Before the

National Telecommunications and Information Administration

Washington, D.C.

____________________________________

)

In the Matter of)

)

Request for Comments on Deployment)Docket No. 011109273-1273-01

of Broadband Networks and Advanced)

Telecommunications)

)

____________________________________)

COMMENTS OF VERIZON COMMUNICATIONS

“Government’s role . . . should be to facilitate the deployment of new technologies by removing any unnecessary roadblocks to that deployment.”

“[P]olicies that promote rational facilities investment should be pursued.”

“[I]t is important to try to regulate comparable services in a manner that does not interfere with marketplace outcomes.”

-- NTIA Administrator Nancy Victory, 

December 6, 2001 [1]

“I believe strongly that broadband should exist in a minimally regulated space.Substantial investment is required to build these networks and we should limit regulatory costs and uncertainty.We should vigilantly guard against regulatory creep of existing models into broadband, in order to encourage investment.”

--FCC Chairman Michael Powell

October 25, 2001 [2]

Introduction and Summary

The formulation and implementation of a uniform national policy governing broadband services is perhaps the most economically significant regulatory challenge facing the United States.The pro-competitive, deregulatory framework for broadband that Assistant Secretary Victory and Chairman Powell identified in the quoted remarks is exactly what the country needs today.Now the Government must turn their words into concrete policy changes.

Nationwide deployment of broadband infrastructure would generate economic and consumer benefits estimated to be worth as much as $500 billion each year.The economy needs this unique stimulus even more now that the largest economic expansion in American history has come to a close.After a period of ever-accelerating growth, the pace of new broadband connections has slowed dramatically since the beginning of the year. The Government should act quickly to remove artificial impediments to the timely and efficient deployment of broadband infrastructure and to provide a regulatory environment in which various technologies can compete with one another for the delivery of broadband content and applications.Current federal policy thwarts these important goals by discouraging investment in broadband facilities and distorting competition.

Although still in its youth, the broadband market is already marked by robust, facilities-based competition.Telephone companies are minority players in the market, which is dominated by incumbent cable modem operators.New technologies – satellite and terrestrial wireless – have entered the marketplace and are expected to gain significant market shares in the months and years ahead.But while there are numerous broadband technologies and services that compete head to head, further deployment of current and future generations of broadband will require substantial additional investment on the part of all providers.

Yet, among all these competing technologies and providers, only the telephone companies, with a minority share, are subject to burdensome common-carrier regulations that were developed for circuit-switched narrowband local voice services.These regulations increase the telephone companies’ costs, magnify the risk of new investments, and deny them the flexibility to enter into innovative marketing and pricing arrangements that would better serve consumers and provide an opportunity to recover investments.By contrast, despite controlling some 70% of the broadband market, cable modem providers are substantially free from regulation, as are providers of satellite and terrestrial wireless services.Unlike telephone companies, these other players in the market may price their services as they choose, without filing tariffs, and they are under no obligation to make their services or facilities available to competitors at prescribed rates.

This disparity in regulation is not simply unnecessary and unfair, but also counterproductive, because it undermines the telephone companies’ incentives to expand their broadband offerings – for example, by deploying DSL capability at remote terminals outside their central offices – or to invest in new technology, such as fiber-based services, which have the potential to increase transmission speeds and reduce costs.This does not suggest that country needs an “industrial policy” favoring telephone companies over other broadband providers or even favoring the broadband industry over other industries.Rather, it suggests that the Government should remove regulatory deterrents to investment and allow market forces to shape the development of broadband services and facilities.

Perversely, regulations that were designed to spur competition in the narrowband market have the opposite effect in the broadband arena:by hampering telephone company investment, the regulations allow cable operators to preserve and even extend their dominance.As a result, the current regulatory environment risks snatching defeat from the jaws of victory as a marketplace that is now competitive becomes less so, with cable companies continuing to increase their market share at the expense of other competitors that are artificially handicapped.

The extension of narrowband voice rules to broadband data services has often happened reflexively, through “regulatory creep,” rather than through conscious, considered policy choices.Now is the time to reverse the creep and formulate a uniform, rational broadband policy for the nation.Prior experience with wireless telephony, customer premises equipment, and information services (including the Internet itself) all provide concrete marketplace evidence of the benefits that will flow from a policy that allows the market to drive investment in new broadband technologies and services without investment-deterring regulatory constraints.In each of those cases, adoption of market-driven policies created an environment in which competition flourished, subscribership rose, quality improved, and prices dropped.

The two overarching themes of the new, truly national broadband policy should be: (1) allow the market to drive efficient broadband deployment by removing artificial regulatory obstacles to investment, and (2) treat all broadband providers alike.

The first step in establishing a national broadband policy is to determine the appropriate regulatory classification for broadband.In doing so, it is critical, both as a matter of law and sound policy, that all competing services be regulated alike, rather than being subject to disparate regulation based on the history or parentage of the entity providing them.Historically, the FCC has treated broadband services as common carrier services subject to Title II of the Communications Act when provided by telephone companies – and only when provided by telephone companies.To the extent the FCC continues to apply Title II to some providers in the future, it necessarily must do so for all.

The more logical way to implement a new national broadband policy, however, would be to declare that the broadband facilities and services fall under Title I of the Communications Act regardless of who provides them.The FCC at one time did so for cable services and still does both for computers and other forms of customer premises equipment and for the Internet and other information services.Under this new scheme, the nature of the service, rather than the nature of the entity providing the service, would determine what regulations apply.This is the surest method of preventing narrowband voice rules from being applied inappropriately to the broadband data world.

