Copyright 2000 Federal News Service, Inc.
Federal News Service
March 28, 2000, Tuesday
SECTION: PREPARED TESTIMONY
LENGTH: 3193 words
HEADLINE:
PREPARED TESTIMONY OF STEPHEN C. GRAY PRESIDENT AND CHIEF OPERATING OFFICER
LOCAL SERVICES MCLEODUSA INCORPORATED
BEFORE THE
SENATE COMMERCE COMMITTEE SUBCOMMITTEE ON TELECOMMUNICATIONS,
TRADE AND CONSUMER PROTECTION
SUBJECT - BROADBAND
DEPLOYMENT AND PROPOSED RBOC DATA RELIEF LEGISLATION
BODY:
Summary of Testimony
McLeodUSA,
headquartered in Cedar Rapids, Iowa, is a leading facilities-based Integrated
Communications Provider serving both residential and business customers. We
currently operate in 12 Midwest and Rocky Mountain states; nine additional
states have been targeted for expansion. We have focused on serving customers in
smaller markets [Tier 2, 3, 4), rather than in major metropolitan areas. The
core business of McLeodUSA is to provide "one-stop," integrated communications
services including local, long distance, high-speed Internet access, voice mail
and paging all from a single company on a single bill, tailored to the
customer's needs. McLeodUSA, with 8,100 employees, has currently deployed over
10,000 miles of fiber. The Company derives its revenues from the sale of
telecommunications services and the publication of telephone directories.
McLeodUSA Publishing will print and distribute more than 25 million directories
in 23 states, reaching 43 million people, over the next 12 months. McLeodUSA
strongly encourages Congress to resist any RBOC proposal for broadband data
relief. The 1996 Telecommunications Act is working to bring competition to
telecommunications consumers in all areas of the country. While that competition
is not progressing as rapidly as many would hope or were led to believe in 1996,
the delays have resulted not from inadequate legislation, but from a failure of
the incumbent RBOCs to fulfill their duties under that legislation. Attempting
to impose an artificial distinction between data and voice services will only
serve to delay the deployment of advanced services and the development of
competition in general. This result will disadvantage consul, and delay the goal
of providing faster, better, less expensive telecommunications services to all
Americans.
Finally, if high speed data services and facilities are
deregulated, confusion about ultimate goals will not be limited to customers.
McLeodUSA is acutely aware of the need to maintain investor confidence in the
national goal of bringing competition to the telecommunications marketplace.
That confidence has been bolstered by the clear commitment to the 1996
Telecommunications Act, and the efforts of the FCC, to reach that national goal.
Legislation which would carve out dam services from the pro-competitive goals of
the Act would be seen in financial markets as a retreat from that national
commitment. As a result, the ability of new entrants to raise the capital needed
to bring true, facilities-based competition to all telecommunications markets
could be placed in jeopardy. Thus, the drive toward competition could be slowed
even though that is not what was intended by supporters of such "data
deregulation" legislation.On behalf of McLeodUSA I would like to thank the
Subcommittee for the opportunity to talk with you today. I would like to
accomplish three goals today: first, provide a high level overview of McLeodUSA;
second, summarize our concerns with providing broadband data "relief' to the
RBOCs; and third, emphasize Wall Street's predictable reaction to providing
"data relief' to the RBOCs.
I. McLeodUSA Overview
Clark McLeod
and I formed McLeodUSA, headquartered in Cedar Rapids, Iowa, in 1992. This is
not our first foray into telecommunications. In the early 1980s, Clark formed
Teleconnect and built it into the fourth largest long distance company in the
United States. In 1990, MCI purchased the company, then named TelecomUSA.
McLeodUSA is a member of the major trade associations representing the
competitive telecommunications industry, the Competitive Telecommunications
Association (CompTel), and the Association for Local Telecommunications Services
(ALTS).
