Page 1       TOP OF DOC
27–225 PDF








APRIL 25, 2006

Serial No. 109–109

Printed for the use of the Committee on the Judiciary

 Page 2       PREV PAGE       TOP OF DOC
Available via the World Wide Web: http://judiciary.house.gov


F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
BOB INGLIS, South Carolina
MARK GREEN, Wisconsin
DARRELL ISSA, California
 Page 3       PREV PAGE       TOP OF DOC

JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California

PHILIP G. KIKO, General Counsel-Chief of Staff
PERRY H. APELBAUM, Minority Chief Counsel

 Page 4       PREV PAGE       TOP OF DOC
    Note: The Task Force on Telecom and Antitrust was established on March 26, 2006 and consists of all the Members of the full Judiciary Committee.


APRIL 25, 2006

    The Honorable Chris Cannon, a Representative in Congress From the State of Utah, and Member, Committee on the Judiciary

    The Honorable John Conyers, Jr., a Representative in Congress From the State of Michigan, and Ranking Member, Committee on the Judiciary


Mr. Paul Misener, Vice President for Global Public Policy, Amazon.com
Oral Testimony
Prepared Statement

Mr. Earl W. Comstock, President and Chief Executive Officer, COMPTEL
Oral Testimony
Prepared Statement

Mr. Walter B. McCormick, Jr., President and Chief Executive Officer, United States Telecom Association
 Page 5       PREV PAGE       TOP OF DOC
Oral Testimony
Prepared Statement

Mr. Timothy Wu, Professor of Law, Columbia Law School
Oral Testimony
Prepared Statement


Material Submitted for the Hearing Record

    Prepared Statement of the Honorable John Conyers, Jr., a Representative in Congress From the State of Michigan, and Ranking Member, Committee on the Judiciary

    Prepared Statement of the Honorable Bob Goodlatte, a Representative in Congress From the State of Virginia, and Member, Committee on the Judiciary

    Prepared Statement of Mark Cooper, Director of Research, Consumer Federation of America, on behalf of Consumer Federation of America, the Free Press, and the Consumers Union

    Prepared Statement of Kyle McSlarrow, President and CEO, National Cable & Telecommunications Association

    Press Release of the Federal Communications Commission, dated April 3, 2006
 Page 6       PREV PAGE       TOP OF DOC

    Article from Communications Daily submitted by Walter B. McCormick, Jr., President and Chief Executive Officer, United States Telecom Association

    Letter to the Honorable F. James Sensenbrenner, Jr., Chairman, Committee on the Judiciary, from Deborah J. Majoras, Chairman, Federal Trade Commission

    A Public Knowledge White Paper by John Windhausen, Jr., entitled ''Good Fences Make Bad Broadband, Preserving an Open Internet through Net Neutrality''



House of Representatives,
Task Force on Telecom and Antitrust,
Committee on the Judiciary,
Washington, DC.

    The Task Force met, pursuant to notice, at 2:05 p.m., in Room 2141, Rayburn House Office Building, the Honorable Chris Cannon (Acting Chair of the Task Force) presiding.

    Mr. CANNON. The Committee will come to order.

 Page 7       PREV PAGE       TOP OF DOC
    Just a note before we get started that we have a bill coming up on the—the Committee has a bill coming up on the floor at 2:45. We may have to recess this Committee. We're just trying to work out—it is the rule of the Committee that we recess when the Committee has a bill on the floor of the House. We are trying to work that out so that we don't inconvenience everyone with a 45-minute recess, and so we are going to get started here directly, and hopefully we will work that out so we don't have to recess.

    In recent years, changing technology industry consolidation, and regulatory developments have fundamentally altered the telecommunications marketplace. With the changes in the industry, it is important that the pro-competitive goals that were the hallmarks of the 1996 act are maintained. Some have argued that these goals have gone unrealized, and it is essential that this Committee makes sure these goals do not slip away.

    President Ronald Reagan boldly predicted that, ''The Goliath of totalitarianism will be brought down by the David of the microchip.'' He really was a visionary guy, you know? Substituting the word ''Internet'' for ''microchip'' is particularly appropriate given the unprecedented manner in which the Internet has revolutionized the manner in which we access and transmit a broad range of goods, services, and information. High-speed broadband Internet services have dramatically enhanced the ability of Americans to access the Internet, but the safeguards that we have allowed these services—that have allowed these services to flourish are under growing legal and regulatory assault.

    The Committee on the Judiciary has a central role in ensuring that market power of firms that provide access to the Internet is not used to discriminate against the content or services of competitors that drive innovation and consumer choice. Many credit the rapid rise of the Internet to the open architecture that defines it. Observers have noted that a unique feature of the Internet is the nearly unrestricted ability of anyone with service to connect to it, access and post information, download content, and consume goods and services without discrimination. The open architecture of this medium is central to our understanding of the Internet and a fundamental attribute of its success.
 Page 8       PREV PAGE       TOP OF DOC

    Most Americans think that open and nondiscriminatory access to the Internet is something to be taken for granted, but it is not. Broadband providers exercise considerable control over how information and services are accessed over the Internet, and the inference that some of these providers may restrict access to the networks is of concern to all. While considerable effort has been made to confuse the definition of ''net neutrality,'' the term refers to the fundamental architecture of the Internet that allows for uninhibited, end-to-end communication.

    Former FCC Chairman Powell enunciated four Internet freedoms that provide a useful framework to understand this issue. These principles of Internet nondiscrimination are:

    First, freedom to access content. Consumers should have access to their choice of legal content.

    Second, freedom to use applications. Consumers should be able to run applications of their choice.

    Third, freedom to attach personal devices. Consumers should be permitted to attach any devices they choose to Internet portals.

    And, fourth, freedom to obtain service plan information. Consumers should receive meaningful information regarding their service plans.

    Principles of net neutrality have been successfully articulated, but the mechanism to enforce them has not. The most notable example of Internet discrimination involved the Madison River Telephone Company obstruction of access to voice over Internet protocol, or VOIP, services provided by Vonage. In this case, the FCC investigated allegations that Madison River violated nondiscriminatory obligations contained in the Communications Act, but the redefinition of broadband as an information service dramatically reduces the authority of regulators to deter this kind of competitive misconduct.
 Page 9       PREV PAGE       TOP OF DOC

    The House Committee on the Judiciary and the antitrust laws have played a critical role in fostering competition in the telecommunications industry. While the technological dynamics of the telecom industry have shifted the use of market power to deter competition and undermine consumer choice has not. The continued success of the Internet depends upon unfettered interconnection and the ability of consumers to connect and access online information, content, goods, and services in a nondiscriminatory manner. If consumers are going to continually migrate to the Internet and businesses are going to prosper because of the Internet, the House Committee on the Judiciary must be at the center of the debate defining competition—defending competition.

    Today's hearing will examine whether the threats posed to net neutrality and whether the concerns that broadband providers have or intend to abuse their market power to violate these principles are substantive or speculative. The hearing will also examine whether broadband providers have an economic incentive to limit access to the Internet, the sufficiency of current legal and regulatory authority to preserve net neutrality, the competitive impact of proposals to provide Internet access on a tiered basis, recent legal and regulatory developments that affect broadband competition, and whether current legislative proposals being considered by Congress promote or undermine net neutrality.

    Today's hearing marks the first in a series by the Committee's Task Force on Telecom and Antitrust. Over the next several months, the task force will conduct a number of hearings to examine competitive aspects of the telecom industry and to consider legislation to ensure that Americans are provided with the innovation and consumer choice that unrestrained market competition preserves and promotes.
 Page 10       PREV PAGE       TOP OF DOC

    I want to thank the witnesses for appearing before today's panel and yield to the Ranking Member for his remarks. Mr. Conyers?

    Mr. CONYERS. Thank you, Chairman Cannon. I'm happy to welcome the witnesses, as you have, and begin a Judiciary Committee undertaking of the subject of net neutrality.

    I begin by noting that our colleagues Zoe Lofgren and Rick Boucher, as well as many other Members, have been working on this subject for quite a while, and I want to commend them and the Chairman of this Committee for making sure that our jurisdiction in this matter is put forward and that we can hold these kinds of hearings, because this is a very important subject, and it has to do with the issues that affect the state of competition in the telecommunications industry as applied to the Internet. And unless we have instances of a problem, it's not clear to me that we ought to be moving forward. But here, on the subject of net neutrality, I think everyone agrees that it has to be addressed. And without going into the Committee on Commerce's work in this area, it I think is to the credit of this Committee that we begin to examine the issues that are put forward in this matter.

    As far as I'm concerned, we have telecom companies that have indicated that they do not intend to let companies like Google and Yahoo! or next generations of Internet entrepreneurs go free or use the pipes without significant payments. We have some very interesting quotations from Mr. Seidenberg at Verizon and Mr. Ed Whitacre at AT&T that illustrate that things are changing, and what we are trying to do with this hearing is to help determine what kind of changes should be made and whether or not we should allow the FCC to make the decisions through sometimes rather general statements as to what the policy ought to be, whether content should be controlled by those who are delivering the services.
 Page 11       PREV PAGE       TOP OF DOC

    It's an important hearing. Network neutrality is something that should be very carefully considered as we move forward, and I think that the role of the Judiciary Committee is going to be very important, especially in the backdrop of a larger consideration of the questions involving commerce and communications. There are some large issues as we move toward the end of the 109th session of Congress that I'm not sure if we can handle all of this in the closing months. But there is no better and appropriate way to begin this than examining the question of net neutrality, and I'd like to have permission to put my statement in the record and welcome our witnesses and begin a very important hearing.

    And I thank you, Mr. Chairman.

    Mr. CANNON. I thank the gentleman from Michigan, who has worked together with me—and I've worked with him, I should say, at his feet learning on this issue for a very long period of time and look forward to working with him on this Committee. And without objection, his full remarks are entered in the record, and at this point, without objection, all Members' opening statements may be included in the record. Hearing no objection, so ordered.

    Let me introduce our witnesses—would anyone like to make an opening statement?

    [No response.]

    Mr. CANNON. Good. Thank you.

 Page 12       PREV PAGE       TOP OF DOC
    Let's go ahead and introduce the witnesses. The first witness is Paul Misener. Mr. Misener is the Vice President for Global Public Policy at Amazon.com. Prior to joining Amazon.com, Mr. Misener worked in both the Government as the senior legal advisor to FCC Commissioner Harold Furchgott-Roth and in private industry as a partner at Wiley, Rein & Fielding. He has the unique perspective of being both an engineer, graduating with a degree in electrical engineering and computer science from Princeton, and a lawyer, graduating from George Mason University. I thought that those were like incompatible. I gave up my law degree—or not the degree but my practice, largely because I love engineers. It's nice to see someone who actually embodies both.

    Our second witness is Earl Comstock, the President and CEO of COMPTEL. Mr. Comstock previously served as the chief counsel and legislative director for Senator Ted Stevens, former Chairman of the Senate Commerce, Science, and Transportation Committee, and later served as the special counsel for telecommunications for the Senate Commerce Committee, where he negotiated and drafted key provisions of the Telecommunications Act of 1996. Mr. Comstock graduated with a political science degree from the University of California at Santa Barbara and earned a law degree from George Mason University.

    Our third witness is Walter McCormick, President and CEO of the United States Telecom Association. He has previously served as the general counsel for the Department of Transportation and then Under Secretary Andrew Card. Mr. McCormick also has extensive congressional experience with over 10 years serving in the Senate, holding numerous positions including general counsel, chief counsel, and staff director for the Senate Committee on Commerce, Science, and Transportation. He obtained his undergraduate and law degree from the University of Missouri, studied international economics and political science at Georgetown University, and has completed the program for senior managers in government at Harvard University's John F. Kennedy School of Government.
 Page 13       PREV PAGE       TOP OF DOC

    Our final witness is Timothy Wu, Professor of Law at Columbia University. He currently teaches copyright and trade and advance intellectual property and telecommunications at Columbia. Mr. Wu was formerly the Director of Corporate Marketing at Riverstone Networks, Inc., in Silicon Valley. He has written extensively on telecommunications and the issue of net neutrality and has been published in the Supreme Court Review as well as a number of Law Review journals, including those at Michigan, Virginia, and Harvard. Mr. Wu obtained his undergraduate degree from McGill University and graduated magna cum laude from Harvard Law School.

    It is the practice in this Committee to swear in all witnesses, so if you wouldn't mind standing and repeating after me, raising your arm.

    [Witnesses sworn.]

    Mr. CANNON. The record should indicate that all of the witnesses indicated in the affirmative.

    We will now proceed with witness opening statements. I think you all have probably testified here before, but we have a little system of lights. The first light will be green and that goes on for 4 minutes. You have a yellow light, and when the light turns red, we won't tap you down, but given the possibility that we may have to recess, we suggest—we would hope that you would keep it near 5 minutes.

    Thank you and, Mr. Misener, would you please proceed.

 Page 14       PREV PAGE       TOP OF DOC

    Mr. MISENER. Yes, sir. Good afternoon. It is on. Thank you. Good afternoon, Chairman Cannon, Mr. Conyers, and Members of the task force. Amazon belongs to a coalition of companies that includes eBay, Google, IAC, Microsoft, and Yahoo! that is working closely with the growing assembly of well over 100 consumer groups, associations, and companies which share concerns about the topic of this hearing. I respectfully request that my entire written statement, which lists the organizations in this assembly, be including in the record. Thank you very much for inviting me to testify.

    Mr. Chairman, we are here because things have changed. Within the past few years, the phone and cable companies have acquired the technical means, market power, and regulatory permission to restrict consumers' access to broadband Internet content, such as movies and music, and they've clearly announced their plans to do so. In short, the phone and cable companies will fundamentally alter the Internet unless Congress acts to stop them. And yet the response so far from Congress, the bill being considered in the House Energy and Commerce Committee, is wholly inadequate. Worse than failing to confront the threat, this bill would tie the hands of the expert agency. Surely, as it did a few years ago with the Tax Freedom Act, Congress can better thwart this clear and present danger to the Internet.

    Mr. Chairman, rather than read all or part of my written statement, I would like to use my allotted time to describe what will happen if Congress fails to reinstate essential consumer safeguards recently abandoned by the FCC.

 Page 15       PREV PAGE       TOP OF DOC
    For the next 5 to 10 years, phone and cable companies will maintain their duopoly market power over consumer broadband Internet access. The phone and cable companies also will continue to invest and deploy broadband, as they have for many years under nondiscrimination rules. And they will continue to realize returns on their investments by being handsomely paid for access by consumers and content providers alike. Although the network operators will continue to promise that they won't, quote, block access to websites, they will firm up their plans to degrade access to some websites as a consequence of giving priority, fast-lane access to others.

    The telcos also will start providing proprietary video service and will continue to seek accelerated franchise grants without build-out requirements, based in part on the existence of Internet video competition which, simultaneously, they are moving to quash.

    At some point, the phone and cable companies will present a simple ultimatum to major Internet content providers: Pay us for prioritization, or if you don't pay, your content will be degraded relative to those who do pay. Similar deals may be struck based on political or religious viewpoints or other non-technical discriminatory factors. In this way, the network operators will extend their market power over access to market power over content. They will use their monopolies to monopolize. A bidding war will quickly ensue. The top-tier Internet content companies will bid up the price of prioritization on each of the half dozen or so major Internet access networks. Smaller companies will recognize that they have no hope of competing in this bidding war, and independent venture capital for new online businesses will dry up.

    The new way for an entrepreneur to take a business online will be to seek permission from the phone and cable companies. A flurry of antitrust actions will then be filed against the network operators, but even if the courts don't find that the plaintiffs failed to state a claim, these actions will take far too long to be effective.
 Page 16       PREV PAGE       TOP OF DOC

    Meanwhile, the foreign network operators, such as Deutsche Telekom, almost all of which are wholly or partially owned by a foreign government, will follow through on their already announced plans to use discrimination as a great way to make more money off the world-leading American Internet content companies. In effect, foreign network operators will restrict access of American Internet companies to foreign markets.

    Congress or the FCC will soon thereafter realize that it was a mistake to allow the network operators to control Internet content and will rush to pass remedial legislation. Unfortunately, it will be too late because the lost years of innovation will be forever lost, the network operators will have wastefully invested in equipment designed for discrimination instead of speed, and the foreign governments certainly won't reverse themselves just because America reconsidered.

    So the result of Congress' unwillingness to address this clear and present danger will be to leave American consumers with dramatically reduced content choice, to stall American online innovation, and to wound U.S. global Internet competitiveness.

    Mr. Chairman, this sorry tale is eminently avoidable. I urge you and your colleagues to recognize that, despite how much we wish it were otherwise, the market for broadband Internet access is not competitive and that the network operators, both domestic and foreign, fully intend to extent their market power over access to market power over content. I, therefore, urge that Congress act now to reinstate meaningful, enforceable, bright-line safeguards that preserve consumers' longstanding freedom of Internet content choice.

 Page 17       PREV PAGE       TOP OF DOC
    Thank you again for inviting me to testify this afternoon, and I look forward to your questions.

    [The prepared statement of Mr. Misener follows:]


    Good morning, Chairman Sensenbrenner, Mr. Conyers, and Members of the Task Force. My name is Paul Misener. I am Amazon.com's Vice President for Global Public Policy. Amazon belongs to a coalition that includes eBay, Google, IAC/InterActiveCorp, Microsoft, and Yahoo!, that was formed to express our shared concerns about the topic of this hearing. Thank you very much for inviting me to testify on this important matter. I respectfully request that my entire written statement be included in the record.


    Mr. Chairman, the phone and cable companies will fundamentally alter the Internet in America unless Congress acts to stop them. They have the market power, and regulatory permission to restrict American consumers' access to broadband Internet content, including music and movies, and have announced their plans to do so.

    Amazon.com is an Internet-based retailer and retail platform with over fifty million customers worldwide. We merely want to ensure that our customers retain their longstanding freedom to access the broadband Internet content of their choice, including that content available from Amazon.com. Currently, consumers pay network operators for Internet access, and have the freedom to select lawful content from providers like Amazon, who pay network operators millions of dollars a year for Internet access.
 Page 18       PREV PAGE       TOP OF DOC

    In essence, we fear circumstances in which broadband network operators with market power are permitted—based on payments, political or religious viewpoints, or any other non-technical discriminatory factors—to prefer some content and thereby restrict consumer access to other content.

    As already noted, many large Internet content companies including Amazon.com, eBay, Google, IAC/InterActiveCorp, Microsoft, and Yahoo! are very concerned about network operators' ability and plans to restrict content choice. Earlier this month, the chief executive officers of these companies, Jeff Bezos, Meg Whitman, Eric Schmidt, Barry Diller, Steve Ballmer, and Terry Semel, wrote the Honorable Joe Barton, Chairman of the House Committee on Energy and Commerce to say that

Until FCC decisions made last summer, consumers' ability to choose the content and services they want via their broadband connections was assured by regulatory safeguards. Innovators likewise have been able to use their ingenuity and knowledge of the marketplace to develop new and better online offerings. This ''innovation without permission'' has fueled phenomenal economic growth, productivity gains, and global leadership for our nation's high tech companies.

    These six CEOs then urged that, in order ''[t]o preserve this environment,'' a bill should be passed ''that directly addresses broadband network operators' ability to manipulate what consumers will see and do online. It is equally important to pass a bill that fleshes out these consumer freedoms via rules of the road that are both meaningful and readily enforceable.'' Lastly, the CEOs expressed their desire to work for legislation ''to protect millions of Americans' legitimate expectations in an open Internet, as well as the innovation and competitiveness that it creates.''
 Page 19       PREV PAGE       TOP OF DOC

    Our companies believe that Congress must act to preserve longstanding consumer freedoms. The telco and cable operators must not be allowed to extend their market power over broadband Internet access to market power over broadband Internet content.

    This is not just a ''big Internet company'' issue, however. Ultimately, this is a consumer and much broader industry issue, and a coalition of well over 100 organizations have joined together to support legislative safeguards to preserve the openness of the Internet. These organizations include the AARP, Acopia Networks, Adaptive Marketing LLC, Adobe, Advancedmultimedia.com, Aegon Direct Marketing Services, Airespring, Amazon.com, American Association of Libraries, AnalogZone, AngleBeds.com, Ask.com, Association of Research Libraries, Awow Communications, Bandwidth.com, Bloglines, Borsetti & Co., BT Americas Inc., Business Software Alliance, CALTEL, Cendant, Chemistry.com, CinemaNow, Circumedia LLC, CitySearch, CommPartners Holding Company, COMPTEL, Comunicano, Inc., Consumer Electronics Association, Consumer Federation of America, Corliant, Cornerstone Brands, Inc., Dagdamor Media, Dave Pettito Direct, DiMA, Domania, Downstream, Dreamsleep.com, Dresses.com, EarthLink, eBay, eBrands Commerce Group, Economics & Technology, Inc., Educause, Elaine P. Dine, Electronic Retailing Association, Entertainment Publications, Evite.com, Excite, Expedia, Free Press, Free World Dialup, GetSmart, Gifts.com, Google, GotVoice, Inc., Graceline Canada, Hawthorne Direct, Home Shopping Network, Hotels.com, Hotwire, HSE24, IAC/InterActiveCorp, Iceland Health Inc., iFreedom Communications, iNest, InPulse Response, INS, Interactive Travel Services Association, InterMetro, Internet2, Interval International, Intervox.com, IntraISP, Invens Capital, Isen.com, LLC, IVR Technologies, iWon, J. Arnold & Associates, JohnnyZip, Lafayette Group, Inc., Law Offices of James Tobin, LendingTree, Lingo, Inc., Listyourself.net, Livemercial, Match.com, McFadden Associates, MCM Telecom, Media Access Project, Media Partners Worldwide, Mercury Media, Merrick Group, Microcom, Microsoft, Miller & Van Eaton, National Retail Federation, Nationalblinds.com, NetCoalition, Objectworld, Pac-West, PointOne, PRC, Primus Telecommunications, Product Partners LLC, Public Knowledge, Pulver.com, RealEstate.com, ReserveAmerica, Rifftone.com, S & B Technical Products, Savatar, Savvier, ServiceMagic, Shelcomm, Shoebuy.com, Skype, Sling Media, Sling Media Inc., SOHOlutions, Sonus Capital Management, Sony Electronics Inc., SunRocket, Symercy Financial Corp., Techviser, Telekom Austria, Telephia, TELLO, Ticketmaster, Tier1Research, TiVO, TNS, Tonystickets.com, Tranqulitymattress.com, Travelocity, udate.com, VI Technologies, Vivox, WCW Networks, and Yahoo!
 Page 20       PREV PAGE       TOP OF DOC

    I hope that all of these entities' views and, most importantly to Amazon.com, the interests of our customers, will be thoroughly considered.

