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STATEMENT OF MATTHEW R. KORN,
VICE PRESIDENT OF OPERATIONS
AND VICE PRESIDENT OF AMERICA ONLINE NETWORKS
TO THE FEDERAL COMMUNICATIONS COMMISSION
January 23, 1997
On behalf of America Online, Inc. ("AOL"), I appreciate the opportunity to participate in this forum, exploring the issues raised in the Federal Communications Commission's ("Commission") goal to bring increased bandwidth to all Americans. AOL commends the Commission for initiating the investigation of these important issues both by holding this forum and by releasing its Notice of Inquiry in the access charge docket. The Commission has properly recognized the complexity of the issues facing the Internet online industry as more and more people seek to get online and, we believe, has drawn the correct conclusion that companies like AOL should not pay current long distance carrier access charges to local exchange carriers ("LECs"). Since the primary mechanism for Internet online access today is the only ubiquitous telecommunications infrastructure in this country -- the public switched telephone network ("PSTN") the Commission must help ensure that the marketplace is able to provide the capacity necessary to make access to the Internet ubiquitous as well. Universal access to the Internet and other advanced telecommunications networks is critical, lest we end up with a society of information "haves" and "have-nots".
Founded in 1985 and headquartered in Dulles, Virginia, AOL is the world's largest Internet online service with more than 8 million members, providing local dial-up access to its services and the Internet in 700 cities worldwide. AOL employs over 6,000 individuals worldwide. The company was formed and operates in a highly competitive environment and its business decisions are based on the imperatives dictated by that environment. In fact, during the more than ten years of AOL's existence there has been no time when the company could operate under a theory of complacency. Instead, continuous technological developments and restructuring of our business model have resulted in AOL's dominance of the Internet online marketplace.
AOL's fundamental mission is to bring the wonders of the Internet online medium to mainstream America and to citizens all over the world. The company believes that the resources in the online environment, despite the industry's infancy, are unparalleled in any other medium heretofore seen. As a result, AOL supports the Commission's efforts to ensure that our nation's school children have access to the Internet and other online services and hopes that the Commission's rules in the Universal Service proceeding enable AOL to provide some of that access. In fact, AOL's recent surge in membership illustrates that the Internet online medium is becoming increasingly important to the lives of Americans, with many people using AOL for business, education, entertainment and information. As a result, the Commission must tread carefully as it considers policies that could significantly increase the costs of Internet access for consumers. If the Commission awards large new fees to the LECs for access to the PSTN, there will be a significant risk that the only winners will be the phone companies, while consumers and the entire Internet online industry will lose.
In order to realize the promises of this exciting, global medium, all sectors of the industry must keep pace with demand and with technological development and deployment. And, just as AOL must increase investment and modify business plans to meet the explosive demand for Internet online services, so must our counterparts in the telecommunications service business respond to trends with respect to use of the PSTN to meet the needs of its customers. Without forward-looking plans by both industry sectors, and cooperation between the two, the Internet online medium will be unable to flourish. AOL believes it is critical to provide access to our customers in the fastest, most efficient manner possible. That means we can no longer be stuck in the world of 14.4 modems provisioned through line-side analog connections but must, with the cooperation of telecommunications providers, be able to provide access at faster and faster speeds.
In addition, since AOL's recent marketing and new flat rate pricing plans have increased demand beyond our expectations, the company must take responsibility to increase its modem capacity to meet customers' needs. In order to do this, just last week we made the decision to increase our investment in expanding our system capacity over the next several months by $100 million to a total of $350 million. AOL is adding additional customer support representatives and expanding its member communications initiatives to improve the quality of our members' experiences.
II. The Internet Online Environment Requires that Telephone Companies Keep Pace with the Demands of the Marketplace.
One of the greatest challenges that AOL has faced in recent months with the meteoric increase in demand for online access, is dealing with the problems originating in the public switched telephone network. As the largest dial-up network, we are dependent upon access to the PSTN by way of local exchange carriers to provide our services. In general, our mostly residential customers dial into AOL through a modem in their homes, and connect to AOL as they would to any other local business by going through the local central office switches. The calls are then routed to AOL's modems and taken into our computers in Northern Virginia via dedicated lines. Unfortunately, in certain heavily trafficked areas around the country, the local monopoly telephone company has not responded to customer needs by making the necessary upgrades to handle the increased data traffic.
