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The Shattering of the Cable T.V. Monopoly

by George Gilder
From the February 1995 American Civilization

The entire landscape of companies that we currently think of when we talk about telecommunications competition is about to be entirely transformed. The cable companies and regional Bell phone companies and long distance carriers, all of these different entities which people imagine are somehow permanent players are going to assume an entirely different configuration over the next five years or so. As a matter of fact, they already would have assumed a completely different configuration driven by the overwhelming tides of technology had the regulators not risen up massively against it.

During the 1980s Michael Milken and a bunch of other junk bond purveyors did the crucial initial steps for the reconstruction of this industry. Milken directed a total of $15 billion to: TCI, which was then a small cable company; MCI, which was a competitor in the long distance market; McCaw, which was the foundation of a national cellular system; Turner, which was really the key cable programming company; and a whole array of other companies.

All of these firms which now are crucial for the landscape of telecommunications emerged from the restructuring process launched by Drexel and other companies during the 1980s. But that came to a halt when the entire establishment rose up against this threat to its power.

Thus today we have an inexorable clash between technology and this now congealed set of arbitrary companies which are governed by arbitrary and inapplicable regulations. If this clash is won by the forces of innovation and technology, then the United States can continue to lead the world in all of these technologies, as we have for the last decade and even into the 1990s.

For example, between 1987 and 1992, U.S. companies commanded 47.7 percent of the profits in the world economy and 37.3 percent of the revenues during the time after this 1980s destructuring. And that destructuring yielded about $1.5 trillion in new wealth, as Michael Jensen of the Harvard Business School has estimated.

And the opportunities now are far greater, but it entails recognizing that the existing companies -- the regional Bell phone and cable companies -- are all obsolete. They don't represent anything that corresponds with the true driving forces of technology -- the sand and glass and air technologies -- which will be the foundation for this new economy.

The sand comes in the form of the silicon sliver the size of your thumbnail inscribed with a logical pattern as complex as a street map of America, switching its traffic in trillions a second. And that technology is going to move to a billion transistor chip in the next five or six years. A billion transistor chip -- equivalent to the processing power of 16 Cray YAMP supercomputers, or 42 telephone companies' central office switches that would cost some $300 million -- is manufacturable on a single chip for less than $100. This technology is just six or seven years away.

Meanwhile, the communications technology -- fiber optics -- is moving about twice as fast as the microelectronics technology. You will have probably a million fold rise in bandwidth over the next decade or so in the ground, as fiber optic threads, as thin as the human hair, as long as Long Island, are fed by a laser as small as a grain of salt and as bright as the sun. This is fiber optics technology. It's on a million fold rise in its capacity over the next decade.

Wireless technology is moving just as fast, and it overthrows all the assumptions of the regulators. People keep asking questions about the cable companies: Do we have to continue to regulate cable companies? Well, cable companies will probably die unless they're deregulated.

The current direct broadcast satellite (DBS) technology, which reaches everywhere in the country and shortly everywhere in the world, has 150 channels, and soon upward of 400 channels, of high resolution video. This kind of competition is devastating to cable companies.

Cable is not a monopoly, it's fighting for its life. And this will mean that cable companies will have to start serving the really big market, which is two way computer communications. Whenever I go to a cable company, I always tell them that in the next decade that they are going to make far more money offering two way service to computers than they do delivering entertainment to TVs. And, indeed, that's what cable companies will have to do.

But in order to do that, they have to collaborate with telephone companies. So all of these laws that prohibit collaboration between cable companies and phone companies in their own region have to go. It is not for a free market, it is not open competition in communications, all of the existing competitors are kept segregated.

A two wire solution will not work. It will delay the emergence of an information superhighway or whatever term you chose by as much as a decade because it doesn't pay to have two wires delivering the same service to everybody's home. And that's what DBS is delivering in abundance.

Thus we should allow cable companies and phone companies to collaborate in their own regions, to use this huge unique American resource of this broadband pipe that's already there. If not, we are not going to have broadband communications. What we'll have is various attempts to combine content and conduit pumping some special array of programming into homes.

That is the John Malone of TCI model, as it's called. It's where you get control of a bunch of programming and you get control of the pipe to the home and you gain monopoly profits from that control. And if you have reasonably narrow band pipes, somebody has to control content, and it doesn't matter whether you're Reed Hunt or Mother Theresa, you still have to decide who goes on the pipe.

But the real promise of this era, what all of these new technologies offer, is bandwidth abundance. And if you have a true broadband network, then the whole Malone model, the whole idea of controlling content and controlling the conduit, collapses. If you're a movie company, for example, and you have broadband networks, you aren't going to want to restrict your movies to one conduit or to one channel, you're going to want to go on everybody's conduit.

If you own a broadband conduit, you're not going to want to restrict yourself to just one company's movies. You're going to want everybody's movies. If you're supplying these broadband two way conduits, you're going to find your biggest business is communication, teleconferencing, telecommuting, video telephones -- the whole array of services that will emerge when you have a truly broadband network in place.

The key is that there are no monopolies in store in this new world, where the technology doubles every year or so. The whole idea of one person establishing a permanent system, like the old AT&T monopoly, is entirely quixotic in this new world.

While everybody debated in Congress over the terrible monopoly commanded by the cable companies just this year, not only did the cable companies lose their monopoly; they lost their edge in service, the number of channels, everything. And this kind of surprise is going to happen over and over again.

Wireless telephony means that the local loop is competitive now. There are some 18 million cellular phone subscribers now. There's soon going to be PCS. There's a whole array of new wireless technologies.

And digital wireless overthrows the basic assumption of local telephone regulations, which is that it costs more to supply rural customers, like me, than urban customers -- 30 times as much sometimes. But with wireless digital service, it's just as cheap to serve rural customers as urban customers. So the whole foundation for cross subsidies collapses.

With this kind of on rush of technological change, monopolies are not the issue. This will overthrow all the hierarchies and monopolies, pyramids, and power grids of the established communications infrastructure. It's all going to be overthrown.

A completely new configuration will emerge if the capital markets and the technologies are allowed to combine to reshape this landscape in confirmation with this miraculous technology that now is available to it.

George Gilder of the Discovery institute gave these remarks at a Congressional Seminar, Updating the Communications Act: The Free Market Approach, which was co-sponsored by PFF.



The Progress & Freedom Foundation