From Washington: Considering the Broadband Debate

Stage magicians can make rabbits, lions, female assistants, and sometimes entire buildings seem to disappear for a few moments—but only if they divert the audience’s attention. So, too, in Washington, can skilled lobbyists sometimes make entire industries vanish for an extended period.

Consider the broadband debate where the airwaves are crowded with charges and counter-charges, accusations and insults, mostly traded by the four big Bell phone companies and their upstart rivals, the Competitive Local Exchange Carriers (CLECs). The Bells say they can’t build the new broadband networks needed by the nation until they are freed from the 1996 Telecommunications Act, which forces them to share their networks with their rivals. In response, the CLECs cite chapter and verse of the act, which gives them the right to use the Bells’ networks at prices set by bureaucrats at the Federal Communications Commission.

What has half-disappeared from this fight is the cable-TV industry, mostly because the cable companies are doing their best to stay away from the TV cameras. As of June of this year, their disappearing act ensured most attention in Congress was focused on the Bells’ disagreement with the CLECs. That’s a great diversion for the cable companies, because it gives them more time to quietly capture the broadband marketplace, step by step, market by market, regional monopoly by regional monopoly.

We need to untangle the money, the technology, and the law.

The Telecommunications Act says the Bells must rent their networks to their 300 smaller rivals—the CLECs. If any Bells upgrade their lines to carry digital subscriber line (DSL) data, they are required to let CLECs use the DSL service to steal many of the Bells’ most profitable customers. Moreover, the CLECs themselves don’t have the money to deploy DSL anywhere but in areas where there are telecom-hungry corporate customers. So for the Bells, the obvious strategy, the legally possible strategy, the only moral strategy (assuming morality stems from duty to shareholders), is to stall, stonewall, delay, prevaricate, drag their feet, postpone, protest and whine until the CLECs lose the confidence of Wall Street. And this is exactly what the Bells have done since 1996. The FCC has fumed and charged them almost $400 million in fines—but the CLECs have been gutted. On Wall Street the CLECs were worth $242 billion in March 2000; they then fell 83%, down to $38 billion in May 2001. In comparison, the Nasdaq only fell 48% over that period, according to a study completed by James K. Glassman, an economist at the American Enterprise Institute in Washington, D.C.

The cable companies are reluctant to advertise their good prospects, and instead prefer to quietly stoke the unseemly fight between the Bells and the CLECs.

The CLECs desperately want Congress—which fathered many CLECs when it passed the Telecomunications Act—to crack the whip over the Bells until they agree to work for the CLECs’ benefit by installing new DSL gear in suburbia. Naturally, DSL installation would boost the CLECs’ stock value, and allow many executives to get very rich very quickly. To lather up the Bells’ overseers and whip them into action, the CLECs repeat ad nauseam their basic pitch that U.S. consumers be given the opportunity to choose their own DSL service from competing companies after the Bells pay most of the infrastructure cost. That’s as American as apple pie, and who could reject it?

Certainly not the CLEC’s largest ally, AT&T, the nation’s biggest long-distance firm and cable-TV operator. Its chief lobbyist in Washington is James Ciccone, a charming, smart man who is friendly with the Bush family. He has been diligent in demanding the federal government ensure consumers be given a choice of DSL service from either the Bells or the CLECs. Ciccone is one of the few cable guys making an appearance in this broadband demand. Although Ciccone makes his demand for competition and fairness with utter sincerity and decency, he is rarely echoed by anyone else in the cable industry, not even by the sincerely self-interested Steve Case of AOL-Time Warner, the nation’s second largest cable-TV company. That silence is a tactic; while keeping a low profile, the Bells and CLECs bleed each other.

But outside the Beltway, the industry is posed to capture the suburban broadband business. It can win this market because it is lightly regulated by the federal government, has cable TV pipes in most neighborhoods of the country, and its technology can get far more data to more doors at less cost than the Bells ever will. Thus the cable companies are now modifying their old TV networks to add a two-way delivery of six million bits of data per second to each home for an advertised price of $40 per month.

