TYPE: COMMITTEE HEARING

LENGTH: 20780 words

COMMITTEE: SCIENCE AND TRANSPORTATION COMMITTEE

SUBCOMMITTEE: SENATE COMMERCE

HEADLINE: U.S. SENATOR ERNEST HOLLINGS (D-SC) HOLDS HEARING ON GOVERNMENT PROMOTION OF BROADBAND

SPEAKER:
U.S. SENATOR ERNEST HOLLINGS (D-SC), CHAIRMAN

LOCATION: WASHINGTON, D.C.

WITNESSES:

REED E. HUNDT, FORMER CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION
MICHAEL J. PRICE, VICE CHAIRMAN, EVERCORE PARTNERS, INC.
LAWRENCE LESSIG, PROFESSOR OF LAW, STANFORD UNIVERSITY
PETER HUBER, SENIOR FELLOW, MANHATTAN INSTITUTE
CRAIG MUNDIE, SENIOR VICE PRESIDENT AND CHIEF TECHNICAL OFFICER, MICROSOFT CORPORATION

BODY:

 
U.S. SENATE COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION
HOLDS HEARING ON GOVERNMENT PROMOTION OF BROADBAND
 
OCTOBER 1, 2002
 
SPEAKERS:
U.S. SENATOR ERNEST F. HOLLINGS (D-SC)
CHAIRMAN
U.S. SENATOR DANIEL K. INOUYE (D-HI)
U.S. SENATOR JOHN D. ROCKEFELLER IV (D-WV)
U.S. SENATOR JOHN F. KERRY (D-MA)
U.S. SENATOR JOHN B. BREAUX (D-LA)
U.S. SENATOR BYRON L. DORGAN (D-ND)
U.S. SENATOR RON WYDEN (D-OR)
U.S. SENATOR MAX CLELAND (D-GA)
U.S. SENATOR BARBARA BOXER (D-CA)
U.S. SENATOR JOHN EDWARDS (D-NC)
U.S. SENATOR JEAN CARPENTER CARNAHAN (D-MO)
U.S. SENATOR BILL NELSON (D-FL)
 
U.S. SENATOR JOHN MCCAIN (R-AZ)
RANKING MEMBER
U.S. SENATOR TED STEVENS (R-AK)
U.S. SENATOR CONRAD BURNS (R-MT)
U.S. SENATOR TRENT LOTT (R-MS)
U.S. SENATOR KAY BAILEY HUTCHISON (R-TX)
U.S. SENATOR OLYMPIA J. SNOWE (R-ME)
U.S. SENATOR SAM BROWNBACK (R-KS)
U.S. SENATOR GORDON SMITH (R-OR)
U.S. SENATOR PETER FITZGERALD (R-IL)
U.S. SENATOR JOHN ENSIGN (R-NV)
U.S. SENATOR GEORGE ALLEN (R-VA)
 


*


HOLLINGS: Committee will come to order. Today we examine the depression in the telecommunications industry and begin to consider policy to help revive the sector. What perplexes me is that this industry was destined to ensure America's economic superiority in the 21st century. It was the motor of growth, we were told. Instead, the telecom depression dragged our economy into a recession and now threatens our global competitiveness as critical equipment makers like Corning and Lucent are staring bankruptcy in the face. Our telecommunications industry has always been unmatched in its preeminence. In 1996, we sought to extend that supremacy with the Telecommunications Act.

HOLLINGS: Six years later, most of the dazzling promises that led us to pass that legislation remain unfulfilled. Only now are some promises coming true. The bears (ph) are suddenly making progress opening their local markets. Cable is finally offering voice competition in more markets. There is real competition in the business market. Millions of residential customers have a choice for local phone service. Rates are lower than ever in the long distance and wireless sectors. Broadband is available to 80 percent of Americans.

But just as customers are enjoying the fruits of the competition, times have never been worse for the companies, their shareholders and their employees, over half a million of whom have lost their jobs. Bankruptcies, accounting scandals, overcapacity and dozens of bad business plans have destroyed confidence in the industry. This is not how it was supposed to be. And while there is a lot of finger pointing going on among the companies and here in Congress, we need to move beyond that. We need to move beyond the intermurals up there over Tulsa (ph) and dingle (ph) and parity (ph).

That crowd went from the constitutionality -- I had never seen such a group. They wrote the law and then they immediately went to court and said it was unconstitutional. Then the next thing they said there wasn't data that wasn't considered. When we went through the record and found it mentioned 438 times, I think it was, they got off of that and they said, "We could go rural (ph), we could go rural (ph)." And we looked at their business practices as they came to Washington and swearing that they could go rural (ph). They were selling rural (ph) just as fast as they could. More recently, it's been broadband, broadband.

They've tried and then parity (ph). They've tried every gimmick in the book. And if the market demonstrates anything, it is that competition, not deregulation, drives the bears (ph) to invest in their networks and comply with Section 271, the open markets. That is the record in the business market where the bears (ph) responded with cheaper, new offerings to combat (ph) the Celex (ph). And it is true in the residential market where the unity (ph) lines lost to competitors are forcing the bears (ph) to hurry up and comply with the act where they have yet to do so.

Deregulation will not rescue this sector from depression. What ails telecom goes far beyond the regulations governing the bear (ph) companies. Any policy solution must recognize that. Lincoln said years ago the dogmas of (ph) the quiet past are inadequate, I think, for the stormy present. Occasion was filled with difficulty and he said we must rise above the occasion as our case is new (ph), so must we think anew and act anew.

So if we politically can get off of this standoff of working against each other for the past few years and see what we can work together on, we might help in saving this telecommunications economy and the nation's economy. This is what we have in mind with today's telecommunications hearing. Wireless companies may need to consolidate and obtain more spectrum. What we call broadband may not actually be fast enough.

The government may need to subsidize demand and/or infrastructure to promote the highest speeds needed to jump start the industry. We can consider new technologies like Y-fi (ph) and unlicensed spectrum as high speed alternatives. And while I tend to doubt their claims that wholesale pricing regimes discourage investment, perhaps we should examine that also. I can put in the record where with everybody going broke and declaring bankruptcy -- and we'll include here without any objection the revenue margin trends of the wireline operating margins for Verizon SBC, Bell South, Sprint, Alltel, Century Tel (ph), Citizens TDS. Over the last eight quarters, an average, I would say of 24 percent for Verizon, 28 percent for Bell South, 31 percent for Sprint, 36 percent -- I used to be in these hearings at the public service commission back in Columbia, South Carolina, when we fussed around to make sure they got 12 percent on the rate of return. As a public interest monopoly, guaranteed no competition, they were guaranteed at least 12 percent on the rate of return.

But the federal government does have a history of assisting industries to preserve America's global competitiveness. In the '70s, with the aerospace industry and Lockheed Martin and the '80s with the auto industry and Chrysler and with the semiconductor industry and Semitech (ph), America also invested in the infrastructure to benefit the economy as a whole as with the canals and railroads in the 19th century, the REA ruled electorate (ph) petition and federal interstate highway programs in the 20th century, all of which expanded interstate trade.

Investments in higher speed broadband infrastructure could pay similar dividends. I welcome the panel that we have today. It's the most outstanding panel that we've had in many a year up here. We left off our Bell friends and our long distance friends to get away from the yin and the yang of who was right and who was wrong and trying to see with some real minds here that maybe something can be done. Last night, I got all of my Business Week. And I'll make that part of the record. And they had "The Telecom Depression, When Will It End." Without objection, I'll include that article in the record here at this time. After reading that, I'm discouraged. I don't know that you can get there from here. But we've got five folks here can tell us if we can. And I really am grateful for their appearance today.

Senator McCain?

MCCAIN: Thank you, Mr. Chairman. I also read that article in Business Week. And it starts out by saying the telecom crisis is reminiscent of a classic scene in "The African Queen." Humphrey Bogart and Katherine Hepburn, desperate and lost on the Ulonga-Bora River, ripped pieces of wood off the little steamer and used them to fuel the vessel's engine. Today's telecom companies struggling to survive one of the greatest busts in business history are slashing prices below cost and selling precious assets.

So when we discuss broadband, I don't see how we can discuss it without the background and the absolute criticality of the depression that we are seeing now in the telecommunications business. If we had had this hearing, Mr. Chairman, just a year or so ago, we probably would be talking in very different terms than we are today. And as much as I respect and admire the experts before us, I would be curious when each of you predicted that we would be in the situation we are in today.

So, I have always believed that the telecom act of 1996 contributed to this failure, but we won't continue that debate again today. I thank the witnesses. Broadband is a crucial issue. Obviously, all of us want as many Americans as possible as quickly as possible to acquire broadband services. Starting some massive multi- billion dollar central planning effort to do so is not what I believe in or support.

As you said, Mr. Chairman, we continue to be gridlocked on this issue here in the Senate and in the Congress. And clearly we won't act this year. I hope that perhaps with less campaign contributions, maybe it'll free some of us up to be more conducive to negotiations and agreement. We are gridlocked by the special interests. You just mentioned the yin and the yang. None of those special interests will let us move when you give million dollar contributions, either directly to the candidates or to institutions that they would set up in their various states named after them.

So I hope, Mr. Chairman, that in the coming year, that we will be able to work on this issue from the broadest perspective, the telecom depression, but also on the specific issue of broadband access. Both of those issues are indivisible. I thank you, Mr. Chairman.

HOLLINGS: Thank you. Senator Burns?

BURNS: Welcome to production agriculture. We've been going through this for a long time, folks. It's nothing new.

Thank you, Mr. Chairman. I have a statement here and I'll paraphrase some of it. But I want it to be put in the record. And I quit reading those things because they're depressive.

And so, we'll go on with the business at hand and moving America ahead. Last year, we requested a comprehensive GAO report on spectrum management, along with my colleagues, Senator Hollings and Senator Inouye and Senator Kerry. This report, which was unprecedented in its scope, was released yesterday. We haven't had all the time to go through it yet, but I will tell you that there was some very glaring findings in that report. They're nothing short of alarming and I think they beg our immediate attention.

The report indicates that the U.S. currently lacks a national spectrum policy, in large part because it's a divided structure on spectrum management. I should add that both the FCC and the NTIA has done tremendous work recently in coordinating their actions due in a large part to the efforts of Chairman Powell and Secretary Victory. Since, I am concerned that the split in authority over spectrum policy has bred a long-standing institutional turf battle between the two agencies.

Another troubling finding in that report is the dire state of affairs regarding the lack of preparation for the all important world radio communications conferences that's upcoming. The GAO report states that the U.S., and I'll quote, "The U.S. position on some items has remained unresolved until the eve of the conference, leaving the U.S. little time to build pre-conference support.

Furthermore, the head of the delegation who bears a huge responsibility of negotiating a unified U.S. position at the conference typically bears the rank of ambassador for only six months, and that's not very long." We could cite numerous other examples found in the report that faults U.S. spectrum policy, including severe lack of accountability and concerning efficient spectrum used by federal agencies. I have fundamental reservations about the very auction method itself, which views spectrum as some sort of a national resource to be exploited for maximum budgetary impact.

We've seen the results of this sort of thinking in both Europe and here at home, which instead of maximizing revenue, has often resulted in bankruptcies and lawsuits. Rather, spectrum should be viewed as a technology which is a key to the future of the new generation of services for American consumers and American companies. Given the stark nature of the GAO findings, I will begin (ph) immediately working on draft spectrum reform legislation.

I look forward to working with my colleagues on the Commerce Committee and share those concerns. We will also look forward in the GAO's upcoming early 2003 report on spectrum allocation practices of other countries and will incorporate those findings in the final bill. I've become convinced that the ever need for comprehensive reform after traveling. We made a trip to Asia over the Memorial Day recess.

During my trip to Korea and Japan, I met with top legislators and telecommunications CEO's and was quite impressed with the products and services that they're making available to their consumers. Making innovative, wireless services available to consumers is seen as a national priority in each one of those countries. And I believe the key goal should also be a national priority for this country also. And then there's some new things that's coming down.

