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The Freedom Model of Telecommunications

By George Gilder
March 1995

New technologies are overthrowing the logic of regulation and offering Americans a much improved life. The nascent telecosm will empower individuals and families in work, education, entertainment, medicine and even politics. Among the wonders awaiting us in the telecosm is the teleputer, a device which combines both interactive video and telecommunications in one unit. It will replace today’s televisions and telephones, and give its users the ability to tap into a vast world-wide network of other teleputers.

The expansive array of available services will include on-demand mass communication, highly personalized entry to libraries of texts and films, Internet-style forums, teleconferencing between homes and offices, interactive distance learning, virtual family gatherings, telemedicine and access to huge new business markets. Participation in the telecosm will be affordable for all, not just the rich. The average American citizen will gain a new enthusiasm, and the authority to directly affect his life in a positive manner, through this highly effective and selective way to manage both his time and information.

But innovations such as the teleputer, which can be adopted within three years, will be delayed an additional five to seven years if Congress fails to immediately de- regulate the field of telecommunications. The pace of technological change today is such that technology doubles its cost effectiveness every twelve months. Every time technology is blocked, or its natural fulfillment is stifled, the benefits of this cost-effective doubling are irretrievably lost. The secret, as Cal Tech Professor Carver Mead says, is to listen to the technology. Simply put, time costs money, and neither is a commodity we can afford to waste.

By stalling on de-regulation, Congress risks the stagnation of stock market values, incomes and job growth. The best solution is a freedom model of de-regulation which would allow all existing and future companies to interact in each others’ business markets without undue government interference or delay, granting only common carrier status in return. It would remove restrictions to cross-ownership of cable and telephone lines. It would not force companies to separate their functions unnaturally -- and unprofitably -- into subsidiaries, and it would not impose delayed entry schedules and other invidious tests upon competition. Finally, it would not demand universal service or any other unnecessary hidden entitlements.

Phone and Cable Companies

Central to new technologies such as the teleputer are the establishment of broadband connections to the home. Cable TV companies are under tremendous pressure from Direct Broadcast Satellite, which is absolutely universal and far superior to cable in both audio quality and video resolution. Cable providers will not survive unless Congress frees them to find new uses for their connections. Once unassailable regional telephone companies now face similar threats from new technologies, and need cable TV broadband connections to the home, since duplicating cable’s connections would be an obvious waste of time and money. Specifically, telephone and cable companies should be allowed to merge or directly collaborate with one another to create fiber optic systems and digital services in the phone companies’ existing territories.

Bringing broadband digitally switched services over cable wires to the home will require investments of $100 to $300 billion, but these can and should be provided by the private sector. Existing private concerns, and others which may be created, offer the means to enter the telecosm without government subsidies or guarantees. But they cannot make the needed investments if a restrictive regulatory regime makes the changeover unprofitable.

Subsidies and guarantees are unnecessary and unwanted. As there is no way to know in advance which companies will succeed in the telecosm, it is both futile and counterproductive for government to guess. The once legitimate concern about communications monopolies has been silenced by the centrifugal force of the computer chip. Bigness no longer ensures success in telecommunications. Government regulation supposedly claims to protect competition, but it is the kind of competition where nobody wins and nobody loses. Only competition which permits robust rivalries will bring the teleputer and other inventions on-line swiftly.

Universal service is but one example of how technological change continually defies government’s ability to manage issues of equity or efficiency through regulation. Over the last fifty years, various cross subsidies, mandates and special reserves have combined to achieve near universal service in the telephone industry, with 95 percent for America\n homes possessing telephone service. Conversely, technology itself, with the owering in price of a variety of products, has produced 98 percent television coverage, with no requirement for universal service. Furthermore, the basic problem of universal service for current wireline cable TV and telephony is that it costs much more to serve rural customers than it does urban customers. At a time when all voice telephony is rapidly moving to wireless, new digital cellular systems soon will lower the price of wireless telephony tenfold and totally close the gap between the costs of serving rural and urban customers. This removes the need for either cross subsidies or universal service requirements.

A freedom model of de-regulation would restrict the powers of state public utility commissions to regulate investment and depreciation rules, to ensure rate re- balancing and pricing flexibility. Both cable and telephone companies shoulds in order to encourage investment, and eliminate current cross subsidies which discourage both competition and the introduction of new services. The freedom model of de-regulation is not likely to be any company’s or industry’s first choice. Each, of course, would like to preside over a government-protected monopoly which provides restrictions on competition. This is only human nature, but since it is impossible to grant special advantages to everyone, it seems logical that free and open competition should be accepted as each player’s second choice.

Congress has the unique opportunity to free American industry and lead the world into an era of unprecedented hospitality for individual creativity, family authority and economic growth. The main beneficiaries of a telecommunications industry organized along the principles of the freedom model will be the vast American citizenry. It will allow them to take full advantage of the telecosm to exercise greater control over their lives and environment. On the other hand, should Congress fail to adopt a freedom model and persist in the illusory hope that government can shape the future through regulation, America and her citizens stand to lose up to $2 trillion dollars in new economic activity, our world-wide leadership in telecommunications and, worst of all, the personal empowerment which the telecosm could provide. America is at a crucial crossroads in her cultural and technological development. We can only hope that Congress will opt to boldly embrace the future, instead of blindly clinging to the past, and choose the option that is most in the public and national interests, the freedom model of de-regulation for the telecommunications industry.

George Gilder is a senior fellow at The Discovery Institute. This article is adapted from testimony he delivered before the Senate Commerce Committee on March 2, 1995.



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