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Washington's
Bogeymen
Malone
was right in his attempt to sell out at the top to Bell Atlantic. The
idea of combining conduit and content was valid in a regime of bandwidth
scarcity. In a regime of broadband information superhighways, however,
content providers will want to put their programming on everyone’s
conduits, and conduit owners will want to carry everyone’s content.
In a world of bandwidth abundance Paramount will not want to restrict
its films to Bell South’s network any more than Bell South will exclude
films from other sources.
The key condition for the success of the open model and the eclipse of
the Malone model, however, is real bandwidth abundance. If the federal
government prohibits the interconnection of conduits, then the Malone
model gains a new lease on life. In a world of bandwidth scarcity the
owner of the conduit not only can but must control access to it. Thus,
the owner of the conduit also shapes the content. It does not matter whether
the conduit company is headed by a scheming monopolist or by Mitch Kapor
and the members of the Electronic Frontier Foundation. Bandwidth scarcity
will require the managers of the network to determine the video programming
on it.
In a world of information superhighways, however, the most open networks
will dominate, and the proprietary networks will wither. Malone’s
understanding of this fact—that his own model would soon expire in
an environment of bandwidth abundance—motivated his effort to merge
with Bell Atlantic.
The law of the telecosm inexorably dictates mergers not between content
and conduit, but between conduit and conduit. In particular, today it
mandates the merger of the huge fiber resources of the telephone companies—which
are nine times as extensive as cable industry fiber and are estimated
to rise to 2.7 million lines by next year—with the huge asset of
57 million broadband links to homes commanded by the cable industry. Obstructing
such mergers in the name of competition, or antitrust, or regulatory caprice,
is wantonly destructive to the future of the economy.
The Siren Call From Foreign Shores
Most of the gains of the telecosm depend on government willingness to
allow the creation of coherent broadband networks with no prohibitions
against the convergence of cable and telco systems. For a while it appeared
that the Clinton administration was willing to accommodate this development.
Now it appears that it prefers to lead the U.S. government into a private-sector
monster hunt. Rather than releasing America’s cable and telco firms
to build this redemptive infrastructure, Washington leaders seem chiefly
concerned with assuring themselves that no one will make any money from
it. As a result, with some $ 1 billion in annual funding from Wall Street,
cable and telephone firms are increasingly moving abroad to fulfill the
promise of information superhighways.
TCI and U.S. West, for example, are serving some quarter- million British
citizens with combined telephone and cable functions over a hybrid network
of coax and fiber. The current regulatory climate dooms the proposed merger
of Southwestern Bell and Cox Cable and their plans to launch information
highways in Phoenix and Atlanta. But these companies continue to expand
their hybrid cable and phone networks In Liverpool and Birmingham in England.
In the U.S. NYNEX has been one of the most sluggish Bells in information
superhighway projects. But from Gibraltar to Bangkok, it is supplying
an array of wireless and wireline services. In the U.K. NYNEX Cablecomm
holds 17 cable franchises passing 2.5 million homes and plans some $ 2
billion in future investments. In the wake of the new regulations Bell
Canada International (BCI) reduced its offer for Jones Intercable by five
percent, but the two companies are barging ahead in East London, Leeds
and Aylesbury. Time Warner, Ameritech and other cable and telephone companies
are also rushing to less regulated realms to lay information infrastructure
everywhere from Scotland to New Zealand.
In the U.S. such collaborations of cable and telephone companies would
be paralyzed by litigation and bureaucracy. It appears increasingly possible
that despite the huge lead created by the U.S. cable industry, which,
unique in the world, has extended broadband access to some 95 percent
of American homes, broadband networks will first be built outside the
U.S.
American politicians must face reality. With cable, the U.S. is far and
away the world leader in broadband technology. With cable, the U.S. can
have a national network reaching every American community by the year
2000. Without cable, however, the U.S. can forget the idea of building
a national system of information superhighways in this decade. Without
cable, the global race is even, and several European and Asian countries
command a significant edge as a result of their integrated cable and telephone
firms.
The U.S. panacea of “competition” without winners may work for
commodity markets, which require low levels of incremental investment
and offer returns commensurate with the rate of interest. Governing technological
progress, though, is the very different regime of dynamic competition
and creative destruction.
Impelling most technology investment is the pursuit of transitory positions
of monopoly that may yield massive profits. That’s why in the late
1970s and early 1980s Milken directed some $ 17 billion to the cable TV,
fiberoptic telephony and cellular telephone industries, giving the U.S.
a decisive lead in all these areas. That’s why Intel Corp. has been
investing $ 2 billion a year in new wafer fabrication capacity to secure
its global edge in microprocessors. That’s why Microsoft invests
$ 1 billion a year or more (depending on definitions) in new software
technology to integrate ever-new functions into its dominant operating
systems. And that’s why Bell Atlantic contemplated investing what
amounted to some $ 33 billion in John Malone’s company, TCI.
Until replaced by a better system, every innovation gives its owner a
temporary monopoly. Otherwise it is not a true innovation. Today, whether
anyone likes it or not, the cable industry has a temporary monopoly on
broadband links to the home. By interconnecting these links to the fiber
networks of the phone companies, the two industries together can create
a national information superhighway some five or 10 years sooner than
can Japan or Europe.
Some 79 percent of the costs of a network come in the final connections
to homes: the distribution and drops that the cable industry has installed
over the last 25 years. Joined with the telephone industry’s fiber
optics—nine times more extensive than the cable industry’s fiber
deployment—this hybrid cable-telco network would represent an authentic
innovation and would trigger a flood of real competition supplying a huge
array of powerful new broadband communications services. According to
authoritative estimates cited by Vice-President Gore and the FCC, these
innovations would increase U.S. productivity growth by 40 percent over
the next decade. This immense undertaking would also yield huge profits
for as long as a decade to some of the companies that master it.
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