Forbes ASAP, June
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 Baronscreators
of the great industries of oil, steel and financewho 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 Malonenew 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
Of the three new monsters, big government managed to deliver us first
from Michael Milken, depicted as a Banker Shark. But Milkens vision
impregnably survives in the form of the industries and infrastructures
he financed, chiefly cellular phones, fiber optics and cable televisionthe
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 Milkens 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 industrythe
core of U.S. world industrial leadershipwill 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 decadeits 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 switchesrapidly
obsolescing by any objective standardare 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 TCIs 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
Malones 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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