Transcripts For CSPAN2 Key Capitol Hill Hearings 20140527

Airlines, what have you. Theres two things that happen. Once a commission interests itself in a particular area, puts a sign out that says open for business, which is basically what we did when we did the open Internet Order, right . What happens . Firms realize, oh, i dont get to make money looking at customers and making investments, i make money by going to the regulators and getting them to favor me and disfavor others. The phrase economists use for this is rent seeking. And thats what it does, it opens up rent seeking. For 30 years we never had any complaints about interconnection. Since 2010 weve had a number of complaints. Why . Open for business. The second thing that happens, and this is, i think, the most dangerous part of it, is even though the commissioners may say, well, we want to limit how much we regulate, okay . That wont happen. They will be under constant pressure to expand the regulatory writ. And weve seen this happen now. Level iii, for example, in 2010 said lets try to Leverage Network neutrality into regulating interconnection. Now, genachowski said at the time quite wisely no, no, no, no, thats not Network Neutrality. Were not going to touch that, okay . Well, even that appears to be changing. So it looks like were now leveraging the interest of the fcc and Network Neutrality into in interconnection. Into interest in interconnection. How much more do we expect . It will encompass the whole internet eventually. Camels nose under the tent, okay . Theres a backstop, light touch regulation. Doesnt happen that way, guys. Just look at what regulation has done in the past. Its a disaster. If you love the bell system and title ii regulation, youll love this with the internet. Was that clear enough . [laughter] well, well let the audience audience anne marie, a lot of your work, as you said, is how investors think about the broadband infrastructure. What could you tell us about how investors might respond to a more active role for the fcc this regulating interaction . One of the things investors do is look at data, and whether youre looking at data from cisco or telegeography or any number of other sources, what youre going to see is tremendous growth not only in the amount of traffic that runs over the internet, but as john pointed earlier, a tremendous amount of flexibility in the way the internet has evolved to respond to that. And what we have evolved out of the network of networks that john talked about is really a network of innovators, millions of them around the globe. And what has made all of that possible is the tremendous flexibility of the commercial, very highly informal as someone said earlier, handshake agreements in many cases to change rapidly. And one thing, you know, some regulation has some advantages, but one thing that regulation does not offer is flexibility. Once you encode something in law, youre kind of stuck with it for a very long time, for an awful lot of litigation. And so i think a major concern for investors and why i think investors would be very concerned to see government regulation of the internet is that that flexibility which enables the whole ecosystem not just the network layer, but all of the application layers, service and layers above that would suddenly become rigidified. Anywhere sitting in that ecosystem anyone sitting in that ecosystem is going to have to start thinking about how do i make sure that my application sitting up here is not suddenly going to be subject to regulation. What keeps me from being a Telecom Service when so many of the things out there not being regulated could qualify . So i think what you would find is a tremendous concern about that lack of flexibility, and you would find investment drying up. Okay. John, let me ask you a technical question. So part of this discussion, and i alluded to this earlier when we were talking to kevin, part of this discussion is about voice traffic. So as were completing the ip transition and moving off of the tdm network and on to all ip networks, one of the questions is whether or not interconnection requirements on the voice network, how and if those translate to the, to an ip network and whether or not its kind of just expanding that to all traffic and treating them all under different kinds of interconnection rules. If we were just talking about voice traffic, from a technical stand point is it possible for isps to distinguish voice packets from other packets and subject, you know, just those to interconnection rules . And if so, is there a way of doing it without introducing other kinds of technologies that maybe have some downsides that we have seen in other contexts . So complicated question. Let me divide that into two cases. There is a voiceover ip service that would broke look to you like a normal telephone. Theyre never mixed together with other internet traffic. In the world today, they may actually be converted back to old circuits and then back to ip again and sort of a leftover of the legacy circuit switch days. I can imagine the world where, hopefully, where that sort of art official Technology Change artificial Technology Change will go away and theyll all be ip packets, but theyll all be voice. And it wont be any different from what it is today. Contrast that with Something Like sciech where the skype where the voice packets are all mixed together with all the internet traffic, and now i cant tell it apart unless i use deep packet inspection. Interesting question. The first kind of Voiceover Service is probably going to live on for the foreseeable future even as we go to ip. We will have Internet Connection that technically is ip but in terms of business arrangements looks a lot like telephone. But the more we mix these together im technically, i dont know how were going to separate them. And from a policy perspective, im actually getting a little worried as we start to treat these different types of traffic differently as to why and how were treating it differently, and if its because of exerting market power or just normal business. Yeah, well, go ahead, anna maria and then jerry. Well, to me, looking at it again from the investment perspective, think about someone whos designing a game, right . I want to invest in someone whos designing a game. I want that kid this his garage to think about the that kid in his garage to think about the best possible game, not to think about how to design it in a way that will keep the voice part of the game out of regulation, you know . Look at skype. You figure out how to divide voice from the video packets, whats skype going to look like . How are they going to sort of arbitrage the rules to stay out from under the regulation . Thats what i meant when i said earlier that for investors, the huge concern is going to be eliminating a lot of innovation and a lot of flexibility because the energy that now goes into those is going to go into regulatory arbitrage. How do i design my product, my service to avoid regulation . Jerry . Go ahead. This was a very interesting point which was the transition from the old Public Switch Telephone Network, the copper wires, to eventually to ip. And i want to commend two folks. One is kevin, he has a great paper on this. T i disagree with all his conclusions, but its a great paper. [laughter] the other thing i want to mention that chairman wheeler has teed this issue up, and its an ugly issue. Im glad he did it. Somebodys got to look at it because, you know, telephony, wire telephony is in freefall. And weve got a lot of companies that have all kinds of obligations to maintain copper wire in a situation where thats a dying, dying market. I mean, okay . And we have to figure out how to do that. Now, the only thing i dont want to have happen is that the death of the pstm become the tail that wags the interconnection dog. And i think we have to keep our view on what do we want interconnection to look like . Do we want it to be title ii regulated, or do we want to continue as a free market thing . And i dont want the death of pstn to really determine that outcome. I think that would be a mistake. I dont want to mischaracterize your position on this, kevin, so let he just clarify this. Is your view that however the fcc gets involved or more involved or stays involved with interconnection, do you see a distinction between voice traffic and all other traffic in terms of what that regime would look like, or do you see a similar set of rules, similar set of regulations applying to all of them, and if so, is it 251 and 252 of the existing act . Theres a set of legacies. The paper that jerrys talking about is called no dial tone, and the issue there is we have a set of industries that is subject to certain regulation, and the problem is the way things have evolved, that regulation is all or nothing, and once traffic goes to ip as a technical matter, the argument is suddenly all those rules go away. While the industry stays the same. While you still have the existing structure of the Communications Industry where we have no longer legally mandated monopolies but still some very powerful, very dominant players, and players that understand how to play that regulatory arbitrage game. You cant just say, guess what, ip is magic pixie dust, now youre in the internet, and now its a get out of jail free card. Thats the flip be side about the concern that youre hearing about regulatory arbitrage is an arbitrage that goes the other way. So as that transition happens and i agree with jerry, a difficult set of issues, but one that appropriately the fcc is taking on, and the industry is taking on as well we need to work through what the transition looks like. At the end of the day, no, it doesnt make sense to say theres some magic about voice packets thats somehow different than any other kind of packets. At the end of the day, i think we need one interconnection regime which is, again, why ive been trying to argue these distinctions weve historically made between what happens on the pstn and what happens to voice traffic that somehow is not on the pstn, what happens to net flew central Net Neutrality on the Network Versus off the network, all these distinctions ultimately dont make sense n. The middle theres a lot we have to do to maintain relationships and to manage a transition. I think thats appropriate. But the ender of the day, the question is what we want to have. And what im worried about is what jerry said at the beginning. I would hate to see the internet turned into a supermarket thats just selling us peas. Thats not what the internet is today. Thats not the kind of open platform thats generated so much extraordinary innovation. Thats a Traditional Market where youve got a distributer that controls whats on the shelf space, and they have the power of life and death over every purveyorover products by of products by allocating that shelf space, and its a linear market. Nothing comes back from consumer back the other way. Thats not the internet that weve had over the past few decades, and thats not the internet we should have in the future. So, i mean, obviously, the fcc can only work with the tools the fcc has available to it by law. Weve mentioned, i mentioned section 251, section 252, that deals with interconnection now on the switch Telephone Network. Interesting enough, if that was sort of within the tool set that the fcc was going to use to get more involved here, that would also kind of ask an interesting question about the role of state regulators in that process. So i want to ask all of you or any who have an opinion about this, is there a role leave the legal aside for a moment should there be an appropriate role for state regulators in managing or regulating interconnection, and if so, what should that role be as distinct from the federal role . Who wants to take