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Document 248 of 383.

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JULY 14, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 3705 words

HEADLINE: PREPARED TESTIMONY OF
C. MICHAEL ARMSTRONG
CHAIRMAN AND CEO, AT&T CORP.
BEFORE THE SENATE JUDICIARY COMMITTEE

BODY:

Mr. Chairman and Members of the Committee, I'm pleased to have this opportunity today to testify about broadband technology and the communications revolution that it will bring to American consumers. It is a revolution that promises to transform the way we communicate, entertain, inform and educate ourselves. It will provide the foundation for a whole new generation of communications, information and entertainment services.
AT&T intends to play its part in these changes. It's what our cable mergers and acquisitions have been all about. Last year, I testified about our plans to purchase TCI, which we closed in March 1999. I'm delighted to tell you that we have already begun to deliver on our commitment to bring choice -- and a better deal -- to residential local telephone consumers through TCI's cable plant. In Fremont, California, we are now offering cable lines for telephony: one for Mom, one for Dad, one for the kids, one for the fax or PC. Each line with its own distinctive ring, and for only $11.00 per line for the first line and $5.00 per line for each additional line, compared to the $11.25 per month Southwest Bell currently charges in California for each and every line a customer buys. And, we're on target to bring our cable telephony offer to consumers in Salt Lake City, Detroit, Pittsburgh and other cities within the year.
As we implement our plans, consumers will see big changes. Let me bring them home -- to your home and mine. Start with the capabilities digital cable will provide your family. The cable box on your TV will not only deliver hundreds of channels and movies -- it will be a virtual communications center. When you come home, you'll turn on the TV, the PC or telephone -- which one is up to you -- to retrieve your e-mail, voice messages or fax. If you want to get onto the Internet, the cable box will give you access at speeds a hundred times faster than 28 kbps modems. You'll always be online: no need to dial up and wait for your computer to connect. That same cable line that brings TV and the Internet into your home will give you multiple telephone lines. And, customers will get all this at lower prices for telephone and Internet services than they pay today. That's what competition delivers.
With our rollouts to customers in TCI territories underway, AT&T recently announced its agreement to purchase the MediaOne cable systems for $58 billion dollars in cash and AT&T stock. Our merger with MediaOne -- just like our earlier acquisition of TCI -- will mean that far more American consumers will have a choice in local phone service and the opportunity to enjoy high speed Internet services. With MediaOne, AT&T will gain immediate access -- and the ability to provide competitive, facilities- based local exchange services -- to millions of consumers in service areas where we currently have no facilities. Together, MediaOne and AT&T will bring video, voice and data services to these communities more quickly than we could separately.
With over $100 billion in acquisitions to bring this communications revolution to American families, we've demonstrated that AT&T is willing to make the investments necessary to compete in the local services market. But, even with this downpayment, there is still a lot of work to do.
AT&T's combination with MediaOne will give us owned and operated systems passing about 26 million homes in 18 of the nation's top 20 markets. That's about 26 percent of American homes. While we are hopeful this will give us a base from which to negotiate joint ventures with other cable companies to reach more of our customers -- who reside in every neighborhood across America -- we do not have the reach of our telephony competitors.
The MediaOne merger will give us some of the scale we need to compete with the larger and more powerful local exchange company monopolies. But, from the outset, the pending Bell mergers will create combined companies that already serve far greater numbers of customers than AT&T has the potential to serve with our cable telephony plant. While we begin with virtually no share of the local market and the opportunity to win customers, SBC/PacBell/Ameritech will begin operations serving every customer within its territory, about 40% of the total U.S. population (or one-third of all U.S. access lines). Similarly, Bell Atlantic/GTE will start with a customer base of about 35% of all U.S. access lines.
As the FCC reviews AT&T's merger with MediaOne, we will ask them to consider these facts and the role cable is playing in local service competition. The opportunity is now ripe for the FCC to harmonize the now-outdated and suspended horizontal ownership limitations with the goals of the 1996 Telecom Act. Simply put, limiting the scope of AT&T's cable coverage would limit the growth of competition in the local telephony market.
Of course, the FCC will also look to the original purpose of the ownership rules: to prevent abuses in the control of video programming by cable companies.
The suspended rules pre-date the era of digital television and the explosive growth in programming capacity that goes with it. Similarly, they do not reflect the now ubiquitous scope of direct broadcasting satellite (DBS) firms, or the role DBS firms will play in the programming market as their competitive position is bolstered by the passage of the pending Satellite Home Viewer Act. If enacted, DBS firms, for the first time, will have the opportunity to offer video and local broadcast packages on par with cable programming that will inevitably expand their subscribership. The substantial increase in the number of programming outlets created by these technological and market changes inevitably will diminish any potential for monopsony power over programming by cable systems.
Let me also make clear that AT&T is not primarily in the content business.
We're in the communications business. We're distributors. So we want to encourage as much content as possible. That's why AT&T structured its broadband architecture for maximum openness to content providers. Our open software platform is designed to encourage content providers, for the simple reason that the more content we can carry, the more attractive our services will be to our customers. We are not primarily interested in owning content, but in packaging other people's content to our customers in the forms they want and at attractive prices.
And that's exactly why AT&T negotiated a very pro-competitive relationship with Microsoft. Under our non-exclusive agreement with Microsoft, AT&T agreed to expand its Windows CE-based license to cover an additional 2.5 million to 5 million digital set-top devices, which will enable applications from a number of companies to deliver communications, entertainment and information services. The Microsoft set-top box software will provide an open environment for the creation of services and applications. Microsoft is required by our contract to disclose all Application Programming Interfaces (APIs) that it or any other firm uses in the software. This means that any firm will have the technical ability to create services and applications that work with the Microsoft software and that Microsoft will not have any advantage through the use of undisclosed APIs.
AT&T made no commitment to deploy the Microsoft set-top box software that it licensed, except in three showcase cities. In the third showcase city, Microsoft is obligated to work with AT&T to deploy Microsoft set-top box software together with a third party's server software. We'll also buy hardware and software from multiple vendors.

