Telecom/1996-04-telecom-walnutcreek.iso/george.gilder.essays/washingtons.bogeymen

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Date: Thu, 7 Jul 94 02:02:50 CDT
From: [e-mail] (TELECOM Digest (Patrick Townson))
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To: telecom
Subject: Washington's Bogeymen by George Gilder

Gordon Jacobson <[e-mail]> recently sent along still another
essay in the collection of several by George Gilder which are being
kept in the Telecom Archives. I hope you enjoy it as much as I did.

PAT

  Date: Sat, 02 Jul 1994 08:04:58 -0400
  From: [e-mail] (Gordon Jacobson)
  Subject: George Gilder's Eighth Article - Washington's Bogeymen

   This series of articles by George Gilder provide some interesting
technological and cultural background that helps prepare readers to
better understand and place in proper perspective the events relative
to the National Data Super Highway, which are unfolding almost daily
in the national press.  I contacted the author and Forbes and as the
preface below indicates obtained permission to post on the Internet.
Please note that the preface must be included when cross posting or
uploading this article.

   The following article, WASHINGTON'S BOGEYMEN, was first published
in Forbes ASAP, June 6, 1994.  This article may be included as a
portion of George Gilder's book, Telecosm, which will be published in
1995 by Simon & Schuster, as a sequel to Microcosm, published in 1989
and Life After Television published by Norton in 1992.  Subsequent
chapters of Telecosm will be serialized in Forbes ASAP.


                          "WASHINGTON'S BOGEYMEN"
                                    BY
                              GEORGE GILDER

     Big Government and Mass Media always feed on fear of monsters.
While politicians promise to protect the people from the dreaded
private sector, leading newspapers such as the Washington Post and
network shows such as "60 Minutes" chime in with continuing reports on
the economy as seen from the shores of Loch Ness.  Peering through the
shifting, inscrutable murk of the marketplace, pundits both private
and public can descry beneath every ripple of industrial change the
spectral shape of some circling shark or serpent from which only a new
bureaucracy or liberal constabulary can save us.

     There are always many witnesses to the threat.  In his campaigns
of creative destruction, any great capitalist provokes enough panic in
the establishment to fuel the beadles who would bring him down.
Losing competitors, whether in oil or software, are always in the
vanguard of the monster hunt, which is therefore usually launched in
the name of "competition" and is designed to stop it in its tracks
before anyone wins.

     In the industrial era it was the so-called Robber Barons --
creators of the great industries of oil, steel and finance -- who
greased the growth of government with their chimerical menace.
Radically reducing the prices of their products, such leaders as
Rockefeller, Carnegie and Morgan expanded the economy to serve middle-
and lower-income customers and laid the foundation for the American
industrial leadership that triumphed in two world wars.  But at the
same time, charged with predatory pricing, collusive marketing dumping
and other competitive violations, Rockefeller, Carnegie and Morgan
emerged as the monsters of monopoly who fueled the growth of
government through the first 40 years of the century.

     Now, with information technology driving private sector wealth
and power, there is a need for new monsters to fuel new sieges of
government and regulatory growth.  This time the monsters bear the
names of Milken, Gates and Malone -- new trolls to terrify little
children and cause competitors to cozen Washington and judges to reach
for their RICO bludgeons and commissioners to salivate and shuffle
subpoenas and senators to tremble and wreak new tomes of law and
bureaucrats to sow the economy with minefields of abstruse new rules.

     Of the three new monsters, big government managed to deliver us
first from Michael Milken, depicted as a Banker Shark.  But Milken's
vision impregnably survives in the form of the industries and
infrastructures he financed, chiefly cellular phones, fiber optics and
cable television -- the forces that laid the foundation for a new
broadband economy.

     With Milken laid low by cancer and the courts, Washington needed
new monsters for the 1990s.  After serious and continuing contemplation
of Bill Gates as a possible MicroShark hidden amid the mazes of
Windows and DOS, Washington recently has focused on the formidable
visage of John Malone.

