Before the

Federal Communications Commission

Washington, D.C. 20554

In the Matter of)

)

Deployment of Broadband Networks and )Docket No. 011109273-1273-01

Advanced Tele4communications Services)

)

SBC Communications Inc. Comments

SBC Communications, Inc. (SBC) hereby submits its comments in response to the Notice issued by the National Telecommunications and Information Administration (NTIA) on November 19, 2001 seeking comment on issues related to broadband deployment in the United States.[1]SBC applauds NTIA’s initiative to gather information about the broadband market and to remove obstacles to broadband deployment.SBC also appreciates the opportunity to comment on the critical issue of how broadband deployment is affected by regulation and government policies.

I. Executive Summary

SBC urges the Administration – as one of its top priorities – to establish a comprehensive national broadband policy that will stimulate investment in broadband networks and services by unleashing facilities-based competition and the power of the free market.A regulatory framework that is conducive to investment and facilities-based competition will bring valuable new services to consumers and advance a number of important public policy goals, such as improving the quality of education and increasing economic opportunity for Americans.

Broadband deployment also will stimulate economic growth and improve national productivity.The telecommunications/technology sector of our economy has been hit particularly hard during the current recession.It has experienced the most bankruptcies and the most job losses of any sector in the economy by far.In a recent letter to U.S. Department of Commerce Secretary Donald L. Evans and others, a group of well-known economists called on the Administration, in light of the current economic slowdown, to take aggressive action to eliminate disincentives to broadband investment by accelerating deregulation as rapidly as possible.[2]This call for deregulation was echoed by Scott Cleland, a leading industry analyst, who wrote that deregulation “remains the most effective, easiest and cheapest policy option to stimulate this critical and troubled sector of the economy.”Technology companies, including the Telecommunications Industry Association, Intel and Corning, also are urging the government to take immediate deregulatory measures with respect to broadband facilities and services.

While the current recession makes it all the more imperative to eliminate regulations that create economic barriers to investment in broadband infrastructure, regulatory reform would be warranted even in the absence of a recession.The current regulatory regime for broadband services makes no sense.It subjects one class of broadband providers – incumbent local exchange carriers (ILECs) – to burdensome and costly regulations and ongoing uncertainty as to the scope of their future regulatory burdens, while leaving all other broadband providers, including the largest players in the market, wholly unregulated.Moreover, it does so not because of any coherent public policy rationale, but by the reflexive extension of regulations designed for legacy voice networks to new investment and technologies in a highly competitive emerging market.It is a textbook example of “regulatory creep.”

The existing regulatory construct has a profound adverse impact on competition, efficiency, and investment.First, it skews the market by conferring significant cost and other advantages on ILEC competitors – advantages that are flatly inconsistent with the fundamental principle that consumers, not regulators, should pick winners and losers in the market.These advantages result in a sub-optimal allocation of societal resources.Second, it reduces ILEC incentives to invest in broadband facilities, resulting in less competition, lower productivity, fewer jobs, and fewer consumer benefits.

Broadband investment is inherently risky.As Michael K. Powell, Chairman of the Federal Communications Commission (FCC) recently observed, there are “many questions that remain as to what services consumers will value, and to what degree they will be willing to subscribe.”[3]While no broadband provider should expect protection from those risks, the current regulatory regime heightens them significantly for SBC and other ILECs.Not only do they face the risk of increased costs and reduced revenues, but asymmetric regulation compromises the ILECs’ ability to price their broadband services on a competitive basis.The fact that, even apart from regulation, DSL service is more expensive and operationally difficult to deploy than cable modem service, only underscores the serious impact the current regime is having on ILEC broadband investment incentives.

In order to create a more rational broadband regulatory framework – one that promotes efficient investment by all participants in the market - the Administration should establish a comprehensive national broadband policy that applies to all providers and technology platforms.This policy should be based on the following three bedrock principles:

Regulators should take a “hands-off” approach to the broadband market. It is time to “unleash the broadband economy.”[4]A hands-off approach to the broadband market will promote sustainable facilities-based competition, which in turn will lead to increased deployment, innovation, service competition, and consumer choice in the broadband market.

Broadband policy must be competitively and technologically neutral.The market for high-speed Internet access and other broadband services is characterized by intense competition among multiple technology platforms – including wireline telephone, cable, wireless and satellite.Any regulation of the broadband market must be competitively and technologically neutral for all providers in the critical areas of (i) competitive access to a provider’s broadband services, (ii) the right of competitors to use a provider’s broadband facilities, and (iii) the design and pricing of broadband services for consumers.

National broadband policy should provide regulatory certainty across all jurisdictions.Regulatory certainty is essential to encouraging providers to make the enormous investment that will be required if broadband services are to be widely available.This involves avoiding disparate and ever-changing state regulation of broadband services that will undermine federal policies.It also involves eliminating the threat of future broadband regulation at the federal and state level, which has a chilling effect on broadband investment.