In 1992, desiring to bring competition to the local telephone
industry, we formed what today is called McLeodUSA Incorporated. Our primary
focus as a company has been to serve small business and residential customers in
the Tier 2, 3, and 4 markets in our target states. As a result (as of January 1,
2000), we provided competitive local exchange services to over 280,000
telecommunications customers, in the 12 Midwest and Rocky Mountain states. (We
have targeted an additional 9 states for expansion this year). Nearly 30 percent
of the 679,000 total access lines served by McLeodUSA are residential lines. Our
average business customer subscribes to 5.5 lines.
McLeodUSA's corporate
team, with over 250 years of experience, is recognized as one of the strongest
management groups in the telecom industry. Strong because of our breadth, and
strong because of our depth.
McLeodUSA has already become the leading
facilities-based Integrated Communications Provider (ICP) in our market area,
providing local, long distance and high-speed Internet services.
McLeodUSA derives its revenues primarily from the sale of
telecommunications services and the publication of telephone directories.
McLeodUSA has developed one of the largest competitive white and yellow page
directory companies in the United States. In fact, McLeodUSA Publishing will
print and distribute more than 25 million directories in 23 states, reaching 43
million people, over the next 12 months.
The opportunity for our
employees is incredible: one third of our stock ownership resides with
employees. This is an important linkage for our investors, and gives our
employees a major stake in our success.McLeodUSA's three-part phased execution
is success based First, building local line market share by resale and by
leasing Bell facilities...concurrently expanding our brand presence.
Second, building the platform, with inter-city fiber connecting regional
gateways.
And third, our current phase, migrating customer traffic
on-switch/m- net, which involves constructing intra-city fiber which connects
our customers with our regional gateways.
This execution allows us 100%
access to build customer share, while capital is efficiently and effectively
deployed.
In our first phase of building customer share, we have leased
RBOC central offices, which allows us to sell to 100% of the customers in our
592 cities. In addition to pervasive coverage, this service is relatively easy
for the Bells to provision and is generally a transparent switch over. Once the
switch has occurred, we control many of the features for the customers through
on-line provisioning terminals.
Our data strategy, with our recent
acquisition of Splitrock Services, Inc. and the addition of industry veteran Roy
Wilkens to our management team, will add new revenue opportunity from our
collocations and XDSL technology. The Splitrock network includes 350 ATM
(asynchronous transfer made) switches providing dial-up and dedicated data
services to other competitive local exchange carrier (CLECs), internet service
providers (ISPs) and large multi-state business customers.
Splitrock
also has a 20-year irrevocable right of use (IRU) for up to 16 fibers in a
16,000-mile network. This broadband network is capable of carrying integrated
voice, data and video signals to 90 percent of the nation's population in 800
cities across all 50 states.
Concurrent with building customer share, we
have executed the 2nd phase of our strategy and deployed the most advanced
platform in our region. Over 10,000 miles, both intra-city and inter-city, high-
density fiber, SONET ring topology, with incredible capacity, is capable of
supporting all our voice, data and video applications.
For the last 5
years, McLeodUSA has been focused primarily on the voice market; however, the
data opportunity is explosive. Data revenues will surpass voice revenues in
2009. And the bandwidth required to capture data will require companies to own
or control high capacity networks. McLeodUSA is positioned for these
opportunities in several key areas.
First, the market position. Our
customers conveniently have only one number to call for customer service, and
one bill provides the best value proposition - one company, simple and complete.
Second, our customer service is World Class. Our goal is to have a real
person answering calls within 20 seconds, 24 hours a day, 7 days a week, with
one call resolutions. Great people providing great service. McLeodUSA has proof.
Since 1994, we have averaged 0.5% business customer chum, the lowest in the
industry.
Finally, from a platform position, we can pick the best
solution for the customer and the company. Our collocations connect to local
access rings, which connect to 500 mile backbone rings, which then attach to
high capacity regional gateways. This design is a low cost way to serve 1st, 2nd
and 3rd tier markets with one regional center, robust capacity, and
functionality. It also allows us to use both our network and the Bell network to
optimize the economics.
Our results through end of year 1999 have been
incredible.
