Comments of Covad Communications Company

Covad Communications Company hereby respectfully submits its comments in response to the above-captioned notice. ~~Covad,~~A as the nation’s largest independent provider of broadband DSL services, Covad is ~~clearly~~ particularly concerned with the wireline aspects of a broadband policy. The questions asked by NTIA in this inquiry suggest that the Administration is searching for a foundation for its nascent broadband policy. As Covad sets out in these comments, the foundation of that policy should be competition – the market-opening provisions of the Telecommunications Act of 1996 (1996 Act) are working, and consumers have benefited from an explosion of broadband service offerings since 1996 because of that competition.

Founded shortly after passage of the 1996 Act, Covad has quickly grown to over 360,000 broadband subscribers in nearly fifty metropolitan areas. Covad is a facilities-based provider, having invested hundreds of millions of dollars and deployed a nationwide broadband network that reaches nearly half the homes and businesses in the country. In order to reach its customers, Covad leases unbundled network elements (UNEs) pursuant to section 251(c)(3) of the 1996 Act. Specifically, Covad obtains unbundled access to the last mile of the nation’s established telecommunications network by leasing loops, linesharing, and interoffice transport from the incumbent telephone companies. Roughly half of ~~our~~ Covad’s subscribers are residential users. And unlike ~~our~~ incumbent telephone companies~~competitors~~, we Covad offers ~~types of~~ DSL-based services especially tailored to small business, providing this bandwidth-hungry market with an option for an affordable high-speed connection.

Like other new entrants to the local telecommunications marketplace, Covad suffered during the recent economic downturn and the harsh new realities of the capital markets. ~~We watched as CLEC after CLEC ceased to operate or was acquired by a larger company. However~~Covad is on the cusp of emerging successfully from a debt reorganization proceeding and ~~now~~ has raised sufficient capital to ~~posses a~~ fully fundd its business plan.[1] We ~~look forward to working with the NTIA on broadband policy issues, and will limit these comments to those areas most relevant to Covad.~~ Proving the economic viability of the competitive telecommunications sector has been one challenge successfully met by Covad: proving the policy viability of that sector is the challenge now facing the NTIA.

Since the founding of Covad, and in reality since passage of the 1996 Act, the four Bell Operating Companies (BOCs) repeatedly mounted attempts to change the Act and prevent CLECs like Covad from leasing certain parts of the local phone network. Today, at both the FCC and on Capitol Hill, efforts are underway to rewrite the 1996 Act and ultimately undermine the pro-competitive environment that Congress envisioned. Covad respectfully submits that the Administration cannot support the dismantling of competition, and instead should resist the efforts to eliminate competition, as the FCC and now Congress have done.

Question 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.

~~One need only look to the past to see what the primary consideration in formulating a broadband policy ought to be: competition.~~ A policy environment that promotes competition whenever and wherever possible will drive both technological innovation and infrastructure deployment. As a simple principle of economics, a monopoly has no incentive to innovate, and no incentive to create new products that may lower prices to consumers. Indeed, a monopoly has incentive only to promote barriers to entry and to increase monopoly profits. Why would a monopoly voluntarily cede market share by deploying new products that might give rise to competitive entry? It would not do so, and would seek instead to bar competitors from offering consumers a choice of services that would erode the monopolist’s market share.

Such economically rationale behavior is behind the regulatory agenda of the BOCs. Rather than spending their capital on deploying new and innovative services, the BOCs have, in recent years, devoted hundreds of millions of dollars to a campaign with one primary goal: scaling back the 1996 Act and limiting competition wherever possible. Rather than embrace the wholesale market opportunity created by the 1996 Act[2], the BOCs have sought to eliminate competitive entry.

Covad strongly believes that competition, not monopoly, is responsible for the broadband deployment that has exploded since the passage of the 1996 Act. As set out below, monopoly telephone companies that had broadband technology on their shelves did not begin deploying such services until competitors forced their hands. That nearly 10% of Americans actually subscribe to broadband services today – and that at least half the country has access to such services when they wish to subscribe – is a testament to the benefit of competition.[3]

One of the most objective means of gauging the pace of broadband deployment is to compare it with the adoption rate of other innovative technologies. For example, the pace of adoption of ~~Consider first the introduction and deployment of~~ cellular phone technologies was initially glacial, due to a regulatory duopoly that had no incentive to compete on price. When a that stagnant duopoly in service providers gave way to vibrant competitive marketplace with numerous players, prices dropped, innovation increased, and infrastructure investment occurred at a rapid pace.

The adoption rate of broadband is also impressive when measured against other new technologies. The roughly 10% adoption rate of residential broadband virtually mirrors the adoption rate of DBS Satellite TV service upon its introduction. After five years, DBS penetration also stood at roughly 10%.[4] Further, the adoption rate of residential broadband is much greater than the initial penetration rates of other “new” technologies. As the Federal Communications Commission noted in its first Section 706 Advanced Services report, both the color television and the cellular phone demonstrated slow initial penetration rates upon introduction.[5] These dynamic new technologies, like broadband, were not instantly accepted by consumers, who needed to be convinced that it was worth their while to purchase something they had never seen before, and didn’t know they needed. So too with broadband.