There are at least two separate legal bases upon which the Administration could frame such a national broadband policy.First, the Administration should urge the FCC to declare that broadband networks and services fall under Title I of the Act, not Title II, irrespective of who provides them.The FCC has previously taken this step with respect to information services, and a similar analysis could apply to broadband services.Chairman Powell recently observed that “broadband is not some simple high-speed pipe, [but] a convergence, a fusing, of communications power, with computer power, with content.”[5]As such, it falls squarely within the statutory definition of information services, which are subject to Title I, not Title II.

Second, the Administration should urge the FCC to exercise its forbearance authority under Section 10 of the Act with respect to broadband services.SBC already has asked the FCC to forbear from applying dominant carrier regulation to its provision of broadband services.But the FCC can and should go further.While Section 10 prohibits the FCC from forbearing from the requirements of Section 251(c) and 271 until those sections are “fully implemented,” they can and should conclude that Section 251(c) is fully implemented with respect to broadband facilities and services, given the significant competition that exists in the broadband market.

II. Introduction

In 1999, the management of SBC made an important decision.The company would spend $6 billion over three years on a bold initiative to extend the availability of high-speed broadband services to residential consumers throughout its 13-state territory.SBC’s goal for “Project Pronto,” as it was called, was to provide broadband capability to about 80% of its local telephone customers, and ultimately to deliver broadband services to tens of millions of Americans (more than a quarter of the U.S. population).The plan was not without risk.In order to overcome the speed-and-distance limitations of DSL provided over copper loops, SBC would be deploying cutting edge Next Generation DLC (NGDLC) equipment in thousands of remote terminals located in residential neighborhoods.If it worked, however, SBC would almost double the number of its residential consumers with access to broadband services.

From the very beginning, SBC was forced to confront the realities of regulation in its design of Project Pronto.For example, like other telephone companies, SBC is prohibited from offering broadband services that are integrated with some type of content (e.g., music, streaming video) or computing power (e.g., data storage, protocol conversion) unless it artificially segregates the transmission component of its broadband services and makes that component available as a stand-alone offering.[6]As a result, SBC could not maximize the efficiency of its network architecture, and it was forced to spend hundreds of millions of dollars on network enhancements that would give third-party carriers access to SBC’s stand-alone transmission services.

SBC’s management also had to confront a series of merger conditions that greatly complicated and substantially increased the cost of its broadband deployment.Most notably, SBC had been required to offer broadband services out of a structurally separate affiliate. To comply with this requirement, SBC was forced to devote considerable financial and personnel resources establishing the separate affiliate and implementing all of the operational support and other systems needed to conduct business on a stand-alone basis.In addition to being a hugely expensive proposition, the transition to provisioning all broadband services out of a separate affiliate was a complicated and distracting process that also hampered SBC in the broadband market.

The separate affiliate requirement also created a roadblock for the deployment of Project Pronto, which relies on equipment in the telephone company network to split off the voice and data traffic.Obtaining the necessary regulatory approval from the FCC interjected uncertainty and substantial delay in SBC’s deployment plans.After an exhaustive regulatory review process that took almost nine months, SBC obtained a limited waiver of the separate affiliate requirement for Project Pronto.In exchange, SBC committed to incurring additional costs to accommodate potential CLEC requests for collocation and to make its Project Pronto broadband service offering available to competitors at TELRIC prices.

No sooner had SBC begun deploying Project Pronto than additional regulatory issues arose.The FCC initiated a number of proceedings in which it sought comment on additional unbundling requirements for SBC’s broadband network.[7]Suddenly, SBC’s management was faced with the real possibility that the cost of Project Pronto could increase by hundreds of millions of dollars and that competitive providers would be able to reap the benefits of the financial and technical risks assumed by SBC’s shareholders.

To make matters worse, the regulatory uncertainty created by the FCC began carrying over to the states.Slowly but surely, state commissions initiated their own proceedings to consider whether to impose unbundling requirements on the Project Pronto architecture.To date, 10 of the 13 states in SBC’s territory have initiated proceedings to consider such requirements, and the issue remains pending in nine of those states.In Illinois, SBC originally was ordered to unbundle virtually every aspect of Project Pronto – a requirement that effectively doubled the cost of SBC’s DSL deployment in Illinois and made it impossible for SBC even to recover the costs of Project Pronto in that state.While the original decision of the Illinois commission was subsequently revised, Project Pronto deployment was delayed for months and the proceeding is ongoing to this day, as are similar proceedings in eight other SBC states.

Faced with ever-increasing regulatory risk and uncertainty combined with a severe economic slowdown, SBC’s management made the difficult decision to reduce its aggressive deployment of Project Pronto.In October 2001, SBC announced that it would reduce capital spending by 20% next year and scale back its original deployment schedule for Project Pronto.SBC Chairman and CEO Edward E. Whitacre, Jr. explained the company’s decision in no uncertain terms: “Today’s regulatory rules and uncertainty artificially increase costs, affect how we invest capital and how we market our products and services. . . .No responsible company could justify deploying broadband capabilities and investing in broadband networks in the face of this uncertain environment.”[8]

In addition to Project Pronto, SBC has begun working on plans to overcome the speed-and-distance limitations of copper by utilizing a broadband passive optical network (BPON) architecture that would bring fiber optic facilities directly to the customer’s premises.This initiative also has sparked the interest of regulators, and SBC is gravely concerned that BPON also could be targeted for burdensome regulatory requirements at some point.SBC is now carefully weighing regulatory risks as it considers whether and on what scale to deploy BPON in its broadband network.

At the time SBC’s management announced its Project Pronto initiative, the four largest cable television companies – AOL Time Warner, AT&T, Comcast and Cox – all were in the process of deploying cable modem services on a widespread basis.In fact, cable modem service already had a significant head start over DSL service in the broadband market.By the end of 1999, there were 1.4 million cable modem lines in services, compared to only about 370,000 DSL lines in service nationwide.

Like SBC, a cable television company had to consider the business risk of making a significant investment in upgrading its cable network and deploying cable modem service.One thing it has not had to worry much about though, was regulation.Unlike the incumbent telephone companies, regulators have elected to take a “hands-off” approach to broadband services provided by cable television companies.Therefore, a cable company has had total flexibility to design its broadband network and package its broadband services in the most cost-effective and customer-friendly manner; it has not been required to artificially segregate the transmission component of its broadband services.A cable company has had exclusive use of its broadband network and been able to use its network solely for delivering broadband services to its own customers; it has not been subject to costly and inefficient unbundling requirements, and it has not had to give competitors access to its facilities.A cable company has had complete freedom to set its prices for broadband services; it has not been subject to any federal or state pricing requirements.A cable company has been able to subsidize the build out of its broadband network with cable television revenues; it has not been subject to structural separation, affiliate or cost allocation requirements, or price regulation.In short, a cable company has been free design its broadband services and to conduct its broadband business as any other company would in a competitive market.

The concept of being subject to the type of requirements that apply to SBC is so foreign to the cable companies that they cannot even conceive of how broadband services could be offered in such an environment.As AT&T Chairman and CEO C. Michael Armstrong stated, “No company will invest billions of dollars to become a facilities-based broadband services provider if competitors who have not invested a penny of capital nor taken an ounce of risk can come along and get a free ride on the investments and risks of others.”[9]

Given the gross regulatory disparity, it should come as no surprise that cable modem service has continued to dominate the broadband market.Cable modem providers have twice as many subscribers as DSL providers and their market share has been widening, not narrowing, in the past year.Yet cable companies enjoy the advantages of a preferential hands-off regulatory approach, whereas ILEC broadband deployment is subject to costly and inefficient regulation.There is no justification for this regulatory disparity.Asymmetrical regulation of any kind distorts competition, but it is utterly indefensible when the regulatory disparity favors the largest provider in the market and handicaps the smaller providers.The current regulatory framework is impeding broadband deployment and reducing competition in the market, which has the effect of reducing the availability of broadband services and raising prices for consumers.Thus, the establishment of a more rational broadband policy should be a top priority of this Administration.

III. Responses to Specific NTIA Questions

The following are SBC’s responses to the specific questions posed by NTIA.

A.What should be the primary policy considerations in formulating broadband policy for the country?Please discuss the relative importance of the following: access for all; facilities-based competition; minimal regulation; technological neutrality; intra-modal competition; inter-modal competition; and any other policy consideration.

The ultimate objective of the Administration’s broadband policy should be to create a regulatory environment that will unleash market forces that will drive the widespread deployment of broadband infrastructure and services.Broadband services bring valuable new services to consumers and advance a number of worthy goals (such as improving the quality of education and increasing economic opportunity for more Americans), but also stimulate economic growth and improve national productivity.It is for these reasons that Congress enacted Section 706 of the Telecommunications Act of 1996, which directs federal and state regulators to utilize measures such as regulatory forbearance to eliminate regulations that impede broadband deployment.

Unfortunately, much of the federal and state policymaking to date actually has impeded broadband deployment.As discussed further below, in the absence of an overarching regulatory framework for broadband services and facilities, regulators have reflexively extended rules that were designed for the legacy circuit-switched voice network to ILEC broadband investment.The effect of such ad hoc regulatory action has been to stifle broadband investment and distort competition by bestowing artificial regulatory advantages on certain competitors in the market.

