, it is unfair. It is embarrassing to come in and talk about innovation and competition and then to be out there actively blocking competition. It takes a lot of gall. This ought to be one of the first conditions I would urge the Committee to look at both for the antitrust officials and communications policy in general, the notion of barring entry in a world in which we have seen SBC swallow up two other Bell companies--former Bell Atlantic, now Verizon, swallow up two of its equi-sized colleagues. They all swallow them up. How many times did they tell you that was going to be the merger that was going to get you the competition? And, oops, it never is; it is always the next one. And here they are blocking competitors. It ought to be stopped. Senator Kohl. Thank you, Mr. Chairman. Chairman DeWine. Senator Brownback. Senator Brownback. Thanks, Mr. Chairman. Thank you for holding the hearing. I have a written opening statement I would like to submit for the record, if I could, too. Chairman DeWine. That will be fine. [The prepared statement of Senator Brownback appears as a submission for the record.] Senator Brownback. Gentlemen, I was on the Commerce Committee before and so I have been around this issue for the years I have been in the U.S. Senate. It does strike that, for whatever reason--and it was partially, I think, the 1996 Act, but it also is just a lot of technology--competition is very robust now. We sought to create that in 1996. We sought to be able to take advantage of some of the competition in the marketplace that we thought could be there with that Act. We got it partially right, probably got a lot of it wrong. But at the end of the day, we are at a point now where there is robust competition, there is a declining price structure, there is good quality of service on a lot of different platforms, to the point that I can't keep up with my latest device. They change it on me about every six months and it is something new and it is better. So I commend you as a group and as a field for that taking place. I think that has just really been a great innovation and I think it has been a great competitive advantage for the United States and I think it has been a great efficiency factor for us, increasing productivity across the United States, plus I can keep track of kids a lot better now than my parents could keep track of me, which is good for both of us. I am curious, though. Mr. Cleland--and I want some of the others to comment on this--you seem to look at this merger and say, okay, this is going to really stifle this continuation, and I guess I just don't have the degree of fear of this taking place, given all of the competition that is coming into this field right now, whether it is in Internet protocols or whether it is happening in cable or other places. I think you are going to have robust competition, it seems like, because of the technological factors and the number of ports that people can get into the phone service. Mr. Cleland, let me put the question, though, in reverse to you. What happens to these large companies that are merging if the merger does not go through? What would be the likely impact on them and on competition if it doesn't go through? Mr. Cleland. Well, to answer that specific question, I am an analyst for the investment community and so while I have one position--when I analyze these under antitrust law, I don't think that they warrant disapproval or necessarily heavy conditions. However, if you are asking my opinion on what would these companies do if they didn't merge, I think they would be a lot better off. I think in SBC buying ATT and Verizon buying MCI, they are changing their risk profile and their growth profile and they will become negative growth companies. So I am scratching my head about why they are wanting to do it. This is a free country. They have chosen to do it. I think that whether they are merged or not, that is not the competitive dynamic that is the real concern. I am a believer in intermodal competition and deregulation and in market forces, and I believe it is increasingly competitive. Right now, you have DSL, you have cable modems, you have three 3G networks coming on board nationally this year from Sprint, from Verizon, from Cingular. You have companies like Clear Wire doing WiMax. You have broadband over power lines that is very promising; it is not right now, but it is coming down the pike. You have WiMax that is very promising. And so I personally believe that these companies, whether they merge or whether they don't, are dinosaurs and they are going to be affected very negatively by competition. Their prices are going down. They offer services that are on the wrong side of technology, the wrong side of history. And you can provide techcom services, services like Mr. Citron is, for anywhere between 20 and 90 percent less than what the incumbents offer. So competition is coming more furiously, but it is coming from technology. Senator Brownback. I understand. So regardless of the merger, the competition is going to be furious for the consumer out there. Mr. Cleland. Increasingly, if--and there is a big ``if''-- as a strong proponent of deregulation and of market forces, I also believe that deregulation does not mean a state of lawlessness or obligationlessness. Just like there is 911, CALEA, consumer protection, disability access, universal service, antitrust--all of those are social and national obligations we all agree should be on there--in addition to that, the critical one is protecting the duty to interconnect and