[Senate Hearing 113-679] [From the U.S. Government Publishing Office] S. Hrg. 113-679 AN EXAMINATION OF COMPETITION IN THE WIRELESS MARKET ======================================================================= HEARING before the SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND CONSUMER RIGHTS of the COMMITTEE ON THE JUDICIARY UNITED STATES SENATE ONE HUNDRED THIRTEENTH CONGRESS FIRST SESSION __________ WEDNESDAY, FEBRUARY 26, 2014 __________ Serial No. J-113-51 __________ Printed for the use of the Committee on the Judiciary [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] U.S. GOVERNMENT PUBLISHING OFFICE 95-280 PDF WASHINGTON : 2015 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Publishing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON THE JUDICIARY PATRICK J. LEAHY, Vermont, Chairman DIANNE FEINSTEIN, California CHUCK GRASSLEY, Iowa, Ranking CHUCK SCHUMER, New York Member DICK DURBIN, Illinois ORRIN G. HATCH, Utah SHELDON WHITEHOUSE, Rhode Island JEFF SESSIONS, Alabama AMY KLOBUCHAR, Minnesota LINDSEY GRAHAM, South Carolina AL FRANKEN, Minnesota JOHN CORNYN, Texas CHRISTOPHER A. COONS, Delaware MICHAEL S. LEE, Utah RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas MAZIE HIRONO, Hawaii JEFF FLAKE, Arizona Caroline Holland, Chief Counsel and Staff Director Bryson Bachman, Republican Chief of Staff ------ Subcommittee on Antitrust, Competition Policy and Consumer Rights AMY KLOBUCHAR, Minnesota, Chairman CHUCK SCHUMER, New York MICHAEL S. LEE, Utah, Ranking AL FRANKEN, Minnesota Member CHRISTOPHER A. COONS, Delaware LINDSEY GRAHAM, South Carolina RICHARD BLUMENTHAL, Connecticut CHUCK GRASSLEY, Iowa JEFF FLAKE, Arizona Craig Kalkut, Democratic Chief Counsel Boyd Matheson, Republican General Counsel C O N T E N T S ---------- STATEMENTS OF COMMITTEE MEMBERS Page Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota.. 1 Lee, Hon. Mike, a U.S. Senator from the State of Utah............ 3 Leahy, Patrick J., a U.S. Senator from the State of Vermont, prepared statement............................................. 40 WITNESSES Witness List..................................................... 39 Milch, Randal S., Executive Vice President and General Counsel, Verizon Communications Inc., New York, New York................ 6 prepared statement........................................... 42 Ham, Kathleen O'Brien, Vice President, Federal Regulatory Affairs, T-Mobile USA, Inc., Washington, DC.................... 8 prepared statement........................................... 50 Spalter, Jonathan, Chair, Mobile Future, Berkeley, California.... 10 prepared statement........................................... 65 Graham, Eric B., Senior Vice President, Strategic Relations, C Spire Wireless, Ridgeland, Mississippi......................... 11 prepared statement........................................... 83 Layton, Roslyn, Ph.D. Fellow, Internet Economics, Center for Communication, Media, and Information Studies, Aalborg University, Denmark............................................ 13 prepared statement........................................... 99 Wood, Matthew F., Policy Director, Free Press, Washington, DC.... 15 prepared statement........................................... 104 QUESTIONS Questions submitted by Senator Klobuchar for Randal Milch........ 116 Questions submitted by Senator Klobuchar for Kathleen Ham........ 117 Questions submitted by Senator Klobuchar for Jonathan Spalter.... 118 Questions submitted by Senator Klobuchar for Eric Graham......... 119 Questions submitted by Senator Klobuchar for Roslyn Layton....... 120 Questions submitted by Senator Klobuchar for Matthew Wood........ 121 Questions submitted by Senator Franken for Randal Milch.......... 122 Questions submitted by Senator Franken for Kathleen Ham.......... 123 Questions submitted by Senator Franken for Eric Graham........... 124 Questions submitted by Senator Franken for Matthew Wood.......... 125 ANSWERS Responses of Randal Milch to questions submitted by Senators Klobuchar and Franken.......................................... 126 Responses of Kathleen Ham to questions submitted by Senators Klobuchar and Franken.......................................... 130 Responses of Jonathan Spalter to questions submitted by Senator Klobuchar...................................................... 135 Responses of Eric Graham to questions submitted by Senators Klobuchar and Franken.......................................... 137 Responses of Roslyn Layton to questions submitted by Senator Klobuchar...................................................... 139 Responses of Matthew Wood to questions submitted by Senators Klobuchar and Franken.......................................... 142 AN EXAMINATION OF COMPETITION IN THE WIRELESS MARKET WEDNESDAY, FEBRUARY 26, 2014 U.S. Senate, Subcommittee on Antitrust, Competition Policy, and Consumer Rights, Committee on the Judiciary, Washington, DC. The Subcommittee met, pursuant to notice, at 10:04 a.m., in Room SD-226, Dirksen Senate Office Building, Hon. Amy Klobuchar, Chairman of the Subcommittee, presiding. Present: Senators Klobuchar, Lee, and Flake. OPENING STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM THE STATE OF MINNESOTA Chairman Klobuchar. All right. We are calling this hearing to order. Thank you, everyone, for coming today and for getting through the weather. We consider this minor weather in our two States. But it is good to see everyone here. And also someone told me Ben Affleck is testifying in another hearing, so we consider you guys our Ben Afflecks. Okay? Just remember that. Right, Mike? Exactly. Thank you for being witnesses. Thank you to everyone here. This hearing highlights an industry that impacts consumers across the country and will continue to change the way that we communicate for years to come. Mobile phones have revolutionized the way we talk to each other. Today more than 90 percent of adults--and I remember doing this a few years back, and it was not even that high. More than 90 percent of adults own a wireless phone, and that does not even count all the teenagers out there with cell phones, or in the case of my family, multiple cell phones when they lose their cell phone. And today, two in five U.S. homes have a mobile phone but no landline. Mobile devices are not just telephones anymore. In fact, young people today probably do not even remember when cell phones only made calls. People depend on their smartphones to conduct their everyday lives. Smartphones are the primary way for 34 percent of users to access the Internet, for everything from telehealth to education to Words with Friends. And they are consuming a voracious amount of data to the tune of 1.2 gigabytes per user per month last year. That is double the amount from 2012, and that number will only grow. That is why we need to make sure consumers are able to reap all of the benefits that come from robust competition: lower prices, high-quality service, innovative devices, and an abundance of choice. Antitrust has a role to play in this market. As Thurgood Marshall wrote for the Supreme Court, our antitrust laws and the competition that they promote are ``the Magna Carta of free enterprise.'' The competitive landscape in the wireless industry has gone through remarkable changes since the 1990s when I was in private practice focusing on communications law. Just 10 years ago, consumers had six national wireless carriers and a variety of regional carriers to choose from. As a result, aggressive competition led to declining prices and the rollout of new services and new devices. In 2005, the number of nationwide carriers went down to four when Cingular merged with AT&T and Sprint acquired Nextel. In 2007, the iPhone was unveiled and revolutionized the way people interact with their mobile phones. In 2011, AT&T and T- Mobile attempted to further consolidate the industry until the Justice Department stepped in and blocked the merger and the parties ultimately abandoned the merger. Recently, T-Mobile has re-emerged as the maverick it had been before the proposed AT&T merger with its ``Un-carrier'' emerging markets, which offers consumers free international data roaming, reimburses them for early termination fees, and eliminates long-term contracts. T-Mobile has also boosted its spectrum holdings by acquiring MetroPCS. Last year, Sprint was acquired by Japanese-based SoftBank, a transaction that was promoted as providing Sprint with capital and expertise needed to deploy its national LTE network. Sprint also took full control of Clearwire. AT&T is expected to close an acquisition later this year to acquire Leap Wireless. Verizon bought a large swath of spectrum from several cable companies and more recently sold a block of unused spectrum worth $3 billion to T-Mobile. And regional carriers like C Spire continue to expand and offer more and more consumers their competitive 4G LTE service. A lot has changed in the fast-moving industry, and yet some things remained relatively constant. AT&T and Verizon are still the dominant wireless providers, accounting for roughly 68 percent of all subscribers. But anyone that watched the Super Bowl knows from the ad campaigns going on that there has still been some vigorous competition, especially in recent months, which is why this hearing is so timely. So now is a good time to assess the future outlook for competition and consumers. We need to ask important questions. Are we seeing the kind of competition we would expect from a competitive market? Are we seeing price wars, competing offers to try to acquire each other's customers, and new and innovative services and choices that differentiate competitors? What barriers to competition remain, and what challenges do competitive carriers face? What should we be mindful of as we consider spectrum and other policies impacting competition or further consolidation in the wireless market, such as a potential Sprint/T-Mobile merger? Wireless carriers and their partners innovate and compete on a variety of levels, so we expect to see them trying to win over new customers on everything from Internet speeds to a variety of service plans and the latest handset features to cutting-edge applications, including safety and security features that will help stem the tide of mobile phone theft. As you know, I am particularly interested in this area, as we have seen an exponential increase in cell phone thefts across the country. One in three burglaries are now the result of cell phone stealing, and I have legislation on this. But the focus is to, of course, reduce these kinds of thefts by actually reducing the value of the phone to the thieves by allowing consumers with new technology to keep their own private information on the cloud but turn it off for the thief that steals their phone. When we think about competition and antitrust enforcement in this area, we need to acknowledge that the mobile world is quickly evolving. For example, just last week, Facebook bought the mobile phone instant messaging service WhatsApp for $19 billion. New ideas, products, and services are being unveiled this week at the Mobile World Conference in Barcelona, Spain. So you guys got the short end of the stick, huh? [Laughter.] But just because technology is moving at a swift pace, the antitrust laws are no less applicable. The wireless industry is a hotbed for new technology, and by ensuring a fully competitive market, we will foster innovation and ensure that consumers will be the ones to pick the winners and losers. So today we will hear from witnesses who will paint the current picture of competition in the wireless industry and inform us about what Congress should take into account when considering wireless policy and future mergers in the industry. Again, I thank the witnesses, and I turn it over to my Ranking Member here, Senator Lee. OPENING STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM THE STATE OF UTAH Senator Lee. The Dirksen Building really is a nice destination even when compared to Barcelona, but I will not say more than that. Mine is one of those homes where you can find both cell phones and a landline. I am still not sure why we have the landline. It is one of those things that we have been reluctant to part with. It seems irresponsible, almost, as a citizen not to have a landline, even though we never, ever use it. My wife refers to it as ``the line that people use to call us that we do not want to talk to.'' [Laughter.] A few years ago, my son, James, commented, when he could not find his phone, ``You know, someone really should invent a phone that is connected to the wall with a wire that cannot be removed so you cannot lose it.'' I told him, ``That has been used in the past, but no one wants it.'' Today's hearing focuses on competition in the wireless market, and our Subcommittee's hearings often address the competitive state of a particular industry or market, but in some ways today's hearing is unique because, as it is presently constituted, the wireless market is, in fact, very competitive. Indeed, looking back a decade or two, there are perhaps few industries in which the benefits of competition are more readily apparent and pronounced than in the present-day wireless market. Many of us attending or watching this hearing can remember a time when mobile phones were still something of a novelty, and perhaps all of us can remember the time when a cell phone was little more than that. It was just a phone. Today smartphones are ubiquitous, and they do so much more than allow us just to make phone calls. In fact, within a few years, a majority of Americans will access the Internet, primarily not through a computer but through a mobile device. These rapid developments are in large part the result of forces of competition. Consumers in the wireless market have benefited from competition not just in the form of low prices, but also in the form of high-quality service, which is the product of innovation and which leads to more innovation. Consumer demand has pushed carriers to offer better, faster service on better, faster devices. In the last 20 years alone, carriers have paid more than $50 billion for spectrum and have invested well over $300 billion in infrastructure. As the Department of Justice noted last year in its comments to the FCC regarding spectrum, ``Competitive forces have been a central driver of innovations that have enabled wireless carriers to expand capacity and improve service quality.'' The wireless market is, thus, in many ways a success story that illustrates what can happen when government stays