A Morgan Stanley Dean Witter study predicts that by 2005, 93% of U.S. homes will be passed by cable modem service, and a full 80% will be passed by DSL service.[6] The Morgan study assumes that the current regulatory structure will remain intact. The fact that – according to current estimates - nearly 10 years out from the introduction of competition, almost every home in America will be able to purchase a broadband service is perhaps the greatest testament to pro-competitive public policies.

Considering the slow adoption rate of disruptive technologies in the past, the 10% subscription rate of broadband services is remarkable. Broadband services were not deployed in earnest until mid-1999, and a ten percent take rate of such services after only two years is nothing short of an explosion. The reason for such success is simple: consumer demand for broadband services is high, and the rush to meet that demand exists because of the ability of a wide variety of competitors to offer service to consumers. This is the hallmark of the ~~Consider next the vast success of the pro-competitive policies of the Telecommunications Act of 1996 (the “Act”)~~1996 Act. ~~The Act help usher in the broadband era in which we now live.~~

Additionally, broadband is being deployed in rural areas that are not served by the BOCs. The National Telephone Cooperative Association, the organization composed of the nation’s true rural telephone companies, recently reported that 60% of rural customers can order a basic broadband service, though only 3-4% choose to do so.[7] The NTCA study proves again that there is no crisis in the deployment of broadband. Clearly, the services are available. And at least in these areas, customers are just not yet convinced that the value proposition is worth it.

Once competition was introduced into the local telecommunications market, broadband deployment increased significantly, including deployment for the first time by the incumbent telephone companies. But the telephone companies did not deploy DSL services until competitors began to do so; indeed, Covad was one of the first companies in ~~America~~ the country toof offer DSL on a commercial basis. In fact, ~~we believe that~~ the existence of wireline competitors like Covad has been a key factor in driving broadband deployment across the entire industry. ~~In support of that belief we offer t~~The following DSL deployment statistics strongly support that theory:

Carrier	Year-end 1998	Year-end 1999	Year-end 2000	3Q 2001
Verizon	N/A	N/A	540,000	975,000
Bell Atlantic		30,000	N/A
GTE		57,000	N/A
Qwest	N/A	N/A	255,000	391,000
USWest		110,000	N/A
SBC		169,000	767,000	1.2M
BellSouth		20,000	215,000	463,000
Covad		57,000	274,000	346,000
Northpoint		23,500	110,000
Rhythms		12,500	67,000
Other CLECs		12,000	56,918
Yearly Total	Roughly 38,000	491,000	2.3 Million	3.4 Million

Compiled using analyst estimates and industry press releases

The incumbent telephone companies will likely argue in this proceeding that there was no consumer demand for broadband services prior to 1996 because the commercial use of the Internet had not yet created such demand. This chicken and egg argument is difficult to resolve, but the fundamental economic motivator of the telephone companies is not. Prior to the deployment of DSL, businesses seeking broadband services had one choice – T-1 services from the phone company. Cable companies do not generally reach businesses, and even where they do, the shared bandwidth nature of cable modem services is inadequate in both speed and security to address business-class service needs. Telephone company T-1 services, priced in the pre-1996 market at upwards of a thousand dollars a month, were in heavy demand because they were the only option for businesses. These businesses were not surfing the Internet – they relied on T-1 services for their data needs irrespective of the development of the public Internet. The advent of competition, and the deployment by Covad of business-class DSL services costing a fraction of telephone company T-1 prices, offered businesses higher-speed services at lower prices. Despite the invention of DSL technology in the 1980s, telephone companies did not deploy DSL services until competitors began to eat away at the lucrative T-1 revenue.

The significance of this history for the instant proceeding is the risk of return to the pre-1996 broadband marketplace. The telephone companies argue before regulators and legislators that they have no incentive to deploy new broadband services because unbundling obligations chill any investment incentive they would otherwise have. To uncover the facial invalidity of that argument, NTIA need only look to the pre-1996 broadband deployment of those same companies. With DSL technology available to deploy, and business demand for broadband data services high, did the telephone companies deploy DSL, a lower price, higher-bandwidth service than T-1 services? No. Despite the lack of investment disincentives, the telephone companies did not deploy DSL, because they had no competitive pressure to do so, and thus did not wish to voluntarily reduce their monopoly profits. Only when Covad and others began eroding that lucrative T-1 profit stream by offering consumers DSL services at lower prices did the telephone companies themselves begin deploying DSL. Today, demand is high, and competitors are meeting that demand with lower-priced, innovative services. The telephone companies are claiming that their unbundling obligations are deterring their willingness to address that demand, but the recent explosion in BOC DSL deployment tells a different story. Incentive comes from meeting a market demand – in this case, the demand for broadband services.

