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Forbes ASAP, June
5, 1995
From
Wires to Waves
As
wireless telephony goes digital, it gets very cheap very fast.
U.S. Sen.
Ted Stevens of Alaska wants to know: With deregulation of telecommunications,
who will bring connections to Unalakleet, to Aleknagik and to Sleetmute?
Who will bring 500 channels up the Yukon with the salmon to the people
in Beaver? What will happen to the Yupik, the Inupiat and the Inuit? Will
we leave them stranded in the snow while the world zooms off to new riches
on an information superhighway?
A senior Republican on the Senate Commerce Subcommittee on Communications,
Stevens is a key figure in the telecom deregulation debate on Capitol
Hill. As he contemplates the issues of restructuring communications law,
he has reason to be suspicious of the grand claims of an information age.
He knows that universal service—the magic of available dial tone
in your own home—has hardly reached rural Alaska at all. As George
Calhoun points out in his sort invented by Alexander Graham Bell in 1881
and now extended to some 95% of American households) are simply not feasible,
either technically or economically, in many remote regions.
In Beaver, for example, there is one telephone in a hut linked to a nine-foot
satellite dish. Permafrost and cold economic reality make it impossible
to extend dial tone to the several hundred households of this town, even
though its average household income, mostly from salmon fishing, is some
$120,000.
Ted Stevens is right to be concerned. Portentiously sharing his concern
are other powerful Republicans from rural states, including Larry Pressler
of South Dakota, the chairman of the subcommittee. Extended now from phone
service to broadband digital superhighways, their concerns could pose
a deadly obstacle to true deregulation of communications and thus to continued
American leadership in these central technologies of the age. At stake
is some $2 trillion of potential value to the U.S. economy (see Forbes
ASAP, April 10). The problems of universal service in Alaska disguise
the more profound paradox of telephone service in most of the world.
The fact is that the universality of telephones is crucial to their usefulness;
yet universal service using current technology is totally uneconomical
and impractical. Snow and ice are the least of it. The basic problem is
the architecture of the system, with a separate pair of lines, on average
two miles long, devoted exclusively to each user. It simply does not pay
to lay, entrench, string, protect, test and maintain miles of copper wire
pairs, each dedicated to one household that uses them on average some
15 or 20 minutes a day.
Connections in cities are one thing. Urban access systems comprise a bramble
of millions of wire loops, each linking a home or business telephone to
a nearby central office switch. Under a half mile in length, these lines
still represent some 80% of the cost of the system. But because the lines
are short and often bundled together, city telephony benefits from economies
of scale and convenience. In rural areas, however, the copper lines cost
between 10 and 30 times as much per customer as they do in cities.
Moreover, Calhoun reports that in general, phone companies cannot supply
ISDN (integrated services digital network) and other digital services
over twisted-pair wire more than 18,000 feet (some 3.5 miles) from the
central office. Perhaps a third of all the nation’s phones are more
than 3.5 miles from a central office.
What saves us is socialism. Closing the huge differential between the
costs of serving rural and urban customers is a Byzantine web of cross-subsidies,
whereby inner-city and business callers in urban areas subsidize the worthy
citizens of Kirby, Vt.; Vail, Colo.; Mendocino, Calif.; Round Rock, Texas,
and Tyringham, Mass., among other bucolic locales, to the tune of billions
of dollars. Overall, subsidies from business and urban customers to rural
and other expensive residential users total some $20 billion a year. In
case the cross-subsidies do not suffice to guarantee universality, Congress
has established a $700 million “Universal Service Fund.” For
all that, some 5% of homes still lack telephone service (compared with
2% unreached by TV, which faces no universal service requirement).
Lending huge physical authority to this Sisyphean socialist scheme are
some 65,049,600 tons of copper wire rooted deep in the rights of way,
depreciation schedules, balance sheets, mental processes and corporate
cultures of the regional Bell operating companies and other so-called
local-exchange carriers. The minimum replacement cost of these lines deployed
over the last 50 years or more—and still being installed through
the mid-1990s at a rate of at least five million lines a year—is
some $300 billion. By comparison, Calhoun estimates, the telcos could
replace every telephone switch for one-tenth that amount while radically
upgrading the system.
In this cage of twisted copper wires writhe not only the executives of
the telephone companies, but also the addled armies of telecommunications
regulators, from the Federal Communications Commission and other Washington
bodies to 50 state public utilities commissions and the towering hives
of lawyers in the communications bar. The coils of copper also subtly
penetrate the thought processes of MIT Media Lab gurus, libertarian lobbyists
from the Electronic Frontier Foundation and myriad political analysts
who see this massive metal millstone as a fell weapon of monopoly power.
The copper colossus even intimidates scores of staunch Republicans who
have arrived in Washington determined to extirpate every government excess,
but who bow before the totem of universal service in their districts.
Like any socialist system, the copper colossus will die hard. But die
it must.
Some 20 years ago, AT&T’s long-distance lines comprised a similarly
imperious cage of copper wires, installed over the previous 50 years and
similarly impossible for rivals to duplicate. Then too, analysts termed
telephony a natural monopoly because the system could handle additional
calls for essentially zero incremental cost and because network externalities
ensured that the larger the number of customers, the more valuable the
system. These assumptions had led to government endorsement of the Bell
monopoly as a common carrier committed to universal service.
Regulators, politicians and litigators always imagine that they can control
the future of telecom, awarding monopoly privileges in exchange for various
high-minded goals, such as universal or enriched services. But their actual
role, as Peter Huber and his associates show in their new text, Federal
Broadband Law, is mostly to promote monopoly at the expense of such values
as universality, which ultimately depend not on law but on innovation.
As a form of tax, regulations reduce the supply of the taxed output. It
is technological and entrepreneurial progress, impelled by low tax rates
and deregulation, that brings once- rare products into the reach of the
poor, always the world’s largest untapped market.
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