Copyright 1999 Federal News Service, Inc.
Federal News Service
JUNE 30, 1999, WEDNESDAY
SECTION: IN THE NEWS
LENGTH:
3198 words
HEADLINE: PREPARED TESTIMONY OF
SCOTT C.
CLELAND
MANAGING DIRECTOR OF
THE LEGG MASON PRECURSOR GROUP
BEFORE
THE HOUSE JUDICIARY COMMITTEE
SUBJECT - HR 1686 "THE
INTERNET FREEDOM ACT"
HR 1685 "THE INTERNET GROWTH AND DEVELOPMENT ACT OF
1999"
BODY:
TRANSMITTED BY: FEDERAL NEWS
SERVICE 620 NATIONAL PRESS BUILDING WASHINGTON, DC
Mr. Chairman, thank you
for the honor of testifying before your Committee on "The Internet Freedom Act"
and the "Internet Growth and Development Act of 1999."
I am Scott Cleland,
Managing Director of the Legg Mason Precursor Group. The views expressed here
are mine alone. I request that my full written testimony be printed in its
entirety in the hearing record.
By way of introduction, I am not a
traditional Wall Street sell-side analyst who analyzes companies or recommends
the purchase of stocks. For Legg Mason, I run an investment research group that
tracks regulatory, technological, and competitive developments in the
communications, technology and e-commerce sectors for large institutional
investors. Unlike most of Wall Street, we do not focus on what will happen in
the next quarter. We focus on trying to anticipate major investment-relevant
change coming in the next three- 18 months.
In that context, I offer the
following insights and observations in hopes that they will be useful to the
Committee in its deliberations over "The Internet Freedom Act" and the "Internet
Growth and Development Act of 1999."
I. Investment and Market Perspective
In general, investors are wary of almost any proposed legislation or
regulation because it increases uncertainty -- which investors dislike. However,
investors are not much different from the old political adage "where you stand,
depends on where you sit." Where investors stand on proposed legislation often
depends on what they own in their portfolio. It is important for this Committee
to appreciate that its action or inaction on this proposed legislation will have
a marginal effect on the overall level of investment, but it could have a large
effect on how investment dollars move around within the marketplace.
Market's Perception of Cable: I believe that the market's current very
positive outlook for the cable industry rests on three primary assumptions at
the heart of the open access debate.
(1) Cable enjoys the best broadband,
multiple-service, consumer pipe to the home.
(2) The cable pipe won't be
opened up to competition by the government.
(3) Cable will be able to
vertically leverage its video market power and customer base into the Internet
and e-commerce.
Moreover, the market largely assumes the best case right now
about cable's story, that all the new proposed services will pan out in full.
The market loves a growth story that faces little competition. In other words,
the market views cable's glass as half full.
Market's Perception of Local
Telcos: In contrast, I believe the general market perception of the local telcos
has been different. Despite the local telcos' positive financial performance
since the Telecom Act passed, investor fears of increased competition continue
to cloud the local telcos' overall growth outlook. In other words, the market
views the local telcos' glass as half empty.
For very different reasons,
this Committee's proposed bills cut to the heart of both these industries'
growth outlooks and the market's perception of them.
II. The Deregulatory
"Trojan Horse": It's All About Preventing Competition. Why has cable closed
Internet access and limited streaming video to 10 minutes? Cable's deregulatory
rhetoric appears to be a "Trojan Horse" to divert attention from the main event
-- reducing the potential for more competition to cable.
A. There's More
Than One Threat to the Internet: Both HR1685 and HR 1686 recognize that there is
more than one threat to the Internet than just government regulation -- but also
anticompetitive behavior by owners of scarce broadband conduit. While it is wise
for the Government to let the market work and not regulate, this Committee has
also recognized that the market works best when everyone is free to compete and
innovate.
Both HR1685 and HR 1686 recognize that one does not have to
compromise on competition and nondiscriminatory access to deregulate. The bills
offer the Bells data deregulation without compromising the procompetitive
principle that the Bells must still provide nondiscriminatory access to their
"last-mile" facilities. The Committee's bills take a nonregulatory antitrust
approach: "Prohibition of Anticompetitive Behavior or Contracts:" The bills
oppose "restraining unreasonably the ability of a service provider from
competing."