Some might judge the Bells’ offer as a better deal: between six million and 16 million bits of DSL data per second for an advertised price of $50 per month. Despite their complaints about the CLEC-favoring regulations, the Bells are quietly deploying many DSL lines. The number of DSL connections doubled in the second half of last year to two million lines, according to a FCC report released in August. But DSL connections still lag behind cable modems, which totaled 3.6 million, an increase of 57%, according to the report.

But if consumers ever decide to adopt DSL enmasse—regardless of whether the Bells or the CLECs are selling it—then cable companies can easily upgrade their networks to carry 16 megabits, or maybe 60 megabits, or even 160 megabits of two-way data per second for the same monthly price. They can do this because their coaxial cables now carry roughly 250 million bits of televised data per second. So far, they’ve only declared they will allocate six million of those 250 million bits for data—but they could allocate far more should they so wish.

Moreover, the various cable-TV companies’ natural monopolies, or sometimes duopolies, in each of the local cable-TV markets are safe from rivals, who would have to build an expensive network from scratch before they lure even one customer away from the existing incumbent, or perhaps the second-place DSL vendor. Satellite-TV rivals can’t provide easy two-way broadband yet. Wireless technology is not ready, and is sure to be slowed by local zoning boards’ worries about ugly antennas or scary radiation. Also, counties regulate the cable-TV companies with mutual back-scratching agreements in which the cable-TV companies turn profits in exchange for modest tax payments, plus the handover of a few TV channels to the local teachers’ monopoly and council meetings. These channels are made incomprehensible by the lack of a local C-SPAN that might feature explanations, debate, or critique from local activists, reporters, and political rivals.

This technological marketplace and political reality puts the cable-TV companies in the driver’s seat and leaves the Bells fighting for a distant second place against the CLECs (there is no third place worth having). The cable companies are reluctant to advertise their good prospects, and instead prefer to quietly stoke the unseemly fight between the Bells and the CLECs. Correspondingly, the Bells are frantically pointing the finger at the cable companies, which reply by shaking their heads in mock sadness as they urge the Bells to "do the right thing by the young and vulnerable CLECs."

The Bells and cable companies do most of their talking via advertisements in Washington, where a series of front groups (such as the Bells’ group, Connect USA) are buying ads for and against a broadband bill sponsored by local politicians—Rep. Bill Tauzin, and Rep. John Dingell, the senior Republican and Democrat, respectively, on the House Energy and Commerce Committee. The bill itself has lousy prospects, partly because of opposition from the CLECs and cable companies, but also because several key Senators are long-standing critics of the Bells. But the bill’s legislative future may not matter—during the one week where the bill made significant progress in the House of Representatives, the CLECs’ stock prices fell by $87 billion. (Consider for a moment the cost-effectiveness of the Bells’ lobbying, which wiped $87 billion from its enemies for perhaps $2 million in up-front lobbying costs.)

However, what matters more than the Tauzin-Dingell bill is the underlying marketplace, where the Bells are looking more and more likely to win … second place behind the cable companies, leaving the CLECs in third place, and thus facing bankruptcy. This is the reason investors are bailing out of the CLECs, not because a bill is making some lurching progress in the House.

When the smoke clears in a few years, the cable companies’ dominance of the broadband market will be obvious. It will be then that the federal government will shuffle into action, if only because politicians know it is good election-day move to demand cheap TV from the reviled cable companies. The cable companies can delay this day of reckoning, but when regulation is reimposed, the cable-TV companies will already have the market sewn up—and the Bells and surviving CLECs will be paralyzed. Perhaps Congress will cap their monthly cable fees at some profitable level while allowing them to protect their market shares and reap additional profits from deluxe services, data-collection and advertising, inside deals with particular merchants and movie studios, a percentage of sales from e-commerce, government services via the Internet, and who knows what else.

Maybe Congress will try to get at those side deals by passing an "open access" law to stop the cable companies from doing what they clearly want to do—use their control over the networks to push their preferred products and partners, while hurting their rivals. But to solve the "open access" issue, the government would have to reregulate the entire telecommunications industry, from sockets to software to side deals. If it actually does that, the feds will need a massive new bureaucracy … we’ll call it "Ma Cable."

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