Chairman Walden, Ranking Member Eshoo, Chairman Upton, Chairman Waxman, Chairman Barton, distinguished members of the committee, thank you for inviting me to testify today on behalf of my company, AT&T.  I recognize it is unusual to be asked to testify on a resolution on which we’ve not taken a position.  However, as I’m sure all of you know, we have been involved for years in the issue that underlies H.J. Res. 37, and that is the protracted dispute over net neutrality regulation by the FCC.

Let me first stress that AT&T has long supported the “broadband principles” laid out by the FCC six years ago.  We support an open Internet, and have promised to abide by that concept.  But like many issues that start from a shared belief, this one quickly devolved into a long and contentious debate over specifics:  whether the FCC should be able to enforce the broadband principles; whether a broad set of rules was needed; what legal authority the FCC has to put any such rules in place.  And all of this despite any real evidence of a problem.

As in most regulatory debates, this one has not lacked for radical voices.  Many sought heavy-handed government regulation and control of free markets… some for commercial advantage, others to advance their own ideology.   Since this debate began back in 2005, AT&T has consistently opposed any FCC regulation of Internet services or facilities.  This is still our strong preference today.  We feel the antitrust laws, the Federal Trade Act, and the discipline of highly competitive markets are more than adequate to police any potential abuses. 

Nonetheless, the pressure for Internet regulation continued.  You’ve all heard the saying that there is nothing so powerful as an idea whose time has come.  Unfortunately, this is sometimes also true of a bad idea.  And the versions of net neutrality put forth by our opponents were in many cases truly bad, and radical, ideas.

In October of 2009, some of these bad ideas found their way into a proposed net neutrality rule at the FCC.  AT&T, and the entire industry, strongly opposed this proposal.  It created a high degree of market concern, and needless to say a very bad climate for investment.  Unfortunately, in the spring of 2010, the situation went from bad to worse.  Following a decision by the DC Circuit that questioned the FCC’s legal authority to enforce its broadband principles, the Commission reacted by proposing to subject all broadband facilities to common carriage regulation under Title II of the Communications Act.  This proposal was both extreme and without foundation in law, and we fought it vigorously.   Again, this even more radical proposal upset the financial markets.

By the summer of last year, and after hearing from a bipartisan majority of House and Senate members, Chairman Genachowski, to his credit, began seeking a different approach.  Discussions began between the opposing sides.  AT&T participated because, quite frankly, we felt the issue was on a dangerous path that could end very badly for our company and industry.  This process was long, hard, contentious.  It led ultimately to discussions last Fall under the auspices of Chairman Waxman and a compromise with which, like most compromises, no one was entirely happy, but most participants felt to be fair.  However, legislation proved impossible in that time frame, and the FCC made clear its intentions to move forward with a vote on net neutrality regulations by year end.

In this situation, my company faced a difficult decision given that the only proposals currently before the FCC were either bad, or worse.   With others in the industry, we decided we’d be willing to accept a rule modeled on the compromise reached in the Waxman process, but were unwilling to support anything that went beyond that.  Chairman Genachowski, I might add, was under tremendous pressure from others, including voices on the Commission, to impose Title II regulation.  Instead, he and his staff worked with the industry in good faith, and with the various stakeholders, to craft a compromise rule that tried to balance major differences while avoiding more extreme proposals.

I would be the first to stress this is not a perfect solution.   Our preference has always been that the FCC should not regulate in the Internet space.   But it was also clear to us that a majority of the FCC was determined to move forward in December, and that we would not be representing our shareholders well if we let the perfect be the enemy of the good.   We faced opponents pressing for more extreme regulations, and knew that, absent a fair middle ground, a good bit of harm might be done to our industry and to needed investment.

Chairman Genachowski resisted those pressures and acted in good faith to find that fair middle ground.  The rule is consistent with AT&T’s current Open Internet policies, and would not require us to change any of our business practices or plans assuming it is applied in a reasonable, narrowly tailored way.  And as our Chairman has said, it provides a path for continued investment by removing much of the uncertainty this issue has caused.  It was a factor, along with recent tax law changes, in AT&T’s decision to accelerate the investment in the buildout of our LTE wireless network.  In short, we believe the result, given the alternatives before the Commission, is both fair and will help maintain our company’s ability to invest.