    Moreover, this is not merely a dispute between American network operators on one hand, and American consumers and content providers on the other. Rather, it is the first and precedent-setting battle in a worldwide conflict. Recent news reports confirm that foreign network operators such as Deutsche Telekom and Telecom Italia also are interested in extending their market power over their networks to market power over content. Thus, if U.S. policymakers were to allow American network operators to extract oligopoly rents from American content providers, our policymakers would be simultaneously setting a precedent for allowing foreign operators to exercise the same leverage over world-leading American Internet content companies and their customers.

    In my time this afternoon, I will describe the market power of network operators and the details of how they intend to extend that market power to limit consumer choice of content, such as movies, television, and music. I then will describe the need for Congress to require adoption of regulations to confront this clear and present danger; how failure to act will set a dangerous international precedent that will harm American competitiveness overseas; and how legislation that would grant national video franchising relief should not be enacted without such provisions. Lastly, I will propose modest safeguards to preserve Americans' longstanding freedom of Internet content choice.

 Page 21       PREV PAGE       TOP OF DOC

    Mr. Chairman, as much as we wish it were otherwise, consumers have little or no real choice of broadband Internet access. For the foreseeable future, nearly all Americans will have two or fewer providers available: the phone company, the cable company, or both. And, unfortunately, consumers will continue to face discouragingly high costs of switching between them; equipment swaps, inside wiring changes, technician visits, long term contracts, and the bundling of multiple services all contribute to these costs.

    Despite the common misconception intentionally perpetuated by the network operators, the Internet did not grow up in an unregulated environment; its growth and success were due in large measure to the longstanding rules that governed its infrastructure until last year's FCC decision. Although many of the rules were outdated and worthy of deregulation, the Commission erred by completely abandoning non-discrimination requirements before the market became competitive.

    The Commission's own semi-annually reported data on the competitive availability of broadband access are fundamentally misleading. These data, which purport to show multiple broadband service providers in many areas of the country, completely obscure the realities faced by individual consumers. Unfortunately, however, these data also were the basis for the Commission's recent actions.

    In the first place, the data count as high-speed broadband any services that deliver as little as 200 kbps in one direction. Although this may have been a reasonable definition of broadband a decade ago, it is preposterously slow today, incapable of delivering even typical TV quality video, let alone HDTV, and is but one five-hundredth the speed being provided to millions of consumers in Korea and elsewhere. Second, the geographic areas analyzed are zip codes, not individual neighborhoods or households. So while there may be three or four true broadband network operators (for example, two telcos and two cable companies) serving small separate areas in a zip code, no one consumer may have access to more than two of them (one telco and one cable company).
 Page 22       PREV PAGE       TOP OF DOC

    The result of these misleading FCC data is that the amount of broadband consumer choice is wildly overstated, particularly when the aforementioned high switching costs are considered. If it really were easy for Americans to switch among five, six, or more true broadband Internet access providers, the market would be competitive and legislated consumer safeguards would not be necessary.

    Unfortunately, what exists for the vast majority of Americans is, at best, a duopoly of the local phone and cable companies. Widespread deployment of alternative broadband technologies capable of high quality video remains a distant hope and, with yet another mega-merger in the works (this time AT&T and BellSouth), the promise of inter-regional local phone company competition is all but dead. In such oligopolistic conditions, consumers are left with fewer services, higher prices, or both.

    The FCC's most recent semi-annual broadband deployment data, released earlier this month, verify this bleak assessment. Perhaps the most salient fact revealed in the data is that, of the 34.3 million advanced services broadband lines serving primarily residential end users, only one half of one percent use other than telco or cable technology. Given that telco-telco and cable-cable overbuilds are so very rare, this fact confirms that nearly all American consumers are stuck with the telco-cable duopoly.

    To be clear, we don't begrudge the phone and cable companies their current market power over broadband Internet access networks. Despite the longstanding desires and noble aspirations of policy makers, America is stuck with this super-concentrated market for the foreseeable future.
 Page 23       PREV PAGE       TOP OF DOC

    Moreover, although we oppose the collection of oligopoly rents, we certainly don't seek to deny network operators a healthy return on their investments. But there are two obvious considerations: what are their investments and are they getting a return? While it is true that there are new investments being made (well before any discriminatory pricing regime has been established), even the operators like to remind regulators that they are, in Verizon's words, potential video service providers ''who already have access to the rights-of-way'' around the country. But, of course, they did not obtain these incredibly valuable rights-of-way on the competitive market but, rather, by government grant to a monopoly service provider. In sum, much of their ''investment'' was either given to them or explicitly protected from competition by the government.

    Just as importantly, content providers currently pay network operators for the amount of connection capacity they use, and network operators can charge consumers different prices depending upon how much bandwidth they use. This sort of connectivity ''tiering'' makes perfect sense. And, of course, network operators will charge consumers for the provision of any ancillary services, such as affiliated video content.

    Perhaps the best way to gauge whether they believe their investments without discrimination are providing an acceptable return is to note that the FCC data indicate that telco and cable broadband services are being deployed and taken by consumers at a rapid pace. Given the network operators' claims (which I believe) that they are not currently engaged in much, if any, content discrimination, this is a clear indication that network operators need not discriminate to deploy broadband in America.

 Page 24       PREV PAGE       TOP OF DOC
    We also welcome broadband network operators' innovations within the network. With Moore's Law at work, network operators ought to be able to deploy innovative new technologies and services that, with increasing efficiency, provide benefits to operators and users alike. And we certainly don't oppose network operators' entry into competing businesses so long as they are not allowed to leverage their market power over broadband Internet access to favor these ancillary endeavors.

    What we seek is more modest, yet far more important: We ask that Congress keep the telco and cable operators from taking their market power over broadband Internet access and extending it to market power over broadband Internet content.


    Mr. Chairman, unless Congress acts soon, American consumers will receive artificially restricted choice of broadband Internet content. Leveraging their market power, phone and cable companies plan to restrict American consumers' access to such content based in large part on lucrative deals they intend to cut with third parties. And it will be just as easy for the operators to favor content based on political or religious viewpoints or other non-technical discriminatory criteria. By constraining consumer access to content providers, the network operators also would create an artificial ''channel scarcity''—essentially a bandwidth cartel—where none previously existed.

    After years of administrative proceedings and litigation, last year the FCC reclassified broadband Internet access by wireline service providers, both telco and cable. Although the Commission simultaneously adopted a policy statement that confirms the agency's statutory authority and possible intentions to act, the statement fails to address some likely discriminatory behaviors and, in any case, is explicitly unenforceable. So, with the exception of weak merger conditions that apply the FCC's equally weak policy statement to a few network operators, and expire for no apparent reason in 18 months (the market certainly won't be competitive by then), telcos and cable companies may restrict consumer access to content at will. Because American consumers' access to Internet content is in jeopardy, Congress needs to act.
 Page 25       PREV PAGE       TOP OF DOC

    Just as it is clear that the network operators have the market power to restrict consumers' choice of broadband Internet content, it has become equally clear that they fully intend to do so. Not only have the telcos and cable companies stridently and steadfastly opposed any meaningful network neutrality rules, their most senior executives have, over the past six months (noticeably, beginning only after the FCC's final reclassification actions), issued scary yet refreshingly honest statements that reveal their plans for restricting consumer access to content. Simply put, the network operators are planning to restrict consumer choice of broadband Internet content based on deals they intend to strike with content providers and, perhaps, editorial viewpoints or other non-technical discriminatory criteria. This is precisely the opposite of ''a la carte'' pricing being sought from current, vertically integrated video service providers. Indeed, rather than enhancing consumer choice and flexibility, the network operators are moving retrograde to constrain such choice and flexibility and create an artificial scarcity of content outlets.

    Although the network operators have been somewhat less clear on exactly how they intend to limit consumer access, their FCC filings and public statements reveal that they plan to do so in three key ways. But before I describe these, please allow me to summarize their technology plans. There are many differences among the technologies the duopoly network operators intend to use (hybrid fiber-coax by the cable operators and either fiber-to-the-home or fiber-to-the-node plus DSL over copper twisted pair by the telco operators), but all three technologies have been designed to operate the same way in practice, with two downstream components: a very high capacity (''fast lane'') cable-like private network component, and a much lower capacity (''slow lane'') downstream broadband Internet access component. The fast lane will be operated as a closed network, while the slow lane will be more (but not entirely) open.
 Page 26       PREV PAGE       TOP OF DOC

A. Specific Network Operator Plans

    The network operators apparently plan to restrict consumer choice of broadband Internet content in three essential ways: by providing (1) a closed fast lane and an open slow lane; (2) paid 'police escort' within the slow lane; and (3) preferential ''local on-ramps'' into the slow lane.

    1. Closed Fast Lane and Open Slow Lane. First, as noted before, each network operator has or is constructing a fast lane for their affiliated broadband content provided by a sister company and a slow lane for broadband Internet content provided by others. The fast lane they reserve for themselves is a closed, private network. This has always been the case for cable operators and, even for the telco operators deploying broadband, make no mistake: the overall broadband pipes they're deploying are mostly just another version of cable TV, not broadband Internet. Consumers should recognize that despite the nearly ubiquitous and puffy advertising, it's not about ''your world, delivered,'' it's mostly about their world.

    2. Paid Police Escort within the Slow Lane. Second, the network operators intend to offer Internet content providers paid prioritization (essentially a paid ''police escort'') in the slow lane. Their plan is that, as content enters the operators' slow lanes from an Internet or other network access point, the speed with which this content transits their network will be determined, in part, based on whether the content owner paid for prioritization. The terms of art the network operators use to describe this prioritization include ''quality of service'' and ''tiering.'' Each term is intentionally confusing. I am not suggesting that certain types of services be denied prioritization, just like certain kinds of road traffic, like emergency services, deserve police escort. But such police escort should not be made available for a fee; otherwise those unable to pay the fee will always be stuck in traffic. Put another way, to prioritize some traffic is to degrade other traffic. It's a zero-sum game at any bottleneck. This fact is intentionally obscured by network operators, who incorrectly claim that they will not degrade anyone's content. Neutral prioritization (for example, network management whereby all live video streams receive priority above all text files) would be perfectly acceptable. But for an operator to sell priority to the highest bidder, the degradation of service to content providers who can't or don't pay would be anticompetitive. Fortunately, it also is predictable and, with modest legal safeguards, avoidable.
 Page 27       PREV PAGE       TOP OF DOC

    As should be obvious, small businesses will have a very hard time innovating if they need to pay for 'police escort' prioritization to compete. When some companies like mine have noted this previously, some of the network operators respond with something to the effect of ''beware when big companies are looking out for the interests of little ones.'' That response seeks to change the subject and obscure three key points. First, it doesn't change the underlying fact that small entrepreneurs—facing a possible bidding war among big companies—are going to be hurt unless Congress does something now. Second, many of the big companies noting this imminent throttle on small company innovation were, indeed, innovative small companies only just a few years ago. And, third, on behalf of our customers, we want to ensure that our innovations—essentially new businesses operating in start-up mode by our employees—are not hindered in the same way. We merely want, as Internet pioneer Vint Cerf so clearly puts it, ''to innovate without permission'' of the network operators.

    3. Preferential Local On-Ramps into the Slow Lane. Lastly, the network operators intend to offer downstream content injection (essentially ''local on-ramps'' to the broadband slow lane) to content providers who are willing to pay. This would enable content to be delivered from geographic locations closer to consumers and provide better user experiences. Such local on-ramps already are provided in a competitive access market by companies such as Akamai, which has servers distributed throughout the United States so that content can be delivered quickly to consumers, rather than having to traverse great distances on the Internet. Although content providers have no expectation that such local on-ramps must be provided for free, network operators must not offer local on-ramps on discriminatory terms.

B. Network Operator Claims
 Page 28       PREV PAGE       TOP OF DOC

    So how do the network operators discuss these plans? They obfuscate. For example, most network operators say they won't, quote, ''block'' websites. This relatively new concession is neither noble nor comforting and, in fact, is quite misleading. While they may not actually block access to a particular website, they easily could make that site's content unusable, either by overly constraining capacity (making the slow lane too slow); by providing prioritization only to those willing and able to pay (the paid ''police escorts'' that make everyone else wait); or by providing downstream injection (the local on-ramps) only on unreasonable or discriminatory terms. So it's a matter of semantics: they may never block content, but still could make it unusable.

    Wireless network operators and their representatives are seeking exemption from any non-discrimination requirement enacted, but it is difficult to see on what basis such an exemption would be justified. Technology neutrality dictates equal treatment of copper, glass, and the ether. Consumers need not, and should not, have their access via such various means treated differently by regulation, unless there is some difference among them that legitimizes disparate treatment. The possible differences for wireless are bandwidth, mobility, ''closed network,'' and competition.

    If the concern is bandwidth or mobility, wireless providers can rest assured that a non-discrimination requirement would neither require certain levels of bandwidth or performance but, rather, that all sources of technically-similar Internet content be treated equally. And if a wireless carrier wants to offer a purely private network, without Internet access, then non-discrimination rules would not apply.

 Page 29       PREV PAGE       TOP OF DOC
    It is important to recognize that, as competitive as the mobile wireless market may appear on the surface, it would not exist on this issue because the competing wireless providers are almost all owned by the uncompetitive telcos who oppose non-discrimination rules. Although Sprint/NexTel is independent, T-Mobile is owned by Deutsche Telekom (which has announced its intention to discriminate), Cingular is owned by AT&T and BellSouth, and Verizon Wireless is owned by Verizon. On the issue of Internet content non-discrimination, therefore, policymakers cannot expect the wireless market to behave competitively.

    Other network operators say, dismissively, that this is a ''solution in search of a problem,'' or that policymakers should wait for a problem to arise before acting. This wait-and-see approach was endorsed by the FCC last year. But what further proof is needed? The time to act is now. To ignore the network operators' market power, their strident and steadfast opposition to meaningful safeguards, their boldly announced intentions, and their increasingly clear specific plans, is truly to turn a blind eye to a clear and present danger to consumers.

    This situation is eerily similar to that facing Congress a few years ago with respect to Internet access taxes. Congress correctly foresaw the future problem of state and local governments imposing burdensome taxes on Internet access and moved peremptorily to ban such taxes by enacting then extending the Internet Tax Freedom Act. Today, the functional equivalents of the state and local tax collectors are the oligopolistic telco and cable network operators, and Congress should likewise recognize and peremptorily thwart the threat they pose to the Internet.


 Page 30       PREV PAGE       TOP OF DOC
    To make matters worse, foreign broadband Internet access network operators have plans to restrict world-leading American content companies' access to overseas consumers. Deutsche Telekom and Telecom Italia have already announced their plans. Earlier this year, for example, Kai-Uwe Ricke, the CEO of Deutsche Telekom said that ''the Googles, Yahoos, eBays and Amazons'' ''need infrastructure''; that ''[i]t cannot be that infrastructure providers like [Deutsche] Telekom continue to invest, while others profit from it''; and that ''Web companies that use infrastructures [sic] for their business should also do their part.'' But, of course, Amazon.com and others already do their part by paying for Internet connections. What Mr. Ricke actually wants, of course, is exactly what our domestic network operators want: to use market power to charge consumers once and American content providers twice, all for the same thing.

    American policymakers must consider the effects of our domestic regulatory actions on our global competitiveness. American content companies like Amazon.com are world leaders today, in part because our access to consumers in other markets has not been impeded. If foreign network operators, almost all of which face no competition and are fully or partly owned by foreign governments, with obvious incentives to favor non-American content companies, are allowed to extract discriminatory rents from American content companies, our competitiveness both as an industry and a nation will suffer. Put another way, even if it were sound policy for Congress to allow American network operators to extract oligopoly rents from American content companies, it could not be sound policy to set the precedent for foreign network operators to extort payments from world-leading American content companies. How could our trade representatives challenge such actions abroad if we permit them here at home? Clearly, we must not lay the groundwork for every network operator around the globe to extort payments from American Internet companies. The only way we can hope to prevent this outcome is to hold the line domestically: we must not allow consumer choice of content to be artificially restricted by network operators with market power.
 Page 31       PREV PAGE       TOP OF DOC


    Mr. Chairman, the preservation of American consumers' longstanding freedom of choice of Internet content should be addressed in the context of national video franchising relief. The reason for granting such relief is, of course, the introduction of additional video competition for consumers, so it would be counterproductive to facilitate the delivery of content of one additional competitor (the phone company), while limiting the availability of thousands of other competitors via the Internet.

    Moreover, in support of their opposition to requirements for system build-out and service to rural areas, the telcos recently have repeatedly cited the competition from Internet content providers (''Internet streaming video'' and ''Internet-downloaded video,'' in AT&T's words). As Verizon reported to the Commission in opposition to video build-out requirements, there is ''significant competition in access to video programming through myriad means, including internet and satellite sources. . . .'' BellSouth went so far as to tell the FCC that Internet content competition would diminish unless telcos were given video franchising relief: ''[i]f LFAs [local franchising authorities] are permitted to delay or prevent broadband providers from also [in addition to cable] offering video service, then competition will be greatly (and probably permanently) impeded. This is particularly true given the plethora of new [Internet-based] video offerings that require robust broadband networks.''

    So the network operators have the temerity to cite the presence of competitive Internet-based video programming as justification for preempting local government rules and dodging reasonable build-out obligations, all while planning to quash that competition by restricting consumer access to Internet content.
 Page 32       PREV PAGE       TOP OF DOC

    In the interests of competition and consumer choice, therefore, video franchising relief must not be granted without meaningful broadband Internet content safeguards; otherwise, consumers will receive less, not more, choice of content.

    These safeguards must keep the network operators from cutting ''paid police escort'' deals that would adversely affect the traffic of other content providers who can't or don't pay. And they also should keep the operators from insisting upon unreasonable or discriminatory terms for leasing ''local on-ramps.'' In short, the most likely and dangerous anti-consumer discriminatory behaviors of broadband network operators must be thwarted in advance by legislation and regulation.

    Mr. Chairman, your Committee's interest in this matter is greatly appreciated. We seek bright line rules that would avoid unnecessarily lengthy litigation, especially given how easily foreseen—even forthrightly announced—the network operators' anticompetitive actions are. As I noted in testimony before Congress almost three years ago, and as the FCC recognized in its final broadband reclassification order last August, that agency does not need new authority to act in this area. Congress needs either to direct agency action under current authority, or to enact another mechanism for protecting American consumers and competition.


    Mr. Chairman, we respectfully ask that Congress enact modest but effective safeguards to reinstate limited protections that the FCC recently abandoned, and thereby preserve American consumers' longstanding freedom of choice of Internet content. Without much effort, these regulatory safeguards can be narrowly drawn so that operators' private networks are not invaded and so that operators are appropriately compensated for the services they provide.
 Page 33       PREV PAGE       TOP OF DOC

    Two essential consumer safeguards we seek can be summarized as follows:

(1) Content transiting an operator's broadband Internet access network may be prioritized only on the basis of the type of content and the level of bandwidth purchased by the consumer, not ownership, source, or affiliation of the content. (That is, for traffic within the broadband network's Internet access lane, ''police escort'' may be provided only based on the technical nature of the traffic or whether the consumer has a paid more for a somewhat higher speed limit.)

(2) The terms for local content injection must be reasonable and non-discriminatory; network operators must not be allowed to give preferential deals to affiliated or certain other content providers. (That is, ''local on-ramps'' into the Internet access lane need not be free, but the road owner must not charge unreasonable or discriminatory rates to favor their own or only some others' traffic.)

    Note that we are not seeking to have broadband Internet access reclassified as common carriage. To the contrary, we think that with modest safeguards, appropriately drafted and clarified, and with mandatory and meaningful agency enforcement, American consumers could be confident that their longstanding choice of lawful Internet content will not be limited by network operators.


    In conclusion, Mr. Chairman, the phone and cable companies will fundamentally alter the Internet in America unless Congress acts to stop them. They have the market power, technical means, and regulatory permission to restrict American consumers' access to broadband Internet content, and they've announced plans to do so.
 Page 34       PREV PAGE       TOP OF DOC

    For the foreseeable future, American consumers will have little or no real choice of broadband Internet access. And—unless Congress acts soon to reinstate modest and longstanding consumer safeguards—consumer freedom to choose broadband Internet content will be artificially limited. I urge you and your colleagues to recognize that, despite how we wish it were otherwise, the market for broadband Internet access is not competitive and that the network operators—both domestic and foreign—fully intend to extend their market power to restrict consumer choice of content by discriminatorily constraining consumer access to American content companies. I also urge that, simultaneous to any grant of video franchising relief, Congress enact safeguards to preserve American consumers' longstanding freedom of Internet content choice.

    Thank you. I look forward to your questions.


[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]

    Mr. CANNON. Thank you, Mr. Misener, for a very compelling statement. We appreciate that.

    Mr. Comstock?

 Page 35       PREV PAGE       TOP OF DOC

    Mr. COMSTOCK. Thank you, Mr. Chairman and Members of the Committee. It's a pleasure to be here. I'm Earl Comstock, the President and CEO of COMPTEL. We represent a diverse mix of competitive providers. We have everything from cable overbuilders to wireless companies to Internet companies. We basically represent the entire spectrum of application and network operators that seek to serve consumers.

    I would like to build a little bit on what Mr. Misener just said. I think, you know, he is speaking from an Internet content company side, and now we're looking at the folks that are primarily in my organization, actually seek to provide competing transmission services. Many of them do have their own facilities, and the keys that are here and the reason why Congress needs to act is that the reality of the situation today is in this United States we have two facility-based operators that reach essentially all homes and one facility-based operator that reaches essentially all businesses. And that has not changed. Both of those operators built their networks in a protected environment. They had at least a decade, if not several decades, in which to build out their facilities with the guarantee that if they built those facilities, they would get the customers. And here I'm talking about not only the incumbent phone companies, but the incumbent cable companies as well.