     As the titan of cable and leader of Tele-Communications Inc.,
better known as TCI, he was a billion-dollar beneficiary of Milken's
bonds.  At a time when governments everywhere covet the huge, new
wealth emerging from information superhighways, Malone has become the
favored target of the Loch Ness news hounds and public-law pinstripes:
an Abominable Snowman ranging down from the Rockies to raid and ruin
rival companies, terrorize politicians and gouge his 21 million
customers.  Or, in the words of then Senator Albert Gore, Malone is
Darth Vader himself.

     This particular monster hunt, however, could not be more ill-
timed.  There is no way that this administration can demonize the
cable industry and micromanage telecom without direly damaging all its
hopes for an information superhighway and thus the best prospects for
the future of the U.S. economy.  Just as the automobile industry was
the real heir to the triumphs of the "robber barons" in oil, steel and
finance, so the computer industry -- the core of U.S. world industrial
leadership--will be the chief beneficiary of cable and telecom
ventures in broadband networks.

     The U.S. now commands global dominance in computer technology.
But as Andrew Grove told Forbes ASAP, "infinite processing power will
only get you so far with limited bandwidth." The next generation of
computer progress depends upon the efficient use of cable bandwidth to
homes and home offices, which comprise a fist-growing 60 percent of
the current market for computers.  Even if computer executives fail to
see the threat, the monster hunt against cable thus jeopardizes the
supreme achievement of the American economy over the last decade --
its global lead in computers.

     The U.S. government constantly reiterates its desire for
information superhighways.  The problem is that punctuating the call
for broadband nets is an insistent mantra of "competition" that
reverberates through the speeches of nearly all participants in the
debate.  As Ward White, vice-president of government affairs for the
U.S. Telephone Association, points out, however, this mantra of
competition "disguises a new scheme of market allocation run by the
regulators."

     In this competition no one can win or make any money.  The $ 10
billion in profits claimed by the Baby Bells still under the Greene
thumb are highly questionable.  Most of their copper wires and
narrowband switches -- rapidly obsolescing by any objective
standard--are being written off over decades. That means the real
costs of the Bells should be much higher than their announced costs,
which do not adequately reflect the fact that their $ 300 billion
worth of plant and equipment is rapidly losing market value.  As TCI's
sharp and salty young COO, Brendan Clouston, points out, telephone
companies are used to pretending to make money under rate-of-return
regulations when they are really losing it.

     Cable companies, by contrast, are used to pretending to lose
money when in fact they are raking it in.  A standing joke around the
offices of John Malone's cable empire, which comprises TCI and Liberty
Media, asks what Malone will do if the firm ever reports a large
profit.  The answer: Fire the accountant.  Indeed, TCI did not report
even a cosmetic profit until the first quarter of 1993. Cable firms
were financed with junk bonds and other debt that allows investors to
be paid off with tax- deductible interest payments rather than
double-taxed dividends and capital gains favored by the telcos.

     Michael Milken, the financial father of the cable industry,
channeled some $ 10 billion in high-yield securities to TCI, Time
Warner, Turner, Viacom and other cable firms at a time when they were
struggling for survival.  As a result, the cable companies are eight
times more leveraged in their debt-equity ratios than telephone
companies are.  But driven by the demands of debt, the cable firms use
their capital some two-and-a-half times more efficiently. Generating $
20 billion in revenues, one-fourth as much as the telcos, cable firms
use just one-tenth the capital.

     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.

     In essence, the law of the microcosm shattered the financial
system into silicon smithereens and vastly enhanced its productivity.
As the late Warren Brookes has written, "If every bank is nothing more
than an information system, then by definition every information
system has the capacity to be a bank, and every owner of an
information system, from a desktop computer to a mainframe terminal,
can be a banker." What happened was that thousands of brokers,
mathematicians, financial consultants, insurance salespeople, credit
card merchants and bonds traders took this opportunity to break into
the field of financial entrepreneurship.