We hope to talk to some witnesses today about Y-fi (ph) and other unlicensed wireless technologies. It's amazing to see new entrepreneurs coming up with new ideas and just using a small slice of spectrum, unlicensed spectrum, I would say, for commercial innovations. So, Mr. Chairman, I appreciate this hearing today. It'll be interesting on what our witnesses have to say. But we're wounded in this industry a little bit, but we're a long way from being dead or counted among the dying. So, we think there's a great future and I appreciate the witnesses coming. And I appreciate you having this hearing today. Thank you very much.

HOLLINGS: Thank you.

Senator Dorgan?

DORGAN: Mr. Chairman, thank you very much.

Let me start just by saying that I know there are people who are pushing to have the FCC make decisions right now on some very important issues. We have a nomination for an FCC commissioner that's pending here. It's been pending for a good long while.

DORGAN: It's someone who I care a great deal about because that person's going to bring a rural voice, in my judgment, going to bring a rural voice to the Federal Communications Commission and has been the case with too many nominations on key issues, this nomination language is -- and, I mean, I'm not quite sure when we can expect some action on it, but I guess I'd say I'd like the FCC to have a full compliment of commissioners and the input from all of the commissioners before they make some of these decisions.

And so, we can talk about these things a little later. But I don't quite know what we do about this. I mean, how on earth can anybody hold up Jonathan Adelstein's nomination at this point? This ought to go to the floor for a vote. It ought to be there today. It's just unforgivable that we have a commission that has so many important decisions in front of it with a nomination that's been sent here a long while ago. This committee has acted on it. So there it sits on the floor of the Senate. Well, I'll say more about that on the floor in the next couple of days.

But let me thank the chairman for holding this hearing. The issue of broadband is very important. I carry a blackberry, which is probably both a blessing and a curse. But my blackberry that I have with me works just fine in Washington, D.C., but when you get off the airplane in the Dakotas, you just as well turn it off because there's no service at all. Yet this company would advertise they serve, I think, 90, 94 percent of America. I've seen ads about these kind of devices where they say we cover 90 some percent of the country. Well, that's true. It's just the major cities.

You gather up all the folks that live in the major cities and you've got 90 percent of the country. But if you take a look at the geography of the country, devices like this don't work over a large part of the country. The reason I mention this is people tell us that by 2002, 90 percent of the people in this country will have access to broadband. Well, that's probably true as well. But take a look at the map and you'll find a whole large portion of the rural areas of this country that will not have access.

And so, you know, in order to exercise and maximize the full potential of the Internet, you do need high speed connections. And we wrote the telecommunications bill. We talked about providing advanced services with universal service fund support. We were explicit in that as we started in 1996. So we have a lot to talk about, Mr. Chairman. I know there's -- once again -- I say this often -- once again as I was shaving this morning and getting ready for work, I saw more ads on television by both sides lobbying back and forth and, you know, it's like advertising foot powder to hear these ads by both sides on the telecommunication industry.

But frankly, we need an FCC that makes good decisions. We need a Congress that's proactive and aggressive in setting goals on the build out of broadband and enhancing broadband capability for all Americans and comporting with the law. We wrote the law in a very simple way. We said that universal service funds shall support advanced telecommunications services. Some people seem to forget that.

Mr. Chairman, I look forward to the witnesses' testimony. Thank you.

HOLLINGS: Thank you.

Senator Smith?

SMITH: Thank you, Mr. Chairman. If I may, I have a longer statement I'd like to include in the record.

HOLLINGS: It'll be included.

SMITH: In the interest of time and hearing from our witnesses, I won't read it. But to just simply say that I think broadband deployment can be a significant part of economic development, particularly in rural places. There are places in my state where they have, in one case, La Grande, Oregon, a deployment, tremendous amount of medical services are served or given there through this technology that I think is very, very promising. And I think we need to structure policies and tax policies in particular to incentivize the deployment of broadband all over the place. But there are some other questions that I hope to ask. So I'll get to the witnesses.

Thank you, Mr. Chairman.

HOLLINGS: Thank you.

Senator Breaux?

BREAUX: I thank you, Mr. Chairman. I thank you for having the hearing and for our witnesses.

I think by any measure that we look at that the telecommunications industry in this country is in a tailspin, whether you're a manufacturer of telecommunication equipment or whether you're a long distance company or whether you are a Bell local service company. You have to look very hard to find someone who's really been successful. I think one of the companies let go another 12,000 employees on Friday. Nearly 500,000 jobs have been lost and $2 trillion in market value just in the last 24 months. And it's across the board. You could say that well, long distance is doing well and local service is not. But that's not true. And the opposite is not true as well.

There's not a segment of one of the most important industries in this country that is not in very serious financial trouble. And when this committee was considering the legislation a couple of years ago to bring the telecommunications industry into the 21st Century, legislation which I strongly supported, none of us, I bet, would have thought that in a short period of time we'd be here looking at an industry in the shape that it's in today. And the real question is what do we do to help. And, I mean, I think there are some things that need to be considered and looked at, but we just can't sit back and watch one of the most important industries in this country go down the tank. And that is what is happening.

I thank you for having the hearings.

HOLLINGS: Thank you.

The committee welcomes our very distinguished panel. The Honorable Reed Hundt, former chairman of the Federal Communications Commission; Mr. Michael J. Price, the vice chairman of Evercore Partners in New York; Mr. Craig Mundie, the senior vice president and chief technical officer of Microsoft; Mr. Lawrence Lessig, professor of law at Stanford University; Mr. Peter Huber, senior fellow of the Manhattan Institute.

Mr. Hundt, Chairman Hundt, glad to see you back.

HUNDT: Thank you very much, Senator.

Thank you all for inviting me back. It's a great privilege. It's been five years since I've had the opportunity to appear in front of you and five years since I have left public service. And there certainly has been a lot of water that's gone under the bridge since then and some bridges have been washed away.

(UNKNOWN): Don't worry about the Potomac, though. It comes and goes.

HUNDT: And it's pretty low right now. So, I was trying to think about how to summarize these last five years. And fortunately, my high school senior son showed me a book that he's just been assigned which is the "Tale of Two Cities". And you only have to read the first paragraph to encapsulate the last five years. It's been the best of times and it's been the worst of times. It's been the time of hope and it's been the time of despair.

And if you'll permit me, I'd like, in the very, very short period of time, to talk to you about the best of times part and the worst of times part in my judgment and then urge you to take the leadership you've shown so often in the past and take the steps to build America the finest next generation broadband network in the world that'll reach absolutely everybody, especially including those of you in your state, Senator Burns or your state, Senator Dorgan, who are the most expensive and the most in need of the government help in being part of the networks.

So the best of times, actually the telecommunications sector measured by revenue is much bigger now than it was in 1996 when you signed the law. It is much bigger this month than it was six months ago. Measured by revenue, it's $277 billion for this year and was only $164 billion when the telecommunications act was signed. It's been a story of continual growth measured by revenue. One of the main reasons is the spectacular new services that have been introduced all across the country in this time period, the Internet, cell phones, even broadband itself with 15 million subscribers in homes and small businesses. These are tremendous growth stories from the perspective of consumers.

What lies behind them is the competition has produced better prices for new services than ever before in the history of telecommunications. Since '96, long distance prices have dropped at a rate of six percent per year on a compound basis. Wireless prices have dropped at 19 percent per year on a compound basis since 1996. And long haul (ph) data dropped in just one year 99 percent in price. As a result of all of these price drops, consumers have purchased, not the same amount for less money, but more for more money.

And every time you read a story about how we have a consumer led economy that is just barely keeping us out of recession, it is in particular the epitome of that that the consumers are buying more in the communications sector. All of this is because of the magic elixir of competition and innovation at the same time. We've never seen so much innovation. We've never seen so much competition. All this has also produced net job growth in this time period. Looking at the telecommunications companies alone, we now have 1.6 million jobs. We had 1.2 million 10 years ago. Jobs increased in the telecommunications sector every month from the signing of the telecommunications act until May of the year 2001.

Since then, they have begun to decline. Now let's talk about the worst of times. The worst of times is that in the last two and a half years, there's been a flight of capital and a retraction of investment in this particular sector. It's true at the start up level. It's true at the big company level. It's true in the public stock markets. We have the longest bear market in 60 years and it is most dramatically the case that we have a bear market in the telecommunications sector.

As investment leaves, we all know that there is a non virtuous cycle that goes on. As investment leaves, companies begin to lay off people. They reduce the innovation. They don't produce new services. Ultimately, the dynamic, innovative strength of the sector fades away and dissipates because there's not new investment. And as the services are not introduced and as companies are not trying to market them successfully, ultimately the consumers don't buy more and the whole economy tips into a recession.

That's where we are right now, I would suggest, with great respect and with great humility in terms of predicting the future. We're at the very knife edge of decision where it is absolutely imperative that the government play its right role in exercising the leadership to make sure that we build on all these strengths of the real economy and create a new vigor and a new confidence in the market economy and in the capital markets in particular. There are two choices that have to be made.

Here is the first choice, I would say with great respect. Do we adopt a policy of monopoly and try to consolidate industries through a pro-monopoly policy at the government level, thereby building the confidence of investors in those particular industries? Or do we stick with the policy of competition? Here's the choice that was faced in the crash of the market in 1929. And the policy choice made over the 10 years thereafter was to revert to monopoly and have big government come in and regulate those monopolies and make sure that there wasn't too much capital invested in any of the infrastructures of America.

That's why the Federal Communications Commission was created in 1934. That's the wrong policy, I would say. That is the policy that reduces jobs, shrinks investment, reduces innovation, reduces the number of services and ultimately will reduce the size of the economy. The right policy is competition. But the essential key -- and this is the bottom line that I hope will join in the thoughts already expressed by the senators and build a momentum to the degree my testimony can for a new policy of universal service.

The essential extra ingredient to a competition policy is to have the government look at broadband, look at the new technologies of fiber and upgrades of existing plants and wireless and decide that the government needs to make an investment of public monies in jump starting our broadband industry. There has never been a communications industry or a transportation industry in the history of America that didn't benefit from an original government jump start or incentive plan to get going. And this broadband industry needs that help now.

HOLLINGS: Very good.

Mr. Price?

PRICE: Thank you, Senator and Mr. McCain for -- thank you, Senator Hollings and Senator McCain for holding these hearings.

Today I would like to present you with my views of what has led to the telecom meltdown and highlight three observations about industry structure that need to be addressed and leave you with one legislative proposal for you to consider. The telecom act in '96 created unbridled enthusiasm about the opportunities available to new competitors. It also created a consumer friendly frenzy that has destroyed the balance sheets and income statements of many of America's largest and most important companies. In essence, we have too many competitors, particularly in wireless and in the backbone transport (ph).

Further, our bankruptcy laws are a problem. They don't eliminate the capacity. Normally, our bankruptcy process would allow the companies to reorganize and other companies would buy these assets. Using today's bankruptcy laws, what many companies do is use these laws to reorganize. When they reorganize, it's a path to liquidity, not a path to capacity reduction. And unfortunately, this perpetuation of this capacity is going to make more trouble for the stronger companies as time goes on. You can imagine a Worldcom that is reorganized without its debt. How is it going to compete with AT&T?

PRICE: So this is a problem that is not as forefront yet today, but I think portends a looming problem that's going to happen in two or three years from now. To Senator McCain's point of what did you predict, in October, 2000, when I was running my Celek (ph) in Europe. We saw this coming. In August, 2001, we saw it coming again. So we've seen this coming for some time. My concern about the bankruptcy laws in this country is with these reorganizing with debt free, they'll create a terrible situation for the companies that have been managed prudently and stay in business.

My second point is that we have too many competitors, particularly in the over capitalized wireless industry. In my testimony, there's a chart which highlights the industry structure. According to my comport it is five factors. And you can see that the wireless industry closely resembles the airline industry. Six, seven or eight competitors are too many for a capital intensive industry where the switching costs are near zero.

