'MY WAY OR THE HIGHWAY'?
Telco, Cable and Government Cross Wires

by Denise Caruso

c. 1994 Technology & Media

The only place where convergence is not just the misnomer du jour is in the telecommunications business. As digital technology has made it increasingly possible to send any kind of information down a wire or through the airwaves, all the various network providers -- but especially the cable and telephone companies -- have become aware that the walls separating them are crumbling.

Having achieved near-saturation in their own protected markets, cable operators and local telco providers have more incentive than other network providers to expand their reach into less traditional application areas. Failed mergers and joint ventures aside, the complimentary technological strengths of both networks, not to mention their formidable market clout and hunger, make it inevitable that the two industries should cross wires and make a play for each other's turf.

Both need the blessing of the federal government, which controls how the nation's networks operate. Without an official nod to their converging realities, neither industry has the opportunity to test their ability to succeed in providing services so different from what they offer today.

Thus today's pitched battle between the heavily regulated, monopoly regional telephone industry, the relatively unregulated, monopoly cable operators and the government -- a monopoly of a different sort -- that controls them both.

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A WEIGHTY STATE OF LEGISLATION

More than 30 pieces of legislation affecting various aspects of the telecommunications industry are now under consideration in Congress, but the two most significant deal with the intricacies of deregulation and competition that will sanctify the two monopolies' entry into each other's territories.

They are HR3636, also known as the "National Communications Competition and Information Infrastructure Act of 1994," which is making its way through House of Representatives, and Senate bill S.1822, the "Communications Act of 1994." In a nutshell, they both promote competition for local telephone companies, provide guidelines for non-proprietary systems, allow telcos into video programming through offering "video platforms" (with nominally non-discriminatory access) and allow local telcos to phase into long-distance service provision.


Millions of Dollars in Influence Peddling.

Enormous donations from political action committees (PACs) are being directed toward Capitol Hill to tilt the balance of power on these bills. PC World magazine found that individual members of the five Congressional committees with power over deregulation and communications accepted nearly $5.7 million from communications PACs in the 1992 election cycle. The Congressional watchdog group Common Cause says that between 1984 and 1993, communications industry contributions to Congress were $50.2 million.

Despite all the special interest money -- or maybe even because of it -- the bills are hitting snags at every turn. The sticking points are many: all the minutiae of cable-telco cross ownership, how local telco providers should enter long distance, preconditions for telco entry into cable and cable entry into telco, buyouts and joint ventures, who must provide universal service, who must be regulated under "common carriage" rules, who you have to share your infrastructure with and under what conditions, how to let other utilities provide telecom services, etc., etc., etc.

It's widely believed on Capitol Hill that neither of the infrastructure bills will make it out of their respective committees before the end of 1994.


The Internet Model: Relinquishing Control.

Since both cable operations and local telcos operate as monopolies, it is not surprising that their corporate DNA compels them to perpetuate a business model based on controlling competitive access to their markets.

But those who understand digital networks and computer technology know that any network can carry any kind of digital signal, with bandwidth (the amount of information that can be sent at any given time) the distinguishing factor, not the contents of the transmission. The physical realities of convergence have already fundamentally redefined business for both industries.

The global Internet is the most frequently cited example. It is a completely unregulated (to date), fully distributed (no central server, head-end, office or other point of control for information) "network of networks," connecting thousands of computers around the world and allowing access to any service or content provider and any user on a completely non-discriminatory basis.

Internet service providers typically buy bandwidth, or capacity, and pay no marginal costs for using the network. Users pay a variety of charges, depending on how their Internet service provider resells access to the network. These costs are becoming highly competitive as the popularity of the network increases.

It is possible today to deliver video and audio, as well as faxes, via the Internet. It is an environment so compelling that thousands of new users sign up every month, and commercial service and content providers are springing up like weeds to serve them.


Power Shift from Provider to User.

The success of the Internet has permanently altered the existing power structure between network provider and consumer. 

Internet users have repeatedly demonstrated that they have the desire, the opportunity and the power to create and distribute, as well as consume, information on the network. Thousands of "newsgroups," as they're called, are filled with random thoughts, research, reporting and commentary on virtually any subject.

Internet users in Central America, for example, can tell you how many trees are cut down in the rainforest on a daily basis. Eyewitness reports, weather maps, photographs, sound and video are generated, transmitted and received every day by Internet users.