In fact, we have already signed agreements with Sun Microsystems and Sony for use of their software products in digital set-top boxes.
As an endorsement of our broadband strategy, Microsoft has also made a $5 billion passive investment in AT&T, amounting to approximately a 3% equity stake in the company. There are no board seats or other dependencies involved in the arrangement. The investment in AT&T by Microsoft will be used to accelerate the upgrade of AT&T's cable networks. That means quicker delivery of the competitive local telephone service, digital television, and high-speed Internet access we've promised to customers.
Now, I can't leave the question of open systems without mentioning the issue of cable unbundling -- particularly since I know some of you have been considering this issue. Contrary to some of the rhetoric, our cable networks are not closed. Our customers enjoy open systems in terms of content. Our broadband Internet customers can access any non- proprietary site, portal, or online service on the Internet with one click of the mouse at higher speed and with better quality than they could before.
We also will continue to meet our customers' demands for whatever content they want to reach on the Net, in partnership with Excite@Home, RoadRunner or others.
But we will make these arrangements on the basis of sound commercial relationships. These commercial relationships will recognize the economic, contractual and technical realities that are part of doing business.
And, while we will ensure that our customers will have the access to the programs they want to see, we will also make sure that they have the control over the programs they don't want to see and the information they choose to keep private. This includes giving parents the tools they need to protect their children from objectionable content in their homes. And, it also means keeping personal information private through systems with adequate safeguards and privacy practices that give consumers confidence.
In the end, as I see it, there is no basis for government intervention in any of these areas: the market should make the choice, competition should spur development and customers will determine what they want. Already the market is proving this right. Since AT&T unveiled its investment in TCI, deployment of multiple broadband pipes and all types of advanced broadband services has skyrocketed. The appearance of cable modem competition has begun to make the phone companies get serious about broadband capacity of their own. Look at the way the Bells and GTE have responded. They have had the capability to deploy digital subscriber line (DSL) technology, which offerband over ordinary telephone lines, for a decade. But they only began to deploy it and lower their prices in response to the emerging competition from AT&T. In fact, they're deploying broadband capabilities throughout their territories far more quickly than anyone anticipated even a year ago. From ground-zero just a year ago, Bell and GTE will convert about 31 million of their existing copper loops to DSL-capable loops by the end of 1999. This will grow to 94 million lines within the Bell companies' and GTE's territories by 2002. There's nothing like the sight of a determined competitor on the horizon to make dyed-in-the wool monopolists get religion about serving customers with new technology.
And, while the deployment of these new technologies hold great promise, we all must ensure that all Americans are part of this bright future. We cannot allow any American to be left behind. As AT&T deploys its all-distance, broadband service through its cable properties, we will do so in every neighborhood -- urban, suburban or rural -- served by our cable systems. And, there is evidence already that broadband service deployment is not and will not be limited to major cities. Smaller independent telephone companies serving rural areas are entering the race. Home Telephone Company, based in Jacob, Illinois, has introduced its Supernet service providing Internet access and speeds up to 50 times faster than 28.8 kbps modems. Buckland Telephone, serving 2000 access lines throughout three counties in Ohio, has begun to roll out its DSL service, starting with Wapakoneta, Ohio. Panhandle Telephone in Oklahoma is also deploying ADSL in approximately 11 areas throughout its service territory.
