FTC NN7
- See FTC Workshop Transcript for index
Current and Future State of Broadband Competition Panel
This panel addresses the current and future state of competition in the market for broadband Internet access. Among the topics discussed are: Is this market really a duopoly, as some maintain? To what extent do other platforms, such as wireless, satellite, or power lines, compete with cable modem and DSL service? What has happened to prices and speeds over the past few years, and what will happen to them going forward? Is robust broadband competition sufficient to address the potential harms envisioned by proponents of broadband connectivity regulation?
And with that, I'm happy to turn over the microphone to Jeff Schmidt, the
director of bureau of competition at the FCC[1].
>>JEFFREY SCHMIDT
Thanks for braving the weather and coming out this morning. We have a great
panel on a very interesting challenging topic so we want to jump right into it. I'm
just going to introduce each of the speakers as they get up to speak and give a
brief presentation. I think our hope is to keep the -- each of the panelists'
individual presentations to somewhere in the 10 to 15 minute rang, and that
should leave us plenty of time for some questions at the end of that time. Also, in
order to shorten the introductions and the like and get more into substance I'm
going to refer you all to the bios that are contained on the website for the detailed
biographies of each of the speakers. I'll just give their current affiliations. So with
that let's start off with our first speaker who is Michael Altschul, Senior Vice
President and General Counsel of CTIA, the wireless association.
>>SPEAKER
Thank you, Jeff.
>>JEFFREY SCHMIDT
Going the wrong direction. That's me after the first slide. First of all, we were
joking earlier, instead of the last mile problem, I think this morning many of us
experienced the first mile problem getting out of our homes and getting here. But
we've made it and these are important issues. On behalf of C M's members who
are the nation's commercial mobile radio service providers and their suppliers, I
want to thank the commission for the invitation to speak on this panel. As we
heard yesterday, wireless communications are now being provided over licensed
and unlicensed spectrum, and they are providing broadband connectivity to the
Internet, along with wire line carriers, cable companies, satellite providers, and
others. What I want to do this morning is to demonstrate some of the speeds
and capabilities of these different kinds of services to show you how we really are
all in the same ball park. There is a lot of information on this slide, but it
demonstrates that the various alphabet soup of wireless services compete with
cable modem and DSL services and speeds. So there is no duopoly. Instead,
there is this alphabet soup of services. I apologize for the acronyms but as
somebody recently pointed out, these wireless technologies have been named
by engineers, not marketers. What they do illustrate is that consumers have a
broad range of competitive choices to choose among, and I think this also rebuts
those who claim that the broadband market is the cable Telco duopoly unaffected
by a wireless oligopoly. In fact, wireless broadband technologies offer
competitive speeds and capabilities. The range of speeds and technologies that
are now being provided also show the rapid pace of innovation that characterizes
the wireless industry, but is inconsistent with an oligopoly market. You'll see that
we have circled some of the -- some of the speeds. The dial-up and dial-up
equivalent is not considered broadband by the FCC. It's less than 200 kilobytes
per second. The 3G equivalent is our group of services that are equivalent to
DSL service, and the WiFi and WiMAX services which are characterized by
fourth generation services are equivalent to cable modem, and at least some of
the tiers being offered by Verizon's FIOS service. For those of you who are not
familiar with the terms 3G and 4G they are used in the wireless industry to
describe broadband technologies. The first generation was analog which the
FCC mandated for cellular carriers. While this aloud a uniform build-out when
the service was new, it also insured that carriers could not compete on
technological innovation, since all carriers had to provide the same service.
Second generation services were the first digital technologies. At the time, they
were called TDMA, GSM, IDEM and CDMA. Their introduction begins the
introduction of rapid differential in the wireless industry. The features of these
third and fourth generation services are identified in this slide which begins to
describe the various kinds of applications and features that are supported in
wireless today. Some critics of the wireless industry express a preference for
single standardized error information much like the FCC approach to the analog
cellular standard of 25 years ago; technological innovation is a major driver of
competition. New wireless technologies enable new services, they drive down
costs through more efficient use of spectrum and they allow carriers to introduce
features and services that differentiate service offerings in a competitive market.
Cellular carriers are still required to support the AMP standard and it is no more
spectrally efficient than it was in 1982 and it still doesn't support text messages or
pictures, just like you can't get messages or pictures over wire line telephones
that connect to the luck network through the RJ 11 standardized interface face.
This slide begins to demonstrate the wide variety of broadband devices that are
available at your local Best Buy or circuit city store. It also illustrates the wide
range in screen size, keyboards, memory, features and functions that consumers
can choose among. There is a website phone scoop.com that lists more than
800 handsets in wireless enabled devices that are available in the US today.
Carriers and aggregators must work together and with third party content
developers to insure interoperability, quality user experience for consumers
across the wide range of these devices, and to block objectionable content such
as spam and mall ware. In an oligopoly, one would expect stable rising prices
and a lack of innovation but that is precisely what is not happening in wireless.
You can go to CTI's own website, CTI.org or the FCC's annual CMRS
competition report or your own experience as one of the nation's 230 million
wireless subscribers for proof that prices are falling, the number of subscribers
are growing and consumers are using wireless for more and more of their
communications needs including voice, Internet browsing, text messages and
other data services. This slide is taken from the FCC's 11th annual report on
CMRS competition and it illustrates the rollout of 3G technology by county
throughout the United States. It's already been overtaken by events I must add.
It's about a-year-old, and the aggressive deployment by the nation's wireless
carriers have expanded the scope of these services. This slide has a lot of
words but it's a snapshot of the 3G services deployed by the nation's five largest
wireless carriers. Unlike in an oligopoly we are seeing new entry in ramped up
investment and build-out last summer, as many of you know the FCC conducted
the advance wireless spectrum auctions, and awarded more than 1,000 new
licenses to 104 bidders. The number 1 winner in this auction, T-Mobile
essentially doubled its spectrum holdings across the country, enabling it to
impact the status quo significantly. T-Mobile has announced plans to spend $2.7
billion by 2008 building out a 3G HSDPA network using the spectrum and
enabling it to offer more and faster services to its customers. The third largest
winner of licenses was a new entrant, the spectrum co-cable consortium, which
was the highest bidder on licenses totaling 267 million pops. This will enable
companies explore mobile or wireless options and threatens to disrupt any
postulated equilibrium. Two wireless carriers which have been using alternate
business models, metro PCS and Leap Wireless were also winners in the AWS
auction. Metro PCS was the fourth largest bidder winning licenses covering 144
million pops. Leap was the sixth and seventh largest bidder because they
participated through two entities and won licenses covering, oh, about 170 million
pops. Once the AWS licenses are issues we will have licenses in 36 of the top
50 markets. These companies leak and metro PCS are among the fastest
growing wireless companies and demonstrate not all wireless carriers have the
same business model. In addition, the wireless industry includes carriers with a
significant regional presence such as all tell, US cellular, Dobson and sun com
and we've seen the emergence of successful MVNOs's, mobile virtual network
operators. The most successful of these MVNOs have designed their service
offerings to meet the needs of specialized markets by providing exclusive content
and wireless devices tailored to their customers' needs. While perhaps
anathema to principles of common carrier obligations, consumers benefit from
this type of product differentiation. For example, EarthLink's Helio MVNO
permits its -- not permits, promotes its exclusive drift handset and it's self-
proclaimed one of a kind buddy beacon for location based social networking and
mobile MySpace service. While Helio advertises in wired magazine, I brought a
little pop here because it's such a compelling ad.
>>MALE SPEAKER
They can't use that.
>>SPEAKER
There is an MVNO Jitterbug advertised in the bulletin. I bought one of these for
Mississippi 82-year-old mother because it was developed to meet the needs of
older persons. Their handsets feature large buttons and easy to read texts and
there is live operator service and even a dial tone to confirm service. There are
dozens of MVNOs offering differentiated services to all types of users and
demographic groups. Virgin mobile has a music-based service called text tones
based on an exclusive deal for content with major record label and available only
on virgin's Cyclopes phone. We've seen MVNOs with a Hispanic orientation
where users press 1 for Spanish and 2 for English. Disney's mobile's MVNO
service is designed to meet the needs of family and uniquely Disney from end to
end with exclusive handsets. And we have MVNOs like AMP who offer content
in handsets geared to the young and hip according to them which certainly rules
me out. This slide just summarizes an important announcement by Sprint which
is deploying the nation's first 4G network using WiMAX technology with data
rates of 2 to 4 millibits per second. Today's "Wall Street Journal" has a story that
describes how we in the US through the Sprint build-out, which is going to invest
more than a billion dollars this year, where it has put us ahead of Europe and the
rest of the world. Finally, if you are looking for empirical evidence that wireless
broadband access service has really been deployed, and that consumers find
great value in these services, the FCC just released their high-speed services
report for the first six months of 2006. According to the report, while total high-
speed access lines grew 26% during the first half of the year, 59% of all new ads
were mobile wireless broadband access customers. In other words, wireless
carriers added more new customers than cable and telco combined. Based on
this record of competition innovation, wireless should not be subject to any Net
Neutrality rules, policymakers should allow the market to continue to work, and
regulate only in the event of a market failure.
