<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:27225.wais]
NETWORK NEUTRALITY: COMPETITION, INNOVATION, AND NONDISCRIMINATORY
ACCESS
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HEARING
BEFORE THE
TASK FORCE ON TELECOM AND ANTITRUST
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
APRIL 25, 2006
__________
Serial No. 109-109
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
_____
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, General Counsel-Chief of Staff
Perry H. Apelbaum, Minority Chief Counsel
----------
Note: The Task Force on Telecom and Antitrust was established on
March 26, 2006 and consists of all the Members of the full Judiciary
Committee.
C O N T E N T S
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APRIL 25, 2006
OPENING STATEMENT
Page
The Honorable Chris Cannon, a Representative in Congress From the
State of Utah, and Member, Committee on the Judiciary.......... 1
The Honorable John Conyers, Jr., a Representative in Congress
From the State of Michigan, and Ranking Member, Committee on
the Judiciary.................................................. 3
WITNESSES
Mr. Paul Misener, Vice President for Global Public Policy,
Amazon.com
Oral Testimony................................................. 5
Prepared Statement............................................. 7
Mr. Earl W. Comstock, President and Chief Executive Officer,
COMPTEL
Oral Testimony................................................. 15
Prepared Statement............................................. 17
Mr. Walter B. McCormick, Jr., President and Chief Executive
Officer, United States Telecom Association
Oral Testimony................................................. 47
Prepared Statement............................................. 49
Mr. Timothy Wu, Professor of Law, Columbia Law School
Oral Testimony................................................. 53
Prepared Statement............................................. 54
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress From the State of Michigan, and
Ranking Member, Committee on the Judiciary..................... 93
Prepared Statement of the Honorable Bob Goodlatte, a
Representative in Congress From the State of Virginia, and
Member, Committee on the Judiciary............................. 93
Prepared Statement of Mark Cooper, Director of Research, Consumer
Federation of America, on behalf of Consumer Federation of
America, the Free Press, and the Consumers Union............... 94
Prepared Statement of Kyle McSlarrow, President and CEO, National
Cable & Telecommunications Association......................... 101
Press Release of the Federal Communications Commission, dated
April 3, 2006.................................................. 106
Article from Communications Daily submitted by Walter B.
McCormick, Jr., President and Chief Executive Officer, United
States Telecom Association..................................... 109
Letter to the Honorable F. James Sensenbrenner, Jr., Chairman,
Committee on the Judiciary, from Deborah J. Majoras, Chairman,
Federal Trade Commission....................................... 111
A Public Knowledge White Paper by John Windhausen, Jr., entitled
``Good Fences Make Bad Broadband, Preserving an Open Internet
through Net Neutrality''....................................... 119
NETWORK NEUTRALITY: COMPETITION, INNOVATION, AND NONDISCRIMINATORY
ACCESS
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TUESDAY, APRIL 25, 2006
House of Representatives,
Task Force on Telecom and Antitrust,
Committee on the Judiciary,
Washington, DC.
The Task Force met, pursuant to notice, at 2:05 p.m., in
Room 2141, Rayburn House Office Building, the Honorable Chris
Cannon (Acting Chair of the Task Force) presiding.
Mr. Cannon. The Committee will come to order.
Just a note before we get started that we have a bill
coming up on the--the Committee has a bill coming up on the
floor at 2:45. We may have to recess this Committee. We're just
trying to work out--it is the rule of the Committee that we
recess when the Committee has a bill on the floor of the House.
We are trying to work that out so that we don't inconvenience
everyone with a 45-minute recess, and so we are going to get
started here directly, and hopefully we will work that out so
we don't have to recess.
In recent years, changing technology industry
consolidation, and regulatory developments have fundamentally
altered the telecommunications marketplace. With the changes in
the industry, it is important that the pro-competitive goals
that were the hallmarks of the 1996 act are maintained. Some
have argued that these goals have gone unrealized, and it is
essential that this Committee makes sure these goals do not
slip away.
President Ronald Reagan boldly predicted that, ``The
Goliath of totalitarianism will be brought down by the David of
the microchip.'' He really was a visionary guy, you know?
Substituting the word ``Internet'' for ``microchip'' is
particularly appropriate given the unprecedented manner in
which the Internet has revolutionized the manner in which we
access and transmit a broad range of goods, services, and
information. High-speed broadband Internet services have
dramatically enhanced the ability of Americans to access the
Internet, but the safeguards that we have allowed these
services--that have allowed these services to flourish are
under growing legal and regulatory assault.
The Committee on the Judiciary has a central role in
ensuring that market power of firms that provide access to the
Internet is not used to discriminate against the content or
services of competitors that drive innovation and consumer
choice. Many credit the rapid rise of the Internet to the open
architecture that defines it. Observers have noted that a
unique feature of the Internet is the nearly unrestricted
ability of anyone with service to connect to it, access and
post information, download content, and consume goods and
services without discrimination. The open architecture of this
medium is central to our understanding of the Internet and a
fundamental attribute of its success.
Most Americans think that open and nondiscriminatory access
to the Internet is something to be taken for granted, but it is
not. Broadband providers exercise considerable control over how
information and services are accessed over the Internet, and
the inference that some of these providers may restrict access
to the networks is of concern to all. While considerable effort
has been made to confuse the definition of ``net neutrality,''
the term refers to the fundamental architecture of the Internet
that allows for uninhibited, end-to-end communication.
Former FCC Chairman Powell enunciated four Internet
freedoms that provide a useful framework to understand this
issue. These principles of Internet nondiscrimination are:
First, freedom to access content. Consumers should have
access to their choice of legal content.
Second, freedom to use applications. Consumers should be
able to run applications of their choice.
Third, freedom to attach personal devices. Consumers should
be permitted to attach any devices they choose to Internet
portals.
And, fourth, freedom to obtain service plan information.
Consumers should receive meaningful information regarding their
service plans.
Principles of net neutrality have been successfully
articulated, but the mechanism to enforce them has not. The
most notable example of Internet discrimination involved the
Madison River Telephone Company obstruction of access to voice
over Internet protocol, or VOIP, services provided by Vonage.
In this case, the FCC investigated allegations that Madison
River violated nondiscriminatory obligations contained in the
Communications Act, but the redefinition of broadband as an
information service dramatically reduces the authority of
regulators to deter this kind of competitive misconduct.
The House Committee on the Judiciary and the antitrust laws
have played a critical role in fostering competition in the
telecommunications industry. While the technological dynamics
of the telecom industry have shifted the use of market power to
deter competition and undermine consumer choice has not. The
continued success of the Internet depends upon unfettered
interconnection and the ability of consumers to connect and
access online information, content, goods, and services in a
nondiscriminatory manner. If consumers are going to continually
migrate to the Internet and businesses are going to prosper
because of the Internet, the House Committee on the Judiciary
must be at the center of the debate defining competition--
defending competition.
Today's hearing will examine whether the threats posed to
net neutrality and whether the concerns that broadband
providers have or intend to abuse their market power to violate
these principles are substantive or speculative. The hearing
will also examine whether broadband providers have an economic
incentive to limit access to the Internet, the sufficiency of
current legal and regulatory authority to preserve net
neutrality, the competitive impact of proposals to provide
Internet access on a tiered basis, recent legal and regulatory
developments that affect broadband competition, and whether
current legislative proposals being considered by Congress
promote or undermine net neutrality.
Today's hearing marks the first in a series by the
Committee's Task Force on Telecom and Antitrust. Over the next
several months, the task force will conduct a number of
hearings to examine competitive aspects of the telecom industry
and to consider legislation to ensure that Americans are
provided with the innovation and consumer choice that
unrestrained market competition preserves and promotes.
I want to thank the witnesses for appearing before today's
panel and yield to the Ranking Member for his remarks. Mr.
Conyers?
Mr. Conyers. Thank you, Chairman Cannon. I'm happy to
welcome the witnesses, as you have, and begin a Judiciary
Committee undertaking of the subject of net neutrality.
I begin by noting that our colleagues Zoe Lofgren and Rick
Boucher, as well as many other Members, have been working on
this subject for quite a while, and I want to commend them and
the Chairman of this Committee for making sure that our
jurisdiction in this matter is put forward and that we can hold
these kinds of hearings, because this is a very important
subject, and it has to do with the issues that affect the state
of competition in the telecommunications industry as applied to
the Internet. And unless we have instances of a problem, it's
not clear to me that we ought to be moving forward. But here,
on the subject of net neutrality, I think everyone agrees that
it has to be addressed. And without going into the Committee on
Commerce's work in this area, it I think is to the credit of
this Committee that we begin to examine the issues that are put
forward in this matter.
As far as I'm concerned, we have telecom companies that
have indicated that they do not intend to let companies like
Google and Yahoo! or next generations of Internet entrepreneurs
go free or use the pipes without significant payments. We have
some very interesting quotations from Mr. Seidenberg at Verizon
and Mr. Ed Whitacre at AT&T that illustrate that things are
changing, and what we are trying to do with this hearing is to
help determine what kind of changes should be made and whether
or not we should allow the FCC to make the decisions through
sometimes rather general statements as to what the policy ought
to be, whether content should be controlled by those who are
delivering the services.
It's an important hearing. Network neutrality is something
that should be very carefully considered as we move forward,
and I think that the role of the Judiciary Committee is going
to be very important, especially in the backdrop of a larger
consideration of the questions involving commerce and
communications. There are some large issues as we move toward
the end of the 109th session of Congress that I'm not sure if
we can handle all of this in the closing months. But there is
no better and appropriate way to begin this than examining the
question of net neutrality, and I'd like to have permission to
put my statement in the record and welcome our witnesses and
begin a very important hearing.
And I thank you, Mr. Chairman.
Mr. Cannon. I thank the gentleman from Michigan, who has
worked together with me--and I've worked with him, I should
say, at his feet learning on this issue for a very long period
of time and look forward to working with him on this Committee.
And without objection, his full remarks are entered in the
record, and at this point, without objection, all Members'
opening statements may be included in the record. Hearing no
objection, so ordered.
Let me introduce our witnesses--would anyone like to make
an opening statement?
[No response.]
Mr. Cannon. Good. Thank you.
Let's go ahead and introduce the witnesses. The first
witness is Paul Misener. Mr. Misener is the Vice President for
Global Public Policy at Amazon.com. Prior to joining
Amazon.com, Mr. Misener worked in both the Government as the
senior legal advisor to FCC Commissioner Harold Furchgott-Roth
and in private industry as a partner at Wiley, Rein & Fielding.
He has the unique perspective of being both an engineer,
graduating with a degree in electrical engineering and computer
science from Princeton, and a lawyer, graduating from George
Mason University. I thought that those were like incompatible.
I gave up my law degree--or not the degree but my practice,
largely because I love engineers. It's nice to see someone who
actually embodies both.
Our second witness is Earl Comstock, the President and CEO
of COMPTEL. Mr. Comstock previously served as the chief counsel
and legislative director for Senator Ted Stevens, former
Chairman of the Senate Commerce, Science, and Transportation
Committee, and later served as the special counsel for
telecommunications for the Senate Commerce Committee, where he
negotiated and drafted key provisions of the Telecommunications
Act of 1996. Mr. Comstock graduated with a political science
degree from the University of California at Santa Barbara and
earned a law degree from George Mason University.
Our third witness is Walter McCormick, President and CEO of
the United States Telecom Association. He has previously served
as the general counsel for the Department of Transportation and
then Under Secretary Andrew Card. Mr. McCormick also has
extensive congressional experience with over 10 years serving
in the Senate, holding numerous positions including general
counsel, chief counsel, and staff director for the Senate
Committee on Commerce, Science, and Transportation. He obtained
his undergraduate and law degree from the University of
Missouri, studied international economics and political science
at Georgetown University, and has completed the program for
senior managers in government at Harvard University's John F.
Kennedy School of Government.
Our final witness is Timothy Wu, Professor of Law at
Columbia University. He currently teaches copyright and trade
and advance intellectual property and telecommunications at
Columbia. Mr. Wu was formerly the Director of Corporate
Marketing at Riverstone Networks, Inc., in Silicon Valley. He
has written extensively on telecommunications and the issue of
net neutrality and has been published in the Supreme Court
Review as well as a number of Law Review journals, including
those at Michigan, Virginia, and Harvard. Mr. Wu obtained his
undergraduate degree from McGill University and graduated magna
cum laude from Harvard Law School.
It is the practice in this Committee to swear in all
witnesses, so if you wouldn't mind standing and repeating after
me, raising your arm.
[Witnesses sworn.]
Mr. Cannon. The record should indicate that all of the
witnesses indicated in the affirmative.
We will now proceed with witness opening statements. I
think you all have probably testified here before, but we have
a little system of lights. The first light will be green and
that goes on for 4 minutes. You have a yellow light, and when
the light turns red, we won't tap you down, but given the
possibility that we may have to recess, we suggest--we would
hope that you would keep it near 5 minutes.
Thank you and, Mr. Misener, would you please proceed.
TESTIMONY OF PAUL MISENER, VICE PRESIDENT FOR GLOBAL PUBLIC
POLICY, AMAZON.COM
Mr. Misener. Yes, sir. Good afternoon. It is on. Thank you.
Good afternoon, Chairman Cannon, Mr. Conyers, and Members of
the task force. Amazon belongs to a coalition of companies that
includes eBay, Google, IAC, Microsoft, and Yahoo! that is
working closely with the growing assembly of well over 100
consumer groups, associations, and companies which share
concerns about the topic of this hearing. I respectfully
request that my entire written statement, which lists the
organizations in this assembly, be including in the record.
Thank you very much for inviting me to testify.
Mr. Chairman, we are here because things have changed.
Within the past few years, the phone and cable companies have
acquired the technical means, market power, and regulatory
permission to restrict consumers' access to broadband Internet
content, such as movies and music, and they've clearly
announced their plans to do so. In short, the phone and cable
companies will fundamentally alter the Internet unless Congress
acts to stop them. And yet the response so far from Congress,
the bill being considered in the House Energy and Commerce
Committee, is wholly inadequate. Worse than failing to confront
the threat, this bill would tie the hands of the expert agency.
Surely, as it did a few years ago with the Tax Freedom Act,
Congress can better thwart this clear and present danger to the
Internet.
Mr. Chairman, rather than read all or part of my written
statement, I would like to use my allotted time to describe
what will happen if Congress fails to reinstate essential
consumer safeguards recently abandoned by the FCC.
For the next 5 to 10 years, phone and cable companies will
maintain their duopoly market power over consumer broadband
Internet access. The phone and cable companies also will
continue to invest and deploy broadband, as they have for many
years under nondiscrimination rules. And they will continue to
realize returns on their investments by being handsomely paid
for access by consumers and content providers alike. Although
the network operators will continue to promise that they won't,
quote, block access to websites, they will firm up their plans
to degrade access to some websites as a consequence of giving
priority, fast-lane access to others.
The telcos also will start providing proprietary video
service and will continue to seek accelerated franchise grants
without build-out requirements, based in part on the existence
of Internet video competition which, simultaneously, they are
moving to quash.
At some point, the phone and cable companies will present a
simple ultimatum to major Internet content providers: Pay us
for prioritization, or if you don't pay, your content will be
degraded relative to those who do pay. Similar deals may be
struck based on political or religious viewpoints or other non-
technical discriminatory factors. In this way, the network
operators will extend their market power over access to market
power over content. They will use their monopolies to
monopolize. A bidding war will quickly ensue. The top-tier
Internet content companies will bid up the price of
prioritization on each of the half dozen or so major Internet
access networks. Smaller companies will recognize that they
have no hope of competing in this bidding war, and independent
venture capital for new online businesses will dry up.
The new way for an entrepreneur to take a business online
will be to seek permission from the phone and cable companies.
A flurry of antitrust actions will then be filed against the
network operators, but even if the courts don't find that the
plaintiffs failed to state a claim, these actions will take far
too long to be effective.
Meanwhile, the foreign network operators, such as Deutsche
Telekom, almost all of which are wholly or partially owned by a
foreign government, will follow through on their already
announced plans to use discrimination as a great way to make
more money off the world-leading American Internet content
companies. In effect, foreign network operators will restrict
access of American Internet companies to foreign markets.
Congress or the FCC will soon thereafter realize that it
was a mistake to allow the network operators to control
Internet content and will rush to pass remedial legislation.
Unfortunately, it will be too late because the lost years of
innovation will be forever lost, the network operators will
have wastefully invested in equipment designed for
discrimination instead of speed, and the foreign governments
certainly won't reverse themselves just because America
reconsidered.
So the result of Congress' unwillingness to address this
clear and present danger will be to leave American consumers
with dramatically reduced content choice, to stall American
online innovation, and to wound U.S. global Internet
competitiveness.
Mr. Chairman, this sorry tale is eminently avoidable. I
urge you and your colleagues to recognize that, despite how
much we wish it were otherwise, the market for broadband
Internet access is not competitive and that the network
operators, both domestic and foreign, fully intend to extent
their market power over access to market power over content. I,
therefore, urge that Congress act now to reinstate meaningful,
enforceable, bright-line safeguards that preserve consumers'
longstanding freedom of Internet content choice.
Thank you again for inviting me to testify this afternoon,
and I look forward to your questions.
[The prepared statement of Mr. Misener follows:]
Prepared Statement of Paul Misener
Good morning, Chairman Sensenbrenner, Mr. Conyers, and Members of
the Task Force. My name is Paul Misener. I am Amazon.com's Vice
President for Global Public Policy. Amazon belongs to a coalition that
includes eBay, Google, IAC/InterActiveCorp, Microsoft, and Yahoo!, that
was formed to express our shared concerns about the topic of this
hearing. Thank you very much for inviting me to testify on this
important matter. I respectfully request that my entire written
statement be included in the record.
i. introduction
Mr. Chairman, the phone and cable companies will fundamentally
alter the Internet in America unless Congress acts to stop them. They
have the market power, and regulatory permission to restrict American
consumers' access to broadband Internet content, including music and
movies, and have announced their plans to do so.
Amazon.com is an Internet-based retailer and retail platform with
over fifty million customers worldwide. We merely want to ensure that
our customers retain their longstanding freedom to access the broadband
Internet content of their choice, including that content available from
Amazon.com. Currently, consumers pay network operators for Internet
access, and have the freedom to select lawful content from providers
like Amazon, who pay network operators millions of dollars a year for
Internet access.
In essence, we fear circumstances in which broadband network
operators with market power are permitted--based on payments, political
or religious viewpoints, or any other non-technical discriminatory
factors--to prefer some content and thereby restrict consumer access to
other content.
As already noted, many large Internet content companies including
Amazon.com, eBay, Google, IAC/InterActiveCorp, Microsoft, and Yahoo!
are very concerned about network operators' ability and plans to
restrict content choice. Earlier this month, the chief executive
officers of these companies, Jeff Bezos, Meg Whitman, Eric Schmidt,
Barry Diller, Steve Ballmer, and Terry Semel, wrote the Honorable Joe
Barton, Chairman of the House Committee on Energy and Commerce to say
that
Until FCC decisions made last summer, consumers' ability to
choose the content and services they want via their broadband
connections was assured by regulatory safeguards. Innovators
likewise have been able to use their ingenuity and knowledge of
the marketplace to develop new and better online offerings.
This ``innovation without permission'' has fueled phenomenal
economic growth, productivity gains, and global leadership for
our nation's high tech companies.
These six CEOs then urged that, in order ``[t]o preserve this
environment,'' a bill should be passed ``that directly addresses
broadband network operators' ability to manipulate what consumers will
see and do online. It is equally important to pass a bill that fleshes
out these consumer freedoms via rules of the road that are both
meaningful and readily enforceable.'' Lastly, the CEOs expressed their
desire to work for legislation ``to protect millions of Americans'
legitimate expectations in an open Internet, as well as the innovation
and competitiveness that it creates.''
Our companies believe that Congress must act to preserve
longstanding consumer freedoms. The telco and cable operators must not
be allowed to extend their market power over broadband Internet access
to market power over broadband Internet content.
This is not just a ``big Internet company'' issue, however.
Ultimately, this is a consumer and much broader industry issue, and a
coalition of well over 100 organizations have joined together to
support legislative safeguards to preserve the openness of the
Internet. These organizations include the AARP, Acopia Networks,
Adaptive Marketing LLC, Adobe, Advancedmultimedia.com, Aegon Direct
Marketing Services, Airespring, Amazon.com, American Association of
Libraries, AnalogZone, AngleBeds.com, Ask.com, Association of Research
Libraries, Awow Communications, Bandwidth.com, Bloglines, Borsetti &
Co., BT Americas Inc., Business Software Alliance, CALTEL, Cendant,
Chemistry.com, CinemaNow, Circumedia LLC, CitySearch, CommPartners
Holding Company, COMPTEL, Comunicano, Inc., Consumer Electronics
Association, Consumer Federation of America, Corliant, Cornerstone
Brands, Inc., Dagdamor Media, Dave Pettito Direct, DiMA, Domania,
Downstream, Dreamsleep.com, Dresses.com, EarthLink, eBay, eBrands
Commerce Group, Economics & Technology, Inc., Educause, Elaine P. Dine,
Electronic Retailing Association, Entertainment Publications,
Evite.com, Excite, Expedia, Free Press, Free World Dialup, GetSmart,
Gifts.com, Google, GotVoice, Inc., Graceline Canada, Hawthorne Direct,
Home Shopping Network, Hotels.com, Hotwire, HSE24, IAC/InterActiveCorp,
Iceland Health Inc., iFreedom Communications, iNest, InPulse Response,
INS, Interactive Travel Services Association, InterMetro, Internet2,
Interval International, Intervox.com, IntraISP, Invens Capital,
Isen.com, LLC, IVR Technologies, iWon, J. Arnold & Associates,
JohnnyZip, Lafayette Group, Inc., Law Offices of James Tobin,
LendingTree, Lingo, Inc., Listyourself.net, Livemercial, Match.com,
McFadden Associates, MCM Telecom, Media Access Project, Media Partners
Worldwide, Mercury Media, Merrick Group, Microcom, Microsoft, Miller &
Van Eaton, National Retail Federation, Nationalblinds.com,
NetCoalition, Objectworld, Pac-West, PointOne, PRC, Primus
Telecommunications, Product Partners LLC, Public Knowledge, Pulver.com,
RealEstate.com, ReserveAmerica, Rifftone.com, S & B Technical Products,
Savatar, Savvier, ServiceMagic, Shelcomm, Shoebuy.com, Skype, Sling
Media, Sling Media Inc., SOHOlutions, Sonus Capital Management, Sony
Electronics Inc., SunRocket, Symercy Financial Corp., Techviser,
Telekom Austria, Telephia, TELLO, Ticketmaster, Tier1Research, TiVO,
TNS, Tonystickets.com, Tranqulitymattress.com, Travelocity, udate.com,
VI Technologies, Vivox, WCW Networks, and Yahoo!