that on . Jerry probably has a very short answer. [laughter] good god. [laughter] let he mention one thing, however, because we havent talked about this at all. But generally, if we have problems with terminating access to monopolies as kevin mentioned, if we have some problem in what is otherwise looks like a Competitive Industry where we might get into some market power, the answer to that is not regulation, its antitrust. And i think the same answer applies at the state level. Getting the state regulators involved if i dont even want the feds involved, i certainly dont want the states guys, but can they do something in the antitrust arena . Can state attorney generals take action if they think its necessary . Because i think thats the appropriate place to have action if we have whatever problems might arise with sewer connection interconnection, thats what we ought to be doing about it, not regulating it. Anna maria . I dont believe that something at the level of the states has a role in what is global traffic effec the next google that were all trying to protect in all of this discussion that momentum have that kind of that doesnt have those kinds of resources and would also find itself fighting in 50 different state arenas and a whole bunch of courts. That just doesnt make a lot of sense. I think either side of this event wants the states involved i want to make sure kevin gets, goes on the record one way or the other. That would be a complete nightmare. I wanted to just elaborate on something gerry said. He said we do have antitrust as a backstop if a Transit Provider thought it was being excluded from a deal. We have something else, too, thats important, and i mentioned this in the policy brief, and that is were about to get a new set of rules that are designed to protect edge providers, namely content and app providers and device makers, and these are going to be a no blocking rule youre talking about the open internet. Yeah. It isnt just entirely antitrust wed be leaning on, wed be leaning on antitrust plus whatever new productions are going to come out for content providers including a nondiscrimination rule, a no blocking rule. So to me, the real way to kind of tee up the policy debate is once you have antitrust and the rules that are aimed to protect content providers, you know, what extra protection are you getting by overlaying an interconnection obligation . For me, its a pretty small amount of protection that youre buying. I think that the only folks youre really helping out are going to be these standalone, Transit Providers or content delivery networks, and its just not obvious to me what additional protections are needed, what kind of social purpose is served by breathing life into intermediaries, and i mean that in a loving sense [laughter] well, i upset someone from a level iii when i called them intermediaries. I didnt mean anything pejorative about that. But, you know, what are you getting with this at the margin . Thats, to me, the key policy question that should be addressed. So, kevin, lets be clear, do you see a role for states in terms of interconnection regulation, and if not, how do you keep them out . Well, turn the question around, what could states contribute to anything in this regime or in this world . I think theres a good argument that states will continue to have a strong role in universal service because theyre closer to the ground, and they are familiar with local variations which still exist even in a Global Internet interconnected world. And states, perhaps, have a role in consumer protection, again, because theyre closer to the end users and heavy a better understanding and a better capacity to resolve some of those issues. I think in terms of an overall interconnection regime for the internet or for ipbased services no reason to say that that has to go through 50 state commissions, and i would certainly agree that that just, you know, magnifies a regulatory problem. But, you know, there are some of these issues that come into play where, for example, if you have a rural provider thats being blocked or traffic thats not being delivered, i think a state could have some role at least as a factfinding matter in that dispute so we could talk about how to do that. But i dont think thats really core to any of these issues that were talking about here. Yeah, john, go ahead. So ive already made a comment on whether we regulate and transparency versus regulation, but assuming you were going to regulate, id just remind you that were looking at interconnection between two big networks. Each of those networks may operate in dozens of states, and they probably have interconnection points in at least half a dozen states, maybe a dozen states. If you have a dozen different sets of state regulations, what does that a do to interconnection agreements, and how can you even find where the problem is if youre only looking at whats going on in one state . I think you need federal agencies involved. Yeah. I mean, i guess to me one reason i was happy to see section 706 is sort of the preferred mode in the open Internet Order that came out even though title ii is also raised because it seems to me that that leaves the fcc a lot more flexibility in all of these areas in terms of what it would draw into the net of regulation and what it would exclude. I mean, its lovely for kevin to say states have this role but not that role, but if you actually as i know he has done extensively look at 251 and 252, states initiate steps, you know . States come back and say, wait a minute, i think voice is actually under my jurisdiction. Its kind of hard to prevent that if youve brought in that regime. And what that then mean is the a very lengthy process during which investors have no idea what the outcome is going to be, during which the attention of the companies that are involved is focused on the legal issues as opposed to focused on their business. So that, to me, is the concern. Did you want to follow up . Sure. One is this nose under the camels tent, look, i was at the fcc in the 1990s. They didnt want me to have the word internet in my title, so i got to be called council for new technology policy. We were dealing with all these issues. We have dealing with regulation of voip in 1998 when the fcc put out the stevens report which if you look closely says, essentially, phonetophone, carrier, voiceover ip is a communications service, were just not going say that right now because we want the market to grow. If you had open internet rules from 2010 to 2014, and all investment didnt dry up, and all the internet didnt just become this regulated thing that everyones afraid of. So it doesnt necessarily go all one way or the other. The one thing ill say about the states, the one thing that i worry about with is pstn transition, and this gets fairly technical, but the efficient way to do ip interconnection is with a smaller number of interconnection points. So the legacy interconnection of whats called tdm, the kind of interconnection we have on the phone system, you basically have interconnection all around the country. So there are lots of companies that are interconnected into the phone network in lots of different places. Ip, so you look at Companies Like comcast, theyre the third large phone company in the u. S. , they switch all their traffic in Something Like four or five places across the country. Thats the efficient solution, thats where were going to go to, and i dont think regulation should stop that. But i think, you know, if you have a jump pod from a world where there are hundreds of providers around the country that have interconnection into the network and you say, guess what, its all gone, if you want to carry your traffic all the way to cleveland and interconnect with us here in this way, have at it, i think we these a transition, and maybe states have a role there. But i dont think that that inevitably means were going to have 50 sets of rules and states are going to be monkeying around just because theres a transition period. All right. Well hold you to that. [laughter] let me, i want to ask two more questions, and then im going to turn it over to the audience. Again, to remind you the hashtag is fccnetrules. Let me ask two last questions before i turn it over. A couple of you have talked about netflix, and i want to sort of explore that a little bit further. So beyond the actual relationship they have with comcast, we do know that theyve been developing their own Cdn Technology now around the world, in fact, for some years, and theyve recently announced new transit agreements with a number of isps, not just comcast. There has been a lot of discussion about this that described that as a sort of first of its kind arrangement and a dangerous one, but i dont know how many of you saw there was an article last week from dan rayburn that actually gave a very nice chart showing of all the main content providers including google, apple, amazon, facebook, microsoft and all of the direct interconnection relationships they had with kind of it wasnt complete, but with many of the leading isps and some of the leading intermediaries, is there a better word that they want now . [laughter] no. I just know they dont like that one. So let me just ask all of you, and take it whatever order youre most inspired by, are these kind of arrangements which are apparently more widespread than suggested, are these kinds of arrangements dangerous, and is this something that the fcc should encourage, discourage or do nothing about . Anna maria . Do you want to go ahead . I would be on the side of encouraging commercial agreements possibly by simply doing nothing about them which is the way theyve evolved for a couple of decades. I mean, another piece of news recently was google saying theyre going to be pairing with netflix settlement free. And i think its lovely. One set of Companies Reached an arrangement that works for them. Netflix itself was another company reached a different youre talking about google tyber in this case. Yes, google fiber that works for them. I, you know, thats fine. I dont know i dont see any reason to intervene in that. And i think just one piece of data that is at least worth thinking about in this context which comes from netflixs own web site is the fact that they have the speed tests that theyre showing around the globe, and there is no place on any isp that they run higher than four megabits per second. That includes googles gigabit fiber and fiber all over the scandinavia, etc. So i think before we make assumptions about whats going on in terms of congestion with individual isps, etc. , we need to start to understand that perhaps netflix is making choices that work for it with a whole range of different isps. Yeah. So i think these sorts of engagements should be encouraged. Theyre going to happen. And i think as an economist if we see content providers, large content providers basically vertically integrating into cdn networks into transit, theyre doing it because they must be Getting Better terms than if they were trying to go through an intermediary. And so you start to get concerned for the intermediary who gets squeezed out of the relationship whether its cogent or level iii. But i just want to point out theres still a lot of traffic from small and mediumsized content providers thats going to continue to use these intermediaries. Level iii announced in its Earnings Call that netflix was not even the top 30 of its customers. So in that sense, you know, you think these guys are going to do just fine without the regulator breathing life into their Business Models. Yeah. This is a red herring. The rules are not to protect one set of companies. The rules are about protecting the openness of the internet ecosystem. So heres a data, packet clearing which is an organization that studies things like peering did a study in 2011. They looked at 144,000 peering agreements. They had data from 86 of all of the internet providers this the world. Do you want to guess what percentage of them were settlementfree . 