Copyright 1999 Federal News Service, Inc.
Federal News Service
JUNE 30, 1999, WEDNESDAY
SECTION: IN THE NEWS
LENGTH:
2999 words
HEADLINE: PREPARED TESTIMONY OF
GEORGE
VRADENBURG III
SENIOR VICE PRESIDENT, GLOBAL & STRATEGIC POLICY
AMERICA ONLINE, INC.
BEFORE THE HOUSE COMMITTEE ON THE
JUDICIARY
SUBJECT - H.R. 1686, "THE INTERNET FREEDOM ACT"
AND H.R. 1685,
"THE INTERNET GROWTH
AND DEVELOPMENT ACT OF 1999"
BODY:
INTRODUCTION
Chairman
Hyde, Ranking Member Conyers, members of the Committee, good morning. Thank you
for asking America Online to testify before the committee today on two important
pieces of legislation:
-- H.R. 1686, "The Internet Freedom Act", introduced
by Congressman Goodlatte; and
-- H.R. 1685, "The Internet Growth and
Development Act of 1999", introduced by Congressman Boucher, both Members of
this Committee.
These bills, and this hearing, are important parts of
Congress' ongoing consideration of issues that are critical to the future of the
American economy and society as we move further into the Information Age. We
hope you will act swiftly and decisively to prevent certain kinds of
anti-competitive behavior that threaten consumer welfare by stifling competition
in the market for Internet access.
THE INTERNET TODAY: COMPETITIVE MARKETS
BENEFITTING CONSUMERS
How and Why the Internet Has Grown
Unlike any
other communications technology that has preceded it, the growth of the Internet
is a truly remarkable phenomenon. In only a few short years, the medium has
literally transformed the way Americans communicate, engage in commerce, educate
themselves and even participate in our democracy. An untold number of new
entrepreneurs have discovered that if they build something on the Internet -- a
Website, a business or a new access service -- thousands, even millions, will
come. Always open for business, always open to new ideas, the Internet is
perhaps the most dynamic force in our society and economy today.
It has
become a cliche to call the Internet "revolutionary". But, as we've seen
throughout the 20th century, revolutions come and go. The Internet's truly
world-changing impact is evolutionary; it is quickly causing fundamental and
lasting changes in the ways society, and the world economy itself, operates.
The impact of the Internet economy already is stunning. A recent University
of Texas study concluded that today's Internet economy, measured by the value of
goods and services flowing through it, is valued at $301 billion. Let me put
that figure in perspective. The Internet economy already is bigger than the
telecommunications sector ($270 billion) and is fast closing in on the auto
industry ($350 billion). Yet, the Internet is in its infancy and your policy
choices will have an enormous impact on its future.
The most significant
aspect of this online phenomenon in many ways is the degree to which consumer
choice and competition at all levels of the Internet marketplace have fueled its
astounding growth. Consumers' Internet adoption rates are far outpacing the
predictions of even the most aggressive analysts only a few short years ago --
and far outpace the track record of any other medium in history. More than half
of American households -- a total of 53 million -- now own PCs. And about
one-third of American households now have access to the Internet. Every month,
nearly 1.5 million Americans join the online world for the first time, bringing
the percentage of the US population online from nearly zero in 1990 to over 30
percent today. Indeed, the number of online households in the United States grew
by a factor of eight between 1994 and 1998.
In five years, nearly 60 percent
of Americans are expected to be online. This same rapid growth path can be seen
throughout the world, where the number of online users is expected to reach 250
million by the year 2002. As one would expect from all of these online users,
traffic on the Internet is doubling every 100 days. Analysts are predicting that
by 2002 consumers will spend nearly $43 billion a year online, compared to $8
billion last year.
The Internet often is referred to as a "network of
networks". Its power and strength is rooted in its open architecture, one where
all networks are voluntarily interconnected, where each network delivers its
traffic to other networks in bartered peering arrangements and where, as a
consequence, every person on any network can reach every other person on any
other network. As more and more networks, of ever- increasing capacity, are
added to this "network of networks", every consumer and business benefits.
Amazingly, all of this power is today delivered to residential consumers
over a single "last-mile" infrastructure consisting of local telephone lines
built for an entirely different purpose -- namely, local voice service. Through
this "last mile," more than 6000 competing Internet service providers, or ISPs,
offer a wide variety of price, feature and service packages to residential and
business customers alike. In just five short years, a system has emerged that
serves over 90% of Americans with competing ISPs with local dial-up connections.
Competition among ISPs has been crucially important to the widespread
adoption of the Internet by Americans. As explained in the attached charts,
competition to offer consumers Internet access has brought prices for Internet
access down to a greater degree, and much more quickly, than they ever would
have come down in an environment with only a few providers. (See Exhibit A). ISP
competition has raised the quality of Internet access service and expanded the
range of Internet features available to consumers at all points in the Internet
value chain. From the adoption of flat rate pricing to rapid innovation in
business models, no ISP has been able to avoid the need to excel in this market.