making sure that people don't mess with the freedom to access any content, to access any application or attach any device. That is critical. Competition without those protections is really going to collapse. Senator Brownback. I appreciate you mentioning that because coming from a rural State, a number of these services and needs are things that are built into the law that we need to be able to maintain a set of infrastructure support that can be cost- competitive. I actually think that is a far bigger issue than these mergers as to what we need to do to be able to maintain those services and the funding streams to be able to do that, because I think those funding streams are going to have to be altered, it looks like to me, to collect the new people that are coming into the field and make sure everybody is sharing in this. Mr. Citron, I am not sure maybe if you would be the right one to ask this or not, so I will apologize ahead of time if you are the wrong to ask. But when you hear Mr. Cleland say that there is going to be robust competition, regardless, and we shouldn't have a state of lawlessness, but there is going to be robust competition, don't you agree with that as you look at the overall factors? Regardless of the merger, this is going to be a robust field? Mr. Citron. Well, I think I would agree in a sense. I believe already that there is robust competition for consumers' business. I think that has led to obviously pricing declines. We think that is a very positive trend. I think one thing that people sometimes miss is that all providers of communications services still rely on critical infrastructure and if access to that critical infrastructure is not provided, then all of a sudden you will not have competition. Vonage is already facing problems in getting access to many systems that are critical, like the 911 infrastructure, and that is problematic. In addition, I notice that Mr. Cleland did mention wireless broadband opportunities. One of the new wireless broadband providers in this country actually is disrupting and blocking Vonage's access to its customers. They literally stop our packets from flowing over the wireless links to the consumers to provide them voice over IP service. So what good is voice over IP competition if the broadband provider that is delivering those packets interferes with them for their own benefit? That is the problem that we see. Senator Brownback. Now, Vonage, as I understand it, is the largest VoIP provider. Is that correct? Mr. Citron. That is correct. Senator Brownback. Much larger than ATT on that type of service? Mr. Citron. That is correct as well. Senator Brownback. And it doesn't seem to be that you have had problems providing that sort of service to date, or competing with the large telephone incumbents to date. I mean, you are identifying other fields where there are blockages and not particularly this one? Mr. Citron. No. Actually, if you look at our problem, say, with interconnecting to 911, we have asked all four Bell companies for direct access to the E911 system so that we can provide an E911 solution that is on parity with the regular wire lines--something that everyone in this room should be very concerned about. Only one of those four Bell companies has granted us access to date. The other three Bell companies still refuse to give us access. Some are talking to us about it. Senator Brownback. On what basis? What do they articulate to you? Mr. Citron. They don't have to. Senator Brownback. And they have not? Mr. Citron. They have not. Now, I will add one more point to that just related to these mergers. Today, Vonage wants to go ahead and access the PSTN network, the core tandems, to be able to take our customer calls and have them communicate with other networks, basically for my mom to call her friend who is not on the Vonage service. To make that happen, we need to interconnect at the tandems. These are critical core network elements. Vonage has asked for access to these tandems. The incumbent Bell operating companies have told us no. Why? They can. Senator Brownback. Let me ask Mr. Cleland kind of a tight question, if I can, on this. Mr. Grivner's testimony states that the DOJ, upon close scrutiny of the geographic markets, will find that the SBC/ATT merger will fail to meet legal standards. Would you agree with that assertion? Do you feel in a position to be able to make any statement regarding that assertion today? Mr. Cleland. Well, if they drill down and look at individual markets like that, there may be some difficulties. I think what I expect DOJ to do is to draw back a little bit bigger in the markets. Remember, each one of these markets has been declared in a congressional act and through all the painful, ad nauseam regulation to be irreversibly open to competition. So the regulators have deemed that local and long distance integration is now allowable. There is a lot of competition and potential competition. I think it would be very difficult for the Department of Justice to go to court and say that these mergers were anti-competitive. Mr. Kimmelman. Senator Brownback, can I just say here is the interesting conundrum: the irreversibility was based upon a set of regulations that enabled ATT and MCI to come in aggressively and offer local phone service that have now been obliterated, where those companies will now be part of the companies they were competing against. So I think there is an open question as to how irreversibly open any of these markets are, given these changed circumstances. Senator Brownback. Thank