This series of articles by George Gilder provides 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 1996 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.


According to Web-Counter, this article has been accessed times since Nov 3, 1995.





 

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: GOVERNEMENT

     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 moderns 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.


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