We’ll start with what everyone wants to know… moderator Cecilia Kang of The Washington Post asking Verizon’s Tom Tauke whether it will appeal the FCC’s Order.  The clip also includes Tauke musing on the openness rules applied to its 700 MHz spectrum.

Here’s FCC Chief of Staff Eddie Lazurus and Googles’s Rick Whitt on the FCC’s rules pertaining to mobile broadband.

And here we get the Hill perspective on the FCC’s rules from Neil Fried, Senior Telecom Counsel to the House Energy and Commerce Committee, and Roger Sherman, Chief Counsel to the House Energy and Commerce Committee.

And let’s not forget our very own Jim Cicconi, expounding on the nexus of rules, investment and innovations on the show floor.

Finally, here’s a snippet of every panelist, in yes/no format, on whether they support the FCC’s Order.

We appreciate the views expressed publicly by Commissioners McDowell and Baker.  Theirs is, we feel, a position supported by the factual record in front of the Commission, and by law.  It would also be our preference, especially given the utter absence of any evidence that abuses are occurring in the Internet market, let alone any of the gravity to justify government intervention.

At the same time, we recognize the determination of the Chairman to move forward with a rulemaking.  In this circumstance, which is not ideal, our overarching concern is to bring market certainty so that investment and job creation can go forward, while ensuring that we can still meet the expectations of our customers.  Though a final view must await a careful reading of the FCC’s order, we believe the Chairman’s compromise can provide this certainty while taking steps to preserve flexibility for investment and innovation. 

In particular, we would like to commend Chairman Genachowski and his staff for seeking a fair middle ground in this contentious debate.  As we have seen in many issues, there are always radical voices urging heavy-handed government regulation and control of free markets.  Such voices have not been absent from the net neutrality debate despite their repudiation by the American public.

Too often, well-funded ideologues have used intimidation, vilification, and fear-mongering to advance their goal that government control the Internet and other forms of communication without regard for their impact on the jobs and livelihoods of millions already challenged by a difficult economy.  The Commission’s apparent rejection of such unfeeling dogma is an added reason to be heartened by today’s FCC vote.

Level 3’s Shifting Positions on Peering -

As a Backbone Provider in 2005, Level 3 Said:

“There are a number of factors that determine whether a peering relationship is mutually beneficial. For example, Cogent was sending far more traffic to the Level 3 network than Level 3 was sending to Cogent’s network. It is important to keep in mind that traffic received by Level 3 in a peering relationship must be moved across Level 3′s network at considerable expense. Simply put, this means that, without paying, Cogent was using far more of Level 3′s network, far more of the time, than the reverse. Following our review, we decided that it was unfair for us to be subsidizing Cogent’s business.” Level 3 Press Release, Oct. 7, 2005

As a Content Delivery Network Operator in 2010, Level 3 Said:

“It is regrettable that Comcast has sought to portray this simply as a commercial disagreement or a peering dispute. They miss the point and are attempting to distract from the fundamental issue….The fundamental issue is not whether Comcast sends more traffic to Level 3 or whether Level 3 sends more traffic to Comcast. Both Level 3 and Comcast are responding to the requests of Comcast’s subscribers, who want to be free to see and use the full suite of content and applications that are available on the Internet today and in the future. Level 3 wants to assure that freedom is preserved.” Level 3 Press Release, November 29, 2010

Despite all the spin from Level 3 and political organizations like “Free Press,” and at the risk of contradicting one of my old Spinal Tap heroes Nigel Tufnel, I have to conclude that it’s not, in fact, louder just because it “goes to eleven”…this is just a peering dispute no matter how loudly Level 3 and Free Press shout “net neutrality violation.”

In 2005, Level 3 created quite a stir in the Internet infrastructure community when it unilaterally “de-peered” Cogent Communications (i.e., disconnected Cogent from significant parts of the Internet), regrettably without informing any of Level 3’s or Cogent’s customers.