>>JEFFREY SCHMIDT
Thanks, Michael. Continuing our distinguished panel on the current and future
state of broadband competition, Harold Feld. Harold is the Senior Vice President
of the Media Access Project, a nonprofit public interest law firm.
>>HAROLD FELD
Thanks, because of the time limits I'm going to have to blow past these slides
real quick. My key point here is to raise a whole bunch of questions and then
based on the uncertainty it will produce, to make some policy recommendations.
Paul Klemperer, one of the more renowned economists in Europe once remarked
that it was a lot better for policy people to have only an undergraduate
understanding of economics rather than PhDs because at the Ph.D. level you
can be very seduced by theory and by a large number of elegant models but if
you are an under grad and you don't get that stuff you do a gut check and say
does this stuff make sense. So having had some very enlightening Ph.D.s
yesterday I'm hoping to do the econ101 gut check here. And part of that is we
have this panel backwards. What we really care about are the goals when we're
talking about the policy here and how do we best achieve those goals. In that
setting we only care about competition as a means to an end, not an end in itself
and defining what competition means and how it works and whether it will in fact
emerge on its own is very difficult, because sometimes it's not enough to just say
oh, competition and let's deregulation. You have to look out there and say what
do I have to do to make competition happen. If I have competition, how is it
going to work right to achieve the policy goals? Now, Congress has set some
specific policy goals. I'm going to blow by the various statutory provisions I've
cited here and translate into plain English. Goal number 1, as we, from Baldwin
might say is cheap wicked bad broadband for everybody. Number 2, Internet is
open as diverse as it exists today or better. I don't just mean on the consumer
side which is bullet number 3. Everybody should go back and read Reno versus
ACLU, the case on the communications decency act and see what people were
excited about. It was an Internet as diverse as human thought where anybody
could say whatever the heck they want. Things like the growth of social
networking and other great services that people want to sell are all about what
Joe Farrell and Gigi Sohn were talking about yesterday in the pleasure to
communicate. The first amendment cares about this stuff. Our democracy
depends on this stuff and Congress has told us to protect it as part of the policy.
Any policy that doesn't protect that, even if it is more economically efficient is a
failed policy. We want lots of competition for all goods and services related to
Internet access available on line, and finally I did not want to forget good old
section 230 for the deregulatory types, unfettered or federal by state regulation
whatever that means. As we'll discuss, that's hard to define. What do we mean
by competition? That's a very hard question. Everybody hearing from the FTC
understands it's not just an issue of counting noses. Sometimes you need to
worry about how comparable the service is, market share may or may not matter,
potential market share may or may not matter, walk in, disclosure, other things
that keep people from switching. For my money competition only works if you
have enough people who can switch to discipline bad behavior because
otherwise who cares if you are a provider. So one of the things that means is
you have to ask whether these services are substitutable as economists like to
say. My example here is soda; does it compete with bottled water? Yeah,
probably. Does soda compete with tap water? Well, maybe a little bit because
the presence of tap water keeps soda from getting too expensive but I think we'd
all agree that it doesn't compete with mud puddles though they are both liquid
and if you are desperate can you drink both. Competing products. Are they
available in sufficient numbers to affect discipline? Do we care whether they are
available nationally, regionally or locally? Bottled water may compete with soda
but free soda 100 miles away doesn't make a difference. Walk in, sticky
features, these are things that haven't been discussed in the debate. We like to
think about broadband as an independent stand-alone product but it's not and not
being marketed that way. To go back to my water example. If you have a
Poland springs cooler in your water cooler service and you want to switch but in
order to switch there is a termination fee of $1,000, it will take five days out of
your time, you need to buy new glassware in order to be able to drink the new
water and you also have to switch from oil to natural gas heat because that got
sold to you as a bundled service, you are a lot less likely to switch. That is
important as we move forward into how this is being marketed. The other thing
to keep in mind is users cannot use a potential service. Bottled water even if it
competed with mud puddles does not compete with it looks like rain. The
problem with a lot of what I'm hearing is don't regulate because it looks like rain.
So how much competition is enough? That's a very good question and it's very
hard to determine. Even just saying duopoly is not enough, economists can tell
you and we see in the real world sometimes a duopoly is enough and a lot of
times though it isn't enough and we don't know anything about how this market is
functioning at the moment or let me rephrase that. We know some things but we
do not have nearly detailed information about how this market is functioning,
whether there is going to be conscious peril Ism, how the upstream market takes
in this, the complex relationship, vertical integration not merely with content but
all the way up to things like backbone and transport. These are hard questions
that are obscured in the debate over well, there are five cellular guys, a satellite
guy, a cable guy and a telephone guy. Is this market really unfettered? People
love to portray this as being all about maintaining the pristine nonregulated state.
Bunk. There are a lot of laws that impact both the direct service providers and
the related market and it has to be recognized that these laws impact how
competition is going to unfold. If you are saying broadband over power lines,
BPL is going to compete with Telcos and cable you need to take into account
that under the pole attachments law one of the great negotiating chips for the
BPO guys is utterly thrown out the window. If we're going to talk about cable and
Telco competition we've got to recognize the program access takes an arrow
how of the quiver of the cable guys and going head to head on bundled service
and mandatory connection, termination of calls favors cable companies over the
telcos because they can have their Telco service be complete and terminated
and sell on effective bundle where it may not be as easy for telcos to offer a
genuinely competing video service. That difference matters for the emergence of
the broadband market and broadband competition. Federal laws in other area
make a huge difference. You can't talk about wireless without recognizing the
fact that without a federal license you are not going to be doing WiMAX. If you
are relying on unlicensed provider to take into account the different laws that
govern that space as well. State and local also make a big difference, it's not
about franchise repeal, wide other things, patents or extraneous laws make a
huge difference in how competition is actually unfolding on the ground and the
presence or absence of government also makes a huge difference to the reality
as it unfolds divorced of the theory when you chop it into different bits. So how
does the real world stack up today? Broadband is not wicked fast. In fact
especially when compared to other countries it is wicked slow. It is not available
everywhere. I'm sorry, that's true even of satellite and these oft services, to take
just one example. If I'm in an MDU in someplace downtown in a less than nice
neighborhood I need a clear view of the southern sky in order to get satellite
Internet. And that knocks out three quarters of the people who happen to be face
together wrong direction in that building and probably knocks out the first half of
the building on the south side as well because they can't see past the building
next to them. So the notion that any one of these at the moment really is a
complete national competitor everywhere on the ground is simply not true. The
other thing I do have to point out when we do these comparisons is we ten to
care about the people in the room. So yeah, if we forget about fly over country,
poor people, Native American, those neighborhoods that we are asking to be
relieved of build-out requirements that we don't have to see them, then yeah,
things are looking up. If you want to say I can switch to four or five different folks
in Montgomery county and Arlington and screw the people out in Montana, that's
great. But that's not our national policy. How does this stack up with the real
world today? We're talking 95% under the FCC's best numbers where we're only
talking about 200 KBPS so we've lowered the bar as far as we can. Even so,
95% of residential subscribers, according to the FCC's latest record are taking
DSL or cable as their primary home service. And that's huge because again, on
the policy stuff, on the things we care about, we want residential broadband
because residential broadband is a huge impact on people's behavior, what they
say, how they think, Pughe project on the Internet American life has done a lot of
good on this. Bluntly there is no evidence of substitutability for other services.
People view the Internet available on this as a substitute, not as a -- not as a
substitute rather but only as a supplement. Internet content and servers are still
competitive and diverse but the ability to tier is relatively knew and all we know it
may be happening. Bust because it's glowing to be MDA's we'll never know until
there are bad consequences. I want to point out it will take a couple billion
dollars of investment which is why Cisco is hyped because they'll sell that
equipment in order to make it possible. We have to figure it will be a little while to
get these things to happen. Is competition going to emerge on other platforms.
>>SPEAKER
We have to take into account these realities. You can't ignore the reality and
wave this stuff away, the technological challenges, the market forces, all these
things make it uncertain. We don't know about how the walk in is going to work.
How is duopoly shaping up? We seem to have duopoly in residential space. Is
that working? The problem is not really. After an initial period where DSL was
trying to capture new subscribers because we had an immature market, we had
people who weren't subscribing to either service, we had a brief period of DSL
trying to catch up and cut its prices. But now we are seeing a slowdown. We are
seeing conscious parallelism. These guys are looking at each other and trying to
be just a little bit better so they can keep people. So in this uncertain
environment what do we do.