The wireless industry's capital structures are under tremendous strain due to the next generation technologies, upgrades and marketing costs. In 2002, the wireless industry is expected to have $0 in free cash flow, yet suffering under $84 billion of debt. The European wireless market provides evidence that three or four competitors can still maintain a high degree of competition. And in fact, competition remains fierce and penetration has reached 87 percent in Europe.

My view is that the same competitive environment would exist in the U.S. if there were three or four competitors. Remember in the late 1990s, in the highly concentrated long distance industry where three players, AT&T, Sprint and MCI had an 80 percent market share, competition was intense. This is fundamentally because the switching costs were zero, just like it is in the wireless industry. To Senator Burns' point, beyond allowing consolidation, I believe the government should also give additional spectrum to carriers at no cost.

This is not the government's piggy bank. I don't think it should be seen as such. We can strengthen the remaining carriers if we give them this additional spectrum and allow them to have 60 or 70 megahertz per market. In an engineering context, spectrum is a substitute for capital. It's a direct economic tradeoff. This will allow the existing wireless carriers to be a strong, effective competitor for the land line communication network. In fact, it will also lead to the Arbocks (ph) competing with each other, which I also believe should be a broader public policy objective.

So let's get to the Arbocks (ph). With huge cash flow, EBITDA margins of 40 percent and relatively strong balance sheets, they appear to be the stalwart this industry. However, this is changing. With the improving coverage of wireless services, home phones are becoming optional. Several providers, like LEAP, estimate that 26 percent of their customers have dropped their home phone. According to USA Today, one in five Americans think of their cell phone as their primary phone. The cost advantage of cable is an emerging reality.

Coax cable technically has more capacity for a given level of technology expender (ph) than a copper loop. The average charge for the high speed Internet service by DSL is $51. And the average charge for cable is $45, and $10 less if you already have video. So the cost advantage that they have is reflected in their pricing. This has led to cable capturing two thirds of all broadband customers. Cable's cost advantage is also due to lack of regulation, which in my view was a good policy decision. Freed from price caps six years ago effectively, cable has now upgraded their plan for high speed Internet and digital cable.

In two to three years, cable telepathy will be providing voice, another effective competitor to the Arbock (ph) monopoly in residential voice. When I recently surveyed a group of Telco executives and asked them what they would give up first, their home phone or their cable TV, the answer was unanimous, the home phone. So, in this regard, the telecom act is an apparent success. The question for this committee I would pose and the FCC is if facilities based competition to the Arbocks (ph) residential voice monopoly has become a reality, when should the regulatory environment be changed.

So now let's get to the need for broadband, which I think is an important economic concern. We've all talked about the technology and telecom depression and the jobs lost and the wealth lost. Furthermore, the trend of recycled bankrupt assets becoming viable again will only serve to hurt the strong players of today. Fundamentally, we need a technology new deal. I would propose a broadband subsidy of $300 per month be paid to the provider if the provider agrees to provide high speed Internet service for under $30 a month for a three-year period. Just as we had a comment several years ago, it's the economy, stupid, the problem with broadband is price.

If we fix the price, we'll get the demand caught up. If we did this for 20 million homes, this plan would cost $6 billion, probably over two to three years. Without a change in the regulatory environment, there'll be no catalyst to revise investment in wired and wireless networks. The equipment manufacturers will not survive the cutbacks that are currently being made in the carrier capital budgets. Lucent and Nortel have reacted by partially reducing their spending in nexgen technology. If this continues, the U.S. will lose its competitiveness.

Already, Nortel has cut back its investment in its world leading optical technology. How much longer do we expect Lucent to lose $3.5 billion a year and continue funding Bell labs? And where would the country be without Bell labs? I leave this committee with three observations and an aforementioned proposal. One, our bankruptcy laws which allow stand alone restructures will perpetuate the overcapacity that plagued this industry for years to come by maintaining excess capacity and creating new low cost competitors.

Two, the wireless industry resembles the airline industry and needs to be consolidated and given more spectrum. If they cannot earn an acceptable rate of return on new equipment due to overcapacity, they will not innovate and continue to invest. Three, the historical regulation of the telco's needs to be examined in light of the changing regulatory environment, cable superior technology plan and the increasing quality of wireless offerings.

Four, no constructive action by this government with the three previous industries will solve these problems in a meaningful time and we need a technology new deal to stimulate demand. Thank you very much. I appreciate the opportunity to come before this committee.

HOLLINGS: The full statement of both Chairman Hundt and you, Mr. Price and all the panels will be included.

Mr. Mundie?

MUNDIE: Thank you, Mr. Chairman, members of the committee.

My name is Craig Mundie. I'm the senior vice president and chief technical officer of advanced strategy and policy at Microsoft Corporation. I'm very glad to be here today because I think we bring a different perspective than many witnesses the committee would have seen in the past on telecommunications matters. In fact, I think Microsoft has an almost unique perspective. We're not in the telecommunications business, but rather, like many other high technology companies, we are in the business of developing software and services that will excite consumers enough that they will actually pay for bigger pipes to run ever more innovative services and applications.

And like everyone in our industry, we believe that reasonably priced, ubiquitous broadband deployment will advance economic opportunity for the American public. The issue today before this committee is how do you use public policy to promote broadband deployment. We have two straightforward suggestions. First, make more unlicensed spectrum available and regulate it minimally, but more smartly than we have in the past.

Second, to protect consumers' ability to use the Internet, free from any artificial interference by the underlying network provider. We understand several members of the committee are exploring proposals to address these goals and we fully support those efforts. But time is of the essence because the U.S. is falling behind in broadband deployment. If analyzed closely, current statistics are not all that encouraging.

According to a recent Commerce Department study, our country has the most households of any nation connected to a broadband service, over 11 million. However, as a percentage, our penetration rate is sixth in the world, behind the likes of Sweden, South Korea and Taiwan, among others. And the recent trend lines indicate that we are falling further behind rather than catching up. The stakes in this debate are not as many would have portrayed it.

The Internet is becoming a programmable medium, creating a potentially different model of broadband usage, not just one of carrying media. Therefore, reexamining our policies is critical because we are rapidly moving from today's world in which the vast majority of activities focus on publishing of content, like Web pages to a different world, a world in which literally millions upon millions of computing devices will be simultaneously and constantly connected to the Internet. And on consumers' behalfs will be communicating with each other continuously.

Again, we need to take two critical steps. First, we need to have wireless broadband connections that will provide a third way for consumers. In particular, these are not the traditional forms of wireless communications that we all know today as cellular telephony. In particular, policy makers should more aggressively manage the nation's unlicensed spectrum. These systems are currently referred to today as they get deployed as 80211 B, radio land or popularly now, Y- fi (ph).

More generically, you should think of them or refer to them as emerging radio technologies. These technologies and even more futuristic ones such as ultra wideband and software defined radios not only offer an additional means of delivering packets at high speed, they also allow new business models for delivering broadband connectivity to emerge. These are not your same old radio services. To do this, the industry needs more spectrum for unlicensed use. And the FCC should adopt spectrum etiquettes for the benefits of all Americans.

The policy makers here at the FCC and indeed around the world make more spectrum available for these devices and simultaneously, adopt minimalist spectrum rules or etiquettes that limit the devices' ability to interfere with each other. The result would be more choice for consumers and stimulated innovation in broadband services overall. That value proposition, higher speeds with relatively cheap and fast deployment, is especially compelling in rural areas where distance is so frequently the enemy of network efficiency and a major cost driver for broadband deployments, as well as in inner city areas where the high cost of broadband is a significant inhibitor to deployment.

The second critical step is to ensure consumers freedom from network operator interference. We are troubled that in the ongoing debate on what our nation's broadband policy should be, a fundamental lesson from the last century and that's been an integral part of the Internet success up to this point may, in fact, be slipping away. Proposals pending before the FCC would remove long-standing obligations of network operators not to interfere and not to discriminate in their customers' use of the network. At the same time, we see ominous signs that network operators will frustrate consumers' ability to go anywhere on the Net.

Already, cable operators have adopted provisions that impair the ability of consumers to use their broadband connection as they see fit. These issues have been documented to the FCC by a coalition of trade associations, the so-called Hi-Tech Broadband Coalition. In response to these kinds of restrictions, the Hi-Tech Broadband Coalition has developed basic connectivity principles that we believe should be respected as we enter the broadband era.

The first principle is that consumers should be free to attach to a broadband network any device which they may choose to purchase at retail. And secondly, that consumers should be able to use these devices to access any application or service for any lawful purpose as long at it does not harm the network. As a company, we have urged the FCC to apply these principles to both DSL and cable modem providers.

In closing, let me be clear that we are not advocating forced or open access to these networks. Nor do we suggest that DSL and cable modem providers should be limited in how they offer their own services and bundle it with other services. At their core, the connectivity principles articulate nothing more than a non-interference rule. We commend Chairman Hollings and this committee for focusing attention on these issues. And I look forward to taking your questions. Thank you.

HOLLINGS: Thank you very much.

Professor Lessig?

LESSIG: Thank you, Mr. Chairman.

I'm concerned that there's a fundamental point that's being overlooked in this debate. And I borrowed, I insist, borrowed from my hotel this morning some props to help make this point clear. There are 65 million homes in America today that have two networks that enter the home. One network looks like this. It's the electrical network. The second network looks like this. It's the cable network. These are fundamentally different networks. This electrical network doesn't care whether I plug a Sony TV into the plug or a Panasonic TV. It doesn't know whether my computer runs Microsoft's operating system or Apple's operating system.

And innovators realize that if they develop technology that plugs into this network, the network will run it regardless of the preferences of the network owner. This network, the electrical network, has produced extraordinary innovation in the past 100 years in America. This network is fundamentally different. A consumer sits here with a device and selects among the choices that a network owner has made for him or her.

Now these choices, of course, are expanding. There are hundreds now. And 20 years ago, there were only 12. But still, the fundamental architecture of this network is the network makes the choice about what you see and what you get to do. And the consequences, the only innovators for this network are the network owners.

The Internet took off and was the engine of innovation and growth when it looked like this network, when it looked like the electrical network, when anybody could devise an application or content and plug it into the network and the network ran it whether or not the network owner wanted it. This was the principle of end to end in the network. The decline -- and Senator McCain asked who was pessimistic.

LESSIG: I'm the most famous pessimist about the Internet. I will take that claim. Since '99 I've been predicting this decline. The decline in the network has happened as the Internet has become more and more like this network. As the network owners have increasingly been in a position to pick and choose what kind of content and what kind of applications will run on this network. Now the key to innovation and growth in the broadband network is regulation that gets us back here, gets us back to this network.

And I will say something that will surprise many people. I think the model to get there is exactly what Mr. Mundie has just proposed. It's two steps. I'm going to reverse the order. The first step is to make sure that the wired providers of network service respect basic principles of neutrality, that they, like the electrical service, do not build in technologies that say if you're running Microsoft's XBox, you've got to pay us 12 cents a month, but if you're running Amazon, you don't have to pay us anything.

That principle of neutrality is critical to assure that the next Microsoft can come along and displace this Microsoft as the greatest innovator for the network. Neutrality on this network is crucial.

And to get there, it may well be that open access is no longer the solution. But we need principles of neutrality enforced in the way that the competitive connectivity principles that Craig has described would. That's the first step.

But the most critical step is what Mr. Mundie presented first, wireless. Wireless technologies have got to be opened up for innovators to develop unimagined technologies for exploiting this network. Now in this context, this requires not more regulation, this requires a different kind of regulation. It requires opening up unlicenses bands and protecting them from government interference, protecting particular uses of the technology.

So Mr. Mundie says we need much more wireless spectrum diverted to unlicensed bands. I agree with that.

He says we need certain minimal protocols. And so long as we insist on the word minimal, as minimal as possible, I agree with that, too.

But those two changes would produce in the wireless context exactly what the Internet looked like 10 years ago today. It will produce a platform where an extraordinary range of competitors could develop new technologies that would drive demand for broadband services and explode the Internet on wireless technologies in the way 10 years wired technologies did the same.