In the interests of understanding this issue (and why it is a classic peering dispute and not a net neutrality issue), let’s spend a minute on peering.  Level 3 and Cogent had a Settlement-Free Peering arrangement that Level 3 felt Cogent was violating. Those types of agreements are generally based on a set of criteria that may include provisions like each party agreeing to maintain a network that is roughly equivalent in size and scope (a party may require a certain number international and/or domestic interconnection points), a commitment to interconnect at a specified bandwidth (AT&T requires OC192), and a commitment to exchange roughly the same volume of traffic (AT&T’s current settlement-free peering ratio is 2:1). There may be other criteria, but those are the big hitters. (I apologize in advance to all the peering geeks out there for the 10,000 foot level characterization that lacks the technical minutiae that you folks adore).

The basic concept behind those requirements is simply that the relationship has to be mutually beneficial to both parties, since no money is exchanging hands.  Companies that do not meet the settlement free peering criteria will generally enter into an agreement for some form of paid peering or transiting arrangement.  AT AT&T, we have a relatively small number of providers with whom we have settlement-free arrangements but many more agreements that are for some form of paid peering/transiting.

Back in 2005, Level 3 explained its actions with Cogent by arguing that Cogent was utilizing “far more of Level 3′s network, far more of the time.” Because Cogent was delivering far more traffic to Level 3 than it was receiving from Level 3, Level 3 asserted that settlement free peering was not appropriate – the arrangement was not mutually beneficial and Level 3 was therefore being asked to “subsidize” Cogent’s business. Thus, Level 3 wanted Cogent to enter into a paid arrangement.  And despite the fact that Level 3, in its own peering policy, continues to adhere to the concept of commercial negotiation of mutually beneficial agreements (their current policy reads: “Like any commercially negotiated arrangement, Level 3 believes such arrangements are appropriate when both parties equally benefit from the relationship.”), Level 3 has apparently changed its tune on the importance of balance in exchanging traffic (as did Cogent in the other direction when it de-peered Limelight in 2007 – are you keeping track of all this?).

Comcast asserts that Level 3 has stated its volumes will double in the coming months and its traffic balance ratios will increase from +2:1 to 5:1, similar to Cogent’s increasing traffic imbalance with Level 3 in 2005.  And Comcast has responded by telling Level 3 that it does not qualify for the existing terms of their peering arrangement, just like Level 3 said to Cogent 5 years ago.  So why is the imbalance suddenly increasing?  Earlier this month Level 3 won some of NetFlix’s streaming business which may have something to do with the growing traffic imbalance.  I am confident that the CDN providers Level 3 “won” this business from had been paying Comcast to deliver this same content to Comcast’s customers.

But whatever the reason, balance (or imbalance) in a peering relationship is important for the very same reason Level 3 claimed five years ago. When traffic flows to a broadband provider increase, the provider has to augment its infrastructure and build out more bandwidth to carry that traffic to its customers.  An arrangement where one provider sends far more traffic to another provider than it receives, without some additional compensation, is simply not mutually or “equally” beneficial – instead it’s a subsidy just as Level 3 described it five years ago.

We all know that distributing content costs real money.  In the brick and mortar world, GigaOm estimates that Netflix’s current postal distribution cost exceeds $700 million annually (not an insignificant number for $2.5B revenue business) – a cost that will be avoided (although different other costs will be incurred) if it abandons the snail mail system.  However, there is a significant and growing cost to deliver that high-bandwidth content over broadband networks to consumers too. Ultimately, someone is going to have pay for those costs.

And while Level 3 and perhaps content providers might prefer a model whereby all of Comcast’s broadband subscribers collectively pay for that cost in the form of higher broadband Internet access rates (irrespective of whether they subscribe to Netflix or some other high-bandwidth content service), that model is not necessarily consumer friendly.  If Comcast prevails in this “negotiation” with Level 3 (and apparently now the  NetRoots community), some of those infrastructure costs will be passed onto Level 3 and thus NetFlix who will presumably incorporate those costs into subscription rates for the consumers who actually use its service, just as it does with the +$700M postal distribution costs it incurs today.  Isn’t that a more rational way to approach this?  Seems like common sense to me.