I hope that all of these entities' views and, most importantly to
Amazon.com, the interests of our customers, will be thoroughly
considered.
Moreover, this is not merely a dispute between American network
operators on one hand, and American consumers and content providers on
the other. Rather, it is the first and precedent-setting battle in a
worldwide conflict. Recent news reports confirm that foreign network
operators such as Deutsche Telekom and Telecom Italia also are
interested in extending their market power over their networks to
market power over content. Thus, if U.S. policymakers were to allow
American network operators to extract oligopoly rents from American
content providers, our policymakers would be simultaneously setting a
precedent for allowing foreign operators to exercise the same leverage
over world-leading American Internet content companies and their
customers.
In my time this afternoon, I will describe the market power of
network operators and the details of how they intend to extend that
market power to limit consumer choice of content, such as movies,
television, and music. I then will describe the need for Congress to
require adoption of regulations to confront this clear and present
danger; how failure to act will set a dangerous international precedent
that will harm American competitiveness overseas; and how legislation
that would grant national video franchising relief should not be
enacted without such provisions. Lastly, I will propose modest
safeguards to preserve Americans' longstanding freedom of Internet
content choice.
ii. network operators have market power: consumers have little or no
choice of broadband internet access
Mr. Chairman, as much as we wish it were otherwise, consumers have
little or no real choice of broadband Internet access. For the
foreseeable future, nearly all Americans will have two or fewer
providers available: the phone company, the cable company, or both.
And, unfortunately, consumers will continue to face discouragingly high
costs of switching between them; equipment swaps, inside wiring
changes, technician visits, long term contracts, and the bundling of
multiple services all contribute to these costs.
Despite the common misconception intentionally perpetuated by the
network operators, the Internet did not grow up in an unregulated
environment; its growth and success were due in large measure to the
longstanding rules that governed its infrastructure until last year's
FCC decision. Although many of the rules were outdated and worthy of
deregulation, the Commission erred by completely abandoning non-
discrimination requirements before the market became competitive.
The Commission's own semi-annually reported data on the competitive
availability of broadband access are fundamentally misleading. These
data, which purport to show multiple broadband service providers in
many areas of the country, completely obscure the realities faced by
individual consumers. Unfortunately, however, these data also were the
basis for the Commission's recent actions.
In the first place, the data count as high-speed broadband any
services that deliver as little as 200 kbps in one direction. Although
this may have been a reasonable definition of broadband a decade ago,
it is preposterously slow today, incapable of delivering even typical
TV quality video, let alone HDTV, and is but one five-hundredth the
speed being provided to millions of consumers in Korea and elsewhere.
Second, the geographic areas analyzed are zip codes, not individual
neighborhoods or households. So while there may be three or four true
broadband network operators (for example, two telcos and two cable
companies) serving small separate areas in a zip code, no one consumer
may have access to more than two of them (one telco and one cable
company).
The result of these misleading FCC data is that the amount of
broadband consumer choice is wildly overstated, particularly when the
aforementioned high switching costs are considered. If it really were
easy for Americans to switch among five, six, or more true broadband
Internet access providers, the market would be competitive and
legislated consumer safeguards would not be necessary.
Unfortunately, what exists for the vast majority of Americans is,
at best, a duopoly of the local phone and cable companies. Widespread
deployment of alternative broadband technologies capable of high
quality video remains a distant hope and, with yet another mega-merger
in the works (this time AT&T and BellSouth), the promise of inter-
regional local phone company competition is all but dead. In such
oligopolistic conditions, consumers are left with fewer services,
higher prices, or both.
The FCC's most recent semi-annual broadband deployment data,
released earlier this month, verify this bleak assessment. Perhaps the
most salient fact revealed in the data is that, of the 34.3 million
advanced services broadband lines serving primarily residential end
users, only one half of one percent use other than telco or cable
technology. Given that telco-telco and cable-cable overbuilds are so
very rare, this fact confirms that nearly all American consumers are
stuck with the telco-cable duopoly.
To be clear, we don't begrudge the phone and cable companies their
current market power over broadband Internet access networks. Despite
the longstanding desires and noble aspirations of policy makers,
America is stuck with this super-concentrated market for the
foreseeable future.
Moreover, although we oppose the collection of oligopoly rents, we
certainly don't seek to deny network operators a healthy return on
their investments. But there are two obvious considerations: what are
their investments and are they getting a return? While it is true that
there are new investments being made (well before any discriminatory
pricing regime has been established), even the operators like to remind
regulators that they are, in Verizon's words, potential video service
providers ``who already have access to the rights-of-way'' around the
country. But, of course, they did not obtain these incredibly valuable
rights-of-way on the competitive market but, rather, by government
grant to a monopoly service provider. In sum, much of their
``investment'' was either given to them or explicitly protected from
competition by the government.
Just as importantly, content providers currently pay network
operators for the amount of connection capacity they use, and network
operators can charge consumers different prices depending upon how much
bandwidth they use. This sort of connectivity ``tiering'' makes perfect
sense. And, of course, network operators will charge consumers for the
provision of any ancillary services, such as affiliated video content.
Perhaps the best way to gauge whether they believe their
investments without discrimination are providing an acceptable return
is to note that the FCC data indicate that telco and cable broadband
services are being deployed and taken by consumers at a rapid pace.
Given the network operators' claims (which I believe) that they are not
currently engaged in much, if any, content discrimination, this is a
clear indication that network operators need not discriminate to deploy
broadband in America.
We also welcome broadband network operators' innovations within the
network. With Moore's Law at work, network operators ought to be able
to deploy innovative new technologies and services that, with
increasing efficiency, provide benefits to operators and users alike.
And we certainly don't oppose network operators' entry into competing
businesses so long as they are not allowed to leverage their market
power over broadband Internet access to favor these ancillary
endeavors.
What we seek is more modest, yet far more important: We ask that
Congress keep the telco and cable operators from taking their market
power over broadband Internet access and extending it to market power
over broadband Internet content.
iii. unless congress acts soon, network operators will use their market
power over access to restrict consumer choice of broadband internet
content
Mr. Chairman, unless Congress acts soon, American consumers will
receive artificially restricted choice of broadband Internet content.
Leveraging their market power, phone and cable companies plan to
restrict American consumers' access to such content based in large part
on lucrative deals they intend to cut with third parties. And it will
be just as easy for the operators to favor content based on political
or religious viewpoints or other non-technical discriminatory criteria.
By constraining consumer access to content providers, the network
operators also would create an artificial ``channel scarcity''--
essentially a bandwidth cartel--where none previously existed.
After years of administrative proceedings and litigation, last year
the FCC reclassified broadband Internet access by wireline service
providers, both telco and cable. Although the Commission simultaneously
adopted a policy statement that confirms the agency's statutory
authority and possible intentions to act, the statement fails to
address some likely discriminatory behaviors and, in any case, is
explicitly unenforceable. So, with the exception of weak merger
conditions that apply the FCC's equally weak policy statement to a few
network operators, and expire for no apparent reason in 18 months (the
market certainly won't be competitive by then), telcos and cable
companies may restrict consumer access to content at will. Because
American consumers' access to Internet content is in jeopardy, Congress
needs to act.
Just as it is clear that the network operators have the market
power to restrict consumers' choice of broadband Internet content, it
has become equally clear that they fully intend to do so. Not only have
the telcos and cable companies stridently and steadfastly opposed any
meaningful network neutrality rules, their most senior executives have,
over the past six months (noticeably, beginning only after the FCC's
final reclassification actions), issued scary yet refreshingly honest
statements that reveal their plans for restricting consumer access to
content. Simply put, the network operators are planning to restrict
consumer choice of broadband Internet content based on deals they
intend to strike with content providers and, perhaps, editorial
viewpoints or other non-technical discriminatory criteria. This is
precisely the opposite of ``a la carte'' pricing being sought from
current, vertically integrated video service providers. Indeed, rather
than enhancing consumer choice and flexibility, the network operators
are moving retrograde to constrain such choice and flexibility and
create an artificial scarcity of content outlets.
Although the network operators have been somewhat less clear on
exactly how they intend to limit consumer access, their FCC filings and
public statements reveal that they plan to do so in three key ways. But
before I describe these, please allow me to summarize their technology
plans. There are many differences among the technologies the duopoly
network operators intend to use (hybrid fiber-coax by the cable
operators and either fiber-to-the-home or fiber-to-the-node plus DSL
over copper twisted pair by the telco operators), but all three
technologies have been designed to operate the same way in practice,
with two downstream components: a very high capacity (``fast lane'')
cable-like private network component, and a much lower capacity (``slow
lane'') downstream broadband Internet access component. The fast lane
will be operated as a closed network, while the slow lane will be more
(but not entirely) open.
A. Specific Network Operator Plans
The network operators apparently plan to restrict consumer choice
of broadband Internet content in three essential ways: by providing (1)
a closed fast lane and an open slow lane; (2) paid `police escort'
within the slow lane; and (3) preferential ``local on-ramps'' into the
slow lane.
1. Closed Fast Lane and Open Slow Lane. First, as noted before,
each network operator has or is constructing a fast lane for their
affiliated broadband content provided by a sister company and a slow
lane for broadband Internet content provided by others. The fast lane
they reserve for themselves is a closed, private network. This has
always been the case for cable operators and, even for the telco
operators deploying broadband, make no mistake: the overall broadband
pipes they're deploying are mostly just another version of cable TV,
not broadband Internet. Consumers should recognize that despite the
nearly ubiquitous and puffy advertising, it's not about ``your world,
delivered,'' it's mostly about their world.
2. Paid Police Escort within the Slow Lane. Second, the network
operators intend to offer Internet content providers paid
prioritization (essentially a paid ``police escort'') in the slow lane.
Their plan is that, as content enters the operators' slow lanes from an
Internet or other network access point, the speed with which this
content transits their network will be determined, in part, based on
whether the content owner paid for prioritization. The terms of art the
network operators use to describe this prioritization include ``quality
of service'' and ``tiering.'' Each term is intentionally confusing. I
am not suggesting that certain types of services be denied
prioritization, just like certain kinds of road traffic, like emergency
services, deserve police escort. But such police escort should not be
made available for a fee; otherwise those unable to pay the fee will
always be stuck in traffic. Put another way, to prioritize some traffic
is to degrade other traffic. It's a zero-sum game at any bottleneck.
This fact is intentionally obscured by network operators, who
incorrectly claim that they will not degrade anyone's content. Neutral
prioritization (for example, network management whereby all live video
streams receive priority above all text files) would be perfectly
acceptable. But for an operator to sell priority to the highest bidder,
the degradation of service to content providers who can't or don't pay
would be anticompetitive. Fortunately, it also is predictable and, with
modest legal safeguards, avoidable.
As should be obvious, small businesses will have a very hard time
innovating if they need to pay for `police escort' prioritization to
compete. When some companies like mine have noted this previously, some
of the network operators respond with something to the effect of
``beware when big companies are looking out for the interests of little
ones.'' That response seeks to change the subject and obscure three key
points. First, it doesn't change the underlying fact that small
entrepreneurs--facing a possible bidding war among big companies--are
going to be hurt unless Congress does something now. Second, many of
the big companies noting this imminent throttle on small company
innovation were, indeed, innovative small companies only just a few
years ago. And, third, on behalf of our customers, we want to ensure
that our innovations--essentially new businesses operating in start-up
mode by our employees--are not hindered in the same way. We merely
want, as Internet pioneer Vint Cerf so clearly puts it, ``to innovate
without permission'' of the network operators.
3. Preferential Local On-Ramps into the Slow Lane. Lastly, the
network operators intend to offer downstream content injection
(essentially ``local on-ramps'' to the broadband slow lane) to content
providers who are willing to pay. This would enable content to be
delivered from geographic locations closer to consumers and provide
better user experiences. Such local on-ramps already are provided in a
competitive access market by companies such as Akamai, which has
servers distributed throughout the United States so that content can be
delivered quickly to consumers, rather than having to traverse great
distances on the Internet. Although content providers have no
expectation that such local on-ramps must be provided for free, network
operators must not offer local on-ramps on discriminatory terms.
B. Network Operator Claims
So how do the network operators discuss these plans? They
obfuscate. For example, most network operators say they won't, quote,
``block'' websites. This relatively new concession is neither noble nor
comforting and, in fact, is quite misleading. While they may not
actually block access to a particular website, they easily could make
that site's content unusable, either by overly constraining capacity
(making the slow lane too slow); by providing prioritization only to
those willing and able to pay (the paid ``police escorts'' that make
everyone else wait); or by providing downstream injection (the local
on-ramps) only on unreasonable or discriminatory terms. So it's a
matter of semantics: they may never block content, but still could make
it unusable.
Wireless network operators and their representatives are seeking
exemption from any non-discrimination requirement enacted, but it is
difficult to see on what basis such an exemption would be justified.
Technology neutrality dictates equal treatment of copper, glass, and
the ether. Consumers need not, and should not, have their access via
such various means treated differently by regulation, unless there is
some difference among them that legitimizes disparate treatment. The
possible differences for wireless are bandwidth, mobility, ``closed
network,'' and competition.
If the concern is bandwidth or mobility, wireless providers can
rest assured that a non-discrimination requirement would neither
require certain levels of bandwidth or performance but, rather, that
all sources of technically-similar Internet content be treated equally.
And if a wireless carrier wants to offer a purely private network,
without Internet access, then non-discrimination rules would not apply.
It is important to recognize that, as competitive as the mobile
wireless market may appear on the surface, it would not exist on this
issue because the competing wireless providers are almost all owned by
the uncompetitive telcos who oppose non-discrimination rules. Although
Sprint/NexTel is independent, T-Mobile is owned by Deutsche Telekom
(which has announced its intention to discriminate), Cingular is owned
by AT&T and BellSouth, and Verizon Wireless is owned by Verizon. On the
issue of Internet content non-discrimination, therefore, policymakers
cannot expect the wireless market to behave competitively.
Other network operators say, dismissively, that this is a
``solution in search of a problem,'' or that policymakers should wait
for a problem to arise before acting. This wait-and-see approach was
endorsed by the FCC last year. But what further proof is needed? The
time to act is now. To ignore the network operators' market power,
their strident and steadfast opposition to meaningful safeguards, their
boldly announced intentions, and their increasingly clear specific
plans, is truly to turn a blind eye to a clear and present danger to
consumers.
This situation is eerily similar to that facing Congress a few
years ago with respect to Internet access taxes. Congress correctly
foresaw the future problem of state and local governments imposing
burdensome taxes on Internet access and moved peremptorily to ban such
taxes by enacting then extending the Internet Tax Freedom Act. Today,
the functional equivalents of the state and local tax collectors are
the oligopolistic telco and cable network operators, and Congress
should likewise recognize and peremptorily thwart the threat they pose
to the Internet.
IV. FAILURE TO PROTECT AMERICAN CONSUMERS ALSO WILL ENABLE FOREIGN
NETWORK OPERATORS' ANNOUNCED PLANS TO RESTRICT AMERICAN CONTENT
COMPANIES' ACCESS TO OVERSEAS MARKETS
To make matters worse, foreign broadband Internet access network
operators have plans to restrict world-leading American content
companies' access to overseas consumers. Deutsche Telekom and Telecom
Italia have already announced their plans. Earlier this year, for
example, Kai-Uwe Ricke, the CEO of Deutsche Telekom said that ``the
Googles, Yahoos, eBays and Amazons'' ``need infrastructure''; that
``[i]t cannot be that infrastructure providers like [Deutsche] Telekom
continue to invest, while others profit from it''; and that ``Web
companies that use infrastructures [sic] for their business should also
do their part.'' But, of course, Amazon.com and others already do their
part by paying for Internet connections. What Mr. Ricke actually wants,
of course, is exactly what our domestic network operators want: to use
market power to charge consumers once and American content providers
twice, all for the same thing.
American policymakers must consider the effects of our domestic
regulatory actions on our global competitiveness. American content
companies like Amazon.com are world leaders today, in part because our
access to consumers in other markets has not been impeded. If foreign
network operators, almost all of which face no competition and are
fully or partly owned by foreign governments, with obvious incentives
to favor non-American content companies, are allowed to extract
discriminatory rents from American content companies, our
competitiveness both as an industry and a nation will suffer. Put
another way, even if it were sound policy for Congress to allow
American network operators to extract oligopoly rents from American
content companies, it could not be sound policy to set the precedent
for foreign network operators to extort payments from world-leading
American content companies. How could our trade representatives
challenge such actions abroad if we permit them here at home? Clearly,
we must not lay the groundwork for every network operator around the
globe to extort payments from American Internet companies. The only way
we can hope to prevent this outcome is to hold the line domestically:
we must not allow consumer choice of content to be artificially
restricted by network operators with market power.
V. ANY LEGISLATION GRANTING VIDEO FRANCHISING RELIEF MUST ALSO
AFFIRMATIVELY PRESERVE CONSUMER FREEDOM OF CHOICE OF INTERNET
CONTENT
Mr. Chairman, the preservation of American consumers' longstanding
freedom of choice of Internet content should be addressed in the
context of national video franchising relief. The reason for granting
such relief is, of course, the introduction of additional video
competition for consumers, so it would be counterproductive to
facilitate the delivery of content of one additional competitor (the
phone company), while limiting the availability of thousands of other
competitors via the Internet.
Moreover, in support of their opposition to requirements for system
build-out and service to rural areas, the telcos recently have
repeatedly cited the competition from Internet content providers
(``Internet streaming video'' and ``Internet-downloaded video,'' in
AT&T's words). As Verizon reported to the Commission in opposition to
video build-out requirements, there is ``significant competition in
access to video programming through myriad means, including internet
and satellite sources. . . .'' BellSouth went so far as to tell the FCC
that Internet content competition would diminish unless telcos were
given video franchising relief: ``[i]f LFAs [local franchising
authorities] are permitted to delay or prevent broadband providers from
also [in addition to cable] offering video service, then competition
will be greatly (and probably permanently) impeded. This is
particularly true given the plethora of new [Internet-based] video
offerings that require robust broadband networks.''
So the network operators have the temerity to cite the presence of
competitive Internet-based video programming as justification for
preempting local government rules and dodging reasonable build-out
obligations, all while planning to quash that competition by
restricting consumer access to Internet content.
In the interests of competition and consumer choice, therefore,
video franchising relief must not be granted without meaningful
broadband Internet content safeguards; otherwise, consumers will
receive less, not more, choice of content.
These safeguards must keep the network operators from cutting
``paid police escort'' deals that would adversely affect the traffic of
other content providers who can't or don't pay. And they also should
keep the operators from insisting upon unreasonable or discriminatory
terms for leasing ``local on-ramps.'' In short, the most likely and
dangerous anti-consumer discriminatory behaviors of broadband network
operators must be thwarted in advance by legislation and regulation.
Mr. Chairman, your Committee's interest in this matter is greatly
appreciated. We seek bright line rules that would avoid unnecessarily
lengthy litigation, especially given how easily foreseen--even
forthrightly announced--the network operators' anticompetitive actions
are. As I noted in testimony before Congress almost three years ago,
and as the FCC recognized in its final broadband reclassification order
last August, that agency does not need new authority to act in this
area. Congress needs either to direct agency action under current
authority, or to enact another mechanism for protecting American
consumers and competition.
VI. CONGRESS SHOULD REINSTATE LONGSTANDING REGULATORY SAFEGUARDS TO
PRESERVE CONSUMER FREEDOM OF CHOICE OF INTERNET CONTENT
Mr. Chairman, we respectfully ask that Congress enact modest but
effective safeguards to reinstate limited protections that the FCC
recently abandoned, and thereby preserve American consumers'
longstanding freedom of choice of Internet content. Without much
effort, these regulatory safeguards can be narrowly drawn so that
operators' private networks are not invaded and so that operators are
appropriately compensated for the services they provide.
Two essential consumer safeguards we seek can be summarized as
follows:
(1) Content transiting an operator's broadband Internet access
network may be prioritized only on the basis of the type of
content and the level of bandwidth purchased by the consumer,
not ownership, source, or affiliation of the content. (That is,
for traffic within the broadband network's Internet access
lane, ``police escort'' may be provided only based on the
technical nature of the traffic or whether the consumer has a
paid more for a somewhat higher speed limit.)
(2) The terms for local content injection must be reasonable
and non-discriminatory; network operators must not be allowed
to give preferential deals to affiliated or certain other
content providers. (That is, ``local on-ramps'' into the
Internet access lane need not be free, but the road owner must
not charge unreasonable or discriminatory rates to favor their
own or only some others' traffic.)
Note that we are not seeking to have broadband Internet access
reclassified as common carriage. To the contrary, we think that with
modest safeguards, appropriately drafted and clarified, and with
mandatory and meaningful agency enforcement, American consumers could
be confident that their longstanding choice of lawful Internet content
will not be limited by network operators.
VII. CONCLUSION
In conclusion, Mr. Chairman, the phone and cable companies will
fundamentally alter the Internet in America unless Congress acts to
stop them. They have the market power, technical means, and regulatory
permission to restrict American consumers' access to broadband Internet
content, and they've announced plans to do so.
For the foreseeable future, American consumers will have little or
no real choice of broadband Internet access. And--unless Congress acts
soon to reinstate modest and longstanding consumer safeguards--consumer
freedom to choose broadband Internet content will be artificially
limited. I urge you and your colleagues to recognize that, despite how
we wish it were otherwise, the market for broadband Internet access is
not competitive and that the network operators--both domestic and
foreign--fully intend to extend their market power to restrict consumer
choice of content by discriminatorily constraining consumer access to
American content companies. I also urge that, simultaneous to any grant
of video franchising relief, Congress enact safeguards to preserve
American consumers' longstanding freedom of Internet content choice.
Thank you. I look forward to your questions.
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Mr. Cannon. Thank you, Mr. Misener, for a very compelling
statement. We appreciate that.
Mr. Comstock?
TESTIMONY OF EARL W. COMSTOCK, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, COMPTEL
Mr. Comstock. Thank you, Mr. Chairman and Members of the
Committee. It's a pleasure to be here. I'm Earl Comstock, the
President and CEO of COMPTEL. We represent a diverse mix of
competitive providers. We have everything from cable
overbuilders to wireless companies to Internet companies. We
basically represent the entire spectrum of application and
network operators that seek to serve consumers.
I would like to build a little bit on what Mr. Misener just
said. I think, you know, he is speaking from an Internet
content company side, and now we're looking at the folks that
are primarily in my organization, actually seek to provide
competing transmission services. Many of them do have their own
facilities, and the keys that are here and the reason why
Congress needs to act is that the reality of the situation
today is in this United States we have two facility-based
operators that reach essentially all homes and one facility-
based operator that reaches essentially all businesses. And
that has not changed. Both of those operators built their
networks in a protected environment. They had at least a
decade, if not several decades, in which to build out their
facilities with the guarantee that if they built those
facilities, they would get the customers. And here I'm talking
about not only the incumbent phone companies, but the incumbent
cable companies as well.