    And I think it's important for the Committee to recognize that the network dynamics lead to inevitable discriminatory practices if Congress sets the law the wrong way. Right now today, you have the possibility that residential consumers might actually enjoy two facilities-based options while most businesses enjoy only one. Without some kind of rules that provide access to that infrastructure that was built across public rights-of-way and using public spectrum, we will not have competition that allows the content providers that Mr. Misener was speaking about, the innovators of all the innovative services and applications that everyone seeks to get access to today, we won't have any competition in the provision of the vital transmission. That's the key ingredient that everyone needs, the essential facility, in antitrust terms, that has to be available. And it's something that can't easily be duplicated. It took a lot of time and a lot of money to build out infrastructure throughout the United States. The thought that a competitor in the face of an entrenched incumbent would be able to not only gain the capital but then construct facilities—which, again, can't magically appear everywhere at once but have to be built out over time. In the face of someone who has an entrenched revenue stream and an entrenched network and the very customers that competitor is seeking to serve, that's an incredible barrier to entry unless there are some rules that make it possible for you to do that.
 Page 36       PREV PAGE       TOP OF DOC

    Now, this Committee doesn't necessarily set the common carrier rules, but you do have oversight over the antitrust rules. And I'd point out the parallels here between what's happening now and we're seeing the re-establishment of the very kind of monopoly that led the Reagan administration Antitrust Division to break up AT&T. It was an effort that actually started 10 years before in the Nixon and Ford administrations and was carried through to the Reagan administration, and thankfully they followed through it. And what that case illustrated—the divestiture from AT&T illustrated was the incredible loss to this country, the lost opportunity that came about from having that kind of monopoly control of a network. It wasn't until after the divestiture that we saw all the benefits, the innovation of the Internet, wireless companies, all kinds of new broadband services, none of which the incumbent would have employed or deployed because it would have threatened their revenue stream.

    And the same is true of cable operators. Cable modem service came about largely because of an opportunity that Congress provided in the 1996 act, where the cable industry believed that the phone companies were going to come into their market immediately, so they sought to respond to that potential competition by offering Internet access service.

    Now they're in a situation where, gee, if I just continue to do what I'm doing, maybe the Bell Company gets in and offers video, but I'd much rather have a cozy duopoly than I would see competition. So what you're seeing is an effort to get the cable rules applied to everybody, and those rules tie transmission and content, and that's what's so dangerous to the United States. If you allow that essential facility, the transmission, to be tied together with the content you will create the very gatekeepers that we broke up the AT&T monopoly to prevent.

 Page 37       PREV PAGE       TOP OF DOC
    So I hope that you'll look at enforcing some antitrust provisions, and I think antitrust is a possible remedy. But to do that, you really need to spell out some very clear violations, because I think as Mr. Misener said, the problem for most start-up companies is it's a matter of time. If they don't know up front that there's going to be some relief from the kind of anticompetitive abuses, the exclusionary practices that network operators traditionally will engage in, then they've got no opportunity to get in the market in the first place.

    So it's the opportunity foregone, the opportunity lost, that really is at issue here, and it is going to take some rules to make the Internet work. The Internet grew up on common carriage, and if we're not going to have common carriage, we need a stronger antitrust remedy to solve that problem.

    Thank you.

    [The prepared statement of Mr. Comstock follows:]


[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]

    Mr. CANNON. Thank you. I appreciate that. That was also very insightful.

    And now for a slightly different perspective, I believe, Mr. McCormick?
 Page 38       PREV PAGE       TOP OF DOC


    Mr. MCCORMICK. Thank you, Mr. Chairman. Chairman Cannon, Congressman Conyers, Members of the Committee, thank you for the opportunity to be here today and to appear before this task force to discuss net neutrality.

    Mr. CANNON. You know, I think that box will slide closer to you, if you'd like.

    Mr. MCCORMICK. Is that better? Okay.

    As you know, our association represents about 1,200 innovative companies that range from the smallest rural telecoms in the Nation to some of the largest corporations in the United States economy.

    What unites us is that we have a 100-year tradition of connecting people to each other over networks. We are 100 percent committed to this tradition as we invest billions of dollars building out our new, next-generation broadband networks that are capable of meeting America's rapidly increasing ''need for speed.''

    Today, I make the same commitment to you that our companies have made to their customers: We will not block, impair, or degrade content, applications, or services.
 Page 39       PREV PAGE       TOP OF DOC

    If you can go there today on the Internet, you'll be able to go there tomorrow. The functionality that you have today on the Internet, you will have tomorrow.

    For more than a century, our businesses have connected customers with those whom they choose to connect with. If a customer wants to call Sears, we don't connect them to Macy's.

    And the FCC has made it abundantly clear that it will move swiftly to protect consumers' right to be in control of their Internet experience.

    But more fundamentally, consumers' Internet experience is today unimpeded—in the absence of virtually any regulation of the Internet—because there exists a powerful consumer mandate for Internet freedom.

    In a new communications era defined by multiple choices—numerous communications pathways—consumers simply will not continue to purchase Internet service from a provider that seeks to block or restrict their Internet access.

    When consumers have choices in the marketplace, consumers have control. There is vigorous competition between DSL, cable modem, wireless, satellite, and other Internet access providers. In some areas free Wi-Fi access is available. In others, access over powerlines is available. This results in numerous benefits to consumers, including DSL prices as low as $12.99 a month. These benefits, of course, contribute to the FCC's recent announcement of a 60-percent year-over-year increase in U.S. broadband subscriptions, which is, of course, good news for our Nation's economy and global competitiveness.
 Page 40       PREV PAGE       TOP OF DOC

    But continued progress, continued technology advancements, continued expansion of consumer communications and entertainment choices, rests on continued investment in these next-generation networks.

    Mr. Chairman, the Internet exists today on networks. That is, in fact, what the Internet is—networks connecting with networks. Have network operators sought to control or restrict the Internet? No. Our companies have invested and grown and sought to increase the scale and the scope of the Internet. And we have sought public policy that encourages increased investment in networks that will make the Internet even more robust tomorrow than it is today.

    All sides of the network neutrality debate agree that what will be required in the future is more investment in networks. Indeed, Internet traffic is multiplying. Network traffic is now growing about 100 percent annually. Further acceleration is expected soon. Cisco CEO John Chambers predicts that broadband video and other bandwidth-intensive applications will drive a four-fold to six-fold increase in network traffic over the next decade.

    The answer is investment, not legislation that would discourage it.

    Congress has an important role in promoting competition. It should facilitate investment in next-generation broadband, investment from across today's competitive landscape, along the lines of the legislation that's now being developed by the Energy and Commerce Committee. We appreciate the vigilance of this task force, and we look forward to our continued work together.
 Page 41       PREV PAGE       TOP OF DOC

    Thank you, Mr. Chairman.

    [The prepared statement of Mr. McCormick follows:]


[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]

    Mr. CANNON. Thank you, Mr. McCormick.

    And now for sort of the higher view, I suspect. Mr. Wu, you're recognized for 5 minutes.


    Mr. Wu. Thank you, Mr. Chairman, Mr. Conyers, and Members of the Committee. Thanks for having me testify, and thank you very much also for directing your attention to this issue.

    What I want to emphasize in my remarks today is, as you suggested, the long view. I want to suggest that the issue the Committee faces here and the Congress faces here is really not a new issue, despite the fancy label of ''net neutrality.'' It is a very old problem that this Nation has always had—the problem of the abuse of market power on information networks. This is a problem that's been confronted as far back as the telegraph, through the Bell networks, through every stage of telecommunications history, and it has at every stage been important that Government do the minimum that it needs to do to prevent the worst anticompetitive practices from occurring.
 Page 42       PREV PAGE       TOP OF DOC

    Now, I want to start by discussing why there's been such a popular reaction to this issue of network neutrality, and I think we live in an era where the Internet has become part of the infrastructure of American life. That is to say, people rely on the Internet the way they rely on the electric network, the way they rely on the roads, the way they rely on the telephone. They plan their lives around it. They plan weddings. They buy airplane tickets. People use this network for their daily life. And I think that's why there was such a surprise and reaction when the Bells began to announce plans that they would be considering plans and situations where they would be picking and choosing favorites, trying to decide which companies should get favored access and which should get less favored access. And I think that cannot fail but to provoke a reaction.

    You know, if you allow an analogy, it might as if pne day the electric company were to say from here on forth your refrigerator you purchased from Samsung isn't going to work quite as well as the one purchased from General Electric. That might make more money for the electric company. It might make more money for General Electric. But it's obvious that this would be a bad outcome for competition between refrigerators. And that's exactly the situation we face today.

    The problem with network discrimination is it is inherently a tax and a distortion on competition in the network. The situation we have today, the basic layout, is that you have an extremely vigorous market operating on top of the Internet, operating on top of the infrastructure. It's a market where someone with very little resources, just a good idea, a website, and people willing to invest, can almost overnight become a billion-dollar company. Companies like Amazon, companies like eBay, companies like Google started very, very small, with almost nothing. Today, if you write a good blog, if you're clever and smart enough to say funny things or have insight into politics, you can get more readers than the Washington Post or the New York Times.
 Page 43       PREV PAGE       TOP OF DOC

    This is how the free market is supposed to work. The markets on top of the Internet are probably the best examples in our current economy of markets working the way the free market is supposed to work. They're low barriers to entry, they're entrepreneurial, they're innovative, and they are a driving part of the American economy.

    The only problem with this market is it has one Achilles heels, and that is the infrastructure. The access side of this market has never been competitive. It is not competitive today. Over 90 percent of Americans have a choice between one or two companies. And the threat, the real threat, is that the anticompetitive, the noncompetitive side of this network will spill over into what is the best functioning market in the United States today, the infrastructure—the market that is on top of the Internet's infrastructure. That is the trade-off.

    Now, Mr. McCormick and the Bell Companies will explain that greater profit is needed because they need to make investments in their network, and no one denies that. The question for the Committee and the question for Congress is: What is the best way to fund these kind of things? And I suggest to you the worst way is to tax innovation and tax competition. I suggest that among the alternatives to Government, the worst way to try and promote a network build-out is allow the network owners, as gatekeepers, as crown corporations, to distort what is the strongest and one of the most vigorous parts of the American economy.

    Now, not all the plans that have announced are so bad, but some of the worst ones amount to what I would call a Tony Soprano model of networking; that is to say, they're simply a threat by companies who are in a position to hurt other companies to make their life difficult. If you are offering some companies better service and degrading others, you are saying pay us or we will ruin your business. That's simply a protection scheme and not a market strategy. That's anticompetitive conduct, a threat of anticompetitive conduct, and even if you believe, as I do, in limited Government, there must be a role of Government to guarantee the very basics of a fair market and prevent the worst anticompetitive conduct.
 Page 44       PREV PAGE       TOP OF DOC

    Thank you very much.

    [The prepared statement of Mr. Wu follows:]



    Mr. Chairman, and Members of the Committee,

    Over the last several months, the debate over Network Neutrality has provoked rather more of a reaction than I think anyone might have thought, and I want to begin by considering why.

    I think there are several reasons. First and foremost, this is an issue that affects people directly. Once upon a time the internet was a kind of toy, used by hobbyists, scientists, and geeks. But today it's something different: it has become part of America's basic infrastructure. It has become as essential to people and to the economy as the roads, the electric grid, or the telephone. It's an infrastructure that people and firms depend on for everyday activities, whether planning weddings, managing investments, or running a small business.

    Given this infrastructure, Americans are accustomed to basic rights to use the network as they see fit. That's why there's been surprise and indignation over plans, advanced by the Bells, to begin deciding what consumers want, by slowing down disfavored companies, and speeding up favored companies. It's as if the electric company one day announced that refrigerators made by General Electric would henceforth not work quite as well as those made by Samsung. That would be a shock, because when it comes to the electric grid and the internet, people are used to a network that they are free to use as they wish.
 Page 45       PREV PAGE       TOP OF DOC

    Second, whatever AT&T and others may claim as motives, the potential for abuse of market power is obvious to everyone. Ninety-four percent of Americans have either zero, one, or two choices for broadband access.(see footnote 1) Many of us wish things were otherwise, but they are not.

    Given today's market, it's obvious that a firm like AT&T may earn, at the margin, more money by distorting competition among internet firms. It can, through implicit threats of degradation, extract a kind of protection money for those with the resources to pay up. It's basically the Tony Soprano model of networking, and while it makes some sense for whoever is in a position to make threats, it isn't particularly good for the nation's economy, innovation, or consumer welfare.


    The problem faced here is actually not new at all—it is a familiar problem of market power on networks that government has grappled with since the days of the telegraph. What I want to make clear is the central economic tradeoff involved in these kinds of cases. Letting the internet or any infrastructure become discriminatory may offer marginally more profit for operators. But it does so at the cost of a tax on network competition and innovation. Whether it's a nation's ports, roads, canals, or information networks, discrimination comes at a price to the activities that depend on the infrastructure.

    That's why at nearly every stage in the history, governments have maintained at least a basic anti-discrimination rule to block the worst forms of anti-competitive behavior. And today, that's all that's needed—a simple ban on the worst kinds of behavior; a basic rule whose goal is simply to guarantee basic consumer rights and let the free market work.
 Page 46       PREV PAGE       TOP OF DOC


    Problems of network discrimination are nothing new. Network owners with market power have always been tempted to use their gatekeeper position to discriminate between favored and disfavored uses.

    The history, in fact, goes as far back as the 1860s, when Western Union, the telegraph monopolist, signed an exclusive deal with the Associated Press. Other wire services were priced-off the network—not blocked, but discriminated against.(see footnote 2) The result was to build Associated Press into a news monopoly that was not just dangerous for business, but dangerous for American democracy. As telecommunications historian Paul Starr writes ''Western Union had exclusive contracts with the railroads; AP had exclusive contracts with Western Union; and individual newspapers had exclusive contracts with AP. These linkages made it difficult for rival news services to break in.''(see footnote 3) The AP monopoly had an agenda: it didn't just favor Google or Yahoo—it went as far as to chose politicians it liked and those it didn't. As Historian Menahem Blondheim has documented, AP used its Western Union-backed monopoly to influence politics in the late 19th century, even going so far as to exercise censorship on behalf of the State. The method was simple: when faced with messages from disfavored politicians, the wires simply didn't carry them.

    A much more recent example comes from the 1960s, when the Bells would not allow anyone to hook up anything to their telephone system other than a Bell telephone.(see footnote 4) It took the courage of the D.C. Circuit, and later the FCC, to force Bell to accept a consumer's right to attach anything to the network not dangerous to the network. To that courage we owe better choice in telephones, and over time much more. To the freedom of network attachments we also owe the answering machine, the fax machine, and finally the modem and the whole birth of personal networking. I don't want to overstate the point, but freeing network attachments from Bell control, as technical as that sounds, has played a part in making this country the leader of the world in information technology. Here's what two FCC economists, Jay Atkinson & Christopher Barnekov, said about freeing network attachments from Bell control:
 Page 47       PREV PAGE       TOP OF DOC

''we believe that the recent development of the Internet, and of much of Information Technology, would not have happened if CPE (for example, modems) were still marketed only by LECs. The blossoming of the CPE market into a highly competitive industry offering a wide variety of choice at low cost and rapid technological advances, and enabling previously unknown possibilities such as the increasingly numerous Internet services, is arguably a direct consequence of the deregulation of CPE.''(see footnote 5)

    So what do we have today? In terms of market structure, you have a range of diverse and highly competitive markets operating on top of the internet's basic infrastructure. These markets are viciously competitive. Invent a new search engine, like Google did, and in a few years you can be a multi-billion dollar concern. Write a popular blog, and if you're lucky you can have nearly as many readers as the New York Times. Conversely, many more businesses and ideas have failed, like the famed ''pets.com,'' but usually on the merits.

    These markets functioning on top of the internet are in many ways an economist's dream. Barriers to entry are low. Startup costs are minimal: many successful business began with just an idea and a good web site. Competition is mostly meritocratic—the best online stores win, not the ones with a famous names or the right connections. Meritocratic competition, in turn, leads to Darwinian or what economists call ''Schumpeterian'' innovation. That just means that new technologies supplant the old, in a constant process of industrial rebirth. In all, today's markets operating on top of the internet's neutral infrastructure may be some of the best examples of markets working like the free markets are supposed to.

 Page 48       PREV PAGE       TOP OF DOC
    But this thriving market has an Achilles heel. For there's one part of the net which isn't competitive at all: broadband access. The access networks are part of the old telecom world—monopolistic, slow-moving, well-connected in Washington, and prone to anti-competitive behavior. They are the ''Broadband Bottleneck.'' And the Bells, who lead the way in their efforts to change the internet, are almost an extension of government, fed and raised on government subsidies and rate-setting since 1913 or so. It is no surprise that they should be leading the way, looking for a way to make the free market of the internet work more and more like the old Bell monopoly.


    In any discussion of neutrality rules, the Bells and even the cable companies will always turn back to their one big argument: we need more money to build the infrastructure, and if you don't give it to us, we won't build it. I think the government needs to learn how to stand up to these kinds of threats. What we have here in truth is a tradeoff. The Bells want permission to discriminate in exchange for a promise that they'll use any money earned to build more infrastructure. But even if the Bells make more money, and even if that money is actually invested in infrastructure deployments, that doesn't mean the tradeoff costs don't exist. The tradeoff is a distortion, a tax, on the healthy markets that are on top of the basic network.

    It is inevitable that a discriminatory infrastructure will affect competition and innovation in the markets that depend on it. Imagine, for a moment, that private American highway companies reserved a lane for Ford cars. That would be good for Ford, but obviously would affect competition as between Ford and General Motors. It would also slow innovation—for it would no longer be the best car than wins, but the one that signs the best deals and slows down their competitors. The race is no longer to build a better car, but to fight for a better deal with the highway company.
 Page 49       PREV PAGE       TOP OF DOC

    That's the threat to innovation on the internet. Today, as I said early, you can start a business on the internet with relatively little capital. But in a world where AT&T or Verizon decides who gets priority access, entrepreneurs get a different message. Its not who has a better product: its who can make a deal with AT&T, Verizon, Comcast or Time-Warner. That's a different kind of market, one more like the old days of telecommunications. That's when starting a network business meant making a deal with a big Telco, or forget it.

    In short, the long-term costs to the economy of allowing a discriminatory internet are real. Encouraging infrastructure investments is a serious challenge, but in the end one only tangentially related to the Network Neutrality debate. The real spur to network deployment and innovation will be market entry—whether municipal broadband, or otherwise, that scares today's providers into offering something better. Indeed, even given the limited competition we have today, it is the superiority of the cable network that has goaded the Bells into beginning fiber optic deployments. For these deployment decisions, facilities-based competition is the strongest answer, and letting gatekeepers tax application competition is really a sideshow. Taxing innovation is hardly the only, and probably the most expensive way to encourage infrastructure deployment.


    I think many people agree instinctively that an open and neutral internet has been a good thing for the nation. It's been good for consumers, good for entrepreneurs, and good for the U.S. economy. Countries become rich through innovation, and need basic infrastructure to innovate. That's often the difference between rich nations and poor—access to basic infrastructures needed to start a business. In this respect the neutral internet has been a sterling example of an infrastructure that has driven the national economy. Perhaps, in U.S. history, only the early canals, railways, roads, railways and electric networks can compare as boosters to the U.S. economy and the well-being of citizens.
 Page 50       PREV PAGE       TOP OF DOC

    Even if neutrality works better—something the cable operators, to their credit, agree with—there is a different kind of hesitation out there. It is as to whether government should be involved at all. After all, Congress has with some exceptions stayed away from trying to regulate the Net, and for the most part that's been a good thing. There's no rate-setting, and no long battles over ''internet unbundling.''

    But in truth things are more complex. As everyone knows, the essential initial research and build-out of the internet was funded by the Defense Department. That funding of research and development was an astonishing success, in part because the resulting design was so good it hasn't much needed government. The internet is by design diverse and decentralized, making competition on top of the infrastructure viciously competitive. That competition has ironed out many of the problems government might otherwise be needed to solve.

    But while Government hasn't acted much to regulate applications, at the infrastructure side the story is completely different. The initial build-outs, as we already said, were all government funded. Thereafter, through the entire history of the internet, the Government has maintained some kind of rules to maintain basic neutrality on the network—to control, in effect, the bottleneck it helped create. We already discussed the deregulation of network attachment in the 1960s—a matter essential for letting consumers buy modems and hook them up, and a right that helped lead to a mass consumer internet. Later, the Federal Communications Commission, through the 1980s and 1990s maintained rules that protected the rights of dialup ISPs to reach customers over the phone lines. That tradition continued when, in the early 2000s, Chairman Michael Powell announced the ''network freedoms'' rules. In 2005 the FCC fined a regional phone company that was blocking Voice over Internet services, the latest of a long tradition of efforts to protect Network Neutrality.(see footnote 6)
 Page 51       PREV PAGE       TOP OF DOC

    What do these stories have in common? At each stage, the internet's vigorous competition has relied on one baseline government guarantee: consumers get the use their network as they like. That's the same deregulatory instinct that government needs now—to guarantee consumers access to whatever content and applications they want, free of discrimination and playing favorites.

    Some of you may feel hesitant, feel that government's role will necessarily be complex. It need not be. All government needs to say is this: leave things the way they are. It needs merely to recognize consumers' rights to access the content and applications of their choice, free from discrimination, and give meaningful remedies when those freedoms are interfered with.

    The best proposals for network neutrality rules are simple. They ban abusive behavior like tollboothing and outright blocking and degradation. And they leave open legitimate network services that the Bells and Cable operators want to provide, such as offering cable television services and voice services along with a neutral internet offering. They are in line with a tradition of protecting consumer's rights on networks whose instinct is just this: let customers use the network as they please. No one wants to deny companies the right to charge for their services and charge consumers more if they use more. But what does need to be stopped is raw discrimination that is nothing more than a tax on innovation taken by government-supported corporations.


 Page 52       PREV PAGE       TOP OF DOC
    This mission—protecting consumer choice against market power—is a minimum and appropriate role of government. I wouldn't be here if there were five broadband providers, each competing to give customers the best and fastest service possible. If that were the case, I am certain that the best service would win out—if one company blocked or slowed some companies, consumers would run away. If a rental car company doesn't let you drive the car where you wanted, you'd choose a different company. The problem is the lack of choice in this market.

    Let me close by looking at who's on each side. The Bell companies have taken the lead in moving things back to the world where they pick and choose who gets better access on the network. Who wants that? Very few people. Not bloggers, libertarian, conservative, or liberal, who know that larger media outlets will be favored over them. Not the application makers, among the most active sectors of the nation's economy. Not anyone who dislikes or distrusts excesses of centralized power. Not even cable operators. And, when made aware, certainly not consumers. In fact, no one wants this but the Bells themselves, and perhaps that tells us something.

    Mr. CANNON. The Chair would note that all members of the panel concluded their remarks in remarkably good time. We appreciate that.

    I'd ask unanimous consent that the following items be made part of the hearing record: testimony from Mark Cooper of Consumers Union; a letter to Chairman Sensenbrenner from the National Broadcasters supporting net neutrality protections; testimony from Kyle McSlarrow; an open letter from small, medium, and large Internet companies opposing the Energy and Commerce bill; and the Federal Communications Commission press release of April 3, 2006. Pardon me. That should be the National Religious Broadcasts. Somehow I skipped over that very important distinction. And without objection, so ordered.
 Page 53       PREV PAGE       TOP OF DOC

    The Chair recognizes himself for 5 minutes to ask questions, and first, a subject dear to my heart that I'd like a quick opinion on from all of you. Should we extend and make permanent the Internet Tax Freedom Act's moratorium on the taxation of Internet access? Let's just go down the line?