99. 73 . All right . Very, very few had any positive charge of the sort that exists in this Netflix Comcast arrangement. Well, you might say, all right, thats because traffic would equal netflix is different because it generates so much traffic. What percentage of netflix are settlement free . Over 99 . Now, i think absolutely that deal with comcast, the deal they have with other parties may very well be spirally legitimate entirely legitimate. Again, every indication we have suggests that this was hashed out between two parties. Netflix got some benefits, and thats fine. And i think we should allow for that differentiation to exist among companies. One reason, you know, its funny, for you in the audience, im the one farther to the left in this debate, but in the Net Neutrality debate not far. Well, okay, to the left. This terms of im the one here thats advocating for some role in the interconnection, and the Net Neutrality i often find myself on the other side where im suggesting the approach that chairman wheeler suggested in the Net Neutrality or the open internet notice of proposed rulemaking which would allow for companies to do some level of private agreements as long as there was not a slow lane and someone was degraded, i think thats a reasonable approach if it can be done in a way that has a backstop. But its the same issue. Just because two parties sign a contract doesnt necessarily mean that there isnt anticompetitive behavior, that its not, essentially, an extortion relationship. We need some he can nhl to get that mechanism to get that data to have some sort of backstop. Within that, absolutely, go at it. And i think its entirely reasonable to think there will be some of these deals like the ones that were seeing that have a price, have a charge, and thats fine. But if we go so far as to say that anything is allowed because we just assume that parties are doing a competitive deal, thats when we have the danger of closing off the openness of the internet and that freedom for innovation that weve all benefited from. And once thats gone, its going to be hard to ever get it back. John and gerry. There are agreements that bring tremendous peering and interconnection agreements that bring tremendous efficiencies. We know that. To pick an extreme case, there are isps in africa that not all that long ago used to have to send a Transit Provider on a different continent and then back to africa to get to an isp nearby. That they can peer directly is a huge win. We want to encourage lots of those arrangements. But there is something new going on here which is interesting. A dozen years ago i wrote a paper which i called the benefits and risks of Net Neutrality, which i described if you had a broadband provider that had market power, theyre always going to be able to exert that in the broadband ma market. But at that time market. But there were new technologies that said, well, they could apply that separately in the video market or the web market or the voice market, and if they can openly discriminate, there might be some interesting new problems weve got to keep our eyes on. And i thought that had nothing to do with interconnection. At the time, it did have nothing to do with interconnection. Now its a little less clear. Now that we have interconnection agreements just with a video provider, you start to raise those questions again, you know . Is this treated differently because this is a video provider that, by the way, competes with the capable service . I dont know. With the cable service. I dont know. I dont see any evidence of problem. One deal isnt going to make me worry that theres a problem, but it seems to me this is something we ought to be watching and we need a little, again, transparency in peering agreements. Gerry, go ahead. The issue of do these things happen, could they possibly happen, yes, indeed. Could we be signing contracts with guns to heads . Possible. But theres certainly Legal Recourse to things like that. We dont necessarily need a regulator to stop that. You know, contract law is sufficiently strong to cover that. So to me, people sign voluntary contracts, end of story, okay . If not, bring a suit. One of the things i want to point out, this should be very clear here. Were talking about disputes about interconnection and what have you, and we sort of think about, well, ken says were talking about the kevin says were talking about the open internet or customers, or were talking about small, innovative providers. Were not. These disputes are between big companies, okay . And many regulatory disputes are between big companies, because theyre fighting over the rents. Thats what this is about. Its about comcast and verizon and cogent and netflix fighting over the rent. And to pretend its anything else, you know, you dont understand regulation or business. All right. Well, let me im going to stop there. Im going to ask one last quickie question, and then im going to turn it over. So weve been hostly well behaved here, we were talking about interconnection mostly well behaved here. Red herring. [laughter] we were talking about interconnection which is the back end and, obviously, you know, the elephant in the room here is discussions about the front end. And weve mentioned a couple times that the nprm that was issued a couple weeks ago on new open internet rules, one of the discussions that came out of that and thats certainly part of the Data Collection the fcc is doing is about the applicability of title ii which is the old, essentially, the old pstn set of rules as a basis for the fcc enforcing or, in fact, getting involved in this. I just want to go down the line here, and well go the opposite order. This time ill start with you, john, and come back this way. Do you think that this is a wise road to go down, or do you think otherwise . Title ii for the interconnection or title ii for the open internet . Title ii for the open internet. For the cus end customer end. I think i am not yet sure we can achieve what e need to achieve without title ii, so at in this point im going to abstain from that. All right. Ann that maria . I think it would be a disaster which is why i said earlier i was glad to see 706 is the more viable option. I think all layers of the broadband ecosystem get sucked into regulation. Whether thats intended or not, it would be done through state commission suits, it would be done through suits of individuals who feel that they can gain something in that process. Its really not avoidable. So i think it is far wiser to start out in a limited way and make, see if that works rather than start out with something that is potentially 20 years of litigation pretty much stopping innovation. Gerry . Its hard to improve on their statement. It really is. Okay. [laughter] i would say this, i dont if we have to have something, i think where chairman wheeler is pointing us to nondiscrimination, and its hard to argue about that. The only problem i have with that again, whod be against nondiscrimination . But i think its the nose in the tent argument, and i think thats where youre going which is to say once its in, its going to expand, as you mentioned. Thats my concern. Hal . So i think using 706 authority is the right way to go. I think chairman wheelers instinct, initial instinct was the correct one. I think that you have to tolerate some priority deals but police them on a casebycase basis after the fact for any, you know, if discrimination rears its ugly head. But bringing title ii in is like installing a fire hydrant in the kitchen for the chance of putting out a kitchen fire. Its aesthetically not pleasing, and your kids could flood the kitchen. Could be fun on a hot day. Im on record, i think 706 can get the fcc to where the it needs to go, and its the simplest way forward, and i think its a reasonable approach. Just a couple of days ago there was a decision in the tenth circuit about the universal service intercarrier compensation rules which added further legal sanction, judicial sanction saying that 706 is a viable path forward from the fcc. I think the whole legal debate about Network Neutrality was really a debate about does the fcc have a leg to stand on in jurisdiction once youre out of the legacy traditional Public Switch Telephone Network world, and the answer is, yes, it does. And so i think thats a reasonable way to go forward. But were going to have this fight tight, as we should, about the difference between that and the title ii regime, what this means to be a public utility, and i hope that the preceding will hopefully get all that on the table. Well, that was im not going to argue with a good answer. Let he turn it over and see if there are any questions in the audience. And if youll wait until a microphone shows up, ive got one on the back, on this side of the room. Just briefly introduce yourself and keep your question brief, thank you. [inaudible] fcc. Weve dope and gave done and gave a quick History Lesson of all the interconnection disputes that weve had in probably regard time. One that hasnt been mentioned is the retrans issue, namely where you have two entities and a content provider and a distribution entity hashing out the appropriate interconnection fee if you like. Its not quite the same, but it has some of the same hallmarks. And i wonder if experience or success or than success depending on how you see that where theres a largely unregulated negotiation, if that could be seen as a harbinger of things to come, or if is that sufficiently different that it is not a precedent or an indicator . Right. So you guys understand. All right. Go ahead, kevin. Thank you. So i was going to so that oohs the answer to gerrys notion that the its a private contract, we should just let it happen. Whats been the result when you have this classic holdout problem with retransmission for video, you have companies doing this game of chicken where they cut off service to customers. Theyre starting now to block traffic on their Internet Services for customers, and the ultimate result is programming costs spiral up and up. You wonder why your cable bill keeps going up . One big reason is that the resolution of these disputes over retransmission where the fcc is really hamstrung by the rules and the ways interpreted, the congressional mandate to get involved here. The easy result is these parties eventually agree to deals which raise prices and give consumers lots of channels they dont actually want. So thats what im afraid of. I think that to say that interconnection happens in a private way is great, and i think there definitely should be room for private deals. But if we get to that point for interconnection, i think it would be a real tragic outcome. Hal and then anna maria. I do think there are some lessons from retransmission consent. I dont know if id draw the same ones as kevin, but it seems to me you have two behemoths that are trying to cut up the rents. And in that kind of bilateral negotiation, theres very little room for regulation to do something good. Were just kind of putting our thumb on the sale and pushes the pents to the party who has better lob bests. I would lobbyists. If you told the content provider in those situations that it had to license its content or else, you know, there was no way it could walk away from the deal, you know, that, of course, would affect the terms and, number two, it might even create more disputes than you have currently. Anna maria . I think one major difference which is were still going to have no blocking on the internet at the access level, its not going to be possible for the access provider to block the content provider. And