From mech Mon Mar 14 19:33:52 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA28939 for mech; Mon, 14 Mar 1994 19:33:52 -0500 Date: Mon, 14 Mar 1994 19:33:52 -0500 From: Stanton McCandlish Message-Id: <199403150033.TAA28939@eff.org> To: mech Subject: Edward D. Horowitz - Viacom Broadcasting Status: RO PREPARED REMARKS BY EDWARD D. HOROWITZ, CEO, VIACOM BROADCASTING, BEFORE THE HOUSE ENERGY AND COMMERCE, TELECOMMUNICATIONS AND FINANCE SUBCOMMITTEE TOPIC: INTERACTIVE VIDEO-SYSTEMS 2322 RAYBURN HOUSE OFFICE BUILDING TUESDAY, FEBRUARY 01, 1994 MR. HOROWITZ: Viacom's view of the appropriate role for content providers in this emerging new world can be summarized as follows: 1. We believe open access for all programmers is essential. The single packager, exemplified in the broadcasting and cable television models of today, no longer needs to control access to product. In addition, the level of vertical integration between content providers and distributors must be carefully controlled, so that a firm with powerful interests in cable systems, transport technology and programming does not have the ability or incentive to act as a gatekeeper to discriminate against independent programmers in favor of its own programming. 2. WE believe the telecommunications superhighway should be content and identity neutral. What that means is that, as on an actual highway, a toll is paid to gain access to the highway and that toll is not determined by what a particular vehicle is carrying or the owner of that vehicle. Like the telephone company today, people should pay based on how much they use the superhighway, not on what they say or do on it or who they are. 3. We believe there is no legitimate gatekeeper function to be served other than for security purposes. All other gatekeeper functions are simply bottlenecks, which will serve to limit the flow of information to the consumer and increase its retail cost. Today's local telephone service might offer a good model in terms of security. Each customer has his or her own phone number or access code, but that code does not restrict the different regional or long distance telephone services through which one can gain access. Multiple keys or "smart cards" may offer similar security and open access to the subscriber of tomorrow's electronic superhighway. 4. A centralized authorization system will not promote the goals of open access, interoperability or unlimited capacity, unless it is structured as an open, free-trade zone. Each programmer should be charged the same amount for authorization access and any programmer willing to pay the fee should be included. The government should ensure that whatever digital compression protocol is established not be proprietary in nature. (END OF SUMMARY) (COMPLETE REMARKS) MR. HOROWITZ: Good morning Mr. Chairman and members of the Subcommittee. My name is Ed Horowitz and I am Senior Vice President of Viacom International Inc. Viacom international Inc is a diversified entertainment and communications company, which employs approximately 5,000 people worldwide. At the core of our company is Viacom Networks, which consists of MTV Networks and Showtime Networks, Inc. MTV Networks includes three advertiser-supported, basic cable television networks: MTV: Music Television; VH-1/Video Hits One and Nickelodeon/Nick at Nite. Showtime Networks Inc. operates three premium television networks: Showtime, The Movie Channel and FLIX. We are also joint owners of Comedy Central, Lifetime and All News Channel; three additional advertiser-supported, basic cable networks. Our cable division owns and operates television systems that serve approximately 1.1 million customers. Our broadcast division, of which I also serve as Chairman and Chief Executive Officer, owns five television and 14 radio stations. Through our entertainment division, we produce programs for the broadcast networks and for first-run syndication. Our new media group is working to develop, produce, distribute and market interactive programming for the stand-alone multimedia and interactive marketplace, which is fast emerging. Viacom has recently entered into a definitive merger agreement with Blockbuster Entertainment Corporation under which Blockbuster _ a global leader in the entertainment industry and the world's largest home video retailer, as well as one of the world's largest music retailers _ will merge into Viacom. Completion of this merger is pending shareholder approval and customary regulatory review. As has been widely reported in the news, Viacom is also seeking to merge with Paramount Communications Inc., a prominent leader in the global entertainment and publishing marketplace. I am particularly pleased to have this opportunity today to share our perspective on the coming telecommunications information infrastructure and the particular significance we attach to the principle of open access. I applaud you, Mr. Chairman, as well as Mr. Fields _ the Ranking Minority Member on the Subcommittee _ for you leadership in closely examining the important public policy concerns relating to this approaching telecommunications revolution, especially in light of the dizzying pace of technological and business developments. At this critical stage of development, it is imperative that we create a system without artificial barriers at any point along the "electronic superhighway." Otherwise, we run the risk of restricting consumer choice for decades to come, effectively undermining the very promise of the National Information Infrastructure (NII). It is vital that we neither stall the NII's development, not curtail its full promise by taking roads today that may lead to dead-ends tomorrow. I think it is imperative that in examining particular aspects of the NII _ such as the set-top box _ we affirm the principle that any proprietary system must not have the effect of preventing or restricting the ability of programmers to gain access. The set-top box must be able to accommodate all sources of information and various transport formats, if it is to be truly compatible with the other elements of the telecommunications superhighway. This linkage is vital to a National Information Infrastructure built with open architecture. Any company that suggests it is building an open system, but is placing a proprietary transport layer on it data signal is not, in fact, creating an electronic superhighway with open access. Not all systems, presently being discussed as examples of open architecture, may prove to be truly open in the final analysis. Viacom intends to be an active participant in the development of an industry position on these issues. We have advocated the wide scale adoption by the cable industry of an open standard-based, video signal compression system. This protocol, known as main profile, main level, full resolution MPEG2, was developed by the Motion Picture Experts Group. For the last 50 years, television has offered Americans an ever increasing variety of entertainment and informational programming. The advent of cable television and satellite-delivered networks has been singularly responsible for the relative explosion in programming choice. There are now 92 cable TV networks in operation. The traditional three over-the-air broadcast TV networks (ABC, CBS, NBC) have since expanded to five (PBS and Fox) and will soon increase to seven (Paramount/Chris Craft; Time Warner/Tribune). Still, the model for delivery of these program options has not changed much. The local distributor _ whether it be the cable system or the local broadcast station _ has functioned as the gatekeeper. What reaches the consumer in the end is determined by these system and station managers. And, while cable has increased the available "shelf space" tremendously _ first to 12 channels, then 36, now 72, and in certain cases even 150 channels _ the gatekeeper function has not fundamentally changed. What has changed is that technology is now giving us the ability to hand over the keys, once held by the gatekeeper, to the individual consumer. Digital compression makes the transmission of hundreds of channels technologically and economically feasible on the existing delivery system. Digital compression is at the heart of what makes the electronic superhighway possible. Video-on-demand, multiplexing and interactive multimedia applications are all possible through the convergence of the television set and personal computer through digitization. The development of digital compression technology has been characterized by a struggle between advocates of an open, universal standard for the compressed signal, where equipment developed by various manufacturers would be compatible, on the one hand, and those who favor a technology based on a closed, proprietary system, on the other. How this struggle has played out in the non-broadcast, TVRO marketplace may be instructive of identifying potential problems ahead in the constructif thNational Information Infrastructure. Virtually all programming services that transmit scrambled programming signals by satellite to this market use General Instrument's proprietary, closed "VideoCipher" encryption/decryption system. Accordingly, VideoCipher has become the de facto industry standard. In any business, the first manufacturer to get its product into customer's homes has an advantage since late-comers will have to adapt to what's already established, and possibly pay a licensing fee to use the leading technology. If the first set-top boxes, which can process digital compression, use a proprietary, closed compression technology, such as, but not limited to, GI's DigiCipher II, or fail to come into full compliance with agreed upon industry standards, such as MPEG2, they have the ability to create a bottleneck along the telecommunications superhighway. Lawmakers should be concerned about any proprietary system which has or may have the effect of preventing or restricting the ability of programmers to gain access. There are two technological issues which I believe underlie a thorough discussion of the National Information Infrastructure. One is the concept of capacity, which digital compression can make into an almost unlimited resource. But because it is technically possible does not guarantee it will happen. If we are not careful to ensure that no artificial barriers can be erected on this new electronic superhighway, we may simply be passing today's gatekeeper's keys on to a new gatekeeper. Unlimited capacity will prove a hollow attribute, if the systems being created cannot speak to one another. Accordingly, Interoperability is the second technological issue before us. History is littered with technological advances that delivered less than they promised because of artificial limits placed on them due to proprietary technology. The inventors, creators and developers of new hardware must be rewarded for their efforts through fair and reasonable licensing fees or other appropriate mechanisms. But their reward should not make them an essential facility," whereby these manufacturers could deny others access through pricing or exclusionary practices. Underlying the technological concerns bout Capacity, and Interoperability, there are two philosophical principles which are key to appreciating the full promise of the National Information Infrastructure: 1. Open Access and 2. Universal Service. Open access, whereby information and program providers can get on the electronic superhighway unimpedis amental. Non- discriminatory access for providers and consumers alike could be blocked by the abuse of proprietary technology and the undue vertical integration of firms capable of acting as gatekeepers. This would have a devastating effect on providers of information and entertainment and also limit consumer choice. Neither result should be acceptable. It is vital that policy makers examine claims of open access closely to ensure they are truly open for all. Open access does not suggest programmers be provided a free ride. Network operators must be guaranteed a profit, or the pipeline _ so central to the national Information Infrastructure _ will never get built. Viacom, as a program provider, recognizes that owners of the telecommunication network must be compensated fairly for the operation and maintenance of this vital pipeline. A reasonable rate of return should be assured. Secondly, the concept of universal service is important if consumer acceptance of this new technology is to become widespread. The more "on" and "off" ramps at the consumer level, the greater number of software or programming options will be developed. I do not mean to suggest, however, that each and every citizen be guaranteed complete, unrestricted, unlimited access to the National Information Infrastructure. To do so would be prohibitively expensive. Clearly, there may be some basic level of service that all citizens should have, much as we've come to see the telephone as a "Lifeline" to essential services, such as police, fire and other key local service agencies. Indeed in this new age of competition, policy makers will need to re-examine concepts like cross-subsidies which have historically permitted utilities, like the regional telephone companies, to serve unprofitable customers. We will need to find new ways to bring at least minimum service to all customers. We may conclude that access to the National Information Infrastructure _ if not guaranteed at the individual household level _ should at least be assured at the convenient community centers, which are easily accessible and open to the public. I applaud Vice President Gore's challenge to the industry to provide links from the information superhighway to classrooms, libraries, hospitals and clinics nationwide. All public policy should take into account a total picture of the National Information infrastructure. Each component should be evaluated in terms of the other components and in light of the principles of open access, interoperability and unlimited capacity, which I previously discussed. The NII's major components include the source or origination point of information, data and entertainment, as well as the pipe or transportation system for delivering it. Each component has the potential for either expanding or restricting consumer choice. Depending on its configuration, each element can prove to be either a pass key to the electronic superhighway or an intractable bottleneck. The origination point or entrance to the electronic superhighway must be structured so as to permit as many program providers as possible. Entrance fees should be based on an equal levy determined by volume or time, but not based on content valuations. Otherwise, we are simply re-establishing the role of the gatekeeper. Additionally, the creators of software products need to understand the rules of the road for this new highway, so their products can get on at any point in the nationwide network and flow smoothly to the consumer located at various points along the network. These rules of the road should help us control traffic and congestion along the network and permit us to be able to take advantage of new technical advances still to be discovered. Lawmakers should also be careful to prevent the owners of the pipeline from requiring consumers to buy-through various tiers of service in order to get particular programming. The buy-through model, traditionally used by cable operators, should not be re-created on the telecommunications superhighway of tomorrow or we risk limiting the promise of greatly expanded consumer choice. If the new cornucopia of information, data and entertainment is to move smoothly along the electronic superhighway, the pipe or network needs to be compatible from end to end no matter what the ownership configuration. Creators of software need to know the appropriate formats and standards, so their products are compatible with the "road." What this means is whether the pipeline is twisted-pairs of copper wire, coaxial cable or fiber optics; whether the format is analog or digital, it must be able to be interconnected as a seamless web. We need to develop protocol standards that will ensure this development. Otherwise, we risk creating bottlenecks at each junction of the superhighway. Finally, the user equipment necessary for the consumer to translate the stream of information, data and entertainment onto his or her home display unit, must be configured so that full and easy access is available. It is imperative that we not create de facto gatekeepers, by permitting only certain manufacturers of this user equipment to hold the keys to the pipeline through which the bounty of the electronic superhighway is made available. The pipeline should be subject to regulations similar to those proposed for the set-top box: provisions for a reasonable rate of return and open access requirements. Perhaps the "all-channel Rule," which ensured that manufacturers of television sets would not discriminate against any group or single program provider, might be used as model for establishing appropriate regulations governing the set-top box for the national Information Infrastructure. The "unified" and "symmetrical" regulatory principles outlined recently by Vice President Gore in his call for national telecommunications reform are certainly commendable. I am concerned, however, with the "Title VII" concept as I understand it. If companies can elect "Title VII" status, we leave open the possibility that some builders of the electronic superhighway may choose to escape requirements for open, non-discriminatory access. The private sector should not be forced to face the "cross-fire of conflicting and duplicative regulatory burdens," as stated by the Vice President, but neither should we create a regulatory regime which offers an escape hatch from open access requirements. All regulations, without exception, should be based on the services that are offered and their ability to compete _ and not on corporate identity, regulatory history or technological process. The clearest way I know of achieving this goal is to ensure that protocol standards and rules are adopted early on to govern the National Information Infrastructure's development. A lesson from history can be instructive in this regard. This month, 90 years ago, an automatic fire alarm went off in the basement of Baltimore's John E. Hurst wholesale dry-goods warehouse. Within minutes an explosion spread the fire to neighboring buildings and soon the fire was burning out of control. An hour after the fire started, the Baltimore fire department's chief engineer sent a telegram to Washington urgently requesting help. The rescuing Washington firemen made the trip in a record 38 minutes by rail, but unfortunately found that their hoses would not fit the Baltimore hydrants. They wrapped them to the plugs with improvised canvas bandages, but by that time many businesses had burned down. By 1905 _ one year later, national standards for fire hoses were adopted, but it took considerably longer _ decades in fact _ to retrofit the 600 different sizes and varieties of hose couplings, which were then being used in the United States. Now is the time to insist on establishing protocol standards and rules for the electronic information superhighway. This will assure open access on a non-discriminatory basis. It will serve to include, rather than exclude, the largest number of sources for information, data and entertainment. It will guarantee that the pipeline is capable of connecting the greatest number of entrance and exit ramps onto the superhighway. And, it will permit user equipment to interface with all of these varied services, maximizing consumer choice. END From mech Mon Mar 14 19:34:22 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA28988 for mech; Mon, 14 Mar 1994 19:34:21 -0500 Date: Mon, 14 Mar 1994 19:34:21 -0500 From: Stanton McCandlish Message-Id: <199403150034.TAA28988@eff.org> To: mech Subject: Hal M. Krisbergh - General Instrument Coporation Status: RO TEXT OF STATEMENT PREPARED FOR DELIVERY BY HAL M. KRISBERGH, PRESIDENT, COMMUNICATION DIVISION GENERAL INSTRUMENT CORPORATION BEFORE THE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE OF THE HOUSE COMMITTEE ON ENERGY AND COMMERCE MONDAY, FEBRUARY 1, 1994 Good morning, Mr. Chairman and members of the subcommittee. I am Hal Krisbergh, president of the GI Communications Division of the General Instrument Corporation. The General Instrument Corporation is headquartered in Chicago and has major facilities in Pennsylvania, Texas, California, North Carolina and New York. We are a world leader in the development and manufacture of addressable set-top operating systems and other equipment for the broadband cable, telephone, MMDS, satellite and DBS communications markets. We are also the leading developer of digital compression technologies and equipment. Our June 1990 announcement that we would submit an all digital HDTV system for consideration by the FCC as the U.S. advanced television standard is recognized as the seminal event initiating the so-called "digital revolution." Importantly, it was that event which also spawned the technological movement toward adaptation of digital compression as a means to create quantum increases in the number of channels that could be delivered over existing cable, satellite and MMDS networks. It is General Instrument technology that is the basis of the often referenced 500 channel systems which will be deployed later this year. This digital compression revolution, together with the extensive use of fiber optics and other advancements in information utilization, most notably involving the Internet, on-line systems and bulletin boards, have also been catalytic in the emergence of a new national information infrastructure which is now commonly referred to as the information superhighway. As President Clinton expressed in his State of the Union address this past week, the information superhighway is expected to become a reality by the end of this century. The foundation of this infrastructure is being established at this moment by countless private sector initiatives and investments. As my opening remarks indicate, General Instrument is at the vanguard of this information revolution with related R&D spending planned to exceed $100 million dollars in 1994, which represents over 10 percent of our anticipated division revenue. In your invitation to testify before the subcommittee you asked whether local network management operating systems, referred to as set-top box operating systems, should have an open architecture not unlike the one which currently exists between the telephone network and the telephone. You also asked if such openness might be facilitated by a single set of industry-wide standards possibly enabling consumers to be able to buy boxes from third party vendors. The basis for these conclusions appears to be concern that such local network management systems that receive information from this "highway" and redistribute it to consumers will utilize "proprietary" technologies that will foster a "closed access," non-competitive marketplace that could frustrate easy access to, and use of, the superhighway by consumers. First let me state that we believe that easy access to the information superhighway must be available to both consumers and potential service providers and that local network management systems could not impede such access. In my testimony, however, I will show that set-top operating systems currently provide a similar open access architecture to the telephone systems and that interface standards already exist which enable the consumer to easily connect consumer products to cable networks. As the role of set-top terminals in cable network management systems is understood, it will become apparent that establishing interface standards between the set-top terminal and the local network management system is unnecessary and inappropriate. In fact, we believe that establishment of such industry-wide interface standards will actually retard the ability of the industry to grow and would raise significant concerns as to the security of the systems and open the way to significant incursions of privacy. Finally, there are, and soon will be, many alternative and competitive ways for the consumer to gain access to the information superhighway. As Chart 1 shows, local telephone and cable network management systems enable the system operator to bill, authenticate, secure and efficiently handle communications between consumers and the information superhighway in such a way as to appear transparent _ or neutral _ to such communications. In the case of the telephone, the consumer connects it into a telephone jack which is connected to a remote terminal, RT, located outside the home. In the case of a TV set, the consumer connects it directly to a terminal located inside the home, the set-top terminal. With both networks, the terminal devices enable the consumer to connect any appropriate device such as a TV set, computer or telephone using a standard connector, to many different and proprietary, non- standard, local network management systems. Similar interfaces at the telephone central office or the cable headend to a nationwide communication network, allow service providers to easily connect to the local network management system and thereby easily access the consumer. The set-top terminal is an integral part of the cable network management systems and there already exists a standard interface between the TV set and the set-top terminal. The relationship of the telephone to the telephone network is analogous to the TV set to the cable network. Some have proposed that the interface between the set- top and the network management system be standardized. This in effect would be equivalent to standardizing the whole network as the set-to is an integral element in a cable network management system. This would be as illogical as requiring the interface between the RT and the telephone network to be standardized. Simply put, cable network management systems utilizing set-top terminals perform necessary administrative functions without impeding the access between nationwide service providers and consumers. Standard interfaces already exist which allow nationwide services providers and consumers to easily connect to the network and there is therefore no need for nationwide standards to be developed. In addition, if a single nationwide standard is imposed on set- top operating systems it will create serious concerns. Over the past 10 yeas significant expansion has occurred in the number of channels and other services cable operators can deliver to consumers. Because TV sets last on average 14 years, they are not capable of adjusting to the technological advances that cable operators have been able to provide. In order to address this inflexibility, cable operators have relied on the ability to replace existing set-tops with more advanced technology, which in turn enables these expanded services to be provided without making already purchased TV sets obsolete. Standardization of set-top operating systems will limit the deployment of technological advances as it will freeze the current state of technology, thereby significantly diminishing the availability of new services to consumers. This is exactly the opposite effect that it was hoped such standards would create. The current system of letting the competitive market forces justify the need for deploying new technology in set-to operating systems has worked well in the past and is already allowing a whole new landscape of services such as digital compression, interactive multimedia and broadband telephone to be provided competitively and economically to the consumer. Standardization is set-top operating systems could also raise serious concerns related to security and potential invasions of privacy. It is the nature of broadband systems that transactions and communications to individual homes are also accessible in all homes in a given served area. The integrity and security of this network is crucial to preventing unauthorized access to this information. Extensive industry experience has indicated that setting a single nationwide standard provides a large target for the would be hacker or pirates to break the system and once broken would compromise the entire system. The industry has instead taken the approach of installing many different proprietary systems lessening the size of the target and well as for allowing a logistically feasible method of phasing deployment of new security technology on an area by area basis. The heart of achieving the most secure systems is to ensure the lack of a single standard which would be readily available to a large number of individuals worldwide. Retail sale of set-top terminals would be impractical as they are not interoperable with other proprietary operating systems. This is also true of the sale of any component of a proprietary telephone operating system, such as a line card of the remote terminal. In addition, commoditization of set-top technology for retail sale would make attempts to insure the security of the system at best very difficult. It would also sacrifice leadership in these important new industries. Such sale, given the rapid changes in technology, would leave the consumer with an obsolete product in a relatively short period of time. It would be better to leave the logistics of managing such technological change to the system operator who can deploy older terminals freely to other consumers who do not wish the more advanced services. Finally, any concerns as to the competitive environment that cable operators face in the future should be eliminated with the explosion of new alternative local distribution access systems (see Chart 2) that are and will be deployed in the future. Telephone companies will be deploying broadband fiber optic networks which will be capable of delivering a similar array of services to the consumer. Multichannel Microwave Distribution Systems (MMDS) are also currently being deployed throughout the U.S. This year three new Direct Broadcast Satellite services (DBS) will be launched to further provide the consumer with additional alternative access options. Cellular telephone (two providers in each area) can also provide for competitive access as well as the proposed PCS services (seven providers in each area) will also add to this list. In summary, set-top operating systems provide for the same important open access architecture as today's telephone systems. Standards already exist between local network management systems and therefore do not need to be established. The demands of insuring the consumer has access to the most recent developments in technology, as well as protecting the consumer from potential invasion of privacy, further point to the dangers of creating nationwide standards and allowing the commoditization and retail sale of such critical elements of the broadband operating system as the set-top terminal. From mech Mon Mar 14 19:34:39 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29020 for mech; Mon, 14 Mar 1994 19:34:38 -0500 Date: Mon, 14 Mar 1994 19:34:38 -0500 From: Stanton McCandlish Message-Id: <199403150034.TAA29020@eff.org> To: mech Subject: John Hendricks - Discovery Communications Inc. Status: RO TEXT OF STATEMENT PREPARED FOR DELIVERY BY JOHN HENDRICKS, CHAIRMAN AND CHIEF EXECUTIVE OFFICER DISCOVERY COMMUNICATIONS, INC BEFORE THE COMMITTEE ON TELECOMMUNICATIONS AND FINANCE OF THE HOUSE COMMITTEE ON ENERGY AND COMMERCE TUESDAY, FEBRUARY 1, 1994 MR. HENDRICKS: Mr. Chairman, members of the subcommittee, my name is John Hendricks, and I am founder, chairman and chief executive officer of Discovery Communications, Inc. I appreciate the opportunity to appear before you today to share our company's views on the future of digital, interactive video systems. Discovery is a privately-held multimedia company which manages and operates The Discovery Channel and The Learning Channel, as well as businesses in home video, interactive video, publishing, merchandising and international program sales and distribution. Discovery has four shareholders, John S. Hendricks Cox, TCI and Newhouse, and is a vertically-integrated programming service. Although no single shareholder has majority control of Discovery, the combined ownership of cable operating companies is over 51 percent. Discovery has been at the forefront in developing a technologically advanced program packagand very system that will permit virtual video-on-demand access to top television shows supplied by broadcast, cable and independent sources. Our system, known as Your Choice TV, is based on the latest advances in computer technology, as well as the most sophisticated digital compression techniques available. This satellite-based interactive program package and delivery system will require not only the use of a remote control device and a set-top terminal, but also a national operations center, which will digitally compress and package programming for transmission via satellite. It is anticipated that the remote control devices and set-top terminals will be supplied by third-party manufacturers. Your Choice TV is possible because of the tremendous technological advances that have been made recently in compression techniques, digitalization and fiber-optics. Of course, Discovery is not alone in attempting to capitalize on this progress. Other entities are seeking to meet consumer needs as they see them and in different ways. It is clear that this environment of technological change holds great promise for the American public as well as domestic and international businesses. This entrepreneurial environment benefits the nation. Consumers will receive greatly increased choices of video programming, new interactive services, and the ability to access numerous data networks. New markets and submarkets will develop and new and existing companies will rush to meet consumer demands. Domestic and international trade will grow and new jobs will be created. As a participant in this "revolution," I can tell you I am very optimistic about the future. One concern I have, however, is that, without a standardized transmission infrastructure, these new services and new jobs will not be created as quickly as otherwise would be the case. To ensure there is no problem in this regard, I believe it is imperative that an open architecture standard be established for the transmission of such services to any American consumer. Universal services and robust competition require a universal transmission standard _ a standard that will allow technological advances to be incorporated quickly and efficiently into the national information superhighway. To achieve this goal, we must create a market environment capable of promoting an open architecture standard for advanced digital cable systems. To create the type of open architecture that we, as content providers, need, this standard-setting process must primarily focus on the digital transmission format. Such transmission standards should specifically concentrate upon, one, the channelization and transmission format; addressing signals to control subscriber equipment from a central location; and three, encoding or scrambling signals that are used to protect the security of services. In short, service providers should be able to reach any consumer with one transmission. The first important aspect of this approach is to simply agree upon a standard for digital video transmission. In this regard, Discovery fully endorses the MPEG-2 standard and encourages its use for all direct to home, cable-cast and file-server based digital video systems. Once this and other transmission standards are in place, programmers, cable operators, telephone companies and equipment manufacturers can proceed to develop products and services in a coherent and rational manner. Within 12 months, we expect that the cable industry will have settled upon MPEG-2 as the digital transmission standard and that other interactive addressable signal standards necessary for conducting transactional communications will have also been universally adopted within the cable delivery infrastructure. I am less clear about the transmission delivery standard-setting process in the very different switched networks being built by the telephone companies. Another concern which I have relates to the concept of open access which has received so much attention lately. For the foreseeable future there will continue to be technological constraints with respect to the distribution of video signals. In a 500-channel world it will simply not be possible for everyone who wants to participate in the video marketplace to do so. Congress and the FCC should continue to ensure that the distribution marketplace is a free and open one, open to all competitors _ as they did with the program access provisions of the 1992 Cable Act. However, the government should not create barriers to technological development by imposing mandatory access requirements on distributors which would have the effect of strangling new distribution businesses with low-consumer demand services. Finally, let me state that content businesses _ data, video, interactive and retail _ developed for the national information superhighway will and must overcome the traditional challenges that face any new enterprise in our free economy. These challenges include, one, satisfying a real market demand; two, developing and implementing an effective national promotion plan; securing adequate capital to finance initial operating losses; and four, eventually producing annual revenue that exceeds expenses. If digital transmission delivery standards are adopted and are well publicized, then numerous competitors will emerge to confront the above four challenges which, together, continue to fuel the hearts of American entrepreneurs. Thank you again for the opportunity to appear before you today, and I look forward to your