>>SPEAKER
Do we intervene or say don't intervene? This is to my mind it's the health
inspector versus the restaurant critic. The critic comes in after it's opened for six
months to give it time to work the service problems out and make a
recommendation to diners. Health inspectors come in before a restaurant is
allowed to open which is better to keep people from getting sick. In this particular
case we need to worry about what economic theory tells us about the potential
dangers which weigh heavily in preserving openness, betting on cartellation
historically and the natures of the market is the way to bet. We might get more
competition but we'll see. Discrimination, all that's the odds. Other countries
with more intrusive regulations are whipping our butts. So the notion intervening
now is going to delay deployment is somewhat suspect. Finally, this is critical
infrastructure. This is not turnips or tulip bulbs. If we're talking about betting
everything about our economy and democracy, maybe this will all work out and
we shouldn't intervene, I think that ought to give us a lot of pause. My
recommendation is network neutrality, not just for the reasons I've said but
because for democracy civic engagement is absolutely critical. You know, I am
terribly worried about just people not being able to afford to do the stuff they're
doing now if they have to pay for differential tiers. All these guys will tell you they
have a duty to their shareholders. That's great. I do not want to see free speech
be the collateral damage to economic efficiency. That is a very real problem if
what our policy is only structured around producer incentives. Finally, if we are
going to look at this we need to figure out how competition is actually going to
work and be prepared to intervene on a regulatory level to make competition
work. We need to get rid of these, you know, level playing field and technological
neutrality. This is not a football game. Reality matters, technologies are
different. People use and access this stuff in different ways and it's important
how they do so. If you are going to rely on a competition you have to, you ask if
you want competition or not or are you just in love with the theory. Finally we
need to recognize we may need to encourage other potential broadband delivery
forms directly T name Internet was built on government subsidy and contract and
volunteer labor. The first backbones were built through government subsidy. A
lot of this stuff has been built using different types of economic models that
encourage volunteerism and mutual cooperation. We ought to start thinking
about what are we going to need to do to make it possible for those things to
happen and not just worry about the incentives for the players that we all
recognize as the biggest players in the room. Thank you.
>>JEFFREY SCHMIDT
Thank you, Harold. Our next speaker will be Christopher Putala, the Executive
Vice President of Public Policy of EarthLink.
>>CHRISTOPHER PUTALA
Thanks for the opportunity to participate with the panel today. Happy Valentine's
Day to all. I've got to read a written statement I would like to submit. Let me
summarize, Chris Putala, Executive Vice President for public policy at EarthLink.
By way of introduction, EarthLink is the nation's largest independent service
provider. In a publicly traded company based in Atlanta, Georgia. We are proud
to provide Internet access to more than 5 million customers around the country.
We provide these services through a wide variety of methods, DSL, dial-up,
cable modem commercial wireless, WiFi, broadband over power line and
anything else we can come up with to bring the Internet to consumers. We are
the leading owner and operator of municipal WiFi networks, offering service on
networks that we own, build and operate, in Philadelphia, New Orleans, Milpitas,
and Anaheim, California. With service coming soon to Alexandria, Virginia,
Atlanta, Georgia, Houston, Texas, Pasadena and San Francisco. We partner in
11 markets to rent unbundled loops from the incumbent telephone company and
then combine those with our own electronics to provide a wicked fast DSL
product at up to 8 megabits per second, significantly faster than DSL offerings at
1.5 and 3.0. We also buy broadband from cable and incumbent telephone
companies where they will agree to sell to us. We are an investor in broadband
over power line technologies, and Helio, as was pointed out, our mobile wireless
joint venture with Korea's S.K. Telecom is on the cutting edge of wireless data
offerings. In short we're well positioned to comment on the current and future
state of competitive alternatives for consumer broadband. I want to start by
pointing out we're all parties to the Net Neutrality debate agree. That is the
willingness of all of us to invoke regulation when we are on the short end of
someone else's market power. Unfortunately we're having this debate because
some of us say hands off when they have market power. For example, when the
bells go to enter television markets they recognize they need access to content if
they are to have a fighting chance to compete against cable. No TV offerings in
Philadelphia would have much of a chance without being able to offer a Philly's
game. So they take advantage of nondiscriminatory television neutrality rules,
also known as program access rules. Last year, for example, Verizon filed a
complaint at the FCC under these rules to get access to broadcast the Yankees
in New York. I'm a Red Sox fan but I still think the folks in New York should be
able to see the Yankees on as many competitive alternatives as the market can
provider. Similarly when cable provides telephone service, they recognize they
are not going to have very good luck starting a new telephone service, if their
customers can't send and receive calls to the millions of Bell company telephone
customers. Wireless came to the same recognition more than a decade ago. So
Cable & Wireless take advantage of laws requiring nondiscriminatory telephone
neutrality, also known as interconnection rules. I respectfully suggest that these
same open access nondiscrimination goals guide policymakers as they consider
appropriate policies for Internet access. Incumbents with a strangle hold on vital
inputs should not decide who can sell television, telephone or Internet services.
This is the fundamentally point of television neutrality, telephone neutrality and
Internet neutrality. This brings us fairly squarely to the first key question
addressed to this panel. Is this market still a duopoly? In other words, are there
anti-competitive strangle holds on vital inputs? The answer to this foundational
question, as it was when the FCC examined the AOL Time Warner merger said
yes. It is an especially resounding yes when broadband is evaluated, as it must
be, not as a single product market but as multiple product markets. Let's just
look at the FCC's recent broadband report as of June, 2006. Over 93% of all
broadband is provided by a cable company or an incumbent telephone company.
That's 60 million out of 64 million lines nationwide. The much Heralded
independent alternatives are still tiny. EarthLink and others fields of optimism are
working hard from making them from tiny to small to medium to big but they are
still tiny. Broadband over power line, for example, nationwide, 5,208 lines. Six
wireless is only about 360,000 lines nationwide. Mobile wireless not affiliated
with an ILEK serves less than 2 million total broadband lines. The numbers are
worse when broken down by speed, the crucial ingredient for consumer Internet
access. For lines between 2.5 megabits per second and 10 megabits per
second, just 19,8027 out of more than 29,500,000 are served by fixed or mobile
wire, satellite or broadband over power lines. That means that 99.93% of this
fast category, 2.5 to 10.0 are almost all of those 30 million lines are served by
DSL, cable modem are fiber. Not enough evidence? Let's look at pricing data.
One hallmark of a duopoly is duopolists don't compete vigorously on price. We
see that today, too. You don't have to take my word for it. Investment analyst
Sanford Bernstein has written that Comcast cable modem average revenue per
unit has not declined and has in fact slightly increased over the past two years,
increasing from $42.91 up a month to 43.14 per month T Sanford Bernstein
report goes on to observe, the owe "The broadband market has proven less price
sensitive and cost elastic than once imagined as consumers have been willing to
trade price for speed. In English this means we can't just look at all broadband
as being equal or even competing with one another. For example, this is why, as
Mike pointed out, commercial wireless broadband offerings appear to actually be
competitive. We're seeing price decreases, we're seeing a robust wholesale
market, one of the reasons that our joint venture Helio can exist, but that does
not mean that we're seeing that same kind of competitiveness. In fact, we're
seeing the opposite in the high-speed broadband residential market. For
EarthLink this means as we go to compete with Comcast and Verizon in
Philadelphia, we're going to try to offer both our municipal WiFi broadband
service with symmetrical speeds of about a Meg up and down, as well as our 8
megabits ADSL 2 plus or wicked fast broadband service that requires us to have
access to Verizon's unbundled loops T point remains because we have a bell
cable duopoly market, there is a need for equal access protection,
nondiscrimination rules so the powerful incumbent cannot put their thumb on the
scale of Internet competition. When a few control key inputs regulatory action is
justified. To insure these inputs are supplied on reasonable and
nondiscriminatory terms, that's what holds for television neutrality, that's what
holds for telephone neutrality, that's what ought to hold for Internet neutrality.
Unfortunately and because of the frustration of anyone seeking comprehensive,
effective and competition-based answers to Internet neutrality, some actually
want the FCC to run head long down a path of reinforcing duopoly, particularly in
the higher speed broadband offering by forbearing from loop unbundling which is
critical to EarthLink's and many other innovators' access to using new electronics
on old wires to provide faster, better and competitive broadband offerings. Any
solution to Net Neutrality must expand and certainly you must not shrink the full
range of competitive alternatives to the cable and incumbent telephone
companies across the full range of broadband markets. That's why municipal
WiFi broadband is a critical part of the network of Net Neutrality solution.
Similarly any solutions continuing to allow companies such as EarthLink to get
excel to unbundled copper loops so we can provide the super fast, wicked fast
broadband services to more and more consumers. If competitive offerings are
not encouraged and developed, this commission will almost inevitably be drawn
into regulation of the duopoly. As this commission has set forth, it has jurisdiction
overbroad band connectivity and everyone should be aware and watch very
closely, this agency has already testified twice before Congress to oppose
measures that would effectively extend the common carrier exemption to
broadband. Finally, as this commission is also well aware, even competitive
markets only can function well if consumers are well informed. Consumers need
to know what they are buying. Thus any broadband connectivity provider that
limits access to or provides -- or prefers specific Internet applications or content
should be required to disclose those limitations or preferences clearly to
consumers. Just yesterday commissioner Liebowitz commented and I quote.