its regulatory hand and allows the free market to respond productively to consumer demand. To again quote the Department of Justice, ``Competition generally represents the best method of ensuring that consumers receive low-price, high-quality products and services, greater choice among providers, and important innovation.'' Today we have got the opportunity to discuss the government policies that may best ensure that consumers and the wireless industry continue to enjoy the benefits of robust competition. As spectrum is the lifeblood of the wireless industry and a scarce resource administered by the government, some of our discussion will understandably center on that topic. With data use exploding each year within the United States, carriers are aggressively seeking spectrum to fulfill demand. Indeed, to the extent the wireless industry has consolidated, the need for spectrum may go a long way toward explaining that trend. Although the Federal Government has taken some steps to free up available spectrum for commercial use, I believe additional steps can and should be taken in this regard. Particularly where the government is holding low- frequency spectrum for non-military use, a careful evaluation of measures that may allow for some of that spectrum to be made available for commercial use may be extremely beneficial and may forestall additional attempts at consolidation. Some have expressed concern that a carrier may seek to accumulate spectrum for anticompetitive purposes. Although the foreclosure value of spectrum makes such an outcome theoretically possible, we must be careful to ground any antitrust analysis in the facts of specific transactions. Absent evidence that a carrier is hoarding spectrum or otherwise seeking spectrum for a purpose other than to serve its customers, it is at best premature to assume that a carrier's desire to purchase additional spectrum is itself anticompetitive. Particularly in light of the increasing demand for spectrum, it seems likely that all carriers will, for legitimate commercial purposes and very legitimate reasons that have everything to do with the desire to compete in a competitive marketplace, continue to seek additional spectrum. In that scenario, competitive forces and market valuation will best allocate spectrum to its most efficient and highest-value use. I have also heard concerns expressed regarding the competitive state of other aspects of the mobile device ecosystem, including the market for operating systems. For example, I have heard concerns expressed regarding the potential for a company with market power to leverage that power to limit competition in mobile services. I have likewise heard concerns expressed from small carriers regarding the availability of the latest and best mobile devices. These are important considerations as we take account of the competitive state of the wireless industry as a whole. Throughout our consideration of all these issues, we must keep our focus on protecting competition and not protecting competitors. By carefully evaluating the evidence and applying rigorous economic analysis, we can continue to ensure the best outcomes for consumers. I look forward to hearing from our witnesses today, and I thank them for coming. Chairman Klobuchar. Well, thank you, Senator Lee. I would now like to introduce our distinguished witnesses. Our first witness is Mr. Randal Milch. Mr. Milch is executive vice president and general counsel of Verizon. Previously he was associate general counsel at Bell Atlantic, which merged with GTE to form Verizon in 2000. Our second witness is Ms. Kathleen O'Brien Ham. Ms. Ham is vice president for federal regulatory affairs at T-Mobile. Before going to T-Mobile, Ms. Ham was at the FCC for 14 years and served in a number of top policy positions, including Deputy Chief of the Wireless Telecommunications Bureau. Next we will hear from Mr. Jonathan Spalter. Mr. Spalter is the chairman of Mobile Future. Prior to joining Mobile Future, he founded the independent investment research company Public Insight. Mr. Spalter also served as the Associate Director of the U.S. Information Agency during the Clinton administration. The next witness will be Mr. Eric Graham. Mr. Graham is senior vice president for strategic relations for C Spire Wireless. Prior to joining C Spire in 2007, he practiced law in Jackson, Mississippi, with a focus on public policy, consultation, and public utilities regulation. Then we will be hearing from Ms. Roslyn Layton. Ms. Layton studies Internet economics at the Center for Communication, Media, and Information Technologies at Aalborg University in Denmark. She has worked with many companies in the IT industry on digital marketing software, Web analytics, platforms, disruptive technologies, and Web development services. Our final witness will be Mr. Matthew Wood. Mr. Wood is the policy director of Free Press. Prior to joining Free Press, Mr. Wood worked at the public interest law firm Media Access Project and in the communications practice groups of two law firms in Washington, DC. Thank you all for appearing at our Subcommittee's hearing to testify. I now ask our witnesses to rise and raise their right hand as I administer the oath. Do you affirm that the testimony you are about to give before the Committee will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. Milch. I do. Ms. Ham. I do. Mr. Spalter. I do. Mr. Graham. I do. Ms. Layton. I do. Mr. Wood. I do. Chairman Klobuchar. Thank you. We will start with Mr. Randal Milch. STATEMENT OF RANDAL S. MILCH, EXECUTIVE VICE PRESIDENT & GENERAL COUNSEL, VERIZON COMMUNICATIONS INC., NEW YORK, NEW YORK Mr. Milch. Chairman Klobuchar, Ranking Member Lee, thank you for the opportunity to testify, and I would request that my written testimony be entered into the record. Chairman Klobuchar. It will be entered in the record. Mr. Milch. Thank you very much. U.S. consumers are benefiting from a fiercely competitive and deeply innovative wireless market. That is a key driver for our national economy and for maintaining America's competitive edge in the global economy. Normally I would not burden you with numbers, but the numbers here are impressive. First, on the competitive standpoint, the market is indisputably characterized by massive investment, falling prices, and deep rivalry. This is a competitive market by all of these measures. Capital investment is truly staggering. As Senator Lee noted, in 2013 America's wireless carriers invested more than $34 billion in their networks, and since 2001, it is $300 billion in capital investment in the United States, and that is not including the investment in spectrum that was made. Lately, this investment has centered on our 4G LTE networks across the board. This was a big bet that Verizon first made in 2008, announcing it was going to go to 4G LTE. And since that investment, all major carriers and regional carriers as well have started investing in 4G LTE, which has been a major transformation in the industry. Because of that kind of investment by all carriers, the United States has almost 300 million wireless broadband subscriptions, and that is more than double that of any other country in the world. And these broadband subscriptions can provide mobile broadband speeds that are comparable to wireline alternatives. This has been a bright spot in the economy. The wireless industry has gained almost 1.6 million new jobs from 2007 to 2011, and that is at the same time when, unfortunately, total U.S. private sector jobs fell by 5.3 million. Our industry generated almost $200 billion in economic activity during the same period, and the projection for continued investment is staggering as well. Over the next five years, it is estimated that there will be more than $1 trillion in additional investment in economic growth--I am sorry, in economic growth and will create almost 1.2 million new jobs. The results are a great deal of choice for consumers: nearly 200 facilities-based carriers in the United States, more than any nation in the world; more than 90 percent of U.S. consumers have a choice of three or more wireless carriers; there are over 300 different handsets available to U.S. consumers from a variety of manufacturers; and by 2017, 87 percent of connected device sales will be tablets and smartphones, and these are devices that did not exist even exist more than a handful of years ago. And they would not exist without mobile broadband networks. At the same time, prices are falling. From 2008 to 2012, as data usage skyrocketed, data prices plummeted 93 percent, dropping from 46 cents a megabyte to only three cents a megabyte. And from 2005 to January 2014, the wireless CPI, Consumer Price Index, fell 10 percent while the overall CPI for all items increased almost 19 percent. All this investment and choice has led to U.S. consumers using far more mobile services than their international counterparts. This is a well-known fact that we have some real experts on the panel who can probably be more evocative on this than I am. Let me turn, though, to the deep rivalry among the carriers. As Chairman Klobuchar noted, you look at the Super Bowl ads, you look at the ads in any newspaper, there is a huge amount of effort to attract new customers and attract customers away from other carriers. For instance, in nine months alone, from January to September 2013, telecom companies spent almost $7 billion in advertising. That is an 11-, almost 12-percent increase over the same period in 2012. And as we know, this is a period when other consumer segments' advertising spend was decreasing. The wireless market was increasing. There is a great deal of additional benefit beyond the economic benefit to the Nation from this effort. We believe, and we are trying to lead the way, in ensuring that mobile broadband helps answer questions and our deepest problems in the health care area by the use of distance medical usage and allowing the transmission securely of MRIs and X-rays. In education, in STEM, this is a great effort where Verizon and others are launching programs to ensure that mobile technology is embedded and utilized well in the classroom. There are a few issues that we should address. Privacy and security are very important as mobile devices become more and more embedded in our everyday lives. This is an area that we believe deserves the greatest attention from the carriers and from policymakers. And we believe it is an area where carriers will strive to differentiate from one another as part of the competitive process. Finally, spectrum, spectrum, spectrum--the lifeblood of our industry. We need to ensure both that there is a supply, continued supply of spectrum, as Senator Lee noted, from parts of the government where it is underutilized at the current time and coming up with an auction process and other processes of having that spectrum being made for commercial use, processes that are fair and neutral and encourage all carriers to invest. And, finally, a robust secondary market for spectrum is very important. Let me close simply by saying Verizon is honored every day to serve 100 million customers around the country, and we attempt to do justice to the investment that our shareholders have allowed us to make, the trust that our customers put into us every day, and to keep alive the innovative spark that is furthering the mobile industry. Thank you. [The prepared statement of Mr. Milch appears as a submission for the record.] Chairman Klobuchar. Thank you very much. Ms. O'Brien Ham. STATEMENT OF KATHLEEN O'BRIEN HAM, VICE PRESIDENT, FEDERAL REGULATORY AFFAIRS, T-MOBILE USA, INC., WASHINGTON, DC Ms. Ham. Thank you. Good morning, Chairwoman Klobuchar, Ranking Member Lee, and Members of the Subcommittee, and thank you for inviting me to testify on the subject of wireless competition. My name is Kathleen Ham, and I have been the vice president of federal regulatory affairs for T-Mobile since 2004. T-Mobile is headquartered in Bellevue, Washington, employs more than 38,000 Americans, and offers nationwide wireless voice and data services to individual, business, and government customers. We are the fourth largest wireless carrier in the U.S., serving approximately 47 million subscribers. Since the spring of 2013, T-Mobile has been transforming itself into a more competitive force in the wireless market-- the ``Un-carrier.'' We have implemented a series of initiatives to address perennial customer pain points, including eliminating the annual service contract, allowing more frequent handset upgrades, providing free unlimited international data and text roaming, and paying the early termination fees for consumers who switch from another national carrier to us. T-Mobile has been growing fast in comparison to the other wireless companies. A year ago, we had virtually no 4G LTE network. Today our LTE network covers over 200 million people and is still growing. We added more than 4.4 million new subscribers in 2013, including 1.6 million in the fourth quarter. That was our third consecutive quarter with more than a million net customer additions, representing a significant turnaround from a year earlier. Despite its popularity with consumers, T-Mobile faces a number of fundamental challenges that put at risk its ability to maintain its disruptive presence in the marketplace. Our subscriber base is still nowhere near that of AT&T or Verizon, and their great numbers give these carriers significant access to capital and economy-of-scale advantages. Our smaller scale yields lower profit margins, smaller cash flows, and greater challenges in funding capital expenditures and bold, disruptive innovations. By contrast, our larger competitors have substantial economy-of-scale advantages in such critical areas as equipment purchasing, handset rollout, business financing, the acquisition of backhaul and roaming services, and national brand advertising. The funding requirements needed for this business, exacerbated by the lack of scale relative to the big two, remain a major competitive challenge to T-Mobile going forward. As discussed in our written testimony, T-Mobile faces other challenges the U.S. policymakers can impact, including securing access to roaming at commercially reasonable rates to interconnection with the other major carriers as we move to an all-Internet protocol world and to backhaul from our cell sites, especially outside of major metropolitan areas. One extremely important issue for wireless carriers is low- band spectrum. The broadcast incentive auction represents a critical moment for the wireless industry that