Proposed laws may make the going even more slippery for cable, telcos

Push is rapidly coming to shove in the escalating conflict between the cable industry and the nation’s phone companies over who will deliver video to U.S. consumers — though at this point, both industries would probably like to give Congress, rather than each other, a good heave-ho.

Proposed legislation during the past couple of months — a “consumer” bill for cable re-regulation, the FCC’s solidifying the technical details of “video dial tone” service for the telcos, and a bill to re-regulate the Regional Bell Operating Companies (RBOCs) back out of information services — has both industries clambering for a strategic foothold on a playing field that appears to be tilting crazily at the mercy of political whims.

No time for bad policy. Though to some extent all these proposals (especially the re-regulation bills) seem to have at their core a desire to make the world a safer place for consumers, they ignore the long-term ramifications of their actions. They might lower some costs in the short term, but what’s more likely to happen is that both industries will bring to a screeching halt their plans for investment in an upgraded telecommunications infrastructure. This would considerably slow progress toward a sufficiently powerful delivery platform for new consumer information services, and on a larger scale, for digital media as a whole.

If nurtured carefully, the cable and phone lines that these services require for delivery — services ranging from interactive TV to custom news delivery, and scores of things no one’s even thought of yet — could very quickly provide the foundation for a whole new phase of economic growth. But bad policy right now could take years to undo, and with an already limping U.S. economy, the government can ill afford slamming doors in the face of opportunity.

HELPING THE ‘WOUNDED BEARS’ RETURN TO THE COMPETITIVE ARENA

Much of the regulatory policy proposed by the Federal Communications Commission (FCC) over the past couple of years has been directed toward nudging the RBOCs — “the wounded bears of American business,” according to one industry watcher — back into the competitive arena after years of operating as a regulated monopoly.

Even after the Modified Final Judgment (MFJ) that broke up the Bell system more than a decade ago, so stringent were regulations about where and when the RBOCs could compete that it seemed illegal for them to so much as think about innovative technologies or services that might increase revenue. Their technology labs brimmed with inventive engineers, but they couldn’t even sell what they’d invented to an outside company to commercialize.

The stiff regulations were not undeserved. After all, let’s not forget that there were serious monopolistic practices at play that caused the breakup of AT&T in the first place — a danger that many, particularly the newspaper industry, believe is still imminent.

But FCC chairman Al Sikes believes that since the MFJ broke up the Bell System, sufficient safeguards are in place to make sure the Baby Bells don’t throw around their still-formidable weight.

Sikes admits that the main thrust behind most everything the FCC does today is to level the playing field so that the phone companies, still operating under regulatory pressure in most areas of their business, can find the economic incentive to upgrade their existing copper plant to fiber optics and create a thriving, deregulated, highly competitive national network (see Vol. 2, No. 1, p. 9). This is his mission, and as the November election approaches, it’s clear that Sikes is trying to get as much done toward this goal as he can while he still has a job.

BROOKS BILL TRIES TO RE-REGULATE THE RBOCS

Sikes believes RBOCs may be willing to take the financial risk of investing in fiber networks if they are allowed to compete in the potentially lucrative information services market. One very hot segment of that market is the delivery of television or video signals into the home, or “video dial tone” — an area that the cable industry has virtually owned for many years and, many believe, taken advantage of by charging unjustifiably high subscription fees.

Deliberately striving to give cable an equally large competitor, the FCC has just finished crafting the regulatory framework for video dial tone (more on this later). But there’s another bill in Congress, authored by Jack Brooks, head of the House Judiciary Committee, that would essentially re-regulate the RBOCs out of information services before they’d even begun.

You haven’t heard much about MFJ Bill H.R. 5096 since its introduction in May, mostly because it’s being soft-pedaled by the phone companies. They hope that the politics of the situation will keep the bill from passing: Insiders say Brooks is locked in a power struggle over the bill with Edward Markey, chair of the House Subcommittee on Telecommunications and Finance and author of the cable re-regulation bill.

“The Brooks bill would be a disaster,” says one RBOC representative. “We’re looking at it as the death knell — it would close us out [from competing for information services] for more than five years.”

Bill Bechmann, manager of corporate strategy for RBOC Ameritech, says that part of the reason the Brooks bill even came to pass is because the telcos “do a horrible job communicating what our jobs are.” If they were better able to articulate their cause, he says, the re-regulation bills would likely never have seen the light of day.

“The issue is consumers,” he says. “One of the biggest issues that Congress hears about from its constituents is cable pricing and quality of service. That’s where competition would be of value. We have quality and could deliver good pricing. As we’ve gotten competitors over the years, our quality improves and our pricing gets more competitive.”