Directories: 1998:14 million 1999:21 million Local Lines:
1998:400,000 1999:679,000 Network: 1998: over 7,000 miles 1999: over 9,000 miles
Revenue: 1998:$600 million 1999:$909 million
II. Concerns about providing "data relief' to the RBOCs
Based on the
progress that McLeodUSA has made in bringing competition to its markets, it is
tempting to conclude that all must be going well in the world of emerging
telecommunications competition. This optimistic conclusion, however, ignores the
reality faced by McLeodUSA every day: that the incumbent RBOCs upon whom we
depend for inputs are doing everything in their power to limit our ability to
serve our customers. Those companies, at every turn, make use of each
opportunity to introduce delay, uncertainty, and unnecessary expense into our
business relationship.
This situation reveals an important fact about
the relationship between emerging competitors like McLeodUSA and established
incumbent RBOCs: the grossly unequal commercial power between those entities.
Typically, when two companies negotiate a commercial agreement, both parties
have something to gain and something to lose; and that situation leads both
parties to seek a result where there is mutual benefit. In such a case, because
either party can seek a better bargain elsewhere, both parties seek a compromise
solution that maximizes their mutual gains. In contrast, our relationships with
RBOCs show deafly that those companies believe they have nothing to gain by
dealing with McLeodUSA. As a result, we typically find that compromise is not
possible, and we are told that, if we disagree with an RBOC position, we will
need to seek regulatory relief.
An example of this type of conduct is
instructive. We have had a dispute with an RBOC about the charges that we pay
when we order unbundled loops; not the recurring "monthly" charge (which we also
believe is generally too high), but simply the one-time charge to have the loop
supplied at all. We are sometimes charged thousands of dollars when the RBOC
supplies these loops, even though there is no charge at all when the same
service is provided to the same location by the RBOC for its own end-user
customer. We know that this is the case because, when these charges have made it
financially impossible for use to serve the customer ourselves, that customer
has ordered the same service from the RBOC and not been charged for such
"special construction."
Under the forward-looking TELRIC pricing
standards used to determine rates for unbundled loops, we believe that loop
costs should already include the ability to "unbundle" loops. Even if this were
not the case, however, there is certainly no reason for competitive careers to
be charged by the RBOC when the RBOC would not charge its own end- users. We
believe this situation is a dear example of discrimination against companies
like McLeodUSA. At least two state commissions - the Michigan Public Service
Commission and the Illinois Commerce Commission - have agreed, and has refused
to allow such "special construction" charges for unbundled loops.
Of
course, the RBOC is appealing those decisions to court; and when we have
attempted to use the reasoning of those decisions in the RBOC's other states to
convince them to change their position on this issue, the response we received
was a flat "no," with the notation that we were free to litigate before the
other state commissions if we so desired.
This result plays into the
RBOC's long-term strategy in two ways. First, by requiting new competitors to
expend their resources litigating issues multiple times before regulatory
agencies and in subsequent court appeals, they are effectively diverting the
competitor's resources away from the goal of providing competitive services to
customers. Second, by simultaneously attempting to convince state legislatures
and the Congress that regulatory oversight must be reduced, they are trying to
close the only channel available to us to obtain fair treatment. And that brings
us squarely to the subject before the Subcommittee today.
It is clear to
me in my job as President of McLeodUSA that the RBOCs with which we deal are not
committed to allowing competitive markets to develop in their historical
monopoly territories. Instead, it appears that these RBOCs are committed to
finding a way to enter markets which are "off limits" under the Telecom Act
while preserving their local exchange monopolies essentially intact Deregulation
of data services is an integral part of that strategy.
News reports,
industry analysts, and assorted pundits have all noted the "convergence" of
voice and data technology in recent years. My company firmly believes in such
convergence. Given this phenomenon, it is not at all clear why policy-makers
should spend the effort required in an attempt to develop separate legal
frameworks for voice and data. The Telecommunications Act itself defines
"telecommunications" to include any "information of the user's choosing." lifts
definition on its face includes voice, data, video, and all other sources of
"information." If the data services were not to be included within the
procompetitive framework of the Act, it would have been a simple matter to
specify that telecommunications included only "voice" services; yet the Congress
did not do that when the Act was passed in 1996. Existing law makes no
artificial distinction between voice and data services; both are considered to
be "telecommunications." This is a wise course, and it should be maintained.