And I think it's important for the Committee to recognize
that the network dynamics lead to inevitable discriminatory
practices if Congress sets the law the wrong way. Right now
today, you have the possibility that residential consumers
might actually enjoy two facilities-based options while most
businesses enjoy only one. Without some kind of rules that
provide access to that infrastructure that was built across
public rights-of-way and using public spectrum, we will not
have competition that allows the content providers that Mr.
Misener was speaking about, the innovators of all the
innovative services and applications that everyone seeks to get
access to today, we won't have any competition in the provision
of the vital transmission. That's the key ingredient that
everyone needs, the essential facility, in antitrust terms,
that has to be available. And it's something that can't easily
be duplicated. It took a lot of time and a lot of money to
build out infrastructure throughout the United States. The
thought that a competitor in the face of an entrenched
incumbent would be able to not only gain the capital but then
construct facilities--which, again, can't magically appear
everywhere at once but have to be built out over time. In the
face of someone who has an entrenched revenue stream and an
entrenched network and the very customers that competitor is
seeking to serve, that's an incredible barrier to entry unless
there are some rules that make it possible for you to do that.
Now, this Committee doesn't necessarily set the common
carrier rules, but you do have oversight over the antitrust
rules. And I'd point out the parallels here between what's
happening now and we're seeing the re-establishment of the very
kind of monopoly that led the Reagan administration Antitrust
Division to break up AT&T. It was an effort that actually
started 10 years before in the Nixon and Ford administrations
and was carried through to the Reagan administration, and
thankfully they followed through it. And what that case
illustrated--the divestiture from AT&T illustrated was the
incredible loss to this country, the lost opportunity that came
about from having that kind of monopoly control of a network.
It wasn't until after the divestiture that we saw all the
benefits, the innovation of the Internet, wireless companies,
all kinds of new broadband services, none of which the
incumbent would have employed or deployed because it would have
threatened their revenue stream.
And the same is true of cable operators. Cable modem
service came about largely because of an opportunity that
Congress provided in the 1996 act, where the cable industry
believed that the phone companies were going to come into their
market immediately, so they sought to respond to that potential
competition by offering Internet access service.
Now they're in a situation where, gee, if I just continue
to do what I'm doing, maybe the Bell Company gets in and offers
video, but I'd much rather have a cozy duopoly than I would see
competition. So what you're seeing is an effort to get the
cable rules applied to everybody, and those rules tie
transmission and content, and that's what's so dangerous to the
United States. If you allow that essential facility, the
transmission, to be tied together with the content you will
create the very gatekeepers that we broke up the AT&T monopoly
to prevent.
So I hope that you'll look at enforcing some antitrust
provisions, and I think antitrust is a possible remedy. But to
do that, you really need to spell out some very clear
violations, because I think as Mr. Misener said, the problem
for most start-up companies is it's a matter of time. If they
don't know up front that there's going to be some relief from
the kind of anticompetitive abuses, the exclusionary practices
that network operators traditionally will engage in, then
they've got no opportunity to get in the market in the first
place.
So it's the opportunity foregone, the opportunity lost,
that really is at issue here, and it is going to take some
rules to make the Internet work. The Internet grew up on common
carriage, and if we're not going to have common carriage, we
need a stronger antitrust remedy to solve that problem.
Thank you.
[The prepared statement of Mr. Comstock follows:]
Prepared Statement of Earl W. Comstock
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Mr. Cannon. Thank you. I appreciate that. That was also
very insightful.
And now for a slightly different perspective, I believe,
Mr. McCormick?
TESTIMONY OF WALTER B. McCORMICK, JR., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, UNITED STATES TELECOM ASSOCIATION
Mr. McCormick. Thank you, Mr. Chairman. Chairman Cannon,
Congressman Conyers, Members of the Committee, thank you for
the opportunity to be here today and to appear before this task
force to discuss net neutrality.
Mr. Cannon. You know, I think that box will slide closer to
you, if you'd like.
Mr. McCormick. Is that better? Okay.
As you know, our association represents about 1,200
innovative companies that range from the smallest rural
telecoms in the Nation to some of the largest corporations in
the United States economy.
What unites us is that we have a 100-year tradition of
connecting people to each other over networks. We are 100
percent committed to this tradition as we invest billions of
dollars building out our new, next-generation broadband
networks that are capable of meeting America's rapidly
increasing ``need for speed.''
Today, I make the same commitment to you that our companies
have made to their customers: We will not block, impair, or
degrade content, applications, or services.
If you can go there today on the Internet, you'll be able
to go there tomorrow. The functionality that you have today on
the Internet, you will have tomorrow.
For more than a century, our businesses have connected
customers with those whom they choose to connect with. If a
customer wants to call Sears, we don't connect them to Macy's.
And the FCC has made it abundantly clear that it will move
swiftly to protect consumers' right to be in control of their
Internet experience.
But more fundamentally, consumers' Internet experience is
today unimpeded--in the absence of virtually any regulation of
the Internet--because there exists a powerful consumer mandate
for Internet freedom.
In a new communications era defined by multiple choices--
numerous communications pathways--consumers simply will not
continue to purchase Internet service from a provider that
seeks to block or restrict their Internet access.
When consumers have choices in the marketplace, consumers
have control. There is vigorous competition between DSL, cable
modem, wireless, satellite, and other Internet access
providers. In some areas free Wi-Fi access is available. In
others, access over powerlines is available. This results in
numerous benefits to consumers, including DSL prices as low as
$12.99 a month. These benefits, of course, contribute to the
FCC's recent announcement of a 60-percent year-over-year
increase in U.S. broadband subscriptions, which is, of course,
good news for our Nation's economy and global competitiveness.
But continued progress, continued technology advancements,
continued expansion of consumer communications and
entertainment choices, rests on continued investment in these
next-generation networks.
Mr. Chairman, the Internet exists today on networks. That
is, in fact, what the Internet is--networks connecting with
networks. Have network operators sought to control or restrict
the Internet? No. Our companies have invested and grown and
sought to increase the scale and the scope of the Internet. And
we have sought public policy that encourages increased
investment in networks that will make the Internet even more
robust tomorrow than it is today.
All sides of the network neutrality debate agree that what
will be required in the future is more investment in networks.
Indeed, Internet traffic is multiplying. Network traffic is now
growing about 100 percent annually. Further acceleration is
expected soon. Cisco CEO John Chambers predicts that broadband
video and other bandwidth-intensive applications will drive a
four-fold to six-fold increase in network traffic over the next
decade.
The answer is investment, not legislation that would
discourage it.
Congress has an important role in promoting competition. It
should facilitate investment in next-generation broadband,
investment from across today's competitive landscape, along the
lines of the legislation that's now being developed by the
Energy and Commerce Committee. We appreciate the vigilance of
this task force, and we look forward to our continued work
together.
Thank you, Mr. Chairman.
[The prepared statement of Mr. McCormick follows:]
Prepared Statement of Walter B. McCormick, Jr.
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Mr. Cannon. Thank you, Mr. McCormick.
And now for sort of the higher view, I suspect. Mr. Wu,
you're recognized for 5 minutes.
TESTIMONY OF TIMOTHY WU, PROFESSOR OF LAW,
COLUMBIA LAW SCHOOL
Mr. Wu. Thank you, Mr. Chairman, Mr. Conyers, and Members
of the Committee. Thanks for having me testify, and thank you
very much also for directing your attention to this issue.
What I want to emphasize in my remarks today is, as you
suggested, the long view. I want to suggest that the issue the
Committee faces here and the Congress faces here is really not
a new issue, despite the fancy label of ``net neutrality.'' It
is a very old problem that this Nation has always had--the
problem of the abuse of market power on information networks.
This is a problem that's been confronted as far back as the
telegraph, through the Bell networks, through every stage of
telecommunications history, and it has at every stage been
important that Government do the minimum that it needs to do to
prevent the worst anticompetitive practices from occurring.
Now, I want to start by discussing why there's been such a
popular reaction to this issue of network neutrality, and I
think we live in an era where the Internet has become part of
the infrastructure of American life. That is to say, people
rely on the Internet the way they rely on the electric network,
the way they rely on the roads, the way they rely on the
telephone. They plan their lives around it. They plan weddings.
They buy airplane tickets. People use this network for their
daily life. And I think that's why there was such a surprise
and reaction when the Bells began to announce plans that they
would be considering plans and situations where they would be
picking and choosing favorites, trying to decide which
companies should get favored access and which should get less
favored access. And I think that cannot fail but to provoke a
reaction.
You know, if you allow an analogy, it might as if pne day
the electric company were to say from here on forth your
refrigerator you purchased from Samsung isn't going to work
quite as well as the one purchased from General Electric. That
might make more money for the electric company. It might make
more money for General Electric. But it's obvious that this
would be a bad outcome for competition between refrigerators.
And that's exactly the situation we face today.
The problem with network discrimination is it is inherently
a tax and a distortion on competition in the network. The
situation we have today, the basic layout, is that you have an
extremely vigorous market operating on top of the Internet,
operating on top of the infrastructure. It's a market where
someone with very little resources, just a good idea, a
website, and people willing to invest, can almost overnight
become a billion-dollar company. Companies like Amazon,
companies like eBay, companies like Google started very, very
small, with almost nothing. Today, if you write a good blog, if
you're clever and smart enough to say funny things or have
insight into politics, you can get more readers than the
Washington Post or the New York Times.
This is how the free market is supposed to work. The
markets on top of the Internet are probably the best examples
in our current economy of markets working the way the free
market is supposed to work. They're low barriers to entry,
they're entrepreneurial, they're innovative, and they are a
driving part of the American economy.
The only problem with this market is it has one Achilles
heels, and that is the infrastructure. The access side of this
market has never been competitive. It is not competitive today.
Over 90 percent of Americans have a choice between one or two
companies. And the threat, the real threat, is that the
anticompetitive, the noncompetitive side of this network will
spill over into what is the best functioning market in the
United States today, the infrastructure--the market that is on
top of the Internet's infrastructure. That is the trade-off.
Now, Mr. McCormick and the Bell Companies will explain that
greater profit is needed because they need to make investments
in their network, and no one denies that. The question for the
Committee and the question for Congress is: What is the best
way to fund these kind of things? And I suggest to you the
worst way is to tax innovation and tax competition. I suggest
that among the alternatives to Government, the worst way to try
and promote a network build-out is allow the network owners, as
gatekeepers, as crown corporations, to distort what is the
strongest and one of the most vigorous parts of the American
economy.
Now, not all the plans that have announced are so bad, but
some of the worst ones amount to what I would call a Tony
Soprano model of networking; that is to say, they're simply a
threat by companies who are in a position to hurt other
companies to make their life difficult. If you are offering
some companies better service and degrading others, you are
saying pay us or we will ruin your business. That's simply a
protection scheme and not a market strategy. That's
anticompetitive conduct, a threat of anticompetitive conduct,
and even if you believe, as I do, in limited Government, there
must be a role of Government to guarantee the very basics of a
fair market and prevent the worst anticompetitive conduct.
Thank you very much.
[The prepared statement of Mr. Wu follows:]
Prepared Statement of Tim Wu
introduction
Mr. Chairman, and Members of the Committee,
Over the last several months, the debate over Network Neutrality
has provoked rather more of a reaction than I think anyone might have
thought, and I want to begin by considering why.
I think there are several reasons. First and foremost, this is an
issue that affects people directly. Once upon a time the internet was a
kind of toy, used by hobbyists, scientists, and geeks. But today it's
something different: it has become part of America's basic
infrastructure. It has become as essential to people and to the economy
as the roads, the electric grid, or the telephone. It's an
infrastructure that people and firms depend on for everyday activities,
whether planning weddings, managing investments, or running a small
business.
Given this infrastructure, Americans are accustomed to basic rights
to use the network as they see fit. That's why there's been surprise
and indignation over plans, advanced by the Bells, to begin deciding
what consumers want, by slowing down disfavored companies, and speeding
up favored companies. It's as if the electric company one day announced
that refrigerators made by General Electric would henceforth not work
quite as well as those made by Samsung. That would be a shock, because
when it comes to the electric grid and the internet, people are used to
a network that they are free to use as they wish.
Second, whatever AT&T and others may claim as motives, the
potential for abuse of market power is obvious to everyone. Ninety-four
percent of Americans have either zero, one, or two choices for
broadband access.\1\ Many of us wish things were otherwise, but they
are not.
---------------------------------------------------------------------------
\1\ Cf. Federal Communications Commissions, ``High-Speed Services
for Internet Access,'' as of 12/31/04, available at <http://
www.fcc.gov/wcb/iatd/comp.html>.
---------------------------------------------------------------------------
Given today's market, it's obvious that a firm like AT&T may earn,
at the margin, more money by distorting competition among internet
firms. It can, through implicit threats of degradation, extract a kind
of protection money for those with the resources to pay up. It's
basically the Tony Soprano model of networking, and while it makes some
sense for whoever is in a position to make threats, it isn't
particularly good for the nation's economy, innovation, or consumer
welfare.
______
The problem faced here is actually not new at all--it is a familiar
problem of market power on networks that government has grappled with
since the days of the telegraph. What I want to make clear is the
central economic tradeoff involved in these kinds of cases. Letting the
internet or any infrastructure become discriminatory may offer
marginally more profit for operators. But it does so at the cost of a
tax on network competition and innovation. Whether it's a nation's
ports, roads, canals, or information networks, discrimination comes at
a price to the activities that depend on the infrastructure.
That's why at nearly every stage in the history, governments have
maintained at least a basic anti-discrimination rule to block the worst
forms of anti-competitive behavior. And today, that's all that's
needed--a simple ban on the worst kinds of behavior; a basic rule whose
goal is simply to guarantee basic consumer rights and let the free
market work.
network discrimination problems in history and today
Problems of network discrimination are nothing new. Network owners
with market power have always been tempted to use their gatekeeper
position to discriminate between favored and disfavored uses.
The history, in fact, goes as far back as the 1860s, when Western
Union, the telegraph monopolist, signed an exclusive deal with the
Associated Press. Other wire services were priced-off the network--not
blocked, but discriminated against.\2\ The result was to build
Associated Press into a news monopoly that was not just dangerous for
business, but dangerous for American democracy. As telecommunications
historian Paul Starr writes ``Western Union had exclusive contracts
with the railroads; AP had exclusive contracts with Western Union; and
individual newspapers had exclusive contracts with AP. These linkages
made it difficult for rival news services to break in.'' \3\ The AP
monopoly had an agenda: it didn't just favor Google or Yahoo--it went
as far as to chose politicians it liked and those it didn't. As
Historian Menahem Blondheim has documented, AP used its Western Union-
backed monopoly to influence politics in the late 19th century, even
going so far as to exercise censorship on behalf of the State. The
method was simple: when faced with messages from disfavored
politicians, the wires simply didn't carry them.
---------------------------------------------------------------------------
\2\ For more on the early history of the telegraph, see Robert L.
Thompson, Wiring a Continent: The History of the Telegraph in the
United States 1832-1866 (1947); Daniel J Czitrom, Media and the
American Mind: From Morse to McLuhan, ch. 1 (1982); Paul Starr, the
Creation of the Media 184 (2005).
\3\ Starr, the Creation of the Media, 184.
---------------------------------------------------------------------------
A much more recent example comes from the 1960s, when the Bells
would not allow anyone to hook up anything to their telephone system
other than a Bell telephone.\4\ It took the courage of the D.C.
Circuit, and later the FCC, to force Bell to accept a consumer's right
to attach anything to the network not dangerous to the network. To that
courage we owe better choice in telephones, and over time much more. To
the freedom of network attachments we also owe the answering machine,
the fax machine, and finally the modem and the whole birth of personal
networking. I don't want to overstate the point, but freeing network
attachments from Bell control, as technical as that sounds, has played
a part in making this country the leader of the world in information
technology. Here's what two FCC economists, Jay Atkinson & Christopher
Barnekov, said about freeing network attachments from Bell control:
---------------------------------------------------------------------------
\4\ On this episode, see Carterfone, 13 F.C.C.2d 420 (1968); See
Jay Atkinson & Christopher Barnekov, A Competitively Neutral Approach
to Network Interconnection 3 (Office of Plans & Policy, FCC, Working
Paper No. 34, Dec. 2000); Kevin Werbach, Breaking the ICE, 4 J. Telecom
& High Tech. L.J. (2005).
``we believe that the recent development of the Internet, and
of much of Information Technology, would not have happened if
CPE (for example, modems) were still marketed only by LECs. The
blossoming of the CPE market into a highly competitive industry
offering a wide variety of choice at low cost and rapid
technological advances, and enabling previously unknown
possibilities such as the increasingly numerous Internet
services, is arguably a direct consequence of the deregulation
of CPE.'' \5\
---------------------------------------------------------------------------
\5\ See Jay Atkinson & Christopher Barnekov, A Competitively
Neutral Approach to Network Interconnection 3 (Office of Plans &
Policy, FCC, Working Paper No. 34, Dec. 2000).
So what do we have today? In terms of market structure, you have a
range of diverse and highly competitive markets operating on top of the
internet's basic infrastructure. These markets are viciously
competitive. Invent a new search engine, like Google did, and in a few
years you can be a multi-billion dollar concern. Write a popular blog,
and if you're lucky you can have nearly as many readers as the New York
Times. Conversely, many more businesses and ideas have failed, like the
famed ``pets.com,'' but usually on the merits.
These markets functioning on top of the internet are in many ways
an economist's dream. Barriers to entry are low. Startup costs are
minimal: many successful business began with just an idea and a good
web site. Competition is mostly meritocratic--the best online stores
win, not the ones with a famous names or the right connections.
Meritocratic competition, in turn, leads to Darwinian or what
economists call ``Schumpeterian'' innovation. That just means that new
technologies supplant the old, in a constant process of industrial
rebirth. In all, today's markets operating on top of the internet's
neutral infrastructure may be some of the best examples of markets
working like the free markets are supposed to.
But this thriving market has an Achilles heel. For there's one part
of the net which isn't competitive at all: broadband access. The access
networks are part of the old telecom world--monopolistic, slow-moving,
well-connected in Washington, and prone to anti-competitive behavior.
They are the ``Broadband Bottleneck.'' And the Bells, who lead the way
in their efforts to change the internet, are almost an extension of
government, fed and raised on government subsidies and rate-setting
since 1913 or so. It is no surprise that they should be leading the
way, looking for a way to make the free market of the internet work
more and more like the old Bell monopoly.
the tradeoff
In any discussion of neutrality rules, the Bells and even the cable
companies will always turn back to their one big argument: we need more
money to build the infrastructure, and if you don't give it to us, we
won't build it. I think the government needs to learn how to stand up
to these kinds of threats. What we have here in truth is a tradeoff.
The Bells want permission to discriminate in exchange for a promise
that they'll use any money earned to build more infrastructure. But
even if the Bells make more money, and even if that money is actually
invested in infrastructure deployments, that doesn't mean the tradeoff
costs don't exist. The tradeoff is a distortion, a tax, on the healthy
markets that are on top of the basic network.
It is inevitable that a discriminatory infrastructure will affect
competition and innovation in the markets that depend on it. Imagine,
for a moment, that private American highway companies reserved a lane
for Ford cars. That would be good for Ford, but obviously would affect
competition as between Ford and General Motors. It would also slow
innovation--for it would no longer be the best car than wins, but the
one that signs the best deals and slows down their competitors. The
race is no longer to build a better car, but to fight for a better deal
with the highway company.
That's the threat to innovation on the internet. Today, as I said
early, you can start a business on the internet with relatively little
capital. But in a world where AT&T or Verizon decides who gets priority
access, entrepreneurs get a different message. Its not who has a better
product: its who can make a deal with AT&T, Verizon, Comcast or Time-
Warner. That's a different kind of market, one more like the old days
of telecommunications. That's when starting a network business meant
making a deal with a big Telco, or forget it.
In short, the long-term costs to the economy of allowing a
discriminatory internet are real. Encouraging infrastructure
investments is a serious challenge, but in the end one only
tangentially related to the Network Neutrality debate. The real spur to
network deployment and innovation will be market entry--whether
municipal broadband, or otherwise, that scares today's providers into
offering something better. Indeed, even given the limited competition
we have today, it is the superiority of the cable network that has
goaded the Bells into beginning fiber optic deployments. For these
deployment decisions, facilities-based competition is the strongest
answer, and letting gatekeepers tax application competition is really a
sideshow. Taxing innovation is hardly the only, and probably the most
expensive way to encourage infrastructure deployment.
on the case for maintaining government's role
I think many people agree instinctively that an open and neutral
internet has been a good thing for the nation. It's been good for
consumers, good for entrepreneurs, and good for the U.S. economy.
Countries become rich through innovation, and need basic infrastructure
to innovate. That's often the difference between rich nations and
poor--access to basic infrastructures needed to start a business. In
this respect the neutral internet has been a sterling example of an
infrastructure that has driven the national economy. Perhaps, in U.S.
history, only the early canals, railways, roads, railways and electric
networks can compare as boosters to the U.S. economy and the well-being
of citizens.
Even if neutrality works better--something the cable operators, to
their credit, agree with--there is a different kind of hesitation out
there. It is as to whether government should be involved at all. After
all, Congress has with some exceptions stayed away from trying to
regulate the Net, and for the most part that's been a good thing.
There's no rate-setting, and no long battles over ``internet
unbundling.''
But in truth things are more complex. As everyone knows, the
essential initial research and build-out of the internet was funded by
the Defense Department. That funding of research and development was an
astonishing success, in part because the resulting design was so good
it hasn't much needed government. The internet is by design diverse and
decentralized, making competition on top of the infrastructure
viciously competitive. That competition has ironed out many of the
problems government might otherwise be needed to solve.
But while Government hasn't acted much to regulate applications, at
the infrastructure side the story is completely different. The initial
build-outs, as we already said, were all government funded. Thereafter,
through the entire history of the internet, the Government has
maintained some kind of rules to maintain basic neutrality on the
network--to control, in effect, the bottleneck it helped create. We
already discussed the deregulation of network attachment in the 1960s--
a matter essential for letting consumers buy modems and hook them up,
and a right that helped lead to a mass consumer internet. Later, the
Federal Communications Commission, through the 1980s and 1990s
maintained rules that protected the rights of dialup ISPs to reach
customers over the phone lines. That tradition continued when, in the
early 2000s, Chairman Michael Powell announced the ``network freedoms''
rules. In 2005 the FCC fined a regional phone company that was blocking
Voice over Internet services, the latest of a long tradition of efforts
to protect Network Neutrality.\6\
---------------------------------------------------------------------------
\6\ ``Madison River Communications, LLC Order and Consent Decree,''
March 3, 2005, <http://www.fcc.gov/voip/>.