Who Decided to put Competition in the Backseat? It appears from
the tenor of this debate that somehow deregulation and infrastructure deployment
are now supposed to be more important public policy goals than promoting
competition and protecting consumers. Once again, what congressional action or
official FCC ruling reordered these priorities? What decision officially
endorsed the trade-off that the "ends" of deregulation and broadband
deployment "justify the means" of reducing competition and not
safeguarding consumer interests?
B. Deregulatory Misinformation: If one were
to listen to much of the current debate, one could get the false impression that
the cable industry already was deregulated and that government did not believe
cable had market power. In fact, Congress has effectively found that the cable
industry has anticompetitively used its scarce conduit control to stifle
competition in several markets.
Program Access: In the 1992 Cable Act,
Congress found that cable was discriminating anticompetitively against satellite
broadcasters, and legislatively obligated cable to provide satellite competitors
with nondiscriminatory access and prices to cable programming. That "regulatory"
"open access" to cable programming promoted competition and has provided more
than 10 million Americans a competitive choice of video distribution supplier in
about six years.
Must Carry and Retransmission Consent: The 1992 Cable Act
policy was to "ensure that cable television operators do not have undue market
power vis-a-vis video programmers and consumers." Congress recognized cable's
market power over local TV stations, so Congress gave local TV stations the
legal option to either choose "must carry" of their broadcasts or to choose a
commercial negotiation through the legal process of retransmission consent.
Leased Access: "To promote competition in the delivery of diverse
sources of video programming and to assure that the widest possible diversity of
information sources are made available to the public " section 612 of the 1992
Cable Act obligated cable operators to make 10%-15% of their system capacity
available for commercial use (resale) because competitors did not have
sufficient alternative ways to distribute their product.
Competitive
Availability of Navigation Devices: In the 1996 Telecom Act, Congress worried
that cable's market power over cable equipment was stifling competition and
passed section 629 to "assure the commercial availability to consumers " of
cable equipment. Cable can still sell equipment to consumers, but it can not
charge a price that is "subsidized" anticompetitively by its cable service.
Congress effectively created for consumers an "open access" market for cable
equipment. It also created a regulatory sunset of this provision when the FCC
finds the market for video programming and video equipment is "fully
competitive."
Continuation of an Anticompetitive Pattern? Few are now
advocating "deregulating" cable from any of these procompetitive cable
obligations described above. Is that because consensus still supports
procompetition policies which protect against a widely appreciated pattern of
cable anticompetitive behavior? Cable open access is not a new or an isolated
problem. It is a continuation of a long and clear pattern of commercial behavior
to reduce competition.
Internet access is a new market that largely came
into being after passage of the 1996 Telecom Act. Both HR1685 and HR 1686
implicitly recognize that this new form of cable anti-competitive behavior may
have to be addressed legislatively again.
III. Why Is Open Access Important?
The issue of cable open access is much more than an industry squabble or a
regulatory food fight. In fact, whether the cable plant is open or closed to
competitive access is a major fork in the road for this nation's policy towards
competition, convergence, the Internet and electronic commerce. Will the nation
continue down the open pro- competitive road it has traversed for the last 30
years, or will the nation now divert to a new more closed and potentially
anticompetitive road in the future? This is not just about ISPs and "last mile"
access. It is even more importantly about vertical linkage of backbone, access,
content, and e-commerce.
What's at Stake?
A. Will Internet technology be
allowed to compete against cable? By way of analogy, will the government enable
Internet competitors to compete against cable with open access as the government
enabled Direct Broadcast Satellite (DBS) to compete against cable with program
access in 1992?