The fourth freedom is particularly important to us at the FTC. Some of the most
critical issues regarding the Internet involve transparency and disclosure. Will
carriers slow down or interfere with applications or services? If so, will
consumers be told about this before they sign up? To my mind, failure to
disclose such material terms or conditions should be considered unfair, deceptive
and in violation of the FTC act. Does anyone disagree with that? Okay. We
have unanimity. The fourth freedom, that's recall what the fourth Internet
freedom is. Consumers are entitled to competition among network providers,
application and service providers, and content providers. I hope the unanimity of
yesterday continues today. In closing, robust competition and full consumer
disclosure can break the duopoly and to paraphrase Chairman Majoras, protect
consumers through the market. But those robust competitive alternatives have to
be allowed to exist. Thank you, and I look forward to your questions.
>>MALE SPEAKER
John Thorne next. The vice president, deputy General Counsel of Verizon.
>>JOHN THORNE
Jeff, thank you. It's a pleasure to be here. Welcome all you who braved the ice
and those who are at home by your warm fires. In addition to working at Verizon
I also am an adjunct professor at Columbia University and last fall had a chance
to teach at Georgetown which gave me a parking place this morning. Grateful for
that. And so if I sound a little bit academic, I apologize in advance for that. Move
the microphone closer? Thanks. Over the past 10 years the policy of Congress
and the federal communications commission has been to encourage investment
and innovation in broadband networks. This policy has been wildly successful.
We have witnessed over the past decade one of the largest infrastructure
deployments in history. Prices have dropped, service quality has improved and
new technologies have been deployed. Unless policies makers reverse course
by adopting pro regulatory approaches that have been labeled variously as Net
Neutrality. It's no accident that the broadband revolution started on cable TV
systems. They began life already lightly regulated with their new services and in
the 1996 telecom act they were relieved of some additional regulations that had
constrained them. This enabled cable operators to gain Wall Street's backing for
a rough number is $100 billion of investment to convert their one-way pipes into
two-way broadband pipes. For a while cable had the field to itself because
phone companies and others were subject to a regulatory regime that imposed
sharing obligations and price regulation on their networks. Lifting those
regulations in 1996 and the subsequent years that the FCC has led to
accelerated phone company broadband investments. DSL deployment in
particular has ramped up sharply in the years following deregulation of DSL is
now catching up to cable. The DSL challenge in turn led to the cable companies
investing more in their networks to offer faster speeds. Comcast, just about two
weeks ago announced it's going to invest $5.7 billion in infrastructure for 2007,
which exceeded the analysts' expectations for that company. Now the phone
companies have moved to the next generation of their products. Verizon is
spending $18 billion to deploy a fiber to the premise network called FIOS which
will eventually reach 18 million customers by the end of 2010. If you look, for
example, at the consumer reports issue that came out last month it urges you, if
you can get it, to get FIOS, the best product available. Providing over 10
megabits per second with new versions to come that will offer up to 100 megabits
per second of capacity. A tornado -- AT&T, one of the other telephone
companies in the country is spending $4.6 billion over three years to deploy a
fiber to the node network to 19 million homes. Meanwhile you heard a little bit
from Mike, but it's a clear thing that wireless companies are now accelerating
their offerings of 3G broadband technology. Verizon's EVDO broadband wireless
network now reaches 200 million people with broadband Internet access speeds
up to two megabits per second. The FCC's most recent report to Congress on
wireless competition said that for the first time in years America's wireless
networks had caught up with and surpassed the European wireless networks in
terms of speed and coverage. Fixed wireless, you heard Chris talk a little bit
about his company's efforts in that there a fixed wireless has now become a
viable broadband alternative. WiMAX provides speeds up to 156 megabits per
second, 30 miles. Clear wire Intel not on the panel but they could have been is
offering WiMAX in 30 cities and expanding. Tower stream is offering WiMAX in
six metropolitan areas. Last August Sprint announced by the end of 2008 it
expects to spend $3 billion to build a nationwide WiMAX network to provide
customers access in the range of 2 to 4 megabits per second. Some estimates
are that there are now 40,000 WiFi hot spots in America today which is more
than in any other country on the planet. There are several hundred US
municipalities in the process of installing citywide WiFi networks, already 65 cities
have such networks. Some of the municipal WiFi networks include the ones that
Chris's company is deploying, Google is deploying, and those now often are
supported in part by vertically integrated content such as advertiser supported
search in Google's case in order to make the service more affordable to
consumers. In San Francisco, for example, Google will be the exclusive provider
of content at the present time on the advertiser-supported services that it and
EarthLink plan to offer. There are now three satellite companies investing
substantially to improve their nationwide broadband coverage. They offer
speeds comparable to the most widely purchased DSL offerings. Recent
technology advances have aloud broadband every power lines which has
become in many places a feasible access alternative. Google-backed current
technologies is rolling out BPL in Texas and Ohio. The current speeds are in the
range of 3 megabits per second, but the next generation is offering speeds as
high as Verizon's files, 100 megabits per second. Other power companies have
started their deployments as well. Cumulatively this is a massive program of
private investment and innovation. Verizon for the past three years running has
become the number one capital spender in the country. This actually amazed
me. I put it on a slide so you can see it, too. If you go through who would you
think is spending the most in capital in America, General Electric, the big oil
companies, GM, Ford, Intel, this is a list of the biggest. Verizon for three years
has been the number 1 capital spender in the United States. There is no more
cutting edge technology than the broadband networks we're building today. My
friends watching this in California will say to themselves that they are the ones
that are high tech and that the Verizon guys that are the guys that wear the hard-
hats and get the dirt under their fingers nails digging trenches in the street. But
the science we are deploying in our broadband networks-T enabling universes of
video, data and voice with the reliability of the old phone system, the science and
technology is truly leading edge whiz-bang stuff. I took over at Verizon, the
electrical property group and we have so far today been awarded 2,500 patents
on the innovations that go into this network with another 1,000 patents pending.
Unlike most historic infrastructure projects of this scale, when we make these
huge investments, we are not being granted exclusive franchises and we are not
being publicly funded. We're rolling out these networks in the teeth of fierce
competition and extraordinary technological risk. When Verizon puts its fiber
down the street it costs us $800 past each home, another $840 to connect a
home that actually takes the service. We spend the money to pass the home but
we don't know whether the customer is going to buy broadband service at all or
buy it from us. Competitors make these large and risky investments for the
opportunity to earn a return commensurate with the risk. That includes having
the freedom to innovate, differentiate and make commercially sensible decisions
needed to compete and win in the market. The core element of the Net
Neutrality advocacy campaign, the central premise of the whole theory is that
phone and cable companies have a chokehold on the last mile of Internet access
and that we're really talking about just a duopoly. You've heard that a couple of
times this morning. The Net Neutrality advocates claim that cable and phone
companies can and will use this alleged choke hold to limit the ability of upstream
content and application providers to reach end users and thus skew competition
by favoring some and disfavoring others. I hope I've stated the case for the other
side correctly.
>>MALE SPEAKER
Not quite. But we can talk about that during the Q&A.
>>MALE SPEAKER
But that case isn't true. We have made clear when consumers buy Internet
access capacity from us they should be able to reach any lawful website they
want to get to with that capacity and we do not and will not block, degrade or
interfere with consumers' access to any website. No phone company or cable
company has the market power to injury competition, among content and
application providers. Now, the first place the assertion that this market is a
duopoly is a gross misrepresentation T broadband market is fiercely competitive
today and is on a trajectory, clearly on a trajectory to an ever more competitive
market. Consumers have multiple choices. You've heard some this morning of
access providers and the choices are not going away. They are expanding.
According to the FCC's numbers, 87% of zip codes, that's almost 9 out of 10,
have three or more broadband choices, 2/3 have five or more choices, 1/5, and
increasing have 10 or more choices. Broadband prices do not reflect market
power. Prices are falling even as speeds are increasing. The DSL average
prices have fallen by nearly 30% in three years, and by nearly 50% for a given
speed. Cable modem prices have decreased 70% in three years on a per
megabit per second basis. More importantly, this is probably the most important
novel idea I've got that I want to impress upon you. Regulation advocates are,
when they talk about a duopoly are engaging in a sleight of hand about what the
relevant market should be, when you think about this. The question is not what's
the range of choices for an end user in a particular locality. That is the power of
the last mile owner has over some local end user. That's not the question. The
broadband regulation argument hinges on the power that the last mile owner can
exert over the upstream content suppliers. That's not just a national market.
That's a global market. Let me show you a picture on this. The top US Web
sites generate much more traffic from outside the US than from within the US.
Google, Wikipedia, MSN, Yahoo!, eBay, Amazon, they can reach anybody who
uses the Internet in the US or in the world. Verizon for its part, to take an
example, is only providing consumer broadband access in a fraction of the
country where it has local phone facilities. So whatever Verizon's market share
might be looked at from the point of view from an end user in a particular locality,
it's no more than about 12% on a US basis or 2% on a US basis of the
broadband lines that are looked at from the point of view of the content providers.
So does Verizon have the ability to prevent Google or eBay or these others from
reaching end users when the most we could do is temporarily shut off a couple
percent of the end users they can see? The bottom line is due to the fractured
structure of this industry, no last mile provider has any power over the market for
distribution of content and applications. There is no single broadband provider
that's got that kind of power. It may be more important no broadband provider
has an incentive to limit their end user's experience on the public Internet. What
we are selling is precisely the capacity to reach all lawful content and
applications. Broadband providers are motivated to maximize the content and
applications available to our customers because doing that maximizes the value
of our network, and the sales we can make. As we've seen over the past
decade, regulation deters competition and innovation. But removing regulatory
barriers and thus create together freedoms to invest, differentiate and earn a
profit encourages competition and innovation. The deregulatory policies adopted
by the FCC and Congress are working. I urge this commission to support those
policies and thank you. Thanks for the random comments, too.