questions. From mech Mon Mar 14 19:35:00 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29053 for mech; Mon, 14 Mar 1994 19:34:59 -0500 Date: Mon, 14 Mar 1994 19:34:59 -0500 From: Stanton McCandlish Message-Id: <199403150034.TAA29053@eff.org> To: mech Subject: Wayne Rosing - Sun Microsystems Inc. Status: RO TESTIMONY OF WAYNE ROSING, CORPORATE EXECUTIVE OFFICER OF SUN MICROSYSTEMS INC. AND PRESIDENT, FIRSTPERSON, INC. A DIVISION OF SUN BEFORE THE HOUSE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE TUESDAY, FEBRUARY 1, 1994. MR. ROSING: I would like to thank Chairman Markey and Congressman Fields for inviting me to testify before their committee today. This hearing will contribute to the debate on how the government can help make sure that all Americans have the opportunity to participate in the new information age. Although the national information infrastructure (NII) will continue to evolve over the rest of this decade, a number of key architectural decisions made today will shape it entire future. Among these decisions are the questions of how to guarantee universal access and choice and whether monopoly control of key interfaces will be allowed. The NII is envisioned as a network of networks, connecting multiple sources of data, education, services, and entertainment with homes, schools, businesses, and government. When widely deployed, it will enable entirely new ways of learning, working, selling, consuming, and communicating. The socioeconomic impact of this "Information Superhighway" is widely expected to exceed the impact of a physical superhighway _ the interstate highway system _ built during the 1950s and 1960s in the United States. A key element to the successful development of the NII is interoperability. Each of the pieces of the NII must be able to communicate with the other pieces: that is, to interoperate. Interoperability is what allows systems with multiple components to work together, and it creates the opportunity for the existence of competing, interchangeable implementations. Interoperability assures a level playing field for businesses interested in providing products and services for the NII: it also guarantees consumers the widest possible range of choices at competitive prices. This interoperability will require the establishment of widely accepted, standard interface specifications. Interfaces are the on-ramps and off-ramps to the Superhighway. Interface specifications are the maps that tell drivers how to go from one road to another. The national information infrastructure will have a number of critical interfaces: for example, the interface where consumers attach the "set-top" box to the network; and at the other end, where content providers enter the digital superhighway to distribute their information services. The use of standard interfaces in the NII is critical because without such agreed-upon interfaces, the Information Superhighway would remain just a collection of unconnected dirt roads. A crucial distinction in the formulation of public policy must be made between interfaces and implementations. Interface specifications are pieces of paper; implementations are actual products or services. For example, the ISO specification for 35mm ASA 100 film is an interface specification. It defines the size of the film, the spacing of the sprocket holes, and how the film will respond to light. The interface specification enables multiple manufacturers to produce cameras which can use the film. Each of them competes on the value of their implementations. No one attempts to profit by controlling the spacing of the sprocket holes or the size of the film can. An interface specification does not define the "recipe" for a product. It would not, for example, specify the chemical ingredients of the film nor provide the instructions for how the film is made. Such a definition would actually specify an implementation. The distinction between an interface specification and an implementation is important because the former provides the basis for interoperability, while the latter provides the basis for competition. An interface specification is necessary to design interoperable components. For example, the interface specification for the electric outlets used in the U.S. is widely known, and enables every manufacturer of electrical products to design a cord and plug for their products which will connect with every outlet in the U.S. (Note, however, that the lack of an international standard for electrical outlets precludes the same interoperability from country to country.) Another common example of a standard interface is the connection jack used on stereo components. Not too many years ago, a stereo was a large, integrated unit, incapable of being modified by its owner to incorporate new technologies. Today, however, it is a simple matter for most owners to add a CD player, a new tape deck, or even a surround-sound amplifier to produce a home entertainment center _ all because of the use of a standard interface. Although there is widespread agreement that the interfaces to the NII should utilize this same concept of standard interface-based interoperability, there is disagreement over the issues of ownership and control. Should a single company be allowed to own or control the specification for a key interface to the NII? Universal access to the NII is important to both consumers and industry. The NII will make a wide variety of services available to the consumer, including educational tools, lifetime training, interactive video, and other services. Many of these services may prove to be as integral to daily life as the telephone and U.S. mail are today. Just as the government assures universal access to these services, so must it commit to making the NII available to all by guaranteeing success to basic services at an affordable price. Universal access is important to industry, too. The development of the NII is dependent upon the investment of large sums of money and human capital _ in the form of innovation _ by many firms, in many industries. Their economic participation is, in turn, dependent upon the minimization of any structural entry barriers that would otherwise tend to limit competition. For example, for multiple companies to successfully offer each of the key elements of the NII, their products and services must be widely interoperable _ like stereo components. To achieve this end, the components of the digital superhighway must utilize standard interfaces whose specifications are freely available _ i.e., not under monopoly control. Monopoly, or single-point control of interfaces, would restrict or eliminate access by potential alternative suppliers to the specifications necessary to create and produce interoperable components. Similarly, it would limit the ability of potential players to add new interfaces and services. This would clearly limit consumers' choices. Without the pressure of such competitive products or services, the pace of innovation and the intensity of price competition would be reduced. This lack of competition would not only be detrimental to consumers, but also to America's competitive strength in the global economy. Some potential barriers to competition based on proprietary control of interface specifications are summarized in Table 1. Each of these potential barriers to competition exerts its influence by restricting access to the information necessary to produce interoperable products or services. Monopoly control of interfaces might make specifications unavailable to third parties, or it might allow access to only a select group of suppliers, thereby limiting competition. A similar anti-competitive impact would occur if interface specifications were only available for excessive license fees by effectively prohibiting new entrants. Incomplete or untimely disclosure of interface specifications might also make true interoperability difficult, and stymie new, smaller entrants. Consumers will demand choices when they connect to the NII: choice of content, choice of providers, and choice of the devices they use to access the digital superhighway. Why? Because their needs and desires differ. Just as Henry Ford discovered that not every driver wants a black car, not every NII consumer will choose to access the same services from the same company, using the same set-top box. Proprietary control of the key NII interfaces would limit consumers' choices. For example, if the interface to the network in your home _ an NII off-ramp _ was proprietary, it would be possible for the transmission company provider to require that you use only their set-top box. Once locked into their system, you have only two choices: pay the price of the service, or forgo the service. Similarly, at the origin end of the network, the transmission company might limit consumer choice, by blocking services that other want to provide to the consumer. This would be tantamount to blocking the on- ramps to the interstate highway. Sun believes that the interface specifications which become standards in the data superhighway must be free of single-point control and proprietary barriers. Although implementations _ the actual products and services _ can and should be proprietary and built by private industry, the interface specifications must be barrier-free. These interface specifications must be free from the barriers like those shown in Table 1, which limit access or choice and restrain competition and innovation. The impact of the NII, like the interstate highway system, the telephone network, and NTSC broadcast television, will be immense. That is why it is fundamentally different from other industries and why the Government alone has a responsibility, and the ability, to guarantee universal access and choice, by mandating barrier-free interfaces. To do this the Government should take two actions: 1. Designate critical NII interfaces as barrier-free. Sun recommends that the FCC establish a broad-based committee made up of representatives from consumer groups, government, industry, and academia, to identify the critical interfaces which must remain barrier-free; and 2. Set the policy _ legislatively define what constitutes barrier-free, along the lines illustrated in Table 2. These criteria are meant to apply to critical NII interfaces, not implementations. Sun has always, and will always, support appropriate and stringent intellectual property protections for implementations. We, like other companies, have a serious stake in protecting the hundreds of dollars we invest every year in the research and development that produces intellectual property. When setting policies for creating barrier-free interfaces, it is crucial that the Government not select specific implementations posing as standards _ that would freeze innovation and greatly limit all the benefits of competition. The Government's role in the information superhighway should be to set the rules, not pick the winners. Let the marketplace _ consumers and producers _ do that. The forerunner to the NII, the Internet, is an excellent barrier- free model for the information superhighway. The rules of the Internet prohibit the selection of an interface as a standard which has any elements which remain under the proprietary control of a vendor. These same practices should be incorporated in the policy setting which establishes the NII. Barrier-free interface specifications will allow multiple vendors to create competing, yet compatible implementations. Benefits from this competition include: lower costs and greater choices for consumers, increased opportunities for companies _ both large and small, a reduction in barriers to the formation of new companies, and resulting economic and job growth. For some industry executives, a barrier-free business philosophy seems counter-intuitive. Yet, many companies and entire industries have prospered in business environments using barrier-free interfaces. Common examples exist throughout everyday life. _ Camera and film makers share the interface specification for film. _ Tire and auto makers meet the same interface specifications for wheels. Consumers know they can buy different brands _ proprietary implementations _ on both sides of the interface. _ Makers of basketballs and basketball rims are secure in their knowledge that one will fit the other. _ The specification for motor oil, SAE10W-40, is not controlled by a single oil company. _ And the TCP/TP computer networking protocol used by in most large government computer networks. In each case, the companies in these industries compete on the basis of their implementations, not the interface specifications. Companies in industries from automobiles to computers, photography to VCRs, and tires to electrical appliances, have benefited enormously from the vastly enlargearkets made possible by widespread use of barrier-free interfaces. Equally important, the customers of technologies based on barrier-free interfaces have won, because they have benefitted from widely expanded choices, at competitive prices, in industries aggressively pursuing innovation. The ultimate success of the NII depends on the contributions, the experimentation, and the entrepreneurial efforts of many service providers. Their participation requires the freedom of access to the NII as a major new medium of commerce, that only barrier-free interface specification can make possible. The technologies which make the NII possible hold the potential for new, billion dollar industries in the U.S. They will present massive new business and job opportunities. They can, and will, increase our nation's lead in the information, software services, and entertainment sectors of the global economy, and thereby fuel exports of high value goods and services. A timely government decision to specify the use of barrier-free interfaces in the NII would help to ensure that the NII achieves its potential. Thank you. From mech Mon Mar 14 19:36:48 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29123 for mech; Mon, 14 Mar 1994 19:36:46 -0500 Date: Mon, 14 Mar 1994 19:36:46 -0500 From: Stanton McCandlish Message-Id: <199403150036.TAA29123@eff.org> To: mech Subject: Al DeVaney - Association of Independent Television Stations Inc. Status: RO TESTIMONY OF AL DEVANEY ASSOCIATION OF INDEPENDENT TELEVISION STATIONS, INC. COMPETITIVE ENVIRONMENT FOR MULTI-MEDIA DISTRIBUTION SYSTEMS THE U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE WEDNESDAY, FEBRUARY 2, 1994 MR. AL DEVANEY: Good morning Mr. Chairman and members of the subcommittee. My name is Al DeVaney and I am senior vice president and general manager of WPWR-TV, channel 50 in Chicago. I am also chairman of the board of the Association of Independent Television Stations, Inc., and appear before you today on behalf of Independent television stations across the country. There is no doubt that the Administration and the Congress are committed to the creation of a national "information superhighway." In general, INTV applauds these efforts. However, over the past decade our member stations, along with the American consumer, have been the victims of a wire-based monopoly transmission system. We do not want to see this situation replicated under the guise of the "information superhighway." Our fundamental objective, in this debate, is to promote and ensure a truly competitive environment for all multi-media distribution systems. For this reason, Independent television stations and broadcast television stations overall have been frustrated by the decision not to include over-the-air television broadcasters as part of the information infrastructure debate. Mr. Chairman, hopefully these hearings will mark the beginning of television broadcasters' active participation in the process. We thank you for the opportunity to be heard. To date, there has been an implicit assumption in the "information highway" debate that all video product, news sports and entertainment, will be delivered to our homes and offices by wire- based delivery services. Policy makers have assumed that broadcasters sole role in this highway will be to provide programming for this highway. We cannot help but feel that there is a concerted effort to push all video delivery onto a wire. We believe this approach is a mistake. Television broadcasting, as a 'transmission' system, should be considered a key component of the "information highway." Delivering video programming by wire will not be free. If cable television has taught us anything, it is that consumers will pay to access wire-delivered program services. Video programmers will be charged an access fee to travel the road and consumers will be paying to receive these message. In this regard, the analogy to the free interstate highway is inaccurate. Rather, what will be created is a national information toll road. If television broadcasters are to become simply another programmer on the toll road, the American consumers must adjust to the simple fact that they will have no option but to pay for access to all basic news, sports and entertainment programs which they now receive over-the-air for free. While supporters of the "information highway" stress the idea of universal service, and avoiding a society of "information haves and have nots," they have failed to address the issue of how much it will cost consumers to receive basic information. As a society, are we prepared to confront the situation where the only means of accessing basic information is through a pay medium? And the only way millions of people can access this pay medium will be through a communications version of food stamps. Today we have a wire-based delivery system _ cable television _ that passes about 90 percent of American households. Nevertheless, approximately 35 to 40 percent of the population still relies exclusively on free over-the-air television for access to basic news, sports and entertainment programs. What will happen to these people in an environment where all programs are delivered by wire with no free, over-the-air option? Policy makers have always assumed that free over-the-air television will retain its present posture. Whether this remains true depends in large measure on the steps taken in the next few months. Right now the United States has an off-air video delivery system that reaches 99 percent of American households. It provides basic news, sports and entertainment to the American public for free. All Americans, rich and poor, urban and rural, can access this system simply by purchasing a television set. Television stations have the facilities and transport mechanisms to deliver a variety of video and non-video information _ over-the- air _ to all America. Broadcasters have spent billions in physical plant ensuring the provision of interference-free service. Our highway is already up and running. Consumers do not have to pay the cost of laying new broadband wires or tearing up streets across the United States. Off-air television broadcasters are poised to compete with the wire-based information toll road. We have the ability to offer another "lane" on the information highway. Moreover, broadcasting completely avoids the potential of cross-subsidization. You can be assured that the highway will not be built on the backs of basic telephone ratepayers or cable subscribers. The key to this over-the-air express lane is digital transmission. For the past five years the broadcasting industry has been developing a new digital transmission system in order to create High Definition Television (HDTV). Proponents of the various HDTV systems have formed a Grand Alliance which will lead to the creation of a standardized digital broadcast system. The FCC plans to allocate spectrum for this system sometime in 1995. The most important aspect of this new transmission system is the ability to switch from current television distribution - which is analog - to a digital system. Digital transmission allows a broadcaster to compress its signal, making room for a variety of video and data services, not just HDTV. Each television broadcaster is being asked to spend millions of dollars to convert the current transmission system into a digital system. Once accomplished, we will be able to provide service to all Americans faster and cheaper than more expensive wire-based systems. More importantly, we will be able to retain a basic channel of news, information, sports and entertainment programming that is available to all Americans for free, shall also offering many enhanced services. The key question before the subcommittee is whether it will enact policies that encourage a competitive _ wireless _ information highway. Unfortunately, the debate has been confined to shifting all video programming onto a wire-based toll road. INTV does not believe the debate should be so limited. The Congress cannot assume that free off-air television broadcasting will remain intact as the wire-based information highway is being built. Unless corrective steps are taken in this legislation, broadcasting, as we now know it, may cease to exist. Millions of Americans living in areas that are not wired _ or those unable to afford pay television _ will be stranded. At the most fundamental level free off-air television provides an important information safety net. It also offers a tremendous competitive alternative to wire-based delivery systems. Such incentives to remain in broadcasting and continue to provide free, universal, ubiquitous video service must be provided. If broadcasters ultimately are treated like any other program source with supposedly non-discriminatory access to the wire-based "information highway," will the remaining economic incentives to maintain this over-the-air transmission capability be sufficient? Would stations find it more sensible to abandon their off-air facilities and provide their programming and services strictly on a pay basis like other programmers? Congress must not take continued free broadcast service for granted. If it wants free universal service, it must assure a regulatory environment which supports the economic soundness of broadcast television. If broadcasting is to retain its competitive posture, this subcommittee should consider several important elements as it moves forward with this legislation. For the past decade, INTV has fought against discriminatory behavior by monopolist cable operators. Denying cable carriage and providing local television stations with disadvantageous channel positioning was merely an example of cable using its network architecture to discriminate against its off-air broadcast competitors. After years of conflict, Congress solved this problem with the must-carry and retransmission provisions of the 1992 Cable Act. The cable industry has fought this every step of the way. The telephone companies have now tipped their hand by arguing that must-carry is unconstitutional before the Supreme Court. From our perspective this is merely a sign of things to come. The anticompetitive ingredients are there. The telephone companies, through separate video subsidiaries and ownership interests in programming, will be permitted to have an interest in the content that travels over their own wires. They have a strong incentive to make sure subscribers watch this programming as opposed to unaffiliated programmers like local television broadcasters. Presumable, their program subsidiaries will attempt to sell local advertising. INTV has witnesses first hand the anticompetitive problems when the owner of the wire has an economic interest in some of the programming carried over that wire. Access is the core issue. History demonstrates that once a consumer subscribes to a wire-based service, he usually removes his ability to access television signals over the air. Indeed, in spite of an FCC consumer education program, 94 percent of cable subscribers do not retain the ability to access signals off-air. As a result, broadcasters that do not have equivalent access to the new cable/telco highway may find themselves at a significant competitive disadvantage. As we found with cable, lack of access will adversely affect a television station's revenue stream, hindering its ability to provide service to those not connected to the wire. The information "have nots" suffer the most. To its credit, H.R. 3636 attempts to apply the access provisions of the 1992 Cable Act, i.e., must-carry, channel positioning and retransmission consent, to the new video platforms that will be established by the new telco/cable entities. However, these provisions were designed to address discrimination in the context of existing cable technology and architecture. They may be completely inadequate as applied to the new telephone video program architecture. Unfortunately, nobody knows what the new wire-based network architecture will actually look like. How will the program schedules for competing services be listed? For example, how will the basic platform appear on consumers' screens? Will the offerings of the telephone companies' program subsidiary appear first? Will the consumer have to scroll through numerous screens to access their local television broadcasters? As we learned with channel repositioning on cable systems, local television broadcasters may find themselves in video Siberia _ several "clicks" from oblivion. The legislation does give the FCC the authority to establish rules that prevent a telephone company from discriminating in favor of its own video programming affiliate with respect to rates, terms and conditions for access to the video platform. Nevertheless, INTV believes strongly that additional non-discriminatory access provisions are necessary to prevent potential anticompetitive abuses. Because we do not yet know the exact mechanisms that could be employed to discriminate, the FCC should be directed to enact rules to prevent new cable/telco entities from using their architecture and/or information menus from placing local broadcast stations at a competitive disadvantage. Complaints filed by local television stations should be handled on an expedited basis. The FCC should have the ability to impose significant fines and grant injunctive relief. In addition, the legislation should expressly state that a violation of these rules or any form of discrimination would constitute a per se violation of law, giving rise to a private cause of action by aggrieved parties for violations. Statutory penalties in the form of treble damages should be made available to parties victimized by such anticompetitive conduct. On this fact, the legislation attempts to apply the must-carry provisions of the 1992 Cable Act to the new video platforms. Consistent with the must-carry concept, local off-air television stations should have the ability to obtain free access to the video platform. At the very least, charges for access by local television stations should be at a significantly reduced rate. Unlike other program services, local broadcasters are subject to unique public interest responsibilities. Only local broadcasters have a regulatory responsibility to meet the interests and needs of their local communities. Local television broadcasters are subject to the political equal time rules under Section 315 of the Communications Act. We must provide access to federal candidates under Section 312. In addition, the FCC is considering new children's program requirements for television stations and may reinstate rules limiting the amount of commercials. New, wire-based programming services offered on the video platform probably will not be subject to these public interest obligations. Second, some have expressed concern over the prices that will be charged to consumers under the new regime. Requiring access charges for basic broadcast television service will simply drive up the cost of these services to consumers. If local television broadcasters have to pay to access the highway, these costs will be passed on to consumers. Such a result is inconsistent with the concept of a universal basic television service. Third, the concept that all programmers will be granted access on the same rates, terms and conditions does not necessarily equate to equal access. Most local television stations do not have vast libraries of programs. At best they provide enough programming to fill each broadcast day. Compare this to the program services envisioned by the new cable/telco giants. These services will offer a vast array of programs, voice and data services. However, if the access charges for all program services are the same, broadcasters will have to pay more on a per program basis. The telephone companies' video programmers will be able to spread the access costs across a vast array of programs and services. Local television broadcast stations will not have this luxury. In the end consumers will have to pay more for broadcast programming than for competing services. Finally, local Independent broadcasters have experienced problems with having to pay cable operators for access to the wire. Prior to the 1992 Cable Act, many stations were required to pay in order to get carried. In effect, the monopoly pipeline charged for access and then used the revenue to bid programming away from local over-the-air television stations. This placed free over-the-air television at a considerable disadvantage. We should not replicate this mistake when constructing the "information highway." The creation of large vertically integrated cable/telco combinations will radically alter the means of program distribution across this country. At the present time, local television broadcasters are able to secure exclusive rights to programs in their local markets. However, what happens when a fully integrated wire- line network makes it possible to access television stations from distant markets? For example, could a subscriber in Washington, D.C. access television stations located in New York City that broadcast the same programs as the Washington station? The New York stations have purchased and secured the exclusive rights to programs for the New York City market. The Washington stations have likewise acquired the exclusive program rights for their local market. The ability to access distant television stations through the "information highway" could create havoc with the program distribution systems that are currently in place. Local off-air television stations must be able to protect the exclusive rights to product in their market. Absent such protection, local television stations have little or no incentive to invest in top quality programming. A similar problem confronted local stations when cable systems imported distant out-of-market television stations. The FCC resolved this problem by reinstating the syndicated exclusivity and network non-duplication rules. These rules give a local station the ability to force a wire-based delivery service to "delete" duplicate programs that appear on the cable system due to the carriage of an out-of- market television station. INTV believes that similar rules should be made applicable to both the basic video platform and any programming services offered on the new "information highway." In a similar vein, we are also concerned that the telephone companies, without our permission, may offer services that permit the time shifting of our program schedules. Each television station spends millions of dollars developing a program schedule. The television station, not the telephone company, should control the scheduling of our programs. The entire cable/telco debate has been premised on one fundamental fact _ competition is preferable to monopoly. There was a sincere belief that allowing the telephone companies to enter the video business would provide competition to the existing cable industry. INTV believes that the only way to ensure competition and to reduce prices to the American consumer is to create a system where two or more separately owned wire-line delivery systems compete in the same geographic area. Unfortunately, it now appears that this laudable goal may not be achieved. Some telephone company executives are already stating that you do not need two separate wire-based delivery systems. According to the sirens song, you only need one wire with "safeguards" that promote competition among program suppliers. Of course, the telephone company will be a major program supplier over the single wire and, according to the telephone companies, traditional access safeguards for local television stations such as Must-carry should not apply because they allegedly infringe on a telephone company's First Amendment rights. What we are witnessing today is not the creation of a system where there will be two or more independently owned wire-based delivery systems. The rush is on for telephone companies to simply buy out existing cable systems in the areas where they provide local telephone service. We are creating a system of a few telecommunications giants which will perpetuate the cable industry's existing monopoly power. Electronic Media recently reported on John Malone's speech before the Center for Strategic and International Studies. Mr. Malone is one of the most visionary executives in the telecommunications business. Nevertheless, his predictions are somewhat frightening. John Malone, president and chief executive officer of TCI, last week predicted that two or three companies will eventually dominate the delivery of telecommunications services over information superhighways worldwide... Mr. Malone also said the sense that only the biggest players would be able to take full advantage of the new telecommunication environment is what's spurring the ongoing wave of industry mergers and joint ventures. The article goes on stating that Mr. Malone ...