will influence the structure of the market for years to come. Like our wireless industry competitors, we believe that Congress and regulators should do all they can to encourage widespread broadcaster participation so that as much spectrum as possible can be released for wireless broadband services. In addition, there is a general consensus among mobile carriers that the FCC should adopt a band plan for the incentive auction that maximizes the amount of paired spectrum available for licensed wireless broadband services, and we have worked closely with our industry colleagues, including Verizon, in pursuing that goal. Finally, T-Mobile strongly believes that the FCC should adopt reasonable spectrum aggregation limits to ensure that the two dominant wireless carriers do not foreclose smaller competitors from acquiring low-band spectrum in the auction, as the Department of Justice has warned could happen. Spectrum below one gigahertz is especially critical. It offers superior building penetration and broader coverage than the higher spectrum T-Mobile currently uses. Reasonable spectrum aggregation limits have been applied in the United States and around the world. In fact, it was the FCC's decision to put reasonable limits on PCS spectrum concentration that led to the development of real competition and mobile services in the late 1990s. The mobile industry would look vastly different today if the FCC had not ensured a procompetitive distribution of spectrum in the PCS auctions. As the ``Un-carrier'' in the wireless market, T-Mobile is providing new options for consumers tired of high prices and low levels of innovation. Heightened competition means better service and more options and leads to a virtual cycle of innovation and adoption, with consumers as the ultimate beneficiaries. We all want this industry to be competitively vibrant, aggressively innovative, and economically healthy for years to come, and decisions we make now will determine whether that shared vision becomes a reality. Thank you, and I look forward to your questions. [The prepared statement of Ms. Ham appears as a submission for the record.] Chairman Klobuchar. Thank you very much. Mr. Spalter. STATEMENT OF JONATHAN SPALTER, CHAIR, MOBILE FUTURE, BERKELEY, CALIFORNIA Mr. Spalter. Chairman Klobuchar and Ranking Member Lee, it is a pleasure to be here before the Senate Committee. I am Jonathan Spalter, chair of Mobile Future, and I am pleased to join you today from the solar vortex of the San Francisco Bay area. Chairman Klobuchar. Very funny. From the polar vortex to the solar vortex. That is pretty good. Mr. Spalter. My organization proudly represents innovators across the mobile ecosystem, those who build apps, networks, devices, and those who also leverage wireless technologies to improve their communities. This morning, we have heard and we will hear some compelling national data about the choices available to millions of U.S. wireless consumers, but I would like to tell the exciting story of American mobile competition through the eyes of actually just one of these customers--my brother-in- law, Jason Gu. Jason has lived in the town of Plymouth, Minnesota, for the past eight years. Plymouth, of course, is the lovely home town of our esteemed Chairwoman. Jason lives there with his wife, Jill, and they share their home with two mobile experts--their teenage daughters. Now, Jason and his family regularly drive past the AT&T and the T-Mobile stores, just located three blocks apart on Vicksburg Lane. Six miles away, at the Ridgedale Mall, they can shop at Best Buy Mobile, at AT&T, Century Link, T-Mobile again, and Shock City Cellular. Across the street is Verizon. Down a few blocks on Wayzata Boulevard is Sprint, and the nearby Target offers prepaid phones from no less than seven competing brands. And the local Walmart offers the chain's Family Mobile Plan alongside service from six additional providers. Now, that is a lot of choices, not just of providers but also of devices, operating systems, apps, and service plans, and it really is creating tremendous value. We know that the price per megabit for mobile broadband has been declining by more than 93 percent in just five years. And with this abundance of choice and competition, Plymouth has a lot in common with communities across our Nation, including, Senator Lee, those in your home State of Utah and those that your family and your son, James, enjoy in Alpine. And every company in this space competes and innovates in an ecosystem where truly the only certainty is disruption. Just ask Facebook CEO Mark Zuckerberg in Barcelona, who, as you mentioned, Senator Klobuchar, found nearly 19 billion good reasons to like the free text service WhatsApp. And this is just the latest and most powerful reminder that formidable new rivals can emerge in the blink of the eye or the snap of a chat. Or ask Cisco CEO John Chambers. He sees just around the corner 50 billion devices connecting to the Internet of things, creating a $2 trillion global industry. This is the competition we must win. The so-called Internet of things encompasses everything from the fitness monitors on our wrist to the thermostat we adjust from our phone, right up to the very edge of science fiction, for example, Google's pursuit of essentially wireless contact lens that can register blood levels, and the wireless sensors my 10-year-old daughter has to implant in her body twice a week to manage her Type 1 diabetes. Who knows what exciting new business opportunities or new entrants or new life-saving wireless technologies will emerge next? But what we do know is that the appetite of consumers and the vision of innovators should guide the mobile future, and it would be pure folly for anyone, especially for government, to try to predict or to prescribe future market architecture. In the Bay Area where I reside, technology companies have adopted an approach we call ``minimal viable product,'' or MVP for short. The idea is keep products simple, ship them quickly, and listen very, very carefully to your customers. And in many ways, this same MVP approach has successfully guided our Nation's wireless policy for two decades now, making our mobile ecosystem, I believe, the envy of the world. So for the sake of Jason's family, and American mobile families everywhere, I truly do hope that past will be prologue, for if so, with a dash of humility and restraint in how we design our products and our policies, I am confident that an even greater phase of our Nation's mobile future lies yet ahead. Thank you very much. [The prepared statement of Mr. Spalter appears as a submission for the record.] Chairman Klobuchar. Thank you. Mr. Graham. STATEMENT OF ERIC B. GRAHAM, SENIOR VICE PRESIDENT, STRATEGIC RELATIONS, C SPIRE WIRELESS, RIDGELAND, MISSISSIPPI Mr. Graham. Good morning, Chairwoman Klobuchar and Ranking Member Lee, and thank you for the opportunity to be here today on behalf of Cellular South, who now provides C Spire Wireless service. Our company has been in the wireless business for over 25 years, beginning in the late 1980s in the era of the duopoly, when there were only two providers in each market nationwide. We continued through the era of competition, which was marked by the introduction of PCS spectrum licenses, where new operators seemingly sprang up overnight, giving customers a dizzying array of choices for their carriers, driving innovation, and spurring competition in a way that has not been seen since. Following that era of competition, we entered the decade of the 2000s and began the era of consolidation, where we saw the remnants of Ma Bell begin to reconstitute themselves into the wireless Twin Bells--Verizon Wireless and AT&T Mobility. It has carried through today into this era of stratification, where we have two nationwide operators with roughly 100 million subscribers. We have a couple of metropolitan operators in that 40- to 60-million subscriber range. Below that we have a super- regional operator, and then 100 or so regional and rural, primarily rural, operators throughout the rest of the country. If you think back over the last four or five years, there have not been that many innovations purely in wireless for the customer. There have been apps that have come on. There have been maybe different devices that the customer does not necessarily touch every day. But think of the form factor of the phone that you use today. It is relatively unchanged from what it was four or five years ago. If our industry metrics were viewed through the lens of another industry, I do not think we would be quite as comfortable as we are saying that wireless is competitive. So let us take a moment and think about the aviation industry in the United States. Consider if in airline travel in the United States the two largest airlines controlled 70 percent of the domestic passenger traffic. Consider that these airlines also had the market power not only to demand but to receive exclusive access to the latest and greatest jets, keeping them out of the hands of their competitors. Further consider that these airlines have the ability to dictate the terms on which connecting passengers could access their routes, charging exorbitant rates that bear virtually no relation to the cost of transporting that passenger or operating that jet. Let us layer on top of that the government's desire to introduce more capacity into that market through opening up new gates at airports across the country, and position these two airlines with the power to absorb 100 percent of that capacity under the rationale that eventually they will need it, whether they need it today, but certainly with the motivation there that they could foreclose competitors from having that capacity. I do not think that we would be willing to sit by and let the airline industry operate like that, unfettered and with a purely hands-off approach. I certainly do not believe we would call that a ``competitive industry'' nor a ``healthy industry.'' Yet when we transfer that to wireless, my fear is that we have become too complacent and too comfortable in a world where the largest two operators have 70 percent of the wireless subscribers and in 2013 combined to account for 86 percent of the industry's earnings. The largest two have routinely demanded and received exclusivity agreements to be the only provider of particular devices in the market, keeping them out of the hands of their competitors. They dictate the terms on which roaming customers can access their networks, typically at exorbitant rates that have little to no relationship to the cost of providing service for those customers. We have heard this morning already the statistic that data costs three cents a megabyte. I can assure you rural and regional operators seldom get a rate that approaches three cents a megabyte for data roaming. Let us layer on top of that now the government's interest in introducing more spectrum that our industry desperately needs, and consider that the largest two operators have not only the ability but certainly the motivation to absorb nearly all of that capacity, not only in the most attractive markets but markets across the country, under the rationale that if we do not need it now, we will certainly need it later. Well, later means that competitors are foreclosed from having access to that spectrum today when we need it now. So I would submit to you that as we sit here today, we are in a world where the wireless industry is stratified between the largest two national operators, two metropolitan operators, and a collection of smaller operators who need procompetitive policies to assure us that, as we move forward, we will have access to those inputs to the business that let us serve your constituents and customers who have come to depend on us. Thank you again for the invitation to be here this morning and be a part of this panel, and I look forward to exploring these and other issues with you. [The prepared statement of Mr. Graham appears as a submission for the record.] Senator Lee [presiding]. Thank you. Ms. Layton. STATEMENT OF ROSLYN LAYTON, PH.D. FELLOW, INTERNET ECONOMICS, CENTER FOR COMMUNICATION, MEDIA, AND INFORMATION STUDIES, AALBORG UNIVERSITY, DENMARK Ms. Layton. Good morning. Thank you for the opportunity to share my testimony on competition in America's wireless market, and a special thank you to Caroline Holland and Kayla Johnson of Senator Klobuchar's office who did a lot of work to pull together today's session. My name is Roslyn Layton, and I am a Ph.D. fellow at the Center for Communication, Media, and Information Studies in Copenhagen, Denmark. I am also a visiting fellow at the American Enterprise Institute, and I am a vice president of Strand Consult, an independent consultancy to the mobile industry. As an American who lives in Europe and studies the international wireless market, I hope to provide an international perspective. Senator Lee and Senator Klobuchar, I believe that we share the same goals. We want all Americans to enjoy the benefits created by the wireless markets, the networks, the devices, the services, and the applications. And, in addition, we want Americans companies, especially those that create American jobs in the mobile ecosystem, to win in the global economy. So I have three points today in relation to these goals. First of all, competition comes from the level of technology, not from the number of competitors. Second, Americans get value for money when it comes to mobile products and services. And, finally, that America's mobile ecosystem and its digital export economy is highly dependent on mobile operators' investments in infrastructure. So my first point: Competition comes from the level of technology, not from the number of competitors. We can examine wireless competition by looking at technology development in mobile standards, in infrastructure facilities, in services, handsets, operating systems, and platforms. But, unfortunately, I can only talk about one example today. As Senator Klobuchar so pointed out already, consumers are increasingly using their mobile subscriptions to access competing communication services. They are also called over- the-top or OTT services. And the example that we have seen of late is the text messaging service WhatsApp, which Facebook purchased for $19 billion. With over one billion users, Facebook is actually the world's largest communications provider. It is a wireless platform where people communicate by voice, text, and data, and at $175 billion, Facebook has a larger market cap and a larger market share than any mobile