---------------------------------------------------------------------------
What do these stories have in common? At each stage, the internet's
vigorous competition has relied on one baseline government guarantee:
consumers get the use their network as they like. That's the same
deregulatory instinct that government needs now--to guarantee consumers
access to whatever content and applications they want, free of
discrimination and playing favorites.
Some of you may feel hesitant, feel that government's role will
necessarily be complex. It need not be. All government needs to say is
this: leave things the way they are. It needs merely to recognize
consumers' rights to access the content and applications of their
choice, free from discrimination, and give meaningful remedies when
those freedoms are interfered with.
The best proposals for network neutrality rules are simple. They
ban abusive behavior like tollboothing and outright blocking and
degradation. And they leave open legitimate network services that the
Bells and Cable operators want to provide, such as offering cable
television services and voice services along with a neutral internet
offering. They are in line with a tradition of protecting consumer's
rights on networks whose instinct is just this: let customers use the
network as they please. No one wants to deny companies the right to
charge for their services and charge consumers more if they use more.
But what does need to be stopped is raw discrimination that is nothing
more than a tax on innovation taken by government-supported
corporations.
conclusion
This mission--protecting consumer choice against market power--is a
minimum and appropriate role of government. I wouldn't be here if there
were five broadband providers, each competing to give customers the
best and fastest service possible. If that were the case, I am certain
that the best service would win out--if one company blocked or slowed
some companies, consumers would run away. If a rental car company
doesn't let you drive the car where you wanted, you'd choose a
different company. The problem is the lack of choice in this market.
Let me close by looking at who's on each side. The Bell companies
have taken the lead in moving things back to the world where they pick
and choose who gets better access on the network. Who wants that? Very
few people. Not bloggers, libertarian, conservative, or liberal, who
know that larger media outlets will be favored over them. Not the
application makers, among the most active sectors of the nation's
economy. Not anyone who dislikes or distrusts excesses of centralized
power. Not even cable operators. And, when made aware, certainly not
consumers. In fact, no one wants this but the Bells themselves, and
perhaps that tells us something.
Mr. Cannon. The Chair would note that all members of the
panel concluded their remarks in remarkably good time. We
appreciate that.
I'd ask unanimous consent that the following items be made
part of the hearing record: testimony from Mark Cooper of
Consumers Union; a letter to Chairman Sensenbrenner from the
National Broadcasters supporting net neutrality protections;
testimony from Kyle McSlarrow; an open letter from small,
medium, and large Internet companies opposing the Energy and
Commerce bill; and the Federal Communications Commission press
release of April 3, 2006. Pardon me. That should be the
National Religious Broadcasts. Somehow I skipped over that very
important distinction. And without objection, so ordered.
The Chair recognizes himself for 5 minutes to ask
questions, and first, a subject dear to my heart that I'd like
a quick opinion on from all of you. Should we extend and make
permanent the Internet Tax Freedom Act's moratorium on the
taxation of Internet access? Let's just go down the line?
Mr. Misener. Yes.
Mr. Comstock. Yes.
Mr. McCormick. Yes.
Mr. Wu. I haven't thought about it before, but why not?
Mr. Cannon. Thank you for the quick answers. Do you have
any rationale? This is not exactly the record we're building,
but are we going to get investment--is the lack of a permanent
moratorium chilling investment in any of your views? Mr.
McCormick?
Mr. McCormick. Well, Mr. Chairman, I think that, you know,
consumption taxes were typically applied as a matter of policy
on those areas of the economy where we want to discourage
consumption. Internet is an area of the economy, and
particularly the information economy, where we want to
encourage further investment and consumption, so that the whole
theory of tax policy in that area would be to keep hands off
the Internet when it comes to taxation.
Mr. Cannon. Thank you. I note that every other member of
the panel is concurring. I agree with that, so let's cut that
one off and move on to some other issues.
Mr. McCormick, you mentioned that consumers have a range of
broadband options, but can you explain the apparent discrepancy
between that in your remarks and the statistics provided by the
FCC that 98.8 percent of advanced service lines--the advanced
service line marketplace is cable and DSL?
Mr. McCormick. Yes, Mr. Chairman. Under traditional
competitive analysis, the immediate choice to the consumer and
the contestability of the market are both restraints upon
price. Market contestability is very present today. We have
access to the Internet today over DSL, over cable modem.
There's satellite access wherever you have a view of the
Southern sky. There is wireless access to the Internet. There
is now unlicensed spectrum available to those who want to
invest, unlicensed spectrum through Wi-Fi and Wi-MAX
technologies. In fact, Google has now entered into partnerships
where it's providing, for a fee, Internet access.
So what you have is you have both consumer choice and you
have market contestability. Indeed, even at a convention like
the COMPTEL convention, you have individuals like Jeff Compton
of Telscape Communications being reported in Communications
Daily as saying that it would be a mistake for the Bells to
push competitors off of wirelines because, he says, ``If the
competitive industry is pushed off telecom wires, it will ally
with cable, broadband over powerline providers, wireless
carriers, or even satellite companies. The Bells will be
sitting there with the infrastructure maintained and less of
the market share.''
I'd like to introduce this article for the record because
of the variety of consumer choice.
Mr. Cannon. Without objection.
Mr. Comstock. Mr. Chairman, if I might just respond very
briefly to that?
Mr. Cannon. Certainly.
Mr. Comstock. The statistics you cited are absolutely
correct. There is no real competition in that, and I'd also
note that that's in the residential marketplace. In the
business marketplace, without the access rules imposed under
the Communications Act, there would be relatively little
competition; fewer than 3 percent of the buildings in this
country have alternative fiber going into them. And with
respect to satellite and broadband over powerline and other
services, the reality is less than 1 percent of the services
are being provided over that. These are not competitive
alternatives at the moment, and they probably won't be in the
foreseeable future.
And I'd just like to add for the record, on page 6 of my
testimony we cited a Wachovia analysis that basically said
there's a cozy duopoly structure here and that's what's
allowing Verizon to raise their low-end DSL price from $15 to
$18 and tack on a $20 surcharge. So if that's a competitive
marketplace, then, you know, I think we're all missing
something here.
Mr. Cannon. Does anyone on the panel know how many
consumers current access the Internet over powerlines?
Mr. Comstock. According to the FCC's own statistics, it's
less than 1 percent.
Mr. Cannon. Right. That's for all----
Mr. Comstock. That's for all access over----
Mr. Cannon. Not just powerlines, which are----
Mr. Comstock. Right.
Mr. Cannon. It seems to me that the point here is that we
have lots of potential, but, in fact, we have sort of a
duopoly. Can I just ask the panel their views on municipal
build-out for access to the Internet? Starting with you, Mr.
Misener, if you'd like.
Mr. Misener. Well, certainly more competition is better.
The sooner the better, the better for American consumers,
American innovation, American industry. It's just not there
yet. It won't be here anytime soon.
Mr. Cannon. Are you familiar with the Swedish model?
Mr. Misener. The Swedish model?
Mr. Cannon. Yes, of Internet build-out. [Laughter.]
It provides wonderful access.
Mr. Misener. I have no recollection.
Mr. Cannon. They are--Sweden---- [Laughter.]
It was the after-dinner drinks, I suspect, but thank you.
Does anyone know about Sweden, what's happened with the build-
out in Sweden?
Mr. Comstock. The municipalities are building out the
infrastructure and----
Mr. Cannon. It's actually private, but has done--it's been
a very interesting process. Do you have a comment, Mr.
McCormick? Do you have any members who are municipals?
Mr. Comstock. Well, we have members that are supplying the
service to municipalities, and I second what Paul said. But I
think the key point everybody has to remember, regardless of
whether it's municipalities or someone else, all of these are
smaller networks that need to connect to the larger networks.
Mr. Cannon. Right.
Mr. Comstock. And I think that's really the key, is without
strong interconnection rules, a smaller network has no chance.
Mr. McCormick. I guess my point, Mr. Chairman, is that----
Mr. Cannon. Let me just ask it this way, because my time is
almost up. You can answer as long as you'd like, but I can't
imagine that you guys would be opposed to the municipals
building out and adding to your network.
Mr. McCormick. Our view has been that as long as they come
in and compete on an equal basis with the private sector. But
as I said, I represent 1,200 companies. A number of them are
smaller rural companies. In many of these areas, there is not
Internet access today. What's standing in the way of Internet
access is investment. The technology is there, whether it's
broadband over powerline, whether it's unlicensed spectrum,
whether it's cable modem or DSL, or whether it's wireless.
There is no technological barrier to entry. The only barrier to
entry is the willingness to invest and to deploy. And
historically in this country, people invest and deploy if they
feel that they can get a return on their investment.
So for everyone sitting here at the table, there is an
opportunity for them to invest and deploy Internet access.
Mr. Cannon. I think the--could you just--pardon me, I've
gone over my time, but just let me ask: Isn't deployment
dependent upon many of your members connecting with these
smaller networks?
Mr. McCormick. There is a history in the Internet of
interconnection on a pairing arrangement. I am not aware of any
problems relating to interconnection of Internet networks that
has not been--the only one I'm aware of is the one that you
mentioned, Madison River, which was dealt with immediately. But
every Wi-Fi network that's being deployed is connecting with
the Internet. There's been no problem whatsoever.
Mr. Cannon. I plead the panel Members to accept my apology
for going over time and hope that none of them follows my
example. I yield back now and recognize the senior Member of
the Committee, the Ranking Member, Mr. Conyers.
Mr. Conyers. Thank you, Mr. Chairman. This is a very
important and informative set of statements that have come from
the witnesses.
Professor Wu, what we're gathered here about in discussing
market neutrality, net neutrality, is really a question of
whether market power is going to be able to prevail over and
intercept and control content; and that at the same time, the
Federal Communications Commission has been moving away from
this issue, making it very hard for consumers to seek a remedy
without having to all get lawyers. Is that a fair
interpretation of what I've been hearing from the majority of
the witnesses at the table today?
Mr. Wu. I think it is, Congressman Conyers, and this is a
situation with historical precedent. I'll give you one strong
example from history.
In the 1860's, the telegraph companies, which were also a
monopoly--Western Union--signed an exclusive deal with
Associated Press that only allowed Associated Press to be
carried over the wires; that is to say, they only allowed--they
didn't actually block other companies. They just discriminated
against other companies.
That in turn led to a news monopoly in the late 19th
century which was a threat not only to American business and
competition but a threat to American democracy, because this
was a combined action of the telegraph monopoly plus the news
monopoly that would pick political favorites, choose
politicians they liked, and run only their news and their
information over the wires.
I don't want to suggest we're at that far of a stage, but
what I'm suggesting is when network owners pick favorites,
that's very dangerous for the American democracy and dangerous
for American business.
Mr. Conyers. Well, the idea of network neutrality, a few
years ago I didn't see a problem but--I would argue that there
wasn't a problem then. I've got statements now from people in
the business who use--who have market power, control the pipes,
who are saying we're going to start charging, we're going to
start discriminating.
Is that, Mr. Misener, a fair appraisal of what the issues
are that bring us to the table here this afternoon?
Mr. Misener. Yes, sir, Mr. Conyers. Things have changed.
It's not the case that this is a static circumstance. The
market has radically consolidated over the past few years. Ten
years ago, soon after my company started in business, there
were dozens of ISPs in any major metropolitan area. Currently,
at best, you'll get two broadband ISPs serving an area. As Mr.
Comstock pointed out, something less than 1 percent of
consumers are taking broadband Internet access from someone not
on cable or a telco.
The other thing is that the FCC has deregulated last year
to allow longstanding nondiscrimination principles to be
removed from the books before competition arrived. I think we
all wish there were competition and all believe that, were
there competition, the rules would not be necessary. But the
Commission moved first before the competition arrived.
Mr. Conyers. I just wanted to ask Mr. McCormick, we've got
a number of quotations from industry leaders, from SBC--all
friends of mine--Verizon--some less friendly--BellSouth. But
the whole idea is that they're saying network operators must be
free to control the type and quality of service on the system.
How does that comport with what you've told us this afternoon,
sir?
Mr. McCormick. Mr. Conyers, I think what Mr. Whitacre and
others in the industry like Mr. Notebaert have done over the
course of the last couple months is respond to--try to respond
in a very thoughtful way to that in two ways: First, they have
said we will not block, degrade, or impair anyone's access to
the Internet. With regard to operating the network, the way we
currently operate it, by making sure that certain applications
are afforded a level of security or privacy, we have to have
the flexibility to do that in the future.
So, for example, today the Federal Government comes to us,
and they say----
Mr. Conyers. But you're telling me that I should sleep
comfortably in my bed tonight because I shouldn't take these
too seriously.
Mr. McCormick. No. I think that you should take them
seriously, but I'm trying to explain what they meant by that.
Mr. Conyers. Oh.
Mr. McCormick. And what they meant was that there are
network applications, for example, Bank of America comes and
they want to have a virtual private network that is secured for
privacy purposes. That network operates over the Internet, but
we plug into that network certain security and quality of
service applications. The Federal Government comes to us and
needs secured applications for national security. Health care
facilities come to us, and they need to have virtual private
networks. We need to be able to continue to be able to manage
the networks----
Mr. Conyers. Well, I don't know if Ed Whitacre was thinking
about that when he said, ``Now, what they''--Google and
Yahoo!--``would like to do is use my pipes free, but I ain't
going to let them do that.'' Those are--that's his vernacular.
I don't think he's talking about the concerns that you're
explaining to me.
Mr. McCormick. Well, I think that what he is relating is
that, as Google and Microsoft and others move into new
applications that require enormous amounts of bandwidth, that
Google and Microsoft will be looking for what amounts to
virtual private networks. And I think, Mr. Conyers, that terms
like ``toll lanes on the Internet'' and others, those have
not--that's not been our terminology.
The network neutrality debate has two sides to it: one is
the service provider side; the other is the content and
application side. This Committee took its first look at search
engines in connection with airline reservation systems and said
there should be no screen bias. Today, if you wanted to buy a
book, Trover Book Shop is about three blocks away. But if you
go on Google and plug in that you would like to buy a book near
1st and Independence Avenue, S.E., you will get ten responses;
nine of them--eight of them will be Barnes & Noble book stores,
as much as 8 miles away, and Trover Books won't be listed until
number eight down. If you plug in that you just want to buy a
book, the first response you will get is Amazon.com out of more
than 1 billion responses.
Now, the reason for that is that they have paid for
priority. There is a screen bias in Google, and the screen bias
with regard to ``buy a book'' is a priority that's paid by
Amazon.com that disadvantages Trover.
So if the Federal Government is going to get into the
business of regulating network neutrality, pursuant to these
FCC principles, that applies both to the service providers and
to the content providers. And this kind of screen bias is
precisely the kind of screen bias that this Committee
investigated in connection with computer reservation systems in
the airline industry.
Mr. Conyers. Well, this is--I'm way past my time, but----
Mr. Wu. Can I comment?
Mr. Cannon. But asking very interesting questions.
Mr. Wu. Can I comment? There's a large difference in the
search engine market and the Internet access market. The search
engine market is a highly competitive market in which it is
truly survival of the fittest. Google comes along, A9 comes
along. There's an ongoing battle. And customers go to whoever
gives them the best search results.
What we're talking about here is a completely different
issue. We're talking about a noncompetitive market with one and
two competitors, at most, with some others on the side. It's a
completely different situation. The analogy is not apt.
Mr. McCormick. Except the market share of Google in the
search engine market far exceeds the market share of the Bell
companies with regard to Internet access.
Mr. Cannon. The gentleman's time has expired, and the
gentleman from North Carolina, Mr. Coble, is recognized for 5
minutes.
Mr. Coble. Thank you, Mr. Chairman. Good to have the
panelists with us today.
Mr. McCormick, telecom companies provide capital to build
out and maintain the Internet's hard infrastructure pipes. Of
course, we want more pipes. We want growing Internet access and
lowering prices.
If I'm a small businessman or small businesswoman or rural
Internet provider paying to use your pipes, competing against
one of your companies, is it your belief that that constitutes
fair competition in an open market?
Mr. McCormick. Mr. Coble, let me make sure that I
understand. What you're saying is that you are a small business
owner, like a furniture store, that would be trying to obtain
Internet access over our pipes?
Mr. Coble. Yeah.
Mr. McCormick. And you want to sell furniture and you're
concerned that because you're having to pay the local telephone
company in North Carolina for Internet access that you might
somehow be disadvantaged?
Mr. Coble. Yeah, that's the direction in which I'm headed.
Mr. McCormick. I cannot imagine a situation where they
would, but I can tell you, just like with Trover Books, if you
were to plug into the search engine that you want to buy
furniture in a small town in North Carolina, what you're going
to find is that out of hundreds of thousands of responses,
you're going to get eBay and you're probably going to get
Amazon.com and you're going to get a few other large companies
that are paying for priority to be listed on that search engine
as the first two or three examples.
So this part of net neutrality with regard to content and
application providers is a very significant issue in the
competitive realm and one that I know the Committee will want
to take a look at with regard to the broader issue.
Mr. Coble. Now, the professor's body language tells me he
wants to insert oars into these waters.
Mr. Wu. You know, I think you bring up a very important
point, which is that small businesses are very dependent on
infrastructure. They need roads to get to the rest of the
country, they need phone lines, and they now need the Internet.
They rely on getting neutral access to whatever they depend
upon for the Internet. And the whole problem with the Bell
Companies starting to pick and choose favorites is that small
businesses cannot be sure that they'll get the access they need
to the companies that they partner with. Or if the small
business is a company itself that wants to succeed on the
Internet, it needs to be in a position where it can enter the
market really without having to make a deal with the Bells.
Mr. Coble. Mr. Comstock, did I detect body language from
you as well, or Mr. Misener won?
Mr. Comstock. Absolutely, sir. What I think the important
difference is--and while this Committee may well want to look
into prioritization of screens and the practices of content
providers, it's a totally distinct issue because the
infrastructure that's essential for all of the content
providers is that transmission network. And that's where the
essential facility. That's where there's a bottleneck. This is
like--very much like someone owning a road and getting to
decide which cars will travel on it. And the problem in the
furniture example would be if the Bell Company were also--or
the cable company also owned a furniture store and then said,
``I'm going to favor my furniture store over someone else,''
this is becoming an essential medium for people to do their
business. They're advertising, they're reaching consumers. And
this is about making sure there's rules that allow people to
get access to that infrastructure on a nondiscriminatory basis.
Mr. Coble. I want to ask the professor a question, but I
don't want to cut Mr. Misener out. Okay. Professor, let me ask
you this before my red light illuminates. Adequate
infrastructure is vital to Internet access. How does net
neutrality affect rural areas where smaller telecom providers
maintain infrastructure, A? And let me ask you this: In the
era--in this era of wireless phones and growing Internet
services, what markets or regulatory measures protect the
profitability of these rural telecom companies? And I ask that,
gentlemen, because I'm subjective. I have rural outfits in my
district.
Mr. Wu. Right. I don't think that they are the same issues.
For rural areas, as much as the rest of the country, it's
important that the businesses and people in rural areas get the
access they need to a neutral infrastructure, the neutral
Internet. They're as dependent on the Internet for economic
growth as the rest of the country.
Now, what about the precise situations of rural carriers? I
don't know if--I think the network neutrality issue is more or
less--is not directly implicated by that. I think it's just a
different issue. There are probably--there's a lot of money
that needs to be spent to build infrastructure in rural areas.
There's no question about that. Government has ways--Government
has ways of encouraging companies to build infrastructure. But
allowing discrimination as a way to encourage companies to
build infrastructure strikes me as one of the worst ways to do
so. It's a tax on innovation, it's a tax on the infrastructure
that doesn't actually promote what you need. If you want to
have rural build-outs, Government needs to subsidize them.
Mr. Coble. Thank you----
Mr. McCormick. That's not necessarily true.
Mr. Comstock. Mr. Coble, the short answer to your question
is these rural companies have all lived under exactly what
we're asking for for the last 60 years of their life. They were
regulated as common carriers. It didn't in any way impede their
ability to provide the service that they offer, which is
transmission. So net neutrality is nothing more than the
reimposition of common carrier rules or antitrust rules that
mimic the common carrier rules. They're flip sides of the same
coin. So this is not something that they haven't lived with
before.
Mr. Coble. Thank you, gentlemen. Before the Chairman
keelhauls me, I'm going to yield back. Thank you, gentlemen.
Mr. Cannon. I wish there was a bright-line rule about what
questions were interesting or not, but I was certainly engaged
in what you were asking, Mr. Coble.
The gentlelady from California, Ms. Lofgren, is recognized
for 5 minutes.
Ms. Lofgren. Thank you, Mr. Chairman. I think this hearing
proves the value of this task force, and I look forward to
additional hearings, because as we've listened to the
testimony, at least to me it becomes clearer and clearer the
need to make sure that networks remain available to all users
and there be some net neutrality rules.
I was on the Committee when we did the Telecom Act in 1996,
and really since that time, and especially in the last several
years we've seen a reconglomeration, I guess, if that's the
right word, of telecom companies. And I think about what the
old AT&T monopoly was like in terms of competition. I mean, you
couldn't hook up an answering machine or a fax machine to the
network. It certainly disfavored new technology. And since we
lessened that death grip, I mean, technology exploded. And in
my part of the world, in Silicon Valley, there were--the
companies that have really led the economy really were allowed
to do that because of the freedom to innovate that the
limitation on the monopoly provided. And I worry if we allow,
for example, the incumbents to control access to Google, as has
been suggested by some company executives, what happens--not
just to Google; they're now a pretty big company--but to the
next Larry and Sergei in a dorm room coming up with something
that will be Google? I mean, we need to make sure that there is
an environment for innovation and creativity, and that's what
monopolies prevent.
I am concerned--I just want to say one thing about Google.
They're just outside my district, and I have thousands of
constituents who work for them. And I think I just want to
correct the record. It is a mistake to suggest that anything
but the algorithm they uses--they use come up with the results.
I mean, they have an algorithm that favors hits. They also have
paid placements, but I use Google all the time. The paid
placements are very--I mean, they're evident. They're marked as
paid placements. Everybody knows you can use them or not use
them. I just thought it was important to mention that, and as
has been mentioned by the witnesses, there are a plethora of
search engines. It's a very competitive market. And, for
example, the Amazon search engine is for the Amazon site. I
mean, and a lot of sites have sell sites. So it's a mistake and
misleading to try and mix those two together.