And there's plenty of play as well as work. The wildly popular MUDs, or Multiple User Dimensions, allow users to enter fantasy worlds where they create their own persona and interact with other personas via on-screen wordplay.


A Network that Expands to Meet Demand.

Rather than limit the amount of information that can flow through the network, charging premiums based on scarcity, the Internet's design instead makes it easy to expand the network itself.

Becoming an Internet service provider is as easy as buying the right kind of computer and leasing the right kind of access line from a telephone company. Since user interface and network navigation issues are being addressed quickly by network-based entrepreneurs (such as former Silicon Graphics chairman Jim Clark's Mosaic Communications Corp. and Jim Gleick's Pipeline, Inc.), launching your own information service isn't much different from setting up a small business using a personal computer. Anything you can't figure out how to do yourself can be done by a growing cadre of Internet-literate consultants. You don't have to ask anyone's permission or give them a percentage of your royalties. You just do it.


Cable, Telco. . .Internet?

So how does the Internet fit into the competitive landscape of the cable-telco battle? Is it a curiosity, competition or a model to emulate?

The answer depends on your filter. If you believe the Marshall McLuhan axiom that "the medium is the message," then you probably see the Internet as a network with its own identity and strengths; it couldn't possibly compete with either the cable or telco businesses because even though it shares elements of both networks, what it does best is fundamentally different from both.

Communicating via computer, as one does on the Internet, requires you to project your mind into the ether. You have a completely different relationship to what you're doing than when you're watching TV or even talking on the phone.

Given the high pitch of experimentation in the Internet community, certainly someone will use it to deliver movies or telephony services. But if history is any indication, these kinds of transplanted applications will be peripheral to the brainy mix of interpersonal communication and ready access to information matrices that enthrall Internet users in the first place.

So if you're a cable or telco, the Internet probably isn't much of a threat to your existing business. In fact, you could probably find some pretty lucrative ways to take advantage of the Internet's astounding growth curve, such as providing high-bandwidth Internet access via cable modem, or making high-bandwidth ISDN (Integrated Services Digital Network) telephone service available more widely to U.S. homes.

However, if you believe the only sustainable business model is one that allows the network provider to control and/or own whatever information travels on the network, then you may be in trouble. A network of 20 million users and service providers will soon expect infinite bandwidth and access, and may be in a position to demand it from networks that provide anything less.

That's because the success of the Internet is also the success of a new model for access. The Internet's inventors believed in the unrestricted flow of information; this fundamental belief resides in every feature of the network, from its widely published standard protocols to its easy expandability, flat-fee pricing structure and culture of acceptance for all points of view.


Adapting a New Pricing Model.

That said, however, many interested parties are closely watching how the Internet's pricing model changes as a result of its newfound star status.

University of Michigan economist Hal Varian, who recently addressed the issue of Internet pricing at an April meeting of the Telecommunications Policy Roundtable, believes that as more demands are made on the Internet's resources and bandwidth -- including multimedia applications and the commercial bypass of telephone networks -- the Internet is likely to adopt a usage-based pricing model, rather than the standard flat rates of today.

Varian proposed adopting usage pricing based on priorities in relationship to network congestion. His example: a college student hooks up a computer to a video camera to send a digitized videogram to her parents. With video data traveling at about one megabyte per second, a high-speed (T1) line could be completely tied up by the transmission.

Under Varian's model, the student might someday use a little known feature of Internet messaging software: she'd assign it a priority and pay for the transmission based on relative urgency. If she's asking for money to pay her late rent, she may want it delivered immediately, no matter what the status of the network, and will pay more (COD, obviously) to do so. For a simple, "Howdy, where's my allowance?" she may opt to have the message go through when the network is less congested, and pay a nominal delivery fee. Access is preserved while some pay extra for convenience.


The Future of Democratic Discourse.

Not incidentally, Varian's address opened the Roundtable's first workshop on the future of democratic discourse on the Internet. It is widely acknowledged in the net community that pricing is one of the critical factors in keep the Internet "open" and flourishing.

Though telephone companies and cable operators are looking at ways to exploit commercially the Internet, one can only hope that both industries will give careful consideration to what has worked in the past.

Throwing the network open, letting anyone who wants to provide services and making bandwidth and access a commodity has allowed the Internet to grow at a rate that most network providers only dream about. Today's very rough estimate is 20 million users, up from 15 million a year ago.


