Copyright 1999 Federal News Service, Inc.
Federal News Service
JUNE 24, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
3460 words
HEADLINE: PREPARED STATEMENT OF
THE
HONORABLE TOM TAUKE
SENIOR VICE PRESIDENT
BELL ATLANTIC
BEFORE THE
HOUSE COMMERCE COMMITTEE
TELECOMMUNICATIONS, TRADE AND
CONSUMER PROTECTION SUBCOMMITTEE
BODY:
Bell
Atlantic 1300 Eye Street Washington, DC 20005
Mr. Chairman, thank you for
this opportunity to testify before the Committee. I am Tom Tauke, Senior Vice
President of Government Relations for Bell Atlantic. I am before you today to
tell you that, without changes in the regulatory architecture, the deployment of
high speed Internet access will be significantly impeded, to the detriment of
all Americans.
Mr. Chairman, the Internet is a wonderful tool that has
developed far faster than anyone could have imagined. But its continued
development and evolution into a technology that can handle any form of
communications and any type of service from educational to medical is
threatened. The current infrastructure on which the Internet rides is
insufficient to handle the explosive growth, and the danger is that we won't
recognize the scope of the problem until it seriously impairs our economic
growth. Policy makers must avoid applying old regulatory models to an entirely
new, competitive technology. The consequences of inaction are very serious. The
entire Internet economy rests on the ability of businesses to reach consumers.
Without BOC broadband deployment many local communities will
never realize the promise of high-speed Internet, and Internet companies will
not be able to reach their markets. This will have a serious impact on the value
of the Internet economy itself -- the sector that everyone agrees is driving
economic growth.
If we slip into using policies for the Internet and
broadband services that were intended for a local voice telephone market, we
will slow deployment of broadband, inhibit competition and risk slowing
investment at the very time when we need every possible player involved to help
advance the capabilities and capacity of the Internet.
The State of the
Industry
A few short years ago, the Internet was something that only serious
researchers and computer jockeys knew about. Electronic commerce was not part of
our vocabulary. In 1995, revenues generated by the Internet were a mere $5
billion. Since then, the growth of the Internet has been astounding, far
outstripping the predictions of most experts. Last year, Internet revenues rose
to an astronomical $301 billion.
With this growth, there has been increasing
demand for bandwidth and speed. The 14.4k modems that were state-of-the-art a
few short years ago are the slowpokes, with 56k being the top speed achievable
by most mass-marketed dial-up modems. As more and more people use the Internet
and more complex information and bandwidth-intensive applications appear, it is
clear that 56k just is not fast enough.
Consumer surveys demonstrate that
speed is a very important issue to users. But so is quality and capability. The
Internet's problems are only partly related to the need for more capacity. It is
an end-to-end system based on hundreds of connections between different
networks. At the top of this system is the Internet backbone which links
together thousands of web sites and Internet providers and takes traffic back
and forth at high speeds across the U.S. The faster data can get on the backbone
and the more backbone capacity there is, the better the connection and the
higher the quality of the data transmitted.
There are vast areas of the U.
S. that simply have no nearby backbone connections or hubs. The three largest
backbone carriers B MCI/WorldCom, Sprint and Cable and Wireless with AT&T
coming up fast B have little incentive to connect their systems with smaller
carriers or locate hubs away from major urban centers. And the level of
concentration is increasing rapidly as the major backbones acquire or displace
smaller players. Even where backbone exists, such as in major urban centers, it
is often congested. Many Internet providers have no way to get their data
traffic to the backbone efficiently and without numerous back-ups and delays.
Many are simply located too far away from convenient backbone connections. And
when they do get to the backbone, they find that the lack of adequate capacity
slows their customers' service.
If a consumer's data B a web page being
transmitted to a person's home for example B is slowed at any point in the
transmission, data can be lost, the connection may drop and some of the more
exciting applications for education and telemedicine involving video, for
example, will simply be impossible. The current lack of competition in the
backbone market and the threat of telephone style regulation of broadband
connections deployed by incumbent telephone companies threaten to slow the
improvement needed in the Internet. We need competition and investment in the
Internet from end-to-end B from the local connection to the nationwide and
global backbone. Whole new industries based on a more advanced Internet will be
stymied and the continued development of our high tech and computer industries
will be slowed. The Internet has driven the growth of the high tech sector.