But irrespective of how this dispute ultimately gets resolved, it is decidedly NOT a net neutrality issue.  Comcast simply wants to be compensated for the additional volume of traffic that Level 3 is delivering to Comcast, which Comcast has to deliver to its customers.  Comcast doesn’t care whether that traffic is video or music or email or web pages.  So, this really has nothing at all to do with net neutrality despite the fact that Level 3 and Free Press would like to raise the volume level to eleven.

“The prospect of net neutrality regulation has lingered as a very real threat to industry investment and jobs for several years.  Obviously, AT&T’s strong preference would be for the FCC to refrain from any regulation in the Internet space.   We feel the industry’s track record, the utter absence of any specific ongoing problem, and the state of the economy all argue for regulatory restraint.  We also believe, based on jurisdictional concerns, that the issue should rightly be deferred to the Congress, a view also expressed by a bipartisan majority of that body.  Nonetheless, we recognize that the FCC has decided to move ahead.

“We understand that the FCC Chairman has prepared a compromise proposal aimed at bridging the differences that have long polarized this debate.  Based on our understandings, this measure would avoid onerous Title II regulation; would be narrowly drawn along the lines of a compromise we have endorsed previously; would reject limits on our ability to properly manage our network and efficiently utilize our wireless spectrum; would recognize the capabilities and limitations of different broadband technologies; would ensure specialized services are protected against intrusive regulation; and would provide for a case-by-case resolution of complaints that also encourages non-governmental dispute settlement.

“While any final statement of position by AT&T must await a careful reading of the actual order and rules when issued, we are pleased that the FCC appears to be embracing a compromise solution that is sensitive to the dynamics of investment in a difficult economy and appears to avoid over-regulation.  We are also mindful of, and grateful for, the impact Congressional views have had in this process.  Such an approach would reduce regulatory uncertainty, and should encourage investment and innovation in next generation broadband services and technologies.  In that regard, we remain committed to working with the FCC to bring the benefits of broadband to all Americans.”

She stressed the importance of avoiding regulation that might deter investment and efficient use of available resources.  She cited the need for investment to avoid bottlenecks and allow for the development of new bandwidth-hungry services and applications.  To deter that investment through unnecessary regulation “would be cutting off our noses to spite our face.”

In addition, Vice President Kroes recognized that effective traffic management is essential – not only to optimize the “best effort” services prevalent on the Internet today, but to allow for the development of the type of specialized services that will enhance the value of the Internet in the 21^st century.

She further recognized the power of the marketplace to police provider conduct, encouraging consumers to leave mobile providers who limit their choices. 

Vice President Kroes also noted differences between the EU and U.S. marketplaces.  Although some have claimed that there is more unbundling-based competition in Europe, thus lessening the need for net neutrality regulations, they tend to ignore the substantial benefits of facilities-based competition in the U.S., which has led to wider deployment of fiber-based networks as well as higher speeds, greater usage and lower prices for consumers.

In the end, she recommended that Europe’s net neutrality efforts be aimed at three relatively straight-forward goals:  effective competition; transparency so consumers are fully informed; and ease of switching providers so consumers can in fact vote with their euros.   She warned that should the Commission encounter significant problems in the future, she would not hesitate to support more drastic intervention.  But such action at this time was not necessary, particularly given her desire to foster investment and innovation.

By balancing the many competing voices on net neutrality, Vice President Kroes found a way past the rhetoric to an effective middle ground, as she telegraphed in a speech back in April.  Her recommendations embody her belief that any content or application that is legal and which does not cause harm should be accessible.  But she drew the line far short of “must carry” obligations that could deter investment and stifle new applications and services.

Virtue lies in the middle ground.  With this recommendation, Ms. Kroes and key Members of the European Parliament are effectively leading the European institutions beyond the extremes of the net neutrality debate to an agenda focused on the great infrastructure challenge of deploying broadband networks for the 21^st century.  It is time that we join them.

“These signaling problems not only caused network overload problems that affected all [local] broadband users; it also ended up forcing [a reengineering of the radio architecture] to address this never-before-seen signaling issue.”

According to the filing, this one application caused an increase in data use of as much as 1,200 percent on a single device.