I just--the one issue that has been raised by the incumbent
monopolies, and I think we have to discuss them in that way,
because--what is it?--94 percent or better of all people get
their Internet access or high-speed Internet access from one of
two providers, and that's the market situation. The one issue
that has been raised to the Congress in opposition to the net
neutrality is essentially--I'm paraphrasing--if we don't get to
do it our way, we won't build out the remainder of the network.
I took a look at fourth quarter revenues for AT&T, fourth
quarter of 2005, and the report was that they added 1.8 million
DSL lines in that last year, that the revenues from consumer
DSL services went up 21 percent last year, and the penetration
rate for DSL services more than doubled in the last 2 years.
They also reported that its operating revenues from data
services went up more than 43 percent, the highest rate of all
its business segments, to an increase of about 30 percent of
its operating expenses. And today the reports for the first
quarter of 2006 were in, and the data revenues rose 85 percent
from the last year compared to a 45-percent increase in
company-wide revenues and a 57-percent increase in company-wide
expenses.
So I'm looking at really a very positive--I don't think I
own any stock in AT&T; I might ask my husband to look at that--
a very positive revenue stream. I'm wondering, Professor,
you're someone who just looks at this, you don't have any axe
to grind, you're an academic. What do you make of their
suggestion that if they don't get their way to control access
and other users, that they won't build out this network?
Mr. Wu. It's something of a regulatory tactic, and my
opinion--and I think the statistics bear this out and the
economy bears this out--is that this neutral Internet has been
good for everybody. It's floated all boats. It's been great for
the cable companies. It's been great for the Bell Companies.
And it's been great for the application makers and, by
extension, the American economy.
You know, I think that the network attachment point you
brought up is a great example. The Bells fought tooth and nail
to prevent consumers from having a right to hook up things to
their telephone lines because they thought that that would
destroy their market and that would hurt them. In the end, it
turned out to be a giant boom. We owe it to that bravery of the
FCC and of the D.C. Circuit in the 1960's to say that consumers
have a right to hook up whatever they want to their telephone,
such developments as the answering machine, the fax machine,
ultimately the Internet itself as a mass medium. And I think
today that--you know, even the cable operators take a different
position than the Bell Companies. They say a neutral Internet
has been great for them, too. They just, you know, feel
differently about regulation.
I think that these kind of threats really represent an old
style of thinking and a return to a kind of 1960's idea of
centralized network build-outs, which has failed. And I think
we need to learn the lessons of the 1990's of what has really
succeeded for everybody.
Mr. Comstock. I would also note that if they don't deploy
their networks, if they don't upgrade their networks, then they
can't offer video. And that means the cable companies take more
of their market share. So I think there's a strong financial
incentive for them to upgrade their networks notwithstanding.
Mr. Cannon. The gentlelady's time has expired.
The gentleman from Texas, Mr. Smith, is recognized for 5
minutes.
Mr. Smith. Thank you, Mr. Chairman.
Mr. McCormick, let me address my first question to you. The
goal of antitrust law is to maximize consumer choice through
free markets. How do you think the kind of tiered access that
we are talking about today will benefit consumers? And, more
specifically, they've been used to a free Internet now for 10
years. How do you think they're going to respond to this kind
of tiered approach?
Mr. McCormick. Okay, let's--I'm hearing a lot of--let me
respond to that in terms of what really isn't in debate, that
the Hushaphone and Carterphone attachments to the Internet, not
in debate. I mean, the FCC has said--one of its principles is
you can attach any lawful device, and we absolutely agree.
What's not in debate is that we would in any way block, impair,
or degrade consumers' access to the Internet. Not in debate.
What I also don't think is in debate is that everyone would
leave it in control of the consumer to decide how much capacity
they want to buy. Do they want to buy one meg? Do they want to
buy a T-1 line? What amount of Internet access do they want to
buy? If you're paying $12.99 for Internet access as opposed to
$100, you're probably getting a much bigger pipe. If you are at
home where you're running--you know, a business gets a bigger
pipe than does a residence.
I think that what is in debate here is when you have
certain application providers who want to move into new areas
that will require enormous bandwidth, such as the delivery of
huge amounts of video, technology will allow you to do that in
one of two ways: either by putting a bigger pipe into the home
and requiring everybody to have that bigger pipe, or doing
certain network configuration that will allow you to compress
and to deliver. So that's a network part.
What's in debate here is who pays for that enhanced portion
of the network. There are a variety of application providers
out there who would like to say that they'd like to
differentiate their product by investing. In the same way today
a person, if they want to have home--a phone answering machine,
they can connect it at the end of a network, right? Or it can
be done inside the network. If you have a cell phone, you
probably want to go ahead and have the messages answered inside
the network.
So the debate here really is who bears the cost. We believe
that the consumers should be in control. We believe that the
consumers should decide what costs they want to bear, how much
network access they want to buy, and that they should be in
control of deciding what sites they want to go visit. Others
would like to say that they would like to load all of the costs
of their own business plans onto the consumer, which will
require us to raise consumer rates to spread out their costs
among everybody. That's not a free market, and we don't agree
with that approach.
Mr. Smith. Okay. Thank you, Mr. McCormick.
Mr. Misener, you look like you're ready to answer, but let
me ask you a slightly different question that you won't mind,
and it's sort of the other side of the coin. The ISPs spent
billions of dollars setting up these networks. Companies like
yours use these networks. Why shouldn't they be able to charge
what the market will bear? And the second part of that question
would be: What do you think the consumer reaction is going to
be?
Mr. Misener. Okay. Thank you, Mr. Smith. It's hard to know
where to begin, but I'll start with saying that we do pay.
Companies like mine pay millions of dollars a year for Internet
access, and we pay based on how much capacity we need to pump
into the networks.
Secondly, we support what Mr. McCormick has suggested as
consumer tiering of services whereby a high user--a gamer, for
example, or someone who wants to watch HDTV on the Internet--
pays more than someone who occasionally sends e-mail. That
makes perfect sense from an economic perspective and a consumer
fairness perspective. These consumers expect that. They pay
more for what they--to get more.
What we don't like is the concept of taking market power
over the network and extending it to market power over content.
It's been suggested somehow that there'd be this deal made in
which some content is prioritized for a fee and other content
is not thereby degraded. That is physically, technically
impossible. We've heard several times Mr. McCormick say today
that he's not going to degrade content. If that's the case, who
on Earth would pay for prioritization that doesn't thereby
relatively degrade the competitor's content? No one's going to
ever pay for that kind of service. It's not worthy. The fact of
the matter is the way the Internet works is that if you
prioritize some content, you put some content in the fast lane,
you by definition at bottleneck choke points put other content
in the slow lane.
Mr. Smith. Okay. Thank you, Mr. Misener.
Mr. Chairman, let me just finish with a comment really
directed toward our full Committee Chairman, Mr. Sensenbrenner.
I just appreciate his having a hearing on this subject because
I think it emphasizes once again, quite frankly, that the
Judiciary Committee is the proper forum to address questions
that involve interstate commerce and monopolization. Whether or
not it occurs isn't the point. The point is that this is the
proper forum to consider those kinds of issues.
I yield back the balance of my time.
Mr. Cannon. I thank the gentleman. I think the Ranking
Member of the full Committee would also thank the gentleman for
that focus on the jurisdiction of this Committee, which is very
important to all of us.
Before we recognize the gentlelady from Texas, let me ask
unanimous consent to include in the record a letter from the
FTC Chairman to Chairman Sensenbrenner on the Brand X decision
and cable broadband obligations. Hearing no objection, so
ordered.
The gentlelady from Texas, Ms. Jackson Lee, is recognized
for 5 minutes.
Ms. Jackson Lee. I thank the Chairman very much and thank
the witnesses. I hope that as we probe each of you, as the
Members inquire, that this will be what it is. It is fact-
finding and it is a recognition that we have a challenge before
us and somewhat of a dilemma. And I might echo or associate
myself with the words of Chairman Cannon to say that--and
Congressman Smith, I believe--that this is the appropriate
vehicle and venue to address these questions.
Let me first start with you, Professor Wu, because I liked
your comparison of the refrigerator. We all want to get into a
refrigerator now and then, and I think the plainness of your
explanation of a refrigerator not working because it was one
versus another so the electricity worked better for the other
one, sort of a biased selection of who ate and who did not.
Help me understand--and I will be going to a few of the other
panelists very quickly, if you can help me understand that
blocking sensation, because we've heard one witness--and, in
fact, I will question Mr. McCormick, because he clearly makes
the point he will not block, impair, or degrade. What is your
sense, Professor Wu, that this will, in fact, happen?
Mr. Wu. Thanks. I do think the electric--the electricity
network is important because it really does capture some of the
feelings that Americans have got--have gotten used to with the
Internet, that they plug stuff in and it works or they go to
the sites they want to go to and they work. And I think I'm
going to disagree with Mr. McCormick, who keeps saying that
degradation is not the issue here. Degradation is the central
issue here in this case. When Bell Companies, when AT&T in
particular--and I've seen AT&T's plans. Their plans are to give
favorable treatment to the companies they make deals with. And
so it's exactly as if the electric company made a deal with
Samsung or made a deal with Kitchenware and suddenly, you know,
your toasters work better, your refrigerator works better, and
you want to buy a General Electric refrigerator, and it just
doesn't work as well, or, you know, it doesn't function the way
you'd like, your iron doesn't get your clothes to be starched
or----
Ms. Jackson Lee. Sooner or later you get rid of it.
Mr. Wu. Right, and the obvious point is that it distorts
competition. It's not who makes the better refrigerator. It's
who has the deal. And so that distorts innovation. It's no
longer survival of the fittest. It's no longer who has the best
technology. It's a question of who goes golfing with the CEO of
AT&T. And I think that's not the American way. I mean,
sometimes it is, but it shouldn't be the American way.
Ms. Jackson Lee. This is the--and thank you, Professor.
This is, I think, the large mountain, Mr. McCormick, that we've
got to ascend to. And let me first of all acknowledge the
reality of life, and that is, we thank you for the massive job
creation that this industry has created, and certainly out of
that, because of the appetite of consumers, certainly we've had
the opportunity for your companies to grow, for jobs to be
created, and, of course, for our districts to be made happy.
But I do want you to try to, if you will, overcome I think the
very succinct argument that has been made. We are fact-finders
here today. Block, impair, or degrade the content applications
or services, what you've said, but my thought is that if I
build a private road and I pay for it, then it is likely--and
that is a transportation road. It is likely to have the right
to say who travels on that road or not. I don't want the big
18-wheeler--forgive me, truck drivers--that may put potholes in
the road. So help me understand and appreciate how you will
avoid that situation.
And then I want to--let me do this with Mr. Comstock,
because you've said some very viable things. I want you to jump
in right after and help me understand why the FCC authority
over broadband--recently limited their authority over broadband
services, and I think you have another comment in here that
said the subjugation of the economic rights of many to the
interests of the few has not been limited only to the FCC. So
we have some regulatory problems as well. But let me go on to
Mr. McCormick, if you would.
Mr. McCormick. Thank you very much. I'd like to stick with
your analogy of the road for a moment, because I think it's a
very apt analogy. The Internet today remains a relatively new
network, like the early road network. And in many areas like
the early road network, there's a single lane. And so the way
the Internet is built is that the consumers who are going to
use that network, that road network, they pay and that covers
the cost of the road network.
Now, let's say that somebody comes along and they want to
put a bunch of 18-wheelers on that network. So now the network
has to be expanded in order to accommodate the shipper who's
putting a bunch of 18-wheelers on that network. Think of
Amazon.com or Google or some others as that shipper. The
consumer--who bears the cost of the ones who are going to now
load onto that network a whole bunch of additional traffic?
Should the cost be borne by the individual consumer? Should
everybody's rates be increased? Or should the people who want
to load that network with a bunch of 18-wheelers have to pay
for the network expansion?
We would argue that the analogy with regard to the road
network is that if you want to load a whole bunch of traffic
onto that network, then you help pay for the network expansion.
Don't make all of the consumers at home have to pay for that
network expansion, because some of those consumers, they may be
only buying things or using the Internet for stuff that's
shipped by small trucks or by cars.
So I think that that analogy is absolutely, absolutely
apropos and apt.
Mr. Cannon. The gentlelady's time has expired, but I think
Mr. Misener is anxious to respond.
Ms. Jackson Lee. He's anxious and I think Mr. Comstock, if
you would indulge me for an additional minute, I ask unanimous
consent for them to be able to respond. Thank you.
Mr. Comstock. I'll be brief, but using that road analogy, I
think where Mr. McCormick takes you astray is the people who
want to load the 18-wheelers on are paying for their access to
the Internet, and the question is, if I pay as a consumer for a
road that would carry that 18-wheeler to my house, can I get
anybody's 18-wheeler or just the 18-wheelers that they say? And
what the Bell companies and the cable companies are saying is
we may build an 18-wheeler road to your house, but then you're
only going to get to use the sidewalk for your public traffic.
The rest of it's going to be my 18-wheelers and the people that
I say.
So that's the problem with this. What's been abandoned in
this--and you mentioned the subjugation of the rights of many.
The FCC has said these are not common carrier services. That
means that with respect to these services, those companies are
no longer obligated to provide nondiscriminatory service upon
reasonable request. So they won't block it once they agree to
serve you, but as long as they reserve the right to not serve
you in the first place, that's how they'll discriminate.
Ms. Jackson Lee. Mr. Misener?
Mr. Misener. Ms. Jackson Lee, just one more point on the
18-wheeler analogy. Mr. McCormick misapprehends how the
Internet works. Those 18-wheelers don't get there based on the
companies' sending them. They only get there when the consumer
asks for them. And our simple point is that when the consumer
asks, he or she ought to be able to get whatever 18-wheeler
they want, not just the ones allowed on by the road owner.
Ms. Jackson Lee. I thank the gentleman.
Mr. Cannon. The gentlelady yields back.
Ms. Jackson Lee. I yield back.
Mr. Cannon. The gentleman from California, Mr. Lungren, is
recognized for 5 minutes.
Mr. Lungren. Thank you, Mr. Chairman. Very enlightening.
We've been talking about Swedish models and golf courses and
18-wheelers and sidewalks and streets.
Mr. Cannon. The Swedish model would never--it would never
have occurred if Mr. Misener was not so handsome, by the way.
[Laughter.]
Mr. Lungren. I appreciate that. I hope that wasn't out of
my time.
I thought this was relatively simple when I walked in, and
it's become more complicated. I try and look at it from the
standpoint of a consumer. I'm a frustrated consumer. The house
I have here in this area is in Virginia. I keep getting ads
from Verizon asking me to join their broadband, and then every
time I call I find out their broadband access stops two blocks
from my house--close to your house, Mr. McCormick. So I believe
I have cable, which is really the only access I've got.
A couple of questions. One is, look, people have paid
additional money for broadband over regular telephone lines,
and presumably that was to cover the costs of the investment
made by the phone company. Presumably we're paying for
broadband access for cable to pay for the investment cost here.
What I'm trying to understand is Mr. McCormick's statement that
you're not going to block, you're not going to degrade, you're
not going to interfere with content on the one hand, and on the
other hand, the suggestion I get in this analogy that you're
only going to allow certain 18-wheelers to come through to my
house.
Now, what are we talking about? If, in fact, your industry
has no intent to block, degrade, or interfere with, do you have
any objection to any legislation that says you can't do that
and won't do that?
Mr. McCormick. Congressman, the Chairman of the FCC has
already said that they feel that they have the authority to
prevent anybody from blocking, impairing, or degrading.
Mr. Lungren. Right. But what I'm asking is----
Mr. McCormick. And they----
Mr. Lungren. --whether you'd object to language in
legislation which would say that----
Mr. McCormick. The House----
Mr. Lungren. --irrespective of what they say, but we will
make that a matter of law that you can't do that.
Mr. McCormick. The House Energy and Commerce Committee is
going to mark up legislation beginning this evening that has
specific language in it that tracks the FCC principles. And
so--and we are supportive of the language that says that we--
the FCC should have authority to make sure that we cannot
block, impair, or degrade.
I'm with you. I'm a little confused when we make the
statement that we'll not block, impair, or degrade, and then I
hear others saying but they're going to block, impair, or
degrade. We're not going to block, impair, or degrade. The FCC
is not going to allow it.
Mr. Lungren. Okay. Well, let me ask the other two panelists
to your right, my left. If, in fact, that's true, why are you
worried about blocking, degrading, or impairing access to
content?
Mr. Comstock. Because there's a long history here of
exactly this type of exclusionary behavior. Today in the
marketplace, our companies face the situation where they go to
seek a customer, and the Bell Company has said, oh, in order
for you to get a lower rate on the areas where we have no
competition to a business user, you must give us all of your
traffic in the areas where there is competition. They use
specific exclusionary practices to prevent competition. And as
I said before, what they keep hiding around is the provision
that the Energy and Commerce Committee is looking at would
restrict the FCC's jurisdiction to a very narrow set of things
on an adjudicatory basis, and it is far narrower and far less
behavior controlling than the type of antidiscrimination
principles contained in the antitrust laws.
Mr. Lungren. Well, let me ask Mr. McCormick--I mean, he's
just give us a specific example that he claims is where your
industry does, in fact, impair access except for a price.
Mr. McCormick. Well, I am unfamiliar with any--what I----
Mr. Lungren. I'd like to find out what we're talking about.
I mean, I'm tired of talking about 18-wheelers. I'm tired of
talking about golf. I'd like to know what we're talking about
here. Now, does it exist or doesn't it exist? I'm not going to
play games. I'm trying to figure out what we're talking about.
Mr. McCormick. Well, what we know is that there are--that
there are hundreds and hundreds of commercial negotiations that
have been entered into between companies that I represent and
companies that Mr. Comstock represents, and that those have led
to finalized deals. We know that at Mr. Comstock's own
convention, his people were saying that if the Bells try and
push competitors off their networks, it's shortsighted because
they can ally with cable, BPL providers, wireless carriers, or
even satellite companies.
What we have said is that there's a marketplace out there
that's working, that with regard to last-mile access, there are
competitive choices and there's a contestable market for
anybody who's willing to invest. So it seems to me that a
requirement, as the FCC has put forward so far, that says you
cannot block, impair, or degrade, an FCC that very aggressively
monitors the kind of interconnection arrangements that Mr.
Comstock is talking about, and finally, the antitrust laws that
he says are strong disincentives to any kind of anticompetitive
behavior, I would be one to say it sounds to me like we've
already got a belt-and-suspenders approach to this. I'm not
sure what problem we're trying to address that hasn't already
been addressed.
Mr. Comstock. Once again, we're talking about fiction here.
He's talking about provisions of law that the FCC has
affirmatively removed, and that's the problem. The world is
changing. The FCC as of last August and then through the
Verizon decision in March removed the very protections that
made the competition possible that he is referring to. That is
the problem.
Mr. Lungren. Mr. Chairman, could I ask Professor Wu to
comment on that?
Mr. Wu. You know, what the Bell Companies are basically
saying here is, ``Trust us.'' But if I were in their position,
if I were the gate--if I was in a strong market position to be
a gatekeeper of the Internet, why wouldn't you start wanting to
degrade and block content, or at least threaten to do so and
extract more revenue. It makes perfect sense. I'm not saying
it's evil. I'm just saying it's bad for the economy. I think
they're in a logical position to be in a position to advance
those kind of business plans. If you look at AT&T's plan
specifically, that is their ideas of where to raise and get
more marginal revenue, by putting a toll booth on companies
like Google, Yahoo! and so forth. So it makes perfect sense,
and, you know, they won't want to call it degradation. They'd
want to call it priority or give it some name so it gets
around, you know, potential FCC action. But why wouldn't they
want to do it? It doesn't--I don't see any reason why not.
Mr. Cannon. The gentleman's time has expired.
The gentleman from California, Mr. Schiff, is recognized
for 5 minutes.
Mr. Schiff. Thank you, Mr. Chairman. I think this has been
a wonderful hearing, and I think the witness testimony has been
very helpful.
I wanted to ask just a couple questions, the first of Mr.
McCormick. In my district, a lot of the industry involves the
creation of content, and we've had a number of discussions over
the years about how to protect that content from piracy. And
the pretty consistent position of the telecommunications
industry has been we just have a pipeline. It's a dumb
pipeline. It doesn't discriminate between content, and we
really can't be responsible for what goes through our pipeline.
But it sounds like here you're now saying we should be able to
discriminate on what goes through our pipeline and be able to
pick winners and losers, or at least discriminate in a way that
helps us recoup the investment necessary to expand the
pipeline.
Are you prepared, if you're allowed this ability to
discriminate, to also accept the responsibility for illegal
content going through your pipeline?
Mr. McCormick. Congressman, first, with regard to the
existing network, the FCC principles that we ascribe to say we
shall not block, impair, or degrade access to any content or
site. So when we say to the creative community, ``Don't hold us
liable if somebody's going to a site and downloading illegal
material,'' because the FCC principles require that we not
block, impair, or degrade.
Now, at the same time--at the same time, you are probably
aware that as we have tried to begin to move into video, that
we have been trying to work with the content community because
their great fear in the Internet space is being able to have
security and privacy and being able to have some integrity to
control their copyright. So when you start hearing us talking
about being able to work with companies like Disney, like
Movielink, like a variety of others who are coming to us and
saying we would now like to explore some new models where we
could provide new services to the consumer, and we would like
to work with you in the development of virtual private networks
that will offer us security and privacy and a variety of other
functionalities, we're met with this kind of opposition that's
saying, ``Aha, they're going to advantage some and disadvantage
others.'' And so----
Mr. Schiff. But if you get into----
Mr. McCormick. --you've hit on one of the issues.
Mr. Schiff. If you down the road get into deciding that
Grokster or Napster or one of the more modern iterations should
be in the fast lane rather than the slow lane, aren't you going
to be taking on some responsibility for the fostering of those
services if those services are primarily in the business of
piracy? Won't it be more difficult for you to claim that we're
just a dumb pipeline?
Mr. McCormick. No. I see it the other way. I see companies
that are engaged in the development of content and want to
protect that content from a Grokster or Napster coming to us
and saying, ``We would like to distribute this content to
consumers over the Internet,'' being able to utilize what is,
in effect, a virtual private network. So----
Mr. Schiff. And you'll facilitate making that happen, but
what happens when the Groksters of the future come to you and
ask you to facilitate the delivery of their pirated work
product? I assume you won't be able to fall back on the
response we had to allow them to have the fast lane because we
can't discriminate?
Mr. McCormick. Well, I guess the response to that would be
that, you know, in many respects, people sometimes don't even
find those sites without going through an Internet search
engine. So, you know, do you go through an Internet search
engine and find a Grokster site? And then do you hold liable
the Internet search engine, do you hold liable the service
provider, if they find the Grokster site by going to Amazon.com
and then buying a book that has the Grokster site? I think that
the issue has been if people like Grokster or Napster are
engaged in the illegal distribution of content, they should be
held liable. What we have done in entering into arrangements
with the content providers, those who are originating content,
their concern with us is that they want to be able to have a
secure network.