A new national broadband policy is needed that will stimulate investment in broadband networks and services by unleashing facilities-based competition and the power of the market.The following principles should guide the Administration’s development of this national broadband policy:

Regulators should take a “hands-off” approach to the broadband market.Broadband investment is inherently risky.It requires technological innovation, an enormous amount of capital investment and an ongoing commitment of financial and personnel resources in pursuit of an uncertain return on investment.While it should not be the role of government to insulate broadband providers from these risks, neither should the government add to them with costly and burdensome regulatory requirements.As Chairman Powell recognized, regulators must guard against “regulatory creep” that discourages investment and stifles innovation in broadband, resulting in numerous unintended consequences.[10]An obvious example of the type of regulation that discourages broadband deployment are unbundling requirements, which significantly increase the cost of broadband deployment and deprive providers of the flexibility to design and deploy broadband networks and service offerings in the most efficient way possible based on the dictates of the market.But virtually all government regulation imposes some costs, and the government must very carefully weigh the costs when it imposes such regulation.Consumers are the ultimate losers when government regulation impedes broadband deployment.

Broadband policy must be competitively and technologically neutral.The market for high-speed Internet access and other broadband services is highly competitive with competing technology platforms – including telephone, cable wireless and satellite providers.As Chairman Powell stated, definitional battles should not define the regulatory treatment of broadband services, nor should broadband deployment be treated as a “one wire” problem that is limited to the telephone network.Disparate regulation of the broadband market distorts competition, deprives consumers of choice and restricts innovation.Therefore, any regulation of the broadband market must be competitively and technologically neutral for all providers, regardless of the platforms they have deployed.

Should some form of regulation be deemed necessary, competitively neutral regulation across competing platforms is critical in three primary areas.First, any network access requirement, whether it is “click through” access or direct access to a broadband circuit, must mean the same thing and result in the same requirements for competing broadband networks.Second, all broadband providers should be free of any requirement to allow competitors to utilize their broadband platform components or capabilities.Requirements that allow competitors to co-opt ILEC broadband networks and obtain a risk-free ride on their investment have the effect of deterring investment and significantly disadvantaging ILECs in the broadband market.Third, all broadband providers must have the same flexibility to design and package their broadband services to consumers.There is no justification for requiring telephone companies to artificially segregate the transmission component of broadband services without imposing a similar requirement on cable modem providers.

National broadband policy should provide regulatory certainty across all jurisdictions.Regulatory certainty is essential to encouraging providers to make the enormous investment that will be required if broadband services are to be widely available.This involves avoiding disparate state regulation of broadband services that undermines federal policies.It also involves eliminating the threat of future broadband regulation at the federal and state level, which has a chilling effect on broadband investment.

Establishment of a uniform broadband policy is critically important – without a cohesive national policy it will not be possible to achieve the goal of widespread broadband deployment.SBC and others are expending billions of dollars and overcoming significant technological and operational challenges to bring the benefits of broadband to consumers.With the economy in a recession, it is even more difficult for companies to assume the risk of making an enormous investment in broadband infrastructure in order to produce a reasonable return on investment in the long term.One of the easiest and most effective ways for regulators to encourage broadband deployment is to remove regulatory obstacles to such deployment and unleash the powerful effects of market-based competition.

B.How should broadband services be defined?Please discuss.

1.what criteria should be used to determine whether a facility or service has sufficient transmission capacity to be classified as "broadband;"

SBC proposes that the definition of “broadband services” (also known as advanced services) include high-speed transmission capacity that is at least 200 kbps in one direction.As discussed below in response to Question J, consistent with longstanding precedent with respect to defining markets, the broadband services market must include all services that are “reasonably interchangeable” from the consumer’s perspective.Narrowband services, which provide limited transmission capacity sufficient for traditional voice service, are clearly not interchangeable with broadband services, which provide high-speed transmission capacity capable of delivering a host of new services and applications that involve the exchange of large amounts of information.The FCC,[11] the Department of Justice[12] (DOJ) and the Federal Trade FCC (FTC)[13] have all reached this conclusion.

In the First Advanced Services Report, the FCC defined broadband as transmission capacity of at least 200 kbps in both the upstream and downstream directions.SBC believes this definition is overly restrictive.While it is true that broadband services may provide the capability for two-way high-speed transmissions, this does not compel a requirement that broadband services must be high speed in both directions.Customers have individualized needs that sometimes will involve variable upstream and downstream transmission capacity, depending on the service application.For example, residential high-speed Internet access users typically download content off of the web, but do not originate large amounts of information.These consumers have no need for expensive symmetrical high-speed connections and often will prefer a service, such as SBC’s ADSL service, that provides asymmetrical downstream and upstream transmission capacity at a more affordable price.

Moreover, the FCC’s definition excludes satellite broadband services, even though these services unquestionably are part of the broadband landscape.Satellite providers have experienced rapid growth since launching two-way Internet access in late 2000, and the Yankee Group predicts that satellite broadband will reach 300,000 residential subscribers in the U.S. by the end of this year and will grow to 4.5 million subscribers by the end of 2005.[14]Thus, SBC supports an expansive definition of broadband that encompasses the full range of services and technologies that are part of the product market.