Adopting a Model of Abundance.

However, there's been little indication that those who control today's networks or media have noted the Internet's successful adaptation of the new "abundance" (as opposed to "scarcity") model for conducting business.

As entrepreneur James Gleick wrote, referring to the Internet in a recent piece in The New York Times Magazine, "In economic terms, the great corporations are acting like socialist planners, while old-fashioned free-market capitalism blooms at their feet."

One cannot help but wonder what will happen to the vast, slow-moving conglomerates that cannot seem to get excited about anything except making themselves bigger. Mired in traditional business models, they seem incapable of even comprehending the depth of the changes around them; if they do comprehend, the best that most of them can do is circle the wagons.

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INFOBAHN OR HO CHI MINH TRAIL?

And so it seems that the ineptly named, much vaunted "information superhighway" is fast becoming the Ho Chi Minh Trail, where land mines and booby traps are a daily occurrence. How then do we advance industrial policy without blowing up the network's potential to revive our education and health care systems, and address the information underclass? Look toward the National Information Infrastructure Advisory Council (NIIAC), established by executive order of the Clinton Administration in early 1993.

The NIIAC was officially launched shortly after Clinton's election. It resides in the Department of Commerce, under the direction of Commerce Secretary Ron Brown.


Moving Past Infrastructure 'Food Fights.'

The NIIAC's charter is to transform the infrastructure food fights into a more useful discussion of how the NII might best serve the greatest number of industries and constituents, and to provide guidance to various agencies in shaping legislation and regulation based on its findings.

According to James Johnson, former government affairs director for Apple Computer, Inc. and an early participant in the formation of the Computer Systems Policy Project (CSPP), a powerful group of computer industry CEOs, the Council's seeds were planted during the Bush administration.

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A PUBLIC/PRIVATE COOPERATIVE

Co-chaired by Ed McCracken, chairman and CEO of Silicon Graphics, Inc., and Delano Lewis, the new president of National Public Radio, the NIIAC's 30 members politically and correctly represent both industry and government, including public schools, cable and telephone companies, entertainment programmers, long distance phone service providers, public utilities, manufacturers and others. Their goal is to get the I-way (hip new slang for "information superhighway") broadly deployed throughout the citizenry via cooperation between private industry and the public sector.

It's good news for the council that the infrastructure bills before the Senate and House have stalled. Katherine Hanson, McCracken's chief of staff for NII issues, says the faltering legislation is likely to aim a hotter spotlight on the work of the NIIAC, which in theory is addressing larger issues than today's cable-telco spats.

The Council has identified three "megaprojects" that encompass the most critical issues raised by the deployment of a National Information Infrastructure. 


Applications, Access and Privacy.

First is the "vision and definition" project, to raise public awareness about socially beneficial applications. Discussions will center around the delivery of health care, education, public safety, criminal justice, electronic commerce and competitiveness via national networks.

Not surprisingly, considering the Council's charter, "entertainment" products such as video on demand are not on its applications list. But many people believe that these less glitzy applications could actually be far more successful than movies and home shopping services that are touted today as the cash cows for infrastructure investment.

In fact, a study completed last year by computer maker Hewlett-Packard Co. indicated that consumers have a high degree of interest in using non-entertainment electronic services that help them deal with the pedestrian realities of their daily lives. Furthermore, they're willing to pay for them.

With luck, an NIIAC member with connections into an interactive TV pilot will ask to wedge in a few educational and/or utilitarian applications and measure consumer response. If response is good, perhaps the millions of dollars now being invested in "twitch" video games and mediocre CD-ROMs would shift over to a new genre of interactive programming for personal enrichment.


Universal Service, Universal Access.

The Council's second megaproject will debate the critical issues of universal service and access, which will determine the network's degree of openness to users, producers of intellectual property and various hardware and software vendors who want to help build the network's infrastructure.

At its highest level, discussions will center around finding the balance between what one member called "societal aspiration and economic reality." A bit closer to earth, the group will also look at how to provide the greatest economic opportunity by opening access to the network itself to those who want to outfit the network with the devices that hook up to it and the services it offers. It will address critical issues such as minimum service, allocation of services and the need to set standards.

One of the most fascinating subject areas will be the logistics of paying for universal service. One suggestion was to underwrite the introduction of electronic mail into national usage by levying a general tax on digital content, or perhaps on "bits" passing through the network. Vice President Gore has suggested a voluntary contribution fund. Other ideas include private investment stimulated by regulatory relief, tax incentives to encourage investment and government subsidies.