     As a result, the U.S. set an entirely new world standard for
capital efficiency, generating far more economic growth per dollar of
savings than any other country.  As explained two centuries ago by
Adam Smith, key to productivity growth is the refinement of the
division of labor, the expansion of specialization, the breakdown of
functions into subfunctions and niches.  The key force fostering
specialization in the U.S. is computer networks.

     Over the next decade computer networks will expand their
bandwidth by factors of thousands and reconstruct the entire U.S.
economy in their image.  TV will expire and transpire into a new
cornucopia of choice and empowerment.  Great cities will hollow out as
the best and brightest in them retreat to rural redoubts and reach out
to global markets and communities.  The most deprived ghetto child in
the most blighted project will gain educational opportunities
exceeding those of today's suburban preppie.  Small towns will become
industrial centers in the new information economy.  Hollywood and Wall
Street will totter and diffuse to all points of the nation and the
globe.  Families will regroup around the evolving silicon hearths of a
new cottage economy.  Video culture will transcend its current
mass-media doldrums, playing to lowest-common-denominator shocks and
prurient interests, and will effloresce into a plethora of products
suggestive of the book industry.

     In essence, people will no longer settle for whatever or whoever
is playing on the tube or down the street or in their local office or
corporation. Instead, they will seek out and command their first
choices in employment, culture, entertainment and religion.  They will
reach out across the country and around the world to find the best
colleagues for every major project.  Productivity and efficiency will
inexorably rise.  A culture of first choices will evince a bias toward
excellence rather than a bias toward the mediocre, convenient or
crude.

     The entire centralizing force of the Industrial Revolution, which
brought capital and labor together in vast pyramidal institutions and
reduced workers to accessories of the machine and the tube, will give
way to the explosive centrifuge of the microcosm and telecosm.
Yielding single-chip supercomputers linked in global broadband
networks, these technologies fling intelligence beyond the boundaries
of every top-down institution and Machine Age social system.

     The vision of information superhighways revitalizing the American
economy and culture is far more true and compelling than even its
advocates comprehend. People who underestimate the impact of bandwidth
will miss the supreme investment opportunities of the epoch.

Decline and Rise of the Malone Model

     Dominant in the industry are two essential models for fulfilling
the promise of the superhighway.  One scheme, long associated with
John Malone and other cable executives, is the monster model:
combining content and conduit in order to gain monopoly rents.

     Because it reaches more than 20 percent of all cable customers,
access to the TCI conduit can heavily influence the success or failure
of any content venture. As Andrew Kessler, partner and multimedia guru
at Unterberg Harris and Forbes ASAP columnist, puts it, "If you want
to create a cable channel, you may have to send it through Malone's
bottleneck -- a satellite dish farm outside Denver.  I suspect that
could cost you some $ 4 million in cash, or, alternatively, you can
give Malone 30 percent of your company."

     This monster model is in essence the way Malone built up Liberty
Media and the content side of TCI, which together own parts of TNT,
the Discovery Channel, American Movie Classics, Black Entertainment
TV, Court TV, Encore, Starz, Family Channel, Home Shopping Network,
QVC, Video Jukebox and an array of regional sports networks.  It has
been widely reported that AT&T and financier Herbert Allen are
creating a new classic sports network and will give a chunk of it to
Liberty in exchange for access to Malone's conduit.

     The other model is that of the common-carrier, upheld both by the
telephone companies and by Internet.  In this model you build an open
conduit and exercise virtually no influence on content.  Using the
phone system or Internet, people can communicate anything they want as
long as they observe the protocols of the public switched telephone
network or of Internet's TCP/IP.  Extended to images, this model
suggests a "video dial tone." You can dial up any other machine
connected to the network and download or upload any films, files,
documents, pictures or multimedia programs that you wish.  Although
telephone companies or Internet providers may own content.  they
cannot privilege their own programming.  Their content has to compete
for customers freely with all other content available on the network.