Bechmann adds, “In the past, the phone company used its monopoly powers inappropriately. In this case, we’re looking at a reverse situation. Cable has the advantage there, delivering entertainment.”

WELCOME TO H.R. 4850: BRINGING CABLE COSTS DOWN?

Which brings us to H.R. 4850. Though some might see this, in combination with the Brooks bill, as a bulldozer for the playing field between the RBOCs and telcos, it does not make eyes twinkle at the FCC.

Submitted by Markey, H.R. 4850 would require that cable rates and services be regulated by the FCC. Some estimate that such regulations would put enormous pressure on the agency — requiring as many as 700 additional employees and nearly half its budget. Though there’s no official commission policy on the bill, “We’ve tried to prevent it from happening,” says Robert Pepper, director of the Office of Plans and Policy for the FCC.

We can see why. Such legislation creates an enormous additional bureacracy for any government agency, and especially one that’s as traditionally overloaded as the FCC. Don’t forget this is also the office that handles the regulations for ham radio, broadcast radio, television, cellular communication, HDTV and wireless computing, in addition to cable and telephone networks and every other newfangled network “thing” that the engineers can dream up.

‘The fire bell is ringing.’ President George Bush is expected to veto the legislation if it ever gets to his desk (it’s undergoing a substantial rewrite in the Senate now), and the National Cable Television Association (NCTA) in Washington, DC, is frothing with opposition to the bill.

NCTA president and CEO James Mooney says the “consumer” aspects of the legislation are politically motivated, and the NCTA states flatly that the bill as written will actually cost cable customers more money. Mooney issued a statement on July 24, in response to the House of Representatives vote on the bill: “Chances of Congress coming up with a reasonable cable bill went last night from 20 percent to near zero… . The fire bell is ringing; it’s time for the entire industry to answer it.”

Regulate and protect. The bill has some very good safeguards built into it, which should become standard across the board as the United States baby-steps its way to a real telecommunications policy. But the problem is that the bill as written today has potential to do the opposite of what it’s intended to do. Instead of saving consumers money, it could generate enormous costs — these in addition to whatever additional tax burden will be passed on in the form of citizen-supported FCC bureaucracy to enforce the regulations.

If this bill passes, the cable industry is sanctioned to pass along the costs of whatever it invests in network development, programming and technology to consumers — just like the phone companies do now via state Public Utility Commissions — at no risk to its bottom line. In this case, regulation equals protection, not more competition.

Of course, the cable industry’s monopoly status grants it virtually the same pass-along privileges today, but the wave of the future will likely force it to change its ways. Trying to regulate today’s cable rate structure through legislation is, in many ways, a laughable pursuit. Certainly it can be done, but when you consider a decade hence, doing so through legislation will prove itself to have been a massive waste of time and money.

COMPETITION IS THE AMERICAN WAY

The irony is that the United States is in a unique position with regard to telecommunications — one that is the envy of the rest of the world. The U.S. is the only major market in the world with a high penetration of cable — and thus the only major market that already has high-bandwidth (coax) wires running past most homes. This means that the United States is the only major market that is in a position to create a truly competitive telecommunications infrastructure.

This, it seems to us, is what Sikes would dearly like to accomplish. The FCC would like to encourage both the cable companies and the phone companies to build high-capacity communication networks and to compete with each other across the board: video services, data services, voice and video phone services — everything.

Because they already have coax cable installed past the home (and, in most cases, into the home), because they can derive profit from the material they transmit, and because they are entrepreneurial in nature, the cable operators start with an advantage. The FCC would like to provide incentives to the phone companies that will help to level the playing field.

When we discussed this with some of the major Japanese consumer electronics manufacturers on a recent trip to Japan, they were puzzled. Is it not wasteful, they asked, to build two competing high-bandwidth telecommunications infrastructures when one should be sufficient to carry all of the traffic?

Our answer was that Americans have learned that the best curb on monopoly abuses, the best way to deflate entrenched bureaucracies, and the best way to encourage investment, innovation and low prices for consumers is through competition. In the long run, encouraging development of two healthy competing communication highway networks will bring low-cost, high-bandwidth communications to the United States far faster than could be accomplished by any other means — and will almost certainly provide the foundation for an explosion of new ways of working and new services that will provide tremendous lift to the United States economy.

CONFUSING THE VALUE OF CONDUIT AND CONTENT

In fact, what might be about to happen, if government steps lightly, is very closely analogous to what’s happened in the personal computer industry. Every major computer and chip manufacturer in the business has acknowledged, with varying levels of chagrin, that personal computers and electronics hardware in general have become a commodity. The only way to make money today is volume — selling lots of computers as well as lots of ways to use them.