The critical focus here is not whether there's regulation or not regulation. It's this mix of regulation and not regulation to a simple end, that we build a platform where the innovators are not the networks. The innovators are the people who build products that plug into that network because there are millions of those innovators. And it's that diversity of innovation that produced the explosion that we think of as the great innovation in the 1990s.

Thank you.

HOLLINGS: Very good.

Mr. Huber?

HUBER: Mr. Hundt remarked a moment ago that there are two basic choices, monopoly or competition. But there is a third and it can be implemented quite effectively if you have enough authority which this city does. And the third is to impose from above on an industry a suicide pact. And we've come fairly close to doing that with broadband. Three concrete facts about broadband which you do have to come back to, you know, after the long bombs aren't working.

First, demand for capacity keeps rising. You can't subsidize your way to broadband because broadband isn't an end point. It's going to keep moving out ahead of us for as far forward as anybody can foresee.

Second, you really have to get concrete about the engineering here. Most of the traffic and the highest speed traffic will always be on wires. There are important innovations to be made in wireless, particularly for rural service and for very short haul at the land level and the short haul level of things.

But the fastest systems -- and these are solidly rooted in the laws of physics. The wires are crucial. You have to have a solid cornerstone of competition. We are lucky to have two wires beginning to approach the level where they can compete head to head. They can get fully there if we give the right environment for this.

But the foundation, the essential cornerstone of broadband policy is going to be on wires. This is not to take away from wireless policy. It's very important. But you have to get real about where the traffic really moves and moves fast.

And finally, the simple, plain, unambiguous fact, deploying wireline networks is enormously expensive. It takes very long planning. You have to have long, stable horizons of regulation and from that, horizons of investment to get these wires rolled and to get this capacity upgraded. Without that, it simply doesn't happen.

Everybody can point their fingers of blame in this city. And as you've said, Mr. Chairman, it isn't very productive.

But the fact of the matter is, the broadband policies put in place in the immediate aftermath of the passage of the 1996 act and still in place today have been, remain an unmitigated disaster. Roughly speaking, the FCC, with all the best intentions in the world, decided that one medium would be left -- one wired medium would be left completely unregulated to do what it wished in the broadband arena and that the other medium would be intensely regulated, that it would be unbundled and price regulated. One was -- one medium was cut loose to build, the other was told to negotiate for however long it might take, how to share this network that hadn't even yet been built and at what price to share it.

And that process has created tremendous delay and uncertainty, not for just the regulated targets, but for the entire industry. Because the prices are ultimately set and the level of competition is ultimately set by the lowest common denominator, on price, on performance, the highest performance, the lowest price. And so long as there is intense uncertainty about how one half of this house is going to be regulated and very long delays in determining how it's going to be regulated, you pull down the entire industry.

Time after time, the high-tech industry has learned that the most important thing to get things moving is growth. Suppressing one rival helps one side in the short-term.

Cable has been the short-term beneficiary of these policies that have suppressed the telephone wire. It has gained approximately a two-to-one ratio of market share because of these policies in the short-term.

But that isn't what creates growth in these industries. What cable most needed, what all the broadband sector needed, was the rapid innovation in digital content from the software providers and the video and audio and other providers. And that hasn't come because the market hasn't grown up fast enough. Cable would have developed faster and would have invested faster, paradoxical though it may sound, if this entire industry had been regulated and if cable itself had faced much more competitive rivalry.

The same is almost certainly true on the wireless side. What we got instead from the policies we put in place -- and I know hindsight is easy, but in this case, some of us were even saying it with foresight. We got a bubble of foolish investment in companies that neither had the resources nor the technical capability to build broadband networks. We had more than 20 major data local exchange carriers, delexa (ph), throwing together quarter baked business plans. Nine of them went public when they had an average of under 300 employees each and they were serving fewer than 2,000 lines each. That was the kind of euphoria we created between a rising stock market and a regulatory system that could make profits for everybody. The Internet bubble burst.

The delex (ph) burst. And now we have to return to reality and see how we can get two wires competing head to head robustly, innovatively.

What we ought to be seeing in this market today is the kind of leap frog competition that we've seen in other sectors with microprocessors and memory chips and software, and so on, where no one player is solidifying a dominant position, where each innovation, whoever's fastest today and has gained some edge in the market today, seriously risks being overtaken a year from now or two years from now by a higher speed, a better performing system.

Once again, wireless has a real role to play here. It will offer mobility and will offer large footprint service, particularly in rural area that wireline can't match. But the backbone, the core competitive battle that has to be the central focus of people who really want to make a change here has got to be wire to wire. That's point number one.

Point number two is you simply cannot subsidize your way to the end points here. It's almost meaningless in my view -- forgive me, Mr. Chairman -- to talk of jump starting this industry. Where did it start? I had a 300 byte per second modem 20 years ago. OK? Broadband compared to that everywhere now, we're 20 to 50 to 100 fold faster than that. But we're nowhere near fast enough. And to think that we will subsidize our way to an end point is equally mistaken.

The new digital television standards are talking 20 megabytes per second. Microsoft's CEO or Intel's CEO says we won't even get excited about broadband until we're at 5 megabytes per second or possibly 100 megabytes per second. Believe me, this Congress cannot pay our way to that end. That will have to come from the private sector. And it will have to come from a stable, balanced, competitive environment in which capital will return to this market and compete head to head.

Thank you very much.

HOLLINGS: Dr. Lessig, I agree that we've got to maintain the neutrality of the network. And I think that's something that perhaps we can all agree on and we ought to get onto the FCC about that. But, Mr. Huber says no jump start. And yet I'm hearing jump start from the first two witnesses. You know, don't stand there. Do something. Mr. Price, you say that $300 be paid to the provider. If a price less than $30 per month for a three-year program. Is that 6 billion a year?

PRICE: No, it's 6 billion in total.

HOLLINGS: Two billion a year?

PRICE: It would be for the first 20 million homes. So however long that took.

HOLLINGS: Yes.

PRICE: So 20 billion, if it took three years, it would be 2 billion a year. Let me comment on Mr. Huber's point because he makes a good point about the speed at which broadband should be available. He's right. It should be that fast. But in order to do that, it's $100 billion to upgrade the fiber network or $30 billion to upgrade the cable plan. And that's not happening tomorrow. So, little steps are good. The benefit of a broadband policy, as the Commerce Department has pointed out, is way beyond the benefits to the telco's and the cable companies. It's to society. So, any bit of broadband is a good thing. And that's what my proposal is about.

HOLLINGS: But Chairman Hundt, you differ. You think that what we ought to do is subsidize the actual broadband rather than the demand side?

HUNDT: I think what we need to do, Senator, is find a way for consumers and users to be able to award a subsidy a sum of money to the service provider in return for that provider building the underlying network, the underlying system.

Take the ancient and positive story of Ford Motors. What does that have to do with telecom? Henry Ford started two businesses and they both failed before he finally invented the car that changed the world. Well, what he didn't do was go to the private markets to raise the money for the roads.

Nor did the first people who bought those cars have the jobs of themselves building roads. Instead, the secretary of commerce, Herbert Hoover, all through the 1920s led the nation and led all the municipalities in using public money to build road systems.

We've always needed to find a way to get the transportation system to the farmer at the end of the road, to the small business in the building. It's always been the case. And there is no reason to think that a tremendously expensive broadband network relying on fiber and wireless technologies can be built entirely by the private market. And it certainly can't be built by the private market at a time that capital is fleeing this industry.

So the government, just as Secretary Hoover stepped in and created a national program for roads, the government needs to step in and find a way to get that underlying network out there so that all the users, the companies that attach the electronics, the companies that want to sell the PC's, the companies that want to distribute the software, the companies that want to distribute entertainment, all the users can find a way to benefit from that infrastructure.

HOLLINGS: And the money is to come from, I take it, spectrum auctions?

HUNDT: Well, Senator, this is one of those cases where the witnesses get to say this is where your leadership steps in.

HOLLINGS: Mr. Mundie, elaborate on Y-fi (ph) because that fiber's too expensive to go all the way into that last mile. How do we subsidize and get it going? What's the roadblocks to it now or problems right now?

MUNDIE: I think there are two problems relative to wireless. And Y-fi (ph), as you mentioned, is sort of the currently popular one. The first is that Y-fi (ph) has emerged, but along with it has emerged many other innovative uses of this current 2.4 gigahertz unlicensed band. Because, in fact, there are no rules of the road for operating within this band, each of these devices brought forward by different manufacturers around the world can actually conflict with each other, in fact, to the point where they may not work at all.

MUNDIE: So this has the potential to create a tragedy of the commons, where the more successful we are in getting people to adopt the technology, the less well it might actually work, thereby, ultimately undermining the ability for people to use it as a dependable alternative to other types of connectivity. And that was why we recommended that you need -- and Larry endorsed the idea -- that you have to have some minimalist regulatory environment.

The second is that there's not really enough spectrum available for people to make business plans broadly that depend on that as the primary form of communication. You see innovation -- I mean, I came from a hotel and I could have brought another socket from the Four Seasons today which actually has two little Internet jacks on it. All right? And, in fact, those things are Y-fi (ph) connected. This morning in the Four Seasons, there was a laptop sitting in the restaurant said this connected by Y-fi (ph) for the use of the patrons of the restaurant. OK?

So in these limited environments, people, in fact, are using it. But you can't really depend on it yet, both technologically and in terms of adequate capacity. And that's why we think we have to have more spectrum allocated.

HOLLINGS: Well, we get more spectrum allocated and then what happens after that?

MUNDIE: I think what happens after that is that you'll continue to see the kind of innovation, both in technological senses and also in business model senses. One of the things that is -- the reason I emphasize unlicensed spectrum as opposed to the traditional notion of licensed allocations that have been used for television or for cellular telephony in the past is that it allows communities to basically step forward.

So for example, if a rural community wanted to get together and put a transmitter on their silo and broadcast Internet services throughout the county, that could happen. In fact, that is happening today. But it's hard to encourage that thing to happen because of the spectrum limits today.

HOLLINGS: Good.

Senator McCain?

MCCAIN: Well, I want to thank the witnesses. This has been a very helpful panel to this member and I think I've been informed. And I know the rest of the committee has been. I do note that cable rates are up 45 percent since the passage of the 1996 act. That can't be right. And maybe it has something to do with Mr. Huber talking about two wires competing on a level basis.

How do you do that, Mr. Huber?

HUBER: Well, there are several different ways to get there. And this, at least, does sharply divide the panel. The FCC has on the table now two proposals, one more or less implemented, the other still pending to move broadband under Title I. That's where broadband should have been put in 1996. That's where it belongs today, a broad, complete definition of broadband, not just part of it, not just some of the facilities. This movement of broadband into Title I, which is essentially the unregulated sphere has got to extend to all mixed use facilities. It's got to extend to anybody who wants to take glass, to take optical concentrator devices, to take the terminals, actually put them in the ground, which is an enormously expensive thing to do and market them to end users ought to be able to do that secure in the knowledge that if they've done something stupid, they'll eat every last dollar of the loss. And if they've done something really smart, they'll get the benefit from it.

That's not the law today. It ought to be the law today. You don't have to share those facilities. They're not yet built yet. And a law that is obsessed with how are we going to divide up that pie after it gets built is counter productive.

MCCAIN: Thank you.

I have a question for all the witnesses, beginning with you, Mr. Hundt. You are either the czar of the FCC, which you once were or have a majority in both houses of Congress and a president of the United States. What would the law and/or regulations look like in order to address this problem successfully, beginning with you, Mr. Hundt?

HUNDT: I would recommend to this committee, to Congress, that we face the economic reality that under any system of competition or under any monopoly approach, it is simply not the case that the private sector is going to invest at the present time, in the present economic climate, is going to invest enough money to build a truly broadband, 10 to 100 megabytes a second system.

MCCAIN: What does your regulations or law look like, Mr. Hundt?