you, Mr. Chairman. Chairman DeWine. Mr. Grivner, let's get back to that map you put up there. I found that kind of interesting. Isn't it true that ATT actually had announced its withdrawal from providing these services before the decision to merge, and isn't the lack of competition in the local market really the result of a court decision that made it difficult for ATT to compete rather than a product of these mergers? In other words, would blocking the mergers change anything? Mr. Grivner. I think, Senator, it is part of, to give kudos to where they are, a very comprehensive overall strategy. ATT specifically withdrew from the consumer business when the writing was on the wall that they were going to have to charge more to their consumers and not be able to compete with the local Bell operating companies when UNEP went away. They were two of the largest users of UNEP. So if you look at it from a regulatory perspective, the regional Bells have been very successful in lobbying the FCC. When you go to the courts, you have got the Trinko decision. You have the issue now that they are fighting through relative to the municipalities. So they have put their two biggest competitors on their backs in the consumer market and then decided to buy them. I think it is a very remarkable overall cohesive strategy on their part, so failing perhaps in those particular markets, but still very, very strong in the business market, where they will still control 80 percent of the wire line business market between Verizon and SBC. Chairman DeWine. So your answer to my question is what? You are telling me that blocking the mergers will change this reality. Is that what you are telling me? Mr. Grivner. I am saying that what the FCC and the Department of Justice need to do is they need to exhaustively examine both of these mergers to understand the impact to consumers, which will be substantial, as well as to business customers. These companies are not failing. They are Fortune 100 companies with $30 billion and $20 billion, respectively, in revenue, and producing significant cash flow as businesses as well. Chairman DeWine. But the specific question I asked you had to do with this market, though. ATT had announced it was withdrawing from providing their services. That is correct. I am not wrong on my facts, am I? Mr. Grivner. You are not wrong on your facts. It is how they got to that point. They got to that point because they were pressured out of the market. Mr. Kimmelman. Mr. Chairman, could I add one thing there? Chairman DeWine. Mr. Kimmelman. Mr. Kimmelman. Even as they announced they were withdrawing, ATT still has more than 25 million consumer accounts. That is a big chunk of the consumer population there. Chairman DeWine. Consumer accounts? Mr. Kimmelman. Yes, consumer accounts. They were withdrawing from marketing to new customers to offer this package of services as the regulations were wiped out. On the business side, what this reminds me of is the 1970s. Do you remember the old MCI? MCI started out not offering the kind of services consumers now know. They offered services to businesses, and the way competition developed was from a new upstart coming in serving businesses and expanding out to the residential market. That is where we are again here with the new technologies and a new set of players. We need companies that can serve the business market independent of the Bells and then expand out to consumers. Chairman DeWine. Mr. Cleland, let me turn to you, but also Mr. Grivner. Both of you have staked out somewhat divergent views on how we should react to these mergers. Mr. Cleland, you said these mergers will not really pose a serious risk unless the Government fails to be vigilant in deterring anti- competitive behavior and urges Congress, the DOJ and FCC to apply vigorous antitrust oversight after the fact. Mr. Grivner, on the other hand, has stated his concern that the current Government oversight scheme cannot be counted upon to correct abuses post-merger. is Mr. Grivner correct to be concerned that our current oversight scheme is inadequate to the task of policing this industry post-merger? Mr. Cleland. Well, where I come from is I believe that in the totality when you look at this thing that it won't be blocked and that it is best for competition going forward not to block it. Does that mean that I don't think there is going to be any anti-competitive effect in certain markets? Of course not, but I think competition is rough and tumble. The old CLEC model is one that was built upon the Telecom Act of essentially interconnecting in a certain way with an overbuilding of the Bell network. And now what we have is a whole new set of technologies that are able to break the bottleneck and don't have to lean on it and I think those will cure many of the ills that Mr. Grivner is talking about. Will it be a totally pretty transition? No. I think we should expect that there will be probably some market power exerted in some localities in some places for a certain period of time. However, if we had that fear, we would never get from here to there. So I think a competitive transition and intermodal transition takes time and will be a bumpy road. Chairman DeWine. Mr. Grivner, do you want to comment? Mr. Grivner. Senator, there were conditions placed on the SBC/Ameritech merger back in 1998, and post that merger SBC has paid $1.2 billion in fines in non-compliance for those conditions. Now, in most States that is a lot of money. That would be a lot of additional revenue, $1.2 billion. But apparently to