In all the hype about the Internet and e-commerce, do not
forget that about 99% of cable's revenues are still video-related. Cable does
not want more programming competition from Internet players. Open access offers
a massive increase in consumer video programming choice as technology develops
over time (i.e., enabling users to stream video). Instead of having to buy
entire packages of programming from cable, Internet competitors could offer
micro-programming packages so consumers could buy only the programming they
want, when they want it, and how they want it. Most consumers use and want only
a fraction of the channels they are forced to buy in a package. If consumers
could choose only what they want to see, ultimately no one would have to pay for
programming they do not want or support. If consumers wanted to, they could
dramatically either decrease or increase their cable bill depending on their
individual viewing choices. Almost everywhere else in the economy, the Internet
is empowering consumers with more choice. Closed cable access would allow cable
video programming to increasingly become an island - impeding outside Internet
innovation.
With open access, cable-broadband Internet Service Providers
(ISPs) could become a very different industry than their telco-narrowband ISP
brethren. Higher speeds could create an entirely new and more competitive video
marketplace. Look at how the Internet and e-commerce has flourished because of
local telco open access. Broadband Internet competitors on cable probably will
be less like today's ISPs, which thrive primarily only on Internet access,
e-mail, and customer service, but will also offer competitive programming as
Competitive Internet Video Programmers (CIVPs).
B. Will Cable "Corner" the
High-End Residential E-Commerce Market? Will conduit control content and
e-commerce?
Competition Is an Antidote for Market Power: The government has
used the introduction of competition to mitigate the potential for the local
telcos to leverage their local market power vertically into adjacent markets.
-- The government opened telephone customer premise equipment to
competition, leading to a flourishing competitive market of multiple vendors for
interoperable devices that hook up to phone lines.
-- Since the late 1960s,
the government has consistently maintained a policy of keeping the regulated
communications infrastructure separate from the unregulated computer, data, and
now Internet markets -- by ensuring nondiscriminatory access to the network. The
result is a flourishing competitive market of more than 6,000 ISPs and tens of
thousands of e-commerce companies.
-- The breakup of AT&T and the
associated nondiscriminatory access policy has led to robust long distance
competition and more than 10 national Internet backbones.
-- The Telecom Act
has promoted local competition and nondiscriminatory access, which has led to
the creation of dozens of competitive local exchange carriers.
Bambis in the
E-commerce Forest? Because there are multiple layers of competition and
nondiscriminatory access policies between the local telcos' "last-mile" market
power and the Internet, to date, e-commerce companies have not had to worry
about a fair unfettered access to their residential customers. In other words,
there are tens of thousands of e-commerce "Bambi" companies that currently don't
worry about conduit players being able to steer their best customer segment away
from them to a cable "preferred" provider. They focus on content, commerce and
customers, and assume they will always have access to infrastructure and their
customers. Most e-commerce "Bambis" are still naively unaware that there is
danger in the e-commerce forest that could lead to the capture of their
potential high-end customers by locking these customer into infrastructure and
exclusive service before these e-commerce companies ever have a chance to sell
to them.
Reducing Competition and Leveraging Market Power: Contrast the
nondiscriminatory competitive approach of the telco "last mile" into 98.5
million American homes with cable's discriminatory attempt to reduce competitive
access to the nation's other ubiquitous "last mile" into 66 million homes.
Cable's closed access policy enables cable to vertically leverage its market
power more freely into e-commerce. Unlike the telecom competition that is
designed to limit a local telcos' market power, cable is limiting competition to
leverage its market power. For example, cable has contractually established a
monopoly distributor of cable Internet access
Home/Road Runner, to ensure no
competition from the 6,000 ISPs or the several dozen competitive local carriers.
Cable also discriminates by not allowing competitive backbone providers to carry
its Internet traffic.
Home/Road Runner also forecloses Internet video
programming competition by limiting any streaming video to less than 10 minutes
in duration. The absence of competition in cable's intermediary markets combined
with ownership of a preferred content and e-commerce portal (i.e., Excite),
provides cable the real potential for exercising its market power into the
high-end residential e-commerce market.