A symbiotic relationship. At the same time, a whole new genre of software — geared toward new and unsophisticated computer users — is taking shape. You may have heard of it; it’s called “multimedia.” It combines images and digital video and text and sound into a new medium that is trying to shape and deliver a new breed of functionality and user experience. There is a growing symbiotic relationship between the need for more powerful computer platforms and applications such as multimedia that show off — and require — that power.

Now consider telecommunications. Wires — whether coaxial cable or copper wire — are already commodities. Virtually everyone has telephone service. Virtually everyone has cable TV delivered into the home. In the telecommunications market of the future, the “applications” of the PC world translate to “information services” — everything from dial-up video to interactive video games and television shows to customized Yellow Pages, and thousands of things we can’t know yet.

Like PC applications, these services also require more power, or bandwidth, and fiber optics can provide that bandwidth. Here, too, a very delicate symbiotic relationship is emerging today between the investments that cable and telcos make in their “platforms” — i.e., the fiber infrastructure that will carry programming and services — and the development of the programs and services that will require use of that fiber.

Universal service is here. One RBOC official agrees. “The theme of universal service, which is really what created the Bell system, is pretty much here. Even low income people have [their] own phones. The margins will be in the content,” he says. “The days of making your money on stuffing a wire as full as you can are pretty much over. It’s still our core business, we’ll still do it. But the pipeline business is growing at 1 to 2 percent a year… . [That's] really one of the best barometers of our business, and it’s pretty flat.”

Despite widely publicized monopolistic behavior toward its customers (or perhaps because of it), cable is the only industry today that is freely and without coercion upgrading its infrastructure to prepare for the future.

Many cable companies, such as Viacom International, are making vast investments in fiber and the technologies that will make it able to compete against the telcos and other service providers. And it is doing so at a rapid clip (see Vol. 2, No. 2, p. 24).

The worst thing that could happen now would be to stop cable from investing in its infrastructure. Why? Because in five years, in a deregulated environment where cable, the RBOCs, the direct broadcast satellite companies and the cellular data network providers are all going after the consumer’s pocketbook with hammer and tongs, the cable industry will have absolutely no choice but to bring its pricing structure and services in line with others who are able to offer the same or similar services. All other things being fair and equal, they will have to become competitive to survive.

VIDEO DIAL TONE A CHALLENGE FOR TELCOS

The cable industry sees video dial tone — the capability for RBOCs to deliver video programming via the phone network — as its Waterloo. For years the only alternative to network television (which was no alternative at all in Manhattan and rural areas where broadcast reception was virtually nonexistent), cable knows the telcos are the only network providers that can actually challenge it in terms of power and ubiquity.

“If video dial tone is deployed, then maintaining the [cable] cartel is impossible,” says one government official. Within the past few weeks, the FCC has taken more steps to ensure video dial tone is indeed deployed. It has adopted rules and a framework for the service, and if all goes smoothly from here (i.e., none of the planned appeals stick), Pepper of the FCC believes phone companies will be able to start filing for specific services and tariffs. “I would expect within the next 18 months we’ll begin to see specific service proposals to offer video dial tone,” he says.

This is particularly threatening to the cable industry, which is responding in part with dramatic posturing, and in part with interesting questions that must be answered.

Here is the dramatic posturing: “When you cut through all the technological ballyhoo, this is a kind of half-step toward encouraging phone companies to build a lot of hugely expensive TV plants, with telephone customers financing the investment,” said NCTA’s Mooney about the FCC’s video dial tone proceeding in mid-July. “The other half-step belongs to Congress; whether they’ll take it remains to be seen.”

Though the NCTA says it “does not oppose the transmission of video programming by telephone companies on a common carrier basis,” it is encouraging the FCC to first establish an “appropriate” regulatory framework to deter “anti-consumer and anti-competitive practices.” (We leave the irony of this concern to you.)

But the NCTA’s major concern, and it is one we share despite the industry’s lousy reputation for service, is that the provision of video dial tone for the RBOCs is a little too paternalistic for their tastes.

In an excerpt from comments made to the FCC earlier this year on video dial tone, the NCTA said, “There are … troubling indications that the Commission may be less concerned, in this proceeding, with fostering an efficient, competitive video marketplace than with hastening the construction of a particular vision of the future — specifically, a vision in which a single, telco-based broadband infrastructure is the basis for voice, data and video telecommunications.”

LINE UP THE DUCKS BEFORE YOU SHOOT

So obviously, the cable industry thinks the FCC has it in for them. But true or not, the bigger question has always been whether or not the RBOCs were clever or capable enough to see this particular brand of writing on the wall and move into a radically new business. Until the past couple of weeks, our answer would have been, “No.”