[M]aintained that the critical issue for programmers and others will be inclusion in the "two or three branded communications bundles" the largest players provide, not the simple access to superhighway facilities that many federal regulators currently appear to have in mind. "The big bubbles get bigger and the little bubbles disappear"... and "The guy who is out there selling his own service is going to have a very hard time"... INTV simply does not believe it is in the public interest to permit the creation of two or three large, vertically and horizontally integrated cable/telco companies that will dominate the "information highway." Our experience with the cable industry has taught us that control over the pipeline to the home permits a company to leverage its power to control an ever increasing segment of the video program industry. One sure way to avoid Mr. Malone's prediction is to create a regulatory climate that fosters two or more wire-based delivery systems in each local market. Such a policy takes away the key to exercising anticompetitive power. To this end, H.R. 3636 attempts to prevent telephone companies from simply buying out cable systems in their local telephone service area. Unfortunately, the bill is riddled with exceptions that will ultimately create a single video leviathan in each market. The exceptions swallow the rule. The bill permits a local telephone company to purchase or joint venture with cable systems within its own telephone service areas so long as such cable systems, in aggregate, serve less than 10 percent of the total number of households in the company's telephone service area. This creates an enormous loophole in the legislation's anti-buy out provisions. For example, there are approximately 12.7 million households in Bell Atlantic's telephone service area. This means that a telephone company could acquire cable systems serving approximately 1.3 million homes. This is roughly equivalent to all the television households in the Washington, D.C. market (which includes the entire metro area). Alternatively, Bell Atlantic may be able to acquire almost all the cable systems in Virginia or all the systems in the District of Columbia, Maryland or Delaware. There are approximately 11.7 million households in the NYNEX service area. Under the legislation, NYNEX could acquire a majority of the cable systems in Massachusetts or all of the cable systems in Connecticut or Main or Rhode Island or New Hampshire or Vermont. Southwestern Bell reaches approximately 11.4 million households. Under the legislation, Southwestern Bell could purchase all the cable systems in the Houston market. The FCC may permit a telephone company to by out cable systems within its telephone service area upon a showing of undue economic distress or if the incumbent cable operator would not be economically viable. This waiver requirement would permit almost every telephone company to buy out all existing independent cable operators located within the telephone company's telephone service area. Indeed, it is consistent with Mr. Malone's observations that only a few large telecommunications giants will control the "information highway." Faced with competition from new cable/telco ventures, the remaining independent cable operators have a way out _ sell to the local telephone company. This language is ripe for abuse. A liberal waiver policy will simply nullify the rule. INTV fails to understand how such broad based exemptions foster competition or even promote the development of the "information highway." On the contrary, permitting telephone companies to simply buy out existing cable systems provides disincentives to develop new broadband facilities. One can expect a telephone company to simply depreciate existing cable plant and facilities once they are purchased. There is little or no competitive incentive to build new broadband facilities. These exemptions simply permit the telephone companies to perpetuate cable's existing monopoly status. INTV believes that telephone companies should not be permitted to simply acquire existing cable systems that are located within the company's telephone service area, period. Entry into the video business should be conditioned on building new wire-based facilities. Such a policy would promote facilities-based competition. Consumers would benefit from lower prices and upgraded facilities. Program suppliers would benefit because they would not depend on a single gatekeeper to access customers. The exceptions contained in the statute should be eliminated. Consistent with the goal of promoting competition among distribution services, Congress should enact policies that maximize competition between off-air and wire-delivered services. Indeed, Congress and the FCC have embraced competition between off-air cellular telephone services and wire-line services. The FCC's recent decisions regarding personal communications services (PCS) provide further support for the concept that off-air services can and should compete with wire-based facilities. There is every reason to apply these same pro-competitive principles to the video industry. American consumers would surely benefit from additional competition. In fact, given the recent round of mergers between telephone companies and existing cable systems, competition from independently owned off-air broadcast stations may be the only real competition in many local markets. Unfortunately, existing rules governing the broadcast industry make it difficult or impossible for broadcasters to compete in the new telecommunications marketplace. INTV believes Congress must address two key issues. Broadcast multiple ownership rules should be eliminated. In today's environment it makes little sense to subject the broadcast industry to the existing national multiple ownership rules or the local market ownership restriction. The TCI/Bell Atlantic merger is the largest in the history of telecommunications. The resources this combination will bring to the marketplace will be unprecedented. Given these facts, off-air television broadcasters, which will be forced to compete with these telecommunications giants, must be able to harness the economic efficiencies that flow from group ownership. There is no justification for limiting broadcast ownership to 12 stations and 25 percent of the national audience. Eliminating or raising the national ownership limits will promote competition and diversity. It will create broadcast entities that have the economic clout to compete with the cable/telco giants. Moreover, by increasing the national audience reach, it becomes more economical for a television broadcast group to engage in new program production. Equally important is the elimination of the television duopoly rule. This rule prevents an entity from owning more than one television station in any local market. The rule makes no sense when compared with the regulatory regime enacted for cable television. Even though cable systems are monopolies in their local franchise areas, the FCC has declined to enact rules which limit cable ownership in local markets. For example, a single cable operator is free to acquire all the cable systems in the Washington, D.C. metro area. In other words, a single cable operator can own all the cable systems (with each system providing an average of 36 channels of video programming) but a television broadcast station is limited to one advertiser supported video channel in each market. This disparate regulatory treatment makes little or no economic sense and will severely weaken off-air television broadcasting. If broadcasters are to compete with wire-based services, they must be free to harvest the efficiencies from local market combinations. The second issue is spectrum flexibility. For nearly a half century television broadcasters have been transmitting video signals to all America. However, in order to compete with new broadband services, broadcasters will have to radically alter the way they do business. The wire-based "information highway" will offer a variety of services including video entertainment, interactive communications, data transmission, home banking and traditional telephone service. It becomes increasingly difficult for an off-air transmission service to compete with such a vast array of services if it is limited to a single video channel. The advent of digital transmission will permit broadcasters to compress their signals. It is entirely possible that a station may be able to transmit four or more video channels or to provide a combination of video channels with voice and/or data transport. Broadcasters need the flexibility to use the spectrum to meet market demands. Admittedly this is a radical change from the traditional role occupied by broadcast television stations. However, the competitive imperatives of the new telecommunications marketplace require us to adapt. Without this flexibility, the free over-the-air television service that now exists may not survive into the next century. Importantly, we are not asking for the flexibility in order to cease free, over-the-air television broadcasting. On the contrary, free, over-the-air television will remain the core of our business. We will continue to provide at least one channel of free television. What we request is the flexibility to provide other services on the spectrum we now occupy. Revenues derived from these ancillary non- broadcast services will help ensure that the core business _ free off-air television _ remains viable. In addition, the flexibility will give the American consumer a competitive alternative to wire- based delivery systems. In conclusion, off-air television broadcasting facts many challenges in the very near future. We are very concerned that the "information highway" will become nothing more than the perpetuation of monopoly power by a wire-based delivery system. Accordingly, INTV requests that the subcommittee strengthen the access requirement of the bill as they relate to local off-air television stations. Also, the exemptions in the bill permitting the telephone companies to buy out existing cable systems should be eliminated. Finally, the local television broadcaster must be given the relief from existing ownership rules and spectrum flexibility to provide a competitive alternative to the wire-based telecommunications giants that will occupy the playing field in the very near future. Congress should not take the existing free off-air television service for granted. Without careful attention t the needs of television broadcasters,m our universal, free broadcast service will decline. Without free television, American consumers will have no choice but to travel on the new information toll road. From mech Mon Mar 14 19:37:43 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29150 for mech; Mon, 14 Mar 1994 19:37:42 -0500 Date: Mon, 14 Mar 1994 19:37:42 -0500 From: Stanton McCandlish Message-Id: <199403150037.TAA29150@eff.org> To: mech Subject: Decker Anstrom - National Cable Television Association Status: RO NATIONAL CABLE TELEVISION ASSOCIATION REGARDING H.R. 3636, THE NATIONAL COMMUNICATIONS COMPETITION AND INFORMATION INFRASTRUCTURE ACT OF 1993 BEFORE THE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE COMMITTEE ON ENERGY AND COMMERCE US HOUSE OF REPRESENTATIVES, WASHINGTON, DC WEDNESDAY, FEBRUARY 2, 1994 Mr. Chairman, members of the subcommittee, my name is Decker Anstrom and I am President and CEO of the National Cable Television Association. Thank you for inviting me to testify before you today on behalf of the NCTA, which represents more that 60 cable program networks and most of the cable operators serving our nation's 62 million cable subscribers. I welcome this opportunity to comment on H.R. 3636, the "National Communications Competition and Information Infrastructure Act" authored by the chairman, ranking member, and several other members of this committee. NCTA supports your efforts and those of the Administration to promote the construction of an advanced telecommunications infrastructure in the United States. The cable industry agrees with the vision of a competitive information services marketplace based on (1) private investment, technology, and initiative, and (2) the concept of a "network of networks," not just a single wire. Furthermore, we agree with H.R. 3636's fundamental premise that local telephone service should be opened to competition. We also acknowledge that local telephone companies should be allowed to enter the television business - as long as such telco entry does not undermine fair competition in the video market. The cable industry actively supports legislation that will build a competitive national telecommunications infrastructure, and we are committed to working with you to redefine and pass H.R. 3636. The creation of a competitive local telecommunications marketplace requires the establishment of an appropriate legislative and regulatory framework. That framework must encourage new participants to enter the telephone and telecommunications market by removing barriers to entry and limiting regulation of the new entrants, given their lack of market power. One need only look at the history of the long distance industry to see the benefits that come from carefully nurtured competition. Cable television companies _ with their broadband facilities now available to more than 95 percent of US homes - are likely to be the primary competitors to local exchange companies. For that competition to develop, however, cable must be able to attract the capital necessary to expand its service offerings. Lawmakers should therefore adopt policies that foster facilities-based competition, permit the capital formation necessary to build advanced communications infrastructures, and exercise caution in removing the restrictions on local phone companies. Recent advances in communications technology are causing a "convergence" of services that traditionally were very distinct from one another. As this convergence occurs in computer, television, and telephone technologies, it raises new questions about the practical application of many laws and restrictions that govern providers of communications services. Chief among these issues are the validity of the local telephone industry's monopoly over the local loop and the need to bar local telephone companies from providing cable television services. At the same time that these questions are opened for debate, there is new enthusiasm for policies that will foster the development of an advanced telecommunications infrastructure in the United States. The cable industry supports policies that will promote multiple networks and multiple providers that compete to provide Americans the most advanced and affordable communications services possible. Leading policy makers in both the Congress and the Clinton Administration have expressed their support for widespread "facilities-based" competition in telecommunications - and this principle is a central element of H.R. 3636. Cable television companies, which currently reach over 95 percent of the homes in the United States, are the most likely to provide such facilities-based competition to the local telephone companies for advanced communications services. Cable television companies can build on their existing facilities to develop advanced telecommunications networks far more efficiently and inexpensively than telephone companies can. Indeed, new enhancements will ultimately allow cable companies to deliver 500 channels and virtually every type of communications service conceivable. However, cable companies must first raise more than $20 billion during the next decade to build these advanced facilities. The primary obstacle to a competitive telecommunications marketplace is the monopoly that local telephone companies have over local telephone service. This monopoly requires that public policy acknowledge two central issues: The local telephone loop should be opened to competition (currently, state and local regulations help ensure that virtually all telephone calls travel through the local telephone company's facilities), and that as telephone companies are allowed to enter new lines of business, precautions must be taken given their size, financial strength, and ability to limit competition. Although cable companies are prepared to compete with local exchange carriers, the latter's financial strength and market dominance must be recognized. Local telephone companies control more than 99 percent of all residential phone calls and generate over $100 billion a year in revenues. Cable companies must have the opportunity to compete without being hampered by state and local rules, and to obtain the necessary capital and invest it in order to become true competitors in the local loop. Today, almost all telephone calls are routed through the local telephone company's "loop" _ the wires that connect customers to the phone company's central office. Local telephone companies enjoy a monopoly on phone service that is often protected by a myriad of state and local regulations which bar other providers from competing to serve residential telephone users. In fact, 47 states have statutory or regulatory barriers that limit cable entry into local telephone service. Until recently, this state-sanctioned monopoly made sense. After all, there was no expectation that other communications providers would develop alternative networks to compete with local phone companies. Now, however, that has changed. New technology eventually will make genuine competition possible for local telephone service, especially from the cable television industry. Cable television companies have constructed communications networks that reach 95 percent of American homes, and those networks carry up to 900 times as much information as the telephone company's twisted pairs. Furthermore, as cable companies continue to install more fiber optic trunks over the next five years, their capacity will double and system reliability will increase dramatically. Digital compression will ultimately bring the capacity of cable networks to 500 channels or more and will enable companies to deliver interactive voice, video and data services over the same wire. These developments will eventually allow cable companies to provide virtually every type of communications service conceivable, including voice communications. As such, cable is in a position to become a facilities-based competitor to the local telephone monopoly. It is essential that lawmakers act to eliminate the barriers that prevent cable and other potential communications providers from introducing true competition to the local telephone marketplace. Specifically, Federal regulators must act to preempt state and local restrictions that preclude competition to the local loop. The telecommunications infrastructure is rapidly becoming a seamless national network, and potential competitors must be able to enter the marketplace on a national basis. Communications providers - and the investors that finance them - must have the assurance that state and local barriers will not stand in the way of competition. If potential competitors to the local phone companies are expected to fight regulatory barriers in each of the fifty states, there is simply no possibility that competition will emerge in this century, if at all. The size and strength of the nation's phone companies vis-a-vis cable companies: The nation's local telephone companies have demonstrated their ability to dominate any market they enter. In 1986, 50 percent of the top 20 cellular telephone markets were controlled by the seven Regional Bell Operating Companies (RBOCs) and GTE. In 1992, 75 percent had been captured by these companies. In fact, the local phone companies possess the size and financial strength to overwhelm the competition in any market they enter. For example, annual revenues for the RBOCs are larger than those for the cable television, broadcasting, and motion picture industries combined; the Bell Operating Companies have revenues that exceed the GNP of several industrialized nations, including Greece, Portugal, and Hungary; the value of the telephone company stock has increased an average of 278 percent in the past eight years; the phone companies' return on equity averages about 15 percent, while the top 1000 US corporations average less than 10 percent; and the 30 most profitable firms in the US include all seven RBOCs, but no cable television companies. The phone companies' financial strength is especially pronounced in contrast to that of the cable companies. For example, the RBOCs have bond ratings that range from A+ to AAA, while most major cable companies have ratings that range for B to BBB. Net income for Bell companies was 11.1 percent of revenue in 1990, compared to 0.3 percent for the cable industry. Cable rate regulation also dealt a serious blow to the cable industry's financial capacity. Federally-mandated rate reductions are estimated by the FCC to have reduced the industry's revenues by at least $1 billion. As a consequence, most cable companies have be forced to renegotiate and restructure their loans. Furthermore, Paul Kagan conducted a study in January 1994 on the impact of the new rate regulations on the cable industry's revenue, cash flow, and its ability to invest in new programming and technology. According to the Kagan study, the "rate re-regulation mandated by the Cable Act and implemented by the FCC, combined with the subsequent rate freeze which has been extended into 1994, have already precipitated more than an estimated $2 billion direct loss of revenues and cash flow to system operators." Kagan estimates that this loss is equivalent to the industry's investment in bringing new technological services to 7.3 million American homes or about 10 percent of all cable homes. Kagan further estimates that the $2 billion in lost revenue "translates into the deferred startup of 40 new program networks." Before cable companies can be expected to compete against the telephone companies, they must have the opportunity to work through this regulatory transition; to reestablish their financial strength and lines of credit; and to make efficient investments in new technologies necessary to introduce competition in telecommunications. Competition will not develop if telcos are allowed into the video market immediately. The need for an "incubation" period has be recognized in the U.K., and in other contexts in the U.S. Local phone companies have clearly demonstrated their eagerness to become providers of video services. In fact, they have exerted tremendous efforts over the past five years to change current laws and regulations that prevent them from doing so. The cable television industry and others have historically opposed the telephone companies' efforts out of concern that they could exercise their monopoly power to unfairly compete in the video market. But the cable industry does not contend that these cross- ownership restrictions should be maintained forever. Indeed, the cable industry acknowledges that the question is no longer "whether" the phone companies will someday be allowed to provide video services; but rather, "when and under what circumstances." However, the government must take steps to ensure that when phone companies do enter the video market, they will not be able to exercise monopoly power so that a truly competitive video market will be allowed to flourish. The current restrictions on telephone companies were established for very good reasons. In fact, they were created in response to clearly-identified abuses that occurred over several decades and continue to this day. Therefore, in loosening these restrictions, lawmakers must proceed carefully to ensure that those anticompetitive abuses are not permitted to recur. Specifically, the cable industry advocates two important conditions on any phone company entry into the video business. First, their entry should come in stages _ when the market for local phone service becomes "effectively competitive" or when seven years have elapsed in the absence of such competition. Second, strict safeguards must be put in place to help prevent anticompetitive behavior. During the transition period before telcos enter cable, telephone companies will provide the basis for new competition in video services. Current "video dialtone" rules allow telephone companies to build facilities capable of delivering video and advanced communications services and lease channel capacity to independent service providers. The phone companies should continue to have the ability to build and lease these facilities as staged entry occurs. There is both a clear rationale and a historical precedent for "staging" the phone companies entry into the video market. Due to the local phone companies' size, strength, and virtually limitless resources, their premature entry into the video market would threaten competition in two areas: First, competition in the market for advanced telecommunications services would be jeopardized because the telcos' most likely competitors - cable television companies - would be unable to acquire the financing necessary to compete in a capital-intensive race. Second, competition in the market for video services would be threatened by inappropriate cross-subsidies between the telephone companies' unregulated services and their monopoly service. Consequently, lawmakers must exercise great care in allowing local telephone companies to enter new lines of business. Deregulatory models from other markets, including the US electronic publishing market and the British telecommunications market, demonstrate the benefits of staged entry and gradual deregulation. The regulatory treatment of AT&T with respect to the electronic publishing market provides an instructive example for the introduction of competition to video services. In reviewing the AT&T Consent Decree in 1982, the US District Court determined that AT&T should be barred from the electronic publishing market for a period of seven years _ "the period necessary to establish conditions conducive to free and fair competition". Among other things, the court expressed concern that the combination of AT&T's financial, technological, manufacturing, and marketing resources would dwarf any efforts by its competitors to provide electronic publishing, and so imposed the seven-year ban on AT&T's entry into that market. These are precisely the concerns that would apply to the premature entry of the RBOCs into the video market. Another useful regulatory model is found in the British telecommunications market, where the government has sought to introduce competition to communications services. Like policy makers in the US, British lawmakers believed that cable companies offer the best hope for facilities-based competition. However, they were concerned that allowing telephone companies to immediately enter the video market would damage the opportunity for competition by other providers of communications services. Consequently, in 1991, the British government concluded that telephone companies would not be allowed to provide video services until ten years had elapsed, while acknowledging the possibility that the restriction might be eliminated after seven years. (In Japan, NTT, the monopoly provider of telephone service, is also barred from providing cable television services.) In the meantime, the British have opened the market for local telephone service to competition. In response, the market for advanced telecommunications services is booming in the U.K. According to a recent Business Week report, "a rich mix of Baby Bell telephone companies, cable-TV operators, media companies, long-distance carriers, and technology boutiques are installing networks to carry video, voice, and data" to residents and businesses in Britain. Cable operators have already invested about $2 billion in just three years, and plan to spend another $10 billion on fiber optic networks and switches. As of October 1992, for example, Birmingham (England) Cable had reached 35 percent penetration for state-of-the-art cable services and 21 percent penetration for local telephone service. Without staged entry, these telecommunications providers could not have attracted the capital that allowed them to introduce this vigorous competition. The British experience demonstrates that opening the local loop to competition, while staging the telcos' entry into video services, can result in vigorous competition for local telephone service and widespread development of advanced communications technologies. An "effective competition" standard is the single most important safeguard that lawmakers can enact, because it will substantially reduce the telephone companies' ability to shift unregulated costs to monopoly services. In short, competition is the best regulator. Cross-subsidy concerns reflect the fact that phone companies have the incentive and the ability to misallocate costs from competitive services to monopoly services, thereby gaining an unfair advantage over competitors while overcharging monopoly ratepayers. Opening the monopoly to competition is the surest way to address that concern. Other safeguards can also help ensure that phone companies refrain from anti-competitive behavior and make such behavior easier for regulators to detect. For example, lawmakers should require that phone companies deliver video services and develop any programming through separate subsidiaries in order to allow regulators to track transactions between regulated and unregulated sides of the business. Lawmakers should also establish strict rules on cost allocations and the treatment of intangible assets to ensure that unregulated costs are not inappropriately apportioned to regulated services. Recent events have shown that structural safeguards, such as separate subsidiaries, are critical to deterring anticompetitive conduct. Cost allocation rules and other regulatory safeguards alone are inadequate. The FCC, for instance, permitted GTE to continue to fund a cable operation in Cerritos, California - in violation of the cable-telco restriction - for more that three years, despite a Federal court of appeals decision holding that the Commission had failed to justify an exception to the restriction in that case. Likewise, a recent GAO study (July 1991: RCED-91-195) shows that federal regulators can audit local telephone companies only once every 18 years to ascertain their compliance with regulatory safeguards. These factors lend greater urgency to the need for laws and regulations that will forestall anticompetitive behavior. Other requirements for a competitive telecommunications marketplace, aside from preemption, staged entry, and safeguards include national information infrastructure legislation and should also included several other components, such as Reduced Regulatory Requirements for Non-Dominant Service Providers. In the interest of promoting competition in the local loop, new entrants and providers without market power should not be subject to the same degree of regulation as monopoly providers. The level of regulation appropriate to dominant local telephone companies is unnecessary for fledgling competitors and would impede the growth of competition in the local loop by imposing a significant barrier to entry. The deregulation of long-distance telephone service provides a relevant example for the regulatory treatment of new competitors against an entrenched monopoly service provider. In 1980, regulators classified long-distance carriers as "dominant" or "non-dominant" based on their market power. Non-dominant carriers were subject to streamlined regulations that would improve their ability to compete against AT&T. Tariff regulations for AT&T's business services were streamlined in 1991, only after competitors had gained a foothold in the long-distance market. Similarly, Congress enacted legislation authorizing the FCC to relieve providers of wireless services from the full range of regulations applicable to landline carriers. This kind of regulatory flexibility - with "non-dominant" carriers subject to less stringent regulation than carriers with market power - is essential to the development of competition in the local telecommunications marketplace. A "one size fits all" regulatory scheme will impose unnecessary burdens on new entrants and serve only to deter the development of alternatives to the local telcos. Flexibility on Joint Ventures and Mergers: Antitrust laws are designed to prevent anticompetitive practices and to ensure that dominant players do not disadvantage other competitors or consumers. However, these laws do allow joint ventures or mergers to occur when they do not create monopolies or lessen competition; they also recognize that such transactions produce consumer benefits which would not otherwise materialize. These antitrust standards, rather than an outright ban on mergers and joint ventures, should regulate the behavior of telephone and cable companies in the provision of advanced communications services. An outright ban, in fact, may actually diminish the widespread availability of advanced communications services to all Americans. In areas where side-by-side communications networks could not be expected to exist, cable and telephone companies should have the opportunity to pool their resources - in a regulated environment - to introduce advanced communications services. In rural areas, for example, cable and telephone companies individually may not have the economic basis to build advanced information infrastructures due to the higher cost of serving these areas. Likewise, smaller markets might not sustain two competing providers of advanced communications services. In these cases, joint ventures or mergers might provide the only opportunity to introduce advanced communications services to those areas. Comparable Franchise Obligations: Telephone companies that enter the market for video services should have the same franchise obligations as the cable companies against which they will compete. For example, cable companies are typically required to obtain a franchise, pay franchise fees of up to 5 percent of revenues, and to provide public, governmental and educational access channels. Extending these fees and service obligations to all video service providers is essential in terms of both the public interest and competitive fairness. Interconnection Rights: The cable industry supports initiatives to promote interconnection by alternative providers of voice services to the local telephone switch. Interconnection is essential to ensure that consumers have complete access to the nation's telecommunications resources. The facilities of dominant common carriers should be open and accessible to the facilities-based providers on reasonable and non-discriminatory terms and conditions. Preservation of Universal Service: As competitors enter the local telecommunications marketplace, they must begin to share in the cost of ensuring that basic telephone service is available to all Americans. Regulators should determine how much of a contribution to universal service is included in the rates charged by local telephone companies for services subject to competition, and devise an equitable means of apportioning that amount among all providers of competitive local telecommunications services. The funds collected in this manner should be made available to any provider of local telecommunications service that can provide universal service most economically and efficiently. The cable television industry recognizes the vital importance of ensuring universal basic telephone service and is prepared, as cable companies begin to offer telephone services, to pay a proportionate share of any subsidies required to meet this goal. Consumers will benefit from a diverse, competitive telecommunications environment that features multiple networks and multiple providers. Multiple networks will minimize the cost of the service to consumers by encouraging companies to provide competitive rates and to offer the specialization that consumers demand. Consumers will also benefit from the job creation and capital investments that are sure to accompany a competitive approach to developing the nation's infrastructure. Telcos have long argued that deregulation will produce economic benefits by, for instance, giving them the "incentives" to develop their communications networks. The data show, however, that as they have diversified into new lines of business, local telephone companies have actually cut their employment levels by more than 15 percent while cable companies have increased theirs by 58 percent. All Americans will benefit from an infrastructure that makes efficient use of the nation's existing communications networks. Many cable companies are already laying the foundation for a national information superhighway; it is imperative that government policies ensure that it can be used to its fullest potential. Modern cable systems represent an invaluable resource that the US can use toward meeting its telecommunications objectives. These existing infrastructures must be part of the national communications superhighway. H.R. 3636 is commendable for both its vision and many of its specific provisions. Several sections of the bill are straightforward and need only slight refinement to ensure full implementation of the committee's goals. For example, the cable industry strongly supports the bill's preemption of state and local regulatory barriers to competition. As described earlier, this preemption is essential to the development of a national information infrastructure that offers consumers the fullest range of choices among competing providers and services. However, other sections require some revision - particularly the terms for telco entry into television. The cable industry looks forward to working with Members, committee staff, and other interested parties in the weeks ahead to strengthen the bill as it moves forward to markup. Repeal of the Cable-Telco Restriction Outstanding issues include the need for threshold certification. The bill requires only that a telephone company providing cable service also establish a common carrier "video platform" for use by unaffiliated programmers. Thus, telcos could enter the cable business before state-imposed barriers to local competition were preempted and even if they were not in compliance with the bill's infrastructure obligations. The Need for Staged Entry As described earlier, the size and strength of the nation's phone companies, their demonstrated ability to dominate new markets, the immediate financial constraints facing the cable industry, and the lessons of other de-regulatory models all support the notion of "staged entry" for telephone companies as they seek to offer video services. These factors demonstrate that phone companies, if allowed to enter the video market immediately, would endanger the likelihood of competition in the market for both the video and advanced communications services. Indeed, H.R. 3636 recognizes the need to ensure that dominant local exchange carriers cannot impede competition before they are permitted to enter new businesses by providing for a five-year transition period before they are allowed to offer inter- state long-distance services. Because telcos today possess extraordinary market power, their entry into video services must be staged in such a way that will promote genuine competition. The cable industry proposes that the timing of the telephone companies' entry into television be based on one of two tests, whichever comes first. Test NZ1 is effective competition. The most effective means for eliminating the treat of anticompetitive behavior is to establish "effective competition" as a precondition for allowing telephone companies to enter the video market. In others words, local phone companies should be found to face genuine competition in the local loop before they are allowed to provide video services. An effective competition test to govern telco entry into cable could be modeled on the definition of effective competition in the 1992 Cable Act or on the effective competition test contained in Senator Inouye's S.2112 (the "Information Services Diversity Act of 1991") from the 102nd Congress. Under the 1992 Cable Act, effective competition is defined to mean the availability of an alternative multichannel video programming distributor or distributors reaching 50 percent of households, and 15 percent of households obtaining service from distributors other than the largest one. In S. 2112, effective competition was deemed to exist if 50 percent of all business and residential customers had access to alternatives to the local telco, and 10 percent of all customers obtained service from those alternative providers. In an effectively competitive local exchange marketplace, where consumers have a choice of providers, a local telephone company's ability to cross-subsidize its cable business by shifting the costs of cable to telephone ratepayers would be significantly reduced. In such an environment, moreover, regulatory safeguards stand a better chance of working. Where telcos retain the unfettered ability and incentive to act anti-competitively, as they would if they were permitted to enter the cable business before effective competition develops, the task of detecting and preventing anticompetitive cost shifting would be practically impossible. Under those circumstances, accounting rules and other behavioral safeguards have historically been unable to prevent such conduct. Test NZ2 is date-certain. In the event that effective competition fails to materialize, telcos should be allowed to enter the video market several years after the enactment of legislation to make the local telephone loop competitive. The cable industry proposes that period to be fixed at seven years. At least three factors supports a seven-year expiration period for the video restriction on telcos. First is bank financing. Cable companies and other potential competitors must have the opportunity to raise the capital and invest in efficient telecommunications infrastructures before the telephone companies enter the video market and foreclose