Of course, even if the Commission were to classify broadband as common carriage subject to Title II regulation, it still has authority to remove many of the key regulatory impediments to broadband investment and deployment.On the retail side of the business, the Commission can and should eliminate tariff and pricing regulations for broadband and should instead allow all providers to experiment with different and innovative pricing schemes such as those that prevail in the cable industry and on the Internet.On the wholesale side, the Commission likewise has authority to eliminate investment-deterring unbundling requirements and other requirements (such as collocation in remote terminals) that inflate operational costs, introduce added technical complexities, and deter broader deployment.

In the absence of a new, truly national deregulatory policy, broadband deployment in general, and DSL deployment in particular, will likely continue to stagnate.Millions of consumers will remain beyond the reach of competitive broadband services.The regulatory status quo is deterring investment in broadband facilities, cementing the supremacy of cable modem providers in the marketplace, and stunting economic growth.It is time for a change.

***

The following Comments discuss the structure and dynamics of the broadband market and the urgent need to remove regulatory obstacles to investment in broadband infrastructure.The Comments draw upon and incorporate three comprehensive analyses, which are attached as exhibits.In Exhibit A (pdf) economists Robert W. Crandall and Charles L. Jackson examine the importance of broadband deployment to the nation’s economy.In Exhibit B, economists Alfred Kahn and Timothy Tardiff explain why the application of narrowband voice regulations to broadband data services is counterproductive and inhibits effective competition in the broadband market.Exhibit C is a fact report describing in detail the state of broadband network deployment and the trends affecting the market.Finally, Exhibit D is a table indicating where in these Comments Verizon has addressed the various questions posed by the NTIA in its Request for Comments.

Discussion

I. Broadband Has the Potential To Create Enormous Consumer Benefits, But Massive Investments Will Be Needed To Realize that Potential

Verizon strongly concurs in the Administration’s belief, expressed by Assistant Secretary Victory in opening the recent National Summit on Broadband Deployment, that “new technologies and the deployment of high-speed networks are crucial to promoting America’s economic growth and our nation’s social well-being.”[3]One recent study estimated the economic and consumer benefits of widespread broadband deployment at some $500 billion each year.[4]The economy desperately needs the kind of major economic stimulus that rapid, widespread broadband deployment could foster, but such deployment is expensive and risky.Moreover, as discussed below, the current regulatory environment for telephone companies magnifies both the expense and the risk, thus deterring investment and postponing indefinitely the economic and social improvements that widespread deployment would bring.

A. New Investment in High-Speed Networking Is Needed To Re-Kindle Economic Growth

As explained in more detail in the study by Robert W. Crandall and Charles L. Jackson attached, the record-breaking economic boom of the 1990s was fueled by innovation in information technology and the Internet.A steep decline in the price of information technology equipment led to massive investments in that technology, which not only provided businesses and consumers with more computing power at lower prices but also enabled the development of new applications for information technology that were not even imaginable a decade ago.
Labor productivity in the U.S. economy nearly doubled between the first and second halves of the decade.[5]Various distinguished economists, including Federal Reserve Board Chairman Alan Greenspan, have independently reached the conclusion that most of the remarkable increase in labor productivity was attributable to information technology.[6]Merely investing in better, faster computers was not enough to spark economic growth, however.Instead, the evidence suggests that networking those computers together was the main enabler of the boom.An important explanation for the sudden acceleration in productivity and economic growth after 1994 is the Internet, which opened up a whole new universe of information, entertainment, and e-commerce opportunities.[7]

The average number of hours of household Internet use rose dramatically beginning in 1994, but the rate of growth in Internet use is slowing.[8]The slowdown is attributable, at least in part, to users’ frustration at trying to use innovative new network applications at the slow speeds allowed by ordinary dial-up connections.What the economy needs now, as unprecedented growth has given way to recession, is the stimulus that would result from high-speed networking – the high-speed networking that local broadband connections could provide.Rekindling economic growth will be difficult unless the economy encourages deployment of the infrastructure required to continue the information technology revolution.

B. The Broadband Market Is Distinct from the Narrowband Market and Is Characterized by Robust Competition

“Broadband,” “advanced services,” and various other terms have been used to refer to services that transfer data faster than standard dial-up modem technology (so-called “narrowband” technology).[9]Verizon proposes the following definition as the basis for the Administration’s policymaking:A broadband service is one that, using a packet-switched or successor technology, includes the capability of transmitting information that is generally not less than 384 kilobits per second in at least one direction or 56 kilobits per second in both directions.Examples include Digital Subscriber Line (“DSL”) services and Frame Relay services or Asynchronous Transfer Mode (“ATM”) services, which may be accessed with speeds of at least 56 kbps.[10]
The proposed market definition encompasses both residential and business users because the same broad deregulatory policy framework can and should be applied to all broadband users.Of course, larger businesses typically demand different services at higher price points than do residential and smaller business users.Services marketed chiefly to larger business customers include Frame Relay, ATM, and Gigabit Ethernet,[11] while residential users are more likely to demand DSL or cable modem service.One unifying characteristic of these broadband services is that telephone companies have no historical facilities bottleneck and instead are deploying these services for the first time – just as others can do and are doing as well.Indeed, as discussed below, cable companies, satellite companies, and terrestrial wireless companies are all building new broadband facilities.

Every government agency to have considered the question has found that broadband services constitute a separate and distinct product market from narrowband services.For example, in reviewing the AOL-Time Warner merger, both the FCC and the FTC recognized the distinctiveness of broadband. [12] The Department of Justice did likewise when reviewing the AT&T-MediaOne merger. [13] There is no mystery to this distinction.Broadband allows consumers to do many things that are simply infeasible over narrowband, including – to name just a few – downloading movies and music, telecommuting, online gaming, streaming video, and distance learning.Demand for broadband (as distinct from narrowband) services will increase in the future as additional broadband-dependent applications emerge. [14]

Not only is broadband a separate market; as discussed below, it is a market characterized by robust competition both within and among competing delivery technologies.