HUNDT: So consequently, you need to throw money at it. You need to have the consumers be able to have a subsidy in their pocket that they can award to the service provider to build that kind of network. The exact amount of money would be, I might add, a fraction of what we spent to build roads in this country. The kind of numbers that Mr. Price is talking about represent a fraction of even federal spending on roads on an annual basis.

MCCAIN: So your answer is to set up a process and program of subsidization of broadband for all Americans. Is that basically your answer?

HUNDT: You're exactly right.

MCCAIN: Thank you. Thank you.

Mr. Price? Take the microphone, please.

PRICE: Thank you. First, I think broadband should be unregulated. There are two competitors for it right now. I think wireless may be a third competitor. And I think there's no reason for broadband to be regulated. Second, I think we need more spectrum and it needs to be available at low costs. Third, I think we do need some short-term subsidy just to kick start the market, to show a little bit of confidence to the whole industry participants. And fourth, I think longer term when cable is an effective competitor on the wire for voice in the home, we need to look at the regulation for the R box in the residential voice monopoly.

MCCAIN: Mr. Mundie?

MUNDIE: I address it in two tranches. The first would be to create regulatory parity between the telephone wire and the cable wire. I agree with Mr. Huber that facilities based competition is, in fact, the only way that we're going to get sustained investment in this area. And I would move aggressively to do that. However, I think that that regulation would essentially have to have a meet in the middle property so that some of these attributes that Larry and I talked about in terms of the connectivity principles are applied uniformly to those, which would mean a diminishment of the regulation on telephone, but the addition of these connectivity principles to cable.

The second tranche would be essentially direction to the FCC and the NTIA to aggressively manage the country spectrum to the benefit of creating many, many unlicensed uses of these novel radio technologies. Y-fi (ph) is just the tip of the iceberg. The FCC this year approved ultra wideband. But due to the concerns with the Department of Defense, it was so narrowly constrained as to really limit its usefulness in many applications. I think there are many other techniques that could applied to dramatically increase this.

The reason the two are necessary is that the historical regulatory environment in which the cable environment was invested in and the telephone environment was invested in has created a situation in this country where it's been demonstrated to be pretty much impossible to build a third wired network. It's non-economic. And therefore, if you really want to create competition, it should be head to head facilities based within the existing wired plants with the encouragement through applications to grow their investment in that plant.

And then essentially, the wild card of wireless communication, but not in the traditional cellular telephony, three G sense, but in the use of these novel radio techniques. But that can only happen as, in fact, people are confident. I agree with the confidence question. And that's why the connectivity principles give people confidence to develop apps for the wireline networks. But it would be the regulatory change in spectrum that would actually give people confidence to develop the new products and the new services that would compliment that and potentially create new types of networks that would compete with the wireline ones at much lower capital costs.

MCCAIN: What about subsidy as Mr. Hundt and Mr. Price recommend?

MUNDIE: I personally favor creating a lot more competition than direct subsidy. I think that -- as we've seen in other countries -- I mean, last week ironically, the United States was now passed by Brazil, all right, in terms of the penetration of broadband usage in households. If you look at Korea where game usage is essentially one of the single biggest drivers of broadband adoption.

Korea's now at 70 percent of all households penetrated. And our belief is that if you have these new kind of driving applications, which will be brought forward if people have confidence that they have a sustainable business model, then in fact, I think the cash flows will return to these networks and therefore, would not require the kind of subsidy that's been proposed.

MCCAIN: Mr. Chairman, could I ask your indulgence for the final two panelists?

HOLLINGS: Sure. Sure.

MCCAIN: Mr. Lessig?

LESSIG: Thank you. I would agree with the same structure. I think that if there are only two competitors, if it's the only two wired competitors that could provide broadband, then the subsidy solution makes sense. But I think right now we can open a third line of competition to provide broadband if we had a much more aggressive wireless policy along the lines that Mr. Mundie was just describing.

Wireless' last mile is a technology which four years seemed impossible to imagine, but right now is being built by people who have technological capability to set up broadband connections that don't require the extraordinarily expensive investment to put wires out there. So if the FCC's policy as to wireless were much more embracing of this wireless technology, that would produce extraordinary new competition here. Now, one feature ...

MCCAIN: Such as Y-fi (ph)?

LESSIG: Y-fi (ph) and other technologies around Y-fi (ph), meshed networks that would enable -- actually potentially increasing capacity as the number of users increased. This is a potential that we've just not seen before in this context. But it's extremely important that one feature of it be emphasized. Right now the FCC has a string of companies coming to them saying we like unlicense. Unlicensed is great, but you've got to pass rules to protect us to make sure that our use of unlicensed doesn't get destroyed by some other person's use of unlicensed.

And what that would do is lock in today's technology against future technological innovations. So in critical future of -- if there's an agreement between Mr. Mundie and myself about this, the critical future about minimal regulatory protocols is that they truly are as minimal as possible technologically.

(UNKNOWN): Spectrumatically.

LESSIG: That's right. Spectrumatically, but at the most minimal positions so that enables lots of new technologies to come along and use this wireless capacity to compete with the wired capacity. Now if that -- I think my tendency is on this side of the table to believe that that's going to be a lot to get us to where we need to go without the subsidy. But if it's not, the subsidy point is an important one.

When we built the highways, we didn't call up GM and say, if you build the highways, you can then build them so that only GM trucks run on the highways or Ford trucks run a little bit slower. And my concern again is that we're building the Internet such that the people who give us must see TV are giving us must see Internet where they say, here's the Internet you're going to get. Here are the applications you're allowed to use and defeating the basic neutrality of this network.

So subsidy may be an important part of this, but the critical feature of what made the original Internet run wasn't subsidy. It wasn't the fact that wires were there. It was that the rules enabled broad range competition among innovators outside of the network, not the network itself.

MCCAIN: Mr. Huber?

HUBER: I really hate this highway metaphor and you should hate it, too. If you have $1,000 per home to put five megabytes in or $100 billion for the nation, go ahead and spend it and spend it fast. OK? But if you're going to go a quarter way up there, don't waste your money because you won't even begin to catch up with what's needed and what ought to be happening in the market. And the market will spend that 100 billion. Give the market -- if you want a one line law, say that any provider of broadband service, any provider above 200 kilobytes say, OK, can opt into the regulatory structure that's applicable to any other provider above 200 kilobytes and see what happens.

MCCAIN: Thank you.

Thank you very much, Mr. Chairman.

HOLLINGS: Senator Burns?

BURNS: Well, we've pretty well gone over that and everybody gets a version of it. I want to ask Mr. Lessig, you said OK with interference in these unlicensed spectrum.

Tell me how you'd award that spectrum.

LESSIG: Well, the premise ...

BURNS: In other words, if we're going to be plagued with interference, then we're going to have to have some sort of a protection or licensing situation. How would you do that?

LESSIG: Well, the premise of the unlicensed spectrum is that the FCC is not in the business of awarding who gets to use it and who doesn't. And what has to happen in that context is protocols have to be developed to facilitate exactly the kind of cooperation of the space that Mr. Mundie was describing. The only issue is at what stage the FCC plays a role in establishing or enforcing those protocols.

In my view, historically the FCC's role in establishing and enforcing protocols has stifled competition for many of the reasons Mr. Huber's work is excellent in showing this to be true. So I would resist the FCC's role except at the most minimal layer and I think (inaudible) Mr. Mundie's proposal is actually at the five gigahertz band, not the place that we typically see Y-fi (ph) going on right now, the 2.4 gigahertz band.

BURNS: In other words, the FCC would be in the business of developing protocols, rather than licensing the spectrum. Is that correct?

LESSIG: Well, I would not say the FCC is in the business of developing protocols. (inaudible) to say they're not in the business of regulating access. I would see protocols to be developed by the private, including protocol organizations. And then those protocols at some stage might need to be adopted as this minimal protocol to make sure that there could be cooperation among the uses at these different spectrum layers.

(UNKNOWN): Senator, maybe I could just...

BURNS: Yes. Comment on that because I'm really unclear on it.

(UNKNOWN): I think there's two things that are very important.

(UNKNOWN): The first is the idea that these are not allocated bands in the sense that there's no single entity who's given a right or permission to do anything with the band. In fact, to the contrary, the public is authorized to do anything they want with the band. The key problem we have right now -- and that's essentially what's driving Y-fi (ph) into existence. It drove citizens band radio to some extent, you know, and now the family radio services. These are all things -- they were a bit more specific in their application, but it's an example where the public was given something that they could take up and use.

The unlicensed bands, however, in the digital era, are not set up in a way that reflect how digital systems work. They're still designed and essentially controlled per the FCC's specifications or rules according to the way people have always used analogue radios. And so, there's an opportunity now to take the techniques that are used within that cable that hooks up your PC to the network to take a similar kind of protocol and apply it in the air. And if that's done -- and there are a number of companies and, in fact, the DOD, in dialogue now about how you would specify such a minimalist handshaking mechanism. And given that, we do believe it's possible they have really unlimited innovation within any one unlicensed band.

I think in addition we'll need -- and we propose, for example, how that might happen in the five gigahurtz band, which it'll be Y-fi (ph) version two. But we think other bands will also be required below one gigahurtz to deal with both the distance propagation problem in the rural area and also to deal with the penetration of wall and concrete structures like in the inner city. The current five gigahurtz and 2.4 bands don't have the propagation properties that we would want there. And that's why I recommend that there ultimately have to be other unlicensed bands allocated. But they should all have this same uniform property of handshaking before use.

BURNS: Mr. Price, you walk me through -- what changes would you make in the bankruptcy law to facilitate the situation we're going through now?

PRICE: I really don't have any specific proposals. I merely brought it up to point out to the committee how this is working. I will tell you, though, that I have witnessed firsthand in our work in advising creditor committees and companies how companies can get bankruptcy judges to give them an enormous amount of leniency in terms of spending the creditors' money and keeping the companies alive. So, I just think that's a subject for another day.

BURNS: OK. I'm really interested in this unlicensed thing because I guess I'm the only one in this room that ever said that spectrum was never a property of the United States government. I always said it was a technology that was developed. And the reason we put the FCC in business in 1934 was to make sure everybody stayed in their lane, so to speak. But it's interesting on the unlicensed part of spectrum I'm having a hard time of converting, oh, this is OK. You're going to be given so much. Are they going to get it on a lottery or is it just going to be a free for all out there?

PRICE (?): It's a free for all. That is how it works, that everybody can come forward. And the way the radios actually work allow people to all come forward and participate. And the radios sort out from each other who gets to talk. And that is how it actually works today.

(UNKNOWN): Can I just add, Senator? One way to think about this...

BURNS: Yes.

(UNKNOWN): That's the way the Internet works. Right now the capacity of the Internet is such that everybody talks in some sense at the same time and the mechanism or protocol figures out how to make it all function without the FCC coming in and saying, you get to talk now or you get to talk in this particular way. It's the same insight. It's just now being applied in a different context.

BURNS: OK.

(UNKNOWN): One last...

BURNS: If it's anything I love to watch is a good old fashioned free for all. That's great spectator sport.

(UNKNOWN): It is.

(UNKNOWN): I think the one other thing -- you know, I might just go on record as predicting I believe certainly 20 years from now, maybe even 10 years from now, we will look back and realize that the historical notion of band oriented management of spectrum was, in fact, a quaint idea. And that, in fact, that we'll find eventually that there are completely different ways to use the spectrum to control these things.

And the challenge for this country and others will be to try to figure out how we carefully take ourselves from the band oriented approach that we have as our legacy now, as does the rest of the world, into a management of the entire spectrum capacity that will allow the emergence of these new technologies. And, you know, that should actually be the long-term mission of the FCC with respect to husbanding the spectrum.

BURNS: Very interesting approach. And I think it merits more thought. And thank you, Mr. Chairman. I appreciate it.

HOLLINGS: And thank you.

Senator Dorgan?

DORGAN: Mr. Chairman, we're really having a couple of conversations here. Let me try to ask about both of them.