To be clear, I am not casting stones.  We have been on the frontlines of the mobile broadband data and app revolution, working and investing furiously to keep pace with the exploding demand for wireless data services.  But this experience shows once again how the advocated “all apps are created equal” regulatory straightjacket, which doesn’t even make sense for the wired web, is spectacularly ill-suited for wireless networks.

Even pro-Net neutrality advocate Robert Cringley has acknowledged that a handful of Slingbox streams are enough to overtake the capacity of a cell tower.   

Given the unique ways in which wireless networks are being taxed by new applications, it is absolutely critical that the Commission not apply net neutrality requirements to any spectrum other than the open access restrictions it has placed on the 700 MHz upper C-Block.  When the Commission imposed broad open access requirements on C-Block licensees, it did so with the explicit understanding that such requirements could have adverse consequences.  That is why the Commission wisely decided that it would only impose these untested restrictions on one spectrum block and in a way that would allow everyone – carriers, regulators, Congress and investors alike – to see how the restrictions would actually work in real time on a real network.  It is also why participants at auction placed a much lower value on the restricted C-Block licenses than they did on the unrestricted licenses elsewhere in the band.

From our perspective, neutrality rules are based on an idealized version of the Internet – an online experience in which data traffic never spikes, malware and DOS attacks are nonexistent, and consumers all use about the same amount of data in the same way at the same place every day.  Others disagree.  So be it: The FCC has rules already in place to test the neutrality hypothesis with licensees that have embraced the experiment and assumed the added risks and possible costs of operating with these restrictions in exchange for a very steep discount on the price of the spectrum.

In the meantime, mobile data use in America continues to surge.  And as CTIA reported this month, even amid the country’s difficult economic picture, wireless data demand has spurred mobile carriers to expand their already significant CapEx commitments by 8 percent year over year.  And these investments mean more jobs.

Everyone agrees that wireless users, like their wired brethren, deserve choice and freedom online. They also deserve the kind of protections that Chairman Henry Waxman proposed earlier this fall, which were endorsed not only by us but also unions and consumer groups.  But we also know that one rogue app can cause major disruptions in ways not contemplated or considered by wireless net neutrality rules, and  demonstrates why all in the wireless ecosystem, including applications, have a responsibility to use resources efficiently.  The C-Block experiment will be instrumental in matching the openness theories being espoused today with actual network realities.

While many (ok, just a few) folks are focused on the fate of “House,” the medical TV drama on Fox, we here in Tech/Telecom Policy Land are watching a sea change in what the Fox/Cablevision drama is telling us about the net neutrality debate.

Earlier this year, we filed comments in the FCC’s Open Internet proceeding, explaining, at great length, exactly why  the “terminating monopoly” theory of net neutrality regulation (one of the policy justifications used for imposing rules on ISPs), just didn’t make sense in the Internet ecosystem.

Well, in a semi-controlled experiment still underway, Fox and Cablevision are doing a pretty good job proving that point.  Some would even say the (ISP) King is dead. Long live the (Content) King.  Fox and Cablevision are embroiled in a dispute over retransmission consent that has resulted in Cablevision customers losing access to Fox channels. Over the weekend, the dispute briefly escalated to the point where Fox was allegedly blocking Cablevision’s Internet customers from accessing Fox content on Hulu and Fox.com. 

Several prominent supporters of net neutrality regulation, including Representative Ed Markey and Public Knowledge rushed in to complain that such action was inconsistent with the FCC’s Open Internet principle that protects the right of users to access the lawful content of their choice – an irony given that many of those same folks insisted that the FCC’s net neutrality proposals should focus solely on ISPs not content providers like FOX.  By way of example, see this comment from Public Knowledge, remarking that the FCC’s Open Internet draft rules only apply to ISPS:  “The proposed Open Internet rules make no attempt to regulate broadband access providers in their role as content providers and editors. In fact, the Open Internet rules make no attempt to regulate anyone in their roles as content providers or editors.”

