<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:21757.wais]
S. Hrg. 109-48
SBC/ATT AND VERIZON/MCI MERGERS: REMAKING THE TELECOMMUNICATIONS
INDUSTRY, PART II--ANOTHER VIEW
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
APRIL 19, 2005
__________
Serial No. J-109-8A
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
David Brog, Staff Director
Michael O'Neill, Chief Counsel
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
------
Subcommittee on Antitrust, Competition Policy and Consumer Rights
MIKE DeWINE, Ohio, Chairman
ARLEN SPECTER, Pennsylvania HERBERT KOHL, Wisconsin
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa JOSEPH R. BIDEN, Jr., Delaware
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York
Peter Levitas, Majority Chief Counsel and Staff Director
Jeffrey Miller, Democratic Chief Counsel
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
prepared statement........................................... 49
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 3
prepared statement........................................... 64
WITNESSES
Citron, Jeffrey, Chief Executive Officer, Vonage Holdings
Corporation, Edison, New Jersey................................ 7
Cleland, Scott, Founder and Chief Executive Officer, Precursor
Group, Washington, D.C......................................... 9
Grivner, Carl, Chief Executive Officer, XO Communications,
Reston, Virginia............................................... 5
Kimmelman, Gene, Senior Director for Public Policy and Advocacy,
Consumers Union, Washington, D.C............................... 11
SUBMISSIONS FOR THE RECORD
Citron, Jeffrey, Chief Executive Officer, Vonage Holdings
Corporation, Edison, New Jersey, prepared statement............ 25
Cleland, Scott, Founder and Chief Executive Officer, Precursor
Group, Washington, D.C., prepared statement.................... 38
Grivner, Carl, Chief Executive Officer, XO Communications,
Reston, Virginia, prepared statement........................... 52
Kimmelman, Gene, Senior Director for Public Policy and Advocacy,
Consumers Union, Washington, D.C., prepared statement.......... 66
SBC/ATT AND VERIZON/MCI MERGERS: REMAKING THE TELECOMMUNICATIONS
INDUSTRY, PART II--ANOTHER VIEW
----------
TUESDAY, APRIL 19, 2005
United States Senate,
Subcommittee on Antitrust, Competition Policy and Consumer
Rights, of the Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 3:04 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine,
Chairman of the Subcommittee, presiding.
Present: Senators DeWine, Brownback and Kohl.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Chairman DeWine. Good afternoon. We apologize for being
late. We had two consecutive votes on the Senate floor, but we
are here. The good news is the Senate is now in recess for a
while, so we will not be interrupted.
Let me welcome all of you to the Antitrust Subcommittee
hearing examining the proposed mergers between SBC/ATT and
Verizon/MCI. As promised, this is a continuation of the
examination that we began last month with the full Judiciary
Committee. The difference today is that rather than hear from
the CEOs of the merging parties, we will hear from witnesses
who take a somewhat different view.
As you all know, at that time I expressed some reservations
about these mergers. Not surprisingly, the CEOs of the four
respective companies acquitted themselves quite well at the
hearing and emphasized very clearly that ATT is already leaving
the residential market and MCI is likely to follow. In other
words, they made the important point that in some ways these
mergers don't change the competitive landscape for consumer
services.
They also emphasized the impact of intermodal competition,
meaning competition from other forms of service such as
wireless cable and voice over Internet protocol. These are
important arguments and the companies made them very
effectively. But, frankly, I am still worried. I think there is
still a lot more to it. In my mind at least, it is still an
open question between the SBC/ATT merger and the Verizon/MCI
merger are good for competition and for consumers. That, of
course, is what we are here today to discuss and to look at.
As we began to explore last month, there are a range of
issues that raise concerns. Perhaps the one which has received
the most traditional antitrust scrutiny so far is the so-called
enterprise market, the sector of the market comprised of large
businesses with sophisticated telecommunications needs. All
four of the merging parties currently compete in this market
sector. So large business customers will likely be affected by
the deals. This area will require close scrutiny.
There are also questions regarding the impact of these
deals on the markets for long-haul capacity and in the market
for Internet backbone that today's witnesses are particularly
well-suited to answer. We are looking forward to these
discussions.
As we discussed in our last hearing, however, the critical
issue here is intermodal competition. According to the
testimony we heard from the company CEOs, they are facing
competition on numerous different technological platforms,
specifically, as mentioned, cable companies, wireless companies
and companies that provide voice over IP services.
Once again, we must keep in mind that intermodal
competition, by definition, does not always provide the type of
direct competition we are used to seeing. Wire line, wireless,
cable--these services are inherently different and provide
similar services in different ways with different pluses and
different minuses. Not all will always provide sufficient and
competitive benefits for all consumers. In fact, there are a
number of concerns that have been raised about each which I
know we will explore today.
But most important in this context, we must discuss whether
or not merger conditions are required to ensure that these
multiple modes of competition are, in fact, available. For
example, voice over IP is often held up as the poster child for
intermodal competition. In fact, Vonage, one of our witnesses
today, is a voice over IP provider.
It is certainly a very promising product, but our witness
himself will testify today that voice over IP is a type of
service that is available to the consumer only if he or she has
broadband access, and currently that access is widely available
only from the phone company or the cable company. Think about
it. Voice over IP providers must rely on their competitors to
get access to their customers. Clearly, that is a somewhat
tenuous situation and we will need to consider if the mergers
change it at all.
There are several other issues to explore. In most places,
residential consumers currently face duopoly choice--buy an
expensive bundle of local, long-distance, Internet and wireless
service from the phone company or buy an expensive bundle of
similar services from the cable company. What impact will the
purchase of ATT and MCI have in this situation? Will it allow
the phone companies to provide better products and services, or
will it remove two of the few potential existing market
entrants?
Another important point is that high-speed and wireless
broadband will clearly be required for the next generation of
services and will certainly help competitors such as voice over
IP and cable telephone service. ATT and MCI, as independent
competitors, had a big stake in promoting the development of
broadband. How will these mergers impact the development of
those broadband capabilities? Similarly, how will the mergers
impact the availability of new wireless spectrum?
Finally, I hope that the panelists will share their
thoughts about what we in Congress can do more broadly to help
promote competition and innovation in the telecommunications
industry. Many have noted the need for a rewrite of the 1996
Telecommunications Act, and it is time to start thinking about
what such a rewrite would entail.
Certainly, it seems that there is a need to free up the
spectrum necessary to enhance wireless broadband development.
Another issue is the need for the FCC to expeditiously rule on
their own proceedings on inter-carrier compensation, special
access pricing and the regulation of IP-enabled services.
These proceedings have been going on for an extended period
of time and the industry is to some extent in limbo awaiting
the rulings. Outdated legislation and incomplete regulations
can only hinder the type of aggression competition that leads
to innovation, better products and lower prices. So with that
in mind, we look forward to hearing from our panelists today on
a wide range of issues.
Before I turn to Senator Kohl, I would just to acknowledge
some news that we all heard this morning. Verizon has announced
that it will be making stand-alone DSL service available to
some of its customers in certain regions. This is an issue that
we discussed at some length in our last hearing, and I think we
all agree that to the extent that stand-alone DSL is available,
it makes voice over IP a stronger and more valuable competitor
and provides more choices for consumers. So I applaud Verizon's
actions in this regard, and we will be watching to see if
Verizon and others within the industry are able to continue
down this path.