     The notoriety of the Malone model and the resentment it arouses
far and wide explain much of the hostility toward the cable industry
and John Malone.  This may even explain the current rage to reregulate
the industry.  The great irony today is that Malone and the rest of
the cable leaders were in the process of abandoning the Malone model
at the very moment that many telephone executives seemed to adopt it.

     It was Malone, after all, who was willing to sell his content to
Bell Atlantic, and it was Raymond Smith, above all, who insisted on
acquiring the assets of Liberty Media.  It was Bell South that was
willing to pitch in some $ 2 billion to QVC's bidding for Paramount
when John Malone left Batty Diller high and dry.  Ameritech, too, was
reported to be preparing a pitch for Paramount.

     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.

     The government might regard these profits as "obscene." But they
will be indispensable both to pay for the transformation of American
media and to attract the next generation of competitors into the
business.  These rivals are already on the way: Direct Broadcast
Satellite (DBS), wireless cellular "cable" at 28 gigahertz,
low-earth-orbiting satellites such as the Gates-McCaw Teledesic,
all-fiber "Internets" and the array of passive fiber- to-the-home
technology summed up as the fibersphere.  Even broadcasters and
utilities will enter the field.  In a world where the government
micromanages communications in the name of "competition," however, all
these capital-hungry competitors will languish.

Dynamic Competition or Static Competitors?

     The dynamics of competition on the information superhighway
repeats the previous dynamics of competition in computers.  Preventing
the dominance of successful technologies -- sustaining an artificial
diversity -- is anticompetitive.  If in the early 1980s the Department
of Justice had ruled against the Microsoft and Intel standards, for
example, and had required a variety of microprocessor instruction sets
and operating systems, the result would have been less competition in
computers, not more.  Perhaps Pick, Quarterdeck, Digital Research and
others would have gained share against Microsoft.  But the applications
software business, with its floods of real competition in new programs
for everything from financial management to videogames, would have
languished, along with the parallel markets in hardware peripherals.

     The fact is that Microsoft faces antitrust pressure at the
twilight of its dominance.  Impelled by the new markets for multimedia
and handheld communicators, the industry is on the cusp of an entirely
new landscape of competition.  In this new arena Microsoft's present
market share and installed base are barriers to entry for Microsoft
rather than for its rivals.  If Microsoft is to prevail in these new
areas, it must cannibalize its own systems and compete on an equal
basis with everyone else.

     The laws of dynamic competition apply just as forcefully to
networks as to computers.  Just as the time arrived when text editing
and disk utilities would be integrated into operating systems--or
floating point computations would be integrated into microprocessors
 -- broadband cable services now must be integrated into the public
switched telephone network (PSTN), not segregated from it.  Despite
the "competitive" access dreams of politicians and regulators, true
competition requires that the "two-wire model" of home communications
give way to a broadband, one-wire system.

     The best and most cost-effective network practicable today is a
combination of telco fiber and cable coax.  Even the telephone
industry agrees.  U.S. West, Pacific Telesis and Bellcore all have
resolved on the same hybrid system that TCI, Time Warner and Cablelabs
have pioneered.  Without mergers with cable firms, the telcos in
essence will try to rebuild cable networks.

     Attempting to duplicate the connections to homes built by the
cable industry over the last 25 years, however, the telephone industry
would have to spend some $200 billion. It would have to sustain this
level of new investment while maintaining its existing plant and
expanding into long-distance and other services.  It would have to
summon large incremental capital in the face of continued competition
from the cable industry's taking of many of the most profitable
markets.

     The telcos currently declare they are willing to make these
investments.  They tell Washington regulators and politicians that all
will be fine as long as they are allowed to own programming and
information services and build equipment. But the message from the
markets is clear and to the contrary.  At the very time that telco
executives were intoning their bold plans, telephone and cable share
prices were plunging toward new lows.  Now Raymond Smith of Bell
Atlantic is announcing a half-billion- dollar reduction in
infrastructure outlays. Southwestern Bell is giving up its plans to
buy Cox Cable.  Under a similar "competitive" regime in cellular
telephony, even AT&T and McCaw have found their merger in jeopardy.