SBC it is not; it was cost of doing business. So I think those conditions need to be very, very carefully analyzed and I don't think we are at that point yet. Chairman DeWine. Let me ask all of you this question. The testimony we have heard and seen had a great deal of emphasis on the idea that access to the local network may be the most important factor in allowing other market entrants to compete. However, this certainly may be easier said than done. When we tried to implement the unbundled network elements method as a way to assure that the long-distance companies had access to Bell company networks after the 1996 Telecommunications Act, we saw years of fighting and litigation. How exactly do all of you suggest ensuring access to the local network? Mr. Kimmelman, do you want to start? Mr. Kimmelman. Well, I think there are some straightforward conditions that have been mentioned. Unbundling DSL and making sure it is offered at a reasonable price in its terms and conditions would be helpful. Let's push Verizon to go much further than they have here and get SBC to the table on that. That would certainly be helpful. The variety of non- discrimination requirements that have been mentioned could be helpful. I believe, given that history, I believe you are absolutely right, Mr. Chairman. It was a tough row to hoe and it didn't really work. Really, the best thing we could do is back these companies off of blocking new entrants, whether they be power companies, whether they be municipalities, find a way to make this a merger condition or enact it into law, if Congress has to, because the best way to ensure there is new availability of competition for consumers is to have a wireless broadband network offered by somebody else. Chairman DeWine. Mr. Cleland. Mr. Cleland. Yes. I really want to hammer home the point that in a deregulatory environment I think the incumbents have basically gone to the extreme of saying in a marketplace there are no obligations, there are no requirements. I think that is way over-reaching and very anti-competitive and a problem. Price deregulation didn't work. I think it is a failed policy and a lot of the reason we had the legal fights that we had was I think the FCC was overly aggressive in price regulation and less concerned about making sure that there was good interconnection and good access. So I think that the emphasis should be very, very strong toward enforcing and policing interconnection, and whenever there are people that are impeding or denying access to 911 or other networks, tandem networks, that is the thing that should raise the ire of regulators and antitrust enforcers, and they should back off of trying to micromanage the prices and the economics of the market. Mr. Citron. Clearly, we already have a framework for allowing for interconnection, and clearly that framework doesn't work because that framework does not currently extend beyond the current providers. It doesn't encompass voice over IP, it doesn't encompass our company. That is why we are having such difficulty in gaining access. I think there are a couple of prescribed approaches to this problem. One, of course, is as a condition of these mergers you can force the emerging entities to make sure they provide that their network is open and available to us on a competitive basis and to similarly situated companies. Another way is to actually look at the current laws and the constructs and to expand those laws on interconnection to allow players like ourselves to go ahead and compete and gain access to services. Mr. Grivner. While competition exists in the market today, it is extremely fragile. We all depend on that last-mile access. We have talked about some very innovative technologies--broadband, wireless and some new things. But those things are years away, and in the meantime the current FCC rules need to be enforced and they need to be innovative enough to allow new entrants into the market as well. Chairman DeWine. Mr. Kimmelman, in his written testimony Mr. Cleland has mentioned a number of technologies--wireless, cable modem, WiFi, WiMax, broadband over power lines--all as likely competitors against traditional wire line service. First of all, do you agree with this, and are these technologies ready for prime time do you think? Mr. Kimmelman. I agree with all them being potentially out there. Some of them have been potentially out there for 5, 10, 15, maybe 20 years. Chairman DeWine. Emphasis on the potential. Mr. Kimmelman. Yes, a lot of potential. He mentioned 3G networks and he mentioned Cingular, Verizon and Sprint. Well, two of those are the merging parties here with their most likely competitors. The problem is not just the technology. You have to look at the market power they have in using the new technologies bundled with the old technologies. I do believe there is potential here. I really do urge you to look at this like the 1970s when old Ma Bell was being broken up, when MCI was challenging it. It took some hefty intervention to open up that market to more competition, and I think all the technologies Mr. Cleland is talking about are there. They are ripe for consideration in the marketplace. It is rough and tumble, but there needs to be some non- interference from public officials in order to make that happen. Otherwise, it won't happen. Chairman DeWine. Mr. Cleland? Mr. Cleland. Yes, thank you, Mr. Chairman. There is a lot going on right now. We call this dynamic techcom, and why these technologies, broadband over power lines? I followed it for nine years and was yawning