    Mr. MISENER. Yes.

    Mr. COMSTOCK. Yes.

    Mr. MCCORMICK. Yes.

    Mr. Wu. I haven't thought about it before, but why not?

    Mr. CANNON. Thank you for the quick answers. Do you have any rationale? This is not exactly the record we're building, but are we going to get investment—is the lack of a permanent moratorium chilling investment in any of your views? Mr. McCormick?

    Mr. MCCORMICK. Well, Mr. Chairman, I think that, you know, consumption taxes were typically applied as a matter of policy on those areas of the economy where we want to discourage consumption. Internet is an area of the economy, and particularly the information economy, where we want to encourage further investment and consumption, so that the whole theory of tax policy in that area would be to keep hands off the Internet when it comes to taxation.
 Page 54       PREV PAGE       TOP OF DOC

    Mr. CANNON. Thank you. I note that every other member of the panel is concurring. I agree with that, so let's cut that one off and move on to some other issues.

    Mr. McCormick, you mentioned that consumers have a range of broadband options, but can you explain the apparent discrepancy between that in your remarks and the statistics provided by the FCC that 98.8 percent of advanced service lines—the advanced service line marketplace is cable and DSL?

    Mr. MCCORMICK. Yes, Mr. Chairman. Under traditional competitive analysis, the immediate choice to the consumer and the contestability of the market are both restraints upon price. Market contestability is very present today. We have access to the Internet today over DSL, over cable modem. There's satellite access wherever you have a view of the Southern sky. There is wireless access to the Internet. There is now unlicensed spectrum available to those who want to invest, unlicensed spectrum through Wi-Fi and Wi-MAX technologies. In fact, Google has now entered into partnerships where it's providing, for a fee, Internet access.

    So what you have is you have both consumer choice and you have market contestability. Indeed, even at a convention like the COMPTEL convention, you have individuals like Jeff Compton of Telscape Communications being reported in Communications Daily as saying that it would be a mistake for the Bells to push competitors off of wirelines because, he says, ''If the competitive industry is pushed off telecom wires, it will ally with cable, broadband over powerline providers, wireless carriers, or even satellite companies. The Bells will be sitting there with the infrastructure maintained and less of the market share.''
 Page 55       PREV PAGE       TOP OF DOC

    I'd like to introduce this article for the record because of the variety of consumer choice.

    Mr. CANNON. Without objection.

    Mr. COMSTOCK. Mr. Chairman, if I might just respond very briefly to that?

    Mr. CANNON. Certainly.

    Mr. COMSTOCK. The statistics you cited are absolutely correct. There is no real competition in that, and I'd also note that that's in the residential marketplace. In the business marketplace, without the access rules imposed under the Communications Act, there would be relatively little competition; fewer than 3 percent of the buildings in this country have alternative fiber going into them. And with respect to satellite and broadband over powerline and other services, the reality is less than 1 percent of the services are being provided over that. These are not competitive alternatives at the moment, and they probably won't be in the foreseeable future.

    And I'd just like to add for the record, on page 6 of my testimony we cited a Wachovia analysis that basically said there's a cozy duopoly structure here and that's what's allowing Verizon to raise their low-end DSL price from $15 to $18 and tack on a $20 surcharge. So if that's a competitive marketplace, then, you know, I think we're all missing something here.
 Page 56       PREV PAGE       TOP OF DOC

    Mr. CANNON. Does anyone on the panel know how many consumers current access the Internet over powerlines?

    Mr. COMSTOCK. According to the FCC's own statistics, it's less than 1 percent.

    Mr. CANNON. Right. That's for all——

    Mr. COMSTOCK. That's for all access over——

    Mr. CANNON. Not just powerlines, which are——

    Mr. COMSTOCK. Right.

    Mr. CANNON. It seems to me that the point here is that we have lots of potential, but, in fact, we have sort of a duopoly. Can I just ask the panel their views on municipal build-out for access to the Internet? Starting with you, Mr. Misener, if you'd like.

    Mr. MISENER. Well, certainly more competition is better. The sooner the better, the better for American consumers, American innovation, American industry. It's just not there yet. It won't be here anytime soon.

    Mr. CANNON. Are you familiar with the Swedish model?

 Page 57       PREV PAGE       TOP OF DOC
    Mr. MISENER. The Swedish model?

    Mr. CANNON. Yes, of Internet build-out. [Laughter.]

    It provides wonderful access.

    Mr. MISENER. I have no recollection.

    Mr. CANNON. They are—Sweden—— [Laughter.]

    It was the after-dinner drinks, I suspect, but thank you. Does anyone know about Sweden, what's happened with the build-out in Sweden?

    Mr. COMSTOCK. The municipalities are building out the infrastructure and——

    Mr. CANNON. It's actually private, but has done—it's been a very interesting process. Do you have a comment, Mr. McCormick? Do you have any members who are municipals?

    Mr. COMSTOCK. Well, we have members that are supplying the service to municipalities, and I second what Paul said. But I think the key point everybody has to remember, regardless of whether it's municipalities or someone else, all of these are smaller networks that need to connect to the larger networks.

 Page 58       PREV PAGE       TOP OF DOC
    Mr. CANNON. Right.

    Mr. COMSTOCK. And I think that's really the key, is without strong interconnection rules, a smaller network has no chance.

    Mr. MCCORMICK. I guess my point, Mr. Chairman, is that——

    Mr. CANNON. Let me just ask it this way, because my time is almost up. You can answer as long as you'd like, but I can't imagine that you guys would be opposed to the municipals building out and adding to your network.

    Mr. MCCORMICK. Our view has been that as long as they come in and compete on an equal basis with the private sector. But as I said, I represent 1,200 companies. A number of them are smaller rural companies. In many of these areas, there is not Internet access today. What's standing in the way of Internet access is investment. The technology is there, whether it's broadband over powerline, whether it's unlicensed spectrum, whether it's cable modem or DSL, or whether it's wireless. There is no technological barrier to entry. The only barrier to entry is the willingness to invest and to deploy. And historically in this country, people invest and deploy if they feel that they can get a return on their investment.

    So for everyone sitting here at the table, there is an opportunity for them to invest and deploy Internet access.

    Mr. CANNON. I think the—could you just—pardon me, I've gone over my time, but just let me ask: Isn't deployment dependent upon many of your members connecting with these smaller networks?
 Page 59       PREV PAGE       TOP OF DOC

    Mr. MCCORMICK. There is a history in the Internet of interconnection on a pairing arrangement. I am not aware of any problems relating to interconnection of Internet networks that has not been—the only one I'm aware of is the one that you mentioned, Madison River, which was dealt with immediately. But every Wi-Fi network that's being deployed is connecting with the Internet. There's been no problem whatsoever.

    Mr. CANNON. I plead the panel Members to accept my apology for going over time and hope that none of them follows my example. I yield back now and recognize the senior Member of the Committee, the Ranking Member, Mr. Conyers.

    Mr. CONYERS. Thank you, Mr. Chairman. This is a very important and informative set of statements that have come from the witnesses.

    Professor Wu, what we're gathered here about in discussing market neutrality, net neutrality, is really a question of whether market power is going to be able to prevail over and intercept and control content; and that at the same time, the Federal Communications Commission has been moving away from this issue, making it very hard for consumers to seek a remedy without having to all get lawyers. Is that a fair interpretation of what I've been hearing from the majority of the witnesses at the table today?

    Mr. Wu. I think it is, Congressman Conyers, and this is a situation with historical precedent. I'll give you one strong example from history.

    In the 1860's, the telegraph companies, which were also a monopoly—Western Union—signed an exclusive deal with Associated Press that only allowed Associated Press to be carried over the wires; that is to say, they only allowed—they didn't actually block other companies. They just discriminated against other companies.
 Page 60       PREV PAGE       TOP OF DOC

    That in turn led to a news monopoly in the late 19th century which was a threat not only to American business and competition but a threat to American democracy, because this was a combined action of the telegraph monopoly plus the news monopoly that would pick political favorites, choose politicians they liked, and run only their news and their information over the wires.

    I don't want to suggest we're at that far of a stage, but what I'm suggesting is when network owners pick favorites, that's very dangerous for the American democracy and dangerous for American business.

    Mr. CONYERS. Well, the idea of network neutrality, a few years ago I didn't see a problem but—I would argue that there wasn't a problem then. I've got statements now from people in the business who use—who have market power, control the pipes, who are saying we're going to start charging, we're going to start discriminating.

    Is that, Mr. Misener, a fair appraisal of what the issues are that bring us to the table here this afternoon?

    Mr. MISENER. Yes, sir, Mr. Conyers. Things have changed. It's not the case that this is a static circumstance. The market has radically consolidated over the past few years. Ten years ago, soon after my company started in business, there were dozens of ISPs in any major metropolitan area. Currently, at best, you'll get two broadband ISPs serving an area. As Mr. Comstock pointed out, something less than 1 percent of consumers are taking broadband Internet access from someone not on cable or a telco.
 Page 61       PREV PAGE       TOP OF DOC

    The other thing is that the FCC has deregulated last year to allow longstanding nondiscrimination principles to be removed from the books before competition arrived. I think we all wish there were competition and all believe that, were there competition, the rules would not be necessary. But the Commission moved first before the competition arrived.

    Mr. CONYERS. I just wanted to ask Mr. McCormick, we've got a number of quotations from industry leaders, from SBC—all friends of mine—Verizon—some less friendly—BellSouth. But the whole idea is that they're saying network operators must be free to control the type and quality of service on the system. How does that comport with what you've told us this afternoon, sir?

    Mr. MCCORMICK. Mr. Conyers, I think what Mr. Whitacre and others in the industry like Mr. Notebaert have done over the course of the last couple months is respond to—try to respond in a very thoughtful way to that in two ways: First, they have said we will not block, degrade, or impair anyone's access to the Internet. With regard to operating the network, the way we currently operate it, by making sure that certain applications are afforded a level of security or privacy, we have to have the flexibility to do that in the future.

    So, for example, today the Federal Government comes to us, and they say——

    Mr. CONYERS. But you're telling me that I should sleep comfortably in my bed tonight because I shouldn't take these too seriously.

 Page 62       PREV PAGE       TOP OF DOC
    Mr. MCCORMICK. No. I think that you should take them seriously, but I'm trying to explain what they meant by that.

    Mr. CONYERS. Oh.

    Mr. MCCORMICK. And what they meant was that there are network applications, for example, Bank of America comes and they want to have a virtual private network that is secured for privacy purposes. That network operates over the Internet, but we plug into that network certain security and quality of service applications. The Federal Government comes to us and needs secured applications for national security. Health care facilities come to us, and they need to have virtual private networks. We need to be able to continue to be able to manage the networks——

    Mr. CONYERS. Well, I don't know if Ed Whitacre was thinking about that when he said, ''Now, what they''—Google and Yahoo!—''would like to do is use my pipes free, but I ain't going to let them do that.'' Those are—that's his vernacular.

    I don't think he's talking about the concerns that you're explaining to me.

    Mr. MCCORMICK. Well, I think that what he is relating is that, as Google and Microsoft and others move into new applications that require enormous amounts of bandwidth, that Google and Microsoft will be looking for what amounts to virtual private networks. And I think, Mr. Conyers, that terms like ''toll lanes on the Internet'' and others, those have not—that's not been our terminology.
 Page 63       PREV PAGE       TOP OF DOC

    The network neutrality debate has two sides to it: one is the service provider side; the other is the content and application side. This Committee took its first look at search engines in connection with airline reservation systems and said there should be no screen bias. Today, if you wanted to buy a book, Trover Book Shop is about three blocks away. But if you go on Google and plug in that you would like to buy a book near 1st and Independence Avenue, S.E., you will get ten responses; nine of them—eight of them will be Barnes & Noble book stores, as much as 8 miles away, and Trover Books won't be listed until number eight down. If you plug in that you just want to buy a book, the first response you will get is Amazon.com out of more than 1 billion responses.

    Now, the reason for that is that they have paid for priority. There is a screen bias in Google, and the screen bias with regard to ''buy a book'' is a priority that's paid by Amazon.com that disadvantages Trover.

    So if the Federal Government is going to get into the business of regulating network neutrality, pursuant to these FCC principles, that applies both to the service providers and to the content providers. And this kind of screen bias is precisely the kind of screen bias that this Committee investigated in connection with computer reservation systems in the airline industry.

    Mr. CONYERS. Well, this is—I'm way past my time, but——

    Mr. Wu. Can I comment?
 Page 64       PREV PAGE       TOP OF DOC

    Mr. CANNON. But asking very interesting questions.

    Mr. Wu. Can I comment? There's a large difference in the search engine market and the Internet access market. The search engine market is a highly competitive market in which it is truly survival of the fittest. Google comes along, A9 comes along. There's an ongoing battle. And customers go to whoever gives them the best search results.

    What we're talking about here is a completely different issue. We're talking about a noncompetitive market with one and two competitors, at most, with some others on the side. It's a completely different situation. The analogy is not apt.

    Mr. MCCORMICK. Except the market share of Google in the search engine market far exceeds the market share of the Bell companies with regard to Internet access.

    Mr. CANNON. The gentleman's time has expired, and the gentleman from North Carolina, Mr. Coble, is recognized for 5 minutes.

    Mr. COBLE. Thank you, Mr. Chairman. Good to have the panelists with us today.

    Mr. McCormick, telecom companies provide capital to build out and maintain the Internet's hard infrastructure pipes. Of course, we want more pipes. We want growing Internet access and lowering prices.

 Page 65       PREV PAGE       TOP OF DOC
    If I'm a small businessman or small businesswoman or rural Internet provider paying to use your pipes, competing against one of your companies, is it your belief that that constitutes fair competition in an open market?

    Mr. MCCORMICK. Mr. Coble, let me make sure that I understand. What you're saying is that you are a small business owner, like a furniture store, that would be trying to obtain Internet access over our pipes?

    Mr. COBLE. Yeah.

    Mr. MCCORMICK. And you want to sell furniture and you're concerned that because you're having to pay the local telephone company in North Carolina for Internet access that you might somehow be disadvantaged?

    Mr. COBLE. Yeah, that's the direction in which I'm headed.

    Mr. MCCORMICK. I cannot imagine a situation where they would, but I can tell you, just like with Trover Books, if you were to plug into the search engine that you want to buy furniture in a small town in North Carolina, what you're going to find is that out of hundreds of thousands of responses, you're going to get eBay and you're probably going to get Amazon.com and you're going to get a few other large companies that are paying for priority to be listed on that search engine as the first two or three examples.

    So this part of net neutrality with regard to content and application providers is a very significant issue in the competitive realm and one that I know the Committee will want to take a look at with regard to the broader issue.
 Page 66       PREV PAGE       TOP OF DOC

    Mr. COBLE. Now, the professor's body language tells me he wants to insert oars into these waters.

    Mr. Wu. You know, I think you bring up a very important point, which is that small businesses are very dependent on infrastructure. They need roads to get to the rest of the country, they need phone lines, and they now need the Internet. They rely on getting neutral access to whatever they depend upon for the Internet. And the whole problem with the Bell Companies starting to pick and choose favorites is that small businesses cannot be sure that they'll get the access they need to the companies that they partner with. Or if the small business is a company itself that wants to succeed on the Internet, it needs to be in a position where it can enter the market really without having to make a deal with the Bells.

    Mr. COBLE. Mr. Comstock, did I detect body language from you as well, or Mr. Misener won?

    Mr. COMSTOCK. Absolutely, sir. What I think the important difference is—and while this Committee may well want to look into prioritization of screens and the practices of content providers, it's a totally distinct issue because the infrastructure that's essential for all of the content providers is that transmission network. And that's where the essential facility. That's where there's a bottleneck. This is like—very much like someone owning a road and getting to decide which cars will travel on it. And the problem in the furniture example would be if the Bell Company were also—or the cable company also owned a furniture store and then said, ''I'm going to favor my furniture store over someone else,'' this is becoming an essential medium for people to do their business. They're advertising, they're reaching consumers. And this is about making sure there's rules that allow people to get access to that infrastructure on a nondiscriminatory basis.
 Page 67       PREV PAGE       TOP OF DOC

    Mr. COBLE. I want to ask the professor a question, but I don't want to cut Mr. Misener out. Okay. Professor, let me ask you this before my red light illuminates. Adequate infrastructure is vital to Internet access. How does net neutrality affect rural areas where smaller telecom providers maintain infrastructure, A? And let me ask you this: In the era—in this era of wireless phones and growing Internet services, what markets or regulatory measures protect the profitability of these rural telecom companies? And I ask that, gentlemen, because I'm subjective. I have rural outfits in my district.

    Mr. Wu. Right. I don't think that they are the same issues. For rural areas, as much as the rest of the country, it's important that the businesses and people in rural areas get the access they need to a neutral infrastructure, the neutral Internet. They're as dependent on the Internet for economic growth as the rest of the country.

    Now, what about the precise situations of rural carriers? I don't know if—I think the network neutrality issue is more or less—is not directly implicated by that. I think it's just a different issue. There are probably—there's a lot of money that needs to be spent to build infrastructure in rural areas. There's no question about that. Government has ways—Government has ways of encouraging companies to build infrastructure. But allowing discrimination as a way to encourage companies to build infrastructure strikes me as one of the worst ways to do so. It's a tax on innovation, it's a tax on the infrastructure that doesn't actually promote what you need. If you want to have rural build-outs, Government needs to subsidize them.

    Mr. COBLE. Thank you——
 Page 68       PREV PAGE       TOP OF DOC

    Mr. MCCORMICK. That's not necessarily true.

    Mr. COMSTOCK. Mr. Coble, the short answer to your question is these rural companies have all lived under exactly what we're asking for for the last 60 years of their life. They were regulated as common carriers. It didn't in any way impede their ability to provide the service that they offer, which is transmission. So net neutrality is nothing more than the reimposition of common carrier rules or antitrust rules that mimic the common carrier rules. They're flip sides of the same coin. So this is not something that they haven't lived with before.

    Mr. COBLE. Thank you, gentlemen. Before the Chairman keelhauls me, I'm going to yield back. Thank you, gentlemen.

    Mr. CANNON. I wish there was a bright-line rule about what questions were interesting or not, but I was certainly engaged in what you were asking, Mr. Coble.

    The gentlelady from California, Ms. Lofgren, is recognized for 5 minutes.

    Ms. LOFGREN. Thank you, Mr. Chairman. I think this hearing proves the value of this task force, and I look forward to additional hearings, because as we've listened to the testimony, at least to me it becomes clearer and clearer the need to make sure that networks remain available to all users and there be some net neutrality rules.

    I was on the Committee when we did the Telecom Act in 1996, and really since that time, and especially in the last several years we've seen a reconglomeration, I guess, if that's the right word, of telecom companies. And I think about what the old AT&T monopoly was like in terms of competition. I mean, you couldn't hook up an answering machine or a fax machine to the network. It certainly disfavored new technology. And since we lessened that death grip, I mean, technology exploded. And in my part of the world, in Silicon Valley, there were—the companies that have really led the economy really were allowed to do that because of the freedom to innovate that the limitation on the monopoly provided. And I worry if we allow, for example, the incumbents to control access to Google, as has been suggested by some company executives, what happens—not just to Google; they're now a pretty big company—but to the next Larry and Sergei in a dorm room coming up with something that will be Google? I mean, we need to make sure that there is an environment for innovation and creativity, and that's what monopolies prevent.
 Page 69       PREV PAGE       TOP OF DOC

    I am concerned—I just want to say one thing about Google. They're just outside my district, and I have thousands of constituents who work for them. And I think I just want to correct the record. It is a mistake to suggest that anything but the algorithm they uses—they use come up with the results. I mean, they have an algorithm that favors hits. They also have paid placements, but I use Google all the time. The paid placements are very—I mean, they're evident. They're marked as paid placements. Everybody knows you can use them or not use them. I just thought it was important to mention that, and as has been mentioned by the witnesses, there are a plethora of search engines. It's a very competitive market. And, for example, the Amazon search engine is for the Amazon site. I mean, and a lot of sites have sell sites. So it's a mistake and misleading to try and mix those two together.

    I just—the one issue that has been raised by the incumbent monopolies, and I think we have to discuss them in that way, because—what is it?—94 percent or better of all people get their Internet access or high-speed Internet access from one of two providers, and that's the market situation. The one issue that has been raised to the Congress in opposition to the net neutrality is essentially—I'm paraphrasing—if we don't get to do it our way, we won't build out the remainder of the network.

    I took a look at fourth quarter revenues for AT&T, fourth quarter of 2005, and the report was that they added 1.8 million DSL lines in that last year, that the revenues from consumer DSL services went up 21 percent last year, and the penetration rate for DSL services more than doubled in the last 2 years. They also reported that its operating revenues from data services went up more than 43 percent, the highest rate of all its business segments, to an increase of about 30 percent of its operating expenses. And today the reports for the first quarter of 2006 were in, and the data revenues rose 85 percent from the last year compared to a 45-percent increase in company-wide revenues and a 57-percent increase in company-wide expenses.
 Page 70       PREV PAGE       TOP OF DOC

    So I'm looking at really a very positive—I don't think I own any stock in AT&T; I might ask my husband to look at that—a very positive revenue stream. I'm wondering, Professor, you're someone who just looks at this, you don't have any axe to grind, you're an academic. What do you make of their suggestion that if they don't get their way to control access and other users, that they won't build out this network?

    Mr. Wu. It's something of a regulatory tactic, and my opinion—and I think the statistics bear this out and the economy bears this out—is that this neutral Internet has been good for everybody. It's floated all boats. It's been great for the cable companies. It's been great for the Bell Companies. And it's been great for the application makers and, by extension, the American economy.

    You know, I think that the network attachment point you brought up is a great example. The Bells fought tooth and nail to prevent consumers from having a right to hook up things to their telephone lines because they thought that that would destroy their market and that would hurt them. In the end, it turned out to be a giant boom. We owe it to that bravery of the FCC and of the D.C. Circuit in the 1960's to say that consumers have a right to hook up whatever they want to their telephone, such developments as the answering machine, the fax machine, ultimately the Internet itself as a mass medium. And I think today that—you know, even the cable operators take a different position than the Bell Companies. They say a neutral Internet has been great for them, too. They just, you know, feel differently about regulation.

    I think that these kind of threats really represent an old style of thinking and a return to a kind of 1960's idea of centralized network build-outs, which has failed. And I think we need to learn the lessons of the 1990's of what has really succeeded for everybody.
 Page 71       PREV PAGE       TOP OF DOC

    Mr. COMSTOCK. I would also note that if they don't deploy their networks, if they don't upgrade their networks, then they can't offer video. And that means the cable companies take more of their market share. So I think there's a strong financial incentive for them to upgrade their networks notwithstanding.