In addition, the universal service group will debate the issue of organizing standard-setting bodies which include representatives from the government, private companies, educational and cultural institutions, and nonprofit organizations. It will look at raising the level of understanding by teaching "mediacy," or media literacy. It also intends to explore how standard techniques for indexing and retrieval, for example, and better user interfaces could lower people's resistance to technology and increase their likelihood of tapping into the NII.


The Show-Stoppers: Privacy, Security and Intellectual Property.

The third NIIAC megaproject -- privacy, security and intellectual property -- is likely to receive a lot of public attention. It's already clear that without intelligent approaches to these issues, the broadband networks of tomorrow won't be carrying much traffic.

Privacy is the issue that doubtless will draw the hottest debate. During the past decade, the public has become increasingly troubled by the amount of personal information that can be easily gathered about it.

As database and on-line technology continue to be deployed in new applications areas such as interactive TV, in which citizens conduct an increasing amount of business over the network -- banking, shopping, purchasing of entertainment, adult education and health care -- suddenly the lack of control over their personal information takes on a more ominous quality.

Who owns the personal information about you -- from your credit card limits to the number and gender of your children -- that's stored or moving around someplace on a network? Today the answer is, "Not you." It belongs to whomever finds it and puts it in their database. They can sell it, trade it, mail or telemarket from it. All you can do is tell them to stop; you can never get it back. But when interactive TV networks start recording everything from what sitcoms you watch to which commercials you buy products from (see "If We Build it, Who Will Pay?" page 13), how do you want that information treated?

Most people want this transactional information put into a black box that no one can copy, trace or use without express permission. But many companies setting up interactive TV trials are using the network's ability to collect demographic data as a selling point to potential advertisers. As public awareness grows, transactional privacy will become a show-stopping issue for the development of the I-way. And it's likely that consumers will demand full and complete ownership of their personal information -- meaning that marketers will have to pay them to use it.

Security is another potential stumbling block, as evidenced by the strident debates around the Clinton Administration's Clipper chip proposal and the FBI's Digital Telephony proposal. In short, the National Security Agency and other law enforcement agencies want to be able to both wiretap digital communications and decode messages scrambled by encryption technology, when given the authority to do so by the proper government agencies.

The private sector, which rarely agrees on anything, is unanimous in its disapproval of both proposals. Without getting into the intricacies of the two proposals here (though we strongly suggest you do so), consensus is that (a) no one will buy telecommunications and/or computing products if they aren't truly secure, (b) consumers won't use networks if they can't truly secure their personal information and communications and (c) content owners won't distribute their electronic products over networks -- certainly one of the most certain money-making applications going -- unless they're sure they can protect them from theft or alteration.

And finally, the issue of intellectual property is one that gives night sweats to media company executives. The questions are many and complex, though they don't necessarily hinge on network distribution. To list just a few: When does a digitally altered piece of art (music, graphics, video, text) become something new, and thus not beholden to the original rights owner? If a perfect copy can be made from an original piece of digital media, how will electronic libraries prevent wholesale copying and sale of copyrighted information? Are electronic mail conversations considered to be public -- published and/or publishable -- or are they privileged communication, like mail delivered by the Postal Service?

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DISCUSSION OR NO, IT'S GOING TO BE TOUGH SLEDDING

There is likely to be a fair amount of resistance, even within the NIIAC, to some of the ideas raised in these three project areas. For example, the larger cable companies -- specifically those heavily invested in entertainment programming -- are strongly disinclined to support the "open platform" network architecture concept that's so important to universal access. As one industry watcher said, "They're afraid that open access might actually lead to open access."

That's because cable's closed, "gatekeeper" architecture is the foundation of its business. Cable operators control everything that moves through their wires. They also collect revenue from every possible source: if they have programming investments, they collect usage fees from smaller operators who need programming for their systems. If they don't, they take money from TV programmers who want to lease "channel" space.

They also require that subscribers use only their specified settop box, and obviously, subscribers can see only the channels the cable companies allow.

The telco's behavior is a bit less egregious, but only because they are forced by law to operate under the rules of "common carriage" -- that is, whoever has the money to pay the installation fee can provide services over the telephone network. Even the telco model, however, can exert a chilling effect -- the local phone company reserves the option to not handle billing services for certain kinds of customers, such as those providing phone sex services.