Mr. Schiff. If I can, I because I'm running out of time, I
want to pose this one question to Mr. Misener that was posed
earlier by Mr. Conyers or by actually your response to Mr.
Conyers, and that was the question about the prioritizing of
Amazon.com on a search engine. And I understand the point that
there's greater competition within the search engines, but
let's say that there was that same level of competition among
the access providers as are among the search engines, or that
the search engines become less competitive because you have two
that monopolize. Would you argue that you shouldn't be able to
discriminate based on your paying a fee to get to the top of
the list? I always naively assumed you got to the top of the
list by having more hits than anyone else, but maybe it's a
self-fulfilling cycle. But if the number of entrants into the
field of access increases, would you allow them to
discriminate? If the number of search engines decreases, would
you come before us and argue, well, we should no longer have
the ability to discriminate in the search engines?
Mr. Misener. Again, great questions. There are some two
dozen search engines out there. If there were two dozen
residential broadband Internet access providers, we would not
be here seeking legislation. There aren't. There's a duopoly
for the present, for the near future, probably even for the
distant future. This will be a duopoly. They're seeking to
extend their market power. I'm very frustrated by this
incredibly obfuscatory argument that somehow this is analogous
to a search engine. It's not. A search engine is a destination.
Consumers have a choice of going to it. A consumer can get
broadband Internet access and never, ever once go to Google if
they so choose. There are another two dozen search engines
available to them if they want to use a search engine. They
don't even have to use one. But in this circumstance they're
forced to use either the cable or the telephone company. There
is no other choice for consumers. It's a radically different
proposition, and the law should treat them differently.
Again, if there were some two dozen broadband Internet
access providers available to each consumer, we wouldn't be
here.
Mr. Schiff. And, conversely, if the search engines so
whittled down to two major providers, you would----
Mr. Misener. Hopefully not because we have a stake in one
of them.
Mr. Schiff. Well, hopefully not to the exclusion of the one
you have the stake in, at least.
Mr. Misener. Thank you.
Mr. Cannon. The gentleman's time has expired.
The gentleman from California, Mr. Issa, is recognized for
5 minutes.
Mr. Issa. Thank you, Mr. Chairman. And I want to echo and
associate myself with my colleague Mr. Schiff. It's always
amazing to me that we came in as classmates together, and he
was smarter then, and he's still smarter. But I will try to
focus on a slightly different area since he did such a good job
where he was.
When we talk about a duopoly versus, if you will, the power
of a search engine, the selectivity, to me I just have to ask
why is it that I shouldn't treat this like a standard antitrust
question. You have incredible market power, far past the 10
percent by any stretch of the imagine. And, look, we could
pretend that satellite delivery of Internet and a few other
ways are going to grow, but it is unlikely, particularly Mr.
McCormick, it's unlikely that either of the two entrenched
utilities are going to drop below 10-percent market share
anytime. But more importantly, in a given neighborhood like
mine, it is unlikely that you're going to have all the others
available to you anyway. If you have 30 percent, 50 percent, 60
percent, and more importantly, if your companion is doing
exactly the same thing, why shouldn't I treat this simply as a
utility that has been granted a monopoly, or the equivalent,
trying to have a tie-in of less desirable services, leveraging
the more desirable service or, if you will, the essential
service? Why shouldn't I look at it that way?
Mr. McCormick. I think that--I think to take a traditional
antitrust analysis is the way to do it, and a traditional
antitrust analysis looks at the existing market and the
contestability of the market.
A couple of points. First, the market share of the
telephone companies with regard to Internet access is less than
the market share of Google with regard to Internet searches.
So----
Mr. Issa. Well, wait a second. With all due respect I'll
define the relevant market here.
Mr. McCormick. Okay.
Mr. Issa. We're talking about the pipe.
Mr. McCormick. And with regard to the pipe, you would have
to look at all the ways to access the Internet. So I would take
issue with the duopoly. You can access the Internet, DSL, cable
modem, wireless--Sprint is offering a full wireless access to
the Internet--satellite if you have a clear view of the
Southern sky; in some areas, broadband over powerline, but
where it does not exist, it could exist but for investment; Wi-
Fi and Wi-MAX technologies.
Now, therefore, a traditional antitrust analysis would take
a look at what are existing market shares, what is the ability,
you know, of others to enter the market, and what barriers are
there to enter the market. So I support----
Mr. Issa. And I'll follow up on that using, if you will,
telcos and cable providers. If we--and this would be Commerce
Committee, not Judiciary Committee, I have to be sensitive to.
But if we redefined that you were regulated for the last mile,
you had to put a green box in, and everybody could have access
from there and put T-3 lines in and compete so that you were
only selling a very regulated last hook-up to the house, then
would you--you know, to be honest, would you see that, in fact,
that isn't the way that you have--I mean, to have competition,
you would have to essentially recognize that the two wires to
leading to the house are the absolutely best way to deliver 8
MP or higher data rates and that in the current technology
that's the only way to deliver that kind of bandwidth because
you're the only ones, the telephone company or the cable
company are the only ones that have the right to tear up the
streets to get to my house, and certainly virtually the only
ones in most communities to get to a mile away from my house.
You don't see that?
Mr. McCormick. Well, Congressman, there are--no, I don't
see that because----
Mr. Issa. Okay. Mr. Wu, do you see that?
Mr. Wu. I do see that. You know, the argument--I do see
that, and the argument that isn't--market power isn't a duopoly
problem is like saying there wasn't a Standard Oil monopoly
because they would have invented solar power one day or
something.
All these things, wireless, you know, they exist in these--
--
Mr. Issa. Or you could have hauled your own oil in from
Venezuela.
Mr. Wu. Right. You know, and there was always the potential
if someone really wanted to, they, you know, could have
invented--or taken a bicycle or something. I mean, these are
sort of potential technologies that may one day be more
competitive, but I think you're exactly right. This is a
classic duopoly, a classic antitrust problem, and there are
ways that a monopolist can extract extra rents at the cost of
the entire economy. And it's the duty of Congress to make sure
that doesn't happen and preserve competition.
Mr. Issa. Mr. Misener, I'd like to hear your comments. I'd
also like to tee up another ``what if.'' What if every product
that you made was tied in with Microsoft in their package?
Would you say that--and if, in fact, they charged a premium if
you wanted to be able to access your product using their
operating system, would you have a problem with that even
though Linux is around?
Mr. Misener. Yes. I think that was the right answer. More
to the point, on the duopoly here, the switching costs are
extraordinarily high. When we look at search engines, the
switching cost is a click of your finger. You want to go from
ask.com to Google.com to Yahoo! to MSN, A9--put in a plug for
Amazon's. All these search engines are----
Mr. Issa. Duly noted.
Mr. Misener. --a click away. Okay? A click away. To switch
between cable and telco broadband is huge. You've got long-term
contracts. You've got truck rolls, equipment changes. These
sorts of things present very high barriers just switching among
them. So consumers don't have the sorts of choices that they
have of search engines in the broadband Internet access world.
It just is--it simply is not the case.
Mr. Issa. Thank you, and thank you for holding this
hearing, Mr. Chairman.
Mr. Cannon. You're welcome.
The gentleman's time having expired, the gentleman from
Maryland, Mr. Van Hollen, is recognized for 5 minutes.
Mr. Van Hollen. Well, thank you, Mr. Chairman. Let me also
thank you and the Chairman of the full Committee and the
Ranking Member for holding these hearings and thank all our
witnesses.
I've been listening for some time, and one thing I think we
can all agree on, which is that we all have--clearly the
witnesses have different definitions of what it is to block,
impair, and degrade. And I am just trying to understand sort of
the universe we're operating in here.
I do think that we have to distinguish between future
potential and the reality today. The reality today based on the
statistics is we have an effective duopoly if it's true that 90
percent of the pipes essentially are through cable and telecom.
Clearly, there's potential in the future for a build-out of a
greater network, but in terms of the regulatory scheme we have
in place, we have to deal with the reality that's in place
today.
But I would like to ask the witnesses to respond to issues
I understand Mr. McCormick raising here, which is that we
have--we don't have enough, you know, broadband, we don't have
enough bandwidth today to accommodate all the substance we want
to put on the content that we want to put on the network,
especially as we're talking about video on demand and those
kind of services. So if you have a pipeline and you have
already more traffic that is crowding that pipeline, I don't
understand the technology completely, but does that mean that
if you don't somehow make choices between the different content
providers, that everybody's service is going to be somehow
degraded.
I mean, the question I have is there seems to be consensus
that we have limitations on the size of the pipe----
Mr. Comstock. Well, I think that's----
Mr. Van Hollen. --and then the question is, if that's true,
somehow someone is going to either be left out or degraded. And
while we don't want people to sort of pay more to play and get
preference, there is somebody, according to this analysis I've
seen, that is being left out; it's just that we're not being
clear as to how they're being left out. If you could all
respond to that.
Mr. Comstock. I think that's where we might disagree a
little bit. The reality is we have two broadband networks that
run by everybody's home today, and as I said, in the business
market it's limited to one. But there's a lot of capacity out
there. Right now, in the case of cable, they choose to use the
bulk of it for their exclusionary video programming, and a lot
of this is about protecting that market share. The Bell
Companies would also like to protect market share in video by
tying video content to transmission.
If you look at what Verizon is doing to the home today,
when they run their FIOS network fiber to your home using
commercial technology, there's a minimum of a gigabit coming
into that. Yet they've already filed papers at the FCC saying
we're going to take the bulk of that and reserve it for our
cable service; then we're going to take another big chunk of it
and reserve it for our private network, the extra--the pay
extra network; and then we'll reserve this tiny little bit for
the public Internet.
And the problem that we have in the United States is we've
set up incentives for the network operator to restrict
transmission capacity in order to protect their core services,
particularly video.
And so if you allow competitors to get access to this
network, as it going on in Europe today, for example, you'll
suddenly find that you can get 25-megabit-a-second DSL service.
Cavalier Telephone, one of COMPTEL's members, is doing that in
Richmond today. If we allowed more people access to the
network, innovators would come along and solve a lot of our
transmission problems and expand the bandwidth available.
If you took the capacity that's being reserved for video
today and made that available to the end user for purchase, and
they could freely buy it, they would have unlimited choice of
video content providers. They could go directly to Disney,
directly to ABC. That's the nightmare that the cable industry
fears and the Bell Companies also fear. They want to reserve
that capacity for their exclusive content as a means of
leveraging their transmission monopoly into other services.
Mr. Wu. Congressman Van Hollen, if I could just try and
address your question directly, it is true that for the average
broadband connection there is, let's say, one or two megs, a
certain amount of capacity there. The fundamental question
we're getting at is who gets to decide how that capacity is
used. The way the Internet is today, primarily it is the
consumer who is deciding. The consumer, if they try to download
a movie that they don't have enough bandwidth for, the movie
will not function properly. If you have 30 different things
running at once, if you are, you know, reading your e-mail,
watching movies, and do everything at once, your bandwidth will
begin to degrade.
But the critical choice is whether consumers should get to
decide how their bandwidth is used or whether the gatekeepers,
the duopolists, are going to decide how that bandwidth is used
and charge extra to the different companies.
My submission is that consumer choice serves you better--
the economy better and is essential to the free market system,
and that's why these kind of constraints are something that
consumers should solve for themselves.
Mr. Van Hollen. Thank you.
Mr. McCormick, if you could respond, please, to both
statements that were made, I'd appreciate it.
Mr. McCormick. As I stated in my testimony, one visionary
technologist recently compared the Internet to a Los Angeles
freeway. He said, ``Traffic jams happen. The more we upload and
download and share, standard definition video, high definition
video, home movies, and multiple megabit photos, the more
bandwidth we consumer. The more PCs and servers we back up
online, the more bandwidth we consume. The more bandwidth we
consume, the more Internet traffic jams we have. The more
Internet traffic jams we have, the worse our Internet
applications perform.''
Now, not to oversimplify, but there are two parts to the
network. One is the part that goes from the network up to the
consumer's house. That's really the amount of bandwidth you're
buying to access the Internet network. We're saying we're not
going to block, impair, or degrade; whatever the consumer buys,
that's how much capacity they're going to have to download
their applications.
But the other part of the network is this network that's
carrying everything. And as consumers begin to look to obtain
more stuff, some consumers may be buying truckloads of material
from Amazon.com. So the issue becomes, you know, how do we
expand? The network has to be expandable and scalable, and who
pays to expand and to scale that network?
If you go to Land's End today and you want to buy five
truckloads of clothes, you know, the average consumer sitting
in the house next door to you doesn't have to pay for that.
You're paying Land's End, and Land's End pays the provider of
the service.
So, similarly, we think that the network of the future
ought to operate the same way. It should not be spread across
consumers who aren't asking for all those applications. It
ought to be the consumers that want to make use of it that are
paying for it and that they're going to be in a financial
arrangement with these companies.
Mr. Van Hollen. All right. Mr. Chairman, if I could, I
mean, I don't know if there's a response to that, but as I
understand it, let's say I'm, you know, a moderate user or a
limited user of the Internet and I use it for certain purposes.
I guess the question is: If I'm on the sort of low user end of
the Internet, should I be also paying for the costs of building
out the major pipelines on the Internet because everybody else
wants to have a much higher usage? I mean, these are rough
analogies.
Mr. Comstock. That is the analogy.
Mr. Van Hollen. It would be useful for me to get a response
from the others very quickly, if I could, Mr. Chairman.
Mr. Comstock. That is the thing, but he's basically
reversed it. It is about the last mile to your home. There is
so much capacity in the backbone today. There are tons of
companies that have unlit fiber. This is not an issue of
network congestion in the backbone--unless, of course, you're
talking about solely on the AT&T backbone or solely on the
Verizon backbone, which they own and control. But nobody is
asking consumers to pay for the expansion of that backbone.
That is being paid for by the big companies that use it. It's
the last-mile connection that they're using to make you drink
through a straw when you wanted to pay for a much bigger straw,
and that's the issue. I think Mr. Wu said it correctly. It's
who controls this. Does the user control the bandwidth or does
the network operator?
Mr. Van Hollen. Okay. Thank you. Thank you all.
Mr. Cannon. The gentleman yields back.
Mr. Goodlatte, the gentleman from Virginia, is recognized
for 5 minutes.
Mr. Goodlatte. Thank you, Mr. Chairman.
Mr. Chairman, I have an opening statement I'd ask be made a
part of the record.
Mr. Cannon. It's already been agreed to by unanimous
consent. I thank the gentleman.
Mr. Goodlatte. I'd like to direct a follow-up question to
Mr. McCormick's comments and Mr. Comstock's comments to Mr.
Misener and ask you how you'd respond to Mr. McCormick's
arguments that network providers need to find a way to continue
to pay for the increased bandwidth that will be necessary to
ensure that we don't counter those Internet traffic jams that
he and others have described as more and more content is made
available to providers. And how would you recommend that the
network providers pay for the increased capacity they need to
build?
Mr. Misener. Well, as they're doing today, Mr. Goodlatte.
The FCC's biennial report on the deployment of broadband
services to American consumers came out earlier this month, the
most recent one, and it showed two things. We've been talking
about one of them, which is the strong and growing duopoly
power of the cable and telco network operators. But something
else it shows is the rapid deployment of broadband lines to
American consumers, which is a great thing. I think we'd all
agree that it is. But it's being deployed in a circumstance
where many of the parties actually deploying the lines are
precluded from the source of discrimination that they have
announced that they intend to engage in. Some are precluded by
their merger conditions. AT&T is one; Verizon is another.
So the fact of the matter is that lines are being deployed
today. Investment is being made today, even with these
nondiscrimination merger conditions imposed upon the companies.
We are fully in favor of consumer tiering, as has been
suggested. The person who sends the occasional e-mail should
not have to pay as much as someone who games 24/7. That
certainly isn't the case. What we oppose is what has been
called Whitacre tiering, which is where the network operators
take their market power over the network itself and extend it
to market power over the content. They essentially extort
monopoly rents from content providers who have no other way to
get to consumers----
Mr. Goodlatte. I understand that. You're moving away from
my question, though, which is: How do they pay for it in the
future?
Mr. Misener. Well, they're continuing to pay for it. I
mean, they've already demonstrated that they're paying for it.
How they will pay for it in the future is----
Mr. Goodlatte. And you think that----
Mr. Misener. --continue to pay----
Mr. Goodlatte. --current revenues are sufficient to
continue the kind of rapid build-out that's needed?
Mr. Misener. Yes. It's a demonstrated fact, yes, sir.
Mr. Goodlatte. All right. Well, let me ask Mr. McCormick a
question then. In the future, is it feasible that the Internet
could become the ultimate video programming arena and that each
website could have programming similar to a current television
station or channel, like the Discovery Channel's website, it
could offer all of its programs via its website? Isn't it a
natural instinct for cable companies and now the telephone
companies to want to protect their investments in their closed
video programming services by resisting such a move to a
potentially open Internet video programming model? Are you
aware of any telecom companies in your association or any
companies that have built into their contracts with content
providers any requirements that content providers not offer
their video programs on their websites?
Mr. McCormick. I'm not aware of any contractual provisions
like that. I would go back to the FCC principles, which say we
will not block, impair, or degrade access to any website, that
consumers would have the ability to access any website they
want. And I think that it--this is going on right now. I mean,
if I want to access Movielink or if I want to access Starz, I
can do that right now and pay Starz $30 a month, and I can
download movies. Disney is going to begin to offer Web-based
services. But these companies are coming to us, companies like
Disney and others, and they're talking to us about building
into our networks certain applications that will enhance their
services. I don't think that this is any different than what
has been historically done with our networks where we have
offered to people the ability to have in the network virtual
private network and enhanced services that offer increased
security and privacy and we build that into the network and let
the companies bear the cost of that rather than having the
consumers across the board bear that cost.
Mr. Goodlatte. Let me ask the other panelists if they want
to respond, particularly Mr. Misener, to the comment made
earlier by Mr. McCormick that the legislation that may be
coming forth from the Energy and Commerce Committee contains
language that would effectively codify the FCC's comments
regarding having sufficient authority to prevent downgrading.
Mr. Misener. Yes, Mr. Goodlatte, actually it ties the hands
of the agency by precluding them from rulemaking in this area.
It's very unfortunate. The Commission currently has the
authority to fully enforce using their rulemaking and
adjudicatory powers the policy statement that they issued last
August. What the Energy and Commerce bill would do, however, is
actually remove the rulemaking authority from the Commission
over those--over that area.
Mr. Goodlatte. I wonder if the other--Mr. Comstock?
Mr. Comstock. Yeah, I was just going to point out that,
again, we don't have to speculate about some of the behavior,
and I appreciate your point about the cable. You know, the
reality is in the 10 years since the 1996 act, the cable
companies have been free to enter the phone and data market,
and people have been free to enter the video market. And the
behavior of the cable companies, once the FCC decided not to
treat them as common carriers, demonstrates exactly what were
concerned about. They ran the ISPs out of business by refusing
them access to their network and by bundling their broadband
service with their ISP.
So, I mean, this is natural financial behavior. I mean,
it's been seen over and over and over again. And so the concern
that somehow imposing some of these conditions would result in
lost investment isn't borne out in other parts of the world.
Europe is imposing these very same open access requirements
that we had in the 1996 act, and people are investing. And the
other point is that empirically the evidence is strong that
without some kind of behavior constraints, these network
operators will use their market power to protect their core
services.
So I think that, you know, we have demonstrated over and
over again that this is a problem, and what you're hearing from
Mr. McCormick is just more promises to listen to us once again,
and don't worry, we'll take care of it.
Mr. Goodlatte. Do you agree with Mr. Misener that the
language that is being proposed in the Energy and Commerce
markup is counterproductive? I take it that's what your
position is.
Mr. Comstock. It is counterproductive and the only
qualification I would make on Mr. Misener's statement is I'm
not sure that the FCC does, in fact, have any authority now
that they've declared them non-common carriers to enforce those
principles. They are principles that follow along the line of
common carriage, and it's not clear that the FCC's title I
authority would be adequate.
Mr. Goodlatte. Mr. McCormick, do you want to respond? And
also, do you want to respond to Mr. Misener's answer to my
first question regarding how you pay for all this?
Mr. McCormick. Yeah, I would. First, with regard to Mr.
Misener and the House--we'd be happy to see that provision drop
out of the House bill. We think that the FCC has sufficient
authority today. We don't think that there's a need for the
House to move forward and codify it. At the same time----
Mr. Goodlatte. I found something you all agree on. We could
agree to drop----
Mr. Comstock. You'd have to make it stronger.
Mr. McCormick. Secondly, I think one of the reasons that
there's such difficulty here is that the whole debate is ``what
if.'' You know, what if the Bell Companies do this? What if the
cable companies do this? There's no problem out there right
now. There's no problem that can be cited that the Congress
needs to deal with or that even the FCC needs to deal with. The
Chairman of the FCC has said if a problem comes along, I've got
sufficient authority to deal with it. But until such time as a
problem develops, let's let the marketplace work.
I had begun my testimony today by saying that the net
neutrality debate under these FCC principles does, in fact,
address not just service providers but content providers, and
that this Committee did look at screen bias in connection with
the original search engines, which were the airline computer
reservation systems. And I would like to insert for the record
this search on Google with regard to where you buy books, and
the first one that comes up is Amazon.com as a sponsored link--
a sponsored link here, a sponsored link over here, too. But for
the average consumer, that screen bias is pursuant to a toll
that is paid to Google by Amazon.com to list Amazon.com as the
very first result. It says so right here, ``Sponsored link.''
So I would argue that because--there's not a real problem
out there right now because the marketplace is exploring this
new era of the Internet and companies are beginning to jockey
for how to make the right investments, how to find the market.
I would go with what John Chambers of Cisco said, which is
now is not the time to legislate. Now is not the time to
regulate in this area. First, do no harm. Let's wait and see if
a problem develops and then address it.
Mr. Goodlatte. Mr. Chairman, if I might have leave to allow
Mr. Wu to respond to that, I would----
Mr. Cannon. First of all, let me suggest that--or ask
unanimous consent that the document you've indicated from
Google, the Google search, be admitted to the record.
And without objection, Mr. Wu, you are recognized to
respond.
Mr. Wu. Yeah, I think that Mr. McCormick is right that 2 or
3 years ago there wasn't a problem. The reason that this
hearing is being held, the reason that there's so much popular
attention, the reason the blogosphere is alarmed, the reason
that gun groups, the reason that conservative bloggers,
libertarian bloggers, liberal bloggers are all getting into
this is because they've seen the plans of AT&T and Verizon.