that opportunity. A seven-year window will allow cable companies to work through the current transition period and assure lenders that they can achieve earnings on new investments before telcos enter the market. Second is the issue of depreciation schedules. A seven-year expiration date for the restriction on telcos will allow cable companies to assume the expenses associated with new facilities after having depreciated existing plant. Studies have shown that the useful life of most cable plant is about seven years. Consequently, most cable plant is depreciated over that period. Third are the British Telecom and AT&T Electronic Publishing Models. As previously discussed, the British government established a seven-year minimum period after which the restrictions on British Telecom could be reviewed. Likewise, AT&T was banned from entering the electronic publishing market for seven years in order to promote competition. Regarding the outstanding issues of regulatory flexibility, while H.R. 3636 recognizes that "smaller" carriers should be exempted from certain regulatory requirements, the bill should focus on market power, not size, in determining the need for regulatory flexibility. Specifically, the FCC should be required to exempt non-dominant providers of telecommunications services from any common carrier requirements not necessary to accomplish the purposes of the Communications Act. The FCC has long recognized that carriers without market power need not be subject to the same degree of regulation as "dominant" carriers. On much the same basis, Congress itself recently enacted legislation authorizing the FCC to relieve providers of wireless services from the full range of regulations applicable to landline carriers. The treatment of rural telephone companies under HR 3636 raises some specific concerns. They are statutorily exempt from interconnection and equal access requirements, and the FCC is empowered to waive any other infrastructure requirement for common carriers providing telecommunications services in rural areas. These exemptions create a significant regulatory disparity: a rural telco would be able to enter the cable business, but would not be required to provide interconnection and equal access to a rural cable operator that wished to provide telecommunications services. Buyouts and Joint Ventures. The buyout provisions of H.R. 3636 impose a _ (missing text) _ telcos' video programming activities are not subsidized by rate payers and that the waiver will not harm the interests of telephone rate payers or cable subscribers. These provisions substantially weaken the bill's safeguards. The record is absolutely clear that telephone companies have strong incentives to act anticompetitively, given their market power, resources, and regulatory environment, and that they will act on these incentives. The bill also permits a telco to provide "inbound telemarketing" or referral services for its video affiliate if such services are provided on the same terms to any other video programmer or cable operator. A telco can petition the FCC for permission to market video programming directly in a particular geographical area if a "cable operator ... provides telecommunications services and markets such services jointly with video programming services." Allowing the incumbent telephone company, which provides an essential service, to provide inbound telemarketing is an invitation for abuse. The FCC is also required to prescribe rules to prevent cable operators from using cable revenues to "cross-subsidize" the provision of telecommunications services. This requirement is inappropriate since cable companies do not have the ability to charge artificially high cable rates to finance their entry into other lines of business. Telephone companies, as monopoly providers of an essential service, receive revenues based on a rate of return. Consequently, they have both the ability and the incentive to cross-subsidize. Regarding the applicability of the Cable Act to telephone companies offering video services, the following is true. There is no provision in H.R. 3636 that requires a telephone company's video programming affiliate - i.e., the entity that provides cable service to subscribers - to obtain a cable franchise from the local franchising authority. Also, must carry, retransmission consent, and the other Cable Act requirements enumerated in H.R. 3636 apply to the telco's video platform - its common carrier video transmission offering - and not it its video programming affiliate. Thus, the telco affiliate that retails video programming in competition with independent cable operators would not be subject to the regulations applicable to those cable operators. These disparities would place cable operators at a substantial competitive disadvantage. Finally is universal service. As noted earlier, the cable industry accepts its obligation to help ensure universal basic telephone service as it enters the broader market for voice and data services. While H.R. 3636 describes a process for ensuring universal service, there are several concerns with the basic definitions contained in the bill. For example, the statutory language strongly suggests an expansive definition of "universal service" (i.e., what service(s) should be subsidized), requiring the maintenance of "quality services at affordable prices," as well as a universal service "plan" that "seek(s) to promote access to advanced telecommunications services by including [such] services in the definition of universal service ..." The costs of subsidizing such an unrealistically broad definition of universal service could easily overburden providers of telecommunications services and their customers. The bill tempers this broad mandate by stating that the universal service plan should "maintain affordable rates." However, given the bill's scope, such a disclaimer may not be adequate. In addition, the bill states that all providers of telecommunications services must make a contribution to universal service without also making explicit that all such providers would be eligible to compete for the funds collected in a universal service pool. As competitors enter the local telecommunications marketplace, they must begin to share in the costs of ensuring that basic telephone service is available to all Americans. Subject to appropriate statutory guidelines, regulators should determine how much of a contribution to universal service is included in the rates charged by local telcos for service subject to competition, and devise an equitable means of apportioning that amount among all providers of competitive local telecommunications services. The funds collected in this manner should be made available to any provider of local telecommunications that can deliver universal service most economically and efficiently. In conclusion, the national communications infrastructure is a vast mosaic in which cable television is an important piece. In the next few years, cable companies could play an even greater role in that infrastructure than they do today, as the introduction of new technology enables cable operators to add voice and data transmission to their wide range of video offerings. The cable industry envisions a "network of networks" in which Americans can choose between competing providers of advanced communications services. But in order to fulfill that vision lawmakers must proceed cautiously to ensure that true competition can survive. By opening the local telephone loop to competition, and by adopting a policy of entry into television by big telephone companies, lawmakers can take the first major step toward achieving a competitive telecommunications marketplace that is founded on facilities-based competition. The cable television industry is eager to compete and to use its resources to bring advanced communications services to all Americans. H.R. 3636 brings us closer to realizing the common goal of an advanced, competitive, and accessible national telecommunications infrastructure. NCTA looks forward to working with this committee to refine and pass H.R. 3636 in 1994. From mech Mon Mar 14 19:38:33 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29179 for mech; Mon, 14 Mar 1994 19:38:32 -0500 Date: Mon, 14 Mar 1994 19:38:32 -0500 From: Stanton McCandlish Message-Id: <199403150038.TAA29179@eff.org> To: mech Subject: Edward Reilly - National Association of Broadcasters Status: O TESTIMONY OF EDWARD T. REILLY THE NATIONAL ASSOCIATION OF BROADCASTERS BEFORE THE HOUSE COMMITTEE ON ENERGY AND COMMERCE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE ON H. R. 3636 THE NATIONAL COMMUNICATIONS COMPETITION AND INFORMATION INFRASTRUCTURE ACT OF 1993 FEBRUARY 2, 1994 MR. EDWARD T. REILLY: Thank you, Mr. Chairman, for the opportunity to testify here today. The national Association of Broadcasters (NAB) represents the owners and operators of America's radio and television stations, as well as the major networks. As such, we have a significant interest in the subject of today's hearing. Broadcasters have been serving the American people with news, information and entertainment for more than seven decades. Indeed, radio and television have been the heart of the nation's "information infrastructure." As new technologies have emerged in recent years, we have adapted our role to this new environment. Yet we remain the single free and "universal" service available in this country now and in the future. Unfortunately, in the rush to move forward on the so-called "information highway, " we believe the need to include broadcasters as an integral part of that grand design has been largely overlooked by the Administration and by some in Congress. We cannot allow that to happen. Broadcasters play far too important a role in our society for our industry to be shunted aside simply under the guise of embracing new transmission paths. In addition to our transmission role, our program creation _ news, sports, entertainment and public service programming _ make up the bulk of all the content the American people watch and enjoy. We do it in a very cost-effective fashion and we do it for free _ drawing all of our revenue from advertising. Let us look at how broadcasters see the debate unfolding and raise some concerns that we believe you and your subcommittee should address as you move forward with significant telecommunications legislation this session. Whatever Congress and the Administration do on the national Information Infrastructure (NII), the byword must be competition. Broadcasters embrace competition _ it is competition that has made our industry do such an outstanding job of serving the public interest for so many years. In fact, we face internal competition in every market we serve. Competition also will ensure that consumers will benefit both in cost and in services offered. Last Congress, this subcommittee under your leadership passed landmark legislation. The Cable Television Consumer Protection and Competition Act of 1992 was a watershed for our industry and for the American people. The goal was two-fold; provide regulation where there was an absence of effective competition, and create an environment that allowed for greater competition among multi-channel video providers. While there have been many bumps in the road in implementing this legislation, we continue to believe that the 1992 Cable Act was important and necessary legislation that will benefit the American people and it has the potential to create a more competitive telecommunications world. You notice we used the work "potential." We do so because in recent months, we have seen a numer of activities that we believe threaten the ability of competition to flourish in this new world of telecommunications. And if that trend continues unabated, the promise of the Cable Television Consumer Protection and Competition Act may never be fully realized. New technologies may offer American consumers the most exciting and efficient telecommunications system ever imagined. With the spread of fiber optics, satellites, computers, video and audio services, digital technology and more, we are experiencing the "convergence" of technologies that may create thousands of new jobs, allow people to work at home, make our world safer, increase our productivity, and provide access to information and entertainment that is unparalleled anywhere in world history. This convergence of technologies can be good _ good for our industry, good for other communications industries and good for the public. Broadcasters are already exploring many new ways to work with these technologies to provide better and more diverse services to our local communities. But in the wake of the proposed merger of Tele-Communications, Inc. (TCI) and Bell Atlantic, one of the nation's seven Regional Bell Operating companies (RBOCs), this convergence instead may turn into concentration _ concentration of monopoly power, concentration of access (i.e., becoming the ultimate "gatekeeper"), and concentration of resources. Without a "blueprint" from Congress about how convergence can promote competition, we believe this merger represents a net loss to the American people, not a net gain. Competition must be the watchword for any national information infrastructure. Without competition between telephone companies, cable operators, satellites, broadcasters and other media, the American people will not fully realize the benefits of the new technologies all of us are seeking. The Bell Atlantic federal court decision earlier this year was a serious blow to a competitive marketplace. When the court ruled that the cable/telco cross-ownership provisions of the 1984 Cable Act were unconstitutional as they applied to Bell Atlantic, some observers saw the decision as a dangerous step in the telcos' efforts to enter unregulated businesses. It removed the last, though narrow, restriction on telcos entering the mass media/information services area, with few if any restrictions or regulations that would address cross-subsidies and anti-competitive behavior. As we know, the Regional Bell Operating Companies have made no secret of their desire to enter into video and audio services and other activities which they were prohibited from entering under the Modified Final Judgment (MFJ). For many information services providers, the lifting of the MFJ's information service restriction crumbled the wall which protected them from RBOC dominance. In the video industry, the merger of Bell Atlantic with TCI _ coupled with the court decision overturning the cross ownership provision _ may seriously erode the prospect of the development and delivery of future, competitive telecommunications services, unless you and your subcommittee develop legislation that will ensure that competition is maintained. Broadcasters are eager for development of a new telecommunications regime that would allow for fair and equal access to a national information infrastructure. But what we have seen born out of the Bell Atlantic court case and the subsequent announcement of Bell Atlantic's merger with TCI is not competition _ but a joining of two huge communications monopolists with no balancing between entry and the assurance of future competition. Achieving that balance is the role congress must now fulfill. We already know the problems that can occur when communications industries become increasingly vertically integrated _ that is, when the owners of the "software" also control the "hardware" in video and audio delivery systems. The abuses caused by vertical integration were at the very heart of last year's cable bill. For too long, lawmakers, consumers and competitors have seen major cable multiple system operators (MSOs) twist their ownership power of the conduit and the content to their advantage. That market power retarded the development of both potential competitive cable services, such as another cable news channel, and delayed alternative delivery systems, such as MMDS, from coming into existence. In fact, it is the existing cable monopoly which has prompted many on this subcommittee to champion telco entry. We need now to establish the blueprint for that entry, since events have made moot the question of whether there will be entry. We also are concerned with the RBOCs' "changing" attitude toward universal delivery of broadcast service. In many conversations with them over recent years, they have repeatedly assured us that they were interested in carrying broadcast signals in the event that they were allowed to provide video services. In fact, they repeatedly assured us that they had no problem with "must carry," as was enacted last year by the Congress. Yet just a few months ago, all but one of the RBOCs opposed must carry in a filing at the Supreme Court, claiming that must carry would infringe on their First Amendment rights. With these telcos now looking to enter the cable business, it seems as if they have adopted the cable industry's notion of their role as gatekeeper of the video marketplace. Mr. Chairman, our focus today, however, is on the new National Information Infrastructure (NII) that the Administration has outlined and which your legislation, H. R. 3636, attempts to facilitate. Last month, Vice President Al Gore laid out the basic structure of the NII. It is based on five principles, 1) encouraging private investment, 2) providing for and protecting competition, 3) providing open access to the network, 4) avoiding the creation of information "haves" and "have nots", and 5) encouraging flexible and responsive government action. As broadcasters view these principles, we find ourselves in total agreement with then. Without these kinds of basic principles as a framework, the NII will not be able to achieve any of the goals President Clinton, Vice President Gore or any of you have for it. However, the problem is that as the administration views the NII, there apparently is no place for broadcasters. It seems to assume delivery only by wireline transmission. In his remarks before the Academy of Television Arts and Sciences on January 11, the Vice President pointed out that private investment will be spurred by ensuring that there is more competition for all phases of he information toll road. Unfortunately, however, when the Vice President listed the industries he saw as important competitors to provide the infrastructure, he failed to include broadcasters on that tally sheet. Yet broadcasters _ as the result of the tremendous development of digital video delivery systems _ will soon have the technological capability to provide many of the same kinds of services a telephone companies, cable operators or electric utilities without needing the massive infrastructure up-front costs. In addition, because there are an average of five or six television stations and up to 40 radio stations in each market, there is a potential for dozens of competing broadband carriers in each market. In addressing the development of the NII and resolving the question of telco entry into cable, the discussion has focused on the advent of competition between and among just two distinct monopolies _ local telephone companies and cable TV operators. In opening these two monopolies to competition between each other and hopefully other entities, we must not ignore and damage existing, related competitive markets. While two competitors are better than one, we want an information infrastructure with as many players in every market as possible. On the issue of open access, the Vice President emphasized the need to ensure non-discriminatory access to telephone company networks, including access for public broadcasting. But what about commercial broadcasting? Is it not in the public interest to ensure open access for local radio and television stations, often the only providers of local news, weather information, and public service programming? We are the only ones who provide their services free to both rich and poor, literate and illiterate, educated and those not so fortunate. The Vice President also discussed the new approach to regulation that would be offered to broadband, interactive services. They could choose the current provisions of the 1934 Communications Act, or they could opt for regulation under new Title VII, which would trade non- discriminatory access to their facilities for de-regulation. Yet what about the huge regulations placed on broadcasting? If those were modified, could not this free and ubiquitous, already -universal service be able to provide such services to nearly every segment of the public? Through the NII, the government is attempting to establish comprehensive, technology-neutral places that encourage the universal distribution of broadband services to the public. Yet in so doing, the NII has yet to deal in any meaningful way with the role broadcasters can and should play in ensuring universal, open access to many of these services. Mr. Chairman, broadcasters believe that the NII must be expanded to include our industry as a vital spoke in the wheel of service delivery and technological development. We must have a legislative framework that will set reasonable safeguards to protect consumers and current content providers if we are going to allow virtually unrestricted telco entry into video and other services. Any legislation must provide at its roots real choice and real benefits to consumers _ along with assurances of access to telco and cable delivery systems by a wide range of information providers. Crucially, you must make sure that the risks of such entry into unregulated businesses are borne by the shareholders of these companies, not the rate payers for either cable or telco. To do otherwise would be grossly unfair and set the stage for an environment where the multitude of voices could not expect to compete. Some have suggested that antitrust law can prevent misbehavior on the part of telcos or cable in such cases. We respectfully disagree. The long, expensive and uncertain nature of antitrust litigation and enforcement makes it an unwieldy tool for the fast-moving field of telecommunications. For example, the MFJ was agreed to only after 10 to 12 years of litigation. Competitors simply cannot afford to wait 10-12 years forthe Congress to establish the environment for information diversity to flourish, not the courts, and not the Justice Department. Their role should be limited to enforcing the law, not creating it. There are also copyright concerns regarding the NII legislation. Some, for example, would like to use the NII legislation as a backdoor means of expanding performance royalty rights, which congress has repeatedly refused to give. Although not within the jurisdiction of the Energy and Commerce Committee, NAB urges the Congress to thwart any such efforts. Before looking at your bill, H. R. 3636, let us summarize the position of the National Association of Broadcasters on the NII, which was approved by our Joint Board of Directors just two weeks ago. Broadcasters need and want competitive telephone company entry into the video distribution marketplace. Our history with monopoly cable operators, particularly during this past year's retransmission consent discussions, proved that unless there are alternative distribution systems besides cable, we will continue to have little ability to receive appropriate value for our signals when they are carried by a multi-channel provider. Thus, the essence of the NII _ to bring about a new competitive information infrastructure for all Americans _ should help bring about the kind of marketplace where local broadcasters can flourish. But again, it appears that the Administration continues to overlook the realities of what broadcasters do and can do as part of this new telecommunications landscape. Over-the -air, locally-based radio and television broadcasters are and will remain the ONLY means of providing innovative, universal band non-discriminatory service with no direct charge to the public. To that end, broadcasters support these basic tenets which we urge you to weave into any legislation. First, the removal of regulatory barriers that inhibit competition is a stated goal of the NII. To ensure that regulatory freedom, we believe that government should review broadcast rules and modify and eliminate any that may restrict the full participation by broadcasters in the NII. Remember _ a bit is a bit is a bit. In computer language, that means that a video signal transmitted digitally is the same thing as an audio signal or a data transmission or any other digital communication. With the coming advent of digital broadcasting, both for radio and television, broadcasters will be able to provide a full panoply of services in addition to our current programming if we are allowed to do so. With the increased spectrum efficiency that digital technologies allow, broadcasters could and should provide new competition in a number of services now provided by wireline businesses. Data transmission, voice and paging services within existing spectrum _ all of these possibilities and more loom on the horizon. Imagine if you will, these potential new services broadcasters could provide _ broadcasting information to personal digital assistants that people carry in their pockets or briefcases; broadcasting data to pagers or fax machines; broadcasting data or even TV programming to laptop computers; and providing additional information along with advertising. For example, if a car commercial were airing, viewers could access availability, price information, even maps of how to get to the nearest dealer. In a digital world, our efficient, wireless distribution system can and should form the basis for additional competition in our information infrastructure. But to get there, we need a new regulatory framework for our business that makes sense for the public as well. Wireless communications generally are a more efficient means of providing universal service, in part because the capital costs of distribution are often much less when compared to wired forms of communications like telephone or cable. Broadcasting, of course, must be included in any list of wireless media. Indeed, broadcasting has the widest coverage of any wireless or wired media today. More households have televisions and radios than have telephones or cable service. Even with 60 percent of the nation subscribing to cable, only 40 percent of the nation's televisions are actually hooked up to a cable. Over-the-air free television and radio reaches nearly every American and at a fraction of the cost of providing wired services. We are the ones people turn to in times of disaster, such as the recent Los Angeles earthquake, where we save lives and provide massive public service benefits. Beyond broadcasting's natural wireless advantages in providing universal service, broadcasting has a specific, unique statutory mandate. The communications Act of 1934 explicitly requires a broadcasting structure built upon a foundation of locally-based radio and television stations that are equitable and widely distributed throughout the nation. Furthermore, these local stations have public interest obligations that are incumbent upon no other wired or wireless medium. Recognizing broadcasting's place in the communications infrastructure of the future will ensure that this public service remains available to all of our citizens. All of these new business opportunities are ancillary to our basic charge under the 1934 Communications Act. Yet in many ways, broadcasters are still being treated by regulators as they were 70 years ago when the first AM radio stations went on the air. We are proud of our record of serving the public interest and have no desire to stop doing that vital work. But what we do seek in this new world of information providers is the removal of artificial barriers and impediments which limit our ability to serve and to compete against business operators with much deeper pockets. Does it make sense, for example, to allow Bell Atlantic and TCI to merge, yet restrict the number of local television stations a single company may own to 12? In a world of "500 channels," how can we possibly hope that single-channel providers will survive unless we give them the regulatory tools to do so? One of the frequently-cited goals of the National Information Infrastructure policy debate is to assure universal service to the public, so that our nation does not evolve into one of communications "haves and have nots." Making sure broadcasting stays strong is one way (and maybe the only way) to assure that universal service will continue for years to come. There is also the issue of jobs. Given the Administration's and Congress' desire to increase jobs, it is imperative that they consider the contributions to employment made by the broadcasting community. Of course, there are the 187,000 Americans who presently work at local radio and television stations, broadcast groups, and national networks. Equally important are the multitude of jobs created as a result of the advertising aired on local radio and television stations. By airing this advertising, businesses, both large and small, and "get the word out" about their products and services. As suppliers of by far the largest audiences for advertising messages, local and national radio and television broadcasters provide an essential function in the workings of the local and national economies. By providing these large audiences, broadcasters are providing a necessary input for many businesses to attract a large enough customer base. Without attracting a large enough potential customer base, many of these businesses will not reach a scale to warrant investing in new products or services. Hence, they would not invest, thereby giving up the possibility of new jobs and greater output. Second, the NII can only work if the government establishes clear and enforceable policies that promote full and vigorous competition among wired and wireless service providers. Therefore, we believe the following safeguards should be included in any legislation that this subcommittee approves, a competitive multi-wire marketplace should be promoted by prohibiting telephone company purchase or control of existing "in-region" cable systems, and by requiring the establishment of common carrier-based platforms. There is NO competition created when major telephone companies simply buy up existing cable systems. In fact, such purchases will simply foreclose the market from any real competition for video and audio services. We note that the Administration strongly supports this position, to provide continued access by broadcasters, regulatory standards must be set to ensure non-discrimination in "navigational" systems (i.e., in those systems in the NII used to help consumers make choices about services which are available to them.) In a world of 500 "channels," a key to using such a system will be how consumers access the various choices available. As we learned when a few major airlines owned the reservations computer network used by most travel agents, there is plenty of opportunity to "fudge" the system to favor one provider over another. When a customer dials up this information highway program on his or her computer, how that first menu appears will have a great impact on which choices that consumer makes, to protect against the possibility of cross subsidization, telephone companies should be allowed to offer video/audio services only through separate subsidiaries, with structural separations beyond accounting procedures. It is not enough merely to have telephone companies build a temporary "fence' around their unregulated information service offerings. If telephone business to compete with other providers who do not have that resource, then no real competition will survive, legislation should include swift and certain penalties for anti- competitive behavior. We believe that there should be specific, realistic disincentives to deter telephone or cable companies from trying to squeeze out competitors using their "highways", the wired delivery of video/audio programming must ensure the integrity and preservation of the locally-based system of broadcasting, through continuation of such rules as "syndicated exclusivity" and "network non-duplication." If broadcasters cannot protect the programming that they create or purchase for exclusive distribution in a given market, then they will soon lose the ability to bid for and to carry such programming. It is vital that Congress ensure that the FCC's rules which protect that proprietary interest be maintained, the protections of the 1992 Cable Act, including must carry, retransmission consent and buy- through prohibitions, should apply to the distribution of video programming through wired delivery systems. Broadcasters fought hard for the right to control the use of their signals by others. That right _ thanks to you and the 1992 Cable Act _ has been restored. But the advent of new technologies can threaten our ability to make sure that we do not once again find ourselves at the short end of the stick. These principles must guide you and your panel as you weigh how best to craft legislation that will accommodate the new technologies while not diminishing the ability of current technologies to continue their important service to the public. It would be a shame if our economy supports the construction of a digital highway that ends up traveled by fewer providers than current exist, instead of more. Let us look specifically at your legislation and see how it stacks up against these basic principles. In looking at the Chairman's bill, H. R. 3636, we believe the authors have taken an important first step toward trying to untangle the twisted web of telco entry legislation. An attractive feature of this legislation is that it requires telcos which provide video programming directly to their subscribers to offer a common carrier-based video platform _ which the FCC has termed "video dial tone." The addition of a video common carrier tier will help provide competitors of the telco-provided video delivery system with nondiscriminatory access to the telco's customers. This is certainly a big step toward ensuring competitive fairness. However, the bill contains several problem areas which must be closed. Foremost is the anti-buyout provision, contained in section 656 (a) . We favor prohibiting telcos from buying existing cable systems within their telephone service area. The anti-buyout provision of this legislation, however, is effectively neutralized by an exemption contained in proposed section 656 (b). Section 656 (b) (2) makes the buyout prohibition inapplicable if the cable system serves less than ten percent of the households in the service area of the carrier "and its affiliated common carriers." As the provision seemingly applies to each cable MSO separately, I doubt that there are many cable operators, if any at all, that serve ten percent of the total service area of any RBOC or GTE. The anti-buyout provision, therefore, would affect only small telephone companies in non- rural areas. As proposed, section 656 (b) (2) could merely replace a local cable monopolist with a larger, more powerful telephone monopolist. In order to ensure competition in the video programming delivery market, telcos should not be allowed to purchase existing cable systems within their telephone service areas. Such a flat-out prohibition _ with no exemptions _ is contained in Senate bill S. 1086 as an effective means of promoting competition. Instead, the bill allows telcos to own up to five percent of an existing cable system. That provision enhances competition. Section 656 (b) (2) also could thwart the retransmission consent provision of the Cable Act. If a local broadcaster could not reach agreement with the telco for carriage on its cable system, the only alternative in many cases would be carriage on the telco-operated video dial tone system. Absent real competition, particularly the assurances of two wires to each home, the telco would control total access to the home, eliminating any real bargaining on retransmission consent. While we support the establishment of a common carrier platform as found in H. R. 3636, we call upon the subcommittee to strengthen the provisions that require that the video platform's customers receive at least the same quality service for transmission, inter- connection and inter-operability as those programmers carried on any other telco-provided video programming service. Such a change will ensure that independent program providers, such as local broadcasters, will not be 'ping-ponged" back and forth between the telco's cable service and is common carrier platform. The ability of the local telco to provide tow video services which are regulated differently can only benefit consumers and other competitors if there is a second wireless carrier serving the same area. In the event that is not the case, the subcommittee should maintain common carrier regulation on the telco, even if it provides video service directly to the home. Similarly, syndicated exclusivity and network non-duplication could be lost as local market protections for broadcasters. We urge that H. R. 3636 re-affirm those regulations for all uses of broadcast signals, whether regulated by Title VI (cable), Title II (common carrier) or a new Title VII of the 1934 Act. H. R. 3636 should also be modified to address the potential anti- competitive problems that would be created by not addressing the ability of telcos to enter into joint ventures or to acquire sizable minority interests where they can exercise effective control. Another point which needs to be strengthened is the separate subsidiary requirement for the provision of video programming. The current legislation only sets out the broad plan for the separate subsidiary requirement; it merely provides that the telco and its video programming subsidiary must maintain separate books and records, must conduct separate promotional advertising and cannot own real or personal property in common with each other. A much stronger separate subsidiary provision is found in H. R. 3626, which deals with electronic publishing by RBOCs. That legislation details restrictions on the RBOC regarding such matters as joint directors, joint personnel, joint equipment, joint investments, and common marketing tools, such as names, trademarks and service marks. The provision in H. R. 3626 provides a much better prospect for real competition. We can think of no valid reason why electronic newspaper publishers should have greater protection than other information services providers. Thus, we urge the adoption of similar separate subsidiary requirements for all telcos in the provision of video programming as part of your bill, H. R. 3636. We stand ready to work with you, other members of the subcommittee and your staff to shape this legislation so that it will accomplish all of the goals both you and we seek. But the bottom line is that broadcasters cannot and must not be ignored in this process. Whatever legislation is produced must take into account the unique role that we play, and take advantage of our universal access, our local service and our free distribution system as a vital part of the information network of tomorrow. President Clinton's call for passage of the NII this year meets with our concurrence. Unless Congress acts soon to place meaningful rules on the convergence of telephone, cable, computer and related industries, we urn the risk of having the marketplace act and deny the very benefits to all Americans that the NII envisions. If there are more mergers like those announced in recent months, then the rules will be set before Congress has the chance to establish a game plan that will ensure that these mergers do not foreclose competition in the broadband delivery world. But in our haste to craft those rules, broadcasting must be a factor in the framework you and this subcommittee create. Wireless technology such as ours, augmented by the digital revolution we are pursuing, will offer a myriad of new and increasingly efficient ways to deliver all kinds of services beyond traditional broadcasting to all Americans. You cannot and should not allow this potential resource to be denied to the American public based on outmoded assumptions about what our industry can or cannot do. In the spirit in which you and the Administration want to move forward on the NII, we pledge to do everything we can to help you achieve a truly balanced telecommunications policy. Above all else, that policy must ensure that there is continued competition _ not just competition between telephone companies and cable, but flourishing competition from other existing and yet-to-be-created media, including broadcasting. Let us not allow our wanderlust search for the information toll road to cause us to abandon our reliable, resilient and time-tested system of over-the -air radio and television. Again, on behalf of the NAB, thank you, Mr. Chairman, for the chance to discuss our views with you. From mech Mon Mar 14 19:39:05 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29230 for mech; Mon, 14 Mar 1994 19:39:04 -0500 Date: Mon, 14 Mar 1994 19:39:04 -0500 From: Stanton McCandlish Message-Id: <199403150039.TAA29230@eff.org> To: mech Subject: Marilyn Praisner - National League of Cities Status: O TESTIMONY OF MARILYM PRAISNER CHAIRMAN OF THE COMMITTEE ON MANAGEMENT AND FISCAL POLICY ON BEHALF OF THE NATIONAL LEAGUE OF CITIES THE NATIONAL THE UNITED STATES CONFERENCE OF MAYORS THE NATIONAL ASSOCIATION OF COUNTIES THE NATIONAL ASSOCIATION OF TELECOMMUNICATIONS OFFICERS AND ADVISORS BEFORE THE U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON ENERGY AND COMMERCE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE FEBRUARY 2, 1994 HON. MARILYN PRAISNER: I would like to thank the Chairman and members of the Subcommittee for the opportunity to testify today on behalf of the United States Conference of Mayors, the National League of Cities, National Association of Counties and the National Association of Telecommunication Officers and Advisors (collectively, the "Local Government Organizations") concerning H.R. 3636. While we have long supported ensuring a more competitive environment to enhance our national telecommunications infrastructure, we call on Congress and the administration to make municipal and county leaders full and equal partners in building this new information superhighway. Although, global competitiveness and the information superhighway have occupied much of the focus of this legislation, it is critical that the bills assure that our country's communities _ large and small, rural and urban, rich and poor _ benefit from the changes in telecommunications. It is at the community level where the true impact of these dramatic changes will be experienced _ in people's personal lives, their jobs, schools, libraries, hospitals, transportation, and public safety. Local Government Organizations welcome and encourage the development of the information superhighway. Local Government Organizations believe that development of the information superhighway may result in economic development and new jobs in local communities. Local Government Organizations have long-standing policies that state that there should be greater competition in the local telecommunications market place, which should result in lower prices for consumers, businesses, institutions and other users of telecommunications services. In many communities, local governmental entities are one of the largest users of telecommunications services and would benefit from the lower prices that would result from competition. However, as custodians of public property, local governmental authorities have a responsibility to ensure that the development of the information superhighway is done reasonably, properly and in a safe manner. In order to protect and advance the public interest in the information superhighway, the legislation must affirmatively preserve a local community voice in the emergence of a competitive voice, data, video, and multimedia landscape. Federal policy must allow local governmental entities the authority and flexibility to protect local community interests. Congress must not leave local interests at the mercy of "trickle down" national telecommunications policy. The Cable Communications Policy Act of 1984 ("Cable Act"), as amended in 1992, serves as a model of how Congress can ensure that the information superhighway develops in a manner consistent with the public interest. In enacting the Cable Act, Congress confirmed the right of local franchising authorities to franchise cable operators and to ensure that cable subscribers receive appropriate benefits and protection. The Cable Act struck an appropriate balance between streamlined regulation and public needs and interests. The cable industry has experienced tremendous growth and development since the Cable Act was enacted in 1984, while franchising authorities _ through the franchising process _ have ensured that cable subscribers received appropriate benefits and protection. The Cable Act demonstrates that local regulation in the public interest would be compatible with the development of the information superhighway. In fact, the growth of the cable industry has been so successful that the Local Government Organizations now urge Congress to take the next step and enact legislation that will further promote competition to cable operators in the provision of information services, subject to appropriate safeguards. At this time, telephone companies ("telcos") have the capability of being one the few viable alternatives to traditional cable operators. We are pleased that H.R. 3636 would permit telcos to provide multichannel video programming services as an alternative to traditional cable operators. However, we are deeply concerned that H.R. 3636 would not subject such telcos to the same public interest obligations and requirements to which cable operators are subject. In addition to promoting competition, H.R. 3636 should ensure that the public receives the benefits and protection they have a right to expect from commercial users of public property. Local Government Organizations believe that the best way to ensure that telcos providing video programming services meet local communications needs is to subject them to the same franchising structure and public interest regulations that have operated successfully with respect to cable operators. H.R. 3636 should be amended so that telcos are subject to the local franchise requirement under section 621 of the Cable Act, and to the other appropriate public interest obligations under the Cable Act. Through the franchising process, local communities can ensure that telcos, among other things, provide educational and community communications networks which provide local information services responsive to local community needs, such as, but not limited to public, and educational access channels, facilities and equipment; provide channel capacity and associated support to assist local governments in providing improved services and in improving communications with their citizens through institutional networks; compensate local governments for the for-profit use of local public property and right-of-way; abide by local customer service standards and other consumer protection measures to prevent inadequate or discriminatory service; and do not discriminate against, for example, low-income neighborhoods. The same requirements should be imposed on all providers of multichannel video programming to ensure that there is open market entry and uniform rules for all participants. In addition, H.R. 3636 should be amended to prohibit a telco from buying out, or obtaining any ownership interest in, a franchised cable operator in their telephone service area, except in exception circumstances subject to approval by the local franchising authority. Moreover, H.R. 3636 should contain provisions authorizing local governments to require local communications facilities to deliver governmental and other community related services. This authority should give local governments discretion to require capacity, technical support and development of demonstration projects. Local Government Organizations have other concerns that must be addressed. We are concerned about three aspects of the proposed telecommunications infrastructure: 1) the privacy safeguards needed to protect local governmental information; 2) the revenue implications for cities and counties; 3) further assurances that the information superhighway will result in the intended public benefits. Local Government Organizations believe that the legislation should contain privacy safeguards which, among other things, would deter and detect unauthorized access to local government information, such as property tax records. With regard to revenue implications, we have broad concerns about the potential impact and lack of clarity with regards to local rights and authority. Many cities rely of franchise agreements to help finance needed public services. Franchise agreements also provide local governments access to public education and government channels. An additional revenue concern for local governments is whether out-of-state telephone companies and other telecommunications providers would be required to collect and remit sales taxes on goods and information services purchases made by persons in the local jurisdiction, and thereby restore a level playing field the competition between local merchants and out-of-state retailers. In addition, Local Government Organizations believes that the legislation should contain stronger provisions to ensure that: (a) the information superhighway produces the local public benefits described above, such as, but not limited to, universal, non- discriminatory service, and the provision of public, educational and governmental access to the information superhighway; and (b) information superhighway providers have the technical, financial, legal and other qualifications necessary to operate. Since the local governmental authorities are closest to the operations of a telecommunications system in their community, they should have a role in ensuring that such goals are achieved. The vision for a highly advanced, robust telecommunications landscape which will deliver services that are meaningful to the businesses, institutions and residents of each individual community will be realized only if such communities have a role in their development. That role must balance the need for streamlined entry and relaxed but uniform regulation with the needs and interests of people in their own unique locales. Localism can not be administered nationally, and Congress and the federal government must not forget the diversity of our nation's communities in designing the new telecommunications environment. The Local Government Organizations look forward to working closely with the Subcommittee on these issues to make all consumers the true beneficiaries of the new information superhighway. From mech Mon Mar 14 19:39:21 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29241 for mech; Mon, 14 Mar 1994 19:39:20 -0500 Date: Mon, 14 Mar 1994 19:39:20 -0500 From: Stanton McCandlish Message-Id: <199403150039.TAA29241@eff.org> To: mech Subject: David D. Kinley - Sun Country Cable Association Status: O STATEMENT BY DAVID D. KINLEY, PRESIDENT SUN COUNTRY CABLE ON BEHALF OF THE SMALL CABLE BUSINESS ASSOCIATION BEFORE THE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE ON H.R. 3636 "THE NATIONAL COMMUNICATIONS COMPETITION AND INFORMATION INFRASTRUCTURE ACT OF 1993" FEBRUARY 2, 1994 MR. DAVID D. KINLEY: Good morning Mr. Chairman and members of the Subcommittee. My name is David Kinley. I am president of Sun Country Cable, a cable television company which operates in 16 small towns with just under 10,000 customers in Washington, Oregon, and northern California. I am also Chairman of the Small Cable Business Association ("SCBA"). The SCBA was formed by 100 small, rural cable operators during an emergency meeting in Kansas City on May 15, 1993. That organizational meeting was called in response to the more than 600 pages of incredibly complex rate regulations that had just been released by the FCC. The Association has grown rapidly in its eight month existence. It now has 278 member companies, all of whom serve rural areas and small towns throughout America. But for these small companies, service to many of these areas might never have been provided. SCBA member companies serve 1.5 million subscribers, slightly less than three percent of all U.S. cable customers. The median company size is less than 1,000 customers. On behalf of all the members of SCBA, I want to commend you, Mr. Chairman, and the members of the subcommittee, for your efforts in dealing in a comprehensive and reasoned manner with extraordinarily complex telecommunications policy issues that are critical to our nation's future. We support these efforts and your recognition of the need to incorporate maximum regulatory flexibility in dealing with these issues. WE urge you to ensure that small, rural cable companies will be active and vital participants in building the National Information Infrastructure. It is vital that the less populated areas of our members and others like them serve will have access to the same array of services available in the top markets. We join FCC Chairman Hundt in supporting the committee's efforts to guarantee the inclusion of all Americans in the information economy. We also agree with Assistant Commerce Secretary Irving that many rural markets will be unable to sustain competition between two competing systems. With the foregoing in mind, I would like to turn to several issues of particular concern to small system operators: joint ventures, mergers, and acquisitions, the establishment of an information superhighway trust fund, regulatory parity and open access. HR3636 prohibits joint ventures, mergers and acquisitions between telephone companies and cable companies, except in rural areas. The bill defines those areas generally as places with a population of less than 10,000, known as a "rural exemption". The key issue can sustain competition between two or more sets of video service providers. The types of facilities contemplated for the National Information Infrastructure are quite different from plain old telephone service or plain old cable service. The services will be very sophisticated. Many are only now being developed. Consequently, we so not know what it will cost to provide these services in small town America. The only certainty is that the facilities required in the years to come will cost far more than the typical cable plant or telephone network that is in place in rural areas today. In the small cable business, we focus on the number of homes we serve, rather than the population in the area. In rural areas we serve, some portion of the population will be scattered so widely that the homes cannot be served economically. In addition, a population of less than 10,000 on average would equate roughly to only 3100 homes. In terms that the telephone companies use, that would probably average less than 3500 access lines. This figure is well below the figure used by the FCC to define small local exchange carriers. That figure is 50,000 access lines. Our understanding is that a local exchange area served by 50,000 access lines would average roughly 40-45,000 homes. In the cable industry, this equates roughly to a system with approximately 20- 25,000 subscribers. We note that the definition adopted by the Small Business Administration of a small cable operator works out to about the same size. Therefore, we recommend that the exemption to the prohibition on mergers, etc. apply not only in areas of not more than 10,000 population, but also to cable operators serving less than 25,000 subscribers. We fully support the proposal to authorize the FCC to grant waivers of the prohibition. However, the FCC must be afforded greater discretion to grant waivers where service is not likely to be available from multiple providers. The Commission should be directed to act expeditiously to consider such requests and be favorably disposed to granting waivers for cable systems serving less than 75 homes per plant mile; and take into consideration other factors in the public interest, including but not limited to the size of the company and whether the cable or telephone system has adequate financial capability to make the necessary investment in the information superhighway. SCBA also urges the Committee to revise HR 3636 to establish an Information Superhighway Trust Fund. ("ISTF"). The ISTF would be modeled on the funding mechanisms currently employed to provide rural America with universal telephone service. Funding for the trust fund would come from the users of telecommunications of all sorts. Its goal should be to assure universal access to the NII, to avoid shutting anyone out of the new information economy. The ISTF would have two related objectives: (1) to provide financial resources to help small companies reach rural and inner city areas which would otherwise be bypassed by the NII, and (2) to help schools, community groups, non-profit organizations and other deserving institutions obtain the resources necessary to purchase the computer hardware, software and related interface equipment required to access the NII. Telephone Companies providing video services should be subject to the same affirmative regulatory requirements as the cable operators with which they compete. We applaud you recognition that telephone companies entering the video business should be required to pay franchise fees. However, like cable operators, they should also be required to obtain a franchise, provide access channels for public, governmental and educational uses, and comply with all other regulatory requirements typically imposed on cable operators. The SCBA endorses equal access and interconnection. Without the free flow of information and ideas between competing technologies and communities large and small, the telecommunications superhighway now envisioned for this country will never come to fruition. It is for this reason that HR3636's treatment of rural telephone companies must be viewed with particular concern, as they are exempt from interconnection and equal access requirements. In effect, they would be allowed to provide video services in competition with rural cable companies, but would bear no obligation to provide equal access and interconnection to a rural cable operator. The SCBA urges that all telephone companies and cable companies, large and small, be subject to equal access and interconnection requirements. Mr. Chairman, in summary, I want to emphasize th importance for this committee to 1) Allow joint ventures, mergers, and acquisitions of small cable television companies in low-density, rural areas under specified circumstances; 2) Create an Information Superhighway Trust Fund; and 3) Assure regulatory parity between existing and new entrants into cable television and related services operating in competition with one another Thank you for this opportunity to testify. END From mech Mon Mar 14 19:39:45 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29250 for mech; Mon, 14 Mar 1994 19:39:44 -0500 Date: Mon, 14 Mar 1994 19:39:44 -0500 From: Stanton McCandlish Message-Id: <199403150039.TAA29250@eff.org> To: mech Subject: Gary McBee - U.S. Telephone Association Status: O PREPARED TESTIMONY OF MR. GARY MCBEE, CHAIRMAN UNITED STATES TELEPHONE ASSOCIATION THE HOUSE ENERGY AND COMMERCE COMMITTEE, SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE THURSDAY, FEBRUARY 3, 1994 MR. GARY MCBEE: Mr. Chairman, I am Gary McBee. I am the chairman of the United States Telephone Association (USTA), on whose behalf I am testifying today. As you know, USTA represents over 1,100 local telephone companies ranging in size from the RBOCs and GTE to rural carriers with fifty customers. More specifically, USTA members are the proprietors of the finest public switched network in the world. Local telephone companies are the only providers of universal service. Our nation's local phone companies, together with our brothers and sisters in the CWA and IBEW, have created and operate the finest information transportation system on the planet. While others operate important appendages in the public telecommunications system, it is the local phone companies who provide the heart, the muscle, and most of the brains for this dynamic body of networks. And as the Congress moves to perform major surgery on this system, we need to be mindful of the first precept of medicine, do no harm, to the health and vibrant system that is growing stronger and smarter each day. While we are unabashedly proud of our system, we are aware that even a basically health body may need development to reach its full potential, and USTA pledges to work with the Congress to enact progressive legislation. Indeed, USTA has been working with Congressmen Boucher, Oxley, Fields, and other for the past six years to enact legislation to spur modernization of the network. As early as 1990, that legislation provided for competition in the local loop so long as competitors would operate under the equivalent regulation as the incumbent phone companies. I want to specifically congratulate Congressmen Markey, Fields, and the rest of the Subcommittee who have worked on H.R. 3636. We, at USTA, believe that the bill clearly takes several steps in the right direction. Specifically, it is the most comprehensive treatment of how to deal with funding universal service that has been authored to date. While I will have several suggestions to improve the bill in this area, I want to clearly express our support for the general approach. In essence, we believe that progressive legislation should have three key elements. First, equal business opportunities; that is, LECs should be able to move into new lines of business as easily as competitors move into ours. Second, regulatory parity; that is, even if business freedoms are granted de jure by legislation, we cannot, as a practical business matter, compete unless we all operate under the same rules. Third, an equitable sharing of the cost burden of providing universal service; as I said earlier, only local phone companies have a universal service obligation. We currently finance the provision of universal service through a complex system of implicit and explicit subsidies which I will describe more fully in a moment. Replacing the utility model of local phone service with a competitive model demands that this system be dramatically altered just to maintain the current level of universal service. Several studies and independent news articles, including the Wall Street Journal, have placed the amount of universal service support at risk in the neighborhood of $20 billion dollars a year. This burden is carried disproportionately by the nation's local telephone companies, which places them at a competitive disadvantage to new market entrants. It is not enough to say that effective competition required that all competitors must contribute to universal service. It also is essential to assure that their contributions are adequate to the task and that they are shared in an equitable and market-neutral manner, such as proportionately to each provider's participation in the market. It also is essential to assure that certain existing mechanisms, such as the Universal Service Fund that presently supports some of the LECs service high-cost rural areas, are protected during the transition. A procedure must be established by Congress that will ensure that the FCC and the state commissions act concurrently with the opening of the local exchange market. Only if universal service is funded in a competitively neutral manner will we be able to ensure the provision of today's basic service at affordable rates while expanding access to new education, health and entertainment services. However, if we fail to construct an effective system of funding universal service to deal with the competitive environment, the effects could be devastating, and so USTA cautions, we must restructure the universal system correctly the first time. Wisely, Congress chose not to specifically define universal service in the 1934 Communications Act. As a result, the concept has grown and changed over the years. For example, at one time, universal service meant access to a party line, now we all expect private lines. Indeed, the precise technical characteristics of universal service may still differ from area to area. But the common thread that has held universal service together is a social contract between local phone companies and their regulators to assure that basic phone service would be priced at levels that most people could afford, even though the actual cost of providing the service is substantially higher. Hence, universal service is inherently tied to rates. In fact, residential local phone service on average generally costs about twice as much to provide as phone companies charge consumers. In rural areas, the cost for providing service may be many times the rates charged to consumers. Historically, the difference between the amount customers pay for their service and the cost to provide service has been made up by the rates local phone companies charge for other services such as long distance, touch-tone, and including some non-justified charges such as for color telephones. Since large businesses have been the prime users of these other services, they have been the greatest contributors to universal service. In short, regulators have consciously and affirmatively set prices that would cross-subsidize universal service rates with money earned from charges for other services provided predominantly to large business users. The mechanisms used to effect these cross-subsidies have been both explicit (e.g. the University Service Fund) and implicit (e.g. long distance cost allocations and rate averaging). In addition, some of these explicit mechanisms were targeted to companies serving high cost areas (e.g. the Universal Service Fund) and some to low income individuals (e.g. lifeline and like-up programs). As long as local phone companies retained an exclusive franchise to provide all of these services, the system worked. However, as the telecommunications market has changed over the years, the system has been modified. First, the customer premises equipment (CPE) market became competitive, and its contribution to universal service was eliminated. Then, with the divestiture of AT&T, the toll settlement pools among the then Bell System companies, as well as the nation's independent telephone companies, were discontinued. Residential customer access charges of $3.50 per month and similar charges to business customers were used to lower long distance charges by several billion dollars. To prevent additional increases in local telephone rates, some $10 billion in interstate subsidies for local loop costs was shifted to the interstate access services provided by local telephone companies to interexchange carriers. This, and comparable shifts among intrastate services, gave rise to the concerns over uneconomic bypass and stimulated the development of access competition. Not surprisingly, those most affected by access charges, the interexchange carriers and large volume users such as big business, as well as those who see an opportunity for structurally advantaged competitive entry, such as alternative access providers (ALTs) and competitive access providers (CAPs) are among those clamoring loudest in favor of competition for the local phone companies. And, thanks to technological advances and regulatory actions at both the state and federal level, competition in the local exchange is here and growing. CAPs and ALTs, often with significant financial ties to the cable industry, are competing in the lucrative business market. Similarly, MCI has recently announced its intention to enter the access market, and AT&T, which last year purchased that nation's largest cellular carrier, McCaw, is similarly poised to provide local competition. Merrill Lynch independently documented the effect of this competition when it reported to its clients following the expanded interconnection and switched access ruling the FCC made this summer, that 25 percent of the local telephone market was now subject to competition. None of these corporations are truly new entrants deserving of regulatory protection normally provided to "mom and pop" operations or small businesses. Quite the contrary, the competitors to local phone companies are actually large, well-financed firms that are siphoning off enormous revenues that would otherwise go to supporting universal service. Since competitors do not have universal service obligations, they are free to enter only the high volume business markets. Since they do not have to serve all customers and do not have to support residential rates with revenues from business accounts, they can undercut the local phone company and still earn sizable profits. And they can do all of this while service a relatively small portion of the total market, and they can do it with the local company still involved, hence the famous 99 percent market share figure. For example, in California 1.7 percent of the state's land area produces 49 percent of the business calling revenues. Six and one- half percent of the land area produces 90 percent of the business calling revenue. California is not a unique example. In New York state, one percent of the land area produces 54 percent of the business calling revenue. Ten percent of the land area produces 90 percent of the business calling revenue. Nationwide, the stakes of this competition are enormous. Last July, Calvin Monson, who helped design the pro-competitive telecommunication policies recently instituted in Illinois while he was Director of Communications Policy at the Illinois ICC, and Jeffrey Rohlfs of Strategic Policy Research documented a $20 billion annual support embedded in telephone company rates which is used to maintain universal service. The Monson/Rohlfs study concluded that if local phone companies lost this revenue to competition, residential rates would, on average, double. A separate study by BellCore last summer corroborated the magnitude of contribution to universal service when it indicated that LEC-provided interexchange access and toll services contributed more that $18 billion to maintain universal service. Two points must be made in summary. First, CAPs are free to focus on large business customers and urban markets where traffic is concentrated and costs are low. The LEC services against which the CAPs compete have been artificially overpriced and geographically price averaged to meet public policy obligations to support universal service. Bottom line, the current contribution to universal service will be lost, either through the loss of those services that provide support or through repricing such services to meet competition unless a new, competitively neutral funding mechanism is established. Similarly, while competition will primarily emerge in high density affluent urban markets, there are some urban areas and vast rural areas that are a long way from being financially attractive. And if competition does come to these rural areas, it will likely only target profitable business segments of the market. If a small rural telephone company loses its franchise to serve the profitable military base or university to a CAP, who will have the obligation to serve the remote resident on the mountain top? Stripped of supports provided by the current utility model, customers in these areas, and the companies that serve them, will be under increasing financial strain. Second, the amount of money cited in the studies refers to maintaining universal service as it is today, and there is an ongoing debate about expanding the definition of universal service. While USTA members are second to none in their desire to provide state-of- the-art telecommunications to all, if there is to be an expansion in universal service obligation, someone, somewhere must pay for it. And when LECs are transformed from utilities into competitors, you lose many of the alternatives for financing we have used in the past. Does H.R. 3636 need to be changed to assure universal service? Yes. While USTA supports the general director of H.R. 3636, we want to continue to work with Representatives Market, Fields, Boucher, and others to perfect the bill. First, we believe that the legislation needs specific language which would enable local phone companies to adjust their rates for a competitive market. We have already established that universal service is inherently tied to the issue of rates. We also have established that rates are currently set using a utility model in which some rates (e.g. long distance access) are kept artificially high to subsidize lower rural and residential rates to assure universal service. Since the legislation eliminates all entry barriers to local exchange and access competition, a system must be put in place to preserve universal service in a competitive environment. The legislation does this. At the same time, however, rates which were set under a utility system must be adjusted to reflect the new competitive environment. The legislation omits any treatment of this equally important issue. The legislation directs the FCC to promote access to advanced telecommunications by including advanced telecommunications services in the definition of universal service while maintaining affordable rates. USTA supports the notion of providing all Americans with access to advanced services. But the key term is "access". Not all customers will want to travel the information highway. If service can be defined as "universal" and hence available at subsidized rates, you automatically choke off much of the incentive to roll out advanced services. Moreover, you run the risk of dramatically increasing the size of the subsidy pool and further drain investment. We suggest a simple two-word amendment clarifying that it is access to advanced services that the Congress wishes to assure. Third, and in a similar vein, we have grave concerns regarding the open platform. To begin with, we are not sure what it means. Does ISDN satisfy the definition? Is full motion video included? If so, why is Section 653 requiring a basic video platform needed? More specifically, we are concerned that this is an indirect way to impose a universal service obligation to deliver broadband services without determining who will pay for it. To mandate that local exchange carriers, and only local exchange carriers, must fund the deployment of advanced universal services at below cost prices is unreasonable and violates Vice President Gore's first principle governing the Administration's support for National Information Infrastructure, namely the need to "encourage private investment". We noted, with some amusement, that one of our newest competitors, MCI intimated at NTIA's first hearing on universal service that the local exchange industry was engaged in a surreptitious plot to enhance the definition of universal service. They were, of course, quite incorrect. We agree with Vice President Gore's statement that the definition should "evolve as the technology and infrastructure advance". We believe that the marketplace will provide the best indication of which services consumers truly want and need. Consumers certainly need to have access to advanced services, but the market is the best determinant of precisely what service is worthy of being deemed essential. When the determination is made, support programs should be implemented to assure that all Americans have access. Rather, there should be clear, explicit support given to a provider of last resort to build the necessary and agreed to infrastructure. There should also be appropriate supports modeled on our current lifeline and link up programs for companies serving low income consumers so that they may have access to the advanced services provided by the infrastructure. Last, but by no means least, we urge the Subcommittee to include the provisions of H.R. 1504 in the Boucher/Fields Bill on infrastructure sharing (H.R. 3636). This bill requires local exchange companies with economies of scale and scope t share their infrastructure with LECs that do not have such economies. The bill has been co-sponsored by a majority of this Subcommittee, and an identical bill was introduced last Congress by then Senator Gore and gathered fifty-two Senators as co-sponsors. We urge its inclusion in the final bill. We have already established that certain rural areas are simply not competitively attractive. The most efficient way to bring the benefits of enhanced infrastructure to the populations being served by the nation's smaller local phone companies is to enact infrastructure sharing so that the customers of small telephone companies also have access to the advanced network services. END From mech Mon Mar 14 19:40:01 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29264 for mech; Mon, 14 Mar 1994 19:40:01 -0500 Date: Mon, 14 Mar 1994 19:40:01 -0500 From: Stanton McCandlish Message-Id: <199403150040.TAA29264@eff.org> To: mech Subject: Mark Cooper - Consumer Federation of America Status: O CONSUMER FEDERATION OF AMERICA H.R. 3636 NATIONAL COMMUNICATIONS COMPETITION AND INFORMATION INFRASTRUCTURE ACT OF 1993 AND H.R. 3626 ANTITRUST REFORM ACT OF 1993 THE U.S. HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE COMMITTEE ON ENERGY AND COMMERCE THURSDAY, FEBRUARY 3, 1994 DR. MARK N. COOPER: Mr. Chairman and Members of the Committee, my name is Dr. Mark N. Cooper. I am Director of Research for the Consumer Federation of America (CFA). CFA is the nation's largest consumer advocacy organization, composed of over 250 state and local groups with some 50 million members. CFA has been extremely active on telecommunications matters, having participated in virtually every federal regulatory and legislative proceeding dealing with regulatory structures since divestiture. It has provided support to local groups in telecommunications matters in states as diverse as Arkansas, California, Colorado, Georgia, Maryland, Missouri, New York Oklahoma, Vermont and Texas, and has prepared extensive empirical analyses of the current status of the telecommunications network My testimony today is organized around twenty principles that we believe must be followed in order to provide basic service and protect consumers in the information age. While twenty principles may sound like a lot, they are actually rather modest for two reasons. First, most of the economic and regulatory ideas underlying these principles are simple and have been in place during the past half century in which this nation has made such dramatic progress toward universal service. Second, the information industries we are talking about today may be both the highways of economic commerce in the twenty-first century and the marketplace of political ideas. The decisions we make about how to organize and direct the economic and political potential of those industries may go a long way toward determining the nature of our economic well-being and political freedom in the information age. Therefore, Congress must not shrink from the task of establishing a comprehensive and clear set of principles to ensure that the public interest will be served. The legislation before this Committee and the policy statements presented in recent days indicate we are moving in the right direction, but there is a great deal of work yet to be done. For example, H.R. 3636 introduces the concept of an open platform, but needs to require the tariffing of such services to insure widespread availability. It establishes a cost allocation rule for the open platform which mandates "reasonable rates based on the reasonably identified costs of providing such services, utilizing existing facilities to the maximum extent feasible and economically practicable." Reasonable rates driven by proper cost allocation and efficient network utilization are sound concepts that should be applied to all services, not just the open platform. H.R. 3626 outlines effective structural separations for electronic publishing, but fails to give similar protections to may other segments of the information age that need those protections even more. It requires review by the anti-trust authority and the expert agencies, but is leaves serious loopholes in the standards for review that it sets and fails to give the states a role in the process. The Administration has proposed a sound policy on in region buy- outs. It has also begun to recognize the important role that the states must play in managing the transition to a competitive local market and preserving universal service. We believe that the Congress should establish fundamental principles to govern the information industries and apply them uniformly across all segments of those industries. Given the topic of today's hearing, I will focus on the first ten of our twenty principles. These define the two aspects of universal service _ mechanisms to achieve universality and the definition of service. I have submitted documents for inclusion in the record which outline all of our recommendations. We look forward to working with the Committee to ensure that all the principles are included in any rewrite of the Communication Act. In 1934, when the Communications Act first articulated the goal of Universal Service, tow-thirds of all American households did not have a telephone; in 1980, before divestiture, more than eleven- twelfths had telephone service. We went from 35 percent of households with telephones to over 90 percent by adhering to a simple commitment _ to make available, so far as possible, to all people in the United States rapid, efficient, nationwide and worldwide wire and radio communication service with adequate facilities at reasonable charges. We must not abandon the commitment to populist pricing that has served us so well. Universal Service depends on a fundamental commitment to affordable pricing based on just and reasonable rates for all households. Affordability based on just and reasonable rates must be the first goal of national communications policy. Reasonable rates yield fair profits for companies and ensure that ratepayers enjoy the benefits of technological progress. We follow this general principle with a specific cost allocation approach _ a user pays principle. All users of the network should pay for all elements of the network that they use in proportion to the nature of the demands that they place on the network. We believe that affordability can only be assured if Congress establishes a direct link between the expansion of utilization of the network _ the growth of information, data and video services _ and declining costs for basic service. There can be no commercial free riders on the information super highway. As the network is filled up with enhanced and discretionary services, the cost of network access and plain old telephone service will decline for all people if the link between use and basic service rates is well-crafted. The burden of joint and common costs placed on basic access should be minimized. As a matter of social policy and in recognition of the economic value of having more people on the network (i.e. the network externality), we believe that basic service should be a low mark-up service. Local rages presently bear a disproportionate share of the burden of joint and common costs, but as new services are added, these costs should be spread wider. These first three principles are the backbone of an effective policy for assuring universal service for the vast majority of Americans. However, affordability for the vast majority of Americans will not fully accomplish the goal of Universal Service; it never has. In addition, we must have effective policies targeted to assist those who have never been included in the telephone age or whose hold on telephone service is tenuous. Lifeline programs must be expanded and improved. The telephone assistance programs instituted since divestiture in 1984 have limited success because only half the states participate and those that do have defined very narrow programs making it difficult, if impossible for those who need most to take part in these programs. We must have explicit commitments to make the information age accessible to all citizens, regardless of their functional abilities. The new information technologies mean that barriers to access for Americans disabilities can be more easily overcome than ever before, but only if a commitment is made at the outset. We must assure that a reasonable level of technology is available across all geographic areas of the country as the information age evolves. While some areas of the country rush ahead to megabit high speed systems capable of numerous multi-media applications, there are still hundreds of thousands of households who remain on multi-party service. These disparities must not be allowed to persist in the information age. Just as universality was defined simply in the Communications Act and allowed to evolve through well-known principles of legal and regulatory practice over the past half century, so too should the definition of service be simple and evolutionary in the information age. Basic telecommunications service must include access to available digital service with full interconnectivity to all networks at affordable rates, subject to the constraints of efficiency and affordability. End-to end digital service is clearly the minimum standard to support the information age, but Congress should refrain from picking a technology, or assuming any specific functionality should be included, willy-nilly, in the definition of universal service. Over the past half century, the simple concept of public convenience and necessity has allowed telephone service to evolve from operator switched, multi-party service to single party, direct dial, soon to be digital service. What is considered basic will evolve over time. Changes to the definition of basic service should be based on a combination of demand as reflected by the types of service consumers actually select and responsible, open decisions by policy makers. At a minimum, expanding the concept of basic service must not raise the price of basic service; in fact, it must be reasonable likely that it will lower the price of basic service by lowering costs or increasing revenues. As long as technological capabilities add true value to basic service, by improving network efficiency and increasing the services that consumers demand, then an ever expanding concept of basic service will be compatible with the goal of increasingly affordable service. However, the desire to constantly add functionalities to the network must be disciplined by the principle of affordability and network efficiency. It is important to stress that "gee-whiz" high technology should not be allowed to blur our economic vision. Whenever anyone invokes the term "infrastructure," they want us to suspend the rules of economic reason. Infrastructure must be subject to rules of good governance _ competitive bidding, least cost planning, democratic control and open access _ to ensure that it serves the public interest. To be included in basic service, new elements must be communications services which connect each to all and possess characteristics of telecommunications public goods. Because basic service is priced in a manner to promote usage, there is a tendency to want to include many functionalities in the concept of basic service. Policymakers must balance the desire to enrich basic service with the discipline of controlling cost and consumer sovereignty (i.e. not forcing people to pay for services or functionalities they do not want or will not use). On the other hand, public goods are strong candidates for inclusion in the concept of basic service. As the information age merges a number of industries, it is also crucial to merge the best aspects of the concepts of public access from the television industry and common carriage from the telephone industry into a new concept of telecommunications public interest access in the information age. Although policymakers like to talk about the information superhighway in terms of super classrooms, universally available public libraries, or electronic town meetings, whenever we hear businessmen talk about the information superhighway it sounds more like an electronic arcade. Movies and games are the principle product that will be hauled on the superhighway for the foreseeable future. The reality is that without aggressive public policy, money will by entertainment, not the information rich classrooms or the electronic town hall. Providing socially useful applications requires direct public policy intervention, not reliance on corporate philanthropy. We think that the superhighway is certainly wide enough to support a generous "bike lane" for the applications that uplift our intellect, expand our vision and ensure freedom of political expression. Those "bike lanes" should be both channels for programming and functionalities, like the open platform, for ubiquitous digital interconnectivity. Moreover, as long as the cost rule we have advocated is applied, we think there will be more than enough resources to fund specific applications, where necessary. The needs and preferences of all users must be considered in open, public forums. The affordability principle, which links expanded use to declining costs for basic service will ensure that the network evolves in a responsible, consumer friendly fashion, but the decision of what to include in basic service must also reflect the desires of ratepayers and citizens. Preserving the role of the states is crucial to ensuring this democratic process. While the Communications Act stated the goal, the vast majority of the heavy lifting in accomplishing universal service has taken place in the states, where three-quarters of the costs of telecommunications service are recovered. Because conditions differ so dramatically from state-to-state and because the vast majority of telecommunications costs are local costs, the states must remain the focal point of defining and funding universal service, subject to minimum standards set by the national policy. For the bulk of the twentieth century, the Communications Act managed to create a balance between the enthusiasm to deploy new technology and principles of universal service, good governance, economic reason, and consumer protection. If Congress chooses to amend that Act, it must shoulder the same responsibility. We look forward to working with this Committee in fashioning a new mandate for universal service that extends the accomplishments of the Communications Act into the twenty-first century. From mech Mon Mar 14 19:40:38 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29291 for mech; Mon, 14 Mar 1994 19:40:38 -0500 Date: Mon, 14 Mar 1994 19:40:38 -0500 From: Stanton McCandlish Message-Id: <199403150040.TAA29291@eff.org> To: mech Subject: James G. Cullen - Bell Atlantic Status: RO PREPARED TESTIMONY OF JAMES G. CULLEN, PRESIDENT BELL ATLANTIC CORPORATION H.R. 3626 - ANTITRUST AND COMMUNICATIONS REFORM ACT OF 1993 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE TUESDAY, FEBRUARY 8, 1994 MR. JAMES G. CULLEN: Good morning, Mr. Chairman and members of the Subcommittee. My name is James G. Cullen, and I am president of the Bell Atlantic Corporation. I want to thank you for giving me the opportunity to testify on this important piece of legislation. As I stated last week before the House Judiciary Economic And Commercial Law Subcommittee, Bell Atlantic supports H.R. 3626 and applauds the efforts of this Subcommittee to forge a consensus among many diverse, dynamic and competing industries. I would like to focus my testimony on the electronic publishing provisions in H.R. 3626 that establish safeguards for Bell Company participation in the information services market. As you may know, Bell Atlantic took a leadership role in negotiating agreements with the Newspaper Publishers Associations in both New Jersey and Pennsylvania that govern our company's future provision of electronic publishing services. Under the terms of those agreements, if Bell Atlantic provides electronic publishing services, it would do so through a corporate affiliate that would be fully separated from the telephone operating company. Such an affiliate would not share personnel or facilities with the telephone operating company, and would be responsible for its own marketing and operations. Bell Atlantic would also offer all publishers, including its own affiliate, the same services on equal terms.These safeguards ensure both competition and ratepayer protection, and will help Bell Atlantic and newspaper publishers bring the full benefits of an advanced telecommunications network to consumers. Further evidence of our intent to partner with newspaper publishers is found in our announcement last week that Bell Atlantic's Video Services Company and Knight-Ridder, Inc., have agreed to explore ways in which they can work together to deliver news, information and advertising services to customers of Bell Atlantic's 'Stargazer' interactive multimedia television service. Indeed, several RBOCs have entered into numerous agreements with newspaper publishers. We believe these types of alliances will hasten the time when consumers, students and workers will have the information they want delivered when they want it, where they want it and in the way they want it. With working agreements in place and partnerships underway with the newspaper publishing industry, and a U.S. Court of Appeals ruling that there is no substantial possibility that we can impede competition in the information services market, Bell Atlantic actually sees no need for the separate subsidiary requirements included in H.R. 3626. However, we do not believe those requirements will prevent us from continuing to operate efficiently and effectively, and we will not oppose their inclusion in the bill. Likewise, we see no need to establish a "waiting period" before Bell Atlantic can provide traditional alarm monitoring services or develop innovative new approaches dealing with personal security over the new Information Superhighway. However, again, in the spirit of compromise, we will not oppose their inclusion in the bill. But as I testified last week, there is one void in H.R. 3626 that will most definitely impede our ability to be an efficient provider of electronic publishing services. That void deals with "incidental" long distance services. Bell Atlantic agrees with the Administration's suggestion that would allow a Bell company to provide incidental long distance services in connection with provision of information services. Let me explain why. The provision of information services often relies on the use of expensive computer equipment. To provide these services efficiently, we would use these computer servers for more than just one local calling area. (As a hypothetical example, it might be possible to serve the entire state of Pennsylvania with a computer server located in Pittsburgh.) Today, such efficient usage is actually prohibited by the AT&T consent decree. In the case of Pennsylvania, although one server could serve the entire state, the consent decree would require us to deploy five such servers to serve the state. The incidental relief we seek would enable a company like Bell Atlantic to expand accessible and affordable information services to rural and urban areas, crossing all socio-economic boundaries, both inside and outside of its tradition serving area. To begin to deliver these services now, we will need immediate "incidental" long distance relief for information services. Making it immediate, rather than subject to additional rulemakings and procedures, will give added life, indeed a needed push, to electronic publishing partnerships as consumers across the country gain additional exposure to news and information from around the globe. In summary, Mr. Chairman, let me emphasize to you, as I did to Chairman Brooks last week, that the RBOCs support H.R. 3626 and will work vigorously for its enactment. No, it is not the bill we would have written, but as nearly everyone has come to recognize, a very delicate balance has been struck by Chairman Dingell and Chairman Brooks. A balance, that I can tell you from first-hand experience, was not easily reached with respect to electronic publishing. A transition period for the mature newspaper industry is provided, and just as importantly, a sunset provision is also in the bill. To close, let me thank you for allowing me to be here today. This bill, with immediate "incidental" long distance information services relief, will ensure that electronic publishing has a real chance to become a key industry in developingour country's Information Superhighway. END  From mech Mon Mar 14 19:42:02 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29364 for mech; Mon, 14 Mar 1994 19:42:01 -0500 Date: Mon, 14 Mar 1994 19:42:01 -0500 From: Stanton McCandlish Message-Id: <199403150042.TAA29364@eff.org> To: mech Subject: Anne K. Bingaman - Asst. Attorney General Status: RO STATEMENT OF ANNE K. BINGAMAN ASSISTANT ATTORNEY GENERAL ANTITRUST DIVISION BEFORE THE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE COMMITTEE ON ENERGY AND COMMERCE U. S. HOUSE OF REPRESENTATIVES CONCERNING NATIONAL COMMUNICATIONS COMPETITION AND INFORMATION INFRASTRUCTURE ACT H.R 3636 AND THE ANTITRUST REFORM ACT H.R. 3626 PRESENTED ON JANUARY 27, 1994 Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to testify on behalf of the Administration on two important legislative initiatives: H.R. 3626 and H.R. 3636. Given my role in enforcing the nation's antitrust laws, I will focus my remarks on those portions of the bills that relate to competition in the telecommunications business, especially issues arising in connection with the Modification of Final Judgment (MPJ) that governs the actions of AT&T and the Regional Bell Operating Companies (RBOCs). The other members of this panel, Reed Hundt, Chairman of the Federal Communications Commission, and Larry Irving, Assistant Secretary of Commerce, will concetrate on other portions of these bills. The Administration is gratefu to Chairman Edward Markey and Rep. Jack Fields, authors of H.R. 3636, and Chairman Jack Brooks and John Dingell, authors of H.R. 3626, for their hard work in crafting legislation that will clearly help accelerate the telecommunications evolution and the completion of the National Information Infrastructure (NII). We look forward to working with this Subcommittee to move a comprehensive telecommunications reform package, including both legislative proposals which this Subcommittee has asked us to comment on today, quickly through the Congress. The job of building the NII - or more specifically, infrastructure that will permit broadband, interactive communication between all members of our society - has been aptly compared to the building of the nation's interstate highway system. Like the construction of the highway system, the construction of the NII will create hundreds of thousands of jobs. And just as roads have enhanced this nation's productivity and living standards, the completion of the NII will make firms and individuals more productive. The NII will also enhance the quality of our lives by creating new ways to educate adults and children, improve our health care, give us better and cheaper ways of buying products and services,and entertain us at home. There is a key dJfference, however, between the nation's roads and its information infrastructure. Our roads have been built by government. Our NII is being built by private enterprise. But that does not mean that government has no role in promoting the development of the NII. To the contrary, just as in any other sector of the economy, government is needed to set and enforce rules of fair play. In a word, government is needed to ensure competition where technologically and economically feasible. For it is only through vigorous competition in all phases of the telecommunications business _ in the construction of the various information highways and their access roads, wired or wireless; in the operation of those highways; and in the provision of content over the highways that the nation can be assured of having the highest quality telecommnications service at the lowest cost. Each bill on which I am commenting today assigns a central role to competition. H.R. 3636 aims to pave the way for more competition in both local telephone and cable service by stripping away regulations that impede the development of at least "two wires" to the home and opening the telephone companies' "local loop" to full and fair competition. Meanwhile, H.R. 3626 seeks to enhance competition to long-distance telephone services and in the development and manufacture of telecommunications equipment. The Administration's legislative package, outlined by the Vice President's speech on January 11, 1994, seeks the same objectives, but also provides a new, streamlined regulatory regime for telecommunications providers of the future - digital, interactive, broadband communications. All of this activity signals to us that a consensus has emerged in favor of moving telecommunications policy out of the courts and into the statute books so that Congress, representing the public, can establish the far-reaching and comprehensive framework for govening the telecommunications world of the future that the nation deserves. The Administration is eager to work with the members of this Subcommittee and with the entire Congress to bring about this result. In the balance of my testimony, I would like to do the following: _To put the discussion we are having today in a useful framework, by explaining how we got here and, in particular, how the nation has benefitted from the competition in telecommunications markets that has occurred thus far; _To suggest why providing even greater competition in key segments of the telecommnications business _ notably, local and long-distance telephone services, and multichannel video services (cable and satellite) -is critically important for American consumers and industry; _To identiiy the fundamental challenges policymakers face in providing greater competition; and _To discuss the valuable foundation constructed by H.R. 3626 and H.R. 3636 to address these challenges. The Origins Of The Current Telecommnications Revolution The telecommunications revolution - the merging of voice, video and other data transmission and the proliferation of new telecommunications products and services - has been one of America's leading technologicai and economic success stories. At bottom, the key reason is that our scientists, engineers and businesses have developed and introduced telecommunications technologies at a faster pace than anywhere else in the world. Public policies that have promoted competition have been critical to this result. Perhaps nowhere is this more evident than in the case of telephone services, where through the efforts over two decades of the Justice Department and Judge Harold Greene, competition has become the central organizing principle of the industry. Until the Department sued and evtntually broke up AT&T, that company had a monopoly over this nation's telephone market. It was a regulated monopoly, to be sure. But it was also one that thwarted competition and innovation. New companies like MCI that wanted to provide long-distance service could not do so because AT&T's local operating companies refused to provide interconnections to their local loops. Similarly, other manufacturers of telephone equipment wanted to sell equally, if not more, innovative products but were frustrated by AT&T from doing so because of the telephone company's incentives and ability, through its monopoly con-rot of the local loop, to buy such equipment only from its wholly owned subsidiary, Western Electric. These practices were ended when the Department of Justice led by my antitrust law professor in law school, William Baxter, obtained a consent decree in 1982. A Modification of Final Judgment (MFJ) has since been administered with remarkable energy and wisdom by Judge Greene, to whom this nation owes enormous gratitude. By unleashing competition in various segments of the telephone industry, the MFJ has delivered the benefits that competition in other markets routinely guarantees; innovation, better products and services, greater efficiency, and lower prices. Consider that since the MFJ: _interstate long distance prices for residential customers in real terms (adjusted for inflation) have fallen by more than 30% without compromising universal service; _there has been a virtual explosion in the types of telephones and services that consumers can choose from; _competition has stimulated the development of hundreds of innovative voice and data services (such as call waiting and voice mail); _spurred by MCI and Sprint, all major long-distance providers (including AT&T) now have laid fiber optic cable throughout much of the country and the have already built much of the backbone for the NII; and _competition in the telephone equipment market has opened whole new markets and spawned the development and sale of new products. In short, the MFJ has enabled the United States to maintain its technological leadership in telecommunications. Nations that have stuck to the old monopoly model of telephone services have fallen behind. That is why many are now trying to emulate as, rather than the other way around. Competition has been less well advanced in video serviees. To be sure, consumers, have now an unprecedented degree of choice in video programming, due to tbe widespread introduction of cable technology. But, with a few exceptions, cable television operators have monopoly franchises. Yet here too technology is proving that the current video monopolies are far from "natural." A number of Regional Bell Operating Companies (RBOCs) have announced plans for upgrading their telephone networks to deliver video progrmming. And continuing advances in satellite television promise the delivery of even more television channels to consumers than are now available over cable. Finally, there is hope that technology innovation ultimately will erode the monopoly that the MFJ, by itself, could not end the lock that the local monopolies of the Bell System, the Bell Operating Company (BOCs), still have on local telephone service (carrying more than 99% of local traffic in their service areas). Just as telephone networks can be upgraded to provide video service, cable television systems are expected relatively soon to carry telephone traffic. In addition, while expensive, cellular and specialized mobile radio services - which can transmit calls through the air rather than by wire - are growing rapidly throughout the country. Shortly, the FCC will auction off additional spectrum of Personal Communications Services (PCS), yet another form of wireless communication. Still, it is important to keep in mind that these alternatives are largely prospective; they are not yet widely available and affordable today, and it is not yet clear when they will be. The Need For And Benefits of Even Greater Competition Hopefully, technological advances already here or on the horizon will bring even greater competition to telecommunications markets. In particular, technology could soon make possible interactive, digital communications over broadband fiber or coaxial networks (and perhaps through the air as well), which should unleash the full promise of the NII. As Larry Irving will explain in greater detail, the Administration wants to encourage the rapid development and introduction of these networks by creating a new, simplified regulatory framework for those who provide them. But there is still a need for policymakers to encourage greater competition in existing telecommunications markets, which both H.R. 3626 and H.R. 3636 well recognize. Cable television and local telephone service are the most obvious markets where more competition is necessary. Both are currently monopolized by existing providers, prompting government regulation to protect consumers from excessive rates. Yet even though the technological advances I have just mentioned may make it possible for competition to erode these monopolies and thus end or relax current regulation, government regulations still inhibit this competition. In particular, existing law frustrates providers of cable and local telephone services from offering both services, in full competition with each other in the same service territories. Second, while several competitors certainly have made significant inroads in long distance telephone markets, there is room for more competition. AT&T still has about 60% of long-distance traffic. Third, while telephone equipment is now probably the most competitive of the three markets affected by the MFJ, this market also could use additional competition. Here, too, AT&T continues to be a major force, although it faces stiff competition from numerous other providers, domestic and foreign. Given their expertise in the industry, some or all of the RBOCs may be natural entrants into developing and manufacturing telecommunications equipment, especially network switching, but are precluded from entry by the MFJ. Under the right terms and conditions, entry by the RBOCs into these activities could help spur innovation and bring down prices for telecommunications equipment. In the process, the RBOCs could help enhance the competitiveness of American firms in the international telecommunications equipment market. Policy Challenges Ahead The key challenge now for all telecommunication policymakers _ in Congress, in the Executive branch, and the states - therefore could not be clearer: To encourage greater competition in all facets of the telecommunications industry in a way that does not distort the marketplace or pose dangers to consumers. In particular, as long as the RBOCs have a monopoly over phone service, they _ as did AT&T _ will continue to have incentives, and the ability, to cross-subsidize and discriminate. Ultimately, effective competition in local telephone markets will provide the best protection against cross-subsidization and discrimination by the RBOCs, since without market power RBOCs will be unable to leverage their local telephone monopolies into other markets. However, until local telephone markets are competitive, entry tests an/or structural safeguards that allow for objective analyses by regulators of pricing, cross-subsidization, and discrimination are important means available to ensure that local telephone customers are not charged with the costs of long-distance service and manufacturing and that markets are not distorted by unfair and cross-subsidized pricing. In addition, policymakers should encourage added competition to cable television from other firms and technologies, which will reduce the market power that existing cable operators maintain in their markets througout the country. Statutory and regulatory restrictions that prevent such competition therefore should be removed. The Important Contributions of H.R.3636 H.R. 3636 is a major step forward toward meeting an important challenge outlined above: enhancing competition in markets monopolized by existing firms. Among other things, this legislation would clear the way for cable and telephone companies to compete vigorously against each other in the same markets. In addition, the legislation aims to open up local telephone markets by prempting existing local and state restrictions against entry while requiring the RBOCs to "unbundle" their services. In the process, RBOCs would be compelled to provide interconnection to other firms that want to use the "local loop" to provide local telephone services and to provide digital "open platform" service to enable subscribers to access multimedia information services. The Administration strongly supports those provisions of H.R. 3636 that seek to open the local loop, and we believe that the RBOCs should be required to unbundle and fairly price each element of their local monopoly services at technologically and economically feasible points. Such disaggregated unbundling, coupled with fair pricing, is a critical precondition for establishing truly effective competition in the local telephone market. Structural safeguards for the local loop should also be considered. The Administration also strongly endorses the provisions in H.R. 3636 that would permit existing cable and telephone companies to offer both video and telephonic services in the same geographic areas. The Administration also endorses the general thrust of the provisions in the legislation that prohibit telephone and cable television companies from acquiring each other within the same service territory. It is crucial that public policy promote competition between methods for delivering telecommunications vices. For this reason, the Administration believes that any exceptions to this general merger pprohibition should be narrowly limited only to acquisition within rural areas where two wires may be economically infeasible. In addition, our proposal would permit the FCC to relax the general prohihition after five years if such action would not harm competition. The Department of Justice would also have the authority thereafter to challenge any cable-telco merger within the telco' service region (and elsewhere) as inconsistent with the antitrust laws. We believe it is important that the Congress adopt a flat ban on "within region" cable telco mergers (subject to the rural exception) for at least five years so that there is absolutely no uncertainty in the private sector about the policy of promoting the construction of the second wire. The Important Contributions of H.R. 36262 H.R. 3626 addresses a second key policy objective I have mentioned: specifying the conditions under which the RBOCs, which now have monopoly power in local telephone service, can provide added competition in long-distance telephone service without using their monopoly leverage to distort cornpetition in either or both the local and long-distance markets. Like its companion bill authored by Chairman Markey and Rep. Fields, the bill introduced by Chairmen Brooks and Dingell represents a major step forward in constructing an appropriately competitive environment in the telecommunications industry.] In particular, H.R. 3626 retains entry tests, administered by DOJ and the FCC, for RBOCs to enter long-distance (should they pass the tests) after minimum waiting periods (18 months for reselling and five years for facilities-based service out of region). H.R. 3626 also would permit the RBOCs to develop and manufacture equipment not earlier than one year after enactment unless DOJ objects and prevails in court. The Administration supports the thrust of these provisions of H.R. 3626: _While the nation owes deep gratitude to Judge Greene for his enormous efforts in administering the MFJ, the rapid pace of technological change suggests that the time has come to do what H.R. 3626 would accomplish: move telecommunications policy out of the courtroom and into the hands of the two expert agencies charged with protecting the broad public interest in telecommunications (FCC) and competition (DOJ, which helped launch the telecommunications revolution with its suit against AT&T); _The Administration endorses competition-based entry tests requiring the approval of the DOJ and FCC before the RBOCs may provide long-distance service as a key safeguard. _The Administration suggest building on the concept in H.R. 3626 of allowing RBOC entry into certain limited portions of long-distance service that are "incidental" to the provision of other services. Specifically, the Administration would permit the RBOCs to offer long-distance to facilitate the provision of wireless, cable and certain other services that were not subjects of the AT&T lawsuit. _The Administration supports RBOC entry into manufacturing, safeguarded by the requirement that such activities be carried out in a fully separate affiliate, as H.R. 3626 would mandate. We also support the provisions in H.R. 3626 providing for a notification-and waiting-period procedure prior to entry, which would preserve the right of the DOJ to investigate, and if necessary, sue and enjoin the proposed entry. Conclusion In the end, the Administration shares the belief of sponsors of both H.R. 3626 and H.R. 3636 that the legal framework governing the telecommunications industry should promote as broad a degree of competition in all phases of the business as possible, with many viable competitors providing products and services, on a level playing field for all. While removing existing legal barriers to entry in various markets is essential and may appear to promote competition, truly effective competition requires a truly level playing field, where no competitor is able use its monopoly or market power in one market, such as local telephone services to disadvantage competition in other markets. Ultimately, it is competition, not regulation, that will provide the best guarantee of promoting new products, lower prices, employment, expanded export opportunities, and innovation in the telecommunications industry. The Administration looks forward to working with the Congress to provide the fair and competitive environment for the telecommunications industry that its participants and consumers deserve. Both H.R. 3626 and H.R. 3636 will be essential components of the telccommunications reform package that will ensure this From mech Mon Mar 14 19:42:33 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29376 for mech; Mon, 14 Mar 1994 19:42:31 -0500 Date: Mon, 14 Mar 1994 19:42:31 -0500 From: Stanton McCandlish Message-Id: <199403150042.TAA29376@eff.org> To: mech Subject: Larry Irving - Asst. Secretary for Communications & Information Status: RO TESTIMONY OF LARRY IRVING ASSISTANT SECRETARY FOR COMMUNICATIONS AND INFORMATION U.S. DEPARTMENT OF COMMERCE ON TELECOMMUNICATIONS REFORM LEGISLATION BEFORE THE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE COMMITTEE ON ENERGY AND COMMERCE HOUSE OF REPRESENTATIVES JANUARY 27, 1994 Mr. Chairman and Members of the Subcommittee: INTRODUCTION Good morning. Thank you for this opportunity to testify before you today on issues related to the development of a national telecommunications and information infrastructure _ and, specifically, on Administration legislative proposals to promote the advancement of this infrastructure in a procompetitive manner that benefits all Americans. I am pleased to join Assistant Attorney General Bingaman, who will focus on the Administration's reform proposals bearing on the AT&T consent decree. I will discuss more generally the changes in the competitive landscape that make the passage of telecommunications legislation this year a top Administration priority, and, in the context of that discussion, highlight the key elements of the Administration's proposals. Vice President Gore and Secretary Brown unveiled the Administration's National Information Infrastructure (NII) initiative in September of last year, setting forth an agenda for a public-private partnership to help bring about this revolution. This includes support for innovative applications that will use the NII, improving access to government information, protecting individual privacy and intellectual property rights, and the passage of telecommunications legislation _ the subject of today's hearing. Before proceeding further, let me underscore, Mr. Chairman, the profound debt of gratitude the Administration owes you and Congressman Fields and other Members of this Subcommittee for seizing the initiative in developing H.R. 3636. Our proposals for reform of telecommunications regulations, particularly the telephone-cable television company crossownership restriction, interconnection and equal access requirements, local telecommunications service competition, and universal service requirements, substantially build upon your trail-blazing, bipartisan work product. The Administration also wishes to salute the creative bipartisan legislative initiative to revamp the AT&T Consent Decree undertaken by Chairmen Dingell and Brooks. The thoughtful legislative initiatives undertaken by Senators Hollings, Inouye, and Danforth, among others, also merit recognition. We have closely studied all these proposals and they have influenced our thinking as we developed an Administration legislative initiative. Aspects of our set of legislative proposals, which I will touch on today, also build in large part upon the foundation they have established. The Administration looks forward to working closely with Congress to arrive at a final telecommunications legislative product this year. In working with Congress, the Administration will seek to ensure that a complete, integrated telecommunications set of reform proposals moves forward. The meritorious reform ideas embodied in different bills currently before Congress complement each other. A comprehensive, far-reaching overhaul of our telecommunications regulatory system is badly needed. Failure to take such an approach could also, perversely, distort competition between firms most affected by regulatory changes and other firms whose operations largely escaped regulatory revamping. The Administration will consult and cooperate closely with Congress to ensure that an integrated legislative approach succeeds. THE NEED FOR LEGISLATION There is a national consensus that an advanced information infrastructure will transform everyday life for every person in the United States in the near future. We have all heard of countless examples of how broadband, interactive communications will connect and empower all people in this country. Vice President Al Gore recently said that the word "revolution" by no means overstates the changes ahead. The newspapers bring us daily examples of the ways in which the development of the NII will revolutionize American life. - The January 19 Washington Post reported how interactive dial-up computer network services allowed individuals to communicate with friends and relatives in the Los Angeles area immediately after last week's disastrous earthquake, and to spread vital news to other interested subscribers within a matter of minutes. - On January 19, Secretary of Health and Human Resources Shalala announced a contract that will provide by the end of this decade for the electronic payment of nearly all of the $1 billion annual Medicare bills. - InterPractice Systems, a joint venture of Harvard Community Health Plan in Boston and Electronic Data Systems, has placed terminals in the homes of heavy users of health care, such as the elderly, pregnant women, and families with young children, so that these users can access health care information 24 hours a day in a form that aids decision making. - The Texas Education Network serves over 25,000 educators and is making the resources of the Internet available to classrooms, so that students in small school districts can access NASA and leave messages for the astronauts, browse around in libraries larger than they will ever be able to visit, and discuss world ecology with students in countries around the world, among other things. These and countless other examples attest to the rapid rate at which the American public is entering the information age. It would be a mistake, however, simply to "let nature take its course" and allow change to proceed under the existing legal regime, whose underlying structure was established 60 years ago. This is true for three essential reasons. First, in an increasingly competitive world trade environment _ which will become even more open with the implementation of NAFTA and the GATT Uruguay Round _ we simply must ensure that our telecommunications capabilities remain the best in the world. Because information transmission increasingly is the life's blood of all our industries, archaic rules that inappropriately retard innovation by telecommunications firms have a negative impact on the international competitiveness of the private sector in general by inhibiting industrial productivity and job creation. Legislation that lifts these outdated structures will enhance competitiveness and spur the creation of good new jobs. Second, the existing regulatory structure has been altered on an ad hoc basis over six decades to meet perceived problems of the moment. This has created an uneven playing field that artificially favors some competitors over others, and that in some instances unnecessarily discourages investment and risk-taking. These effects, in turn, inappropriately skew the growth of industry sectors and retard the development of the NII itself. Accordingly, legislation is needed to eliminate these unwarranted regulatory disparities. Third, we need to be sure that our telecommunications policies are fully responsive to the needs of the American people as a whole, and, in particular, poorer and disadvantaged Americans. As Secretary Brown stressed on January 5, we cannot "become a nation in which the new information age acts as a barrier, rather than a pathway, between Americans" _ a nation divided between the information rich and the information poor. Yet, while the universal provision of "plain old telephone service" has long been a national goal, the existing regulatory structure may not be sufficient to ensure that all Americans benefit from the broader range of information services that will become available under the NII. Accordingly, legislative reform is urgently needed to address this shortcoming. I will have more to say about the Administration's views on universal service below. THE ADMINISTRATION'S PROPOSALS The Administration, as promised last fall, has prepared a set of legislative proposals setting forth the principles under which we believe the advanced infrastructure should operate. As I have already indicated, these proposals further the visions set forth in House and Senate legislative initiatives. We are also building upon innovative regulatory reforms and other dramatic steps taken by various states, and we intend to work closely with the states in promoting an advanced telecommunications and information infrastructure. Together we can encourage competition, infrastructure modernization, and advanced NII applications in health care, education, and government services. Underlying the Administration's set of proposals are five fundamental principles that Vice President Gore and Secretary Brown have outlined. These principles are: - Encouraging private investment in the NII; - Promoting and protecting competition; - Providing open access to the NII by consumers and service providers; - Preserving and advancing universal service to avoid creating a society of information "haves" and "have nots"; - Ensuring flexibility so that the newly-adopted regulatory framework can keep pace with the rapid technological and market changes that pervade the telecommunications and information industries. ENCOURAGING PRIVATE INVESTMENT AND PROMOTING COMPETITION The Administration believes it is time to act decisively to lift the artificial regulatory boundaries that separate telecommunications and information industries and markets. Those clear, stable boundaries served us well in the past. They enabled regulators to establish separate regulatory regimes for firms in different industries. They also prompted regulators to address the threat of anticompetitive conduct on the part of some telecommunications firms by barring them from certain industries and markets. Technological and market changes are now blurring these boundaries beyond recognition, if not erasing them entirely. As Vice President Gore emphasized on January 11, we are moving away from a world where technologically valid regulatory distinctions may be made among local telephone, long distance telephone, cable, and other purveyors of information transmission. Digital technology enables virtually all types of information, including voice, video, and data, to be represented and transmitted as "bits" _ the ones and zeros of computer code. Thus, rules which artificially distinguish among different types of "bit transmitters" based on old historical understandings will no longer serve a socially useful purpose. Accordingly, regulatory change is necessary to fully realize the benefits of private investment and greater competition in the information infrastructure. Regulatory policies predicated on the old boundaries can harm consumers by impeding competition and discouraging private investment in networks and services. The Administration is therefore committed to removing unnecessary and artificial barriers to participation by private firms in all communications markets, while making sure that consumers remain protected and interconnected. These reforms are necessary in order for people in the United States to "win" the information revolution as soon as possible. To this end, the Administration supports the initiation by the Federal Communications Commission (FCC) of a review of current broadcast policies. Broadcasters remain the principal source of free, universally available electronic information in the United States, and it is important to ensure full participation by that industry in the NII. CABLE TELEVISION-TELEPHONE COMPANY CROSS-OWNERSHIP The Administration strongly supports most of the major provisions on telephone-cable television company crossownership in H.R. 3636. Mr. Chairman, you, Mr. Fields, and other cosponsors of this bill are to be commended for your insightful, carefully-crafted approach to the telephone-cable crossownership issue. While the Administration's initiative in this area does differ in certain respects from H.R. 3636, it is in line with the overall philosophy and general approach outlined in H.R. 3636. The Administration supports repeal of the current cable television-telephone company cross-ownership restriction in the 1984 Cable Act. We believe that telephone companies should be allowed to provide video services in their local exchange areas, subject to effective safeguards to protect consumers and competition. The Administration is proposing two critical safeguards. First, consistent with the approach of H.R. 3636, telephone companies will be required to make channel capacity available to unaffiliated video program providers on a nondiscriminatory basis, while providing video programming through separate affiliates. This requirement should create market opportunities for competing providers of video services, thereby reducing prices and expanding the diversity of programming and services available to television viewers. Second, the Administration proposes to prohibit telephone companies from acquiring cable systems located in the companies' local exchange areas for at least five years. This will deter premature and potentially anticompetitive mergers between telephone companies and their most likely competitors, existing cable companies. The Administration proposal allows fewer exemptions of telephone company buyouts of cable firms than H.R. 3636. However, telephone companies operating in rural areas will be exempted, because these markets may be unable to support more than one carrier. The need for this second safeguard may wane in the coming years as markets change, so the Administration has added to it a flexible element. We propose to authorize the FCC to begin proceedings that could allow such acquisitions five years after the date of legislative enactment, if certain conditions, to be established by the Commission, are met. An example of such a condition might be the presence of sufficient competition in the telephone company's service area in the delivery of telephone or cable services. Of course, any telephone company/cable system acquisition would be subject to the antitrust laws in the same manner as an acquisition in any other industry. The Administration's proposals on the "video platform" are similar to those in H.R. 3636, except that the Administration's proposal makes clear that the platform will be subject to all requirements of Title II, not simply the requirement that rates be nondiscriminatory, as H.R. 3636 appears to contemplate. The Administration proposal also requires a carrier to afford nondiscriminatory access to the video platform whenever it offers video programming. LOCAL TELECOMMUNICATIONS SERVICES The Administration's proposals regarding local competition in telecommunications services bear much similarity to H.R. 3636. The Administration owes a debt of gratitude to the framers of H.R. 3636 for their creative and thoughtful approach to these issues. The most notable difference is that the Administration's approach identifies general obligations and leaves to the FCC (and in some cases, the states) the task of prescribing details. The Administration supports removal of those barriers preventing competition in the provision of local telecommunications services. Competition has already generated substantial benefits for consumers in a host of communications and information service markets. For example, the varieties of customer premises equipment have expanded dramatically since deregulation. In addition, the price of interstate long distance telephone service for the average residential user has declined more than fifty percent in real terms since 1984, due to competition and regulatory reform. At the same time, the infrastructure used to provide long distance services has been substantially upgraded. There are now four digital, fiber-based national networks serving the United States, and many more interconnected regional networks. Consumers will realize similar benefits in service innovation, declining prices, and infrastructure enhancement from the expansion of competition in the local telephone service market. Such competition will reduce the ability of any telephone company to harm competition and consumers through monopoly control and will encourage investment and innovation in the "on and off ramps" of the NII. The early history of local telephone service demonstrates the benefits of such competition. The Bell Company originally marketed telephone service as a high priced business service that, with few exceptions, was not offered outside of major cities or to residential customers. When competitors were able to enter local services markets after the Bell Company's patents expired in 1893-1894, a large number of entrepreneurs began offering telephone service, first in areas unserved by Bell and then in direct competition with the Bell system. Bell responded by rapidly building out its own system, and soon in most major cities consumers and businesses had a choice of telephone companies. In 1906, 57 percent of the communities with more than 5,000 people were served by two or more local telephone companies. By 1907, non-Bell companies served more than half _ 51 percent _ of the telephone customers in the country. During this period, prices for services fell dramatically, while at the same time "infrastructure" investment soared. In 1920, at the close of the "first" competitive era, there were some 13.4 million telephones in the United States, or one telephone for every eight of the nation's 105.7 million people. At the rate the number of telephones was growing prior to competition, there would have been fewer than one million telephones in the United States by 1920. Moreover, 55 percent of all telephone subscribers were residential customers, and more than 30 percent of all farm households had telephones. Thus, competition proved to be a powerful engine in serving what we now call universal service goals _ that is, making advanced telecommunications technology widely available to the American people at affordable prices. Unfortunately, competing systems were not interconnected, leading to public dissatisfaction eventually addressed by government establishment of franchised monopolies for telephone service. Had government intervened instead by establishing interconnection obligations among competing carriers, we might have had local competition for the last 100 years. The Administration's local competition proposal I am about to describe demonstrates that we have learned from this historical lesson. Current policies regarding interconnection, service bundling, and specific barriers erected by individual states inhibit competition _ and the low prices, service choices, and other benefits such competition brings to consumers. The Administration proposes to ensure that competing providers have the opportunity to interconnect their networks to local telephone company facilities on reasonable, nondiscriminatory terms. Local telephone companies will also be required to unbundle their service offerings whenever technically feasible and economically reasonable, so that alternative providers can offer similar services using a combination of, for example, telephone company-provided switching and their own transmission facilities. Finally, in order to ensure a consistent, procompetitive environment for telecommunications services, the Administration proposes to preempt state entry barriers and rate regulation of new entrants and other providers found by the FCC to lack market power. Competition in local telecommunications markets should generally lower prices and increase innovation in the services offered users. Nevertheless, we are aware of concerns that repricing of some local services may result in rate increases in some cases in an increasingly competitive environment. Accordingly, in order to guard against any possible "rate shock" for users, the FCC and state regulators will be directed, in implementing network interconnection and unbundling, to prevent undue rate increases for any class or group of ratepayers. MODIFIED FINAL JUDGMENT (MFJ) RESTRICTIONS The Modified Final Judgment (MFJ) in the AT&T Consent Decree helped unleash an era of competition and innovation that brought low prices and new service choices for consumers. In short, it has been a tremendous success. The Administration acknowledges the great public service the judiciary has performed in overseeing the breakup of that monopoly. But twelve years have passed since the basic framework of the MFJ was established, and it has been over ten years since the breakup took place. Technologies and markets are changing rapidly. A judicial decree may at some point soon become a barrier to a more comprehensive, far-reaching approach to an advanced information infrastructure. Reform of the MFJ goes hand-in-glove with opening up local competition, which I described above. The development of full-fledged competition in local telecommunications services will alleviate the competitive concerns that prompted the strictures placed by the MFJ on the activities of the Regional Bell Operating Companies (RBOCs). Thus, comprehensive legislative procedures for loosening the MFJ restrictions as competition develops are appropriate. Implementation of these procedures in the wake of enhanced local competition will allow the RBOCs to compete in markets for goods and services now closed to them. This will further enhance innovation in the American economy and benefit consumers. Assistant Attorney General Bingaman will address the MFJ reform provisions. I wish to note, however, that while Assistant Attorney General Bingaman will describe the Administration's position, the Departments of Commerce and Justice have worked together closely in developing the Administration's position in this area. This position represents not only the joint efforts of our two Departments, but also the work of others in the Administration who have joined in this policy initiative. OPEN ACCESS AND PROGRAMMING DIVERSITY The public benefits of the information revolution would be severely diminished without a wide range of diverse programming. An advanced information infrastructure, to be truly useful, must offer a potpourri of educational material, health information, home and business services, entertainment, and other programming matter, both passive and interactive. Barriers to open access and widespread availability of programming serve only to harm users. The Administration's set of legislative proposals would further the goals of promoting a diversity of programming and open access to distribution of this programming. Specifically, the Administration proposes that the FCC, one year after enactment, promulgate rules that would establish nondiscriminatory access obligations on cable television systems, except when technology, costs, and market conditions make it inappropriate. ENSURING REGULATORY FLEXIBILITY AND FAIRNESS As barriers to an advanced information infrastructure fall, the regulatory regime must adapt to the changing environment. In the rapidly changing telecommunications and information industries, the only certainty is uncertainty. A new regulatory framework is required that will stand the test of time, without the need for continual upheaval in the nation's overall approach to telecommunications and information policy. At the same time, similarly situated services should be subject to the same regulatory requirements. In order to advance these principles, the Administration proposes to allow the FCC to reduce regulation for telecommunications carriers that lack market power. This so-called "forbearance" authority will ensure that unnecessary government regulation _ however well-intentioned _ does not harm users of the infrastructure, or impede competitive entry, investment, and the introduction of new services. TITLE VII SERVICES A new kind of communications service provider will soon emerge, one that offers broadband, interactive, switched, digital transmission services to homes, offices, schools, hospitals, and other places. Firms offering these services face the potential of being regulated under two different parts of the Communications Act _ Title II, which regulates common carriers, and Title VI, which regulates cable communications. These firms could also be subject to regulation at the state level for the intrastate component of their Title II services and at the local level for their Title VI services. This will create a needlessly overlapping and complex regulatory environment. The nation needs a flexible, adaptable regulatory regime that encourages the competitive provision of the broadband, interactive, switched, digital transmission services that will enable the American people to enjoy the full benefits of the information age. The Administration therefore proposes a new Title VII to the Communications Act that will encourage firms to provide these services. The Administration's proposal will provide the FCC with broad regulatory flexibility while maintaining key public policy goals, including open access, interconnection, and interoperability requirements, and obligations to support universal service. Rate regulation of Title VII services would occur only when the FCC finds that a firm has market power in offering those services. State regulation of the intrastate components of such services would be subject to varying degrees of federal oversight, depending on the service. Firms would elect to be regulated under the new framework, provided that they meet threshold criteria established by the legislation. The FCC would be authorized to tailor regulation of Title VII firms in light of changing competitive conditions. UNIVERSAL SERVICE A revolution is not complete without extending its benefits to everyone. "Universal service," that is, the widespread availability of basic telephone service at affordable rates, has been a bedrock principle of U.S. telecommunications policy for many years, and helped provide equal opportunities for all people in the United States to communicate. This principle should be expanded to the advanced infrastructure of the future. The Administration is committed to developing a new concept of universal service that will serve the information needs of the American people in the 21st century. Indeed, the full potential of the NII will not be realized unless all Americans who desire it have easy, affordable access to advanced communications and information services, regardless of income, disability, or location. In a January 5 speech, Secretary Brown challenged the private sector "to expand universal service to the National Information Infrastructure." He pointed out that promotion of universal service advances American competitiveness, stating: "Just as progressive businesses have increasingly recognized that their fate is tied to education and good schools, so the businesses that will take advantage of the new information marketplace must realize that our national future is dependent on our national competitiveness _ on ensuring that no talent goes to waste." In crafting its universal service provisions, the Administration was greatly inspired by _ and borrowed in large part from _ the approach to universal service taken by H.R. 3636. Mr. Chairman, once again, the Administration is indebted to the outstanding work by you, Mr. Fields, and the cosponsors of H.R. 3636 in developing a universal service concept for the new information age. The Administration recognizes that crafting a new, meaningful, and practical definition of universal service will require flexibility, foresight, and the balancing of diverse interests. Given these circumstances, our set of legislative proposals will establish several overarching guidelines and charge the expert agencies _ the FCC and the state regulatory commissions _ with establishing the details. Specifically, the Administration proposes to: - Make the preservation and advancement of "universal service" an explicit objective of the Communications Act. The concept, which has evolved over time, is not specifically described in the Act. The "universal service" goal should be codified in order to provide the FCC and the states with a sound legal basis to address these issues as they apply to advanced telecommunications services. - Charge the FCC and the states with continuing responsibility to review the definition of universal service to meet changing technological, economic, and societal circumstances. - Establish a Federal/State Joint Board to make recommendations concerning FCC and state action on the fundamental elements of universal service. In its deliberations, the Joint Board must gather input from non-governmental organizations. - Oblige those who provide telecommunications services to contribute to the preservation and advancement of universal service. However, the FCC, in consultation with the states, would be authorized to permit "sliding scale" contributions (for example, to avoid burdening small providers and new entrants), or "in-kind" contributions in lieu of cash payments. In addition, it is an Administration goal that, by the year 2000, all of the classrooms, libraries, hospitals, and clinics in the United States will be connected to the NII. To help attain that goal, the Administration proposes that the National Telecommunications and Information Administration of the U.S. Department of Commerce conduct an annual nation-wide survey of the availability of advanced telecommunications services to those locations and report on its findings. Moreover, the Administration proposes that the FCC be directed to commence an inquiry and, subsequently, a rulemaking proceeding to ensure, to the extent feasible, the availability of advanced telecommunications to school classrooms, health care institutions, and libraries. The FCC would consider the tariffing of preferential rates for interstate services to such locations, and ensure that standards are in place to permit uniform interconnection to the NII. Implementation of new universal service policies for the information age is of profound public policy significance. It will empower individuals and thereby complement the Administration's efforts to advance health care, educational, and welfare reform. For example, it will enable disabled people and members of poor families to obtain health care or job training information that enhances the quality of their daily lives. It will give students in remote rural areas the ability to "attend" classes interactively in distant locations that they cannot access today, thus better preparing them for higher education _ and for the jobs of the future. It will allow rural health care providers to render better service to their patients through consultations with specialists at research hospitals. It will allow welfare recipients to consult more frequently with social service agencies and be made aware of educational or training opportunities that can prepare them for steady jobs. It will enrich the lives of shut-ins by providing them with a wider variety of news and cultural programming. It will, in short, contribute to the public welfare by affording large groups of citizens new opportunities to realize the American dream. As the examples outlined above suggest, the new universal service for the information age will help advance the Administration's goals of health, welfare, and education reform by enabling chronically disadvantaged individuals to improve their quality of health care and education. In short, an expanded universal service concept for the information age complements the Administration's broad domestic policy goals. The Administration's universal service proposal adopts a broad framework of general principles, leaving specific implementation details to the FCC, to permit governmental flexibility in this rapidly changing industry. It does include provisions that bear similarity to H.R. 3636, such as use of a Joint Board and requiring contributions from service providers. The Administration also includes FCC consultation with the Department of Commerce on universal service, which, as I have said, is a high priority for the Administration. NTIA is working proactively to advance the universal service agenda by holding hearings in a variety of locations on the desirable scope and attributes of new universal service offerings. An initial hearing was held on December 16 in New Mexico. A Los Angeles hearing scheduled for January 20 was postponed due to the earthquake and will be held in February. Other hearings will be held over the coming months. We anticipate that these hearings will provide valuable information on the universal service needs of various groups and the means by which universal service goals can best be advanced. CONCLUSION In conclusion, enactment of telecommunications reform legislation will promote the development of the NII in a flexible, procompetitive fashion that creates incentives for desirable investment, economic growth, and the wide-scale availability to all Americans of new, highly valued information services. In developing its telecommunications reform proposals, the Administration has benefited from the bipartisan spadework undertaken by Congress. The Administration looks forward to close collaboration with Congress to enact a set of legislative proposals that achieves these desired ends. This concludes my testimony. I would be pleased to respond to any questions you may have. From mech Mon Mar 14 19:44:12 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA29427 for mech; Mon, 14 Mar 1994 19:44:11 -0500 Date: Mon, 14 Mar 1994 19:44:11 -0500 From: Stanton McCandlish Message-Id: <199403150044.TAA29427@eff.org> To: mech Subject: Reed E. Hundt - Federal Communications Commission Status: RO Statement of Reed E. Hundt Chairman Federal Communications Commission Before the Subcommittee on Telecommunications and Finance Committee on Energy and Finance United States House of Represenatatives H.R. 3636, the National Communications Competition and Information Infrastructure Act of 1993~ and H.R. 3626, the Antitrust Reform Act of 1993~ and the Communications Reform Act of 1993~ January 27, 1994 Introduction Mr. Chairman and Members of the Subcommittee: It gives me great pleasure to appear before you today to testify on H.R. 3636 and H.R. 3626. As you know, this is my first appearance before the Subcommittee with jurisdiction over the Federal Communications Commission ("Commission" or "FCC") and, indeed, it is my first appearance before any committee of Congress. I am very gratified that the President nominated me, and the Senate confirmed me, as chair of the FCC at these very momentous times in our ongoing communications revolution. Furthermore, it is a very happy occasion for me, personally, to appear before the members of this Subcommittee. SOme of you I have had the pleasure of knowing for many years; others I have been honored to meet and confer with in recent days, weeks, and months; still others I look forward to getting to know shortly. It will be a remarkable experience to work with all of you. You should know that your reputation for wisdom and vision is well-known to me and the other members of the Commission. The bills that you have before you today can only enhance that reputation. H.R. 3636 and H.R. 3626, if passed, will inaugurate a golden era of innOvation and growth for what may be the most important sector of our economy in the next century. At the same time, these far-sighted bills portend to guarantee the inclusion of all Americans in the information economy. The means to these ends chosen by the authors of these bills is a commitment to a carefully monitored and regulated transition from currently noncompetitive markets to competitive markets. This crucial transition will protect consumers from unreasonable prices and limited choices as competitive markets develop. The bills together set forth a flexible and adaptive regulatory model that is likely to promote substantial investment and lead to economic growth and job creation. Mr. Chairman, you and the other authors of the legislation before you here: including, among others, Chairman Brooks, Chairman Dingell, Congressmen Fields, Boucher and Oxley, are to be commended for the visionary nature of these bills. I am also very encouraged, Mr. Chairman, that both President Clinton and Vice President Gore have voiced their strong commitment to the same goals of promoting private investment in the nation's telecommunications infrastructure while ensuring access for all. Tuesday night, in his State of the Union address, the President called on Congress to pass legislation establishing the information superhighway this year. President Clinton stressed that building out this nation's telecommunications infrastructure will increase productivity, help us to educate our children, improve the provision of health care services, and create jobs. The President also joined with the Vice President in calling on the country to meet the goal of connecting every classroom, hospital, and library to the national information infrastructure by the year 2000. Indeed, Mr. Chairman, the President and Vice President share a common vision with you, Chairman Dingell, Chairman Brooks, and the other authors of this legislation of the potential benefits that our national information infrastructure offers and a common commitment to making those benefits a reality for all Americans. I applaud that vision and commitment and I am excited by the challenge that lies before us. We stand on the verge of a transition to a new competitive world, a world in which the average consumer will be able to choose among competing suppliers of local, long distance, video, and wireless telephone services. In managing that transition, we in government at the federal and state levels should seek to promote competition wherever and whenever possible and to enhance access to competitive markets for consumers and providers of services and products. At the same time, we must continue to exercise regulatory supervision over telecommunications markets that are not _ or not yet _ competitive in order to replicate, as nearly as possible, the results that a competitive market would produce. There was a time, of course, when everyone thought that local and long distance telephone service was a natural monopoly - - that was the assumption of the drafters of the Communications Act of 1934. But, over time, thanks to American technological inventiveness and the pioneering efforts of entrepreneurs, people began to realize that the monopoly might not be so natural after all. The changes that have occurred in the telephone manufacturing and sales markets over the past 30 years provide a vivid illustration of the benefits that the introduction of competition and the promotion of access can provide to American consumers. When I was growing up, the telephone was a black, rotary dial instrument that was owned by the telephone company and was considered part of the telephone network. The first step toward opening the telephone equipment market was a modest one. In the 1950's, an entrepreneur developed a small cup-like device that could be attached to the end of a telephone to provide some measure of privacy in crowded settings. From the Hush-a-phone case in the 1950's and the Carterfone case in the 1960's to the adoption of the FCC's Part 68 registration program in the 1970's, momentum toward ending the telephone company's monopoly control of the customer premises equipment ("CPE") market gradually increased until the FCC deregulated this business and unleashed the forces of competition. Today, consumers have a seemingly limitless range of choices. They can buy telephones of all shapes, sizes and colors with a bewildering array of features and functions. They can buy telephones with built-in answering machines, telephones with memory, telephones with speed dialing, and cordless telephones. And yes, you can still buy one of those old, black, rotary dial telephones. Equally important, the prices for this equipment have fallen since deregulation. As prices declined, sales increased. Sales of cordless telephones, for example, increased from approximately 4 million units in 1985 to 9 million units in 1992. It's hardly unusual today for American consumers to have several telephones in their homes. For businesses, competition in telephone equipment has meant the ability to purchase their own private branch exchanges, or PBXs, which enable an office, in effect, to operate its own internal telephone network and to link remote locations in a single system. Competition has also led to the widespread availability of facsimile terminals. The purchase of fax machines soared from 137,000 in 1986 to 3.5 million in 1992, while the installed base of this equipment grew from 300,000 terminals in 1986 to 10.7 million in 1992. Many, perhaps most, business cards now list both a telephone number and fax number. And the introduction of fax machines has resulted in increased usage of the telephone network. Consumers now use fax machines not only as a substitute for the physical delivery of documents, but also instead of voice messages. Businesses routinely accept new orders by fax instead of relying on oral communications. Technological advances and entrepreneurial initiative also led to competition in the long distance market. As early as the 1950's, upstart businesses sought to apply new technologies, such as microwave, to offer an alternative to the telephone company. The new entrants faced a difficult task in making competitive inroads because of AT&T's control over the integrated public switched network, particularly the bottleneck-local telephone networks that are needed to originate and terminate long distance calls. It was AT&T's efforts to use that control to hamper competitors in the long distance and equipment markets that caused the Department of Justice to file an antitrust suit against AT&T in 1974. That litigation culminated in 1982 in a consent decree, known as the Modified Final Judgment ("MFJ"), that led to the break-up of the old Bell system in 1984. The divestiture of AT&T was the seminal event in the development of a truly competitive long distance business and I believe it was the right approach. Moreover, since 1984 Judge Greene has done an able job in enforcing the MFJ to ensure that providers of long distance service compete on a level playing field. During the past 10 years, the Commission has played an important role in assisting the efforts of the court to increase competition in long distance. The FCC, for example, developed and implemented a system of non-discriminatory access charges that permits competing long distance companies to use the local telephone network to originate and terminate their long distance calls. This system requires the Regional Bell Operating Companies ("RBOCs") and other local exchange carriers to provide access to the local telephone network on a non-discriminatory basis to all long distance companies. The Commission also successfully supervised the technological changes to the RBOCs' local networks that enabled consumers to select their carrier for "1+" interstate long distance service instead of being forced to use the incumbent monopoly carrier. Although the MFJ required the RBOCs to offer this "equal access11 service, the Commission also extended a similar requirement to non-Bell companies located in markets that competing long distance providers wished to serve. The introduction of competition in long distance is a real success story for the economy and consumers. Today, there are approximately 400 interexchange carriers, both facilities-based and resellers. Since 1986, the number of carriers serving 45 or more states has grown from 2 to 9. The total long distance market has grown from $38.8 billion in 1984 at the time of divestiture to $59.4 billion in 1992. More importantly, since divestiture, the price of long distance service has fallen dramatically. For example, the price of a 10 minute daytime call from Chicago to Atlanta, expressed in 1993 dollars, was $6.28 in 1984; today that same call costs only $2.30. The consumer response to this decline in rates has been equally dramatic. In 1985, AT&T carried approximately 133 billion of the total 167 billion minutes of interstate usage. Over the next eight years, AT&T's market share steadily declined from over 80% to 60%, but its traffic volume grew by about 60% to 212 billion minutes and the volumes of its competitors increased more than four-fold to 138~bi1lion minutes. These extraordinary increases reflect two of the principal benefits that competition in the telecommunications industry has produced over the past decade: declining prices and increased usage of our telecommunications network. The more competitive telecommunications environment has also led to an expanding array of new choices for consumers. Consider for a moment the services and products that were available in 1982 and compare them to today. In 1982, a long distance call was an expensive treat - - or it meant something was wrong. Today, the same call is likely to cost about half as much, and friends and relatives living thousands of miles away seem much closer. In addition, in 1982 almost no one had a cellular telephone or a pager. Today, parents can go to the movies with peace of mind, knowing that the babysitter can call or page them in an emergency. Economic growth in the telecommunications industry over the past decade has contributed significantly to improving consumer welfare in this country and has played an increasingly larger role in the overall domestic economy. In 1982, the telecommunications equipment and services sector generated approximately $94.6 billion ($143 billion in 1993 dollars). By 1993, that figure had grown to $171.9 billion. The growth in the communications and information sector as a whole over this period also has been impressive. In 1982, the total sector generated approximately $317 billion; $478 billion in 1993 dollars. By 1993, the total sector amount had grown to about $718 billion. The history of the CPE and long distance markets over the past decade shows that competitive markets serve the interests of consumers by creating strong economic incentives for product and service providers to reduce their costs, lower their prices, promote technological innovation and respond quickly to changing consumer demand. The FCC played a critical role in the evolution of both of these markets by removing regulatory barriers to entry by new competitors and taking steps to ensure that consumers would have access to competing service providers. We now must meet this challenge of promoting entry and enhancing access in order to open new markets to competition. Enactment of the legislation would assist the Commission in managing the transition to more competitive telecommunications markets by providing the agency with a clear statutory mandate to utilize appropriate regulatory tools in accomplishing its overriding competitive and public interest objectives. In the past, litigation over the scope of the Commission's authority to act in certain areas created uncertainty about the effect of Commission rulings and diverted resources to litigation that could have been spent for more productive purposes. A broad and unambiguous grant of authority to the agency will remove any doubt as to the Commission's authority to adopt and enforce rules that will withstand judicial review. Moreover, a legislative initiative could also substantially eliminate the cost of the ongoing litigation before the MFJ court. H.R. 3636 I. Local Exchange Competition Entry I applaud H.R. 3636's objective of promoting competitive entry into the market for local exchange and exchange access services. The local network is almost the only telephone market today that continues to be dominated by a single provider. The advent of new, wireless technologies, such as Personal Communications Services (PCS), the growing presence of competitive access providers, and the expanded capabilities of cable systems create the potential for an effectively competitive market for local telephone service (including intraLATA toll service). H.R. 3636 would eliminate governmental barriers to entry into the local market that would undermine the development of competition for local services. The removal of these barriers should foster the continued development and deployment of advanced, reliable technologies. New entrants can be expected to both utilize and compete with the service offerings of the local telephone companies. The introduction of competition for local services on a broad scale also will create strong incentives for competing firms to increase the pace of technological innovation, develop new services, and reduce their cost of providing service. All of these efforts will contribute to economic growth by stimulating demand for telephone service. Safeguards H.R. 3636 correctly recognizes the need for safeguards to ensure that new entrants can interconnect their facilities with the existing local networks. Although Section 201 of the Communications Act of 1934, as amended, currently empowers the Commission to order common carriers to offer interconnection to other carriers, the bill's explicit treatment of reasonable nondiscriminatory access and interconnection issues properly highlights their importance in a world of many facilities-based telecommunications service providers. Interconnection and interoperability are essential to the full realization of the benefits that vigorous competition in the local exchange market can produce. H.R. 3636's proposal to require exchange carriers to offer interconnection at any point that is "technically feasible" and "economically reasonable" establishes a workable standard for the FCC to apply in formulating regulations to goyern interconnection arrangements. Many of the issues identified in H.R. 3636 related to unbundling, access, and interconnection, however, involve considerable technical complexity and implicate network reliability and integrity concerns. We would be pleased to work with the Subcommittee staff in refining and clarifying these sections of the bill. Pricing Flexibility I share the view expressed in M.R. 3636 that inter-carrier compensation arrangements and pricing flexibility for non-dominant and, at the appropriate time, formerly dominant carriers will be critically important to fostering local exchange competition. New carriers entering the local market to compete with incumbent telephone companies need the discretion to package and price their service offerings so that they are attractive to potential customers. By the same token, the incumbent telephone companies in time will require similar pricing flexibility to respond to competitive offerings. H.R. 3636 grants the Commission the discretion necessary to manage this transition. Moreover, the proposal to require the FCC to establish criteria for pricing flexibility that would also govern state commission decisions to grant such flexibility for intrastate rates should facilitate the introduction of consistent rates and rate structures for interstate and intrastate services. Preemption Another merit of M.R. 3636 is that it would authorize the FCC to preempt any state regulation of entry or state policies that restrict the exercise of interconnection or access rights provided by the bill or the FCC's implementing regulations. It would be advisable to extend preempt ion to inconsistent state rate regulation requirements. Rate regulation of non-dominant service providers may hamper their ability to compete effectively with the incumbent carrier. By the same token, continued rate regulation of previously dominant carriers may prevent the local market from becoming effectively competitive. Network Planning Another laudable feature of H.R. 3636 is that it recognizes the importance of network planning and reliability as additional service providers interconnect with the existing public switched network. The FCC has already adopted significant service quality and network reliability reporting requirements. It was notable that the public switched telephone network withstood the earthquake in California last week with relatively little disruption to its switching centers. As a result, millions of calls got through, enabling residents to obtain emergency assistance and console one another. I also approve of the bill's provisions requiring prompt licensing and approval of new services, which will ensure the expeditious deployment of advanced technologies and services. II. Universal Service Enthusiasm for promoting new competitive markets and encouraging new technologies and services must not distract our attention from the critical task of ensuring that all Americans haye access to basic telephone service. Currently, approximately 94 percent of all American households have telephones. That is an impressive, but not completely adequate achievement: almost 6 million households do not have active telephone service. Furthermore, a disproportionate percentage of households without active telephone service are low-income, particularly AfricanAmericans and Hispanics. The continued deployment of new telecommunications technologies capable of delivering a wide range of advanced services will require the FCC and the states to address on an ongoing, evolving basis whether access to basic dial tone service should continue to be the only goal of universal service. I share the authors' view that it is imperative to redefine the term "universal service" continually over time, as technology advances. Further, because competition in the local exchange market will increase pressure on current rate structures, H.R. 3636 recognizes the importance of continually monitoring and reacting to the effects of local competition on the maintenance of universal service. The bill proposes that the FCC convene a Joint Board charged with developing recommendations for preserving universal service in the emerging world of widespread competition for all telecommunications services. Joint Boards in the past have provided a vehicle for the FCC and the states to work closely to formulate and administer consistent universal service policies. In addition to embracing an evolving definition of universal service, it is also quite appropriate for the bill to extend the obligation of contributing to universal service to "[a]ll providers of telecommunications services." This feature of the bill is fair and crucial to promoting competition and efficiency. 111. Competition In the Multichannel Video Distribution Market Entry The market for multichannel video distribution is dominated today by cable television providers. This market should be opened to more competition. The existing prohibition that bars telephone companies from providing video programming to customers in their telephone service areas should be repealed. It is very appropriate, therefore, that H.R. 3636 would remove this restriction and allow telephone companies to compete with cable companies in providing one-way and interactive video services. Direct, facilities-based competition between cable and telephone companies will produce substantial benefits for the American public. Competition in this market will spur the deployment of advanced technologies that are capable of delivering the full range of services that customers demand. These services include not only entertainment services, but also the growing number of educational, health, and social services that are accessible over broadband technologies. In addition, competition in this market can be expected to produce the same positive results for consumers that we have seen in other markets for telecommunications services that have undergone the transformation from monopoly to competition: technological and service innovation, lower prices, and responsiveness to consumer tastes. Telephone company entry also will expand the electronic marketplace of ideas by creating new outlets for video service providers. As you know, Mr. Chairman, the FCC already has taken steps to enhance competition in the multichannel video distribution market. Within a few months, U.S. consumers will be able to receive programming from a Direct Broadcast Satellite service. This service is capable of delivering scores of channels of programming directly to homes and offices equipped with 18-inch dishes. In 1992, the Commission authorized telephone companies to offer video dial tone service within their operating territories through a basic "video platform" that provides non-discriminatory access to multiple video programmers. Since these rules were enacted, four telephone companies have received authorization from the Commission to construct and operate video dial tone systems for purposes of testing technology and evaluating consumer demand for the services offered. Elimination of the existing cross-ownership restriction should stimulate new telephone company investment in facilities that are capable of delivering video and advanced telecommunications services. Consumers should be the beneficiaries of the expanded choices that facilities-based competition in this market will foster. Safeguards Adequate safeguards must be in place to ensure vigorous and effective competition between telephone companies and cable companies. In a report to Congress in 1992 that recommended removal of the prohibition against telephone company entry into video programming, the FCC cautioned that certain restrictions might be necessary to prevent potential anticompetitive practices, including possibly a requirement that a telephone company provide video programming to end users through a separate affiliate. H.R. 3636 would impose this restriction as an initial requirement and I support that approach. The bill also would require a carrier to make available up to 75 percent of its capacity to unaffiliated video programmers upon request. I share the authors' concern that unaffiliated video programmers must have adequate access to the video platform to ensure delivery of their video programs and services. I also agree that the Commission should monitor closely the impact of this requirement during the first two years after enactment. Given the pace of change, it might be appropriate to give the Commission the authority to modify the reserve requirement if an investigation shows that it is no longer in the public interest. Generally, the Commission should have the discretion needed to adjust its policies to achieve the overall goal of promoting competition. Similarly, while I support the bill's proposal to require the FCC to examine whether cable systems should be required to provide non-discriminatory access to a video platform (just as telephone companies would be required to do), the FCC might be given the authority to adopt such a requirement, if its investigation shows that such enhanced access to cable systems would be in the public interest. Mr. Chairman, I would like to offer one other suggestion before turning to H.R. 3626. The removal of barriers to entry into the local telephone market and the video distribution market as proposed by H.R. 3636 likely will accelerate the trend toward convergence of the markets for all telecommunications services. This trend suggests that, over time, traditional regulatory distinctions between telephone and cable companies will become increasingly blurred and outdated. It also suggests that serious consideration should be given to a third regulatory paradigm, one that would permit the FCC to regulate these emerging diversified service providers under a single, integrated system, rather than partially under Title II and partially under Title VI. As I will discuss later in my testimony, the Administration has suggested a possible third regulatory model to address the emergence of this new type of service provider. In general, we should aspire not to impose unnecessary or duplicative regulations that increase consumer rates and hinder the development of fully competitive markets for telephony and video services. I hope this Subcommittee, therefore, will consider granting the Commission the regulatory flexibility necessary to permit it to refrain from imposing obligations that would undermine, rather than foster, the continued development of competitive markets for telephone and video services. The Commission's exercise of its limited existingforbearance authority under Title II has produced substantial benefits - - the permissive detariffing policy contributed to the development of a competitive long distance market and more recently to the emergence of competition for access services. Moreover, Congress last year recognized the importance of broad forbearance authority in facilitating the emergence of competitive telecommunications markets when it granted the Commission the discretion to forbear from imposing on commercial mobile service providers any Title II requirements except those contained in Sections 201 (non-discrimination), 202 (just and reasonable rates) and 208 (resort to complaint process). H.R. 3626 The MFJ prohibited the RBOCs from engaging in certain telecommunications businesses, most notably the provision of interLATA interexchange services, information services, and the manufacturing of telecommunications equipment. These restrictions were imposed as part of the settlement of the Justice Department's antitrust suit against AT&T in order to preclude the RBOCs from using their local exchange monopoly to obtain market power in other, related markets. The court subsequently revised the MFJ to eliminate the information services restriction, but the interThATA service and manufacturing prohibitions remain. Since the divestiture of AT&T in 1984, the structure of the interexchange and equipment markets has changed substantially. Although AT&T continues to control by far the largest share of the interexchange market, there are now hundreds of domestic interexchange carriers. Further, over the past decade MCI and Sprint have become established nationwide competitors. Competition in the telecommunications equipment market also increased during this period, as the RBOCs and other exchange carriers substantially increased their purchases of switching and other equipment from non-AT&T suppliers. Moreover, the development of effective competition in the local telephone market, as contemplated by H.R. 3636, would limit the incentive and ability of the RBOCs to engage in cross-subsidization. In light of the changes over the past 10 years, I agree with the authors of H.R. 3626 that the time has come to develop a plan for lifting the remaining MFJ line-of-business restrictions and returning primary responsibility for regulating the practices of the RBOCs to the FCC. I also agree with the authors of this bill that any plan for removing these restrictions must provide adequate safeguards to preclude the RBOCs from using their existing market power in the local exchange to undermine competition in the markets they seek to enter. I. RBOC entry into Interexchange Services I support the objective of allowing the RBOCs, over time and subject to appropriate safeguards, to provide interexchange services. With their capital resources and technical expertise, the RBOCs would be formidable competitors for AT&T, MCI and Sprint. Consumers of long distance services would be the principal beneficiaries of increased competition in this market. I am also pleased that the bill would permit the RBOCs to apply immediately for authorization to provide interexchange services that are "incidental" to other telecommunications services that they are already permitted to provide. In the past, the interexchange prohibition has forced the RBOCs to incur unnecessary costs in upgrading their networks in order to avoid routing signalling information across bkTA boundaries. H.R. 3626 properly directs the Commission to apply a public interest standard in determining whether to permit the RBOCs to enter the interexchange services market. This broad standard requires the Commission to assess a wide variety of relevant factors in making its determination, including the need for additional regulatory safeguards. II. RBOC Entry into Manufacturing I also support H.R. 3626's objective of permitting the RBOCs to engage in the manufacturing and provision of network equipment, and the manufacturing of CPE, subject to effective and appropriate safeguards. RBOC entry into these markets can enhance competition, promote continued technological innovation in CPE and other equipment and foster lower prices. Further, their direct involvement in the research and development area should facilitate the production of equipment that is suited to each company's requirements and improve network reliability. Entry of the RBOCs into manufacturing, subject to appropriate safeguards, should benef it?' both consumers in the equipment market as well as the U.S. economy generally. From telephones, to fax machines, to wireless cellular telephones and pagers, telecommunications equipment has become a ubiquitous presence in our lives. Consumers throughout the United States, residential and business, urban and rural, would gain from the additional competition that the RBOCs could provide in these markets. The additional economic activity spurred by their entry should benefit the economy as a whole. Our experience with long distance telephone services and CPE has shown the tangible benefits to the economy and consumers that arise with more competitive markets. I believe consumers will realize similar benefits in telecommunications equipment markets with the passage of this legislation. As product and geographic markets develop and change, however, it may be necessary for the FCC to adopt regulatory safeguards that will protect consumers and competitors against anticompetitive practices without hampering the ability of the RBOCs to compete. Generally, I believe that it would be wise to confer upon the Commission appropriate regulatory tools to accomplish the legislative goals of safeguarding competition and consumers. I believe that the Commission can and should be able to meet these goals under changing economic circumstances by flexible implementation of both structural and non-structural safeguards. Because the RBOCs currently are permitted to provide (although not manufacture) CPE, the Commission has enacted regulations designed to reduce the ability of the RBOCs to engage in anticompetitive practices in this market. The Commission's Part 68 rules govern the compatibility standards between the network and CPE. The "no harm to the network" standard for compatibility has contributed significantly to making the CPE market robustly competitive. In addition, the Commission has imposed a series of nonstructural safeguards to protect against discrimination and cross-subsidization. Specifically, the Commission has adopted unbundling, network disclosure, and nondiscrimination reporting requirements on the BOCs as well as comprehensive accounting regulations. The significant competition already present in current telecommunications equipment markets provides an additional safeguard to discipline the behavior of the RBOCs. As competition among communications equipment suppliers continues to evolve into a global market, the potential of the RBOCs to cause anticompetitive harm will diminish as well. Other Legislative Initiatives Mr. Chairman, as you know, the Administration has released a White Paper concerning its proposals for reform of the Communications Act. Although many of the proposals described in the paper appear to be patterned after provisions in H.R. 3636, I would like to comment briefly on three new initiatives. The Administration plans to amend the Communications Act to add a new Title VII, which would apply, on an elective basis, to providers of two-way, broadband, digital, transmission services, offered on a switched basis. In contrast to the disparate regulatory treatment of local exchange carriers and cable television operators under Titles II and VI, respectively, Title VII would establish a uniform regulatory scheme applicable to all service providers that meet the statutory requirement. The creation of this third regulatory model is intended to encourage private investment in new technology and foster the widespread availability of advanced telecommunications services. I believe, Mr. Chairman, that the Administration has presented an innovative approach that raises important, provocative questions. In principle, we should be supportive of initiatives that create incentives for new, efficient investment in advanced telecommunications facilities. Further, as I mentioned earlier, the growing trend toward convergence suggests that alternatives to the current Title II and Title VI regimes should be explored. It is important, also, that Title VII would not repeal either Title II or Title VI of the Communications Act. If a firm providing Title VII broadband services also furnished transmission services over other facilities, the rates, terms and conditions applicable to the latter services would continue to be governed by Title II or VI. The Administration should be applauded for developing a regulatory model that is designed to address the growing convergence in the communications industry. It is an exciting and timely idea and I look forward to obtaining more detailed information regarding its implementation. The Administration also proposes to direct the Commission to adopt regulations that would require cable operators to offer non-discriminatory access to channel capacity on their systems for unaffiliated video programmers, except where technology, costs and market conditions make such offerings inappropriate. This proposal represents an important step toward establishing regulatory parity between exchange carriers and cable television systems in the multichannel video distribution market. Under H.R. 3636, exchange carriers that wish to offer video programming to customers in their telephone service territory would be required to offer non-discriminatory access to unaffiliated video programmers through a video platform. Cable television operators currently do not have a comparable obligation. The Administration's proposal would further the goals of promoting competition and enhancing access by creating a new outlet for video programmers in local markets. Finally, Mr. Chairman, the Administration proposes to take the initiative to help fulfill the goal set by the President in the State of the Union address and the Vice President in his speech in Los Angeles on January 11 to connect every classroom, hospital and library to the information superhighway by the year 2000. The White Paper indicates that, as part of that effort, the Commission will be asked to commence an inquiry and subsequently a rulemaking proceeding to ensure that access to advanced telecommunications services are accessible to these vital social institutions. The Commission welcomes this -responsibility and we are prepared to commit the resources necessary to initiate and complete these proceedings promptly. Conclusion Mr. Chairman, as your hearings continue, I will commit the very able staff of the Commission to the task of commenting and pursuing the topics raised by the members of your Subcommittee and the witnesses. Our experts will be available to consult with members of the Subcommittee or their staffs. I thank you, again, Mr. Chairman, for the opportunity to appear before this Subcommittee and testify about these important bills. I also look forward to working with you, the full Committee Chairman and the other members of the Subcommittee as the legislative process moves ahead. I would be happy to answer any