2.how the definition should evolve over time; and

While regulators always must ensure that regulations are adapted to technological and market changes, the goal of any formative broadband policy should be to define broadband so as to minimize the need for ongoing adjustments.Fundamental to NTIA’s inquiry is the recognized need to provide regulatory certainty.Regulatory certainty is not provided if the parameters of broadband are so narrowly construed as to be outdated by the time the policy is established.Policy makers should consider the wisdom behind the Computer Inquiries proceeding, where the “enhanced services” category was very broadly defined such that twenty years later it still has relevance in the market place and in the regulatory framework (i.e., the statutory definition of “information service”).

The same approach is required for broadband if there is to be regulatory certainty and removal of the regulatory chilling effect on investment and technology deployment.History suggests that a prudent starting point would be to adopt a definition of broadband that is sufficiently broad as to have lasting relevance.Any other approach would severely limit the effect of any broadband policy determinations, require continued intervention in the marketplace, create regulatory uncertainty and inhibit broadband investment.

As noted above, the definition of broadband services must include all “reasonably interchangeable” services, regardless of technology and transmission medium.By adopting a definition of broadband that is competitively and technologically neutral, regulators can ensure that their definition remains relevant in a rapidly evolving marketplace.This also will help to ensure that the regulations adopted for the broadband market do not distort competition.In addition, a definition of broadband that is service-based and not technology-based will provide much-needed regulatory certainty that will promote facilities-based competition and help to ensure fair and equal regulation of competitors.

3.the policy implications of how the term is defined.

A uniform definition of broadband is essential to implementing a coherent and effective national broadband policy.The fundamental problem with the existing regulatory framework is that it is asymmetrical.Providers of competing and functionally equivalent broadband services are subject to vastly different regulations based solely on their regulatory status in other product markets.The solution is straightforward.Regulators must adopt a clear definition of broadband and then implement a uniform framework of policies and regulations for all broadband providers, regardless of their technology or transmission medium.

C.Several studies indicate that the rate of deployment of broadband services is equal to or greater than the deployment rates for other technologies.What is the current status of (1) supply and (2) demand of broadband services in the United States?When addressing supply, please discuss current deployment rates and any regulatory policies impeding supply.When addressing demand, please discuss both actual take rates and any evidence of unserved demand.Please also address potential underlying causes of low subscribership rates, such as current economic conditions, price, cost-structure, impediments to the development of broadband content, or any other factor.To what extent has the growth in competition for broadband and other services been slowed by the existing rates and rate structures for regulated telecommunications services?

It is important to put the question of broadband supply and demand into the proper context for this inquiry.There is little disagreement that broadband deployment is good for the economy and national competitiveness.The fundamental purpose of NTIA’s inquiry is to identify regulatory impediments to broadband deployment and develop a national policy that will result in increased broadband investment.Accordingly, the question is not whether there is sufficient broadband deployment by some objective standard, but what steps regulators and policymakers can take to encourage companies such as SBC to invest billions of dollars in broadband infrastructure.Thus, the most notable aspect of current supply and demand figures for broadband services is how the regulatory disparity between DSL service and cable modem service is reflected in the marketplace.

Supply.SBC currently is able to offer DSL service to only a little more than half of its customers.[15]Nationally, fewer than half of all U.S. households have access to DSL service.[16]There are a number of reasons for this relatively low penetration rate.In addition to the enormous cost of DSL deployment, there are some significant technological constraints – DSL cannot reach customers whose copper loops exceed 18,000 feet from the service point.[17]In order to overcome these constraints and extend the availability of DSL, SBC must deploy expensive new technologies, such as those used in Project Pronto, that further increase the cost of DSL deployment.But regulation and the threat of regulation have dampened ILEC incentives to make the significant investment needed to overcome the distance limitations of copper.

In contrast, cable modem service, which is not subject to any regulation, is far more widely available.The National Cable and Television Association reported in September 2001 that 83 percent of all U.S. households passed by cable would be upgraded for cable modem service by the end of 2001.[18]This is consistent with a recent analyst report issued by the Yankee Group, which found that as of year-end 2001, two thirds of all U.S. households will have access to cable modem service and that, by year-end 2002, 77 percent of U.S. households would have access to cable modem service.[19]Another report, issued jointly by JP Morgan and McKinsey & Co., found even higher addressability: 74 percent of U.S. households at the end of 2000, and an estimated 82 percent at the end of 2001.[20]A more recent report projects that by the end of 2002, 95.2 million homes (or about 90% of homes passed by cable) will have access to cable modem service.[21]