~~While promoting competition between service delivery platforms is important, Covad clearly demonstrates the utility in promoting competition over the public telephone network.~~ The Administration should not promote or adopt policies that focus solely on inter-modal competition. In particular, adopting policies that focus on competition between cable companies and telephone companies will not spur broadband deployment. Consider the attached chart.[8] In 1996 and 1997, Time Warner Cable, Adelphia, MediaOne, and Cablevision all rolled out broadband in Bell Atlantic’s (now Verizon) service territory. Did the telephone company respond to this competition by deploying its own broadband? No. In fact, Bell Atlantic did not even announce the availability of DSL until mid-1998. In the meantime, CLEC after CLEC began turning up service in the Northeast. And when Bell Atlantic finally deployed DSL, it initially focused on Washington, D.C., a market where CLECs also operated.

Clearly, the advent of competition from cable is not enough of an incentive for the phone company to deploy. It is only competition from DSL providers, offering services similar to the BOCs that compete directly with the BOCs, that provide enough incentive for the BOCs to deploy. While competition between service platforms is obviously important, it is not enough to get the job done. The fundamental question before the Administration is this: more competitors, or fewer competitors? Which provides more benefits to the American people seeking broadband services? Covad submits that the answer is clear: more competitors means more innovation, better service, and lower prices for consumers. Fewer competitors means less innovation, poorer service, and higher prices. The Administration should remember the lessons learned from the duopoly days of wireless cellular service, where prices remained high, innovation low, and service poor while the duopoly remained in place. When regulators took steps to further open the wireless market to competition beyond merely two players – innovation exploded, prices plummeted, and wireless subscribership exploded. Those positive developments benefited consumers only after the wireless spectrum was opened to a wide variety of new entrants. The same is true of wireline broadband services. The variety of innovative broadband services priced at market rates is a result of the wide variety of providers that offer service to consumers. The Administration should be wary of BOC claims that a broadband duopoly – cable modem and BOC providers dividing up the market alone – is the model that will best serve consumers. Like the wireless experiment, a duopoly in the broadband marketplace will stifle innovation and harm consumers.

Question 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?

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

3. To what extent are the returns on ILECs' investments in new infrastructure uncertain? Is the uncertainty of gaining an adequate return on each infrastructure improvement (attributable in part to other firms' ability to use those facilities to offer competing services) significant enough to deter investment?

4. What are the principal strengths and weaknesses of the FCC's total element long run incremental cost (TELRIC) methodology? What changes could be made to render TELRIC an effective deterrent to the exercise of market power and conducive to efficient infrastructure investment? Would it be possible to construct an alternative methodology that would not depend on cost information controlled by regulated firms?

Covad does not believe – and finds little evidence to support – the notion that the unbundling and interconnection requirements of the Telecommunications Act are a disincentive for the ILECs to deploy new facilities. ~~As we all know, the~~The statute requires competitors to pay rates that equal the ILEC’s “cost” plus a “reasonable profit” for accessing the public telephone network.[9] Thus, the ILECs are ensured of recovering their investment, plus a “reasonable profit.” ~~The problem, to the extent one exists, can therefore not be one of interconnection and unbundling.~~The basic BOC argument is that their incentive to deploy broadband services disappears when such network investment must be (1) shared with competitors (2) at a price that does not ensure a reasonable return based on the investment risk of deploying new services.

First, the BOCs argue that they lose investment incentive if they must share “new” facilities with competitors. The telephone companies appear to concede the need to unbundle legacy network facilities –i.e. those in the ground on February 8, 1996, when the Telecommunications Act became law – but they argue that any new network facilities deployed after such date should not be subject to unbundling.

At a more basic level, the BOC argument that new facilities should not be subject to unbundling raises an obvious question: did Congress intend, in passing the 1996 Act, to subject only legacy facilities to unbundling, and exempt any new construction from such rules? The answer is clearly no. There is nothing in the language of the 1996 Act to support such an argument. Congress did not limit unbundling to only what was in the ground on the date of enactment, and the 1996 Act and its legislative history are devoid of such language. Indeed, the best evidence of that fact is the legislative pursuit by the BOCs of changes to the Act to support the exemption of new facilities from unbundling. Had Congress already done so, the BOCs would not bother utilizing their resources in Washington in pursuit of an unnecessary legislative fix.

If the BOCs were truly concerned simply about the price they were able to recover from requesting carriers, that issue could be easily addressed by the BOCs in the existing statutory environment. Section 252 of the Act requires state commission to conduct pricing proceedings to determine the price that the telephone companies may charge for each unbundled network element. Each state is required to determine the “cost” of a particular facility, and also required to apply the TELRIC methodology when seeking that cost. Covad’s position has routinely been that the cost the ILEC proves to the state should be the cost the ILEC is allowed to charge. T

Comments of Covad Communications Company

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