the layers, at levels above that there is a choice of networks for, say, netflix to reach me, right . So if my access provider cant block and netflix can get to me through a whole web of connections all over the internet, how do you get to that problem . John . Of course, im happy to say we do not yet see evidence of those kind of failed negotiations on a massive scale. They happened a few times, and thats not good, but theyre not happening as often as in this scenario. If they started to happen more often i, frankly, would first hope that we would see Third Party Organizations i happen to be part of btag, for example, or other extra government organizations perhaps playing a mediation role. But well have to see if we get there. I hope we dont. Gerry, did you want yeah. Something that hasnt come up and i think is relevant here particularly when were talking about the fcc kind of jumping in and regulating here is when we have interconnection regulation of the Telephone Network which in the old bell system days worked pretty well because it was pretty easy to do, but there was a period when we had things called clix. Does everybody remember that . Okay. So we introduced a kind of partially competitive partially regulated network, and everything went to hell in a hand basket. The whole thing about intercarrier compensation, terminating access fees. I dont know if you remember, clex were positioning themselves in front of dialup isps. Remember no ez . Yeah remember those . They jacked their terminating rates up very high, and the ilx could not respond, okay . It was a disaster which was eventually fixed in 2004 by the fcc. But, of course, they were the ones that created the problem to begin with because it was partially regulated. Okay . Partially competitive, partially regulated. What im trying to do is to avoid making that happen in the internet, having it partially regulated and partially competitive. Because we know what happens this that case. Its a disaster. Other questions . I have one in the front here. Just wait one minute. Mike nelson with microsoft and georgetown university. Is there anything we can learn by looking overseas . The same discussion is starting to happen in other countries, and im just curious if theyve got a different way of talking about it or another way of approaching it, when were seeing a growing number of problems there as well. Two answers to that question. One is in response to what gerry just said, the disaster of dialup Internet Access was when the carriers, the Bell Operating Companies came to the fcc and said the internet traffic is congesting our switches, we need to impose permanent access charges on dialup internet, the fcc said, no. The result of which was that the internet market in the did not have permanent charges for most subscribers unlike most of the rest of the world. The result of that was the internet exploded in the u. S. Far more quickly and developed far more sophisticated ways than anywhere else in the world. So, absolutely, there was arbitrage, and there was rent seeking by some of those clecs, i but there was also a benefit. And thats one lesson historically. The lesson today on this issue is if you look at oecd papers on this, what they talk about is most of the rest of the world has settlementfree interconnection. And part of that is they have different market structures where theyve required open access to broadband providers which almost every other developed country in the world, we havent done in the u. S. So they have different sores of issues sorts of issues. The only place weve seen things similar are, for example, france. There was an issue where free, a competitive provider of broadband, wasenesqn allegedly degrading youtube traffic. And it was a bunch of Different Things going on. The french regulator looked into it and eventually concluded that there didnt appear to be any deliberate keg degradation, buzt was within this regulatory but it was within this regulatory regime, they looked into the data, made public the information, and things seemed to be generally resolved. Thats the closest case i can find. But most of the rest of the world has a different structure of their broadband market. Its worse in some ways than ours, but it doesnt necessarily have the kind of concentration and market power that we have here. Of course, a lot of them also, too, have direct government censorship oh, absolutely. Of content as well, which is different. Anyone else want to weigh in on the international question . Okay. Other questions in other questions . All right. Well, i dont see any more audience questions. Let me ask you guys since we have a couple of minutes, do you have any closing thoughts . Have you changed your mind, kevin [laughter] have you changed your mind, hal . Gerry, i know you havent, that seems pretty clear. But any additional thoughts from what youve heard this afternoon . Well, john referred to bill nortons work, and one of the charts that i have in the pack of my mind in the back of my mind on the same web site, i think, is a chart of whats happened to transit pricing. And it is basically, you know, started here, whatever, 15 years ago, and we are down here and still defending. So even where were not doing settlementfree peering, the pricing of transit per megabit has declined exponentially and done so without any intervention. John . I very much agree, but with a couple of caveats worth mentioning. It is worthwhile, we talked about competing approaches of direct peering, transit and cdns, and they are checks on each other in terms of price to some extent. That is great. The caveats being, one, peering is falling incredibly fast. Although i note the volume of traffic is going way up, and so far peering steams to be falling faster seems to be falling faster. The other being that all assumes quality of service is not an issue, that its just dollars, and that may be the case as well, but our last dispute raises the possibility that in some cases if congestion and quality is an issue, its important. Gerry . Im going to question myself because we hear about. Oh, this is all small innovative firms, garage firms, that sort of thing, and i never hear from them. Has anybody heard from somebody in a garage saying, oh, yes, im in favor of regulating interconnection . I kind of suspect they werent, but thats just a guess. Ive never heard from that constituency, and id love to. Well, since i lived it, i can tell you you live in a garage. I live in a garage. [laughter] well, youre the guy. Silicon valley. As a Silicon Valley person, ill tell you and ill remind you if you have forgotten this but we basically dont want to know that you are here. The basic attitude of Silicon Valley for years has been, theres been these sort of hurricane antitrust actions that every now and then wake us up. But the bottom line is even among the venture capitalists is if we ignore washington, its not there. Which ive argued for years is extremely dangerous and a foolhardy approach to things. But that is still, unfortunately, i think the prevalent view of entrepreneurs as well as their investors at least out in the valley. Both encouraging and depressing. Exactly, yeah. The reality is you cant get away from these issues. I mean, you cant get away from strategic behavior on all sides. I think when people say, well, you cant trust the incumbents because theyre going to behave strategically, i think thats fair. Thats what businesses do, they try and take advantage of opportunities. And when people say, well, google and netflix behave strategically, thats right too. Theyre not just in there to serve some altruistic goal. Investors are in this to make money. Theyre not in it just to create good innovations just for the progress of science. The question is whats the minimal regime that we need to channel this in a positive direction, you know, do we need anything, or do we need to realize that these issues just arent going to go away . Theres no set of circumstances, i think, where were going to turn around in 10 or 20 years and say, oh, it all worked itself out, you know . We can all shut down the fcc and go home. This is the nature started at the beginning of the day, the nature of any Network Industry that there are these potential for these flashpoints. Hal, last thought . Im actually worried that were learning about the interconnection debate through the prism of the netflix, really the netflix wars. Whether its Netflix Comcast, netflix whomever. And netflix may not be all that average representative of your content provider. So im concerned that regulation is going to be spawned through a prism that might be a false one. I also want to point out that netflix has certain counterstrategies in its pocket. If it wanted to, you know, for example if an isp gave it a hard time, they could impose an isp surcharge for customers of that isp to discoarnlg people to switch to a rival isp. Theyre in the drivers seat, and thats just another reason why we should take, i think, a goslow approach to adding on another layer of regulation. Im going to give anna maria the last word. Just to answer gerrys question, there is a blog post on the fccs blog that was put out friday in response to the chairmans blog by brett glass who runs a wireless isp in laramie, wyoming, and it is an impassioned plea to not regulate the internet explaining from a very small isps perspective what that would mean to his ability to gain investment. So that is, at least, worth a read. All right, thank you for that. And thank you to my exceptional panelists here. And thank you to ppi for organizing this event, and thank you to all of you for m can cooing. Ive learned a lot, so i thank you all for coming. Ive learned a lot, and so i hope you have as well. And help me in thanking the panelists. [applause] [inaudible conversations] [inaudible conversations] [inaudible conversations] if you missed any of the discussion on the fccs internet policy, youll find it online at cspan. Org and later in our program schedule. Also coming up just a bit later, in under an hour, president obama at the white house reportedly today will seek to keep 9800 u. S. Troops in afghanistan after the war formally ends later this year. The president speaking at 2 45 eastern, and we will have live coverage for you on cspan. With the senate in recess this week, its booktv in prime time all week. Tonight a look at american authors beginning at 8 eastern, Michael Simms and the adventures of henry thorough. Kwame appiah, and ben turn of discusses the beam januaries bohemians. All of that coming up tonight on booktv in prime time. And over on cspan tonight, former senator chris dod and former congressman barney frank will talk about the 2010 financial Regulatory Reform law that bears their names. Its at an event marking the 15 0th anniversary, and warny frank talked about barney frank talked about the success of the t. A. R. P. Program as well as its political costs. We did something unpopular that staved off disaster. Heres the disadvantage politicians are at visavis economists. Economists can write articles and do analyses in which they invoke the counterfactual. They can talk about why this was a good thing, because they can talk about the counterfactual. What would have happened. Politicians are not allowed to use the counterfactual. Any elected official gets up there and says, look, i understand youre upset, but it would have finish i staved it from getting a lot worse. I mean, it was so frustrating. I actually had a slogan which jim see gets brother printed up which i was dissuaded from using in 2010 [laughter] it said things would have sucked worse without me. [laughter] that was my political [laughter] but the problem was we got all of the negative political vibes from the t. A. R. P. And very little public. Thats why it was still very tough to