Let me now turn to my colleague and my friend, Senator
Kohl.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
WISCONSIN
Senator Kohl. Thank you, Senator DeWine.
Today, we return to the topic we began considering a month
ago at the full Committee's hearing on consolidation in the
telecom industry. As we noted then, the mergers we are
examining and the technological changes we are witnessing will
fundamentally change how Americans communicate and what we pay
for these services.
At our Committee's hearing last month, we heard from the
four CEOs of the merging companies explain why they believe
these deals are in the consumer's best interests, and we agree
that today's telecom market is very different from the market
that existed when the ATT phone monopoly was broken up 21 years
ago, and that there is the great potential for many consumers
to benefit from new forms of competition and new choices.
But the sheer magnitude of these mergers and a potential to
concentrate market power in the hands of two large telecom
companies requires us to carefully examine the competitive
consequences of these deals. Today's hearing will be an
important opportunity to hear the views of consumer
representatives, competitors and independent experts as to
whether the mergers will be good for competition and for
consumers.
The Bell companies and their merger partners have testified
that new technologies and innovation should allay any concerns
we have about the size and market power of the companies that
will emerge once these mergers are completed, and we hope they
are proved correct.
Our first responsibility therefore must be to ensure that
the development and deployment of these new technologies are
not stifled in their infancy by today's consolidation. We must
seek to avoid the creation of a world where consumers are left
with only two choices for a bundle of telecom services--the
Baby Bell phone company and the cable company.
Our witness from the Internet telephone company Vonage is
an example of one exciting new way consumers can make telephone
calls without using traditional phone lines controlled by the
companies involved in these mergers. However, in order to
access Vonage's service, consumers still need to obtain high-
speed access to the Internet. And, today, the only provider of
such high-speed Internet connection for most consumers is
either the Bell phone company or the cable company.
We need to ensure that these Internet connections come
without strings attached and that consumers are free to buy
Internet connections without also being required to buy
conventional phone service. We need to make sure that the phone
or the cable company providing the Internet connection does not
attempt to block or degrade the consumer's access to these
Internet-based telephone services.
So our concerns remain the same as we stated them last
month. First, how can we ensure that this consolidation will
not decrease the choices and increase the cost to consumers and
business customers, both large and small? Second, how can we
ensure that new technologies and new services can get access to
the Bell company networks?
Our goal must be the nurturing of a truly competitive
telecom marketplace with a maximum of choice for consumers, a
market that will not be controlled by a few dominant players.
We must insist that the Justice Department and the FCC
scrutinize these mergers properly so that the tremendous gains
in telecom competition over the last 20 years are not lost in
the midst of this industry consolidation.
We thank our witnesses for coming to testify today and we
look forward to hearing their views.
Thank you, Mr. Chairman.
[The prepared statement of Senator Kohl appears as a
submission for the record.]
Chairman DeWine. Senator, thank you very much.
Let me briefly introduce our panelists, and thank you all
for being here.
Carl Grivner is CEO of XO Communications, the largest
independent competitive local exchange carrier. Prior to his
tenure at XO, he served as CEO of Global Crossing. He has
worked in the telecommunications industry for the past 25
years. Thank you for joining us.
Jeffrey Citron is the Chairman and CEO of Vonage. In 1999,
he co-founded the company. In addition to his work in the
telecommunications industry, he has worked extensively in the
financial services industry and founded both Island ECN and
Daytech Online Holdings.
Mr. Scott Cleland is the founder and CEO of Precursor, and
also serves as the chairman of the Investor Side Research
Association. He has testified before the Subcommittee on prior
occasions and we certainly welcome him back.
Gene Kimmelman is the Director of the Washington, D.C.
office of Consumers Union, certainly no stranger to this
Subcommittee or to the full Committee.
Gene, thank you for joining us again.
Mr. Grivner, thank you. We will start with you. We will go
from my left to right. Each one of you will have five minutes
and we would ask you to kind of keep your eye on the clock and
that will give us the opportunity to have plenty of questions
for you. Thank you.
STATEMENT OF CARL GRIVNER, CHIEF EXECUTIVE OFFICER, XO
COMMUNICATIONS, RESTON, VIRGINIA
Mr. Grivner. Good afternoon. My name is Carl Grivner and I
am CEO of XO Communications, one of the Nation's largest
facilities-based providers of telecommunication and broadband
services to business. XO is headquartered in Reston, Virginia.
We have nearly 5,000 employees nationwide. We were formed in
1996, and since then XO has expanded telecommunications
offerings from its original four small markets to more than 70
area markets in 26 States today. Our company provides a
comprehensive array of voice and data telecommunications
services to small, medium and large businesses serving nearly
200,000 customers.
I want to thank Senator DeWine and Senator Kohl for
inviting me to testify before the Subcommittee on the
competitive ramifications of the SBC acquisition of ATT and the
Verizon acquisition of MCI.
I believe a number of questions were left unanswered
following the previous hearings held on these mergers, and I
hope that our testimony today will provide you with additional
information needed to properly analyze the effects of these
mergers.
These mergers are truly monumental in scope, as they seek
to join the largest telephone monopolies with their largest
competitors. There is no doubt that these mergers will reduce
the amount of competitive choices for your individual
constituents and businesses.
With the loss of ATT and MCI, future competition between
the incumbents and the remaining competitors will look much
like a match between the Green Bay Packers and a Pop Warner
team. And I didn't mean that as a partisan comment. I have been
a Packer fan for 40-plus years.
My written testimony addresses a number of our concerns in
detail. However, I would like to highlight a number of specific
points that we hope the members of the Committee will consider.
First, the SBC/ATT merger and the proposed Verizon/MCI deal
will fundamentally reshape this industry, marrying the two
largest local telecommunications providers with their two
largest competitors. Only the breakup of ATT in 1984 and the
1996 Telecommunications Act can compare to the massive industry
restructuring that will result from these mergers.
Second, these mergers are particularly harmful to business
customers, both retail and wholesale, in local markets. We have
gathered for the Subcommittee preliminary high-level data that
demonstrate the substantial injury that occurs. The charts here
that we are showing, which use the same data employed by the
RBOCs in the FCC's triennial review process, provide a sobering
look at what these mergers can do to local competition.
The first set of charts shows the current status of
competition in Cleveland, Ohio, and Milwaukee--no coincidence.
Chairman DeWine. We thought that looked familiar.
Mr. Grivner. Yes, okay. I hope so.
Chairman DeWine. The shoreline looked a little familiar to
us, yes.
Mr. Grivner. As measured by the presence of competitors in
commercial buildings, ATT is in red, while all other CLECs are
in green. Indeed, competitors have made some headway in these
local markets as a result of the 1996 Act.
The second chart shows what these markets will look like
after the mergers with the removal of ATT. You will notice that
these markets are significantly altered. The presence of
competitive providers drops by a staggering 53.6 percent for
Cleveland and 64 percent in Milwaukee. In other words, the
competitive injury to customers from ATT exiting the market
will be real and substantial.
And don't expect alternative providers to make up this
competitive gap. ATT is unique. It entered local markets with
an enormous advantage. It had tens of millions of long-distance
customers, including relationships with top business customers
throughout the country. It had tremendous financial resources,
$11 billion of which it spent to acquire the largest local
provider, Teleport, and then it continued to expand its local
network.