provider in America. I think Mr. Graham certainly points out a number of things about mobile market concentration, but if we look at Internet companies, their industry is more concentrated in terms of the number of competitors. So while $19 billion is a staggering sum, four times this amount is lost by the mobile industry worldwide as users are switching from the services they can get from their mobile provider to the over-the-top services. This is a classic example of the innovator's dilemma and demonstrates that the bigger a mobile provider grows, so do the incentives for the upstart to disrupt its revenues. This suggests to me that the market can better discipline than any regulator. And it is because of this competition in the wireless market that Americans get value for their money with mobile products and services. Americans use five times more voice and twice as much data than Europeans. The current next-generation mobile standard 4G LTE is available to 97 percent of Americans but only 26 percent of Europeans. The mandated low prices that you have heard about in Europe come at a high long-term cost. Europeans are being shortchanged on the future because operators there cannot afford to invest in investments in next-generation networks. So in practice in Europe, you may have one mobile network being shared by 20 or more resellers. They are frequently owned by the incumbent. So this is not meaningful competition as we have here in the United States where different facilities are actually competing, and we can certainly see this now with new efforts in nomadic WiFi also competing for mobile subscriptions. If we measure the value that consumers have gotten over time and the improvement in the capability of the mobile ecosystem, it has been a dramatic improvement. To get the equivalent of an iPhone 20 years ago, you would have had to spend $3.5 million. Today your mobile provider subsidizes your handset as part of your subscription. I want to make a special point for the Chairwoman because I know she cares very much about mobile services being affordable and available, especially for the citizens of her State. In my own home State of Florida, we have many Minnesotans who come to Florida for the winter and seniors from across America. And I think as Mr. Spalter so eloquently described, in Plymouth, Minnesota, the marketplace has a mobile product that suits every budget and every person. There is one thing we can do to improve the affordability and availability of mobile, and that is to remove the barriers at the local level for deploying mobile infrastructure. In my studies, I have found that mobile operators often pay four times the market rate to secure the rents to deploy their mobile mass and toward. If we want to have mobile in rural areas, we need to reduce these barriers. I come to my last point. America's mobile ecosystem and its digital export economy is highly dependent on operators' investments in infrastructure. Facebook's business model is predicated on mobile operators making fundamental investments in infrastructure so they can reach their users. As Mr. Milch so much described about the many tens of billions of dollars that the wireless providers are making, altogether Americans got an investment of $75 billion in networks last year, this means that Americans who are just four percent of the world's population enjoy one-quarter of the worldwide broadband investment. This is twice the rate per capita as Europeans. Of the world's 25 Internet companies in terms of market cap, 15 come from the U.S. and just one from the EU. This means that Europeans and others around the world are using American- made mobile operating systems, handsets, search engines, social networks, and mobile apps. In fact, America's digital goods and services sent abroad, over $350 billion annually, are now our third largest category of exports. If our wireless networks were not up to speed, there is no way we would realize these numbers today. America's wireless market is highly competitive, consumers get value for money, and investment in infrastructure by America's mobile providers supports a vibrant mobile ecosystem and a digital export economy second to none. [The prepared statement of Ms. Layton appears as a submission for the record.] Chairman Klobuchar [presiding]. Thank you. Mr. Wood. STATEMENT OF MATTHEW F. WOOD, POLICY DIRECTOR, FREE PRESS, WASHINGTON, DC Mr. Wood. Chairman Klobuchar and Ranking Member Lee, thank you for the chance to testify today on the topic of wireless competition. My name is Matt Wood, and I am the policy director at Free Press, a nationwide, nonpartisan nonprofit with 700,000 members. Free Press works for media and technology policies in the public interest, like promoting affordable wireless access for everyone, because these communications tools are so vital for our free expression, our democracy, and our economy. The wireless market today does show some signs of improved competition, especially when compared to some other telecom sectors. Positive steps taken by DOJ and the FCC, like blocking the T-Mobile/AT&T merger and encouraging divestiture in the Verizon/SpectrumCo deal, were grounded in the law and common sense, and we have seen good outcomes from those decisions. Still, the FCC has not done quite enough to follow Congress' command to promote economic opportunity and competition. So the FCC must do more about concentration in the wireless market, which qualifies as highly concentrated still today under DOJ guidelines. Verizon and AT&T exercise significant market power. That leads to the loss of untold billions of dollars in consumer surplus per year. A few facts and figures show the impact of this type of concentration on a wireless market that is still top-heavy. For instance, AT&T and Verizon have more than 68 percent of wireless subscribers, as you noted, Chairman Klobuchar, but they rake in more than 82 percent of the entire industry's profits. Verizon alone enjoys nearly 50 percent of the industry's earnings. With Sprint and T-Mobile, those four companies control 98 percent of the country's wireless customers. This type of concentration is bad for consumers. For example, many customers today pay more for plans worse than they had when smartphones first came on to the scene. In 2008, for example, an AT&T iPhone customer could buy 450 voice minutes, 200 text message, and unlimited data for $60 per month. Today she would pay $95 for a plan with unlimited voice and texts but just two gigabytes of data. That is a 58-percent rate hike for a comparable plan, and Verizon's similar plan is little better at $90 per month rather than $95. Wireless customers also shell out an absurd amount for the devices that they buy once you know what they pay back for these so-called subsidies that some carriers still offer. Compared to budget carrier plans with the same allowances on voice, text, and data, that $95 per month AT&T customer might pay an extra $1,200 during the course of a two-year contract, swamping the $450 phone subsidy. In reality, that is not a subsidy. That is a loan, at rates that would make a payday lender blush, with an annual interest rate of 120 percent. The FCC and Congress also must act to give people more control over these tools we use to stay connected, because when people can do more with the devices they buy, their service choices go up and their prices go down. Unlocked phones that actually work with and roam on to other carriers' networks increase competition by letting customers move around. The bill sponsored by so many Members of the Senate was a welcome spur to the FCC's unlocking measures last year, and your Smartphone Theft Prevention Act is welcome news for consumers who pay so much to replace these stolen devices to the tune of $30 billion per year. Devices should not take away customers' freedom to take their business elsewhere, and that is why we need these steps. Neither should spectrum imbalances that stem from AT&T and Verizon's status as early spectrum recipients. Rather than focusing solely on the upcoming incentive auction, though, Free Press has asked the FCC to restore sensible spectrum limits for all spectrum holdings. The FCC should not and cannot keep anyone out of this upcoming incentive auction, but the agency should recognize the superior value and coverage afforded by the low-band spectrum that will be on the auction block. There are other imbalances, too, in addition to spectrum, based on AT&T and Verizon's legacy as wireline monopolies. On one of those, the FCC needs to move ahead at last on special access and correct assumptions made nearly 15 years ago, because these mistakes still harm wireless customers and competition today. AT&T and Verizon can and do raise the cost of wireless alternatives by overcharging their rivals to carry traffic from the tower back to the network. Last, but certainly not least, the FCC must open more spectrum for unlicensed uses like WiFi and other innovations. A study this month estimates that unlicensed contributed almost $230 billion to the U.S. economy in 2013 alone. New entrants and licensed carriers alike use WiFi to benefit consumers. Wireless competition today does show some signs of life, and that is due in part to smart intervention by antitrust authorities and the FCC. Competition has improved because of, not in spite of, well-timed oversight. That is why the FCC must prevent spectrum concentration, promote unlicensed use of spectrum, and put people in control of their wireless devices. Thank you very much, and I look forward to your questions. [The prepared statement of Mr. Wood appears as a submission for the record.] Chairman Klobuchar. Thank you. Thank you to all of you. I think one of the themes of this hearing has been some competition that we have been seeing in just the last few months, and I think that followed the breakdown of the proposed AT&T and T-Mobile merger. We could see from the ads we have referenced that T-Mobile has emerged as an aggressive competitor. Last quarter, it acquired 896,000 consumers from its competitors, no doubt a result of the promotions and the offerings. We have seen Verizon and AT&T respond with price cuts. In fact, just yesterday, AT&T announced it would drop the cost of calls to North America and give customers to its mobile share plans unlimited international text messages for free. Mr. Wood, do you think that the level of competition we are seeing today is sufficiently benefiting consumers? Mr. Wood. Well, I think some of those facts and figures show that it is not good enough yet, it is not effective enough yet to really discipline the prices that consumers pay, especially for the biggest two carriers, and that by making sure all carriers have access to these critical inputs like affordable roaming rates, special access that is not under the control exclusively of AT&T and Verizon, and, of course, spectrum, that we will see more benefits for consumers from this competition rather than the top-heavy market we still have today. Chairman Klobuchar. Ms. Ham, yesterday T-Mobile announced fourth quarter losses. Is T-Mobile's aggressive discounting and efforts to win over new consumers sustainable? And is T-Mobile in this competitive mode for the long term? Ms. Ham. Well, T-Mobile is the little engine that could. We come from the position of number four in the marketplace, and in the last year we have been very aggressive. But that comes at a cost, and as I noted in my testimony, we have scale disadvantages to the larger two. And over time, whether that is sustainable, I think, is something that we will have to see in time. But I think, you know, right now we are doing our darnedest to compete, but the scale disadvantages, the costs, the investment that is needed in this industry are very real and something that we have to contend with. Chairman Klobuchar. Mr. Graham, is C Spire able to provide the same kind of vigorous competition where you operate? What unique challenges do you face? Mr. Graham. Well, we are able to provide competition in a number of areas in our specific markets, but our struggles stem from the fact that even though we have just a little bit less than a million subscribers these days, when the Leap transaction closes, we will be the sixth largest operator in the country. As I said, there are two nationwide operators with approximately 100 million subscribers each and the scale that that brings. There are two metropolitan operators with 40 to 60 million subscribers and the scale that that brings. Just ahead of us sits United States Cellular at about 5 million subscribers, and then it is us and 100 others smaller than us, sixth, seventh, eighth on down. And so what we struggle with is ensuring that we have a clear pathway to the latest devices, that we have certainty of access to roaming on nationwide networks or networks in other parts of the country, and access to spectrum. Given those three things, we will compete with anybody, as we have for 25 years. In our market, we compete with the largest four operators every day, and quite honestly, in most of those markets we win. The way that we lose is when we lose access to those critical inputs to our business. Chairman Klobuchar. Thank you very much. In a speech a few weeks ago, the Assistant Attorney General for the Antitrust Division, Bill Baer, said that competition in the wireless industry is ``driving enormous benefits in the direction of consumers.'' He went on to indicate that at this time it would be hard to make the case that reducing the number of nationwide wireless competitors from four to three would be good for consumers. Mr. Wood, again, there have been reports citing talks between Sprint and T-Mobile about a potential combination. Do you have concerns about further consolidation in the wireless market? I think I know the answer. And why is having at least four national wireless networks important for consumers not only in the prices but also for things like service billing practices and cell phone unblocking? Mr. Wood. Thank you, Senator. My reputation precedes me. [Laughter.] Mr. Wood. We do have some concerns, although I do think I have to say that not only is the jury still out on this potential deal, it has not even been called yet because it is still speculation at this point in time. Obviously antitrust, as we all know, protects competition and not competitors, but the claim that reducing the number of competitors will increase competition is one that deserves a lot of scrutiny, in our opinion. So we think going from four to three and that Justice found that that was not