get the bill through. Again, all of that discussion with barney frank and chris dodd tonight at eight eastern over on cspan. If you go back and look at coolidge, he was a conservative hero, and then his tax rate was a Gold Standard tax rate that we saw in the video, 25 was what he got the top rate down to. And he fought like crazy. It started, remember, with wilson in the 70s, so that was an epic battle and when you go look at what all the social socialites said about coolidge, you want to remember that they were probably also from families that endorsed other policies, especially Alice Stewart roosevelt, t. R. Was a active, bully pulpit presidency, and here was coolidge, prissy and cold and not giving out favors. So she said he looked as though hed been weaned on a pickle. Coolidges silence was cultural. He was from new england. Farmers dont talk a lot or wave their arms about because a cow might kick them, you know, if youve lived and it was temperamental, of temperament. He was a shy person. But it also had a political purpose. He knew that if he didnt talk a lot, people would stop talking. And, of course, a president or a political leader is constantly bombarded with requests. And his silence was his way of not giving in to special interests. And he articulated that quite explicitly. Author and columnist amity. Leitz will take your calls, emails and tweets on taxes, depressionera president s and current fiscal policies in depth, live for three hours sunday at noon eastern on cspan2s booktv. Now a hearing assessing the future of the u. S. Postal service and new innovations in the postal delivery industry. Along with top officials from the Postal Services, witnesses included representatives of private Postal Companies including stamps. Com, outbox and newgistics. This hearings an hour and 40 minutes. Good morning. The committee will come to order. As is traditional within the oversight committee, id like to start by reading our mission statement. We exist to secure two fundamental principles. First, americans have a right to know that the money washington takes from them is well spent. And, second, americans deserve an efficient and effective government that works for them. Our duty on the oversight and Government Reform Committee is to protect these rights. Our column responsibility is to hold the government accountable to taxpayers, because taxpayers have a right to know what they get from their government. We will work tirelessly in partnership with citizens watchdogs to deliver the facts to the American People and bring genuine reform to the federal bureaucracy. This is the you mission of the oversight and Government Reform Committee. At this point, id like to recognize myself for an openingo statement. Over which is in a different book. You know, the staff suggests one thats not always 100 . Today well examine recent efforts by a number of private Sector Companies and startups to develop innovative postal products. While the internet has been avae boon for the national and globau economy, its been a mixed blessing for the Postal Service. First class mail volume is down more than 33 from its peak in 2001 and continues to drop. Rvic however, package volume is growing rapidly thanks to ecommerce. Americans are rapidly changing how they communicate with one another, and the Postal Service has struggle today adapt. Struggled to adapt. That does not mean we are living in a postu. S. Postal service world. The Postal Service still has a vital role in affording andill connecting affordably connecting even the most remote parts of the country. Our. Connecting even the most remote parts of the country. Thats why innovation in the Postal Service is so important. We need an infrastructure in this company for moving matter, not just bits of data. Efforts to create new innovative postal products to preserve existing mail volume or create new demand for mail and possibly streamline the way mail is handled. These efforts target every aspect of the Postal Services current operation including innovations into new mail piece design, online postage purchasing, ecommerce return logistics and Greater Consumer targeting for advertising. Today, im looking forward to hearing from private Sector Companies and discussing with them their efforts to develop new postal products and services. Specifically, what problems, if any, have they encountered along the way working with the Postal Service to develop an implement to embrace annotations privateSector Companies are willing to spend millions of dollars to implement new products into the sign to bring future revenue to the Postal Service. In the community often they use the word disruptive and it isnt necessarily a bad thing. Its a change. My wife when she was in her Junior League days thats the way that weve always done it and we have to be very wary of falling into the trap of thats the way weve done it. Its going to continue to be shut down or steamrolled by the bureaucratic red tape before they have a chance to get off the ground. Future innovators look elsewhere to prevent the need to present ideas. I hope to hear Success Stories from those that work with the Postal Service and the future entrepreneurs and innovators can create more marketable open environments in the Postal Service. There is need for innovation whether it is close or boxes for secure Package Delivery orbiter access to the databases like the changes of address there are many areas rightparen innovation. My fear is as a government watchdog and taxpayer with the postal products the American People will be left in the bill for the Postal Service and thats the last thing we need right now. I look forward to hearing from the panel and belief there are smart ways the Postal Service can lower the cost and improve the innovation and private partnerships. Closer to the internet speed. Before i recognize mr. Lynch for his Opening Statement i ask unanimous consent that he be allowed to participate in the hearing. And without objection, so ordered. Your Opening Statement, sir. To develop the innovative Postal Service is by the postal servi service. There are some very innovative individuals hoping the subcommittee for the work. In novembe november 2013 the pol service send it int entered intc partnership with online retailer amazon. Com to test the sunday Package Delivery markets otherwise known as seven day delivery. Its why the Postal Service has recently demonstrated the ability to grow revenue in the face of the most difficult financial conditions. In its Quarterly Financial report will be released on the ninth of this year and they recorded a revenue increase of 379 million over the scene reporting period last year. The Third Straight quarter to 8 increase in shipping and package revenue. In light of these results the sunday Package Service is expanding to other cities across the country. This illustrates the agency can experience Financial Results when capitalizes and builds upon what it already does best at is derived and that is driven by a high working dedicated workforce to deliver the mail to the American People seven days a week. Its an example of innovation rather than degradation of existing postal products and services and we would be willing to take a similar approach in todays Postal Service. As evidenced by yesterdays markup in the full committee the chairman continues to perform a variety of misguided proposals that presume that we can enhance the financial viability of the Postal Service by degrading the very services that have come to define the agency in the eyes of the American People. I simply do not agree that we can reform the Postal Service for the better by eliminating the current delivery by mandating a wholesale conversion of the delivery addresses. Such proposals would only place the Postal Service at the greater businesses to advantage and discourage the longterm viability. To further satisfy the part in the issue icon in the Ranking Member for his strong continued leadership in this area and im proud to sponsor or cosponsor this legislation 2690 the innovative delivery act. This approach to the postal reform would establish the chief Information Officer to lead to the development of the product into services that fall online with the emerging technologies and changing market trends. It would also require the chief innovation officer to ensure thaofficer to ensurethat such pe revenue to the Postal Service. Postal innovation will be the key to the meaningful postal reform package and mail delivery coming and i understand that there are a variety of perspectives on how best to facilitate that innovation in a manner that will paste on a financial footing. Accordingly, i very much look forward to discussing the issues with our witnesses. I look forward to your input and i yield back the balance of my time. Time. Members we have seven days to submit records and we will recognize the panel. Mr. James cochrane the chief Information Officer and executive Vice President of the United States Postal Service. Mr. David williams as the Inspector General of the United States Postal Service. Mr. Welty this is the chief executive officer of outbox in inc. Pursuant to the committee rules, the witnesses will be sworn in before they testify. Would you please rise and raise your right hand . Do each of you solemnly swear or affirm that the testimony youre about to give will be the truth, the whole truth and nothing but the truth . The witnesses reflect all of the witnesses answered in the affirmative. Thank you and you may be seated. Just a little housekeeping matter its my understanding the house will have votes around 10 40 and it will be a rather long series of votes so i want to get everything covered if we can get it done by 10 40 we have to sit around here for over an hour while the go vote and i might be able to make an earlier flight back to texas. So it will be a winwin if you abide by the little timer that gives you five minutes for your testimony an and we we will thee and ask questions. Your entire written testimony is a part of the record and is available for this committee and others to review. You are recognized for five minutes or. Good morning searcher man and members of the subcommittee for calling the hearing on examining the postal products in the 21st century. My name is jim cochran and i service the Information Officer executive Vice President of the Postal Service. And the Innovation Technology in all aspects of the business. During my 39 years in the Postal Service i developed a broader perspective on the business, how we serve the marketplace and our customers. This business is a central as technology mouth is a foundational role in virtually every postal product and service. Emerging technologies while exciting often times also challenge us with a potentially disruptive effect. Effectively traversing this emerging disrupting continuum is my responsibility and a matter of survival for the Postal Service. Postal service operates one of the Largest Technology infrastructures in the world and is supported and codeveloped by some of the most respected Technology Companies as well as many Small Businesses that bring fresh insight. Our goals are simple. Every day we focus on how we can Innovative Technology and new partnerships to generate revenue, reduce expenses, deliver consistent, Reliable Services and a worldclass Customer Experience. Though our goals are simple and our Business Model is most complex and diverse. For nearly 40 years, the Postal Service workforce programs have shared the responsibility for efficiency and innovation with Business Partners. This model is guided by the premise that our profits and brand are enhanced when our partners are profitable and our joint customers receiving a value proposition. Printers come software vendors, mail service providers, Transportation Companies