The only other local competitor with similar resources is
MCI. And as I am about to demonstrate, post-merger, it too will
not fill this gap. The next set of charts depict the effect of
MCI's departure from the market. You can see that the
competitive presence declines even further, a total of 61
percent for Cleveland and 69 percent for Milwaukee.
The reason we took MCI out of the market leads me to my
third point regarding these mergers. No one should expect that
SBC and Verizon will compete head-on. Today, SBC and Verizon
are the number one and number two local telephone providers. In
the hand-outs that we provided you, you will see that in the
Los Angeles market SBC and Verizon share a common geography.
Yet, neither is competing in the other's territory. So why
should we assume they will compete if these mergers are
approved?
SBC and Verizon operate under that old Cold War principle
of mutually-assured destruction. Each company is a mirror of
the other, and each knows the other has an overwhelming
competitive advantage in its home territory. So why attack and
face annihilation? Better to operate under a strategy of
containment.
Fourth, these mergers will reduce, not encourage the
innovation that has flourished in the competitive environment.
It was competitive companies that brought your constituents
DSL, and now voice over IP. It was companies like XO that
incurred the enormous expense of laying much of the fiber that
is now used for advanced telecommunications services, and it is
competitive companies that are continuing to innovate to find
solutions to the so-called last-mile access.
The basic fundamentals of antitrust law demand a thorough
examination of these mergers. It is not consolidation, per se,
that is the paramount concern. It is the massive concentration
and the injury to customers that ensues.
It is important that Congress understand that if these
mergers are approved, SBC and Verizon will control nearly 80
percent of the business wire line market, more than 63 percent
of ILEC lines and more than half of all wireless subscribers
nationwide. We hope that the members of the Subcommittee will
resolve to fully examine the competitive impacts of these
proposed mergers we are discussing today.
I thank you for the opportunity to testify today.
[The prepared statement of Mr. Grivner appears as a
submission for the record.]
Chairman DeWine. Thank you very much.
Mr. Citron.
STATEMENT OF JEFFREY CITRON, CHIEF EXECUTIVE OFFICER, VONAGE
HOLDINGS CORP., EDISON, NEW JERSEY
Mr. Citron. Good afternoon, Chairman DeWine, Senator Kohl
and members of the Subcommittee. Thank you for the opportunity
to appear today. I am Jeffrey Citron, the CEO of Vonage
Holdings Corp. We are the largest provider of consumer and
small business voice over IP service, as we refer to the
industry, with over 600,000 subscriber lines.
For once, the entire telecommunications industry can all
agree that today's phone service market is highly competitive.
Consumers have many choices, from plain old telephone service,
to wireless service, to new and exciting offerings from voice
over IP providers like Vonage. But no matter what kind of
competitive phone service you choose, all providers need access
to certain critical facilities. These facilities are network
bottlenecks where there is little or no competition.
Vonage would like to express our concern that the proposed
mergers of SBC and ATT or Verizon and MCI would diminish
existing competition by further consolidating the ownership and
control over the critical building blocks upon which all
communications service rely.
A good example of this critical infrastructure is the 911
emergency service network. There is only one 911 network for
every market, which is typically owned and operated by the
local phone company. There is no competitive marketplace for
911 services. All calls to 911 must go through this unique
system.
Vonage has requested access to the Bell's 911 network and
to date has been denied by all but one of the major phone
companies. In an attempt to resolve this issue, Vonage has
built a basic 911 solution, but it has limited functionality.
Since there is no alternative to the Bell 911 network, Vonage
cannot offer true 911 service if not guaranteed access to this
public trust. At this critical juncture, we are crippled from
meeting our collective social policy goals to deploy 911 for
all. These mergers cannot be approved without conditions
guaranteeing consumers with Internet phones direct access to
911 service.
Another good example of critical telephone network
infrastructure are the Bells' network tandems. Tandems are
where competing providers of phone service meet to link their
networks together. The core of the public telephone network is
made up of these tandems. These tandems are essential because
they enable customers from one phone network to talk to
customers of all other phone networks, and vice versa.
To be clear, this is not about reselling the Bells'
network, as it has been debated to death. I don't want to
resell plain old telephone service. I just want my customers to
be able to call grandma. In an effort to link Vonage's network
to the public telephone network, we have requested direct
access to the tandems that are controlled by the major phone
companies and all these requests have been rebuffed.
This has forced Vonage to seek other alternatives such as
purchasing these services from third parties like MCI and ATT.
Now, the combination of MCI with Verizon and ATT with SBC puts
two of the largest competitive carriers and long-distance
companies under the control of the two largest Bells, giving
them additional ability and incentive to deny competitors
access. Congress must ensure that voice over IP providers have
the right to directly interconnect with the merged companies
that comprise the public telephone network to prevent the
collapse of the competitive phone market.
Another essential piece of many new communications services
is the Internet itself. In order for us to offer our service,
Vonage must have access to both the Internet and the
traditional telephone network. MCI and ATT are two major
providers of access to the public Internet backbone. Post-
merger, the Internet would largely be controlled by the Bells,
all of whom have the incentive, ability and history of denying
Vonage access in order to gain a competitive advantage in the
retail market. Congress must ensure that the merged entities
provide their competitors nondiscriminatory access to the
Internet backbone.
Furthermore, wireless spectrum has slowly been consolidated
into the hands of the powerful local phone companies. As the
spectrum caps and resell requirements for these services have
eroded, to accommodate our increasingly mobile customers Vonage
must have access to this critical infrastructure in order to
compete with local phone companies. Recent industry analysis
indicates that when these mergers are complete, SBC and Verizon
will control more than half of the wireless market. These
mergers leave the interconnection rights of yet another
essential facility at the discretion of the Bells.
The final concern I would like to raise today is that the
consolidation of retail services and broadband network
providers will continue to put pressure on consumers' rights to
switch their phone service to a provider like Vonage. Today's
consumers are prevented from moving their phone service to
Vonage if they have DSL. If a customer wants to transfer their
number to Vonage or to another competitive service, SBC and
Verizon will cancel their DSL service. This practice slows
broadband adoption and reinforces anti-competitive practices.
DSL tying also holds consumers hostage by controlling which
services they can and can't use their phone number with. Less
than 20 percent of our customers use Vonage over DSL. Stand-
alone broadband is a critical driver for this emerging
competitive market. Therefore, Congress should ensure that the
merged companies allow existing customers to switch their phone
service and keep their stand-alone DSL.
In light of all these concerns, we respectfully submit that
these mergers cannot be approved by the FCC and the DOJ without
appropriate conditions to remedy these problems. Policymakers
must ensure that retail providers like Vonage have fair and
equal access to the essential facilities, the 911 network, the
tandems and the Internet backbone. These conditions are
necessary in order to protect retail customers and to allow for
the continued innovation of voice over IP and other Internet-
based applications.
I look forward to answering any questions that you might
have. Thank you.
[The prepared statement of Mr. Citron appears as a
submission for the record.]
Chairman DeWine. Thank you very much.
Mr. Cleland.
STATEMENT OF SCOTT CLELAND, FOUNDER AND CHIEF EXECUTIVE
OFFICER, PRECURSOR GROUP, WASHINGTON, D.C.
Mr. Cleland. Yes, thank you, Mr. Chairman and Senator Kohl
and Senator Brownback, for letting me share my views today. I
will take a little different tack today. What I want to do is
emphasize kind of a forward-looking view to the extent that I
can.
I think antitrust is very relevant to these transactions,
but in a traditional way I am not one that believes that these
mergers pose a potential antitrust threat that warrants
disapproval. On the condition issue, I think these mergers are
subject to a tremendous amount of existing regulation that can
be adapted and modified to address many of the concerns that
people have in this merger context.
Now, that being said, that does not mean that I don't think
that there are serious antitrust and enforcement issues here. I
want to respectfully suggest how I think antitrust needs to
adapt to what we call a techcom future. What is really going on
here is we are seeing the convergence of tech and telecom. It
is becoming a new industry which we call techcom. In my
testimony, we have a piece that summarizes it and explains kind
of where that is going.
The one point on a going-forward basis that is absolutely
critical to get right is there is, I think, in the United
States a core constant, unshakable principle that is embedded
in the 1934, the 1996 Act and in the Internet, and that is the
national value of free and unfettered access of every American
to every other American. That is critical for our social and
political cohesion as a Nation, our economic growth and
innovative society, and for national security and homeland
security.
Let's remember the 1934 Act basically required
interconnection because ATT successfully monopolized the market
by denying interconnection to small players. The 1996 Act in
this respect got it dead right--a mandated duty to interconnect
and be interoperable. Then the Internet is the ultimate example
of this principle, where it is what connects everybody as
simply, broadly and universally as possible.
So I think the biggest anti-competitive threat that faces
the techcom world is not pricing power that many may discuss
here. Pricing in this market is plummeting because of Internet
protocol substitution. Prices are plummeting. Now, that does
not mean there aren't antitrust issues here. What it means is
you all should be concerned about subtle and naked attempts to
gain market power by impeding or denying interconnection or
network access for the purpose of competitive gain. It is going
to require, I think, some real vigilance among the Congress,
the Department of Justice and the FCC. But I think with market
forces and with that vigilance, I think it will turn out to the
benefit of all.
What I want to do is list four anti-competitive concerns on
a going-forward basis that are very important to focus on. The
first is bit interference. That is basically trying to impede,
sabotage, block, slow down somebody else's traffic that is
going over your network. And we know from the recent Madison
River case that affected Mr. Citron's company that this exposed
potentially the most lethal risk to emerging techcom
competition. If companies are allowed to technologically sort,
block, impede or sabotage bit transmissions, competition cannot
develop or flourish.
Another one that you should be looking at very closely is
the rather innocuous term of ``quality of service.'' That can
be used to discriminate where, say, a large network says I am
going to allow my customers to get premium passage and fast
traffic and anybody that doesn't use my service gets put in
second-class or the slow lane. And the fastest way for an
incumbent to win and shut everybody else out is to create two
tiers of discriminatory quality of service. That has to be
watched very, very closely. It could also be lethal to
competition.
The most insidious form of anti-competitive behavior that I
have seen is the non-cooperation on 911. It is absolutely
unacceptable that people are denying or impeding or not
cooperating as incumbents with any competitor that is trying to
promote what we all agree is a national goal of 911. Every
American expects that that is there and it needs to be. That is
very insidious.
Another one that people don't think about as being
insidious is muni broadbands, the opposition to municipal
networks, and I want to characterize that in a little different
way. These are technological and equipment companies that are
trying to sell to the single largest market, which is municipal
broadband buyers. If they are banned by the government, that is
probably singularly the most anti-competitive thing that can go
and prevent most Americans from enjoying the benefit of
alternative competitive sources.
So with, I believe my time is up, but thank you for the
opportunity to talk about this in front of the Subcommittee.
[The prepared statement of Mr. Cleland appears as a
submission for the record.]
Chairman DeWine. Mr. Kimmelman.
STATEMENT OF GENE KIMMELMAN, SENIOR DIRECTOR FOR PUBLIC POLICY
AND ADVOCACY, CONSUMERS UNION, WASHINGTON, D.C.
Mr. Kimmelman. Thank you, Mr. Chairman, Senator Kohl,
Senator Brownback. On behalf of Consumers Union, the print and
online publisher of Consumer Reports, it is a pleasure to be
here again to discuss with you these mergers.
I want to take all the points that Mr. Cleland makes and
put them into a consumer context, because I believe he is right
on the mark and I believe all the conditions that XO and Vonage
have requested are on point.
Enormous technological explosion leaves us at a juncture
now where consumers ought to be in the near future receiving
broadband service, local telephone and unlimited long distance
for as little as $40 a month. If you put together the prices
that the muni wireless broadband networks can offer with the
$25 package like Vonage offers for unlimited local and long
distance, that is the average phone bill today for local and
long distance for more than 50 percent of consumers, but that
would have broadband included in it. It would be a marvelous
innovation.
But the companies that are merging are charging $75, $80
for it, as are the cable companies, and they have every
incentive to prevent that from happening. That is what is the
fundamental danger for consumers in these mergers. They may not
see the day of these price declines that Mr. Cleland pointed
out we have had in the past and that we ought to have in the
future.
Let's look at the world of intermodal competition that
could have and should have brought us this with these mergers.
Who are the biggest players out there to challenge the Bells?
ATT, MCI, gone, part of the almost total dominance in the SBC
territory for local and long distance, and in the Verizon
territory as well.
Wireless is out there, someday may be price-competitive,
may improve its quality, but it is still twice to three times
as expensive as wire line service for the average consumer use
package. And who owns wireless? Verizon wireless is dominant in
the Verizon region; Cingular, owned by SBC and Bell South,
dominant in the SBC territory. It doesn't solve the problem.
Voice over Internet offered by cable. Well, if you are
going to pay the high price, you might be able to get it. Only
30 percent or less of consumers right now have it. It is not
clear how many can afford it at those price levels. And what
you heard from these witnesses is the underlying Internet
backbone that needs to be there with the adequate resources
available to support competition may decline, may diminish,
because ATT will pick up a lot of the traffic they were
carrying, as will MCI. We may not have that service fully
available to consumers.
The final opportunity for meaningful intermodal competition
is municipal wireless. You have companies like Verizon and SBC
leading the charge to prevent communities from building out
these networks. Whether it is not the community and a public
entity, the critical point there is that, looking at the actual
costs of providing wireless broadband, Philadelphia has found
they could offer it at wholesale for $9 a month to Internet
service providers, who claim at that price they could turn it
around for as little as $15 a month for residential consumers.
I don't care if it is municipality or if it is a start-up
company. That is where the market ought to be moving. These
companies are trying to block that innovation, block that
competition.
So we believe from a consumer perspective that these
mergers need to be substantially revamped. The conditions that
Mr. Cleland were not that big a deal--quality of service, bit
interference--yes, there are regulatory tools for them. But,
boy, are they hard to police. That has been the Achilles heel
in getting competition in telecommunications for 35 years. They
are very important. We need the right incentives. They are not
just a regulatory police force. So conditions are very
significant here.
I am not even sure that is enough. Even if you have DSL
stand-alone, naked DSL, what is the price? How much control of
the customer information, the quality of service, the bits, is
there still going to be in these dominant Bell companies?
Mr. Chairman, members of the Committee, we think it is
really time for Congress to step in beyond the merger and look
at whether your goals of competition in the 1996 Act are really
being delivered to consumers, whether we are going to be able
to sustain it in this environment, mergers conditions or not,
and reopen the Act and think about what really needs to be
done. Do you really want competition? Do you really want a $40
package for all these wonderful services? If you do, I suggest
it is going to take some reworking by Congress.
Thank you.