1. Four Competing Technologies

Currently, four main technologies are being used to provide broadband services to consumers: cable modem, DSL, satellite, and fixed terrestrial wireless.[15]While these technologies overlap and compete today, cable companies are the dominant incumbents in the broadband business, with existing broadband-capable infrastructure reaching most U.S. homes.As of September 2001, there were 6.2 million cable modem subscribers in the U.S., compared to 2.8 million residential DSL subscribers, and 100,000 broadband satellite and fixed wireless subscribers.[16]

a) Cable Modem

Cable television networks pass more than 90% of the 105 million households in the U.S., and approximately three-quarters of all households passed by cable are passed by networks that now have the two-way capabilities needed for cable modem functionality.[17]According to analysts, cable modem service is actually being offered today to between 50% and 66% of all U.S. homes.[18]The nation’s seven largest cable operators – AT&T Broadband, Time Warner, Comcast, Charter, Cox, Adelphia, and Cablevision – serve more than 80% of all cable subscribers, and approximately 95% of all cable modem subscribers.[19]
Cable not only has a large lead over other broadband technologies, but it also continues to add new subscribers at a faster rate.[20]Over the past year, cable has increased its market share of new subscriber additions.Even before cable operators began this latest growth spurt, the FCC predicted that cable operators would continue to serve the majority of residential broadband customers until at least 2004,[21] and industry analysts expect cable to maintain a considerable lead over DSL and other broadband technologies for the foreseeable future.[22]

b) Digital Subscriber Line

DSL is provided over the existing local telephone network by connecting digital modems over copper loops to the central office, and then ensuring that those loops are free from various electronics (e.g., load coils) that are needed to provide voice service but inhibit the provision of data services.[23]One reason DSL has fewer subscribers than cable is that it is available to fewer potential subscribers than cable.Analysts estimate that cable modem service was available to between 50% and 71% of U.S. households as of first quarter 2001 and that it will be available to between 66% and 77% of U.S. households by the end of 2001.[24]By contrast, analysts estimate that DSL was available to between 34% and 43% of all households as of first quarter 2001, and that it will be available to approximately 45% by the end of 2001.[25]
Changing this means increasing beyond the current 45% level the percentage of customers who are addressable by DSL.In order to increase the number of addressable lines, significant added investment is needed to deploy more broadband-capable equipment to more locations.For example, in areas served by long copper loops, it is necessary to deploy in remote terminals outside the central office, thus shortening the distance to the end user.The needed upgrades include building new or retrofitting existing physical locations, deploying necessary equipment (DSLAMS, Digital Loop Carrier Systems, fiber cross-connect panels), rearranging the existing network to connect to the new equipment, updating operations support systems, and constructing new fiber-optic transmission facilities.It will therefore take billions of investment dollars for DSL to significantly expand the reach of DSL services beyond today’s levels.

Furthermore, while DSL is a competitive way for telephone companies to enter the broadband business, it is not an end-state technology.In order to provide ubiquitous broadband over the long term, telephone companies will likely need to replace a great deal of their copper distribution plant with fiber optics – another multi-billion-dollar investment proposition.[26]As discussed below, companies will not make the gigantic investments needed to upgrade their networks unless the regulatory regime makes it reasonable for them to take that risk.

c) Satellite and Terrestrial Wireless

Broadband satellite services are provided using the same constellation of Direct Broadcast Satellites (“DBS”) that currently provide video services to more than 17 million subscribers.[27]These geostationary satellites operate in the Ku-band and have broad geographic footprints that enable them to provide service to virtually all U.S. homes.[28]Until recently, satellite broadband used a telephone line as the upstream return path.In late 2000, two satellite providers – StarBand and Hughes – began providing two-way broadband services.[29]In the next few years, several additional two-way broadband satellite services using the Ka-band are expected to become available.[30]
Terrestrial wireless uses high-frequency spectrum to transmit signals to a stationary transceiver up to several miles away.[31]The main fixed wireless services provided to residential customers use the Microwave Multipoint Distribution System (“MMDS”), which uses spectrum in the 2.4 GHz band.WorldCom and Sprint own most MMDS spectrum in the United States, and have commercially deployed MMDS in a handful of markets.[32]Several companies also plan to offer residential broadband services using unlicensed spectrum bands, including the 2.45 GHz Industrial-Scientific-Medical (ISM) band and the 5.8 GHz Unlicensed National Information Infrastructure (UNII) band.[33]In addition, the FCC recently authorized the creation of a new Multipoint Video and Data Distribution Service (“MVDDS”), which will be licensed on a nationwide basis to share the 12.2-12.7 GHz band with DBS and other satellite operators.[34]

Although both two-way satellite and fixed wireless are new technologies with very small market shares at present, they are expected to grow rapidly and take share from the cable modem and DSL operators in the coming years.[35]According to one report, “[t]wo-way satellite broadband Internet access will be the fastest growing single-access technology. . . .This rapid growth will reflect the introduction and aggressive marketing of several high-profile satellite Internet services to the residential market during the 2002 to 2004 period, as well as the continued expansion of the installed base of satellite dishes in U.S. households for satellite TV broadcast services such as DirecTV.”[36]

2. Robust Competition Within and Between Delivery Technologies.

Competition in the broadband market is robust.The FCC has noted with approval “a continuing increase in consumer broadband choices within and among the various delivery technologies,” which indicates that “no group of firms of technology will likely be able to dominate the provision of broadband services.”[37]Each of the four main delivery technologies competes head to head with the others in a single broadband market.All four are functionally similar:they all provide Internet access at comparable speeds.[38]In addition, as the FCC has recognized, broadband services using different technologies are available at similar prices.[39]
Equally significant, the service providers clearly, and appropriately, view one another as direct competitors. Time Warner and AOL have touted the “significant actual and potential competition affording consumers adequate choice across existing and emerging [broadband] platforms.”[40]The recent refusal of cable companies to sell advertising time to phone companies to promote DSL service confirms that cable modem providers perceive DSL providers to be their direct competitors.[41]

Moreover – and more important – consumers view the technologies as interchangeable.Recent survey results confirm the opinions of industry analysts who describe broadband consumers as “platform agnostic.”[42]In essence, consumers want broadband functionality, and they do not care what kind of hardware or software is used to implement that functionality.