In fact, attempting to develop separate frameworks is bound to result in
an artificial situation which is more complicated, less efficient, and
ultimately does not serve the needs of our customers. In the long run, there
will be no reasonable distinction that can be made between voice and data as it
is carried over telecommunications networks. Even now, much of the voice traffic
carried on existing telecommunications networks is carried in digital form.
Since digital information is nothing more than a siring of binary digits
(carried either electronically or in optical form), there is no way to
distinguish digital voice signals from other digital signals once the conversion
to a digital signal is made. Thus, a legal distinction based on differences
between "voice" and "data" is bound to fail.
The only way this traffic
can be practically separated is before digital conversion. Yet, we will
increasingly see digital conversions taking place at the home, or within the
telephone network prior to switching. As a result, by the time the digital
signal is ready to be switched, it will already be in digital form, ready to be
placed onto a packet-switched network. There will be no distinction to be made
between voice and data in such a world.
The structure of the
Telecommunications Act is not based upon specific technologies or traffic
patterns.
Rather, that structure is based upon an immutable fact: for
the foreseeable future, in most circumstances, new competitors will have no
alternative but to use the existing loop distribution plant (the "copper wires")
of the incumbent RBOCs. The Telecommunications Act makes those copper wires
available for lease by competitors not because they are necessary to provide
voice service, but because they are necessary to provide any service to the
household served by them. Those wires constitute a bottleneck which the RBOCs
will use to stifle the drive toward competitive local markets unless prevented
by regulators and legislators from doing so. A drive to "deregulate" those
bottleneck facilities simply because they are used for data transmission is
exactly the wrong response if we want competitive markets to fully develop.
RBOC control of that bottleneck will be just as damaging to the
development of competition for data services as it has been for voice service,
if control of the bottleneck facility is not held in check by regulatory
oversight Even if one attempts to distinguish between voice and data service, it
is clear that those wires are just as necessary for data as they are for voice.
Increasingly, consumers will use those copper wires to transmit both voice and
data, with little distinction between the two. Constructing differing regulatory
regimes for each will only confuse customers and hinder our pursuit of the
ultimate goal of competition in all telecommunications markets.
III.
Wall Street's predictable reaction to RBOC "data relief' proposal
Finally, if high speed data services and facilities are deregulated,
confusion about ultimate goals will not be limited to customers. McLeodUSA is
acutely aware of the need to maintain investor confidence in the national goal
of bringing competition to the telecommunications marketplace. That confidence
has been bolstered by the clear commitment to the 1996 Telecommunications Act,
and the efforts of the FCC, to reach that national goal. Legislation which would
carve out data services from the procompetitive goals of the Act would be seen
in financial markets as a retreat from that national commitment As a result, the
ability of new entrants to raise the capital needed to bring true,
facilities-based competition to all telecommunications markets could be placed
in jeopardy. Thus, the drive toward competition could be slowed even though that
is not what was intended by supporters of such "data deregulation."
Conclusion
The 1996 Telecommunications Act is working to bring
competition to telecommunications consumers in all areas of the country. While
that co petition is not progressing as rapidly as many would hope or were led to
believe, the delays have resulted not from inadequate legislation, but from a
failure of the incumbent RBOCs to fulfill their duties under that legislation.
Attempting to impose an artificial distinction between data and voice services
will only serve to delay the deployment of advanced services and the development
of competition in general. This result will disadvantage consumers, and delay
the goal of providing faster, better, less expensive telecommunications services
to all Americans.
Again, I thank the Subcommittee for the opportunity to
appear before you today, and would welcome the opportunity to answer any
questions that any of the Members might have.
END
LOAD-DATE: March 30, 2000 