    Mr. CANNON. The gentlelady's time has expired.

    The gentleman from Texas, Mr. Smith, is recognized for 5 minutes.

    Mr. SMITH. Thank you, Mr. Chairman.

    Mr. McCormick, let me address my first question to you. The goal of antitrust law is to maximize consumer choice through free markets. How do you think the kind of tiered access that we are talking about today will benefit consumers? And, more specifically, they've been used to a free Internet now for 10 years. How do you think they're going to respond to this kind of tiered approach?

    Mr. MCCORMICK. Okay, let's—I'm hearing a lot of—let me respond to that in terms of what really isn't in debate, that the Hushaphone and Carterphone attachments to the Internet, not in debate. I mean, the FCC has said—one of its principles is you can attach any lawful device, and we absolutely agree. What's not in debate is that we would in any way block, impair, or degrade consumers' access to the Internet. Not in debate.

    What I also don't think is in debate is that everyone would leave it in control of the consumer to decide how much capacity they want to buy. Do they want to buy one meg? Do they want to buy a T-1 line? What amount of Internet access do they want to buy? If you're paying $12.99 for Internet access as opposed to $100, you're probably getting a much bigger pipe. If you are at home where you're running—you know, a business gets a bigger pipe than does a residence.
 Page 72       PREV PAGE       TOP OF DOC

    I think that what is in debate here is when you have certain application providers who want to move into new areas that will require enormous bandwidth, such as the delivery of huge amounts of video, technology will allow you to do that in one of two ways: either by putting a bigger pipe into the home and requiring everybody to have that bigger pipe, or doing certain network configuration that will allow you to compress and to deliver. So that's a network part.

    What's in debate here is who pays for that enhanced portion of the network. There are a variety of application providers out there who would like to say that they'd like to differentiate their product by investing. In the same way today a person, if they want to have home—a phone answering machine, they can connect it at the end of a network, right? Or it can be done inside the network. If you have a cell phone, you probably want to go ahead and have the messages answered inside the network.

    So the debate here really is who bears the cost. We believe that the consumers should be in control. We believe that the consumers should decide what costs they want to bear, how much network access they want to buy, and that they should be in control of deciding what sites they want to go visit. Others would like to say that they would like to load all of the costs of their own business plans onto the consumer, which will require us to raise consumer rates to spread out their costs among everybody. That's not a free market, and we don't agree with that approach.

    Mr. SMITH. Okay. Thank you, Mr. McCormick.

 Page 73       PREV PAGE       TOP OF DOC
    Mr. Misener, you look like you're ready to answer, but let me ask you a slightly different question that you won't mind, and it's sort of the other side of the coin. The ISPs spent billions of dollars setting up these networks. Companies like yours use these networks. Why shouldn't they be able to charge what the market will bear? And the second part of that question would be: What do you think the consumer reaction is going to be?

    Mr. MISENER. Okay. Thank you, Mr. Smith. It's hard to know where to begin, but I'll start with saying that we do pay. Companies like mine pay millions of dollars a year for Internet access, and we pay based on how much capacity we need to pump into the networks.

    Secondly, we support what Mr. McCormick has suggested as consumer tiering of services whereby a high user—a gamer, for example, or someone who wants to watch HDTV on the Internet—pays more than someone who occasionally sends e-mail. That makes perfect sense from an economic perspective and a consumer fairness perspective. These consumers expect that. They pay more for what they—to get more.

    What we don't like is the concept of taking market power over the network and extending it to market power over content. It's been suggested somehow that there'd be this deal made in which some content is prioritized for a fee and other content is not thereby degraded. That is physically, technically impossible. We've heard several times Mr. McCormick say today that he's not going to degrade content. If that's the case, who on Earth would pay for prioritization that doesn't thereby relatively degrade the competitor's content? No one's going to ever pay for that kind of service. It's not worthy. The fact of the matter is the way the Internet works is that if you prioritize some content, you put some content in the fast lane, you by definition at bottleneck choke points put other content in the slow lane.
 Page 74       PREV PAGE       TOP OF DOC

    Mr. SMITH. Okay. Thank you, Mr. Misener.

    Mr. Chairman, let me just finish with a comment really directed toward our full Committee Chairman, Mr. Sensenbrenner. I just appreciate his having a hearing on this subject because I think it emphasizes once again, quite frankly, that the Judiciary Committee is the proper forum to address questions that involve interstate commerce and monopolization. Whether or not it occurs isn't the point. The point is that this is the proper forum to consider those kinds of issues.

    I yield back the balance of my time.

    Mr. CANNON. I thank the gentleman. I think the Ranking Member of the full Committee would also thank the gentleman for that focus on the jurisdiction of this Committee, which is very important to all of us.

    Before we recognize the gentlelady from Texas, let me ask unanimous consent to include in the record a letter from the FTC Chairman to Chairman Sensenbrenner on the Brand X decision and cable broadband obligations. Hearing no objection, so ordered.

    The gentlelady from Texas, Ms. Jackson Lee, is recognized for 5 minutes.

    Ms. JACKSON LEE. I thank the Chairman very much and thank the witnesses. I hope that as we probe each of you, as the Members inquire, that this will be what it is. It is fact-finding and it is a recognition that we have a challenge before us and somewhat of a dilemma. And I might echo or associate myself with the words of Chairman Cannon to say that—and Congressman Smith, I believe—that this is the appropriate vehicle and venue to address these questions.
 Page 75       PREV PAGE       TOP OF DOC

    Let me first start with you, Professor Wu, because I liked your comparison of the refrigerator. We all want to get into a refrigerator now and then, and I think the plainness of your explanation of a refrigerator not working because it was one versus another so the electricity worked better for the other one, sort of a biased selection of who ate and who did not. Help me understand—and I will be going to a few of the other panelists very quickly, if you can help me understand that blocking sensation, because we've heard one witness—and, in fact, I will question Mr. McCormick, because he clearly makes the point he will not block, impair, or degrade. What is your sense, Professor Wu, that this will, in fact, happen?

    Mr. Wu. Thanks. I do think the electric—the electricity network is important because it really does capture some of the feelings that Americans have got—have gotten used to with the Internet, that they plug stuff in and it works or they go to the sites they want to go to and they work. And I think I'm going to disagree with Mr. McCormick, who keeps saying that degradation is not the issue here. Degradation is the central issue here in this case. When Bell Companies, when AT&T in particular—and I've seen AT&T's plans. Their plans are to give favorable treatment to the companies they make deals with. And so it's exactly as if the electric company made a deal with Samsung or made a deal with Kitchenware and suddenly, you know, your toasters work better, your refrigerator works better, and you want to buy a General Electric refrigerator, and it just doesn't work as well, or, you know, it doesn't function the way you'd like, your iron doesn't get your clothes to be starched or——

    Ms. JACKSON LEE. Sooner or later you get rid of it.

    Mr. Wu. Right, and the obvious point is that it distorts competition. It's not who makes the better refrigerator. It's who has the deal. And so that distorts innovation. It's no longer survival of the fittest. It's no longer who has the best technology. It's a question of who goes golfing with the CEO of AT&T. And I think that's not the American way. I mean, sometimes it is, but it shouldn't be the American way.
 Page 76       PREV PAGE       TOP OF DOC

    Ms. JACKSON LEE. This is the—and thank you, Professor. This is, I think, the large mountain, Mr. McCormick, that we've got to ascend to. And let me first of all acknowledge the reality of life, and that is, we thank you for the massive job creation that this industry has created, and certainly out of that, because of the appetite of consumers, certainly we've had the opportunity for your companies to grow, for jobs to be created, and, of course, for our districts to be made happy. But I do want you to try to, if you will, overcome I think the very succinct argument that has been made. We are fact-finders here today. Block, impair, or degrade the content applications or services, what you've said, but my thought is that if I build a private road and I pay for it, then it is likely—and that is a transportation road. It is likely to have the right to say who travels on that road or not. I don't want the big 18-wheeler—forgive me, truck drivers—that may put potholes in the road. So help me understand and appreciate how you will avoid that situation.

    And then I want to—let me do this with Mr. Comstock, because you've said some very viable things. I want you to jump in right after and help me understand why the FCC authority over broadband—recently limited their authority over broadband services, and I think you have another comment in here that said the subjugation of the economic rights of many to the interests of the few has not been limited only to the FCC. So we have some regulatory problems as well. But let me go on to Mr. McCormick, if you would.

    Mr. MCCORMICK. Thank you very much. I'd like to stick with your analogy of the road for a moment, because I think it's a very apt analogy. The Internet today remains a relatively new network, like the early road network. And in many areas like the early road network, there's a single lane. And so the way the Internet is built is that the consumers who are going to use that network, that road network, they pay and that covers the cost of the road network.
 Page 77       PREV PAGE       TOP OF DOC

    Now, let's say that somebody comes along and they want to put a bunch of 18-wheelers on that network. So now the network has to be expanded in order to accommodate the shipper who's putting a bunch of 18-wheelers on that network. Think of Amazon.com or Google or some others as that shipper. The consumer—who bears the cost of the ones who are going to now load onto that network a whole bunch of additional traffic? Should the cost be borne by the individual consumer? Should everybody's rates be increased? Or should the people who want to load that network with a bunch of 18-wheelers have to pay for the network expansion?

    We would argue that the analogy with regard to the road network is that if you want to load a whole bunch of traffic onto that network, then you help pay for the network expansion. Don't make all of the consumers at home have to pay for that network expansion, because some of those consumers, they may be only buying things or using the Internet for stuff that's shipped by small trucks or by cars.

    So I think that that analogy is absolutely, absolutely apropos and apt.

    Mr. CANNON. The gentlelady's time has expired, but I think Mr. Misener is anxious to respond.

    Ms. JACKSON LEE. He's anxious and I think Mr. Comstock, if you would indulge me for an additional minute, I ask unanimous consent for them to be able to respond. Thank you.

    Mr. COMSTOCK. I'll be brief, but using that road analogy, I think where Mr. McCormick takes you astray is the people who want to load the 18-wheelers on are paying for their access to the Internet, and the question is, if I pay as a consumer for a road that would carry that 18-wheeler to my house, can I get anybody's 18-wheeler or just the 18-wheelers that they say? And what the Bell companies and the cable companies are saying is we may build an 18-wheeler road to your house, but then you're only going to get to use the sidewalk for your public traffic. The rest of it's going to be my 18-wheelers and the people that I say.
 Page 78       PREV PAGE       TOP OF DOC

    So that's the problem with this. What's been abandoned in this—and you mentioned the subjugation of the rights of many. The FCC has said these are not common carrier services. That means that with respect to these services, those companies are no longer obligated to provide nondiscriminatory service upon reasonable request. So they won't block it once they agree to serve you, but as long as they reserve the right to not serve you in the first place, that's how they'll discriminate.

    Ms. JACKSON LEE. Mr. Misener?

    Mr. MISENER. Ms. Jackson Lee, just one more point on the 18-wheeler analogy. Mr. McCormick misapprehends how the Internet works. Those 18-wheelers don't get there based on the companies' sending them. They only get there when the consumer asks for them. And our simple point is that when the consumer asks, he or she ought to be able to get whatever 18-wheeler they want, not just the ones allowed on by the road owner.

    Ms. JACKSON LEE. I thank the gentleman.

    Mr. CANNON. The gentlelady yields back.

    Ms. JACKSON LEE. I yield back.

    Mr. CANNON. The gentleman from California, Mr. Lungren, is recognized for 5 minutes.

 Page 79       PREV PAGE       TOP OF DOC
    Mr. LUNGREN. Thank you, Mr. Chairman. Very enlightening. We've been talking about Swedish models and golf courses and 18-wheelers and sidewalks and streets.

    Mr. CANNON. The Swedish model would never—it would never have occurred if Mr. Misener was not so handsome, by the way. [Laughter.]

    Mr. LUNGREN. I appreciate that. I hope that wasn't out of my time.

    I thought this was relatively simple when I walked in, and it's become more complicated. I try and look at it from the standpoint of a consumer. I'm a frustrated consumer. The house I have here in this area is in Virginia. I keep getting ads from Verizon asking me to join their broadband, and then every time I call I find out their broadband access stops two blocks from my house—close to your house, Mr. McCormick. So I believe I have cable, which is really the only access I've got.

    A couple of questions. One is, look, people have paid additional money for broadband over regular telephone lines, and presumably that was to cover the costs of the investment made by the phone company. Presumably we're paying for broadband access for cable to pay for the investment cost here. What I'm trying to understand is Mr. McCormick's statement that you're not going to block, you're not going to degrade, you're not going to interfere with content on the one hand, and on the other hand, the suggestion I get in this analogy that you're only going to allow certain 18-wheelers to come through to my house.

    Now, what are we talking about? If, in fact, your industry has no intent to block, degrade, or interfere with, do you have any objection to any legislation that says you can't do that and won't do that?
 Page 80       PREV PAGE       TOP OF DOC

    Mr. MCCORMICK. Congressman, the Chairman of the FCC has already said that they feel that they have the authority to prevent anybody from blocking, impairing, or degrading.

    Mr. LUNGREN. Right. But what I'm asking is——

    Mr. MCCORMICK. And they——

    Mr. LUNGREN. —whether you'd object to language in legislation which would say that——

    Mr. MCCORMICK. The House——

    Mr. LUNGREN. —irrespective of what they say, but we will make that a matter of law that you can't do that.

    Mr. MCCORMICK. The House Energy and Commerce Committee is going to mark up legislation beginning this evening that has specific language in it that tracks the FCC principles. And so—and we are supportive of the language that says that we—the FCC should have authority to make sure that we cannot block, impair, or degrade.

    I'm with you. I'm a little confused when we make the statement that we'll not block, impair, or degrade, and then I hear others saying but they're going to block, impair, or degrade. We're not going to block, impair, or degrade. The FCC is not going to allow it.
 Page 81       PREV PAGE       TOP OF DOC

    Mr. LUNGREN. Okay. Well, let me ask the other two panelists to your right, my left. If, in fact, that's true, why are you worried about blocking, degrading, or impairing access to content?

    Mr. COMSTOCK. Because there's a long history here of exactly this type of exclusionary behavior. Today in the marketplace, our companies face the situation where they go to seek a customer, and the Bell Company has said, oh, in order for you to get a lower rate on the areas where we have no competition to a business user, you must give us all of your traffic in the areas where there is competition. They use specific exclusionary practices to prevent competition. And as I said before, what they keep hiding around is the provision that the Energy and Commerce Committee is looking at would restrict the FCC's jurisdiction to a very narrow set of things on an adjudicatory basis, and it is far narrower and far less behavior controlling than the type of antidiscrimination principles contained in the antitrust laws.

    Mr. LUNGREN. Well, let me ask Mr. McCormick—I mean, he's just give us a specific example that he claims is where your industry does, in fact, impair access except for a price.

    Mr. MCCORMICK. Well, I am unfamiliar with any—what I——

    Mr. LUNGREN. I'd like to find out what we're talking about. I mean, I'm tired of talking about 18-wheelers. I'm tired of talking about golf. I'd like to know what we're talking about here. Now, does it exist or doesn't it exist? I'm not going to play games. I'm trying to figure out what we're talking about.
 Page 82       PREV PAGE       TOP OF DOC

    Mr. MCCORMICK. Well, what we know is that there are—that there are hundreds and hundreds of commercial negotiations that have been entered into between companies that I represent and companies that Mr. Comstock represents, and that those have led to finalized deals. We know that at Mr. Comstock's own convention, his people were saying that if the Bells try and push competitors off their networks, it's shortsighted because they can ally with cable, BPL providers, wireless carriers, or even satellite companies.

    What we have said is that there's a marketplace out there that's working, that with regard to last-mile access, there are competitive choices and there's a contestable market for anybody who's willing to invest. So it seems to me that a requirement, as the FCC has put forward so far, that says you cannot block, impair, or degrade, an FCC that very aggressively monitors the kind of interconnection arrangements that Mr. Comstock is talking about, and finally, the antitrust laws that he says are strong disincentives to any kind of anticompetitive behavior, I would be one to say it sounds to me like we've already got a belt-and-suspenders approach to this. I'm not sure what problem we're trying to address that hasn't already been addressed.

    Mr. COMSTOCK. Once again, we're talking about fiction here. He's talking about provisions of law that the FCC has affirmatively removed, and that's the problem. The world is changing. The FCC as of last August and then through the Verizon decision in March removed the very protections that made the competition possible that he is referring to. That is the problem.

    Mr. LUNGREN. Mr. Chairman, could I ask Professor Wu to comment on that?
 Page 83       PREV PAGE       TOP OF DOC

    Mr. Wu. You know, what the Bell Companies are basically saying here is, ''Trust us.'' But if I were in their position, if I were the gate—if I was in a strong market position to be a gatekeeper of the Internet, why wouldn't you start wanting to degrade and block content, or at least threaten to do so and extract more revenue. It makes perfect sense. I'm not saying it's evil. I'm just saying it's bad for the economy. I think they're in a logical position to be in a position to advance those kind of business plans. If you look at AT&T's plan specifically, that is their ideas of where to raise and get more marginal revenue, by putting a toll booth on companies like Google, Yahoo! and so forth. So it makes perfect sense, and, you know, they won't want to call it degradation. They'd want to call it priority or give it some name so it gets around, you know, potential FCC action. But why wouldn't they want to do it? It doesn't—I don't see any reason why not.

    Mr. CANNON. The gentleman's time has expired.

    The gentleman from California, Mr. Schiff, is recognized for 5 minutes.

    Mr. SCHIFF. Thank you, Mr. Chairman. I think this has been a wonderful hearing, and I think the witness testimony has been very helpful.

    I wanted to ask just a couple questions, the first of Mr. McCormick. In my district, a lot of the industry involves the creation of content, and we've had a number of discussions over the years about how to protect that content from piracy. And the pretty consistent position of the telecommunications industry has been we just have a pipeline. It's a dumb pipeline. It doesn't discriminate between content, and we really can't be responsible for what goes through our pipeline. But it sounds like here you're now saying we should be able to discriminate on what goes through our pipeline and be able to pick winners and losers, or at least discriminate in a way that helps us recoup the investment necessary to expand the pipeline.
 Page 84       PREV PAGE       TOP OF DOC

    Are you prepared, if you're allowed this ability to discriminate, to also accept the responsibility for illegal content going through your pipeline?

    Mr. MCCORMICK. Congressman, first, with regard to the existing network, the FCC principles that we ascribe to say we shall not block, impair, or degrade access to any content or site. So when we say to the creative community, ''Don't hold us liable if somebody's going to a site and downloading illegal material,'' because the FCC principles require that we not block, impair, or degrade.

    Now, at the same time—at the same time, you are probably aware that as we have tried to begin to move into video, that we have been trying to work with the content community because their great fear in the Internet space is being able to have security and privacy and being able to have some integrity to control their copyright. So when you start hearing us talking about being able to work with companies like Disney, like Movielink, like a variety of others who are coming to us and saying we would now like to explore some new models where we could provide new services to the consumer, and we would like to work with you in the development of virtual private networks that will offer us security and privacy and a variety of other functionalities, we're met with this kind of opposition that's saying, ''Aha, they're going to advantage some and disadvantage others.'' And so——

    Mr. SCHIFF. But if you get into——

    Mr. MCCORMICK. —you've hit on one of the issues.

 Page 85       PREV PAGE       TOP OF DOC
    Mr. SCHIFF. If you down the road get into deciding that Grokster or Napster or one of the more modern iterations should be in the fast lane rather than the slow lane, aren't you going to be taking on some responsibility for the fostering of those services if those services are primarily in the business of piracy? Won't it be more difficult for you to claim that we're just a dumb pipeline?

    Mr. MCCORMICK. No. I see it the other way. I see companies that are engaged in the development of content and want to protect that content from a Grokster or Napster coming to us and saying, ''We would like to distribute this content to consumers over the Internet,'' being able to utilize what is, in effect, a virtual private network. So——

    Mr. SCHIFF. And you'll facilitate making that happen, but what happens when the Groksters of the future come to you and ask you to facilitate the delivery of their pirated work product? I assume you won't be able to fall back on the response we had to allow them to have the fast lane because we can't discriminate?

    Mr. MCCORMICK. Well, I guess the response to that would be that, you know, in many respects, people sometimes don't even find those sites without going through an Internet search engine. So, you know, do you go through an Internet search engine and find a Grokster site? And then do you hold liable the Internet search engine, do you hold liable the service provider, if they find the Grokster site by going to Amazon.com and then buying a book that has the Grokster site? I think that the issue has been if people like Grokster or Napster are engaged in the illegal distribution of content, they should be held liable. What we have done in entering into arrangements with the content providers, those who are originating content, their concern with us is that they want to be able to have a secure network.
 Page 86       PREV PAGE       TOP OF DOC

    Mr. SCHIFF. If I can, I because I'm running out of time, I want to pose this one question to Mr. Misener that was posed earlier by Mr. Conyers or by actually your response to Mr. Conyers, and that was the question about the prioritizing of Amazon.com on a search engine. And I understand the point that there's greater competition within the search engines, but let's say that there was that same level of competition among the access providers as are among the search engines, or that the search engines become less competitive because you have two that monopolize. Would you argue that you shouldn't be able to discriminate based on your paying a fee to get to the top of the list? I always naively assumed you got to the top of the list by having more hits than anyone else, but maybe it's a self-fulfilling cycle. But if the number of entrants into the field of access increases, would you allow them to discriminate? If the number of search engines decreases, would you come before us and argue, well, we should no longer have the ability to discriminate in the search engines?

    Mr. MISENER. Again, great questions. There are some two dozen search engines out there. If there were two dozen residential broadband Internet access providers, we would not be here seeking legislation. There aren't. There's a duopoly for the present, for the near future, probably even for the distant future. This will be a duopoly. They're seeking to extend their market power. I'm very frustrated by this incredibly obfuscatory argument that somehow this is analogous to a search engine. It's not. A search engine is a destination. Consumers have a choice of going to it. A consumer can get broadband Internet access and never, ever once go to Google if they so choose. There are another two dozen search engines available to them if they want to use a search engine. They don't even have to use one. But in this circumstance they're forced to use either the cable or the telephone company. There is no other choice for consumers. It's a radically different proposition, and the law should treat them differently.
 Page 87       PREV PAGE       TOP OF DOC

    Again, if there were some two dozen broadband Internet access providers available to each consumer, we wouldn't be here.

    Mr. SCHIFF. And, conversely, if the search engines so whittled down to two major providers, you would——

    Mr. MISENER. Hopefully not because we have a stake in one of them.

    Mr. SCHIFF. Well, hopefully not to the exclusion of the one you have the stake in, at least.