Consumers are the drivers -- and the ultimate beneficiaries -- of this
fierce competitive and open environment. There are virtually no barriers to
entry into the Internet marketplace and no gatekeepers collecting tolls from new
businesses. As a result, consumers have seen their product choices expand, have
been granted access to a wealth of information historically available only to
those with means, and have been empowered to participate in civic life in ways
that were previously unimaginable.
The Multidimensional Broadband Future
Soon, the Internet will be available not only over today's "narrowband"
technologies but also through "broadband" connections 100 times faster than
today's access speeds. That transition is beginning even now.
As broadband
becomes widely available, affordable and easy to use, we would expect all ISPs
to use that technology to meet the needs of consumers, small businesses and the
entire American population in new ways we have only begun to imagine.
Online
shopping -- and online selling -- will explode as more sophisticated
technologies expand the range of products and services available online and make
it possible to view, tour, test and even "try on" a range of products.
Beyond online shopping will come the home office. Telecommuting --
involving everyone from typists to traders -- will come into the mainstream
through broadband's capabilities, benefiting cities across the country through
reduced traffic and pollution and giving businesses and employees much needed
flexibility. One-person Internet- based operations will compete with
multinational corporations, creating whole new local industries.
As
broadband expands the capabilities of the Internet, its role will expand as
society's "great leveler" -- putting world-class resources, the widest range of
products and services, and even access to the outside world at the fingertips of
anyone capable of flipping a switch or dialing a telephone.
While today's
Internet is built on a single telephone access platform, broadband Internet has
the potential to be built on multiple access platforms -- telephone, cable,
satellite and wireless. AOL's vision for residential Internet access is one of a
true "broadband tapestry." In a multiple-platform environment, consumer choice
and competition can and should be enhanced, not limited. Internet rivals should
be able to offer a wide range of new Internet applications, using different
speeds and platforms. In fact, the consumer need not be aware of which access
technology its Internet service provider is using -- the consumer cares about
service and applications, not technology.
Realistically, however, the next
few years will see two-way broadband access to the Internet for the consumer
marketplace will be offered primarily through two sources, both wireline --
DSL through traditional phone lines and cable modems over cable
systems. In the case of DSL, telephone companies offer
non-exclusive and non- discriminatory interconnection arrangements for these
telecommunications services. We, and our Internet competitors, have entered into
such arrangements with the prospect of higher speed Internet services and more
robust applications becoming widely available in neighborhoods accessible by
DSL by the end of the year. As I will discuss a bit later,
cable however, poses some serious problems.
Other broadband access
technologies will also become available at some point in the future that will
permit Internet customers unprecedented choice and flexibility. In fact, just
recently AOL announced an alliance with Hughes Electronics to help bring a
hybrid form of high- speed Internet access through satellite to consumers by
early next year. As a result, consumers will be able to benefit from affordable,
convenient and faster Internet service even if they live in traditionally
hard-to-serve communities like rural areas. But even this satellite-based system
will continue to partially utilize the telephone network.
THE POLICY
CHALLENGE: PRESERVING THE COMPETITIVE ENVIRONMENT
As stated above,
competition, openness and consumer choice are the essential ingredients of the
success of the Internet, whether consumers access the Internet through
narrowband or broadband. In the telephone environment, the move from narrowband
to broadband will preserve those elements. But the cable industry's intention to
close their systems threatens the Internet's success by stifling consumer choice
and competition in Internet access. Unlike in other broadband facilities, cable
companies do not plan to offer access to Internet services. The cable industry
insists that a customer purchase the cable-owned or affiliated Internet service
before buying or accessing a competitive Internet service.
Two recent events
underline the fact that the "closed system" model has been chosen by the cable
industry solely as a means to exercise its market power in broadband to the
detriment of competition:
-- A GTE test over its cable system in Clearwater,
Florida, demonstrates that cable systems are technically able to support
competitive Internet access providers - despite cable industry claims to the
contrary;
-- The general counsel of the Nation's second largest cable
company testified before a Congressional committee last week that his own
company has the technical ability to offer open Internet access, but will not do
so for business reasons.
This practice has at least three adverse
consequences.
First, it eliminates competition in the access market, thereby
challenging the Internet model that has kept prices falling and service quality
rising over the last several years.
Second, it forces consumers to pay twice
to get the Internet service of their choice, thus depriving moderate and low
income families of the benefits of competition in cable-based Internet service.
Third, it discriminates in service quality between the cable-owned Internet
service providers -- whose content is directly accessible -- and independent
Internet service providers -- whose content is only indirectly available through
the Internet. To make matters worse, the cable companies have even stated their
intention to preclude access to content otherwise available to the consumer on
the Internet, material with which the cable system does not wish to compete,
including video material longer than ten minutes.