First of all, Mr. Mundie, will there be enough unlicensed spectrum for all the applications that want to use it? And then, I'm trying to think through with you ahead here ways how will it affect the wireless carriers who've paid the substantial amount to use the spectrum that they do control?

MUNDIE: Well, as the unlicensed bands are allocated today, I would tell you that there's not sufficient spectrum, either in absolute band width and specifically not in the right places in the spectrum to allow a comprehensive and reliable -- let's say -- community network to form in your community or any other one. But both of those could be addressed by the FCC quite directly and actually without forsaking any huge traditional notions of the amount of money that might have been garnered from the auction of those particular bands, in my opinion.

I think that the more difficult question is, you know, how do the applications emerge in this environment. And without assurances that these bands are going to be available, you won't know. Relative to the second part of your question, which is how does this relate to the telecom companies who bought their spectrum, in essence, this is, as he's indicated and Mr. Huber indicated, a situation where you pay your money, you take your choice.

At the point where you bet on what we know today as cellular telephony as the core of wireless technologies, which are big antennas with multi-mile radius transmission and receive capabilities and what we know today as cellular phones, they've met and made a good business out of that. But, in fact, you know, the history of the technology industry is one that says, you're always going to be surprised by the next thing that comes along. And essentially what I'm advocating and, in fact, what I think you see some of the cellular carriers today recognizing is that they didn't anticipate Y-fi (ph) and its popularity.

This little hunk of unlicensed band usage in this particular computer application is now getting some of those cellular companies to come forward and say, I want to buy controlling interest in these little Y-fi (ph) hot spot companies because, in fact, they recognize that that's likely to be true. You know, I have -- I mean, this thing I use every day now is a combination of a -- you have a blackberry. I used to have one. It's been replaced by this. It's a cell phone. You know, World GSM cell phone with a pocket computer in it.

DORGAN: Have you tried to use that in Fargo?

MUNDIE: No, I haven't. But I expect it probably won't work.

DORGAN: Won't work.

MUNDIE: But it turns out that...

(UNKNOWN): They don't either.

MUNDIE: The next version of these things will actually support simultaneously, not only the traditional telephone network, but the Y- fi (ph) network. And so, in fact, if somebody in Fargo decided to put up a Y-fi (ph) hot spot, I could come into town and while I would find that I might not get my telephone connection, I'd get a local area connection and I'd have an alternative. And that's why I speak, you know, so enthusiastically about the potential for competition between the unlicensed band which does not depend on capital flowing from Wall Street.

It does not depend on any company owning or controlling spectrum. It's rate of diffusion at that point is limited only by the choice of the consumer to go down to the good guys or Circuit City and buy a little box and take it home and plug it in. And therefore, you get to do this third option on the back of the bank accounts of the American public at their discretion as opposed to, you know, some large a prioral allocation.

DORGAN: Let me ask -- well, yes, I don't want to use the five minutes on one question, but...

PRICE: Senator, if I could just explain?

DORGAN: Go ahead.

PRICE: Well, we at Evercore have an investment in a company called Boingo (ph). Its purpose is to negotiate with the guy in Fargo, the guy in South Carolina who has the hot spot and provide a universal access mechanism to them. So it cobbles together all the entrepreneurs to a uniform system. And you sign up for a service called Boingo (ph) and wherever you are, it works.

DORGAN: All right. I won't ask the question, but I'm curious because all of you have talked about the competition. How many of you have the same local telephone provider that you had in 1996? I won't ask you, but the reason I would ask the question if I had time it would be about how much competition really does exist in the local exchanges around the country. The answer is not much. And I believe in competition. I believe we ought to do what we can to foster more and more competition. I want to ask two things quickly in my remaining time.

One is the issue of the universal service fund, which has kind of become the forgotten stepchild these days of telecommunications policy. We specifically wrote in law in '96 that the universal service fund shall support advanced telecommunications services. So that seems to me to be a platform for policies that make sense in terms of what some of you are suggesting as we try to provide the impetus for a better and more robust buildup. Mr. Reed, you might want to comment on that. But second, some of you mentioned Korea. And I don't know much about Korea, but I'm curious if Korea has, what, a 70 percent, you said, 70 percent of the Korean households have access to broadband, or have broadband...

HUNDT (?): Right. That's right.

DORGAN: Subscribe to broadband. Presumably then, it's affordable in Korea. Is that correct? Or is it subsidized?

HUNDT (?): Well, it's partially subsidized by the government, I think, but there's really aggressive competition between two DSL providers.

DORGAN: OK. But if it's partially subsidized by the government, if you come here and tell us how great things are in Korea -- and someone says because they're playing video games -- and the government subsidizes the subscription to broadband -- I mean, I think it suggest, at least, that whether it's through the universal service fund or some other device, that governments are deciding that in order to have universal access like the old REA program, you have to do something to stimulate that. Would you disagree?

And I raise it only because you all have raised the question of Korea and someone, Brazil. I don't know much about those countries. But I assume that if it's affordable there, the ingenuity of the American marketplace can make it affordable here if we have public policy that supports that through some kind of cross subsidy if we need to through the universal service fund.

HUNDT (?): Maybe I could comment. You know, many, many countries have contemplated this question over the last few years because they recognize that having an accelerated deployment of broadband is an opportunity to steal a march on the major established countries, including and especially the United States in terms of participating in this sort of information economy. And so many of them have actually been more aggressive than we have in this country, either in subsidies or regulatory environment. Canada, for example, I don't think, has done anything in subsidy, but they actually force cable to provide open access.

DORGAN: Is there also more aggressive competition in those areas?

HUNDT (?): In many cases there are. For example, there's both real competition between different, mostly, telephone suppliers in those countries because cable is not as uniformly deployed. The reason I say the United States is slightly different is because we have such a huge penetration of cable already in place and largely upgraded for these services. And we also have the telephone network which could be fairly directly used to provide these services.

DORGAN: I should just confess that I still have the same local exchange service as I had when we wrote the law and I assume you do.

(UNKNOWN): Does it count if you only change names?

DORGAN: I haven't had one telephone call during dinnertime suggesting that I should change it because there is no competition in local service in most areas of the country. Reed, did you have a comment on...

HUNDT: Senator Dorgan, I recall you, when I first came into office at the FCC, explaining to me the cost of telephone service, the economic cost of telephone service in your hometown.

DORGAN: That's right.

HUNDT: Which $300 a month, I think, was the number?

DORGAN: That's correct.

HUNDT: That is the problem with broadband whether it's your hometown, not a large place, not even Fargo in North Dakota or whether it's even some of the suburbs around our major cities. The underlying economic cost of building a truly high speed, fiber based, wireless land, all the different technologies, even the most efficient, the underlying economic cost is greater than any private market is going to invest.

That's why Korea, that's why China in Shanghai, that's why the European countries all are going to have policies. Some will be wise. Some will be less wise. But they will all have policies in which the government steps in, as it did with the road system, as it did with broadcast TV, as it did with radio, as it did with rural electrification and figures out how the network is going to reach everyone. And it is an imperative that we do that in this country. But it would be a godsend to our capital markets to know that there was such a plan so that all the other technologies that the learned gentlemen are speaking about would be able to enjoy the benefits of it.

DORGAN: I suggest to clear it up, in my hometown, they drove down the cost of that telephone service by the universal service fund support in order to make it affordable, which was the case all across the country.

Mr. Chairman, as is always the case, I'm supposed to be in two places at once so I have to leave. But this hearing is very important. I'm going to read the rest of the transcript. And I really appreciate your holding it. I think we've got tough decisions ahead of us. But we need to start making those decisions.

HOLLINGS: We've got the best of advice.

Senator Breaux?

BREAUX: Thank you very much, Mr. Chairman.

Thank the members of the panel.

Mr. Hundt, I'm not sure I agree with your suggestion that we apply the Herbert Hoover economic model to the telecommunications industry. And apparently the rest of your panel don't think too highly of it either from what I take from their testimony.

Mr. Huber, comment on Mr. Hundt's last statement about the fact that the government came in and built the roads, built the television and there was a whole bunch of other things that Mr. Hundt said that we did through subsidies. Why isn't that a good example of why we should do it in this area?

HUBER: Well, to begin with, certainly with the major network industries, there was a long period of private sector incubation before government even touched them. I mean, Edison built the Pearl Street Station in New York to sell light bulbs. The first radio broadcasters were built to sell radios. It was completely closed and private sector. Number two, the key problem with this highway metaphor is go ahead, subsidize the highways, but keep in mind that it's four lanes this year.

Within three years, it's going to be eight and then it's going to be 16 and then it's going to be 32. And there's no sign whatsoever that that progress will stop. It ought not to stop. OK? There is no -- we're not going to pave over the whole country and then have to stop building highway here. You can't subsidize your way to a horizon that's always receiving on you and receiving that fast.

BREAUX: Your testimony on page three, I mean, I think, answers what I was going to ask. But can you elaborate on it? I mean, are those things that are short of what Congress can do to help move this process forward? I mean, I think Congress is hopelessly, you know, log jammed on these issues. And as someone pointed out, all the television ads are back on, do this, do that. I mean, most people, quite frankly, don't understand what the ads are advocating. It's very, very difficult. And, you know, I just don't get a lot out of that. I think that you talked about the FCC having various issues before them now that if they acted on it, what do you think the results could be?

HUBER: Well, on broadband, we simply have to get back to where we ought to have started in '96. We have to move the main wireline infrastructure, broadband regulation to a system that applies one set of rules for all and that says we mean it, it's going to stay this way, and if you invest your next 100 billion in joint use facilities, you know, you'll sink with that if it's a stupid investment or you're going to get rich as Croesus if it's a good one. You've got to get that message out emphatically. It's not hard. Washington can do it. But you've got to do it.

As for subsidies that everybody is discussing, before you cook up the next one, try enforcing the 1996 act which said subsidies had to be made explicit. People aren't competing for residential service in Dakota because it's ridiculous to compete for residential service in Dakota. It's subsidized like crazy, internally. The subsidies are not explicit. Nobody can beat the rural rates when they're so heavily subsidized. Make your subsidies explicit. In other words, implement what was in the '96 act. And then talk about your next round. But don't do it the other way around.

BREAUX: Mr. Price, you mention in page 12 of your testimony when you elaborate on number three when you talked about the historical regulation of telco's need to be reexamined in light of the changing competitive environment and cable superior technology plant and the increasingly equality of wireless offerings. The current regulatory regime may be appropriate in a monopoly context, but the Arbock (ph) monopoly is rapidly waning. There are some who would argue that they still have a lot more to cinch from a monopolistic standpoint. Can you elaborate more about what you meant in that point number three?

PRICE: Yes. Arbocks (ph) generally provide...

BREAUX: Use your mike.

PRICE: Thank you. The Arbock (ph) generally provides three services today, residential voice, data and wireless. In the residential voice business, they have 80 to 90 percent market share. In data, it's one third market share. And in wireless, the strongest person nationwide, Verizon, has a 25 percent market share. So the only monopoly that still exists is in residential voice. In residential voice, we have wireless carriers increasingly impinging on this monopoly. And if any of you have college kids, just ask them which phone they use.

I mean, there's a sea change coming like this that is going to take maybe a half a generation to be implemented, but it's coming with respect to the wireless phone. With respect to cable, it's going to impinge upon the residential voice business. And what I'm saying is in a very short period of time, relatively, you know, three years, four years, you're going to see the Arbock (ph) residential voice monopoly gone. And at that point in time, you need to examine the entire regulatory regime for the Arbock (ph).

BREAUX: What would happen if anybody -- Mr. Huber, you outlined this in your testimony. Maybe you'd be the best. Suppose the Arbocks (ph) had the same regulatory requirements that they had to meet in providing a broadband that the cable companies currently have to operate under. What would be the result of that?

HUBER: They would be rolling out glass very aggressively because their legacy network, the copper network, they are squeezing it out to the very last limits of what it can do today. And they should be -- they've had concrete proposals like this on the table and they spent three to four years negotiating them with the FCC and with state regulators to see how they'd share this glass network once they deployed it. They'd be pushing remote terminals out to rural areas and to the places (INAUDIBLE).