The competitive service providers have shown themselves quite willing to be exclusionary as well. AT&T, which actually has one of the more progressive models for providing future network services, admits that it won't let just anyone be a service provider on its sophisticated new PersonaLink messaging service that's supposed to roll out this fall. It doesn't have to, either, since PersonaLink is an enhanced network service that doesn't not fall under common carriage provisions.

An "open platform" architecture, much like that of the Internet, is the antithesis of this model. Though the NIIAC hasn't even begun to specify how the network's component parts might best snap together, it's likely there will be strong support within the content world, as well as in the computer and user communities, to reject "gatekeeper" architectures so that the market can quickly drive down the cost of components, bandwidth and programming into a range that's accessible by the majority of the public.


Lines Once Blurred Are Virtually Gone.

Open platform is going to be a tough issue, though, for many reasons -- not the least of which is that the most powerful players have deep cross-industry investments.

Three high profile examples: Tele-Communications Inc., the largest cable provider in the country, is deeply invested in various entertainment programming companies. Viacom International Inc., another major cable operator, now owns three of the most successful entertainment franchises in the world: Paramount Communications, Inc., MTV Networks and Nickelodeon. And Time Warner Inc., another of the country's largest cable providers, claims to be the world's largest holder of intellectual property rights.

In a perfect world, Al Gore and/or Reed Hundt would find a way to keep John Malone, Summer Redstone and Gerry Levin from spontaneously combusting while passing a law that forbids the ownership of content by those who also own network conduit.

Not only would such a law instantly obviate "control" and "gatekeeping" issues, because any network owner would be financially compelled to welcome any and all programmers with open arms, but it would also eliminate fears about the power of networks providers to unfairly squelch competition to their own programming or information services.

And, as mentioned earlier, in a  world where network capacity is virtually infinite and traffic over the network continues to expand to meet capacity, the conduit business alone will be incredibly lucrative. 

Of course, this will never happen. But it is an idea that keeps popping up, and it is certainly a good ice breaker for any "open platform" discussion.

In addition, it's clear that software companies are eyeing the gray areas between conduit and content.

If the software is fundamental enough, every piece of hardware or software or intellectual property that comes in contact with it could potentially trigger a licensing fee. While not a gatekeeper in the same way as the cable model, it's a toll gate nonetheless. An "open platform" network architect would not smile on such an arrangement, but he or she would be hard pressed to argue against it.

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PROCEED WITH CAUTION

Under the best of circumstances, there are no direct paths to information nirvana. But since telecommunications has become "the" national issue, resonating through the halls of industry as well as Capitol Hill, everything that we find distasteful about the political process is coming home to roost in the debates over broadband networks. As conflicting interests try to build and control the I-way, each move made by the NIIAC, the cable industry, the telephone industry, Congress and the FCC will be alternatively vilified and lionized.

In face, the NIIAC itself is very likely to be the scene of much position-jockeying. No matter how noble the cause, it is very rare that a group of competing interests such as those contained within the NIIAC can put self-interest even one stop below the greater good.

Outside the Council, accusations will continue unabated. Every cable operator with an agenda will continue to sling mud at Reed Hundt and the FCC. Telephone companies will continue to stamp their feet in the media and threaten, "We won't invest in infrastructure if you don't deregulate us now!" (One Senator's classic response to one such threat was, "Are you saying, 'It's my way or the highway'?")

The bottom line? If they choose to not invest in the nation's infrastructure, others will gladly do it for them.

As you read this, in fact, a big, galumphing, broadband network is being snapped together by relatively normal people all around the U.S. -- using commodity parts and standard technologies -- and they don't have to ask anyone's permission to do it, not even the government's. The Internet isn't pretty and it isn't even very easy to use just yet, but it's getting there. Though it may eventually be forced to capitulate to a variety of external pressures, today it is a splendid example of free-market economics in action: supply meets demand, solutions to problems arise organically from the desire to serve customers, and once again, we get to marvel at the ingenuity of the unfettered entrepreneur.

It's critical that the government take the high road. Much intense public debate, free from conflicts of interest, is required before we hand over tomorrow's networks to today's giants no questions asked. We are at a critical juncture, on the verge of building a new communications infrastructure to take us into the 21st century. It's not so important to do it fast. Let's make sure we take our time and do it right.