appropriate in the AT&T/T-Mobile deal, the deal can be considered, but we think that it likely would lead to a reduction in competition because you would have three national carriers with basically the same number of subscribers and not the same kind of disruption and maverick potential we see today from someone like T-Mobile. Chairman Klobuchar. Ms. Layton, in your testimony you state that competition comes from the level of technology, not the number of competitors. Would two wireless carriers be sufficient to sustain a competitive ecosystem under your analysis? What do you think works? Ms. Layton. Definitely. You can certainly see competitive markets with only two players, and I would say a great example is look at the Internet companies today. Look at our market for search engines. Essentially everyone uses Google. We have heard of Bing and Yahoo, and they are there trying to offer their services. But, for example, what Google competes on is to constantly outdo itself. How can it continue to make a more innovative experience? So I, in principle, do not have any problem with seeing fewer carriers, and it is certainly the--you talk about the Mobile World Congress. My colleagues from my company are there today, and what they are talking about is consolidation across all the countries of the world where the third and fourth carrier want to merge. It is very difficult to be the third and fourth carrier, and let alone down the line, certainly as Mr. Graham has explained. So no problems with having more consolidation. Chairman Klobuchar. Mr. Milch, any views on what the optimal number of carriers is? Do not say one. [Laughter.] Mr. Milch. No, Senator Klobuchar, I do not have any views. [Laughter.] Chairman Klobuchar. Okay. I just want to turn to this spectrum issue. One essential element for competition in the wireless industry is, of course, spectrum. Some of you have brought that up. And in a filing with the FCC last year, the Justice Department Antitrust Division pointed out that spectrum is a scarce resource and key input from mobile wireless. Especially important is access to what is known as low-band spectrum that can travel greater distances and penetrate walls and reach consumers inside buildings and homes much better than high band. Ms. Ham, Mr. Graham, could you explain the importance of access to low-band spectrum for your companies to be able to compete in the wireless market? Ms. Ham. Yes, thank you. Low-band spectrum, as you note, has unique propagation benefits. You think about your television set and your ability to watch it indoors. As more and more consumers want to watch things indoors and use data indoors, having that type of spectrum as part of your portfolio, I think, is very important to compete. This is why T-Mobile has been very aggressive in the proceedings at the FCC on this upcoming auction. This auction, as I indicated, is really important to the future structure of the market. Right now AT&T and Verizon overwhelmingly have the majority of that spectrum, about 80 percent of it, as noted by the Department of Justice. T-Mobile recently entered into an agreement, which is pending before the FCC, to acquire some low-band spectrum. That gets us about half a footprint, and it gets us about an additional six megahertz averaged nationwide-- I mean not nationwide, but over only half the country. So we are going to be interested in more of that coming up. That auction is going to be, I think, very important to ensuring that, you know, there is a leveling of the playing field out there, that everybody has an opportunity to get access to low-band spectrum. Chairman Klobuchar. Mr. Spalter, what do you think the consequences for competition of having so much low-band spectrum controlled by two companies' low band? Mr. Spalter. Let me say, Senator, that I think that as the market evolves and as consumer needs are increasingly defined, all carriers need to be able to conform their networks and their spectrum needs to address consumers where they live and to address their needs. I do not believe that there should be any special weight given to spectrum below one gigahertz. We know, as Ms. Ham has just said, that T-Mobile is acquiring spectrum assets in the secondary market below one gigahertz. We know that there are other competitors that are seeking spectrum above one gigahertz. Fundamentally what we need to figure--what we need to put into our calculations are consumers' needs regarding the spectrum that they require in communities and the geographies that they live. And carriers for technical and operational reasons need to be able to have the flexibility to be able to acquire spectrum assets and use those spectrum assets, both above and below one gigahertz, to best meet those needs. Chairman Klobuchar. So then you agree with the DOJ's assessment when the head of the Antitrust Division talked about how regional carriers lack that spectrum they need, the low band, to keep their services competitive and called on the FCC to, in fact, institute auction rules that guard against excessive aggregation of spectrum? Mr. Spalter. You know, I believe that the Spectrum Act was very clear in making sure that the auctions that are going to be conducted by the FCC catalyze systemic competition and not privilege one competitor or advantage one competitor's business plan over another. I believe that the fundamental principle of open auctions available to all competitors, both for commonsense reasons but also for the benefit of American consumers, is the appropriate policy architecture for developing and designing spectrum auctions as they have proven to be in virtually every other kind of economic model for auctions that we understand. Chairman Klobuchar. Okay. Well, I have--Mr. Graham, do you want to respond? Then I am going to---- Mr. Graham. I would, if I might address the low-band spectrum question. You can argue spectrum a number of ways, but you cannot change the physics of spectrum, and it is clear low- band spectrum propagates better and travels further than high- band spectrum. And it is a fallacy to believe otherwise. It propagates better in buildings, and it penetrates vegetation better than high-band spectrum. It is indisputable. And so low- band spectrum will always have a higher value than high-band spectrum will for that very reason. I mentioned that our business has been--our company has been in the wireless business for over 25 years, so we have some of the original cellular licenses at 850 megahertz, which is low-band spectrum. We also have PCS licenses, higher-band spectrum, in a number of our markets. And if I were to show you a map of our licenses and overlay--or, excuse me, if I were to show you a map with pinpoints where we have customers, I would not have to tell you where we have cellular spectrum and where we have PCS spectrum. You would see the greatest concentration of customers is in the areas where we have low-band spectrum. The signal is better, and the coverage is better. And as Verizon spends millions of dollars showing everyone on TV, the map matters. The coverage matters. Chairman Klobuchar. All right. Well, when I am in the next round, I am going to ask you guys about the cell phone theft issue and the technology there, but I will now turn it over to Senator Lee. Senator Lee. Thank you, Chairman Klobuchar. I want to pick up on the spectrum issue. I will start with Mr. Milch. You know, as you know, a lot of people have expressed concern about the fact that we have got the two largest carriers who have acquired a lot of spectrum, and some have expressed concerns about this, suggesting that by buying it up, in buying it up, they could be motivated by a desire to box out others, that this acquisition of spectrum could serve as a kind of natural restriction on entry helping to keep the two largest carriers in place as the incumbent big carriers. In your view, what is the likelihood that a carrier could or would acquire spectrum for this purpose, for the purpose of excluding others rather than for the purpose of using it? Mr. Milch. Senator Lee, thank you. To directly answer your question, I find the prospect, while theoretically interesting and certainly an alarmist talking point, to be vanishingly small. Capital dollars are very dear to everyone in a capital- intensive industry, and the notion that you are going to stockpile something that is so capital-intensive and not get a return on it is ridiculous. I think that it is very unlikely as a matter of fact. You know, I think that there is an example that is worth nothing, so we have noted--there has been noted a number of times--that Verizon has a substantial position in low-band spectrum, the 700 megahertz spectrum. We bought that at an auction, and I would point out in that auction we did not out- muscle T-Mobile for that spectrum, for instance. They did not participate. So the decisions that companies make about what they need for spectrum at a particular time influenced their future abilities, and they may pay more later, they may pay less later, there may be new things that are available later, like the 600 megahertz--600 band that is coming up for the incentive auction. I think that the notion that while there is the physics, as Mr. Graham points out, about the propagation characteristics of low-band spectrum, that does not necessarily equate to value. The value that a carrier sees in any particular band of spectrum depends on what they need at the time, whether they need to have--do they need to have a widespread footprint? Do they need to fill in? I mean, just last--just yesterday, the T- Mobile CTO made it very clear that their strength is extremely strong in urban areas, which I believe have a lot of buildings in them, based on the density of their network and our spectrum position in the mid-band. So that was what their CTO said yesterday. They added that when they get the MetroPCS spectrum, which is in the AWS band, which is higher-band spectrum, they are going to be able to bring that across and will continue to add spectrum in the AWS band and were in a good position and a great position. So I think that a lot of this depends on what you need at the time. That is what is valuable to you as a carrier in buying spectrum. Senator Lee. Okay. Thank you. Let us turn to Ms. Layton. I understand you have done a lot of work studying the wireless markets, both within the U.S. and in Europe. I was wondering what you could tell us about your study, what you can glean from your understanding of the European wireless market, what that can tell us here, particularly what you can tell U.S. policymakers and regulators in the United States that might be helpful from your understanding of Europe. Ms. Layton. Sure. Well, thank you for that question. I think that we have had a 10-year natural experiment with what we might call a European approach and an American approach--the American approach, which is a technology-neutral, market-led approach to the wireless market, and that has been shown to win. Now, I think if you ask around the United States, people will not say that, but if you ask Europeans, they will definitely say that. And if you go--right now Europeans have been involved in a three-year effort to create a digital signal market led by Neelie Kroes, who is the vice president for digital life. And I think probably she, more than anyone, has talked about the successes of the United States. This is largely motivated by Europeans who know they are missing out. They are not winning in the Internet economy. There are only pockets of next-generation access networks in Europe. They do not have the wide footprints that we have here. You know, she is pointing out how carriers can cover the entire United States. There is no carrier in Europe who can do that. There are 28 layers of telecom regulation. Operators cannot consolidate across different states in Europe, so this makes it very difficult. I think there is one more example that I might want to share, which is that there is a model of a kind of managed- access competition where you have an incumbent provider who will resell services. And I think--you know, the Europeans took the approach of if they could control the reselling and control the end-user prices that this would be fair. But the problem is, if you are the network owner, any investment you make in your network, if you have to give it to your competitors, it is really a disincentive for you to invest. So that is what we find going on today, and, you know, I will just give you very quick numbers to keep this in mind. Ten years ago, the EU accounted for one-third of the world's broadband investment. That number has fallen to less than one- fifth today. It has absolutely plummeted. And, interestingly, in the United States we have maintained our level of investment at one-fourth of the world's total. Even though the whole pie in the world has been increasing--China is coming online, other nations are investing in their networks--we have maintained our level. So, you know, as far as that goes, the writing is on the wall. I definitely would say it is challenging if you read the media, lots of reports about, you know, U.S. is falling behind. But if you are in Europe today, there is no one in Europe who says, you know, Europe is beating the U.S. on these things. Senator Lee. Right, and we have achieved that because we have maintained competition in part because we have allowed the government to stand back enough to allow competition to exist and continue. In your testimony, your written testimony, you note how quickly technological markets can develop, and the impact that creative destruction can have on an industry. They can change the makeup of an industry very, very quickly in unexpected ways and in ways that often inure to the benefit of consumers. Can you give us some examples of how creative destruction can operate in this market and how it could benefit consumers? Ms. Layton. Sure. Well, ``creative destruction'' is a very loaded term. I think it is an important part of our--it comes from Schumpeter, is an important part of our idea of innovation. Just my own personal example is, you know, my office in Copenhagen, we are in the former headquarters of Nokia. They had an R&D center with 2,000 people, and Nokia actually used to make more phones than Apple and Android put together. They invented the smartphone. But nobody knows that because Apple is the one who brought the iPhone, and finally we could understand what a smartphone was. So Nokia was a company that did not really know how to market, and it was bought by Microsoft