[The prepared statement of Mr. Kimmelman appears as a
submission for the record.]
Chairman DeWine. Senator Kohl.
Senator Kohl. Thank you, Mr. Chairman.
Mr. Citron, Mr. Kimmelman, one important new way for
consumers to make phone calls is through the technology, as we
know, voice over Internet protocol. This allows consumers to
make phone calls over the Internet rather than over
conventional phone lines. Making phone calls using voice over
Internet requires a high-speed Internet connection, a service
many consumers obtain from their phone company.
With the exception of Qwest, until now none of the regional
Bell companies will sell consumers high-speed Internet service
without also requiring that the consumer also buy local phone
service. This clearly eliminates any incentive for the consumer
to purchase voice over Internet phone service and is therefore
a significant obstacle to the deployment of this technology.
At our last hearing, we asked the Bell companies whether
they would be willing to sell high-speed Internet DSL service
without also requiring that the consumer buy phone service. The
Bell companies answered that they would do so only if they
could make a profit on stand-alone DSL service.
Mr. Citron, what is your reaction to this statement? Can
you market your voice over Internet service to consumers who
use DSL Internet connections if these consumers are also
required to buy phone service?
Mr. Kimmelman, I am interested in your view, and what do
you think of Verizon's plan announced today to offer limited
stand-alone DSL to their existing customers in the Northeast?
Mr. Citron. Senator Kohl, Vonage has found it incredibly
difficult for our ability to sell voice over IP services to
customers who have DSL. We find the problem in two forms.
First, in order to go ahead and get the DSL, most customers are
required to buy phone service. So buying voice over IP and then
being required to keep a phone service you don't want makes it,
of course, too cost-prohibitive to go out and get the service.
Even in examples where people are able to go ahead and
purchase stand-alone DSL, the ability does not exist yet for
people to transfer their phone service, when tied with DSL,
over to Vonage's service, the ability for them to keep their
phone number and move the service seamlessly over. Both are
enormous barriers to competition and for people to switch.
Senator Kohl. Mr. Kimmelman.
Mr. Kimmelman. From the consumer perspective, you pay $25
for your local phone service and then you can get, for about
$30, DSL. But they have told us up until now you have to buy
both. Well, why go out and then pay extra money to get the same
service you have already paid for? It undermines competition,
as Mr. Citron says.
Is what Verizon is offering a real stand-alone DSL? Boy, I
hope it is. It doesn't look like it. At least from what I saw
from press accounts, they are offering it to existing DSL
customers. Well, that leaves out more than 90 percent of their
current customers.
Why can't somebody who is interested in getting a high-
speed connection tomorrow call Verizon and say all I want is
high-speed? Why can't they get the same thing that they have
just offered someone else? I don't understand it. I mean,
limited is better than nothing. I don't want to criticize it in
that respect.
Once you get past technical barriers, which clearly Qwest
has shown there are not--they offer this on a stand-alone
basis--I don't understand why Verizon is offering so little. It
is really very little for very few people. Hard to understand.
Senator Kohl. Mr. Citron, on February 17 the Washington
Post reported that the FCC was investigating complaints by your
company that local phone companies were blocking or disrupting
access to your voice over Internet service. Has your company's
service been the victim of such actions by telephone companies,
and are you concerned that this will occur in the future? Will
these mergers make it easier for phone companies to have
increased capabilities to block or to degrade access to your
phone service in the future?
Mr. Citron. Well, yes, it is true, Senator. A company known
as Madison River, a small ILEC, went out and started blocking
Vonage's service. Of course, we did go to the FCC and the FCC
under its Title II authority was able to investigate the matter
and ultimately a censure and a fine against this company.
Vonage is highly concerned about this problem. We see the
effects of what we call port blocking or disruption of the
service occurring in a number of different sectors. We are
seeing it occur right now with a wireless Internet service
provider. We are seeing it with a very, very, small cable
company that is also blocking Vonage's service. So we find this
to be problematic and we find this to be a growing trend.
But beyond the last mile, we are also concerned about being
able to purchase that Internet backbone. As I have already
mentioned in my testimony, we buy a lot of capacity from MCI
and ATT and others, and with the majority of the Internet
backbone controlled by the Bells post this merger, we are
concerned that not only do we have to worry about tampering in
the last mile, but potential tampering inside the core of the
network with, quite frankly, the inability to purchase services
at the core of the network level.
Senator Kohl. Are there remedies that the regulators can
enforce that will prevent this from happening?
Mr. Citron. Well, in the case of a phone company DSL
provider, yes, under the Title II authority the FCC did find
that capability. But there are a lot of concerns about whether
or not you can enforce this on other providers or players. So
this is something that we take issue with.
Senator Kohl. Mr. Kimmelman and Mr. Cleland, as you know,
one important possible alternative to traditional phone service
for consumers will be wireless connections to the Internet.
Using these connections, consumers can access alternative phone
providers such as voice over Internet and provide the Bell
companies connections to their homes.
Cities and municipalities such as Philadelphia have begun
to build such wireless networks and plan to offer it to their
residents as a municipal service. At our hearing last month,
the Bell companies admitted that they were actively lobbying
State legislatures around the country to pass laws forbidding
cities from building these new networks to deploy these
technologies. Pennsylvania recently adopted such a law and
other States considering such laws include Illinois, Texas and
Florida.
What are we to make of such lobbying efforts? Do these
municipal networks offer competitive alternatives? What do you
make of the Bell companies' claim that it is unfair to ask them
to compete with a municipal system?
Mr. Cleland?
Mr. Cleland. I think it is patently anti-competitive, and
what they have done is they have framed the debate that it is a
municipality that is trying to compete directly with them and
it is a fundamental misunderstanding of the technology and how
they service is provided.
Essentially, the WiFi phenomenon emerged because Intel
decided without telling anybody that people wanted wireless
access and they put it in a chip. And then people bought for
less than $50 a WiFi stick and they put it in their home or in
Starbucks or wherever it was. It is a form of a gorilla
network. It doesn't require an operator or a service provider
like we know that a Bell is. Somebody can put up a WiFi stick
for virtually no cost and you can replicate not everything that
a DSL can have, but you can replicate a lot of it.
Why it is anti-competitive is incumbents don't fear the
municipalities as competitors. What they fear is the massive
price deflation of people realizing that there is an extremely
cheap technology that replicates what they do that can be put
up very, very simply.
You can put up WiFi sticks on light poles, on mailboxes, or
whatever. You put them around extremely cheaply and it can be a
tech company supplier who is in this instance is a competitor
to the incumbent. By getting it banned, what they are doing is
they are basically shutting down the greatest competitor
potentially to an incumbent, which is technology companies
selling new technology that really doesn't require a
traditional operator.
So the last analogy that I will leave you with here that I
think is a powerful one is would you have thought it was good
public policy in the past when railroad companies came and said
I don't think municipalities should be in the road-building
business, they shouldn't build highways and they shouldn't
build an airport because that would be an unfair subsidy to the
automobile companies and the plane companies? Of course not. It
is patently absurd in the sense that municipal broadband
networks are much like what it was to build roads and to build
airports in the past.
Mr. Kimmelman. I couldn't agree more with Mr. Cleland. This
is patently anti-competitive, it is unfair. It is embarrassing
to come in and talk about innovation and competition and then
to be out there actively blocking competition. It takes a lot
of gall.