In view of consumers’ indifference between delivery platforms, competition among different delivery modes is more valuable than competition among service providers within a given mode.Intermodal competition is by nature facilities-based and hence more likely to lead to innovation.Intramodal competition, by contrast, has for the most part not been facilities-based competition.It focuses more on the price for using a given pipeline to the customer rather than on service quality or innovation.Only through facilities-based competition will the market adapt to meet consumers’ needs, both in terms of the types of services and in terms of efficient delivery to different types of customers.span class=MsoFootnoteReference>[43]

C. Regardless of Whether Growth is Supply-Constrained or Demand-Constrained, Government Should Let the Market Work To Bring Better Services to More Customers

Although broadband markets are competitive and generally healthy, that does not necessarily mean that all is well looking forward.Only about 9% of consumers use broadband services.[44]While many more customers say they want service, the pace of new connections has slowed dramatically since the beginning of the year.During the first two quarters of 2001, there were, on average, only 1.2 million new cable modem and residential DSL subscribers combined, compared with nearly 1.5 million in the fourth quarter of 2000.[45]DSL has experienced a more dramatic slowdown than cable.Indeed, by the second quarter of 2001, the number of new DSL installations had shrunk to less than 60% of what it had been six months earlier.[46]The total number of subscribers added by satellite and fixed wireless technologies also fell by 50% from the first quarter to the second quarter of this year, from 40,000 to 20,000 new quarterly additions.If the broadband market is to remain competitive over the longer term, the regulatory environment must be conducive to the enormous investments that competing providers must make to take on the cable modem incumbents.
Because the broadband market is still in its infancy, no one yet knows what the most popular application for broadband services will be.Some commenters in these proceedings may argue that the relatively low take rates for broadband are due to lack of demand rather than lack of supply.The question whether the constraint is one of supply or one of demand is of little relevance to the formulation of an appropriate, growth-oriented national broadband policy, however.Like Assistant Secretary Victory, Verizon believes that, in the broadband market, “policy responses should not be driven by consumer adoption rates [but by] facilitat[ing] the deployment of new technologies by removing unnecessary roadblocks.”[47]No one can know exactly how demand and supply in the broadband market will evolve, but the market will eventually bring supply and demand into balance if the regulatory environment does not artificially impede its development, as today’s does.

As economists Alfred Kahn and Timothy Tardiff explain in their attached declaration, the country needs, first, a deregulatory national broadband policy that will allow market forces to work with the least amount of distortion; and second, a level regulatory playing field among competing broadband suppliers, so that Government does not skew competition for or against any particular industry or technology.[48]Moreover, “it is very difficult, perhaps impossible, to forecast how competition for broadband services will evolve (what technologies will emerge, how successful each will be, what proportion of consumers will choose to subscribe, and how frequently and for what purposes they will use the services).”[49]Because “[n]o one can possibly know the ultimate size of the market and how it will be supplied,” the Government’s task “is to remove all remedial hindrances to the competitive market’s giving us the definitive answers.”[50]

This policy approach is consistent with Assistant Secretary Victory’s recent remark that the Government’s role “should be to facilitate the deployment of new technologies by removing any unnecessary roadblocks to that deployment.Then it’s up to the market — both in terms of carriers’ decisions to deploy and consumers’ decisions to subscribe.”[51]Verizon concurs entirely with this view.

II. The Current Regulatory Environment Discourages the Needed Investments

The most striking feature of the broadband regulatory environment today is that cable modem, satellite, and terrestrial wireless providers are substantially unregulated, while incumbent LECs’ activities in the broadband arena have been subjected through regulatory creep to many legacy regulations designed for the very different narrowband voice market.As one prominent industry observer has noted, “current Federal telecom policy is fundamentally deflationary and unintentionally discourages investment and economic growth.”[52]Applying federal telecom policy to the development and deployment of broadband similarly discourages investment and economic growth.

A. Regulations Designed for Traditional Voice Services Have Been Extended to Broadband Through Regulatory Creep

Traditionally, the Government has taken a hands-off, deregulatory approach to data services and the Internet.Within the broadband sphere, providers of cable modem, satellite or terrestrial wireless service operate in a completely deregulated environment.They may price their services as they choose, without filing tariffs, and they are under no obligation to make their services or facilities available to would-be competitors at prescribed rates.
In stark contrast to the completely deregulated universe in which cable modem and wireless broadband services operate, telephone companies face a raft of unnecessary, burdensome, and illogical regulation imported from the local voice market.Often, these requirements have been imposed reflexively, through regulatory creep, rather than through conscious or considered policy choices.Among the requirements not faced by cable, satellite, or wireless broadband providers are regulations that limit telephone companies to providing cost-based tariffed transport services -- thus preventing experimentation with innovative pricing strategies and alternative revenue models – and that subject retail services to unbundling and other obligations under the so-called Computer III rules.[53]On the wholesale side, telephone companies are subject to unbundling obligations and other requirements such as collocation outside central offices (at remote terminals) that compel them to allow competitors to use their networks at artificially low rates, inflate operational costs and technical complexities, and require costly operations support systems capabilities that are otherwise not needed.The problem is compounded by the threat of still further regulations, such as the possibility of being required to provide unbundled access to DSL-capable line cards at remote terminals, provide unbundled access to new fiber distribution plant, or maintain copper plant where fiber has been added to their networks.