There is a very real danger that if the Internet does not advance to a new
level, one capable of providing higher speed, higher quality connections, the
growth our economy has enjoyed because of the explosion of information
technology could well be undermined.
The information superhighway is
exploding while driving at 56k, imagine what will happen when we allow consumers
to drive at 10 or 100 times that speed.
Today, the two most promising
landline technologies to provide residential consumers with high speed Internet
access at a reasonable cost are Digital Subscriber Line (DSL) services, and
cable modem services. Only one of these services, DSL, is subject to significant
federal regulation. Even worse, only certain providers of DSL -- the Bell
operating companies (BOCs) -- are so constrained as to not be able to provide
data services across LATA boundaries.
If consumers are to get widespread
deployment of high speed Internet services from competing providers, it is
necessary for DSL services to be deregulated. Current regulation hampers
significant DSL deployment and denies consumers benefits.
To Regulate or Not
to Regulate, That is the Question
The question before Congress is AWhy
should companies that are best able to bring broadband to all Americans be
constrained from doing so by an antiquated regulatory structure?" Bell Atlantic
thinks they should not.
The high-speed data business of today should not be
regulated like the telephone network of yesterday. In most urban areas, there
are several companies vying for the high-speed data business. Cable companies
are upgrading systems to be Internet-capable with high-speed cable modems. New
entrants, such as Covad, Northpoint, and Rhythms NetConnections, provide DSL
services to business and residential consumers. And unlike the voice markets,
local telephone companies are not the dominant providers of residential
high-speed data services C cable companies are. They already serve 80 percent of
the residential customers buying high speed Internet access.
Even
though there are several willing providers of the service, there is still
precious little deployment of high-speed Internet services. The players who can
make the financial commitment to widely deploy DSL services, and can help new
entrants in their deployment of the services, are being held back by the
regulatory regime in place today.
Bell Atlantic and other Bell operating
companies (BOCs) are prohibited from carrying data traffic across LATA
boundaries. That means that a Bell Atlantic customer must rely on other
providers to reach the Internet. It also means that Bell Atlantic cannot operate
Internet backbone services.
To provide customers reliable end-to-end data
services, a provider must be able to move data from one end of the country to
the other, and overseas. Sprint, MCI, and AT&T all have this capability
today. Cable companies and the nascent DLECs are not prohibited from providing
these services. The only companies not allowed to provide this service are the
BOCs.
Remember that the reason that AT&T was split into local and long
distance components was the threat that AT&T would use its market power in
one market to harm competition in another market. At that time, AT&T had a
monopoly over the local exchange market. There is no current monopoly for
high-speed data services. In fact, out of the nearly 100 million Internet users,
there are only 70,000 total DSL customers nationwide. There are seven times more
high-speed data customers using cable modems (500,000) than DSL.
Bell
Atlantic may not even provide its Bell Atlantic.net customers direct Internet
access. Instead, Bell Atlantic.net must contract with a third party to provide
the Internet portion of the Bell Atlantic.net service.
There is very little
justification for the FCC's protection of AT&T and MCI from Bell Atlantic's
pro-consumer entry into the data business on an equal footing. These mammoth
companies have the capital and know-how to compete for data customers. Even the
start-up DLECs are in an excellent financial position. These companies have been
the darlings of Wall Street, in spite of the fact that most of these companies
have only started to build their customer base. NorthPoint Communications has a
market capitalization of $4.5 billion, in spite of the fact that its revenues in
1998 were less than $1 million. Covad's market capitalization is $3.1 billion,
with 1998 sales at $5.3 million. Rhythms NetConnections market capitalization is
nearly $4 billion, on 1998 sales of $500,000.
There are other existing
regulations that handicap Bell Atlantic's provision of DSL. The FCC is busy
working on applying Section 251 unbundling and resale requirements to Bell
Atlantic and other incumbent LECs. Bell Atlantic is committed to providing
unbundled DSL- compatible loops to competitors. Any other unbundling of the DSL
service or the provision of DSL-capable loops is unnecessary and can harm
deployment of DSL.