     Under rate-of-return regulations with prohibition of cross-
subsidies from current cash flow, a "competitive" information
superhighway simply cannot fly. An information superhighway cannot be
built under a canopy of federal tariffs, price controls, mandates and
allocated markets.

Highway Imperative:  Cable-PC

     Politicians must recognize that what is at stake is not merely
games, entertainment and a few educational frills but the very future
of the U.S. economy.  Cable is central not only to the next generation
of television technology but also to the next generation of computer
technology.

     Again, many companies offer bold words in business plans for
interconnecting homes with new networks.  Indeed, the telcos can
provide some intriguing computer services through their accelerating
rollout of Integrated Services Digital Networks (ISDN), as was so
eloquently urged by Mitch Kapor and others.  Internet will continue to
expand rapidly its cornucopia of mostly narrowband offerings.  Bill
Gates and Craig McCaw may even enlarge the bandwidth available to
homes to a level of 2.4 megabits per second through their elegant and
ambitious Teledesic.  Direct broadcast satellite systems and public
utilities and wireless cable operators will all enrich the flow of
video to the nation's homes.

     Except in the short ran, though, these systems are not remotely
competitive with cable.  Available ISDN, for example, offers less than
one-100th the bandwidth of one digital cable channel and less than
one-1,000th the bandwidth of a cable coax line.  The other rivals to
cable, from direct broadcast satellite to Teledesic, are similarly far
too little and too late.  Even the advanced 28-gigahertz wireless
cable projects, for all their promise as supplementary systems, cannot
ultimately compete with the potential two-way bandwidth of fiber-coax
systems in the ground.

     All the current plans of the telephone companies and the
government leave the huge U.S. endowment of home computers -- the
fastest-growing and most promising segment of the computer industry --
stranded in a narrowband world.  Only the cable industry's gigahertz
links, passing into some 95 percent of American homes, can launch the
American personal computer industry into a new level of two-way
broadband digital connectivity.

     For that reason the future of the American computer industry
largely depends on the future of the cable industry.  By linking
America's computers to broadband networks and then to telco fiber
systems, cable can be the great enabler of the next phase of
development in America's digital economy.

     In laying broadband systems the cable industry has already been
forced to solve many of the key problems of an information superhighway.
Although often depicted as an intrinsically one-way service, cable
technology has, in fact, long provided two-way capabilities.

     Every cable coax line, for example, offers potential bandwidth
equivalent to six times the 160 megahertz of spectrum assigned by the
FCC for personal communications services.  Cable can accommodate as
much as one gigahertz -- a billion cycles per second -- of communications
power.  This is some 250,000 times the capacity of a four-kilohertz
telephone line to the home.  Just one six-megahertz cable channel
commands 1,500 times the bandwidth of a telephone line.  In every coax
connection the first four channels, between five and 30 megahertz, are
reserved not for broadcast but for reverse communications to the
headend.  Widely used to transfer video programming among headends and
satellite dishes and other programming sources, these channels alone
already represent a potential information highway for home computers
2,500 times faster than a 9,600-baud modem to a phone line.

     Even these possibilities, however, underestimate the potential of
cable.  The coax laid by the cable firms must carry analog video
material without interference or distortion.  This means cable
equipment must track perfectly all the analog waveforms representing
the shape and brightness of the image, and must detect tiny
differences in the frequencies of FM signals bearing color and sound
information.  Because any deviation in an analog wave imparts a defect
to the picture, cable TV has had to develop extremely low loss
technologies. Although most current cable systems function at much
lower signal-to-noise ratios, measured logarithmically, a cable TV
plant can potentially function at nearly 50 decibels, or at a
signal-to-noise power ratio of almost 100,000-to-one.