and parcel integrators all play a vital role in together weve built an industry around the market needs. Disruption through the ecommerce and Free Shipping has been a dramatic shift to the ground basegroundbased solutio. Its an innovative product developed to answer that demand that leverages the worldclass processing Transportation Network of kampala daters such as Jeffrey Rosen providing a Great Customer solution. Parcel select enabled competition where ups and fedex or traditional competitors and provide Network Logistics and the Postal Service provides the last service creating a winwin for the consumers. The package market is continuing to change. The new norm involves the same day delivery, customization and constant realtime tracking. Consumers are demanding these without an increase in the cost requiring that we adapt or face air relevance. The Postal Service is hoping to make it more valuable engaging and interactive. To the barcodes and financial incentives for the optimized mail we are creating a digital reflection for the coffee and a digital action for response. We are building new Digital Products that will limit the privacy, security and trust and we welcome Creative Ideas from individuals, companies and entrepreneurs regarding the concepts and technologies. Unsolicited programs provide a venue to submit technologies, ideas to advance the mailing industry. In order to be adopted, these ideas must align with the mission, have a path to profitability and generate postal revenue and they must not damage the respected brand or what product services. The Postal Service receives ideas from a variety of sources. Some of these are not new concepts. Some are being pursued internally and some cannot be adopted because of restrictive laws. The role of the Postal Service and the life and business is changing at a rapid pace. More than ever citizens are using a wide range of technology to transact business and shop. Everchanging Technology Presents the Postal Service with opportunities for success is dependent on how fast we can evolve. We remain guided and a commitment to provide the value and service upon which the businesses and consumers depend. The Postal Service continues to make Great Strides in adapting to changing mailing and shipping needs however the efforts are limited by the outdated restricted Business Model. We have the responsibility to provide universal service for the nation but we do not have sufficient authority of the flexibility to efficiently carry the mandate and we need comprehensive postal reform legislation to return to financial viability. Such should provide an authority to offer products and services that allow us to take advantage of the infrastructure and competencies. We urge congress not to make them ask more difficult by placing further restrictions on the ability to innovate and compete. The Postal Service competes vigorously but we also compete fairly consistent with our legal obligations. We look forward to continuing to work with you and the rest of the committee to a publish meaningful reform legislation and continue to deliver invasions to the American Public and i would be pleased to answer any questions you might have. Mr. Chairman and mr. Lynch would you bring the microphone a little bit closer they dont pick up as well as the members of the subcommittee. The postal industry has a long history of working in the private sector and others to spur innovation. Historically the mail transport fuel on the railroad and Airline Industries postal applications also stimulated advances in handwriting recognition technologies. They acted as a platform for the private sector innovators and electronic postage pre sorting and mailorder industries and the Postal Service and pose the zip code across the country to the benefit of businesses and researchers. The ungovernable internet has changed the world. Great opportunities and enhanced capabilities exist alongside the systems, and unfamiliar risks. Last the forces of Creative Destruction have ravished Traditional Communications and Logistics Systems and the job of the infrastructure like the Postal Service is a support for citizens as they try to compete and position themselves. But it also takes care to assure that the Market Forces prevail and are not undermined. Its increasingly critical endeavor is the Postal Service faces a tricky challenge of modernizing traditional products as it provides support services for emerging technologies. Its largely on its ability to innovate and embrace the innovations of others. As a result, the strengthening of the Postal Services process for innovation will be needed. That includes seeking to understand the frustrations and supporting emerging needs for a strategy clarifying the entry point for innovators and providing the staff to join innovators and navigating the huge postal structure and remained with them until the proposal is resolved. Stressing the financial viability of the puzzles and developing the ability to engage in the rapid prototyping of the new products and operational innovations. The partnerships for the private sector and the government are important and bringing new ideas and a specialized competencies. They seem particularly rich. Support for ecommerce and health and government transactions at the front end by providing a portal for the Identity Verification for individuals and businesses and providing access to the Currency Exchange instruments and at the back end by assisting with packaging and the shipment of parcels. Using the micro warehousing to help Small Businesses and innovators with logistic shipping solutions and the Digital Access to the Postal Service networks for the public and the commerce by linking them together the website and post offices and digitally enabled carriers and conduct individual and office of the data that is now generated throughout the network for the revenue ideas and business intelligence. The integration of the data streams into supporting matters the internet, smart devices, Search Engines and Cloud Storage to lay the foundation for the changing world. An aspect of what will come next on the foundation will likely be an ecosphere that continues to be ungovernable and chaotic and the changes in the learning curves and substantial destruction. In this area it will depend on part of the competency of the postal infrastructure. It will deploy the nature to the new technologies that include Additive Manufacturing also known as three d. Printing. The internet links ubiquitous censoring. Augmented realities and smart devices, data analytics, advanced robotics. They were slow to grasp and adapt in the early phases of the digital age and were partially constrained from doing so legally. The next phase of the age of technology will likely be more disruptive and would seem today. The Postal Service must be highly agile and develop an intuitive sense of the changing roles and the new challenges facing the american businesses and citizens. The key aspect in the Postal Service ability to transform boston put a stronger confidence competencies for the innovatio innovations. Thank you mr. Chairman. We will now move on to some of the private sector folks. We have heard it spoken about at least a dozen times in earlier testimony and i feel the need to go off script and a movie is the only thing that comes to mind. Its one of my favorites. The princess bride. There is a scene where montoya is caught up with a band of criminals and theres a criminal mastermind and he keeps using the word inconceivable when all of his plans do not go as planned. Montoya looks at him and says you keep using that word. I do not think it means what you think it means and that is how i feel today in the word innovation. I dont think that it means what you think it means. The reason for this is because innovation at its heart is disruptive. It destroys things. It kills jobs. If you think that is too bold of a statement, consider the fact that in 1926, the index was formed. The average tenure at the time of the company is on the index was 60 years. Today it is less than 15. In fact since its inception, there is only one company that remains on the index and that is general electric. One single company. All the companies are gone and destroyed. But for all of its disruptive capabilities, they are is an effect pursuing innovation. It is the narrow road in the cash flows and for something that is uncertain. The promise comes from the form of new jobs, new marketplaces for every job come every company can every market that is destroyed through increasing innovation to more of them pop up in its place in the market and ideas and new concepts and new workforce is visibly couldnt have been fathomed but what happens in th that processs the incumbents usually fail and go the way on the s p 500. We have to understand that truly embracing it means a fundamentally different Postal Service. It means that in ten years it looks almost unrecognizable from the Postal Service today but that doesnt mean that it is worse off. In fact, it doesnt mean the jobs have to be destroyed in the Postal Service but make no mistake. Innovation will come. Disruption will come. As we talk about innovation and embracing it, we need to understand that it means fundamental chord changes to the Business Model and embracing it means destruction but also means new markets, new jobs, new opportunities. Thank you. Thank you. Mr. Jeffre weissberg. We are internetbased software that allows companies to be customers to print their owyourown postage using their eg computer and printer. Stamps. Com serves over 500,000 registered customers, primarily Small Businesses. In 1999, we became the First Company to offer a software only pc postage solution enabling the customers for the First Time Ever to print real postage from any internet connected standard printer. Just seven years ago, the postage accounted for one quarter of a billion dollars of annual postage sales. Last year it accounted for over three and one quarter of a billion dollars in the postage. The postage growth of load was more than 35 yearoveryear. That is consistent doubledigit growth every year even through the heart of the recession. Virtually all of the priority and express growth in the recent years is generated through the pc postage industry channel. The recent study showed revenue through the industry pc postage channel that costs 2 cents per dollar of revenue compared to 47 cents per dollar through the usps outlet. Pc postage produces secure identifiable knowledge of secure for the biological attacks in the postage provides customers from cuttingedge Technology Without the Postal Service having to pay for research, development, support or maintenance. Stamps. Com launched a service targeted at organizations with multiple geographic locations. It features enhanced reporting that allows a Central Location such as a corporate headquarte headquarters, greater visibility and control over the postage expenditures across their entire network of locations. The ecommerce merchant with multiple stores can use stamps. Com to consolidate their orders to ship them out with these. With one click they can directly import all of their order to data from the most Popular Online marketplaces and Shopping Cart Software and then automatically print shipping labels. All the data including usps tracking automatically posts back to the web store. Stamps. Com keeps the buyer informed and orders the carrier pickup, sends an electronic manifest the Postal Service and generates the form so all the carrier does is scanned the form once and all of the packages are automatically in the Postal Service computer systems. Pc postage is based on a Publicprivate Partnership with the Postal Service regulating industry participants. Our products must compete extensive usps testing and evaluations