for about $6 billion. It is less than an app company today. But the interesting part about the creative destruction from that perspective is, you know, my university took over that R&D location, and so now they are--Nokia itself is trying to redeploy in different areas and working in networks and in mapping. But in terms of the United States, we are no strangers to this idea of creative destruction. It is certainly a challenge right now for the mobile industry where the revenues that they have depended on in voice and text message, those are disappearing. They know that they are not coming back, and they have to try to find a way to be interesting and relevant for their customers. And if you are in Silicon Valley, you can definitely make a cooler app than, you know, a number of mobile providers can do. So that itself is a more potent form of a competition than anyone, you know, sitting in Washington or in a regulator can say we are going to make you, operator, do this or that. The marketplace is exerting the discipline. Senator Lee. Thank you. Mr. Spalter, you note that there is an important role that economies of scale can play in many industries, and in this industry in particular. How do you balance that role, taking into account the benefits to the consumer that can flow from economies of scale against the corresponding risk of one or more businesses becoming too big and playing too prominent a role in a particular market? Can those two interests be balanced? Mr. Spalter. I do believe, Senator, that those interests can be balanced, and I think that the record shows that consumers have voted conclusively that our market is benefiting not only the evolution in innovation that they are enjoying, but also the kinds of question of services that mobile consumers in a wide variety of guises have been experiencing. One of the reasons that we can actually achieve this equilibrium, this balance between scale and also ensuring that market harm does not take place, is because we have a vital and functioning Federal Communications Commission and its Enforcement Division that has a number of safeguards and a number of remedies at its disposal to address market harm. It also has a number of tools at its disposal to ensure on a case- by-case basis that specific issues with regard to--including the question of spectrum, can be evaluated on a transaction and on a case-by-case basis. I think that that approach, a muscular and nimble Federal Communications Commission that has a long checklist of tools at its disposal to prevent market harm, is a bulwark against any excesses and has proven to be in the past and will continue to be in the future. Senator Lee. Thank you. Thank you, Chair. Chairman Klobuchar. Thank you very much. Senator Flake. Senator Flake. Well, thank you. Sorry for arriving late. You have plowed a lot of this ground before, so please indulge me. Ms. Layton, talking about the Europe--all the research that you have done there, I find it very interesting, because the perception is that they are way ahead of us. That is what we hear all the time. But in terms of--and that may be the case in terms of number of users. What is the number of smartphone uses in Europe, generally, compared to the U.S.? I have not seen that comparison in what you have done. What is that? Ms. Layton. Well, I think maybe to get to your larger point, it is an interesting question. You know, why is it persisting in the United States, this idea that Europe is somehow doing better? I think that that is really the interesting question. And I think a lot about that myself. I am actually doing a study of media bias here in the United States, and it is interesting. I think it is difficult as a Member of Congress or member of the public to really understand, because even the leading publications in the United States--New York Times, Wall Street Journal--print contradictory information every day, on the same day. So it is interesting that certain journalists will have an opinion and look for whichever information to try to support that. But what I would definitely say is that there is an industry in trying to create a fear about America's falling behind. And I remember this back in the 1980s when it was all about Japan is taking over America, go destroy your Nissan. Then it was India. Then it was China. And now it is broadband. So there is a whole industry about books and selling magazines and whatnot to try to make us afraid. And I think the ulterior motive is to get the government to take over broadband. There is a general fear that the market cannot do the job. There is a distrust. There is a dislike of companies to earn a profit for a service that is provided to people who they happily pay for. So in that respect, I think it is unfortunate that we have facts that are maybe manipulated one way or the other. Senator Flake. Okay. Usually the measure that is used in order to justify greater government intervention is investment in basic research, coverage, or whatever else. Mr. Milch, you mentioned in your testimony that the level of investment per person here is significantly higher than it is in Europe. What are those figures? Mr. Milch. Senator Flake, as I said earlier, you know, last year alone the wireless carriers invested $34 billion in their networks, which is four times more per subscriber than anywhere in the world. So I do not have to break it down country by country, but as a general overall world level, that is about four times. And since 2001, that investment is $300 billion in their networks. So it is one of the characteristics, I believe, of a competitive market that you have this huge wealth of investment in the infrastructure in order to compete, and if there were no competitive urges, there were no competitive requirements, carriers would not spend so much of their capital, so much of their shareholders' capital, in constant investment in networks and in spectrum. Senator Flake. All right. Mr. Spalter, what are your views there? Would we likely see more investment in broadband coverage and research if we had greater government involvement? If you say that the FCC has an all-ready toolbox to go over this, is that--do we need to tip the balance in that direction? Mr. Spalter. Senator, thank you. I think it is both wise public policy and good economic sense for policymaking to proceed as I had mentioned with restraint and with humility regarding the evolution of America's dynamic mobile innovation sector. The last 20 years have shown us conclusively that this approach has engendered more, not less, investment in our infrastructure and innovation, both at its core and at its edges---- Senator Flake. I am sorry. Back up for a second. When you say ``this approach'' that we have? Mr. Spalter. Of regulatory restraint, regulatory humility, the idea that we should not be prescriptive in viewing future market problems that have not yet developed, but acknowledging that this is one of the world's most dynamic marketplaces. It is changing all the time. It requires intensive continued and sustained resilience of investment and innovation so that consumers, who really should be at the core of all of our consideration here, can continue to benefit, as they have in the United States and as they will continue to benefit if we can hew to an approach of, as I had mentioned, minimally engineering and not over-architecting our laws and regulations and assumptions about how this market is going to evolve or how it should evolve. Let consumers be in the driver's seat in this regard. Senator Flake. Well, thank you. I have to run to another meeting, but I just want to say in general, in this industry and elsewhere, we have benefited where the government treads as lightly as possible and lets the private sector innovate as long as there is competition. And if you look at the level of investment that is going in right now, it would seem that we have struck a better balance than some other countries have. So I hope that that continues. I appreciate the testimony and look forward to continuing the discussion. Chairman Klobuchar. Thank you very much, Senator Flake. I was going to focus here now on the Smartphone Theft Prevention Act and the work that is going on technologically to try to reduce theft of the cell phones. I introduced this bill with Senators Mikulski, Blumenthal, and Hirono, and the bill calls on the wireless carriers and manufacturers to offer a technical function to their consumers that would wipe their data and render the device useless to thieves, therefore devaluing its resale value. We have a situation, as I mentioned, where one out of three burglaries now in the country are cell phone-related. We have seen that all over our State. I know Senator Mikulski has seen it in Maryland, especially in the transit system, and part of that is because the cell phones are fetching between $100 to $500 on the international market. The fact is that the thieves know a few people might have turned on their iPhone 5 function which allows them to basically wipe the data, but still store--it wipes--it allows the owners of the phone their own right to wipe the data, but keep the data on the cloud for their own use but not the thieves' use. But right now what is happening is the thieves see value in this, of course, because of the market value, because of the fact that they have actually a functioning phone when they sell it to someone on the black market, that they actually have a phone that has stuff in that they can use, not necessarily the data but the phone is ready to go. And one of the reasons we introduced this bill was to try to push other carriers to find this technology. I guess I would start with Mr. Milch. Verizon has stated publicly that it has no objection to a secure kill-switch type application that is free to consumers and secure. Are you actively as a company engaging with device manufacturers on possible solutions for Verizon so they can offer it to their customers? Mr. Milch. Thank you, Senator Klobuchar. Yes, of course we are doing that. We believe that this is--to any extent that our customers are put in danger or could have their phone taken from them--I recently had a theft in my own family of a cell phone, and it is quite alarming to everyone. And we were lucky that in this instance we could turn it into a brick, and we could turn it into a brick from a foreign country where we happened to be at the time. We are eagerly awaiting secure and free kill-switch capabilities from other phone manufacturers. This is both a manufacturer and an operating system issue. We believe that it is important, as with the Apple ability, that it is free, and we are very, very concerned that it is also secure. We do not want an instance where it is a hackable kill switch. We have spoken before of our children and their phones. I can only imagine that that would be a delightful thing to be able to do to one of their friends' phones if they could do it. So I think that it is--or former friends' phones if they could do it. So it is very important, and we are actively engaged with both app developers and manufacturers to encourage them to bring forward these options. Chairman Klobuchar. Yes, and I think that there has been something out there about how well they could all be hacked. Apple developed this for a reason. They saw it as a good thing to have on the phones. It protects consumers, and it also is something that gives them a competitive edge, clearly. And so for people that say, well, this should never be done because it only could be used by hackers or that somehow the government is going to be getting ahold of it, the whole idea here is to allow individual private users to actually protect their own data. Mr. Wood, would you agree that consumers are calling for more security functions on their phones in light of this exponential increase in cell phone thefts and that carriers and manufacturers need to listen to these demands? Mr. Wood. I would agree, and I think that is the key, is giving people the tools that they want to use, not necessarily saying, ``Here, you have to take this application because we, the carrier, have decided that you should have it.'' Chairman Klobuchar. Well, yes, but remember that this would still be a choice for them to do---- Mr. Wood. Oh, of course. I think that is the key, and that is what your bill is aiming toward, is giving people that choice if there has been some road block in between them and getting access to an app that will do that securely and cheaply and easily. Chairman Klobuchar. Okay. Anyone want to add anything? Ms. Ham. Ms. Ham. Yes, I would just say that we share your goals. T- Mobile has been very active in this area as well. We are also part of the GSMA global IMEI Data base, where stolen devices are listed on a centralized data base in an effort to prevent their use in another carrier's GSM LTE network. I would also add that we load on all of our phones an application called ``Lookout'' that enables the customer to locate, lock, and wipe their phone, and that comes free to the customer, and that is something that we are doing now. Chairman Klobuchar. Okay. Very good. Mr. Graham. Mr. Graham. I would add that we are supportive of the concept also, but, again, we come to that stratification problem where, when you get to carriers our size and below, we do not have the ability to require manufacturers to preload that onto their phones. You mentioned that Apple does offer it. It is a competitive advantage for Apple and for those who can offer that product. So to the extent Verizon or anyone else develops that with device manufacturers, it will not reach customers in rural areas if those devices, that app, that feature is exclusive to the largest operators. It is the same problem we run into, just from a different perspective. Chairman Klobuchar. Okay. Well, thank you. I appreciate what you have all said here, and I think you know the reason we introduced this bill is just we feel that this has been taking too long, and the problem is just mounting, and the bill is supported by the Major Cities Police Chiefs as well as a number of Attorneys General from across the country, including New York, the district attorney in San Francisco, and other places. You mentioned rural, Mr. Graham, so I think that is a good segue into some of these issues. Looking at each carrier's nationwide map, you can see tremendous gaps in coverage in rural areas. I have talked about this mostly at Commerce Committee hearings on which I also serve. And I have a bill with Senator Fisher, Deb Fisher, the Rural Spectrum Accessibility