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Washington's
Bogeymen
The cable companies are leveraged at a rate of between seven- and ten-to-one
on their cash flow. Moreover, some 60 percent of cable company assets
are “good will.” Included in the purchase price of new acquisitions,
“good will” represents the intangible value of cash flows and
synergies expected from new technologies and programming.
Built on vision and debt, such entrepreneurial companies cannot invest
without the possibility of large returns. Attack the cable industry’s
cash flow and prospects, and you attack its lifeline. Attack the cable
industry’s cash flow and prospects, and you reduce its available
investment by a factor of five or more. Bell Atlantic was originally willing
to pay for TCI nearly 12 times its cash flow.
The Real Monster: Government
In this highly leveraged arena government itself is the real monster:
an 800-pound gorilla. Where does the 800-pound gorilla sit? Wherever it
wants. Early in April of this year it chose to sit on the cable industry.
More specifically, it plumped down in the middle of Brendan Clouston’s
desk in the form of a 700-page FCC document reregulating the cable industry.
It was full of detailed regulations on everything from how fast he must
pick up his phones for customer complaints and what he should charge for
each tier of service and for each component of cable gear, to how large,
implicitly, his return on investment can be (about 11.5 percent). He faced
the mandate to adjust nearly every price and policy in the company within
six weeks and to justify each price by filling out 60 pages of forms.
In a menacing note for the future portending new government plans for
redistributionist pricing, he is required to report the median income
in each of his service areas.
The FCC is not really to blame for this onslaught, since it resisted the
new congressional power grab. In any case, this agency is only part of
Clouston’s problem. He also faces an aggressive new spirit at the
Federal Trade Commission, at the Department of Justice and in Congress,
which permits him to collaborate with any company as long as it is not
a telephone firm with useful fiber networks and switching systems in TCI’s
own regions. Full of rhetoric inviting every industry from the telcos
to the power companies into the cable trade, many of the legislative proposals,
FTC policies and FCC ukases converging on Clouston’s desk seem to
be intended to transform cable from a galvanizing entrepreneurial force
in the U.S. economy into a sleepy-time public utility run by lawyers.
At stake is the future of the information superhighway and thus the future
of the U.S. economy.
Superhighway Hype is Understated
Information superhighways are one of those rare technologies that are
actually far more powerful and promising than the hype surrounding them.
The first fruits of this development are already evident, as the U.S.
has led the world in deploying computer networks. Over the next five years
broadband networks can transform the entire economy, projecting it onto
a higher plane of growth and productivity.
For the last decade the performance of the economy has perplexed the economics
profession. Throughout the 1980s most economists predicted that U.S. interest
rates would soar as a result of world-lagging rates of personal savings.
When interest rates instead dropped, economists pointed to a “dangerous
dependence” on foreign sources of capital such as Japan, which were
investing close to $ 100 billion annually in the U.S.
Today, adverse tax and regulatory policies in the U.S. have entirely reversed
capital flows, with funds now leaving the U.S. for foreign markets at
an annual rate of $ 80 billion. Meanwhile, as Federal Reserve Governor
Lawrence Lindsey has warned, personal savings have plunged to all-time
lows. By every rule of economics, interest rates should soar or growth
should collapse.
Yet despite a slight upward drift in recent months, U.S. interest rates
remain low by historic standards, and the U.S. continues to lead the major
powers in economic growth and has extended its lead in productivity. As
Michael Jensen of Harvard Business School has shown, a close analysis
of the figures from U.S. corporations now reveals a historic acceleration
of U.S. productivity growth during the 1980s. According to an analysis
by Morgan Stanley, between 1987 and 1992 U.S. corporations captured some
47.7 percent of global profits and 37.4 percent of global sales. Continued
slumps in Europe and Japan combined with reviving growth in the U.S. indicate
that U.S. market share is still rising.
This record of supremacy is entirely baffling to the economics profession
and its megaphones in the media. Focusing on the Loch Ness news, they
have spent a decade in lamentations over the prospects of the U.S. economy,
reaching a pitch of funereal keening during the 1992 election campaigns.
But to analysts focused on the ever-growing U.S. lead in technology, these
results are no mystery at all.
U.S. supremacy is focused on information tools and spearheaded by computer
networks. U.S. companies command some two-thirds of the world’s profits
in information technology, hardware and software, and entirely dominate
world markets in computer networks. Half the world’s 110 million
personal computers are in the U.S., and between 1989 and 1993 the share
connected to networks rose from less than 10 percent to more than 60 percent.
The ultimate information industry is finance. During the last decade the
U.S. employed information technology to transform its financial system.
Spearheaded by Milken and a $ 200 billion junk bond market, the U.S. drastically
reduced the role of banks and proliferated an array of more flexible and
specialized financial agencies. While over the last 12 years banks’
share of private credit for non-financial companies dropped from two-
thirds to less than 20 percent, the U.S. surged into global leadership
in applying information technology to the field of financial innovation.
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