Populism + telecommunications = global democracy - how mergers between telephone companies and the cable television industry are changing the future of international communication and information services - Cover Story

National Review, Nov 15, 1993 by Neal B. Freeman

AFTER YEARS of hype and hope, the old communications barriers of time and distance are beginning to crumble as dramatically as the Berlin Wall. The digital era of communications is here, and its essence is this: vastly more people will have vastly improved access to vastly more information.

The presumptive consumer benefits of this shift from analog to digital have been widely advertised: video phone calls, movies on demand, the Library of Congress accessible by home computer, bill-paying and plane-booking, and so on. No doubt the market will surprise us all as it sorts out the real values from the entrepreneurial passions. But the hard news is that the data superhighway is being built and it should be open for business before Messrs. Clinton and Gore have time to fund it or the opportunity to manage it.

Just who will come after they build it is less clear. Consider the megadeals of the last few months.

Southwestern Bell buys Hauser Communications for $650 million. Here we have a Regional Bell Operating Company (RBOC) buying cable systems in the territory of a sibling Baby Bell. What does it get for its full-price buck? Among other things, it gets the chance to offer telephone service by cable, giving rise to the speculation that even the RBOCs have conceded that cable is the superior platform for information services. Not an easy concession to make after you have already sunk billions in installed telephone plant.

US. West invests $2.5 billion in Time-Warner. Another RBOC opens the register and hands over the cash to its putative archrival, the nation's second largest cable operator. What does it get in return? A minority interest without management control. If you were looking for a shootout at the O.K. Corral between telcos and cable, this deal suggests you may be disappointed. Telephone managers have been raised, after all, to believe that competition is unpleasant and avoidable.

The New York Times buys the Boston Globe for $1.1 billion. As the deadline for placing bets arrives, the Times draws on its deep experience in information collection, retrieval, and distribution--and bets on a tired regional newspaper.

MCI sells a 20 per cent interest to British Telecom for $4.3 billion. In what MCI's CEO modestly labels the "deal of the century," the nation's second largest long-distance carrier-that is to say, one of the companies that, along with AT&T and Sprint, have already built the data highway--puts billions in its war chest, aligns itself with one of the giant international players, and retains control of its own destiny.

Where, then, lies the value? Some see value in the "switch," which permits the telephone companies simultaneously to arrange millions of one-to-one connections. Others see value in the "broadband" capability of cable to move large digital payloads down coaxial pipelines. Others place a premium on the software and listen expectantly for the big feet of Microsoft. Or is it chips that will add the value (Intel) or consumer-friendly gizmos (Apple) or plain old intellectual property (Disney)? Why, in a moment of such confusion, would risk-averse corporate managers be placing such heavy bets? Because it is one of those rare moments in techno-economic history when it becomes dear that some players will win big and many other players will win at least a little. The zero-sum, scarce-spectrum game is over, and real growth is at hand. Here's what the digital era may portend for the political economy.

1. The increased power of special interests. Dozens of groups, gangs, flocks, tribes, and posses have already formed their own networks, bringing punch and contemporaneity to their political operations. Consider the following networks launched this past June at the National Cable Television Association convention in San Francisco: The Caribbean Satellite Network; The Crime Channel; The Gaming Network (for parimutuel betting on dogs and horses); The Golf Channel; and The World African Network. And that's just a sample.

2. The retreat of telecommunications regulation. Current regulation is based, politically and economically, on the scarcity of the electromagnetic spectrum. Until recently, if A the broadcaster or B the cop or C the cellular phone operator was using part of the spectrum, other users were crowded out. The government thus got into the allocation business, assigning pieces of the spectrum to various user groups. In the digital era, when you can fire the Encyclopaedia Britannica down a continental pipe faster than you can carry Volume I across your living room, there is less allocation business to do. Alas, a Clinton-Gore FCC seems less likely to put itself out of this business than the Reagan-Bush commissions.

3. The loss of America's cultural hegemony. If you consider the global market to be the sum of cultural products consumed outside the producer's home market, U.S. dominance is astonishing. In music, films, and television, the rest of the world combined cannot challenge us. Through the Eighties, we have enjoyed what looks very much like a monopoly (and to Third World governments exactly like imperialism). In a digital era others will get into the game more easily. While the U.S. will enjoy a strong and possibly pre-eminent position in the popular culture, our relative strength will erode.