BREAUX: Well, how different is it from what the cable operators have to do versus what the telco companies have to do in providing a broadband?

HUBER: Cable, of course, they don't like to talk about it, but they're still a shared medium in the last half mile or mile. They are bandwidth limited. They claim they've got more than they've got. They can't actually deliver very broad band during peak usage areas. They have a ton of building to do as well, so do the wireless people. And they will do it. They will all do it in an environment that tells them, build or die.

BREAUX: But I'm talking about their regulatory requirements in terms of comparing that to what the telco's have to compete with.

HUBER: Cable today is under Title I for broadband. They can do what they like. And they can charge what they like. Telco's today, if they build it, they will find out some manana, like next year or two years from now whether Illinois or the FCC or somebody else will tell them, look, you've just put in $5 billion here now. Take it apart and sell it at a price we prescribe. That is the situation. That is the law today.

BREAUX: Thank you, Mr. Chairman.

HOLLINGS: Senator Allen?

ALLEN: Thank you, Mr. Chairman. And thank you for holding this hearing.

And I thoroughly enjoyed -- whether I agree with each one of the witnesses, your perspective has been an outstanding force. I think it might be helpful, and we've gotten into it, looking at this in a third way or a different way, in alternatives rather than worrying about the Ilex (ph) and Celex (ph) and the old way of looking at everything, whether they're highways, rural electrification and so forth. And I think that we ought to focus on spectrum efficient technologies, satellite services, wireless technologies and possibly even power line broadband capabilities.

All these incentives -- there's not enough incentives or tax credits available to make sure that folks will dig up into mountain hollows or across wide expanses of our country. And to that extent, I've been working along with Senator Boxer for several months now and our staffs' been working diligently on coming up with the proper approach. And I've heard our witnesses talk about it as far as Y-fi (ph) or wireless fidelity. I think that that is a third way that is not bogged down by all the legacy litigation, regulations, precedent, animosity and everything else that is engendered in the other way of thinking.

And I feel that we're making progress. And I do want to commend Senator Boxer and her staff and mine for working together on this. And we're working also with the FCC and the Department of Defense which has not really been mentioned much in here but is very, very important as we move forward. And this is just a working draft of where we are. And I'm going to ask some of the gentlemen, especially those who have focused on this, their views on it as we're trying to go forward. And Senator Hollings, I know you care a great deal about Y-fi (ph) as well. And listening to some of the comments of others, we might be able to get a convergence of views.

The goal of our legislation at least at this stage -- this is not the legislation, it's a working draft proposal -- is to provide an alternative to wireline broadband services by using advances in wireless technology and spectrum efficiency. It's to accelerate the development of wireless broadband networks in both residential and business markets and allow schools and libraries the ability to purchase wireless devices that deliver broadband services under the universal service fund.

Now the specifics are as follows. And again, it's a draft at this point. But we would require the Federal Communications Commission to make additional unlicensed spectrum available for wireless broadband services. The draft approach would also require the FCC to establish quality of service and technical rules of operation that facilitate spectrum efficiency for unlicensed wireless broadband technologies, require the FCC to establish baseline Internet connectivity principles that ensure consumers have access to Internet content, services, applications and devices as was mentioned. And obviously allows the schools and libraries to pay for it with the universal service fund. What would your view -- what's your horseback reaction to such a draft proposal? And again, we've been working with several months, gotten to this and obviously getting comments. But certainly would like your comments and insight on such a frame work or structure of principles.

LESSIG (?): Senator, let me simply say, I would agree with the frame work. And in particular, in response to some of the discussions about subsidy, as Mr. Mundie suggested, the critical feature about wireless technologies is that, like computer infrastructure, the subsidy for this technology is in large part coming from consumers purchasing the devices necessary to make it work. It's not Wall Street that needs to do it. It's actually the consumers that are developing the technology to make this work.

So you're getting consumers to help make this project go forward. The one thing that I would again emphasize, though, is the quality of service provision. And I think that's linking with what Mr. Mundie was talking about when he was saying basic protocols. The quality of service regulations have got to assure that they don't interfere with experimentation for the next generation of technologies. The history of damage that the FCC has done -- and again, Mr. Huber's book is, I think, excellent in bringing this out -- has been effectively, the FCC putting out these -- what would be the equivalent of quality of service protocols or rules that have the effect of stifling next generation technologies.

So it's got to be minimal in the way that Mr. Mundie has described, but constantly leaving rope and an extraordinary range of experimentation. Because the technologists will tell you they're humble. This is a rare quality among lawyers. And I don't know about Congresspeople. But the technologists will tell you they don't know what the future could hold for this wireless technology. There's a great potential that it could provide more capacity as the users increase, something we've not seen before. But they need the space to experiment with that. And FCC regulations that set up certain protocols have the potential to interfere with that opportunity in a way which I don't think has yet been appreciated.

ALLEN: Thank you. Mr. Mundie, what's your view? Seeing how you obviously focused on this and we seem to share similar philosophies and ideas.

MUNDIE: Clearly your bill as you outline it with respect to the wireless seems to be completely compatible with the recommendations that we made. Again, I think the thing that's important to realize is that if this is really going to be what I would say a dependable medium. Today, I mean, any of you think back to citizens band radio and other things. You know, people used it, but it was hard to really depend on it. And I think the problem we've got today is two problems. If we don't get the etiquette right to allow this innovation to occur, then in fact, even within the bands we have we'll end up with just congestion or cacophony. I think the other problem with dependability is the fact that we ultimately want to see this used in many different environments, inner city, rural...

ALLEN: Exactly.

MUNDIE: ... you know, et cetera. And to do that, physics plays a real role here and the different bands have different propagation properties. So, for example, you know, the good old television band was chosen because it goes through bricks and mortar and everything else and you can watch TV with your rabbit ears. None of the spectrum in that band, for example, has been allocated for these kind of applications. And as a result, it's very hard to get those kind of propagation characteristics.

So I think, as I mentioned earlier, the other key idea that perhaps you should consider is directing that we need a bouquet, if you will, of bands that are all unlicensed and managed in a compatible way so that people could, in fact, have assurances that it would be both dependable under heavy use and that it would be dependable relative to the different propagation environments.

ALLEN: I thank you. My time's up. I was going to ask that question, but...

HOLLINGS: Well, go ahead, Senator.

ALLEN: ... you generally -- well, in response to a question from Senator Burns as to, you know, which of the gigahertz and bandwidths and so far, part of that spectrum is most important. And you answered that previously on the record. And obviously, I'm not sure if in our legislation or any legislation you'd want to micromanage to that level. I don't mean to be legislating on a draft proposal here. I think that if you establish the proper principles, that's the way to go with it. If necessary, I suppose you do have to come in and tell them what to do. But nevertheless, if you have knowledgeable people such as yourself and others working on that and adapting the bottom line principles, hopefully it would be done -- hopefully it should be done right.

MUNDIE: The industry is fully engaged, both with the FCC and the DOD around these questions to try to find a compromise that works for everybody. I think the -- and I agree with your statement about principle. It's less important to pick which bands than it is to realize that there are two fundamental principles. One is that it has to be reliable under heavy use.

ALLEN: Right.

MUNDIE: And the second is it has to work no matter whether you're, you know, in Kansas or Manhattan, in a building or on a farm.

ALLEN: There's a Manhattan, Kansas.

MUNDIE: OK. I apologize.

ALLEN: Or in Washington, D.C.

ALLEN: Well, I do think the application, Mr. Chairman, is that you and I, I know, care about rural areas.

And rural areas look at access to broadband as they did rural electrification. I hate to get back to those and interstate and railroads, and so forth. And it is important, rural areas. It's also important in inner city areas or metropolitan areas where it gives the consumer another choice and you're not having to dig up all the roads constantly for another wire to be laid. So it's applicable anywhere.

And I look forward to working with you, Mr. Chairman. I know Senator Boxer will and also these gentlemen. I thank you all for your insight and perspective. And really, I think Y-fi (ph), out of this whole hearing, which was generally gloom and doom, this is one area where I think innovation is exciting and has tremendous potential. And I thank you again for your great leadership on this issue, Mr. Chairman.

HOLLINGS: All right. We're just trying to find something we can get done. Along that line -- and you mentioned the rural.

Chairman Hundt, you hear Mr. Huber say let's take broadband out from Title II, put it under Title I, remove the common carrier obligation on the one hand. What happens to the Celex (ph)? On the other hand, remove the support of universal service. What happens to the rural areas? Well, what happens if we do that? You've heard that suggested.

HUNDT: Well, the Celex (ph), the competitive local exchange companies, have, in fact, a broad competition in voice and data to small businesses in the United States since 1996. There are now 22 million lines supplied principally to small businesses by Celex (ph).

HOLLINGS: But they're not facilities based. I mean, they depend on that connection. I'm an Arbock (ph) and now on broadband, I don't have to really make that connection under 251.

HUNDT: Well, rural (ph) Celex (ph)...

HOLLINGS: Or what happens to me?

HUNDT: As you know, Senator, those Celex (ph) have only been able to come into an existence and provide that competition because they've been able to lease the last mile or the local loop. Now if that's going to be upgraded to fiber, which is what we're all talking about, as a core technology because the wireless solution isn't going to be a complete solution. Although I agree with Senator Allen it's going to be a tremendous advance. That local loop if it's going to be subsidized needs to be available to be leased by competing companies.

HOLLINGS: But Mr. Huber is against all that subsidization. We're not going to have the subsidy. I'm talking about the situation today without -- and just trying to find where I am with respect to broadband. If I take it and put it under Title I, remove any kind of common carrier obligation, specifically I don't have as an Arbock (ph) the end (ph) to connect to any sealink (ph). And what, other than covad (ph) or something like that, they all depend on that business customer you were talking about. So I've eliminated -- I'm an Arbock (ph). I can eliminate that competition by getting that done. Isn't that correct?

HUNDT: I think that's right. I think that the move to Title I, if that's what we're going to do...

HOLLINGS: Yes.

HUNDT: ... is pretty much tantamount to the attempt to recreate the old AT&T monopoly, at least in this particular space.

HOLLINGS: And what happens to the rural areas that Senator Allen and I are both interested in? What happens to the universal service contribution? No contribution at all.

HUNDT: No contribution at all.

HOLLINGS: You know, it's very interesting. I've been trying to get -- you see, what we had is you and I seven years ago prior to '96, we all owned, let's say at that time, Bell Atlantic up here. I've been paying the rates for the last 36 years or back home for, not 80 years, but almost that. I'm still 20 years younger than Strom, Michael. Don't look at me like that.

But for Bell South. So what we had was really not a subsidy, we just set up that monopoly and said you don't have any competition. And you've got the rights of way and everything else of that kind and no competition and a guaranteed return. And it worked. And so, here we were sitting around, everybody agreed wait a minute. When we do all this deregulate, deregulate, deregulate, particularly me, it didn't work with the airlines. It didn't work with natural gas. It didn't work with trucking. It didn't work with the Security Exchange Commission.

All this deregulate, deregulate, I said wait a minute. I'm a born again regulator now. Before I go along with this deregulation, I want to make sure we don't mess up the Arbocks (ph), the Bell companies. You can still -- it's dependable. You use the word dependable seven times. I counted them, Mr. Mundie. And they're dependable. I can pick up my telephone and I can get Verizon right now. So the system is working. And one of the biggest reason they've all gone broke, as my early morning TV, the district attorney in New York is carrying five of those super duper wonderful executives to the hoosgow (ph). I can tell you that right now.

I mean, they were swapping (ph) each other and everything else. That's why they lost all the money. And now they lost all their employees. You know what I mean? So, don't blame -- nobody said something's wrong with the law. If someone said it, we'd have amended the law right away. You could get a majority vote around here. I'm back to Mr. Price's observation that the Arbocks (ph) monopoly is gone. What we had was the task of letting the Arbocks (ph) continue to perform and give that good universal service, common carrier responsibility in the public interest. It was working fine. And yet let the competition ensue, let it be deregulated. How do you deregulate a monopoly?