Act, which would incentivize wireless carriers with larger quantities of spectrum to coordinate and work with carriers serving predominantly rural areas in order to expand coverage into our rural areas. I know Verizon has its Rural America Program, which is already working in parts of rural America. Mr. Milch, since your company has already started partnering with rural carriers, would you agree that rural carriers need to be part of the wireless market to make sure that consumers, no matter where they live or work, that they are able to connect with their families to contact first responders and to do business via wireless devices? Mr. Milch. I certainly do agree with that, Senator Klobuchar. I think that we are eager to have as many rural customers as urban customers, indeed, and Verizon is probably the largest rural carrier there is in America. And we have extended that capability by, as you said, our Rural America Program where we have over 20 agreements with rural wireless operators to bring the benefits of our LTE spectrum, our 700 spectrum there. The networks cover 2.2 million people as of today and more than 58,000 square miles, and over 300,000 people use them every day to do exactly what you said, connect with their loved ones and utilize mobile broadband. So we are eager to continue that program with rural carriers. It is a cooperative program where we supply the spectrum and we assist them in building out the network in their footprints. And we are eager to continue that program. Chairman Klobuchar. Well, as you know, 34 percent of smartphone users use wireless almost exclusively to access the Internet, including many in rural areas. Mr. Graham, how is the 600 megahertz spectrum block of particular use to serving rural America and the demand for mobile broadband? Can you touch on the importance of interoperability requirements and if there should be rural buildout requirements for spectrum licensees who purchase spectrum in the upcoming auction? Mr. Graham. Sure, I would be happy to. Thank you for the question. Let us back up to the 700 megahertz auction for just a moment, because I think it highlights the problems--or the potential that was there, the problems that came after it, and what we hoped for the 600 megahertz auction, 700 megahertz being low-band spectrum, with spectrum that we acquired, we acquired the licenses throughout our operating footprint and beyond, and intended to deploy service, deploy LTE service throughout our footprint in rural areas, primarily in Mississippi, which, as we all know, is always in the bottom rankings when you look at the poorest of States in the country. What we were unable to do, though, was deploy that service, the reason being there were separate bands created for that lower 700 megahertz spectrum that allowed AT&T to take its spectrum licenses and deploy, while those who got spectrum licenses in another part of that band were unable to deploy our spectrum. And, indeed, it was only under the leadership of interim Chairwoman Clyburn at the FCC that we reached an interoperability agreement that will finally allow that spectrum to be put to use. We talked already about how that spectrum propagates so much better than mid-range or high-band spectrum. If we repeat the same mistakes in the 600 megahertz space, then rural America will once again be left hoping for services that are available to their brothers, sisters, cousins in urban areas but are unavailable in their areas because their spectrum does not--the spectrum covering that area is not interoperable in the larger ecosystem of devices. Chairman Klobuchar. Okay. Thank you. I will turn it over to Senator Lee. Senator Lee. Thank you very much. Mr. Graham, in your testimony you express some significant concerns about contracts for data roaming and for backhaul. Can you tell us a little bit more about those concerns, where they are rooted, and let us know if you have any evidence that data roaming and backhaul contracts are not reasonably available in the marketplace? Mr. Graham. I cannot get into the specifics of data roaming rates because, unfortunately, those are protected under NDA in the data roaming agreements themselves. In fact, I believe we are prohibited from even saying who our data roaming partners are in most cases. But what I can tell you is that the rates that were cited earlier in an opening statement of three cents a megabyte, what customers pay, I can assure you that the data roaming rates that operators like C Spire sees are multiples of that. Three cents is not something that we see from those large--the Twin Bells, the wireless Twin Bells. On backhaul, wireless towers are, of course, connected back to the switch that routes traffic, either by a wireline connection, either copper, these days fiber, or occasionally microwave connections that eventually hit a wireline connection and go back to that switch. Generally small operators are restricted to the incumbent Bell for that backhaul service, who, of course, have affiliated wireless companies these days. This became such a problem for us roughly 10 to 12 years ago that we created our own backhaul company. It is C Spire Fiber, and it has provided backhaul to us where they could build for years now. We are actually leveraging that and beginning a fiber-to-the-home initiative. But it was such a problem that we had to create our own company and invest that money in order to build our own backhaul. I am not sure a public company could do that. I think a public company would probably be punished by Wall Street for a move like that. But we are privately held. Our owners take a long-term view of our business and knew that it was in the best interest, and 10 years ago that was a difficult call to make. I can tell you that there have been a number of instances where we have gone to the incumbent Bell provider for backhaul services looking for a fiber connection to backhaul traffic from our tower back to the switch, and though fiber runs to that location where we are collocated on a tower, we are given a number of excuses on why it could take months for us to get that faster backhaul connection and why we have to sit on typically a T1 or bonded T1 connections to backhaul that traffic to our switches. Senator Lee. So in some cases, you have been effectively excluded, and that is one of the reasons why you---- Mr. Graham. Either delayed or excluded. The need was immediate, so in that sense, excluded; but delayed, certainly. Senator Lee. Okay. Mr. Wood, in your testimony you state that the demand for licensed spectrum may be overstated, and you advocate for more unlicensed use of spectrum. Can you tell us a little bit about how this would work and how this would allow carriers to better accommodate the increased demand for data in the coming years? Mr. Wood. Sure. Thank you, Senator. Glad to do it and thank you for the question. We have seen, I think in the last 10 years alone, a dramatic shift in the conversation about unlicensed. Without impugning their motives, I think 10 years ago or so, carriers thought of unlicensed as some kind of threat to them, and today they use it as a valuable part of their own portfolio to decrease congestion and more efficiently handle their own customers' traffic. You might have seen yourself when you try to download some apps from the Internet or from an apps store, it will say, ``Please switch to WiFi. That will be better for you''--and, frankly, better for the carrier as well. So the numbers, I think, are always growing and always changing, a little bit uncertain as to the present snapshot at this very moment, but I think the estimates now are that something like 37 percent of all U.S. wireless traffic from smartphones goes over a WiFi connection already. And by smartly combining licensed and unlicensed, we can have a more efficient system and a more affordable system for everybody because it is not really an either/or choice. It is something that both new entrants and licensed carriers make use of already today. Senator Lee. Thank you. I appreciate that. Let us go back to Mr. Graham for a minute. In your testimony you indicate that the wireless industry went through a period of over a decade of effective competition, but has since shown some signs, some indicia of perhaps returning to kind of a duopoly, a duopoly kind of arrangement. Some have suggested that this might be the product of some unfair competition, or others have suggested that it might just be the product of very good, sound business decisions by a couple of carriers who, as a result of their good business decisions, have achieved more prominence in the industry. If it is the latter, that is to say, if, in fact, the two largest carriers have achieved that much market share simply as a result of sound business decisions, wouldn't there be some pretty profound implications to our adopting policies that would, in effect, punish those carriers for those sound business decisions? Mr. Graham. Let me restate the question to make sure I understand it. Senator Lee. Yes. Mr. Graham. Under an assumption where sound business decisions led to the growth of the two largest carriers, would policies that restricted--or that promoted competition then punish them for sound business practices? Senator Lee. Yes. Would policies that were designed to diminish their market share, in other words, so they have achieved some market share, and if you start from the presupposition that they achieved that market position as a result of sound business decisions, does that present a dilemma for us as policymakers if we are asked to do something specifically designed to undermine their position? Mr. Graham. Right. I think it would be difficult to justify any policies that would specifically take away market share, intervention by the government to pull market share away. Having said that, I think the country prospered when Judge Greene broke up Ma Bell years ago. At this stage we saw so much consolidation, unfettered consolidation, which is what led to the size of Verizon Wireless and AT&T Mobility these days. It was not a decade of beating others in the market. It was a decade of buying others in the market, which conceivably had no limits until AT&T tried to go for the one that was too big, acquiring T-Mobile. If you look back to what happened in 2008 when Alltel was acquired, that sort of closed that period of consolidation. There have been a couple of others--MetroPCS and Leap Wireless Cricket. But I think we could clearly see it has been consolidation, it has been acquisition of companies, not acquisition of customers, that has led to this stratification in the industry these days. Senator Lee. Okay. Thank you. Mr. Spalter, I was wondering if we could get you to respond to Mr. Graham's answer to the question I asked two questions ago about backhaul and data roaming. Do you have any particular response to his point about the lack of availability of contracts in this area? Mr. Spalter. In 2011 the FCC, working closely and in good cooperation with the American carrier community, evolved a set of protocols, a set of very clear principles regarding data roaming, which included provisioning recourse, a set of very clearly etched tools that are available to any competitor to be able to go to the FCC and bring issues of concern to the FCC. As far as I am concerned, as far as I understand, Senator, I am not aware of any such complaints that have been brought, and the system that has been architected on a voluntary basis by industry participants working with the FCC seems to be working quite well. There is an adage, sir, that, ``If it ain't broke, don't fix it,'' and I think in this regard there is some wisdom to that. Senator Lee. Thank you. Mr. Graham, do you care to respond? Mr. Graham. Yes, if I might. We actually went through that process, so we did not--there are two ways you can do this. One is the official filing of a complaint, and then there is also sort of a mediation process, an unofficial process that you can go through. We tried this actually with another panelist, went through the mediation process, and although data roaming rates were able to become somewhat more rational, rational in this respect is relative. And it does not take away from anything I have said earlier about the three-cent figure that was cited being anything realistic that our customers would see. Senator Lee. You went through this with another panelist whom you are not going to mention. [Laughter.] Senator Lee. We will leave folks to guess. Ms. Ham. It was not us. [Laughter.] Mr. Spalter. If I could just also just comment, you asked about backhaul and special access. One of the exciting features of this dynamic marketplace that we are experiencing is the evolution and the continued advancement of technology standards in the generations of technologies consumers are being able to use, and that includes the actual technical means for backhaul. We are transiting to a next generation of much higher capacity and much higher-speed backhaul facilities based on the ethernet. The existing special access regime, 95 percent of that marketplace still covers 1.5 megabit per second speeds, which is actually even slower than plain old telephone service. Universal service funds would not even provision speeds at that level. I think the policy focus going forward should be to migrate beyond legacy regimes and legacy networks and legacy approaches, and thinking about creating abundance and creating advancement by focusing our efforts in the transition toward better, faster, quick, more scalable technology, that should be the policy focus. Senator Lee. Okay. I am over time, but I see Mr. Wood is itching to---- Mr. Wood. Well, just to the special access point, we are all for more abundance, but this has been a 15-year struggle in some ways. The FCC actually largely deregulated special access in 1999 based on the promise of--not actual competition but the promise of competition from MCI and from AT&T before it was acquired by SBC. And so you asked about evidence that it is harming competition. There are reams of evidence, but the FCC is still in data-gathering mode here about a decade and a half later. So the FCC definitely does have some tools at its disposal, and we think sometimes it has been too slow to use them, not to try to structure the future in any way that Mr. Spalter or I would not like, but to make sure that carriers have access to these crucial inputs they need to provide service to their own customers. Senator Lee. Mr. Milch. Mr. Milch. Thank you. I, too, am very interested in the details of the