These wholesale and retail regulations were designed to regulate the telephone companies’ control over what were thought to be essential or “bottlneck” facilities in the traditional voice telephone market.But the so-called “incumbent” LECs are not incumbents in the broadband market; they are new entrants trying to challenge the dominant cable modem operators, who have about twice as much market share as the telephone companies. As Professor Kahn and Dr. Tardiff observe, “[w]hatever merits regulations such as these have in facilitating efficient competition for traditional telephone services, they are both unnecessary and counterproductive when applied to broadband.”[54]The regulations are unnecessary because competitors do not require access to the telephone company facilities in order to provide broadband service.Even the FCC has recognized that the “preconditions for monopoly appear absent” in the broadband market.[55]The presence of robust, facilities-based competition means that there are various alternative suppliers of these inputs.

As discussed in more detail below, the regulations are counterproductive because they artificially dampen telephone company incentives to invest in deploying and upgrading their facilities to provide broadband services.The effect of this asymmetric regulatory tax on telephone companies is to slow the development of the broadband market as a whole and to preserve artificially the current dominant position of cable modem providers.Consequently, a marketplace that is now competitive can be expected to become less so, as cable companies’ market share continues to increase at the expense of telephone companies, which provide most of the competition today.Perversely, regulation that was designed to spur competition in the narrowband market will have precisely the opposite effect in the broadband market and will enhance the ability of cable companies to exercise market power that a deregulated market might otherwise erode over time.

B. Unbundling and Other Wholesale and Retail Requirements Deter Critical Investments In Broadband Facilities

The net result of importing wholesale and retail regulations from the local voice market into the broadband sphere is to deter telephone company investment in broadband facilities and services.This in turn reduces the competitive pressure on cable modem service providers to improve their service offerings, thus hindering development of the market as a whole.[56]On the wholesale side of the business, current regulations raise telephone company costs and magnify the already substantial risk of investing in broadband technologies and services.On the retail side, the regulations prevent telephone companies from entering into innovative marketing and pricing arrangements and from charging market-based rates for their services.

1. Wholesale Regulations Increase Riskiness of Broadband Investments

The FCC’s wholesale regulations allow CLECs to free-ride on successful telephone company innovations at artificially low, cost-based rates, while forcing telephone company shareholders to bear the full costs of any investment that fails.If new facility or service offerings lose out to the competition, the telephone companies can recover none of the costs in the FCC’s system of regulated charges for their network elements.Yet if new offerings are successful, the telephone companies would risk having to make them available immediately to competitors at rock-bottom prices.The grotesquely disparate treatment of investment successes and failures eliminates the incentive to undertake costly and risky investments in innovation.[57]

a) Unbundling and Other Wholesale Requirements Inhibit Investment and Competition

Numerous observers have noted the negative effect that requirements such as these have on the incentive to invest.AT&T Chairman C. Michael Armstrong, for example, has emphasized that there would be no incentive for an incumbent to invest in broadband services and facilities if competitors could use that network without placing their own capital at risk:
[I]t would inhibit industry growth and competition.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.

[58]

Professor Kahn and Dr. Tardiff reinforce this point and also explain the detrimental impact on facilities-based broadband competition:

The current broadband regulatory scheme as applied to [telephone companies] appears to be designed not to provide incentives for them to compete against cable modems and other facilities-based providers but to provide [competitors] an opportunity to get a piece of the action by free-riding on their facilities.The fact is, however, that greater public benefits flow from facilities-based competition than from the efforts of competitors reselling the [telephone company] facilities, taking advantage of regulatorily-created opportunities; and it is precisely that facilities-based competition that the present rules both distort and discourage.[59]

Similarly, Justice Stephen Breyer underscored the negative effects of the wholesale sharing regime on facilities-based competition in his concurring opinion in Iowa Utilities Board:

Increased sharing by itself does not automatically mean increased competition.It is in the unshared, not in the shared, portions of the enterprise that meaningful competition would likely emerge.Rules that force firms to share every resource or element of a business would create not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms.[60]

b) Cost-Plus Rate Regulation Is Counterproductive

Another legacy of narrowband voice regulation that makes no sense in the rapidly developing, already competitive broadband marketplace is the requirement that telephone companies must charge regulatorily prescribed rates that are based on the cost of providing broadband transport service, instead of allowing rates to be set by demand and supply.[61]All broadband providers should be allowed to charge commercially reasonable rates. As things now stand, the best the telephone companies can hope to do on their broadband operations is to recover their original costs (and less under TELRIC[62]), while their shareholders must pay for any shortfall and for any investments that fail.But in the absence of market power, there is no need for this onerous restriction.The market itself, not regulators, should discipline telephone company pricing decisions.
To make matters worse, the FCC has prescribed a methodology for setting wholesale rates that systematically undercompensates incumbents, thus further discouraging investment.The so-called TELRIC methodology calculates the cost of network elements based on the cost of a hypothetical, optimally efficient network that no one would ever build.The methodology consistently produces rates that are lower than the actual incremental costs faced by suppliers in the marketplace.As one prominent industry observer recently noted, “no company, incumbent or competitor,” who built a facility network and charged the TELRIC price could “ever hope to earn a return on their investment.”[63]

The result of the TELRIC pricing scheme is that neither telephone companies nor their competitors has an incentive to build new facilities to provide broadband service.“Why should a competitor invest capital if they can lease the incumbents’ network without risk at a lower cost than even the competitor could build it for?Why should an incumbent invest to upgrade its plant if it will be forced to resell it [for] less than it costs to provide it?”[64]Professors Areeda and Hovenkamp have concluded that when the Government forces a company to “provide [a] facility and regulat[es] the price to competitive levels, then the [prospective entrant’s] incentive to build an alternative facility is destroyed altogether.”[65]In short, TELRIC is a counterproductive, deflationary, wrongheaded methodology for the broadband market.