>>JEFFREY SCHMIDT
Thank you, John. Our next speaker will be Scott Wallsten, the Senior Fellow and
Director, Communications Policy Studies, the Progress and Freedom
Foundation. Scott.
>>SCOTT WALLSTEN
Thank you. I assume this has been turned into the first slide. Okay. Thanks
very much for having me here. I do have a Ph.D. in economics so I hope the
comments are still relevant, although as a Ph.D. economist, Howard, I think you
must have missed a few days of econ101 class. I'm sorry, you should have
equal opportunity to take a dig at me later and I'm sure you'll follow up on that.
So I'm going to talk about broadband competition in the United States. Now,
often these debates start with this comparison showing the US looking relatively
bad compared to OECD countries in terms of broadband penetration.
Sometimes people talk about speeds too. Right now I guess the current rank
suggestion 12th. But I think these statistics are actually completely misleading,
and they create a false sense of urgency which leads us ultimately to really bad
policies. But the real question we should be asking first is is there a market
failure, and if so, will intervention yield any -- yield net benefits. That's where this
discussion should start. So you know, what is the evidence on that? Well, going
from the most recent FCC data which was released just at the very end of
January and goes through June, 2006, we see that the number of high speed
lines increased by, I think it's 26% in six months. And so this trend is just
continuing as sort of evidence of good investment. Now, we know about the
problems with the FCC data that broadband is defined as at least 200 kilobytes
per second which few people would call broadband. OEDC has the same
problem, they define there's as 256 kilobytes per second. But the evidence
suggests that investment is continuing fast and the FCC is beginning to collect a
tax on speeds and I think now it's something like 65% of all these lines have at
least 2.5 megabits per second. I'm not exactly sure about the number, it's
around 60, 65%. More important is to look at the number of platforms that are
being offered. All of the economic evidence, the empirical research on the
question of determinants of broadband build-out show the importance of
competition and especially facilities-based, platform-based competition in
encouraging build-out and investment. When you look at -- when you look at the
breakdown you begin to see some really good things happening. It's still
dominated by cable and DSL. There is no question about that. But we begin to
see wireless as its own platform coming up, 11 million lines now as of June,
2006, it's got to be a lot more now, were mobile wireless. And we begin to see
fiber coming out, I think in the June, 2006 data there were only about 700,000
fiber lines. I think Verizon has about that many by itself now so that number has
got to be much bigger. Now, the other piece of evidence, the other one other
piece of evidence from the FCC data on the state of the market is the share of
zip codes with as least so many providers. We know the problem with the zip
code data, the problem being basically if one provider has one customer in a zip
code that zip code is counted as having a provider. It's hard to know exactly how
many people are served in the zip code. It's a big problem. People at the FCC
are aware of this problem bust it's still right now the best information we have. I
wouldn't use it to give a specific number, but it gives you some general trends
about availability, and you see that the share with zero providers has gone
almost to zero. The number that share zip codes with three or more keeps going
up and up. This is evidence of investment, even if, you know, you wouldn't take
this to say that 90% of the population has access, which one might. So in
general what we are seeing in this market is huge amounts of investments.
We've seen this, I mean nearly every speaker has talked about this. Verizon has
pledged $18 billion, I guess T-Mobile has pledged $2.7 billion, $5.7 billion by
Comcast, and I forget. There were lots of these numbers going, being thrown
out. So we see lots of investment in broadband, in broadband infrastructure in
the US. And that's what is keep to improving broadband service. Nothing can
happen without investment, and so when are you looking for market failure that's
one of the things you might look for. Now, in looking at what would be the
optimal sort of supply and price of broadband or quality or however you want to
describe it, we've been talking mostly about supply of broadband. And what
technologies are available, and what it takes to put them there. But there is also
demand, and people don't talk about demand very often. But demand obviously
is a critical part of broadband, not everybody wants blazing wicked fast Internet
because they are not willing to pay for it and there is no reason why they should
have to. Lots of things actually reduce demand for broadband. One of them is
dial-up connections. A lot of people still use dial-up. Now, when you hear lots of
people say that, they say oh, this is such a terrible thing, so many people are
using dial-up. To the extend that people us dial-up and they want broadband and
are willing to pay for it and can't get it that could represent a problem. But most
people who have dial-up say that they have no interest in broadband connections
according to the Pughe Internet American trust foundation in a recent survey they
did. 60% have no interest in broadband. Obviously that's going to change as
prices continue to come down and content available on line increases, so that
market is going to slowly disappear. But it's still there, it's pretty substantial. So
that's actually a good thing. That reduces demand for broadband because there
is another choice that people love broadband and want wicked blazing fast
Internet for everybody don't like but this is an option for some people who have
currently no interest in broadband. So that's to the extent that they could have
broadband and don't, that 60%, for example, that's fine. Now, another way,
because people are stupid, it's a market failure?
>>MALE SPEAKER
Let's give the panelist the courtesy of not interrupting.
>>MALE SPEAKER
(inaudible) freedom foundation has had a speaking slot.
>>MALE SPEAKER
I'm asking you to give the panelist the courtesy of not interrupting him.
>>MALE SPEAKER
I'd be happy to talk to you afterwards, if you would like. But I believe that
allowing consumers to express their own preferences and purchase what they
want is actually a good thing. Now, local franchising for Internet television also
means that the difficulties in getting franchises, also reduces demand, it reduces
-- it makes it more costly to supply the services because it's hard to get those
franchises but it reduces demand for those services, and that reduces it in a bad
way. One of the comparisons that people like to talk about is Japan and France,
for example these days as examples of very good broadband service. But one
thing that people don't often mention is that broadband providers were allowed to
provide television service over those lines right away. There is enormous
demand for television. People like to watch TV. The more content can you get
over those lines the more demand there will be for that service. By not allowing,
by making it difficult to provide television over those services, reduces demand.
And that also helps keep broadband penetration and investment down. Now,
there isn't an obvious market failure here but policies of course still matter a lot.
And the objective that we should be going for is of course competition. All of the
evidence, all of the empirical evidence shows the importance of competition in
broadband build-out. One of the things we should do is continue to reduce entry
barriers and one of the most promising ways is through wireless competitors and
the FCC should continue to release spectrum into the market. The AWF auction
was hugely successful in terms of both the existing providers getting more
spectrum and with new providers who hadn't yet been into -- been able to provide
voice service or 3G service getting more spectrum to be able to provide these.
There is an upcoming 700 megahertz auction, which the 700 megahertz band
has especially good propagation characteristics for broadband so we might
expect to see a lot of broadband coming out of that and we continue to move
spectrum into the market because we don't know what firms don't exist yet that
would want to provide service, we don't know what services they want to provide.
That's one way to continue to promote entry into this market much course you
want to remove demand barriers. That's where franchise reform gets to be very
very important. Well, I'm not advertising the break. But basically in these
questions when are you looking at a regulation the first thing you want to do is
see whether there appears to be a market failure F there is a market failure you
want to target your policy or regulation very very clearly at that problem and
make sure that you at least expect that the net benefits would exceed the costs.
And in this market so far given this huge amount of investment, the increasing
speeds reduce -- the price that is continue to come down, it's hard to see where
there is a market failure and the key going forward is to insure that there -- that
all of these firms face robust competition. That's it. Thank you.
>>JEFFREY SCHMIDT
Thank you, Scott. I think we have some written questions that we've asked you
to pass up to the front here. In the meantime while -- and I am going to ask that
the questions be written and we're not going to recognize anybody from the
audience, just as a courtesy to those who have taken the time to write down their
questions. Let me start while we're gathering those from the audience with just a
question, quick question for each of the panelists and Michael, just starting back
with you. With Net Neutrality regulation have any unique effects in your view on
the provision of wireless broadband service?
>>SPEAKER
We think they would have unique effects and they would be negative. The whole
nature of neutral service of a common carrier system is really inconsistent with
the way consumers are choosing their wireless broadband services today. For
example, as I mentioned and others as well, there are multiple facilities based
broadband networks. There are multiple MVNOs that offer a wide range of
specialized content, unique content and specialized devices and handsets that
are differentiated and allow them to focus on meeting the needs of very specific
segments of the market, instead of making everybody drive a Chevrolet we have
Cadillacs and Volkswagens to use in an old example. And we also have a much
wider range of devices, screen sizes, operating systems, keyboards, all that sort
of thing, which requires customization of content for applications to run. Many of
you will have downloaded Google maps and perhaps Google's G mail regardless
of what your wireless carrier is, it can be done by the applications developer to
make the user experience the same overall platform. It also can be done through
aggregators. We also have, and have on my BlackBerry pearl a choice of walled
garden and open Internet Web browsers, so there hasn't been any lack of
choices, any market failure, and with regulation always comes unintended
consequences.