While it is certainly true that the increase in online usage over the last year has been large, it is also the case that alternative uses of the PSTN have been growing steadily over the last several years. Indeed, it should come as no surprise to the LECs that traffic other than voice telephone traffic from fax machines, telecommuting, and data transfer, for example has increased the overall use of their networks. In fact, aggressive marketing by the LECs of second lines to the home for just these services illustrates that the trends in this area were, or should have been, well known. Despite clear indications of a changing environment, for example, the LECs have continued to base their business plans on an average call hold time of 3 to 5 minutes per call. Without a recognition that this is no longer the norm, the telephone companies will increasingly make it difficult for customers to receive reliable service over the public switched telephone infrastructure.
AOL believes that telephone companies should welcome the development and deployment of a data-friendly environment and should be willing to work with AOL and other members of the Internet online industry to ensure that data traffic and voice traffic can co-exist in the future. For example, there may be clearly foreseeable traffic increases in certain central offices where the local telephone companies could work with AOL and other ISPs to implement engineering solutions that help prevent network overload. Just as AOL has had to commit $350 million this year to respond to the changing demands of the marketplace, the phone companies should be willing to make investments to keep pace with the demands on their infrastructure. They should not, however, be permitted to obtain a government sanctioned increase in fees levied upon certain selected industry sectors to do so. Indeed, it would ultimately do a disservice to consumers if the LECs were able to change pricing structures by regulatory mandate, while the investments that AOL must make will be tested in the competitive marketplace and hopefully be paid off in the long term.
III. Most of AOL's Network Congestion Problems are Distinct from Problems Within the Public Switched Telephone Network.
In determining how to address the issues relating to increased bandwidth across the country, AOL hopes that the Commission will not fall prey to the perception that AOL's network congestion problems indicate a serious problem with congestion on the PSTN. With a few limited exceptions in high-density, high-use areas around the country, the widely-reported congestion problems complained of by AOL members have not affected the ability of people in local areas to make voice telephone calls. Instead, the vast majority of busy signals heard by AOL subscribers relate to the difficulties that AOL has had in the speedy deployment of modems. As the person in the company in charge of ensuring modems are deployed, I can attest to the fact that AOL employees are literally working around the clock to correct these problems and the company is committed to increasing the current total of 200,000-plus modems in AOLnet by 75% by the end of June, 1997. But despite the intense, full-time focus of AOL employees, modem deployment takes time.
Critically, however, AOL finds itself dependent upon local telephone companies for certain key infrastructure and services and therefore cannot move faster than those companies permit us to. Thus many congestion problems that ISPs have, as distinguished from public switched network congestion, could be alleviated by faster and better provisioning by local telephone companies. AOL has also tried, where possible, to look to competitive providers for efficient quality service in local markets. What the company has found is that the incumbent monopoly providers themselves have, from time to time, delayed provisioning to competitors of necessary facilities and services and resisted efforts to introduce competition into the local marketplace. Such activities will continue to make progress in the Internet online marketplace very difficult.
IV. Online Usage Does Not Threaten the Collapse of the PSTN.
AOL believes that in order for the Commission to fairly and accurately address the challenges presented in this Forum and in the access charge proceeding, an important key fact must be remembered there is currently no widespread threat to the PSTN from Internet online usage.
While some telephone companies have pointed to limited "switch congestion" in areas where ISPs are located as a problem that interferes with the PSTN traffic, these limited instances do not portend impending doom and could be addressed by better and more forward looking network engineering on the part of the telephone companies. Even in the few instances where there have been problems, there appear to be technological and engineering answers. In addition, a significant majority of online traffic continues to occur at off-peak hours when capacity in the telephone network would otherwise lie idle.
AOL believes that the investments currently being made by the telephone companies need to be directed towards addressing the issues arising from efforts to carry voice and data traffic over the same facilities. We also believe that the long term goal for the Commission in ensuring that the scattered problems of today do not become the pervasive problems of tomorrow should be to establish policies that encourage the development of true facilities-based competition in the local telecommunications market.
AOL intends to participate actively in the Commission's pending proceeding on access charge reform and hopes to be able to work with the Commission in developing and implementing market-based solutions for a competitive telecommunications future that helps reach the Commission's goal of bringing Internet online services to every American household.
Thank you for the opportunity to participate in this important dialogue. We look forward to working with you.
Director, Law and Public Policy
Assistant General Counsel
Deputy Director, Law and Public Policy
America Online, Inc.
22000 AOL Way
Dulles, VA 20166-9323