2. Retail Regulation Skews Competition and Discourages Investment

Rate regulation is equally pernicious on the retail side of the business.Because the telephone companies are minority players in the broadband market, they have no market power to exercise.Where there is no potential for monopoly-type abuses, competitors should be free to charge market rates without filing tariffs.And in charging market rates, telephone companies should be free to experiment with innovative pricing schemes of the type that cable modem companies and Internet companies are already using – for example, rates based on a percentage of the customer’s revenue generated using the service.Allowing some competitors to develop new revenue models to recover the costs of broadband deployment, while making telephone companies stick to regulated, tariffed rates, needlessly tilts the competitive playing field against telephone companies, once again discouraging investment.
The sheer newness of the broadband market provides a separate ground for refraining from rate regulation.As Professor Kahn and Dr. Tardiff observe,

New services offer customers additional alternatives not available to them previously.Their introduction is fundamentally a competitive rather than a monopolistic phenomenon, even though they may be distinctive and the innovator may be in a position to earn supernormal profits from them.To deny an innovator the rewards of being first would inhibit innovation, and it should not matter for these purposes whether the innovator is an incumbent telephone company, an incumbent cable television provider, or a new entrant.[66]

There is no guarantee that telephone companies will succeed in the broadband marketplace, but where they succeed they deserve to be rewarded for making the massive investments necessary to bring success.Although it is too soon to know what pricing formulas will be successful as the market develops, telephone companies should be free to experiment with different revenue models, just as their competitors are doing.Regulating the telephone companies’ retail rates distorts their investment decisions, handicaps them in the marketplace, and ultimately retards the growth and development of the market as a whole.

3. The Harmful Impact on Investment Incentives is Not Merely Hypothetical

Both wholesale and retail regulations decrease telephone companies’ incentives to invest in broadband facilities and services.These regulations are already affecting telephone company investment decisions in such key areas as deployment of DSL capability in remote terminals and replacement of copper plant with fiber.

a) Deployment of DSL Capability in Remote Terminals

As noted above, large new investments are needed in order to increase the number of loops that qualify for DSL service.In particular, deploying DSL capability at remote terminals outside of central offices can shorten loop length and increase the number of DSL-addressable lines.In a recent letter to Chairman Powell, Verizon explained that “one of the key reasons that Verizon to this point has significantly constrained deployment of DSL capability in [its] remote terminals” was the uncertainty regarding whether line cards in remote terminals that can be used jointly for voice and broadband DSL services would have to be unbundled, and whether collocation of other providers’ line cards at the remote terminals would be required.[67]
Providing DSL service through remote terminals already costs significantly more than providing DSL service through a central office.This cost difference would be even greater if telephone companies were required to provide unbundled access to line cards at remote terminals, or to try to find some way to allow line cards of other carriers to be collocated there (which may not be feasible).Collocation obligations would require these companies to incur extra costs to prepare, power, and condition larger remote terminals with space for potential collocation that may never be used; would increase operational costs and complexities; and would require development of costly new operations support system capabilities.

Because of these concerns, Verizon has to this point significantly constrained deployment of DSL capability at remote terminals.

b) Deployment of Fiber

Fiber deployment will be similarly affected.The existing rules make it operationally harder, riskier, and more costly for telephone companies to upgrade their networks by adding fiber.As noted above, while telephone companies are relying on DSL technology to enter the broadband market, DSL is not an end-state technology.Successive generations of broadband will require pushing fiber still further into the field through Fiber to the Home (“FTTH”) or other architectures.The current regulatory environment is even more problematic for these new architectures than for DSL.For example,FTTH relies on shared electronics in the central office and a shared passive optical distribution network to provide broadband services to many end-users.Mandating unbundled access to the data architecture in such a system would require that individual fibers, splitters or other equipment be dedicated to specific carriers, thus undermining the economics of the shared architecture, which assumes that facilities costs will be spread over multiple users.Undbundling of FTTH would also create enormously complex technical, practical, and operational problems.For instance, physical access by competitors to the distribution fiber and passive splitting devices in the field could potentially disrupt existing services to other customers.And once again, operations support systems would have to be augmented to administer multiple carriers.
Moreover, still further uncertainty is generated by the possibility that telephone companies might be required to maintain copper plant in areas where fiber feeder or distribution facilities are deployed, which would further reduce the incentive to deploy fiber.A telephone company’s annual cost to maintain copper loop plant would include both capital expenses (depreciation, cost of capital, federal/state income taxes) and operating expenses (maintenance, repair, testing, administration).If a telephone company were required to maintain duplicative fiber and copper feeder networks without regard to business considerations, the economic rationale for deploying fiber broadband capability would be undermined:for instance, fiber-based Digital Loop Carrier (“DLC”) costs more to deploy initially but has lower life-cycle operating costs than the current copper network.There is little point in incurring the higher up-front costs for DLC, however, if the higher operating costs of copper feeder must be incurred in any event.

As this discussion shows, the chilling effects of current regulation and the overhand of still further possible requirements on telephone company investments are neither speculative nor remote; they are real and immediate.Federal policy (or the lack thereof) is a significant deterrent to investment in broadband facilities, stunting economic growth, and cementing the supremacy of cable modem providers in the marketplace.It is time for a change.