The Congressional Choice
With the threat to Internet competitiveness looming, H.R. 1686 and H.R. 1685
mark an important step in ensuring that that Internet of today serves as the
model for tomorrow. As both bills recognize, technologies are converging and all
services -- voice, data, video and others - are beginning to be offered over
traditionally distinct voice or video platforms. As a result, old regulatory
classifications will not be sustainable. Pro-competitive policies reflecting
regulatory parity must become a clear priority. Congress should not favor one
technology platform over another through public policy or regulatory
disparities, or adopt or acquiesce to policies that hobble Internet deployment
and use.
As is reflected in the two bills before this committee, Congress
long has believed that its responsibility to preserve competition is broad
based: the Nation's legal framework encourages competition at all levels, and
ensures that market failures are minimized by proscribing specific kinds of
conduct.
The most important way that Congress has acted to encourage
competition and prevent market failures is by establishing a broad framework of
antitrust laws that have operated for more than a century to preserve
competition in all the Nation's industries and to preempt the ability of
competitors with market power from exercising that market power to the detriment
of consumers.
While the antitrust laws are often invoked to redress market
failures after they occur, they are intended to encourage competition in all
markets, whether they be emerging markets or mature markets. As the Supreme
Court has said, the antitrust laws are "designed to be a comprehensive charter
of economic liberty aimed at preserving free and unfettered competition as the
rule of trade." Northern Pacific Railway Co. v. United States, 356 U.S. 1, 4
(1958).
The antitrust laws are based on a foundation much more concrete than
just a desire to ensure general notions of fairness in the marketplace. The
Sherman Act reflects the assumption that competition is the best method of
allocating resources in a free market and the Congressional judgment that
ultimately, competition will produce not only lower prices but also better goods
and services. Neither Congress nor the courts apply different standards to
anti-competitive situations based on the age or maturity of the market -
evidence of anti-competitive intent remains the touchstone.
Antitrust laws
and principles have preserved and enhanced consumer welfare in countless
industries, including the telecommunications industry and the mass media.
Members with longer memories will recall that the antitrust laws required major
changes in the ways that motion picture studios could be involved in the
distribution and exhibition of their products. Antitrust concepts were applied
to perceived discrimination by broadcast networks in the acquisition of
independent television programming. Congress used antitrust concepts to prevent
the cable industry from snuffing out emerging competition in satellite
programming. The antitrust laws have been applied numerous times to correct real
and potential problems with price fixing, technology transfer, and mergers and
acquisitions.
And, every Member of this Committee is well aware of one of
the most famous antitrust cases in our Nation's history. The consent decree that
resolved the AT&T case ushered in a new era of customer choice in long
distance and telephone equipment that unquestionably has benefited every one of
your constituents. In fact, Congress has sought to build on the benefits of the
AT&T divestiture: the 1996 Telecommunications Act was enacted after a decade
of effort to further stimulate competition in the delivery of telecommunications
services. In that Act, Congress continued its historical efforts to ensure that
all Americans have the best and lowest cost services in telecommunications
through various initiatives aimed at promoting competition through open access
for competitors. Clearly these principles of openness have enabled the Internet
to develop and give in ways that would never have been possible in the closed
environment of the pre-consent decree era.
As we move to the broadband
world, real and substantial threats are emerging to the competitive Internet
access market that necessitate strong, immediate and unequivocal Congressional
action to preserve competition and openness in the Internet marketplace across
all facilities.
The Goodlatte/Boucher legislation does this by proscribing
specific kinds of anti-competitive conduct that would threaten the continuation
of today's fierce competition in the Internet access market as we move to the
broadband world. The legislation does so for the right reasons: to ensure that
consumers have choices in prices and services, and to ensure that Congressional
policy to mandate and encourage competition in the delivery of
telecommunications services at all levels is not thwarted.
CONCLUSION
The goal of Congress in preserving and enhancing competition in Internet
markets should be similar to how it is dealing with other Internet-related
issues: to rely increasingly on the marketplace, and less on regulation, to
provide the greatest consumer benefits. That is one important reason why
antitrust policy is the right tool to address these issues: It focuses on
existing or threatened market failures and tries to prevent them.
Right now,
Internet access is a highly competitive market where entry costs are low and
where business success is achieved by better products and services and lower
prices. This Internet DNA of choice and competition -- not the gatekeeper DNA of
vertical integration -- should be our guiding star. If gatekeepers want to play
in the new Internet game, we should require them to play by Internet rules. We
owe consumers no less.
Congress can do that in the best, simplest, and
clearest way by passing the Goodlatte-Boucher legislation and establishing
principles based on competition and choice for the Internet access marketplace.
Thank you again for inviting me to share our views. I look forward to your
questions.
END
LOAD-DATE: July 1, 1999