in the areas of operational reliability, financial integrity, and security. The Postal Service also partners with the industry to achieve mutual goals of improving the Customer Experience come increasing revenue and minimizing cost. The cio sitting on the panel had so many of the dedicated postal veterans who have ably worked with us for many years deserves much credit for the Success Story that is the partnership between the Postal Service and the postage industry. We believe that partnerships are the best path forward as Technology Innovation becomes increasingly important for the future. Having the Postal Service create its own technology is not the best approach. Instead it should provide incentives for industry innovation. This allows customers to pick the best Technology Solutions for their needs. The pc postage provides the jobs in the industry and the Postal Service. Every package produced is ultimately delivered by the city or the rural carrier. The growth in the postage means more packages to deliver, more letters to deliver, more volume to service. Thank you for the invitation to testify today. Mr. Eidemiller . Make it gets mangled quite often. Im used to it. Good morning mr. Chairman for the impact systems we are a small Startup Company that produces a better pharmacy for the future of prescription packaging. By the 71yearold navy veteran from a small town and the california population 85. This is impact. This is the traditional roundabout. This bottle of water is evident, this prescription is not. We have more security in this event we do in this. Hard to believe. We also have a lot more legal space so it is much easier to read. Last it is much more Space Efficient and compact. Its made in the United States and pennsylvania. That is another reason im here today. The usps provides a favorable rate for the machine. This is a parcel. It is 2. 22. This is a dollar 56 cents for the taxpayer for every Prescription Medication that gets built out in the United States. Realizing what we had with file as one of the largest by mail we send the opportunity to save the taxpayers money and provide a better and safer through the mail and through the post office. Itoffice. So working with the manufacturer in new york, we developed this envelope that meets all of the mechanical requirements in the flat. We tested it on the testing equipment in fort worth, verified that it worked for me and we received our approval. Over the next 18 months we continue to improve our product and refine it. And we came back with a product that looked like this. Smaller, lighter, cheaper. We took 2 ounces out of this envelope. We put a package together that we could do at 50 each second and this one was 15 per minute. So 18 months of work belie deler not to go from this to this. We resubmitted the package. This package plus some of the internal improvements and we also wanted to test this. Our packages were rejected. Not only this new package, but the existing package as well. We were shocked. For a completely different reason and it wasnt the fact that the mechanical requirements of the machine flap which has been like this and like this. It was that a box in an envelope is not a machine flat and thats why we rejected it. We were shocked. We had already been approved. We went back, we solicited. I sent a letter to the father of the flat rate box. I love them and i use them all the time. And we asked for a sympathetic year. We were referred back to the mailing standards and got a very curt response that basically said, and i quote, thank you especially for your persistence. Unfortunately the piece with its current content qualifies as a parcel. If you change the contents, please contact us again. If we change the contents from this to this the entire point, im sorry, is not this, the point is this is a better and safer file because of its shape and its 29 cents cheaper. Thats the point. After feeling very frustrated with our entire experience in the post office and weve been to the post office for a reason. The post office provides value and is the only agency that can legally put prescription drugs through a mail slot in the mailbox and not leave it on your doorstep. Thats an important factor in safety and in leaving drugs on the doorstep. We want to work with the postal office. We begged and pleaded. We will change our package and test it in our expense. We want to use the post office and it fell on deaf ears. We went to the private sector and said you know what, we will take it. No questions asked. We know how many of these we can put on the plane and they can be second day service at a dollar a piece. Thank you. Members of the committee . Good morning. Today i will describe fo the subcommittee how the United States Postal Service has partnered with and helped make it possible for my company newgistics to direct to the manufacturers, distributors and Logistics Service providers. Thank you mr. Chairman and members of the committee for allowing me to speak on behalf of newgistics. Im the operating officer at a privately held Company Based in austin texas. We have over 400 people on the table. We were formed on the premise we could develop a better way for consumers to return merchandise to retailers. Today we are a provider and Technology Enabled solutions for the directtoconsumer retailers, manufacturers, distributors and providers. The success is due in no small part to the Postal Service and its willingness to listen and work with private entities like newgistics. More specifically we offer a National Integrated Parcel Delivery return service for customers. We provide costeffective reliable convenient shipping solutions by working with the Postal Service to provide first Mile Delivery and pickup. When wwithout it we viewed ourss as a Technology Company that would provide information retailers regarding the package is however we evolved into a Logistics Company handling returns for the retailers making use of innovative technologies. We concluded customers want to be able to return packages easily and retailers to make the returns more efficient and costeffective. Therefore we developed a proprietary return solution making use of barcodes in our sport label. The barcode provides us and for customers with detailed information that quickly enables customers to manage the transportation and return processing resources. As we evolve we discussed the possibility of creating a convenient process for handling the returns for the large merchandise that made use of the spot labeled. Based upon the collaboration of the Postal Service who developed one of the most innovative products, the postal returns with his. Prs is a Postal Service program under which the providers like newgistics returned them from designated Postal Service facilities. Early retrieval enables us to provide advanced data and customized return service to the retailers. We find the Postal Service is receptive to working with us beginning in late november of 2001 we had numerous meetings and following those meetings in may of 2003 they got permission from the commission to test and approval was granted in september of 03 and testing began in october of 03. After two years of testing in october of 2005 the Postal Service got permission to become a permanent class of mail. The Commission Approves on or about march 32006 and from that point we were able to implement the return solution including the smart label in conjunction with the program. The intelligent return solution developed in collaboration with the Postal Service simplifies the return process by offering the consumers prepaid returns over the pickup at their home, workplace or drop of dropped ofy mailbox or post office, that is through the solution packages through the posta postal servics retail collections network. Our solution also gives consumers return the products the confidence to return will be handled expeditiously. In addition, the return solution has a bold newgistics to expand offerings to include Parcel Delivery fulfillment and Ecommerce Solutions to customers. The Postal Service has been and continues to be a willing and important partner in our efforts to develop Innovative Solutions that bring significant value to customers and their consumers. Likewise we have been successful for the Postal Service perspective based upon the most recent available data of the prs continues to grow and the Postal Service fiscal 2013 it handled more than 50 million packages have generated more than 120 million in revenue. Members of the subcommittee thank you again for the opportunity to justify. We are going to break with tradition. Normally i would ask the first round of questions. Mr. Lynch has a vote in another committee so im going to allow him to ask his questions and then i will take my opportunity. Thank you mr. Chairman. I appreciate that. And i think the members of the panel further help. Its been a very interesting discourse this far. When i think about the future of the next iteration in the United States Postal Service. One of our local companies has a system over there that theyve rolled out where its called a digital mail scam where i can pull up my email as it arrives at the regional facility and i can go on the website and see the mail to be delivered when you say junk mail is coming, not necessarily. Its not as inevitable as we would think. You can click on it and tell them not to deliver it, so that is a sort of new iteration in the Postal Service thats out there and i think thats good to be coming to the United States at some point and that is really disruptive. It would be a great thing for the environment because the huge drop in the mail volume because people wont be getting mail that they dont want and their mailbox and down here in dc, you know, at my apartment that is 90 of what i get is the circular and stuff like that and, you know, if my wife and my girls didnt get the information that they get every single day i would probably be saving a ton of money. But, so the volume will drop because people i will be good for the Environment Committee would be a terrible thing for the United States Postal Service National Letter carriers. It will drop in volume, but thats really disruptive change command that is what we are going to have to deal with at some point. But the chairman of the full committee has in mind is putting out about 1. 5 million of these steel boxes in urban areas and towns he wants to change 15 milliondollar delivery addresses so even if it is 100 in a box that comes to 1. 