HunTel Systems, based in Blair, Nebraska, has plans to introduce DSL service to Washington County, Nebraska early next year. DSL access is also being offered in Harrison, Arkansas; Sergeants Bluff, Iowa; Winthrop, Maine; and Kamas, Utah.
AOL, which today serves about 60% of Internet subscribers, has also stepped up its efforts to use DSL to deliver new broadband services. By the fall of this year, as a result of its deals with Bell Atlantic and SBC, AOL will have a broadband AOL offer available across 50% percent of its customer base in 21 states. AOL also recently announced a series of agreements with DirecTV, Hughes Network Systems, Phillips Electronics and Network Computer, to develop a broadband AOL-TV offer that will make AOL accessible through the television.
Similarly, MindSpring, another large ISP, has made a DSL deal with BellSouth and Prodigy has teamed up with Bell Atlantic to offer their customers high speed DSL Internet access. Satellite and wireless firms are also bringing more broadband pipes to homes and businesses. Hughes is investing $1.4 billion in Spaceway, a two-way satellite broadband service it plans to deploy by 2002. AOL has also agreed to invest $1.5 billion to help fund Hughes' plan to offer Internet access via its satellite systems and it will market AOL broadband service nationwide via Hughes DirecPC service by early 2000. And, Teligent and Winstar are deploying broadband access using wireless networks in markets across the country.
Congress well understood the powerful relationship between competition and innovation when it passed the Telecommunications Act of 1996. It understood that innovation needs the spur of a competitive market. That's why Congress mandated that the market for local telephone service be opened to competition. And, that's also why Congress decided to treat new entrants and cable facilities differently than the incumbent Bells. Congress was counting on cable as a second wire to the home to give consumers a choice in local phone service and to deliver the advanced services you expect in a competitive market. AT&T's cable purchases are designed to do just that. And, now, in response to AT&T's investment and innovation, other companies are building a variety of other broadband paths to homes and businesses across the country.
But I don't mean to imply that all you have to do is stand back -- and let the future unfold. I can't think of a single revolution in history that worked that way.
AT&T has demonstrated its willingness to compete in the local service market, but our cable systems will never reach every one of the 100 million households in America or every one of the 61 million AT&T long distance families we serve.
Today, to offer local service in the majority of communities, we will need to rent the local telephone companies' wires if they are economically and operationally viable. And even where we do own and operate cable systems, we will need the local telephone company's cooperation in switching customers from their network to ours.
That's what the Telecommunications Act of 1996 was all about.
Congress recognized that it wouldn't be easy to cajole the Bell companies to give up a regulated revenue stream they'd had for almost a century. So it included an inducement for the Bells to cooperate. It established the quid pro quo that the Bells could get into the long distance market once real competition is established in the local services market.
Why hasn't this happened yet? For one thing, we all under-estimated the practical difficulties of opening up such a huge, technically complex market to competition. And for another, too much time and energy were consumed in litigation after the Act was passed. That litigation seems to have run its course, and the Telecom Act is still intact. More important, I hope that some of the Bell companies now recognize not only the inevitability of local competition but its desirability as well.
From the consumer's perspective, the desirability of local competition is obvious. The faster the flywheel of competition and technology spins, the more consumers have to show for it. Local competition will stimulate new investment and new services. Consumers will get the classic benefits of a competitive market--- more choice, lower prices and better value.
These benefits are close at hand. But close isn't good enough. To finish the job, the FCC must re-establish the obligation of the Bell companies to provide all of the unbundled network elements (UNEs), individually and in combination, and including DSL-capable loops.