and saying when is it going to come? Well, it finally has come. The reason why many of these technologies that we are talking about--they are not pie-in-the-sky; they are real and they are coming on now for several reasons. We have a critical mass of wireless access. We have a critical mass of processing power. Essentially, Moore's law. Silicon chips have gotten so fast and so cheap that they are solving problems that before were barriers to competition. Storage is getting dramatically cheaper and dramatically smaller. We now have 185 million people with cell phones, so there is mass penetration there. We have broadband access all through the enterprise market, 90 percent. Thirty percent of the consumer market has broadband access. That is 60 percent of the buying power, so broadband access has been critical. Deregulation--we have displays, foreign factors. There is a confluence of things that are coming together, and we call it the techcom dynamic, where the things that we have all been talking about in pieces are finally starting to come together. What we call the techcom dynamic is mobility times convergence times the any-to-any connectivity of IP. What you have is a very, very dynamic, innovative marketplace that really was kind of started in the last year. VoIP is just one dimension of the exciting changes that are going on. People have been talking about convergence for a long time. What they are going to see is in the next two to three to four years it is going to happen much faster than people anticipate. Chairman DeWine. Mr. Cleland and Mr. Kimmelman, some have raised concerns that after the merger SBC and Verizon are not likely to compete in one another's territory even for enterprise customers, since they have not very aggressively competed in the past. However, a large part of the motivation for this merger on the part of SBC and Verizon is to gain access to the large enterprise clients currently served by ATT and MCI. Why would SBC and Verizon spend all this money to acquire ATT and MCI if they did not intend to compete head-to-head to get these big business clients? Mr. Kimmelman. I will start. Well, they clearly are spending money because they think they can make money here, and Mr. Cleland has made some good points about why it may not make total sense. The enterprise market is not where I focus, but there are very few competitors today in the enterprise market. They may be willing to challenge each other somewhat, but the real problem there is there are deregulatory pricing rules for a two-player market involving what is called special access that are leaving very high prices for business customers. This will not solve any of that problem and it will create the political environment that makes it impossible to solve that problem. There will be nobody else out there who is well-positioned to serve the enterprise market. I will just go back to my earlier point. While we don't focus on business customers, the history of telecommunications has been that many players coming in servicing business markets first end up in residential markets. So the danger here is that this just locks in a very tight oligopoly even further. Chairman DeWine. Mr. Cleland. Mr. Cleland. Well, the problem with the enterprise market-- and SBC and Verizon are going to learn it quickly--is you tend to covet and want what you don't have, and the Bells don't have those large enterprise customers. When SBC and Verizon buy them, they will realize that that customer segment is rapidly moving away from them and ATT and MCI. What is happening in that marketplace is essentially enterprises are in-sourcing. They used to have to out-source and they needed ATT and MCI. They are now moving most of their voice traffic and their data traffic onto their own networks. They just don't need telecommunications providers anywhere near as much as they did in the past. So that market, we believe, is going to be a steadily declining market for several years. I don't think in that marketplace that SBC/ATT and Verizon/MCI are going to be able to exert market power. They are going to have to do their best just to hold their own. Mr. Kimmelman. Mr. Chairman, what I hear Mr. Cleland saying is there really is no competition and big businesses ultimately will spend on their own if the prices are too high from the commercial market. That is not a very good set of policies, I believe. Mr. Cleland. Well, once again it is very important. You have to understand techcom competition is different than telecom competition. In the techcom world, large enterprises already have networks. They are Microsoft, they are IBM. They have their own networks. They don't need ATT, MCI, Verizon and these companies like they did in the past. So that is what technology is allowing them to do. Technology is allowing these enterprises to totally bypass or do without what they used to absolutely have to have. Chairman DeWine. I want to thank all of you very much. I think it has been a very helpful hearing. I think we can safely say we have heard just about all sides of the many issues raised now by these mergers. This panel has done a great job of balancing out the testimony that we heard last month from the merging parties themselves and really, I think, given our Subcommittee a lot to think about, which we will. As we have said, there are a wide range of issues raised by these deals. So we again thank our witnesses. I want to thank Senator Kohl for his great work, and we thank all of you. Thank you. 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