III. New National Broadband Policy Should Remove Regulatory Obstacles to Investment and Deployment

The nation plainly needs a uniform national broadband policy.Verizon respectfully submits that the twin touchstones of that policy should be:(1) to allow the market to drive efficient broadband deployment by removing artificial regulatory obstacles to investment, and (2) to treat all broadband providers alike.
These twin touchstones echo Assistant Secretary Victory’s recent comments that“it is important to try to regulate comparable services in a manner that does not interfere with marketplace outcomes” and that “competition should be promoted using a technology-neutral paradigm.”[68]FCC Chairman Powell has likewise recommended that the Commission move to “some degree of less regulation” in the broadband market that would be “not so technology centric.”[69]“We need these things harmonized,”he said.[70]“Otherwise, we’re penalizing a competitive technology simply because of its legacy.”[71]

Once again, Professor Kahn and Dr. Tardiff sum things up well, “[t]he newness of the service, its reliance on risky technologies, the rapid expansion of the market and the leading position of unregulated suppliers all strongly suggest that the FCC’s general disposition to keep its hands off the Internet has been fundamentally correct.”[72]That general deregulatory disposition should now be extended to all the players in the broadband market.

Of course, this is also the best means of ensuring widespread deployment of broadband in an economically efficient manner. As Chairman Powell recently noted, “Government is a notoriously bad investor,” and “a developing market needs the cues provided by consumer free choice.”[73]The wiser course is to allow market mechanisms to increase penetration rates through the deployment of new technologies.Different locations may be more economically served by different technologies, but the best way to achieve the efficient distribution is for the Government to get out of the way and let the market work.

Significantly, this does not mean that the Government should engage in any kind of “industrial policy” favoring telephone companies.Rather, the Government should end the de facto industrial policy favoring cable modem operators that is embodied in the current asymmetric regulatory scheme.The Government cannot rationally maintain Title II regulation for telephone companies that provide broadband services at the same time that it declines to impose similar obligations on the dominant providers in this market.If incumbent cable companies do not control a bottleneck broadband access facility, and therefore do not need to be regulated when they provide broadband services, then new entrant telephone companies, with only about half as many broadband subscriber lines, need not be regulated either.Conversely, if telephone company broadband services are to be regulated under the common carrier regime, all competing broadband services should be subject to the same set of rules.

No less an authority than the Department of Justice has recognized that “[a]pplying different degrees of regulation to firms in the same market necessarily introduces distortions into the market; competition will be harmed if some firms face unwarranted regulatory burdens not imposed on their rivals.”[74]Telephone companies are not asking for guaranteed success in the market or even a leg up on the competition; they just want a level playing field.Experience shows that the market will pick winning strategies and technologies if regulators will get out of the way and allow the market to work.That is the aim of Verizon’s proposals here.

Importantly, Verizon does not propose to use additional regulatory freedom to adopt a closed network model (as cable modem, satellite, and terrestrial wireless broadband providers have done).On the contrary, there can be significant value in maintaining a wholesale business that allows other providers to reach their customers over Verizon’s network.And the availability of an open network competing with the cable incumbents may well create competitive pressure for cable companies to open their systems to more providers as well.Verizon has suggested, for example, that it could offer a service at its central offices to other providers so that they could reach their customers over Verizon’s network at commercially reasonable rates.

A. Broadband Should Be Regulated Under Title I of the Communications Act

The first step in establishing a national broadband policy is to determine the appropriate regulatory classification for broadband.In doing so, it is critical, both as a matter of law and sound policy, that all competing services be regulated alike, rather than being subject to disparate regulation based on the history or parentage of the entity providing them.Historically, the FCC has treated broadband services as common carrier services subject to Title II of the Communications Act when provided by telephone companies – and only when provided by telephone companies.To the extent the FCC continues to apply Title II to some providers in the future, it necessarily must do so for all.The more logical way to implement a new national broadband policy, however, would be to declare that the broadband facilities and services fall under Title I of the Communications Act regardless of who provides them.
The FCC has previously taken this approach successfully for other then-emerging technologies and services.For example, three decades ago in the case of the fledgling computer industry, the Commission classified computers and other customer premises equipment as subject to Title I, thus allowing the Commission to adopt a truly national deregulatory policy that left competitive markets to competitive actors.[75]Likewise, by classifying so-called “enhanced” services as subject to Title I, the Commission was able to adopt a similarly deregulatory policy that prompted the growth of what today are known as information services and the Internet.[76]The Commission even took this approach with cable service itself in the early days of that industry.Recognizing that cable service did not fit into the then-existing regulatory categories of Titles II or III, the Commission asserted jurisdiction over cable under Title I, and the Supreme Court upheld this approach.[77]The same considerations support regulating the nascent broadband under Title I today.And these precedents illustrate that the Commission has the legal authority to do so.

Traditionally, the Commission imposed common carrier regulation on services in order to counteract market power in the underlying transport market.[78]By contrast, “[i]n markets where competition can act in place of regulation as the means to protect consumers from the exercise of market power, the Commission has long chosen to abstain from imposing regulation.”[79]As demonstrated above, the broadband market is already competitive, and telephone companies have no market power in that market.Hence, there is no need to subject telephone company broadband services to the Title II common carrier regime.And there is certainly no justification for doing so while declining to impose the same requirements on all other providers, including the dominant incumbent cable modem providers.Ample precedent supports the proposition that the key consideration in determining which regulation should apply to a given service is the nature of the service itself – not the character of the entity providing it.[80]Or, to put it another way, it has long been established that telephone companies can be common carriers for some purposes but not others, and telephone companies have long provided a broad array of non-common-carrier services, including information services and customer premises equipment.Consequently, there is no inconsistency in treating telephone companies as common carriers in the narrowband voice market but not treating them as common carriers in the broadband market, given the very different economics and competitive dynamics of the two markets.