>>JEFFREY SCHMIDT
Harold, let me turn one over to you. In your view how does media consolidation
affect the Net Neutrality issue?
>>MALE SPEAKER
Okay. See, now this is problematic because I'd love to respond to this one
because I should actually answer the question that was asked so I'll try to do
both.
>>JEFFREY SCHMIDT
Let's try to give time at the end because I think we'll have time to respond to any
of the responses.
>>MALE SPEAKER
I recognize when we have limited time we can't have the up fun debate we would
like to have if we were doing this in a bar. The media consol -- consolidation
issue goes into one of the factors that I tried to highlight earlier, which is very
much about you can't just segment out a narrow bit of the market, and you have
to look at all of the interrelated factors that are impacting the negotiations among
these companies, what's going on among them, not just in terms of where the
subsidies are because I'll tell you, cable is a great example. They are able to
raise their rates every year despite having the most profitable, you know, every
year their per subscriber numbers go up and they can still raise their rates. I may
have skipped a few days of econ101 but that doesn't sound like they live in a
competitive video market and that level of consolidation helps them subsidize
other things like their broadband companies. That's one factor that needs to be
considered. Two other things that are about the media consolidation issue are
important here. One is people are looking to broadband. Again, this comes from
a touchy feely first amendment civic engagement guy not from the econmarket
failure world. But a lot of people are excited and interested about broadband
because of its potential to allow real communication with each other, and if you
look at the study that the Pughe project on the Internet American life did on the
2006 election you will see that particularly where people have broadband in their
homes, that really affects the way they behave, and that is not something that is
dealt with as a means of, you know, provider incentives and it is something that
is severely impacted if we allow the carriers to pier and replicate the mainstream
media environment which so drives up the cost of political advertising and direct
contact with one another in the broadband environment that is trying to -- that is
being driven in no small part because people see it as an anteed to that sort
consolidation. Finally there is one other point about media consolidation here
which is significant to make, which is that the level of huge cross dealings that
becomes necessary in order to attract the attention of the larger carriers. You
know, absolutely right. There are these differentiated deals being made all the
time. One per customer, which I'm glad they think is enough for me to have. So
Cingular makes a deal with MySpace and Rupert Murdoch because Rupert
Murdoch is a big fish and can get their attention and can cut a deal for MySpace.
I happen to use a social networking site called live journal which is a much
smaller open source shop. They are never going to be able to get the same kind
of deal. And that is in no small part because when Cingular is negotiating with
Rupert Murdoch it's not just because they are negotiating for MySpace. They are
also talking about access to video content and all these other things. So to just
ignore all these external factors and pretend that we can segment this without
any regard to the rest of the media environment is going to produce very bad
policy results and ignore evidence of market failures.
>>JEFFREY SCHMIDT
Let me try to switch over to some of the questions that we received from our
audience to make sure we cover as many of those as possible. And some of
these are not directed at a particular person, so I'll try to spread them out a little
bit. So Christopher, maybe if you could take a shot at this one. Why can't
consumers get cheap super high speed broadband from Verizon, EarthLink or
other companies like Japanese consumers can? What is the problem, what is
taking so long to deliver super fast access?
>>MALE SPEAKER
Well, think that one of the important policy deals struck in the past at the FCC is
the new wires, new rules, old wires, old rules concept. Some would argue that
the new wires new rules allowed greater incentives for investment in fiber. That's
all well and good. Might have happened anyway and this is just the regulatory
frosting. But seems to me that's sort of a decision that's water over the dam.
The crucial thing that I try to focus on is holding to the old wires, old rules. In
essence, EarthLink, as other companies, are in the process of making their own
investments in technologies that you put into the central office, that still require
access, unbundled loops from the central office back to the home. And with this
new electronics we can in fact using old wires bring wicked fast broadband to
consumers. We're rolling this out now in 11 cities around the country. We
believe that with this new electronics DSL 2 plus, that we can offer a DSL service
that's up to 8 megabits of a significant fast product. This is the kind of
combination of regulatory scheme and investment plans that have worked in
Europe and Japan. And I think, look, this entire panel has talked about, you
know, more competition is better. We've differed about how much competition is
there. For the entire panel and many panels yesterday discussed more
competition is better. It seems to me the last thing we should do is we try to
advance this debate forward is go back on the old rules, old wires, old rules deal,
try to unscramble that egg, and in effect limit the ability of competitors to put
more wicked fast broadband options out there for consumers.
>>JEFFREY SCHMIDT
John, you did receive a couple of specific questions. Let me throw one out at
you. What will Net Neutrality rules stop Verizon from doing? In other words, how
will those rules limit Verizon's incentive to invest?
>>MALE SPEAKER
There are so many flavors of proposed network neutrality rules that this would be
a long answer to go through even a few of them. But let me give you an
example. Suppose Verizon and Johns Hopkins university wanted to roll out a
medical product that required some network upgrades. Runs on the basic FIOS,
fiber platform, connects people who have FIOS to the university and some of the
medical facilities, and allows new medical technologies to proceed without
bringing the people back and forth to the hospital, making them wait in the
waiting room for long periods. To make that work Johns Hopkins might be willing
and interested in helping to fund the technology, and Verizon for its part would be
very eager to engage in a cooperative venture. And we would strike a one off
deal to get this started and we would install additional infrastructure and Johns
Hopkins would install stuff on its part and it might pay for part of this or maybe
there would be a joint grant to help pay for it. Some of the flavors of Net
Neutrality proposals would say you can't do that. Only consumers can pay for
this. Not until you've done it for all consumers may any consumer have the
benefit of an improved service. So again, I have trouble -- you sort of have to
start with a view of what is Net Neutrality require and then what might it inhibit?
It's certainly true that when telephone companies were restrained in the pre 1996
act period, you saw a lot less investment, a lot less development of the fast
infrastructure. Cable companies, when they were afraid of whatever they
dedicated to broadband access, they were afraid that it was going to be subject
to similar rules. There had been a decision in the ninth circuit in the Portland
case that said maybe one cable dedicates part of its capacity to broadband that it
would be seized with common carrier-like obligations. That seemed to deter
cable investment. You lift the restrictions and you see people investing in this
space. So if you want faster service and more places, I think we all do, then, you
know, Net Neutrality is just a long way to go. It's the wrong way to go.
>>JEFFREY SCHMIDT
Scott, one from the audience for you. Where do you stand on designating white
spaces and TV band as unlicensed?
>>MALE SPEAKER
I haven't thought a lot about the white spaces shy in particular. In general I
believe that licensed uses are better. Companies are -- seem to be much more
willing to invest. When they purchase the license and they know they can use
that spectrum, now, that actually brings -- I mean that's an interesting question. I
don't want to say anything about white space in particular. But in general I think
the evidence shows the huge value of licensed spectrum. I would like to I think,
take this chance to talk about one of the uses of WiFi which is unlicensed
spectrum on the muni WiFi question, just to take a different controversial one.
And it seems to have become different than what people thought it would be a
couple years ago. It's turned into a business model as we see now, EarthLink,
for example, and Google trying to do this. And one thing that I wonder with this is
if we're going to do this, why would you grant a license to -- why would you allow
only one company to do this? Why would you allow only one company to have
access to the telephone poles or whatever it is that you need? I mean
competition is good, so I don't know why you would want to create, allow only
one firm to operate in this space now.
>>SPEAKER
If I could have a comment on that, EarthLink is in the process going to cities
around the country, and partnering with them to build WiFi clouds that cover
entire municipalities. We then offer a variety of services within that, some free
tiers as well as some paid tiers. I will node that in many of these cities it is in fact
not an exclusive deal. We have an arrangement that if we build out the entire
city, you know, we get to do it but this does not stop another provider from
coming in, and also building out. I'll note that for one. The other important thing
that EarthLink has committed to do as we talk the talk and walk the walk is that
we have committed to an open access wholesale market. We are offering,
committed to offering to as many local ISPs, to AOL, to anyone else who wants
to sell capacity on our WiFi necks networks, the ability to get the same
nondiscriminatory, very reasonable wholesale pricing so that they can make an
offering, they can go out to consumers, use their creativity to bring customers to
our network. So I think that sort of is the penultimate form of Net Neutrality is to
have a robust wholesale market that you make your network available to, and
that's what EarthLink is executing today.
>>JEFFREY SCHMIDT
Harold, let me ask you a specific one that came from the audience but then at the
end of that you indicated you indicated an interest of responding to comments
one or two panelists have made. Let me give you the opportunity to do that as
you please. The question from the audience is many panelists have argued two-
wire line prod band providers plus four wireless providers offer inadequate choice
and should be regulated under Net Neutrality but there is no city that has more
than two daily newspapers and many have fewer. Why shouldn't newspapers be
regulated.
