[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
INDUSTRY COMPETITION AND CONSOLIDATION: THE TELECOM MARKETPLACE NINE
YEARS AFTER THE TELECOM ACT
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
APRIL 20, 2005
__________
Serial No. 109-26
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
______
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona ADAM SMITH, Washington
MIKE PENCE, Indiana CHRIS VAN HOLLEN, Maryland
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
C O N T E N T S
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APRIL 20, 2005
OPENING STATEMENT
Page
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah.................................................. 1
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Ranking Member, Committee on
the Judiciary.................................................. 3
WITNESSES
Mr. Carl J. Grivner, CEO, XO Communications, Inc., on behalf of
Comptel/ALTS Alliance and Association for Competitive
Telecommunications
Oral Testimony................................................. 5
Prepared Statement............................................. 7
Mr. Brian R. Moir, Attorney-at-Law, on behalf of e-Commerce and
Telecommunications Association (eTUG)
Oral Testimony................................................. 24
Prepared Statement............................................. 25
Mr. Michael Kellogg, Partner, Kellogg, Huber, Hansen, Todd, Evans
& Figel, PLLC, on behalf of the United States Telecom
Association
Oral Testimony................................................. 28
Prepared Statement............................................. 29
Mr. Philip L. Verveer, Partner, Willkie Farr & Gallagher, LLP
Oral Testimony................................................. 34
Prepared Statement............................................. 35
APPENDIX
Material Submitted for the Hearing Record
Response to questions submitted by Representative Chris Cannon to
Carl J. Grivner, CEO, XO Communications, Inc., on behalf of
Comptel/ALTS Alliance and Association for Competitive
Telecommunications............................................. 71
Questions submitted by Representative Chris Cannon to Brian R.
Moir, Attorney-at-Law, on behalf of e-Commerce and
Telecommunications Association (eTUG).......................... 79
Response to questions submitted by Representative Chris Cannon to
Michael Kellogg, Partner, Kellogg, Huber, Hansen, Todd, Evans &
Figel, PLLC, on behalf of the United States Telecom Association 81
Response to questions submitted by Representative Chris Cannon to
Philip L. Verveer, Partner, Willkie Farr & Gallagher, LLP...... 93
INDUSTRY COMPETITION AND CONSOLIDATION: THE TELECOM MARKETPLACE NINE
YEARS AFTER THE TELECOM ACT
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WEDNESDAY, APRIL 20, 2005
House of Representatives,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 2:14 p.m., in
Room 2141, Rayburn House Office Building, the Honorable Chris
Cannon presiding.
Mr. Cannon. The Committee will be in order.
I'd like to apologize to the Members of the Committee and
the panel for my being late. Work as we try here, sometimes we
just get hung up and caught. I appreciate your indulgence.
The House Committee on the Judiciary and the antitrust laws
have played a central role in fostering competition in the
telecommunications industry. This Committee and the Department
of Justice played a major role in the historic breakup of ``Ma
Bell;'' and the antitrust laws formed the primary legal basis
for decades of congressional efforts to bring about telecom
competition, first in long distance, and then in local
services.
These efforts culminated in the clearest expression of
congressional determination to bring about local competition,
the Telecommunications Act of 1996. The act was conceived as a
comprehensive, pro-competition mandate to remedy decades of
monopoly control of the local exchange. The 1996 act also
expressly preserved an active and continuing role for the
antitrust laws in this marketplace.
Today, the Committee will examine the current state of
competition in the telecom marketplace and the vitality of the
antitrust laws in preserving and promoting competition 9 years
after the act.
We do so against a backdrop of proposed industry
consolidations, FCC rulings that largely abdicate a muscular
role for the Commission in ensuring access to local monopoly
facilities, and troubling court decisions that question the
coexistence of the 1996 act and the antitrust laws.
Taken together, these developments have dramatically recast
the competitive landscape in the telecommunications industry,
undermining the pro-competitive goals of the 1996 act.
Moreover, recent vertical and horizontal industry consolidation
has created what some perceive to be a telecommunications
oligopoly comprised of a diminishing number of Regional Bell
Operating Companies (RBOCs) that increasingly resemble the ``Ma
Bell'' monopoly from which they were created and that do not
compete in local interregional markets.
For example, if some of the proposed mergers are finalized
without divestitures, then two companies may have a dominant
market position, controlling a combined 80 percent of the
business telephone market and as much as two-thirds of the
regional Bell operating companies' residential customers. One
of the combined entities alone might control 44 percent of the
business market.
And any merger poses particular concern when one of the
merging entities is currently the primary competitor for
business customers within the other merger partner's region. In
addition, RBOCs do not presently compete in each others'
regions for non-cellular residential or business services;
thereby risking merger to monopoly in a key market segment and
a fractured competitive landscape harmful to consumer choice
and innovation.
The 1996 act was predicated on a common-sense notion that
the regional Bell operating companies, or ``Baby Bells,''
provide non-discriminatory access to the local monopoly
networks the Bells inherited from the breakup of ``Ma Bell.''
Since last-mile facilities built by the decades-old,
Government-sanctioned, guaranteed-rate-of-return ``Ma Bell''
monopoly could not economically be replicated, the 1996 act
clearly mandated non-discriminatory local exchange access for
competing local services.
In the immediate wake of the act, the FCC enforced its
provisions and issued regulations to implement it. As a result,
competition briefly flourished, and meaningful consumer choice
accrued to millions of Americans. Nine years later, the
competitive landscape envisioned by the act has not been
realized, and is receding. In 2000, there were 375 Competitive
Local Exchange Carriers (CLECs) in operation; today, there are
less than 100, and that number continues to dwindle.
Section 271 of the 1996 act, and the proactive role of the
Department of Justice that it established, were a capstone of
the act's early success. Put simply, the incentive for RBOCs to
continue, or to comply, and open access to their legacy
monopoly networks under the act was the carrot of gaining
approval to enter long-distance service in States where they
complied; a privilege expressly prohibited by the consent
decree that broke up AT&T.
The act also contained the stick of potential FCC fines,
injunctive relief orders for non-compliance with the local
market opening provisions of the act, or withdrawal of long-
distance authority. In addition to this regulatory scheme, the
antitrust laws and treble damages served as a pro-competitive
bulwark to moderate the anti-competitive potential of newly
vertically-integrated telecom providers.
But if today the carrot has been eaten, since RBOCs have
received approval to offer local and long distance, and the FCC
has decided to no longer wield the stick of regulatory
enforcement, what legal incentives remain to promote local
competition and discourage anti-competitive behavior by ever
larger incumbents in the telecommunications marketplace?
As intermodal competition and new technologies such as
Voice Over Internet Protocol continue to shape the telecom
marketplace, the antitrust laws serve as a tested and vital
tool to prevent vertical monopolization of broadband and the
Internet backbone.
As Congress moves forward in the telecom debate, the
Committee on the Judiciary will play a vital role in any
rewrite of the Telecom Act, by protecting and promoting
meaningful competition in this marketplace, defending the
primacy of the antitrust laws, examining the need for State tax
preemption to maintain a level playing field, encourage
promising pro-competitive technologies, and ensuring that the
Communications Assistance for Law Enforcement Act (CALEA) and
other law enforcement tools are properly updated to reflect
changing technology in the communications marketplace.
Let me conclude by observing the following: Some critics
contend that political conservatism and respect for the free
market are somehow inconsistent with a commitment to antitrust.
However, to paraphrase Chairman Sensenbrenner, as a
conservative who adheres to the primacy of free markets, I
believe the proper application of the antitrust laws serves to
preserve and promote the integrity of the free market upon
which America's economic prosperity and consumer welfare
depend.
I look forward to the testimony of the witnesses, and I now
yield to the Ranking Member, Mr. Conyers, for opening remarks.
Mr. Conyers. Thank you, Mr. Chairman--while the other
Chairman is signing the--or is watching the President sign the
Bankruptcy Act. I want to welcome this particular panel of
witnesses because of the long experience they bring to the
subject matter today.
First of all, it's important that this Committee make it
clear that our jurisdiction has been here; we were there for
the 1996 act; we're going to be here now. And we want to begin
to examine, along with anyone else in Congress that wants to,
the very important issues that are involved here.
Now, several things become clear. Since 1996, we're not so
sure of how successful that Telecommunications Act was. Lots of
problems have come up. The main one, of course, is that telecom
keeps changing; new developments, unforeseeable. And we also
have a--we have some Bells, or former Bells, that are very
determined to keep, and expand as much as they can, their area
in the fields that they started in.
So I'm looking for Mr. Grivner and Mr. Moir to explain to
us why there may be an exception to my general rule against
mergers. The general rule is: Mergers drive up costs, take
choice away from consumers, and bring back the monopoly
experience that we had up until 1984. Now, I'm perfectly aware
that Mr. Kellogg and Mr. Verveer may have another position to
add to this discussion, which makes this a very good panel.
I'm particularly impressed with those of you who feel that
the Trinko decision, which involves us greatly in Judiciary--
namely, that antitrust is a very important concept, which
brought about the breakup in '84 to begin with--has not been
vitiated by the fact that we have regulatory agencies over the
Telecommunications Act.
Antitrust exists with or without regulatory supervision.
And so it's hard for me to think that we should go much longer
without taking some action to limit the effect and implications
of Trinko.
What we are dealing with now is a very sensitive market.
And we have proposals for mergers that are very compelling, in
one sense. That is that, without which, we may not have any
large, global telecommunications operation anywhere, if we
don't view these things in the context of where we find
ourselves today.
So for more than a century, antitrust laws--an economic
bill of rights, if you will--have provided the ground rules for
fair competition. It's even more true today than they were at
the time of the Sherman and Clayton Antitrust Acts. And so, Mr.
Chairman, I join with you in looking forward to the testimony
of the gentlemen before us today.
Mr. Cannon. Thank you, Mr. Conyers. And I also thank you
for pointing out that Mr. Sensenbrenner would be here but for
the fact that he's down at the White House with the President
signing the bankruptcy bill.
I'd ask unanimous consent that all Members be allowed to
submit their opening statements for the record. So ordered.
Let me now introduce our witnesses. Our first witness is
Carl Grivner. Mr. Grivner is chief executive officer of XO
Communications. He appears today on behalf of XO and its
competitive industries trade association, Comptel/ALTS Alliance
and Association for Competitive Telecommunications. Mr.
Grivner's career in telecom and technology spans over 25 years,
where he has held senior executive positions in a variety of
telecom companies. He graduated with a bachelor's of science in
biology from Lycoming College.
Our second witness is Brian Moir, an attorney for the e-
Commerce and Telecommunications Association. Mr. Moir
previously served as chief counsel for the House Energy and
Commerce Committee, staff attorney for the FCC, and assistant
corporate counsel for Tele-Communications, Inc. He received his
juris doctorate from the University of Denver, where he was
honored with the International Legal Studies Award, and was a
member of the Denver Journal of International Law and Policy.
The third witness is Michael Kellogg, a partner in the
Washington, D.C. law firm of Kellogg, Huber, Hansen, Todd,
Evans and Figel. Mr. Kellogg appears today on behalf of the
United States Telecom Association. He served--he previously
served as an assistant to the Solicitor General at the
Department of Justice. Mr. Kellogg graduated from Stanford
University and Harvard Law School, where he was the editor of
the Law Review.
And the final witness is Philip Verveer, a partner in the
telecommunications department of Willkie Farr and Gallagher.
Mr. Verveer previously served as the antitrust counsel at the
Department of Justice during the original filing of divestiture
against AT&T, and as a supervisory attorney in the FCC's Bureau
of Competition. He graduated from Georgetown University, and
received his juris doctorate from the University of Chicago.
Now, it is our habit to swear our witnesses in, so if each
of you would please rise and raise your right hand, I'll
administer the oath.
[Witnesses sworn.]
Mr. Cannon. The record should reflect that each of the
witnesses answered in the affirmative.
Thank you. You may be seated. Without objection, the
written statement of each of the witnesses will be included in
the record as part of their testimony.
We would like to ask the witnesses to confine their remarks
to 5 minutes. We don't expect you to just stop, but if it
goes--you'll see before you a light panel that goes green and
then, when you have 1 minute left, yellow, and when you have
finished the five--and I may tap my pencil or something, just
to remind you. We will have a 5-minute rule here in the panel
and so you'll have, I suspect, quite a bit of time to respond
to questions as we continue. Thank you.
Mr. Grivner, would you like to begin?
TESTIMONY OF CARL J. GRIVNER, CEO, XO COMMUNICATIONS, INC., ON
BEHALF OF COMPTEL/ALTS ALLIANCE AND ASSOCIATION FOR COMPETITIVE
TELECOMMUNICATIONS
Mr. Grivner. I would. Good afternoon. My name is Carl
Grivner. I am CEO of XO Communications. And after that
introduction, I am glad my son John is going to get his law
degree, and not to have to sit in front of a panel again with
just a bachelor's degree. So, thank you for the introductions.
I am CEO of one of the nation's largest facility-based
providers of telecommunications and broadband services to
business customers. XO is headquartered in Reston, Virginia. We
have nearly 5,000 employees nationwide. It was formed in 1996.
XO has expanded its telecommunications offering from its
original four small markets, to more than 70 metropolitan-area
markets in 26 States today, serving nearly 200,000 business
customers.
Today I'm also testifying on behalf of our association,
Comptel/ALTS, an association representing over 350 competitive
companies and entrepreneurs in the telecommunications industry.
I want to first thank the Chairman and Ranking Member
Conyers for inviting me to testify before the Committee on the
competitive ramifications of the SBC acquisition of AT&T, and
the Verizon acquisition of MCI. These mergers are truly
monumental in scope, as they seek to join the largest telephone
monopolies with their largest competitors.
There is no doubt that these mergers will reduce the amount
of competitive choices for your individual constituents and
businesses. With the loss of AT&T and MCI, future competition
between the incumbents and the remaining competitors will be,
in a word, a mismatch.
My written testimony addresses a number of our concerns in
detail. However, I'd like to highlight a number of specific
points that we hope the Members of the Committee will consider.
First, the SBC-AT&T merger and the proposed Verizon-MCI
deal will fundamentally reshape this industry; marrying the two
largest local telecommunication providers with their two
largest competitors. Only the breakup of AT&T in 1984 and the
1996 Telecom Act can compare to the massive industry
restructuring that will result from these mergers.
Second, these mergers are particularly harmful to business
customers, both retail and wholesale, in local markets. We have
gathered for the subcommittee preliminary, high-level data that
demonstrates the substantial injury that occurs. The charts
here, which use the same data employed by the Bells in the
FCC's triennial review process, provide a sobering look at what
these mergers can do to local competition.
The first set of charts shows the current status of
competition in Cleveland and Milwaukee, as measured by the
presence of competitors in commercial buildings. AT&T is in
red, with all the other CLECs in green. Indeed, competitors
have made some headway in these local markets.
The second chart shows what these markets will look like
after the mergers, with the removal of AT&T. You will notice
that the markets are significantly altered. The presence of
competitive providers drops a staggering 53 percent for
Cleveland, and 64 percent in Milwaukee. In other words, the
competitive injury to customers from AT&T exiting the market
will be real and substantial.
And don't expect alternative providers to make up this
competitive gap. AT&T is unique. It entered local markets with
an enormous advantage. It had tens of millions of long-distance
customers, including relationships with top business customers
throughout the country. It had tremendous financial resources;
$11 billion of which it spent to acquire the largest local
provider, Teleport, that it continued to expand its local
network. The only other local competitor with similar resources
is MCI. And as I am about to demonstrate, post-merger it, too,
will not fill this gap.
The next chart depicts the effect of MCI's departure from
the market. You can see that the competitive presence declines
further; a total of 61 percent for Cleveland, and 70 percent
for Milwaukee.
The reason we took MCI out of the market leads me to my
third point regarding these mergers. No one should expect that
SBC and Verizon will compete head-on. Today, SBC and Verizon
are the number one and number two local telephone providers.
In the handouts that were provided to you, you will see
that in the Los Angeles market SBC and Verizon share common
geography; and yet, neither is really competing in the other's
territory. So why should we assume that when we complete these
mergers and they are approved that they will compete then?
SBC and Verizon operate under that old, Cold War principle
of ``Mutually Assured Destruction.'' Each company is a mirror
of the other, and each knows the other has an overwhelming
competitive advantage in its home territory. So why attack, and
face annihilation? Better to operate under a strategy of
containment.
The basic fundamentals of antitrust law demand a thorough
examination of these mergers. It is not consolidation, per se,
that is a paramount concern. It is the massive concentration
and the injury to customers that result.
This Committee has maintained its dedication to preserving
the applicability of U.S. antitrust laws to the
telecommunications industry. With the Trinko decision by the
U.S. Supreme Court, antitrust actions are now limited in
addressing anti-competitive acts in the telecommunications
industry. In other words, no one should count on the current
Government oversight scheme to correct any competitive abuses
post-merger.
The Committee does retain its jurisdiction over section 271
of the '96 act, which elevated the Department of Justice role
in examining competitive conditions and local markets before
the FCC could approve a Bell's application to provide long-
distance service. With the two largest Bell companies planning
to purchase the two largest long-distance carriers, it is
important that incentives exist to ensure they maintain open
local markets.
We hope that steadfast resolve will continue as Congress
examines the proposed mergers we are discussing today. Thank
you for your time today.
[The prepared statement of Mr. Grivner follows:]
Prepared Statement of Carl Grivner
Good afternoon. My name is Carl Grivner and I am CEO of XO
Communications, one of the nation's largest facilities-based providers
of telecommunications and broadband services. Prior to joining XO as
CEO in 2003, I served as Chief Operating Officer for Global Crossing
and held various positions at telecommunications companies including
Worldport, Cable & Wireless, and Ameritech. I am appearing here on
behalf of XO and our competitive industry's trade association, Comptel/
ALTS.
I want to thank the Chairman and Ranking Member for inviting me to
testify before the Committee on the competitive ramifications of the
SBC acquisition of AT&T and the Verizon acquisition of MCI. These
mergers are truly monumental. They join the largest incumbent
telecommunications providers, SBC and Verizon, with their largest
competitors, AT&T and MCI. As a result, competition is certain to
diminish in markets throughout the country. I am confident that once
the government reviewers examine the evidence in depth, they will find
these mergers cause substantial competitive injury to customers,
competitors, and vendors. As such, they do not meet the legal standards
for approval.
You are to be commended for understanding the important
implications of these mergers. I urge you to follow-up on this hearing
by pressing the merging parties to completely produce and disclose all
information and by ensuring the Department of Justice and Federal
Communications Commission undertake in-depth analysis of all possible
competitive harms.
Let me begin by telling you about XO Communications, the largest
independent competitive local exchange carrier. I believe who we are
and what we bring to customers is particularly relevant to issues
before the Committee today.
BACKGROUND ON XO COMMUNICATIONS
Originally formed as Nextlink in 1996, XO has expanded its
telecommunications offerings from its original 4 small markets to 70
metro area markets in 26 states. Our company provides a comprehensive
array of voice and data telecommunications services to small, medium,
and large business customers. Our voice services include local and long
distance services, both bundled and standalone, other voice-related
services such as conferencing, domestic and international toll free
services and voicemail, and transactions processing services for
prepaid calling cards. XO data services include Internet access,
private data networking, including dedicated transmission capacity on
our networks, virtual private network services, Ethernet services, and
web hosting services.
XO has invested heavily in building its own facilities spending
over $8 billion and constructing over 1.1 million miles of fiber. We
have metro fiber rings to connect customers to our network, and we own
one of the highest capacity and scalable IP backbones in the industry,
capable of delivering data end-to-end throughout the United States at
speeds up to 10 Gigabits per second.
Even with this extensive network, we are nowhere close to having
ubiquitous on-net coverage--and after AT&T and MCI, we can be
considered the nation's largest local competitive carrier. To build
such a network would require over $100 billion and many decades to
construct--not to mention monopoly rights like the Bells have had.
Instead, we reach most customers by procuring facilities or circuits
from other providers. The major suppliers are the Bells, from whom we
lease loop and transport unbundled network elements (pursuant to the
Telecommunications Act of 1996) and special access circuits. Where we
can find competitive alternatives, we will use them, since their prices
tend to be lower, and they actually want to do business with us.
INTRODUCTION TO THE MERGERS
For 40 years, it has been the innovation of entrepreneurial
companies coupled with market opening regulations that have brought
choice to customers and new technologies and services to the market.
This tradition is continuing with the numerous competitive companies
that are creating new ways to serve customers using cutting edge
technologies. However, the choice customers have seen and the dramatic
growth in innovation that has occurred in our industry, started by the
break up of Ma Bell, is now threatened by SBC's acquisition of AT&T and
Verizon's current deal to purchase MCI.
Whenever companies of this scale merge, there are always the same
warnings, and rightfully so. Here are some comments,
``This merger should not be approved as it presently stands
because it will limit rather than promote local exchange
competition. The proposed merger constitutes a setback for
consumers. Furthermore, we saw that when SBC took over Pac
Bell, prices rose and service dropped in California.''
``It's hard to see how new competition promised by the
Telecommunications Act can be attained if existing monopolies
simply combine into larger ones. The concern is especially
great when these two companies otherwise would have had
powerful incentives to compete against each other.''
By the way, these comments were made by AT&T at the times of SBC's
acquisition of Ameritech and the Bell Atlantic-NYNEX merger.
With such increased concentration of power coming to both the
business and residential consumer telecom markets what will be the
impacts on competition and innovation?
I will begin by putting the mergers in context of the development
and status of telecommunications competition, particularly in local
markets.
the development and status of telecommunications competition
No discussion about the telecommunications industry can take place
without recognizing the unique nature of the business. The Bell
Operating Companies and other incumbent local companies are not like
other American businesses. By virtue of having the sole local telephone
franchise for so many years, they have developed an enormous degree of
market power. As a result, they have the incentive and ability to harm
customers, competitors and vendors.
The government has sought to rein in this market power by
regulating the provision of their services and often by restructuring
them or limiting their operations. The most well known effort at
restructuring by the government was the 1984 divestiture of AT&T of its
local telephone operations (the birth of the ``Baby Bells''). It
created SBC and Verizon, which in the past decade have swallowed 3 of
the 7 original Bell companies--and, in the case of SBC, now seeks to
acquire its former parent, putting the old Bell system back together
again.
In 1996, Congress believed it could eliminate this market power and
bring to customers the same benefits in pricing and innovation for
local service that were being seen in the long distance market. The
Telecommunications Act of 1996 was a watershed law, and it set in
motion a massive undertaking: bringing competition to a market
dominated by monopolists where tremendous amounts of capital needed to
be expended up front and where returns on investment would not be
appreciable until economies of scale were reached.
To expedite this process and enhance the chances of success,
Congress adopted two fundamental policy mechanisms. First, it permitted
the FCC to lift the 1984 Consent Decree provision prohibiting the Bells
from entering the long distance business, but only if the Commission
found the Bells provided competitors access to their networks at non-
discriminatory and pro-competitive terms. This was the so-called
``carrot.'' Second, it adopted a ``stick''--the Bells were immediately
required to offer competitors access to unbundled network elements at
cost-based rates.
It is clear from the Congressional debate on the 1996 Act that AT&T
and MCI, the two largest long distances providers, were seen as the
leading companies to enter the local markets. And, they did. Right
after the Act was passed, AT&T bought Teleport for over $10B, and MCI
bought MFS and Brooks Fiber for over $5B--the three leading facilities-
based local telecommunications competitors. Since then, AT&T and MCI
have expended many billions of dollars to expand and enhance these
local networks. They have acquired about10 million local residential
customers and many millions of business customers.
As a result of this surge in local entry, the FCC permitted SBC and
Verizon to enter the long distance business in every market, and it
most recently significantly deregulated the requirement that these
companies provide unbundled network elements at cost-based rates.
Yet, even though AT&T and MCI have gained a toehold in local
markets, facilities-based competition is just beginning, and there is a
real question whether it can be sustained. Since I know this business
first hand, I know how difficult it is. To truly sustain competition,
these firms needed to gain scale. AT&T and MCI were the closest to that
goal. They had developed sufficient market presence to negotiate with
the Bells on a more equal basis, and the beneficial prices, terms and
conditions in their agreements became benchmarks for the entire
competitive sector.
Now we are faced with the two largest competitors being snapped up
by SBC and Verizon, and the resulting competitive harms to customers
and the overall market landscape are easy to detect are substantial.
the effects of the mergers on telecommunications competition
Ten Myths about Competition and the Mergers
When the mergers were announced, the leaders of the merging parties
carried on endlessly about synergies, efficiencies, innovation,
globalization, and other corporate buzzwords. Their PR departments
worked overtime to paint these mergers as good for all Americans and
all businesses. I'm not surprised. They've got a big job convincing
people that greater market concentration is good for them. I've gone
through many of their arguments and selected my top ten list of myths
used by SBC and Verizon to support these deals.
First, they claim these are ordinary, garden-variety mergers.
Nothing could be farther from the truth. As I said at the outset, they
will fundamentally reshape the industry. We have seen such events
before and so have a sense of their importance in the marketplace. In
the 1980s, it was the divestiture of AT&T. In the '90s, the 1996
Telecommunications Act. In this decade, it is these two mergers, and
the reason is obvious. These mergers marry the two largest local
telecommunications providers with their two largest competitors.
SBC and Verizon are the two dominant local telephone companies,
controlling their own local markets (for instance, with a residential
market share exceeding 80%) and providing service to 3 out of 4
customers nationwide. In these markets, their bottleneck control has
only begun to be eroded by a decade of competition. Yet, in the very
short time they have been permitted to enter the long distance
business, SBC and Verizon have begun the second and third largest
providers. Their residential market shares are about 50% and 40%
respectively. These two behemoths also have a firm grip on the wireless
market, again controlling almost two-thirds of the customers in the
country. And now, they seek approval to merge with the two most
prominent local, long distance, and Internet competitors.
Second, don't be fooled by all the rhetoric that the
telecommunications industry is somehow so completely different than ten
years ago when Congress passed the 1996 law. The basic rules about
marketplace competition still apply, and this is precisely where
antitrust enforcement and the public interest inquiry need to be
focused. Companies like SBC and Verizon, which control bottleneck
facilities, have both the incentive and ability to use their market
power to harm customers, competitors, and vendors. What's more, they
have an insatiable appetite to use that power to leverage themselves
into markets that are competitive where they will use their monopoly
rents to harm competition.
Third, it has been ten years since Congress opened local
telecommunications markets, and competition is just beginning to take
hold. Many companies have entered, but they face well-entrenched
monopolists--companies that have 100% of the customers and their
entire, capital intensive network in place. It will take time to
achieve true facilities-based competition. XO embraced the intent of
the market opening provisions of the 1996 Act and invested $8 billion
in its own infrastructure. As one of the major new entrants seeking to
compete on a facility-by-facility basis, we want to see the law's
objective achieved. But, local competitors still have a small share in
most markets, and this share will diminish substantially if these mega-
mergers are consummated.
Fourth, should the mergers receive approval, don't expect SBC and
Verizon to compete head-on. It goes against their basic constitution.
Over the past decade, both companies have had numerous opportunities to
compete in each other's markets, and they just don't do it. In several
major markets--such as Los Angeles, Dallas/Plano, and New York/
Connecticut--their territories abut, and yet neither crosses over. In
the SBC-Ameritech merger, the FCC placed conditions on SBC to compete
outside its region, and it made only the most minimal effort. I've
tried to obtain SBC service here in Washington and had no luck. The
reason is easy to understand. SBC and Verizon each know that it has a
significant cost advantage in its home market. Consequently, they have,
in effect, a tacit non-aggression pact. With these mergers, the value
of this pact increases immeasurably.
Fifth, the joke in the old Bell System was that every customer had
a choice: a black rotary phone or a black rotary phone. Plastic shells
with different colors were a major innovative breakthrough that took
decades to come to market. No one seriously believes that companies
with market power innovate. They don't have the incentive because these
innovations could spin out of control and inject new competitive
forces. It was only when the government enabled competitive entry that
innovation blossomed. DSL, VoIP, managed services for businesses all
were first brought to market by competitors. Consequently, because the
mergers greatly reduce marketplace competition, there is absolutely no
way innovation will burgeon. Rather, it will be stifled. At a time when
our global leadership is being challenged, this would be a disaster.
Sixth, once these mergers are approved, there is no government
backstop. By virtue of deregulatory actions by the FCC combined with
activist court review, the government has largely ceded its oversight
role of SBC and Verizon. In addition, with the Trinko decision by the
U.S. Supreme, antitrust actions are hardly useful to address
anticompetitive acts in the telecommunications industry. In other
words, no one should count on the current government oversight scheme
to correct any competitive abuses post-merger.
Seventh, by any objective measure, AT&T and MCI are not failing
firms. In fact, both were just named to the ``Fortune 100.'' You can't
get much more successful than that. AT&T had revenues of over $30B in
2004; MCI over $20B. In the 4th quarter of last year, AT&T's EBITDA was
$7B, and MCI's was $2B. In the second half 2004, both companies
experienced growth in their EBITDA. A recent Wall Street analyst report
forecasts that both companies will have positive earnings for the next
two years. So, there is absolutely no support for justifying these
mergers based on the business weaknesses of AT&T or MCI.
Eighth, the merging parties tout the synergies and efficiencies of
the deals, particularly because SBC and Verizon can place their long
distance traffic on AT&T's and MCI's networks, respectively. But, they
already have that capability. Because the long distance market is
extremely competitive, efficient ``integration'' can occur via
contract. In other words, all SBC and Verizon need to do is enter into
an arm's length agreement with AT&T and MCI respectively to obtain the
very same benefits they claim to be obtaining with the mergers. They
also have the possibility of forming other relationships short of
merging--all in the name of greater efficiency.
Ninth, SBC and AT&T claim that AT&T's decision to exit the local
residential market is irreversible, but this flies in the face of
AT&T's actions of the past 20 years. In that short time, AT&T has
reversed course so often it makes my head spin. First, they're out of
mobile wireless, then in, then out, and then in. As for fixed wireless,
they have had so many starts and stops that it gives you whiplash. And,
then there's the entry and exit into the cable business combined with
more recent discussions with cable operators about possible
partnerships. As a CEO in a dynamic industry, much of this is
understandable. Technologies and markets change. Any decision can be
reversed given the proper circumstances.
Tenth, contrary to the public filings of the acquiring companies,
these mergers will not improve the national security of this country or
otherwise improve the telecommunications services received by the
federal government. AT&T and MCI are already prominent government
contractors, as are SBC and Verizon, and they are providing the
government with innovative, high-quality services. If they remain
standalone entities, they would continue to provide these services. In
fact, it is the mergers--by reducing competition and combining
networks--that will generate significant problems for the government.
First, it is likely government will end up paying more for
telecommunications services. In addition, just when the government
wants to have a diversity of facilities to increase the odds of
survivability of the network, these mergers combine the largest local
networks. These are problems that must be addressed by the government
reviewers of the mergers.
The Merger Review Process: It is Essential that the Department of
Justice and FCC Conduct a Rigorous Examination with Complete
Information
Because of the magnitude of these mergers--their impact on the
entire telecommunications marketplace--and their evident competitive
problems, the Department of Justice and the Federal Communications
Commission (along with the relevant states) have an obligation to carry
out a thorough, deliberate review. In a very real sense, these mergers
pose a test to these government officials and to the value and
integrity of these merger review processes. I very much want them to
pass this test.
I believe it is critical that these mergers be reviewed through the
``regular order.'' That is, the Department of Justice needs to gather
complete information to identify markets, pre- and post-merger
concentrations, barriers to entry and exit, and other relevant features
of market, and then through application of the Merger Guidelines it
should determine whether these mergers substantially diminish
competition in those markets. And, the FCC needs to do the same in
application of its public interest requirements. As I've said, razzle-
dazzle and hype about futuristic competitive alternatives or distant
possibilities for market convergence have no place in such an analysis.
Determinations need to be based on facts engrained in current market
realities, and I believe once this is done the conclusion will be
clear: these mergers are bad for customers of all types and sizes and
in all locations.
In undertaking this analysis, it needs to be made clear that
neither of the filings at the FCC by SBC and Verizon provide much
relevant data on the mergers. One could characterize them as long on
rhetoric and short on evidence. They were filed quickly after the
mergers were announced so that they could get the clock running as soon
as possible. Because of this, I call upon the Committee to urge the
Department of Justice and FCC to ask for complete information upon
which all of us can review the mergers--and the clock should be stopped
until that occurs.
Local Markets, Increased Concentration, and Competitive Harms
XO believes that on their face these mergers pose serious
competitive concerns and is confident that upon closer scrutiny will
fail to meet legal standards. We are now beginning the detailed
analysis required to determine precisely the competitive harms. This is
going to take months given the many markets involved in these mergers,
the difficulty in gathering data (particularly data controlled by the
merging parties), and then the complex analysis that will need to be
conducted. That said; let me provide some preliminary thoughts about
the basic issues involved here.
First, market definitions should be based on well-engrained
concepts and current realities.
Applying traditional antitrust analysis--and following the
precedent in all recent telecommunications mergers--the relevant
product and geographic markets for analyzing the effects on competition
of the proposed transactions include: the local high-capacity service
market, the local mass market, the long distance termination market,
and Internet access and backbone markets. For my company--and for
business customers--the most important market is the first--the market
for high-capacity local services.
I know that the proponents of the merger allege that the
underpinnings of the telecommunications business have changed so
dramatically that these market definitions should be scrapped. They
allege that geography doesn't matter and that all products are
fungible. That may be the case some day far down the road. But, that
isn't true today, and it is within the current market context that we
need to evaluate these mergers.
Second, the local high-capacity market will see increased
market concentration.
By virtue of their century-old monopoly, SBC and Verizon serve the
vast majority of customers in these markets--both retail and wholesale.
Their market share for the provision local exchange services to
business customers in almost all local markets is somewhere between
80%-95% depending on the market. They also provide the dominant share
of wholesale circuits to competing providers. AT&T and MCI are the two
largest competitors in virtually every local market--dwarfing the rest
of the CLEC industry. In two markets--Cleveland and Milwaukee--where XO
has conducted a preliminary inquiry (based on a methodology similar to
that used by SBC last year in a submission in the FCC's Triennial
Review Process), it has found that the presence of competitors will
diminish substantially when AT&T is acquired. And, none of the
competitors that remain--of which XO is the largest--have the resources
to replace them any time soon. As a result, when these combinations are
completed, the SBC and Verizon will increase their local market
concentrations significantly.
Third, local market entry cannot occur expeditiously.
Such significantly increased concentrations are troubling, but they
could be offset if other competitors could rapidly enter to replace the
local facilities and competitive presence of AT&T and MCI. However,
this simply won't occur. It's important to understand that AT&T and MCI
developed their local presence because of the tens of millions of long
distance customers they had and their enormous financial strength. Once
AT&T's and MCI's local facilities are bought, they will be integrated
into the Bell's facilities and won't continue to be available on the
current standalone basis. (As I said earlier, SBC and Verizon have been
reluctant to pursue opportunities out-of-region, and they have the
incentive to continue this practice even after they acquire AT&T's and
MCI's facilities that are out of their home territories.) Thus, both
retail customers and carriers who resell their capacity are left
without real alternatives.
Fourth, after AT&T and MCI exit, customers will see
significant price increases.
Once AT&T and MCI exit the market, SBC and Verizon have an
increased opportunity to raise prices to its customers. This harms
competitors directly, and because it increases the prices of their
inputs, it places the competitors at an extreme disadvantage against
the Bell company in acquiring retail customers. This is the very
definition of substantial harm to competition.
CONCLUSION
Ten years ago, Congress committed the government to the development
of local telecommunications competition. Entrepreneurs took that
commitment seriously, and many tens of billions of dollars were
expended to build a competitive local market presence. Not
surprisingly, in the gold rush atmosphere that ensued after passage of
the 1996 Act, more firms entered than could succeed. A shakeout
occurred, and a group of more financially and operationally sound
competitors have survived. This competition benefits all customers.
Now, however, competition is threatened by these mergers, and it is
time for the government to stand tall. I urge you to take this
opportunity to renew your commitment to the development of local
competition. These mergers require very careful and deliberate
investigation--and, as we will prove, would produce serious competitive
harms that must be addressed.
ATTACHMENT
Mr. Cannon. Thank you, Mr. Grivner.
Mr. Moir?
TESTIMONY OF BRIAN R. MOIR, ATTORNEY AT LAW, ON BEHALF OF e-
COMMERCE AND TELECOMMUNICATIONS ASSOCIATION (eTUG)
Mr. Moir. Thank you, Mr. Chairman. My name is Brian Moir,
and I'm here today on behalf of the large business users that
Carl just referred to. I'm going to devote my oral testimony to
discussing many of the abuses that we've been experiencing in
the industry.
Unfortunately, what we find is that the Bell operating
companies--as they did in '96, as they did earlier--today still
retain pervasive market power. And these market powers are over
the provision of these access services that everybody is
dependent upon in order to move traffic within the ILECs, and
particularly the Bells networks.
Their market power continues to have meaningful levels and,
as a consequence, business users and the potential customers
that are dependent upon accessing those facilities for
terminating traffic, for moving traffic within a region, are
all suffering.
Had the FCC and other Government policymakers been doing
their job, many of the abuses I'm going to discuss here today
would not have either happened, or would not have reached the
level of severity that they have.
Unfortunately, the FCC's fallen down on the job. They
haven't implemented the goals and objectives that many of you
were talking about during the '96 act. And the rest of the
industry is suffering. And we have companies now looking for
suitors, because they find that the best way to preserve
shareholder value.
The Bell market power, as I mentioned earlier, continues.
And in particular, unlike most of the areas that get attention,
which are more what I call retail residential, the perspective
I want to talk about is particularly what I call the large
business customers. We use huge data pipes. Cellular, the
wireless services, don't have the throughput rates--the band
width, throughput rates--necessary for the traffic that we
move, and at the speeds we need to move them at. The cable
television services that they provide to our homes also don't
have the capability, the throughput rates, the speeds, that we
need to handle our type of traffic.
And as a consequence, given the fact of the limited number
of areas where the CLECs have been able to deploy facilities,
and the additional problem that we just saw of then getting
access to the various buildings that allow them to actually tie
into the customer operations, we find that for the basic
building blocks in our networks, which we call DS-1 lines--
they're about 64 times the capacity of the typical voice lines
we get at home. These DS-1 facilities, the most recent end-user
study, where we actually go out and analyze the number of lines
a customer is using, 95 percent of those lines are being
provided by the Bells. Why? Because there aren't any other
alternatives to utilize.
That same type of study is being replicated and reinforced
by what we're hearing from the wireless industry. All of the
cellular towers in the United States have to be tied into their
networks. They use these same building blocks that business
users use, and their results--the only ones we look at are the
non-Bell-owned ones; Nextel, AT&T Wireless before they became
part of the Bell-owned Cingular system--found 90 to 95 percent
of their towers were dependent upon the same blocks that we are
dependent upon day in and day out.
What's happened to the rates of return they're making off
of these services? Well, what's happened is, in 1999, the FCC
didn't say there was competition in this market for these what
we call high-capacity pipes that we use; they made a predictive
judgment that competition would come. You know, like the
``Field of Dreams.'' Unfortunately, you know, these alternative
facilities were never built; the competition never came to
sufficient meaningful levels that you all are normally
accustomed to looking at. And as a consequence, rates have gone
up for these building blocks that we have no choice but to use,
because there's no other market.
And the rates of return--things the Bells don't like to
talk about, but which any of us, when we analyze how companies
are doing in the market, whether for business purposes or
investment purposes, we look at rates of return. The market
rules were changed in '99. The Bells are now making, as of
2004: SBC, 76.2 percent, an increase of 93 percent from 1999;
Bell South, now making 81.9 percent, an increase of 153 percent
over 1999; Qwest, 76.8 percent return on these services, an
increase of 139 percent since 1999. I can go on, but these are
the things that are happening. And the FCC, even though they
have the data, has done nothing to rectify the problem.
So you could ask, why are the Bells, why are the CLECs, why
are the wireless companies using these same facilities? Because
for the majority of their needs, they don't have any choice,
either.
[The prepared statement of Mr. Moir follows:]
Prepared Statement of Brian R. Moir
Thank you for the invitation to submit testimony on ``Industry
Competition and Consolidation: The Telecom Marketplace Nine Years After
the Telecom Act'' from the perspective of the large commercial and
institutional end users of electronic commerce, information
technologies (``IT''), Internet, and telecommunications products and
services. Mr. Chairman, you and the Committee should be commended for
your efforts to examine the telecom marketplace because significant
problems to exist. I hope that the perspective of the large telecom end
user will facilitate the Committee's deliberations by identifying some
market realities and policy objectives that warrant serious attention.
INTRODUCTION
I have been representing the interests of the large end users of
telecom services and products, as well as electronic commerce, IT, and
the Internet for approximately 24 years. Through out that time large
end users have consistently stated that competition is the ultimate
safeguard for the telecom industry. In the absence of meaningful
competition, just, equitable, and reasonable regulations, prices,
policies and laws are necessary. My testimony will cover some of the
problems within the telecom marketplace as well as regulatory policies.
LARGE END USER DEPENDENCE ON TELECOM
Large end users of electronic commerce, IT, Internet, and telecom
services and products face competitors here in the U.S. and abroad in
both technologically developed countries as well as low-wage and less-
developed countries. To compete in these markets, large end user
businesses have an absolute need for timely, accurate, cost-effective
information that can be made available on demand. To accomplish this,
large end user companies typically obtain, operate, maintain, and
utilize cutting-edge technologies.
Large end user businesses have become increasingly dependent on
efficient, reliable, readily available, and reasonably priced telecom
services and facilities. Public policies that promote increased
competition and user choice in those areas of the telecom marketplace
that are already subject to competition while at the same time
fostering meaningful competition where it is not fully available by
providing just, equitable, and reasonable prices, regulations,
policies, and laws significantly benefit large end user businesses and
the American economy.
The U.S. telecom marketplace has evolved over many years. Beginning
around the early 1970's, it was the large end user customers, not the
then monopoly suppliers, who developed new and innovative methods of
using the many technological telecom advances. As a consequence, large
end users were forced to go outside the traditional providers of
telecom services, such as the old Bell System, to obtain the
technologies and services necessary to meet their growing requirements.
This promoted new industries to develop equipment, information
technologies, and transmission systems to meet these new and ever
expanding user needs.
As the U.S. telecom marketplace evolved technologically, the
traffic that transited the transmission systems evolved as well. What
began as largely voice related traffic has now evolved to a point where
the vast majority of large end user traffic is data. While the voice
component has remained somewhat flat, the data component has been
experiencing explosive growth. As a consequence, large end users
largely focus their attention on ensuring that their data will be
handled in a high-quality, cost-effective manner.
TELECOM MARKETPLACE
Federal Communications Commission (``FCC'') decisions in the 1970's
and 1980's, anti-trust actions and the AT&T Consent Decree triggered
developments that lead to a healthy competitive environment (with the
exception of the local telephone market) that has been capable of
providing state-of-the-art telecom and IT services and equipment to
large end user businesses. Many had hoped that the 1996 Telecom Act
would bring the same results to the local telecom marketplace. Even if
meaningful competition was slow to take hold, many expected that the
Act's provisions (particularly sections 252,252. 271 and 272) would
provide relief from some incumbent local exchange carrier (``ILEC'')
related problems including access pricing. Views of the Act's impact
vary depending upon the supplier or customer market perspective it is
viewed from.
A growing percentage of residential and small-to-medium sized
businesses have access to three different types of technology suppliers
(CATV, wireline telco, and wireless) of voice services (either
traditional voice service or VoIP), as well as broadband.
Unfortunately, from the perspective of the large end user, the
developments have not been as favorable. Due to the unique nature of
large end user transmission needs (i.e., vast majority of traffic being
data), large capacity transmission facilities are required. The
transmission speed rates of the typical CATV and wireless service
suppliers are just not adequate to meet the high capacity needs of the
large user community.
The typical minimum bandwidth or transmission rate required by
large end users is fulfilled by telecom carrier DS-1 (``digital
signal'') lines that are usually rated at 1.544 Mbps. [These DS-1 lines
have the capacity of 24 voice grade lines if they are running at a full
64 Kbps.] Usually, the highest transmission rates typically available
with copper wire transmission lines is 44.736 Mbps with DS-3 lines.
Much higher transmission rates are available thru fiber optical carrier
(``OC'') lines (OC-1 at 51.84 Mbps thru OC-192 at 9.953 Gbps).
Today the ILECs are the suppliers of 90%-95% of the basic building
block (DS-1s) in many large user networks. [The ILECs provide these
facilities through their interstate special access services.] As recent
survey of large end user petroleum companies indicated that
approximately 80% of their large end user DS-3's were provided by
ILECs. [See Keller and Heckman Ex Parte in FCC RM Docket No. 10593 on
1-6-2005.] While ILEC market power at these levels is troubling enough
to large end users who strive for competitive choices in the markets
they depend on, what is even more distressing is the fact that the FCC
made a predictive judgment in 1999 (based on misinformation from major
ILECs) that the ILEC special access markets were facing growing
competition. As a consequence, the FCC radically changed its interstate
special access pricing regulations to allow for pricing deregulation.
Despite customer objections, the FCC began to grant ILEC special access
pricing deregulation the next year with some ILEC rate-of-returns
(``ROR'') on their interstate special access services now reaching
levels in excess of 80% ROR. These types of levels are clearly
excessive. These continually escalating returns have occurred because
the ILECs have increased their special access prices which is
contradictory to what the FCC had predicted would happened when it
radically altered it special access pricing rules in 1999. Even if one
used the FCC's very out-of-date authorized ROR of 11.25% as a basis to
view the most recent regional bell operating company (``RBOC'')
interstate special access revenue data filed with the FCC, it would
show that their returns are exceeding authorized ROR levels by $6.4
billion per year. The ILEC use of their special access market power has
clearly resulted in excessive charges that serve as a monopoly tax on
the critical information needs of this Nation's largest businesses and
as a drag on the entire economy.
Another indicator of the ILECs' market power for interstate special
access services is their use of ``lock-in'' provisions which ``quite
plainly deter special access subscribers from self-deploying facilities
or shifting to bypass providers....'' [See AT&T Ex Parte Letter in WC
Docket No. 04-313 & CC Docket No. 01-338 on 11-12-2004.] While not
relevant to the ILEC special access marketplace, the RBOCs have
utilized a number of long-distance price squeeze strategies aimed at
hampering local telephone competition by using their local market
power. [See Declaration of Michael R. Lieberman & Robert Panerali filed
by AT&T in WC Docket No. 04-313 & CC Docket No. 01-338 on 10-I22-4-
2004.]
FCC RESPONSES TO ILEC MARKET POWER ABUSES
The FCC responses to ILEC market power abuses and their own
mistakes has not facilitated the vision of increased competition and
lower prices that many were told would flow from the 1996 Act's
implementation.
After growing concerns regarding the effects of FCC's radical
changes to its special access pricing rules in 1999, filing of a
Petition for Rulemaking by AT&T in 2002, volumes of pleadings, and a
Mandamus petition, the FCC released the text of a Notice of Proposed
Rulemaking (``NPRM'') which finally creates a proceeding to review the
damage caused by its 1999 predictive judgments. [See In re Special
Access rates for Price Cap Local Exchange Carriers, Order and Notice of
Proposed Rulemaking, WE Docket No. 05-25, 2005 WL 235782 (Jan. 31,
2005).] While the FCC's NPRM raises many of the critical issues that
many believe must be addressed by the Commission, the text of the NPRM
is by no means an indicator of what, if anything, the FCC might do or
when.
With regard to the major ILEC special access pricing provisions
that are premised on their market power in the special access
marketplace, ex parte communications and filings have been occurring at
the FCC over the last few years with no indications that the FCC
intends to eliminate the abuses.
Since FCC actions have largely eliminated unbundled elements
(``UNEs'') as a tool for potential local exchange competitors and the
lack of any meaningful levels of venture capital monies for significant
additional competitive exchange carrier (``CLEC'') buildouts, ILEC
special access services have become of extreme importance to many CLECs
as the only practical tool available for targeting specific potential
customers not passed by their facilities. Unfortunately, the excessive
ILEC rates for these services have many CLECs wondering how cost-
effective these services will really be to them.
CONCLUSION
The most recent industry merger proposals were driven, not by
technological innovation or any dramatic changes triggered by the 1996
Telecom Act, but by the repeated failure of regulators to recognize the
significance of ILECs' market power and to adequately respond to
repeated facts, data, and requests from large end users, IXCs, non-RBOC
owned wireless carriers, and CLECs. The long-distance companies that
have sought these mergers were heavily involved in efforts to resolve
the problems raised in this testimony. The FCC has largely ignored
their concerns as well as those expressed by the rest of the non-ILEC
industry. Significant harm has been done to their industry as well as
the CLEC, non-RBOC wireless and large end user sectors. I agree with
SBC that these problems should not be made part of these merger
proceedings. These issues are too important to the future
competitiveness of the telecom marketplace and this country's non-ILEC
economic engines that are still dependent upon critical telecom
services subject to ILEC market power. The resolution of these issues
must be solved now--well before government merger decisions are
completed.
Mr. Cannon. Thank you, Mr. Moir. We appreciate that.
Mr. Kellogg?
TESTIMONY OF MICHAEL KELLOGG, PARTNER, KELLOGG, HUBER, HANSEN,
TODD, EVANS & FIGEL, PLLC, ON BEHALF OF THE UNITED STATES
TELECOM ASSOCIATION
Mr. Kellogg. Thank you, Mr. Chairman. Mr. Conyers was
absolutely correct when he said that the telecom marketplace
has changed radically since the time of the 1996 act. And it's
very helpful to go back and think of where we were in 1996.
Wireless was still in its infancy. Broadband had not been
deployed anywhere. VoIP had not even been conceived. The inter-
exchange market was a cozy oligopoly, protected from
competition. And local exchange service was protected by local
franchises.
Now, some of the changes that have taken place since 1996
are the result of the 1996 act. The local franchise was
eliminated; competition was allowed in; the inter-exchange
market was opened up to competition, and proved to be a fairly
artificial market, as customers realized they wanted bundles of
minutes that covered both local and long distance.
But the major developments, and the most important ones for
your consideration, are the ones that happened in the
marketplace and that were not fully expected. One is that
wireless and data now significantly outpace voice, wireline
voice, in terms of revenues. At the time of the '96 act, it was
90-10, voice revenues over wireless and data; today, it's 40-
60. That is a sea change that has tremendous implications for
policy.
And the wireless story generally really has to be
understood. Today, this year, the tipping point is being
reached, and there will be more wireless access lines than
there are wireline access lines. Over 180 million wireless
lines are increasing dramatically; wirelines are decreasing.
Eleven million people have abandoned wireline telephone service
altogether, in favor of wireless. And another three million are
doing that every year.
There is intense competition in wireless; three to five
providers in every market. There is improved service; there's
decreased prices. As a result, it is not uncommon for people at
home to use their wireless phones to make long-distance calls,
because it's cheaper to do so.
Now, the second major development is in broadband. The U.S.
is currently 11th in the world in deployment of broadband. That
should be shocking. We had the greatest telecom industry in the
world throughout the 20th century, and excessive regulation
dramatically impaired investment in that infrastructure.
It's starting to turn around. The FCC is starting to turn
things around. The new chairman has pledged to open up
broadband markets freely to competition. But there's still a
lot of--a lot of room to grow there. There's 90 percent access
now to U.S. homes. Cable has about 60 percent of that market,
compared to DSL. It's about a two-to-one margin.
The big story is going to be wireless broadband, next-
generation wireless, which is going to blow this market wide
open.
Billions of dollars has to be invested over the next decade
in this market to make the U.S. competitive. And it will happen
if there is a competitive marketplace and a level playing field
for all competitors.
The most significant development, probably--the third--is
VoIP, or Voice Over Internet Protocol. In the next five to 10
years, voice is going to be merely an application over
broadband service. It's going to completely transform the way
that people get their ordinary telephone service. Comcast today
is adding a thousand customers per day in New York City alone
to VoIP service.
And these developments are terrific for consumers. They
pose complicated challenges, though, for the incumbent
telephone companies and for the regulators. The incumbents have
to innovate, if they are going to survive. Their access to
capital is highly constrained.
Consolidation in this industry is inevitable, and very
healthy. The wireless experience ought to be a lesson. Back at
the beginning, the FCC gave multiple licenses and limited how
much spectrum could be provided, and growth was sluggish. They
eliminated those caps. Consolidation occurred, three to five
providers per market. Competition is intense, and growing.
The regulators have an equal challenge, because they have
to get out of the way. They've got to clear away a lot of the
underbrush based on an old model of how telecommunications was
served; a model that leads to inefficiencies, subsidies, calls
for special interests, not to consumer benefits.
The market-based approach will work, and it will return the
U.S. to the top telecom industry in the world. But it has to be
allowed to work on a competitive framework. Thank you.
[The prepared statement of Mr. Kellogg follows:]
Prepared Statement of Michael Kellogg
Mr. Chairman and Members of the Committee. My name is Michael
Kellogg. I am a partner at the law firm of Kellogg, Huber, Hansen,
Todd, Evans & Figel, P.L.L.C. I am appearing today on behalf of the
United States Telecom Association.
For more than a century, the telecommunications networks and
services in this country were the envy of the world. We had the
fastest, cheapest, most advanced technology and an infrastructure that
reached into just about every home and business in the nation. No other
country could boast comparable levels of service and technology.
As a result, our telecom industry has long been a critical engine
for domestic economic growth. The telecom sector standing alone
accounts for nearly 3 percent of the U.S. GDP--more than any other
high-tech industry.\1\ The existing infrastructure reflects literally
trillions of dollars in invested capital. At its peak in the year 2000,
the sector as a whole was investing about $110 billion per year, and
thus accounted for about 10 percent of all annual capital spending in
the United States.\2\
---------------------------------------------------------------------------
\1\ Industry Analysis & Technology Division, Wireline Competition
Bureau, FCC, Telecommunications Industry Revenues 2002 at Table 1 (Mar.
2004); Bureau of Economic Analysis, Current-Dollar and ``Real'' Gross
Domestic Product, http://www.bea.gov/bea/dn/gdplev.xls (GDP for 2002).
According to an October 2000 news article, for example, the personal
computer industry earned $180 billion in revenue. D. Bartholomew, E-
Business Commentary--PC Industry Stuck in Neutral, IndustryWeek.com
(Oct. 1, 2002), http://www.industryweek.com/CurrentArticles/ASP/
articles.asp?ArticleId=1330.
\2\ United States Census Bureau, Annual Capital Expenditures: 2001
at 10-11 (Jan. 2003).
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Through its impact on productivity, moreover, the telecom sector's
capital investment boosts economic output across the board. The Bureau
of Economic Analysis estimates that each dollar invested in U.S.
telecom infrastructure has resulted in nearly three dollars of economic
output.\3\ That multiplier is likely to get larger as low-cost
broadband service becomes more widely available.
---------------------------------------------------------------------------
\3\ Bureau of Economic Analysis, Input-Output Accounts Data: 1999
Annual I-O Table Two Digit at Table IOTotReqIxCSum.xls, http://
www.bea.doc.gov/bea/dn2/i-o.htm#annual.
---------------------------------------------------------------------------
The telecom sector has had a commensurately large impact on
employment. In the year 2002, it employed almost 1.2 million
workers.\4\ Employment in the telecom sector as a whole grew more than
twice as fast as the national average between 1998 and 2000, and, by
the year 2000, the telecom sector was paying nearly twice the average
U.S. salary.\5\
---------------------------------------------------------------------------
\4\ Bureau of Labor Statistics, U.S. Dep't of Labor, Career Guide
To Industries: Telecommunications, http://www.bls.gov/oco/cg/
cgs020.htm. As of end of year 2000, a total of 5.6 million workers were
involved in IT occupations--nearly 5 percent of all U.S. workers.
Economics and Statistics Administration, Dep't of Commerce, Digital
Economy 2002 at 42-44 (Feb. 2002).
\5\ United States Census Bureau, Statistics of U.S. Businesses:
Tabulations by Enterprise Size, Number of Firms, Number of
Establishments, Employment, and Annual Payroll by Employment Size of
the Enterprise for the United States, All Industries--1998, http://
www.census.gov/csd/susb/usalli98.xls; United States Census Bureau,
Statistics of U.S. Businesses: Tabulations by Enterprise Size, Number
of Firms, Number of Establishments, Employment, and Annual Payroll by
Employment Size of the Enterprise for the United States, All
Industries--2000, http://www.census.gov/csd/susb/usalli00.xls.
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As we all know, that situation has changed dramatically. We are
currently in a period of ``creative destruction'' that is transforming
the industry. Since 2000, telecommunications service providers and the
equipment manufacturers that supply them have lost over 700,000 jobs
\6\ and over $2 trillion in market capitalization,\7\ while annual
investment declined by more than $70 billion \8\ and the United States
fell to 11th in the world in deployment of advanced broadband
networks.\9\
---------------------------------------------------------------------------
\6\ See Layoffs Near 2 Million in 2001, San Jose Bus. J. (Jan. 3,
2002) http://sanjose.bizjournals.com/sanjose/stories/2001/12/31/
daily23.html; V. Godinez, Tech Posts Are Out There, If You Do a Little
Looking, Seattle Times (Feb. 2, 2003); December Job Cuts Top 100K, CNN/
Money.com (Jan. 5, 2005), http://money.cnn.com/2005/01/05/news/economy/
jobs--challenger/.
\7\ See S. Rosenbush, et al., When Will the Telecom Depression
End?, Business Week at 66 (Oct. 7, 2002).
\8\ See Skyline Marketing Group, CapEx Report: 2002 Annual Report,
Carrier Data Sheet 1 (June 2003) (overall investment by wireline and
wireless carriers in 2000: $126 billion); Skyline Marketing Group,
CapEx Report: 3Q04, Carrier Data Sheet 1 (Feb. 2005) (2004 est. based
on data through 3Q 2004: $51 billion).
\9\ See, e.g., G. Arlen, ed., TR's Online Census at 11 (Fourth
Quarter 2003) (``The United States ranks 11th worldwide in broadband
use, according to a recent United Nations report.''). See also FCC
Chairman Michael K. Powell, Remarks at the National Association of
Regulatory Commissioners General Assembly (Mar. 10, 2004) (``The
greatest nation on earth should not be content to be 11th in broadband
deployment.'').
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These developments are attributable to two main factors: first,
mistakes by the FCC in its implementation of the 1996 Telecom Act and,
second, the growth of new technologies have advanced at a rapid pace to
compete with and displace traditional telecommunications services. The
first factor has to some extent been corrected by the Courts and by
changes in FCC policies that are now more pro-competitive; but there is
still progress to be made to eliminate anti-growth policies that have
stifled investment in recent years. The second factor will make this
industry more competitive and vibrant than ever, provided that current
de-regulatory policies are continued and expanded.
Let me begin with the first point. In order to jumpstart
competition in local telephone services, Congress decided not simply to
eliminate existing franchises and open up markets; Congress went
further and required incumbents affirmatively to assist new entrants
through the mechanism of unbundling incumbent facilities. Whatever the
merits of that idea, the FCC responded with a form of heavily managed
competition more suitable to the old Soviet Union than to the new
frontier of technology and innovation here in the United States.
Congress wanted unbundling as a temporary crutch upon which new
entrants could rely while getting on their feet and building their own
networks. The FCC turned it into a cradle-to-grave welfare system for
bogus business models. As a result the FCC's unbundling rules led to a
quick boom as hundreds of new entrants flooded the market. But it then
led to an even quicker and deeper bust when markets finally realized
that the FCC was promoting forms of competition that were untenable.
The focus of unbundling regulation was on creating hundreds of new
competitors as quickly as possible. At the height of the competitive
local exchange carrier (``CLEC'') industry in 2001, ALTS--the CLEC
trade organization--reported that there were more than 200 competing
providers. Although these carriers invested nearly $100 billion, much
of this investment proved wasteful: there were as many as 50-60
competitive providers in some metropolitan areas.
Moreover, very little investment was made in residential markets,
due to the availability of the ultra-cheap resale, known as the UNE
platform (``UNE-P''). While the traditional long-distance carriers were
at one time viewed as serious competitors of the local telephone
companies, due to the UNE-P, all they ever did was resell local
service.
The FCC's unbundling rules have now been thrown out three times in
the Courts; once by the Supreme Court and twice by the D.C. Circuit. On
all three occasions the Courts have chided the FCC for adopting an
excessively regulatory model to implement what was supposed to be a
deregulatory statute. The FCC's mismanagement on this issue must bear a
fair share of the blame for the high-tech boom and bust of the late
1990s and early 2000s.
But that is all water under the bridge at this point. My desire
today is not to criticize anyone for past mistakes, but to learn from
those mistakes. The much more important point is thus the second one:
the dramatic changes in technology and whether these new technologies
will be allowed to flourish in a truly competitive marketplace.
We must recognize that the telecommunications industry is very
different today than at the time Congress passed the 1996 Act. Indeed,
circumstances have changed so drastically as to warrant Congress in
revisiting and updating the current law.
In 1996, ordinary wireline voice calls still generated 90 percent
of the telecom industry's total revenues, with wireless and data
splitting the rest. Today, the split is about 40-60. In another four
years it is expected to be 30-70.\10\ Traditional wireline telephone
service is under tremendous pressure, as it has been at no other time
in our history.
---------------------------------------------------------------------------
\10\ See J. Halpern, Bernstein Research Call, U.S. Telecom Update:
Revising Earnings Forecasts, Raising AT&T Target Price, Maintaining
Ratings at Exhibit 1 (Dec. 17, 2004).
---------------------------------------------------------------------------
Three areas in particular--wireless, broadband, and the advent of
Voice Over Internet Protocol (``VOIP'')--warrant discussion.
Wireless. The growth of wireless has exceeded even the most
optimistic projections. The number of wireless subscribers has grown
from about 35 million at the time the 1996 Act was enacted to more than
180 million today.\11\ By contrast, there were approximately 180
million wireline access lines as of June 2004, and that number has been
in decline since 2001.\12\
---------------------------------------------------------------------------
\11\ See CTIA, CTIA's Semi-Annual Wireless Industry Survey, http://
files.ctia.org/pdf/CTIAYearend2004Survey.pdf.
\12\ See Industry Analysis & Technology Division, Wireline
Competition Bureau, FCC, at Table 1 (Dec. 2004).
---------------------------------------------------------------------------
There is intense competition for wireless, with an average of 3-5
providers in virtually every geographic area.\13\ An increasing share
of wireless subscribers, moreover, are abandoning their wireline phones
altogether. As of year-end 2004, approximately 11 million primary
wireline access lines were displaced by wireless, and that number is
expected to reach about 22 million by the end of 2008.\14\
Approximately 3 million wireless subscribers are now giving up their
wireline phones each year.\15\ At least 14 percent of U.S. consumers
now use their wireless phone as their primary phone.\16\ Even larger
percentages of young consumers--which will make up the next generation
of homeowners--are disconnecting their wireline service, which makes it
likely that the rate of substitution will increase even further in the
future.\17\
---------------------------------------------------------------------------
\13\ See Implementation of Section 6002(b) of the Omnibus Budget
Reconciliation Act of 1993, Ninth Report 9, WT Docket No. 04-111, FCC
04-216 (rel. Sept. 28, 2004) (Ninety-seven percent of the total U.S.
population have three or more operators offering mobile telephone
service in the counties in which they live. Approximately 87 percent of
the population have five or more operators offering mobile telephone
service in the counties in which they live.).
\14\ B. Bath, Lehman Brothers, Final UNE-P Rules Positive for RBOCs
at Figure 2 (Dec. 10, 2004).
\15\ See id. at 4 & Figure 2.
\16\ C. Wheelock, In-Stat/MDR, Cutting the Cord: Consumer Profiles
and Carrier Strategies for Wireless Substitution at 1 (Feb. 2004)
(``14.4% of US consumers currently use a wireless phone as their
primary phone'').
\17\ See, e.g., Frank Louthan, Vice President, Equity Research,
Raymond James, prepared witness testimony before the Subcommittee on
Telecommunications and the Internet of the House Energy and Commerce
Committee, Washington, DC (Feb. 4, 2004) (``We believe the roughly 9.6%
of the population that are single between the ages of 20 and 34 are the
most likely to disconnect their wireline phone for a wireless phone
(with a significant proportion of this age group having already done
so). As young consumers between 15 and 19 (another 6.6% of the U.S.
population) become households, we believe these households could become
prime wireless substitution candidates.''); A. Quinton, et al., Merrill
Lynch, Telecom Services: Unraveling Revenues at 5 (Nov. 20, 2003)
(``[W]e believe that demographic trends favor wireless. . . . So, as
the US population ages, more young people are likely to become wireless
subscribers--and either displace the purchase of a wireline service
with wireless or cut the cord on an existing line.'').
---------------------------------------------------------------------------
Wireless prices have fallen to the point where it is now
considerably cheaper for many customers to use their wireless phone.
Wireless prices have declined--by as much as 10 to 20 percent a year in
recent years.\18\ Wireless service packages include unlimited long
distance calling, which has contributed to wireline traffic
substitution and increasing average minutes of use among wireless
carriers. As a Wall Street Journal article explained, ``[t]hanks to
unlimited night and weekend minutes . . . cellphone plans are the
method of choice when it comes to long-distance calling from home.''
\19\ The Yankee Group estimates that wireless subscribers make 60
percent of their long-distance calls on their wireless phones.\20\
---------------------------------------------------------------------------
\18\ See, e.g., Implementation of Section 6002(b) of the Omnibus
Budget Reconciliation Act of 1993, Ninth Report, Appendix A at Table 9,
WT Docket No. 04-111, FCC 04-216 (rel. Sept. 28, 2004) (showing average
revenue per minute declining every year since 1995 (1998: 21%; 1999:
23%; 2000: 20%; 2001: 30%; 2002: 9%; 2003: 13%)).
\19\ W. Mossberg, The Mossberg Solution: Turning Your Home Phone
into a Cellphone--Call-Forwarding Devices Let You Use Cellular Service
on a Traditional Phone, Wall St. J. at D6 (Dec. 3, 2003).
\20\ P. Marshall, et al., The Yankee Group, Divergent Approach to
Fixed/Mobile Convergence at 7 & Exhibit 4 (Nov. 2004).
---------------------------------------------------------------------------
Wireless service quality has also improved dramatically. Consumers
now report high levels of satisfaction with the quality of their
wireless service. For example, a GAO survey found that 83 percent of
wireless users were satisfied with the call quality of their cell
phone, while only 9 percent were dissatisfied.\21\ Analysts similarly
report that ``[c]ultural awareness and acceptance of wireless as an
acceptable/preferred communication medium is growing.'' \22\
---------------------------------------------------------------------------
\21\ General Accounting Office, FCC Should Include Call Quality in
Its Annual Report on Competition in Mobile Phone Services at 27, Report
No. GAO-03-501 (Apr. 2003).
\22\ S. Ellison, IDC, U.S. Wireless Displacement of Wireline Access
Lines Forecast and Analysis, 2003-2007 at Table 1 (Aug. 2003).
---------------------------------------------------------------------------
The wireless story is one of unqualified success: competition is
intense, output is increasing, and prices are falling. That is exactly
what we should all want to see. And it has happened--I cannot stress
this point enough--because the FCC has stayed out of the way. Wireless
is a deregulated industry. Competition is untrammeled. And the results
of that competition are plain for all to hear.
Broadband. Broadband, unfortunately, is a more complicated story.
Although the 1996 Act promotes deregulation as the approach to spur
broadband deployment, the FCC ignored this mandate for many years and
imposed unbundling here too. The FCC's broadband unbundling policies
created disincentives to investment that slowed the deployment of
broadband. These policies were all the more misguided as they were
imposed only on local telephone companies, not on cable companies that
have been the leaders in broadband deployment from the outset by an
almost two-to-one margin. As a result, the U.S. fell behind many of its
main competitors (such as South Korea, Japan, Canada, and parts of
Europe) in broadband deployment.
Only after the FCC eliminated these policies did broadband
competition intensify. And the FCC's current Chairman, Kevin Martin, is
strongly committed to a deregulatory broadband market. As a result,
prices have dropped significantly and penetration has increased at
record rates. But there is still a long way to go, both in
rationalizing FCC policies and in preventing outdated state regulations
from blocking or delaying new broadband services, such as IP video.
It is worth remembering that there was no broadband at all at the
time of the 1996 Act. Today, DSL and cable modem service are available
to more than 90 percent of U.S. homes,\23\ and more than 25 percent of
homes subscribe.\24\ At the end of 2004, approximately 47 percent of
all residential Internet connections were either provided over cable
modem or DSL; analysts expect broadband to surpass dial-up
subscribership this year.\25\
---------------------------------------------------------------------------
\23\ See, e.g., C. Moffett, et al., Bernstein Research, Broadband
Update: Broadband Trends Towards Ubiquity at 5 (Apr. 1, 2005)
(estimating that DSL is available to approximately 79 percent of homes
passed, while cable modem is available to approximately 96 percent of
all cable subscribers).
\24\ See C. Moffett, et al., Bernstein Research Call, Broadband
Update: Broadband Trending Towards 100% of Internet Connections at
Exhibits 3 & 13 (Mar. 15, 2005).
\25\ See C. Moffett, et al., Bernstein Research, Broadband Update:
Broadband Trends Towards Ubiquity at 2 (Apr. 1, 2005).
---------------------------------------------------------------------------
Broadband prices have dropped rapidly. Consumers are now able to
purchase broadband services bundled with their cable television and/or
phone services. As the Congressional Budget Office has observed,
``current providers face the prospect of new broadband market entrants
and other competitive pressures from converging telecommunications
markets.'' \26\ These new broadband market entrants include companies
providing Wi-Fi, WiMax, satellite technologies, fiber-to-the-home, and
broadband over power lines.\27\
---------------------------------------------------------------------------
\26\ Congressional Budget Office, Does the Residential Broadband
Market Need Fixing? at 30 (Dec. 2003), http://www.cbo.gov/ftpdocs/48xx/
doc4868/12-03-Broadband.pdf.
\27\ See Availability of Advanced Telecommunications Capability in
the United States, Fourth Report to Congress, 19 FCC Rcd 20540, 20547
(2004).
---------------------------------------------------------------------------
The market leader is cable modem service, which accounts for more
than 61 percent of residential and small business customers receiving
download speeds of 200 kbps or more in at least one direction, and 83
percent of customers that receive more than 200 kbps in both
directions.\28\ One analyst estimates that at the end of 2004, there
were 21 million residential cable modem subscribers, but only 11
million residential DSL subscribers.\29\ Simply put, local telephone
companies are still secondary players for mass-market customers of
broadband Internet access.
---------------------------------------------------------------------------
\28\ See Industry Analysis & Technology Division, Wireline
Competition Bureau, FCC, High-Speed Services for Internet Access:
Status as of June 30, 2004 at Tables 3 & 4 (Dec. 2004).
\29\ See C. Moffett, et al., Bernstein Research Call, Broadband
Update: Broadband Trending Towards 100% of Internet Connections at
Exhibit 13 (Mar. 15, 2005).
---------------------------------------------------------------------------
But with deregulation, that may change. In order to remain serious
competitors in the 21st century, SBC, Verizon, BellSouth and other
incumbent telephone companies have embarked on ambitious plans to spend
billions of dollars to deploy fiber networks that are capable of
providing video as well as a host of other new services. This is an
unalloyed boon for consumers and for the U.S. economy generally, which
depends so heavily on its critical information infrastructure.
VOIP. In just the last two years, VoIP has gone from barely a blip
on the radar screen, to arguably the most significant competitive
development in decades. All of the major cable operators have begun
offering new voice-over-IP (``VoIP'') services over their networks, and
by the end of this year will be offering service to more than 40
percent of U.S. households; \30\ major cable operators like Time Warner
Cable and Cablevision already make service available in all of their
markets, while Comcast expects to reach that milestone by the end of
next year.
---------------------------------------------------------------------------
\30\ See J. Halpern, et al., Bernstein Research, Quarterly VoIP
Monitor: How High Is Up for Cable VoIP? at 4 & Exhibit 2 (Apr. 1,
2005).
---------------------------------------------------------------------------
Time Warner Cable is now adding 11,000 VoIP households per
week.\31\ Cablevision has been adding another 1,000 cable VoIP
households per day in the New York metropolitan area.\32\ Comcast
expects to achieve 20 percent penetration within five years.\33\ In
addition, there are literally dozens of independent VoIP providers,
such as Vonage, which serves more than 500,000 lines, and has been
adding more than 15,000 lines per week.\34\ Earlier this month, AOL
launched its own VoIP service.\35\
---------------------------------------------------------------------------
\31\ See also P. Grant, Time Warner's Phone Service Shows Cable's
Growing Clout, Wall St. J. at B1 (Feb. 23, 2005).
\32\ See R. Black, Blaylock & Partners, 4Q04 Wireline Preview--The
Telecom Landscape Is Evolving, Tread Carefully at 2 (Jan. 20, 2005).
\33\ See Thomson StreetEvents, CMCSA--Q4 2004 Comcast Corporation
Earnings Conference Call, Final Transcript at 7 (Feb. 3, 2005) (Comcast
COO & President Steve Burke: ``[W]hen you look at what Cox, and more
recently Cablevision, and others have done in this business, we think
the 20 percent penetration is very reasonable within a five-year time
period.'').
\34\ Vonage Press Release, Vonage Becomes First Broadband Telephony
Provider To Activate Over 500,000 Lines (Mar. 7, 2005).
\35\ See AOL Press Release, America Online Introduces AOL(r)
Internet Phone Service (Apr. 7, 2005).
---------------------------------------------------------------------------
These new VoIP providers have deployed voice services over
broadband networks and IP backbones that offer many advanced features
and functionalities--such as online call management, personal
conferencing, and locate-me services.
All three of these developments--wireless, broadband, and VOIP--are
unqualified goods for consumers and the U.S. economy. But they pose
more complicated challenges for the incumbent wireline telephone
companies. These companies are facing unprecedented competitive
pressures. They must rapidly innovate to survive and they must do so at
the time when market access to capital is highly constrained.
Technological transformations cannot be sustained and expanded
without extraordinary further investments of capital. But the capital
markets--burned in the tech boom--are acutely aware of the business
risks inherent in traditional telecommunications firms. Constrained
access to capital and increasing costs are the results. So, too, is a
measure of industry consolidation.
It is important to remember that when wireless first began in the
early 1980s, the FCC tried a policy of promoting hundreds of small
competitors, and awarded licenses by lottery to companies that had no
ability (or even intention) of providing competition. The FCC then put
a cap on how much spectrum each carrier could own. More recently, the
FCC eliminated the spectrum cap and has permitted industry
consolidation, while maintaining deregulatory policies. Wireless
competition has thrived as a result.
As the experience in wireless and many other non-telecom industries
shows, capital intensive industries like telecom, typically are
characterized by a handful of major competitors. It is therefore
fruitless for regulatory policy to focus on promoting an industry
structure with a certain number of like competitors. As the past eight
years show, the market is much better than regulators at determining
the best industry structure.
The focus should instead be on ensuring that intermodal competitors
have opportunities to flourish, as it is these types of competitors
that are most likely to provide sustainable competition going forward.
This is what happened in transportation, where trucks and planes
emerged to compete with railroads.
The 1984 break-up of AT&T created an artificial regulatory divide
between local and long distance service. That divide is completely
obsolete today, as the wireless experience shows. Consumers buy buckets
of minutes that they can use equally to call across the street or
access the nation. AT&T and MCI cannot survive as independent
companies. The hundreds of CLECs started in the wake of the 1996 Act
cannot survive alone either, and they are joining forces and
consolidating into much stronger, more vibrant competitors.
These are trends to be embraced, not resisted. Unless we learn from
the past, we are doomed to repeat it. The time has come for regulators
to get out of the way and let telecom markets once again become the
engine of growth in our economy and the United States be the world
leader in telecommunications throughout the 21st Century.
Mr. Cannon. Thank you, Mr. Kellogg.
Mr. Verveer?
TESTIMONY OF PHILIP L. VERVEER, PARTNER,
WILLKIE FARR & GALLAGHER, LLP
Mr. Verveer. Good afternoon, Mr. Chairman, and Mr. Conyers,
Members of the Committee. I appreciate your invitation to
testify today.
The availability of the antitrust laws, and especially the
Sherman Act, to protect the competitive process in
telecommunications is as important today as it ever has been.
Recent judicial decisions have tended to diminish our ability
to rely upon the Sherman Act. This is an issue which should be
a priority in connection with any legislation or oversight
involving the communications industries.
The broad social concern that this hearing raises is
whether the current changes, marked by disruptive technology
and reflected in convergence and consolidation, will turn out
to be positive. While there are reasons for optimism, the
reality is we do not, and we cannot, know if the
telecommunications sector will retain its progressive quality.
And that counsels caution.
Now, in my written statement I've tried to elaborate
somewhat on that. I'd like to devote the rest of my oral
statement to my concerns in particular about section 2 of the
Sherman Act.
The monopolization provision is the economy's ultimate
protection from the exercise of market power. It is seldom used
successfully; and that is as it should be. But its status as a
legal device of last resort should not be compromised.
Given the inherent uncertainties in the telecommunications
marketplace, it is particularly important that the residual
authority represented by section 2 remain unimpaired. It is
unfortunately the case that it has been impaired recently by
Trinko and other decisions in the Goldwasser line of cases.
Trinko seems to me to have recklessly weakened our ability to
rely upon the Sherman Act to correct instances of
monopolization as they arise.
This is not accidental. The Trinko opinion is remarkably
tendentious and unremittingly hostile to the application of the
antitrust laws to regulated industries. There are three
features of the opinion that I think are especially troubling.
The first is the extended dicta about the relative
capabilities of regulatory agencies and antitrust courts.
Trinko gets this exactly backward. The decision greatly
overvalues the ability of regulatory agencies to adjudicate
monopolization claims, and undervalues that of antitrust
prosecutors and courts.
Second, and more significant, is the way in which it
approaches section 2. Similar to others in the Goldwasser line
of cases, it invites an examination of component parts, rather
than of the whole. This approach looks at a course of conduct
one element at a time, and dismisses each as lawful or as
individually immunized; and then concludes, based on these
intermediate steps, that there is no violation. Prior to
Trinko, the Supreme Court had found this methodology to be
impermissible. The post-Trinko segmentation approach severely
undermines section 2.
Third, as with other cases in the Goldwasser line, Trinko
tends to conjure idealized or imaginary commercial environments
largely free of positive law--or at least, regulatory law--
strictures. It seeks to measure a firm's conduct not against
the law as it exists, but against some conception of the law as
it once was, or should be.
In Trinko, this takes the form of disallowing
considerations of the alleged device of denying, delaying, and
degrading the provision of local loops; because the defendant
would not have provided them, but for the statutory obligation
to do so.
Section 2 should not be predicated on this type of fictive
environment, reduced to a game of counter-factuals. Whether a
course of conduct constitutes monopolization, or attempted
monopolization, should be determined against the commercial
realities as they actually exist.
Those realities are influenced in many ways by statutory
law. The proposition that statutory provisions, and the legal
obligations they create, should be ignored in determining if
monopolization has occurred will deprive our telecommunications
industries, and other regulated industries as well, of
protection against monopolization. Thank you.
[The prepared statement of Mr. Verveer follows:]
Prepared Statement of Philip L. Verveer
Good afternoon, Mr. Chairman and members of the Committee. I am
Philip Verveer. I am a partner in Willkie Farr & Gallagher LLP.\1\
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\1\ My law firm represents companies and associations directly
interested in the development and administration of public policies
affecting the communications industry. In particular, I want the
Committee to be aware of my representation of Sprint Corporation in
connection with its proposed merger with Nextel Communications and of
Telmex-related interests in connection with their proposed sale of MCI
Corporation shares to Verizon Corporation. However, my appearance today
is a result of the invitation of the Committee to express my personal
views on the state of competition in the telecommunications business.
My testimony is not intended to represent any of my firm's clients and
it does not necessarily reflect their views.
---------------------------------------------------------------------------
I appreciate your invitation to testify on telecommunications
industry competition and consolidation. I have spent more than thirty
years, almost all of my professional life, considering these matters,
as a Justice Department attorney in the AT&T antitrust case, as a
bureau chief at the FCC, and as a private attorney.
In the nine years since the passage of the Telecom Act, there has
been a telecom boom and bust, significant consolidation among the Baby
Bells, disappearance of numerous competitive local exchange carriers
and interexchange carriers through liquidation and merger, financial
accounting scandals, and now the imminent absorption of AT&T and MCI.
And, in the nine years since the passage of the Telecom Act, there has
been an enormous expansion of wireless service, even greater expansion
of the Internet, great increases in residential and small business
broadband service through cable modem and DSL technologies, lower
prices for many telecommunications services, and increasing deployment
of digital technology.
So recent history is very mixed. Despite appalling losses of
employment and investment with all of their attendant dislocations,
there is genuine reason to regard the performance of the
telecommunications sector as good and equally genuine reason to protect
the process that produced the performance. And that will be challenging
because the telecom marketplace nine years after the Telecom Act almost
certainly is in the early stage of a fundamental transformation.
The last time this happened was two-to-three decades ago, when the
preference for competition over regulated monopoly established itself
as the prevailing paradigm in both an intellectual and an operational
sense. This preference was reflected in the realm of antitrust law in
the divestiture of the Bell System. It was reflected in the realm of
regulatory law in policies favoring open entry and disfavoring
restrictions on output. The result of this paradigm shift was what its
proponents had hoped and predicted. We have had decades of remarkable
progressiveness in our communications industries. It is observable in
the many products that did not exist in 1975 and in the vastly lower
prices for products that did exist. This was not, of course, a matter
of single causality. More than anything else, it was a function of
technological possibilities being deployed quickly and imaginatively
under the pressure of growing competition. One legacy, then, is the
great improvements in product variety, quality, and price that we enjoy
today. The other is, or at least should be, very strong confidence that
policies favoring the dynamic aspects of competition are to be
preferred.
In sum, the fundamental transformation of three decades ago turned
out to be almost entirely positive. The issue raised by this hearing is
whether the current changes will be as well.
The telecom marketplace nine years after the Telecom Act, from the
perspective of consumers, offers great promise and some risk. Just as
three decades ago, the promise is a function of extraordinarily
favorable developments in technology combined with competitive
imperatives to reduce the developments to practice and bring them to
the marketplace quickly. The risk resides in the equally extraordinary
institutional upheaval affecting the production of telecommunications
services.
My testimony will address the risk side of the equation. It is
important, however, not to lose sight of the enormous benefits that
have been produced by the telecommunications sector in the era of
divestiture and deregulation and of the high probability that
innovation will continue, at an accelerating pace, for the foreseeable
future. The policy issues that we confront involve protecting the
process that has produced these gains and insuring that they are
available across all of our society. In that sense, they are good
problems to have.
One way--I think the best way--to consider the risks to our
telecommunications future is to consider the state of the institutions
on which we depend. What has gotten us to the present desirable state
is a workably competitive industry operating in a legal framework that
takes seriously the threat of undue market power and seeks to prevent
its creation or deter its exercise. The institutional arrangements that
embody this experience are today under great pressure.
To begin with the business institutions: the most significant
aspects of today's telecommunications marketplace are consolidation and
convergence. Both mergers and liquidations have reduced the number of
businesses operating across many parts of the telecommunications
sector. The most obvious examples involve companies that in traditional
terms principally offered local exchange or interexchange services. In
parts of telecommunications where this has not yet happened as
dramatically--equipment manufacturing and distribution most
prominently--it will. All else equal, of course, consolidation
threatens to undermine the workably competitive environment that has
produced the benefits that our society enjoys today. But the
phenomenology of convergence of previously distinct modes of
communication means that all else is not equal. Convergence has been
anticipated for the better part of forty years. It is occurring
dramatically in the case of wireless service displacing wireline
service and in the case of local exchange telephone companies and cable
television companies competing in what had been the other's core
business.\2\
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\2\ It is instructive that the government's anticipation of this
intermodal competition was accompanied by affirmative steps to protect
the cable industry and ultimately the public from exercises of market
power by the local telephone companies. These affirmative steps took
the form of FCC pole attachment regulations and cable-telco
crossownership prohibitions that were, in time, incorporated into the
Communications Act by Congress. In wireless, they took the form of
repeated FCC efforts to force wireline interconnection rates to be
reciprocal and reasonable. These measures had costs, as all regulations
do, and no doubt produced occasional unintended results, but there is
little doubt that today we are better off as a society for the
existence of the requirements.
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The broader point for public policy is that convergence makes it
difficult to assess the competitive effects of consolidation. Both the
definition of product market and the identification of suppliers of the
product become a great deal more difficult.
One other factor makes competitive assessment more difficult yet.
That factor is disruptive technology. Technology, especially digital
technology, is drastically affecting the way in which
telecommunications services are produced just as it is enabling the
creation of entirely new services. To take the obvious example, at
present it appears that broadband-enabled services will be the
preferred objects of consumption in our telecom future. From today's
perspective, it also appears that for most consumers and small
businesses the broadband transmission will be supplied by one of two
providers, either the local telephone company or the local cable
company. However, there are two other technological possibilities,
wireless and broadband over powerline, that could become important in
the supply of broadband transmission services to consumers and small
businesses. Overall, it is virtually impossible to predict how quickly
and how extensively broadband transmission service will spread across
our country, how many providers will be available in any given
geographic area, and what the comparative qualities of broadband
produced with different technologies will be. There are reasons to be
optimistic that broadband will be available in a workably competitive
environment and there are reasons to be cautious about our legal and
regulatory arrangements in the event that it is not.
Changes of this kind have very large consequences for our
assessment of whether businesses enjoying high market shares are in
fact as entrenched as the shares might make them appear. By way of
example, should we consider the local telephone industry's share of
narrowband circuits in the face of possible broadband substitution any
differently than we should have considered paging companies' shares in
the face of cellular substitution or international telex companies'
shares in the face of facsimile substitution? I happen to think that we
should, but the possibility of widespread substitution obviously
influences any estimate of effective market power.
Given where I believe we find ourselves, in the early stages of a
fundamental change in telecommunications industry structure brought
about by disruptive technology resulting in convergence and
consolidation, what should we do? The best answer I can provide is,
proceed cautiously.
With respect to our legal and regulatory institutions--the
Communications Act and the antitrust laws: the recent tendency on the
part of the FCC , the Department of Justice, and the courts is to play
down the possibility of socially harmful single firm conduct and to
play up the possibility that government constraints on single firm
conduct will damage consumers and the broader public interest. In some
respects, this merely reflects the present state of an endless and
ultimately irresolvable debate that is grounded just as firmly in
political philosophy as in economics and empirical evidence.\3\
Assuming agreed desiderata, is government intervention in the
marketplace likely to make matters better or worse? Is it good policy
to risk interfering with productive efficiencies for the sake of
enabling or protecting additional producers? Is it good policy to risk
interfering with productive efficiencies for the sake of distributional
considerations? Is it necessary to secure the desired level of
investment in new technology to permit investors to appropriate the
full value of their investments, or should some of the surplus be
spread to consumers and to others in the productive realm?
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\3\ Arguments over economic regulation are not over whether there
should be regulation, but rather over the type of regulation. The
dichotomy is between regulation based upon public utility concepts and
regulation based upon the law of property, contract, and tort.
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When we look at the legal and regulatory institutions affecting
telecommunications, my thesis is that the present legal tendency in the
present industrial context is dangerous. It is dangerous because the
industrial setting is changing fundamentally, but the legal
arrangements are not reacting to this development in an appropriate
way, that is, with caution.
From the perspective of regulatory law, what has emerged from both
FCC and numerous appellate decisions related to the 1996
Telecommunications Act is a policy that strongly favors incentives to
invest and equally strongly avoids intrusions into corporate decisions.
In a significant sense, the recent Commission and court decisions can
be seen as a reaction against the activist interpretations that
constituted the initial FCC effort to implement the 1996 amendments
shortly after their passage. The controversy surrounding Unbundled
Network Elements constitutes a telling example. Simultaneously, there
has been an inability thus far to amend adequately a whole series of
important traditional arrangements that have come under pressure as a
result of changes in the telecommunications business. These include
universal service and intercarrier compensation, major matters that
have significant distributional implications. While these issues have
only an indirect effect on competition, they contribute to instability
in a sector already significantly destabilized by disruptive
technology.
From the perspective antitrust law, the observable and incipient
changes in the telecommunications industry make Section 7 of the
Clayton hard to apply and Section 2 of the Sherman Act more important
than ever.
As noted, at the local level the relevant product markets are
changing and important competitors are attempting to enter. There is a
reasonable basis to debate whether incumbent local exchange companies
are more entrenched than ever given the failure of many competitive
local exchange carriers and the diminished state of UNE competition, or
more vulnerable than ever due to substitution of wireless service and
of broadband facilities and internet protocol for narrowband facilities
and circuit switching. Whether the substitution will occur on a large
scale and over what time frame are uncertainties that inevitably affect
the predictive judgments required by Section 7 in ILEC transactions. To
say it more simply, confident predictions are much more difficult when
so many of the salient facts are changing. Given the manner in which
the Clayton Act distributes burdens of proof--mergers are permissible
unless proven harmful--the uncertainties have the effect of permitting
mergers. In these circumstances, most telecom mergers would be cleared
even if Justice Department policy makers were not philosophically
disposed to avoid government intrusion, which they plainly are.
If the vast changes overtaking the telecommunications industry tend
to narrow the scope of Section 7, they make Section 2 more important.
The monopolization provision is the economy's ultimate protection from
the exercise of market power. It seldom is used successfully, but I
have always believed that its existence serves to make firms with
strong market positions circumspect in the way they use their economic
power. This is especially important in telecommunications, where
relatively high market shares are commonly found. Given the inherent
uncertainties in the telecommunications marketplace, it is particularly
important that the residual authority represented by Section 2 remain
unimpaired. It is unfortunately the case that it has been impaired
recently by Trinko \4\ and other decisions in the Goldwasser line of
cases.\5\
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\4\ Verizon Communications Inc. v. Law Offices of Curtis V. Trinko,
LLP, 540 U.S. 398 (2004).
\5\ Goldwasser v. Ameritech Corp., 222 F.3d 390 (7th Cir. 2000).
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Trinko seems to me to have materially weakened our ability to rely
upon the Sherman Act to correct instances of monopolization as they
arise and thus to have weakened its deterrent effect. This is not
accidental. The Trinko opinion is remarkably tendentious and
unremittingly hostile to the application of the antitrust laws to
regulated industries. Three features of the opinion are especially
troubling.
The first is extended dicta about the relative capabilities of
regulatory agencies and antitrust courts. Trinko gets this exactly
backward. The decision greatly overvalues the ability of regulatory
agencies to adjudicate competitive disputes and undervalues that of
antitrust prosecutors and courts. It does not denigrate the social
value of the FCC and of state public service commissions to note that
adjudication of competitive disputes is not what they do best. What
they do best reflects the essentially legislative nature of regulatory
agencies. They are designed and staffed to formulate and articulate
policies that apply prospectively. In the process, Commissioners bring
to bear their preconceptions about what is best for society and of
necessity often compromise among themselves. These tendencies--to draw
upon experience and belief rather than solely on a bounded record and
to reach pragmatic compromise--are the opposite of adjudication.
Although Trinko loads up the scale with the ``sometimes considerable
disadvantages of antitrust'' and the ``cost of false positives,'' the
conclusion that competition in telecommunications in its most
fundamental aspects will be protected with diminished possibility of
Sherman Act prosecutions seems to me utterly wrong.
It also ignores history. As the Competitive Impact Statement in
United States v. Western Electric indicated, regulatory failure was one
of the bases for the Justice Department's prosecution that led to the
Bell System divestiture.\6\ The regulatory failure did not reflect a
lack of effort on the FCC's part. The FCC had compiled a remarkable
record in opening several telecom markets to competition. It also made
significant efforts to stop Bell Company violations of its competition-
related orders. History makes it clear that the FCC could not do so
quickly enough, nor in a way that threatened sanctions for future
violations that were sufficiently severe to act as a deterrent.
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\6\ 47 Fed. Reg. 7170 (Feb. 17, 1982).
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Trinko's objection that telecom-related antitrust prosecutions
bring courts into contact with the ``highly technical'' does not
distinguish them from many other controversies that we ask the courts
to consider. The availability of primary jurisdiction referrals offers
amelioration of this concern. The related objection that telecom-
related judicial decrees could prove difficult to administer is
correct, but, again, this does not distinguish them. The goal of a
workably competitive telecommunications sector is worth the price of
imperfect remedies, even recognizing the risk that they could
inadvertently deter some socially beneficial conduct.
The second and more significant concern stemming from the Trinko
decision is the way in which it approaches Section 2. Similar to others
in the Goldwasser line of cases, it invites an examination of component
parts rather than of the whole. This approach looks at a course of
conduct one element at a time and dismisses each as lawful or as
individually immunized and then concludes, based on these intermediate
steps, that there is no violation.\7\ Prior to Trinko, the Supreme
Court had found this methodology to be impermissible.\8\ In other
words, monopolization is an independent violation of the antitrust
laws. A finding of liability does not depend on finding that a
component activity in a course of conduct separately and individually
violates the antitrust laws. If it is to be effective, Section 2 must
require that courts look at the alleged conduct whole. It should not
matter if each of the individual components is lawful, benign, or
immune when viewed in isolation if the end result, taken as a whole,
adds up to an anticompetitive effort to maintain a monopoly.
---------------------------------------------------------------------------
\7\ Covad Communications Co. v. Bell Atlantic Corp., 398 F.3d 666
(D.C. Cir. 2005), decided on the basis of the Trinko precedent,
provides an example of the diminution of Section 2 through the device
of segmenting an alleged illegal course of conduct.
\8\ ``Plaintiffs should be given the full benefit of their proof
without tightly compartmentalizing the various factual components and
wiping the slate clean after scrutiny of each.'' Continental Ore Co. v.
Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962). This citation
often invokes rejoinders that Continental Ore is not authoritative on
this point. I note that the Antitrust Division relied upon Continental
Ore for precisely this point in its Section 2 prosecution of Microsoft.
---------------------------------------------------------------------------
Looking at a course of conduct one element at a time highlights a
third, particularly troubling feature of the Trinko opinion. As with
other cases in the Goldwasser line, it tends to conjure idealized or
imaginary commercial environments largely free of positive law, or at
least regulatory law, strictures. It seeks to measure a firm's conduct
not against the law as it exists, but against some conception of the
law as it once was or should be. Section 2 should not be predicated on
this type of fictive environment, reduced to a game of counterfactuals.
It was designed to, and to be effective in protecting competition in
telecommunications it must, take the world as it finds it, including
the world of positive law-required or -influenced activity. In other
words, whether a course of conduct constitutes monopolization or
attempted monopolization should be determined against the commercial
realities as they actually exist. Those realities are influenced in
many ways by positive, statutory law. The proposition that positive law
and the legal obligations it creates should be ignored in determining
if monopolization has occurred is exceedingly strange, but if and as it
is adopted and extended it will deprive our telecommunications
industries, and other regulated industries as well, of protection
against monopolization.
To conclude, the availability of the antitrust laws, and especially
of the Sherman Act, to protect the competitive process in
telecommunications is as important today as it ever has been. Recent
judicial decisions have tended to diminish our ability to rely upon the
Sherman Act. This is an issue that should be a priority in connection
with any legislation or oversight involving the communications
industries.
Mr. Cannon. Thank you, Mr. Verveer. And may I just lead to
the question to you. You were the lead antitrust counsel at the
Department of Justice at the time of the original filing for
divestiture of ``Ma Bell.'' If the Goldwasser and Trinko
decisions had been in effect as of 1974, is there a significant
danger that the Federal courts would not have been able to
order the breakup of AT&T, and may in fact have had to grant a
motion to dismiss the department's case?
Mr. Verveer. Yes, sir. I think if Trinko had been the
controlling law at the time, it is doubtful that the case could
have been successfully prosecuted. A large part of that case
was predicated on the refusal of the Bell companies to
interconnect with other carriers and to permit interconnection
of terminal equipment. Those obligations were found in the
Communications Act, and had been ordered by the FCC to take
place; and so, as a result, appear to me to be almost exactly
conceptually the kinds of things that Trinko has now apparently
ruled out of bounds.
Mr. Cannon. Thank you, Mr. Verveer.
Mr. Kellogg, in your testimony, you seemed to agree with
Mr. Conyers that the telecommunications industry has radically
changed since 1996, for the better. But you seem to think it
is, in spite of the act, rather than because of the act--rather
than because the act opened up competition.
Mr. Kellogg. That's not completely correct, Mr. Chairman.
In fact, I think the act did two terrific things: which is
eliminating local franchises, and opening telecom markets to
competition and opening up long-distance markets to
competition; and in preempting State attempts to block
competition.
What I am mainly concerned with was the FCC's
implementation of that act, which turned what was intended to
be a temporary crutch for new entrants to allow them access to
incumbent networks until they could build out their own
facilities--and they took those basic, limited principles
established by Congress and turned them into essentially a
cradle-to-grave welfare program for new entrants. That
encouraged a huge amount of inappropriate entry by CLECs, as
Mr. Conyers pointed out. There were 200 CLECs at one point.
That was simply not sustainable competition.
Mr. Cannon. Well, did you expect CLECs to create facilities
that would have wires all the way to every house?
Mr. Kellogg. I expected CLECs to do what they have done;
which is to build ring networks in major municipalities, where
most of the large customers are located, where most of the
revenues are to be found; and then to build out from those ring
networks to individual customers, which they all advertised
that they will do.
Mr. Cannon. But that would have been largely individual
business customers; is that correct, in your mind?
Mr. Kellogg. In terms of the large inner-city networks,
that's true. That's large- and medium-sized business customers.
Mr. Cannon. So you expected that the CLECs would never have
the opportunity to use the last-mile wire to offer services
that the RBOCS had known about, had on the shelves, but refused
to offer their customers all that time?
Mr. Kellogg. No, that's incorrect, Mr. Chairman. Three
things: One, cable companies already had a last-mile wire into
the house, which they're using for VoIP. Second, wireless, of
course, goes directly into the house----
Mr. Cannon. Right, but I think you testified that those
things were not really in the mind of people at the time. But
DSL was on the shelf of the RBOCs, and hadn't been promoted at
all. And CLECs--I don't usually think of the cable companies as
CLECs. Those are companies that came in to offer services on a
system that had been built in a subsidized environment by a
regulated industry.
And so my thought of the 1996 act--it was passed before I
got here--but my understanding was that it was to open up
those--that investment that society made through these
regulated companies, so that we would have more services
available.
Mr. Kellogg. I don't think anyone disputes that the last-
mile copper loop has been appropriately opened up by Congress
and made available to competitors. It's still available today.
What's not available is what's called the ``UNI-P,'' which was
a sort of contrivance of the FCC as a substitute for resale at
extremely low, subsidized rates.
Mr. Cannon. Let me just ask, if I may, Mr. Kellogg, do you
and USTA agree with the Court's reasoning and decisions in
Goldwasser and Trinko?
Mr. Kellogg. Absolutely, Your Honor----
Mr. Cannon. Thank you----
Mr. Kellogg. Oh, do you want me to explain, or just to----
Mr. Cannon. No, certainly go ahead.
Mr. Kellogg. One thing I would point out, it was a
unanimous decision. Two, it followed the letter of this
Congress' law, in preserving antitrust law and saying that it
was not changed by the Telecom Act.
Mr. Cannon. Because my time is up, and I want to be a good
example for the rest of the panel, let me just ask one other
question.
Mr. Kellogg. Fine.
Mr. Cannon. Why is Qwest the only RBOC to offer naked DSL
in America today?
Mr. Kellogg. Well, it's actually not true. Verizon has
begun to offer naked DSL.
Mr. Cannon. Where?
Mr. Kellogg. The service was developed as a complement to
voice. It's extremely expensive to provide it on its own.
Different businesses are going to make different business
decisions about whether it makes sense to do that.
Mr. Cannon. Thank you. My time has expired. Mr. Conyers?
Mr. Conyers. Thank you, Mr. Chairman.
Gentlemen, a couple of things need to be on the record. Are
most of you in agreement with the notion that inevitably there
will probably only be two, maybe three, telecoms that can serve
global customers; and that might be used as an argument for--
that one of these global operations may be United States based?
And the other consideration that I have is, how can we
assure, in today's fast-changing marketplace, that innovation
and price reduction are not driven out of the marketplace when
we go into these mergers? Can they provide more competition,
and we do have these goals happen as a result; or are the
antithetical? Let's quickly chime in, before my 5 minutes run
out.
Mr. Grivner. Okay. Let me start, then. First of all, do I
think there can be more than two or three global
telecommunication companies?
Mr. Conyers. Yes.
Mr. Grivner. I do. Because I think telecommunications, as
we know it today, is certainly changing. And I think if we
fixate ourselves just on the wire-based business, that's the
wrong fixation. Because I do think broadband wireless will be
something that will happen, probably in three to 5 years.
I also think large companies, very large companies, can be
their own telecommunication company, because VoIP and
technologies like VoIP really unmask a lot of the capabilities
for large companies to be their own telecommunication
providers.
Mr. Conyers. Mr. Moir?
Mr. Moir. On the global front, no, I think we'll have more
than that. At first, I thought your question was whether we'd
have two global providers, U.S.-based.
Mr. Conyers. No.
Mr. Moir. I think that's a given, and I think we'll clearly
have more, if you look at the number of global providers;
although I think a low single-digit still.
I think the problem that we're having is not in the pricing
area; isn't so much driven by the mergers, but driven by the
failure of the FCC to provide the safeguards that we thought
they were going to provide after the '96 act. So the abuses are
already occurring; which is negatively impacting customers,
competitive suppliers, and even the wireless industry.
Mr. Conyers. And some of these decisions aren't helping
anything, either; are they?
Mr. Moir. Absolutely not.
Mr. Conyers. Mr. Kellogg?
Mr. Kellogg. I'd like to direct to the second question
about post-merger competition. Mr. Grivner cited two examples,
Cleveland and Milwaukee. I would like to point out to the
Members that in Cleveland there are today 11 operational CLEC
networks. Eleven. There'll be one eliminated after the mergers,
because SBC will combine with AT&T. There'll still be ten.
They'll be strong competitors.
In Milwaukee, there are six operation networks. There will
be five after the merger. Today, there are three to five
wireless providers, and that is considered a paradigm of
competition.
Mr. Conyers. Uh-huh.
Mr. Verveer. Well, Mr. Conyers, the only way we're going to
continue to get good performance out of our industries is if we
maintain a competitive environment. That seems to me to be the
critical point.
As to the number of firms that may be available to serve
the so-called enterprise market, or the big business market, I
guess I'm hopeful that we will have certainly at least three,
and probably a good many more; and particularly if one looks at
it on a worldwide basis. Thank you.
Mr. Conyers. Uh-huh. Mr. Moir?
Mr. Moir. One add-on----
Mr. Conyers. And then Mr. Grivner.
Mr. Moir. --vis-a-vis what troubles me is the discussion of
the number of suppliers in a market.
Mr. Conyers. Right.
Mr. Moir. The only thing I care about as a user: How many
people can supply my points of presence? So even though there
may be 11, I don't care if there are a hundred carriers in the
market. If for 95 percent of my points of presence from my
high-capacity pipes I only have one company to choose, Mr.
Kellogg's numbers are totally irrelevant.
Mr. Conyers. Okay. Last comment.
Mr. Grivner. I just want to add that Mr. Kellogg's remark
is relatively meaningless. It's silly, in the sense of it
doesn't have ubiquity that, certainly, an SBC and AT&T have.
Mr. Conyers. Poor Mr. Kellogg.
[Laughter.]
Mr. Conyers. No commentary. I'm out of time. But I thank
you all for your discussion.
Mr. Cannon. Thank you, Mr. Conyers.
Mr. Smith?
Mr. Smith of Texas. Thank you, Mr. Chairman.
Mr. Cannon. The gentleman is recognized for 5 minutes.
Mr. Smith of Texas. I'm going to give Mr. Kellogg a chance
to follow up on that. First of all, Mr. Kellogg, I want to read
from the end of your prepared written testimony. You say,
``AT&T and MCI cannot survive as independent companies. The
hundreds of CLECs started in the wake of the 1996 act cannot
survive alone, either; and they are joining forces and
consolidating into much stronger, more vibrant competitors.
These are trends to be embraced, not resisted.''
And this is to follow up on a couple of the earlier
questions you got regarding consolidation. but we've talked
about numbers, we've talked about competition. We haven't
talked about whether or not the consolidation actually helps
the industry. We haven't talked about whether the consolidation
will help America's competitiveness or not. Do you have answers
to those questions?
Mr. Kellogg. I hope so. On the issue of helping
competition, I would point out that XO, for example, is an
amalgam of CLECs. It has taken over a number of failing CLECs;
taken over their networks, refurbished them; and turned itself
into an incredibly vibrant provider of business services to
large customers in over 70 markets around the country.
These companies focus on the large cities, because that is
where the major customers are. They build fiber rings. They can
afford to build out from those rings to the individual large
customers.
And there is no question in my mind that the reduction in
number of CLECs is leading to a stronger marketplace. There's
also no question in my mind that a combination such as that
between SBC and AT&T, or Verizon and MCI, because their
networks and their services currently complement one another,
will make them much stronger, better competitors in an
increasingly competitive global marketplace.
Mr. Smith of Texas. Okay. What about the impact of
consolidation on consumers? Is it going to raise prices? Is it
going to reduce the number of options that consumers have?
Mr. Kellogg. I think it will actually increase the options
for consumers, in terms of having viable players who are
capable of building out across the country and competing in all
the markets. You only need three to five to really jumpstart
and promote competition, and I think there's no question we're
going to have that sort of competition.
Mr. Smith of Texas. Okay. Lastly, maybe this is to follow
up or give you a chance to expand an earlier answer. Why is
USTA so supportive of the Trinko decision?
Mr. Kellogg. Well, the Trinko decision really follows in
the line of standard antitrust analysis. That's why it was a
unanimous decision written by--you know, joined by all sides of
that court; because they recognized that the ``essential
facilities'' and ``refusal to deal'' doctrines have only a very
limited role to play in antitrust.
Ordinarily, no one has an obligation to assist their
competitors. You don't want them assisting; you want them to be
competing with one another. Congress imposed certain
obligations on the ILECs, to share their networks with them.
But those are regulatory obligations; those are not a
transformation, a fundamental transformation of the antitrust
laws of the sort that the plaintiffs were attempting to obtain.
Mr. Smith of Texas. Yes. Okay. Thank you, Mr. Kellogg.
Thank you, Mr. Chairman.
Mr. Cannon. Thank you, Mr. Smith.
Mr. Delahunt, you're next if you have some questions.
You're recognized for 5 minutes.
Mr. Delahunt. I noticed Mr. Grivner wishing to respond to,
I think, a comment by Mr. Kellogg. So let me give you the
chance.
Mr. Grivner. Thank you very much. First of all, based on
Mr. Kellogg's kind remarks, I'd like to retract the ``silly''
comment--just kidding.
I want to clarify something, Congressman Smith. We're not
opposed to--I'm not opposed to consolidation. I'm opposed to
concentration in markets. And there's a big difference. For
example, the proposed mergers, SBC and Verizon, will
concentrate 80 percent of the business lines with those two
entities. That's a fairly difficult task to overcome. That's
concentration. That is not going to be good for business
customers in the long term. There's a second point that I want
to clarify----
Mr. Delahunt. But let me interrupt----
Mr. Grivner. Sure.
Mr. Delahunt. --and go to Mr. Kellogg. Respond to Mr.
Grivner's observation about 80 percent and concentration.
Mr. Kellogg. Well, Your Honor, there's no question that the
geographic scope of these companies is going to be larger; and
therefore, they're going to have----
Mr. Delahunt. Eighty percent.
Mr. Kellogg. They're going to--I do not believe that that's
an accurate number but----
Mr. Delahunt. Well, what's your number?
Mr. Kellogg. I don't have a number.
Mr. Delahunt. Well, let's accept his number, then.
Mr. Kellogg. But certainly, for the large business
customers----
Mr. Delahunt. Let's accept his number, and please respond
to my question.
Mr. Kellogg. For the large business customers, the ILECs
are actually bit players in that market today. They do compete
within their own regions, but they have had a great deal of
trouble attracting large business clients across the course of
the country. And the merger is going to allow them to do that.
Mr. Delahunt. Mr. Moir?
Mr. Moir. Right. Having spent many decades representing the
very community Mr. Kellogg just referred to, let me make a
couple of points. First of all, be careful about the terms
being used. ``Large market:'' The market he is describing is
large business customers that have what I call a true multi-
State--like a multinational company. They're in every State in
the country; they're in 200, 300 locations around the United
States.
The reason is, if they were to compete for those markets
when we put out an RFP--because we do all that by contract--
outside their region they'd be nothing more than a reseller.
They haven't chosen to build long-haul facilities outside of
regions that are meaningful. They haven't chose to compete in
the local exchange, like AT&T and MCI and the other facility-
based CLECs. And as a consequence, they've made a strategic
decision to compete within their own region.
For the large customers that are within--or predominantly
within--their marketplace, they are vigorously competing for
those, and doing a very, very good job of sustaining them as
customers. So you have to be careful which type of large
customer he's talking about.
Mr. Delahunt. Anyone else want to add anything to this
conversation? Let's give you a shot, Mr. Kellogg.
Mr. Kellogg. I could point out in response to his point
that AT&T and MCI are vigorous participants in the residential
market. They'd both withdrawn from the residential market
because the business model that they had, which was a purely
resale model, was not working, was not viable over the long
haul.
The provision of their backbone networks and the
combination with the regional facilities of the Bell companies
will actually allow for much more vigorous out-of-region
competition.
Mr. Delahunt. Mr. Grivner?
Mr. Grivner. Yes, I think an earlier comment that Mr.
Kellogg made that I think needs clarification, he said that
voice is declining. And I think, a couple of points there. One,
it's declining because they're moving to wireless. And they are
moving to companies that control 60 percent of the market,
something you should also be concerned about. That would be
Verizon and Cingular, part of SBC.
And secondly, the conversion to data. Well, Voice over IP
integrated access devices, those are classified as data. Voice
is still being carried over those circuits.
Mr. Delahunt. Mr. Moir?
Mr. Moir. One thing, and it's troubling. It came up earlier
in the dialogue between Congressman Smith and Mr. Kellogg. The
statement, the paragraph that was read out of page 13 of the
prepared statement, is factually incorrect. It references that
the reason AT&T and MCI have been exiting the residential
retail market--not the market that I'm responsible for, or that
we're customers of at home--was, you know, because of wireless,
buckets of minutes. And then the add-on description just made
was because the UNE decision, their pricing plan was overturned
by the courts and the FCC.
And then, he makes the statement that AT&T and MCI could
not survive as independent companies. I don't know any analyst
that agrees with that statement. I don't know any of the
management at either of the companies that are going to be
acquired that agrees with that.
What happens is they made a strategic decision because of
failed regulatory decisions that would provide safeguarded
access at reasonable prices to the bottleneck facilities. When
the regulators failed to do their job and those with
jurisdiction over them didn't force their hand, AT&T and MCI,
as they just mentioned, had to leave the market.
But it wasn't that they weren't going to continue as
independent customers--companies--because they would continue
to market to the type of large users which the RBOCs have
decided not to go after and spend the money on. They decided it
was cheaper to just buy companies that already did that. They
were going to continue. They've decided to merge and seek
mergers because they wanted to protect shareholder value before
they totally exited the businesses that they were losing to the
RBOCs.
Mr. Delahunt. Thank you. The gentleman yields back.
Mr. Conyers. Mr. Chairman, could I ask, before Mr. Flake
begins, for 1 minute?
Mr. Cannon. The gentleman asks 1 minute. Unanimous consent
to take 1 minute out of order.
Mr. Conyers. Because I----
Mr. Cannon. Without objection, so ordered.
Mr. Conyers. Thank you. I just wanted to examine AT&T--the
assertion that AT&T is not facing some kind of challenge at the
local level. From what my staff tells me, there are some
problems ahead there. Amazing, since they've been around so
long. But I thought that there was some problem. Let me ask
Kellogg first, and then Moir.
Mr. Kellogg. Yes, Your Honor. The long-distance industry is
declining rapidly. More and more minutes are shifting to
wireless. It's simply not a profitable business; and yet it was
the backbone of both AT&T and MCI. They've got great relations
with large business customers, but they don't have a viable
stand-alone business.
Mr. Conyers. Mr. Moir?
Mr. Moir. Again, mix and match of what I call retail
customer market and large multi-State. They're clearly exiting
the retail residential small-, medium-sized business market,
primarily, as any of them will tell you--and they've said
repeatedly in forums all over this country--because of failed
abilities of the regulators--the FCC--to manage the access that
we have to have to every ILEC in this country.
Those are the same concerns I talked about in my written
and in my oral. For large customers, we're being gouged with
these special access tariffs; again, because we have no choice
but to use them. And as long as the Bells have refused to build
long-haul fiber all over the country to duplicate the many
long-haul carriers that are out there and outside a region,
they're going to have to pay these same egregious charges.
Verizon's going to have to pay, you know, the 80-percent rates
of return charges that SBC's charging. SBC's going to have to
pay when Verizon----
Mr. Conyers. Well, they're going down. The point is--and I
agree----
Mr. Moir. Well, they're going down but it's----
Mr. Conyers. I agree with you that there are multiple
reasons. But the fact is that things ain't what they used to
be.
Mr. Moir. Absolutely not.
Mr. Conyers. All right.
Mr. Moir. And the FCC is the major problem.
Mr. Cannon. Thank you. The gentleman yields back.
Mr. Flake, I think you're next in line. The gentleman is
recognized for 5 minutes.
Mr. Flake. I thank the Chairman and the witnesses. Mr.
Grivner, if you were over at the FCC, if you were in that
position----
Mr. Grivner. Uh-huh.
Mr. Flake. --what concerns you more? Verizon-MCI merger, or
the SBC-AT&T?
Mr. Grivner. Both mergers would concern me because of the
concentration, in the business market specifically, at 80
percent. Both mergers are of a concern. Again, I want to go
back to Congressman Smith's point earlier. It's not
consolidation that's the issue; it's the concentration and the
customer base. Both mergers have a concern for customers as
well as the competitive industry.
Mr. Flake. Mr. Kellogg, you're not troubled by those
mergers, either one? If those were to merge, and then merge
again, would you be concerned?
Mr. Kellogg. It would depend upon the market circumstances
at that time. Currently, I think the two mergers as proposed
will actually lead to stronger competitors and more competition
at all levels. How the market's going to transform itself over
the course of the next 5 years is really impossible to say.
Mr. Flake. As long as we have an American League and a
National League kind of thing, it's all right then? Just the
two? A third league?
Mr. Moir, do you want to comment on that?
Mr. Moir. Actually, the American League--the two-league
proposal is appropriate because typically--and even Baltimore
would speak up on this--you know, they don't compete in each
other's markets. That's much the case with the Bells, also.
They don't compete in each other's markets. And for those who
are dependent upon accessing those markets, you either pay the
freight, or you're not in business.
Mr. Flake. There is something called ``Inter-League Play''
now--limited though it may be.
Just getting kind of back to that, at what point is it your
contention, Mr. Kellogg, that because of the huge shift to
Voice over Internet and wireless that we simply do not need to
be concerned with the land line consolidation?
Mr. Kellogg. I do think that's correct. And I would point
out that the Bell companies are competing vigorously with one
another today through their wireless infrastructures. They're
spending billions to build out these wireless infrastructures
throughout the country. They're taking away lines every day
from one another, through that means.
Mr. Flake. And Mr. Grivner, is there a point at which Mr.
Kellogg becomes correct, and that, you know, the wireline
position or controversy is moot, because of this shift to
wireless and Voice over Internet?
Mr. Grivner. Well, I guess, a couple of points. First of
all, that would be contradictory to what he said earlier, in
terms about the investment in fiber to the home and to the
business. Why would you do that, if you think it's going to
become moot at some point in time?
I think secondly, from a shareholder perspective, you would
have to question why they're spending billions of dollars to
buy ``failing businesses.'' That probably doesn't make a lot of
sense.
And third, wireless and broadband, and VoIP, are different
things. It's like saying Microsoft Windows, and the PC. Without
the two together, they don't make any sense. VoIP is primarily
software. Wireless and broadband, wireless broadband, are
delivery mechanisms. They're transport. They're hard--hard
assets, if you would. The two need to be combined together. If
you look at Vonage, 650,000 subscribers: Very innovative, but
they still rely on that underlying infrastructure to deliver
service to customers.
Mr. Flake. Yes, Mr. Moir?
Mr. Moir. The wireless example, again, as I--we keep
hearing the example go back and forth. On the retail market,
these are relevant, for a percentage of the customers out
there. But for the major business industries in this country,
this is totally irrelevant. And Mr. Kellogg and this industry's
well aware of the absurdity that anybody that's going to run
major data networks in this country with any type of wireless
facility. It's just not going to happen.
Just as the cable industry doesn't, you know. They--for
security reasons, through-put rates, it's wireline, period.
Hopefully, fiber; as opposed to copper. But that's what you're
stuck with. And for 95 percent of the points of presence in
this country, there's only one person supplying those building
blocks. And it's your local ILEC, and that's a fact.
Mr. Flake. Thank the Chairman.
Mr. Cannon. The gentleman yields back. Is Mr. Gallegly
nearby?
[No response.]
Mr. Cannon. Mr. King. The gentleman is recognized for 5
minutes.
Mr. King. Thank you, Mr. Chairman. I appreciate the
testimony on behalf of all the witnesses here, and the
introspective questions that have been asked by the other
Members of this panel.
I would maybe bore into this maybe a little bit in some
more detail. With regard to the questions asked by Mr. Flake, I
thought that the question of what's the next stage if both of
these major mergers do go through--and I recognize your answer,
Mr. Kellogg, with regard to that.
I'm curious as to what your viewpoint was on the breakup of
the ``Baby Bells.'' How did you view that?
Mr. Kellogg. Back in 1984, I thought actually it was a very
pro-competitive thing that happened of splitting up the AT&T
into geographic regions. I think a serious mistake was made by
the Department of Justice then at that point--limit the lines
of business that the broken-off companies could go into,
because that created an artificial, separate long-distance
industry, which AT&T and MCI and Sprint dominated for a long
time; instead of, you know, breaking them up and then letting
them go at one another across all lines of business.
Mr. King. And these, both of these proposed large mergers
that we have in front of us, does that simplify or complicate
the approaching obligation that we'll have to find a way for
Voice over IP to be properly paid for by the customers?
Mr. Kellogg. Well, I think it will actually promote Voice
over IP, because it will allow for more investment to the
network and the speeding of broadband. And once broadband's
there, as somebody pointed out, Voice over IP is just software
that you add on to your computer. And there's no gateway
function that they're going to be able to prevent that. That's
here; it's going to be the future.
Mr. King. And what will that do to the ILECs, then?
Mr. Kellogg. Well, it's going to mean that they have to be
very nimble; that they're going to have to focus on broadband,
on wireless, because those are really the futures. And voice,
which used to be the whole market, is going to be, you know, an
application over wireless and over broadband.
Mr. King. Thank you. And I'd direct the same questions to
Mr. Grivner.
Mr. Grivner. I think what we need to be concerned about is
the level of innovation, especially on things like Voice over
IP. The example of DSL that we've talked about, I worked at
Ameritech in the '80's and the '90's, and it was available in
the late 1980's. Not deployed, because we didn't want to
cannibalize our second lines. It was a revenue decision:
``Let's not deploy that technology, because it'll eat into
future revenues and future profits.'' Wasn't deployed by the
RBOCs until the mid-1990's--post Covad, post Rhythms, post
Northpoint--deploying that technology.
Voice over IP, having worked at a technology company in the
mid-1990's, was available. The technology was being developed
at that time, and could have been more rapidly deployed with
higher investment.
So I think the concern has to be relative to the speed of
innovation you're going to see when you see the concentration
of these mergers, what it's going to mean to the existing
revenue streams, and why people would be willing to cannibalize
those streams early for the customer benefit or for business
benefit.
Mr. King. And would you speculate as to whether new
technology will be deployed more quickly or more slowly if both
mergers take place?
Mr. Grivner. More slowly.
Mr. King. Because of less competition?
Mr. Grivner. Less competition. Why do it? Again, history
would prove that that's not going to happen.
Mr. King. Thank you. Mr. Moir?
Mr. Moir. One thing that underpins the VoIP aspect to your
question, in order to have VoIP, you first have to have a non-
narrow-band pipe. I can go, do Internet access with a dial-up
telephone line just fine, unless, you know, there are kids in
the house that want to move legal video files back and forth,
and all of the things they do. But for, you know, typical
Internet access, sending e-mails, I can use a regular narrow-
band voice line. So you could have a first and second line in
the house, and you're fine.
To do VoIP, I have to have a line that's--what?--two and a
half times as expensive as the voice grade, or twice the
expense, either from the cable company, or the phone company.
So if you just look at the VoIP side and not at the additional
revenues that flow from the underlying pipe, you miss the total
dollar-and-cents picture.
Mr. King. Mr. Moir, though, I want to go to streamed, full-
speed, interactive video some day. What's best going to
facilitate that?
Mr. Moir. The fattest pipes you can get ahold of. And right
now----
Mr. King. What mergers will best facilitate that?
Mr. Moir. Well, actually, the people that have 95 percent
of those are the very companies that are called ``ILECs,''
local phone companies. They have the biggest ones.
Mr. King. I'm out of time. Thank you, Mr. Chairman.
Mr. Cannon. Thank you. The gentleman yields back. And I
think the next person to arrive here is probably Mr. Coble. Mr.
Coble?
Mr. Coble. Thank you, Mr. Chairman.
Mr. Cannon. The gentleman is recognized for 5 minutes.
Mr. Coble. Mr. Verveer, for the past few moments, you've
maintained a vow of silence, so I'm going to let you start off,
if I may. And the rest of you may join in. As you all know,
section 271 long-distance approval has been granted to the
Bells in all States.
If you will, Mr. Verveer, start us off by discussing the
importance of section 271 in creating effective telecom
competition. And explain, if you will, why the Justice
Department should have a continuing active role in monitoring
section 271 compliance.
Mr. Verveer. Well, Mr. Coble, as Mr. Cannon said, section
271 is a situation where the carrot has been eaten, at this
point. And while there is an opportunity, in theoretical terms,
to go back, try to propose sanctions, or even withdraw the
authority to offer long-distance service, these are the kinds
of sanctions that in reality will never be applied.
So we have--from the standpoint of the entry into long
distance, we have something that's been accomplished. It's not
really going to be undone. The reason to want to keep the
Justice Department, and the antitrust laws generally, engaged
is, in fact, despite all of the discussion about the future, we
really do not know how in the present environment--how things
are going to evolve.
And the reason we don't know is because we are in the midst
of a fundamental change; in the midst of a fundamental change
because technology has enabled that, and competition, at least
to this point, is demanding that the technology be deployed
quickly for the benefit of customers.
Now, if we had a clearer picture of how the world was going
to evolve, and if we thought it was going to be a very stable
environment over several decades, one might be able to
configure an arrangement that could be handled by conventional
regulation. But I think, in the face of these uncertainties, we
need something in the way of a backstop, if you will. We need
something to protect the competitiveness, the dynamism, of the
industry, in the event that the more optimistic perspectives--
some of which you've just heard--turn out not to be realized.
Mr. Coble. Thank you, sir. Anybody else want to weigh in on
that? Mr. Moir?
Mr. Moir. Just briefly. I think, hopefully, the most
critical safeguard that would accomplish what Mr. Verveer was
referring to is, at some point, these carriers, no matter how
big or small they are, have to talk to each other. They have to
exchange traffic. Whether it's high-speed, you know, wide-open,
bits and bytes flowing back and forth, or whether it's narrow-
band, voice conversation. And the FCC has totally failed in
managing that process. And as the market becomes more
consolidated, those issues are going to be even more critical.
Mr. Coble. Let me have another question, maybe for Mr.
Grivner and Mr. Kellogg. Rural carriers tend not to be
companies usually that attract a lot of venture capital, or
have the structure to support extensive R&D. But many of them,
however, have deployed advanced technologies, once they're
available. So they do have an interest in innovation. What does
the--what do you, Mr. Grivner and Mr. Kellogg, think will be
the impact of these proposed mergers on innovation, if
approved?
Mr. Grivner. Well, as I said earlier, I think that you
should be concerned about innovation, based on past history;
DSL being a great example. I also think, back to your earlier
question on 271, 271 was granted based on local competition.
And the basis for that local competition in many cases was AT&T
and MCI. That's now gone. So I think--back to answering your
first question, I think 271 needs to be reexamined by the
Department of Justice as a result of that, because that basis
is no longer there.
But I think you should be concerned about innovation, if
these mergers do go through. And I also think that we should
reexamine the overall use of the universal service fund, so
that it applies on a broader base of communication companies,
as well.
Mr. Coble. Thank you. Mr. Kellogg, you haven't been heard
yet.
Mr. Kellogg. Yes, thank you. If I may make a brief caveat,
I've been talking a lot about the mergers. I should note that I
don't believe USTA has taken an official position on the
mergers. So I am speaking more in my own capacity on these
issues.
But I do think that they will lead to tremendous
innovation, which will redound to the benefit of rural
carriers. AT&T's Bell Labs, one of the great innovating arms in
the United States over the past century--taking the benefit of
those technologies; deploying them with the resources that the
Bell companies have, down to consumers; giving IP video to
everybody, in competition with cable.
It's going to have huge consumer benefits, and cost
reductions, because even though that pipe may be expensive,
you're going to get your cable TV over it. You're going to get
your long-distance service over it. You're going to get your
local service over it. And everybody's going to benefit, and
the economy is going to benefit, as well.
Mr. Coble. Mr. Moir?
Mr. Moir. Just one--an aspect of your question, I believe,
was the impact on the 1,100 or so rural phone companies out
there. I mean, one of the advantages, as we've learned over the
years, of not being the first one to deploy a new technology is
if you--they don't always work; they're not always the most
cost-effective. And some of the best-built systems out there
are in rural America, because they took a more prudent approach
to deploying tested technologies, as opposed to being on the
absolute cutting edge.
Mr. Coble. Yes. Thank you, gentlemen, for being with us.
Mr. Chairman, I'll yield back my time.
Mr. Cannon. Thank you. The gentleman yields back.
Ms. Lofgren?
Ms. Lofgren. Thank you, Mr. Chairman.
Mr. Cannon. The gentlelady is recognized for 5 minutes.
Ms. Lofgren. I won't take the whole 5 minutes. First, let
me apologize for my tardiness in appearing. I had my Cyber
Security Bill finally up for markup, and it passed. But I had
to be there.
I have, however, read the testimony. I'm very interested in
this. And I will just say, I don't have a question to ask, but
I am concerned about the mergers. And I know that there's value
in some respects--and everyone has to love the Bell Labs. But
the history is, when you have competition, you have innovation.
And I think the consolidation should give us pause and concern,
in terms of innovation for the future. And you know, I just do
have some concerns.
And we saw, really, a flowering of technology innovation
for a while, and I am concerned that that may diminish as time
goes on, as a result of the lack of competition. So I'll just
state that. I mean, if someone wants to counter that statement,
you'd be welcome to do so.
Mr. Grivner. I don't want to counter it. I just want to
make one comment; that the Bell Labs innovation, a lot of that
was spun off when they created Lucent Technologies.
Ms. Lofgren. That's right. That's right.
Mr. Grivner. And I don't think that--as my best guess,
that's still not part of AT&T today.
Ms. Lofgren. No. But I mean, if you take a look at, really,
the explosion of innovation----
Mr. Grivner. Right. Right. Right. I agree with that.
Ms. Lofgren. --it was a result of the competition.
Mr. Grivner. Right.
Ms. Lofgren. And that's always the case.
Mr. Grivner. I agree.
Ms. Lofgren. So, unless there's further comment from one of
the witnesses, I'll yield back, Mr. Chairman.
Mr. Cannon. The gentlelady yields back. And let me
associate myself with her comments. Competition has resulted in
remarkable things, and that's a matter of deep concern.
Mr. Franks, the gentleman from Arizona, is recognized for 5
minutes.
Mr. Franks. Well, thank you, Mr. Chairman. And Mr. Grivner,
I have to say that most of the questions that I had in mind to
ask have been asked one way or another already. And so perhaps
I can just rephrase some of them, and give me what you can.
Mr. Grivner. Okay.
Mr. Franks. When I was in the legislature about 20 years
ago--I was only a kid then, of course--we voted to break up the
Bell system, the ``Ma Bell'' system.
Mr. Grivner. Uh-huh.
Mr. Franks. And of course, the end goal there was to do
everything that we could to foster competition and to create
innovation and create new entrants into the market; and also,
to get away from the Government subsidy that was such a part of
that system.
And I think, in a sense, you know, I look at my cell phone
today, and I can pull up my web site, and I can talk to
Australia for ten cents a minute. I find the whole explosion of
technology to be a fascinating and magnificent thing.
Having said that, I know that perhaps the biggest challenge
on the table here are these mergers. I mean, that's kind of the
pink elephant in the room that everybody is talking about. And
without, again, repeating some of the previous questions, do
you believe, given some of the statements made, that--if the
mergers do occur, that the business wireline would be
concentrated, at least in the majority sense--do you believe
that that will have a negative or positive effect on new
entrants in the market, new innovation, and competition in
general?
Mr. Grivner. The answer is, I absolutely do believe that.
And as I said earlier--I'm not sure you were here at the time--
that these two mergers will concentrate 80 percent of the
wireline business inside these two mergers. That cannot be good
from a competitive perspective. It can't be good for customers.
And I think, you know, these mergers are so massive that a
branding suggestion might be to call them ``AT&T East'' and
``AT&T West.'' Because that's really what we're doing, is we're
back to that time frame again of putting AT&T back together
again.
Mr. Franks. You said AT&T East and West.
Mr. Grivner. East and West, right.
Mr. Franks. But do you sense any distinction between the
two mergers that is of consequence?
Mr. Grivner. Not between these two particular mergers. And
again, to clarify a point, I am not opposed to consolidation.
I'm not opposed to the mergers. These two do concentrate a
great deal of business line access lines in two entities.
Mr. Franks. If the mergers should go ahead and be effected,
do you think--and I understand that, you know, again, you know,
there's a lot of people up here that are certainly not experts
in telecommunications. But I understand a lot of times that the
business services essentially end up carrying the residential
services, to a large extent; at least, that's been our
experience so far. Is that correct?
Mr. Grivner. When I was at Ameritech--but that was a while
ago--yes, that was true. But I believe it's still true today.
I'm not a hundred-percent sure of that.
Mr. Franks. Well, predicated on the notion that it might
still be, if the mergers are effected, do you--what other
entities are out there, what other companies are out there,
that might provide some competition for the two companies that
would be essentially a result of the mergers?
Mr. Grivner. I think that's a--in terms of size, you'd
probably have to look outside the telecommunications industry
for companies that could combat the cash flow of, for example,
an SBC, in terms of what it brings in in terms of capital and
what it could reinvest back in its network.
When you look at SBC and Verizon, and then you look at the
next players, there's a substantial drop. You'd have to look at
a merger of different companies in different industries,
really, to combat something of that magnitude.
Mr. Franks. Well, Mr. Moir, I might ask you a question. You
know, everyone seemingly on both sides of the aisle today
understand the tremendous benefit of competition and
innovation. And I'm certainly glad to hear that. I hope we can
hear that in the future, you know.
But often times, Government doesn't just try to create
competition. It tries to create a framework--or it should--a
framework of trust, to where companies that are placing capital
at risk and investment can say, ``Well, we're in an environment
where business at least will be done decently and in order, and
where financial statements will mean what they say.'' And you
know, the big challenge for Government, in my mind, is to
create an environment where competition can take place and
where we're essentially just the umpire, the referees; and that
we don't favor one or the other.
Given that sense, what do you think would be the position
that, if you were emperor of the world here and representative
of Government--what kind of environment would you try to create
here, given the dynamic of these potential mergers, and to the
end that competition and the people are best served?
Mr. Moir. Thank you. I think the answer is the greater a
level of choice that exists in markets, the less need there is
for Government policymakers to get in the way. Maybe it's at
the high guideline, but it's a sliding scale. The less choice
that exists, then the Government involvement in making sure
everybody deals with each other fairly has to be less benign
and more active.
And the types of customers I represent--not you and I at
home, but the very large customers that spend, you know, tens
to hundreds of millions of dollars a year on
telecommunications--when 95 percent of their fundamental
building blocks can only be purchased from the local phone
company, then I'd say the scale needs to slide far more than
the FCC has been sliding it recently. And deregulating those
type of prices doesn't pass any business test I'm aware of.
And as a consequence, we have an ironic situation. Mr.
Conyers mentioned earlier in the afternoon global issues. One
point I haven't made is that we have a situation now where--
which is absolutely unheard of at divestiture ten and 20 years
ago--that I can now sit down with large users and, when we're
putting together a global network, get these building block
pieces in the U.K. cheaper than I can get them here in the
United States.
So if I'm putting together a multinational network--which
large multinationals have--and I'm putting multiple, you know,
nodes around the globe--typically, data, for instance--I may
choose to put a redundant facility--because you always have to
deal with time zones and when there are problems--I may put a
redundant facility in the U.K.; not just because, you know, I
need a redundant facility, but also because it's cheaper.
Whereas, 5 years ago, I would have put that redundant facility
in the U.S.
That's what's happened when we have regulators making bad
decisions, you know. That's the extreme I can take for choice.
If I'm here in the United States, I'm stuck for 95 percent of
my choices. There aren't any.
Mr. Franks. Well, Mr. Chairman, last question, then.
Mr. Cannon. The gentleman's time has expired.
Mr. Franks. Yes, thank you.
Mr. Cannon. I think we're going to do another round. But
given the fact that we have several people waiting, let me
recognize--Mr. Issa is out, right? So, Mr. Pence, did you have
some questions? The gentleman is recognized for 5 minutes.
Mr. Pence. I do, Chairman. And I'd be pleased to yield 2
minutes of my time to Mr. Franks.
Mr. Franks. I'm fine. Thank you, sir.
Mr. Pence. Okay. Thanks for holding this hearing, Mr.
Chairman, and I thank the panel. I've been coming and going,
like a lot of our Members, but I'm grateful for your expertise
and the diversity of views that are represented here.
It's apropos--Mr. Moir? Thanks. Your comment about global
competition is what occurs to me. I'm a free-market
conservative. I wouldn't mind a different phone company in
every county in America--theoretically--and just let them go
after it. I'm just not sure that's realistic.
And I guess my question for the panel is--has to do with
what may have come up from Mr. Conyers earlier--is this issue
of global competition, and the recognition that while we do
concern ourselves--and as the Chairman said, I identify myself,
too, with Ms. Lofgren's comments about believing that in a
competitive marketplace it is axiomatic that the quality goes
up and the cost to consumers goes down.
But my sense about this--and I'd love Mr. Moir or Mr.
Kellogg, specifically, to respond to it--is that in an
increasingly global telecommunications marketplace, is there--
are there economies of scale, are there efficiencies, are there
capitalization issues and market access issues that actually
will enhance the ability of these United States companies to
compete in what is actually the real arena; which is a global
telecommunications arena?
And I say that knowing that an awful lot of people pick up
the phone and dial an ``800'' number and have those orders
fulfilled over the telephone or over the Internet on the other
side of the world. And the Midwest-dialect-speaking person on
the other end of the phone, they haven't got the slightest
idea--you know, literally, is in a country that would be very
foreign to the people of Rushville, Indiana.
So it's recognizing that globalization of the marketplace.
Do these mergers help or hinder the ability of these American
companies to compete and succeed on the global stage? And if I
could ask Mr. Moir and then Mr. Kellogg to respond to that?
Mr. Moir. Well, let's look at the global market today, pre-
merger, two ways. From a customer standpoint, I've got, as an
example, let's say, points of presence in 50 countries around
the world, so I'm going to have to run links to all of those
countries. I'll use a combination of one of a limited number of
very large U.S. providers, two of them being involved in
mergers that we're talking about here today, maybe some others.
And I'll have--and if I sign the contracts with those, or
avail myself of one of the other large global companies that
compete with AT&T and MCI to provide these backbone services, I
still have to connect locally. AT&T doesn't have a point of
presence to every customer prem around the world. They're
dependent upon these local phone companies.
The reference I made earlier was that in putting together,
you know, kind of the long-haul facilities--in this case,
really long-haul, because we're going across country boundaries
and oceans--those facilities, we actually have a reasonable
amount of choice now. And the mergers aren't going to change
the number of people supplying that from the U.S.
Mr. Pence. Okay.
Mr. Moir. But the point I was making is that when I go to
connect those facilities in some countries in the world now to
my customer premises, even though I may not have the breadth of
choices that I'd like in some of those countries, in the U.K.,
for instance, I'm not going to pay the same egregious rates
that I'm now being forced to pay here in the United States,
because the regulators did a better job of incenting more cost-
effective prices.
Mr. Pence. But would these mergers--to my point, because I
know I'm looking at a yellow light.
Mr. Moir. Yes. Okay.
Mr. Pence. Do they help or hurt the ability of these
companies to compete globally?
Mr. Grivner. Can I take a shot? Can I take a shot at that?
Mr. Pence. I'd be pleased.
Mr. Grivner. Thirty seconds.
Mr. Pence. Sure. Twenty seconds.
Mr. Moir. The merger doesn't impact the prices they
charge--the local phone companies charge us. Only the FCC can
deal with that. So that remains a problem, regardless of the
mergers.
Mr. Pence. I see.
Mr. Grivner. I think it's a great question. And the reason
I think it's a great question is because next week I'm supposed
to speak in London at a global telecommunications conference.
So beforehand, they give you a list of questions. The number-
one question they want me to ask, companies from Asia,
telecommunication companies, ``If these mergers go through, are
our rates for terminating in the United States going to go up?
Because it's only going to be two companies, and it's only
going to be those two we have to choose from.'' That's their
concern. Is it going to be cost-effective to do business in the
United States?
Mr. Moir. And those rates are already excessive now. We're
running in rates of return of 70 and 80 percent, which are good
by any businessperson's----
Mr. Pence. Mr. Chairman, could Mr. Kellogg respond to that
briefly?
Mr. Cannon. Certainly.
Mr. Kellogg. Thanks, Mr. Chairman. It's a very acute
question, Mr. Pence, because we do live in an increasingly
global marketplace. These are huge multinational companies, who
need comprehensive solutions. Today, Verizon and SBC are
negligible players in that market. AT&T and MCI are much more
significant. Together, they will be able to form flagship
carriers from the United States that can compete in the global
marketplace against British Telecom, the German telephone
companies, the Japanese telephone companies, in order to get
our share of that global business. It's an extremely important
byproduct of these mergers.
Mr. Grivner. Once they buy these failing businesses.
Mr. Cannon. The gentleman yields back. For purposes of
order, let me just point out the order of people left to ask
questions: Mr. Lungren next, Mr. Gohmert, Mr. Chabot, Mr.
Feeney, and then Mr. Goodlatte--well, it looks like Mr. Feeney
may have left.
So Mr. Lungren? The gentleman is recognized for 5 minutes.
Mr. Lungren. Thank you, Mr. Chairman. Boy, am I frustrated.
I feel like when I go and I ask a mechanic about my car. I
don't know much about cars. And I can go to one mechanic, and
he can tell me one thing, and it sounds great. And then I go to
another mechanic, and he tells me another thing. And later on,
I find out that they're 180 degrees away from the same
position. But they both sound equally persuasive to me.
I've left the Congress for 16 years; I'm just back. Twenty-
some years ago, we were dealing with telecom stuff here. It's
always been my observation that usually the Congress passes
legislation just about the time the communications technology
changes, so the legislation we passed is not really applicable.
I was one of those that thought, ``Hey, let's break up
AT&T,'' and then had to answer questions of my wife why our
telephone service wasn't as good as it was when we had AT&T.
I've been to--my home town at one time was Roosevelt,
California. We had a small, local company there that's done
pretty well, now known as ``Share West.'' I remember I was able
to get broadband there. I move out to Northern Virginia, a
piece of property that used to be owned by George Washington. I
couldn't get broadband there. Yet I got advertising asking me
to sign up for it, continually.
So frankly, I'm going to tell you, I'm not an expert on
this. Maybe there are a lot of experts on this panel on this
side, but I'm not one of them. I'm just one of those people
that's tried to figure out why we're back where we were about
20 years ago. Only this time, AT&T is being purchased by one of
the babies, but we're going to end up with something.
But one thing I am somewhat expert on is law enforcement,
and now on homeland security. And so that's where I'd like to
focus this on. And it's a question to all four of you, and you
can answer it as best you can, or if you want to answer it.
And that is, I'm concerned about infrastructure protection.
I'm concerned about us protecting ourselves from attack by
terrorists, attack in various different ways that impact our
overall communications infrastructure. And I guess my question
is this. Would these mergers have any impact whatsoever on our
capacity to be able to protect against that?
Or to put it another way, will these merged companies,
because of enhanced capitalization, have the capacity to do
more for infrastructure protection than otherwise? Or are there
any incentives for them to do those things that are necessary
to protect us against that? Because my observation is 85
percent of infrastructure of all types is privately owned, not
Government owned. And yet, if we have an attack here in the
United States, they're going to go after everything that they
can destroy.
So I guess that's my question to the four of you. Can you
give me any idea whether these mergers that we're talking about
would in any way impact the capacity of the United States to
protect against infrastructure attacks by those who would wish
to do us harm?
Mr. Grivner. I will start. I am not an expert in law
enforcement; however, I have been involved quite extensively at
one time in the CFIUS process, so I understand the concerns and
issues at a very broad level. I think in telecommunications,
when we sell something to a customer, especially a large
business customer, one of the things they're always concerned
about is diversity: more than one choice, more than one path.
What happens if this happens?
When you narrow it down to two paths and you say if you
target just those two companies, you've wiped out most of the
telecommunication business market in the United States, by just
targeting those two companies, yes, you should be concerned by
those two mergers that comprise 80 percent of the business
market.
And if you target just those two companies--and people
spend day and night working on that stuff all the time--you
should be concerned.
Mr. Lungren. Mr. Moir?
Mr. Moir. One of the disadvantages that large customers
have always seen with a, you know, one shop provides all, is
that if there's true synergies within that network design from
end to end, and they use the same protocols, they use the same
network software, from a customer standpoint, many customers
have historically--and Mr. Grivner knows this--have actually
split their traffic between multiple carriers when they go out
and do their RFPs. Government does that, too, from time to
time.
And the reason is, even if the facilities from the two
carriers are coming into my building in different sides, or
using different power grids, the advantage is that every once
in a while somebody reprograms the electronics, and the system
crashes. So at least some of my traffic will continue to go.
And that's why there are a number of smart users out there that
take redundancy and diverse routing to the extreme.
I'm not sure whether the mergers really change--with the
carriers, it's usually either an economic analysis, or the only
way they're going to get a contract because the customer
demands that. Many customers, with carriers screaming and
hollering, have been demanding that type of protection for
decades. There are a number who don't. A number of them are in
the U.S. Government that don't.
And as a consequence, you know, you leave yourself more
vulnerable in the way the networks are configured. And that's
not really an antitrust issue or a merger issue; it's a
network--it's the way the networks are designed for the
customers, whether it's DOD or anybody else. And you'd be
surprised.
Mr. Lungren. Mr. Kellogg, do you have any thoughts on that?
Mr. Kellogg. May I answer, Mr. Chairman?
Mr. Cannon. Certainly. Go ahead.
Mr. Kellogg. It's an infrastructure question. When the
World Trade Center came down on September 11th, it destroyed a
Bell Atlantic, a Verizon central office. Verizon, because it
had the infrastructure in place, was immediately able to route
around that and use redundancy. Working with AT&T, they set up
wireless phone banks and such.
The CLECs couldn't help at all, because they were riding
over Verizon's network, not building infrastructure of their
own.
If we want to be safe from terrorist attacks if we want a
robust network, we have to invest capital in our network. And
these mergers are going to allow that to happen.
Mr. Cannon. Thank you, Mr. Kellogg. The gentleman yields
back. I want to just point out that I think AT&T was a CLEC in
New York City. And they were able to, as part of that rerouting
and efficient service and----
Mr. Kellogg. It was AT&T Wireless, Mr. Chairman; not AT&T
as a CLEC.
Mr. Cannon. Mr. Boucher. The gentleman is recognized for 5
minutes.
Mr. Boucher. Thank you very much, Mr. Chairman. It occurs
to me that the advent of a range of new Internet-enabled
services, Voice over Internet Protocol, multi-channel video
delivered by the Internet Protocol--a subject about which we
had a hearing this morning, in fact, in the Commerce
Committee--will help to promote competition.
I'm wondering if, in your view, the case can be made that
the mergers that are the subject of this hearing would help to
enhance the expansion of broadband in a way that would
facilitate the delivery of these new Internet-based services?
Mr. Kellogg, would you care to comment? Mr. Verveer, perhaps?
Mr. Kellogg. Absolutely, Mr. Boucher. I think that these
mergers will allow further investment of capital. It's going to
cost billions of dollars to build out broadband to every home
in America. There's a huge risk involved in doing that and it
takes--It takes a great deal of capital.
The second thing that's going to be required is a
regulatory framework in which people feel that they're going to
be able to compete freely once they do invest that capital. And
that means clearing away, frankly, a lot of the State franchise
requirements. The telephone companies already have franchises
to deploy their networks. And requiring a second franchise in
order to provide video over those networks is simply going to
allow the incumbent cable industry to block developments and to
keep their entrenched position, instead of introducing
competition.
Mr. Boucher. Well, without diving into what is going to be
a very controversial subject, and that is the extent to which
the new offerors of IP video would be required to comply with
local franchise requirements--a debate we will have, but I
think on another day--let me take from your comment the point
that by allowing a greater aggregation of capital, these
mergers would have the effect of enabling and enhancing a more
rapid deployment of broadband. I take it, you would agree with
that?
Mr. Kellogg. Absolutely. Particularly with, for example,
AT&T's backbone network, which is going to allow--which is
going to be very helpful in combination with the local delivery
facilities.
Mr. Boucher. Okay. Mr. Verveer, comment?
Mr. Verveer. Yes, sir. It's certainly true that the larger
companies will in some sense have greater financial capacity. I
think the question is, will they devote that financial capacity
to the expansion geographically of broadband types of
transmission services?
The answer is, I don't know if they will do that. I am
reasonably confident that they are more likely to do it if they
find themselves in a competitive environment, if they are
subject to competitive pressure.
Mr. Boucher. Well, thank you both for that. There's an
issue that I'm very interested in, which is not exactly at the
core of the subject matter of this hearing; but each of you has
expertise that could bear on this, and I'm going to take the
opportunity of this conversation to raise it with you.
I strongly believe that we should have a principle of
network neutrality. And what that basically means, in the
simplest terms, is that a broadband provider would be
prohibited by law from discriminating against an unaffiliated
content provider in favor of the content that happens to be
affiliated with the broadband provider.
So, for example, an incentive might well exist for a local
telephone company offering DSL service to block access to
Vonage by the customers for that DSL service. And in fact, we
have an actual example of that happening. By the same token, a
cable company would have incentive to perhaps degrade or slow
down access to content residing somewhere out on the Internet
that is not affiliated with that cable company--multi-channel
video perhaps being offered by some independent provider.
And it just seems to me that it's an important principle to
say that networks have to be operated in a way that enables the
subscriber to the DSL service or the cable modem service to
reach any website that subscriber wants to, and to be able to
do so unimpeded by the broadband provider.
I'd like to get a statement of agreement to that basic
principle from you, if you're willing to provide it. Who wants
to start?
Mr. Grivner. Well, based on how you've described it, I'd
have to agree with that. I think the----
Mr. Boucher. Excellent. You're a terrific witness.
Mr. Grivner. I think the Vonage----
[Laughter.]
Mr. Grivner. I think the Vonage example is a fabulous one,
where they were blocked. And I think, you know, that obviously
not the way things are going to be able to work, if this is
going to be truly a competitive industry.
Mr. Boucher. Thank you, Mr. Grivner. Mr. Moir?
Mr. Moir. As a consumer every day at home, I totally agree.
Mr. Boucher. Thank you, sir. Mr. Kellogg?
Mr. Kellogg. Mr. Boucher, I think the most--the key level
of--level playing field is on an intermodal, rather than an
intramodal level. I think as long as cable, broadband,
wireless, DSL, are all treated alike from a regulatory
perspective, you're going to have all the competition you want.
Mr. Boucher. Okay. I'll take that as something less than a
direct answer; but thank you. Mr. Verveer?
Mr. Verveer. Well, I think Mr. Kellogg actually has
crystallized what is the critical question. It is: How
competitive will the transmission systems be? If we have a
workably competitive environment, we probably don't have to
have the kind of duty to deal that we will require if we don't
have a workably competitive environment.
And to, I'm afraid, repeat the same kind of things I've
been saying right along, I think we cannot be sure at this
point how that's going to work out. We might well find
ourselves in a situation where in many parts of the country
there's no broadband available to residential users; in other
parts, there may only be one provider, or two providers.
A lot depends on how effectively the cable companies, the
DSL--the telephone companies compete with one another in terms
of deploying broadband. And a lot depends on whether or not the
wireless possibilities, in terms of WiMAX and other things, and
the broadband over power line possibilities mature into
something that really is available. The less it's available,
the more force there is to the proposition you've raised.
Mr. Boucher. Thank you very much. Let me say, I share your
enthusiasm for competitive markets. And that's one of the
reasons I'm so glad to see the advent of IP video and VoIP,
which I think undoubtedly will benefit consumers through having
choice of service.
But I do not share your unbridled faith in competition as
being the answer to all problems. I think we still are going to
need some fundamental principles about how platforms operate.
But thank you very much for your comments. And thank you, Mr.
Chairman.
Mr. Cannon. The gentleman yields back. Before I recognize
Mr. Gohmert, I think that it was actually--Mr. Kellogg, it was
actually AT&T, not AT&T Wireless, that had a backup switch. I
think there was another--Covad or another CLEC. I'd appreciate
it if you'd check that out. You may have some better
information.
But I think the point is that when you have competition, by
nature, you have redundancy. And that's why I think that
point's important.
But let me recognize Mr. Gohmert. And unless you'd like to
respond to that right now, we'd be happy to just have you
submit that for the record.
Mr. Kellogg. I'll be happy to investigate it further.
Mr. Cannon. Thank you. Mr. Gohmert, you're recognized for 5
minutes.
Mr. Gohmert. Thank you, Mr. Chairman. Appreciate the
hearing and the opportunity to hear from these good witnesses.
Gentlemen, I'd like to hear from each of you. And I don't
want to be repetitive, or anybody to be redundant, but there's
been discussion about the mergers, two mergers, creating
actually 80 percent of the market within two companies.
I'm curious, from your perspective, are there any aspects
to the telecom business that would prevent the 20 percent and
those holding that 20 percent business from cutting in
competitively to the 80 percent? You know, and in the back of
my mind, I'm thinking about the Sherman Antitrust Act and
whether we're getting--you know, what problems might be gotten
into there.
So do you see anything that would prevent those holding the
20 percent from cutting into that 80 percent? And if so, what?
Mr. Grivner. I certainly can't speak from a legal
perspective, and I'm sure that----
Mr. Gohmert. Well, I was not asking you from a legal
perspective. That's where I'm coming from----
Mr. Grivner. But from a business perspective.
Mr. Gohmert. --but I want your factual, business
perspective.
Mr. Grivner. Yes. I think, from a business perspective,
when someone has 80 percent of the market, you'd certainly have
to be concerned with pricing pressures they would place on
competition in the marketplace. Lack of innovation in the
marketplace would be certainly one concern.
Mr. Gohmert. How so, lack of innovation?
Mr. Grivner. Well, lack of innovation, I think as I
mentioned a couple of times, has been a historical problem for
the incumbents, in terms of DSL deployment being several years
behind the actual technology being available, Voice over IP
several years behind the technology being available. So I think
you limit the innovation relative to customers. And I think you
have got to be concerned about market power, when you start at
80 percent and there's only 20 percent of the market left.
Mr. Gohmert. Yes, sir?
Mr. Moir. You know, there are two perspectives. If you're
looking at it from the perspective of a residential customer--
you and I, when we go home--small- and medium-sized businesses,
all three of those categories have one thing in common. They
probably have one, or a handful, of points of presence that
fall within any one local phone company's footprint. From that
standpoint, the merger's probably not going to have a radical
impact on these companies competing elsewhere.
But for another type of customer, the type that I've talked
about earlier here today, the customer that's in, let's say,
all 50 States, to date, the Bell operating companies, as a
practical matter, refuse to compete outside their
jurisdictional footprint.
And even though there are CLECs that have done it, even
though AT&T has done it and MCI has done it, I think the
interesting question's going to be--and none of us, despite the
rhetoric that may occur from some of the players, really knows
for sure what will happen out of region when this merger
occurs. You know, will Verizon, if it follows through with the
MCI merger, or SBC, start to aggressively pursue the
construction or the expansion of existing AT&T or MCI CLEC
facilities that are out of region? You know, SBC in New York,
or Virginia----
Mr. Gohmert. Connecticut.
Mr. Moir. --or Connecticut, Verizon in Houston and Dallas.
Will they take those existing CLEC facilities that they're
acquiring through the merger and expand them with capital
investment, extend out further? Will they build new ones out of
region? I just don't know.
And I think we have to disregard what people are saying
right now because, as we heard around the '96 act, there were a
lot of statements made that many of us--they filled a lot of
hearing records, but basically they haven't carried one bit or
byte of traffic so far.
Mr. Kellogg. On a residential level, I think it's clear
that intermodal competition is where competition is going to
be. That's competition from wireless, competition from cable,
competition from VoIP.
On a business level, in the major cities we have it. You
know, you look at any big city in the country--Boston, there
are 22 operational CLEC networks; in Atlanta, there are 21; in
Seattle, there's 17. SBC Telecom is present in every one of
those markets; as is AT&T. They will now join together, and
they'll be an even stronger out-of-region competitor in those
markets. I think there is going to be a tremendous increase in
competition following these mergers.
Mr. Verveer. I would assume, in answer to your question,
that, first and foremost, the antitrust authorities will look
at the metropolitan area networks that MCI and AT&T control
within the regions of the companies that are acquiring them.
And my guess is that ultimately they'll decide that these have
to be divested, along with either the customers or some
obligation to maintain the traffic on these, to make the
divestitures successful. That's the one concrete thing you
could do to try to effect the competition of the kind you were
describing.
Beyond that, my assumption is that the antitrust
authorities are going to look very, very hard at what is
required to compete in the enterprise market, to try to
understand what kinds of assets one needs, to see if there's
anything that ought to be divested or otherwise effected in
connection with the transaction.
But it seems to me it has to be the case that we are at
least losing some potential--some actual competition, and some
potential competition, with the merger of these two enterprises
into the large Bell companies.
Mr. Gohmert. Thank you very much. I appreciate your
individual perspectives. Thank you, Mr. Chairman.
Mr. Cannon. The gentleman yields back.
Mr. Chabot.
Mr. Chabot. Thank you, Mr. Chairman.
Mr. Cannon. The gentleman is recognized for 5 minutes.
Mr. Chabot. Thank you. I'd like to apologize to the panel
for not being here during most of their testimony; although
I've heard a number of the very interesting questions and
responses thereto. I was down at the White House signing
ceremony of the bankruptcy bill. I know a lot of the business
folks, especially, but many consumers have been waiting now for
8 years to get relief under this bill with the reforms there.
So it's long overdue and, I can report, has been signed into
law. I saw the President sign it. So it's now the law of the
land.
Let me start out with you, Mr. Grivner, if I could. In a
filing made at the California Public Utility Commission,
CalTel, a group to which XO belongs, advocated that as a
condition of approving the SBC-AT&T transaction, the California
PUC should permit the abrogation of wholesale and retail
contracts with SBC. This seems to be a somewhat radical
request. Do you actually believe that a regulatory agency
should be permitted to frustrate contracts that have been
lawfully executed and signed by willing parties?
Mr. Grivner. Well, first of all, those are contracts that
were signed under regulatory rules, and are subject to
regulation. And I think what we're currently asking for, before
we jump to conclusions or remedies or anything along those
lines, is a clear viewing by the Department of Justice and the
FCC of both of these mergers. But certainly, I think contracts
that were built under those regulatory rules need to be
reexamined, because I assume the rules will change to some
degree.
Mr. Chabot. Okay. Let me ask the other panel members, if I
could, a follow-up here. In the absence of any judicial finding
that a party has an unlawful monopoly, for example, should an
agency of the Government be able to declare that all signed
contracts of a specific named party are open for renegotiation?
Any of the other three that would like to respond, I'd be
pleased to hear from you. Mr. Kellogg?
Mr. Kellogg. I would certainly say, no, with one caveat.
There are certain circumstances--for example, the FCC has
imposed certain rules on unbundling which were incorporated
into contracts between ILECs and CLECs, and those rules were
thrown out by the court. And the ILECs had to enter into these
contracts. The court said--subsequently threw out the rules. In
that case, as a remedy, on remand to the agency, an opportunity
to change those contracts could occur. But I would not say in
the ordinary circumstance of a commercial contract, just
because a merger takes place.
Mr. Chabot. Okay.
Mr. Verveer. Most traditional public utility commissions do
in fact have the ability to require the reformation of
contracts. It is the kind of authority that is not used very
often. It's only used, presumably, when there is a very strong
rational basis for doing it. But it's not the kind of
requirement that is necessarily an unusual one. It's
particularly true in the world of communications, as we have
moved from a world of tariffs more and more to a world of
contracts.
Mr. Chabot. Mr. Moir?
Mr. Moir. The answer depends. When they involve the world
of telecommunications and they involve contracts where one
party has been, you know, in control of the local bottleneck
facility and has significant market power, Mr. Verveer is
correct, we have seen the regulators from time to time get
involved.
The first one I was involved in seeing abrogated was a
divestiture--these huge, sophisticated switches that basically
large companies and Government agencies had around the country,
that basically you had no choice but to sign, if you wanted.
The FCC led, through a series of decisions, the abrogation of
those provisions, and allowed the parties to basically rebid
those relationships, or seek other suppliers. So depending upon
the situation, I'd say, yes, that's a good policy.
Mr. Chabot. Okay. And finally, Mr. Moir, let me ask you
this, if I can. XO and other competitive carriers have urged
the California PUC to require the divestiture of AT&T's
customer base as a condition of approving the SBC-AT&T
transaction. Would the business customers you represent want to
be a part of a process in which they are told they cannot do
business with their carrier of choice? And wouldn't a
requirement of this nature be quite disruptive to businesses
that depend on telecommunications as a key input to their
business?
Mr. Moir. Well, I think you probably know what my answer is
going to be. And that is we are very, very concerned, anybody
tells us, any time, who we can negotiate, and who we can't
negotiate; and worse, anybody who's been through the process,
it's necessary to come up with these contracts that typically
take, end to end, 18 months to negotiate. To have them
abrogated by a third party, over user objection, to me is very,
very troubling.
And what's particularly concerning is the--when these
piece-part contracts may be part of a sophisticated nationwide
or even global network that the company has. Then problems are
concerned.
I understand why some CLECs may be interested in ILEC
facilities right now that either of the carriers have--you
know, MCI or AT&T, the CLEC facilities they have. But if you
start to monkey around with the contracts we have, which cover
far more than service--there are all sorts of provisions being
provided under those contracts that go beyond just the raw
transmission of bits and bytes--then that's very, very
troubling.
Mr. Chabot. Thank you.
Mr. Cannon. I thank the gentleman. The gentleman yields
back.
Mr. Goodlatte. The gentleman is recognized for 5 minutes.
Mr. Goodlatte. Thank you, Mr. Chairman. Mr. Grivner, are
you concerned about consolidation in the ownership of the
Internet backbone, as we examine this? What does it mean for
XO, and what should be done about it?
Mr. Grivner. Yes, I am concerned. Right now, XO deals with
what's called a peering relationship with most carriers, tier-
one peering; meaning the traffic that you import and export,
you basically don't pay for, if everything is, you know,
fundamentally equal.
When you combine these four companies together, you've now
created a tier-one-plus, in which companies like XO and others
will have to pay for that traffic which up until this point has
been part of the Internet, part of building the Internet, and
part of the process. Yes, I am concerned.
Mr. Goodlatte. What would you do about it?
Mr. Grivner. Well, what I would do about it is not let the
mergers go through. But barring that, I think there have to be
some very specific restrictions placed on that traffic, so that
pay-for-peering does not occur.
Mr. Goodlatte. Mr. Moir, are you aware of the effects of
the proposed mergers on the ownership of the Internet backbone?
And is there any reason to be concerned?
Mr. Moir. We are still looking at those issues right now;
particularly as, you know, they have regional aspects and
broader aspects. But at the moment now, we still don't have a
position.
Mr. Goodlatte. Let me ask Mr. Kellogg or Mr. Verveer if
they want to respond to either of those two questions.
Mr. Kellogg. My understanding in this area is somewhat
limited, but it is that AT&T and MCI both have national
backbone networks. SBC and Verizon do not. So I do not see how
the merger would lead to more concentration in the critical
national backbones.
Mr. Goodlatte. Mr. Verveer?
Mr. Verveer. I wouldn't pretend to any great expertise in
this area. My impression, generally, is that this is an area
that has become increasingly competitive over the last several
years, and is a competitive environment today.
Mr. Goodlatte. Very good. Mr. Kellogg, Voice over Internet
Protocol, it does require a pipe into one's home or business;
does it not?
Mr. Kellogg. That's correct.
Mr. Goodlatte. And what is USTA's position regarding this?
Are some of your members trying to deny non-discriminatory
access? Or does USTA have a position on that?
Mr. Kellogg. My understanding is that USTA's position is
that Voice over Internet Protocol is a tremendously important
service; that it's, you know, going to dramatically influence
the future of telecom; and that it ought to be allowed to
develop in a competitive environment.
Mr. Goodlatte. Does ``competitive'' mean non-discriminatory
access?
Mr. Kellogg. Well, it's not clear to me that there's a
problem there that needs addressing at this point. You say
there has to be a pipe into the home. Of course, there's the
cable pipe which two-thirds of customers currently use; and
only one-third uses DSL. If people feel that there's
restrictions on their access to broadband services, they are
free to switch to the other carrier. Plus, next-generation
wireless is going to be incredibly important in terms of
broadband access and VoIP services.
Mr. Goodlatte. Okay. Anybody else--Mr. Moir, Mr. Grivner--
want to respond to that?
Mr. Moir. VoIP as we presently hear it, is a phenomenon
that's evolved from basically IP protocol voice traffic, which
has been going on on a packetized basis within the large user
community for--what, decades?
Mr. Goodlatte. Yes.
Mr. Moir. And the issue we're evolving to now is, you know,
you're going to be able to get access to multiple VoIP
suppliers from a residential standpoint. From a business
standpoint, we get the pipe; albeit, we don't have choice for
95 percent of our locations. But you get the pipe. You run the
packetized data out--in this case, VoIP data; which is really
voice packets. And then the issue is, does it terminate on
another VoIP network to the customer prem, or does it terminate
on the switch network and then get subject to something more on
the lines of traditional access charges? So some of those
issues are still to be flushed out.
Mr. Grivner. Yes, full VoIP deployment, full effect of it,
does depend on that broadband pipe, that last-mile access to
the customer; whether it be fiber provided by an RBOC, or by
XO. Or a municipality that decides to get into the cable
business would be another option.
Mr. Goodlatte. Do you think that that type of technology is
receiving fair treatment from those who own the pipes?
Mr. Grivner. Receiving fair treatment from those who own
the pipes? Well, if the CEO of Vonage were here, he'd probably
say ``No.'' Matter of fact, I know he would say ``No.'' I was
with him yesterday.
Mr. Goodlatte. Very good. Mr. Kellogg, do you want to
respond to any of that, or you're--please.
Mr. Cannon. We actually need to be out of this room in
time, at about just about 20 after. So since Ms. Jackson Lee
has joined us, we'll stretch that a little bit. But if you
could give us a quick answer that would be----
Mr. Goodlatte. That's all I'd ask, Mr. Chairman.
Mr. Kellogg. My understanding is that Vonage has access
now. They are adding customers at a rapid rate. And I don't see
a problem that needs any sort of regulatory solution.
Mr. Goodlatte. Very good. Thank you, Mr. Chairman.
Mr. Cannon. The gentleman yields back. Without objection,
all Members will have 5 days to submit questions for the panel,
and then we'll ask you gentlemen--I have several questions that
I'll submit, and others may as well.
And with that, Ms. Jackson Lee, did you have questions?
Ms. Jackson Lee. I do, Mr. Chairman.
Mr. Cannon. The gentlelady is recognized. I think we can
only go 4 minutes, because we just need to vacate. Will that be
acceptable?
Ms. Jackson Lee. Thank you, Mr. Chairman.
Mr. Cannon. The gentlelady is recognized for 4 minutes.
Ms. Jackson Lee. This hearing in the midst of the debate on
the floor dealing with the energy policy legislation in the
backdrop--and I know you gentlemen can help me with a proposed
merger not in your industry at this point, but American West
and another airline, making it competitive with Southwest--sets
the tone, I think, for the importance of the question of
competitiveness and quality of life for consumers.
And it looks like this is deja vu, to a certain extent. We
were in this room some--maybe less than 10 years ago, trying to
pick up where the AT&T antitrust case left off. We thought we
were finding a solution and balance, particularly in the
telecom industry, and finding some balance--I see it says 9
years--with respect to the importance of competition; yet, of
course, the recognition of industry inclination, if I might.
I just want to pose--and you might jump in, since time is 4
minutes, but I think it'll be enough time--to Mr. Verveer and
Carl Grivner, and then others who may wish to join in. I think,
Mr. Verveer, you said that the most significant aspects of
today's telecommunications marketplace are consolidation and
convergence.
And when you say significant aspects--and you may have gone
over this, and I apologize for not being in the room--
significant in a positive sense, or a negative sense? But how
do we then, based on that premise, or those two premise--two
aspects of your statement, ensure both innovation and price
reduction; that those are not driven out of the marketplace?
And I say that in the context of the fact, do mergers
actually enhance the benefits to the consumers? Do we see any
price decrease in large mergers because of, say efficiency? Mr.
Grivner, if you would respond to what you've probably been
responding to all afternoon, that mergers--as a result of
mergers, competition is certain to diminish in markets
throughout the country? Might you reemphasize which market will
be most affected by a merger resulting in the greatest
concentration?
And I think if any of the other two panelists would like to
add to that, I would appreciate it.
I hope, Mr. Chairman, that we can have more than one
hearing, where Members are in and out, and particularly having
to get out of a room at a certain time. But this is a very
important question.
Mr. Cannon. I can assure the gentlelady that we're going to
have other hearings on this.
Ms. Jackson Lee. I understand that from the Chairman of the
full Committee. I thank you very much. But in any event, I
yield to the gentleman.
Mr. Grivner. Okay. Congresswoman, I share your concerns
about the consolidation and what it could potentially do to
innovation and pricing. I've pointed out several times this
afternoon that the technology that we've spoken about in the
market today--DSL technology, Voice over IP--they've been
available for many years. But it has not been until smaller
companies that have been innovative in the marketplace have
deployed those that the bigger companies have accepted those
and have moved in that direction. Consequently, you could argue
we're years behind where we could be, from an overall
deployment of these newer technology perspective.
And I also think, from a price perspective, we need to be
concerned as we move forward when there's only two players in
the business market, where in the business market these two
mergers will have 80 percent of the wireline business. We need
to be concerned about what that means for business customers--
small, medium, and large business customers--from a price
perspective.
Ms. Jackson Lee. What do you consider two players?
Mr. Grivner. Two players, being Verizon and the other
player being SBC, will comprise 80 percent of the business
wireline market.
Ms. Jackson Lee. Mister--Verveer. Sorry.
Mr. Verveer. The thrust of my testimony I think really is
that we are in the midst of a major transformation in terms of
the telecommunications sector; as big a transformation,
probably, as we saw 25 or 30 years ago. We really do not know
how this is going to come out, from the standpoint of
consumers. And the only way we can really be confident that the
progressiveness we've seen in the industry over the last 25 or
30 years will continue is if we have a competitive environment.
So it is awfully important to have the tools available to try
to maintain a competitive environment in this sector.
Mr. Cannon. Thank you.
Ms. Jackson Lee. And I thank the Chairman. I know that if
the other gentlemen wish to answer in writing, I'd welcome
that.
Mr. Chairman, I just want to say this final word to you.
You indicated that this Committee--the full Committee Chairman
and Ranking Member, I know, will insist on further meetings. I
simply ask the rhetorical question: How can we continue to do
good, and not make enemies? I hope that we can damper down the
intensity and the animosity, and find a way to review these
questions in the thoroughness that we desire for the good of
the American people. I yield back.
Mr. Cannon. Yes. Well, I thank the gentlelady. Let me just
reiterate, this is my personal--matter of personal interest.
And anything the Committee does would be subject to the Chair
and the Ranking Member on the decision to go forward, but I'm
fairly sure that there is an interest in doing that.
Either of the questions that we'll get to by way of written
questions relate really to the FCC and how it does its
rulemaking and the decision process; which are important for
the Committee that I chair, which is the Commercial and
Administrative Law Subcommittee of the full Committee.
I want to thank the panel. This has been very, very
insightful and a very helpful hearing.
And I remind those of you who are here that we do have
another hearing starting almost immediately. So unless you're
here for the next hearing, we'd appreciate it if you'd move out
of here very quickly. And with that, this hearing is adjourned.
[Whereupon, at 4:25 p.m., the Committee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Response to questions submitted by Representative Chris Cannon to Carl
J. Grivner, CEO, XO Communications, Inc., on behalf of Comptel/ALTS
Alliance and Association for Competitive Telecommunications
Questions submitted by Representative Chris Cannon to Brian R. Moir,
Attorney-at-Law, on behalf of e-Commerce and Telecommunications
Association (eTUG) \1\
---------------------------------------------------------------------------
\1\ The Committee had not received a response to these questions at
the time this hearing was printed.
Response to questions submitted by Representative Chris Cannon to
Michael Kellogg, Partner, Kellogg, Huber, Hansen, Todd, Evans & Figel,
PLLC, on behalf of the United States Telecom Association
Response to questions submitted by Representative Chris Cannon to
Philip L. Verveer, Partner, Willkie Farr & Gallagher, LLP