This ought to be one of the first conditions I would urge
the Committee to look at both for the antitrust officials and
communications policy in general, the notion of barring entry
in a world in which we have seen SBC swallow up two other Bell
companies--former Bell Atlantic, now Verizon, swallow up two of
its equi-sized colleagues. They all swallow them up.
How many times did they tell you that was going to be the
merger that was going to get you the competition? And, oops, it
never is; it is always the next one. And here they are blocking
competitors. It ought to be stopped.
Senator Kohl. Thank you, Mr. Chairman.
Chairman DeWine. Senator Brownback.
Senator Brownback. Thanks, Mr. Chairman. Thank you for
holding the hearing. I have a written opening statement I would
like to submit for the record, if I could, too.
Chairman DeWine. That will be fine.
[The prepared statement of Senator Brownback appears as a
submission for the record.]
Senator Brownback. Gentlemen, I was on the Commerce
Committee before and so I have been around this issue for the
years I have been in the U.S. Senate. It does strike that, for
whatever reason--and it was partially, I think, the 1996 Act,
but it also is just a lot of technology--competition is very
robust now.
We sought to create that in 1996. We sought to be able to
take advantage of some of the competition in the marketplace
that we thought could be there with that Act. We got it
partially right, probably got a lot of it wrong. But at the end
of the day, we are at a point now where there is robust
competition, there is a declining price structure, there is
good quality of service on a lot of different platforms, to the
point that I can't keep up with my latest device. They change
it on me about every six months and it is something new and it
is better.
So I commend you as a group and as a field for that taking
place. I think that has just really been a great innovation and
I think it has been a great competitive advantage for the
United States and I think it has been a great efficiency factor
for us, increasing productivity across the United States, plus
I can keep track of kids a lot better now than my parents could
keep track of me, which is good for both of us.
I am curious, though. Mr. Cleland--and I want some of the
others to comment on this--you seem to look at this merger and
say, okay, this is going to really stifle this continuation,
and I guess I just don't have the degree of fear of this taking
place, given all of the competition that is coming into this
field right now, whether it is in Internet protocols or whether
it is happening in cable or other places. I think you are going
to have robust competition, it seems like, because of the
technological factors and the number of ports that people can
get into the phone service.
Mr. Cleland, let me put the question, though, in reverse to
you. What happens to these large companies that are merging if
the merger does not go through? What would be the likely impact
on them and on competition if it doesn't go through?
Mr. Cleland. Well, to answer that specific question, I am
an analyst for the investment community and so while I have one
position--when I analyze these under antitrust law, I don't
think that they warrant disapproval or necessarily heavy
conditions. However, if you are asking my opinion on what would
these companies do if they didn't merge, I think they would be
a lot better off.
I think in SBC buying ATT and Verizon buying MCI, they are
changing their risk profile and their growth profile and they
will become negative growth companies. So I am scratching my
head about why they are wanting to do it. This is a free
country. They have chosen to do it.
I think that whether they are merged or not, that is not
the competitive dynamic that is the real concern. I am a
believer in intermodal competition and deregulation and in
market forces, and I believe it is increasingly competitive.
Right now, you have DSL, you have cable modems, you have three
3G networks coming on board nationally this year from Sprint,
from Verizon, from Cingular. You have companies like Clear Wire
doing WiMax. You have broadband over power lines that is very
promising; it is not right now, but it is coming down the pike.
You have WiMax that is very promising.
And so I personally believe that these companies, whether
they merge or whether they don't, are dinosaurs and they are
going to be affected very negatively by competition. Their
prices are going down. They offer services that are on the
wrong side of technology, the wrong side of history. And you
can provide techcom services, services like Mr. Citron is, for
anywhere between 20 and 90 percent less than what the
incumbents offer. So competition is coming more furiously, but
it is coming from technology.
Senator Brownback. I understand. So regardless of the
merger, the competition is going to be furious for the consumer
out there.
Mr. Cleland. Increasingly, if--and there is a big ``if''--
as a strong proponent of deregulation and of market forces, I
also believe that deregulation does not mean a state of
lawlessness or obligationlessness. Just like there is 911,
CALEA, consumer protection, disability access, universal
service, antitrust--all of those are social and national
obligations we all agree should be on there--in addition to
that, the critical one is protecting the duty to interconnect
and making sure that people don't mess with the freedom to
access any content, to access any application or attach any
device. That is critical. Competition without those protections
is really going to collapse.
Senator Brownback. I appreciate you mentioning that because
coming from a rural State, a number of these services and needs
are things that are built into the law that we need to be able
to maintain a set of infrastructure support that can be cost-
competitive. I actually think that is a far bigger issue than
these mergers as to what we need to do to be able to maintain
those services and the funding streams to be able to do that,
because I think those funding streams are going to have to be
altered, it looks like to me, to collect the new people that
are coming into the field and make sure everybody is sharing in
this.
Mr. Citron, I am not sure maybe if you would be the right
one to ask this or not, so I will apologize ahead of time if
you are the wrong to ask. But when you hear Mr. Cleland say
that there is going to be robust competition, regardless, and
we shouldn't have a state of lawlessness, but there is going to
be robust competition, don't you agree with that as you look at
the overall factors? Regardless of the merger, this is going to
be a robust field?
Mr. Citron. Well, I think I would agree in a sense. I
believe already that there is robust competition for consumers'
business. I think that has led to obviously pricing declines.
We think that is a very positive trend. I think one thing that
people sometimes miss is that all providers of communications
services still rely on critical infrastructure and if access to
that critical infrastructure is not provided, then all of a
sudden you will not have competition.
Vonage is already facing problems in getting access to many
systems that are critical, like the 911 infrastructure, and
that is problematic. In addition, I notice that Mr. Cleland did
mention wireless broadband opportunities. One of the new
wireless broadband providers in this country actually is
disrupting and blocking Vonage's access to its customers. They
literally stop our packets from flowing over the wireless links
to the consumers to provide them voice over IP service. So what
good is voice over IP competition if the broadband provider
that is delivering those packets interferes with them for their
own benefit? That is the problem that we see.
Senator Brownback. Now, Vonage, as I understand it, is the
largest VoIP provider. Is that correct?
Mr. Citron. That is correct.
Senator Brownback. Much larger than ATT on that type of
service?
Mr. Citron. That is correct as well.
Senator Brownback. And it doesn't seem to be that you have
had problems providing that sort of service to date, or
competing with the large telephone incumbents to date. I mean,
you are identifying other fields where there are blockages and
not particularly this one?
Mr. Citron. No. Actually, if you look at our problem, say,
with interconnecting to 911, we have asked all four Bell
companies for direct access to the E911 system so that we can
provide an E911 solution that is on parity with the regular
wire lines--something that everyone in this room should be very
concerned about. Only one of those four Bell companies has
granted us access to date. The other three Bell companies still
refuse to give us access. Some are talking to us about it.
Senator Brownback. On what basis? What do they articulate
to you?
Mr. Citron. They don't have to.
Senator Brownback. And they have not?
Mr. Citron. They have not. Now, I will add one more point
to that just related to these mergers. Today, Vonage wants to
go ahead and access the PSTN network, the core tandems, to be
able to take our customer calls and have them communicate with
other networks, basically for my mom to call her friend who is
not on the Vonage service.
To make that happen, we need to interconnect at the
tandems. These are critical core network elements. Vonage has
asked for access to these tandems. The incumbent Bell operating
companies have told us no. Why? They can.