Although cable operators face their own constraints due to their service architecture, they enjoy an inherent cost advantage over DSL service.For example, an analysis by J.P. Morgan and McKinsey & Company concludes that DSL providers face incremental costs of $792 per customer, while cable modem providers face an incremental cost of only $468.[22]That same study concludes that the average cost per customer of a large ILEC undertaking a massive DSL deployment is currently $86 per month per customer.[23]That cost, they conclude, will decline by 2005 to $38 per month per customer.In contrast, the average, per-customer cost of providing cable modem service is estimated to be $55, declining by 2005 to $30.[24]At no point during the next four years is the average cost of providing DSL service less than the average cost of providing cable modem service.To the contrary, the costs of cable modem providers remain substantially lower throughout the period.Thus, the Yankee Group has predicted that “cable modem prices are likely to remain cheaper than DSL prices for comparable service levels due mainly to the low service provision costs on the part of MSOs.”[25]

The regulatory costs that are imposed on ILEC deployment of DSL service merely add to the cost advantage enjoyed by cable modem providers.As discussed further below, ILECs are not allowed to design and offer their broadband services as an efficient integrated offering.Rather, they must artificially segregate the transmission component of their broadband services and offer it on a stand-alone basis.Further, ILECs must absorb all of the inefficiencies and direct costs created by the imposition of unbundling requirements on their broadband services.Ironically, the most significant inefficiencies and costs are those associated with the unbundling requirements that have been proposed for SBC’s most expensive DSL architectures.

Demand.At present, cable modem service far outpaces DSL service in the market.According to a recent FCC subscribership report, there were fewer than 2 million residential DSL lines in service, but more than 3.5 million cable modem lines in service nationwide as of December 2000.[26]By the end of the second quarter of 2001, cable modem providers had expanded their lead in the market and had at least 5.5 million cable modem lines in service nationwide[27] compared to 2.5 million residential DSL lines in service.[28]

Numerous analyst reports confirm, not only that cable modem service is outpacing DSL service, but also that cable has been widening its lead in recent months.Morgan Stanley Dean Witter, Telecom Trend Tracker, Aug. 17, 2001, estimates that cable operators added 779,000 subscribers during the second quarter of 2001, compared with 432,000 new DSL subscribers.A Telecom Research Group study found similar evidence of this trend.[29]It should come as no surprise, therefore, that a number of analysts predict that cable will exploit its first mover advantage to keep its lead through the middle of the decade.Douglas Shapiro of Banc of America Securities sees cable modems ending up in 18.8 million homes by 2005, compared with 13.9 million DSL installations.[30]And the Yankee Group predicts that cable modems will hold an even wider advantage over DSL – 15.7 million to 10.5 million – in 2005.[31]

At this time, satellite technology still accounts for a relatively small share of the broadband Internet access market, although it is ubiquitously available and growing rapidly.The Strategis Group predicts that the number of U.S. satellite subscribers will grow to more than four million by 2005.[32]Satellite broadband services are likely to be most successful in areas in which cable service is not available, because consumers in those areas are likely to use DBS service for video and be the most receptive to satellite-based Internet access.

Overall, the “take” rate for broadband services is extremely sensitive to price.SBC has firsthand experience with these high demand elasticities in the mass market for broadband services.Earlier this year, SBC was forced to increase its ADSL price by $10 in part because of the enormous expenses incurred to comply with various regulatory requirements, such as the costs of creating and maintaining a structurally separate data affiliate, providing larger remote terminals to accommodate potential CLEC collocation requests and providing competitors with access to its broadband network.Following this price increase, SBC experienced a drop in the growth rate for its DSL service, and it lost market share to its cable modem competitors, which merely confirms that the price elasticities of demand for broadband services are high.[33]

Recognition of these demand elasticities must inform broadband policymaking.If there is to be widespread use of broadband services, they must be priced at a level consumers are willing to pay.And if ILECs are to deploy broadband services that offer a competitive alternative to cable modem services (i.e., a second wire) they must be able to price their services competitively.To the extent disparate regulations make this impossible, such regulations are self defeating and only serve to impede broadband deployment and reduce competition in the market.

Apart from price, there are a number of factors that affect demand for broadband services in the mass market.Obviously, the need for computer equipment is one limiting factor on the take rate for broadband services purchased by residential consumers.Another is that computers require some degree of technical sophistication that some residential consumers may lack.As discussed below, these factors suggest that it would not be appropriate to establish a specific broadband availability requirement at this time.

D.Should government adopt as a goal "access for all" to broadband service?What would be the costs of such a goal?What policy initiatives, if any, should be considered to achieve that goal?Are there areas or persons that are unlikely to be served through marketplace forces?

The most appropriate role for government in the broadband arena is to allow the market to work.There is ample evidence of the many benefits of broadband technologies.These benefits cannot drive broadband deployment unless government gets out of the way.The government needs to have faith in our free market system.If the benefits of broadband are as significant as most believe, the market will drive deployment; if they are not, then the market will not drive such deployment.Either way, the government should not interfere.

At this point in time, the government is interfering.Costly regulation and the threat of additional regulation are sapping ILECs of the incentive they otherwise would have in a free market system to deploy broadband facilities and services on a widespread basis.Rather than focusing on deployment mandates or a “take rate” target, the government’s first response should be to unleash market forces and eliminate regulatory obstacles to investment.Later on, it can always assess whether there are any areas of market failure and take targeted corrective action.