Second, the obligations on the Bell companies under the Act to price unbundled network elements and access based on cost must be diligently applied and vigorously enforced. If the Bell companies agree to economically viable rates in setting their wholesale prices for network elements and establish operational systems to implement them, you can count on AT&T to buy capacity on their networks to offer local service. That will be the fastest route to bringing a competitive choice to millions of consumers. But I can also promise you that AT&T will not show up in any community where the Bell's wholesale prices are too high or the operational systems endanger a customer's service.
We've been down that road before. In the rush to get into the market after the Telecom Act was passed, AT&T in 1997 resold the Bell companies' service in a number of states. The wholesale prices were so high, we lost money on every customer -- $3 billion in all. The more customers we won, the more money we lost. You don't need an MBA to know that's no way to do business. And we won't.
We learned something else in that experience -- changing local service companies should be as easy, and as certain, as changing long distance companies. But it wasn't in 1997, and it isn't now. We learned then that our customers had to wait weeks to switch, some lost dial tone and 911 availability. Our business customers were dropped from directory services.
And that brings me to the next plank of my agenda for consumer choice. It concerns all the back-office computer systems necessary to introduce competition to a local network. These systems handle the thousands of individual tasks necessary to provide local phone service -- they track orders, coordinate circuit provisioning, dispatch trucks, render bills. They are the joint responsibility of the incumbent local companies and the new local competitors, including AT&T.
With the right systems in place, customers can switch from a Bell company to another provider easily, without having service disrupted, or access to 911 cut off, and without being dropped from the telephone directory listings.
That's why metrics for system performance and consumer quality and safety should be adopted and applied. Systems should be tested against those standards by a neutral third party. And there should be a real market test before we put all the consumers of a state at risk.
Finally, consumer choice in local services requires that we take access charges down to cost. Everybody in this room pays access charges, although you won't find them on your phone bill. Local phone companies charge an average of about 4 cents per minute to complete both ends of a long distance call. Economists say the actual cost is less than a penny a minute.
Now, the local phone companies didn't invent this system. It's a holdover from the old Bell System days when long distance and business services subsidized local service. But that kind of pricing amounts to a hidden tax that costs long distance callers $10 billion a year in unnecessary interstate access charges.
To be fair, the Bells might say their mark-up is considerably less than that and they still need the revenue to hold down the cost of local service. And we must recognize that access charges are some part cost reimbursement and a large part pure profit to the local company -- a holdover from another era.
My purpose is not to continue this argument here. Quite the opposite. I want to see it ended once and for all. We need a comprehensive restructuring of access charges that eliminates all the subsidies once and for all, giving American consumers a multi-billion dollar tax cut.
Let me sum up: AT&T's merger with MediaOne will offer more customers more choice for local telephony service and new broadband services at lower prices and faster speeds. Through cable, we will offer residential customers the first real alternative to the incumbent monopolies. Already our entry on the horizon has sparked competitive responses in the delivery of new broadband services from the Bells, GTE, Internet Service Providers, and others.
But, while we are making tremendous strides in the deployment of broadband across all of America, we have a long way to go to break open the local services telephony monopoly of the incumbent local exchange companies. The Bells and GTE provide local exchange service to 97% of the customers in their territories.
They have litigated all the way to the Supreme Court to avoid complying with the Telecom Act. And, although that litigation seems to have run its course, the Bells and GTE now are asking Congress to reward their recalcitrance by making exceptions in the Act. Following that path will leave consumers out in the cold as the incumbents lose all incentive to comply with the Act.
My message is simple: Stay the course. Let's get on with enforcement of the Act, and finish the business that finally will bring American consumers the fruits of your labor. We'll all know when we've achieved success: Consumers will have a choice of local companies Consumers will have a choice of local services Consumers will have a choice of local prices And they will be able to switch local companies and services as quickly as they can switch long distance companies and services.
The communications revolution is coming, driven forward by the forces of competition and technology. The only question now is whether decision-makers, both public and private, will speed the process along. Thank you.
END

LOAD-DATE: August 25, 1999

Document 248 of 383.


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