Forbes ASAP, June 6, 1994
Washington's Bogeyman

Big Government and Mass Media always feed on fear of monsters. While politicians promise to protect the people from the dreaded private sector, leading newspapers such as the Washington Post and network shows such as “60 Minutes” chime in with continuing reports on the economy as seen from the shores of Loch Ness. Peering through the shifting, inscrutable murk of the marketplace, pundits both private and public can descry beneath every ripple of industrial change the spectral shape of some circling shark or serpent from which only a new bureaucracy or liberal constabulary can save us.

There are always many witnesses to the threat. In his campaigns of creative destruction, any great capitalist provokes enough panic in the establishment to fuel the beadles who would bring him down. Losing competitors, whether in oil or software, are always in the vanguard of the monster hunt, which is therefore usually launched in the name of “competition” and is designed to stop it in its tracks before anyone wins.

In the industrial era it was the so-called Robber Barons—creators of the great industries of oil, steel and finance—who greased the growth of government with their chimerical menace. Radically reducing the prices of their products, such leaders as Rockefeller, Carnegie and Morgan expanded the economy to serve middle- and lower-income customers and laid the foundation for the American industrial leadership that triumphed in two world wars. But at the same time, charged with predatory pricing, collusive marketing dumping and other competitive violations, Rockefeller, Carnegie and Morgan emerged as the monsters of monopoly who fueled the growth of government through the first 40 years of the century.

Now, with information technology driving private sector wealth and power, there is a need for new monsters to fuel new sieges of government and regulatory growth. This time the monsters bear the names of Milken, Gates and Malone—new trolls to terrify little children and cause competitors to cozen Washington and judges to reach for their RICO bludgeons and commissioners to salivate and shuffle subpoenas and senators to tremble and wreak new tomes of law and bureaucrats to sow the economy with minefields of abstruse new rules.

Of the three new monsters, big government managed to deliver us first from Michael Milken, depicted as a Banker Shark. But Milken’s vision impregnably survives in the form of the industries and infrastructures he financed, chiefly cellular phones, fiber optics and cable television—the forces that laid the foundation for a new broadband economy.

With Milken laid low by cancer and the courts, Washington needed new monsters for the 1990s. After serious and continuing contemplation of Bill Gates as a possible MicroShark hidden amid the mazes of Windows and DOS, Washington recently has focused on the formidable visage of John Malone.

As the titan of cable and leader of Tele-Communications Inc., better known as TCI, he was a billion-dollar beneficiary of Milken’s bonds. At a time when governments everywhere covet the huge, new wealth emerging from information superhighways, Malone has become the favored target of the Loch Ness news hounds and public-law pinstripes: an Abominable Snowman ranging down from the Rockies to raid and ruin rival companies, terrorize politicians and gouge his 21 million customers. Or, in the words of then Senator Albert Gore, Malone is Darth Vader himself.

This particular monster hunt, however, could not be more ill- timed. There is no way that this administration can demonize the cable industry and micromanage telecom without direly damaging all its hopes for an information superhighway and thus the best prospects for the future of the U.S. economy. Just as the automobile industry was the real heir to the triumphs of the “robber barons” in oil, steel and finance, so the computer industry—the core of U.S. world industrial leadership—will be the chief beneficiary of cable and telecom ventures in broadband networks.

The U.S. now commands global dominance in computer technology. But as Andrew Grove told Forbes ASAP, “infinite processing power will only get you so far with limited bandwidth.” The next generation of computer progress depends upon the efficient use of cable bandwidth to homes and home offices, which comprise a fist-growing 60 percent of the current market for computers. Even if computer executives fail to see the threat, the monster hunt against cable thus jeopardizes the supreme achievement of the American economy over the last decade—its global lead in computers.

The U.S. government constantly reiterates its desire for information superhighways. The problem is that punctuating the call for broadband nets is an insistent mantra of “competition” that reverberates through the speeches of nearly all participants in the debate. As Ward White, vice-president of government affairs for the U.S. Telephone Association, points out, however, this mantra of competition “disguises a new scheme of market allocation run by the regulators.”

In this competition no one can win or make any money. The $ 10 billion in profits claimed by the Baby Bells still under the Greene thumb are highly questionable. Most of their copper wires and narrowband switches—rapidly obsolescing by any objective standard—are being written off over decades. That means the real costs of the Bells should be much higher than their announced costs, which do not adequately reflect the fact that their $ 300 billion worth of plant and equipment is rapidly losing market value. As TCI’s sharp and salty young COO, Brendan Clouston, points out, telephone companies are used to pretending to make money under rate-of-return regulations when they are really losing it.

Cable companies, by contrast, are used to pretending to lose money when in fact they are raking it in. A standing joke around the offices of John Malone’s cable empire, which comprises TCI and Liberty Media, asks what Malone will do if the firm ever reports a large profit. The answer: Fire the accountant. Indeed, TCI did not report even a cosmetic profit until the first quarter of 1993. Cable firms were financed with junk bonds and other debt that allows investors to be paid off with tax- deductible interest payments rather than double-taxed dividends and capital gains favored by the telcos.

Michael Milken, the financial father of the cable industry, channeled some $ 10 billion in high-yield securities to TCI, Time Warner, Turner, Viacom and other cable firms at a time when they were struggling for survival. As a result, the cable companies are eight times more leveraged in their debt-equity ratios than telephone companies are. But driven by the demands of debt, the cable firms use their capital some two-and-a-half times more efficiently. Generating $ 20 billion in revenues, one-fourth as much as the telcos, cable firms use just one-tenth the capital.

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