In Section 706 of the 1996 Act, Congress directed federal and state regulators to encourage the deployment of broadband services through regulatory forbearance and other measures that “remove barriers to infrastructure investment.”[34]SBC has repeatedly called for quick and decisive action to establish a comprehensive national policy for all broadband service providers that eliminates regulatory barriers to investment.In addition, SBC recently filed a petition asking the FCC to confirm that it is non-dominant in the provision of broadband services and to forbear from applying dominant carrier regulation to SBC’s provision of broadband services.There is no justification for continuing to impose disparate regulations on ILEC broadband services that discourage investment and penalize otherwise efficient technologies.Consistent with congressional intent, widespread broadband deployment should be achieved by reducing regulation and allowing the market to drive the deployment of broadband services.

It would be premature and inadvisable to subsidize broadband deployment with universal service funding.As Chairman Powell has recognized, the nation should commit to achieving universal availability of broadband in a way that lets the market develop and preserves consumer choice.[35]Therefore, adoption rates should not necessarily drive government responses.Further, Chairman Powell has recognized that universal service objectives should be promoted in economically sound ways.[36]The universal service goals of ubiquity and affordability should be advanced in a manner that does not “dampen competitive opportunity.”[37]Thus, before the government risks distorting the market by including broadband services in federal universal service mechanisms, it should eliminate burdensome regulations that stifle ILEC investment and innovation in broadband services.

Moreover, there are various factors that affect subscribership levels for broadband services.For example, whereas telephones are very inexpensive, computers are not.Further, whereas telephones require no technical knowledge or ability, computers require some degree of technical sophistication and, therefore, may be intimidating to many residential customers.In fact, recent Census Bureau data indicate that only about half of American households (51%) currently own a computer.[38]Therefore, many residential customers do not even have the capability of utilizing high-speed Internet access services from their homes, and those customers who have such capability tend to have higher incomes.[39]

E.Do the interconnection, unbundling, and resale requirements of the Telecommunications Act of 1996 reduce incumbent local exchange carriers' (ILECs') incentives to invest in broadband facilities and services?

The unbundling, interconnection and resale requirements of the 1996 Act do not, by their terms, apply to broadband facilities and services. Rather, the unbundling requirements apply only to facilities used for the provisioning of “telecommunications services,” and then only to the extent the test set forth in Section 251(d)(2) is satisfied. The interconnection and resale obligations apply only to services delivered pursuant to Title II, and the mandatory discount on services resold pursuant to Section 251(c)(4) applies to “telecommunications service that the carrier provides at retail.”

To the extent these obligations are extended to ILEC broadband facilities and services, it unquestionably will have a negative impact on investment incentives.The magnitude of that impact depends upon the particular requirements, but it must be emphasized that any requirement that applies to ILECs and not their broadband competitors distorts competition and dampens ILEC investment incentives.ILECs cannot justify the enormous costs of making broadband services widely available if they cannot price their services on a competitive basis with cable modem and other providers of similar services.Significantly, as noted in response to Question C above, it is already widely recognized that even without the additional costs of burdensome regulations, DSL service is more expensive and technically difficult to deploy than cable modem service.Moreover, cable telephone companies, the largest providers in the broadband market, are deregulated and thus are free to subsidize cable modem deployment with increases in basic cable television services.In contrast, ILECs are uniquely burdened with strict cost accounting, cost allocation and price cap regulation of their telephone services, which prevents them from financing their broadband deployment through higher prices for telephone services.For these reasons, regulations that exacerbate the cost effectiveness of DSL service as compared to cable modem service inevitably have a severe chilling effect on ILEC plans to invest billions of dollars in broadband facilities and services.

SBC already has been forced to incur significant costs and inefficiencies as a result of asymmetrical regulatory requirements that are imposed on its broadband network, including its Project Pronto architecture.For example, SBC was required to configure Project Pronto in such a way that the transmission component of its broadband service can be made available to its competitors. That required SBC to install Optical Concentration Devices (OCDs) that are significantly more expensive than would otherwise have been required.These OCD costs added nearly $240 million to SBC’s Project Pronto deployment on the scale originally envisioned.SBC also spent $25-50 million to increase the size of remote terminals to accommodate potential CLEC collocation requests.Even worse, SBC faces the threat of additional federal and state unbundling requirements that could double the cost of SBC’s Project Pronto deployment, effectively pricing SBC’s DSL service out of the market.A more detailed discussion of the cost impact that unbundling requirements would have on Project Pronto is attached hereto as Attachment 1.

In addition to the direct costs of unbundling requirements, unbundling imposes considerable network design and management costs.SBC has designed Project Pronto to deliver efficiently mass-market DSL services to residential consumers who live too far from a central office to receive DSL over a standard copper loop.This is accomplished by deploying a NGDLC system that, at a high level, moves the “DSLAM” functionality from the central office to a remote terminal location that is closer to the customer’s premises.Diagrams illustrating the Project Pronto architecture are attached hereto as Attachment 2 and 3.