     Necessary to transmit high-quality analog video, between 10,000-
and 100,000-to-1 signal-to-noise ratios are vast overkill for the
relatively crude on-off codes of digital communications, which can
function at 17 decibels or less.  Therefore, the one-gigahertz coax
lines can carry many more than one bit per hertz.  Craig Tanner,
vice-president of advanced TV projects at Cablelabs, the industry's
research arm in Louisville, Colo., estimates that by wiggling every
wave in readable patterns using a modulation scheme called 256 QAM
(quadrature amplitude modulation), cable systems can transmit as many
as seven bits per hertz.  This means that the one-gigahertz bandwidth
of an existing cable line might potentially carry between six and
eight gigabits per second, or more than three gigabits per second each
way.  These potential links to homes are more capacious than the
current telephone fiber lines that accommodate tens of thousands of
phone calls among telco central offices.

     This bandwidth represents the real potential of cable coax.  For
the next decade much of the cable plant will still be devoted to
analog TV broadcasts or to digital renditions of pay-per-view movies.
Time Warner's Orlando project, however, envisions devoting the top 350
megahertz of its system to two-way digital communications, including
100 megahertz for the personal communications services of wireless
telephony and 150 megahertz for digital two-way data flows.  At a very
conservative estimate of two bits per hertz, Time Warner projects a
total of 300 megabits per second from these digital channels.  At
these levels a computer could download a full movie of two-and-a-half
hours in about one minute.

Cable's Real Potential is Not TV

     Abandonment of the Malone model by Malone and the rest of the
cable industry ultimately requires that cable TV magnates develop a
new grasp of the dynamics of the microcosm: the exponential growth of
computer power and connections. Accustomed to the role of propagating
mass entertainment, cable leaders have long downplayed the potential
market in computer communications.

     Gradually growing throughout TCI, Time Warner, Continental
Cablevision, Jones Intercable and other cable firms, however, is a
recognition that the real future of cable is in computers rather than
TVs.  As David Fellows of Continental declared in launching his
pioneering new Internet access system in Boston In late February, "The
market for computer communications is huge."

     Indeed, during the next decade the cable companies are going to
discover that the computer market for their services is far more
important than the television market.  The computer industry, hardware
and software, is already some 60 percent larger than the television
and movie industries put together and is growing six times as fast.
On-line networked computer services, such as Prodigy, CompuServe,
Delphi and America Online, are collectively growing at a pace of close
to 100 percent per year.  When on-line services can exchange video and
audio files as readily as they transfer text today, these computer
networks will be able to outperform any television system.  Against
all their expectations and plans, cable executives are going to find
themselves a central part of the computer networking industry.

     As Fellows explains, "Cable and computer network topologies go
together perfectly.  Both provide shared bandwidth.  Ethernet over
cable is a natural." In both networks all the data flow by every
terminal.  The receiver tunes into the desired channel.  For
computers, cable offers the dumb bandwidth that is increasingly needed
as terminals gain near-supercomputer powers.  In the past networks had
to be smart in order to provide needed services to the dumb terminals
on their periphery, whether phones, computers or TVs.  Dumb terminals
could tolerate narrowband connections.  In the future, however, all
terminals will command supercomputer powers.

     When terminals are smart, the intelligence in networks flows to
the fringes. When terminals are smart, networks must be broad and
dumb.  There is no way that an intelligent switching fabric can
anticipate the constantly evolving technology emerging from a computer
industry in a frenzied process of change. There is no way that John
Malone's satellite farm outside Denver will be able to satisfy the
demands for programming and communications of 100 million networked
teleputers.  While the telephone business struggles with the
increasing problems of intelligent central switches with some 25
million lines of software code, the cable industry is creating dumb
networks in tune with the explosive growth of supersmart machines in
every home and office.