The FCC is currently considering a proposal to require
spectrum unbundling, also called line sharing. Under this proposal a competitor
would be allowed to use only a portion of the capacity of the loop for free to
provide DSL service and the incumbent LEC would still be required to provide the
underlying basic telephone service and cover the full cost of the loop. To split
the capacity of the loop, however, is bad public policy. Line sharing deters the
development of competition for local voice services by "stranding" voice and
discouraging competition for voice services. Line sharing discourages CLEC
investment in local voice services by giving the new DLEC competitors a "free
ride" on the ILEC's voice service, which is priced below cost. Competing
carriers do not need to share the unbundled loop to offer advanced services.
They are already free to offer advanced services over an unbundled loop or to
invest in other technologies, such as wireless technologies. Like the ILEC, they
can recover the cost of the unbundled loop by offering voice and other services
over that unbundled loop.
The FCC is also in the midst of determining
whether LEC DSL services should be subject to the resale discounts provided
under Section 251. Bell Atlantic has filed a tariff at the FCC to provide DSL
service on a wholesale basis to ISPs such as AOL and to competing carriers.
CLECs claim that ISPs are the end-users of that service, and therefore CLECs
should be able to obtain an additional discount from the ISP tariff price. What
they are trying to do is give themselves a better deal for DSL services so that
it is impossible for ISPs to compete against carriers in the residential mass
market. But that makes no sense from either a legal or policy perspective.
First, as a legal matter, the Section 251(c)(4) discount applies only to
services that are provided "at retail" to "subscribers" of those services. The
xDSL services provided to Internet service providers (ISPs) and other carriers,
however, will be used as an input to their own retail Internet services and
resold to their own subscribers. It is the ISPs and other carriers that purchase
under this tariff that will perform the retail functions of marketing,
advertising, billing and customer. There are no further retail costs that Bell
Atlantic would avoid by providing these same wholesale arrangements to carriers
and therefore there is basis for applying the avoided cost discount that is
normally applied services offered at retail. Second, as a policy matter,
imposing a wholesale discount requirement on wholesale xDSL services would make
it impossible to provide ISPs the lowest possible price. If any price made
available to ISPs, no matter how deeply discounted, automatically would have to
be available to CLECs at a further 20 percent discount, the simple fact is that
carriers will be unable to offer ISPs as significant a volume discount. And ISPs
will be unable to compete in the residential mass market against carriers that
are getting the same service, but at a significantly lower price.
With the
proper deregulation in place, DSL deployment will increase significantly. A
rising tide will raise all ships, as the standard speed for Internet access
increases by a factor of 10 or 100, every high-speed data provider will benefit.
Deregulation often provides consumer benefits in deployment, prices, and
choices.
The Cellular Experience
There are some parallels between what
happened in the cellular industry and what is happening in the high-speed data
marketplace. The slow roll out of cellular service, and continuing regulation of
the service has cost consumers and the economy billions of dollars. Significant
deregulation, however, has increased subscribership and lowered consumer costs.
In 1968, the FCC initiated its first inquiry into reallocating UHF spectrum
for mobile telephone service. The Commission issued its first report and order
in 1970. Several decisions and reconsideration followed, and the first
experimental cellular system finally became operational in 1979 in Chicago. In
March 1982, the FCC issued its Report and Order creating the commercial cellular
service. Commercial cellular service finally began in 1983, even though the
technology was developed and ready for market more than 10 years earlier.
According to one estimate, this delay in cellular licensing cost the U.S.
economy a staggering $86 billion.
Moreover, no one predicted cellular's
fantastic growth. In fact, at the time of the breakup of the Bell system, it was
unclear as to whether AT&T or the BOCs would inherit AT&T's cellular
spectrum licenses. AT&T had predicted that cellular subscription levels
would reach one million by 1999. In reality, cellular subscribership reached
that level in 1987, and at the end of 1998, there were 69,209,321 wireless
subscribers in the U.S.
Wireless growth was actually very slow at first. By
the end of 1988, there were approximately two million cellular subscribers in
the U.S. The FCC made an effort to significantly deregulate cellular service in
1988. This first of two significant deregulatory events in the cellular industry
help make wireless telecommunications the ubiquitous service it is today.
In
December 1988, the average monthly cellular bill was $98.02 for the two million
plus subscribers. Within four years of the FCC's deregulatory effort, cellular
subscribership reached 11 million, while the subscriber's average monthly bill
dropped by nearly 30 percent.