If cable:
(1) continues to
enjoy a dominant share of the residential broadband market (currently cable's
broadband market share is 90%+);
(2) can prevent intermediary competition
for competitive access; and
(3) can leverage exclusive Internet access with
Internet backbone transport to gain a powerful incumbent "default" advantage
over competitors;
then cable would be able to substantially lessen
competition by effectively limiting their competitors' addressable market. In
effect, cable could "corner" a substantial portion of the high-end residential
broadband e-commerce market for itself and its "preferred" e-commerce partners.
C. Will Government Keep the Unregulated Internet Separate From Regulated
Infrastructure, Which Has Been Key to its Success and Growth to Date? In other
words, will the unregulated "virtual" world of the Internet and e-commerce
remain separate from the regulated physical infrastructure businesses?
The
Internet Is Separate: The Internet is simply a universal communications language
that links any type of electronic device over any carrier's physical
infrastructure, to deliver any type of information (text, data, graphics, voice
or video). In effect, the Internet "delinks" communications from the physical
technology. In the past, communications was driven by the physical hardware
technology: phone, radio, TV, cable, wireless, or satellite. The Internet is not
the physical infrastructure, but the virtual and boundaryless world of
communications and e-commerce that rides on top of the various technologies.
Cable Self-Deregulation? Cable is trying to reverse more than 30 years of
communications/computer regulatory separation by self-declaring that cable
infrastructure and the Internet are one and the same. Cable is trying to
"relink" its infrastructure to the Internet in order to cloak itself in the
deregulatory rhetoric of the Internet. However, in Congress' much-touted
deregulatory Internet policy statement in the Telecom Act, there is no mention
of cable or any other infrastructure player. Despite the current confused
debate, I can find no place in which Congress or the FCC affirmatively and
officially decided that cable was the Internet and, therefore, cable
infrastructure should be "unfettered by Federal or state regulation."
D.
Schizophrenic Infrastructure Regulation Diverts Convergence. There could not be
more of a stark regulatory contrast than the competitive policy the FCC applies
to the telcos and to the cable industry. The FCC is polarizing residential
broadband investment by hyperregulating the telco monopoly pipe using the
broadest regulatory interpretation of the law and taking a laissez-faire
approach toward the cable monopoly using the narrowest interpretation of the
law. Apparently, the FCC has opposite definitions of competition depending on
who is on the receiving end.
-- Current "activist" telecom broadband
competition policy is to:
(1) demonopolize by promoting competition on an
open, shared network at wholesale prices;
(2) encourage access investment
and innovation by Internet competitors; and
(3) prevent the incumbent from
anticompetitively cross-subsidizing or leveraging market power vertically.
-- In contrast the current "look the other way and hope" cable broadband
policy is the opposite:
(1) it fosters a duopolization by allowing cable a
closed proprietary network at retail prices;
(2) it discourages competitive
investment and innovation by Internet competitors; and,
(1) it allows the
incumbent to cross-subsidize and leverage market power vertically.
Long-Standing Open Access Precedent: Since 1966, the government has had an
ongoing regulatory proceeding, Computer Inquiry, whereby it has tried to
reconcile the convergence and interdependence of communications transport and
enhanced data processing technologies by keeping them separate to the extent
possible for regulatory purposes. Neither the 1992 Cable Act, nor the 1996
Telecom Act, nor the World Trade Organization Telecom Agreement specifically
anticipated the emergence of cable as a primary broadband data "last-mile"
carrier. In the absence of specific legal language, cable has lobbied furiously
for political self-deregulation from the long-standing, bipartisan and
international consensus supporting the promotion of competition to monopolies
and the policy of nondiscriminatory access (i.e., open networks). I can find no
vote or official policy decision whereby the government decided to reverse its
consensus procompetitive, open network access policy and officially and
explicitly decided that the cable "last-mile" should be closed to competition in
order to spur deployment.
Mr. Chairman, thank you again for the honor of
testifying before your Committee on this important subject.
Attachment: "Too
Rosy an Outlook for Residential Broadband Competition?" and accompanying chart:
"Precursor Watch: Residential Broadband Deployment Outlook."
END
LOAD-DATE: July 1, 1999