And, you know, Mr. McCormick uses words like ``VPN,'' virtual
private network, which are designed to sound very low key, but
they're simply a priority lane for selected companies. That's
why we have a problem now, is we have a plan for roll-outs of
networks that are discriminatory, and that's a change.
As for this question of, you know, who will build the
networks, I think the network neutrality issue is almost a side
issue to that question. There is marginally more profit that
may be made from this priority lane approach, from this
degradation approach, which is the same thing, which is why the
Bells are interested in it. But the truth is that the neutral
and open Internet has floated all boats. That is to say, these
companies are making more money than they ever have with the
neutral network. And so while there's a possibility of
marginally more profit, what the Committee has to really
understand is the trade-off. The trade-off is distortion of
competition. I said this already about the refrigerator. We're,
you know, starting to repeat ourselves. But there is a trade-
off from this priority approach. There are other ways for them
to make money that are less distortionary, less discriminatory.
What the Government needs to do is to urge the less distortion,
least discriminatory way----
Mr. Goodlatte. In that regard, how would you respond to his
analogy with regard to Google and Amazon?
Mr. Wu. You mean that Google--you know, first of all, I
mean, Zoe Lofgren, Congresswoman Lofgren pointed this out.
Google actually does run a neutral search. Google search
results are neutral. They have advertisements. And what he's
referring to is the fact that there are advertisements on the
Google website, which he is calling a priority lane. And I
think it's a confusing issue. I think it confuses the issue.
We've already said over and over again that--we've already said
over and over again that the search engine is a competitive
market. A9 is a pretty good search engine. I'm thinking of
switching myself. It's a completely different type of market,
and the analogy is just confusing. It's just this ``Blame
Google'' approach. You know, maybe because Google is in China
or something we can get some traction on this. It's a
completely different issue. No one thinks the competitive
conditions--no economist could come up here and say that
competitive conditions for the search engine market are
anything like the access market. So I don't think it's even a
good use of the Committee's time to think about it or talk
about it.
Mr. Goodlatte. Thank you, Mr. Chairman. I thank all the
panelists. It was great.
Mr. Cannon. I thank the gentleman. The gentleman yields
back.
The Chair recognizes the Ranking Member for purposes of a
unanimous consent request.
Mr. Conyers. I want to insert into the record the Chair's
of the Federal Trade Commission's letter to myself and Chairman
Sensenbrenner dated March 14.
Mr. Cannon. Without objection, so ordered.
The Chair recognizes the gentlelady from California, Ms.
Waters, for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman and Members.
This has been a very interesting discussion, and it seems to me
we need to put a lot more time in on understanding what is
taking place with the Internet.
I have some very simple and direct questions I'd like to
ask. Is there a capacity problem with DSL, broadband, and
cable?
Mr. Comstock. I think it depends on how you define that.
The issue today is that because increasingly competitors cannot
get access to the infrastructure, you're seeing a degradation,
a slowing down of the innovation that goes on that's led to it.
As I mentioned, Cavalier Telephone down in Richmond, Virginia,
is using DSL circuits to provide voice, video, and data.
They're doing that on TV. If you look at in Europe today, DSL
is widely used to do IPTV. So it can be done, and that
innovation occurs when you unbundle the network.
If you look on the cable side, there is far less innovation
going on because they've got an incentive not to expand the
capacity too quickly or people might provide video over it.
So I think that the infrastructure is there, broadband
deployment is there. The issue broadband penetration, which
means you need to bring down the price, and the way you bring
down the price is by having competition. And that's why
Americans are paying so much more today for broadband than
people are in other parts of the world, and that's why we're
dropping in the OECD statistics. It's not broadband deployment
we're dropping in. It's broadband penetration that we're
dropping in, which is a function of people buying the service.
Ms. Waters. Mr. Misener, you said when there was some
discussion about charging and paying, you say, ``Well, we do
pay.'' Would you explain?
Mr. Misener. Yes, ma'am. Companies, content companies like
Amazon.com, have large servers in which we--servers and content
in which we've invested billions of dollars of capital. And to
connect those servers to the Internet backbone, we have
contracts with many companies, including many of Mr.
McCormick's members, in which we pay millions of dollars a year
just to connect our content to the Internet.
Ms. Waters. However, that does not give you any priority,
just the connection. Is that right?
Mr. Misener. That's correct.
Ms. Waters. I'd like also again for you to explain why the
consumer is being squeezed and why there's less access or
potentially less access for the average consumer, small
consumers, not the big guys?
Mr. Misener. Yes, Ms. Waters. Thank you. It's because there
are only two available service providers. Right now and for the
foreseeable future, there will be this duopoly of only cable
and telephone companies providing broadband Internet access to
American residential consumers. We see the same thing overseas
as well, in fact, and one of the things that I think has come
out in this hearing is that not only is there this strong
potential--in fact, announced intentions of the network
operators in America to try to extract monopoly rents from
American Internet companies, we're actually seeing
announcements from foreign Internet companies. In my testimony,
there's some quotes from the CEO of Deutsche Telekom. He
intends to go after Google, eBay, Yahoo!, and Amazon. Those
were the companies he named. Certainly no German companies were
on that list.
American Internet companies are world-leading, and so
foreign carriers are going to follow the example here in
America and try to extract the same sorts of rents except it
won't be foreign Internet companies that they're getting it
from. It'll be American Internet companies.
Ms. Waters. Thank you. I guess it would Mr. McCormick, will
you counter the argument that consumers are being squeezed,
that they will have less access and they will basically be
competing for space with the huge companies that can afford to
pay, like Disney?
Mr. McCormick. I guess I'm still--I can't even comprehend
how the consumer is going to get squeezed. The FCC has said
that there are four principles: consumers are entitled to
access lawful Internet content of their choice; consumers are
entitled to run applications and use services of their choice
subject to the needs of law enforcement; customers are entitled
to connect their choice of legal devices that do not harm
networks. In the case of those who are offering voice over
Internet protocol services, the FCC has already shown that if
consumers are in any way blocked or impaired from being able to
use the VOIP provider of their choice, that the FCC will act.
The Chairman of the FCC has said that he believes he continues
to have legal authority in that regard.
So I don't know how the consumer is going to get squeezed.
Ms. Waters. Okay. Well, thank you.
Do you know how, Mr. Wu?
Mr. Wu. I do, and it comes from--it comes from the problem
of network stagnation; that is to say, if we have a situation,
if we move towards--which is the plan of the Bells, to move
toward a discriminatory Internet, consumers--the applications
which consumers may prefer may not be the ones that run best.
I'll turn it back to the electric network. You know, let's say
you really prefer General Electric products over Samsung. But
you go out and buy and General Electric's refrigerator just
doesn't operate as well. That is, the applications the
consumers like best, whatever their idiosyncratic preferences
may be, may not work as well on the network, and that's the
threat--that's the short-term threat to consumers. The long-
term threat is that when competition on the network becomes a
question of who has the best connections with the gatekeepers,
you no longer have the kind of innovative market which has been
good for consumers. Consumers every year can look forward to
new search engines, for better or for worse--I keep talking
about A9, have these strange ways you can search block by
block. There's constant arrival of new innovations in Internet
space, and that is what's at threat. That's something that's
very important for consumers, very good for the national
economy. And that's what's at threat, the innovative dynamic
nature. That's the trade-off of allowing discrimination.
Ms. Waters. Thank you. Mr. McCormick, I would take it you
would just flatly disagree with Mr. Wu.
Mr. McCormick. Well, I would flatly disagree. I mean, let's
take--let's take his refrigerator example and let's say that
you've got some refrigerator that you can now make telephone
calls on and watch TV on and maybe Samsung will come up with
that kind of refrigerator. What the FCC principles say is that
the consumer has the right to attach that device to the network
and that the network operator will in no way block, impair, or
degrade service to that Samsung refrigerator that you can watch
TV and get telephone calls over. So with those----
Ms. Waters. So you're basically saying electricity is
electricity, that if you have access to it, you can buy as much
as you need or want, but that electricity works well for
everybody.
Mr. McCormick. It works well very everybody.
Ms. Waters. Thank you, Mr. Chairman. I don't know if I know
any more than I knew before I came in here about this argument,
but it has been interesting. Thank you.
Mr. Cannon. As long as your heart is pure, it will work.
The Chair would ask unanimous consent to include in the record
a document by John Windhausen, Jr., dated February 6, 2006,
``Good Fences Make Bad Broadband.'' Without objection, so
ordered.
The Chair would ask unanimous consent that he be allowed an
additional 5 minutes to ask questions of the witnesses without
going into a second round. Without objection, so ordered.
I really do this because I'd actually like to flesh out the
record a little bit. And, Mr. Misener, you talked about the
Commerce bill, which I take it you're somewhat familiar with.
In your view, what would happen to antitrust enforcement if the
Commerce bill is passed?
Mr. Misener. Mr. Chairman, I'm no expert on antitrust, but
I am concerned that if that were to be passed, then the holding
in Trinko might actually prevent antitrust enforcement in this
area. We certainly would like to see bright-line rules adopted,
however they're adopted and however they're enforced, to be in
place and advanced so that we're not engaged in long, spread-
out litigation post hoc.
My company is all of 11 years old. Seven years of an
antitrust case don't get us very far, especially in this
circumstance where there is such an obvious clear and present
danger that is, as I say, eminently avoidable by bright-line
rules in advance.
Mr. Comstock. I think, Mr. Chairman, if I might comment, I
think the concern specifically with the Commerce bill is, as
drafted, it appears to provide exclusive authority to the FCC
and then limit that authority specifically to these wonderful
principles that Mr. McCormick keeps referencing, which are
that--they're principles, they're very vague, and there's no
rulemaking authority.
So I think the concern would be that it might be
interpreted, particularly in light of Trinko, to have preempted
antitrust enforcement, and that's a major concern. You know,
these entities, particularly the Bell Companies, are claiming
protection under the filed rate doctrine. There's issues having
to do with whether or not I'm directly buying service from
them, what if I'm an indirect purchaser, with respect to the
antitrust laws that we'd need clarification on. And I think
having that Commerce Committee language that says the FCC has
exclusive authority to deal with these matters might pose some
problems as well.
Mr. Cannon. Thank you. I'm holding the document, the
proposed bill, the legislation in front of me, and section 3
talks about this adjudicative authority, which you have quoted
precisely. Mr. McCormick, would you like to respond to that?
Mr. McCormick. Yes. I'm sure that if there is a concern
that that language would have any negative impact on antitrust
enforcement, we could probably reach an agreement among the
three of us to let it drop out and let the antitrust laws
govern. I mean, we strongly believe that it's a marketplace
today that should be governed like the rest of the American
marketplace, and it ought to be governed by the Nation's
antitrust laws, and it shouldn't be governed by continued
regulation. So if that language in that bill is of a concern to
these constituents, we could probably reach an agreement in
that regard.
Mr. Cannon. So let me just take it a step further. Based on
what you're saying, would your organization support codifying
those principles in antitrust law?
Mr. McCormick. No. We believe that the antitrust laws are
very explicit with regard to illegal restraints of trade and
anticompetitive behavior, that the antitrust departments and
agencies that are overseen by this Committee--the Federal Trade
Commission, the Department of Justice--are very aggressive in
their enforcement. And as Mr. Issa said earlier, we believe
that traditional antitrust analysis ought to be the analysis
that's applied to this marketplace.
Mr. Cannon. Are you familiar with the hearing the full
Committee had on Trinko sometime ago?
Mr. McCormick. I'm aware of it. I'm not familiar with it.
Mr. Cannon. The industry, the people that you represent
today, had representatives here who testified that we really
didn't need antitrust oversight. I take it you're now saying
something different from that.
Mr. McCormick. Well, I think what the representatives said
is that there should not--you shouldn't be subject to double
jeopardy. You shouldn't have a belt-and-suspenders approach.
There shouldn't be enforcement at the FCC and then once you
follow the dictates of the FCC you should be subject to a
separate level of enforcement on the antitrust laws, so choose.
And I think that what I'm saying today is that if there's
concern that this language as applied to broadband would create
a situation where the antitrust laws would not apply, then
let's not do belt-and-suspenders. Let's let the antitrust laws
govern this segment of the industry, just like they govern
every other segment of the American marketplace.
Mr. Comstock. Mr. Chairman, if I just might, I think it's
important to note that when the antitrust action that broke up
AT&T was taken, the common--the Communications Act applied to
AT&T just as well. So the issue that really exists here is that
you have an industry that has been very successful in
manipulating the arms of Government, and what they keep doing
is saying, well, that guy's regulating me over here so you
don't need to worry over here. And then when you flip it
around, they say the reverse.
And so if antitrust law is going to be the primary tool--
and I think the FTC letter that you entered in the record
illustrates this, that now that there's no longer a common
carrier obligation, the FTC may well be the primary law
enforcement agency. I think it is essential for the American
economy and our position in global competitiveness to have a
clear set of rules spelled out with respect to the operation of
broadband networks in this country, because communications is
an essential service that we all need today if we're going to
stay competitive. So we need something specific. As Mr. Misener
said, 7 years of an antitrust suit isn't going to get Amazon
off the ground, if that's what they're trying to do.
Mr. Misener. Mr. Chairman, if I just may very quickly.
Mr. Cannon. Please.
Mr. Misener. It may be restating the obvious, but consumers
don't care. They don't care how this is accomplished. They just
want to ensure that their longstanding Internet freedoms are
preserved.
Mr. Cannon. Thank you.
Mr. Wu, did you want to make a comment, please?
Mr. Wu. I agree with that. This is an issue about the
Nation's economy and about innovation and the future of this
country. And richer countries have better neutral
infrastructures; poorer countries don't. This is--we risk
getting lost in this battle as to whether it should be
antitrust or whether it should be telecom law or the FCC. The
question--the basic principle is that the engine of the economy
has been the applications layer of the Internet, and this
incredibly well-functioning market on top of the Internet's
infrastructure.
What is needed is minimum action to prevent spillovers from
the uncompetitive part of this network from distorting the
competitive and highly functioning part of this network, the
application side, and that's important to this country's future
and to its economic health. And it doesn't matter how you do
it.
Mr. Cannon. Thank you. I would like to thank all of you for
being with us today----
Ms. Jackson Lee. Mr. Chairman, would you yield for an
inquiry, please?
Mr. Cannon. Certainly.
Ms. Jackson Lee. I know that you had the last 5 minutes
without having a second round, but can I inquire to you, which
would then allow the panelists, the very respected individuals,
to answer the question and, that is, if I may give the
question, that they may ask--answer in writing----
Mr. Cannon. Without objection.
Ms. Jackson Lee. I would be jumping for joy if they could
answer today, but I will yield to that. We have heard a
jangling of agencies--FTC, FCC, and the Department of Justice--
all around the question of what would be a better regulatory
structure for the consumer. I'd be interested in hearing from
each of them as to what would be the better regulatory
structure--to re-engage the FCC, to put the anchor in the FTC,
or whether or not strictly under the Department of Justice,
particularly as it relates to the antitrust law. I'd appreciate
their response in writing, Mr. Chairman, if I could.
Mr. Cannon. Just a clarification. Would you like them to
try and address that now and avoid writing, or would you like--
--
Ms. Jackson Lee. Mr. Chairman, only at your kind indulgence
would I be grateful if they could.
Mr. Cannon. I would prefer leaving them without the burden,
and then you can follow up with----
Ms. Jackson Lee. Well, I'd be happy to have them answer.
I'd be willing to hear their answer on this point.
Mr. Cannon. Why don't we go, Mr. Misener, from you down
the----
Ms. Jackson Lee. Thank you, Mr. Chairman.
Mr. Misener. Thank you, Mr. Chairman and Ms. Jackson Lee.
We certainly would prefer any a priori regulation that
communicates directly to the network operators and to American
consumers what the rules of the road are. So we're looking for
bright-line rules of the road.
It seems to me that since these historically have resided
at the FCC, that that likely is the best place to keep them.
But ultimately, again, consumers don't and need not care from
whence Government rules of the road arise but, rather, that
they exist and they do protect these longstanding consumer
freedoms.
Ms. Jackson Lee. Thank you.
Mr. Comstock. I would generally agree. I mean, we had a
very effective common carrier regime, and I think the problem
that's arisen--and I would note we had a common carrier regime
backed up by antitrust enforcement, and maybe not by the FTC
but still by the Department of Justice. And I think that was a
great model.
I think the problem is then that we've got an agency that,
notwithstanding fairly clear instructions from the Congress in
the 1996 act, has chosen to abandon those responsibilities. And
so I would say the FCC if the FCC is actually going to carry
out the law, but in the absence of that--and that's, I think, a
lot of the reason we're here--then we've got to find another
solution. And, unfortunately, the Department of Justice has
also abdicated in their recent approval of the mergers. You
know, one industry swallowed the other major competitors whole,
and they didn't even blink. So I'm not sure what happened to
competition analysis, but, you know, Mr. McCormick keeps saying
standard antitrust analysis. Well, there appears to be none. So
if it's not going to be either of those two, I'd certainly vote
for the FTC. But, again, I think that's only going to happen--
they're now an ad hoc enforcement agency, and you can't have
something run that way. You've got to have, as Mr. Misener
said, the rules set out up front and very clearly stated. And
if that's going to happen, then it's imperative for this
Committee, the Congress as a whole, to adopt clear rules with
respect to how we're going to deal with these networks. Those
rules should make sure you have service upon reasonable
request, nondiscrimination, interconnection, attachment of
devices--essentially the same things that you have under common
carriage because that's the framework upon which this massively
successful Internet has been built.
Ms. Jackson Lee. Thank you.
Mr. McCormick. Congresswoman, today there exists no
problem. The FCC has set forth a series of principles and has
said that if a problem develops, it has the authority to
enforce. We support that.
Recently, you asked the Federal Trade Commission if the
Federal Trade Commission believed that it had authority to
address anticompetitive behavior, and the Federal Trade
Commission responded that it believed that it did have
authority, sufficient authority to address any anticompetitive
behavior that could result. That we support. We think that the
current environment is one where the Government has clearly
articulated a policy and has available to it the tools it needs
to address any problems should problems arise.
That having been said, we don't think there needs to be new
authority created. We think that the existing antitrust laws
are sufficiently definite with regard to illegal restraints of
trade, attempts to monopolize, and anticompetitive behavior for
the Government to have available to it whatever remedies need
to be available should a problem develop.
Ms. Jackson Lee. Professor?
Mr. Wu. Yeah, I'd just make one point. These matters have
often ended up at the FCC, and part of the problem with that is
what are really issues of national economics and macroeconomic
policy end up always being seen as these kind of weird, geeky
telecom issues, like a battle at the Star Trek Convention or
something. And part of the reason for moving the authority,
arguably, outside the FCC is that it will be easier to
recognize and understand that these are straightforward
antitrust issues. And I think this is part of what, you know,
the Committee is here today to understand. And so these are
issues that affect the entire country and that are
straightforward, familiar anything problems that involve
industries and involve consumers.
So I think there's a good argument from trying to take this
away from this tiny, strange world of telecom policy and into
the broader questions of national economic policy, which are
just moving things away from the FCC.
Ms. Jackson Lee. Thank you, Mr. Chairman. I think we have
our work cut out for us, but we have had an expansive hearing.
Thank you. I yield back.
Mr. Cannon. The Chair's time having expired, let me just
thank the panel for being here today. This has been among the
most lucid, engaging of all hearings I've been to, certainly of
those that I've chaired.
Thank you, and the Committee stands adjourned.
[Whereupon, at 4:28 p.m., the task force was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, and Ranking Member, Committee
on the Judiciary
I want to thank the Chairman for asserting our jurisdiction in this
matter. Contrary to what our friends in the Commerce Committee may
think, it is the Judiciary Committee that has jurisdiction over issues
that affect the state of competition in the telecommunications
industry.
When it comes to the Internet, we should proceed cautiously. Unless
we have documented instances of a problem, I do not believe the
Congress should regulate. I have consistently taken this position. In
the area of Internet taxation, I have always sided with those who
believe we should oppose multiple and discriminatory taxes on the
Internet and need a moratorium on those taxes. In the area of campaign
finance regulation of blogs and other Internet communications, I was
one of the first in Congress to tell the Federal Election Commission to
go slow.
That said, when we do see evidence of a problem, Congress has a
duty to act. In some instances, Congress must provide the rules of the
road to ensure competition, fairness, and sound public policy.
While I remain open on the issue of network neutrality, I have
become more and more concerned that if Congress does nothing, we could
be heading in a direction where those who pay can play, and those who
don't are simply out of luck.
For example, some telecom companies have indicated that they do not
intend to let companies like Google and Yahoo--or the next generations
of Internet entrepreneurs--use their pipes without significant
payments. Verizon's CEO Ivan Seidenberg said he would not let these
companies ``sit on our network and chew up our capacity.'' AT&T's Ed
Whitacre said ``I ain't going to let them do that.''
The network operators say they have a right to charge companies for
enhanced services. The content companies and consumers say the Internet
should be open to all, regardless of their ability to pay.
Americans have come to expect the Internet to be open to everyone
and everything. This is also a key factor in one of the fastest growing
areas of our economy--the Internet.
Whatever Congress does, it must protect these aspects of the
Internet. One option would be to legislate in the most general way
possible, offering only guidelines or principles and punting to the FCC
to figure out how or whether to enforce them. I think that approach is
not responsible. I think Congress has a duty to do more.
I look forward to hearing from our witnesses today, and I hope we
can have a dialogue about how best to ensure and protect the Internet
on which we have come to rely.
__________
Prepared Statement of the Honorable Bob Goodlatte, a Representative in
Congress from the State of Virginia
Thank you, Mr. Chairman, for holding this important hearing.
The Internet continues to be an engine that empowers our citizens
and our economy. New and exciting products and services continue to
emerge that enhance the quality of life of our citizens and increase
the efficiency of businesses.
Part of the reason why the Internet is such a creative forum for
new ideas is that there are very few barriers to using the Internet to
deliver products, information and services. Startups such as Google,
ebay and many others have sprung up and prospered because they had the
same access to consumers via the Internet that other, larger and
established entities had.
In the 106th Congress, I introduced legislation, along with
Congressman Rick Boucher, to ensure competition in the broadband access
and services market. Specifically, this legislation amended the
antitrust laws to prohibit anti-competitive behavior so that the
Internet would remain open to fair competition, free from government
regulation, and accessible to American consumers.
I believe that the Internet should remain open and that network
operators should not be able to pick and choose who wins and loses in
the Internet marketplace. At the same time network operators must be
able to manage their networks in a way that allows them to build more
capacity so that they can provide more consumers with the Internet
sites that continue to grow in size and complexity.
In time, as competition in the provision of broadband Internet
access emerges, it is my hope that the market will provide solutions to
the questions that we will pose today. In the meantime, we must be
vigilant to ensure that the unique benefits of the Internet do not fall
prey to anti-competitive pressures. While I continue to grapple with
whether legislation is needed in this area in the short-term, I believe
that Congress must conduct aggressive oversight on this issue to gather
accurate information about what is--and is not--occurring in the
marketplace.