Senator Brownback. Let me ask Mr. Cleland kind of a tight
question, if I can, on this. Mr. Grivner's testimony states
that the DOJ, upon close scrutiny of the geographic markets,
will find that the SBC/ATT merger will fail to meet legal
standards.
Would you agree with that assertion? Do you feel in a
position to be able to make any statement regarding that
assertion today?
Mr. Cleland. Well, if they drill down and look at
individual markets like that, there may be some difficulties. I
think what I expect DOJ to do is to draw back a little bit
bigger in the markets. Remember, each one of these markets has
been declared in a congressional act and through all the
painful, ad nauseam regulation to be irreversibly open to
competition.
So the regulators have deemed that local and long distance
integration is now allowable. There is a lot of competition and
potential competition. I think it would be very difficult for
the Department of Justice to go to court and say that these
mergers were anti-competitive.
Mr. Kimmelman. Senator Brownback, can I just say here is
the interesting conundrum: the irreversibility was based upon a
set of regulations that enabled ATT and MCI to come in
aggressively and offer local phone service that have now been
obliterated, where those companies will now be part of the
companies they were competing against. So I think there is an
open question as to how irreversibly open any of these markets
are, given these changed circumstances.
Senator Brownback. Thank you, Mr. Chairman.
Chairman DeWine. Mr. Grivner, let's get back to that map
you put up there. I found that kind of interesting. Isn't it
true that ATT actually had announced its withdrawal from
providing these services before the decision to merge, and
isn't the lack of competition in the local market really the
result of a court decision that made it difficult for ATT to
compete rather than a product of these mergers? In other words,
would blocking the mergers change anything?
Mr. Grivner. I think, Senator, it is part of, to give kudos
to where they are, a very comprehensive overall strategy. ATT
specifically withdrew from the consumer business when the
writing was on the wall that they were going to have to charge
more to their consumers and not be able to compete with the
local Bell operating companies when UNEP went away. They were
two of the largest users of UNEP.
So if you look at it from a regulatory perspective, the
regional Bells have been very successful in lobbying the FCC.
When you go to the courts, you have got the Trinko decision.
You have the issue now that they are fighting through relative
to the municipalities.
So they have put their two biggest competitors on their
backs in the consumer market and then decided to buy them. I
think it is a very remarkable overall cohesive strategy on
their part, so failing perhaps in those particular markets, but
still very, very strong in the business market, where they will
still control 80 percent of the wire line business market
between Verizon and SBC.
Chairman DeWine. So your answer to my question is what? You
are telling me that blocking the mergers will change this
reality. Is that what you are telling me?
Mr. Grivner. I am saying that what the FCC and the
Department of Justice need to do is they need to exhaustively
examine both of these mergers to understand the impact to
consumers, which will be substantial, as well as to business
customers. These companies are not failing. They are Fortune
100 companies with $30 billion and $20 billion, respectively,
in revenue, and producing significant cash flow as businesses
as well.
Chairman DeWine. But the specific question I asked you had
to do with this market, though. ATT had announced it was
withdrawing from providing their services. That is correct. I
am not wrong on my facts, am I?
Mr. Grivner. You are not wrong on your facts. It is how
they got to that point. They got to that point because they
were pressured out of the market.
Mr. Kimmelman. Mr. Chairman, could I add one thing there?
Chairman DeWine. Mr. Kimmelman.
Mr. Kimmelman. Even as they announced they were
withdrawing, ATT still has more than 25 million consumer
accounts. That is a big chunk of the consumer population there.
Chairman DeWine. Consumer accounts?
Mr. Kimmelman. Yes, consumer accounts. They were
withdrawing from marketing to new customers to offer this
package of services as the regulations were wiped out. On the
business side, what this reminds me of is the 1970s. Do you
remember the old MCI? MCI started out not offering the kind of
services consumers now know. They offered services to
businesses, and the way competition developed was from a new
upstart coming in serving businesses and expanding out to the
residential market.
That is where we are again here with the new technologies
and a new set of players. We need companies that can serve the
business market independent of the Bells and then expand out to
consumers.
Chairman DeWine. Mr. Cleland, let me turn to you, but also
Mr. Grivner. Both of you have staked out somewhat divergent
views on how we should react to these mergers. Mr. Cleland, you
said these mergers will not really pose a serious risk unless
the Government fails to be vigilant in deterring anti-
competitive behavior and urges Congress, the DOJ and FCC to
apply vigorous antitrust oversight after the fact.
Mr. Grivner, on the other hand, has stated his concern that
the current Government oversight scheme cannot be counted upon
to correct abuses post-merger. is Mr. Grivner correct to be
concerned that our current oversight scheme is inadequate to
the task of policing this industry post-merger?
Mr. Cleland. Well, where I come from is I believe that in
the totality when you look at this thing that it won't be
blocked and that it is best for competition going forward not
to block it. Does that mean that I don't think there is going
to be any anti-competitive effect in certain markets? Of course
not, but I think competition is rough and tumble.
The old CLEC model is one that was built upon the Telecom
Act of essentially interconnecting in a certain way with an
overbuilding of the Bell network. And now what we have is a
whole new set of technologies that are able to break the
bottleneck and don't have to lean on it and I think those will
cure many of the ills that Mr. Grivner is talking about.
Will it be a totally pretty transition? No. I think we
should expect that there will be probably some market power
exerted in some localities in some places for a certain period
of time. However, if we had that fear, we would never get from
here to there. So I think a competitive transition and
intermodal transition takes time and will be a bumpy road.
Chairman DeWine. Mr. Grivner, do you want to comment?
Mr. Grivner. Senator, there were conditions placed on the
SBC/Ameritech merger back in 1998, and post that merger SBC has
paid $1.2 billion in fines in non-compliance for those
conditions. Now, in most States that is a lot of money. That
would be a lot of additional revenue, $1.2 billion. But
apparently to SBC it is not; it was cost of doing business. So
I think those conditions need to be very, very carefully
analyzed and I don't think we are at that point yet.
Chairman DeWine. Let me ask all of you this question. The
testimony we have heard and seen had a great deal of emphasis
on the idea that access to the local network may be the most
important factor in allowing other market entrants to compete.
However, this certainly may be easier said than done.
When we tried to implement the unbundled network elements
method as a way to assure that the long-distance companies had
access to Bell company networks after the 1996
Telecommunications Act, we saw years of fighting and
litigation. How exactly do all of you suggest ensuring access
to the local network?
Mr. Kimmelman, do you want to start?
Mr. Kimmelman. Well, I think there are some straightforward
conditions that have been mentioned. Unbundling DSL and making
sure it is offered at a reasonable price in its terms and
conditions would be helpful. Let's push Verizon to go much
further than they have here and get SBC to the table on that.
That would certainly be helpful. The variety of non-
discrimination requirements that have been mentioned could be
helpful.
I believe, given that history, I believe you are absolutely
right, Mr. Chairman. It was a tough row to hoe and it didn't
really work. Really, the best thing we could do is back these
companies off of blocking new entrants, whether they be power
companies, whether they be municipalities, find a way to make
this a merger condition or enact it into law, if Congress has
to, because the best way to ensure there is new availability of
competition for consumers is to have a wireless broadband
network offered by somebody else.
Chairman DeWine. Mr. Cleland.
Mr. Cleland. Yes. I really want to hammer home the point
that in a deregulatory environment I think the incumbents have
basically gone to the extreme of saying in a marketplace there
are no obligations, there are no requirements. I think that is
way over-reaching and very anti-competitive and a problem.