As recently as the Digital World conference in June, sparse attendance by RBOC representatives — despite vigorous effort on our part to get them involved, either as attendees or speakers — seemed to point to a telco community that remains clueless about the gift called “video dial tone” being handed to it on a silver platter by the FCC.

But according to some RBOC executives, they are doing anything but holding back on the information services market. The problem in part, they say, is that they are getting their ducks in a row before they start shooting. And, they admit, they do a lousy job of presenting their plans and views to the world. This is about to change.

Big changes afoot. Most of the senior executives at the RBOCs today are from the monopoly days. Dealing with the digital world will involve them in services the phone company has never been involved in before. This is not only frightening, but difficult to execute successfully.

Nonetheless, says Ameritech’s Bechmann, they are most certainly examining their alternatives. “We’re transmitting digitally compressed video, trying to understand what our own network infrastructure requires to do that cost-effectively,” he says. “Plus, we’re looking at partnerships and strong ties with cable companies. We hope by the end of the year to understand the whole issue better, what makes more sense strategically.”

Ameritech and Bell Atlantic are among the most active of the seven RBOCs to be investigating what to do with information services. Bell Atlantic, in fact, sponsored the first simultaneous voice and video transmission trial back in 1988, when RBOCs were granted partial relief from MFJ restrictions. And in an attempt to overcome the culture problem of “Bellhead” executives with no experience in market competition, it recently hired two outsiders to lead its foray into video and information services.

“Before fall [when most of the remaining MFJ restrictions were lifted], there were only very specific avenues where you could go,” says Larry Plumb of Bell Atlantic. “After we got across-the-board lifting of restrictions, we said, ‘Gee, we have limited resources and we’ve just been given a meal that we can’t consume.’ We decided to regroup and move ahead rationally — looking carefully at where to put our investments and what businesses were most relevant to us. We went into a period of intense re-evaluation of initiatives and focusing of resources.”

STILL WATERS ARE RUNNING DEEP

Video is definitely at the top of Bell Atlantic’s list. A technology called ADSL (asymmetrical digital subscriber lines) will be the technology Bell Atlantic likely uses first to deliver video (see Vol. 1, No. 11, p. 15). The company has already announced a couple of ADSL trials, one of them an educational multimedia project in New Jersey.

Though it uses copper wire, the company believes ADSL is a good baseline because it can deliver a single channel of full-motion, VHS-quality video signal using compression. After seeing how the market reacts to it, the company will move into fiber or fiber-coax combinations for higher bandwidth delivery. The design concept is to run ADSL over ISDN, which means a customer would still have phone service in addition to video coming into the home.

Own your own. The biggest threat to cable is that the RBOCs may be able to own programming. And certainly this is under consideration. Telco officials say they’re in discussions with a wide variety and number of content providers. “We have not ignored the movie studios,” says one. “We have talked to other smaller production studios that don’t necessarily produce Gone With the Wind, but do produce How to Hang a Door or something similar.”

But ownership of programming is still a sticky issue, legally. The trick is to figure out what kind of leasing arrangements can be made “so that everybody can make money and be happy about doing business.”

In other words, still waters run deep. All the RBOCs, even those not mentioned here, are said to have “some fairly aggressive programs” for delivering information services. They’re looking closely at what arrangements and market strategies make sense. To cut the RBOCs off now via re-regulation would have a devastating effect on a burgeoning area for economic growth not only just for the telcos, but for all the entrepreneurs who need a broadband network to distribute their information products.

WHERE REGULATION WOULD BE BETTER DIRECTED

Regulations in and of themselves are not bad. In fact, when they aren’t designed to micro-manage industries, they are often very good. A large number of the safeguards built into the Markey bill, for example — such as information privacy, technical standards, sufficient access and the like — may cost cable operators money in the short term, but they are of vital importance to the future of telecommunications.

All network providers should expect to make provisions for these safeguards, not just the cable industry. But heavy cost-structure regulations, especially at this critical juncture, would do nothing more than snuff a nascent information services market. As competition escalates, issues such as pricing and service will take care of themselves.

If Congress really wanted to author some “consumer” legislation, it would be better off looking toward the areas of privacy and access in this new, networked world.

Since the majority of Americans get their news from television, why not come up with the equivalent of the phone company’s “lifeline” service that would provide viewers with a highly economical package of cable services that includes a few news networks?

Why not pass legislation requiring that all network types be interoperable, and set up quality and reliability standards? And while they’re at it, why not make sure that the information that programmers glean from the new, two-way links between the TV screen and network provider remains as private as the contents of a consumer’s mailbox or telephone bill?

As we move forward into a world where commerce and communication rely on a national public network, the United States must invest in a national telecommunications policy that not only protects consumers, but helps foster competition in an area where we are indeed the envy of the world.

Denise Caruso