     The movement of computer networks onto cable need not await the
development of advanced broadband systems such as those planned by
Time Warner in Orlando. Already several companies are supplying
modems that allow computers to link directly to cable systems.

     Zenith provided the first system, HomeWorks, operating at a rate
of 500 kilobits per second.  It is being used by Cox Cable to deliver
Prodigy service in San Diego at a rate 52 times faster than existing
9,600-baud phone modems. Also using HomeWorks is Jones Intercable for
Internet services in Alexandria, Va., Continental Cablevision and
CompuServe in Exeter, N.H., and TCI for a distance learning test in
Provo, Utah.

     Zenith is adding a system called ChannelMizer that can offer full
Ethernet capability of 10 megabits per second over a 15-mile radius.
Intel, General Instrument and Hybrid Technologies have announced an
asymmetrical system that runs upstream from the home at 256 kilobits
per second and downstream at 10 megabits per second, the Ethernet rate
run in most office networks.

     Pioneering in the field for several years has been Digital
Equipment Corp. under the leadership of James Albrycht.  Adapting
equipment developed by LANcity, DEC's ChannelWorks offers the
functionality needed for true information highway on-ramps.  Extending
a two-way Ethernet transparently from the office to the home by a full
70 miles, the ChannelWorks frequency-agile modem allows the use of all
83 cable frequency channels.  Cable managers can send digital
information over any underused part of the coax bandwidth.  Currently
deployed chiefly by telecommuting Digital employees, the system is
under evaluation by a variety of hospitals, libraries, schools and
other institutions favored by Vice-President Gore.

     Absolutely crucial to the development of the broadband
superhighway, however, is not only the merger of the two networks but
also access to the capital of the telephone industry.  Creation of
high-bandwidth cable connections to homes will be far cheaper than
laying new coax.  But they still will require expensive upgrades to
existing cable plant.

     The telcos already invest more money every year -- some $24
billion -- than the total revenues of the cable industry.  But even
the telcos will not be able to create information superhighways if
they also have to duplicate the broadband connections to homes already
offered by the cable industry.  Similarly, the cable industry alone
cannot attract sufficient funds to duplicate the broadband fiber
networks already commanded by the telcos, while the telcos move in to
skim off the best pay-per-view movie markets.  Particularly in an
adverse regulatory climate neither industry is capable of building
broadband networks.  With relatively narrowband networks, the Malone
model necessarily thrives.  In the name of fighting monsters the
administration is in fact pursuing what amounts to a
monster-protection policy.

     If this policy continues, innovation once more will follow its
course toward the least-regulated arenas.  Cable and telco firms will
install their best technologies overseas.  In the U.S.  the computer
networking industry will build the information superhighways.  To
Gore's bitter regret, only business and the wealthy will be able to
afford access.  Until the early decades of the next century, much of
the rest of the nation will be left to the mercies of the Malone model
for video entertainment and other cable programming.  Interactivity
will tend to take the form of games and pay-per-view TV.

     Nonetheless, with the increasing movement of activity from big
cities, corporate headquarters, hospitals, schools and other
centralized institutions to homes and small cities, the demand for
broadband computer connections is sure to soar.  Most current
congressional legislation that imposes mandates on businesses relating
to everything from health care reform to parental leave tends to drive
work away from corporations to contractual outsources.  The market for
"interactive TV" is likely to grow far more slowly than the market for
computer connections over cable.

     Both political parties are far behind the public in comprehending
these developments.  But the reversal of the earlier forces of
conurbation and centralized industry responds to the most profound
laws of new technology.  It is the most important movement in America
today.  If the administration continues to strangle new technology
with new regulation and red tape, a new coalition of liberals and
conservatives alike will rise up against it and grasp the future.  Al
Gore may eventually wish he had never heard of broadband networks.

                             #####

Regards, - GAJ

                           Gordon Jacobson
                     Portman Communication Services
                            [phone]

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  MCI Mail ID:  385-1533                   Channel One BBS - Cambridge, MA