>>SPEAKER
Let me take this in a couple of ways. This is what my slide show is about. Is that
I wish it were this easy, you know, I wish we could just compare different things
together and say newspapers are like the Internet and we could ignore all these
other factors. But it's not. You know, and all of the side shows that we're having
about newspapers and search engines and this and this and that are all, you
know, frankly sideshows. They don't get to the questions that you really got to
dig into and ask about. Like a lot of the people yesterday frankly, I am quite
happy to say I am not terribly happy with all of the information that I've got to
make a occasion decision. It's just that in balancing out all of the factors that
concern me, including frankly something we haven't talked about much which is
the danger of regulating too late, that once there is billions of dollars in
investment in explicitly into this technology to differentiate as we saw when we
tried to reregulate cable in 1992 to cure the market failure. There was not a lot
that we could really do other than tweak the edges. So, you know, you can't just
say oh, well, six, that sounds like a good number. Let's see how this is going to
work out. You can't ignore the fact that wireless is different from what you got
residentially in your home. It's a different speed. It works in different ways T
reason why a lot of people get both is because they like the mobility of wireless
and are willing to live with the lack of certain access and certain functionalities in
this for the mobility stuff that they like, but they also really want the existing
openness in the wire line world so they also subscribe at home, especially if they
care about things like going upstream, not just downstream which is another one
of these things that we haven't talked about. I'm about to switch, just to take my
own personal example that will illustrate switching cost and a few things, my wife
so does not want to have to change her email address that we have stuck with
really bad DSL connection, but we'll do it when FIOS is deployed in our
neighborhood because speed is really important and explicitly upstream speed,
because one of our big uses right now for video is not to do pier to pier
downloading of movies but is to send my mother-in-law with MS and my mother
with Parkinson's video clips of our son. And the fact that it takes forever to
upload those means that I'm very reluctant to make videos that are more than a
minute or two in order to send them because it takes forever. Now, I'm glad that
you think that you are offering me enough on here that I should consider that to
be equivalent an I'm glad that you all think that offering asymmetric products is
good enough for me to want to do that but certainly I'm sitting here and I can't
vote with my feet on the right product because there is no right product out there.
So while I'm sure that doesn't look like a market failure because I'm actually
buying DSL, you know, I'm kind of stuck. I'd like other things. I'm not getting
them, and nobody else can provide them because of all of these other market
factors and all of these other things that figure out, including the need to license
federal spectrum, you know, access to these lines, all of these other factors. So
to pretend that this is the same thing as brands of soup or cereal or even, like,
unrelated newspaper issues where frankly we care a great deal about who owns
what in the newspaper world and how that impacts our democracy, is at best to
miss the point and at worst to come up with incredibly bad policies based on
deliberate and will full -- blindness.
>>SPEAKER
Can I ask you a follow-up question? All of these things of course take money
and lots of investment. And even you said investment incentives matter.
>>MALE SPEAKER
We might differ on that.
>>MALE SPEAKER
All the investment that's going on now, where is all the extra money going to
come from? Who is going to spend it? Who would you like to spend more?
Who is not investing fairly?
>>MALE SPEAKER
I would love to answer that. Thank you very much. That is a great question. So
where is all the extra money going to come from to do all of this stuff? Because
we all know we live in a world where all this takes money. Right? There are a
couple of different answers to this question. One is that it turns out there is a lot
that can be done to provide really good broadband, especially at the residential
level, that doesn't take a lot of money. Some of it has to do with unlicensed
spectrum of which I'm a huge fan, and what is going on under the surface at the
community wireless level, not just municipal, but where you have individuals who
are coming in and unwiring neighborhoods on a volunteer basis where you have
these projects, nonprofits coming in and doing that, where people are coming in
and putting in 45 megabit per second symmetric dirt cheap, or free. Now, there
are costs to that on another level because there are certain -- I'm not saying
that's the ultimate answer because there are problems in that deployment model,
too. I'm just saying that if you only focus on producer models and you go back to
this notion of oh, well, we've got to have big companies to invest in this, because
that's the only way that this stuff gets done, I say hogwash because I see it
happening at other levels and maybe it will not ramp up ultimately but I'd sure like
to give it a chance to do that. The other option, of course, is always in other
forms of incentives. This is universal service which nobody wants to get away
from, but the plain fact is one of the reasons why we have a USF and one of the
things we've always hoped to do with that is to say okay, fine. We recognize that
regulation is going to make -- is going to reduce producer incentive at some level.
So as a society we'll make up for it because we care about the people in fly over
country, the Native Americans, the people in those neighborhoods that you don't
want to serve, you know. As a country we care about that. That has, and the
decision to do that has impacts or not impacts. I want to flip the question on its
head. It's basic econ101. You can tell me if I was nodding off that day. It seems
to me it's basic econ101 that producers incentives work where the ascentive IT
actually aligned with the revenue stream, that it is only worth it to invest in
delivery of more speed, where that is the direct payoff. When we're talking about
things like differentiation, you have in fact created a counter incentive. There is
an incentive to maintain scarcity because I will sell that scarcity. We see this all
the time. This is how political advertising works on TV. Advertising time is
scarce, so I can charge people who desperately want to communicate through
that channel and an awful lot of money. As elections and other things come
around I raise the price because I know that those guys have to buy the
advertising in order to reach people. Now, that happens a collateral effect. That
really means that we end up with a particular sort of electoral system that puts a
great emphasis on the ability to raise money and all the collateral effects that that
entails. That's not in economic terms a market failure. I do argue that it is a
societal failure and that as a broadband issue particularly where are looking at
this as an antidote to this kind of stuff we need to be enormously concerned and
prepared to make a tradeoff that maybe Verizon will be less likely to invest in
certain areas in exchange to maintain a vibrant and healthy democracy. But
that's just me.
>>JEFFREY SCHMIDT
Let me ask a couple questions, both of which came from the audience and then
ask any of the panelists who would like to jump in and give a shot at a response
to do so. The first question is is the net different from IPTV? And the second
one is is broadband a single product market or are there multiple product
markets?
>>SPEAKER
Anybody like to take a shot at that? Any panel?
>>SPEAKER
I just had a long one.
>>MALE SPEAKER
I can answer that.
>>MALE SPEAKER
Let me start with the second one. I'm not sure if the broadband market is a
single market or a cluster of markets. I'm pretty sure, though, that if you tried to
define it today, a year from now it would look very different. When the FCC
defined advance tuck communications capability, their jargon for broadband, they
said 200 kilobytes per second was the dividing line. If you asked today people
would say 200 kilobytes per second is kind of slow. You want something more
like 10 megabits per second. If that's what it is today then tomorrow it's going to
be faster. The speeds are going to increase and the capabilities are going to
change. There was a regime put in place, first by the FCC and then by a
Stanford law professor in 1982, bill Baxter, different Stanford law professor that
you might have thought of at first with the help of Harold green, that tried to
codify what was basic telephone service as of circa 1980, 82. They Drew a line
and said that these kinds of connections would be what you call telephone
service, and the bell system, this is back when the bell system was broken up.
Things like what if you are not there, you can't answer the phone, can the phone
system take a message for you? Judge Green and the FCC said no, no, no. If
you keep the phone company out of taking a message, 1,000 flowers will bloom,
community networks, all sorts of wonderful things will take messages instead.
You'll have more competition, it will be a better wormed. The better world was
$40 a month, only doctors could afford those sorts of answering services. When
finally in 1986 a few years later the restriction on taking a message when you
didn't answer the phone was, when that restriction was lifted it was available then
cheap for a couple bucks a month and everybody bought it. It was a great thing.
It held the cost of telephone service down because it was another thing
telephone companies could sell and it was a lot cheaper and people were able to
soak it up. In terms of features or speed or however you denote this market, it's
going to change constantly. We've had enough experience now in talk in
telecommunications to know better than to try to lock in place today's technology.
Instead you should be encouraging the next generation of technology and you do
that by letting lots of people try lots of things without restrictions.
>>JEFFREY SCHMIDT
Anyone else want to give that a shot.
>>SPEAKER
I'll just amplify that last set. It's sort of a false choice. We're seeing what this
panel has been discussing, a lot of different approaches, a lot of public, public
private, private enterprises going out and deploying broadband, in all flavors,
speeds, capabilities, and those that succeed are going to succeed precisely
because they come closest to meeting consumers' needs for the services. If it's
the co-op-based community networks, they are being built now, there is spectrum
available because it's unlicensed. It's available throughout the country. If it's
cable, if it's Telco, if it's wireless, let's say the most successful technology and
enterprise succeed. That's what we should have.
>>SPEAKER
I just want to say something also. I think that's an excellent question. And
maybe we should start it off with that. What exactly is this? What exactly is this
market and how do you define it? This is something that the FCC and the DOJ
and FTC will be debating not among themselves but for years. There are lots of
different parts of the market that might matter for different types of products,
depending on what it is you are talking about. I don't think it has any particular
easy answer. You might have somebody in the future who wants to offer one
service overbroad band, and then you know, are they called part of the
broadband market.
>>SPEAKER
I don't know. I just want to say it's a good question and I think the diversity of
opinions on what exactly is this market and what's available to consumers is a
good thing right now. People should have choices.
>>MALE SPEAKER
Let me tackle the first part of the question, because it will lead into the rest of
that. On the question of is ITP different than the Internet, you know, who knows.