Allowing CLECs to obtain unbundled access to the Project Pronto architecture would make it impossible for SBC to efficiently design and construct its broadband network.For example, if SBC were required to allow a CLEC to “collocate” a line card, the CLEC could quickly consume the limited number of ports available in the NGDLC, even if it served only a few customers.As a result, SBC would be limited in its ability to serve other customers with the same equipment.The only way for SBC to avoid this outcome would be to over-design its network.SBC experienced a similar problem when it was forced to build larger remote terminals than would otherwise have been necessary and deploy more expensive OCDs in order to accommodate competitive access.But this over-building forces SBC to bear the risk that CLEC demand for unbundled access to its network may not materialize, which is precisely what happened with remote terminal collocation.It also forces SBC to incur the up-front costs of implementing costly OSS enhancements to provision unbundling arrangements that may never be requested.

Further, due to the nature of the NGDLC equipment, there is a limited amount of bandwidth that is available to transport data between the remote terminal and the central office.Each type of service provided over the Project Pronto architecture allocates and utilizes this limited shared bandwidth in a different manner.Therefore, if CLECs were allowed to “collocate” their own line card in SBC’s equipment or otherwise exercise control over this limited bandwidth, a CLEC could reduce or even eliminate all of the available bandwidth in providing its own services.In particular, a CLEC that targeted business customers could offer dedicated capacity using a mechanism such as constant bit rate service or a permanent virtual path.This would quickly consume the available bandwidth in SBC’s broadband network, which has been designed to provide shared capacity for mass-market (primarily residential) DSL consumers.The impact of this forced bandwidth reallocation is shown in Attachment 1.Thus, the end result would be to (i) reduce the availability of broadband services (ii) impair the quality of service available to small businesses and residential consumers due to the fact that constant bit rate services take precedent over other levels of service; (iii) drive up the price of DSL service to recover the additional capital and facilities costs; and (iv) reduce the availability of DSL service.

As these examples illustrate, burdensome unbundling requirements produce a sub-optimal allocation of resources that has a negative effect on both the supply and demand of broadband services.On the supply side, ILECs will not deploy innovative broadband architectures if regulators impose or threaten to impose unbundling requirements that destroy the economic viability of the service.This will have the effect of reducing the availability of broadband services and allowing cable modem providers to expand their lead in the market.On the demand side, costly unbundling requirements will be passed on to end users in the form of higher prices for broadband services.Not only will the price of DSL increase, but cable modem providers also will be able to raise their prices in response to the higher cost of DSL.In effect, DSL prices that are inflated for regulatory costs will become the price umbrella for other broadband services in the market.

1.Are there investment disincentives attributable to the regulated rates for interconnection, unbundled network elements, and resold services?

The below-cost rates that have been imposed for interconnection, UNEs and resale undoubtedly create a disincentive to broadband investment.This applies to ILECs that must bear the cost of providing unbundled access to their broadband networks and share the rewards of their investment, as well as CLECs that can lease facilities cheaper than it would cost to invest in their own networks.As discussed further below, the FCC’s TELRIC methodology does not allow ILECs to recover the direct costs associated with interconnection, UNEs and resale because it is based on the costs of a hypothetical optimally efficient network.However, no forward-looking cost methodology would compensate ILECs for all of the residual costs created by government regulation, such as the costs of implementing unbundling requirements and stranded facilities and bandwidth.Nor would ILECs receive compensation for the inefficiencies and loss of network control that result from applying unbundling requirements to broadband networks.Thus, pricing reform for interconnection UNEs and resale would have a positive effect on broadband investment, but would by no means eliminate the significant investment disincentives created by applying these legacy regulations to broadband services.

2.To what extent are those disincentives due to ILECs' uncertainties about their ability to recover the added network costs needed to accommodate potential requests from competitors?What is the magnitude of those additional costs?What mechanisms could be used to share the risks of those costs efficiently and equitably among ILECs, competitors, or users?

One of the principal reasons that unbundling and other burdensome regulations have a chilling effect on broadband investment is because ILECs are unlikely to recover their costs from CLECs. The inherent problem with these types of regulatory mandates is that the level of CLEC demand will never be known in advance. This creates a “Catch 22” whereby an ILEC must over-design its broadband network in anticipation of CLEC demand and assume the risk that such demand will materialize, or design its broadband network to meet the needs of its own customers and assume the risk that CLECs will exhaust available capacity, thereby denying the ILEC the ability to serve its customers.

As discussed above, the bandwidth capacity component of Project Pronto is an example of the network design difficulties faced by ILECs.There is a limited amount of bandwidth at each remote terminal site to handle a certain amount of DSL traffic.If ILECs were required to provide access to this bandwi