Parenthetically, I sincerely hope everyone’s enjoying irony #2 of this drama – Cablevision being denied access to programming, while it simultaneously refused to provide Verizon with access to a NY gubernatorial debate…IN THE MIDDLE of this dispute with Fox. While Cablevision has never shied away from taking an “aggressive” view of its rights to deny programming to its competitors, you gotta admire the chutzpah in this case.

So, how does Fox’s temporary blocking of Internet content to Cablevision customers show that there’s no terminating monopoly problem on the Internet?  Simple, here’s how.  As any telecom lawyer/policy wonk will tell you, the so-called terminating monopoly on the PSTN was created by the confluence of two factors that arose from common carrier regulation: the ability of local phone companies to file tariffs requiring long distance companies to pay them access charges and the INABILITY of long distance companies to block calls to those local phone companies.

On the unregulated Internet, we’ve got the opposite situation.  Cablevision (the local phone company in this analogy) has no tariffing power, and Fox and presumably other content providers (the long distance companies in this analogy) appear ready to block the transmission of content when they think it’s in their business interest to do so.  By the way, this same type of thing occurs every day when ESPN blocks certain premium content for Internet users whose ISPs don’t pay ESPN for the privilege of accessing that content.  Far from being the victims of a terminating monopoly as some pro-regulation advocates predicted, these content providers clearly see themselves as possessors of an “originating monopoly.”

The demise of the “terminating monopoly” school of thought has profound implications for the debate over net neutrality.  If content providers can collect “tolls” on the Internet and ISPs don’t have the unilateral power to force third parties to pay to “use their pipes,” then what is the point of the net neutrality debate anyway?

Additionally, many people are questioning whether the “Incident at Hulu Hill” represents a net neutrality violation or not?  We don’t know the answer for certain, but the question reminded us of a rather prescient statement by Commissioner Michael Copps that might just hint at the FCC’s ultimate answer:  “In particular, we need to recognize that the gatekeepers of today may not be the gatekeepers of tomorrow. Our job is not so much to mediate among giants as it is to protect consumers.”

Harold’s basic point was that the FCC might either permit or prohibit particular instances of “paid prioritization” based at least in part on decisions the FCC has made in the past. I agree completely on this point. Contrary to the title of Harold’s blog, I don’t think anyone at AT&T has said that Title II would “require” the FCC to permit any and all practices that include both payment and prioritization.  But, if someone has, then he or she should go back to common carrier school.

What I and others have said is that under Title II the FCC could not a priori (for some reason lawyers like Latin) ban all practices that may combine payment and prioritization, since in the past they have allowed some practices that do so. Under Title II, carriers would be free in the first instance to offer such services and concerned parties would be free to challenge them. At which point, the process Harold describes would kick in and the FCC would have to decide whether the service in question is “unreasonable,” or “unjustly and unreasonably discriminatory,” yadda, yadda, yadda (or blah, blah, blah, as Harold prefers).

Over time, a body of decisions might develop under which parties would understand roughly where the line is between “good” and “bad” paid prioritization. AT&T has long supported this type of iterative decision-making irrespective of whether it’s under Title I, Title II, or Title XVII.

Despite all the ink that has recently been spilled over paid prioritization, I don’t think there’s nearly so much disagreement as there might appear to be. If anyone thinks that prioritization done (for money) at the behest of ISP customers to enable them to get more satisfaction from real-time applications – like interactive gaming, VoIP, or video conferencing – is unacceptable, please raise your hand. If anyone thinks it would be acceptable for an ISP to try to extort payments from content providers by threatening to artificially slow their traffic, please raise your hand. Okay, all of you with your hands up please leave while the rest of us work on what should be an emerging consensus.

The presentations reviewed some of the history of differentiation and prioritization, both in the context of the Internet and elsewhere. It was an incredibly educational experience and, if you missed it, I recommend that you pop some corn and watch the whole thing here.

I’d like to draw your attention in particular to the part of Scott Jordan’s presentation when he makes the point that our policy focus should be on how to make QoS available on the Internet to the applications that need it. Needless to say, this is a far cry from the view of some that we should preserve the “best-efforts” Internet in regulatory formaldehyde.

I thought Rob Atkinson closed the panel on just the right note when he proposed a new slogan for policy wonks – “I want my QoS.”