5 million. If you make them bigger you can drop that to maybe 750,000. But that is a huge expense even where it is feasible and once we have 750,000 over america how much flexibility to be have . In light of the technological changes that are coming . Putting a steel box in the middle of the neighborhood and telling the Senior Citizens okay you can walk a quarter of a mile to get your mail, it is disruptive in a way that thats not innovation. Thats going backwards, come down to the steel box and get your mail. Thats not created, it is costly and inefficient and it reduces our flexibility i believe in terms of what we are doing max maxed. Would the gentleman yield . Know you can talk about me when im gone. My pleasure. [laughter] im sure it is. So when i think about the idea of going to the fiveday delivery whicfive daydelivery wd idea but its popular around here, the president and the chairman supports it and i oppose it most innovation tries to tie in with what society is doing. It tries to answer the need of that is out there. Where i live which is common in America Today we operate on a seven day schedule. All the stores that used to be open five days long ago theyve gone to seven. So now the post office in the spirit of innovation is going to close for two days every week i just think thats the wrong direction. You seemed bursting with an urge to answer. You have a fabulous example of citizens in switzerland being able to unsubscribe from junk mail and if the technology existed in the United States for two years. We brought the technology to the states with outbox and we unsubscribe over 1 million pieces of junk mail and we were able to do it through the digital delivery postal mail and what we found is even though they unsubscribe from the volume and its the holy grail for advertising. We could know exactly what they wanted and what they preferred or did not prefer, and that type of information is missing and thats why its so unfortunate all im saying is i want to empower the customer. This is the postal customer picking up the tab. They survive on the stamp but i want to empower the customer so they dont have to go to any company they can see their mail when it arrives at the original post only center and click off on it if they dont want it delivered, and that i think is disruptive change and innovative change and it will take us to a whole new world and i think that would lower the cost, that would make it more efficient and improve the Postal Service. Ive gone beyond my time. Of the gentleman from missouri is always welcome to speak in his committee. Thank you mr. Chairman. In 2011, the Inspector General released a report on the role in the digital age the idea of the Postal Service expanding into the hybrid and reversed hybrid mail services. Can you explain what the services are and the elaborate on why it may be beneficial to expand into these areas . We believe that the ability to print a letter at the point of delivery would keep a lot of the mail out of the system and a soviet ideassociate idea on thet and on the fuel and on the crowding through the network come out the network of sorting would be a very good idea. It allows the variation so that you could print different letters for different zip codes in your opinion is the Postal Service put the cart before closing the Distribution Centers . Before they have a plan to go forward to lessen the volume of the mail . I do. I think that there is excess capacity in spite of those centers, but i dont believe that it should come as you said, spring out into the event of the impact of what this would be. Picking the timing for the innovation is devilishly difficult. And if we present something that isnt immediately embraced and we have closed off and burn the ships behind us and closed off the possibility of using the other network, it would be a very serious mistake. And of the hybrid and reverse hybrid sounds similar to the Business Model of one of the witnesses here today. Mr. Davis, your company outbox gave customers the choice to bypass physical mail, correct . Correct. If it was dependent upon the participation of the Postal Service infrastructure and customer participation, correct . Correct. This year outbox announced through the blog post you informed of the customers about why outbox was shutting down the service and the post signed by you and the business partner. You mentioned that the initial test would show positive signs of success and operational simplicity. But the deal didnt work out. Is that correct . Absolutely. Additionally, you described your visit in the Postal Service Senior Leadership as a mr. Smith goes to washington moment where the Senior Leadership made it clear that they would never participate in any project that would limit junk mail and that they were immediately shutting down the partnership is that correct . Correct. In developing the Business Plan were you aware that advertising represented a significant portion of the Postal Service volume in the revenue . Yes. As a self sustaining entity that has to generate revenue where it has a right to choose. Absolutely. Mr. Cochrane, the Postal Service has been quiet on this issue. Is there anything that you would like to add . The concept of people collecting mail and digitizing has been out there for almost ten years. There are other companies in that space. The approach is one where people sign up and go through what we call a commercial agency thats a very common and it happens in buildings all over town and its very common in the business arena is in new york and washington. Outbox approached it differently. That required them to go to the mailbox and pick it up but there are companies out there sustaining the Business Model and providing a digital image on a daytoday basis. Although i commend mr. Davis and the company for the Innovative Solution i think it is unfair to use the hearing to criticize the Postal Service for not being innovative and at the same time insist that it operates with a business mindset, which is what it was doing in this case. In addition, i ask for unanimous consent for may 8, 2014 from the heritage foundation, the founding blog that is titled why the Postal Service was right to side with the junk mail is over outbox. Without objection, so ordered. Would a gentle man yield . I would like to side with you on this case although it is a shame to see that forprofit entity close because they are not making a profit i do agree that when this is an innovation that should be on the list of what the innovation in the Postal Service because it falls squarely within the basic requirement just as stamps. Com is an innovation the post office ignored to their peril. One of the strange things that you and i agree on is at a minimum post office ought to do all of its jobs of revenue and revenue savings first. But the most important innovation in the company is to do the job they are paid to do well and innovatively. They suffer from neglect, so i share with you that in the comprehensive postal reform bill we increase the innovation funds specifically because we hope the post office will innovate within its core in addition to outside its core. So in your opinion, does it cry out for the Publicprivate Partnership . Idb there were some core businesses the post office can and should own and they may use private enterprises as the contractors. But i would say on the record here today the job that outbox proposed if embraced by the Postal Service as a core function. Although mr. Lynch disagrees with everything that i stand for apparently in postal reform including apparently from the Electronics Industry that is the first for my colleagues. But the fact is that when he talks about the digital delivery in switzerland being inevitable, he talks about a version of the Business Plan that switzerland has gotten ahead of us on and he seemed to me was that it would be bad for the base that he cares about. But the fact is that hes right. Hes absolutely right that these innovations are either going to happen within the postal system, or the postal system is going to miss it altogether and then be fighting for, as you said, core right to decide not to participate in the business that may already have gone a long way. So, i couldnt agree with you more that your point was right on. I think that we may be having an out of body experience agreeing with you so much late lately. We will get back to the regular order and start with some of my questions. Mr. Davis i think most of us know the story of outbox. You gave your time to speak about innovation which ive enjoyed listening to. But can you in a minute or so tell us about what outbox did in an elevator speech version . Is enabled the users to view from anywhere so whether it is their iphone or ipad baker to tell us what they wanted and what they did not want physically. So it is a hybrid approach in that regard. Mr. Speedy levin is correct and that this is a fabulous idea that should be adopted by the Postal Service and we started testing it in austin texas with the idea that we would ask forgiveness before we ask permission becausaskedpermissiod regulations are so onerous. And we did so with great fanfare and we were shut down in that meeting with the postmaster general and the senior team and in that team, we had a fundamental misunderstanding of who the customer is in the Postal Service. And he said your customer is not my customer. And i i said mr. General what you mean . He said my customer is the sender of mail that essentially pays me to please mail on the kitchen tables of every american every day. And while true, that is not where the inherent value of the Postal Service lies. The value lies with its connection of every single american. And so, it is my belief that Large Organizations and the government of which the Postal Service is in part both do not naturally attended to adopting innovation because it does disrupt them. And so, it was my hope and my Business Partners hope that we could test this on a small scale in the Postal Service but we were not allowed to and so the only way that we can do this is to have a safe harbor, something within the Postal Service that allows them to be disrupted by smallscale and localities around the country for testing ideas. And as i mentioned our ability to give the customers choice led to higher value. It led to increased understanding of who the customer is in the American People and lets you value opportunities that were beneficial for the enduser and for our company and ultimately the Postal Service. You mentioned that you were unable to get your product classified as a machine . Machine . That is more of a Competitive Service or the post office and i think that you mentioned the amount of postage that it would take. These are overthecounter rates for 2. 22. This is the overthecounter rate which is 1. 56. About in the redesign he said they are delivering them for a dollar a pop. They put in effort on the table and its a challenge that we have that i brought them up is we are a young startup and investing the effort why do we have the opportunity to generate revenue. And while we think this is a great and wonderful idea our business picketed slightly from that so we haven havent had af interest in bringing this to the market but we hav had a lot of discussion. We put a contract on the table until they have the volumes into the unit and cost. But they say yes we be leaving the package. I ask them to submit their record. I give you the impression you would rather use the Postal Service. Service. I would rather use the post office. They have the infrastructure and the trust. They can put this envelope into every mailbox in the United States safely and secure. The volume is their end of the business is there. This is a regular standard business envelope. This is 90 cents overthecounter. 2. 22. Theres hundreds of millions of dollars on the table. Now, as the only possible reason that i can seek the post office says we wanted classified as this versus this is Topline Revenue. Because the Topline Revenue of the parcel is higher than the flat. In the Strategic Plan in 2013, i got this online come it says the post office makes three times more money on the flat then the parcel. So the post Office Actually makes more money doing this at a lower cost than doing this. Three times more revenue. Why . Very simple. Its easy to automate. Weve proven that we can automate this. The only case is the square box in the envelope is a flat. Weve tested it. We volunteer to work with the post office to prove it. To draw you into the debate whether or not a secure delivery location for your parcels would be a benefit to your company or not. Ms. Norden, we took two on your side of the aisle first. If you dont mind well go recognize chairman issa then come back to you. Mr. Chairman . Thank you. This is an interesting and i wont use out of body as mr. Clay did. But interesting turn of events when mr. Lynch calls me a lutite and says theres an inevident blt were going to do what switzerland has done. Now, mr. Williams, i was madder than hell at your proposal. I think the idea that youre trying to be the chief innovation officer