The second major deregulatory effort was
undertaken by Congress in 1993. In the Omnibus Budget Reconciliation Act of 1993
(OBRA 1993), Congress, to a great extent, deregulated the cellular telephone
industry. From 1993 to 1998, wireless telephone subscribership has risen from 16
million to 69 million, while the average monthly bill has dropped by nearly 50
percent.
OBRA 1993 allowed states to petition the FCC for continued rate
regulation. During the pendency of these proceedings, the Cellular Telephone
Industry Association filed a study with the FCC detailing the effects of state
cellular regulation. The study, performed by Jerry Hausman, concluded that
cellular prices in regulated states averaged 17% higher than the prices in
unregulated states. He also found that cellular penetration and cellular growth
is lower in regulated states than in unregulated states.
The
inescapable conclusion is that the cellular industry benefited greatly from
deregulation. In a deregulated environment, subscribership rose and prices
dropped.
The high-speed Internet market is in a similar position today as
the cellular industry was more than ten years ago. Of the nearly 100 million
U.S. Internet users, only 500,000 access the Internet via high-speed cable
modem, and a scant 70,000 use xDSL technology for high-speed Internet access.
Adoption of deregulatory measures, such as those contained in the Tauzin-Dingell
draft bill will permit telephone companies to provide xDSL technologies at a
more rapid pace, hopefully with the same results as deregulation of the cellular
industry: more consumers accessing the technology for lower costs.
Give the
Consumer a Choice
With AT&T providing high speed Internet access over a
closed system, whereby the consumer using AT&T's cable modem must pay for
AT&T's ISP of choice B (At Home), consumers will want a different provider
to give them a choice of both the high speed pipe and the ISP. Bell Atlantic's
DSL will allow consumers to choose from many ISPs, including Bell Atlantic's own
ISP. Bell Atlantic will not condition the deployment of DSL on the requirement
that a customer use Bell Atlantic's own ISP.
Customers want choice. Some
customers are very happy with their current ISPs. Bell Atlantic would like to
provide those consumers with a high-speed Internet option using their ISP of
choice. This is good for the consumer and good for the industry.
Data
Services Are Different
Congress must make the FCC recognize that the
high-speed data business is separate and distinct from the voice telephony
services business. The FCC seems intent on applying the Title II common carrier
regulation of voice services on telephone companies' providing data services,
and applying the Title VI cable regulation, or lack thereof, on cable operators'
providing the same service. A company's parentage should not determine that
company's regulations in a different business. This is a classic case of
regulatory disparity -- those customers purchasing high-speed Internet access
service from a BOC have their service restricted by regulation, while those
purchasing similar high speed Internet access service from AT&T's cable
system have no such regulations.
Rather than impose additional regulations
for data provision by cable operators, the FCC should not be regulating data
services under Title II, Title VI, or any other provisions of the Communications
Act. Congress gave the FCC the opportunity to set the proper deregulatory
environment for high-speed data services by including Section 706 in the
Telecommunications Act of 1996. Unfortunately, the FCC failed to take advantage
of the opportunity and continues to constrain the deployment of advanced
services to all Americans through its imposition of a regulatory scheme designed
for voice services. Clearly, consumers will benefit from deregulation where
there is competition as there is for data services.
Some have argued that
providing interLATA data relief is a back-door way for the BOCs to enter the
interLATA voice business. This argument is a red herring. Bell Atlantic will not
provide interLATA voice telephony until it gains the approval to provide that
service pursuant to Section 271. Bell Atlantic is committed to opening its local
telephone network, and gaining approval to provide long distance services in
every state in its region.
Congress Should Adopt an Open Competition Policy
for Data Services
The policy that will most benefit the consumer and the
Internet is an open competition policy. Congress should adopt a policy that
permits all data service providers to provide Internet backbone services.
Congress should encourage last mile broadband deployment.
Finally, Congress should ensure that regulation is only instituted where there
is a clear market failure.
Overlaying existing telephony regulation to the
Internet will not work. Bell Atlantic urges Congress to adopt legislation that
deregulates the provision of data services and does not favor one provider over
another. The legislation should empower consumers with choice. Bell Atlantic
believes that the Tauzin-Dingell draft legislation meets all of these policy
objectives, and Bell Atlantic respectfully urges Congress to take immediate
action in passing such legislation.
END
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