I thank the chairman for holding this important hearing today, and
I look forward to hearing from our expert witnesses.
__________
Prepared Statement of Mark Cooper, Director of Research, the Consumer
Federation of America, on behalf of the Consumer Federation of America,
the Free Press, and the Consumers Union
summary
In amending the Communications Act we do not have to abandon a pro-
competitive vision for the future, but we must understand the failures
of the anti-competitive past and get back to traditional principles of
communications networks that have served the nation well.
First, the commitment to universal service is more important than
ever because access to communications is increasingly vital in the
digital information age. Second, universals service is an evolving
concept that must ensure that Americans can participate in the digital
future. Policies that attempt to segregate the ``legacy'' network from
the future network and ``ghettoize'' universal service are
unacceptable. Third, at its heart, communications is local. Global
networks are useless without last mile facilities--the local switches/
routers and transport facilities that connect the consumer to the
world. Fourth, competition is an operational means to serve public
interest ends; it is not the end in itself.
Prospects for last mile competition in the converging world of 21st
century U.S. communications are not good. There are only two local,
last mile communications networks that can provide a fully functional
broadband network to the residential consumer and prospects for a third
or fourth are bleak. This feeble duopoly we will not accomplish the
goals of a ubiquitous, nondiscriminatory network available to all
Americans at reasonable rates. America has been falling behind in the
global race to the broadband future, not because there is inadequate
incentive to invest, not because we are less densely populated than
other nations, but because there is inadequate competition to push the
``cozy duopoly'' to make attractively priced services available and
unleash the Internet economy to develop consumer-friendly services.
We urge the Congress to begin from the successful principles of
past policies and to learn from the problems and failures of past
mistakes.
<bullet> Nondiscrimination in interconnection and carriage
should be the explicit legal obligation of communications
networks that provide last mile connectivity and local network
access, as it has been for the last century.
<bullet> The commitment to universal service should be
strengthened, not weakened, and we should apply the program
beyond the dial-tone to broadband capabilities. We support
legislation introduced by Members of this Committee to meet
this need.
<bullet> Congress can promote the goals of competition and
universal service simultaneously by making available more
spectrum for unlicensed uses and protecting the right of local
governments to build last mile networks. We applaud Members of
this Committee who have introduced legislation to accomplish
both of these goals.
<bullet> Congress should recognize the economic reality of the
communications market and direct public policy to correct for
the abuses of a duopoly market structure. Without explicit,
pro-competitive policy, we cannot expect it to grow of its own
accord.
______
Mr. Chairman and Members of the Task Force,
The Consumer Federation of America,\1\ Free Press,\2\ and Consumers
Union \3\ appreciate the opportunity to submit this statement for the
record on the issue of concentration and convergence in the high-speed
broadband market and the importance of preserving Internet Network
Neutrality. My name is Dr. Mark Cooper. I am Director of Research at
the Consumer Federation of America.
---------------------------------------------------------------------------
\1\ The 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 and cooperative organizations, with more than 50
million individual members.
\2\ Free Press is a national, nonpartisan organization with over
225,000 members working to increase informed public participation in
crucial media and communications policy debates.
\3\ 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 5 million
paid circulation, regularly, carries articles on health, product
safety, marketplace economics and legislative, judicial and regulatory
actions which affect consumer welfare. Consumers Union's publications
carry no advertising and receive no commercial support.
---------------------------------------------------------------------------
Dozens of witnesses have testified in Congressional hearings this
year about the future of the Internet, telecommunications policy and
the need for reform. It is not a pretty picture for consumers. Previous
hearings have dealt with specific details of the failure of the
competition policy under the Telecommunications Act of 1996 (the 1996
Act). The 1996 Act promised an explosion of competition voice, video,
and data communications, and yet today we are witnessing the
reconstitution of Ma Bell and the crystallization of a cozy duopoly of
cable and telco. The Committee has been told of skyrocketing cable
rates and the plummeting position of the United States in the global
race to the broadband future. It has been presented with examples of
anticompetitive and anti-consumer behaviors of the giant communications
companies that now dominate the market. Despite the perverse anti-
competitive results of the ``pro-competition'' policies in 1996 Act,
these companies come before you to demand that you legalize
discrimination in the provision of access to the communications network
of the future, an approach that Congress has rejected for a century.
If future prospects are determined by our success in the broadband
market (which few analysts deny), our current position is untenable. We
are now 16th in the world in broadband penetration. Virtually none of
our broadband lines can sustain even 1 megabit per second of speed in
both directions-up and down the network. We pay $15-$20 a megabit for
download speed--20 times more than the global leaders. We have a
pervasive rural/urban digital divide that is increasing as time passes.
Our universal service policies have not been updated and reformed to
efficiently address our broadband woes. Insufficient spectrum has been
opened to facilitate a legitimate, independent wireless broadband
competitor. All we are left with is the false promise of competition
from 1996 and the farcical declarations from cable and telephone giants
that a duopoly market is vigorously competitive.
The parade of horribles with which you have been presented goes on
and on and I will not regurgitate them in detail today. I have attached
half dozen Appendices to this testimony that contain analyses prepared
by our organizations that detail the failure of competition under the
1996 Act. I believe that we have been brought to this sorry condition
because:
(1) the 1996 Act tried to do the impossible in some markets,
aiming to build competition where conditions could not sustain
sufficient competition to protect the public from abuse (e.g.
local, last mile access);
(2) the Federal Communications Commission (FCC) and the
antitrust authorities mishandled the introduction of
competition in markets where it was sustainable, allowing the
incumbents to drag their feet, engage in all manner of anti-
competitive behaviors, and mergers (e.g. network opening,
program access and mergers); and
(3) the FCC misread the 1996 Act in other markets, undermining
and threatening competition that actually existed (e.g.
allowing network owners to undermine competition in Internet
access and services).
In amending the Communications Act (the Act) we do not have to
abandon a pro-competitive vision for the future, but we must fully
understand the failures of the anti-competitive past. A competition-
friendly, consumer-friendly future requires that we return to certain
key traditional values and fundamental principles that made the
American communications network the envy of the world throughout most
of the last century.
social, technological and economic principles for communications policy
In order to evaluate competition and convergence in the
communications sector in the context of a legislative hearing on
amendments to the Communications Act of 1934, there are four basic
principles that must be kept in mind.
First, the Act has a specific purpose laid out clearly in the first
sentence of Title I, Section I: ``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 world-wide wire and radio communications
service with adequate facilities at reasonable charges.'' This
commitment is more important than ever because access to communications
is increasingly vital in the digital information age.
Second, today's analysis must be forward-looking, in the spirit of
the Act, focusing on the broadband communications network that will be
the dominant means of communications in the 21st century. Looking to
the future does not mean we should ignore the problems or the progress
of the past. On the contrary, the right combination of correcting past
mistakes and evolving successful policies for the digital era is the
only means of satisfying the public interest. Certainly, the track
record of competition and the past behavior of market participants are
relevant, especially if the same actors play similar roles. These
market patterns can give a good indication of what is likely to happen
under the various policy regimes under consideration. However, policies
that attempt to segregate the ``legacy'' network from the future
network and ``ghettoize'' universal service are unacceptable. The
commitment to universal service needs to include a commitment to an
evolving level of service to ensure all Americans participate in the
future, as the Telecommunication Act of 1996 (the 1996 Act) explicitly
recognized in Section 254.
Third, at its heart, communications is local. Communications starts
and ends with a local transmission medium and a local network. In order
to make a call from Los Angeles to anywhere in the world, you need a
wire or spectrum and a switch in Los Angeles. In order to terminate a
call in New York from anywhere in the world you need a wire or spectrum
and a switch in New York. The network in between may be national or
global, but the last mile is local. Global networks are useless without
last mile facilities--the local switches/routers and transport
facilities that connect the consumer to the world. The Act recognizes
this as well, in the first two sections of Title II, which establish
the obligation to provide interconnection and carriage of
communications on nondiscriminatory rates, terms and conditions.
Technology has not changed this basic fact.
Fourth, competition is an operational means to serve public
interest ends; it is not the end in itself. Further, the state of
competition is an empirical question, not a theoretical statement of
belief or desire. There is an expression in economics used to describe
competition in markets--``four is few, six is many.' When there are
fewer than the equivalent of roughly six, equal competitors, a market
is considered highly concentrated because economic theory, empirical
evidence and a century of practical experience shows that markets that
are this concentrated do not perform well. In highly concentrated
markets, prices are set above costs and innovation declines. With so
few competitors, it is easy to avoid vigorous, head-to-head
competition, especially when each uses a different technology,
specializes in a different service, or concentrates on a different
geographic area or user sector. Where competition is lacking, there is
little chance that markets will accomplish the goals of the Act. Even
where there is vigorous competition, there are circumstances in which
the market will not accomplish the broader goals of the Act. It is the
responsibility of legislators to conduct a fair assessment of
competition thresholds in order to maximize the effectiveness of public
interest communications policy. We must not place our trust in the
rhetoric of special interests without facts on the ground.
the current state of competition and convergence
In the emerging, converging world of 21st century communications,
prospects for vigorous competition in the local segment of the industry
are not good. At present, there are only two local, last mile
communications networks that can provide a fully functional broadband
network to the residential consumer--the incumbent local telephone
companies and the incumbent cable operators. Two is not a sufficient
number to ensure vigorous competition, and both sets of incumbents have
a miserable record of anticompetitive, anti-consumer behavior.
The best hopes for a third, last mile alternative were undercut
when regulators allowed the most likely candidate--wireless--to be
captured by dominant wireline firms through ownership or joint
ventures. It stretches credible expectation to assume that a wireless
provider owned by an ILEC, or in partnership with a cable giant, will
market a wireless broadband product that directly competes with its
wired product. They will offer premium, supplementary services to be
sure--but it will not be a true third broadband competitor. Hope and
hype surrounding other technologies cannot discipline anticompetitive
and anti-consumer behavior. Mergers such as that proposed by AT&T and
BellSouth will only make matters worse. No company with sufficient
market power to extract monopoly rents will fail to do so absent proper
public policy protections.
On the current trajectory, consumers are falling into the grip of a
``cozy duopoly'' of cable and telephone giants, which will abuse its
market power, abandon it social responsibility and retard the
development of our 21st century information economy. We can debate
whether a regulated monopoly is better or worse than an unregulated
duopoly, but we believe the evidence shows beyond any doubt that the
feeble duopoly we have will not accomplish the broad Communications Act
goal of a ubiquitous, nondiscriminatory networks available to all
Americans at reasonable rates.
The danger of relying on a ``cozy duopoly'' is already apparent.
The harm has already been done, and its impact is severe (see Expanding
the Digital Divide and Falling Behind on Broadband: Why a
Telecommunications Policy of Neglect is Not Benign--October 2004;
Broadband Reality Check: The FCC Ignores America's Digital Divide--
August 2005). America has been falling behind in the global race to the
broadband future, not because there is inadequate incentive to invest,
not because we are less densely populated than other nations, but
because there is inadequate competition to push the ``cozy duopoly'' to
deploy attractively priced services and unleash the Internet economy to
develop consumer-friendly services. The current jostling for upscale
consumers with big bundles of services leaves the majority or Americans
behind. On a per megabit basis Americans pay five to twenty times as
much for high-speed services as consumers in many other nations. Is
there any doubt that the primary cause of the broadband digital divide
is price? Now, after leaving the American consumer in a serious
predicament, the network giants are insisting on the right to
discriminate against content, applications, and services on the
Internet, as blackmail for building broadband networks.
The failure of penetration resulting from high prices and the
threat of discrimination in network access drives innovation out of the
American Internet space and overseas. We should take note that the
world's most advance broadband nations have instituted policies that
are based on last-mile competition, strategic direct investment in
infrastructure, and free market principles of non-discrimination on the
network to drive innovation. Not only has the FCC failed to institute
pro-competitive policies, the Commission has done precisely the
opposite, masking it in rhetorically glowing but substance-less reports
on the state of the broadband market.
the past as prologue: successes and failures on the road to convergence
Telecommunications
The idea behind the break up of AT&T in 1984 was to separate those
parts of the industry that could be competitive from those parts of the
industry that could not and use public policy to advance competition in
the competitive sector. It worked in the long distance industry for
most consumers. Requiring the local companies to provide ``equal
access'' to their networks and shifting fixed cost recovery onto
consumers, federal regulators created an environment in which long
distance companies eventually commoditized long distance--as long as
consumers took large bundles--and competed the price down.
The Telecommunications Act of 1996 sought to introduce more
competition into last mile markets in telecommunications and cable. In
telecommunications, it sought to promote competition by identifying the
various elements of the local exchange network and making them
available to competitors on terms that would allow competition. The
idea was that new entrants would invest in competing facilities where
they could, while the monopoly elements were rented from the
incumbents. Billions of dollars were invested, but this experiment
failed. In the decade since the Telecommunications Act of 1996 was
passed, the Federal Communications Commission (FCC) and the antirust
authorities failed to enforce the communications and competition laws
of this nation to promote a consumer-friendly competitive environment.
The FCC allowed the incumbent local telephone and cable companies to
avoid their obligations under the law to promote entry into the
communications field, while the Department of Justice (DOJ) and the
Federal Trade Commission (FTC) allowed them to buy up their actual and
potential competitors. (See Competition at the Crossroads: Can Public
Utility Commissions Save Local Competition--October 2003; Broken
Promises and Strangled Competition: The Record of Baby Bell Merger and
Market Opening Behavior--June 2005).
The Competitive Local Exchange Carriers (CLECs) were strangled by
the failure of the FCC to force the incumbent local exchange carriers
(ILECs) to open their local markets. And when the possibility of voice
over Internet protocol (VOIP) arose, the ILECs slammed the door by
tying high speed Internet to VOIP service. In essence, forcing
consumers to pay twice, if they wanted an unaffiliated VOIP provider.
The two largest CLECs were recently absorbed by the two largest ILECs.
The same two dominant local companies also absorbed the two players in
largest long distance service and enterprise market, reconstituting the
old Bell system as two huge regional entities that dominate their home
territories with about a 90 percent share of local service, an 80
percent share of long distance, and over a 50 percent in-region share
of wireless service. (See Petition to Deny of the 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,
Federal Communications Commission, WT Docket No. 04-70, May 3, 2004;
Reply, 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).
Cable
The 1984 Cable Act ended local regulation under the promise of
competition. Overbuilders were supposed to enter to compete head-to-
head, and satellite providers were supposed to provide intermodal
competition. It never happened. The last mile market for cable proved
too difficult to crack. Cable rates skyrocketed and the industry was
subject to conditions of nondiscrimination in access to programming in
1992. Rates stabilized because of regulation, not competition.
As in telecommunications, the 1996 Act sought to stimulate head-to-
head competition in multichannel video programming distribution (MVPD),
but failed. Overbuilders could not crack the market--taking a scant 2
or 3 percent of subscribers. Satellite grew, but could not discipline
cable's market power nor effectively discipline prices. The local
telephone companies were invited into the cable business in a variety
of ways, but chose not to enter.
Cable operators still account for about 75 percent of all MVPD
subscribers. Regional concentration has reinforced market power at the
point of sale. Monthly cable rates have doubled since the 1996 Act and
consumers are offered massive, monthly packages which afford them
little choice in what to buy (See Time To Give Consumer Real Cable
Choices: After Two Decades of Anti-Consumer Bundling and Anti-
Competitive Gatekeeping--June 2004; Reply Comments of the Consumer
Union and the Consumer Federation of America, In the Matter of Comment
Requested on a la Carte and Themed Tier Programming and Pricing Options
for Programming Distribution on Cable Television and Direct Broadcast
Satellite Systems, Federal Communications Commission, MB Docket No. 04-
207, August 13, 2004). Geographic consolidation has created a huge
obstacle to entry into the programming sector. Cable operators control
the programming that reaches the public and discriminate against
unaffiliated programmers. The results of these market trends have left
consumers and independent programmers at the mercy of the cable giants.
(See Comments of Consumer Federation of America, Consumers Union and
Free Press, In the Matter of the Commission's Cable Horizontal and
Vertical Ownership Limits and Attribution Rules, Federal Communications
Commission, MM Docket No. 92-264, August 8, 2005.)
Internet
When cable rolled out a telecommunications service--cable modem
service--the FCC moved the goal posts, redefining cable modem service
into a different regulatory category. It abandoned one of the vital
underpinnings of the success of the Internet, the ``Computer
Inquiries.'' This was the digital age expression of the principle of
nondiscrimination that the FCC applied to computer and data services
starting in 1968. As telecommunications in this country have evolved,
the FCC established the policy of keeping the network neutral--allowing
the intelligence in the network to stay at the edge. This dovetailed
with the end-to-end principle of the Internet and provided an arena for
free market innovation, competition and consumer choice that was
unparalleled in recent experience.
When the FCC abandoned this policy for cable modem service,
America's slide from Internet leadership began. This allowed the cable
operators to discriminate against Internet service providers--forcing
consumers to pay twice if they preferred an Internet service provider
other than the cable affiliate (See The Public Interest in Open
Communications in Networks, July 2004). Cable operators have imposed
all manner of anti-consumer, anti-innovation restrictions in their
customer agreements, which have driven applications developers away
from this space. More importantly, the decision to remove Title II
obligations of nondiscrimination in interconnections and carriers
(common carrier regulations) from cable modem service paved the way for
a total cashiering of a century of communications policy. The immediate
result will be nothing short of the destruction of the Internet if the
Congress does not move to hold the line on the last remaining
safeguard-network neutrality. The fundamental mistake in communications
policy, which we have made over and over in the last two decades, is to
allow a very small number of network owners to control the physical
communication system. If we duplicate that mistake again, the result
will be the destruction of the vibrant, vigorous competition and
burgeoning innovation of the Internet economy.
the future
The telephone companies now say they are ready to compete with
cable in video, and the cable companies now claim to be ready to
compete with telephone companies for voice. But they have demanded the
elimination of the fundamental social obligations of the Act--universal
service and nondiscrimination--before they do so. The notion that
Congress anticipated or would ever have enacted the 1996 Act under
belief that we would end up with a duopoly is not believable. The hope
was for vigorous competition among many providers.
Two competitors are simply not enough to discipline pricing, as the
new entrants just match the high priced bundles of the incumbents. Two
are not enough to ensure nondiscriminatory access to the communications
network, as the new entrants demand to be allowed to discriminate and
exclude Internet service providers and rival services. By traditional
economic standards, three or four market players are not enough to
assure competition, certainly not when access to the means of
communications are at stake. If both network giants in a market adopt
the same anti-competitive practices, where will consumers go? They are
trapped.
The fundamental importance of nondiscriminatory access to networks
and services embodied in the Communications Act was reaffirmed just
this month by key members of the ``cozy duopoly.'' Time Warner, the
second largest cable company, has petitioned the Federal Communications
Commission to impose an obligation of nondiscriminatory interconnection
on the incumbent local telephone companies, under Section 251 of the
Act. Verizon, the second largest telephone company, has petitioned the
Commission to impose an obligation of nondiscriminatory access to video
programming under Section 628 of the Act. Yet, both of these entities
directly and indirectly through their trade associations, are lobbying
the Congress, and have pushed the FCC, to eliminate all such obligation
with respect to Internet access and services.
The fact that the anti-competitive and anti-consumer practices of
these companies come and go, as political pressure or public attention
ebbs and flows, is not a justification to abandon the principles of
nondiscrimination. On the contrary, when innovation depends on the
whims of network gatekeepers it is stunted and chilled. As Vint Cerf
has said: the Internet is about ``innovation without permission.'' When
the choices are few, the switching costs for consumers are large, and
the gatekeepers decide which services have access to the public,
innovative activity will go elsewhere.
Current arguments against obligations to provide nondiscriminatory
access are based on the claim that competition exists between two
networks and that is all the American economy needs. That claim is
wrong as a matter of historical fact and practical experience. The
obligation of nondiscrimination came to this country under English
common law. From the founding of the Republic, public roads competed
against privately owned canals, but they were both subject to
obligations of nondiscrimination. Private railroads were added to
compete with canals and roads, and when they began to brutally
discriminate, refusing to be bound by their common law obligations,
they brought a more explicit anti-discrimination approach into the law.
``Unjust discrimination between persons, places, commodities, or
particular descriptions of traffic'' brought common carrier down upon
the railroads in the Interstate Commerce Act of 1887. Telegraph and
wireline telephone were also expected to behave in a nondiscriminatory
manner, but when AT&T refused to interconnect with independent
companies, common carrier obligations were extended to that industry in
the Mann Elkins Act of 1910, thus ensuring nondiscrimination in
communications.
In other words, one of the enduring principles of communications in
America has been nondiscrimination. We have layered alternative modes
of communications one atop another, each using a different technology,
each optimized for a somewhat different form of communications and
still we imposed the obligation of nondiscrimination. We have
accomplished this through both a liability approach and a regulatory
approach. The layering of networks subject to the obligation of
nondiscrimination makes even more sense today when the importance of
the free flow of information is magnified as it is in our digital
economy.
conclusion
As this Committee moves forward to construct a new regime of
communications policy, we urge the Congress to begin from the
successful principles of past policies and to learn from the problems
and failures of past mistakes.
<bullet> Nondiscrimination in interconnection and carriage
should be the explicit legal obligation of communications
networks that provide last mile connectivity and local network
access, as it has been for the last century.
<bullet> The commitment to universal service should be
strengthened, not weakened, and we should apply the program
beyond the dial-tone to broadband capabilities. We support
legislation introduced by Members of this Committee to meet
this need.
<bullet> Congress can promote the goals of competition and
universal service simultaneously by making available more
spectrum for unlicensed uses and protecting the right of local
governments to build last mile networks. We applaud Members of
this Committee who have introduced legislation to accomplish
both of these goals.
<bullet> Congress should recognize the economic reality of the
communications market and direct public policy to correct for
the abuses of a duopoly market structure. Without explicit,
pro-competitive policy, we cannot expect it to grow of its own
accord.
Prepared Statement of Kyle McSlarrow, President and CEO, National Cable
& Telecommunications Association
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Press Release of the Federal Communications Commission,
dated April 3, 2006
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Article from Communications Daily submitted by Walter B. McCormick,
Jr., President and Chief Executive Officer, United States Telecom
Association
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Letter to the Honorable F. James Sensenbrenner, Jr., Chairman,
Committee on the Judiciary, from Deborah J. Majoras, Chairman, Federal
Trade Commission
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A Public Knowledge White Paper by John Windhausen, Jr., entitled ``Good
Fences Make Bad Broadband, Preserving an Open Internet through Net
Neutrality''
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<all>