    Mr. MISENER. Thank you.

    Mr. CANNON. The gentleman's time has expired.

    The gentleman from California, Mr. Issa, is recognized for 5 minutes.

    Mr. ISSA. Thank you, Mr. Chairman. And I want to echo and associate myself with my colleague Mr. Schiff. It's always amazing to me that we came in as classmates together, and he was smarter then, and he's still smarter. But I will try to focus on a slightly different area since he did such a good job where he was.

    When we talk about a duopoly versus, if you will, the power of a search engine, the selectivity, to me I just have to ask why is it that I shouldn't treat this like a standard antitrust question. You have incredible market power, far past the 10 percent by any stretch of the imagine. And, look, we could pretend that satellite delivery of Internet and a few other ways are going to grow, but it is unlikely, particularly Mr. McCormick, it's unlikely that either of the two entrenched utilities are going to drop below 10-percent market share anytime. But more importantly, in a given neighborhood like mine, it is unlikely that you're going to have all the others available to you anyway. If you have 30 percent, 50 percent, 60 percent, and more importantly, if your companion is doing exactly the same thing, why shouldn't I treat this simply as a utility that has been granted a monopoly, or the equivalent, trying to have a tie-in of less desirable services, leveraging the more desirable service or, if you will, the essential service? Why shouldn't I look at it that way?
 Page 88       PREV PAGE       TOP OF DOC

    Mr. MCCORMICK. I think that—I think to take a traditional antitrust analysis is the way to do it, and a traditional antitrust analysis looks at the existing market and the contestability of the market.

    A couple of points. First, the market share of the telephone companies with regard to Internet access is less than the market share of Google with regard to Internet searches. So——

    Mr. ISSA. Well, wait a second. With all due respect I'll define the relevant market here.

    Mr. MCCORMICK. Okay.

    Mr. ISSA. We're talking about the pipe.

    Mr. MCCORMICK. And with regard to the pipe, you would have to look at all the ways to access the Internet. So I would take issue with the duopoly. You can access the Internet, DSL, cable modem, wireless—Sprint is offering a full wireless access to the Internet—satellite if you have a clear view of the Southern sky; in some areas, broadband over powerline, but where it does not exist, it could exist but for investment; Wi-Fi and Wi-MAX technologies.

    Now, therefore, a traditional antitrust analysis would take a look at what are existing market shares, what is the ability, you know, of others to enter the market, and what barriers are there to enter the market. So I support——
 Page 89       PREV PAGE       TOP OF DOC

    Mr. ISSA. And I'll follow up on that using, if you will, telcos and cable providers. If we—and this would be Commerce Committee, not Judiciary Committee, I have to be sensitive to. But if we redefined that you were regulated for the last mile, you had to put a green box in, and everybody could have access from there and put T-3 lines in and compete so that you were only selling a very regulated last hook-up to the house, then would you—you know, to be honest, would you see that, in fact, that isn't the way that you have—I mean, to have competition, you would have to essentially recognize that the two wires to leading to the house are the absolutely best way to deliver 8 MP or higher data rates and that in the current technology that's the only way to deliver that kind of bandwidth because you're the only ones, the telephone company or the cable company are the only ones that have the right to tear up the streets to get to my house, and certainly virtually the only ones in most communities to get to a mile away from my house. You don't see that?

    Mr. MCCORMICK. Well, Congressman, there are—no, I don't see that because——

    Mr. ISSA. Okay. Mr. Wu, do you see that?

    Mr. Wu. I do see that. You know, the argument—I do see that, and the argument that isn't—market power isn't a duopoly problem is like saying there wasn't a Standard Oil monopoly because they would have invented solar power one day or something.

    All these things, wireless, you know, they exist in these——

 Page 90       PREV PAGE       TOP OF DOC
    Mr. ISSA. Or you could have hauled your own oil in from Venezuela.

    Mr. Wu. Right. You know, and there was always the potential if someone really wanted to, they, you know, could have invented—or taken a bicycle or something. I mean, these are sort of potential technologies that may one day be more competitive, but I think you're exactly right. This is a classic duopoly, a classic antitrust problem, and there are ways that a monopolist can extract extra rents at the cost of the entire economy. And it's the duty of Congress to make sure that doesn't happen and preserve competition.

    Mr. ISSA. Mr. Misener, I'd like to hear your comments. I'd also like to tee up another ''what if.'' What if every product that you made was tied in with Microsoft in their package? Would you say that—and if, in fact, they charged a premium if you wanted to be able to access your product using their operating system, would you have a problem with that even though Linux is around?

    Mr. MISENER. Yes. I think that was the right answer. More to the point, on the duopoly here, the switching costs are extraordinarily high. When we look at search engines, the switching cost is a click of your finger. You want to go from ask.com to Google.com to Yahoo! to MSN, A9—put in a plug for Amazon's. All these search engines are——

    Mr. ISSA. Duly noted.

    Mr. MISENER. —a click away. Okay? A click away. To switch between cable and telco broadband is huge. You've got long-term contracts. You've got truck rolls, equipment changes. These sorts of things present very high barriers just switching among them. So consumers don't have the sorts of choices that they have of search engines in the broadband Internet access world. It just is—it simply is not the case.
 Page 91       PREV PAGE       TOP OF DOC

    Mr. ISSA. Thank you, and thank you for holding this hearing, Mr. Chairman.

    Mr. CANNON. You're welcome.

    The gentleman's time having expired, the gentleman from Maryland, Mr. Van Hollen, is recognized for 5 minutes.

    Mr. VAN HOLLEN. Well, thank you, Mr. Chairman. Let me also thank you and the Chairman of the full Committee and the Ranking Member for holding these hearings and thank all our witnesses.

    I've been listening for some time, and one thing I think we can all agree on, which is that we all have—clearly the witnesses have different definitions of what it is to block, impair, and degrade. And I am just trying to understand sort of the universe we're operating in here.

    I do think that we have to distinguish between future potential and the reality today. The reality today based on the statistics is we have an effective duopoly if it's true that 90 percent of the pipes essentially are through cable and telecom. Clearly, there's potential in the future for a build-out of a greater network, but in terms of the regulatory scheme we have in place, we have to deal with the reality that's in place today.

    But I would like to ask the witnesses to respond to issues I understand Mr. McCormick raising here, which is that we have—we don't have enough, you know, broadband, we don't have enough bandwidth today to accommodate all the substance we want to put on the content that we want to put on the network, especially as we're talking about video on demand and those kind of services. So if you have a pipeline and you have already more traffic that is crowding that pipeline, I don't understand the technology completely, but does that mean that if you don't somehow make choices between the different content providers, that everybody's service is going to be somehow degraded.
 Page 92       PREV PAGE       TOP OF DOC

    I mean, the question I have is there seems to be consensus that we have limitations on the size of the pipe——

    Mr. COMSTOCK. Well, I think that's——

    Mr. VAN HOLLEN. —and then the question is, if that's true, somehow someone is going to either be left out or degraded. And while we don't want people to sort of pay more to play and get preference, there is somebody, according to this analysis I've seen, that is being left out; it's just that we're not being clear as to how they're being left out. If you could all respond to that.

    Mr. COMSTOCK. I think that's where we might disagree a little bit. The reality is we have two broadband networks that run by everybody's home today, and as I said, in the business market it's limited to one. But there's a lot of capacity out there. Right now, in the case of cable, they choose to use the bulk of it for their exclusionary video programming, and a lot of this is about protecting that market share. The Bell Companies would also like to protect market share in video by tying video content to transmission.

    If you look at what Verizon is doing to the home today, when they run their FIOS network fiber to your home using commercial technology, there's a minimum of a gigabit coming into that. Yet they've already filed papers at the FCC saying we're going to take the bulk of that and reserve it for our cable service; then we're going to take another big chunk of it and reserve it for our private network, the extra—the pay extra network; and then we'll reserve this tiny little bit for the public Internet.
 Page 93       PREV PAGE       TOP OF DOC

    And the problem that we have in the United States is we've set up incentives for the network operator to restrict transmission capacity in order to protect their core services, particularly video.

    And so if you allow competitors to get access to this network, as it going on in Europe today, for example, you'll suddenly find that you can get 25-megabit-a-second DSL service. Cavalier Telephone, one of COMPTEL's members, is doing that in Richmond today. If we allowed more people access to the network, innovators would come along and solve a lot of our transmission problems and expand the bandwidth available.

    If you took the capacity that's being reserved for video today and made that available to the end user for purchase, and they could freely buy it, they would have unlimited choice of video content providers. They could go directly to Disney, directly to ABC. That's the nightmare that the cable industry fears and the Bell Companies also fear. They want to reserve that capacity for their exclusive content as a means of leveraging their transmission monopoly into other services.

    Mr. Wu. Congressman Van Hollen, if I could just try and address your question directly, it is true that for the average broadband connection there is, let's say, one or two megs, a certain amount of capacity there. The fundamental question we're getting at is who gets to decide how that capacity is used. The way the Internet is today, primarily it is the consumer who is deciding. The consumer, if they try to download a movie that they don't have enough bandwidth for, the movie will not function properly. If you have 30 different things running at once, if you are, you know, reading your e-mail, watching movies, and do everything at once, your bandwidth will begin to degrade.
 Page 94       PREV PAGE       TOP OF DOC

    But the critical choice is whether consumers should get to decide how their bandwidth is used or whether the gatekeepers, the duopolists, are going to decide how that bandwidth is used and charge extra to the different companies.

    My submission is that consumer choice serves you better—the economy better and is essential to the free market system, and that's why these kind of constraints are something that consumers should solve for themselves.

    Mr. VAN HOLLEN. Thank you.

    Mr. McCormick, if you could respond, please, to both statements that were made, I'd appreciate it.

    Mr. MCCORMICK. As I stated in my testimony, one visionary technologist recently compared the Internet to a Los Angeles freeway. He said, ''Traffic jams happen. The more we upload and download and share, standard definition video, high definition video, home movies, and multiple megabit photos, the more bandwidth we consumer. The more PCs and servers we back up online, the more bandwidth we consume. The more bandwidth we consume, the more Internet traffic jams we have. The more Internet traffic jams we have, the worse our Internet applications perform.''

    Now, not to oversimplify, but there are two parts to the network. One is the part that goes from the network up to the consumer's house. That's really the amount of bandwidth you're buying to access the Internet network. We're saying we're not going to block, impair, or degrade; whatever the consumer buys, that's how much capacity they're going to have to download their applications.
 Page 95       PREV PAGE       TOP OF DOC

    But the other part of the network is this network that's carrying everything. And as consumers begin to look to obtain more stuff, some consumers may be buying truckloads of material from Amazon.com. So the issue becomes, you know, how do we expand? The network has to be expandable and scalable, and who pays to expand and to scale that network?

    If you go to Land's End today and you want to buy five truckloads of clothes, you know, the average consumer sitting in the house next door to you doesn't have to pay for that. You're paying Land's End, and Land's End pays the provider of the service.

    So, similarly, we think that the network of the future ought to operate the same way. It should not be spread across consumers who aren't asking for all those applications. It ought to be the consumers that want to make use of it that are paying for it and that they're going to be in a financial arrangement with these companies.

    Mr. VAN HOLLEN. All right. Mr. Chairman, if I could, I mean, I don't know if there's a response to that, but as I understand it, let's say I'm, you know, a moderate user or a limited user of the Internet and I use it for certain purposes. I guess the question is: If I'm on the sort of low user end of the Internet, should I be also paying for the costs of building out the major pipelines on the Internet because everybody else wants to have a much higher usage? I mean, these are rough analogies.

    Mr. COMSTOCK. That is the analogy.

    Mr. VAN HOLLEN. It would be useful for me to get a response from the others very quickly, if I could, Mr. Chairman.
 Page 96       PREV PAGE       TOP OF DOC

    Mr. COMSTOCK. That is the thing, but he's basically reversed it. It is about the last mile to your home. There is so much capacity in the backbone today. There are tons of companies that have unlit fiber. This is not an issue of network congestion in the backbone—unless, of course, you're talking about solely on the AT&T backbone or solely on the Verizon backbone, which they own and control. But nobody is asking consumers to pay for the expansion of that backbone. That is being paid for by the big companies that use it. It's the last-mile connection that they're using to make you drink through a straw when you wanted to pay for a much bigger straw, and that's the issue. I think Mr. Wu said it correctly. It's who controls this. Does the user control the bandwidth or does the network operator?

    Mr. VAN HOLLEN. Okay. Thank you. Thank you all.

    Mr. CANNON. The gentleman yields back.

    Mr. Goodlatte, the gentleman from Virginia, is recognized for 5 minutes.

    Mr. GOODLATTE. Thank you, Mr. Chairman.

    Mr. Chairman, I have an opening statement I'd ask be made a part of the record.

    Mr. CANNON. It's already been agreed to by unanimous consent. I thank the gentleman.

 Page 97       PREV PAGE       TOP OF DOC
    Mr. GOODLATTE. I'd like to direct a follow-up question to Mr. McCormick's comments and Mr. Comstock's comments to Mr. Misener and ask you how you'd respond to Mr. McCormick's arguments that network providers need to find a way to continue to pay for the increased bandwidth that will be necessary to ensure that we don't counter those Internet traffic jams that he and others have described as more and more content is made available to providers. And how would you recommend that the network providers pay for the increased capacity they need to build?

    Mr. MISENER. Well, as they're doing today, Mr. Goodlatte. The FCC's biennial report on the deployment of broadband services to American consumers came out earlier this month, the most recent one, and it showed two things. We've been talking about one of them, which is the strong and growing duopoly power of the cable and telco network operators. But something else it shows is the rapid deployment of broadband lines to American consumers, which is a great thing. I think we'd all agree that it is. But it's being deployed in a circumstance where many of the parties actually deploying the lines are precluded from the source of discrimination that they have announced that they intend to engage in. Some are precluded by their merger conditions. AT&T is one; Verizon is another.

    So the fact of the matter is that lines are being deployed today. Investment is being made today, even with these nondiscrimination merger conditions imposed upon the companies.

    We are fully in favor of consumer tiering, as has been suggested. The person who sends the occasional e-mail should not have to pay as much as someone who games 24/7. That certainly isn't the case. What we oppose is what has been called Whitacre tiering, which is where the network operators take their market power over the network itself and extend it to market power over the content. They essentially extort monopoly rents from content providers who have no other way to get to consumers——
 Page 98       PREV PAGE       TOP OF DOC

    Mr. GOODLATTE. I understand that. You're moving away from my question, though, which is: How do they pay for it in the future?

    Mr. MISENER. Well, they're continuing to pay for it. I mean, they've already demonstrated that they're paying for it. How they will pay for it in the future is——

    Mr. GOODLATTE. And you think that——

    Mr. MISENER. —continue to pay——

    Mr. GOODLATTE. —current revenues are sufficient to continue the kind of rapid build-out that's needed?

    Mr. MISENER. Yes. It's a demonstrated fact, yes, sir.

    Mr. GOODLATTE. All right. Well, let me ask Mr. McCormick a question then. In the future, is it feasible that the Internet could become the ultimate video programming arena and that each website could have programming similar to a current television station or channel, like the Discovery Channel's website, it could offer all of its programs via its website? Isn't it a natural instinct for cable companies and now the telephone companies to want to protect their investments in their closed video programming services by resisting such a move to a potentially open Internet video programming model? Are you aware of any telecom companies in your association or any companies that have built into their contracts with content providers any requirements that content providers not offer their video programs on their websites?
 Page 99       PREV PAGE       TOP OF DOC

    Mr. MCCORMICK. I'm not aware of any contractual provisions like that. I would go back to the FCC principles, which say we will not block, impair, or degrade access to any website, that consumers would have the ability to access any website they want. And I think that it—this is going on right now. I mean, if I want to access Movielink or if I want to access Starz, I can do that right now and pay Starz $30 a month, and I can download movies. Disney is going to begin to offer Web-based services. But these companies are coming to us, companies like Disney and others, and they're talking to us about building into our networks certain applications that will enhance their services. I don't think that this is any different than what has been historically done with our networks where we have offered to people the ability to have in the network virtual private network and enhanced services that offer increased security and privacy and we build that into the network and let the companies bear the cost of that rather than having the consumers across the board bear that cost.

    Mr. GOODLATTE. Let me ask the other panelists if they want to respond, particularly Mr. Misener, to the comment made earlier by Mr. McCormick that the legislation that may be coming forth from the Energy and Commerce Committee contains language that would effectively codify the FCC's comments regarding having sufficient authority to prevent downgrading.

    Mr. MISENER. Yes, Mr. Goodlatte, actually it ties the hands of the agency by precluding them from rulemaking in this area. It's very unfortunate. The Commission currently has the authority to fully enforce using their rulemaking and adjudicatory powers the policy statement that they issued last August. What the Energy and Commerce bill would do, however, is actually remove the rulemaking authority from the Commission over those—over that area.
 Page 100       PREV PAGE       TOP OF DOC

    Mr. GOODLATTE. I wonder if the other—Mr. Comstock?

    Mr. COMSTOCK. Yeah, I was just going to point out that, again, we don't have to speculate about some of the behavior, and I appreciate your point about the cable. You know, the reality is in the 10 years since the 1996 act, the cable companies have been free to enter the phone and data market, and people have been free to enter the video market. And the behavior of the cable companies, once the FCC decided not to treat them as common carriers, demonstrates exactly what were concerned about. They ran the ISPs out of business by refusing them access to their network and by bundling their broadband service with their ISP.

    So, I mean, this is natural financial behavior. I mean, it's been seen over and over and over again. And so the concern that somehow imposing some of these conditions would result in lost investment isn't borne out in other parts of the world. Europe is imposing these very same open access requirements that we had in the 1996 act, and people are investing. And the other point is that empirically the evidence is strong that without some kind of behavior constraints, these network operators will use their market power to protect their core services.

    So I think that, you know, we have demonstrated over and over again that this is a problem, and what you're hearing from Mr. McCormick is just more promises to listen to us once again, and don't worry, we'll take care of it.

    Mr. GOODLATTE. Do you agree with Mr. Misener that the language that is being proposed in the Energy and Commerce markup is counterproductive? I take it that's what your position is.
 Page 101       PREV PAGE       TOP OF DOC

    Mr. COMSTOCK. It is counterproductive and the only qualification I would make on Mr. Misener's statement is I'm not sure that the FCC does, in fact, have any authority now that they've declared them non-common carriers to enforce those principles. They are principles that follow along the line of common carriage, and it's not clear that the FCC's title I authority would be adequate.

    Mr. GOODLATTE. Mr. McCormick, do you want to respond? And also, do you want to respond to Mr. Misener's answer to my first question regarding how you pay for all this?

    Mr. MCCORMICK. Yeah, I would. First, with regard to Mr. Misener and the House—we'd be happy to see that provision drop out of the House bill. We think that the FCC has sufficient authority today. We don't think that there's a need for the House to move forward and codify it. At the same time——

    Mr. GOODLATTE. I found something you all agree on. We could agree to drop——

    Mr. COMSTOCK. You'd have to make it stronger.

    Mr. MCCORMICK. Secondly, I think one of the reasons that there's such difficulty here is that the whole debate is ''what if.'' You know, what if the Bell Companies do this? What if the cable companies do this? There's no problem out there right now. There's no problem that can be cited that the Congress needs to deal with or that even the FCC needs to deal with. The Chairman of the FCC has said if a problem comes along, I've got sufficient authority to deal with it. But until such time as a problem develops, let's let the marketplace work.
 Page 102       PREV PAGE       TOP OF DOC

    I had begun my testimony today by saying that the net neutrality debate under these FCC principles does, in fact, address not just service providers but content providers, and that this Committee did look at screen bias in connection with the original search engines, which were the airline computer reservation systems. And I would like to insert for the record this search on Google with regard to where you buy books, and the first one that comes up is Amazon.com as a sponsored link—a sponsored link here, a sponsored link over here, too. But for the average consumer, that screen bias is pursuant to a toll that is paid to Google by Amazon.com to list Amazon.com as the very first result. It says so right here, ''Sponsored link.''

    So I would argue that because—there's not a real problem out there right now because the marketplace is exploring this new era of the Internet and companies are beginning to jockey for how to make the right investments, how to find the market.

    I would go with what John Chambers of Cisco said, which is now is not the time to legislate. Now is not the time to regulate in this area. First, do no harm. Let's wait and see if a problem develops and then address it.

    Mr. GOODLATTE. Mr. Chairman, if I might have leave to allow Mr. Wu to respond to that, I would——

    Mr. CANNON. First of all, let me suggest that—or ask unanimous consent that the document you've indicated from Google, the Google search, be admitted to the record.

 Page 103       PREV PAGE       TOP OF DOC
    And without objection, Mr. Wu, you are recognized to respond.

    Mr. Wu. Yeah, I think that Mr. McCormick is right that 2 or 3 years ago there wasn't a problem. The reason that this hearing is being held, the reason that there's so much popular attention, the reason the blogosphere is alarmed, the reason that gun groups, the reason that conservative bloggers, libertarian bloggers, liberal bloggers are all getting into this is because they've seen the plans of AT&T and Verizon. And, you know, Mr. McCormick uses words like ''VPN,'' virtual private network, which are designed to sound very low key, but they're simply a priority lane for selected companies. That's why we have a problem now, is we have a plan for roll-outs of networks that are discriminatory, and that's a change.

    As for this question of, you know, who will build the networks, I think the network neutrality issue is almost a side issue to that question. There is marginally more profit that may be made from this priority lane approach, from this degradation approach, which is the same thing, which is why the Bells are interested in it. But the truth is that the neutral and open Internet has floated all boats. That is to say, these companies are making more money than they ever have with the neutral network. And so while there's a possibility of marginally more profit, what the Committee has to really understand is the trade-off. The trade-off is distortion of competition. I said this already about the refrigerator. We're, you know, starting to repeat ourselves. But there is a trade-off from this priority approach. There are other ways for them to make money that are less distortionary, less discriminatory. What the Government needs to do is to urge the less distortion, least discriminatory way——

    Mr. GOODLATTE. In that regard, how would you respond to his analogy with regard to Google and Amazon?
 Page 104       PREV PAGE       TOP OF DOC

    Mr. Wu. You mean that Google—you know, first of all, I mean, Zoe Lofgren, Congresswoman Lofgren pointed this out. Google actually does run a neutral search. Google search results are neutral. They have advertisements. And what he's referring to is the fact that there are advertisements on the Google website, which he is calling a priority lane. And I think it's a confusing issue. I think it confuses the issue. We've already said over and over again that—we've already said over and over again that the search engine is a competitive market. A9 is a pretty good search engine. I'm thinking of switching myself. It's a completely different type of market, and the analogy is just confusing. It's just this ''Blame Google'' approach. You know, maybe because Google is in China or something we can get some traction on this. It's a completely different issue. No one thinks the competitive conditions—no economist could come up here and say that competitive conditions for the search engine market are anything like the access market. So I don't think it's even a good use of the Committee's time to think about it or talk about it.