Furthermore, to the extent that telephone companies offer broadband transport bundled together with information services like Internet access, the bundled service already qualifies as and is currently treated as a Title I Information service.Indeed, under the terms of the 1996 Act, a bundled transport-and-information service offering is, as a legal matter, an information service, and the company providing it does not “provide” telecommunications but instead “uses” telecommunications to provide its information service.[81]

B. Alternatively, If Broadband Continues To Be Regulated Under Title II of the Act, the FCC Should Avoid Regulations that Hinder Investment and Deployment

Even if broadband services continue to be treated as subject to Title II – in which case broadband services from all providers would have to be so classified – the FCC has the authority to refrain from applying to broadband facilities and services many of the narrowband voice rules that are inappropriate for broadband.

1. Section 10 of the Act Requires Retail Forbearance

The Government should forbear from all price and other “retail” regulation ofbroadband services, regardless of provider.This would include eliminating requirements such as those imposed under Sections 201 and 202 to provide services under tariffed, cost-based terms and conditions as well as indirect regulation, such as imputing revenues from or allocating costs to broadband services.In addition, the Commission should decline to extend to broadband services the unbundling and other requirements of its Computer III rules and other similar requirements designed for the narrowband world.In short, the Commission should allow the competitive marketplace to regulate the broadband services provided by telephone companies, just as it does at present for those provided by cable companies, satellite companies, and fixed wireless operators.
There can be little question that the Act’s forbearance requirements are met here.Under the Act, the Commission must forbear from applying any regulation or provision of the Act to a telecommunications carrier or telecommunications service if:

(1) enforcement of such regulation or provision is not necessary to ensure that the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or telecommunications service are just and reasonable and are not unjustly or unreasonably discriminatory;

(2) enforcement of such regulation or provision is not necessary for the protection of consumers; and

(3) forbearance from applying such provision or regulation is consistent with the public interest.[82]

To determine whether forbearance is appropriate for broadband services, the Commission need resolve only a single question:Does any provider control a bottleneck facility?If the answer is no, then the market can be trusted to ensure that charges, practices, and classifications are reasonable and to guarantee that consumers remain free to choose among providers.In such a circumstance, forbearance would be decidedly “in the public interest” because it would eliminate the costs of regulatory compliance and would permit telephone companies the flexibility to respond quickly to marketplace requirements.And, as shown above, the Commission has repeatedly concluded that there is no bottleneck and that the market is fully competitive.

More specifically, forbearance here meets the forbearance standards that the Commission has previously established.First, the Commission has held, in granting a petition under section 10, that “competition is the most effective means of ensuring that the charges, practices, classifications, and regulations with respect to [a telecommunications service] are just and reasonable, and not unjustly or unreasonably discriminatory.”[83]Competition is robust in this market, and there is nothing to suggest that a telephone company with its share of the market could charge unjust or unreasonable prices or engage in unjust or unreasonable practices.

Second, for the same reason, common carrier regulation is not “necessary for the protection of consumers.”Instead, the opposite is true – consumers are best protected by allowing the marketplace to provide them with a robust choice of services from a variety of competing providers.Enforcement of the pricing provisions of Title II is not necessary to constrain the prices that the telephone companies charge for broadband services – competing providers provide that constraint.This competitive marketplace is more than adequate to protect consumers.

Moreover, in applying section 10(a)(2), the Commission has noted that “the fundamental objective of the 1996 Act is to bring consumers of telecommunications services in all markets the full benefits of competition.”[84]The record shows that current regulation stifles rather than stimulates investment in advanced services, the exact opposite of the situation that protects consumers.

Third, in determining whether forbearance is “in the public interest” under section 10(a)(3), the Commission must “consider several factors, including benefits to consumers and whether forbearance will promote competitive market conditions.”[85]The evidence shows that imposition of Title II pricing regulation on one class of competitors while leaving the rest free of regulation skews, rather than promotes, competition.In granting other petitions, the Commission has held that the public interest test of section 10 is satisfied when forbearance would make the petitioner “a more effective competitor.”[86]Verizon has shown that regulation adds costs to its services, and the Commission has found that the avoidance of unnecessary cost is also in the public interest.[87]

Fourth, section 706 of the 1996 Act explicitly mandates the use of “regulatory forbearance” to remove barriers to infrastructure investment and to encourage the deployment of broadband capability on a reasonable and timely basis to all Americans.[88]As shown above, the current regulatory scheme is obstructing investment in broadband infrastructure and delaying deployment.In these circumstances, the Commission must forbear.

2. Section 251(d)(2) Permits Wholesale Deregulation

In the wholesale portion of the market, the Government should refuse to impose one-sided unbundling requirements on telephone company-provided broadband services or to subject those services to investment-deterring TELRIC pricing schemes.As noted above, the section 251 regime was designed as a transition from a monopoly world in local voice telephony to a world in which there was facilities-based competition.The application of that regime to the broadband market is unnecessary and counterproductive.
Moreover, the Commission cannot rationally maintain this regulatory regime at the same time that it declines to impose similar obligations on the dominant providers in this market.If cable operators do not control a bottleneck broadband access facility, as the Commission has found, then the telephone companies, with half the broadband subscriber lines, surely do not control such a facility either.

The Commission has authority to eliminate (or forbear from application of) the unbundling requirements of section 251 in at least three circumstances:when the “necessary and impair” standard of section 251(d)(2) has not been met; when the Commission has determine that the competitive nature of the broadband business obviates the need for unbundling; and when section 271 authority has been granted.

a) “Necessary and Impair”

Section 251(d)(2) provides that, in determining what network elements should be unbundled, the Commission shall consider, at a minimum, whether:
(A)access to such network elements as are proprietary in nature is necessary; and

(B)the failure to provide access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer.