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Public Workshops 2007 Telecommunications Symposium "Voice, Video and Broadband: 9:10 a.m. through 5:23 p.m. Reagan Building
C O N T E N T S Opening Remarks THOMAS O. BARNETT, Assistant Attorney General, Antitrust Division Panel I Moderator: YVETTE TARLOV, Attorney, Telecommunications and Enforcement Section, Antitrust Division Panelists: JOHN THORNE, Deputy General Counsel and Senior Vice President, Verizon Communications Inc. Panel II Co-moderators: CARL WILLNER and LUIN FITCH, Attorneys, Telecommunications and Media Section, Antitrust Division Panelists: SEAN C. LINDSAY, Associate General Counsel, Qwest Communications International Inc. Panel III Moderator: HILLARY BURCHUK, Attorney Telecommunications and Enforcement Section, Antitrust Division Panelists: THOMAS W. HAZLETT, Professor of Law and Economics, George Mason University School of Law Panel IV Moderator: NANCY GOODMAN, Chief, Telecommunications and Media Section, Antitrust Division Panelists: EVAN R. GRAYER, Vice President Broadband, DirecTV Group Closing Remarks DEBORAH A. GARZA, Deputy Assistant Attorney General, Antitrust Division
P R O C E E D I N G S Opening Remarks MR. BARNETT: Good morning. I appreciate all of you coming to our symposium today to talk about telephone and video issues. I will start off with a caveat about the current state of our technology in telecommunications. If all of you could, turn off all of your BlackBerries and cell phones. I am told that it will interfere with our electronic equipment, and there are people who are trying to listen in, as well as watch in person. so we very much appreciate your cooperation. That will also help minimize any interruptions if anyone gets a call in the meantime. We do appreciate your coming today. I think that this is a very exciting topic. It is a very exciting set of industries. As we look out from the Antitrust Division across the economy, there is no doubt that telecommunications and television is one of the most dynamic sectors of the economy. The changes that have taken place over just the last 20 or so years are nothing less than breathtaking. From my perspective, I think of wireless voice communications. You can now reach out and touch somebody merely by pulling out a little handheld device, kind of like what I saw in Star Trek, and dial a few numbers and talk to anybody on the face of the planet, or virtually anybody anywhere on the face of the planet, and you can do things we had only imagined. There is BlackBerry e-mail, text messages, surfing the Internet, all from the convenience of wherever you are sitting or standing. According to the CTIA, many of us are doing just that. As of June of this year, there were 243 million wireless subscribers in the United States. That is an 81 percent penetration rate. As of June of that year, there is 12.8 percent of the population who have cut the cord, who do not have a landline telephone connection. That is something that is up from 7 or so percent just two years before. As of June of 2007, wireless minutes in use were 1.95 trillion, and there were 28.8 billion monthly text messages. There is no doubt that this is an important and widely used service. From the broadband perspective, I think back 20 years to 1987, and the Internet was unknown to the American population. In the 1990s, we were talking about dial-up modems, and if you had a 56K modem, you were top tier. Now we have companies putting fiber optic cables into homes with almost a limitless transmission capacity. Again, the penetration here is very impressive. According to the FCC, from December 2000 to December 2006, the number of high-speed broadband lines increased from 6 million to over 82 million. The number of residential high-speed broadband lines increased from 5 million to 58 million. Similarly, the number of residential high-speed fiber lines increased from under 2,000 in the year 2000 to over 750,000 last year. The number of satellite and wireless high-speed lines increased to almost 3.4 million as of 2006. Again, when I was growing up and I wanted to watch television, I had access to four channels, all analog, all broadcast over the airwaves. Now most of us have access to hundreds of digital channels, and an increasing number of them are in high-definition digital. We can receive the video over the air, over a cable, or over a fiber optic line. From a competition perspective, these developments are all to the good. In addition to expanded product offerings and the increased quality of products, we are seeing increased competition from separate platforms. At one point, we had a single copper wire running into our homes, and that is how we got our telephone, and we had the antenna on top of the house for the television. Now we have copper and fiber optic lines running into the house, coaxial cables, wireless communications, voice over the Internet protocol, or satellite transmissions. Other technologies are on the horizon, including broadband over power lines and mobile wireless broadband. The increase in the use of these technologies and across platform competition clearly has benefitted consumers. As just a couple of small examples, the cost of long-distance communication, which used to be a very significant part of your telecommunications bill, has dropped dramatically. People talk about free long distance in the not-too-distant future. There are indication that where new providers, new facilities-based providers of video/television communication have entered and introduced competition that prices have fallen. While all these are wonderful, we also recognize they don't come free. According to Standard & Poor's, the wireless carriers in 2006 invested over $23 billion in their wireless infrastructure. On the fiber optic side of things, just two companies have announced that they are spending approximately $25 billion to build out their fiber optic network, and according to the National Cable and Telecommunications Association, the cable industry is investing in 2006 over $12 billion in constructing and upgrading their cable facilities. So this is a very dynamic industry. It is doing wonderful things, and people are investing and taking risk with many billions of dollars. It is all very exciting. So why are we having the workshop today? The reason we are having the workshop is that not all of the news that we hear from the Antitrust Division's perspective is good. We believe that cross-platform competition is a good thing for consumers. We periodically hear, however, about factors that may be slowing the expansion of this type of competition. Some of those barriers are impediments that may be technological. Trying to provide high-speed broadband service over power lines or through mobile wireless networks certainly presents major technical challenges that have not been completely solved. Some of the barriers may be economic. As I have just discussed, the cost of building out a nationwide network is many billions of dollars. Some of these impediments may be regulatory. These could include, for example, requirements that a new provider of telephone, broadband, or video services obtain regulatory approvals from a large number of local governmental authorities. The Antitrust Division cares about these issues for two interrelated reasons. First and foremost, expanded competition enhances consumer welfare by increasing the number and kind of product offerings, and by reducing the cost of those offerings. Second, the Division must consider the degree of current and potential competition in a range of contexts. These include our review of proposed mergers, investigations of potential anticompetitive nonmerger conduct, and discussions with other governmental entities on the competitive benefits of proposed governmental actions. We are looking forward to this session and learning more about these important issues. I do want to say that we appreciate the written submissions that have already been sent in. Indeed, we appreciate them so much that we have decided we are going to extend the deadline. In fact, we have heard from a few folks that they had trouble meeting the deadline, and while we announced a cutoff -- and I can't remember what it was -- we will continue to accept and promise to consider any written submissions that we receive by December 31st of 2007, the end of this year. We also recognize that there are far more of you who are interested in coming here to speak today than we could possibly accommodate in a one-day session. We have tried our best to cover a range of interests in those who are going to be able to speak. For those of you who we were not able to accommodate, we do encourage you to submit your comments in writing, and we obviously will take those into serious consideration. We hope to synthesize the information we obtain, both in the discussions today and in the written submissions, and produce a report on these issues sometime next year. So I want to thank all of you for coming. I want to thank you for your written contributions, for your participation in the discussions today, and finally, I particularly want to thank our staff who have put in a tremendous amount of effort organizing this, preparing the agenda, lining up the panels, dealing with the submissions. I thank them for the work they have done so far and the work that they will do after the workshop. So thank you very much for coming, and with that, let's get started. Thank you. [Applause.] Panel I Entry into Multichannel Video Services MS. TARLOV: Good morning. Thank you, Tom. You are always a hard act to follow, but we will give it a shot. I am Yvette Tarlov. I am an attorney in the Telecommunications and Enforcement Section of the Antitrust Division. I will be acting as the moderator of our first panel on entry into the multichannel video market. Many of you, I am sure, have probably seen or received ads about Verizon's FiOS video service. Our first panel will explore the extent to which regulatory or other constraints continue to act as barriers to entry into the video market. We also will be discussing the competitive impact of new entry into the video market: How have the incumbent cable companies responded? Have prices gone up or down? Finally, we will be discussing the significance of offering bundles of services, including video, the so-called "triple play" or "quadruple play." We have five distinguished panelists to address these and other questions this morning. Our first speaker is John Thorne who is the Senior Vice President and Deputy General Counsel for Verizon. John is responsible for a variety of Verizon's legal work, including antitrust, intellectual property, and privacy. He is no stranger to the public speaking circuit. In his spare time, he is an adjunct faculty member at Columbia and Georgetown law schools. Our next speaker will be John Goodman. For the past six years, John has been the Executive Director of the Broadband Service Providers Association. The BPSA is comprised of broadband service providers who provide video, high-speed Internet access, and telephony over facilities-based, state-of-the-art broadband networks throughout the country. Our third speaker is Grier Raclin. Mr. Raclin has been the Executive Vice-President, General Counsel, and Secretary of Charter Communications since 2005. Mr. Raclin oversees Charter's legal and regulatory affairs, as well as its business development, programming, procurement, and facilities departments. Our fourth speaker is Jane Lawton. Ms. Lawton has served as the cable communications chief for Montgomery County since 1996. Her division of Cable and Communications Services oversees the negotiation and administration of cable franchises for the county. In addition, Ms. Lawton is serving her second term in the Maryland General Assembly, representing District 18. Prior to that, she served four terms as Mayor of the Town of Chevy Chase, Maryland, as well as being on the town council. The last, but not least, speaker is Hal Singer, President of Criterion Economics. Dr. Singer's areas of expertise are antitrust, industrial organizations, and damages. He has applied this expertise in a variety of industries, including telecommunications, Internet, and video programming. Hal has published extensively on these topics and has served as a consultant and testifying expert in a variety of antitrust cases. Once all of the panelists have completed their presentations, I will pose some questions to each of them. We will then open the floor to people from the audience to pose questions, and there will be volunteers going around with microphones for each of you to use. Before I turn over the panel to John, I would like to acknowledge the invaluable contribution of my colleague, Rebekah Goodheart, in putting together this panel. Thanks. MR. THORNE: Good morning. First of all, thank you for the invitation to be here. I am going to be brief. I am not going to use a PowerPoint. I did submit a fairly detailed paper that is up on the DOJ website, and I would refer you to that if you want a coherent, logical, more complete than I can be on the hoof version of this, but thanks to Tom Barnett, Deb Garza, Nancy Goodman, Laury Bobbish, Yvette Tarlov, Rebekah Goodheart, Carl Willner, Luin Fitch, and the many of you that we have worked with on other things for hosting this. This is an important topic. I would like to actually spend my entire 5 to 10 minutes echoing Tom's excitement about the business because that is how people at Verizon feel about this now, but I am going to move a little bit beyond that. I will start with the fact that Verizon is spending by itself $23 billion pulling fiber to homes and offices and multiple dwelling units throughout a multi-State area. We are hoping to reach quite a few million customers in a reasonable length of time. The $23 billion is sometimes expressed as a smaller number, sometimes 18 and sometimes slightly different numbers, because if you put fiber in, some of the cost of maintaining the copper can be subtracted. So you can look at it two different ways, but the new money out the door putting in fiber is $23 billion. Verizon is offering a substantially better product than any in the market, and in many places, we are offering it at a lower price than the poorer product that the cable incumbent is offering. I will put my antitrust hat on for a second. I got to tell you, it is the most pro- competitive thing I have ever worked on. I have worked on several, but this is the most exciting that I think we have done. Consumers love the product. We do get some complaints, so I've got to tell you. The complaints are along the lines of "When can I get FiOS on my street?" We get constant e-mails. All my friends ask. My neighbor in Chevy Chase has it, I live in D.C., "When can I get it?" Consumer Reports magazine, February of this year, has an article that, I think, is entitled "Fiber Joins the Fray" that begins with these words: "Cable Internet service has met its match." In our latest survey of more than 34,000 subscribers, our first to assess "the new kid on the block," readers gave Verizon's fiber-based FiOS service top marks across the board. FiOS users were more satisfied with the service's speed than were users of cable. They were more satisfied with FiOS's cost. FiOS got higher marks for both reliability and technical support than did cable or DSL. That is the good news. The bad news? Consumer Reports always has bad news. The bad news is that your chances of getting this promising new service today are slim. Verizon's FiOS currently is being offered to about 6 million homes in roughly one-third of the states where Verizon is otherwise a telephone provider. The article goes on to say, "Plus, the very threat of a cable competitor can have an effect in the few markets where Verizon has rolled out its fiber to the home service. For example, cable has responded with lower prices on broadband, among other incentives." I can go on about how cable has reacted to us, and I do actually in the written submission, which I would recommend to you. Long-run students of this industry -- again, the paper details who they are and their findings -- governmental bodies ranging from the Government Accounting Office to Congress to the Justice Department, the FCC, the Commerce Department, professors who study the economics of this business over the past few decades -- you are going to hear from a couple I think later today, Hal Singer and Tom Hazlett -- repeatedly have concluded that new entry by a wireline rival is good for customers in terms of price, number of channels, quality of programming, all the other dimensions on which consumers evaluate the service. I can tell you that if you look at what the cable companies that are threatened by this development say, you see the same thing. They are not saying "Oh, we don't care" or "Verizon is not a force" or "Customers don't care." I would refer you, for example -- again, there are lots of examples, and I have some in the paper -- on May 3rd of this year, the chief operating officer of Cablevision, Tom Rutledge, said on the transcript of his company's quarterly earnings call that, "Churn" -- churn, that is the loss of a customer -- "Churn was impacted by FiOS competition." Then he got a question from the floor. The question was "Will your churn increase further because of FiOS?" and his answer was "It is a function of how franchises are granted and when they are granted." Now, you all know what that means, but I am going to emphasize the point. When the chief operating officer of an incumbent cable company says it is a function of how franchises are granted and when they are granted, he is telling you that if Cablevision had some ability to affect how and when the franchises were granted, he could affect his churn. He could keep his customers. He will lose his customers to competition if Verizon can enter faster. Now, the entry barriers that Verizon has faced and is facing are partially recounted in the paper that I put in. I got the question from Rebekah and Yvette in preparation for this, what are the current most important entry barriers that are slowing down your bringing this good new product to consumers? I can answer that question, but I think the question actually reflects a mind-set, and I don't want to take issue too much. I think the right question for you to ask is not just what is the problem of the day because the problem of the day has changed every day. If you look back over time, this is an enduring problem. It is not a one-time problem that gets fixed with a one-time solution. For example, you can go back 21 years to the Preferred [Communications v. City of Los Angeles] case. In that case, Los Angeles said that the incumbent cable operator was going to be the only one. There was going to be an exclusive, de jure, single cable operator in Los Angeles. The Supreme Court, Justice Rehnquist -- then justice, not chief, said no. There is a First Amendment right to provide cable TV service, this kind of speech. So, 21 years ago, the municipalities were told, "You cannot issue single cable franchises. Additional entrants must be allowed." Twenty-one years ago. It was 15 years ago that Congress wrote in the 1992 act that a franchising authority -- I am quoting from the statute -- "A franchising authority may not grant an exclusive franchise and may not unreasonably refuse to award an additional competitive franchise." Well, that was 15 years ago. You would have thought maybe 15 years ago, the barrier of franchising had been lifted, and yet regulators have had to continue coming back to the problem not just of franchises, but others. There were three reports issued this year by the FCC. March 5 of this year, the FCC found the current operation of the franchising process unreasonably interferes with competitive entry. That is the heading from one of the sections of the report, and that was a docket that was opened in 2005. In November of this year, just a few weeks ago, November 6th, the FCC issued a second report and order on that same topic. It was still an issue. November 13, just a couple weeks ago, the FCC ruled that a different problem, multiple dwelling units, when a new entrant like Verizon is on the verge of entering a market, the cable companies scurries to sign up MDUs into long-term contracts, so that the residents in the apartment building can't get the competitive service. November 13, the FCC ruled those exclusivity agreements with the MDUs "caused significant harm to competition" and are "an unfair method of competition." That was a docket that was opened this year. That problem was addressed by the FCC this year. I expect the cable companies will appeal that decision. That may not actually get resolved right away. Verizon is very appreciative of the work the FCC has done. We are very appreciative of what Congress has done in the 1992 Act and in other acts. We are very appreciative of the support of the Justice Department. We are appreciative of what the state legislatures have done in some states to make it simpler to get franchises. The question, what are the current problems, is not quite the right question. This is an enduring problem that needs an enduring solution. To be specific in answering the question, I want to make sure, Rebekah, I have done this for you. I think the two current largest problems are one, access to multiple dwelling units and, second, the interconnection necessary in order to get interconnection with an incumbent cable's PEG channels. Often the way this works is the incumbent has put in a studio or other PEG facilities, and the new rival has to connect. It is a fairly simple thing. You may hear about more of this on the subsequent panels. Those of us who have been through the 1996 Act know that it is not that hard to interconnect to facilities, but somehow that has become an issue, and we detail some of that in the submission that we have put in. Let me wrap up and just say again I am very appreciative to have a chance to be here and answer questions a little later on, but I think the right perspective for looking at this problem is that this may be one of those rare situations where this agency and its unique tools should be brought to bear. Thanks. MR. GOODMAN: Good morning. I am John Goodman, and I also want to express my appreciation for being here today. I am also always a little threatened or awed by being in this kind of an environment. I am a nonlawyer, and I am profoundly aware of the fact that I am surrounded almost overwhelmingly by lawyers. My actual start in this industry is also a full cycle in that the first thing I did in the industry was to work for a BSP or a broadband service provider -- some people call them "overbuilders" -- where we built a network in St. Cloud, Minnesota, and that network was put into place competing with Charter, who is sitting here today, and Qwest, who is on a panel later today. So it has been a very interesting thing for me. As I think you are aware, the BSPs are always building networks that do the bundle, and one of the topics today is the bundle and how significant that is. It is also the case that BSPs are always in a competitive position. They have always come into markets where there is somebody else already offering all of the services that they bring. One of the names that you may be familiar with is RCN. They offer services here in the greater Washington area. Other BSPs are Knology, Prairie Wave, SureWest, Everest, et cetera. This is a diagram of the basic system structure that a BSP brings to the market. [BPSA Slide 3] Now, the interesting thing about this basic structure is that it is now being emulated or duplicated with different technologies by most of the players that are coming into the market. The key to this structure or understanding it is that everything inside this box is a private network being operated by the operator. The key to what it can do is the headend. The headend is the connection between the entire outside world, whether it is pulling in video content or connecting to the PSTN or connecting to the Internet, et cetera, and the subscribers that have signed into the network. One of the things that I would point out is that this structure is creating perpetual change. Most of you can understand what we are now calling a three-screen strategy. We have all turned off our BlackBerries, but what is happening, in part driven by this structure and by technology, is that you have content and connections that are now bouncing between the three connections. You used to have the world of TV in its own world. You used to have an Internet PC living in its own world, and then you had a telephone that didn't have a screen. In today's world, you have connections and information that are bouncing between all three screens. That is for the panel kind of my daily life. Some things, I choose to watch on my TV. Some things, I watch on my PC. There are other things that I monitor that have a similar content on my telephone, which is no longer an independent thing. One of the questions is the bundle and how important is that. BSPs have now been selling the bundle for about 10 years, and we decided that we will disclose some of our key numbers in terms of where we are. [BSPA Slide 4] It is pretty clear that the service that is the most important, that has the highest take rate and also economics is video. Fully eighty-nine percent, on average, of our customers take some form of video service. In today's world, about 70 percent of all of our customers are buying some type of bundle. A little over a third are buying all three. The two services that are growing in penetration fairly quickly are broadband and telephone. Not all of the BSPs were offering service from day one when it comes to telephone, but at this point, all of them have migrated to -- if they didn't do switched telephone, they are doing VOIP telephone. So they are offering all three services, and what we expect is the telephone numbers to go up. By the way, all of this data is in the comments that we filed and posted. So you can come back to it there. So the bundle is essential. When you go back to the 1980s and you had overbuilders that came into the market and they only offered video, they failed financially. The difference today in terms of this particular business model, is that you are offering the bundle. You do not have to come into a market and get a dominant market share in any individual service, but you can create enough revenue to survive and do okay. As has been already touted, this is a very capital-intensive business. If you go back to the early entry days, there was a misconception that this business was going to print money, and that is just not true. At the same time, it is a very powerful business model that is becoming very profitable today for the people that are still in it. Some other questions have been raised as to whether these wireline entrants do or do not have significant impact on competition or on consumer welfare. One of the studies that was most significant to finally isolate markets where you have multiple wireline competitors was a Kohl and DeWine study in 2004. This one has been cited now in several of the recent proceedings, including the MDUs and franchising. It is third-party evidence that you do have significant impact when you have an additional wireline competitor come into the market. One of the keys is that the impacts that were identified back then are still going on today. It was not an isolated situation that has really changed. The other thing that I would point out to you is a GAO study that has not has much visibility, but the GAO did a second study where they wanted to see how DBS penetration rates fared in different markets, and in going after this data, what they discovered is that in rural markets, the penetration rate of DBS is pretty high, 29 percent. As you moved into more urban and suburban markets, it dropped down to 18 and 13 percent. When you look at it from a technology standpoint, when you are out in a market where you don't have an upgrade, where DBS is competing with a traditional cable system, the penetration rate is actually the highest, 36 percent. When you come into a market where the incumbent cable or other operators have fully upgraded to the bundle, guess what you find? You find that the DBS penetration rate drops to 16 and 14. In the recent work done by the FCC, they have acknowledged that there are DMAs, major market areas in the country, where the incumbent cable operator still holds nearly 78 percent market share. So what we have is an industry structure where DBS has had significant growth and offered a lot of new competition into the marketplace over the last 10-15 years, but we still have major market segments that have an incumbent operator for video that has an 80 percent market share, which is a very, very strong, nearly dominant position, especially when you consider that the DBS share is split between two providers. So you have an incumbent provider in a major market that may have an 8-to-1 advantage over the next nearest competitor for that service. The other issue that I want to point out is the connection between broadband and video. It has become increasingly apparent, especially with the FCC, that you can't deal with policy issues any more in isolation. When we implement good policies that promote the further expansion of video competition, given that the networks that are being built also offer broadband, what you indirectly do is create a better platform for broadband deployment. A key quote from the FCC's franchising order states that the two are now intrinsically linked. You really can't deal with them in isolation as you go forward, as you look at antitrust laws, as you look at policy, those kinds of things. Three recent actions are worth your looking into and becoming familiar with. One is the extension of the 628 prohibitions. Back when the rules were enacted, they said if programming content was subject to vertical integration and it was delivered by satellite [to the cable headend], it had to be offered on fair and equal terms to competitors. That rule was subject to sunset in the last year, and the FCC went ahead and extended it, and I will talk about that in the next slide. You also have franchising and actions that have been taken on MDUs. The one that I would like to point out to you or ask you to focus on a little bit is programming access. There is a further rulemaking that is pending at the FCC involving the "terrestrial loophole." Right now, under the [FCC's program access] rules, if the [vertically-integrated] content that is being distributed goes through a terrestrial network, there are no rules that assure access, and that is why it is called the "loophole" or the "terrestrial loophole." Because of the development in the industry, a terrestrial network can carry anything that historically was delivered by a satellite. There are many circumstances where a terrestrial feed is going to be preferred - including better economics, better quality, and other issues -- to a satellite feed for regional content. When the FCC extended the current rules, it was a 5-0 vote. We haven't had a lot of 5-0 votes from the FCC in recent years, but this one was unanimous and very strong, and they identified a number of market characteristics that they felt were germane and significant to the decision to extend the rules. We believe that all of the arguments that created this 5-0 vote also play into the terrestrial loophole. The FCC actually closed the terrestrial loophole in the Adelphia merger Order. They decided that it would be anti-competitive if sports programming and other programming in that merger was made unavailable to all of the competitors involved in those markets. The FCC has now issued a new NPRM, called MB No. 07-198, that takes up the issue of the terrestrial loophole and whether they should take action to close it, to treat all vertically- integrated programming in the same way. We expect it is going to be a legal debate. Does the FCC have the authority to do that? Since the foundation of the legal debate is antitrust law, we think there may be some room for you guys to be involved in this one. We are taking the position that the FCC does have the authority, both based on Sections 628(b) and 706 [of the Communications Act of 1934], for those of you that are familiar with those statutes, and quite bluntly, we are going to be asking for congressional and DOJ support to have the FCC take this action at this time. The key message I would like to leave you with is that, BSPs have been in the market for 10 years, and in some sense, they have the longest history of dealing with whatever competitive issue you want to talk about, whether it is predatory pricing or franchising issues or all the rest of them, and all of them can be material. We have come to the conclusion, based on our experience, that the foundational issue for any new wireline competitor is ultimately fair access to programming content. If that access ever diminishes, you are going to have some issues with how quickly and how healthy new competition is. MR. RACLIN: Good morning, everybody. I am Grier Raclin from Charter Communications. It is a pleasure to be here. I guess one thing I learned today is I ought to be a little more gentle on my team that goes out and negotiates interconnection agreements since the litany of woes they come back with sound remarkably like some of the woes I have heard today. I am going to spend a minute, if I can, and only a minute talking a little bit about Charter. I recognize that most of you here in the swamps of the Potomac, where I was for 20 years myself, probably have never heard of Charter. It is a large cable company, about 6 million subscribers in 29 states. That makes it about the third-largest publicly held cable company, the fifth largest MVPD [multichannel video program distributor]. We say publicly held because when Cox went private, they are roughly our same size. Any day of the week, if we buy something or they sell something, we are bigger or they are bigger, and we don't know what they are anymore since they have the luxury of being private, from my perspective. So we say publicly held, but we are the third-largest cable company. We provide a full suite of services, as many large MSOs do, TV, high def, video-on- demand, et cetera, high-speed Internet which we are increasing the speeds on, telephone service, and then we bundle them, which we will get into in a minute. Charter has been around since about 1991 or 1992, but Charter as it exists today really started in the late '90s when Paul Allen rolled up a number of large cable systems and grew it into Charter. Since that time, since we have talked about franchising, we have obtained thousands of franchises. In fact, one point I will make later is that in 18 months, we obtained over 2,000 franchises. So we have a certain amount of limited tolerance for claims that it is an impossibility to do that. One of the things I have been asked to talk about a little bit is our view of the market today, and I think it can be summed up pretty easily. Our view of the market is that it is already robustly competitive, and it is going to become more competitive as time goes on. For years, we have competed with the satellite companies, which are a lot larger than we are. They have over 30 million subscribers compared to our little less than 6 million, a thirty-three percent market share, and $28 billion in combined revenues, which is significant. The number one cost driver in the cable business is the cost of programming, and the larger you are, the less per head you are going to pay for your programming. So, when you get up to 30 million subscribers, that gives them a tremendous cost advantage over us. In addition to that, we compete with other cable companies, overbuilders, municipal cable companies (and if you want pleasure sometime, try competing against your regulator), private cable companies (which originally started out as SMATVs, antennas on large buildings). One of the ways the ILECs have found around franchising rules is they actually go in and build out as a PCO [Private Cable Operator]. So PCOs now are often affiliated with ILECs, and probably, that will grow with the exclusivity rule which we are happy to talk about later and answer some questions on because we obviously have a different view of things. Local telephone companies are another competitor. Charter is not in a number of large communities. Most of our systems are in smaller communities, rural communities, and therefore, the local telephone companies, the rural companies, really are a large part of our competitive market, and they have a tremendous advantage in that their networks were built at taxpayer expense. So we get to not only compete against our regulators, we get to fund our competitors as well. Of course, the ones we are here to talk about today are the ILECs. The RBOCs have gotten the most attention and for good reason. Whenever they come into any market, they invoke a lot of well-deserved attention, given their size, and they are having a fair amount of success. Verizon, for example, claims a little less than 5 million houses. I heard that maybe it is 6 million, but in any event, their build-out is going quite well. They claim to have over 700,000 new subscribers and are gaining 17,000 subscribers a week. That is pretty impressive. Including their DBS partnerships, they have 1.5 million subscribers making them about the tenth largest multichannel video provider. AT&T is building out a little different technology, a little less robust, but in a much broader area. It has about 126,000 customers to what they call their U-verse video, which is their enhanced DSL product, and they are adding at about 10,000 a week, but if you include their satellite partnerships -- and both the RBOCs have partnerships with satellite companies, and have provided what has been called a "synthetic bundle" for years, and again, it is not new competition, it is just a different version of it -- they have over 2 million customers, making them about the ninth-largest, I guess, MVPD. Their successes has good reason. They have tremendous advantages over all cable companies and, certainly, over Charter. They have huge capitalization and revenue flows. Just to give you an example, this is the chart of our competitors' revenues. [Charter Slide 5] The top line is AT&T's revenue. The second is Verizon's. The third is Comcast's. Then you have DirecTV, Time Warner, DISH, and Charter. Verizon, the second-largest, is larger than all the cable companies combined. They have the revenue flow, rate supported by the way, that allows them to undertake some of these massive projects that we would like to undertake. If you look at their market capitalization, it is even more dramatic. [Charter Slide 6] They switch order, but AT&T's market capitalization makes it over 400 times larger than Charter. Verizon is over 200 times Charter's market capitalization, which is the funding source for all their build-out and their programming. It is a tremendous advantage. In addition to these capitalization and revenue flows, they have got in place networks. They are enhancing their network. It is an expensive proposition. It is a complicated proposition. In fact, I would venture to say it is probably a little more complicated than they expected at the beginning. The video business is very different than the voice business, but what they are doing is upgrading an existing network, an in-place network with in-place personnel, in-place systems, infrastructure, and back-office systems. It is a huge advantage, and of course, they have got these tremendous brand names. While they are only beginning, they are going to be very strong competitors in the market. So what is the future? The future is just kind of more of the same, as far as we can tell. The RBOCs are promising pretty dramatic growth. Verizon projects it is going to pass 18 million houses in the next couple of years, have 3 to 4 million subscribers. They will basically be able to do in a couple of years what it took us six years to do because of their scale. AT&T is on track, they claim, to pass over 8 million houses by 2008, and they are dedicating a lot of resources to get this done. We also have the power companies. I have been in Washington for 20 years, and for those 20 years, I have heard about power companies going into communications, but they recently have overcome some of the technical problems that delayed them. So I think you are going to see power companies entering far more vibrantly than you have seen in the past. IPTV is a very sexy topic. It is interesting. I think it was the Conference Board that came out with a study recently that said that over 16 percent of American households have access to video programming over the Internet in the last year, 16 percent in one year. IPTV is being entered into by the major programmers, the Disneys, the ABCs, the CBSs, as well as a litany of small companies, some not so small like Netflix and some very small ones you may never have heard of, but they are coming out with it, and I think it is going to be a very vibrant competitor, direct to the consumer even. It will bypass the broadcast stations and just come right over the Internet, and of course, mobile delivery platforms, probably the most vibrant thing coming in the future, such as a Google platform. One thing, I guess this is a subject for another panel, but the Antitrust Division and this industry is going to be focusing on dramatic changes that are going to happen in the mobile phone industry as the Verizons of the world open up their networks to non-proprietary phones, and some of the development you have seen in the Internet, I think you are going to see it in mobile telephony. So mobile phones are going to be probably, in the long run, the vehicle for delivery of video programming. We have heard a lot, and if you read John's [Thorne] paper, you have read a lot about all the problems that Verizon has faced in building out its network. As I have said, we got 2,000 franchises in 18 months. It is not an impossibility. A couple of the claims made were that we stopped the franchising process. I think as our regulator on the panel will tell you, the existing incumbent not only doesn't have a role in that process, we often find out about it after it has taken effect. So I would like to say that if we control the local franchise authorities and can stop them from doing things, I haven't seen a case of that yet. The second thing that is alleged is that we filed lawsuits. An important thing to understand is that not one of the lawsuits that were filed by Charter or any cable company that I am aware of ever challenged the entry of a competitor. The sole basis for the lawsuits that we were part of and everyone I know of in the industry -- and maybe there are others that I don't know about -- was simply to seek equal treatment based upon equal treatment provisions in our franchises. If you are going to let new entrants in and relieve them of certain requirements, you have got to relieve us of those requirements. That was the total basis for the lawsuits, and I think they are justified, and they didn't stop anybody from entering, as far as I can tell. New entrants have gotten a lot of relief from these franchises. As has been mentioned, the FCC has already granted huge relief. States have done it as well. You have got statewide franchising in over 18 states. I heard this morning, actually, it is up to 20 now, so between 18 and 20 states, and you have 6 or 7 others that are going to do it later in the year. As I say, the FCC has been very, very busy granting relief, in fact, really uniquely to some of our competitors. For example, the satellite companies, the PCOs are not subject to the rate regulation we are subject to. We have been denied the MDU exclusivity, including in existing contracts. I thought there was some kind of constitutional provision about that, but I guess I was wrong. The program access rules, DBS is not subject to them but we are. I mean, we would love to get an NFL Sunday ticket. Must-carry requirements, along with the syndicated non-duplication rules, effectively grant broadcast stations a monopoly in each one of their markets, something we are not entitled to. RBOCs are given unique relief from all the woes in John's [Thorne] paper about how long it took and the build-out requirements. The FCC gave them relief from that, did not give that same relief to us, did give us relief on some of the other areas, but told us to wait until our renewal. It doesn't sound so bad until you realize that some of our franchises go out 10 years, so this effective on renewal thing really is just a sleight of hand. In fact, it doesn't give us any relief at all. On the set-top box waiver, Verizon is getting a permanent waiver for what they only gave one-year waivers to the cable companies. The list goes on, but one thing I think you would have say is that the FCC has been, shall we say, a hospitable environment for the RBOCs. I will wrap it up quickly in terms of what our response is. First, competition is not new. We have faced competition from DBS for years. The RBOCs are probably the third or fourth competitor in our markets. So we don't overreact. Contrary to what you have seen, we do not immediately drop prices. In fact, Keller, Texas, one of the areas everybody talks about, is one of the first areas to have competition. If you tracked it, you would find that actually cable prices rose there after Verizon first entered because it was a pre-arranged raise, and there wasn't any reason to drop it. What you have seen in terms of dropping prices hasn't been a reduction of the rate cards. It has been rolling out of the bundle. The number-one competitive response we have to competition is to roll out a bundle which effectively lowers the price of the service pretty dramatically, and that is what the RBOCs use to claim that their competition lowered prices. Well, they just raised their prices, Verizon did, 20 percent in two years. So I am not too sure competition has led to a lowering of prices. We also roll out new enhanced products, more high definition, higher speed Internet. We are also increasing bandwidth. The number-one problem for a cable company, other than getting programming, is having the bandwidth to transmit it. So we are trying to roll out technologies to get up to the level of bandwidth that FiOS offers -- FiOS is a very robust product -- increasing distribution channels by going through retail outlets, and obviously improving customer service which is our Achilles' heel and something we have done a lot to improve and still have a ways to go. So I will conclude with two points. One, in our view, competition is longstanding and robust. It is going to get more robust. It is going to be a stronger market, but the last thing that the market needs is more regulatory involvement. The market is working quite well. I wish I could say I have enjoyed all the competition, but it is working quite well from a market perspective, and I would suggest that we just leave it alone and let it continue and let the market decide. Thank you. MS. LAWTON: Hi. I am Jane Lawton, the cable administrator for Montgomery County, Maryland. Montgomery County is the suburban district right here next to Washington, D.C., and it is a densely populated county with over a million residents and over 350,000 households. My office negotiates and administers cable and telecom franchises, monitors service quality and resolves customer complaints, oversees and supports 11 PEG channels, and coordinates the siting of wireless facilities. In the past 12 years, my office has handled five cable franchise transfers, a franchise renewal, three competitive franchise applications and approvals, 18 telecom franchises, and approved over 1,200 wireless sites for 15 providers. As you heard before, I serve at the state level. I work at the county level. I used to serve as a local official, and my first job was as a special assistant to the Speaker of the U.S. House of Representatives. So my legislative and public service background actually have given me an expertise in public policy, local and state regulatory processes, economic development, and most important, consumer protection. I know cable customers and cable providers first-hand because my role is to consider their needs and their access, and when there is a problem, whether it be federal or state or local, they call my office. I know firsthand the impact of the cable and telecom industry's behavior on customers and also on providers. In Montgomery Country, we know that triple-play services are essential to all our residents. We want competition, and we have competition. Without state franchising legislation and before the FCC did anything, we had negotiated three competitive wireline franchises who compete in head-to-head markets: Comcast, RCN, and Verizon. We are about to award a fourth franchise to Cavalier Telephone. Montgomery County is pro-competition. For that reason, we are equally aggressive about exercising our full array of police powers to protect consumers and to ensure that all providers are treated equally. Our robust regulatory environment is obviously not a barrier to any of these competitors who have similar franchise agreements, who all support PEG and I-Net and who all enjoy enormous success in our markets. It is not accurate to suggest that local government favors the incumbent or refuses to give new entrants fair treatment. We have been helpful in the emergence and survival of competitive services. Montgomery County is, as far as we know, the first market in the country with four wireline competitors serving the same area. Our experience confirms what the previous speaker was also speaking to, that the state of video competition is determined by economics, not local regulations. There are examples throughout the State of Maryland of communities that have negotiated individual franchises and have supported competition. My comments that are on-line include a big study that shows that. Montgomery County wants all our residents to have access to the services, not just the highly affluent or those in the urban areas, because we consider these services essential. Our franchises have build-out obligations, and two of the providers are meeting them very well. The third has only faltered because of economic problems due to declining investment by Wall Street. This further confirms that it is economics and not local regulation. We accommodated them when they had this challenge. The application of local regulations with an even hand creates a competitive environment that is stable and conducive to business investment. The current efforts by the FCC and state legislatures to completely change this process may, in fact, slow competition. In 2000, we had our first competition, and our new entrant believed that the incumbent was engaging in predatory prices. They came to us for help. Eliminating local authority is actually a hindrance, not a help, to competition. Under our present franchises, basic rates are the same throughout the franchise area. It is difficult to engage in predatory pricing and ensure that one area of the county is not prohibited access by pricing and doesn't subsidize the other. Building standards and testing requirements also help ensure a quality product. Instead of serving as a barrier to entry, our franchise ensures wider access to services and helps providers by giving them a level playing field. Local government also has a legitimate role as a landlord and manager of the public rights-of-way. These are a public asset, and as such, they or their use can't be given away to competitors or to incumbents. This valuable real estate is already shared by all of the utilities, as well as individual homeowners who consider it their front and back yards. Some of our most serious problems arise with regard to the condition and safety of construction activities. Incumbents and competitors alike complain about cut lines, space on poles, impact of street cuts on build-out plans. In fact, when Verizon constructed its FiOS system, our incumbent came to us to report and seek help for hundreds of line cuts. These are real problems that require real management. To John's [Thorne] point that he made earlier, we in Montgomery County offer a neutral hand-off for our PEG channels. Providers assert that competition will improve customer service, spur lower prices, give higher quality service, and offer a wider array of programming choices. Unfortunately, our experience to date has been that this hasn't happened. New entrants have not lowered prices or improved customer services. We have watched the prices go up, the quality of service go down, and programming choices haven't changed significantly. It is the market, rather than local regulation, that determines what the prices do. The FCC's 2006 report shows that prices rose 6 percent, but our experience in this market is even more dramatic. In 2000, when we got our first competition, our incumbent's rate was $36.85. One competitor arrived in 2000 and then another one in 2007. Since that time, there have been no reductions, and Comcast price now is $60.35, a 63.8-percent increase and probably among the highest in the country because our market, our customers, will pay it. Verizon entered the market in 2007 and announced an initial rate that was slightly lower than the incumbents', but they also raised the rate even before they started service, and they just announced a $5 rate increase. This year, RCN's rates will go up by $3. Customers who are attracted to the bundled services find that they run out. They reach the end of their package deals, and they are startled at the increases. My own increase which happened just last month was a 40-percent increase, from $119 to $170. A customer's only choice for relief is to change providers. As competitors enter the market and incumbents anticipate the loss of revenue, they are cutting customer service, raising and creating new fees, and changing customer policies to enhance their bottom-line profits. Since competition came, Comcast has invented new fees, transaction fees, truck trip fees, wiring protection, guide fees. Verizon has a truck trip fee of $79.95. RCN has a fee of $49.95 to pick up your converter box, or you can send it in a mailer for $22, or you can deliver it to another State. Customers are gauged at every turn. Because there are no federal standards for cable modem service, consumers have no assurance that they are getting what they pay for. We have also seen changes in customer service policies that deal with privacy, forced arbitration, and other issues that put customers at a disadvantage and limit their legal remedies. One concern across the country is privacy, and several years ago, Comcast changed their privacy policy to one that our county attorney says goes beyond what the federal government allows. This summer, Comcast announced an arbitration policy where customers could only opt out, and then when they went to the website to do that, it was not functional. Against this backdrop, you can imagine how surprised local government officials were that this division of the Department of Justice offered comments to the FCC and also wrote directly to state legislators without public input to tell them that local franchising retards broadband deployment and will delay consumer protection. I ask you, where is the evidence that build-outs resulting in consumer choice has been faster in state-franchise states, and where is the evidence that they have had reduced prices or resulted in better customer service in state-franchised states? I am a state legislator, and I can tell you if I got a letter from the Department of Justice telling me how to vote on a state legislative piece, I would be outraged. And I would be totally outraged if I got a letter that told me how local franchising was happening in my local district. I know my district, and I know what is happening there. I challenge this panel to find a state that has more consumer choice than we do in the State of Maryland. The only states that begin to compete are Massachusetts, Delaware, Pennsylvania, and New York. None have state franchising laws. The only states with a state-franchising regime that began to compete are Virginia and New Jersey, and those states have the most aggressive build-out policies of any state-franchised states. Compare those to Texas where two and one half years ago, the RBOCs got permission to go in free to serve communities, and they are still in the single digit for penetration. In North Carolina, South Carolina, Kansas, and other states with state franchising laws, the RBOCs have yet to roll out competitive franchises. While you can't document the increased choice in these states, I can document that consumer protection standards have gone down and that compensation for use of public assets has suffered. I know the nature of county and state legislatures, and I know that customers and providers both benefit if franchising is left to the local government. State government is not equipped to handle customer inquiries on a daily basis, and state government has no role in managing or coordinating the activity in local rights-of-way. Consumers now depend on these new services for their communications needs, but without national standards and without local governments' supportive role, they have little assurance that the products they choose are equitably priced, reliable, or even accessible. Consumers deserve more, not less. Local, state, and federal government should work together to ensure that the public has access to the same high-level services at reasonable prices and with confidence that the policies won't change after they sign their contracts to undercut their protection. The public looks to local government for assurance and consumer protection every day. The public and the competitive providers alike will benefit when local government is supported at the federal level. Thanks very much. DR. SINGER: Good morning. My name is Hal Singer. I am the President of Criterion Economics. I am the token economist on this panel. I think my job is to keep the lawyers honest and maybe tell a joke or two. My presentation is going to focus on the welfare effects of telco entry into video markets, and I will touch on a few policy issues as well. MS. GARZA: In light of the circumstances and the time, we have made a decision to terminate Panel I and to resume with Panel II at 11:15. That doesn't reflect on any thought that the Panel I discussion wouldn't have been very good, and we apologize to the people on the panel, but we will have the written comments. So what we will do is resume back here at 11:15 for Panel II. Thank you, and thank you for your patience. [Break taken from 10:16 a.m. through 10:52 a.m.] Panel II Entry into Telecommunications Services MR. WILLNER: I am glad to see everyone back again after the very unfortunate event on our first panel. Given what happened with Jane Lawton, we have decided not to continue with the last presentation and the discussion on Panel I and simply move to Panel II. I would just like to say to everyone good morning and welcome to the second of our four symposium panels. I am Carl Willner. I am an attorney with the Antitrust Division of the Department of Justice in our Telecommunications and Media Section, and I will be one of the co-moderators for this panel, along with Luin Fitch, another attorney in our section who will be the other co-moderator. You have heard the first panel this morning discussing competitive entry into multi-channel video services, and our panel will be addressing the flip side of the developing competition for bundles of voice telephony, broadband, and video. We will be dealing with entry into the voice telephone services that have traditionally been dominated by the regional Bell operating companies and the other smaller incumbent local exchange carriers. We will be addressing what modes of entry competitors are using, how widespread that competition is now and is likely to become, and what obstacles new entrants into telephone services still face. Bundled service offerings have become widespread, and as our first panel did, we will be considering how those offerings have affected the nature of competition, as well as what implications they have for complex antitrust issues such as market definition. In telephone services for residential customers, cable television systems have increasingly become recognized as the leading source of facilities-based wireline competition to the incumbent telcos, and this will be a major focus of our panel, but there are also other types of competitive local exchange carriers serving some areas and other forms of entry or potential entry, such as wirelines, wireless substitution that are often discussed. We will be considering the competitive impact of these possible alternatives and how they are affected by regulatory, economic, or other limitations. We have a distinguished panel of speakers to address these issues, presenting the perspectives both of incumbent telephone carriers and competitive entrants, as well as independent economic expertise. Our first speaker toward the end of our panel lineup will be Sean Lindsay, Associate General Counsel of Qwest Communications International. Mr. Lindsay handles antitrust and commercial matters for Qwest and has worked in-house for 12 years at various telecommunications companies. Qwest, the smallest of the three remaining RBOCs, covers a, geographically, very large region of 14 western states. Unlike the two larger RBOCs, AT&T and Verizon, it does not have its own facilities-based wireless affiliate. Qwest has reported suffering extensive line losses over the past several years, which are attributed in large part to competition from cable companies and other CLECs, as well as wireless substitution. It has frequently requested regulatory relief from federal and state authorities and has been successful in obtaining regulatory forbearance from the FCC in significant parts of Omaha, Nebraska, where it faces Cox as its major competitor. Next, we will hear from Alexandra "Sandy" Wilson, sitting next to Luin. She is Vice President of Public Policy and Regulatory Affairs for Cox Enterprises. Ms. Wilson has been with Cox since 1994 and is responsible for developing and implementing its public policy strategies. Formerly, she served as chief of the Cable Services Bureau and in other significant positions at the FCC. Cox has been one of the leaders among the cable operators in entering telephone services nationwide, with over 2 million digital telephone customers using both circuit switch and voice telephony. That represents a third of its total number of cable subscribers and over a quarter of homes with telephone service. Cox is now reported to be both the fourth largest cable operator and the tenth largest telephone company in the U.S. Our third speaker in the center of the panel lineup will be Stephen Perkins, General Counsel of Cavalier Telephone. Mr. Perkins has practiced in antitrust and other fields of law before coming to Cavalier where he has worked for nearly nine years. He has been heavily involved in implementing Cavalier's entry into video services, opposing RBOC forbearance petitions, and seeking access to co-location, transport, and unbundled loops to combine with Cavalier's own facilities. Cavalier, a competitive local exchange carrier, provides retail and wholesale voice, data, and video services, principally in the Mid-Atlantic and Midwest, and unlike many CLECs, it is focused on addressing residential customers in addition to businesses, gaining several hundred thousand subscribers. Where it operates, Cavalier offers a third alternative for triple-play bundled products to residential customers, in addition to the telephone and cable companies. Fourth, we will be hearing from Jill Canfield, next to Steve on the panel lineup. She is Senior Regulatory Counsel of the National Telecommunications Cooperative Association which represents several hundred smaller incumbent telephone carriers across the United States. Since 1998, Ms. Canfield has represented NTCA in filings with the FCC, federal courts, and other agencies, and providing expert advice to member companies. Like QWEST, many of NTCA's member companies have had to defend against or anticipate telephone service entry by cable companies or other forms of competition, and even in the more rural areas of the United States, they have worked to develop their own competitive bundles in response. Finally, we will hear from Dr. Simon Wilkie, Executive Director of the Center for Communications Law and Policy at the USC Gould School of Law at the end of our panel lineup. He will provide an expert economic perspective on the issues our panel is considering. Dr. Wilkie has had extensive experience with the telecommunications industry and previously served as chief economist at the FCC under Chairman Powell, and he has published widely on subjects such as spectrum auctions, game theory, and telecommunications regulations. His most recent research has involved the wholesale telecommunications market. After all of the panelists have spoken, we will have a discussion of the issues among the moderators and speakers, and at that time, we should also have an opportunity for some questions from the audience. There will be a couple of people moving around in the audience carrying microphones. So, if you want to ask a question, please connect up with one of them, and they will provide you with the mike. I would also like to remind everyone at this time to turn off your cell phones and BlackBerries, if you still have them on, and now let me turn to our distinguished speakers to begin their presentations. Sean? I am Sean Lindsay. I am an attorney in-house at Qwest, and I think I know most of the people in the audience from one place or another over the course of years, but we at Qwest appreciate the opportunity to present the information that we have and to discuss the issues here with all parties. I was talking with a couple of friends in the lobby prior to the meeting, and it occurred to me that perhaps the best visual demonstration I can give of the reasons for the developments and the ways of the developments coming about is this toy. Carl, ultimately, we didn't need it, but he asked me to bring on a flash drive, a copy of my presentation in case we needed to reload it onto the laptops that are driving the computer presentation. This holds 2 gigabytes. The second part of the visual is this, which probably you can't see. This also holds 2 gigabytes. The only difference between these two is this was designed and manufactured about three years ago, and this was designed and manufactured last year. Moore's Law was working quite well, long before the Telecom Act was enacted in 1996, and it shows no current signs of slowing. Moore's Law is the governing, from my perspective. It governs the competition paradigm in local telephony, just as it does in a variety of other markets. Let's pause for a minute. When the Telecom Act was adopted in 1996, it was not creating competition. It was trying to shape it when pointed in a particular direction, but before it was adopted, cellular telephones had been deployed. They were the size of bricks, but they worked nonetheless. Telephone companies were buying cable television companies in order to provide telephone over cable facilities. In 1993, I believe, U.S. West made a multi-billion-dollar investment in Time Warner to that effect, and also the economic dynamics of the telecommunications market haven't changed since prior to the Telecom Act. High-value customers are still the principal focus of new entrants, and new entrants take advantage of regulatory arbitrage in order to maintain regulatory structures or promote regulatory structures that both facilitate their entry and then subsidize it once they have entered. Finally, the last element that I will address in the course of my remarks is that the regulatory structure itself hasn't changed wildly either. At the very heart of residential telephony is a subsidy. 1FR lines continue to be substantially subsidized by other types of services. The extent of those subsidies, the manner of those subsidies, and the above-market pricing of other services have all been addressed by the entrants of competition, but the 1FR continues to be priced below cost. A lot of things have transpired over the last 11 years since the Telecom Act was passed. There have been scads of transactions. As I was building this slide, I actually had about 17 more pages that could have been built in here to talk about the transactions. Transactions come about because of all of the need for capital accumulation and the ability to expend it. There have been many, many, many of those transactions, but still the ultimate drivers come back to Moore's Law and the size of integrated computing circuits. High-speed data networks are being deployed extensively throughout the country, and this, as Carl alluded to, creates an opportunity for competition that didn't previously exist, and it is competition not solely for the opportunity to provide broadband services. We will come into that in a moment with some of the more data-oriented slides that I am going to present. The relevant factors continue to be the desire to enter high-value niches. What it means for Qwest, competitive forces, yes, they come from the cable television companies that are providing telephone service in the regions that were traditionally served by the phone companies, but also two principal other areas. Wireless. I have been quibbling and arguing with various counterparts at the Department of Justice for years to the effect that wireless is, in fact, a meaningful competitor that ought to be included into the product market associated with local wire line telephony, but as the facts will show in a few moments, I think that that has almost become indisputable at this point, but also, every home that has a high-speed data connection, by definition with the advent of Vonage and VoIP.com and a thousand other small VoIP companies, it is tantamount to a local wire line communications device. Disregarding that, I think can mislead us in market definitions. In 2000, Qwest had 17.6 million lines in service. Today, we have 12.1. In 2000, there were 1.4 million CLEC access lines. Today, there are 4.1. We didn't just reverse the numbers. Those are significant measures, but they are not the most relevant ones. The most important one, I think is the number of wireless subscribers. In 2000, there were 12 million, slightly more than 12 million wireless subscribers in Qwest's region. Today, there is 27 million. That is more than all of the CLECs' lines in service and all of Qwest's lines in service combined, and it is more than all of the CLECs' lines in service and all of the Qwest lines in service even in 2000, but that still doesn't exhaust the market definition for residential telephony. VoIP providers are difficult to measure. I don't have great metrics for you that I can present to you, but so far as I know, nobody has come up with very reliable measures of them. I would advocate and will continue to advocate that the right measure for evaluating VoIP provision is the number of broadband lines in service because as soon as you have a broadband connection, you have the ability to receive VoIP telephony services. This slide essentially repeats the same exercise, but emphasizes that over the course of the last seven years, competition has not decreased, and over the course of the last seven years, the number of lines in service has not decreased, and over the last seven years, the demand for telecommunications, it has had some dips, but it hasn't substantially decreased. What you see reflected on this slide relating to the line losses of Qwest, Verizon, and AT&T is competitive inroads, and the competitive inroads are not limited to the percentages of lines no longer in service that are reflected here. That is part of it. You need to add also the wireless lines in service that Carl talked about and that Attorney General Barnett referenced earlier today and also the high-speed data lines and service. Just as a reference -- and this chart is a little bit difficult to read, and I apologize for that -- broadband and dial-up, I at one time had an argument with Larry Frankel about whether those were the same market, but at that point, I believe we were in approximately this area. I don't think there is any question at this point that broadband is, in fact, the paradigm that is going to be relevant for the next several years. This is the other chart that I wanted to draw particular attention to. The number of residential high-speed data lines in service shows the same kind of a shape to the graph that we have learned to expect from computational graph performances as well, and this is the last chart that I want to draw your attention to. These are metrics measured not every year, but every six months. So, from June of '03 until June of '04, there was about a percent-and-a-half increase in penetration. From June of '04 to June of '05, there is about a 2-percent increase. From June of '05 to June of '06, there was about a 3-percent increase, and the line is getting steeper. Wireless is a meaningful competitor to local telephony, and at 11.8 percent as of December of last year, we are interested in looking at the FCC's data that should be released shortly that will tell us exactly how much higher than that number the current market reflects. There are lots of new toys on the market that will allow people to take advantage of WiFi developments. While WiFi may be in the past reasonably considered one of those interesting items that people talk about for potential new entrants that are both difficult to prove and difficult to measure, Sprint has begun deploying these. T-Mobile has begun deploying them. The challenge for antitrust lawyers, whether you are defenders or law enforcement officials, is trying to figure out how you are going to take into account the portion of the market that is affected by these providers. WiFi is here, and it is growing. In Qwest region, we have people deploying WiFi as a telephony device and facilitating VoIP over WiFi, Netgear, Vonage, Skype. There are lots and lots of them. I will spare you the remainder of the charts and graphs that are available through the Department. Qwest welcomes the opportunity to compete. Carl asked me to be sure to at least reference the extent to which regulatory structures affected or didn't affect the degree of competition in our markets. For that lesson, for that learning, I go back to the same dynamics that were in effect and in application before the Telecom Act was passed. That is to say, 1FR our residential wire line service continues to be very heavily regulated. It is a price point. Most of Qwest's region, we offer it for $12 and change. There is a $6 CALC [carrier access line] charge added onto that, and so for most residential customers, a telephone line in service costs them about $17 or $18 in our region. Most of the entrants, as might readily be understood, look at that price point and either price slightly above it or slightly below it, depending on what they are offering. Over the course of years, that figure has stayed roughly flat, which I think means, Carl, that the price has gone down in market terms, but however one chooses to measure the impact of inflation on those prices, in the end, while telephone companies continue to be providers of last resort, both a burden that we accept and that is required of us, the 1FR will continue, at least for the foreseeable future, to be below cost. Other opportunities and technologies may surpass that. For example, there are VoIP companies that are now able to provide VoIP over a preexisting broadband connection for less than the $18 price point that was available before in our regions. The lack of ability to de-average 1FR prices throughout a region and the need for universal service fund support for the same reason, because of the need for de-averaging, because of the impact of the lack of de-averaging drive a number of dynamics in our industry, as they have for the last 10 years. I will stop there and be happy to entertain questions at the end. MS. WILSON: Good morning, everybody. I am Sandy Wilson. I am really glad to be here today to participate in this panel. My first confession is I am not an antitrust lawyer which will become evident quickly I am sure as I talk, but I have been working with Cox since 1994, as Carl mentioned, when I left the FCC, and in that time, it's 13 years, it is really remarkable what Cox has done in terms of getting into the phone space. When I started, it was a fairly small cable company providing one service, and it provided it very well, but it was the delivery of one-way video services, and now we operate state-of-the-art broadband networks around the country, and we are providing the triple-play, and we also have some wireless interest as well. So it has been a remarkable journey and adventure, not for the faint of heart, but fortunately, it has a happy ending. Let me just tell you a little bit about Cox. We actually think we are the third-largest cable company. I think we are sort of neck and neck with Charter there, but we have nearly 6 million residential customer relationships, and it is interesting, we no longer just describe ourselves by the number of basic video customers that we have because, in fact, we have got over a half-a-million non-video customers, people who do not take video from us. We have got 3.6 million broadband customers, and at 2.3 million residential phone customers, that does make us the tenth-largest phone company in the country, although we are obviously still tiny compared to Verizon and AT&T. I think combined, they have got something like 100 million. We have gotten into the business sector as well. We serve about 187,000 business customers, mostly in the small and medium business sector. We are in multiple states. We are here in Fairfax County. We are in Omaha, Nebraska, where we duke it out with Qwest; Phoenix, Arizona; Orange County, California; mostly urban and suburban areas, although we do serve some rural communities at the fringes of our markets. Our market orientation has always been, obviously, we do serve the mass market. We always have, but we have long positioned ourselves as sort of the trusted provider of the services that we offer, and a real strong focus on providing high-quality service and also being "Your Friend in the Digital Age," as one of our marketing tags, sort of helping consumers integrate new technology into their lives in a simple way. That heavy investment in customer service over the years, we used to take a pounding when we were a publicly traded company, Wall Street. Our margins were smaller than most other cable companies, but we really do think that that longstanding commitment to serving the customer made it possible for our customers to consider taking us as their phone provider, and we have also heavily invested in our network. I think we have now spent about $16 billion since the '96 act in private capital, making sure we have got a state-of-the-art network. We have been recognized repeatedly for that quality. I think we have gotten 10 J.D. Power and Associates Awards for phone alone, and as I said, it is really what enabled us to get into the phone business. We are actually celebrating our tenth anniversary this year in the residential phone business. We were the first cable company to role out the triple play. We did that in Orange County, California, in 1997, and of course, voice over IP wasn't around then. So we started off with digital circuit switch technology, and in more recent years, we have added packet switch technology, but our customers don't know that. We hope they don't care. Many markets were actually offering both, but we sell it all as Cox digital telephone. So it is the same customer experience, whether it happens to be using packet switch or circuit switch technology. We are fully facilities-based, and we have had relatively low usage of unbundled network elements over the years, and that has really I think been critical to our ability to kind of thrive in the marketplace. The question of whether or not customers wanted a choice in phone and whether or not they would buy it from their cable company, obviously, both of those questions have been answered with a resounding yes. They love our service. Although we have been in the business for 10 years, we are still adding customers at a pretty good clip. I think we added about 370,000 in the last 12 months alone, and we now have more than 25 percent phone penetration company-wide. One of the things we tried to chat about with Carl is what has been the impact of going into the phone business from just an overall customer perspective, and it turns out our phone customers are very loyal. Sixty percent of them take all three triple-play services from us, and churn is much, much lower for the folks who are taking phone. Very interesting. As a result of just the great consumer reaction, we have committed to offering phone and broadband throughout our footprint. So we are now serving or offering telephone and broadband to virtually 100 percent of our potential customer base, a little different than I think what Sean was talking about, others going in and just targeting certain neighborhoods. We found it is a great product, and people like the value proposition, and that is regardless of socioeconomic status. I wish to say we -- I did mention that we were getting into the business sector. I mean, obviously, we are not. We don't have a national footprint. We are, at most, a regional player. We do think that the small- and medium-size business sector is pretty underserved. So we have targeted those in particular, and we are enjoying success there as well. I have been talking on the topic of cable telephony for as long as we have been doing this, so 10 years, and for a long time, I was sort of the lonely petunia on the onion patch, but the good news is that the other cable companies are now investing heavily as well, and according to NCTA, cable telephony is now available to around 100 million homes, and they think that about 12 million are taking it. So that is quite a ramp-up in a fairly short period of time. NCTA also commissioned a study saying that residential phone customers could save an average of $135 or more a year. Small business customers could save $500 or more a year, and the nationwide savings for those two groups combined could exceed $100 billion over the next five years. So that is a great consumer story, too. How did we get where we are? Obviously, it was not easy, and it was not for the faint of heart. It took a lot of time and money and training. Just as the phone companies have discovered getting into the video business, the video business and the voice business are very different things. We had to scale up. We had to make sure we had enough economies to scale and scope within our footprint certainly early on in order to support the cost of a circuit switch, and IP technology has made that much easier to do. We had to upgrade our network. We had to harden it. We had to activate the return path. We just had to put into place all the complex billing and back-office operations that you need in order to provide a highly reliable service that also complies with some pretty different regulatory requirements than we were used to in the video world. I do think that there were also a significant number of regulatory obstacles, but I think that Congress and state public utility commissions and the FCC and the Department of Justice, I actually think over the last 10 years have done a very good job, maybe not perfect, but a good job at sort of identifying what the obstacles are and moving them out of the way. So, obviously, just allowing competitive phone service to exist in the first place was a huge thing to accomplish. Then the '96 act, of course, worked hard to establish an appropriate and pro-competitive interconnection regime, still working on creating a competitively neutral universal service and inter-carrier compensation scheme. They have dealt with a lot of numbering issues, making sure that new competitors get access to numbers in a reasonable way, and then trying to figure out how do you adapt those requirements, those regulations that deal with sort of social policy obligations, how do you adapt that to an increasingly competitive world, so lots of discussion about how do you apply CALEA, how do you apply E911 universal service, et cetera. I do think that Cox has been very appreciative, too, that over time, policy-makers do seem to have come to the conclusion that promoting facilities-based competition is where they should devote most of their attention I think early on, sort of the different modes of entry that were authorized in the '96 act, whether sort of resale or leasing unbundled network elements or building your own network that are treated a little more on par with each other, but I think they have understood that it is important at the end of the day to make sure that companies are investing in facilities, and I think their policies have moved in that direction, and that is a good thing in our view. Of course, we have been chugging along, sort of rolling out the service and figuring out how to make it work and make sure it is reliable and all that, and in the meantime, the landscape has just changed dramatically. Sean's charts show that. There has just been a ton of change in this marketplace, and there is little doubt that it is increasingly competitive. Consumers increasingly have many, many more choices, and that is all to the good, although some of the competitors have exited, and there has been some stranded investment. I am sure there will be some customers who aren't sure whether all this competition has been a good thing for them. I don't think we are entirely there yet. I don't think we are quite at competition nirvana, but we are certainly heading there. There is still some more work to be done. If you were to say to Cox, what are some of your key policies or priorities, I think, first, we still believe that you need to have meaningful interconnection protections, both for circuit switch and for IP-based services, although obviously as the market changes, those can be looked at, and they are being looked at by the FCC through forbearance petitions and in other ways. Second, just because we do have this interesting mix of both circuit switch and IP technology being used to deliver the same product, we really think that it would be great to have a uniform approach to regulating competitive voice services, regardless of the underlying technology. I know it will be a challenge. There's differences between the federal government and the state governments and then some pretty interesting and thorny regulatory classification issues. I still do think it would make sense to kind of harmonize things, so that the customer experience is what drives the regulatory regime, not underlying technology. Then lastly, I think it is fair enough to pursue retail deregulation of ILEC services as long as that is done with caution. I think policy-makers at both the state and federal level need to pay close attention to what is actually going on in their markets. If you have got sustainable competition thriving, then price deregulation is appropriate. We also think that as the market continues to become more competitive that policy-makers can safely narrow the filter that they use to think about regulations that are applied to voice services in general, protect core goals like universal service and others, that there are things like equal access requirements or price regulation of CLEC services which, believe it or not, we still face in some states. We think those are probably fairly outdated. So let me just sum up by saying it has been a great decade for Cox and the phone business, and I don't think we ever envisioned we would be where we are today, but there ought to be many more changes, too. I am sure one of the things we will talk about is what is the impact of bundling, what is the impact of wireless growth, and I think the good news is that at the end of the day, consumers are all going to regulate, and regulators won't have nearly as much to do with their day. MR. WILLNER: Steve? MR. PERKINS: Good morning. I am Steve Perkins with Cavalier Telephone. I thank everyone for being here, and we appreciate the invitation to present our views here today. Sandy's last remark reminded me of one of my former colleague's comment after he left us and took a job with Comcast, which was you would be surprised how many problems disappear when you own the last mile. It has been a great decade for Cox telephony, and it has been a challenging decade certainly for those of us who rely on unbundled network elements' last-mile facilities to provide service. That is the model that Cavalier started with nine years ago or so, building fiber networks, as Cavalier's founders had done in Michigan, deploying our own switches, having our own customer care, our own billing, all of that stuff except that last mile of copper to the home from the CO. Along the way, there's been some changes. We started out planning to be a voice competitor in two markets. That quickly changed into being a voice competitor and a data competitor in more markets, and as some other players began to see some of the pitfalls and problems and challenges of telecommunications, particularly some of the power companies that had gotten into that business, we acquired some more operations, including some very interesting issues when you stretch fiber across the Peace Bridge into Canada. There's some interesting issues there. The company has more recently expanded into offering video services, the triple play. We found ourselves in an unfamiliar alliance with Verizon on that issue with franchising. What we offer is not a cable TV service. It really is an Internet Protocol TV. It is IPTV. We cobbled together our own system for doing that. We found a set-top box. We got some code. We actually recently acquired a company that wrote some of the encryption software, and it really is a little browser device that sits on top of the TV and feeds it essentially a DSL type of a product. Where we have gone with that is working with the copper last-mile facilities, the thing that Verizon seems determined to leave behind, that AT&T is perhaps a little bit schizophrenic about using the fiber-fed nodes and the copper into the individual premises. We are relying on all copper out of the CO, and we are pushing a 15-meg ethernet service over that. We are pushing video over it and voice. We have got a triple play product that sells for $79.95 a month. We are in triple-play because we have to be. That is where the competitors are going, the big competitors in the marketplace. Carl mentioned that we have several hundred thousand customers. It makes us a fairly big CLEC, but not a very big player in the overall market, and so we follow the market leaders, where they are going as bundles, and we have to beat their pricing because we don't have millions upon millions of dollars for marketing budget. We have to compete on price and on the quality of our service, and if we don't price below what others are offering, we are out of the market. One of the topics that Carl asked us to address was barriers to entry, regulatory and otherwise. I have been sort of on the ground level of entering the voice market and now also entering the video market, sitting there watching the switch techs try to get up the SS7 links and the 911 trunks and just from the ground up starting to offer voice service. We probably have a little different perspective on things as a result of that. I think Grier Raclin mentioned the incumbent's advantage in terms of an established network, and it is an advantage. It has been there for a while. They may have forgotten about it. You go into some new markets, and the experiences can be varied. When we went into the voice markets in Virginia, we saw very cooperative local governments in terms of franchises or rights-of-way agreements, a little haggling here and there about how the insurance section should be worded, what the amount of the bond might be to damage to the rights-of-way, but we were up and running pretty quickly. Notwithstanding the better recent experience with Montgomery Country in the video realm, Maryland as a whole was a different story on obtaining rights-of-way access and franchises. We saw a lot more demands for in-kind services, for outright monetary compensation. There was a lot more emphasis on what the competitor should just hand over to the locality. As a result partly of that, we wound up leasing dark fiber in Maryland, not building our own transport network and owning the actual fiber on the poles or in the conduit like we do in the Central Virginia and Tidewater Virginia areas, like we do in Philadelphia. Philadelphia was yet another story. The interesting issue that arose there was local organized labor saying this can be easy or it can be hard, you can hire X many of our guys in these positions, and it is a little far away from the rarefied world of the Antitrust Division and the Reagan Building here, but a guy said, "Well, here is the gun I carry out in the field in case things get a little rough." I can tell you the former colleague I mentioned and I were sitting there nicely in our suits. We thought we haven't really dealt with that sort of issue before. It is a little different tack. So there are some interesting things that come up on a day-to-day basis that can be challenges in the regulatory realm or challenges I mentioned from organized labor. Also, we ran into some issues with pole attachments with the power companies. I think we moved past that. We actually wound up on very good terms with the company we litigated with the most, which was Dominion Power in Virginia. We wound up acquiring, first through a separate ownership structure and now in our own company, their long haul network, and we are on very good terms with them. Again, that was another example where localities can get into issues with them because we had somewhat protracted litigation with the park authority up in Northern Virginia, which we did manage to resolve recently. In terms of ongoing issues that we have, they basically stem from what I mentioned at the outset, use of the incumbent, the incumbent's last-mile facilities. I often speak solely of Verizon, but now we are also, in the last year, out in former SBC land, now part of the new AT&T, out in Michigan and Ohio. We are transitioning a former UNE-P customer base onto a facilities-based network comprised of fiber that we have built in individual metropolitan areas, and again, the incumbent's last-mile facilities. The issues with regard to the use of last-mile facilities are kind of legion. They break down into sort of operational issues. We have had a variety of issues that we have discussed over the years with Verizon and AT&T. There's examples up here. I am happy to speak to any of the individual ones if people think it would be helpful. There is also the sort of constant regulatory battles which tend to make things very uncertain. It drives up costs. It also I think acts as a barrier to investment in a business model like the one that we have pursued. I don't think you will see too many start-ups going out and trying to use unbundled network elements, given all of the pressures and the issues. Some things that seem somewhat esoteric can have a very strong day-to-day impact. A good example of that is the fiber-fed loops that we cannot access on an unbundled basis. So certain developments in the residential market, certain business customers, we will get a "no facilities ever response" when we order a loop, and we cannot serve that customer. You add on top of that the exemptions that the incumbents enjoy with fiber to the curb and fiber to the premises. You add on that, COs that are non-impaired for competition. It starts to really cut down into the potential customer base that you can serve. I mentioned some of these other issues I have listed here, and these are, again, pragmatic things like the private multi-tenant landlords. In a growing number of businesses, we will see an issue where a landlord will say, "We don't want you on the premises. Go away, or we are calling the police. Your tech cannot enter." Well, if you are trying to get a circuit up and running or repair a circuit, that is a problem, and you really, essentially, can't serve that customer. There is a prohibition on carriers requiring exclusive access to a premise, but there is not a prohibition on landlords doing it. So you end up in a very obvious conflict between private property rights and your pro-competitive goals under the '96 Telecommunications Act. There are some other issues I have listed here in terms of some of the challenges to facilities-based competition, or to competitors, I should say. I was reminded in the course of preparing this that the antitrust laws exist to serve competition and not competitors, but one of the biggest ones I think is the FCC's emphasis on intermodal competition. When you decide to abandon other unbundled access to these existing networks that have been in place, in some cases, a hundred years or more, you really just sort of foreclose, cut off, and abandon potential innovation of the type that Cavalier has engaged in recently, offering the higher Internet connectivity speeds over copper, offering video over copper, and you really wind up with a sort of dirigiste policy where you are going to say, "All right. We have got the people that own the wires into the homes. They are going to compete, and we will see how it shakes out," and I would submit that that is a real challenge to competition, to competitive pricing, and to innovation. I sum that up on this last page. I mentioned the first two points, but also, I have an example here about what has happened to competition in Virginia. AT&T has recently petitioned to raise their prices above the incumbent's rates, essentially exiting the market. AT&T stopped marketing when UNE-P went away, and I think if you see some of these regulatory initiatives like forbearance succeed the way the elimination of UNE-P succeeded, you will see additional competitors leave the market, and I think you will end up with a duopoly, and you will be in a situation where the goals of the Telecommunications Act are really almost completely abandoned. You will have essentially the same people that were in the market before 1996, cable and the incumbent. I mentioned the loss of innovative services. That is true for businesses as well as residential customers. I think the CLECs sort of led the way in these multi-use T1 circuits, Smart T's or whatever trade names they go under. We have also got a vital role for facilities-based competitors in the wholesale market. That is an area where we have been able to compete in the past, providing metro fiber or long haul fiber more recently, to wireless providers and to other carriers. We have served wireless, CLEC, and those are certainly points of potential competition for the incumbent. There are a couple of things I just wanted to mention here at the end. I was reminded by the brave new world of FiOS of what happened to me in one of the ice storms in Richmond a few years ago when all the power was out, but the phone line still worked. It was Christmas Eve, and we were able to plug my laptop in, get a dial-up connection, and find out what the road situation was and leave. Since we were without power for a week, that was a very good decision. We packed up our dog and headed for Virginia Beach. The last point I will mention on that is that we do provide an alternative to government and emergency responders. Consider, if you will, something like a U.S. Coast Guard vessel with a voice-over-IP connection from a competitive provider. If that competitive provider goes away, there may not be a good alternative in the wings for them. There may not be somebody that can patch together a network the way a small competitor like Cavalier has to create a solution for that type of situation. Those are some of the issues that we see in the facilities-based world, the unbundled world. Thanks again for the opportunity to appear here today, and I would be happy to address any questions. MR. WILLNER: Thank you, Steve. Jill? MS. CANFIELD: I do have slides. Thank you very much for the opportunity to come here. I am Jill Canfield, and I am senior regulatory counsel at the National Telecommunications Cooperative Association. I am not an antitrust attorney either, nor do I want to be an antitrust attorney, but I am charged with making sure our association doesn't violate antitrust law. So figure that one out. I am going to give the rural incumbent local exchange carrier perspective on some of these things, where our members' businesses are going, what is driving it, what are some of the obstacles they are facing. I have to talk, obviously, in sort of the aggregate or on anecdotal kind of information because I don't have that inside business perspective that most of the panelists that are here are able to provide. When we discuss the services the carriers provide and why we really need to look to the customers, what are their demands, who is best equipped of all of the potential competitors to meet them, the obvious place to look we think is at the young people. They are the early adopters of technology and the future paying customers as well, and the habits that they develop today really determine the future usage of the consumer. NTCA's Foundation for Rural Service recently did a survey of 1,100 rural youth, ages 14 to 24, on their telecom usage, and we really got some surprising information and some not so surprising information. What we found is that 9 out of 10 of these young people have a mobile phone today, and about the same number have Internet access at home. Three-quarters of those with Internet access have a broadband connection in their house. The number with only dial-up has actually decreased significantly, 14 percent in just one year. Half of those with a broadband connection have a DSL connection in their home. Twelve percent have a wireless connection, and unfortunately, our survey didn't really get do they understand that we meant the pipe coming into the home, not necessarily their home network. Only 8 percent had a cable modem, and I think that is a feature of the kind of service you get in rural areas. DSL penetration is high because you don't see the cable in the very rural areas. Forty-five percent of these rural youth receive their video today via a satellite, their DBS providers. Only 20 percent have a traditional cable video provision in their home, and what we found from these people is that 14 percent receive their video today already from a telephone provider. So that is not far. It is only 6-percent less from those that receive it from the traditional cable provider for their video service. As far as what services these rural youth care about, 88 percent considered their mobile phone service an essential service, and 77 percent considered a broadband essential. It is really interesting. I have a six-year-old, and what does my six-year-old ask for? A cell phone. He is six. Who is he going to call? But yet, that is what they want. As for the traditional wireline phone, that has gone down as far as who considers that an essential service. A percentage of the rural youth who considered that essential, it is down 10 percent in just the last year. The wireline phone, you don't see people asking for a phone in their room anymore. They want a cell phone. Three-quarters of those with a mobile phone say that they only use a wired phone when they are in their own home. They don't seek out a pay phone anymore, or use it even in a friend's house, and another interesting factor is there is simply no brand loyalty whatsoever among these people. They don't even know who their provider is or how much the service costs, primarily probably because their parents are the ones buying it and paying for it, but it shows that you are not developing a brand loyalty with young people living in rural America. By looking at this, you can understand why NTCA's members have really focused in recent years on capturing the broadband customer. Here we have a little plug for NTCA's members, who we are. All of NTCA's members are incumbent local exchange carriers. Half hold wireless licenses today, whether they are providing a fixed service in the home where they can't quite get to the most rural customers or several also hold mobile wireless licenses, the CMRS licenses. Nearly all of our members offer broadband and Internet access to at least part of their service territory, if not the entire territory, and the number offering video is growing at a tremendous rate, and I will talk a little bit more about that in a minute, but we are almost at half of our members providing video right now. Generally, I would say that our members do a better job than the larger carriers at serving rural areas, no offense to Qwest over there, but I think that we can quantify that in the most rural communities. This is just to give you an idea of where our members are. This is a map to show you. The blue areas there are the metropolitan communities, and the green areas are the nonmetropolitan communities. The red here is the service territory, the territory served by the independent telcos. What you can see from this is our members served where the people are not. We have several members who can tell us that their service territory, they pass one household per square mile. Now, living on the East Coast, we think we know rural because we go camping and things like that, but I am telling you, unless you have toured one of these service territories, you really don't know rural. You drive around and you wonder where do these people buy their groceries. There is really not a lot there. The competitive pressures for these rural incumbent local exchange carriers are very similar to any ILEC out there today. The minutes of use is declining. People are using their cell phones now. There is increased emphasis on the broadband pipe, who is bringing the broadband connection into the home. Eighty-seven percent of our members say that they face broadband competition from at least one other provider today, and even in the most rural communities. That is pretty significant. Most face competition only in their cities and towns, but a significant minority, 47 percent, say that they have competition for broadband throughout their entire service territory, and as far as what it is, what the competition that concerns them the most, it is the cable offering voice. That is the biggest competitive threat right now. How do our members try to capture that broadband customer? What are their marketing ploys to do so? Well, the biggest thing they offer is free installation. We have price promotions. Bundling is big. About 59 percent of our members say today they bundle their services, and I expect that number to increase as we see more of the cable companies entering the voice market, and also, one of the factors that drives the marketing promotions in rural communities is simply what are they hearing about that other companies outside of their home market are offering. They watch TV. They hear about others, AT&T is offering or Verizon is offering. They hear about these things, and they expect even the small local provider to offer it as well, free hardware, free software, nothing unusual there. It is generally understood around NTCA and I think probably the industry in general that one of the key drivers for broadband deployment, especially in rural areas, is going to be video. It is generally not going to be entering the video market. It is not a giant money-maker, but you need it in order to retain your customer. You need them to have the reason to bring the broadband pipe into the home and offer them that triple play, so you retain your customer. A recent survey showed just how many of NTCA's members are either offering or planning to offer video. You see right now, it is already at 63 percent. Now, it is important to recognize that that 63 percent includes traditional coax cable providers. The rural incumbent local exchange carriers were allowed to get into the original cable market. So we do have traditional cable providers, and probably, that is a pretty substantial proportion of that, but we also have members who have agreements with the satellite providers and are providing a DBS service to their subscribers, and then we have the IPTV product, the Internet Protocol Television product. Where you see those members who are not currently offering video, but they are planning to do so, my belief -- and I think that there is a good reason for that belief -- is the members who are looking to get into video and are planning to do so are looking at an IPTV product, rather than a satellite product or a cable product. Then you see there that 17 percent there right now have no plans to enter the video market. My best guess there is that these are going to be very rural areas where either they already own the cable company, so they are not facing voice competition from the cable provider, or there simply is no cable provider in their service territory, and believe it or not, that is a substantial number of our members who don't have traditional coax cable providers in their markets. As far as barriers to deployment, you are probably going to see quite a bit of difference here when you look at the rural areas compared to urban areas. Rural areas simply have much higher deployment cost. The loop lengths are very long to get to your customer, and when you are only serving one customer per square mile, that is a lot of fiber or cable or whatever to run to that customer, and you are not getting huge returns on your investment. Long loops. If you are doing a DSL, you have to upgrade to be able to provide broadband over those long loops. Obtaining cost-effective equipment is pretty big at 32 or 33 percent. This is something that you are going to find simply because of the size of our members. They lack the buying power of a major player in the market. So they are generally the last to get the equipment, and the equipment they get is going to be more expensive on a per-subscriber basis. It is simply more difficult. It is more difficult for small carriers to enter anything new. I am going to give you a couple of graphs here that just shows how our members have perceived the barriers to broadband deployment over the last few years. You see that deployment cost has remained pretty steady, and it is still the most significant barrier to deploying broadband. Regulatory uncertainty has kind of ebbs and flows, and it really has depended on what are the issues the FCC is considering at the moment we take the survey. Inter-carrier compensation got really huge there for a while. So there was more concern. Now it has kind of gone off, and I suspect universal service now is being considered, although not in a way that is causing our members a tremendous amount of anxiety. Long loops is a big concern. Cost-effective equipment, it hasn't changed a whole lot, but the one thing that really has changed is the issue of customer demand. At one time, that was the biggest obstacle to deploying broadband in our members' eyes was the customer demand. They could build it, but they weren't coming, and you see that that has decreased significantly over the last few years. That customer demand is now there. Some of the key issues I would say for our members in making sure that they are able to survive and compete in the marketplace, not just in providing voice service, but also your broadband, your video, offering that triple-play, and also with the wireless market. We have a significant number of our members who are in the wireless business. Universal service. I was asked to give sort of an explanation, just in case there are a couple of people who aren't terribly familiar. Everybody, on your phone bill, you usually have a thing that says payment to the universal service fund. Everybody pays in, and it is a policy goal. It is in the '96 Act and even before that, that everybody everywhere in the country should have access to comparable services at comparable prices. So people living in lower cost areas, like all of us, pay into the fund, so that people living where my members serve don't have to pay the true cost of getting service there because it would be cost prohibitive. So it helps even out, so everybody gets the same service for about the same cost. One of the major issues right now -- and this is one that I am spending actually most of my time right now, believe it or not -- is access to video content. This is huge because it is driving the broadband deployment, and our members see that they need to be able to offer that triple play. You see a lot of what we call "tying arrangements" with your vertically integrated cable companies where if you take one station that you want that is the must-have programming, you have to take their 12 other stations as well, and by the way, it must be on your basic tier, and you must pay per subscriber. So they have got all of the power, the negotiating power we as independent telephone companies have not. It is take it or leave it. Compensation for use of the network, that is the inter-carrier compensation issues there. Most of the traffic goes over the wired network at some point or another. Who is paying for that if we no longer have the wire line connection in the home? Regulatory certainty is a big deal. Where is our business going to be five years from now? Where are the revenue streams going to be? Then one that I think hits the small carriers particularly hard is the unfunded mandates that come out of the regulatory bodies. Just to give you an example, CPNI, because we have a deadline that is potentially looming, Customer Proprietary Network Information, the companies have to put a whole bunch of new protections in trying to protect the privacy of your calling habits. It sounds like a great idea. The regulations, there's a lot of them, a lot of things that need to be complied with, and when you are a company with less than 10 employees, though, having a whole set of new regulations for maybe 2,000 subscribers, it is a little bit much, and it is very, very expensive to comply, and we have things like CALEA or E911 mandates that simply won't work in rural areas, but they are being employed across the board without consideration for whether or not the technology exists, whether the rural companies can get there, and it becomes very difficult for our members to survive and compete, especially in that wireless arena. With that, I am going to pass off, and I welcome your questions in a little while. DR. WILKIE: Hi. I am Simon Wilkie, an economist. Unlike Hal on the first panel, I think my role here is to annoy everybody else on the panel. I just wanted to tell a quick story based on the Cavalier experience. I didn't quite understand before the interconnection between the '96 Act and the right to bear arms, such a key part of getting entry, but I will tell a story. Back in Australia, my brother started an independent trucking company, and he bid on a contract and ended up with broken arms. The next day, he went out and hired a driver who was known as "Shotgun Steve." So, apparently, this has a long history in terms of getting entrance into the market. It is not just telecom. What I want to do today is just say what we need is more economics, better economics, more economists at the DOJ. That is not a surprise that these are fundamentally really hard issues, and that the impact of intermodal competition and bundling has made the analysis trickier, and any economist who is selling a panacea is selling you a bill of goods. What I want to do is just run down a quick overview of some fundamental antitrust principles that I think are important here, how they are being impacted by these technology developments and strategic developments, and we will go through a couple of concrete examples of why I think this is making life hard. We shouldn't have a rush to regulate. We shouldn't have a rush to deregulate. We should proceed with a preponderance of caution. I am not going to say what the right answer is here because I don't know it, and nobody else does. The type of issues I am going to talk about are, one, what is the impact of bundled products, touched on by the earlier speakers, what is happening with market segmentation, and what are the barriers to entry, and then I have got just one quick throwaway comment on the role of wireless. Traditionally, the FCC and even the structure of the panels today has been based on traditional market definition, which is that we have a telephony product, we have a TV product, and we have a wireless product, and the FCC is essentially structured that way in terms of the bureaus, but once we had bundled products, then what is the good, and moreover, what is the definition of market dominance, how do we do a test, what is the SSNIP [small but significant and nontransitory increase in price] test with the bundled products when I have competitors selling different bundles with different elements in it. Some parts, I can unbundle and roll my own. How do we judge competitive prices and things like that, these become trickier issues. Also, as mentioned by several panelists today, consumer behavior changes in significant ways as we move from unbundled markets to bundled markets. One of the key issues here I think also affects market definition is the difference between telecom services and access to those services via a wireline or a cable loop. We can think of it as being different. In many cases, they are actually different products, I am going to argue. Market segmentation makes the analysis difficult. Price discrimination makes the analysis difficult. Geographic market definition and deployment is very important. When we look at national averages, these tend to be very misleading, as was mentioned before, that the rural markets might be completely different from certain urban markets. The differences can be quite dramatic across short distances. Market definition. What is the product? Are we talking about access, or are we talking about the services? One argument that we frequently hear is wireless substitution. What we have seen is that there is a vast migration of minutes from landlines to wireless lines. We have also seen a drop in the number of lines, but when economists do careful econometric studies of the degree of substitution and when we look at the access line, is there any evidence that the wireless substitution is sufficient such that it is in the same relevant product market, formally in the DOJ sense. They all say no. Now, it might be that they all say, "Well, it is getting close to yes," but it is still no. It might be that we are at that point with these recent increases that have been reported, or it might be that those are data errors. We don't know at this stage, but even though we have the vast migration of minutes, we don't see any ability to constrain access pricing. Similarly, we have a similar experience with entry via VOIP, as mentioned. If we looked at switch versus IP telephony product, cable entrants have had experiences using both technologies, and VOIP in particular has led to rapid deployment in the last few years. So we have had an explosion in VOIP uses, and as was mentioned, anybody with a broadband connection can run VOIP over it, unless it is being blocked by a provider, which has been known to happen. So, again, I think what we have got there is the phenomenon of minute substitution, but VOIP can't provide access substitution because you need the access line still. One thing that is interesting that the DOJ should undertake would be a systematic study of the number portability data. That is, I have seen data that suggests that there are significant differences in number portability for the same cable company. Think of a company like Cox, and it is not Cox that I am talking about, that has offered both a POTS [plain old telephone service] product and in different geographic markets a VoIP product. If it was a full substitute for access to the original line, then people would port their number. Right? What you find is that number portability data is dramatically different, in particular, for some of the reasons mentioned like E911, emergency backup, the ability to just keep receiving calls on your old phone. People tend to keep the old access line. What they are doing is substituting the minutes. So, therefore, if we say, "Oh, look at the number of VOIP lines that are out there," we can safely deregulate the market, then that is not true for the access market. Prices will rise. I am not saying that is a good thing or a bad thing. I am just saying don't tell me that that is competition if it is going to constrain prices. It is not necessarily true. Now, it might be that having prices rise is a good thing in particular when you have got issues with geographic de-averaging and the cost subsidies that have been mentioned earlier. So I am not saying what the welfare conclusions are. I am just saying don't tell me that this is going to constrain the price of access. So premature deregulation could harm consumers in these markets, and that leads to my next point which really isn't a new point. This is a very old point. Wall Street understands this, and a lot of this industry, the entry has the characteristics of a natural monopoly; that is, that there are large sunk costs. These sunk costs are changing dramatically over time, but they are sunk. They are not recoverable. So Verizon is spending we heard $23 billion on its FiOS project. It is not going to say, "No, we don't really like this market. I am going to take the glass back out of the ground, sell it back to Corning, and maybe turn it into stemware," not so likely. These are the fundamental characteristics of the industry. Now, what is driving Verizon's decision, back when I worked for those guys, for years the number that we got for household pass was $2,900. That was the average cost of doing a deployment. I see many people nodding their heads because that number was around for 10 years, and it never changed. Then we had the technological development of passive optical networks, and Verizon went ahead bit the bullet and realized that with scale, it could get that number down to $700. So that is really the fundamental thing. It is that technological change that is driving that decision to entry. $2,900, your stock g |