In no small part because these terms have different meanings and again in no
small part because of federal regulation. If you -- and you know, it's not only Net
Neutrality advocates or whoever that are accused of wanting things two ways or
whatever. The fact is telcos would understandably like ITP to be an unregulated
information service including not having to get local franchise. They have
arguments there. And they would like it to be a cable service for getting access
to programming. God knows I understand that. They are not in the business of
being consistent or protecting, you know, fundamental principles of law or
economics or anything. They are out there trying to make money and they have
good arguments with both which again boils it down to me that some of these
questions start with the wrong premise. And one of the things as we segue into
the second is that I hope people will agree with this, yes. The market definition
question is critical. It is murky. It is unclear the nature of the markets or the
related markets, and the question is what do we do now when we have to make
a decision, not merely in the absence of perfect data, but in the absence of
critical data. And here is where you get to your evaluations. Those who think
regulation is inherently a bad thing and should only be done where it is
necessary, will tell you that the best thing to do is to do no harm and not regulate.
Those of us who perceive that there are things about the current system that are
extremely at risk in the absence of regulation given the current environment and
which cannot be recovered once they are gone and therefore fear regulation
coming in too late argue the opposite. It's very easy to go from a
nondiscriminatory system to a discriminatory system. If it turns out five years
from now that's the wrong choice, you'll lift the regulation and you'll let people go
play. By contrast, once the discrimination starts and gets into the system, once
that becomes the acknowledged reality, once there are billions of dollars in
investment in particular structures, history tells us that it is impossible to roll it
back. My argument is that I don't, it's funny. I don't think a lot of us are
disagreeing on some of the fundamentals. I think a lot of us are disagreeing on
both the lens to view this and on what we should do with our uncertainty.
>>JEFFREY SCHMIDT
Anybody else want to jump in on that?
>>SPEAKER
I'll add one more point. In talking about these markets, one thing people haven't
mentioned yet is the multi sided nature of this market. That there is cop tent
providers, and there is infrastructure providers and there is also a backbone and
so on, and each side of the market affects the other and each side needs the
other. And the thing that we know about two sided markets is that pricing isn't
always the same on both sides. It's not optimal how these things should be
priced. Consider the classic example. Credit cards where you have to have
consumers and you have to have merchants but you are not going to charge
them all the same things. You've got to induce one to participate in order to get
the other. And that complicates any analysis as well, because it's not, you know,
the market is even as complicated as it is to define as we've been saying, it's
even more complicated because whatever you do on one side of the market is
going to affect the other.
>>SPEAKER
I absolutely agree. And here is again why I think we should favor network
neutrality rather than disfavor it, because to take to sided market example and
the example I had earlier from the mobile phone singular striking a deal with
MySpace, in a universe where each carrier will strike one deal, or maybe two
deals or offer one of its own service, that's possibly 5, possibly 10 providers on
the two sided market side. It's not a market failure. There was a negotiation,
certain guys won in that market, certain guys lost in that market. On the other
hand, right now we have thousands of these choices. Thousands of possible
backlog social networking sites, all of these things made possible by the fact that
they do not have to go through those negotiations because of the environment
that exists now. And I see the danger of losing that is something extremely
important and is not covered by models of economic efficiency or definitions of
market failure.
>>SPEAKER
Let me just follow up quickly, because actually I believe the two sided market
issue points to a reason to not impose network neutrality. People, I didn't -- I
mean this is not the point of this panel but network neutrality proponents assume
that the current setup we have right now is optimal for innovation. That it's
optimal for creating innovation on the content side and innovation on the
infrastructure side doesn't matter or they'll think of something for their incentives
for investment. We don't know what. We don't know what the optimal side is.
We don't know. Anybody who says they know the optimal pricing structure is
wrong because we don't know it. There may be other systems that promote
other types of innovation. We don't know what types of products haven't been --
haven't emerged because companies can't set up, you know, particular links to
particular places. You know, what we have is one model, and there are many
many others, and to say that the one we have is optimal is based on, you know,
is not based on any particular analysis.
>>MALE SPEAKER
First of all, there are analyses. One could GIS agree with it. One, I personally
think that the question of optimal means to maximize which sorts of consumer
welfare and which sorts of innovation, and absolutely true you will get certain
types of innovation will appear in a market that allows the network provider to do
these kind of negotiations that would not appear otherwise. And one of the
points that John made and layer made yesterday that was critical, it's not about
pretending that you could capture all the benefits under one regime or all -- or all
the harms under another regime. It's a question of about balancing, it's a
question about where are we maximizing, you know, the values that we care
about? And that's why I keep coming back to values, not just markets. Because
I can say that something does introduce a certain amount of economic
inefficiency and is still extraordinarily valuable for the contribution that it gives to
us as a society, as a democracy, as a people who all come together and work
together and have access to each other in a very real and fundamental way; that
introduces economic inefficiency. And I would argue that that is something we
should be willing to consider. And if you object --
>>SPEAKER
If I could jump in for just a --
>>SPEAKER
One last sentence.
>>SPEAKER
You know, my problem is not that we might ultimately reject that as saying I don't
think the benefits are necessarily worth it but the problem is that the framework
that we are putting this in right now prevents that critical conversation.
>>MALE SPEAKER
I just want to quickly make clear that these specialized arrangements that say
MySpace may have with Helio or with singular, in no way prevents their users,
users from getting to any website in any social networking site. If they wish I'll be
happy to wager our lunch, Harold. I'll buy you lunch if you can't get to your
preferred social networking site using my device. You can. There is no harm
when you can go anywhere you want using your wireless device.
>>MALE SPEAKER
I want to clarify something that as I listen to this. It seems like we have two very
different problems and it would be helpful to distinguish the two. One is the
question of do content and application providers have trouble reaching
consumers through broadband now or broadband to be built? I don't hear any of
that. I think it's just an irrefutable fact that there is no broadband provider that
has got power, because they don't could the enough compared to the scope of
what the content providers are trying to reach. But, on the other hand, the felled
family needs faster access. The Feld family wants fast Internet access, Verizon
wants to supply that. EarthLink wants to supply it, a bunch of other people want
to supply it. If you impose regulations design to solve a problem upstream that
doesn't exhibit and we're not talking about, you're going to do not something
good for the felled family, you are going to deter people from building to the
Felds. I think you should let us loose.
>>SPEAKER
One of the problems with that, though, John, is that Verizon is in fact seeking to
get out of the unbundling rules which allow another competitor to add its own
electronics, it's over new electronics to bring more competition in the higher
speed space using the old infrastructure. So I hope you go back and take a hard
look at your forbearance petition, recognize your words in favor of competition.
You spoke of the trajectory of competition. This is a way that we can move
forward.
>>MALE SPEAKER
See, Chris, you are confusing things. I'm talking about building multiple networks
so the Felds have choices. You are talking about we all want to share Verizon's
networks so the Felds get one network with different name plates on I you've got
a separate network you are rolling out through the cities using unlicensed
spectrum. That's a good second network. I encourage you to work on that.
>>MALE SPEAKER
If you think about differentiation of the marketplace, that there are WiFi networks
are able to did about a Meg symmetrical up and down. It is not just simply
rebranding or reselling your Verizon networks. What is access doing is taking
the infrastructure that was built under a monopoly structure, old wires, old rules,
the old copper loop built under protective price, guaranteed return on investment,
that old copper loop from the home to the central office and then we got in new
electronics, new DSL technology, it's not yours, you've restricted DSL technology
to go no faster than 3.0, we want to pull out the latest, 8.0, take it to the central
office back to the cloud. That is not simply reselling any service that Verizon is
putting on the marketplace. That is simply taking advantage of the adage that
you all came up with of old wires, old rules.
>>MALE SPEAKER
I'd like to say one more thing to respond to what Harold said. The question is
great. Harold said he wanted to maximize something different. This is a key
point. One thing you hear people say all the time, not Harold, one thing you hear
people say all the time they want to maximize X and Y. You can't. If those two
are related, you can maximize one thing subject to certain constraints and that
will reduce other things. What Harold said he wants to maximize something else
and recognizes that there may be a cost and the cost is inefficiency. I think I'm
basically stating that right. So what I would like to know exactly is, I mean this is
the place to answer this, but what exactly is it that you want to maximize and
what does that cost? When you look at the presentation that he gave, what he
wants is blazing fast Internet for everybody and yet he wants to maximize
something else so it sounds to me he wants to maximize multiple things and you
cannot do that.
>>JEFFREY SCHMIDT
Can you respond in 30 seconds? We need to wrap this up.
>>MALE SPEAKER
It's tough to respond to that in 30 seconds and I won't try. I'll just say that for this
panel my point is my concern is about how the debate has progressed and I
would like to see the debate pushed beyond maximizing producer efficiencies or
two-sided markets and that it must encompass other things such as diversity of
voices which is in section 257 is one of our national policies and has been the
bedrock of communications policy in this country for 70 years.
>>JEFFREY SCHMIDT
Okay. With that I think that's probably the last word we can have time for from
the panelists. I just think we can all agree that having the kind of robust
discussion from experts in the field as we've heard today is extraordinarily
valuable for all of us. Thanks very much.
- See FTC Workshop Transcript for index