And I'm hearing you, Mr. Price, saying the monopoly is gone in three or four years. How does that happen? Tell us about it. That's wonderful. If we can get that and get all the competition going, that's what we all around here keep telling each other that that's what we're trying to get is the competition going. So how do you get it in this -- they've still got 91 percent right this minute. That's why Senator Dorgan says you pick up your -- I've got the same one that I've had for years and still got the same one here. There have been some mergers. But how is the monopoly gone as you see it?

PRICE: We acknowledge that cable has two thirds market share in broadband.

HOLLINGS: They've got two thirds market share in broadband in the business area?

PRICE: No, no, no. In the residential.

HOLLINGS: I mean, in the residential area.

PRICE: That's right. In the residential.

HOLLINGS: Yes.

PRICE: We acknowledge that in wireless no one Arbock (ph) has more than a 25 market share. So now it's down to residential voice is the market that we're talking about. Ninety-one percent is your figure. Let's take that as a good figure. We see increasing substitution today from wireless. You're going to see increasing substitution from cable. Now is cable ever going to have power down the line? I don't think so. Not near term.

So we're talking about second lines. We're not necessarily talking about lifeline voice service. So there may be some period of time when it's still the primary line. Reed tells me that two thirds of lines are lifeline lines, the first line. I would tell you that 20 percent of the people today have a proclivity to give up that lifeline service for a mobile service and have the freedom of flexibility. So, in time, the residential voice monopoly gets withered away. Does it go down to 40 percent, 50 percent, 60 percent? Probably towards the higher end of that is what I would see in some period of time.

Now with respect to broadband, broadband is already a competitive market. With respect to interconnecting a Celex (ph) so that he can have access to that business customer, somehow I think that needs to be preserved. I don't quite know how. But in that part, I am in agreement that we should allow the competitor to get there. But there's a fundamental technology difference and a choice that this country is going to have to make. Because if we want the Arbocks (ph) to upgrade to fiber, they can't do that easy any more. So there is a policy decision that is going to have to be made here of do you want pervasive broadband or do you want to preserve those Celex (ph) in providing that service to anybody.

HOLLINGS: Well, I'm back then, to the universal service. I'm thinking out loud. If I go all to wireless and there's no universal service and the rural areas and the sparsely populated areas are underserved or unserved, they could come undone. I mean, if you got my monopoly gone and there's no reason for me to continue the wireline. Yes, the Arbocks (ph) are taking on now the wireless, too. They'll take on that wireless, but why should they carry it, you know, into North Dakota? That's a big problem.

PRICE: The whole telecommunications system is fraught with subsidies.

HOLLINGS: Yes. All the time we get these smart witnesses. Is there any comment, something you all want to correct or elaborate on? Chairman Hundt?

HUNDT: Senator, I just would say that the whole economy is looking in particular at the information sector for leadership in the right direction, not in the wrong direction. And this is a time when the government can play a crucial role. The kind of bill that Senator Allen is talking about would be a big contribution expanding universal service and having a plan over the next five or 10 years to really have a truly high speed network everywhere in this country would be a tremendous contribution.

We're right at that brink where we could -- and we all hope it isn't so -- we could slip into our second recession in two years. We should go the other way. We could have another resurgence of growth in our economy. But congressional leadership is absolutely critical.

HOLLINGS: Very good.

Mr. Price, you've got any elaboration or question or...

PRICE: I think we need to do two things. One is the new technologies. I am a big fan of Y-fi (ph). I have it on my PC. I mean, I love it. It's great service. But recognize the technology issues that Craig points out. You know, at two and a half or five gigahertz, it goes two miles?

MUNDIE: No. Three hundred yards.

PRICE: Around 300 yards. So if you want to get 15 mile, 50 mile radius in rural areas, you're down at 300 megahertz or some pretty low...

MUNDIE: Well, it's just different power, different antennae. There's many ways to solve the problem without necessarily changing the frequency. But the way that the band is regulated today makes it very hard for people to do that.

PRICE: So, it's not a little leap. It's not a little snap to get there. The second thing I would say is I am very pessimistic about this economy. When I look at the auto companies today financing the customer purchases, it just brings to mind Lucent and Nortel stuffing their equipment down the throats of all their Celex (ph) customers and financing consumer purchases that will become unsustainable next year. So, I worry about this economy. And I am more free market than you would ever think. But I am so scared for this economy that I say let's do something. Let's do something that stimulates demand. Because if we don't, I feel bad about this sector in particular.

HOLLINGS: Good.

Mr. Mundie?

MUNDIE: First thought I thought I'd share with you at the end is that this really is an issue for ultimately the country's national security. We learned in 9/11 -- I'm on the NSDAC, the security telecom advisory at the White House. And, you know, when the buildings fell down in New York and took out the wireline network, it turned out we had congestion in the cell phone network. And it turned out the only thing that people could work with was their blackberries. And they work because they were wireless and they weren't one of these centralized environments as much. And, you know, economic security today is critical to national security.

In the IT sector is, in fact, one of the biggest contributors to overall productivity. The reason other countries are so focused on this is they understand that. And we've kind of taken it for granted because it was all invented in America. But I think, you know, for both economic, you know, well-being and then ultimately to have flexibility in our critical communications infrastructure, finding a balance between these wireline and wireless technologies and getting them deployed I don't think can be emphasized enough these days. Thank you.

HOLLINGS: Technically, you said with the wireless and everything else, but a lot of the firemen, policemen didn't get the wireless message in the building that it was about to come down. Technically, have you corrected that? Can we correct that?

MUNDIE: In a way, yes, I believe that can be corrected. And to some extent, you know, those firemen are using radios that were designed, you know, conceptually about in the 1940s and '50s.

HOLLINGS: So the new designed radios is the logic?

MUNDIE: It's my opinion that some of these novel radio techniques could, in fact, you know, be made to work in that environment. I mean, for example, I mean, just having -- Larry mentioned the idea of having these mesh radio where every radio guy gets (ph) to talk to the next radio and they become a lifeline, if you will. So if all of the -- if you have that as the architecture that was on the belt of every fireman in the World Trade Center, it might have been a different result because you didn't have to worry about propagating from a central tower or down all the way to the truck. And these are the kind of innovations that I think we need to enable. And, you know, that isn't happening now with the way we manage spectrum in these, you know, highly regulated bands.

HOLLINGS: Mr. Lessig?

LESSIG: I want to first I would -- something Senator Allen said about finding a third way here. I think it's important to note what's been said on this panel about the different ways to deal with this regulatory problem. We have, in the broadband wire context, with telco's a requirement of open access.

LESSIG: And Mr. Huber is describing moving all of the broadband into a place where there wouldn't be that requirement any more for open access at the physical layer of network, no common carrier requirements at all, as you were describing. But I think what I've described and in a minimal way, I think what Mr. Mundie has described is even if you do that and you eliminate open access requirements at the physical layer, it's critically important that you have a different kind of regulation to assure that there's at least neutrality on the networks sustained. So, it might be that you give up a failed method of regulating, which I'm still a believer in many contexts in open access.

But let's just assume it fails. That doesn't mean you go to no regulation. It means you shift the kind of regulation that you go to. And the second important point and I think also out of this proposal that Senator Allen is pushing is these new wireless technologies, as Mr. Mundie was suggesting, are fundamentally different from the mentality of wireless technologies that existed for the last 70 years. And we don't understand them and they need lots of encouragement and space to grow.

And the FCC, I think, so far has been pretty good about protecting the unlicensed band from lots of regulation. But it's got to be encouraged by this Congress to open up a much wider range of spectrum for this type of unpredictable innovation which is not controlled by the traditional carriers because it's not the traditional carriers that produce the great innovation that produced the Internet. It's shifting the ability to innovate and build outside of those carriers to the thousands or millions of innovators at the end of the network that will be the key to turning this wireless opportunity into something special.

My parents come from -- live in South Carolina, Senator. And I gave them broadband as a Christmas present five years ago and I still can't deliver on that promise because there still is not broadband in their community even though they come from the Hilton Head area. This is a fundamental failure of national policy. Right now I'm living in Japan for the semester. In Japan, they're offering 12 megabytes per second DSL service. That's 12 times what you can get in the United States for about the price that you pay for DSL service in the United States right now, $50 a month. Twenty dollars a month, you can get six megabytes per second.

Now that's a fundamentally different opportunity for growth in Japan and many other countries that we are missing out on because we failed to find a way to push this innovation into the broadband space.

HOLLINGS: You see what Senator Allen and I have. We've got to contend with the Department of Defense.

We've got to contend with the FBI, Mr. Huber, because if we transfer it over from Title II to Title I, then the FBI says, wait a minute. We can't wiretap, get caught in there and enforce the law. But excuse me, Mr. Huber, your comment.

HUBER: If the FBI has, in fact, told you they can't wiretap Title I services, I can give them some help, believe me, Senator. It can be done.

HOLLINGS: We have to work at that. We're working at that.

HUBER: However much, Mr. Chairman, however much we may disagree about what the law ought to be, we should be able to agree about what the law is. OK? And the law today is that the dominant provider of broadband service to residences, the provider that actually serves two out of three residential customers that subscribe to broadband today is, in fact, deregulated. Not should be. Not might be someday. Is deregulated today. Has been deregulated since well before 1996 in this sphere. OK? So, all we're debating is ought we deregulate or regulate the non-dominant providers. And that makes no sense.

There is no serious disagreement among anybody, including the Bell companies about the legacy copper network and legacy voice services. That sharing decision has been made and it's going to stick. There's a lot of debate about pricing, but there's no debate about the principle. The debate is about the glass network that ought to be built by phone companies that hasn't been built yet.

HOLLINGS: Well, one last question that -- George, unless you've got -- I am, Mr. Price, concerned, not just about communications, the economy. I agree with you. I know yesterday it was a $386 billion deficit for fiscal 2002. Now it got up in the early part of September, last month. It got up to 412, something like that. But they've been moving things over into October to try to get it down below the 400 mark and everything else. But you watch it in the next two weeks. It'll zoom right over the 400. So we ended up instead of a 5.6 trillion surplus, you know, this time last year. Now we ended up this one fiscal year 400 billion and the deficit and the balance of trade 400 billion. And the manufacturing sector is just about gone.

Jack Ralph (ph) led the way several years ago. He said, I'm not contracting with any subcontractor for General Electric unless you move to Mexico. People just don't factor that in. They're talking about jobs, jobs, jobs and the fast track. We believe (ph) in free trade. I believe in free trade and everything else. So the economy is on its heels and we've got to do something. But getting that -- I'm intrigued by the point and I don't want to be quoted as having asked the question. Would you deregulate Arbocks (ph)?

HUBER (?): Not yet.

HOLLINGS: When? At what stage?

HUBER (?): I'd have a market share test. When market share gets below X, then they are deregulated.

HOLLINGS: Yes.

HUBER (?): And then I would -- you'd have to put some subsidy back in for rural.

HOLLINGS: You've got to put something in there.

HUBER (?): You'd have to do that.

HOLLINGS: Well, this has been outstanding. The committee is indebted to each of you. The committee record will stay open for further questions. Thank you very much. The committee will be in recess.

END

NOTES:
[????] - Indicates Speaker Unknown
   [--] - Indicates could not make out what was being said.[off mike] - Indicates could not make out what was being said.

PERSON:  ERNEST F HOLLINGS (94%); DANIEL K INOUYE (57%); JOHN F KERRY (56%); BARBARA BOXER (55%); RON WYDEN (55%); BILL NELSON (54%); JOHN EDWARDS (54%); JOHN MCCAIN (53%); TED STEVENS (53%); CONRAD BURNS (52%); KAY BAILEY HUTCHISON (52%); TRENT LOTT (52%); GORDON SMITH (51%); OLYMPIA J SNOWE (51%); GEORGE ALLEN (50%); JOHN ENSIGN (50%); PETER FITZGERALD (50%); 

LOAD-DATE: October 5, 2002