mediation between C Spire and Free Press, which would be very interesting. [Laughter.] Mr. Milch. I just want to make two points on this. Number one, Verizon has over 50 data-roaming agreements in existence right now. If C Spire were uncomfortable with the rates, it could have always taken the formal route. It did not. It made a business decision that it was going to move forward on the rates that it got. As for backhaul, this is a burgeoning business for us, but it is a very competitive business for us. We see significant entry by the cable companies into this very business of providing backhaul and providing special access. We are eager and try to look every day to make sure that we provide our backhaul customers with the best service we can provide them. And we are eager for the FCC to complete its data gathering. I, too, agree that it has taken a long time for them to gather the data. The data they have not yet been able to gather is the one from the competitive providers of backhaul services. So when that data is in, we are looking forward to seeing it as well as everyone else. Hopefully there will be significant response to their requests, and we will be able to see what the true lay of the land is on the competitive backhaul issue. Thank you. Senator Lee. Thank you. Thank you, Madam Chair. Chairman Klobuchar. Thank you. I was actually going to ask some questions on special access, but you pretty much covered the landscape. I will maybe follow up with a few in writing, so I guess I will have to turn to something less interesting: the Comcast/Time Warner merger. That was a joke. [Laughter.] Okay. Last year, Americans consumed double the amount of monthly data than they did in 2012, and demand is expected to increase as more video is available online. With four nationwide carriers, consumers have meaningful competition for wireless broadband, although we are always concerned about that competition and believe that we need to keep it strong. Now, this is in stark contrast to fixed broadband where a large number of American consumers have only a cable company to choose from. Competition for broadband connectivity will be one of the central focuses, as you know, of our examination of the Comcast-Time Warner cable merger in the hearing coming up shortly. I guess, Mr. Wood, I will start with you. As more and more consumers use their phones and wireless tablets in a way to connect to the Internet, do you view wireless service as a substitute for fixed broadband provided by cable, DSL, or fiber, such as Verizon? Mr. Wood. I would say it is an alternative, but not a perfect substitute, especially when you talk about the prices people pay and the caps they have typically faced from their wireless providers or at least from some wireless providers. DSL may be slower than some LTE offerings today, but in general, wireless is still slower and then more expensive, especially once you take into account potential overages for doing the kinds of things most people expect to be able to do easily with their home broadband connection. Chairman Klobuchar. Mr. Graham, C Spire has invested in building fiber networks to compete with local cable and DSL. Do you view your wireless service as competing with fixed broadband? Mr. Graham. If you look purely at Internet connectivity, I think eventually wireless will be able to compete with broadband. But today when most people look for the fastest broadband connection they can find, they want to pair that with video. Eventually we will reach the point where consumers take their video content over the top. That is probably roughly the time that wireless technology will hit speeds that consumers expect today out of their broadband connection. Until that time, I do not think wireless could be a true substitute or competition for landline broadband connection by fiber or, in some cases, even by cable. Chairman Klobuchar. Mr. Milch, Verizon Wireless offers a wireless broadband Internet product called ``home fusion broadband.'' It markets home fusion in FIOS markets as an alternative FIOS Internet. Do you view Verizon Wireless substitute as a substitute for fixed broadband? Mr. Milch. We believe that home fusion, which is a great product and is available not only in the FIOS areas but all across our footprint--Verizon Wireless sells it wherever it can. We do believe that it is a valuable substitute in some circumstances. In other circumstances it is probably better thought of as an alternative. The marketplace is quite varied, so you have to look not only at what the competitive alternatives are in a particular geography as well as what the needs of the customer are. Customers in some geographies would not want to pay for the extra costs of getting broadband, wired broadband to their homes, particularly if those homes were only being used for certain parts of the year or not--there would be high fixed costs and other costs. So I think that it is a valuable alternative depending on the circumstances of the customer and of the competitive status in a particular geography. I also believe that looking forward there will be, as there always are, technological advances that will increase the speed and lower the costs per unit of broadband, wireless broadband, as it has been. There will be advances in compression technologies. There will be advances in all sorts of technologies that will probably increase its competitive force in more circumstances than are currently--where it currently is a competitive, a real competitive alternative. Chairman Klobuchar. Okay. Anyone want to add anything to this subject? [No response.] Chairman Klobuchar. Okay. Another question for you, Mr. Milch. In 2009, Verizon sent a letter to Congress noting a commitment to limit exclusivity agreements with regard to competitive carriers. Can you reaffirm that commitment? And will Verizon continue to work to ensure that market share will not dictate access for smaller carriers to the latest devices? Mr. Milch. Our commitment that we made in our July 17, 2009, letter to then-Senator Kerry remains fully in force. We have limited any exclusivities that we have to the six months for all manufacturers and all devices, and there are, you know, a score of handsets that are in this program right now. I would say, if I could, that--it might be a bit heretical--exclusives have served a significantly pro-consumer purpose, I believe, in the marketplace. I do not believe--it is not clear to me that if AT&T and Apple had not agreed to an exclusivity relationship for the original iPhone whether there would have been the level of investment by both parties to make sure that worked. So it does, I believe, broaden device capabilities and incent innovative efforts for a certain level of exclusivity. Now, that being said, we recognize the issues that were in front of us, and we did make the commitment in July 2009, and we stand by that commitment today. Chairman Klobuchar. Okay. I am going to turn now to number portability, which is something I remember from my past in the late 1980s, early 1990s. We actually had an entire hearing on it in Minnesota. Number portability is essential to competition, as we all know, in the wireless industry. At that time, I was representing competitive companies. It was a big deal to us. Without the seamless and fast portability that takes place today, consumers would be more reluctant to switch carriers. The whole system is overseen by a consortium of large telecom companies that solicit bids from contractors interested in running the portability system, and there is currently a new contractor selection process underway. The new cost and process for switching numbers as well as the speed and reliability of that transition will be central to consumers. Mr. Graham, does C Spire have concerns about changes to the number portability system? Mr. Graham. Well, the number portability system, as it exists today, is local number portability, meaning numbers can only be ported within the same LATA or to switches that exist within various LATA. Chairman Klobuchar. Right. Mr. Graham. So we think the time has come, especially as we get closer and closer to an IP-based world--we are in this sort of hybrid world. The time has come to make true number portability a reality. Do not tie those numbers to LATAs. We see this frequently where students will come from other States to college in Mississippi. They want to become a C Spire customer, but they want to keep their number. And, unfortunately, they cannot port that number to us because we do not have switches where they came from, and we cannot accept that number in our switches where they would live and go to school. In that case they often decide the number that everyone back home knows is more important than switching carriers. That is not unique to us. That happens across the country with carriers our size and smaller. Chairman Klobuchar. I am just thinking back to this hearing I did when I remember cell phones were the size of Gordon Gekko's cell phone that too up an entire briefcase in the movie ``Wall Street.'' And I remember then that the arguments were being made that people are going to have cell phones all the time and no one will really know what the area code is. A lot of the groups are going, ``No, that is not true. Everyone will care about having the same area code of where they live.'' And that clearly was not quite the case. Mr. Graham. That is right. Look at Google Voice, for instance. Chairman Klobuchar. Yes. Mr. Spalter, are smaller carriers right to worry that larger rivals have an incentive to make the porting process costly and burdensome because it helps protect large user bases against competition? Mr. Spalter. I do not believe that to be the case, and I think the FCC has evolved a conduct--rules for that conduct with regard to local number portability, those rules, and it seems to be working. And the conduct of companies with respect to those rules also seems to be proceeding appropriately. Chairman Klobuchar. Okay. Any other--someone wants to add anything? Mr. Wood. Mr. Wood. We have heard about the tools the FCC has. I think the important thing to remember with the largest carriers is that they have a lot of tools themselves to diminish people's portability, not just for numbers but for devices. So to the point made earlier about capital expenditures and intensive--the intensivity of those capital expenditures, AT&T, when they had that iPhone exclusive, was routinely ranked as one of the worst carriers in terms of service, but people stayed with them because that was the only place they could use their iPhone. Obviously we do not live in that world today, so I would say perhaps there were some benefits to exclusivity, but there were even greater benefits to letting carriers like Verizon and T-Mobile and others have access to those devices. And the exclusivity in all these methods to reduce churn would really be foreign to us in other markets, even in wired broadband, which we say is not as competitive. It does have more device portability in some ways. It would seem outlandish if you could not take your PC or your MacBook from Comcast to Verizon wired broadband. So I think there are lots of things the FCC can continue to do, not to dictate the technology in any sense but to make sure every customer has access to it, no matter which carrier they choose. Chairman Klobuchar. Okay. Thank you. I will have a few more questions in writing. I think we are getting into the weeds. Would you say that now, Senator Lee? And then maybe we will do the rest in writing. [The questions of Chairman Klobuchar appear as submissions for the record.] Chairman Klobuchar. Do you have any other questions that you want to ask? Senator Lee. Yes, I want to go into the weeds just a little bit more. Chairman Klobuchar. Excellent. You are in Nerd Land up here. We are loving this stuff. Senator Lee. Senator Lee. So, Mr. Wood, I have heard some concerns expressed regarding the dominant players in the wireless device operating system market. Some have suggested that the dominant players in that market are unfairly leveraging their market power. Are you familiar with those concerns? And if so, do you share them? What do you think of them? Mr. Wood. I am familiar with them. I think that the interplay between the operating system manufacturers, the equipment manufacturers, and the carriers are all a matter of some concern, because when those things break down, it can ultimately harm the real people who depend on these devices. I do not know that the FCC or Justice or the FTC is necessarily the appropriate body because I have to say I am not as familiar with some of these concerns. But, of course, there is a lot of market power in all of these different markets. We just see usually that the carriers have more of a shield against this kind of creative destruction that Professor Layton talks about because they have this 100-year head start or decades-long head start when it comes to the inputs that they need to provide service. But I do not say that to diminish the possibility that an equipment manufacturer or an operating system manufacturer working in conjunction with a carrier could make agreements that are not ultimately to the benefit of competition or to consumers. Senator Lee. Okay. Thank you very much. I may have some additional questions on other matters in writing. Thank you, Madam Chair, and thanks to all of you. Chairman Klobuchar. Well, thank you. Once again I would like to thank our witnesses for testifying today. Your expertise is critical to help us understand the competition in the wireless market. I think that the takeaways today are that while the industry is competitive and benefiting consumers and that we have recently seen a surge of competitive activity, there are still challenges, particularly when it comes to rural areas where the competitive carriers face an uphill battle to be able to offer consumers the benefit of competition. So any further consolidation in this market will naturally raise concerns, and there will be a high bar to meet to show that further concentration will truly benefit consumers. Our Subcommittee will continue to be involved in these issues. As you know, we have several hearings coming up that touch on these issues, and I want to thank Senator Lee for his continued partnership on this Subcommittee, and I want to thank you all for coming. The record will remain open for one week, and the hearing is adjourned. [Whereupon, at 12:01 p.m., the Subcommittee was adjourned.] A P P E N D I X [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [all]