    Mr. GOODLATTE. Thank you, Mr. Chairman. I thank all the panelists. It was great.

    Mr. CANNON. I thank the gentleman. The gentleman yields back.

    The Chair recognizes the Ranking Member for purposes of a unanimous consent request.

    Mr. CONYERS. I want to insert into the record the Chair's of the Federal Trade Commission's letter to myself and Chairman Sensenbrenner dated March 14.
 Page 105       PREV PAGE       TOP OF DOC

    Mr. CANNON. Without objection, so ordered.

    The Chair recognizes the gentlelady from California, Ms. Waters, for 5 minutes.

    Ms. WATERS. Thank you very much, Mr. Chairman and Members. This has been a very interesting discussion, and it seems to me we need to put a lot more time in on understanding what is taking place with the Internet.

    I have some very simple and direct questions I'd like to ask. Is there a capacity problem with DSL, broadband, and cable?

    Mr. COMSTOCK. I think it depends on how you define that. The issue today is that because increasingly competitors cannot get access to the infrastructure, you're seeing a degradation, a slowing down of the innovation that goes on that's led to it. As I mentioned, Cavalier Telephone down in Richmond, Virginia, is using DSL circuits to provide voice, video, and data. They're doing that on TV. If you look at in Europe today, DSL is widely used to do IPTV. So it can be done, and that innovation occurs when you unbundle the network.

    If you look on the cable side, there is far less innovation going on because they've got an incentive not to expand the capacity too quickly or people might provide video over it.

    So I think that the infrastructure is there, broadband deployment is there. The issue broadband penetration, which means you need to bring down the price, and the way you bring down the price is by having competition. And that's why Americans are paying so much more today for broadband than people are in other parts of the world, and that's why we're dropping in the OECD statistics. It's not broadband deployment we're dropping in. It's broadband penetration that we're dropping in, which is a function of people buying the service.
 Page 106       PREV PAGE       TOP OF DOC

    Ms. WATERS. Mr. Misener, you said when there was some discussion about charging and paying, you say, ''Well, we do pay.'' Would you explain?

    Mr. MISENER. Yes, ma'am. Companies, content companies like Amazon.com, have large servers in which we—servers and content in which we've invested billions of dollars of capital. And to connect those servers to the Internet backbone, we have contracts with many companies, including many of Mr. McCormick's members, in which we pay millions of dollars a year just to connect our content to the Internet.

    Ms. WATERS. However, that does not give you any priority, just the connection. Is that right?

    Mr. MISENER. That's correct.

    Ms. WATERS. I'd like also again for you to explain why the consumer is being squeezed and why there's less access or potentially less access for the average consumer, small consumers, not the big guys?

    Mr. MISENER. Yes, Ms. Waters. Thank you. It's because there are only two available service providers. Right now and for the foreseeable future, there will be this duopoly of only cable and telephone companies providing broadband Internet access to American residential consumers. We see the same thing overseas as well, in fact, and one of the things that I think has come out in this hearing is that not only is there this strong potential—in fact, announced intentions of the network operators in America to try to extract monopoly rents from American Internet companies, we're actually seeing announcements from foreign Internet companies. In my testimony, there's some quotes from the CEO of Deutsche Telekom. He intends to go after Google, eBay, Yahoo!, and Amazon. Those were the companies he named. Certainly no German companies were on that list.
 Page 107       PREV PAGE       TOP OF DOC

    American Internet companies are world-leading, and so foreign carriers are going to follow the example here in America and try to extract the same sorts of rents except it won't be foreign Internet companies that they're getting it from. It'll be American Internet companies.

    Ms. WATERS. Thank you. I guess it would Mr. McCormick, will you counter the argument that consumers are being squeezed, that they will have less access and they will basically be competing for space with the huge companies that can afford to pay, like Disney?

    Mr. MCCORMICK. I guess I'm still—I can't even comprehend how the consumer is going to get squeezed. The FCC has said that there are four principles: consumers are entitled to access lawful Internet content of their choice; consumers are entitled to run applications and use services of their choice subject to the needs of law enforcement; customers are entitled to connect their choice of legal devices that do not harm networks. In the case of those who are offering voice over Internet protocol services, the FCC has already shown that if consumers are in any way blocked or impaired from being able to use the VOIP provider of their choice, that the FCC will act. The Chairman of the FCC has said that he believes he continues to have legal authority in that regard.

    So I don't know how the consumer is going to get squeezed.

    Ms. WATERS. Okay. Well, thank you.

    Do you know how, Mr. Wu?
 Page 108       PREV PAGE       TOP OF DOC

    Mr. Wu. I do, and it comes from—it comes from the problem of network stagnation; that is to say, if we have a situation, if we move towards—which is the plan of the Bells, to move toward a discriminatory Internet, consumers—the applications which consumers may prefer may not be the ones that run best. I'll turn it back to the electric network. You know, let's say you really prefer General Electric products over Samsung. But you go out and buy and General Electric's refrigerator just doesn't operate as well. That is, the applications the consumers like best, whatever their idiosyncratic preferences may be, may not work as well on the network, and that's the threat—that's the short-term threat to consumers. The long-term threat is that when competition on the network becomes a question of who has the best connections with the gatekeepers, you no longer have the kind of innovative market which has been good for consumers. Consumers every year can look forward to new search engines, for better or for worse—I keep talking about A9, have these strange ways you can search block by block. There's constant arrival of new innovations in Internet space, and that is what's at threat. That's something that's very important for consumers, very good for the national economy. And that's what's at threat, the innovative dynamic nature. That's the trade-off of allowing discrimination.

    Ms. WATERS. Thank you. Mr. McCormick, I would take it you would just flatly disagree with Mr. Wu.

    Mr. MCCORMICK. Well, I would flatly disagree. I mean, let's take—let's take his refrigerator example and let's say that you've got some refrigerator that you can now make telephone calls on and watch TV on and maybe Samsung will come up with that kind of refrigerator. What the FCC principles say is that the consumer has the right to attach that device to the network and that the network operator will in no way block, impair, or degrade service to that Samsung refrigerator that you can watch TV and get telephone calls over. So with those——
 Page 109       PREV PAGE       TOP OF DOC

    Ms. WATERS. So you're basically saying electricity is electricity, that if you have access to it, you can buy as much as you need or want, but that electricity works well for everybody.

    Mr. MCCORMICK. It works well very everybody.

    Ms. WATERS. Thank you, Mr. Chairman. I don't know if I know any more than I knew before I came in here about this argument, but it has been interesting. Thank you.

    Mr. CANNON. As long as your heart is pure, it will work. The Chair would ask unanimous consent to include in the record a document by John Windhausen, Jr., dated February 6, 2006, ''Good Fences Make Bad Broadband.'' Without objection, so ordered.

    The Chair would ask unanimous consent that he be allowed an additional 5 minutes to ask questions of the witnesses without going into a second round. Without objection, so ordered.

    I really do this because I'd actually like to flesh out the record a little bit. And, Mr. Misener, you talked about the Commerce bill, which I take it you're somewhat familiar with. In your view, what would happen to antitrust enforcement if the Commerce bill is passed?

    Mr. MISENER. Mr. Chairman, I'm no expert on antitrust, but I am concerned that if that were to be passed, then the holding in Trinko might actually prevent antitrust enforcement in this area. We certainly would like to see bright-line rules adopted, however they're adopted and however they're enforced, to be in place and advanced so that we're not engaged in long, spread-out litigation post hoc.
 Page 110       PREV PAGE       TOP OF DOC

    My company is all of 11 years old. Seven years of an antitrust case don't get us very far, especially in this circumstance where there is such an obvious clear and present danger that is, as I say, eminently avoidable by bright-line rules in advance.

    Mr. COMSTOCK. I think, Mr. Chairman, if I might comment, I think the concern specifically with the Commerce bill is, as drafted, it appears to provide exclusive authority to the FCC and then limit that authority specifically to these wonderful principles that Mr. McCormick keeps referencing, which are that—they're principles, they're very vague, and there's no rulemaking authority.

    So I think the concern would be that it might be interpreted, particularly in light of Trinko, to have preempted antitrust enforcement, and that's a major concern. You know, these entities, particularly the Bell Companies, are claiming protection under the filed rate doctrine. There's issues having to do with whether or not I'm directly buying service from them, what if I'm an indirect purchaser, with respect to the antitrust laws that we'd need clarification on. And I think having that Commerce Committee language that says the FCC has exclusive authority to deal with these matters might pose some problems as well.

    Mr. CANNON. Thank you. I'm holding the document, the proposed bill, the legislation in front of me, and section 3 talks about this adjudicative authority, which you have quoted precisely. Mr. McCormick, would you like to respond to that?

    Mr. MCCORMICK. Yes. I'm sure that if there is a concern that that language would have any negative impact on antitrust enforcement, we could probably reach an agreement among the three of us to let it drop out and let the antitrust laws govern. I mean, we strongly believe that it's a marketplace today that should be governed like the rest of the American marketplace, and it ought to be governed by the Nation's antitrust laws, and it shouldn't be governed by continued regulation. So if that language in that bill is of a concern to these constituents, we could probably reach an agreement in that regard.
 Page 111       PREV PAGE       TOP OF DOC

    Mr. CANNON. So let me just take it a step further. Based on what you're saying, would your organization support codifying those principles in antitrust law?

    Mr. MCCORMICK. No. We believe that the antitrust laws are very explicit with regard to illegal restraints of trade and anticompetitive behavior, that the antitrust departments and agencies that are overseen by this Committee—the Federal Trade Commission, the Department of Justice—are very aggressive in their enforcement. And as Mr. Issa said earlier, we believe that traditional antitrust analysis ought to be the analysis that's applied to this marketplace.

    Mr. CANNON. Are you familiar with the hearing the full Committee had on Trinko sometime ago?

    Mr. MCCORMICK. I'm aware of it. I'm not familiar with it.

    Mr. CANNON. The industry, the people that you represent today, had representatives here who testified that we really didn't need antitrust oversight. I take it you're now saying something different from that.

    Mr. MCCORMICK. Well, I think what the representatives said is that there should not—you shouldn't be subject to double jeopardy. You shouldn't have a belt-and-suspenders approach. There shouldn't be enforcement at the FCC and then once you follow the dictates of the FCC you should be subject to a separate level of enforcement on the antitrust laws, so choose. And I think that what I'm saying today is that if there's concern that this language as applied to broadband would create a situation where the antitrust laws would not apply, then let's not do belt-and-suspenders. Let's let the antitrust laws govern this segment of the industry, just like they govern every other segment of the American marketplace.
 Page 112       PREV PAGE       TOP OF DOC

    Mr. COMSTOCK. Mr. Chairman, if I just might, I think it's important to note that when the antitrust action that broke up AT&T was taken, the common—the Communications Act applied to AT&T just as well. So the issue that really exists here is that you have an industry that has been very successful in manipulating the arms of Government, and what they keep doing is saying, well, that guy's regulating me over here so you don't need to worry over here. And then when you flip it around, they say the reverse.

    And so if antitrust law is going to be the primary tool—and I think the FTC letter that you entered in the record illustrates this, that now that there's no longer a common carrier obligation, the FTC may well be the primary law enforcement agency. I think it is essential for the American economy and our position in global competitiveness to have a clear set of rules spelled out with respect to the operation of broadband networks in this country, because communications is an essential service that we all need today if we're going to stay competitive. So we need something specific. As Mr. Misener said, 7 years of an antitrust suit isn't going to get Amazon off the ground, if that's what they're trying to do.

    Mr. MISENER. Mr. Chairman, if I just may very quickly.

    Mr. CANNON. Please.

    Mr. MISENER. It may be restating the obvious, but consumers don't care. They don't care how this is accomplished. They just want to ensure that their longstanding Internet freedoms are preserved.

 Page 113       PREV PAGE       TOP OF DOC
    Mr. CANNON. Thank you.

    Mr. Wu, did you want to make a comment, please?

    Mr. Wu. I agree with that. This is an issue about the Nation's economy and about innovation and the future of this country. And richer countries have better neutral infrastructures; poorer countries don't. This is—we risk getting lost in this battle as to whether it should be antitrust or whether it should be telecom law or the FCC. The question—the basic principle is that the engine of the economy has been the applications layer of the Internet, and this incredibly well-functioning market on top of the Internet's infrastructure.

    What is needed is minimum action to prevent spillovers from the uncompetitive part of this network from distorting the competitive and highly functioning part of this network, the application side, and that's important to this country's future and to its economic health. And it doesn't matter how you do it.

    Mr. CANNON. Thank you. I would like to thank all of you for being with us today——

    Ms. JACKSON LEE. Mr. Chairman, would you yield for an inquiry, please?

    Mr. CANNON. Certainly.

 Page 114       PREV PAGE       TOP OF DOC
    Ms. JACKSON LEE. I know that you had the last 5 minutes without having a second round, but can I inquire to you, which would then allow the panelists, the very respected individuals, to answer the question and, that is, if I may give the question, that they may ask—answer in writing——

    Mr. CANNON. Without objection.

    Ms. JACKSON LEE. I would be jumping for joy if they could answer today, but I will yield to that. We have heard a jangling of agencies—FTC, FCC, and the Department of Justice—all around the question of what would be a better regulatory structure for the consumer. I'd be interested in hearing from each of them as to what would be the better regulatory structure—to re-engage the FCC, to put the anchor in the FTC, or whether or not strictly under the Department of Justice, particularly as it relates to the antitrust law. I'd appreciate their response in writing, Mr. Chairman, if I could.

    Mr. CANNON. Just a clarification. Would you like them to try and address that now and avoid writing, or would you like——

    Ms. JACKSON LEE. Mr. Chairman, only at your kind indulgence would I be grateful if they could.

    Mr. CANNON. I would prefer leaving them without the burden, and then you can follow up with——

    Ms. JACKSON LEE. Well, I'd be happy to have them answer. I'd be willing to hear their answer on this point.
 Page 115       PREV PAGE       TOP OF DOC

    Mr. CANNON. Why don't we go, Mr. Misener, from you down the——

    Ms. JACKSON LEE. Thank you, Mr. Chairman.

    Mr. MISENER. Thank you, Mr. Chairman and Ms. Jackson Lee. We certainly would prefer any a priori regulation that communicates directly to the network operators and to American consumers what the rules of the road are. So we're looking for bright-line rules of the road.

    It seems to me that since these historically have resided at the FCC, that that likely is the best place to keep them. But ultimately, again, consumers don't and need not care from whence Government rules of the road arise but, rather, that they exist and they do protect these longstanding consumer freedoms.

    Ms. JACKSON LEE. Thank you.

    Mr. COMSTOCK. I would generally agree. I mean, we had a very effective common carrier regime, and I think the problem that's arisen—and I would note we had a common carrier regime backed up by antitrust enforcement, and maybe not by the FTC but still by the Department of Justice. And I think that was a great model.

    I think the problem is then that we've got an agency that, notwithstanding fairly clear instructions from the Congress in the 1996 act, has chosen to abandon those responsibilities. And so I would say the FCC if the FCC is actually going to carry out the law, but in the absence of that—and that's, I think, a lot of the reason we're here—then we've got to find another solution. And, unfortunately, the Department of Justice has also abdicated in their recent approval of the mergers. You know, one industry swallowed the other major competitors whole, and they didn't even blink. So I'm not sure what happened to competition analysis, but, you know, Mr. McCormick keeps saying standard antitrust analysis. Well, there appears to be none. So if it's not going to be either of those two, I'd certainly vote for the FTC. But, again, I think that's only going to happen—they're now an ad hoc enforcement agency, and you can't have something run that way. You've got to have, as Mr. Misener said, the rules set out up front and very clearly stated. And if that's going to happen, then it's imperative for this Committee, the Congress as a whole, to adopt clear rules with respect to how we're going to deal with these networks. Those rules should make sure you have service upon reasonable request, nondiscrimination, interconnection, attachment of devices—essentially the same things that you have under common carriage because that's the framework upon which this massively successful Internet has been built.
 Page 116       PREV PAGE       TOP OF DOC

    Ms. JACKSON LEE. Thank you.

    Mr. MCCORMICK. Congresswoman, today there exists no problem. The FCC has set forth a series of principles and has said that if a problem develops, it has the authority to enforce. We support that.

    Recently, you asked the Federal Trade Commission if the Federal Trade Commission believed that it had authority to address anticompetitive behavior, and the Federal Trade Commission responded that it believed that it did have authority, sufficient authority to address any anticompetitive behavior that could result. That we support. We think that the current environment is one where the Government has clearly articulated a policy and has available to it the tools it needs to address any problems should problems arise.

    That having been said, we don't think there needs to be new authority created. We think that the existing antitrust laws are sufficiently definite with regard to illegal restraints of trade, attempts to monopolize, and anticompetitive behavior for the Government to have available to it whatever remedies need to be available should a problem develop.

    Ms. JACKSON LEE. Professor?

    Mr. Wu. Yeah, I'd just make one point. These matters have often ended up at the FCC, and part of the problem with that is what are really issues of national economics and macroeconomic policy end up always being seen as these kind of weird, geeky telecom issues, like a battle at the Star Trek Convention or something. And part of the reason for moving the authority, arguably, outside the FCC is that it will be easier to recognize and understand that these are straightforward antitrust issues. And I think this is part of what, you know, the Committee is here today to understand. And so these are issues that affect the entire country and that are straightforward, familiar anything problems that involve industries and involve consumers.
 Page 117       PREV PAGE       TOP OF DOC

    So I think there's a good argument from trying to take this away from this tiny, strange world of telecom policy and into the broader questions of national economic policy, which are just moving things away from the FCC.

    Ms. JACKSON LEE. Thank you, Mr. Chairman. I think we have our work cut out for us, but we have had an expansive hearing. Thank you. I yield back.

    Mr. CANNON. The Chair's time having expired, let me just thank the panel for being here today. This has been among the most lucid, engaging of all hearings I've been to, certainly of those that I've chaired.

    Thank you, and the Committee stands adjourned.

    [Whereupon, at 4:28 p.m., the task force was adjourned.]


Material Submitted for the Hearing Record


    I want to thank the Chairman for asserting our jurisdiction in this matter. Contrary to what our friends in the Commerce Committee may think, it is the Judiciary Committee that has jurisdiction over issues that affect the state of competition in the telecommunications industry.
 Page 118       PREV PAGE       TOP OF DOC

    When it comes to the Internet, we should proceed cautiously. Unless we have documented instances of a problem, I do not believe the Congress should regulate. I have consistently taken this position. In the area of Internet taxation, I have always sided with those who believe we should oppose multiple and discriminatory taxes on the Internet and need a moratorium on those taxes. In the area of campaign finance regulation of blogs and other Internet communications, I was one of the first in Congress to tell the Federal Election Commission to go slow.

    That said, when we do see evidence of a problem, Congress has a duty to act. In some instances, Congress must provide the rules of the road to ensure competition, fairness, and sound public policy.

    While I remain open on the issue of network neutrality, I have become more and more concerned that if Congress does nothing, we could be heading in a direction where those who pay can play, and those who don't are simply out of luck.

    For example, some telecom companies have indicated that they do not intend to let companies like Google and Yahoo—or the next generations of Internet entrepreneurs—use their pipes without significant payments. Verizon's CEO Ivan Seidenberg said he would not let these companies ''sit on our network and chew up our capacity.'' AT&T's Ed Whitacre said ''I ain't going to let them do that.''

    The network operators say they have a right to charge companies for enhanced services. The content companies and consumers say the Internet should be open to all, regardless of their ability to pay.
 Page 119       PREV PAGE       TOP OF DOC

    Americans have come to expect the Internet to be open to everyone and everything. This is also a key factor in one of the fastest growing areas of our economy—the Internet.

    Whatever Congress does, it must protect these aspects of the Internet. One option would be to legislate in the most general way possible, offering only guidelines or principles and punting to the FCC to figure out how or whether to enforce them. I think that approach is not responsible. I think Congress has a duty to do more.

    I look forward to hearing from our witnesses today, and I hope we can have a dialogue about how best to ensure and protect the Internet on which we have come to rely.



    Thank you, Mr. Chairman, for holding this important hearing.

    The Internet continues to be an engine that empowers our citizens and our economy. New and exciting products and services continue to emerge that enhance the quality of life of our citizens and increase the efficiency of businesses.

    Part of the reason why the Internet is such a creative forum for new ideas is that there are very few barriers to using the Internet to deliver products, information and services. Startups such as Google, ebay and many others have sprung up and prospered because they had the same access to consumers via the Internet that other, larger and established entities had.
 Page 120       PREV PAGE       TOP OF DOC

    In the 106th Congress, I introduced legislation, along with Congressman Rick Boucher, to ensure competition in the broadband access and services market. Specifically, this legislation amended the antitrust laws to prohibit anti-competitive behavior so that the Internet would remain open to fair competition, free from government regulation, and accessible to American consumers.

    I believe that the Internet should remain open and that network operators should not be able to pick and choose who wins and loses in the Internet marketplace. At the same time network operators must be able to manage their networks in a way that allows them to build more capacity so that they can provide more consumers with the Internet sites that continue to grow in size and complexity.

    In time, as competition in the provision of broadband Internet access emerges, it is my hope that the market will provide solutions to the questions that we will pose today. In the meantime, we must be vigilant to ensure that the unique benefits of the Internet do not fall prey to anti-competitive pressures. While I continue to grapple with whether legislation is needed in this area in the short-term, I believe that Congress must conduct aggressive oversight on this issue to gather accurate information about what is—and is not—occurring in the marketplace.

    I thank the chairman for holding this important hearing today, and I look forward to hearing from our expert witnesses.

 Page 121       PREV PAGE       TOP OF DOC



    In amending the Communications Act we do not have to abandon a pro-competitive vision for the future, but we must understand the failures of the anti-competitive past and get back to traditional principles of communications networks that have served the nation well.

    First, the commitment to universal service is more important than ever because access to communications is increasingly vital in the digital information age. Second, universals service is an evolving concept that must ensure that Americans can participate in the digital future. Policies that attempt to segregate the ''legacy'' network from the future network and ''ghettoize'' universal service are unacceptable. Third, at its heart, communications is local. Global networks are useless without last mile facilities—the local switches/routers and transport facilities that connect the consumer to the world. Fourth, competition is an operational means to serve public interest ends; it is not the end in itself.

    Prospects for last mile competition in the converging world of 21st century U.S. communications are not good. There are only two local, last mile communications networks that can provide a fully functional broadband network to the residential consumer and prospects for a third or fourth are bleak. This feeble duopoly we will not accomplish the goals of a ubiquitous, nondiscriminatory network available to all Americans at reasonable rates. America has been falling behind in the global race to the broadband future, not because there is inadequate incentive to invest, not because we are less densely populated than other nations, but because there is inadequate competition to push the ''cozy duopoly'' to make attractively priced services available and unleash the Internet economy to develop consumer-friendly services.
 Page 122       PREV PAGE       TOP OF DOC

    We urge the Congress to begin from the successful principles of past policies and to learn from the problems and failures of past mistakes.

 Nondiscrimination in interconnection and carriage should be the explicit legal obligation of communications networks that provide last mile connectivity and local network access, as it has been for the last century.

 The commitment to universal service should be strengthened, not weakened, and we should apply the program beyond the dial-tone to broadband capabilities. We support legislation introduced by Members of this Committee to meet this need.

 Congress can promote the goals of competition and universal service simultaneously by making available more spectrum for unlicensed uses and protecting the right of local governments to build last mile networks. We applaud Members of this Committee who have introduced legislation to accomplish both of these goals.

 Congress should recognize the economic reality of the communications market and direct public policy to correct for the abuses of a duopoly market structure. Without explicit, pro-competitive policy, we cannot expect it to grow of its own accord.


    Mr. Chairman and Members of the Task Force,

 Page 123       PREV PAGE       TOP OF DOC
    The Consumer Federation of America,(see footnote 7) Free Press,(see footnote 8) and Consumers Union(see footnote 9) appreciate the opportunity to submit this statement for the record on the issue of concentration and convergence in the high-speed broadband market and the importance of preserving Internet Network Neutrality. My name is Dr. Mark Cooper. I am Director of Research at the Consumer Federation of America.

    Dozens of witnesses have testified in Congressional hearings this year about the future of the Internet, telecommunications policy and the need for reform. It is not a pretty picture for consumers. Previous hearings have dealt with specific details of the failure of the competition policy under the Telecommunications Act of 1996 (the 1996 Act). The 1996 Act promised an explosion of competition voice, video, and data communications, and yet today we are witnessing the reconstitution of Ma Bell and the crystallization of a cozy duopoly of cable and telco. The Committee has been told of skyrocketing cable rates and the plummeting position of the United States in the global race to the broadband future. It has been presented with examples of anticompetitive and anti-consumer behaviors of the giant communications companies that now dominate the market. Despite the perverse anti-competitive results of the ''pro-competition'' policies in 1996 Act, these companies come before you to demand that you legalize discrimination in the provision of access to the communications network of the future, an approach that Congress has rejected for a century.

    If future prospects are determined by our success in the broadband market (which few analysts deny), our current position is untenable. We are now 16th in the world in broadband penetration. Virtually none of our broadband lines can sustain even 1 megabit per second of speed in both directions-up and down the network. We pay $15–$20 a megabit for download speed—20 times more than the global leaders. We have a pervasive rural/urban digital divide that is increasing as time passes. Our universal service policies have not been updated and reformed to efficiently address our broadband woes. Insufficient spectrum has been opened to facilitate a legitimate, independent wireless broadband competitor. All we are left with is the false promise of competition from 1996 and the farcical declarations from cable and telephone giants that a duopoly market is vigorously competitive.
 Page 124       PREV PAGE       TOP OF DOC

    The parade of horribles with which you have been presented goes on and on and I will not regurgitate them in detail today. I have attached half dozen Appendices to this testimony that contain analyses prepared by our organizations that detail the failure of competition under the 1996 Act. I believe that we have been brought to this sorry condition because:

(1) the 1996 Act tried to do the impossible in some markets, aiming to build competition where conditions could not sustain sufficient competition to protect the public from abuse (e.g. local, last mile access);

(2) the Federal Communications Commission (FCC) and the antitrust authorities mishandled the introduction of competition in markets where it was sustainable, allowing the incumbents to drag their feet, engage in all manner of anti-competitive behaviors, and mergers (e.g. network opening, program access and mergers); and

(3) the FCC misread the 1996 Act in other markets, undermining and threatening competition that actually existed (e.g. allowing network owners to undermine competition in Internet access and services).

    In amending the Communications Act (the Act) we do not have to abandon a pro-competitive vision for the future, but we must fully understand the failures of the anti-competitive past. A competition-friendly, consumer-friendly future requires that we return to certain key traditional values and fundamental principles that made the American communications network the envy of the world throughout most of the last century.
 Page 125       PREV PAGE       TOP OF DOC


    In order to evaluate competition and convergence in the communications sector in the context of a legislative hearing on amendments to the Communications Act of 1934, there are four basic principles that must be kept in mind.

    First, the Act has a specific purpose laid out clearly in the first sentence of Title I, Section I: ''to make available, so far as possible, to all people of the United States, without discrimination on the basis of race, color, religion, national origin or sex, a rapid, efficient, nationwide and world-wide wire and radio communications service with adequate facilities at reasonable charges.'' This commitment is more important than ever because access to communications is increasingly vital in the digital information age.

    Second, today's analysis must be forward-looking, in the spirit of the Act, focusing on the broadband communications network that will be the dominant means of communications in the 21st century. Looking to the future does not mean we should ignore the problems or the progress of the past. On the contrary, the right combination of correcting past mistakes and evolving successful policies for the digital era is the only means of satisfying the public interest. Certainly, the track record of competition and the past behavior of market participants are relevant, especially if the same actors play similar roles. These market patterns can give a good indication of what is likely to happen under the various policy regimes under consideration. However, policies that attempt to segregate the ''legacy'' network from the future network and ''ghettoize'' universal service are unacceptable. The commitment to universal service needs to include a commitment to an evolving level of service to ensure all Americans participate in the future, as the Telecommunication Act of 1996 (the 1996 Act) explicitly recognized in Section 254.
 Page 126       PREV PAGE       TOP OF DOC

    Third, at its heart, communications is local. Communications starts and ends with a local transmission medium and a local network. In order to make a call from Los Angeles to anywhere in the world, you need a wire or spectrum and a switch in Los Angeles. In order to terminate a call in New York from anywhere in the world you need a wire or spectrum and a switch in New York. The network in between may be national or global, but the last mile is local. Global networks are useless without last mile facilities—the local switches/routers and transport facilities that connect the consumer to the world. The Act recognizes this as well, in the first two sections of Title II, which establish the obligation to provide interconnection and carriage of communications on nondiscriminatory rates, terms and conditions. Technology has not changed this basic fact.

    Fourth, competition is an operational means to serve public interest ends; it is not the end in itself. Further, the state of competition is an empirical question, not a theoretical statement of belief or desire. There is an expression in economics used to describe competition in markets—''four is few, six is many.' When there are fewer than the equivalent of roughly six, equal competitors, a market is considered highly concentrated because economic theory, empirical evidence and a century of practical experience shows that markets that are this concentrated do not perform well. In highly concentrated markets, prices are set above costs and innovation declines. With so few competitors, it is easy to avoid vigorous, head-to-head competition, especially when each uses a different technology, specializes in a different service, or concentrates on a different geographic area or user sector. Where competition is lacking, there is little chance that markets will accomplish the goals of the Act. Even where there is vigorous competition, there are circumstances in which the market will not accomplish the broader goals of the Act. It is the responsibility of legislators to conduct a fair assessment of competition thresholds in order to maximize the effectiveness of public interest communications policy. We must not place our trust in the rhetoric of special interests without facts on the ground.
 Page 127       PREV PAGE       TOP OF DOC


    In the emerging, converging world of 21st century communications, prospects for vigorous competition in the local segment of the industry are not good. At present, there are only two local, last mile communications networks that can provide a fully functional broadband network to the residential consumer—the incumbent local telephone companies and the incumbent cable operators. Two is not a sufficient number to ensure vigorous competition, and both sets of incumbents have a miserable record of anticompetitive, anti-consumer behavior.

    The best hopes for a third, last mile alternative were undercut when regulators allowed the most likely candidate—wireless—to be captured by dominant wireline firms through ownership or joint ventures. It stretches credible expectation to assume that a wireless provider owned by an ILEC, or in partnership with a cable giant, will market a wireless broadband product that directly competes with its wired product. They will offer premium, supplementary services to be sure—but it will not be a true third broadband competitor. Hope and hype surrounding other technologies cannot discipline anticompetitive and anti-consumer behavior. Mergers such as that proposed by AT&T and BellSouth will only make matters worse. No company with sufficient market power to extract monopoly rents will fail to do so absent proper public policy protections.

    On the current trajectory, consumers are falling into the grip of a ''cozy duopoly'' of cable and telephone giants, which will abuse its market power, abandon it social responsibility and retard the development of our 21st century information economy. We can debate whether a regulated monopoly is better or worse than an unregulated duopoly, but we believe the evidence shows beyond any doubt that the feeble duopoly we have will not accomplish the broad Communications Act goal of a ubiquitous, nondiscriminatory networks available to all Americans at reasonable rates.
 Page 128       PREV PAGE       TOP OF DOC

    The danger of relying on a ''cozy duopoly'' is already apparent. The harm has already been done, and its impact is severe (see Expanding the Digital Divide and Falling Behind on Broadband: Why a Telecommunications Policy of Neglect is Not Benign—October 2004; Broadband Reality Check: The FCC Ignores America's Digital Divide—August 2005). America has been falling behind in the global race to the broadband future, not because there is inadequate incentive to invest, not because we are less densely populated than other nations, but because there is inadequate competition to push the ''cozy duopoly'' to deploy attractively priced services and unleash the Internet economy to develop consumer-friendly services. The current jostling for upscale consumers with big bundles of services leaves the majority or Americans behind. On a per megabit basis Americans pay five to twenty times as much for high-speed services as consumers in many other nations. Is there any doubt that the primary cause of the broadband digital divide is price? Now, after leaving the American consumer in a serious predicament, the network giants are insisting on the right to discriminate against content, applications, and services on the Internet, as blackmail for building broadband networks.

    The failure of penetration resulting from high prices and the threat of discrimination in network access drives innovation out of the American Internet space and overseas. We should take note that the world's most advance broadband nations have instituted policies that are based on last-mile competition, strategic direct investment in infrastructure, and free market principles of non-discrimination on the network to drive innovation. Not only has the FCC failed to institute pro-competitive policies, the Commission has done precisely the opposite, masking it in rhetorically glowing but substance-less reports on the state of the broadband market.

 Page 129       PREV PAGE       TOP OF DOC


    The idea behind the break up of AT&T in 1984 was to separate those parts of the industry that could be competitive from those parts of the industry that could not and use public policy to advance competition in the competitive sector. It worked in the long distance industry for most consumers. Requiring the local companies to provide ''equal access'' to their networks and shifting fixed cost recovery onto consumers, federal regulators created an environment in which long distance companies eventually commoditized long distance—as long as consumers took large bundles—and competed the price down.

    The Telecommunications Act of 1996 sought to introduce more competition into last mile markets in telecommunications and cable. In telecommunications, it sought to promote competition by identifying the various elements of the local exchange network and making them available to competitors on terms that would allow competition. The idea was that new entrants would invest in competing facilities where they could, while the monopoly elements were rented from the incumbents. Billions of dollars were invested, but this experiment failed. In the decade since the Telecommunications Act of 1996 was passed, the Federal Communications Commission (FCC) and the antirust authorities failed to enforce the communications and competition laws of this nation to promote a consumer-friendly competitive environment. The FCC allowed the incumbent local telephone and cable companies to avoid their obligations under the law to promote entry into the communications field, while the Department of Justice (DOJ) and the Federal Trade Commission (FTC) allowed them to buy up their actual and potential competitors. (See Competition at the Crossroads: Can Public Utility Commissions Save Local Competition—October 2003; Broken Promises and Strangled Competition: The Record of Baby Bell Merger and Market Opening Behavior—June 2005).
 Page 130       PREV PAGE       TOP OF DOC

    The Competitive Local Exchange Carriers (CLECs) were strangled by the failure of the FCC to force the incumbent local exchange carriers (ILECs) to open their local markets. And when the possibility of voice over Internet protocol (VOIP) arose, the ILECs slammed the door by tying high speed Internet to VOIP service. In essence, forcing consumers to pay twice, if they wanted an unaffiliated VOIP provider. The two largest CLECs were recently absorbed by the two largest ILECs. The same two dominant local companies also absorbed the two players in largest long distance service and enterprise market, reconstituting the old Bell system as two huge regional entities that dominate their home territories with about a 90 percent share of local service, an 80 percent share of long distance, and over a 50 percent in-region share of wireless service. (See Petition to Deny of the Consumer Federation of America and Consumers Union, In the Matter of Application for the Transfer of Control of Licenses and Authorizations from AT&T Wireless Services, Inc. and its Subsidiaries to Cingular Wireless Corporation, Federal Communications Commission, WT Docket No. 04–70, May 3, 2004; Reply, Federation of America and Consumers Union, In the Matter of Application for the Transfer of Control of Licenses and Authorizations from AT&T Wireless ''Services, Inc. and its Subsidiaries to Cingular Wireless Corporation, WT Docket No. 04–70, May 3, 2004).


    The 1984 Cable Act ended local regulation under the promise of competition. Overbuilders were supposed to enter to compete head-to-head, and satellite providers were supposed to provide intermodal competition. It never happened. The last mile market for cable proved too difficult to crack. Cable rates skyrocketed and the industry was subject to conditions of nondiscrimination in access to programming in 1992. Rates stabilized because of regulation, not competition.
 Page 131       PREV PAGE       TOP OF DOC

    As in telecommunications, the 1996 Act sought to stimulate head-to-head competition in multichannel video programming distribution (MVPD), but failed. Overbuilders could not crack the market—taking a scant 2 or 3 percent of subscribers. Satellite grew, but could not discipline cable's market power nor effectively discipline prices. The local telephone companies were invited into the cable business in a variety of ways, but chose not to enter.

    Cable operators still account for about 75 percent of all MVPD subscribers. Regional concentration has reinforced market power at the point of sale. Monthly cable rates have doubled since the 1996 Act and consumers are offered massive, monthly packages which afford them little choice in what to buy (See Time To Give Consumer Real Cable Choices: After Two Decades of Anti-Consumer Bundling and Anti-Competitive Gatekeeping—June 2004; Reply Comments of the Consumer Union and the Consumer Federation of America, In the Matter of Comment Requested on a la Carte and Themed Tier Programming and Pricing Options for Programming Distribution on Cable Television and Direct Broadcast Satellite Systems, Federal Communications Commission, MB Docket No. 04–207, August 13, 2004). Geographic consolidation has created a huge obstacle to entry into the programming sector. Cable operators control the programming that reaches the public and discriminate against unaffiliated programmers. The results of these market trends have left consumers and independent programmers at the mercy of the cable giants. (See Comments of Consumer Federation of America, Consumers Union and Free Press, In the Matter of the Commission's Cable Horizontal and Vertical Ownership Limits and Attribution Rules, Federal Communications Commission, MM Docket No. 92–264, August 8, 2005.)


 Page 132       PREV PAGE       TOP OF DOC
    When cable rolled out a telecommunications service—cable modem service—the FCC moved the goal posts, redefining cable modem service into a different regulatory category. It abandoned one of the vital underpinnings of the success of the Internet, the ''Computer Inquiries.'' This was the digital age expression of the principle of nondiscrimination that the FCC applied to computer and data services starting in 1968. As telecommunications in this country have evolved, the FCC established the policy of keeping the network neutral—allowing the intelligence in the network to stay at the edge. This dovetailed with the end-to-end principle of the Internet and provided an arena for free market innovation, competition and consumer choice that was unparalleled in recent experience.

    When the FCC abandoned this policy for cable modem service, America's slide from Internet leadership began. This allowed the cable operators to discriminate against Internet service providers—forcing consumers to pay twice if they preferred an Internet service provider other than the cable affiliate (See The Public Interest in Open Communications in Networks, July 2004). Cable operators have imposed all manner of anti-consumer, anti-innovation restrictions in their customer agreements, which have driven applications developers away from this space. More importantly, the decision to remove Title II obligations of nondiscrimination in interconnections and carriers (common carrier regulations) from cable modem service paved the way for a total cashiering of a century of communications policy. The immediate result will be nothing short of the destruction of the Internet if the Congress does not move to hold the line on the last remaining safeguard-network neutrality. The fundamental mistake in communications policy, which we have made over and over in the last two decades, is to allow a very small number of network owners to control the physical communication system. If we duplicate that mistake again, the result will be the destruction of the vibrant, vigorous competition and burgeoning innovation of the Internet economy.
 Page 133       PREV PAGE       TOP OF DOC


    The telephone companies now say they are ready to compete with cable in video, and the cable companies now claim to be ready to compete with telephone companies for voice. But they have demanded the elimination of the fundamental social obligations of the Act—universal service and nondiscrimination—before they do so. The notion that Congress anticipated or would ever have enacted the 1996 Act under belief that we would end up with a duopoly is not believable. The hope was for vigorous competition among many providers.

    Two competitors are simply not enough to discipline pricing, as the new entrants just match the high priced bundles of the incumbents. Two are not enough to ensure nondiscriminatory access to the communications network, as the new entrants demand to be allowed to discriminate and exclude Internet service providers and rival services. By traditional economic standards, three or four market players are not enough to assure competition, certainly not when access to the means of communications are at stake. If both network giants in a market adopt the same anti-competitive practices, where will consumers go? They are trapped.

    The fundamental importance of nondiscriminatory access to networks and services embodied in the Communications Act was reaffirmed just this month by key members of the ''cozy duopoly.'' Time Warner, the second largest cable company, has petitioned the Federal Communications Commission to impose an obligation of nondiscriminatory interconnection on the incumbent local telephone companies, under Section 251 of the Act. Verizon, the second largest telephone company, has petitioned the Commission to impose an obligation of nondiscriminatory access to video programming under Section 628 of the Act. Yet, both of these entities directly and indirectly through their trade associations, are lobbying the Congress, and have pushed the FCC, to eliminate all such obligation with respect to Internet access and services.
 Page 134       PREV PAGE       TOP OF DOC

    The fact that the anti-competitive and anti-consumer practices of these companies come and go, as political pressure or public attention ebbs and flows, is not a justification to abandon the principles of nondiscrimination. On the contrary, when innovation depends on the whims of network gatekeepers it is stunted and chilled. As Vint Cerf has said: the Internet is about ''innovation without permission.'' When the choices are few, the switching costs for consumers are large, and the gatekeepers decide which services have access to the public, innovative activity will go elsewhere.

    Current arguments against obligations to provide nondiscriminatory access are based on the claim that competition exists between two networks and that is all the American economy needs. That claim is wrong as a matter of historical fact and practical experience. The obligation of nondiscrimination came to this country under English common law. From the founding of the Republic, public roads competed against privately owned canals, but they were both subject to obligations of nondiscrimination. Private railroads were added to compete with canals and roads, and when they began to brutally discriminate, refusing to be bound by their common law obligations, they brought a more explicit anti-discrimination approach into the law. ''Unjust discrimination between persons, places, commodities, or particular descriptions of traffic'' brought common carrier down upon the railroads in the Interstate Commerce Act of 1887. Telegraph and wireline telephone were also expected to behave in a nondiscriminatory manner, but when AT&T refused to interconnect with independent companies, common carrier obligations were extended to that industry in the Mann Elkins Act of 1910, thus ensuring nondiscrimination in communications.

    In other words, one of the enduring principles of communications in America has been nondiscrimination. We have layered alternative modes of communications one atop another, each using a different technology, each optimized for a somewhat different form of communications and still we imposed the obligation of nondiscrimination. We have accomplished this through both a liability approach and a regulatory approach. The layering of networks subject to the obligation of nondiscrimination makes even more sense today when the importance of the free flow of information is magnified as it is in our digital economy.
 Page 135       PREV PAGE       TOP OF DOC


    As this Committee moves forward to construct a new regime of communications policy, we urge the Congress to begin from the successful principles of past policies and to learn from the problems and failures of past mistakes.

 Nondiscrimination in interconnection and carriage should be the explicit legal obligation of communications networks that provide last mile connectivity and local network access, as it has been for the last century.

 The commitment to universal service should be strengthened, not weakened, and we should apply the program beyond the dial-tone to broadband capabilities. We support legislation introduced by Members of this Committee to meet this need.

 Congress can promote the goals of competition and universal service simultaneously by making available more spectrum for unlicensed uses and protecting the right of local governments to build last mile networks. We applaud Members of this Committee who have introduced legislation to accomplish both of these goals.

 Congress should recognize the economic reality of the communications market and direct public policy to correct for the abuses of a duopoly market structure. Without explicit, pro-competitive policy, we cannot expect it to grow of its own accord.

 Page 136       PREV PAGE       TOP OF DOC

[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]


[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]


[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]


[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]


[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]
 Page 137       PREV PAGE       TOP OF DOC

(Footnote 1 return)
Cf. Federal Communications Commissions, ''High-Speed Services for Internet Access,'' as of 12/31/04, available at <http://www.fcc.gov/wcb/iatd/comp.html>.

(Footnote 2 return)
For more on the early history of the telegraph, see Robert L. Thompson, Wiring a Continent: The History of the Telegraph in the United States 1832–1866 (1947); Daniel J Czitrom, Media and the American Mind: From Morse to McLuhan, ch. 1 (1982); Paul Starr, the Creation of the Media 184 (2005).

(Footnote 3 return)
Starr, the Creation of the Media, 184.

(Footnote 4 return)
On this episode, see Carterfone, 13 F.C.C.2d 420 (1968); See Jay Atkinson & Christopher Barnekov, A Competitively Neutral Approach to Network Interconnection 3 (Office of Plans & Policy, FCC, Working Paper No. 34, Dec. 2000); Kevin Werbach, Breaking the ICE, 4 J. Telecom & High Tech. L.J. (2005).

(Footnote 5 return)
See Jay Atkinson & Christopher Barnekov, A Competitively Neutral Approach to Network Interconnection 3 (Office of Plans & Policy, FCC, Working Paper No. 34, Dec. 2000).

(Footnote 6 return)
''Madison River Communications, LLC Order and Consent Decree,'' March 3, 2005, <http://www.fcc.gov/voip/>.

(Footnote 7 return)
The Consumer Federation of America is the nation's largest consumer advocacy group, composed of over 280 state and local affiliates representing consumer, senior, citizen, low-income, labor, farm, public power and cooperative organizations, with more than 50 million individual members.

(Footnote 8 return)
Free Press is a national, nonpartisan organization with over 225,000 members working to increase informed public participation in crucial media and communications policy debates.

(Footnote 9 return)
Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the state of New York to provide consumers with information, education and counsel about good, services, health and personal finance, and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with more than 5 million paid circulation, regularly, carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.