Price deregulation didn't work. I think it is a failed
policy and a lot of the reason we had the legal fights that we
had was I think the FCC was overly aggressive in price
regulation and less concerned about making sure that there was
good interconnection and good access.
So I think that the emphasis should be very, very strong
toward enforcing and policing interconnection, and whenever
there are people that are impeding or denying access to 911 or
other networks, tandem networks, that is the thing that should
raise the ire of regulators and antitrust enforcers, and they
should back off of trying to micromanage the prices and the
economics of the market.
Mr. Citron. Clearly, we already have a framework for
allowing for interconnection, and clearly that framework
doesn't work because that framework does not currently extend
beyond the current providers. It doesn't encompass voice over
IP, it doesn't encompass our company. That is why we are having
such difficulty in gaining access.
I think there are a couple of prescribed approaches to this
problem. One, of course, is as a condition of these mergers you
can force the emerging entities to make sure they provide that
their network is open and available to us on a competitive
basis and to similarly situated companies.
Another way is to actually look at the current laws and the
constructs and to expand those laws on interconnection to allow
players like ourselves to go ahead and compete and gain access
to services.
Mr. Grivner. While competition exists in the market today,
it is extremely fragile. We all depend on that last-mile
access. We have talked about some very innovative
technologies--broadband, wireless and some new things. But
those things are years away, and in the meantime the current
FCC rules need to be enforced and they need to be innovative
enough to allow new entrants into the market as well.
Chairman DeWine. Mr. Kimmelman, in his written testimony
Mr. Cleland has mentioned a number of technologies--wireless,
cable modem, WiFi, WiMax, broadband over power lines--all as
likely competitors against traditional wire line service.
First of all, do you agree with this, and are these
technologies ready for prime time do you think?
Mr. Kimmelman. I agree with all them being potentially out
there. Some of them have been potentially out there for 5, 10,
15, maybe 20 years.
Chairman DeWine. Emphasis on the potential.
Mr. Kimmelman. Yes, a lot of potential. He mentioned 3G
networks and he mentioned Cingular, Verizon and Sprint. Well,
two of those are the merging parties here with their most
likely competitors. The problem is not just the technology. You
have to look at the market power they have in using the new
technologies bundled with the old technologies.
I do believe there is potential here. I really do urge you
to look at this like the 1970s when old Ma Bell was being
broken up, when MCI was challenging it. It took some hefty
intervention to open up that market to more competition, and I
think all the technologies Mr. Cleland is talking about are
there. They are ripe for consideration in the marketplace. It
is rough and tumble, but there needs to be some non-
interference from public officials in order to make that
happen. Otherwise, it won't happen.
Chairman DeWine. Mr. Cleland?
Mr. Cleland. Yes, thank you, Mr. Chairman. There is a lot
going on right now. We call this dynamic techcom, and why these
technologies, broadband over power lines? I followed it for
nine years and was yawning and saying when is it going to come?
Well, it finally has come.
The reason why many of these technologies that we are
talking about--they are not pie-in-the-sky; they are real and
they are coming on now for several reasons. We have a critical
mass of wireless access. We have a critical mass of processing
power. Essentially, Moore's law. Silicon chips have gotten so
fast and so cheap that they are solving problems that before
were barriers to competition.
Storage is getting dramatically cheaper and dramatically
smaller. We now have 185 million people with cell phones, so
there is mass penetration there. We have broadband access all
through the enterprise market, 90 percent. Thirty percent of
the consumer market has broadband access. That is 60 percent of
the buying power, so broadband access has been critical.
Deregulation--we have displays, foreign factors.
There is a confluence of things that are coming together,
and we call it the techcom dynamic, where the things that we
have all been talking about in pieces are finally starting to
come together. What we call the techcom dynamic is mobility
times convergence times the any-to-any connectivity of IP.
What you have is a very, very dynamic, innovative
marketplace that really was kind of started in the last year.
VoIP is just one dimension of the exciting changes that are
going on. People have been talking about convergence for a long
time. What they are going to see is in the next two to three to
four years it is going to happen much faster than people
anticipate.
Chairman DeWine. Mr. Cleland and Mr. Kimmelman, some have
raised concerns that after the merger SBC and Verizon are not
likely to compete in one another's territory even for
enterprise customers, since they have not very aggressively
competed in the past. However, a large part of the motivation
for this merger on the part of SBC and Verizon is to gain
access to the large enterprise clients currently served by ATT
and MCI.
Why would SBC and Verizon spend all this money to acquire
ATT and MCI if they did not intend to compete head-to-head to
get these big business clients?
Mr. Kimmelman. I will start. Well, they clearly are
spending money because they think they can make money here, and
Mr. Cleland has made some good points about why it may not make
total sense.
The enterprise market is not where I focus, but there are
very few competitors today in the enterprise market. They may
be willing to challenge each other somewhat, but the real
problem there is there are deregulatory pricing rules for a
two-player market involving what is called special access that
are leaving very high prices for business customers. This will
not solve any of that problem and it will create the political
environment that makes it impossible to solve that problem.
There will be nobody else out there who is well-positioned to
serve the enterprise market.
I will just go back to my earlier point. While we don't
focus on business customers, the history of telecommunications
has been that many players coming in servicing business markets
first end up in residential markets. So the danger here is that
this just locks in a very tight oligopoly even further.
Chairman DeWine. Mr. Cleland.
Mr. Cleland. Well, the problem with the enterprise market--
and SBC and Verizon are going to learn it quickly--is you tend
to covet and want what you don't have, and the Bells don't have
those large enterprise customers. When SBC and Verizon buy
them, they will realize that that customer segment is rapidly
moving away from them and ATT and MCI.
What is happening in that marketplace is essentially
enterprises are in-sourcing. They used to have to out-source
and they needed ATT and MCI. They are now moving most of their
voice traffic and their data traffic onto their own networks.
They just don't need telecommunications providers anywhere near
as much as they did in the past.
So that market, we believe, is going to be a steadily
declining market for several years. I don't think in that
marketplace that SBC/ATT and Verizon/MCI are going to be able
to exert market power. They are going to have to do their best
just to hold their own.
Mr. Kimmelman. Mr. Chairman, what I hear Mr. Cleland saying
is there really is no competition and big businesses ultimately
will spend on their own if the prices are too high from the
commercial market. That is not a very good set of policies, I
believe.
Mr. Cleland. Well, once again it is very important. You
have to understand techcom competition is different than
telecom competition. In the techcom world, large enterprises
already have networks. They are Microsoft, they are IBM. They
have their own networks. They don't need ATT, MCI, Verizon and
these companies like they did in the past. So that is what
technology is allowing them to do. Technology is allowing these
enterprises to totally bypass or do without what they used to
absolutely have to have.
Chairman DeWine. I want to thank all of you very much. I
think it has been a very helpful hearing. I think we can safely
say we have heard just about all sides of the many issues
raised now by these mergers. This panel has done a great job of
balancing out the testimony that we heard last month from the
merging parties themselves and really, I think, given our
Subcommittee a lot to think about, which we will. As we have
said, there are a wide range of issues raised by these deals.
So we again thank our witnesses. I want to thank Senator
Kohl for his great work, and we thank all of you. Thank you.
[Whereupon, at 4:15 p.m., the Subcommittee was adjourned.]
[Submissions for the record follow.]
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